<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Wellsford Residential Property Trust
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------------
(4) Date Filed:
-------------------------------------------------------------------------
Notes:
<PAGE>
LOGO
TWO NORTH RIVERSIDE PLAZA
CHICAGO, ILLINOIS 60606
April 25, 1997
Dear Shareholder:
You are cordially invited to attend a special meeting of shareholders of
Equity Residential Properties Trust ("EQR") to be held at One North Franklin,
Chicago, Illinois, on May 28, 1997, at 10:00 a.m., local time (the "EQR
Special Meeting").
At the EQR Special Meeting, you will be asked to approve the acquisition of
the multifamily property business of Wellsford Residential Property Trust, a
Maryland real estate investment trust ("Wellsford"), by EQR through the tax-
free merger of EQR and Wellsford (the "Merger"). In the Merger, each
outstanding common share of beneficial interest of Wellsford ("Wellsford
Common") will be converted into .625 of a common share of beneficial interest
of the surviving trust ("Survivor Common"). Each outstanding common share of
beneficial interest of EQR ("EQR Common") will be converted into one share of
Survivor Common.
Details of the proposed Merger and information regarding EQR and Wellsford
are contained in the attached Joint Proxy Statement/Prospectus/Information
Statement, which you are encouraged to read carefully. Special note should be
taken of the risk factors relating to the proposed Merger, which are discussed
beginning on page 24 of the attached Joint Proxy
Statement/Prospectus/Information Statement and which include the following
risks:
. The surviving trust is subject to the risks normally associated with
debt or preferred equity financings, including the risk that the
surviving trust's cash flow will be insufficient to meet required
payments of principal, interest and distributions.
. A substantial portion of the surviving trust's debt was issued pursuant
to indentures which restrict the amount of indebtedness (including
acquisition financing) that the surviving trust may incur.
. Immediately following consummation of the Merger, the surviving trust
will own properties and bonds collateralized by properties that are
subject to restrictive covenants or deed restrictions.
. Risks associated with (a) a potential change in the relative stock
prices of EQR Common and Wellsford Common prior to the effective time of
the Merger, and (b) a possible reduction in the market price of Survivor
Common following the Merger.
. Shareholders of Wellsford and shareholders of EQR are not entitled to
dissenting shareholders' appraisal rights under Maryland law.
. EQR and Wellsford are large enterprises with operations in a number of
different states. There can be no assurance that costs or other factors
associated with the integration of the two companies would not adversely
affect future combined results of operations or the benefits of expected
cost savings.
<PAGE>
Your Board of Trustees believes that the proposed acquisition of Wellsford
by EQR will benefit EQR by making the resulting company better equipped to
meet competitive challenges by increasing its diversification and improving
its access to capital. The surviving trust in the Merger will be one of the
largest publicly traded real estate investment trusts ("REIT") (based on the
aggregate market value of its outstanding equity capitalization).
EQR, one of the largest publicly traded REITs (based on the aggregate market
value of its outstanding equity capitalization), is a self-administered and
self-managed equity REIT. EQR was organized as a Maryland real estate
investment trust in March 1993 and commenced operations as a publicly traded
company on August 18, 1993 upon completion of its initial public offering. EQR
was formed to continue the multifamily property business objectives and
acquisition strategies of certain affiliated entities controlled by Mr. Samuel
Zell, Chairman of the Board of Trustees of EQR. These entities had been
engaged in the acquisition, ownership and operation of multifamily properties
since 1969. EQR's senior executives average over 23 years of experience in the
multifamily property business.
Your Board of Trustees has carefully reviewed and considered the terms and
conditions of the Merger and has received and considered the written opinion
of J.P. Morgan Securities Inc. ("J.P. Morgan") dated January 16, 1997 to the
effect that, as of the date of such opinion and based upon and subject to
certain matters stated therein, the consideration to be paid by EQR in
connection with the Merger was fair to EQR from a financial point of view. A
copy of the written opinion of J.P. Morgan is included as Appendix C to the
Joint Proxy Statement/Prospectus/Information Statement and should be read
carefully in its entirety. Your Board of Trustees has approved the Merger and
believes the Merger is in the best interests of EQR and its shareholders, and
recommends that all shareholders vote FOR approval of the Merger.
The Merger requires the affirmative vote of EQR shareholders owning two-
thirds of the outstanding shares of EQR Common. Accordingly, whether or not
you plan to attend the EQR Special Meeting, please complete, sign and date the
accompanying proxy card and return it in the enclosed prepaid envelope. You
may revoke your proxy in the manner described in the accompanying Joint Proxy
Statement/Prospectus/Information Statement at any time before it has been
voted at the EQR Special Meeting. If you attend the EQR Special Meeting, you
may vote in person even if you have previously returned your proxy card. Your
prompt cooperation will be greatly appreciated. This solicitation is made on
behalf of the Board of Trustees of EQR.
Sincerely,
/s/ Douglas Crocker II
Douglas Crocker II,
Chief Executive Officer, President and
Trustee
<PAGE>
WELLSFORD RESIDENTIAL PROPERTY TRUST
610 FIFTH AVENUE
NEW YORK, NEW YORK 10020
April 25, 1997
Dear Shareholder:
You are cordially invited to attend a special meeting of shareholders of
Wellsford Residential Property Trust ("Wellsford") to be held at The Princeton
Club, 15 West 43rd Street, New York, New York, on May 28, 1997, at 10:00 a.m.,
local time (the "Wellsford Special Meeting").
At the Wellsford Special Meeting, you will be asked to approve the
acquisition of the multifamily property business of Wellsford by Equity
Residential Properties Trust, a Maryland real estate investment trust ("EQR"),
through the tax-free merger of EQR and Wellsford (the "Merger"). In the
Merger, each outstanding common share of beneficial interest of Wellsford
("Wellsford Common") will be converted into .625 of a common share of
beneficial interest of the surviving trust ("Survivor Common").
Immediately prior to the Merger, and subject to the satisfaction or waiver
of all conditions thereto, Wellsford will contribute certain of its assets to
its subsidiary (the "Contribution"), Wellsford Real Properties, Inc. ("WRP
Newco"), and distribute to its common shareholders, on a pro rata basis, all
of the shares it owns in WRP Newco (the "Distribution"). Details of the
proposed Merger and Distribution and information regarding EQR, Wellsford and
WRP Newco are contained in the attached Joint Proxy
Statement/Prospectus/Information Statement, which you are encouraged to read
carefully. Special note should be taken of risk factors relating to the
proposed Merger, which are discussed beginning on page 24 of the attached
Joint Proxy Statement/Prospectus/Information Statement and include the
following risks:
. Conflicts of interest due to the fact that certain members of the Board
of Trustees and management of Wellsford have certain interests that
arise in connection with the Merger and the Contribution and
Distribution that are in addition to the interests of shareholders of
Wellsford generally.
. The surviving trust is subject to the risks normally associated with
debt or preferred equity financings, including the risk that the
surviving trust's cash flow will be insufficient to meet required
payments of principal, interest and distributions.
. A substantial portion of the surviving trust's debt was issued pursuant
to indentures which restrict the amount of indebtedness (including
acquisition financing) that the surviving trust may incur.
. Immediately following consummation of the Merger, the surviving trust
will own properties and bonds collateralized by properties that are
subject to restrictive covenants or deed restrictions.
. Risks associated with (a) a potential change in the relative stock
prices of common shares of beneficial interest of EQR and Wellsford
Common prior to the effective time of the Merger, and (b) a possible
reduction in the market price of Survivor Common following the Merger.
. Shareholders of Wellsford and shareholders of EQR are not entitled to
dissenting shareholders' appraisal rights under Maryland law.
. The obligation to pay a substantial break-up fee and/or break-up
expenses under certain circumstances may adversely affect the ability of
Wellsford to engage in another transaction in the event the Merger is
not consummated.
. Upon consummation of the Merger, holders of shares of Wellsford Common
will own approximately 17% of the Survivor Common and will not have
separate approval rights with respect to any actions or decisions of the
surviving trust.
. After the Merger, the distributions payable with respect to Survivor
Common are expected to be less than the distributions payable with
respect to Wellsford Common.
. EQR and Wellsford are large enterprises with operations in a number of
different states. There can be no assurance that costs or other factors
associated with the integration of the two companies would not adversely
affect future combined results of operations or the benefits of expected
costs savings.
. Ownership of interests in WRP Newco may also involve significant risks.
<PAGE>
At the Wellsford Special Meeting you will be asked to approve (i) the
Merger, including the adoption of an amended and restated declaration of trust
for the surviving trust (excluding the Additional Provisions, as defined
below) and (ii) certain modifications to the amended and restated declaration
of trust of the surviving trust (the "Additional Provisions"), to conform
substantially the declaration of trust for the surviving trust to the
declaration of trust of EQR. You will also be asked to approve (i) the
issuance (the "Additional Share Offering") by WRP Newco of up to 12,000,000
shares of common stock, $.01 par value per share, of WRP Newco and (ii) the
adoption of WRP Newco's 1997 Management Incentive Plan.
Your Board of Trustees has carefully reviewed and considered the terms and
conditions of the Merger and Distribution and has received and considered the
written opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") dated January 16, 1997 to the effect that, as of the date of
such opinion, and based upon and subject to certain matters stated therein,
the proposed consideration to be received by the holders of shares of
Wellsford Common pursuant to the Merger and the Distribution, was fair to such
shareholders from a financial point of view. A copy of the written opinion of
Merrill Lynch dated January 16, 1997 is included as Appendix D to the Joint
Proxy Statement/Prospectus/Information Statement and should be read carefully
in its entirety.
Your Board of Trustees has approved the Merger, the Contribution and the
Distribution and believes they are in the best interests of Wellsford and its
shareholders, and recommends that all shareholders vote FOR approval of the
Merger, including the adoption of an amended and restated declaration of trust
for the surviving trust. Shareholders are not being asked to approve the
Contribution or the Distribution, which are not subject to shareholder
approval. However, approval of the Merger will, in effect, constitute approval
of the Contribution and Distribution. Your Board of Trustees also recommends
that all shareholders vote FOR the Additional Provisions, and your Board of
Trustees and the Board of Directors of WRP Newco recommend that all
shareholders vote FOR the Additional Share Offering and FOR the adoption of
WRP Newco's 1997 Management Incentive Plan.
The Merger requires the affirmative vote of Wellsford shareholders owning a
majority of the outstanding Wellsford Common. The approval of the Additional
Provisions requires the affirmative vote of Wellsford shareholders owning two-
thirds of the outstanding shares of Wellsford Common. The approval of the
Additional Share Offering and the adoption of WRP Newco's 1997 Management
Incentive Plan each require the affirmative vote of the holders of a majority
of the outstanding shares of Wellsford Common voting. Accordingly, whether or
not you plan to attend the Wellsford Special Meeting, please complete, sign
and date the accompanying proxy card and return it in the enclosed prepaid
envelope. You may revoke your proxy in the manner described in the
accompanying Joint Proxy Statement/Prospectus/Information Statement at any
time before it has been voted at the Wellsford Special Meeting. If you attend
the Wellsford Special Meeting, you may vote in person even if you have
previously returned your proxy card. Your prompt cooperation will be greatly
appreciated. This solicitation is made on behalf of the Board of Trustees of
Wellsford.
Sincerely,
/s/ Jeffrey H. Lynford
Jeffrey H. Lynford,
Chairman of the Board
/s/ Edward Lowenthal
Edward Lowenthal,
President and Chief Executive Officer
<PAGE>
EQUITY RESIDENTIAL PROPERTIES TRUST
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that a special meeting of shareholders ("EQR Special
Meeting") of Equity Residential Properties Trust, a Maryland real estate
investment trust ("EQR"), will be held at One North Franklin, Chicago,
Illinois, on May 28, 1997 at 10:00 a.m., local time, to consider and vote on a
proposal to approve the merger of EQR into Wellsford Residential Property
Trust, a Maryland real estate investment trust ("Wellsford"), pursuant to an
Agreement and Plan of Merger entered into by EQR and Wellsford on January 16,
1997.
Only holders of record of common shares of beneficial interest, $.01 par
value per share, of EQR at the close of business on April 14, 1997 will be
entitled to vote at the EQR Special Meeting.
By Order of the Board of Trustees,
Bruce C. Strohm
Secretary
Chicago, Illinois
April 25, 1997
PLEASE DATE, SIGN AND RETURN YOUR EQR PROXY PROMPTLY IN THE ENCLOSED, SELF-
ADDRESSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES
<PAGE>
WELLSFORD RESIDENTIAL PROPERTY TRUST
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that a special meeting of shareholders ("Wellsford
Special Meeting") of Wellsford Residential Property Trust, a Maryland real
estate investment trust ("Wellsford"), will be held at The Princeton Club,
15 West 43rd Street, New York, New York, on May 28, 1997 at 10:00 a.m., local
time, to consider and vote on the following proposals:
(i) the approval of the merger (the "Merger") of Equity Residential
Properties Trust, a Maryland real estate investment trust ("EQR"), into
Wellsford, pursuant to an Agreement and Plan of Merger entered into by
Wellsford and EQR on January 16, 1997, including the adoption of an
amended and restated declaration of trust for the surviving trust
(excluding the modifications set forth in proposal (ii) below);
(ii) the approval of modifications to certain sections, including Sections
2.3, 6.6, 9.1, 9.2 and 9.3 of, and the addition of a new Article VII
to, the amended and restated declaration of trust of the surviving
trust;
(iii) the issuance by Wellsford Real Properties, Inc. ("WRP Newco"), a
subsidiary of Wellsford, shares of which are to be distributed to the
common shareholders of Wellsford, pro rata, immediately prior to the
Merger, of up to 12,000,000 additional shares of common stock, $.01
par value per share, of WRP Newco, to satisfy the requirements of the
American Stock Exchange; and
(iv) the adoption of WRP Newco's 1997 Management Incentive Plan.
Only holders of record of common shares of beneficial interest, $.01 par
value per share, of Wellsford at the close of business on April 14, 1997 will
be entitled to vote at the Wellsford Special Meeting.
By Order of the Board of Trustees,
Jeffrey H. Lynford
Secretary
New York, New York
April 25, 1997
PLEASE DATE, SIGN AND RETURN YOUR WELLSFORD PROXY PROMPTLY IN THE ENCLOSED,
SELF-ADDRESSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES
<PAGE>
EQUITY RESIDENTIAL PROPERTIES TRUST
AND
WELLSFORD RESIDENTIAL PROPERTY TRUST
JOINT PROXY STATEMENT
---------------
EQUITY RESIDENTIAL PROPERTIES TRUST
PROSPECTUS
---------------
WELLSFORD REAL PROPERTIES, INC.
INFORMATION STATEMENT
This Joint Proxy Statement/Prospectus/Information Statement is being
furnished to the shareholders of Equity Residential Properties Trust, a
Maryland real estate investment trust ("EQR"), in connection with the
solicitation of proxies on behalf of the Board of Trustees of EQR ("EQR Board
of Trustees") for use at a special meeting of the holders of common shares of
beneficial interest, $.01 par value per share, of EQR ("EQR Common") to be
held on May 28, 1997 and at any adjournment or postponement thereof ("EQR
Special Meeting"). At the EQR Special Meeting, holders of EQR Common ("EQR
Common Shareholders") will be asked to approve the acquisition of the
multifamily property business of Wellsford Residential Property Trust, a
Maryland real estate investment trust ("Wellsford"), by approving the merger
of EQR and Wellsford (the "Merger") pursuant to an Agreement and Plan of
Merger dated as of January 16, 1997 by and between EQR and Wellsford (the
"Merger Agreement"). A copy of the Merger Agreement is attached hereto as
Appendix A. The surviving trust in the Merger ("Surviving Trust") will be one
of the largest publicly traded real estate investment trusts ("REIT") (based
on the aggregate market value of its outstanding equity capitalization), and
will be a self-administered and self-managed equity REIT. The Surviving Trust
intends to continue the multifamily property business objectives and
acquisition strategies of EQR. The name of the Surviving Trust will be Equity
Residential Properties Trust.
This Joint Proxy Statement/Prospectus/Information Statement also is being
furnished to the shareholders of Wellsford in connection with the solicitation
of proxies on behalf of the Board of Trustees of Wellsford ("Wellsford Board
of Trustees") for use at a special meeting ("Wellsford Special Meeting" and,
together with the EQR Special Meeting, the "Meetings of Shareholders") of the
holders of common shares of beneficial interest, $.01 par value per share, of
Wellsford ("Wellsford Common") to be held on May 28, 1997 and at any
adjournment or postponement thereof. At the Wellsford Special Meeting, holders
of Wellsford Common ("Wellsford Common Shareholders") will be asked to approve
(i) the Merger, including the adoption of an amended and restated declaration
of trust for the Surviving Trust (excluding the Additional Provisions, as
defined below), (ii) modifications to certain sections, including Sections
2.3, 6.6, 9.1, 9.2 and 9.3 of, and the addition of a new Article VII to, the
amended and restated declaration of trust of the Surviving Trust (the
"Additional Provisions") as described more fully in "Proposal Regarding
Additional Declaration of Trust Provisions" below, (iii) the issuance by
Wellsford Real Properties, Inc. ("WRP Newco"), a subsidiary of Wellsford,
shares of which are to be distributed to the Wellsford Common Shareholders,
pro rata, immediately prior to the Merger, of up to 12,000,000 additional
shares of common stock, $.01 par value per share, of WRP Newco ("WRP Newco
Common"), to satisfy the requirements of the American Stock Exchange ("ASE")
(the "Additional Share Offering"), and (iv) the adoption of WRP Newco's 1997
Management Incentive Plan.
This Joint Proxy Statement/Prospectus/Information Statement also is being
furnished to the shareholders of Wellsford to provide them with information
regarding WRP Newco. Immediately prior to the Merger, Wellsford will
contribute certain of its assets to WRP Newco, WRP Newco will assume certain
liabilities of Wellsford, and Wellsford will distribute to the Wellsford
Common Shareholders, pro rata, all of the outstanding shares of WRP Newco
Common owned by Wellsford (the "Distribution"). In addition, an affiliate of
EQR will enter into certain financial and business arrangements with WRP
Newco, as described herein.
In considering whether to approve the Merger, the shareholders of EQR and
Wellsford voting on the Merger should consider, in addition to the other
information in this Joint Proxy Statement/Prospectus/Information Statement,
the matters discussed under "Risk Factors." Such matters include:
. The surviving trust is subject to the risks normally associated with
debt or preferred equity financings, including the risk that the
surviving trust's cash flow will be insufficient to meet required
payments of principal, interest and distributions.
<PAGE>
. A substantial portion of the surviving trust's debt was issued pursuant
to indentures which restrict the amount of indebtedness (including
acquisition financing) that the surviving trust may incur.
. Immediately following consummation of the Merger, the surviving trust
will own properties and bonds collateralized by properties that are
subject to restrictive covenants or deed restrictions.
. Risks associated with (a) a potential change in the relative stock
prices of EQR Common and Wellsford Common prior to the effective time of
the Merger, and (b) a possible reduction in the market price of Survivor
Common following the Merger.
. EQR and Wellsford are large enterprises with operations in a number of
different states. There can be no assurance that costs or other factors
associated with the integration of the two companies would not adversely
affect future combined results of operations or the benefits of expected
cost savings.
. Shareholders of EQR and Wellsford do not have appraisal rights in
connection with the Merger under Maryland law.
Shareholders of Wellsford should also consider the matters discussed under
"Risk Factors" and "WRP Newco Risk Factors" in addition to the matters
discussed above. Such matters include:
. Conflicts of interest due to the fact that certain members of the Board
of Trustees and management of Wellsford have certain interests that
arise in connection with the Merger and the Contribution and
Distribution that are in addition to the interests of shareholders of
Wellsford generally.
. The obligation to pay a substantial break-up fee and/or break-up
expenses under certain circumstances may adversely affect the ability of
Wellsford to engage in another transaction in the event the Merger is
not consummated.
. Upon consummation of the Merger, holders of shares of Wellsford Common
will own approximately 17% of the Survivor Common and will not have
separate approval rights with respect to any actions or decisions of the
surviving trust.
. After the Merger, the distributions payable with respect to Survivor
Common are expected to be less than the distributions payable with
respect to Wellsford Common.
. Ownership of interests in WRP Newco may also involve significant risks.
This Joint Proxy Statement/Prospectus/Information Statement also relates to
the common shares of beneficial interest, $.01 par value per share, of the
Surviving Trust issuable upon consummation of the Merger. On April 18, 1997,
the last reported sales price of a share of EQR Common, on the NYSE was
$43.125. On April 18, 1997, the last reported sales price of a share of
Wellsford Common on the NYSE was $28.875.
This Joint Proxy Statement/Prospectus/Information Statement and the forms of
proxy are first being mailed to all of EQR Common Shareholders and Wellsford
Common Shareholders on or about April 25, 1997.
SEE "RISK FACTORS" BEGINNING ON PAGE 24 FOR A DISCUSSION OF CERTAIN FACTORS
WHICH SHOULD BE CONSIDERED BY SHAREHOLDERS OF EQR AND WELLSFORD.
---------------
THE SECURITIES TO WHICH THIS JOINT PROXY STATEMENT/PROSPECTUS/INFORMATION
STATEMENT RELATE HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS/INFORMATION STATEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Joint Proxy Statement/Prospectus/Information Statement is
April 25, 1997.
<PAGE>
AVAILABLE INFORMATION
EQR has filed a registration statement on Form S-4 (the "Registration
Statement") under the Securities Act of 1933, as amended ("Securities Act"),
with the Securities and Exchange Commission (the "Commission") covering the
common shares of beneficial interest and preferred shares of beneficial
interest of the Surviving Trust to be issued in connection with the Merger. As
permitted by the rules and regulations of the Commission, this Joint Proxy
Statement/Prospectus/Information Statement omits certain information, exhibits
and undertakings contained in the Registration Statement. For further
information pertaining to the securities offered hereby, reference is made to
the Registration Statement, including the exhibits filed as a part thereof.
EQR and Wellsford are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and, in
accordance therewith, file reports, proxy statements and other information
with the Commission. WRP Newco has filed a registration statement on Form 10
and, as of the date of the Distribution, WRP Newco will also be subject to the
informational requirements of the Exchange Act. Reports, proxy statements and
other information filed by EQR, Wellsford and WRP Newco can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549; and at its Regional Offices
located at Suite 1400, 500 West Madison Street, Chicago, Illinois 60661; and
Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material can be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission. The address of the Commission's Web site
is: http://www.sec.gov. The EQR Common and preferred shares of beneficial
interest of EQR ("EQR Preferred" and, collectively, "EQR Shares") and the
Wellsford Common and preferred shares of beneficial interest of Wellsford
("Wellsford Preferred" and, collectively, "Wellsford Shares") are currently
listed on the NYSE and such reports, proxy statements and other information
concerning EQR and Wellsford can be inspected at the offices of the NYSE, 20
Broad Street, New York, New York 10005. WRP Newco has applied for listing of
the WRP Newco Common on the ASE.
All information contained in this Joint Proxy
Statement/Prospectus/Information Statement with respect to Wellsford and WRP
Newco has been supplied by Wellsford, and all information with respect to EQR
and ERP Operating Limited Partnership, an Illinois limited partnership ("ERP
Operating Partnership"), has been supplied by EQR.
No person is authorized to give any information or to make any
representation not contained in this Joint Proxy Statement/Prospectus/
Information Statement, or incorporated in it by reference, and, if given or
made, such information or representation should not be relied upon as having
been authorized. This Joint Proxy Statement/Prospectus/Information Statement
does not constitute an offer to sell, or a solicitation of an offer to
purchase, the securities offered by this Joint Proxy
Statement/Prospectus/Information Statement, or the solicitation of a proxy, in
any jurisdiction where or from any person to whom it is unlawful to make such
offer, or solicitation of an offer, or proxy solicitation. Neither the
delivery of this Joint Proxy Statement/Prospectus/Information Statement nor
any distribution of the securities offered pursuant to this Joint Proxy
Statement/Prospectus/Information Statement shall, under any circumstances,
create an implication that there has been no change in the affairs of EQR,
Wellsford or WRP Newco since the date of this Joint Proxy
Statement/Prospectus/ Information Statement.
All documents that are incorporated by reference in this Joint Proxy
Statement/Prospectus/Information Statement but which are not delivered
herewith are available without charge (other than exhibits to such documents
which are not specifically incorporated by reference therein) upon request
from, in the case of documents relating to EQR, Two North Riverside Plaza,
Suite 400, Chicago, Illinois 60606, Attention: Cynthia McHugh, telephone (312)
474-1300, and, in the case of documents relating to Wellsford, 610 Fifth
Avenue, New York, New York 10020, Attention: Kim Ezzy, telephone (212) 333-
2300. In order to insure timely delivery of the documents, any request should
be made by May 16, 1997.
I-1
<PAGE>
INFORMATION INCORPORATED BY REFERENCE
IN THIS JOINT PROXY STATEMENT/PROSPECTUS/INFORMATION STATEMENT
The following documents filed with the Commission by EQR or by Wellsford
pursuant to the Exchange Act are hereby incorporated in this Joint Proxy
Statement/Prospectus/Information Statement by reference:
1. EQR's current report on Form 8-K dated May 23, 1996, as amended.
2. EQR's current report on Form 8-K dated November 15, 1996, as amended.
3. EQR's annual report on Form 10-K for the year ended December 31, 1996,
as amended by Form 10-K/A filed on April 3, 1997.
4. EQR's current report on Form 8-K dated January 16, 1997.
5. EQR's current report on Form 8-K dated March 12, 1997.
6. EQR's current report on Form 8-K dated March 17, 1997.
7. EQR's current report on Form 8-K dated March 19, 1997.
8. EQR's current report on Form 8-K dated March 20, 1997.
9. EQR's current report on Form 8-K dated March 24, 1997.
10. The information prescribed by Items 12, 13, 14, 15 and 16 of Form S-11
contained in EQR's Registration Statement on Form S-11 (No. 33-80420)
dated July 20, 1994, as amended.
11. The description of EQR Common contained in EQR's Registration Statement
on Form 8-A, as amended, dated August 10, 1993.
12. The description of EQR's 9 3/8% Series A Cumulative Redeemable
Preferred Shares of Beneficial Interest, par value $.01 per share,
contained in EQR's Registration Statement on Form 8-A, as amended,
dated May 17, 1995.
13. The description of Depositary Shares each representing a 1/10
fractional interest in EQR's 9 1/8% Series B Cumulative Redeemable
Preferred Shares of Beneficial Interest, par value $.01 per share,
contained in EQR's Registration Statement on Form 8-A dated October 23,
1995.
14. The description of Depositary Shares each representing a 1/10
fractional interest in EQR's 9 1/8% Series C Cumulative Redeemable
Preferred Shares of Beneficial Interest, par value $.01 per share,
contained in EQR's Registration Statement on Form 8-A dated September
10, 1996.
15. Wellsford's annual report on Form 10-K for the year ended December 31,
1996.
16. Wellsford's current report on Form 8-K, dated January 16, 1997.
17. Wellsford's current report on Form 8-K, dated February 3, 1997.
18. The description of Wellsford Common contained in Wellsford's
Registration Statement on Form 8-A dated November 10, 1992 and the
information thereby incorporated by reference contained in Wellsford's
Registration Statement on Form S-11 (No. 33-52406), as amended by
Amendment No. 1 thereto dated November 3, 1992, under the heading
"Description of Shares of Beneficial Interest."
19. The description of Wellsford's Series A Convertible Preferred Shares of
Beneficial Interest, par value $.01 per share, contained in Wellsford's
Registration Statement on Form S-11 (No. 33-69868) dated October 1,
1993 and in Amendments Nos. 1 and 2 thereto dated October 22, 1993 and
November 4, 1993, respectively, under the heading "Description of
Series A Cumulative Convertible Preferred Shares."
20. The description of Wellsford's Series B Cumulative Redeemable Preferred
Shares of Beneficial Interest, par value $.01 per share, contained in
Wellsford's Registration Statement on Form 8-A dated September 5, 1995,
under the heading "Description of Registrant's Securities to be
Registered."
21. All documents subsequently filed by EQR or Wellsford pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the date
of the meetings of shareholders.
Any statement contained herein or in a document incorporated by reference or
deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Joint Proxy Statement/Prospectus/
Information Statement to the extent that a statement contained in this Joint
Proxy Statement/Prospectus/Information Statement or in any other subsequently
filed document that also is or is deemed to be incorporated by reference in
this Joint Proxy Statement/Prospectus/Information Statement modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Joint Proxy Statement/Prospectus/Information Statement.
I-2
<PAGE>
JOINT PROXY STATEMENT/PROSPECTUS/INFORMATION STATEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY................................................................... 1
RISK FACTORS.............................................................. 24
Conflicts of Interest................................................... 24
Adverse Consequences of Debt Financing.................................. 24
Restrictions on Indebtedness of the Surviving Trust..................... 25
Other Restrictive Covenants............................................. 25
Potential Change in Relative Stock Prices............................... 25
Risks to Wellsford Common Shareholders.................................. 25
No Appraisal Rights under Maryland Law.................................. 25
Potential Adverse Effects of Combining the Companies.................... 26
General Real Estate Investment Considerations; Changes in Laws.......... 26
Potential Environmental Liability Affecting the Surviving Trust......... 26
Consequences of Failure to Qualify as a REIT............................ 27
Dependence on Key Personnel............................................. 27
Distribution Requirements Potentially Increasing Indebtedness of the
Surviving Trust........................................................ 27
9.8% Ownership Limit.................................................... 28
Limits on Changes in Control............................................ 28
Control and Influence by Significant Shareholders of EQR................ 29
Exemptions for Mr. Zell and Others from Maryland Business Combination
Law which Tend to Inhibit Takeovers.................................... 29
Tax Termination of ERP Operating Partnership............................ 29
WRP NEWCO RISK FACTORS.................................................... 30
General Risks........................................................... 30
Nature of Investments Made by WRP Newco May Involve High Risk;
Illiquidity of Real Estate Investments................................. 30
Difficulty of Locating Suitable Investments; Competition................ 30
Risks of Acquisition, Development, Construction and Renovation
Activities............................................................. 30
Vacancies at Existing Properties; Dependence on Rental Income from Real
Property............................................................... 31
Operating Risks......................................................... 31
Adverse Consequences of Debt Financing.................................. 32
Lack of Control and Other Risks of Equity Investments in and with Third
Parties................................................................ 32
Risks of Investments in Debt Instruments................................ 33
Risks of Investments in Mortgage Loans.................................. 33
Risk of Loss on Investments in Commercial Mortgage-Backed Securities.... 33
Limitations on Remedies................................................. 34
Third-Party Bankruptcy Risks............................................ 34
No Prior Operating History.............................................. 34
Risks of Uninsured Loss................................................. 34
Potential Environmental Liability Related to the Properties............. 34
Dependence on Key Personnel............................................. 35
Tax Consequences of the Distribution.................................... 35
Changes in Policies Without Stockholder Approval........................ 35
Absence of Public Market; Risk of Changes in Share Price................ 35
Costs of Compliance with the Americans with Disabilities Act and Similar
Laws................................................................... 36
Noncompliance with Other Laws........................................... 36
Effect on Common Stock Price of Shares Available for Future Sale........ 36
Hedging Policies/Risks.................................................. 36
Anti-Takeover Effect Resulting From a Staggered Board/Ability of Newco
to Issue Preferred Shares/and Certain Provisions of Maryland Law....... 36
THE MEETINGS OF SHAREHOLDERS.............................................. 38
EQR..................................................................... 38
Wellsford............................................................... 38
THE MERGER................................................................ 39
Terms of the Merger..................................................... 39
Background of the Merger................................................ 40
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Reasons for the Merger; Recommendation of the EQR Board of Trustees...... 43
Reasons for the Merger; Recommendation of the Wellsford Board of
Trustees................................................................ 44
Opinion of Financial Advisor--EQR........................................ 46
Opinion of Financial Advisor--Wellsford.................................. 49
Effective Time of the Merger............................................. 54
Representations and Warranties; Conditions to the Merger................. 54
Appraisal Rights......................................................... 55
Regulatory Matters....................................................... 55
Termination Provisions................................................... 55
Termination Fee and Expenses............................................. 56
No Solicitation of Other Transactions.................................... 56
Conversion of Shares..................................................... 57
Appointment of Exchange Agent............................................ 57
Exchange of Certificates................................................. 58
Conduct of Business Pending the Merger................................... 58
Waiver and Amendment..................................................... 60
Stock Exchange Listing................................................... 60
Anticipated Accounting Treatment......................................... 60
Shares Available for Resale.............................................. 60
Contribution of Assets of Wellsford to ERP Operating Partnership......... 60
Federal Income Tax Consequences.......................................... 61
INTERESTS OF CERTAIN PERSONS IN THE MERGER AND DISTRIBUTION................ 69
Benefits of Key Executives............................................... 69
Agreements with the Surviving Trust and ERP Operating Partnership........ 71
Agreements with WRP Newco................................................ 71
SURVIVING TRUST SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA....... 72
EQUITY RESIDENTIAL PROPERTIES TRUST SELECTED HISTORICAL AND COMBINED
FINANCIAL DATA............................................................ 74
WELLSFORD RESIDENTIAL PROPERTY TRUST SELECTED HISTORICAL FINANCIAL DATA.... 76
UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF THE SURVIVING TRUST............ 78
POLICIES OF THE SURVIVING TRUST WITH RESPECT TO CERTAIN ACTIVITIES......... 85
Business Objectives and Operating Strategies............................. 85
Acquisition Strategies................................................... 85
Disposition Strategies................................................... 85
Investment Policies...................................................... 86
Financing Policies....................................................... 86
Lending Policies......................................................... 87
Policies with Respect to Other Activities................................ 87
MANAGEMENT AND OPERATION OF THE SURVIVING TRUST AFTER THE MERGER........... 88
Trustees and Executive Officers.......................................... 88
Committees of the Board of Trustees...................................... 90
Compensation of Trustees................................................. 90
Consulting Agreements.................................................... 90
COMPARISON OF RIGHTS OF SHAREHOLDERS....................................... 91
Authorized and Issued Shares............................................. 91
Amendment to Declaration and Bylaws...................................... 91
Special Meetings......................................................... 92
Boards of Trustees....................................................... 92
Mergers, Consolidations, and Sale of Substantially all Assets............ 92
Restrictions on the Ownership, Transfer or Issuance of Shares............ 93
PROPOSAL REGARDING ADDITIONAL DECLARATION OF TRUST PROVISIONS.............. 95
THE CONTRIBUTION AND DISTRIBUTION.......................................... 97
Background of and Reasons for the Distribution........................... 97
Manner of Effecting the Contribution and Distribution.................... 97
Listing and Trading of WRP Newco Common.................................. 97
Conditions; Termination.................................................. 98
Contribution and Distribution Agreement.................................. 98
Tax Consequences of the Distribution..................................... 99
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
WELLSFORD REAL PROPERTIES, INC............................................. 101
General.................................................................. 101
Business Strategy........................................................ 101
Initial Capital and Financing............................................ 102
WRP Newco Line of Credit................................................. 103
Management............................................................... 103
WRP NEWCO PRO FORMA CAPITALIZATION......................................... 105
WRP NEWCO DIVIDEND POLICY.................................................. 105
WRP NEWCO'S BUSINESS AND PROPERTIES........................................ 105
Wellsford Commercial Properties.......................................... 105
Wellsford High Yield Investment Portfolio................................ 107
Wellsford Property Development........................................... 108
Cash..................................................................... 110
Legal Proceedings........................................................ 110
CERTAIN AGREEMENTS BETWEEN WRP NEWCO AND ERP OPERATING PARTNERSHIP......... 110
Common Stock and Preferred Stock Purchase Agreement...................... 110
Registration Rights Agreement............................................ 111
Agreement Regarding Palomino Park........................................ 112
Credit Enhancement Agreement............................................. 113
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES OF WRP NEWCO................... 113
Investment Policies...................................................... 113
Financing Policies....................................................... 115
Policies with Respect to Other Activities................................ 115
MANAGEMENT OF WRP NEWCO.................................................... 116
Directors and Executive Officers......................................... 116
Key Employee............................................................. 116
Compensation of Directors................................................ 116
Board Committees......................................................... 116
Executive Compensation................................................... 118
Employment Agreements.................................................... 118
Compensation Committee Interlocks and Insider Participation.............. 119
PRINCIPAL STOCKHOLDERS OF WRP NEWCO........................................ 120
WRP NEWCO'S CERTAIN TRANSACTIONS........................................... 121
MANAGEMENT'S DISCUSSION AND ANALYSIS OF WELLSFORD REAL PROPERTIES, INC.
(PREDECESSOR)............................................................. 121
REPORT OF INDEPENDENT AUDITORS............................................. 122
WELLSFORD REAL PROPERTIES, INC. (PREDECESSOR) COMBINED BALANCE SHEETS...... 123
WELLSFORD REAL PROPERTIES, INC. (PREDECESSOR) COMBINED INCOME STATEMENT.... 124
WELLSFORD REAL PROPERTIES, INC. (PREDECESSOR) COMBINED STATEMENTS OF CASH
FLOW...................................................................... 125
WELLSFORD REAL PROPERTIES, INC. (PREDECESSOR) PRO FORMA COMBINED INCOME
STATEMENT................................................................. 129
WELLSFORD REAL PROPERTIES, INC. (PREDECESSOR) PRO FORMA COMBINED BALANCE
SHEET..................................................................... 132
DESCRIPTION OF CAPITAL STOCK OF WRP NEWCO.................................. 135
General.................................................................. 135
Common Stock............................................................. 135
Preferred Stock.......................................................... 136
Classification or Reclassification of Common Stock or Preferred Stock.... 136
Power to Issue Additional Shares of Common Stock and Preferred Stock..... 136
Class A Common Stock..................................................... 136
Series A 8% Convertible Redeemable Preferred Stock....................... 137
CERTAIN PROVISIONS OF MARYLAND LAW AND OF WRP NEWCO'S CHARTER AND BYLAWS... 140
Classification of the Board of Directors................................. 140
Removal of Directors..................................................... 141
Business Combinations.................................................... 141
Amendment to the Charter and Bylaws...................................... 141
Merger, Consolidation, Sale of Assets.................................... 141
Dissolution of WRP Newco................................................. 141
Advance Notice of Director Nominations and New Business.................. 141
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
Meetings of Stockholders.................................................. 142
Limitation of Liability and Indemnification............................... 142
PROPOSAL TO APPROVE WRP NEWCO ADDITIONAL SHARE OFFERING..................... 143
PROPOSAL TO APPROVE WRP NEWCO'S 1997 MANAGEMENT INCENTIVE PLAN.............. 144
LEGAL MATTERS............................................................... 147
EXPERTS..................................................................... 147
SHAREHOLDER PROPOSALS....................................................... 148
APPENDIX A AGREEMENT AND PLAN OF MERGER..................................... A-1
APPENDIX B ARTICLES OF MERGER............................................... B-1
APPENDIX C OPINION OF J.P. MORGAN SECURITIES INC............................ C-1
APPENDIX D OPINION OF MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED.... D-1
</TABLE>
iv
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in the Summary and under captions "Risk Factors," "WRP
Newco Risk Factors," "The Merger--Reasons for the Merger; Recommendation of the
EQR Board of Trustees" "--Reasons for the Merger; Recommendation of the
Wellsford Board of Trustees," "--Opinion of Financial Advisor--EQR" and "--
Opinion of Financial Advisor--Wellsford" and elsewhere in this Joint Proxy
Statement/Prospectus/Information Statement constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of EQR, Wellsford or WRP Newco or industry
results to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions, which will, among other things, affect demand for multifamily
properties, availability and credit worthiness of prospective tenants, lease
rents and the availability of financing; adverse changes in the real estate
markets including, among other things, competition with other companies, risks
of real estate development and acquisition; governmental actions and
initiatives; environmental/safety requirements; ability to achieve anticipated
cost savings and operating efficiencies from the Merger; and other changes and
factors referenced in this Joint Proxy Statement/Prospectus/Information
Statement and the documents incorporated herein by reference. With respect to
WRP Newco, such factors may also include: difficulty of locating suitable
investments; illiquidity of real estate investments; risks regarding the
Palomino Park development; limited control of entities in which investments are
made; risks of investments in debt instruments, including reduction in the
value of collateral and the inability to enforce remedies; risks of highly
leveraged transactions; dependence on key personnel; and lack of prior
operating history. See "Risk Factors" and "WRP Newco Risk Factors."
SUMMARY
The following is a summary of certain information contained elsewhere in this
Joint Proxy Statement/Prospectus/ Information Statement. Reference is made to,
and this summary is qualified in its entirety by, the more detailed information
and financial statements contained in this Joint Proxy
Statement/Prospectus/Information Statement, the Appendices hereto and the
documents incorporated by reference herein.
Certain capitalized terms used in this summary are defined elsewhere in this
Joint Proxy Statement/Prospectus/ Information Statement. As used in this Joint
Proxy Statement/Prospectus/Information Statement, except where the context
requires otherwise, "EQR" means Equity Residential Properties Trust, a Maryland
real estate investment trust and its subsidiaries; "ERP Operating Partnership"
means ERP Operating Limited Partnership, an Illinois limited partnership of
which EQR is the general partner, and its subsidiaries; "Wellsford" means
Wellsford Residential Property Trust, a Maryland real estate investment trust,
and its subsidiaries; and "WRP Newco" means Wellsford Real Properties, Inc., a
Maryland corporation, and its subsidiaries.
As used in this Joint Proxy Statement/Prospectus/Information Statement,
"Surviving Trust" means the surviving Maryland real estate investment trust in
the Merger. The name of the Surviving Trust will be Equity Residential
Properties Trust.
PARTIES TO THE MERGER
EQR. EQR, one of the largest publicly traded REITs (based on the aggregate
market value of its outstanding equity capitalization), is a self-administered
and self-managed equity REIT. EQR was organized in March 1993 and commenced
operations as a publicly traded company on August 18, 1993 upon the completion
of its initial public offering (the "IPO"). EQR was formed to continue the
multifamily property business objectives and acquisition strategies of certain
affiliated entities controlled by Mr. Samuel Zell, Chairman of the Board of
Trustees of EQR. These entities had been engaged in the acquisition, ownership
and operation of multifamily properties since 1969. EQR's senior executives
average over 23 years of experience in the multifamily property business.
EQR is the largest publicly traded REIT owner of multifamily properties
(based on the number of apartment units owned and total revenues earned). As of
March 31, 1997, EQR owned or had interests in a portfolio of 250 multifamily
properties containing 75,100 apartment units and managed 12,804 additional
units owned by affiliated entities. As of March 31, 1997, the 250 properties
EQR owned or had interests in had an average occupancy rate of approximately
94%. These properties are located in the following 31 states: Arizona,
Arkansas, California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana,
Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Michigan, Minnesota,
Missouri, New Hampshire, New Jersey, New Mexico, Nevada, North Carolina, Ohio,
Oklahoma, Oregon, South Carolina, Tennessee, Texas, Virginia and Washington.
<PAGE>
All of EQR's interests in its properties are held directly or indirectly by,
and substantially all of its operations relating to the properties are
conducted through, ERP Operating Partnership. EQR controls ERP Operating
Partnership as the sole general partner and, as of March 31, 1997, owned
approximately 88% of ERP Operating Partnership's outstanding partnership
interests (excluding preference units) ("OP Units"), which may be exchanged by
the holders thereof for either shares of EQR Common, on a one-for-one basis or,
at EQR's option, the cash equivalent thereof.
EQR's corporate headquarters and executive offices are located at Two North
Riverside Plaza, Suite 400, Chicago, Illinois 60606, and its telephone number
is (312) 474-1300. In addition, EQR has regional operations centers in Chicago,
Illinois; Dallas, Texas; Denver, Colorado; Seattle, Washington; Tampa, Florida
and Bethesda, Maryland, and area offices in Atlanta, Georgia; Las Vegas,
Nevada; Phoenix, Arizona; Portland, Oregon; San Antonio and Houston, Texas;
Irvine, California; Ypsilanti, Michigan; Raleigh, North Carolina; and Ft.
Lauderdale, Florida.
Wellsford. Wellsford is a publicly traded, self-administered and self-managed
equity REIT, formed in 1992, which owns and operates multifamily properties
located in the Western, Southwestern and Pacific regions of the United States.
As of December 31, 1996, Wellsford owned 72 properties containing 19,004
apartment units. Wellsford's average occupancy rate on March 24, 1997 was
approximately 95.3%. Wellsford's properties are located in the following
states: Arizona, Colorado, New Mexico, Nevada, Oklahoma, Texas, Utah and
Washington.
Wellsford's corporate headquarters and executive offices are located at 610
Fifth Avenue, New York, New York 10020, and its telephone number is (212) 333-
2300. In addition, Wellsford has operating headquarters in Denver, Colorado and
area offices in Dallas, Texas; San Antonio, Texas; Tulsa, Oklahoma; Oklahoma
City, Oklahoma; Phoenix, Arizona; and Tacoma, Washington.
TERMS OF THE MERGER
The Merger Agreement provides that, upon satisfaction or waiver of the
conditions set forth therein, EQR will be merged into Wellsford. The name of
the Surviving Trust will be Equity Residential Properties Trust. The EQR Board
of Trustees and Wellsford Board of Trustees have each approved the Merger as
set forth in the Merger Agreement. Upon consummation of the Merger (the
"Effective Time"), each outstanding share of Wellsford Common will be converted
into .625 (the "Exchange Ratio") of a common share of beneficial interest, $.01
par value per share, of the Surviving Trust ("Survivor Common"). At the
Effective Time, each outstanding share of EQR Common will be converted into one
share of Survivor Common. At the Effective Time, each outstanding share of
Wellsford Preferred and EQR Preferred will be converted into one preferred
share of the Surviving Trust ("Survivor Preferred") having the same preferences
and other terms as the preferred shares previously outstanding of the same
series; provided, however, the conversion ratio for Wellsford's Series A
Cumulative Convertible Preferred Shares of Beneficial Interest, $.01 par value
per share ("Wellsford Series A") will be adjusted in accordance with its terms.
See "The Merger--Terms of the Merger." At the Effective Time, approximately
3.2% of Survivor Common will be owned by affiliates of the Surviving Trust
(assuming that no outstanding options are exercised and no OP Units are
exchanged for shares of EQR Common).
THE DISTRIBUTION OF WRP NEWCO COMMON
Immediately prior to the Merger, Wellsford will contribute certain of its
assets, including an 80% interest in phases I and II of, and in options to
acquire and develop phases III, IV and V of, a 182-acre five-phase development
project located in Denver, Colorado ("Palomino Park"), a $17.8 million mortgage
receivable (the "Sonterra Loan"), on a 344-unit multifamily property located in
Tucson, Arizona ("Sonterra"), an option to purchase Sonterra and approximately
$18 million of cash to WRP Newco and WRP Newco will assume certain obligations
of Wellsford (the "Contribution"). Immediately after the Contribution and
immediately prior to the Merger, Wellsford will distribute to the holders of
Wellsford Common all the outstanding shares of WRP Newco Common owned by
Wellsford as a distribution subject to income tax under Section 301 of the
Internal Revenue Code of 1986, as amended (the "Code"). Pursuant to the
Distribution, the holders of Wellsford Common will receive one share of WRP
Newco Common for each four shares of Wellsford Common owned by such holder.
Cash will be paid in lieu of fractional shares. The Contribution and the
Distribution are not subject to approval by the shareholders of Wellsford.
No shares of WRP Newco Common will be distributed to EQR Common Shareholders.
EQR Common Shareholders will participate indirectly in WRP Newco through the
interests of ERP Operating Partnership in WRP Newco as described under "Certain
Agreements between WRP Newco and ERP Operating Partnership."
2
<PAGE>
Pre-Merger
3
<PAGE>
Post-Merger
4
<PAGE>
Map
5
<PAGE>
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARDS OF TRUSTEES
The EQR Board of Trustees believes that the Merger, including the
consideration to be paid by EQR, is fair and in the best interests of EQR and
its shareholders. The EQR Trustees who voted on the Merger unanimously approved
the Merger and unanimously recommend that the EQR Common Shareholders vote FOR
the Merger. The EQR Board of Trustees considered certain potentially negative
factors which could arise from the Merger. These included (i) the significant
costs involved in connection with consummating the Merger, (ii) the substantial
management time and effort required to effectuate the Merger and integrate the
businesses of EQR and Wellsford, (iii) the increase in the total debt of the
Surviving Trust from the total debt of EQR, (iv) the possible adverse effects
upon the market for shares of EQR Common and upon EQR's ability to raise
capital and issue equity in both the public and private markets which might
result if the Merger were not consummated, and (v) the risk that the
anticipated benefits of the Merger might not be fully realized. The favorable
factors the EQR Board of Trustees considered in reaching the foregoing
conclusions were the beliefs that (i) the Merger would solidify EQR's
leadership position in the multifamily property industry and the Surviving
Trust will be one of the largest publicly traded REITs (based on the aggregate
market value of its outstanding equity capitalization), (ii) the Merger would
increase operating efficiencies through economies of scale, (iii) the Merger
would provide greater access to the public equity and debt markets, (iv) the
Surviving Trust would be a larger and financially stronger company, which would
make it easier to combine with other entities, (v) the combination of the
Wellsford properties with those of EQR would expand the geographic focus of
EQR's operations in the Southwest, Western and Pacific regions of the United
States, and (vi) the Merger could be effectuated through the issuance of shares
of equity to shareholders in the Merger rather than through the use of cash or
a separate public offering of equity or debt securities. The EQR Board of
Trustees also received the written opinion, dated January 16, 1997, of J.P.
Morgan Securities Inc. ("J.P. Morgan") to the effect that, as of such date and
based upon and subject to certain matters stated therein, the consideration to
be paid by EQR in connection with the Merger was fair, from a financial point
of view, to EQR. See "The Merger--Reasons for the Merger; Recommendation of the
EQR Board of Trustees" and "Opinion of Financial Advisors--EQR."
The Wellsford Board of Trustees believes that the Merger and Distribution are
fair to, and in the best interests of, Wellsford and its shareholders. By
unanimous vote, the Wellsford Board of Trustees approved the Merger, the
Distribution and the transactions contemplated thereby, and unanimously
recommend that the Wellsford Common Shareholders vote FOR the Merger. Although
Wellsford Common Shareholders are not being asked to approve the Distribution,
approval of the Merger will, in effect, constitute approval of the
Distribution. The Board of Trustees reached its decision after careful
consideration of a wide variety of factors, including certain potentially
negative factors. These negative factors consisted of the following: (i) the
risk that the anticipated benefits of the Merger might not be fully realized;
(ii) the significant costs aggregating approximately $23.6 million involved in
connection with consummating the Merger; (iii) the substantial management time
and effort required to effectuate the Merger; (iv) the possibility that
Wellsford may be required, if the Merger Agreement is terminated under certain
circumstances, to pay EQR a Break-Up Fee (as defined herein) of $14.0 million
and to reimburse EQR Break-Up Expenses (as defined herein) of up to $2.5
million; and (v) after the Merger, the distributions payable with respect to
the Survivor Common is expected to be approximately 19.5% less than the
distributions payable with respect to the Wellsford Common based upon the
current annualized distributions per share of EQR Common and Wellsford Common.
In making its determination with respect to the Merger and the Distribution,
the Wellsford Board of Trustees also considered, among other things, the
following advantages: (i) the Merger would afford shareholders a significant
participation in a much larger and more geographically diversified REIT with
greater potential for long-term appreciation and improved access to capital
markets, (ii) the Merger was the best alternative reasonably available to
Wellsford Common Shareholders, providing the greatest feasibility and potential
to maximize shareholder value, (iii) the Merger offered anticipated cost
savings and operating efficiencies to the Surviving Trust, including the
anticipated reduction of overhead expenses by approximately $4.1 million per
year, (iv) the market capitalization of the Surviving Trust is expected to be
approximately $4 billion greater than the then-current market capitalization of
Wellsford, (v) the Exchange Ratio fairly reflected the relative contributions
of both companies to the combined entity, and (vi) the Merger would be tax-
free. The Wellsford Board of Trustees received further confirmation of its
decision in the form of the written opinion of Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"), dated January 16, 1997, to the effect
that, as of such date and based upon certain assumptions and considerations,
the consideration to be received by Wellsford Common Shareholders pursuant to
the Merger and the Distribution was fair to such shareholders from a financial
point of view. See "The Merger--Reasons for the Merger" and "Opinion of
Financial Advisor--Wellsford."
OPINIONS OF FINANCIAL ADVISORS
EQR. At the meeting of the Board of Trustees of EQR on January 15, 1997, J.P.
Morgan rendered its oral opinion to the Board of Trustees of EQR that, as of
such date, the consideration to be paid by EQR in connection with the proposed
6
<PAGE>
Merger was fair from a financial point of view to EQR. J.P. Morgan has
confirmed its January 15, 1997 oral opinion by delivering its written opinion
to the Board of Trustees of EQR, dated January 16, 1997, that as of such date,
the consideration to be paid by EQR in connection with the proposed Merger was
fair from a financial point of view to EQR. No limitations were imposed by
EQR's Board of Trustees upon J.P. Morgan with respect to the investigations
made or procedures followed by it in rendering its opinions. See "The Merger--
Opinion of Financial Advisor--EQR."
Wellsford. At the meeting of the Board of Trustees of Wellsford on January
16, 1997, Merrill Lynch rendered its oral opinion to the Board of Trustees of
Wellsford, and subsequently on such date Merrill Lynch delivered its written
opinion, that, as of such date and based upon the assumptions made, matters
considered and limits of review, as set forth in such opinion, the proposed
consideration to be received by the holders of Wellsford Common pursuant to the
Merger and the Distribution was fair to such shareholders from a financial
point of view. No limitations were imposed by Wellsford's Board of Trustees
upon Merrill Lynch with respect to the investigations made or procedures
followed by it in rendering its opinions. See "The Merger--Opinion of Financial
Advisor--Wellsford."
RISK FACTORS
In considering whether to approve the Merger, the shareholders of EQR and
Wellsford voting on the Merger should consider, in addition to the other
information in this Joint Proxy Statement/Prospectus/Information Statement, the
matters discussed under "Risk Factors." Such matters include:
. Adverse consequences normally associated with debt or preferred equity
financing, including the risk that the Surviving Trust's cash flow will
be insufficient to meet required payments of principal and interest.
. Risks associated with the potential change in the relative share prices
of EQR Common and Wellsford Common prior to the time the Merger becomes
effective.
. Possible payment of liquidated damages and expenses: the Merger Agreement
provides for a "Break-Up Fee" of $14 million (the "Break-Up Fee") plus
"Break-Up Expenses" of up to $2.5 million (the "Break-Up Expenses")
payable by Wellsford to EQR if the Merger Agreement is terminated by
either EQR or Wellsford under certain circumstances and, within one year
thereafter, Wellsford enters into an agreement regarding an "Acquisition
Proposal," as defined herein, which is consummated. If the Merger
Agreement is terminated by either EQR or Wellsford under certain other
circumstances, either EQR or Wellsford will be required to pay the other
party's Break-Up Expenses of up to $2.5 million. See "The Merger--
Termination Provisions."
. Possible conflicts of interest due to the fact that certain members of
management of Wellsford, pursuant to existing agreements, have certain
interests that arise in connection with the Merger and the Distribution
that are in addition to the interests of shareholders of Wellsford
generally.
. Shareholders of EQR and Wellsford do not have appraisal rights in
connection with the Merger under Maryland law.
INTERESTS OF CERTAIN PERSONS
In considering whether to approve the Merger, shareholders should be aware
that certain members of the management of Wellsford and the Wellsford Board of
Trustees have certain interests that arise in connection with the Merger and
the Distribution that are in addition to the interests of shareholders of
Wellsford generally. The Board of Trustees considered these interests and
deliberated upon any resulting conflicts of interest unanimously concluding
that the advantages of the Merger and Distribution and the benefits thereof to
the shareholders outweighed any conflicts of interest. These additional
interests arise under existing agreements with, and annual compensation awards
from, Wellsford, which were approved by Wellsford's independent trustees in
prior years, and proposed agreements with WRP Newco and the Surviving Trust
relating to, among other things, severance payments to be made to certain
executive officers (but not Jeffrey H. Lynford, Chairman of the Board, and
Edward Lowenthal, President and Chief Executive Officer), the forgiveness of
loans made to certain executive officers incurred to acquire shares of
Wellsford Common, the issuance of additional shares of Wellsford Common to
certain executive officers, the acceleration of vesting of restricted share
grants issued to certain executive officers (but not Messrs. Lynford and
Lowenthal), payments to be made to certain executive officers to satisfy income
and excise tax obligations resulting from certain monies and other benefits to
be paid to them in connection with the Merger and the issuance of WRP Newco
stock options to certain executive officers and trustees of Wellsford in
replacement of certain existing Wellsford share options and reload options
granted in connection with the exercise of vested Wellsford options. In
addition, upon completion of the Merger, WRP Newco will enter into employment
agreements with Messrs. Lynford and Lowenthal for approximately five and one-
half years and employment agreements with Gregory F. Hughes, Chief Financial
Officer of Wellsford, and David M. Strong, a Vice President of Wellsford, for
two years. WRP Newco will also assume the existing split dollar life insurance
arrangements between Wellsford and Messrs. Lynford and Lowenthal. See
"Interests of Certain Persons in the Merger and Distribution."
7
<PAGE>
Further, upon completion of the Merger, Messrs. Lynford and Lowenthal will
each enter into a five-year consulting agreement with ERP Operating Partnership
and will be appointed to the Board of Trustees of the Surviving Trust for a
three-year term. In addition, Donald D. MacKenzie, Executive Vice President--
Director of Operations of Wellsford, will be a Senior Vice President of the
Surviving Trust upon completion of the Merger. The Surviving Trust will
indemnify each trustee and officer of Wellsford for all actions on or prior to
the Effective Time to the same extent such individuals were indemnified by
Wellsford prior to the Effective Time.
EFFECTIVE TIME OF THE CONTRIBUTION AND THE DISTRIBUTION
As stated in "The Contribution and Distribution," the Contribution and the
Distribution will take place immediately prior to the Merger.
EFFECTIVE TIME OF THE MERGER AND CLOSING DATE
The closing ("Closing") of the Merger will take place at 10:00 a.m. on the
date to be specified by EQR and Wellsford, which will be no later than the
third business day after satisfaction or waiver of the conditions set forth in
the Merger Agreement (the "Closing Date"), at the offices of Rudnick & Wolfe,
203 North LaSalle Street, Chicago, Illinois 60601, unless another date or place
is agreed to in writing by the parties. The Merger will become effective at the
time the State Department of Assessments and Taxation of Maryland (the
"Department") accepts for record the Articles of Merger (the "Articles"), or at
such time as EQR and Wellsford will agree should be specified in the Articles
(not to exceed 30 days after the Articles are accepted for record by the
Department). It is currently anticipated that the Merger will be effective on
or about May 30, 1997.
CONDITIONS TO THE MERGER
The obligations of EQR and Wellsford to consummate the Merger are subject to
the satisfaction or waiver of certain conditions, including, among others, (i)
obtaining the requisite approval of the shareholders of EQR and shareholders of
Wellsford, (ii) the absence of any material adverse change in the financial
condition, business or operations of Wellsford or EQR, (iii) the receipt of
certain legal opinions, including opinions with respect to the tax consequences
of the Merger, (iv) the receipt of all material consents, authorizations,
orders and approvals of governmental agencies and third parties, (v) the
consummation of certain transactions by and between EQR, ERP Operating
Partnership and WRP Newco, (vi) the execution of certain agreements between
each of Wellsford and EQR and their respective affiliates, and (vii) the
consummation of the Contribution and the Distribution. EQR and Wellsford each
have the right to waive any conditions to their respective obligations to
consummate the Merger. See "The Merger--Conditions of the Merger."
APPRAISAL RIGHTS
Shareholders of Wellsford and shareholders of EQR are not entitled to
dissenting shareholders' appraisal rights under Maryland law. Maryland law does
not provide appraisal rights to shareholders of a REIT in connection with a
merger if their shares are listed on a national securities exchange, such as
the NYSE, on the record date for determining shareholders entitled to vote on
such merger. All of the shares of EQR and Wellsford outstanding on the record
date for determining the shareholders entitled to vote on the Merger were
listed on the NYSE.
FEDERAL INCOME TAX CONSEQUENCES
Tax Consequences of Merger. The Merger is intended to qualify as a tax-free
reorganization under Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). For a more detailed discussion of certain U.S. Federal
income tax consequences of the Merger and certain other matters related
thereto, see "The Merger--Federal Income Tax Consequences."
Tax Consequences of Distribution. To the extent the fair market value of the
shares of WRP Newco Common distributed in the Distribution to Wellsford Common
Shareholders exceeds Wellsford's tax basis in such shares, gain will be
recognized by Wellsford. Assuming Wellsford qualifies as a REIT and has a
dividends paid deduction for distributions to its shareholders at least equal
to its REIT taxable income (as computed before taking into account the
dividends paid deduction), no REIT level tax will be incurred on account of the
Distribution.
8
<PAGE>
The distribution of shares of WRP Newco Common will, however, be taxable to
Wellsford Common Shareholders to the same extent as any other distribution made
by Wellsford to the Wellsford Common Shareholders. Thus, so long as Wellsford
qualifies for taxation as a REIT, distributions with respect to its shares,
including the Distribution, made out of current or accumulated earnings and
profits allocable thereto (and not designated as capital gain dividends) will
be includible by the Wellsford Common Shareholders as ordinary income for
Federal income tax purposes. For a more detailed discussion, see "Tax
Consequences of the Distribution."
TERMINATION
The Merger Agreement provides that it may be terminated in a number of
circumstances at any time prior to the Effective Time, whether before or after
the approval of the Merger by the shareholders of EQR and shareholders of
Wellsford. See "The Merger--Termination Provisions."
TERMINATION FEES
Depending on the reason for the Merger Agreement's termination, Wellsford may
be required to pay EQR either the Break-Up Fee and Break-Up Expenses or Break-
Up Expenses, or EQR may be required to pay Wellsford the Break-Up Expenses. See
"The Merger--Termination Fees and Expenses."
ANTICIPATED ACCOUNTING TREATMENT
The Merger will be treated as a purchase in accordance with Accounting
Principles Board Opinion No. 16.
NO SOLICITATION OF OTHER TRANSACTIONS
Wellsford has agreed that it (and its subsidiaries) will not, and will use
its best efforts to not permit its officers, trustees, employees, agents or
financial advisors to, initiate, solicit or encourage, directly or indirectly,
any inquiries or the making or implementation of any proposal or offer
(including, without limitation, any proposal or offer to its shareholders) with
respect to a merger, acquisition, tender offer, exchange offer, consolidation,
sale of assets or similar transactions involving all or any significant portion
of the assets or any equity securities of, it or any of its subsidiaries, other
than the transactions contemplated by the Merger Agreement. The Merger
Agreement does not, however, prohibit Wellsford from entering into discussions
with respect to an unsolicited proposal if the Board of Trustees of Wellsford
determines that such action is required by its duties to its shareholders
imposed by law.
EQR has agreed that if it enters into negotiations with another entity having
a class of equity securities registered under the Exchange Act regarding the
acquisition of such entity (whether effected through a merger, consolidation,
share exchange, tender offer or other form), then at least three business days
prior to executing any definitive agreement with such entity with respect to
such acquisition or making a tender offer for the shares or other ownership
interests of such entity, EQR will notify Wellsford of such transaction and
consult with Wellsford with respect thereto, it being understood, however, that
Wellsford will have no approval rights with respect thereto.
CONVERSION OF SHARES; EXCHANGE OF CERTIFICATES
Each share of Wellsford Common outstanding immediately prior to the Effective
Time will be converted into .625 share of validly issued, fully paid and
nonassessable Survivor Common. Each share of EQR Common outstanding immediately
prior to the Effective Time will be converted into one share of validly issued,
fully paid and nonassessable Survivor Common. Each share of EQR Preferred and
Wellsford Preferred outstanding immediately prior to the Effective Time will
continue as one validly issued, fully paid and nonassessable share of Survivor
Preferred, with all the preferences, rights and powers that each share
previously had as shares issued by EQR or Wellsford, as the case may be, and
will rank pari passu with each other outstanding Survivor Preferred; provided,
however, that the conversion ratio relating to the Wellsford Series A will be
adjusted in accordance with its terms.
All shares of Wellsford Common, when converted pursuant to the Merger, will
no longer be outstanding and will automatically be canceled and retired and
each holder of a certificate representing Wellsford Common will cease to have
any rights with respect thereto, except the right to receive shares of Survivor
Common, and cash in lieu of any fractional shares of Survivor Common, as well
as any distributions declared with respect thereto with a record date after the
Effective Time. At the Effective Time, each certificate representing
outstanding shares of Wellsford Preferred will cease to have any
9
<PAGE>
rights with respect to such shares, except the right to receive a certificate
of the Surviving Trust representing an equal number of Survivor Preferred.
Wellsford Common Shareholders should not tender their certificates for
Wellsford Common with their proxy. As promptly as practicable after the
Effective Time, Boston EquiServe LLP, an affiliate of First National Bank of
Boston, as the exchange agent ("Exchange Agent"), will mail to the shareholders
of Wellsford transmittal materials for use in exchanging certificates
evidencing Wellsford Shares for certificates evidencing shares of the Survivor
Common or Survivor Preferred ("Survivor Shares"). See "The Merger--Exchange of
Certificates."
At the Effective Time, each certificate evidencing outstanding shares of EQR
Common and EQR Preferred will, without any action by the holders thereof,
thereafter evidence the same number of shares of Survivor Common and Survivor
Preferred, as the case may be.
MANAGEMENT OF THE SURVIVING TRUST
The Surviving Trust will initially have twelve trustees. The Board of
Trustees of the Surviving Trust will be made up of the current trustees of EQR,
Jeffrey H. Lynford, the Chairman of the Wellsford Board of Trustees, and Edward
Lowenthal, a Trustee and the President of Wellsford. The Board of Trustees of
the Surviving Trust will be divided into three equally numbered classes serving
staggered three-year terms. One class will serve as trustees until the 1997
annual meeting of shareholders, one class will serve as trustees until the 1998
annual meeting of shareholders, and one class will serve as trustees until the
1999 annual meeting of shareholders.
Senior management of the Surviving Trust will be drawn from the present
management of EQR. As a condition to the consummation of the Merger, Jeffrey H.
Lynford and Edward Lowenthal will enter into consulting agreements with ERP
Operating Partnership. In addition, Donald MacKenzie, Executive Vice
President--Director of Operations of Wellsford, will be a Senior Vice President
of the Surviving Trust upon completion of the Merger. See "The Merger--
Interests of Certain Persons in the Merger and Distribution."
After the Merger, management and control of ERP Operating Partnership will be
vested in the Surviving Trust, which will serve as its sole general partner.
The Merger Agreement also contains provisions relating to, among other
things, employee benefits and indemnification and liability coverage of former
trustees and officers of Wellsford after the Merger. See "The Merger--Interests
of Certain Persons in the Merger and Distribution."
THE MEETINGS OF SHAREHOLDERS
EQR
The EQR Special Meeting has been called to consider and vote on the approval
of the Merger. The EQR Special Meeting will be held on May 28, 1997 at 10:00
a.m., local time, at One North Franklin, Chicago, Illinois. Only holders of
record of EQR Common at the close of business on April 14, 1997 will be
entitled to vote at the EQR Special Meeting. Each holder of EQR Common is
entitled to one vote per share on the Merger as proposed in the notice of the
EQR Special Meeting. EQR had outstanding 53,713,158 shares of EQR Common as of
the close of business on April 1, 1997, of which 1,022,666 shares (or
approximately 1.9% of the outstanding shares of EQR Common) (excluding 681,534
shares where beneficial ownership is disclaimed) were owned beneficially by the
officers and trustees of EQR, and such persons have indicated their intention
to vote such shares in favor of each of the proposals. Approval of the Merger
requires the affirmative vote of two-thirds of the holders of the outstanding
shares of EQR Common.
Wellsford
The Wellsford Special Meeting has been called to consider and vote on the
approval of the Merger, including the adoption of an amended and restated
declaration of trust of the Surviving Trust, the approval of the Additional
Provisions, the approval of the Additional Share Offering and the adoption of
WRP Newco's 1997 Management Incentive Plan. See
"--Proposal Regarding Additional Declaration of Trust Provisions," "--Proposals
Regarding WRP Newco," "Proposal Regarding Additional Declaration of Trust
Provisions," "Proposal to Approve WRP Newco Additional Share Offering" and
"Proposal to Approve WRP Newco's 1997 Management Incentive Plan." The Wellsford
Special Meeting will be held on May 28, 1997, at 10:00 a.m., local time, at The
Princeton Club, 15 West 43rd Street, New York, New York. Only holders of record
of Wellsford Common at the close of business on April 14, 1997 will be entitled
to notice of and to vote at the Wellsford Special Meeting. Each holder of
Wellsford Common is entitled to one vote per share as proposed in the notice of
10
<PAGE>
the Wellsford Special Meeting. Wellsford had outstanding 17,261,897 shares of
Wellsford Common as of the close of business on April 18, 1997, of which
599,828 shares (or approximately 3.5% of the outstanding shares of Wellsford
Common) (excludes 29,727 shares where beneficial ownership is disclaimed) were
owned beneficially by the officers and trustees of Wellsford, and such persons
have indicated their intention to vote such shares in favor of the proposals.
Approval of the Merger requires the affirmative vote of the Wellsford Common
Shareholders holding a majority of the Wellsford Common Shares. Approval of the
Additional Provisions requires the affirmative vote of the holders of two-
thirds of the outstanding shares of Wellsford Common. Approval of the
Additional Share Offering and adoption of WRP Newco's 1997 Management Incentive
Plan require the affirmative vote of the holders of a majority of the
outstanding shares of Wellsford Common voting. Wellsford Common Shareholders
may revoke their proxies at any time prior to the voting thereof by giving
written notice of such revocation to Wellsford, by executing and delivering a
proxy bearing a later date, or by attending the Wellsford Special Meeting and
voting in person.
SURVIVING TRUST SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following tables set forth the summary unaudited pro forma combined
financial data for the Surviving Trust as a combined entity, giving effect to
the Merger as if it had occurred on the dates indicated herein, after giving
effect to the pro forma adjustments described in the notes to the unaudited pro
forma financial statements included elsewhere in the Joint Proxy
Statement/Prospectus/Information Statement.
The summary unaudited pro forma combined operating data are presented as if
the Merger had been consummated at the beginning of the period presented.
The summary unaudited pro forma combined balance sheet data is presented as
if the Merger had occurred on December 31, 1996. The Merger has been accounted
for under the purchase method of accounting in accordance with the Accounting
Principles Board Opinion No. 16. In the opinion of management, all significant
adjustments necessary to reflect the effects of the Merger have been made.
The summary pro forma financial information should be read in conjunction
with, and is qualified in its entirety by, the respective historical audited
financial statements and notes thereto of EQR and Wellsford incorporated by
reference into this Joint Proxy Statement/Prospectus/Information Statement and
the unaudited pro forma financial statements and notes thereto included
elsewhere in the Joint Proxy Statement/Prospectus/Information Statement.
The summary unaudited pro forma operating and balance sheet data are
presented for comparative purposes only and are not necessarily indicative of
what the actual combined results of EQR and Wellsford would have been for the
period and dates presented. Nor does such data purport to represent the results
of future periods.
11
<PAGE>
SURVIVING TRUST
OPERATING DATA:
<TABLE>
<CAPTION>
PRO FORMA YEAR ENDED
DECEMBER 31, 1996
----------------------
(AMOUNT IN THOUSANDS
EXCEPT PER SHARE DATA)
<S> <C>
REVENUES:
Rental income........................................... $578,820
Fee and asset management................................ 6,749
Interest income-investment in mortgage notes............ 12,819
Interest and other income............................... 11,061
--------
Total revenues...................................... 609,449
--------
EXPENSES:
Property and maintenance................................ 167,526
Real estate taxes and insurance......................... 54,010
Property management..................................... 21,506
Fee and asset management................................ 3,837
Depreciation............................................ 124,211
Interest:
Expense incurred...................................... 103,538
Amortization of deferred financing costs.............. 4,242
General and administrative............................ 10,353
--------
Total Expenses...................................... 489,223
--------
Income before gain on disposition of properties and
(loss) on joint venture communities.................... 120,226
Gain on disposition of properties....................... 22,336
(Loss) on joint venture communities..................... (58)
--------
Income before extraordinary item and allocation to
Minority Interests..................................... 142,504
Extraordinary Item:
Write-off of unamortized cost on refinanced debt........ (3,512)
--------
Income before allocation to Minority Interests.......... 138,992
Income allocated to Minority Interests.................. (15,706)
--------
Net income.............................................. 123,286
Preferred distributions................................. 41,563
--------
Net income available for Common Shares.................. $ 81,723
========
Net income per weighted average Common Share
outstanding............................................ $ 1.53
========
Weighted average Common Shares outstanding.............. 53,317
========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, 1996
-----------------
<S> <C>
BALANCE SHEET DATA:
(at end of period)
Real estate, after accumulated depreciation................... $3,708,310
==========
Total assets.................................................. $3,968,482
==========
Total debt.................................................... $1,576,869
==========
Minority Interests............................................ $ 190,793
==========
Shareholders' Equity.......................................... $2,048,133
==========
</TABLE>
12
<PAGE>
EQUITY RESIDENTIAL PROPERTIES TRUST SUMMARY HISTORICAL AND COMBINED FINANCIAL
DATA
The following tables set forth summary historical and combined financial data
for EQR. The summary historical combined financial data for each of the years
ended December 31, 1992, 1993, 1994, 1995 and 1996 are derived from the audited
financial statements of EQR as reported in its Annual Reports on Form 10-K. The
summary historical financial data should be read in conjunction with, and is
qualified in its entirety by, the historical and combined financial statements
and notes thereto of EQR incorporated by reference into this Joint Proxy
Statement/Prospectus/Information Statement.
EQUITY RESIDENTIAL PROPERTIES TRUST
CONSOLIDATED AND COMBINED HISTORICAL FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues
Rental income......... $ 454,412 $ 373,919 $ 220,727 $104,388 $ 86,597
Fee and asset
management........... 6,749 7,030 4,739 4,651 4,215
Interest income-
investment in
mortgage notes....... 12,819 4,862 -- -- --
Interest and other
income............... 4,405 4,573 5,568 3,031 2,161
---------- ---------- ---------- -------- ---------
Total revenues.... 478,385 390,384 231,034 112,070 92,973
---------- ---------- ---------- -------- ---------
Expenses
Property and
maintenance.......... 127,172 112,186 66,534 35,324 30,680
Real estate taxes and
insurance............ 44,128 37,002 23,028 11,403 10,274
Property management... 17,512 15,213 10,249 4,938 2,912
Property management-
non-recurring........ -- -- 879 -- --
Fee and asset
management........... 3,837 3,837 2,056 2,242 2,403
Depreciation.......... 93,253 72,410 37,273 15,384 13,442
Interest:
Expense incurred.... 81,351 78,375 37,044 26,042 31,926
Amortization of
deferred financing
costs.............. 4,242 3,444 1,930 3,322 2,702
Refinancing costs..... -- -- -- 3,284 --
General and
administrative....... 9,857 8,129 6,053 1,994 1,915
---------- ---------- ---------- -------- ---------
Total expenses.... 381,352 330,646 185,046 103,933 96,254
---------- ---------- ---------- -------- ---------
Income (loss) before
gain on disposition of
properties,
extraordinary items and
allocation to Minority
Interests.............. 97,033 59,738 45,988 8,137 (3,281)
Gain on disposition of
properties............. 22,402 21,617 -- -- --
---------- ---------- ---------- -------- ---------
Income (loss) before
extraordinary items and
allocation to Minority
Interests.............. 119,435 81,355 45,988 8,137 (3,281)
Extraordinary Items:
Write-off of unamortized
costs on refinanced
debt................... (3,512) -- -- -- --
Gain on early
extinguishment of debt. -- 2,000 -- -- --
Gain on discharge of
indebtedness........... -- -- -- 1,792 18,203
---------- ---------- ---------- -------- ---------
Income before allocation
to Minority Interests.. 115,923 83,355 45,988 9,929 14,922
Income allocated to
Minority Interests..... (14,299) (15,636) (11,570) (3,834) --
---------- ---------- ---------- -------- ---------
Net income.............. 101,624 67,719 34,418 6,095 14,922
Preferred distributions. (29,015) (10,109) -- -- --
---------- ---------- ---------- -------- ---------
Net income available for
Common Shares.......... $ 72,609 $ 57,610 $ 34,418 $ 6,095 $ 14,922
========== ========== ========== ======== =========
Net income per weighted
average Common Share
outstanding............ $ 1.70 $ 1.68 $ 1.34 $ .42 --
Weighted average Common
Shares outstanding..... 42,586 34,358 25,621 14,601 --
BALANCE SHEET DATA (at
end of period):
Real estate, before
accumulated
depreciation......... $2,983,510 $2,186,636 $1,963,476 $634,577 $ 358,212
Real estate, after
accumulated
depreciation......... $2,681,998 $1,969,453 $1,770,735 $478,210 $ 218,825
Total assets.......... $2,986,127 $2,141,260 $1,847,685 $535,914 $ 238,878
Total debt............ $1,254,274 $1,002,219 $ 994,746 $278,642 $ 343,282
Minority Interests.... $ 150,637 $ 168,963 $ 177,438 $ 83,159 $ --
Shareholders' Equity
(Net Deficit)........ $1,458,830 $ 884,517 $ 609,936 $146,485 $(122,094)
</TABLE>
13
<PAGE>
WELLSFORD RESIDENTIAL PROPERTY TRUST SUMMARY HISTORICAL FINANCIAL DATA
The following tables set forth summary historical financial data for
Wellsford. The summary historical financial data for each of the years ended
December 31, 1992, 1993, 1994, 1995 and 1996 are derived from the audited
financial statements of Wellsford as reported in its Annual Reports on Form 10-
K. The summary historical financial data should be read in conjunction with,
and is qualified in its entirety by, the historical financial statements and
notes thereto of Wellsford incorporated by reference into this Joint Proxy
Statement/Prospectus/Information Statement. Certain reclassifications have been
made to Wellsford's historical financial data to conform to EQR's presentation.
WELLSFORD RESIDENTIAL PROPERTY TRUST
SUMMARY HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
HISTORICAL (000S EXCEPT PER SHARE DATA)
--------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues................... $ 131,821 $ 131,232 $ 82,794 $ 42,007 $ 26,229
Expenses................... (109,035) (113,712) (73,299) (34,816) (26,991)
Gain (loss) on sale of
investment communities.... (66) (819) -- 882 --
Loss on joint venture
communities............... (58) (279) -- -- --
--------- --------- -------- -------- --------
Income (loss) before
extraordinary item........ $ 22,662 $ 16,422 $ 9,495 $ 8,073 $ (762)
========= ========= ======== ======== ========
Net income (loss).......... $ 22,662 $ 10,869 $ 9,495 $ 8,073 $ (762)
Preferred dividends........ (12,548) (8,973) (7,000) (972) --
--------- --------- -------- -------- --------
Net income (loss) available
for common shareholders... $ 10,114 $ 1,896 $ 2,495 $ 7,101 $ (762)
========= ========= ======== ======== ========
Net income (loss) per
common share.............. $ 0.59 $ 0.11 $ 0.25 $ 0.91 $ (0.34)
========= ========= ======== ======== ========
Weighted average number of
common shares outstanding. 17,057 16,938 10,070 7,813 2,273
========= ========= ======== ======== ========
Real Estate assets before
accumulated depreciation.. $ 795,580 $ 736,399 $747,519 $301,389 $156,568
Real estate assets after
accumulated depreciation.. 711,614 677,908 712,742 282,224 143,787
Total Assets............... 756,289 729,638 745,754 322,400 165,963
Mortgages Payable.......... 82,731 77,137 208,858 24,203 17,155
Convertible note payable... -- -- -- 46,070 55,358
Unsecured credit facility.. 18,075 -- 140,000 -- --
Senior unsecured notes..... 248,496 223,307 -- -- --
Shareholders' equity....... 376,686 398,359 371,655 239,775 89,986
Cash dividends declared per
Series A preferred share.. $ 1.75 $ 1.75 $ 1.75 $ 0.24 $ --
========= ========= ======== ======== ========
Cash dividends declared per
Series B preferred share.. $ 2.41 $ 0.86 $ -- $ -- $ --
========= ========= ======== ======== ========
Cash dividends declared per
common share.............. $ 1.94 $ 1.92 $ 1.80 $ 1.68 $ 0.16
========= ========= ======== ======== ========
</TABLE>
14
<PAGE>
COMPARATIVE PER SHARE DATA
The following summary presents selected comparative unaudited per share
information for EQR and Wellsford on an historical basis and EQR and Wellsford
on a pro forma combined basis assuming the combination had been effective
throughout the periods presented. Wellsford pro forma equivalent per share
amounts are presented with respect to pro forma information. Such per share
amounts allow comparison of historical information with respect to the value of
one share of Wellsford Common to the corresponding information with respect to
the projected value of one share of Survivor Common as a result of the Merger
by multiplying the pro forma amounts by the Exchange Ratio of .625 to 1.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Net Income Per Common Share
EQR...................................................... $ 1.70
Wellsford................................................ .59
Surviving Trust pro forma combined (A)................... 1.53
Wellsford pro forma equivalent (B)....................... .96
Cash Distributions Declared Per Common Share
EQR...................................................... $ 2.40
Wellsford................................................ 1.94
Surviving Trust pro forma combined (A)................... 2.40
Wellsford pro forma equivalent (B)....................... 1.50
Shareholders' Equity Per Common Share
EQR...................................................... $28.52
Wellsford................................................ 22.03
Surviving Trust pro forma combined (A)................... 33.10
Wellsford pro forma equivalent (B)....................... 20.69
</TABLE>
- -------
(A) The pro forma combined Net Income Per Common Share and Cash Distributions
Declared Per Common Share data for the Surviving Trust has been prepared
assuming that in the Merger each share of Wellsford Common is converted
into .625 of a share of Survivor Common resulting in total weighted average
outstanding shares of Survivor Common of 53,317,000 for the year ended
December 31, 1996. For the Shareholder's Equity Per Common Share data,
total outstanding shares of Survivor Common was 61,886,000 for the year
ended December 31, 1996.
(B) The Wellsford pro forma equivalent is determined by multiplying the
Exchange Ratio (.625) by the Surviving Trust pro forma combined per share
amounts so that the per share amounts are equated to the comparative values
for each share of Wellsford Common.
COMPARATIVE SHARE PRICES
EQR
The EQR Common has been traded on the NYSE under the symbol "EQR" since
August 11, 1993. The following table sets forth the quarterly high and low
sales prices per share of EQR Common reported on the NYSE, as well as the
quarterly distributions declared per share of EQR Common, from January 1, 1995
through April 18, 1997.
<TABLE>
<CAPTION>
HIGH LOW DISTRIBUTIONS
------ ------ -------------
<S> <C> <C> <C>
1995
First Quarter............................... 29 1/8 25 5/8 .53
Second Quarter.............................. 29 3/4 24 7/8 .53
Third Quarter............................... 31 3/4 27 3/4 .53
Fourth Quarter.............................. 31 7/8 28 .59
1996
First Quarter............................... 33 3/4 28 1/4 .59
Second Quarter.............................. 33 1/2 30 7/8 .59
Third Quarter............................... 36 1/8 32 7/8 .59
Fourth Quarter.............................. 43 3/8 35 5/8 .625
1997
First Quarter............................... 46 39 3/4 .625(1)
Second Quarter (through April 18, 1997)..... 45 42 3/4 N/A
</TABLE>
- -------
(1) The first quarter distribution was paid on April 11, 1997 to shareholders
of record as of March 28, 1997 and represents an annual distribution rate
of $2.50 per share.
15
<PAGE>
On April 18, 1997, the last reported sale price of a share of EQR Common on
the NYSE was 43 1/8 per share. On January 16, 1997, the last full trading day
prior to the pubic announcement of the Merger, the last reported sale price of
a share of EQR Common on the NYSE was 43 3/8. As of April 18, 1997, EQR's
transfer agent reported 544 record holders of EQR Common and, as of April 1997,
The Depository Trust Company held EQR Common on behalf of approximately 19,500
beneficial owners.
Wellsford
The Wellsford Common has been traded on the NYSE under the symbol "WRP" since
November 20, 1992. The following table sets forth the quarterly high and low
sales prices per share of Wellsford Common reported on the NYSE, as well as the
quarterly distributions declared per share of Wellsford Common from January 1,
1995 through April 18, 1997.
<TABLE>
<CAPTION>
HIGH LOW DISTRIBUTIONS
------ ------ -------------
<S> <C> <C> <C>
1995
First Quarter............................... 21 3/4 19 1/4 $ .48
Second Quarter.............................. 22 3/4 20 .48
Third Quarter............................... 22 3/4 21 1/8 .48
Fourth Quarter.............................. 23 1/8 19 5/8 .48
1996
First Quarter............................... 24 1/4 21 3/8 .485
Second Quarter.............................. 22 7/8 20 1/2 .485
Third Quarter............................... 23 1/8 20 3/4 .485
Fourth Quarter.............................. 25 21 1/2 .485
1997
First Quarter............................... 31 3/4 24 1/8 .485
Second Quarter (through April 18, 1997)..... 30 1/2 28 1/2 N/A
</TABLE>
On April 18, 1997, the last reported sale price of a share of Wellsford
Common on the NYSE was 28 7/8 per share. On January 16, 1997, the last full
trading day prior to the pubic announcement of the Merger, the last reported
sale price of a share of Wellsford Common on the NYSE was 25 3/4. As of April
18, 1997, Wellsford's transfer agent reported 629 record holders of Wellsford
Common and, as of April 18, 1997, The Depository Trust Company held Wellsford
Common on behalf of approximately 13,500 beneficial owners.
BECAUSE THE EXCHANGE RATIO IS FIXED AND THE MARKET PRICE OF EQR COMMON IS
SUBJECT TO FLUCTUATION, THE MARKET VALUE OF THE SURVIVOR COMMON THAT HOLDERS OF
WELLSFORD COMMON WILL RECEIVE IN THE MERGER MAY INCREASE OR DECREASE PRIOR TO
AND FOLLOWING THE MERGER. SHAREHOLDERS ARE URGED TO OBTAIN CURRENT MARKET
QUOTATIONS FOR EQR COMMON AND WELLSFORD COMMON.
PROPOSAL REGARDING ADDITIONAL DECLARATION OF TRUST PROVISIONS
The Wellsford Common Shareholders are being asked to separately approve the
Additional Provisions to the Surviving Trust Declaration (defined herein) to
further conform the Surviving Trust Declaration to the terms of the EQR
Declaration (defined herein) and to update the Surviving Trust Declaration to
reflect the current approaches in the REIT industry regarding share ownership
restrictions necessary to maintain REIT status.
Removal of Trustees. Section 2.3 of the Wellsford Declaration currently
provides for the removal of Trustees, with or without cause, by the affirmative
vote of the holders of not less than two-thirds of the Wellsford Shares then
outstanding and entitled to vote on the election of trustees. The Additional
Provisions will provide for the removal of Trustees only with cause.
Restrictions on Transfer and Ownership of Shares. In order to maintain its
status as a REIT under the Code and Title 8, Section 6.6 of the Wellsford
Declaration currently imposes a number of restrictions on the transfer and
ownership of Wellsford Shares. See "Comparison of Rights of Shareholders--
Restrictions on the Ownership, Transfer or Issuance of Shares." Since the
adoption of the Wellsford Declaration in 1992, the comparable section of the
declarations of other REITs has evolved into more detailed provisions relating
to the applicable ownership limits and compliance with the Code. The Additional
Provisions will modify the restrictions on transfer to reflect the effects of
the Merger and the Surviving Trust's relationship with ERP Operating
Partnership.
16
<PAGE>
Amendment to Declaration. Section 9.1 of the Wellsford Declaration currently
provides for its amendment by the affirmative vote of the holders of not less
than a majority of the Wellsford Shares outstanding and entitled to vote
thereon, except that amendments related to the removal of trustees, the
restrictions on the ownership of Wellsford Shares, the reorganization of
Wellsford and the merger, consolidation or sale of all or substantially of
Wellsford's property must be approved by the affirmative vote of the holders of
two-thirds of the Wellsford's Shares then outstanding and entitled to vote on
the matter. The Additional Provisions will require the foregoing to be approved
by a two-thirds vote of the Survivor Shares then outstanding and entitled to
vote thereon.
Mergers, Consolidation, or Sale of Trust Property. Section 9.2 of the
Wellsford Declaration currently states that, upon the affirmative vote of the
holders of not less than two-thirds of the Wellsford Shares then outstanding
and entitled to vote thereon, the trustees of Wellsford may reorganize
Wellsford by creating a separate entity into which Wellsford will merge or sell
its assets. In addition, Section 9.3 of the Wellsford Declaration currently
provides that if Wellsford is not the surviving entity in a merger or
consolidation, or in the event of a sale of all or substantially all of
Wellsford's property, that transaction must be approved by two-thirds of the
Wellsford Shares then outstanding and entitled to vote thereon. In all other
cases, such a merger or consolidation need only be approved by a majority of
the Wellsford Shares then outstanding and entitled to vote thereon. The
Additional Provisions provide that any merger, consolidation, or sale of all or
substantially all of the Surviving Trust's property will be required to be
approved by the holders of a majority of the Survivor Shares then outstanding
and entitled to vote thereon. For a more detailed description of the Additional
Provisions, see "Proposal Regarding Additional Declaration of Trust
Provisions."
WELLSFORD REAL PROPERTIES, INC.
WRP Newco was organized to create and realize value by identifying and making
opportunistic real estate investments through the direct acquisition,
rehabilitation, development, financing and management of real properties and/or
participation in these activities through the purchase of debt or equity
securities of entities engaged in such real estate businesses. Management will
concentrate its efforts on defining and building focused operating businesses
with recurring sources of income. WRP Newco intends to maximize shareholder
value over time through growth in cash flow and net asset value per share.
WRP Newco believes that while liquidity has returned to many real estate
markets and that the supply and demand of many real estate asset classes are in
relative equilibrium, there are specific opportunities which are expected to
continue to exist because of market inefficiencies and impediments to
investment, such as transactional complexity, time-consuming regulatory
approvals, the prospect of no or limited immediate cash flow and a lack of
available property information and market information analysis. In this regard,
WRP Newco will initially focus its investments on three distinct aspects of the
real estate business which management believes currently offer such
opportunities. They are (i) acquiring underperforming office and other
commercial properties below replacement cost, renovating and/or repositioning
them, and owning, operating and/or reselling such properties, (ii) investing in
real estate-related debt instruments with the potential for high-yields or
returns more characteristic of equity ownership and (iii) engaging in selective
property development when justified by expected returns. As opportunities
emerge, WRP Newco may in the future expand its real estate-related businesses
and activities.
WRP Newco currently does not intend to qualify as a REIT under the Code.
Consequently, WRP Newco will have the flexibility to respond quickly to
opportunities without the structural limitations inherent in REITs and to
operate, when deemed advantageous by management, on a more highly leveraged
basis than most REITs. By not qualifying as a REIT under the Code (which would
require WRP Newco to distribute each year at least 95% of its net taxable
income, excluding capital gains), WRP Newco will have the ability and currently
intends to retain for reinvestment its cash flow generated from operations and
to sell properties without the substantial income tax penalties which may be
imposed on REITs in such transactions. In addition, WRP Newco will differ from
opportunity funds that are typically structured as private partnerships. In
that regard, the business of WRP Newco will be conducted without the payment of
acquisition, disposition or advisory fees to general partners which should
result in additional cash flow being available for reinvestment as well as
mitigate the potential for conflicts of interest. In addition, unlike investors
in opportunity funds, WRP Newco's shareholders are expected to have enhanced
liquidity through their ability to sell or margin their stock. WRP Newco also
hopes to attract a broader range of investors because there will be no
stipulated investment minimum. However, unlike REITs and opportunity funds, WRP
Newco will be subject to corporate level taxation.
WRP Newco's management will include Jeffrey H. Lynford, Chairman, and Edward
Lowenthal, President and Chief Executive Officer, who were co-founders of, and
served in the same capacities at, Wellsford, supported by a management
17
<PAGE>
team with experience in real estate acquisitions, development, asset management
and financing. WRP Newco believes that the over 50 years of combined experience
of management in real estate, capital markets and public company operations,
their knowledge, credibility, and business relationships, and their
demonstrated track record of recognizing and profiting from emerging real
estate trends should help WRP Newco accomplish its business objectives. Since
the completion by Wellsford f the initial public offering of its common shares
of beneficial interest in November 1992 (the "Wellsford IPO"), Messrs. Lynford
and Lowenthal, through Wellsford Residential, acquired 69 multifamily
properties containing 16,332 units. From calendar year 1992 through calendar
year 1996, Wellsford's revenues increased from $26.5 million to $131.8 million,
representing a compounded annual growth rate of approximately 49%, and
Wellsford's earnings before interest, depreciation and amortization ("Wellsford
EBITDA") increased from $13.8 million to $72.8 million, representing a
compounded annual growth rate of approximately 52%. In analyzing potential
investments and market trends and inefficiencies, management has reviewed, and
will continue to review, current economic and market information.
To date, WRP Newco has implemented its business strategy by identifying,
negotiating and, except in one instance, consummating the following initial
investments: (i) six office buildings located in Northern New Jersey containing
an aggregate of approximately 940,400 gross square feet, five of which are
vacant, acquired below replacement cost for an aggregate of $47.6 million, or
$50 per gross square foot of building area, with respect to which WRP Newco
currently expects to spend an aggregate of approximately $13.7 million in
renovation and repositioning costs; (ii) a $20 million subordinated secured
mezzanine loan with respect to a class A office building located at 277 Park
Avenue, New York City, expected to close in April 1997, (iii) a $17.8 million
mortgage on, and option to purchase, a 344-unit class A residential apartment
complex in Tucson, Arizona and (iv) an approximate 80% interest in Phases I and
II of, and in options to acquire (at fixed prices) and develop Phases III, IV
and V of, a 1,880-unit class A multifamily development in a suburb of Denver,
Colorado. See "WRP Newco's Business and Properties".
Upon completion of the Distribution and consummation of the Merger, WRP Newco
expects to have available various sources of capital, financing and credit
support, including (i) the proceeds of $3.5 million from the acquisition by ERP
Operating Partnership of WRP Newco's Class A common stock, par value $.01 per
share ("WRP Newco Class A Common") at a price equal to the per share sales
price to any institutional purchaser of WRP Newco Common Stock on or prior to
the Effective Time or, if there is no such purchaser, at a price equal to the
book value (the "WRP Newco Book Value") per share of WRP Newco Common Stock
(which is currently estimated to be $10.43 per share) at the time of the Merger
(the "Issuance Price"), (ii) the commitment of ERP Operating Partnership to
acquire at WRP Newco's option up to $25 million of WRP Newco's Series A 8%
Convertible Redeemable Preferred Stock ("WRP Newco Series A Preferred"), each
share of WRP Newco Series A Preferred being convertible into shares of WRP
Newco Common Stock at a premium equal to 8% of the Issuance Price ("ERP
Preferred Commitment") and (iii) a $50 million two-year line of credit
(extendible for one year) from The First National Bank of Boston ("Bank of
Boston") and Morgan Guaranty Trust Company of New York ("Morgan Guaranty")
("WRP Newco Line of Credit") which will initially bear interest at an annual
rate equal to LIBOR plus 175 basis points. The ERP Preferred Commitment will be
pledged as security for the WRP Newco Line of Credit. See "Wellsford Real
Properties, Inc.--Initial Capital and Financing" and "Description of Capital
Stock of WRP Newco--Series A 8% Convertible Redeemable Preferred Stock".
WRP NEWCO RISK FACTORS
In addition to general investment and real estate risks and those factors set
forth elsewhere in this Joint Proxy Statement/Prospectus/Information Statement
under "WRP Newco Risk Factors," in connection with WRP Newco's future business
activities, Wellsford Common Shareholders should be aware of, among other
things, the following factors:
. Nature of investments may involve high risk.
. Illiquidity of WRP Newco's real estate investments.
. Competition in identifying and making investments and attracting tenants.
. Risks of excessive costs and delays associated with the acquisition,
development, construction and renovation of properties.
. Risks of vacancies at existing properties.
. Lack of control and risks associated with equity investments in and with
third parties.
. Lack of limitation on the amount of debt that may be incurred and risks
of highly leveraged investments.
18
<PAGE>
. Risks associated with debt instruments held by WRP Newco, including the
possibility that borrowers may not be able to make payments when due,
that the value of collateral may be less than amounts owed and that
interest rates charged may be less than WRP Newco's cost of funds.
. Risks associated with investments in mortgage loans and junior mortgages,
including lack of control over the collateral and any foreclosure
procedures.
. Risks associated with investments in commercial mortgage-backed
securities, resulting, in part, from the fact that the process of rating
and servicing such securities is difficult and existing credit support is
inadequate.
. WRP Newco is a newly-formed entity without any prior operating history.
. Risks of uninsured loss at WRP Newco's properties.
. Potential liability for unknown or future environmental liabilities.
. WRP Newco is dependent primarily upon the efforts of its Chairman of the
Board and President and Chief Executive Officer.
. Tax consequences of the Distribution.
. The ability of WRP Newco's Board of Directors to amend or revise WRP
Newco's investment and other policies without a vote of stockholders.
. The lack of a prior market for shares of WRP Newco Common.
. The potential antitakeover effect of certain provisions of WRP Newco's
Articles of Amendment and Restatement (the "Newco Charter") and Maryland
law.
MANAGEMENT
The management of WRP Newco will be led by substantially all of the current
senior management of Wellsford, including, as noted above, Messrs. Lynford and
Lowenthal. During the last 11 years Messrs. Lynford and Lowenthal, together
with other members of their team, succeeded in accomplishing the following:
. Researched and identified multifamily properties in the Southwestern
United States as an opportunity for above-market returns with modest
risk.
. Identified, evaluated and negotiated the acquisition of over 21,000 high-
quality multifamily units in eight states. Wellsford currently owns 72
multifamily properties containing 19,004 units. From calendar year 1992
through calendar year 1996, Wellsford's revenues increased from $26.5
million to $131.8 million, representing a compounded annual growth rate
of approximately 49%, and Wellsford EBITDA increased from $13.8 million
to $72.8 million, representing a compounded annual growth rate of
approximately 52%.
. Completed a $100 million initial public offering of Wellsford, which was
the first publicly-traded REIT dedicated exclusively to the ownership of
multifamily properties.
. Raised approximately $585 million in eight subsequent offerings of
Wellsford's common shares, convertible preferred shares, perpetual
preferred shares and senior unsecured debt.
. Obtained an investment grade rating for Wellsford's senior unsecured debt
and subsequently obtained a rating increase to BBB by Standard & Poor's
Rating Services, Inc. ("S&P") and Duff & Phelps, Inc. ("Duff & Phelps").
. Obtained a $150 million unsecured line of credit for Wellsford from a
consortium of domestic and foreign banks.
. Consummated one of the first public REIT mergers when Wellsford
Residential acquired Holly Residential Properties, Inc.
. Created an internal property management operation for Wellsford which
directly managed 84% of its properties.
. Structured the Merger with EQR in a transaction that valued Wellsford at
approximately $1 billion.
Further, assuming consummation of the Merger, investors who bought their
shares of Wellsford Common at the initial public offering in November, 1992,
would have received an average annual return of approximately 22.8% on their
investment, based upon the April 1, 1997 closing market price of a share of EQR
Common on the NYSE and assuming (i) all distributions received on such shares
of Wellsford Common were immediately reinvested in Wellsford Common and (ii) a
value for each share of WRP Newco Common distributed in the Distribution equal
to their book value (which is currently estimated to be $10.43 per share).
19
<PAGE>
BUSINESS STRATEGY
In furtherance of its business strategy, WRP Newco will initially focus its
investments on three distinct aspects of the real estate business. As
opportunities emerge, WRP Newco may in the future expand or modify its real
estate-related businesses and activities.
Commercial Properties. WRP Newco will seek to acquire office and other
commercial properties below replacement cost and operate and/or resell the
properties after renovation, redevelopment and/or repositioning. WRP Newco
believes that appropriate well-located commercial properties which are
currently underperforming can be acquired on advantageous terms and
repositioned with the expectation of achieving enhanced returns which are
greater than returns which could be achieved by acquiring a stabilized
property. WRP Newco also believes that there are opportunities available to
acquire properties that are not attractive to REITs and institutional investors
because the properties have no or limited cash flow as a result of required
rehabilitation and their not being substantially leased.
High Yield Debt Investments. WRP Newco will make loans that constitute, or
will invest in real estate-related senior, junior or otherwise subordinated
debt instruments, which may be unsecured or secured by liens on real estate,
interests therein or the economic benefits thereof, and which have the
potential for high yields or returns more characteristic of equity ownership.
These investments may include debt that is acquired at a discount, mezzanine
financing, commercial mortgage-backed securities ("CMBS"), secured and
unsecured lines of credit, distressed loans, and loans previously made by
foreign and other financial institutions. WRP Newco believes that there are
opportunities to acquire real estate debt securitized by the use of CMBS,
especially in the low or below investment grade tranches, at significant
returns as a result of inefficiencies in pricing.
Property Development. WRP Newco will engage in selective development
activities as opportunities arise and when justified by expected returns.
Initially, WRP Newco will continue the development of Palomino Park, its five-
phase residential community begun by Wellsford, taking advantage of the fixed-
price land purchase options obtained by Wellsford two years ago. This
development may be retained for investment and operated by WRP Newco, sold, or
converted to condominium ownership. See "WRP Newco's Business and Properties -
Wellsford Property Development--Palomino Park". Certain development activities
may be conducted in joint ventures with local developers who may bear the
substantial portion of the economic risks associated with the construction,
development and initial rent-up of properties. As part of its strategy, WRP
Newco may seek to obtain bond financing from local governmental authorities
which generally bear interest at rates substantially below rates with respect
to conventional financing.
WRP Newco may in the future make equity investments in entities owned and/or
operated by unaffiliated parties and which engage in real estate-related
businesses and activities or businesses that service the real estate business.
Some of the entities in which WRP Newco may invest may be start-up companies or
companies in need of additional capital. WRP Newco may also manage and lease
properties owned by it or in which it has an equity or debt investment.
INITIAL CAPITAL AND FINANCING
Initially, WRP Newco expects to have available the following sources of
capital, financing and credit support:
. $3.5 million of proceeds from the sale to ERP Operating Partnership of
shares of WRP Newco's Class A Common at a price equal to the Issuance
Price.
. $25 million pursuant to the ERP Preferred Commitment to acquire up to
1,000,000 shares of WRP Newco Series A Preferred at the request of WRP
Newco and subject to certain limited conditions. Each share of WRP Newco
Series A Preferred is convertible into shares of WRP Newco Common at a
premium equal to 8% of the Issuance Price. The ERP Preferred Commitment
will be pledged as security for the WRP Newco Line of Credit.
. $50 million under a two-year line of credit as to which Bank of Boston
and Morgan Guaranty have issued a commitment. The WRP Newco Line of
Credit will initially bear interest at an annual rate equal to LIBOR plus
175 basis points and will be extendible for an additional one-year
period.
. Approximately $81.6 million in construction financing and credit
enhancement with respect to Palomino Park.
See "Wellsford Real Properties, Inc.--Initial Capital and Financing,"
"Description of Capital Stock of WRP Newco" and "Certain Agreements Between WRP
Newco and ERP Operating Partnership".
20
<PAGE>
INITIAL INVESTMENTS
In furtherance of its business strategy, WRP Newco has identified, negotiated
and, except in one instance, consummated the acquisition of the following
investments:
. Five properties consisting of six office buildings located in Northern
New Jersey, all of which are vacant except for Greenbrook Corporate
Center, which was approximately 85.7% occupied at April 1, 1997. WRP
Newco currently intends to invest an aggregate of approximately $13.7
million to renovate and reposition such properties. At the time of its
acquisition of these properties, WRP Newco obtained the right to develop
for no additional consideration an additional 1.1 million square feet of
commercial space at these properties.
The buildings are described as follows:
<TABLE>
<CAPTION>
PURCHASE PRICE
LOCATION & PLANNED
IN NEW GROSS AREA PURCHASE PRICE/PURCHASE PLANNED IMPR. PER SQ.
PROPERTY NAME JERSEY (SQ. FT.) PRICE PER SQ. FT.(1) IMPROVEMENTS FT.(1)
- ------------- --------- ---------- ----------------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Point View.............. Wayne 560,000 $ 15.8 million/$28 $9.1 million $44.4
Main Campus
(two buildings)
Greenbrook Corp. Ctr.... Fairfield 190,000 23.7 million/125 0.5 million 127.4
1700 Valley Road........ Wayne 70,600 1.0 million/14 0.2 million 17
Chatham Building(2)..... Chatham 65,000 5.1 million/78 3.1 million 126.2
1800 Valley Road........ Wayne 54,800 2.0 million/36 0.8 million 51.1
------- ------------------- -------------
Total/Weighted
average.............. 940,400 $47.6 million/$50.1 $13.7 million $65.2
======= =================== =============
</TABLE>
- -------
(1) Assumes no allocation of purchase price for undeveloped land.
(2) WRP Newco has entered into a ten-year lease for approximately 22,000 square
feet in the Chatham Building at an initial gross rent of $26.00 per square
foot and rising to approximately $28.00 per square foot in the sixth year.
. $20 million of an $80 million subordinated secured mezzanine loan to the
owner of the approximately 1.74 million square foot, 52-story class A
office building located in mid-town Manhattan at 277 Park Avenue, New
York City (the "277 Park Loan"), expected to close in April 1997. The 277
Park Loan will be payable in full in May, 2007 and will bear interest
payable monthly at the rate of approximately 12% per annum.
. A $17.8 million mortgage loan on, and option (the "Sonterra Option") to
purchase for approximately $20.5 million through December, 1997 and for
$21 million during 1998, a 344-unit, newly constructed class A
residential apartment project located in Tucson, Arizona known as
"Sonterra at Williams Centre". The Sonterra Loan was originated in July
1996, and is payable in full on July 1, 1999 and bears interest payable
monthly at the rate of 9% percent per annum.
. An approximate 80% interest in Phases I and II of, and in options to
acquire and develop Phases III, IV and V of, a 1,880-unit class A
multifamily development known as "Palomino Park," located on 182 acres,
of which 65 acres have been developed, in a suburb of Denver, Colorado.
Palomino Park is being constructed around a centrally located 24-acre
park and has a 29,000-square-foot recreation center. Phase I, which is to
consist of 456 units, is approximately 65% completed and is expected to
be completed in late 1997. Construction on Phase II which is to consist
of 304 units is expected to be completed in late 1998. An aggregate of
approximately $21.3 million has been invested in Palomino Park, exclusive
of amounts advanced under the existing construction loan for Phase I. ERP
Operating Partnership will have an approximate 20% interest in Palomino
Park.
CERTAIN AGREEMENTS BETWEEN WRP NEWCO AND ERP OPERATING PARTNERSHIP
. Common Stock and Preferred Stock Purchase Agreement--Provides for the
purchase by ERP Operating Partnership of (i) $3.5 million of WRP Newco
Class A Common and (ii) $25 million of WRP Newco Series A Preferred as
requested by WRP Newco over a 3-year period. ERP Operating Partnership is
entitled to elect a nominee to the WRP Newco Board of Directors for a
minimum of two years. For ten years after the Effective Time, WRP Newco
has the right to direct the voting of all shares of WRP Newco Series A
Preferred, WRP Newco Class A Common and WRP Newco Common owned by ERP
Operating Partnership or any of its affiliates on most matters. See
"Certain Agreements Between WRP Newco and ERP Operating Partnership--
Common Stock and Preferred Stock Purchase Agreement."
21
<PAGE>
. Registration Rights Agreement--Provides for registration rights at WRP
Newco's expense with respect to shares of WRP Newco Class A Common, WRP
Newco Series A Preferred and WRP Newco Common held by ERP Operating
Partnership. See "Certain Agreements Between WRP Newco and ERP Operating
Partnership--Registration Rights Agreement."
. Sonterra Option Agreement--Provides ERP Operating Partnership with a
right of first offer to acquire the Sonterra Option and a right to
acquire the Sonterra Option if WRP Newco does not exercise it. If WRP
Newco acquires Sonterra, ERP Operating Partnership will have a "Right of
First/Last Offer" for the property.
. Agreement Regarding Palomino Park--Governs the relationship between WRP
Newco and ERP Operating Partnership as 80% and 20% shareholders,
respectively, of the entity controlling Palomino Park, including certain
rights of first offer and put/call rights with respect to each other's
shares. ERP Operating Partnership has also agreed to be a stand-by
purchaser of Phase I if the construction loan thereon is not paid, and to
be similarly obligated with respect to Phase II. See "Certain Agreements
Between WRP Newco and ERP Operating Partnership--Agreement Regarding
Palomino Park."
. Credit Enhancement Agreement--Provides for ERP Operating Partnership to
make its own credit available for a period of eight years in the form of
a guaranty of WRP Newco's obligations to repay the bonds issued to
finance the park and certain infrastructure within Palomino Park. See
"Certain Agreements Between WRP Newco and ERP Operating Partnership--
Credit Enhancement Agreement."
WELLSFORD REAL PROPERTIES, INC. (PREDECESSOR) SUMMARY UNAUDITED PRO FORMA
COMBINED FINANCIAL DATA
The following tables set forth the summary unaudited pro forma combined
financial data for Wellsford Real Properties, Inc. (Predecessor) as a combined
entity, giving effect to the Merger, Contribution and Distribution as if they
had occurred on the dates indicated herein, after giving effect to the pro
forma adjustments described in the notes to the unaudited pro forma combined
financial statements included elsewhere in this Joint Proxy
Statement/Prospectus/Information Statement.
The summary unaudited pro forma combined operating data are presented as if
the Merger, Contribution and Distribution had been consummated on January 1,
1996. In addition to the Merger, Contribution and Distribution, the pro forma
combined operating data gives effect to certain material events which occurred
between January 1, 1996 and March 31, 1997 as if they had occurred on January
1, 1996. See the notes to the unaudited Pro Forma Combined Income Statement for
the year ended December 31, 1996 included elsewhere in this Joint Proxy
Statement/Prospectus/Information Statement.
The summary unaudited pro forma combined balance sheet data are presented as
if the Merger, Contribution and Distribution had occurred on December 31, 1996.
In addition to the Merger, Contribution and Distribution, the pro forma
combined balance sheet data gives effect to certain material events which
occurred between October 1, 1996 and March 31, 1997 as if they had occurred on
December 31, 1996. See the notes to the unaudited Pro Forma Combined Balance
Sheet at December 31, 1996 included elsewhere in this Joint Proxy
Statement/Prospectus/Information Statement. In the opinion of management, all
necessary adjustments necessary to reflect the effects of the Merger,
Contribution and Distribution have been made.
The summary unaudited pro forma financial data should be read in conjunction
with, and is qualified in its entirety by, the respective historical financial
statements and notes thereto of Wellsford and Wellsford Real Properties, Inc.
(Predecessor) incorporated by reference into, and included in, this Joint Proxy
Statement/Prospectus/Information Statement, respectively.
The summary unaudited pro forma operating and balance sheet data are
presented for comparative purposes only and are not necessarily indicative of
what the actual combined results of Wellsford Real Properties, Inc.
(Predecessor) would have been for the period and as of the date presented; nor
does such data purport to represent the results of future periods.
22
<PAGE>
WELLSFORD REAL PROPERTIES, INC. (PREDECESSOR)
SUMMARY UNAUDITED COMBINED FINANCIAL DATA
<TABLE>
<CAPTION>
PRO FORMA YEAR HISTORICAL YEAR
ENDED DECEMBER 31, ENDED DECEMBER 31,
1996 1996
------------------- ------------------
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
-----------------------------------------
<S> <C> <C> <C>
OPERATING DATA:
Revenues:
Rental income............... $ 3,632
Other income................ 250
Interest income............. 3,952 $ 757
------------------- -----------------
7,834 757
------------------- -----------------
Expenses:
Property operating and
maintenance................ 852
Real estate taxes........... 428
Interest.................... 1,550
General and administrative.. 1,750
Depreciation................ 510
Property management......... 181
------------------- -----------------
5,271 0
------------------- -----------------
Income before income taxes.... 2,563 757
Provision for income taxes.... 1,047
Net income.................... $ 1,516 $ 757
=================== =================
Net income per common share... $ 0.31
Weighted average common shares
outstanding.................. 4,900
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL HISTORICAL
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1995
------------ ------------ ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Real estate.............................. $ 68,906 $21,306 $ 7,955
Mortgage notes and interest receivable... $ 37,934 $17,934 $ 0
Total assets............................. $113,192 $44,760 $18,369
Total debt............................... $ 59,755 $14,755 $14,755
Total equity............................. $ 51,109 $30,005 $ 3,614
</TABLE>
PROPOSALS REGARDING WRP NEWCO
In order to satisfy the requirements of the ASE, Wellsford Common
Shareholders will also be asked to approve the Additional Share Offering.
Wellsford Common Shareholders will also be asked to approve the adoption of WRP
Newco's 1997 Management Incentive Plan.
The Additional Share Offering would dilute the equity of existing
stockholders if the purchase price for the Additional Shares is less than the
book value of WRP Newco Common on the date of the Distribution. On the other
hand, the Board of Trustees of Wellsford and the Board of Directors of WRP
Newco believe that the Additional Share Offering will provide more capital
available for investment, enhance WRP Newco's capital structure and increase
the liquidity of WRP Newco Common. See "Proposal to Approve WRP Newco
Additional Share Offering."
The issuance of shares of WRP Newco Common pursuant to WRP Newco's 1997
Management Incentive Plan could be dilutive to existing stockholders or could
adversely affect prevailing market prices. On the other hand, the Board of
Trustees of Wellsford and the Board of Directors of WRP Newco believe that WRP
Newco's 1997 Management Incentive Plan will enable WRP Newco to attract and
retain personnel and will align the interests of management with those of WRP
Newco's stockholders. See "Proposal to Approve WRP Newco's 1997 Management
Incentive Plan."
23
<PAGE>
RISK FACTORS
In considering whether to approve the Merger, the shareholders of EQR and
Wellsford should consider, in addition to the other information in this Proxy
Statement/Prospectus/Information Statement, the matters described in this
section.
CONFLICTS OF INTEREST
In considering whether to approve the Merger, shareholders should be aware
that certain members of the management of Wellsford and the Wellsford Board of
Trustees have certain interests that arise in connection with the Merger and
the Contribution and Distribution that are in addition to the interests of
shareholders of Wellsford generally. These interests arise under existing
agreements with, and annual compensation awards from, Wellsford, which were
approved by Wellsford's independent trustees in previous years, and proposed
agreements with WRP Newco and the Surviving Trust relating to, among other
things, (i) severance payments to be made to Messrs. Kelley, MacKenzie, Hughes
and Strong, executive officers of Wellsford, in the amounts of $1,149,563,
$764,070, $692,440 and $585,000, respectively, approximately $240,051,
$391,062, $347,583 and $260,250 of which (assuming receipt of an annual bonus
each year equal to the average annual bonus received for the prior three
fiscal years, which bonuses are not guaranteed), respectively, will be
received under existing employment agreements if the Merger does not take
place, (ii) the forgiveness of approximately $1.5 million, $1.5 million,
$281,000, $1.1 million, $1.1 million and $369,000 of loans made to Messrs.
Lynford, Lowenthal , Kelley, MacKenzie, Hughes and Strong to acquire shares of
Wellsford Common, approximately $659,000, $659,000, $125,000, $503,000,
$503,000 and $181,000 of which, respectively, will be forgiven over the
remaining terms of the loans if the Merger does not take place, (iii) the
issuance of 22,346 shares of Wellsford Common to each of Messrs. Lynford,
Lowenthal and Kelley, which will not be issued if the Merger is not approved,
(iv) the acceleration of vesting of 2,843 restricted shares issued to each of
Messrs. MacKenzie and Hughes, which will not be accelerated if the Merger is
not consummated, but would vest in subsequent years if Wellsford satisfied
certain performance criteria, (v) payments of $2.6 million, $2.4 million,
$420,000, $1.0 million, $1.1 million and $500,000 to be made on behalf of
Messrs. Lynford, Lowenthal, Kelley, MacKenzie, Hughes and Strong,
respectively, to satisfy income and excise tax obligations resulting from
certain monies and other benefits to be paid to them in connection with the
Merger, subject to adjustment to the extent the actual value of Wellsford
Common at the Effective Time is greater or less than $27.50, which amounts
will not be paid if the Merger is not consummated and (vi) the issuance of WRP
Newco stock options to certain executive officers and trustees of Wellsford in
replacement of certain existing Wellsford share options and reload options
granted in connection with the exercise of vested Wellsford share options,
which replacement options will not be issued if the Merger is not consummated.
See "Interests of Certain Persons in the Merger and Distribution--Benefits of
Key Executives." In addition, upon completion of the Merger, WRP Newco will
enter into employment agreements with Messrs. Lynford and Lowenthal for
approximately five and one-half years at annual base salaries of $275,000 and
employment agreements with Messrs. Hughes and Strong for two years at annual
base salaries of $175,000 and $125,000, respectively. WRP Newco will also
assume the existing split dollar life insurance arrangements between Wellsford
and Messrs. Lynford and Lowenthal.
Further, upon completion of the Merger, Messrs. Lynford and Lowenthal will
each enter into a five-year consulting agreement with ERP Operating
Partnership for annual compensation of $200,000. Subsequent to the Merger,
Messrs. Lynford and Lowenthal will also be appointed to the Board of Trustees
of the Surviving Trust for a three year term. In addition, Mr. MacKenzie,
Executive Vice President-Director of Operations of Wellsford, will be a Senior
Vice President of the Surviving Trust upon completion of the Merger at an
initial salary of $175,000 per annum. The Surviving Trust will indemnify each
trustee and officer of Wellsford for all actions on or prior to the Effective
Time to the same extent such individuals were indemnified by Wellsford prior
to the Effective Time. See "Interests of Certain Persons in the Merger and
Distribution."
ADVERSE CONSEQUENCES OF DEBT FINANCING AND PREFERRED SHARES
The Surviving Trust is subject to the risks normally associated with debt or
preferred equity financing, including the risk that the Surviving Trust's cash
flow will be insufficient to meet required payments of principal, interest and
distributions, the risk that existing indebtedness may not be refinanced or
that the terms of such refinancing will not be as favorable as the terms of
current indebtedness and the risk that necessary capital expenditures for such
purposes as renovations and other improvements may not be financed on
favorable terms or at all. If the Surviving Trust were unable to refinance its
indebtedness on acceptable terms, or at all, the Surviving Trust might be
forced to dispose of one or more of the properties on disadvantageous terms,
which might result in losses to the Surviving Trust and might adversely affect
the cash available for distributions to shareholders. If interest rates or
other factors at the time of the refinancing result in higher interest rates
upon refinancing, the Surviving Trust's interest expense would increase, which
would affect the Surviving Trust's ability to make distributions to its
shareholders. Furthermore, if a property is mortgaged to secure payment of
indebtedness and the Surviving Trust is unable to meet mortgage payments, the
mortgagee could foreclose upon the property, appoint a receiver
24
<PAGE>
and receive an assignment of rents and leases or pursue other remedies, all
with a consequent loss of income and asset value to the Surviving Trust.
Foreclosures could also create taxable income without accompanying cash
proceeds, thereby hindering the Surviving Trust's ability to meet the REIT
distribution requirements of the Code.
RESTRICTIONS ON INDEBTEDNESS OF THE SURVIVING TRUST
A substantial portion of the Surviving Trust's debt was issued pursuant to
five different indentures which restrict the amount of indebtedness (including
acquisition financing) the Surviving Trust may incur. Accordingly, in the
event that the Surviving Trust is unable to raise additional equity or borrow
money because of the debt restrictions in the indentures, the Surviving
Trust's ability to acquire additional properties may be limited. If the
Surviving Trust is unable to acquire additional properties, its ability to
increase the distributions with respect to Surviving Common will be limited to
management's ability to increase funds from operations, and thereby cash
available for distributions, from the existing properties in the Surviving
Trust's portfolio at such time.
OTHER RESTRICTIVE COVENANTS
Immediately following consummation of the Merger, the Surviving Trust will
own properties that are subject to restrictive covenants or deed restrictions
relating to current or previous tax-exempt bond financing and owns the bonds
collateralized by additional properties. The Surviving Trust will retain an
independent outside consultant to monitor compliance with the restrictive
covenants and deed restrictions that affect these properties. The bond
compliance requirements may have the effect of limiting the Surviving Trust's
income from certain of these properties in the event the Surviving Trust is
required to lower its rental rates to attract low or moderate income tenants,
or eligible/qualified tenants.
POTENTIAL CHANGE IN RELATIVE STOCK PRICES
In considering whether to approve the Merger, shareholders of Wellsford and
EQR should consider the risks associated with (a) a potential change in the
relative stock prices of EQR Common and Wellsford Common prior to the
Effective Time, and (b) a possible reduction in the market price of Survivor
Common following the Merger, due to future sales of shares of Survivor Common
or the availability of such shares for future sales, government regulatory
action, tax laws, interest rates and market conditions in general.
Sales of a substantial number of shares of Survivor Common or the perception
that such sales could occur, could adversely affect prevailing market prices
for shares of Survivor Common.
RISKS TO WELLSFORD COMMON SHAREHOLDERS
Termination Payments if Merger Fails to Occur. The Merger Agreement provides
for a Break-Up Fee payable by Wellsford of $14 million plus Break-Up Expenses
of up to $2.5 million if the Merger Agreement is terminated by either EQR or
Wellsford under certain circumstances and, within one year after such
termination, Wellsford enters into an agreement regarding an "Acquisition
Proposal" (as hereinafter defined), which is consummated. In addition, if the
Merger Agreement is terminated for certain reasons, EQR or Wellsford will be
required to pay the other party's Break-Up Expenses of up to $2.5 million. See
"The Merger--Termination Fee and Expenses."
The obligation to pay the Break-Up Fee and/or Break-Up Expenses may
adversely affect the ability of Wellsford to engage in another transaction in
the event the Merger is not consummated.
Reduction in Ownership and Voting. Upon consummation of the Merger,
Wellsford Common Shareholders will own approximately 17% of the Survivor
Common and will not have separate approval rights with respect to any actions
or decisions of the Surviving Trust.
Reduction in Distributions. After the Merger, the distributions payable with
respect to Survivor Common are expected to be less than the distributions
payable with respect to Wellsford Common. Based upon the current annualized
distributions per share of EQR Common and Wellsford Common, the distributions
payable with respect to the Survivor Common would be approximately 19.5% less
than the distributions payable with respect to Wellsford Common.
NO APPRAISAL RIGHTS UNDER MARYLAND LAW
Shareholders of Wellsford and shareholders of EQR are not entitled to
dissenting shareholders' appraisal rights under Maryland law. Maryland law
does not provide appraisal rights to shareholders of a REIT in connection with
a merger if
25
<PAGE>
their shares are listed on a national securities exchange, such as the NYSE,
on the record date for determining shareholders entitled to vote on such
merger. All of the shares of EQR and Wellsford outstanding on the record date
for determining the shareholders entitled to vote on the Merger were listed on
the NYSE.
POTENTIAL ADVERSE EFFECTS OF COMBINING THE COMPANIES
EQR and Wellsford are large enterprises with operations in a number of
different states. There can be no assurance that costs or other factors
associated with the integration of the two companies would not adversely
affect future combined results of operations or the benefits of expected costs
savings.
GENERAL REAL ESTATE INVESTMENT CONSIDERATIONS; CHANGES IN LAWS
General. Real property investments are subject to varying degrees of risk
and are relatively illiquid. Income from real property investments and the
Surviving Trust's resulting ability to make expected distributions to
shareholders may be adversely affected by the general economic climate, local
conditions such as oversupply of apartment units or a reduction in demand for
apartment units in the area, the attractiveness of the properties owned by the
Surviving Trust to tenants, zoning or other regulatory restrictions, the
ability of the Surviving Trust to provide adequate maintenance and insurance,
and increased operating costs (including insurance premiums and real estate
taxes). The Surviving Trust's income would also be adversely affected if
tenants were unable to pay rent or the Surviving Trust were unable to rent
apartment units on favorable terms. If the Surviving Trust were unable to
promptly relet units or renew the leases for a significant number of apartment
units, or if the rental rates upon such renewal or reletting were
significantly lower than expected rates, then the Surviving Trust's funds from
operations and ability to make expected distributions to shareholders may be
adversely affected. In addition, certain expenditures associated with each
equity investment (such as real estate taxes and maintenance costs) generally
are not reduced when circumstances cause a reduction in income from the
investment. Furthermore, real estate investments are relatively illiquid and,
therefore, will tend to limit the ability of the Surviving Trust to vary its
portfolio promptly in response to changes in economic or other conditions.
Changes in Laws. Increases in real estate taxes, income taxes and service or
other taxes generally are not passed through to tenants under existing leases
and may adversely affect the Surviving Trust's funds from operations and its
ability to make distributions to shareholders. Similarly, changes in laws
increasing the potential liability for environmental conditions existing on
properties or increasing the restrictions on discharges or other conditions
may result in significant unanticipated expenditures, which would adversely
affect the Surviving Trust's funds from operations and its ability to make
distributions to shareholders.
POTENTIAL ENVIRONMENTAL LIABILITY AFFECTING THE SURVIVING TRUST
Under various Federal, state and local environmental laws, ordinances and
regulations, an owner of real estate may be liable for the costs of removal or
remediation of certain hazardous or toxic substances on such property. These
laws often impose environmental liability without regard to whether the owner
knew of, or was responsible for, the presence of such hazardous or toxic
substances. The presence of such substances, or the failure properly to
remediate such substances, may adversely affect the owner's ability to sell or
rent the property or to borrow using the property as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic substances may
also be liable for the costs of removal or remediation of such substances at a
disposal or treatment facility, whether or not such facility is owned or
operated by such person. Certain laws impose liability for release of
asbestos-containing materials ("ACMs") into the air and third parties may seek
recovery from owners or operators of real properties for personal injury
associated with ACMs. In connection with the ownership (direct or indirect),
operation, management and development of real properties, the Surviving Trust
may be considered an owner or operator of such properties or as having
arranged for the disposal or treatment of hazardous or toxic substances and,
therefore, potentially liable for removal or remediation costs, as well as for
certain other related costs, including governmental fines and injuries to
persons and property.
All of EQR's properties have been the subject of a Phase I and, in certain
cases, a supplemental environmental assessment completed by qualified
independent environmental consultant companies. All of the environmental
assessments were conducted within the last five years and were obtained prior
to the acquisition by EQR of each of the properties. These environmental
assessments have not revealed, nor is EQR aware of, any environmental
liability that EQR's management believes would have a material adverse effect
on the Surviving Trust's business, results of operations, financial condition
or liquidity.
All of Wellsford's properties have been the subject of a Phase I or similar
environmental assessment completed by qualified independent environmental
consultant companies. Of these environmental assessments, 16 were conducted
during
26
<PAGE>
the period from 1989 through 1991 and 63 were conducted during the period from
1992 through the present. These environmental assessments have not revealed,
nor is Wellsford aware of, any environmental liability that Wellsford's
management believes would have a material adverse effect on the Surviving
Trust's business, results of operations, financial condition or liquidity.
No assurance can be given that existing environmental assessments with
respect to any EQR or Wellsford properties reveal all environmental
liabilities, that any prior owner of a property did not create any material
environmental condition not known to EQR or Wellsford, or that a material
environmental condition does not otherwise exist as to any one or more
properties of EQR or Wellsford.
CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
Taxation as a Corporation. The Surviving Trust intends to operate in a
manner so as to qualify as a REIT under the Code. However, no assurance can be
given that the Surviving Trust was organized and will be able to operate in a
manner so as to qualify or remain so qualified. Qualifications as a REIT
involves the satisfaction of numerous requirements (some on an annual and
quarterly basis) established under highly technical and complex Code
provisions for which there are only limited judicial or administrative
interpretations, and involves the determination of various factual matters and
circumstances not entirely within the Surviving Trust's control.
If the Surviving Trust were to fail to qualify as a REIT in any taxable
year, the Surviving Trust would be subject to Federal income tax (including
any applicable alternative minimum tax) on its taxable income at corporate
rates. Moreover, unless entitled to relief under certain statutory provisions,
the Surviving Trust also would be disqualified from treatment as a REIT for
the four taxable years following the year during which qualification is lost.
This treatment would reduce the net earnings of the Surviving Trust available
for investment or distribution to shareholders because of the additional tax
liability to the Surviving Trust for the years involved. In addition,
distributions to shareholders would no longer be required to be made. See
"Federal Income Tax Considerations."
Other Tax Liabilities. Even if the Surviving Trust qualifies as a REIT, it
will be subject to certain Federal, state and local taxes on its income and
property. See "The Merger--Federal Income Tax Consequences--Other Tax
Considerations--State and Local Taxes." In addition, the Surviving Trust's
management operations, which will be conducted through Equity Residential
Properties Management Limited Partnership, Equity Residential Properties
Management Limited Partnership II and Equity Residential Properties Management
Limited Partnership III (collectively, the "Management Partnerships")
generally will be subject to Federal income tax at regular corporate rates.
See "The Merger--Federal Income Tax Consequences--Qualification of Surviving
Trust as a REIT."
Consequences of Failure to Qualify as Partnerships. The Surviving Trust
intends that ERP Operating Partnership, the Management Partnerships and each
of the other partnership and limited liability company subsidiaries will be
organized as partnerships and will qualify for treatment as such under the
Code. If any of such subsidiaries fails to qualify for such treatment under
the Code, the Surviving Trust would cease to qualify as a REIT, and such
subsidiary would be subject to Federal income tax (including any alternative
minimum tax) on its income at corporate rates. See "The Merger--Federal Income
Tax Consequences--Qualification of Surviving Trust as a REIT."
Each of EQR and Wellsford believes it has operated in a manner so as to
qualify as a REIT under the Code for all taxable years ending on or before
December 31, 1996 and for the period beginning January 1, 1997 and ending on
the date hereof.
DEPENDENCE ON KEY PERSONNEL
The Surviving Trust will be dependent on the efforts of its executive
officers. While the Surviving Trust believes that it could find replacements
for these key personnel, the loss of their services may have a temporary
adverse effect on the operations of the Surviving Trust. None of these
officers has entered or will enter into employment agreements with the
Surviving Trust.
DISTRIBUTION REQUIREMENTS POTENTIALLY INCREASING INDEBTEDNESS OF THE SURVIVING
TRUST
The Surviving Trust may be required from time to time, under certain
circumstances, to accrue as income for tax purposes interest and rent earned
but not yet received. In such event, or upon the repayment by the Surviving
Trust of principal on debt, the Surviving Trust could have taxable income
without sufficient cash to enable the Surviving Trust to meet the distribution
requirements of a REIT. Accordingly, the Surviving Trust could be required to
borrow funds or
27
<PAGE>
liquidate investments on adverse terms in order to meet such distribution
requirements. See "Federal Income Tax Considerations."
9.8% OWNERSHIP LIMIT; INAPPLICABILITY TO MR. ZELL AND OTHERS
In order to maintain its qualification as a REIT under the Code, not more
than 50% of the value of the outstanding shares of beneficial interest of the
Surviving Trust may be owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include certain entities). Certain
beneficial owners (the "Zell Holders") affiliated with Mr. Zell and Equity
Properties Management Corp. ("EPMC") (i.e., beneficiaries of trusts
established for the benefit of Mr. Zell and his family and trusts established
for the benefit of the family of Mr. Robert Lurie, a deceased partner of Mr.
Zell (the "Lurie Family Trusts")) and certain entities controlled by Starwood
Capital Partners L.P. and its affiliates which contributed 23 of the
properties to EQR at the time of EQR's initial public offering (the "IPO")
(the "Starwood Original Owners") (through their potential ownership rights of
EQR Common) together constitute four individuals for purposes of this test
and, under the Code, will be deemed to own approximately 10% of the value of
the outstanding shares of beneficial interest of the Surviving Trust. Due to
such concentration of ownership of the Surviving Trust, ownership of more than
9.8% of the lesser of the number or value of the outstanding shares of
beneficial interest of the Surviving Trust by any single shareholder has been
restricted, with certain exceptions, for the purpose of maintaining the
Surviving Trust's qualification as a REIT under the Code. The Surviving
Trust's Board of Trustees, upon receipt of a ruling from the Internal Revenue
Service (the "Service"), 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 this
restriction. See "Comparison of Right of Shareholders--Restrictions on
Ownership, Transfer and Issuance of Shares." Additionally, the Surviving
Trust's Declaration of Trust will allow certain transfers of such Survivor
Common without the transferees being subject to the 9.8% ownership limit,
provided such transfers do not result in an increased concentration in the
ownership of the Surviving Trust. Finally, if the Additional Provisions are
approved by the Wellsford Common Shareholders, such restrictions in the
Surviving Trust's Declaration of Trust will be reduced to 5%. See "Proposal
Regarding Additional Declaration of Trust Provisions."
LIMITS ON CHANGES IN CONTROL
Ownership Limit. The 9.8% ownership limit, as well as the ability of the
Surviving Trust to issue additional Survivor Common or other shares of
beneficial interest (which may have rights and preferences senior to the
Survivor Common), may discourage a change of control of the Surviving Trust
and may also (i) deter tender offers for the Survivor Common, which offers may
be advantageous to shareholders, and (ii) limit the opportunity for
shareholders to receive a premium for their Survivor Common that might
otherwise exist if an investor were attempting to assemble a block of Survivor
Common in excess of 9.8% of the outstanding shares of beneficial interest of
the Surviving Trust or otherwise effect a change of control of the Surviving
Trust. If the Additional Provisions are approved by the Wellsford Common
Shareholders, such restrictions in the Surviving Trust's Declaration of Trust
will be reduced to 5%. See "Proposal Regarding Additional Declaration of Trust
Provisions."
Staggered Board. The Board of Trustees of the Surviving Trust will be
divided into three classes of trustees. The terms of the classes will expire
in 1997, 1998 and 1999, respectively. As the term of each class expires,
trustees for that class will be elected for a three-year term and the trustees
in the other two classes will continue in office. The staggered terms for
trustees may impede the shareholders' ability to change control of the
Surviving Trust even if a change in control were in the shareholders'
interest.
Preferred Shares. The Surviving Trust's Declaration will authorize the Board
of Trustees to issue up to 100,000,000 shares of Survivor Preferred and to
establish the preferences and rights (including the right to vote and the
right to convert into Survivor Common) of any Survivor Preferred issued. The
power to issue Survivor Preferred could have the effect of delaying or
preventing a change in control of the Surviving Trust even if a change in
control were in the shareholders' interest. There are additional limitations
on ownership regarding each outstanding series of EQR Preferred and Wellsford
Preferred.
Maryland Business Combination Law. Under the Maryland General Corporation
Law, as amended ("MGCL"), certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland real
estate investment trust and any person who beneficially owns 10% or more of
the voting power of the trust's shares of beneficial interest or an affiliate
of the trust who, at any time within the two-year period prior to the date in
question, was the beneficial owner of 10% or more of the voting power of the
trust's shares of beneficial interest (an "Interested Shareholder"), or an
affiliate of such Interested Shareholder, are prohibited for five years after
the most recent date on which the Interested Shareholder becomes an Interested
Shareholder. Thereafter, any such business combination must be recommended by
the board of trustees of such trust and
28
<PAGE>
approved by the affirmative vote of at least (a) 80% of the votes entitled to
be cast by holders of outstanding voting shares of beneficial interest of the
trust and (b) two-thirds of the votes entitled to be cast by holders of voting
shares of beneficial interest of the trust other than shares held by the
Interested Shareholder with whom (or with whose affiliate) the business
combination is to be effected (unless, among other conditions, the holders of
the common shares of the trust receive a minimum price (as defined in the
MGCL) for their shares and the consideration is received in cash or in the
same form as previously paid by the Interested Shareholder for its common
shares). Such provisions could have the effect of inhibiting a change in
control even if a change in control were in the shareholders' interest.
CONTROL AND INFLUENCE BY SIGNIFICANT SHAREHOLDERS OF EQR
As of December 31, 1996, the Zell Holders held certain OP Units issued at
the time of the IPO ("Original OP Units") to certain affiliates of Mr. Zell
which contributed 33 of the properties to EQR at the time of the IPO (the
"Zell Original Owners"), EPMC and other affiliates of Mr. Zell owned in the
aggregate approximately 7.92% of the shares of EQR Common (assuming that all
of the partnership interests in ERP Operating Partnership are exchanged for
EQR Common), and the Starwood Original Owners owned in the aggregate
approximately 3.47% of the shares of EQR Common (assuming that all of the
partnership interests in ERP Operating Partnership are exchanged for EQR
Common). The Starwood Original Owners, together with the Zell Original Owners,
will be referred to as the "Original Owners." As of December 31, 1996, EQR had
options outstanding to purchase approximately 2.33 million shares of EQR
Common which it has granted to certain officers, employees and trustees of EQR
and consultants to EQR, some of whom are affiliated with Mr. Zell,
representing in the aggregate approximately 3.80% of the EQR Common (assuming
that all such options are exercised for EQR Common and all of the outstanding
partnership interests in ERP Operating Partnership are exchanged for EQR
Common). Further, the consent of affiliates of Mr. Zell who are Zell Holders
and of the Starwood Original Owners is required for certain amendments to ERP
Operating Partnership's partnership agreement. Accordingly, Mr. Zell and the
Starwood Original Owners may continue to have substantial influence over the
Surviving Trust, which influence might not be consistent with the interests of
other shareholders, and on the outcome of any matters submitted to the
Surviving Trust's shareholders for approval. In addition, although there is no
current agreement, understanding or arrangement for these shareholders to act
together on any matter, these shareholders would be in a position to exercise
significant influence over the affairs of the Surviving Trust if they were to
act together in the future.
EXEMPTIONS FOR MR. ZELL AND OTHERS FROM MARYLAND BUSINESS COMBINATION LAW
WHICH TEND TO INHIBIT TAKEOVERS
As permitted by the MGCL, the Surviving Trust will exempt any business
combination involving Mr. Zell, the Zell Holders, EPMC and their respective
affiliates and associates, present or future, or any other person acting in
concert or as a group with any of the foregoing persons and, consequently, the
five-year prohibition and the super-majority vote requirements will not apply
to a business combination between any of them and the Surviving Trust. As a
result, Mr. Zell, the Zell Holders, EPMC, any present or future affiliate or
associate of theirs or any other person acting in concert or as a group with
any of the foregoing persons may be able to enter into business combinations
with the Surviving Trust, which may not be in the best interest of the
shareholders, without compliance by the Surviving Trust with the super-
majority vote requirements and other provisions of the MGCL.
TAX TERMINATION OF ERP OPERATING PARTNERSHIP
In connection with the Merger, more than 50% of the total interest in ERP
Operating Partnership's capital and profits will be exchanged. Therefore, the
Merger will result in the termination of ERP Operating Partnership for federal
income tax purposes. Under existing Treasury Regulations under the Code, this
partnership termination will cause a deemed distribution of all of the assets
of ERP Operating Partnership to the partners of ERP Operating Partnership
(including the Surviving Trust) followed by a deemed re-contribution of such
assets by such partners to a newly formed partnership. See "The Merger--
Federal Income Tax Consequences--Tax Termination of ERP Operating
Partnership." Such deemed distribution and re-contribution is not expected to
cause gain recognition to the Surviving Trust because the amount of cash
deemed distributed to the Surviving Trust as a result of the deemed
liquidation (including any deemed distribution occurring under Code Section
752 as a result of a shifting of liabilities among the partners of the ERP
Operating Partnership) is not expected to exceed the Surviving Trusts's
adjusted basis in the ERP Operating Partnership. Moreover, because the taxable
years of both the ERP Operating Partnership and the Surviving Trust end on the
same date, the closing of the ERP Operating Partnership's taxable year as a
result of the termination should have no adverse tax consequences to the
Surviving Trust. However, the termination of the ERP Operating Partnership
will cause the assets of the ERP Operating Partnership to be depreciated as if
they were newly acquired by the ERP Operating Partnership, possibly resulting
in lower annual depreciation deductions to the Surviving Trust for federal
income tax purposes. This reduction in depreciation deductions could cause a
greater proportion of the distribution to holders of Survivor Common and
Survivor Preferred to be taxable as dividends at ordinary income
29
<PAGE>
rates. See "Federal Income Tax Consequences--Taxation of Taxable Domestic
Shareholders." In addition the deemed re-contribution of the assets to the ERP
Operating Partnership could result in a reallocation of the built-in gain
attributable to the properties owned by the ERP Operating Partnership. See
"Federal Income Tax Consequences--Tax Aspects of Surviving Trust's Investment
in Partnerships--Tax Allocations With Respect to the Properties."
WRP NEWCO RISK FACTORS
Ownership of WRP Newco Common involves the following material risks:
GENERAL RISKS
If the properties of WRP Newco, of those entities in which it invests or of
those entities to which it will lend (collectively, the "WRP Newco
Properties") do not generate revenue sufficient to meet operating expenses,
including debt service and capital expenditures, the financial condition and
results of operations of WRP Newco may be adversely affected. WRP Newco's
financial condition and results of operations may be adversely affected by a
number of factors, including international and domestic general economic
climate and local real estate conditions (such as oversupply of or reduced
demand for space and changes in market rental rates); the perceptions of
prospective tenants of the safety, convenience and attractiveness of WRP Newco
Properties; the ability of the owner to provide adequate management,
maintenance and insurance; energy and supply shortages; the ability to collect
on a timely basis all rent from tenants and interest from borrowers; the
expense of periodically renovating, repairing and reletting spaces; and
increasing operating costs (including real estate taxes and utilities) which
may not be passed through to tenants. Certain significant expenditures
associated with investments in real estate (such as mortgage payments, real
estate taxes, insurance and maintenance costs) are generally not reduced when
circumstances cause a reduction in rental revenues from the investment. If a
WRP Newco Property is mortgaged to secure the payment of indebtedness and if
WRP Newco or the entity in which WRP Newco invests or to which it lends is
unable to meet its mortgage payments, a loss could be sustained as a result of
foreclosure on the property or the exercise of other remedies by the
mortgagee. In addition, real estate values and income from properties are also
affected by such factors as compliance with laws, including tax laws, interest
rate levels and the availability of financing.
NATURE OF INVESTMENTS MADE BY WRP NEWCO MAY INVOLVE HIGH RISK; ILLIQUIDITY OF
REAL ESTATE INVESTMENTS
WRP Newco may make investments in real estate-related assets and businesses
which have experienced severe financial difficulties, which difficulties may
never be overcome. Since WRP Newco may only make a limited number of
investments and since many of the investments may involve a high degree of
risk, poor performance by one of the investments could severely affect the
financial condition and results of operations of WRP Newco.
Equity and debt investments in real estate may be relatively illiquid. Such
illiquidity limits the ability of WRP Newco to modify its portfolio in
response to changes in economic or other conditions. Illiquidity may result
from the absence of an established market for the investments as well as legal
or contractual restrictions on their resale by WRP Newco.
DIFFICULTY OF LOCATING SUITABLE INVESTMENTS; COMPETITION
Identifying, completing and realizing on real estate investments has from
time to time been highly competitive, and involves a high degree of
uncertainty. WRP Newco will be competing for investments with many public and
private real estate investment vehicles, including financial institutions
(such as mortgage banks, pension funds and real estate investment trusts) and
other institutional investors, as well as individuals. There can be no
assurance that WRP Newco will be able to locate and complete investments which
satisfy WRP Newco's rate of return objective or realize upon their value or
that it will be able to fully invest its available capital.
Many of those with whom WRP Newco will compete for investments and its
services are far larger than WRP Newco, may have greater financial resources
than WRP Newco and may have management personnel with more experience than the
officers of WRP Newco.
RISKS OF ACQUISITION, DEVELOPMENT, CONSTRUCTION AND RENOVATION ACTIVITIES
Acquisition. WRP Newco intends to acquire existing properties to the extent
that they can be acquired on advantageous terms and meet WRP Newco's
investment criteria. Acquisitions of properties entail general investment
risks associated with any real estate investment, including the risk that
investments will fail to perform as expected, that estimates of the cost of
improvements to bring an acquired property up to standards established for the
intended market position may prove inaccurate and the occupancy rates and
rents achieved may be less than anticipated.
30
<PAGE>
Development, Construction and Renovation. WRP Newco also intends to pursue
the selective development, construction and renovation of commercial and
residential properties for its own account or the account of entities in which
it owns an equity interest as opportunities arise. Risks associated with WRP
Newco's development, construction and renovation activities include the risks
that: WRP Newco may abandon development opportunities after expending
resources to determine feasibility; construction and renovation costs of a
project may exceed original estimates; occupancy rates and rents at a newly
completed property may not be sufficient to make the property profitable; and
development, construction, renovation and lease-up may not be completed on
schedule (including risks beyond the control of WRP Newco, such as weather or
labor conditions or material shortages) resulting in increased debt service
expense and construction costs. Development, construction and renovation
activities are also subject to risks relating to the inability to obtain, or
delays in obtaining, all necessary zoning, land-use, building, occupancy and
other required governmental permits and authorizations. These risks could
result in substantial unanticipated delays or expenses and, under certain
circumstances, could prevent completion of development, construction and
renovation activities once undertaken, any of which could adversely affect the
financial condition and results of operations of WRP Newco. Properties under
development or acquired for development may generate little or no cash flow
from the date of acquisition through the date of completion of development and
may experience operating deficits after the date of completion. In addition,
new development and renovation activities, regardless of whether or not they
are ultimately successful, typically require a substantial portion of
management's time and attention.
WRP Newco may elect not to exercise its option to purchase the land
underlying Phases III, IV and/or V of Palomino Park, in some cases after
having expended money and time to determine the feasibility of developing such
Phase. In addition, WRP Newco may elect, after having acquired the land
underlying one or more of the Phases and paid the purchase price therefor, not
to commence construction, or to delay construction, because of local occupancy
rates or rents, excessive construction or renovation costs, lack of
satisfactory financing or for any other reason.
Any properties developed or renovated by WRP Newco will be subject to the
risks associated with the ownership and operation of real estate described
elsewhere in this section entitled "WRP Newco Risk Factors."
VACANCIES AT EXISTING PROPERTIES; DEPENDENCE ON RENTAL INCOME FROM REAL
PROPERTY
WRP Newco currently owns five office properties consisting of six buildings,
five of which buildings are vacant. The sixth office building is currently
approximately 85.7% leased. WRP Newco expects to incur significant costs,
including those relating to leasing commissions and tenant improvements, in
connection with the leasing of these properties and may be required to offer
tenant concessions, including free rental periods. The failure of WRP Newco to
lease these properties in a timely manner and on economically favorable terms
may have a material adverse effect on WRP Newco.
WRP Newco's cash flow, results of operations and value of its assets would
be adversely affected if a significant number of tenants of the WRP Newco
Properties failed to meet their lease obligations or if WRP Newco or the owner
of a WRP Newco Property were unable to lease a significant amount of space on
economically favorable terms. In the event of a default by a lessee, the owner
may experience delays in enforcing its rights as lessor and may incur
substantial costs in protecting its investment. The bankruptcy or insolvency
of a major tenant may have an adverse effect on a property. At any time, a
tenant may also seek protection under the bankruptcy laws, which could result
in rejection and termination of such tenant's lease and thereby cause a
reduction in the cash flow of the property. If a tenant rejects its lease, the
owner's claim for breach of the lease would (absent collateral securing the
claim) be treated as a general unsecured claim. Generally, the amount of the
claim would be capped at the amount owed for unpaid pre-petition lease
payments unrelated to the rejection, plus the greater of one year's lease
payments or 15% of the remaining lease payments payable under the lease (but
not to exceed the amount of three years' lease payments). No assurance can be
given that the WRP Newco Properties will not experience significant tenant
defaults in the future.
OPERATING RISKS
The WRP Newco Properties are subject to operating risks common to the
particular property type, any and all of which may adversely affect occupancy
or rental rates. Such properties are subject to increases in operating
expenses such as cleaning; electricity; heating, ventilation and air-
conditioning; elevator repair and maintenance; insurance and administrative
costs; and other general costs associated with security, landscaping, repairs
and maintenance. While commercial tenants are often obligated to pay a portion
of these escalating costs, there can be no assurance that they will agree to
pay such costs or that the portion that they agree to pay will fully cover
such costs. If operating expenses increase, the local rental market may limit
the extent to which rents may be increased to meet increased expenses without
decreasing occupancy rates. To the extent rents cannot be increased or costs
controlled, the cash flow of WRP Newco and its financial condition may be
adversely affected.
31
<PAGE>
ADVERSE CONSEQUENCES OF DEBT FINANCING
Leverage. Some of the WRP Newco real estate equity investments may utilize a
leveraged capital structure, in which case a third party lender would be
entitled to cash flow generated by such investments prior to WRP Newco
receiving a return. As a result of such leverage, WRP Newco would be subject
to the risks normally associated with debt financing, including the risk that
cash flow from operations and investments will be insufficient to meet
required payments of principal and interest, the risk that existing debt
(which in most cases will not have been fully amortized at maturity) will not
be able to be refinanced or that the terms of such refinancings will not be as
favorable to WRP Newco and the risk that necessary capital expenditures for
such purposes as renovations and other improvements will not be able to be
financed on favorable terms or at all. While such leverage may increase
returns or the funds available for investment by WRP Newco, it also will
increase the risk of loss on a leveraged investment. If WRP Newco defaults on
secured indebtedness, the lender may foreclose and WRP Newco could lose its
entire investment in the security for such loan. Because WRP Newco may engage
in portfolio financings where several investments are cross-collateralized,
multiple investments may be subject to the risk of loss. As a result, WRP
Newco could lose its interests in performing investments in the event such
investments are cross-collateralized with poorly performing or nonperforming
investments. In addition, recourse debt, which WRP Newco reserves the right to
obtain, may subject other assets of WRP Newco to risk of loss.
Existing Debt Maturities; Foreclosures. WRP Newco anticipates that only a
portion of the principal of WRP Newco's indebtedness outstanding from time to
time will be repaid prior to maturity. However, WRP Newco may not have
sufficient funds to repay such indebtedness at maturity; it may therefore be
necessary for WRP Newco to refinance debt through additional debt financing or
equity offerings. If WRP Newco is unable to refinance this indebtedness on
acceptable terms, WRP Newco may be forced to dispose of properties upon
disadvantageous terms, which could result in losses to WRP Newco and adversely
affect the amount of cash available for further investment.
Risk of Rising Interest Rates. WRP Newco may incur indebtedness in the
future that also bears interest at a variable rate or may be required to
refinance its debt at higher rates. Outstanding advances under the WRP Newco
Line of Credit will bear interest at a variable rate. Accordingly, increases
in interest rates could increase WRP Newco's interest expense and adversely
effect the financial condition and results of operations of WRP Newco.
Covenants. Various credit facilities or other debt obligations may require
WRP Newco to comply with a number of customary financial and other covenants
on an ongoing basis. Failure to comply with such covenants may limit WRP
Newco's ability to borrow funds or may cause a default under its then-existing
indebtedness.
No Limitation on Debt. The organizational documents of WRP Newco do not
contain any limitation on the amount of indebtedness WRP Newco may incur. WRP
Newco also has the ability to use a more highly leveraged business strategy
than typically used by REITs. Accordingly, WRP Newco could become highly
leveraged, resulting in an increase in debt service that could increase the
risk of default on WRP Newco's indebtedness.
LACK OF CONTROL AND OTHER RISKS OF EQUITY INVESTMENTS IN AND WITH THIRD
PARTIES
WRP Newco may invest in shares of "REITs" or other equity interests of
"REITs" or other entities that invest in real estate assets. In such cases,
WRP Newco will be relying on the assets, investments and management of the
REIT or other entity in which it is investing. Such entities and their
properties will be subject to the other risks affecting the ownership and
operation of real estate set forth in this section entitled "WRP Newco Risk
Factors."
WRP Newco may also co-invest with third parties through partnerships, joint
ventures or other entities, acquiring non-controlling interests in or sharing
responsibility for managing the affairs of a property, partnership, joint
venture or other entity and, therefore, will not be in a position to exercise
sole decision-making authority regarding the property, partnership, joint
venture or other entity.
Investments in partnerships, joint ventures, or other entities may, under
certain circumstances, involve risks not present were a third party not
involved, including the possibility that WRP Newco's partners or co-venturers
might become bankrupt or otherwise fail to fund their share of required
capital contributions, that such partners or co-venturers might at any time
have economic or other business interests or goals which are inconsistent with
the business interests or goals of WRP Newco, and that such partners or co-
venturers may be in a position to take action contrary to the instructions or
the requests of WRP Newco and contrary to WRP Newco's policies or objectives.
Such investments may also have the potential risk of impasse on decisions,
such as a sale, because neither WRP Newco nor the partner or co-venturer would
have full control over the partnership or joint venture. Consequently, actions
by such partner or co-venturer might result in subjecting properties owned by
the partnership or joint venture to additional risk. In addition, WRP Newco
may in certain circumstances be liable for the actions of its third-party
partners or co-venturers.
32
<PAGE>
RISKS OF INVESTMENTS IN DEBT INSTRUMENTS
WRP Newco intends to originate debt investments and may acquire performing
or nonperforming debt investments. In general, debt instruments carry the risk
that borrowers may not be able to make debt service payments or to pay
principal when due, the risk that the value of any collateral may be less than
the amounts owed, the risk that interest rates payable on the debt instruments
may be lower than WRP Newco's cost of funds, and the risk that the collateral
may be mismanaged or otherwise decline in value during periods in which WRP
Newco is seeking to obtain control of the underlying real estate. WRP Newco is
also dependent on the ability of the borrowers to operate successfully their
properties. Such borrowers and their properties will be subject to the other
risks affecting the ownership and operation of real estate set forth in this
section entitled "WRP Newco Risk Factors". Some of the loans may be structured
so that all or a substantial portion of the principal will not be paid until
maturity, which increases the risk of default at that time.
It is anticipated that a substantial portion of the debt in which WRP Newco
invests will not be rated by any nationally-recognized rating agency.
Generally, the value of unrated classes is more subject to fluctuation due to
economic conditions than rated classes. WRP Newco's acquisition of credit
supported classes of securitizations (which generally are expected to be first
loss classes) which are unrated at the time of acquisition and which have
lower ratings may increase the risk of nonpayment or of a significant delay in
payments on these classes. Should rated assets be downgraded, it may adversely
affect their value and may adversely affect the financial condition and
results of operations of WRP Newco.
RISKS OF INVESTMENTS IN MORTGAGE LOANS
To the extent WRP Newco invests in mortgage loans, such mortgage loans may
or may not be recourse obligations of the borrower and generally will not be
insured or guaranteed by governmental agencies or otherwise. In the event of a
default under such obligations, WRP Newco may have to foreclose its mortgage
or protect its investment by acquiring title to a property and thereafter
making substantial improvements or repairs in order to maximize the property's
investment potential. Borrowers may contest enforcement of foreclosure or
other remedies, seek bankruptcy protection against such enforcement and/or
bring claims for lender liability in response to actions to enforce mortgage
obligations. Relatively high "loan-to-value" ratios and declines in the value
of the property may prevent WRP Newco from realizing an amount equal to its
mortgage loan upon foreclosure.
WRP Newco may participate in loans originated by other financing
institutions. As a participant, WRP Newco may not have the sole authority to
declare a default under the mortgage or to control the property or any
foreclosure.
Any investments in junior mortgage loans which are subordinate to liens of
senior mortgages would involve additional risks, including the lack of control
over the collateral and any related foreclosure proceeding. In the event of a
default on a senior mortgage, WRP Newco may make payments to prevent
foreclosure on the senior mortgage without necessarily improving WRP Newco's
position with respect to the subject real property. In such event, WRP Newco
would be entitled to share in the proceeds only after satisfaction of the
amounts due to the holder of the senior mortgage.
RISK OF LOSS ON INVESTMENTS IN COMMERCIAL MORTGAGE-BACKED SECURITIES
As noted above, WRP Newco may seek to invest in real estate-related debt
instruments, which may include CMBS. Many of the risks of investing in CMBS
reflect the risks of investing directly in the real estate securing the
underlying mortgage loans. This may be especially true in the case of
commercial mortgage securities secured by, or evidencing an interest in, a
single commercial mortgage loan or a relatively small or less diverse pool of
commercial mortgage loans. See "--Risks of Investments in Mortgage Loans".
The risks of investing in commercial mortgage securities include risks that
the existing credit support will prove to be inadequate, either because of
unanticipated levels of losses or, if such credit support is provided by a
third party, because of difficulties experienced by such provider. Delays or
difficulties encountered in servicing commercial mortgage securities may cause
greater losses and, therefore, greater resort to credit support than was
originally anticipated, and may cause a rating agency to downgrade a security.
WRP Newco may acquire subordinated tranches of CMBS issuances. In general,
subordinated tranches of CMBS are entitled to receive repayment of principal
only after all principal payments have been made on more senior tranches and
also have subordinated rights as to receipt of interest distributions. In
addition, an active secondary market for such subordinated securities is not
as well developed as the market for certain other mortgage-backed securities.
Accordingly, such subordinated CMBS may have limited marketability and there
can be no assurance that a more efficient secondary market will develop.
33
<PAGE>
LIMITATIONS ON REMEDIES
Although WRP Newco will have certain contractual remedies upon the default
by borrowers under certain debt instruments, such as foreclosing on the
underlying real estate or collecting rents generated therefrom, certain legal
requirements (including the risks of lender liability) may limit the ability
of WRP Newco to effectively exercise such remedies.
The right of a mortgage lender to convert its loan position into an equity
interest may be limited or prevented by certain common law or statutory
prohibitions.
THIRD-PARTY BANKRUPTCY RISKS
Investments made in assets operating in workout modes or under Chapter 11 of
the Bankruptcy Code could be subordinated or disallowed, and WRP Newco could
be liable to third parties in such circumstances. Furthermore, distributions
made to WRP Newco in respect of such investments could be recovered if any
such distribution is found to be a fraudulent conveyance or preferential
payment. Bankruptcy laws, including the automatic stay imposed upon the filing
of a bankruptcy petition, may delay the ability of WRP Newco to realize on
collateral for loan positions held by it or may adversely affect the priority
of such loans through doctrines such as equitable subordination or may result
in a restructure of the debt through principles such as the "cramdown"
provisions of the bankruptcy laws.
NO PRIOR OPERATING HISTORY
It should be noted that WRP Newco is a newly formed entity with no prior
operating history and that its properties and assets have only been recently
acquired.
RISKS OF UNINSURED LOSS
WRP Newco will carry comprehensive liability, fire, extended coverage and
rental loss insurance with respect to all of the properties that it owns, with
policy specifications, insured limits and deductibles customarily carried for
similar properties. There are, however, certain types of losses (such as
losses arising from acts of war or relating to pollution) that are not
generally insured because they are either uninsurable or not economically
insurable. Should an uninsured loss or a loss in excess of insured limits
occur, WRP Newco could lose its capital invested in a property, as well as the
anticipated future revenue from such property and would continue to be
obligated on any mortgage indebtedness or other obligations related to the
property. Any such loss would adversely affect the financial condition and
results of operations of WRP Newco.
With respect to those properties in which WRP Newco holds an interest
through a mortgage, as well as those properties owned by entities to whom WRP
Newco makes unsecured loans, the borrowers will most likely be obligated to
maintain insurance on such properties and to arrange for WRP Newco to be
covered as a named insured on such policies. The face amount and scope of such
insurance coverage may be less comprehensive than WRP Newco would carry if it
held the fee interest in such property. Accordingly in such circumstances, or
in the event that the borrowers fail to maintain required coverage, uninsured
or underinsured losses may occur, which could have an adverse impact on WRP
Newco's cash flow or financial condition.
POTENTIAL ENVIRONMENTAL LIABILITY RELATED TO THE PROPERTIES
Under various Federal, state and local laws, ordinances and regulations, an
owner or operator of real estate is liable for the costs of removal or
remediation of certain hazardous or toxic substances on or in such property.
These laws often impose such liability without regard to whether the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. The cost of any required remediation and the owners's
liability therefor as to any property is generally not limited under such
enactments and could exceed the value of the property and/or the aggregate
assets of the owner. The presence of such substances, or the failure to
properly remediate such substances, may adversely affect the owner's ability
to sell or rent such property or to borrow using such property as collateral.
Persons who arrange for the disposal or treatment of hazardous or toxic
substances may also be liable for the costs of removal or remediation of such
substances at a disposal or treatment facility, whether or not such facility
is owned or operated by such person. Certain environmental laws govern the
removal, encapsulation or disturbance of ACMs when such materials are in poor
condition, or in the event of renovation or demolition. Such laws impose
liability for release of asbestos-containing materials ("ACMs") into the air
and third parties may seek recovery from owners or operators of real
properties for personal injury associated with ACMs. In this regard, it should
be noted that the main headquarters building at the Point View office complex
contains ACM's. Upon acquisition of the property, WRP Newco intends to proceed
with the removal of ACM's in such
34
<PAGE>
building. The operation and subsequent removal of certain underground storage
tanks are also regulated by federal and state laws. In connection with the
ownership (direct or indirect), operation, management and development of real
properties, WRP Newco may be considered an owner or operator of such
properties or as having arranged for the disposal or treatment of hazardous or
toxic substances, and, therefore, potentially liable for removal or
remediation costs, as well as certain other related costs, including
governmental fines and injuries to persons and property.
The properties described in this Joint Proxy
Statement/Prospectus/Information Statement that are owned or to be acquired by
WRP Newco have had recent Phase I or similar environmental audits (which
involved general inspections without soil sampling, ground water analysis or
radon testing, and for the Properties constructed in 1978 or earlier, survey
inspections to ascertain the existence of ACMs were conducted) completed by
independent environmental consultant companies. These environmental audits
have not revealed any environmental liability that would have a material
adverse effect on WRP Newco's business.
DEPENDENCE ON KEY PERSONNEL
WRP Newco is dependent primarily on the efforts of Jeffrey H. Lynford,
Chairman of the Board, and Edward Lowenthal, President, and the loss of either
of their services could have an adverse effect on the operations of WRP Newco.
Mr. Lynford and Mr. Lowenthal will each enter into employment agreements with
WRP Newco having a term of approximately five years. WRP Newco intends to
retain the services of individuals with expertise and experience in certain
activities to be conducted by WRP Newco, and the loss of the services of any
of these individuals could also have an adverse effect on the operations of
WRP Newco.
TAX CONSEQUENCES OF THE DISTRIBUTION
To the extent the fair market value of the shares of WRP Newco Common
distributed in the Distribution to Wellsford Common Shareholders exceeds
Wellsford's tax basis in such shares, gain will be recognized by Wellsford.
Assuming Wellsford qualifies as a REIT and has a dividends paid deduction for
distributions to its shareholders at least equal to its REIT taxable income
(as computed before taking into account the dividends paid deduction), no REIT
level tax will be incurred on account of the Distribution.
The distribution of WRP Newco Common will, however, be taxable to Wellsford
Common Shareholders to the same extent as any other distribution made by
Wellsford to its shareholders. Management of Wellsford estimates that
approximately 50% of the value of the shares of WRP Newco Common received in
the Distribution will be taxable as ordinary income. Because this estimate is
based, in part, on future events, there can be no assurance as to the portion
of the value of the Distribution that will be taxable as ordinary income. The
remainder of the value of the shares of WRP Newco Common received in the
Distribution will either constitute a return of capital (reducing basis in the
shares of Wellsford Common that converted in the Merger into Survivor Common)
or capital gain. For a more detailed explanation, see "The Contribution and
Distribution--Tax Consequences of the Distribution."
CHANGES IN POLICIES WITHOUT STOCKHOLDER APPROVAL
The investment, financing, borrowing and distribution policies of WRP Newco
and its policies with respect to all other activities, growth, debt,
capitalization and operations, will be determined by the WRP Newco Board of
Directors. Although it has no present intention to do so, the Board of
Directors may amend or revise these policies at any time and from time to time
at its discretion without a vote of the stockholders of WRP Newco. A change in
these policies could adversely affect WRP Newco's financial condition, results
of operations and the market price of WRP Newco Common. See "Policies with
Respect to Certain Activities of WRP Newco."
ABSENCE OF PUBLIC MARKET; RISK OF CHANGES IN STOCK PRICE
Prior to the Distribution, there will be no public market for WRP Newco
Common, and there can be no assurance that an active trading market for WRP
Newco Common will develop following the Distribution or, if developed, that
any such market will be sustained. In the absence of a public trading market,
an investor may be unable to liquidate his investment in WRP Newco. The
initial valuation of the WRP Newco Common may not be indicative of the market
price of the WRP Newco Common after the Distribution. The prices at which WRP
Newco Common trades will be determined by the marketplace and may be
influenced by many factors, including, among others, the depth and liquidity
of the market for WRP Newco Common, investor perception of WRP Newco and its
businesses, WRP Newco's dividend policy, interest rates and general economic
and market conditions. Prices at which WRP Newco Common may trade after the
Distribution cannot be predicted.
35
<PAGE>
COSTS OF COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT AND SIMILAR LAWS
Under the Americans with Disabilities Act of 1980 (the "ADA"), places of
public accommodations and commercial facilities are required to meet certain
federal requirements related to access and use by disabled persons. Compliance
with ADA requirements could require both structural and non-structural changes
to the properties in which WRP Newco invests and noncompliance could result in
imposition of fines by the United States government or an award of damages to
private litigants. Although management of WRP Newco believes that its
properties are substantially in compliance with present requirements of the
ADA, WRP Newco may incur additional costs of compliance in the future. A
number of additional Federal, state and local laws exist which impose further
burdens or restrictions on owners with respect to access by disabled persons
and may require modifications to properties in which WRP Newco invests, or
restrict certain further renovations thereof, with respect to access by
disabled persons. Final regulations under the ADA have not yet been
promulgated and the ultimate amount of the cost of compliance with the ADA or
other such laws is not currently ascertainable. While such costs are not
expected to have a material effect on WRP Newco, they could be substantial. If
required changes involve greater expense than WRP Newco currently anticipates,
WRP Newco's financial condition and results of operations could be adversely
affected.
NONCOMPLIANCE WITH OTHER LAWS
Real estate properties are also subject to various Federal, state and local
regulatory requirements, such as state and local fire and life safety
requirements. Failure to comply with these requirements could result in the
imposition of fines by governmental authorities or awards of damages to
private litigants. WRP Newco believes that its properties are currently in
material compliance with all such regulatory requirements. However, there can
be no assurance that these requirements will not be changed or that new
requirements will not be imposed which would require significant unanticipated
expenditures by WRP Newco and could have an adverse effect on WRP Newco's
results of operations.
EFFECT ON COMMON STOCK PRICE OF SHARES AVAILABLE FOR FUTURE SALE
Sales of a substantial number of shares of WRP Newco Common, or the
perception that such sales could occur, could adversely affect prevailing
market prices of the WRP Newco Common. Up to 12,000,000 shares of WRP Newco
Common may be issued pursuant to the Additional Share Offering and purchasers
of the Additional Shares may be able to sell such shares in the public market
immediately after purchase. In addition, 1,750,000 shares of WRP Newco Common
have been reserved for issuance pursuant to WRP Newco's 1997 Management
Incentive Plan, and, when issued, these shares will be available for sale in
the public markets from time to time pursuant to exemptions from registration
requirements or upon registration. No prediction can be made about the effect
that future sales of WRP Newco Common will have on the market prices of WRP
Newco Common.
HEDGING POLICIES/RISKS
In connection with the financing of certain real estate investments, WRP
Newco may employ hedging techniques designed to protect WRP Newco against
adverse movements in currency and/or interest rates. While such transactions
may reduce certain risks, such transactions themselves may entail certain
other risks. Thus, while WRP Newco may benefit from the use of these hedging
mechanisms, unanticipated changes in interest rates, securities prices, or
currency exchange rates may result in a poorer overall performance for WRP
Newco than if it had not entered into such hedging transactions.
ANTI-TAKEOVER EFFECT RESULTING FROM A STAGGERED BOARD, ABILITY OF WRP NEWCO TO
ISSUE PREFERRED STOCK AND CERTAIN PROVISIONS OF MARYLAND LAW
WRP Newco's Board of Directors is divided into three classes. The initial
terms of the first, second and third classes will expire in 1998, 1999 and
2000, respectively. Beginning in 1998, directors for each class will be chosen
for a three-year term upon the expiration of their then current term, and each
year one class of directors will be elected by the stockholders. The staggered
terms for directors may limit the stockholders' ability to change control of
WRP Newco even if a change of control were in the interests of stockholders.
The Newco Charter authorizes the Board of Directors to establish one or more
series of preferred shares and to determine, with respect to any series of
preferred shares, the preferences and other terms of such series. Although the
Board of Directors has no intention at the present time, it could issue a
series of preferred shares that could, depending on the terms of such series,
impede or prevent a merger, tender offer or other transaction that some, or a
majority, of WRP Newco's shareholders might believe to be in their best
interest or in which shareholders might receive a premium for their shares
over the then current market price of such shares.
36
<PAGE>
Under the MGCL, certain "business combinations" (including certain issuances
of equity securities) between a Maryland corporation and an Interested
Stockholder are prohibited for five years after the most recent date on which
the Interested Stockholder becomes an Interested Stockholder. Thereafter,
unless exempted, any such business combination must be approved by two
supermajority stockholder votes. The directors of WRP Newco have exempted from
the Maryland statute any business combinations with Jeffrey H. Lynford or
Edward Lowenthal or any of their affiliates or any other person acting in
concert or as a group with any of such persons and, consequently, the five-
year prohibition and the supermajority vote requirements will not apply to
business combinations between such persons and WRP Newco. See "Certain
Provisions of Maryland Law and of WRP Newco's Charter and Bylaws".
The provisions of the MGCL described above and the exemptions granted may
discourage a third party from making an acquisition proposal for WRP Newco and
may inhibit a change in control under circumstances that could otherwise give
the holders of WRP Newco Common the opportunity to realize a premium over
then-prevailing market prices.
It should also be noted that for ten years after the Closing Date, WRP Newco
has the right to direct the voting of all shares of WRP Newco Series A
Preferred, WRP Newco Class A Common and WRP Newco Common owned by ERP
Operating Partnership or any of its affiliates, except as to the election of
the director to be designated by ERP Operating Partnership or any matter
relating to the rights, preferences and privileges of WRP Newco Series A
Preferred or WRP Newco Class A Common. Such voting right may hinder a change
in control.
37
<PAGE>
THE MEETINGS OF SHAREHOLDERS
EQR
The EQR Special Meeting has been called by the EQR Board of Trustees for the
purpose of approving the Merger. The EQR Special Meeting will be held on May
28, 1997, at 10:00 a.m., local time, at One North Franklin, Chicago, Illinois.
Only shareholders of record of EQR Common at the close of business on April
14, 1997 will be entitled to vote at the EQR Special Meeting. EQR had
outstanding 53,713,158 shares of EQR Common as of the close of business on
April 1, 1997, of which 1,022,666 shares (or approximately 1.9% of the
outstanding) shares of EQR Common (excludes 681,534 shares where beneficial
ownership is disclaimed) were owned beneficially by the officers and trustees
of EQR, and such persons have indicated their intention to vote such shares in
favor of the Merger. No EQR Shares other than EQR Common are entitled to vote
on the Merger. Each holder of EQR Common is entitled to one vote per share on
the Merger. If the accompanying proxy form is signed and returned, the shares
represented thereby will be voted in accordance with any direction on the
proxy form, or in the absence of a direction, they will be voted FOR the
Merger. The shareholder may revoke the proxy at any time prior to the voting
thereof by giving written notice of such revocation to EQR, by executing and
delivering a proxy bearing a later date, or by attending the EQR Special
Meeting and voting in person.
The expenses of the solicitation of EQR Common Shareholders will be paid by
EQR. In addition to the use of the mail, proxies may be solicited by trustees,
officers, or regular employees of EQR in person, by telecopy or by telephone.
Arrangements will also be made with brokerage firms and other custodians,
nominees and fiduciaries to forward solicitation material to the beneficial
owners of the shares of EQR Common held of record by such persons, and EQR
will reimburse such brokerage firms, custodians, nominees and fiduciaries for
reasonable out-of-pocket expenses incurred by them in connection therewith.
EQR has retained MacKenzie Partners to assist in the solicitation of proxies.
The fee of such firm is estimated to be $6000, plus reimbursement for out-of-
pocket costs and expenses.
The presence at the EQR Special Meeting, in person or by proxy, of the
holders of a majority of the outstanding shares of EQR Common is necessary to
constitute a quorum under the Amended and Restated Bylaws of EQR (the "EQR
Bylaws"). Votes cast by proxy or in person at the meeting will be tabulated by
election inspectors appointed for the meeting and will determine whether or
not a quorum is present. The election inspectors will treat abstentions and
"broker non-votes" (i.e., proxies of brokers who have limited authority to
vote on specified proposals) as shares that are present and entitled to vote
for purposes of determining the presence of a quorum at the meeting. Under
Maryland law and EQR's Amended and Restated Declaration of Trust (the "EQR
Declaration"), the affirmative vote of the holders of two-thirds of the
outstanding shares of EQR Common is required to approve the Merger.
EQR Common Shareholders may mark the accompanying EQR proxy to vote their
shares FOR or AGAINST, or to ABSTAIN with respect to, the Merger. Abstentions
and broker non-votes will have the effect of a vote against approval of the
Merger.
The EQR Trustees who voted on the Merger unanimously recommend that EQR
Common Shareholders vote FOR the Merger.
Pursuant to the EQR Bylaws, no business may be transacted at the EQR Special
Meeting except that referred to in the accompanying notice of the EQR Special
Meeting.
WELLSFORD
The Wellsford Special Meeting has been called by the Wellsford Board of
Trustees for the purpose of approving the Merger, including the adoption of an
amended and restated declaration of trust of the Surviving Trust, the
Additional Provisions, the Additional Share Offering by WRP Newco and the
adoption of WRP Newco's 1997 Management Incentive Plan. The Wellsford Special
Meeting will be held on May 28, 1997, at 10:00 a.m., local time, at The
Princeton Club, 15 West 43rd Street, New York, New York. Only shareholders of
record of Wellsford Common at the close of business on April 14, 1997 will be
entitled to vote at the Wellsford Special Meeting. Wellsford had outstanding
17,261,897 shares of Wellsford Common as of the close of business on April 18,
1997, of which 599,828 shares (or approximately 3.5% of the outstanding shares
of Wellsford Common (excludes 29,727 shares where beneficial ownership is
disclaimed)) were owned beneficially by the officers and trustees of
Wellsford, and such persons have indicated their intention to vote such shares
in favor of the Merger, including the adoption of an amended and restated
declaration of trust of the Surviving Trust, the Additional Provisions, the
Additional Share Offering and the adoption of WRP Newco's 1997 Management
Incentive Plan. No Wellsford Shares other than Wellsford Common are entitled
to vote on the matters set forth in the notice of the Wellsford Special
Meeting. Each holder of Wellsford Common is entitled to one vote per share on
the matters set forth in the notice of the Wellsford Special Meeting. If the
accompanying proxy form is signed and returned, the shares represented thereby
will
38
<PAGE>
be voted in accordance with any direction on the proxy form, or in the absence
of a direction, they will be voted FOR the Merger, including adoption of the
amended and restated declaration of trust of the Surviving Trust, the
Additional Provisions, the Additional Share Offering by WRP Newco and the
adoption of WRP Newco's 1997 Management Incentive Plan. The shareholder may
revoke the proxy at any time prior to the voting thereof by giving written
notice of such revocation to Wellsford, by executing and delivering a proxy
bearing a later date, or by attending the Wellsford Special Meeting and voting
in person.
The expenses of the solicitation of Wellsford Common Shareholders will be
paid by Wellsford. In addition to the use of the mail, proxies may be
solicited by trustees, officers, or regular employees of Wellsford in person,
by telecopy or by telephone. Arrangements will also be made with brokerage
firms and other custodians, nominees and fiduciaries to forward solicitation
material to the beneficial owners of the shares of Wellsford Common held of
record by such persons, and Wellsford will reimburse such brokerage firms,
custodians, nominees and fiduciaries for reasonable out-of-pocket expenses
incurred by them in connection therewith. Wellsford has retained MacKenzie
Partners to assist in the solicitation of proxies. The fee of such firm is
estimated to be $7,500, plus reimbursement for out-of-pocket costs and
expenses.
The presence at the Wellsford Special Meeting, in person or by proxy, of the
holders of a majority of the outstanding shares of Wellsford Common is
necessary to constitute a quorum under Wellsford's Bylaws (the "Wellsford
Bylaws"). Votes cast by proxy or in person at the Wellsford Special Meeting
will be tabulated by election inspectors appointed for the meeting who will
determine whether or not a quorum is present. The election inspectors will
treat abstentions and "broker non-votes" (i.e., proxies of brokers who have
limited authority to vote on specified proposals) as shares that are present
and entitled to vote for purposes of determining the presence of a quorum at
the meeting. Under Maryland law and Wellsford's Amended and Restated
Declaration of Trust (the "Wellsford Declaration"), the affirmative vote of
the holders of a majority of the outstanding shares of Wellsford Common is
required to approve the Merger. The affirmative vote of the holders of two-
thirds of the outstanding shares of Wellsford Common is required to approve
the Additional Provisions. The affirmative vote of the holders of a majority
of shares of Wellsford Common voting thereon is required to approve the
Additional Share Offering and the adoption of WRP Newco's 1997 Management
Incentive Plan.
Wellsford Common Shareholders may mark the accompanying Wellsford proxy to
vote their shares FOR or AGAINST, or to ABSTAIN from voting with respect, to
the Merger, the Additional Provisions, the Additional Share Offering and WRP
Newco's 1997 Management Incentive Plan. Abstentions and broker non-votes will
be counted in determining the presence of a quorum and will have the effect of
a vote against approval of the Merger and the Additional Provisions. An
abstention and a broker non-vote will have no effect on the proposal to
approve the Additional Share Offering and adoption of WRP Newco's 1997
Management Incentive Plan.
The Wellsford Board of Trustees unanimously recommends that Wellsford Common
Shareholders vote FOR the Merger, the Additional Provisions, the Additional
Share Offering and WRP Newco's 1997 Management Incentive Plan. The WRP Newco
Board of Directors unanimously recommends that Wellsford Common Shareholders
vote FOR the Additional Share Offering and WRP Newco's 1997 Management
Incentive Plan.
The Wellsford Bylaws provide that no business will be transacted at the
Wellsford Special Meeting except that referred to in the accompanying notice
of the Wellsford Special Meeting.
THE MERGER
The description of the Merger contained in this Joint Proxy
Statement/Prospectus/Information Statement is qualified in its entirety by
reference to the Merger Agreement, the full text of which is attached as
Appendix A, and is incorporated herein by reference.
TERMS OF THE MERGER
The Merger Agreement provides that, upon satisfaction or waiver of the
conditions set forth therein, EQR will be merged into Wellsford. The name of
the Surviving Trust will be Equity Residential Properties Trust. At the
Effective Time, each outstanding share of Wellsford Common will be converted
into .625 of a share of Survivor Common. At the Effective Time, each
outstanding share of EQR Common will be converted into one share of Survivor
Common. At the Effective Time, each share of Wellsford Preferred and EQR
Preferred will be converted into one share of Survivor Preferred, having the
same preferences and other terms as the Wellsford Preferred or EQR Preferred
previously outstanding of the same series; provided, however, that the
conversion ratio for the Wellsford Series A will be adjusted in accordance
with its terms. No fractional shares of Survivor Common will be issued in
connection with the Merger. In lieu thereof, holders of Wellsford
39
<PAGE>
Common will receive a cash payment equal to the average closing price of EQR
Common on the NYSE for the five trading days immediately preceding the
Effective Time, multiplied by the fraction of the shares of Survivor Common to
which the holder would be entitled under the Merger Agreement.
BACKGROUND OF THE MERGER
Since 1993, Douglas Crocker, the President and Chief Executive Officer of
EQR and Jeffrey H. Lynford, the Chairman of the Board of Wellsford and Edward
Lowenthal, President and Chief Executive Officer of Wellsford, have had a
personal relationship arising out of their participation in the multifamily
property business. At various times during 1994 and 1995 Mr. Crocker, Mr.
Lynford and Mr. Lowenthal have discussed the general status of the multifamily
property industry. Messrs. Crocker, Lynford and Lowenthal presumed that the
multifamily property industry would be the subject of combinations of existing
companies in the future, and separately considered whether their respective
companies should explore a combination with other companies.
On September 16, 1996, a regular quarterly Wellsford board meeting was held
at which Messrs. Lynford and Lowenthal reported on their discussions with
investment banking firms and other publicly traded REITs regarding possible
strategic combinations. They indicated that these discussions related
primarily to possible transactions in which Wellsford would acquire another
entity or be the survivor in a merger. The Board of Trustees of Wellsford
authorized management to engage in discussions regarding possible strategic
business combinations.
On September 24, 1996, Messrs. Crocker, Lynford and Lowenthal met to discuss
the multifamily property industry and real estate market in general and
whether combining the property portfolios of EQR and Wellsford made sense for
both companies and their shareholders. The parties expressed a general
interest in exploring the possibility of a combination of the companies.
On October 19, 1996, Messrs. Crocker and Lynford had a meeting at which they
specifically discussed each company's interest in pursuing merger discussions.
During such meeting, Mr. Crocker and Mr. Lynford considered whether a merger
would be in the best interests of both companies and their shareholders. Among
the issues considered were whether a merger would combine the talents of their
respective companies, reduce corporate overhead by eliminating redundancies
and create a larger company which might be attractive to institutional
investors and increase access to public equity and debt markets. Mr. Crocker
and Mr. Lynford discussed various exchange ratios for Wellsford Common as well
as possible funds from operations and adjusted funds from operations ratios.
Concluding that a merger might be in the best interests of both companies and
their shareholders, Mr. Crocker and Mr. Lynford decided to pursue merger
discussions.
On October 24, 1996, Mr. Crocker and Mr. Lowenthal met at the National
Association of Real Estate Investment Trusts ("NAREIT") Convention in Dallas,
Texas. Mr. Crocker and Mr. Lowenthal discussed revised numbers with respect to
funds from operations and adjusted funds from operations in connection with
possible exchange ratios. Mr. Crocker discussed the fact that he would like to
reach agreement on these numbers in order to further pursue a merger
transaction. Mr. Crocker and Mr. Lowenthal agreed to have each company's
internal accountants discuss exchange ratios and evaluations.
On November 13, 1996, Mr. Crocker, Mr. Lowenthal, Gregory F. Hughes, Chief
Financial Officer of Wellsford, David H. Lee, Senior Vice President--Capital
Markets of EQR, Gerald A. Spector, Executive Vice President of EQR, and David
J. Neithercut, Chief Financial Officer of EQR, met. Mr. Lowenthal presented
the exchange ratio as a topic for discussion. The parties exchanged views on
relative assets and exchange values, but disagreements remained regarding the
method of valuation, the exchange ratio and other material issues.
On November 27, 1996, Mr. Crocker met with Messrs. Lynford, Lowenthal and
Hughes at Wellsford's corporate offices. The parties again discussed valuation
and determined that EQR was not willing to value the development assets of
Wellsford on a going concern basis in the same manner as the other Wellsford
assets. The parties alternatively discussed the formation of a new Wellsford
subsidiary to be spun off to the common shareholders of Wellsford funded
primarily with the Wellsford development assets. The parties agreed that Mr.
Crocker would serve as a director on the proposed subsidiary's board of
directors and Messrs. Lowenthal and Lynford would serve as trustees on the EQR
Board of Trustees. The parties also discussed estimated financial results of
EQR for year-end 1997 and various employment issues, such as possible
retention of as many Wellsford employees as possible to meet EQR's staffing
needs.
On December 9, 1996, a regular quarterly Wellsford board meeting was held at
which members of management of Wellsford and its legal counsel were present.
At such meeting, Messrs. Lynford and Lowenthal reported on the discussions
they had with other publicly traded REITs regarding possible business
combination transactions. They indicated that the only ongoing discussions at
such time were with EQR, and they reported the status and substance of these
discussions, including
40
<PAGE>
those relating to a possible spin-off of certain of Wellsford's assets, and
the nature and results of management's initial due diligence review of the
business and financial condition of EQR.
On December 12, 1996, Mr. Crocker, Mr. Lowenthal, Mr. Lynford, Mr. Hughes
and attorneys from EQR's legal staff, as well as representatives of Rudnick &
Wolfe, special counsel for EQR, and Robinson Silverman Pearce Aronsohn &
Berman LLP, special counsel for Wellsford, met to discuss the structure of a
possible merger transaction, the formation of the proposed subsidiary and the
specific assets to be transferred to the proposed subsidiary, and the possible
pricing matrix for the Wellsford Common. General terms were discussed. The
tentative Exchange Ratio was determined by establishing relative values for
the EQR Common and Wellsford Common. The value for EQR Common was based on its
then market value of $42.875 per share. No one specific valuation method was
utilized in connection with the determination of the value of the Wellsford
Common. The value for Wellsford Common was negotiated based upon, among other
things, its then market price of $25.00 per share and each party's evaluation
of the value of Wellsford's assets to be acquired in the Merger, which were
estimated at approximately $1,032.2 million, the budgeted net operating
income, earnings before interest, taxes, depreciation and amortization and
funds from operations for 1997 estimated to be generated from the assets to be
acquired by EQR in the merger which were approximately $79.4 million, $76.7
million and $37.4 million, respectively, the cost savings anticipated from the
Merger, which were estimated at $4.1 million per year and the costs associated
with the Merger, including employee severance and retention costs, which were
estimated at $23.6 million. With respect to the Wellsford Preferred, it was
determined to value such shares based upon their liquidation value because the
distribution rates on Wellsford Preferred were established as a percentage of
their respective liquidation values. It was tentatively agreed, subject to
satisfactory resolution of other material issues and completion of due
diligence, that the exchange ratio would be determined based upon a value of
$27.50 per share for the Wellsford Common and $40.00 per share for the EQR
Common, subject to adjustment in the event of a decline in the market price of
EQR Common. In addition, it was tentatively agreed, subject to the additional
study of the relevant assets and completion of due diligence, that the assets
to be contributed to the new subsidiary would have an initial book value of at
least $2.50 per share. Although discussions were still ongoing, EQR and
Wellsford requested their legal counsel to prepare a draft of a merger
agreement and other related documents so that management of the companies
could focus on the issues that required resolution.
On December 20, 1996, Mr. Crocker and Mr. Lowenthal had a telephone call to
discuss certain open issues regarding the possible merger transaction. The
costs in connection with the possible merger transaction were discussed in
detail.
On December 26, 1996, Messrs. Crocker, Lowenthal and Hughes discussed by
telephone concerns regarding the capitalization of the proposed subsidiary
upon consummation of the possible merger. Mr. Crocker suggested that EQR
purchase $3.5 million in shares of common stock of the proposed subsidiary
plus an additional 10% interest in Palomino Park.
From December 26, 1996 through January 9, 1997, the management of EQR and
Wellsford had a number of discussions regarding various business issues.
On January 9, 1997, a special EQR board meeting was held at which members of
management, representatives of EQR's financial and legal advisors were present
in person or by conference telephone call. At such meeting, the trustees were
informed of the status of discussions with Wellsford's management and the
reasons that a combination with Wellsford would be beneficial. In addition,
the trustees discussed with management and EQR's legal advisors, the current
operations of EQR and Wellsford, the form of consideration payable in the
proposed transaction, the valuation methodologies to be utilized by J.P.
Morgan for purposes of its opinion (see "The Merger--Opinion of EQR Financial
Advisor"), potential synergies expected by management to result from the
proposed transaction, certain governance, tax and due diligence matters and
the time table for completion of the transaction. The EQR Board of Trustees
also reviewed the tentative terms of the proposed merger between EQR and
Wellsford.
Mr. Crocker provided the EQR Board of Trustees with a discussion of the
background and events leading up to the meeting with respect to the proposed
merger with Wellsford. Mr. Crocker then set forth the reasons he believed a
possible business combination with Wellsford would be appropriate for EQR. The
reasons discussed were (i) the combined entity would be the second largest
publicly-traded REIT in the United States and the largest REIT focusing
primarily on multifamily properties, with 317 properties, consisting of 90,873
apartment units; (ii) the combined market capitalization, would be
approximately $5 billion and would not significantly alter EQR's existing Debt
to Total Market Capitalization Ratio; and (iii) the merger would improve
access to the public debt and equity markets to support EQR's continued
growth. Mr. Crocker also noted that Mr. Lowenthal and Mr. Lynford would be
added to the EQR Board of Trustees, assuming approval of the Merger by the
shareholders of each company.
EQR's legal counsel presented and explained the terms of the Merger
Agreement to the EQR Board of Trustees including closing conditions,
termination rights and liquidated damages and expense reimbursement
provisions, and advised the EQR Board of Trustees of their fiduciary
obligations. A discussion followed concerning the proposed merger.
41
<PAGE>
The EQR Board of Trustees discussed the advantages and disadvantages to EQR
of the Merger, including the factors raised by Mr. Crocker. The principle
negative factor that the EQR Board of Trustees considered was the significant
costs involved in connection with consummating the Merger and the substantial
management time and effort required to effectuate the Merger and integrate the
businesses of EQR and Wellsford. The EQR Board of Trustees did not believe
that this factor was sufficient to outweigh the advantages of the Merger,
particularly in light of the lower payout ratio of the Surviving Trust based
upon funds from operations, and the similar Debt to Total Market
Capitalization Ratio of the Surviving Trust, as compared with the current
ratio for EQR.
From January 12, 1997 through January 16, 1997, representatives of
management of EQR and Wellsford and their respective counsel met in Chicago to
discuss and resolve the remaining open business and legal issues.
On January 15, 1997, a special meeting of the EQR Board of Trustees was
held. Representatives of J.P. Morgan made a detailed presentation regarding
the proposed merger with Wellsford. J.P. Morgan's presentation included a
discussion of (i) the fairness from a financial point of view to EQR of the
consideration to be paid by EQR in the proposed merger; (ii) a summary of the
financial terms of the proposed merger; (iii) a valuation analysis; and (iv) a
discussion of the impact of the proposed merger on EQR. Also included in J.P.
Morgan's oral presentation of its fairness opinion were (i) an outline of J.P.
Morgan's fairness opinion process; (ii) a pro forma merger analysis; (iii) a
fully loaded share price analysis; (iv) a public trading multiples analysis;
(v) a selected transactions analysis; (vi) a share trading history analysis;
(vii) an historical exchange ratio analysis; (viii) a net asset value
analysis; and (ix) a WRP Newco analysis. See "--Opinion of Financial Advisor--
EQR."
Following such presentations, and after extensive discussion, the Board of
Trustees of EQR concluded that the advantages of the Merger outweighed the
potential risks and the EQR Trustees who voted on the Merger unanimously
approved the Merger Agreement and the related agreements contemplated thereby,
and authorized EQR management to enter into such agreements. J.P. Morgan
rendered its oral opinion to the effect that, as of that date and subject to
the assumptions made, procedures followed, matters considered and limits of
its review, the consideration to be paid by EQR in connection with the Merger
was fair, from a financial point of view, to EQR. J.P. Morgan's written
opinion confirming its oral opinion was delivered on January 16, 1997.
On January 16, 1997, a special meeting of the Board of Trustees of Wellsford
was held at which members of management, representatives of Merrill Lynch and
legal counsel were present. At such meeting, the Wellsford Board of Trustees
was updated on the status of discussions with EQR regarding the potential
merger transaction between Wellsford and EQR. Mr. Lynford reviewed with the
Board of Trustees (i) the background of the proposed merger and spin-off
transaction, (ii) the current status of Wellsford's financial and business
plans without the proposed merger, including the feasibility of improving the
profitability of Wellsford's existing property portfolio and raising
additional capital and acquiring new properties, (iii) pertinent due diligence
findings with respect to EQR, with particular emphasis on the current
operations and properties of EQR and (iv) the potential benefits as well as
the risks of the proposed merger transaction as described below under "--
Reasons for the Merger; Recommendation of the Wellsford Board of Trustees."
Wellsford's legal counsel made a presentation to the Wellsford Board of
Trustees in which it explained the material terms of the proposed merger and
spin-off transaction and agreements related thereto, briefed the Board of
Trustees on certain legal issues raised by the proposed merger transaction and
advised the Board of Trustees of its fiduciary duties in connection with such
transaction.
Merrill Lynch presented its financial analysis of the merger transaction,
which included: (i) an overview of the proposed transaction setting forth,
among other things, a summary of the key transaction terms and a description
of the Distribution, (ii) an analysis of the stock trading history of each of
Wellsford Common and EQR Common, (iii) valuation analyses of Wellsford, EQR
and WRP Newco, (iv) a comparison of each of Wellsford and EQR with selected
publicly traded companies, (v) a comparison of the proposed financial terms of
the Merger with the financial terms of other relevant mergers and acquisitions
and (vi) a pro forma merger analysis. Merrill Lynch concluded its presentation
by orally advising the Wellsford Board of Trustees that as of that date, based
upon the facts and circumstances as they existed at that time, and subject to
certain assumptions, factors and limitations, the proposed consideration to be
received by the holders of Wellsford Common, pursuant to the Merger and
Distribution, was fair to such shareholders from a financial point of view.
Following such presentations, and after extensive discussion of the
advantages and disadvantages of the proposed merger transaction as described
under "--Reasons for the Merger; Recommendations of the Wellsford Board of
Trustees," the Board of Trustees of Wellsford concluded that the advantages of
the Merger and Distribution outweighed the potential risks, and unanimously
approved the merger transaction, the spin-off, the Merger Agreement and all
transactions contemplated thereby.
42
<PAGE>
EQR and Wellsford did not believe that the Merger or the Contribution and
Distribution would have a material adverse effect on the results of
operations, liquidity or capital resources of the Surviving Trust and believed
that the advantages of such transactions outweighed the disadvantages.
The Merger Agreement was executed on January 16, 1997.
REASONS FOR THE MERGER; RECOMMENDATION OF THE EQR BOARD OF TRUSTEES
The EQR Board of Trustees believes that the Merger, including the
consideration, is fair and in the best interests of EQR and its shareholders.
Accordingly, the EQR Trustees who voted on the Merger unanimously approved the
Merger and unanimously recommend approval of the Merger by the shareholders of
EQR. In reaching this determination, the EQR Board of Trustees consulted with
EQR management, as well as its financial advisors, J.P. Morgan, legal counsel
and accountants, and considered a number of factors. The material factors that
the EQR Board of Trustees considered in approving the Merger and unanimously
recommending approval of the Merger are that:
(i) The EQR Board of Trustees believes that the Merger would solidify
EQR's leadership position in the multifamily property industry. The EQR
Board of Trustees viewed this as favorable because the combined entity
would own and operate 317 multifamily properties consisting of 90,873
apartment units; would have funds from operations on a pro forma basis for
the nine months ended September 30, 1996 of approximately $155.4 million
and would have a combined market capitalization, as of September 30, 1996,
of approximately $5.0 billion with an initial Debt to Total Market
Capitalization Ratio of approximately 31%.
(ii) The EQR Board of Trustees believes that the Merger would increase
operating efficiency through economies of scales, which the EQR Board of
Trustees viewed as favorable as the combined entity would realize
significant savings in overhead and expenses (such savings are estimated to
be approximately $3.7 million per annum).
(iii) The EQR Board of Trustees believes that the Merger would provide
greater access to the public equity and debt markets. The Debt to Total
Market Capitalization Ratio for EQR as of September 30, 1996 was
approximately 31.5%, while the ratio on a pro forma basis of the Surviving
Trust as of the same date would be approximately 31%. The EQR Board of
Trustees viewed this favorably because of management's belief, based in
part on discussions with advisors, investment banking firms and lenders,
that it would provide EQR Common Shareholders with enhanced liquidity and
make the Survivor Common a more attractive investment for institutional
investors.
(iv) The EQR Board of Trustees believes that the Surviving Trust would be
a larger and financially stronger company, which would make it easier to
combine with other public or private entities. The EQR Board of Trustees
viewed this as favorable because it would provide another efficient and
attractive means of growth.
(v) The EQR Board of Trustees believes that the combination of the
Wellsford properties (approximately 19,000 units) with those of EQR will
expand the geographic focus of EQR's ownership and operation of properties
and enhance EQR's operations in the Southwest, Western and Pacific
Northwest regions of the United States. The EQR Board of Trustees viewed
this as favorable because it would limit the impact that adverse economic
or real estate conditions in a particular region may have on EQR as a whole
and provide EQR the opportunity for additional expansion in these regions.
(vi) The Unaudited Pro Forma Combined Financial Statements for the nine
months ended September 30, 1996 on a pro forma basis illustrated the
effects of the Merger. On a pro forma basis funds from operations for the
Surviving Trust are $155.4 million for the nine months ended September 30,
1996 instead of $113.3 million for EQR on a historical basis. The EQR Board
of Trustees viewed this as favorable because it would most likely increase
the Surviving Trust's funds from operations available for distribution to
shareholders and holders of OP Units. Funds from operations available for
distribution is not the same as cash available for distribution as it does
not reflect cash required for capital expenditures and principal repayments
on debt.
(vii) The Merger could be effectuated through the issuance of new equity
valued at $464 million (based upon a market price of $43.375 per share of
EQR Common on January 16, 1997), rather than through the use of cash or a
public offering of equity or debt securities, which the EQR Board of
Trustees viewed as favorable.
(viii) J.P. Morgan delivered an oral opinion on January 15, 1997 to the
effect that, as of such date and based upon and subject to certain matters
stated therein, the consideration to be paid by EQR in connection with the
Merger was fair, from a financial point of view, to EQR. The EQR Board of
Trustees viewed such opinion as favorable not only because of the
conclusion reached by J.P. Morgan, but also because such conclusion was
consistent with the opinion of EQR's management.
(ix) The EQR Board of Trustees believes the terms of the Merger Agreement
to be fair to EQR.
(x) Under generally accepted accounting principles, the Merger will be
accounted for as a purchase, and for federal income tax purposes the Merger
will be a tax-free transaction, which the EQR Board of Trustees viewed as
favorable
43
<PAGE>
because, with certain possible exceptions, no gain or loss will be
recognized by EQR, Wellsford or a shareholder of Wellsford who receives
shares of Survivor Common for shares of Wellsford Common exchanged therefor
(except with respect to any cash received in lieu of a fractional interest
in a share of EQR Common).
The EQR Board of Trustees also considered certain potentially negative
factors which could arise from the Merger. These included, among others, the
significant costs involved in connection with consummating the Merger and the
substantial management time and effort required to effectuate the Merger and
integrate the businesses of EQR and Wellsford. The EQR Board of Trustees
considered that the Merger would increase the debt of the Surviving Trust. The
Surviving Trust will assume all of Wellsford's outstanding debt of
approximately $330 million. The EQR Board of Trustees recognized this increase
could adversely affect the ability of the Surviving Trust to obtain debt
financing for additional growth and would subject EQR to the risks of higher
leverage. Overall, however, the EQR Board of Trustees concluded that the
increase in debt would be within EQR's policies with respect to the incurrence
of debt. In addition, the EQR Board of Trustees considered the possible
adverse effects upon the market for EQR Common Shares and upon EQR's ability
to raise capital and issue equity in both the public and private markets which
might result if the Merger were not consummated. Finally, the EQR Board of
Trustees considered the risk that the anticipated benefits of the Merger might
not be fully realized. The EQR Board of Trustees did not believe that the
negative factors were sufficient, either individually or collectively, to
outweigh the advantages of the Merger.
The EQR Board of Trustees viewed as adequate the conditions to the closing
in the Merger Agreement, including the condition that no change in the
financial condition, business or operations of Wellsford will have occurred
that would have a material adverse effect, other than a change which affects
EQR and Wellsford in a substantially similar manner.
In view of the wide variety of factors considered in connection with its
evaluation of the Merger, the EQR Board of Trustees did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weight to the specific factors considered in reaching its determination.
The EQR Board of Trustees view the indemnification provisions relating to
Wellsford trustees and officers as a continuing responsibility and approved of
the continuation of the indemnification of the Wellsford trustees and officers
as part of the negotiated transaction.
The EQR Board of Trustees believes that the proposed transaction is fair to
and in the best interests of EQR and its shareholders. The EQR Trustees who
voted on the Merger unanimously approved the Merger, and unanimously recommend
that the shareholders of EQR vote FOR the Merger.
In the event the Merger is not consummated for any reason, EQR will continue
to pursue its business objectives.
REASONS FOR THE MERGER; RECOMMENDATION OF THE WELLSFORD BOARD OF TRUSTEES
At a special meeting of the Wellsford Board of Trustees held on January 16,
1997, members of Wellsford management, representatives of Merrill Lynch and
legal counsel made presentations concerning the business and prospects of
Wellsford and EQR. As part of its deliberations, the Wellsford Board of
Trustees considered, among other factors, the age, condition and geographic
diversification of EQR's assets, the depth and experience of its management
and its credit rating and analyzed its capital structure, funds from
operations and Debt to Total Market Capitalization Ratio, as well as its
future prospects and opportunities for growth as a combined company with
Wellsford. The Wellsford Board of Trustees also reviewed the terms of the
Merger Agreement and the Contribution and Distribution Agreement with
Wellsford's management and Wellsford's financial and legal advisors. By
unanimous vote, the Wellsford Board of Trustees determined that the Merger and
the Distribution were fair to, and in the best interests of, Wellsford and its
shareholders, approved and adopted the Merger Agreement, the Contribution and
Distribution Agreement and the transactions contemplated thereby, and resolved
to recommend that Wellsford's shareholders approve the Merger. Although
Wellsford Common Shareholders are not being asked to approve the Distribution,
approval of the Merger will, in effect, constitute approval of the
Distribution.
The Wellsford Board of Trustees believes that the Merger offers Wellsford's
shareholders an opportunity to take advantage of the general trend in the real
estate industry towards consolidation, by affording shareholders a significant
participation in a much larger and more geographically diversified REIT with
greater potential for long-term appreciation and improved access to capital
markets.
In making its determination with respect to the Merger and the Distribution,
the Wellsford Board of Trustees also considered, among other things, that:
(i) the Merger represents the alternative which has the greatest
feasibility and offers the greatest potential to maximize shareholder
value. In this regard, the Board considered the discussions management
conducted with
44
<PAGE>
investment banking firms and other publicly traded REITs regarding possible
strategic combinations, as well as EQR's size, financial resources,
geographic diversification and credit rating and the expertise and
experience of EQR's management;
(ii) after management's discussions with other parties regarding possible
strategic business combinations, the Merger was the best alternative
reasonably available to Wellsford's shareholders. The Board believed that
after management's discussions with investment banking firms and other
publicly traded REITs, there were no other prospective purchasers that had
both the financial ability to complete the transaction and would be willing
to pay an aggregate consideration greater than that to be paid by EQR in
the Merger. Other possible strategic business combinations, including
potential acquisitions of other companies, were rejected for many reasons,
including the lack of management depth and experience, age and condition of
the applicable assets, lack of geographic diversification, insufficient
credit rating, insufficient cost savings and size of the other company;
(iii) the anticipated cost savings and operating efficiencies available
to the Surviving Trust from the Merger, particularly from a reduction of
general and administrative overhead expenses, the costs of capital, bulk
purchasing, advertising and property management;
(iv) the terms of the Merger Agreement, which the Wellsford Board of
Trustees viewed as favorable because it believed them to be fair to
Wellsford and its shareholders and because the terms were reached through
extensive arms-length negotiations. In this regard, the Wellsford Board of
Trustees noted that the Exchange Ratio fairly reflected the relative
contributions of both companies to the combined entity and represented an
attractive opportunity for shareholders to continue their investment and
maintain their receipt of quarterly dividends, but with significantly
expanded geographic diversification;
(v) the Surviving Trust will have significantly greater market
capitalization which could increase the liquidity of Survivor Common after
the Merger. In this regard, the Board noted that the market capitalization
of the Surviving Trust is expected to be approximately $4 billion greater
than the then current market capitalization of Wellsford and the Surviving
Trust would have approximately 60,000,000 shares of Survivor Common
outstanding after the Merger;
(vi) the Distribution will enable shareholders to participate in an
opportunity to maximize the value of the Contributed Assets (as defined
herein) because EQR did not wish to acquire the Contributed Assets for a
price that Wellsford considered to be adequate value for such assets;
(vii) the structure of the Merger, particularly the fact that the Merger,
as a "stock-for-stock" transaction, rather than a "cash-for-stock"
transaction, will provide an opportunity for Wellsford's shareholders to
participate in any future appreciation of the Surviving Trust;
(viii) the tax-free nature of the Merger; and
(ix) the opinion, analyses and presentations of Merrill Lynch, including
the opinion that the proposed consideration to be received by Wellsford
Common Shareholders pursuant to the Merger and the Distribution was fair to
such shareholders from a financial point of view, which supported the
conclusions reached by the Board after its own deliberations and analyses.
The Wellsford Board of Trustees also considered certain potentially negative
factors in its deliberations concerning the Merger, including, among others:
(i) the risk that the anticipated benefits of the Merger might not be
fully realized;
(ii) the significant costs involved in connection with consummating the
Merger;
(iii) the substantial management time and effort required to effectuate
the Merger;
(iv) the possibility that Wellsford may be required, if the Merger
Agreement is terminated under certain circumstances, to pay EQR a Break-Up
Fee of $14.0 million and to reimburse EQR Break-Up Expenses of up to $2.5
million; and
(v) that the dividend rate payable with respect to the EQR Common is less
than the dividend rate payable with respect to the Wellsford Common.
In addition to the above factors, the Board of Trustees was mindful of and
evaluated the actual and potential conflicts of interest. In view of the wide
variety of factors considered by the Wellsford Board of Trustees, the Board of
Trustees did not quantify or otherwise attempt to assign relative weights to
the specific factors considered in making its determination. However, after
due consideration of their fiduciary obligations, in the unanimous view of the
Wellsford Board of Trustees, the potential conflicts of interest and
potentially negative factors considered by it were not sufficient, either
individually or collectively, to outweigh the positive factors considered by
it in its deliberations relating to the Merger.
45
<PAGE>
OPINION OF FINANCIAL ADVISOR--EQR
At the meeting of the Board of Trustees of EQR on January 15, 1997, J.P.
Morgan rendered its oral opinion to the Board of Trustees of EQR that, as of
such date, the consideration to be paid by EQR in connection with the proposed
Merger was fair from a financial point of view to EQR. J.P. Morgan has
confirmed its January 15, 1997 oral opinion by delivering its written opinion
to the Board of Trustees of EQR, dated January 16, 1997, that, as of such
date, the consideration to be paid by EQR in connection with the proposed
Merger was fair from a financial point of view to EQR. J.P. Morgan has not
been requested to, and will not, update its opinion prior to the Closing. No
limitations were imposed by EQR's Board of Trustees upon J.P. Morgan with
respect to the investigations made or procedures followed by it in rendering
its opinions.
The full text of the written opinion of J.P. Morgan dated January 16, 1997,
which sets forth the assumptions made, matters considered and limits on the
review undertaken, is attached as Appendix C to this Joint Proxy
Statement/Prospectus/ Information Statement and is incorporated herein by
reference. EQR Common Shareholders are urged to read the opinion in its
entirety. J.P. Morgan's written opinion is addressed to the Board of Trustees
of EQR, is directed only to the consideration to be paid in connection with
the Merger and does not constitute a recommendation to any shareholder of EQR
as to how such shareholder should vote at the EQR Special Meeting. The summary
of the opinion of J.P. Morgan set forth in this Joint Proxy
Statement/Prospectus/ Information Statement is qualified in its entirety by
reference to the full text of such opinion. In the opinion of EQR, no events
or significant changes in information have occurred that would alter the
opinion of J.P. Morgan. However, if such an event or change does occur,
including, without limitation, an amendment to the Merger Agreement or
Contribution and Distribution Agreement which materially affects the financial
terms of either of such agreements, a revised fairness opinion will be
requested.
In arriving at its opinion, J.P. Morgan reviewed, among other things, the
Merger Agreement; the audited financial statements of EQR and Wellsford for
the fiscal year ended December 31, 1995, and the unaudited financial
statements of EQR and Wellsford for the nine months ended September 30, 1996;
current and historical market prices of the EQR Common and Wellsford Common;
certain publicly available information concerning the business of Wellsford
and of certain other companies engaged in businesses comparable to those of
Wellsford, and the reported market prices for certain other companies'
securities deemed comparable; publicly available terms of certain transactions
involving companies comparable to Wellsford and the consideration received for
such companies; the terms of other business combinations deemed relevant by
J.P. Morgan; certain internal financial analyses and estimates of budgeted
1997 funds from operations and net operating income prepared by EQR and
Wellsford and their respective managements; and certain agreements with
respect to outstanding indebtedness or obligations of EQR and Wellsford. J.P.
Morgan also held discussions with certain members of the management of EQR and
Wellsford with respect to certain aspects of the Merger, and the past and
current business operations of EQR and Wellsford, the financial condition and
future prospects and operations of EQR and Wellsford, and certain other
matters believed necessary or appropriate to J.P. Morgan's inquiry. In
addition, J.P. Morgan reviewed such other financial studies and analyses and
considered such other information as it deemed appropriate for the purposes of
its opinion.
J.P. Morgan relied upon and assumed, without independent verification, the
accuracy and completeness of all information that was publicly available or
that was furnished to it by EQR and Wellsford or otherwise reviewed by J.P.
Morgan, and J.P. Morgan has not assumed any responsibility or liability
therefor. J.P. Morgan has not conducted any valuation or appraisal of any
assets or liabilities, nor have any valuations or appraisals been provided to
J.P. Morgan. In relying on financial analyses and forecasts provided to J.P.
Morgan, J.P. Morgan has assumed that they have been reasonably prepared based
on assumptions reflecting the best currently available estimates and judgments
by management as to the expected future results of operations and financial
condition of EQR and Wellsford to which such analyses or forecasts relate.
J.P. Morgan has also assumed that the Merger will have the tax consequences
described in discussions with, and materials furnished to J.P. Morgan by,
representatives of EQR, and that the other transactions contemplated by the
Merger Agreement will be consummated as described in the Merger Agreement.
The projections utilized by J.P. Morgan in connection with its opinion were
derived by calculating the average of the 1997 projections for both EQR and
Wellsford, as projected by the REIT equity analyst community, of (i) total
rental revenues, (ii) net operating income, (iii) earnings before interest,
taxes, depreciation and amortization ("EBITDA"), (iv) FFO and (v) FFO per
share (as provided by First Call, an online data service available to
subscribers which compiles earnings estimates by research analysts). This
resulted in projected 1997 total rental revenues, net operating income,
EBITDA, FFO and FFO per share of approximately $554.1 million, $337.8 million,
$340.4 million, $202.5 million and $3.43 per share, respectively, for EQR, and
approximately $138.0 million, $78.8 million, $77.7 million, $38.5 million and
$2.25 per share, respectively, for Wellsford.
No representation or warranty was made by any party with respect to these
projections. Financial projections are subject to contingencies beyond
management's control and realization of the projections depends on numerous
factors, including
46
<PAGE>
among other things, the cost of integrating the companies, the completion of
pending developments, the actual cost in relation to such projects and
decisions by management to modify business plans to address changing needs and
a changing operating environment. All material events and circumstances cannot
be predicted and unanticipated events and circumstances are likely to occur.
Accordingly, there may be differences between the projected results of
operations and the actual results of operations of the respective companies,
and such differences could be material. In the event that the financial
projections prove to be materially different, the conclusions reached in the
opinion of J.P. Morgan could be materially affected.
J.P. Morgan's opinions are based on economic, market and other conditions as
in effect on, and the information made available to J.P. Morgan as of, the
date of such opinions. Subsequent developments may affect the written opinion
dated January 16, 1997, and J.P. Morgan does not have any obligation to
update, revise, or reaffirm such opinion. J.P. Morgan expressed no opinion as
to the price at which the EQR Common or Wellsford Common will trade at any
future time.
In accordance with customary investment banking practice, J.P. Morgan
employed generally accepted valuation methods in reaching its opinion. The
following is a summary of the material financial analyses utilized by J.P.
Morgan in connection with providing its opinion.
Pro Forma Merger Analysis. J.P. Morgan analyzed the effect of the Merger on,
among other things, the estimated First Call funds from operations ("FFO") per
share of EQR Common for the year ended December 31, 1997. In doing so, J.P.
Morgan combined the average of various equity analyst estimated 1997 operating
results for Wellsford and EQR and assumed certain savings in accounting and
general and administrative expenses per estimates provided by the management
of EQR. J.P. Morgan observed a total projected post-Merger incremental
accretion of 4.4% to EQR's First Call 1997 FFO estimate of $3.43 per share.
The analysis assumed the January 8, 1997 closing price of $42.50 per share for
EQR Common in calculating the purchase price for Wellsford Common.
J.P. Morgan also analyzed the effect of the Merger on EQR's 1997 pro forma
equity market capitalization, total market capitalization, leverage ratios and
dividend payout ratio. In this regard, J.P. Morgan noted that the pro forma
equity market capitalization for EQR would be approximately $2.96 billion,
assuming a share price of $42.50 (EQR's closing share price on January 8,
1997) and 69,702,788 shares of EQR Common outstanding after completion of the
Merger, and a total post-Merger pro forma market capitalization of
approximately $5.27 billion. J.P. Morgan further noted that (i) EQR's Debt to
Total Market Capitalization Ratio would increase slightly, upon completion of
the Merger, from 32.2% prior to the Merger to 33.3% after the assumption of
Wellsford's outstanding debt plus the incremental debt incurred from the
payment of certain transaction costs, and (ii) the ratio of debt plus
perpetual preferred stock to total market capitalization also increases
slightly from 41.3% to 41.9% after accounting for the assumption and re-
issuance of Wellsford Preferred by EQR.
J.P. Morgan also noted that EQR's management intends to retain its current
dividend of $2.50 per common share for the combined company.
Fully-Loaded Share Price. J.P. Morgan calculated the fully-loaded share
price being paid by EQR for Wellsford Common. The fully-loaded share price
adjusts the implied share price of $26.56 (calculated as the January 8, 1997
closing price of $42.50 per share for EQR Common multiplied by the .625
exchange ratio) for certain additional amounts being paid by EQR, including
payments to key executives of Wellsford in compensation, benefits, payments,
accelerations, share options and share appreciation rights. These additional
payments are more particularly described in the Merger Agreement. J.P. Morgan
calculated that these additional amounts create a fully-loaded price of up to
$28.05 per share of Wellsford Common. Based on the fully-loaded share price,
J.P. Morgan calculated a range of FFO multiples from a high of 13.0x
(excluding synergies and accounting) to a low of 9.6x (including synergies and
accounting).
Public Trading Multiples Analysis. Using publicly available information,
J.P. Morgan compared selected financial and stock market data of Wellsford
with similar data for selected publicly traded companies (each, a "Comparable
Company" and, collectively, the "Comparable Companies") engaged in businesses
which J.P. Morgan judged to be analogous to that of Wellsford's. The companies
selected by J.P. Morgan were Security Capital Pacific Trust, United Dominion
Realty Trust, Post Properties, Inc., Avalon Properties, Inc., Merry Land &
Investment Company, Inc., Security Capital Atlantic, Inc., Gables Residential
Trust, Camden Property Trust, Irvine Apartment Communities, Evans Withycombe
Residential, Inc., Oasis Residential, Inc. and Smith Residential Realty. These
companies were selected, among other reasons, because of their specialization
in the multifamily REIT sector.
For each Comparable Company, publicly available financial performance data
through the twelve months ended September 30, 1996 was measured. J.P. Morgan
calculated the multiples of current stock price, as of January 8, 1997, to
analysts estimates for 1997 First Call FFO for each of the Comparable
Companies to determine the 1997 FFO trading multiples. J.P. Morgan's
calculations resulted in a range of 1997 FFO multiples from 10.1x to 13.9x
(excluding the highest
47
<PAGE>
and lowest). These multiples were then applied to Wellsford's First Call 1997
FFO per share estimate (less $0.09 per share associated with the Sonterra Loan
contributed to WRP Newco), yielding a range of implied trading values for
Wellsford's common stock of approximately $21.88 to $29.98 per share. J.P.
Morgan also observed that the Comparable Companies had a range of debt to
total market capitalization of 27.7% to 44.5%.
Selected Transaction Analysis. Using publicly available information, J.P.
Morgan examined selected transactions with respect to purchase price per share
to calculate FFO transaction multiples. Specifically, J.P. Morgan reviewed the
following six transactions (collectively, the "Transaction Comparables") that
it deemed relevant: Camden Property Trust/Paragon Group (pending): (J.P.
Morgan's estimate of the transaction multiple was based upon the announced
exchange ratio multiplied by the January 8, 1997 closing price for Camden's
common stock, divided by the 1997 First Call estimate of FFO for Paragon),
United Dominion Realty Trust/South West Property Trust, Inc., BRE
Properties/California REIT, Mid-America Apartment Communities/America First
REIT, Inc., and Wellsford Residential Property Trust/Holly Residential
Properties, Inc. J.P. Morgan observed a range of transaction multiples from
8.3x to 11.2x First Call FFO of the acquired companies. This range was then
applied to Wellsford's First Call 1997 FFO per share, as adjusted for the
Sonterra Loan, resulting in a range of equity values for Wellsford's common
stock of between $17.91 and $24.17 per share. J.P. Morgan noted that this
range was below both the implied and fully-loaded prices for Wellsford Common.
J.P. Morgan concluded that the multifamily REIT Transaction Comparables were
imperfect comparisons to the Merger and therefore did not provide a fully
meaningful test of the exchange ratio or the purchase price per share for
Wellsford Common. In arriving at this conclusion J.P. Morgan reviewed the FFO
multiples for the Transaction Comparables universe and compared them to both
the average First Call FFO trading multiple for the acquired multifamily REITs
and to the average trading FFO multiple for the Comparable Companies,
corresponding to the period from July 8, 1994 to January 8, 1997 during which
the transactions took place. J.P. Morgan observed that the average FFO trading
multiple for the acquired multifamily REITs was significantly below that of
the Comparable Companies and that the four most comparable of the acquired
multifamily REITs were purchased at a discount to the average FFO trading
multiple for the Comparable Companies for the corresponding time period. Based
on this analysis, J.P. Morgan discounted the relevance of the multifamily REIT
Transaction Comparables as a measure of the multiple for Wellsford's purchase
price.
J.P. Morgan also noted that when certain other transactions from other REIT
sectors were included in the transaction analysis, the range of FFO multiples
became 8.2x to 13.4x, resulting in a range of $17.80 to $28.88 per share for
Wellsford's common stock. These additional transactions were Highwoods
Properties Inc./Crocker Realty, Simon Property Group, Inc./DeBartolo Realty
Corporation, Horizon Outlet Centers, Inc./McArthur/Glen Realty Corporation,
and Omega Healthcare Investors/Health Equity Properties, Inc.
Share Trading History Analysis. Based on publicly available information,
J.P. Morgan reviewed the history of trading prices for Wellsford Common and
EQR Common for the 52-week period ending January 8, 1997 and compared the 52-
week high/low range of $25.00 to $20.75 per share for Wellsford Common to both
the implied purchase price per share of $26.56 (calculated as the product of
the January 8, 1997 closing price for EQR Common times the exchange ratio of
.625) and the fully-loaded price per share of $28.05. J.P. Morgan noted that
the implied price for Wellsford Common was at a premium to the 52-week high.
Historical Exchange Ratio Analysis. J.P. Morgan reviewed the historical
exchange ratio of the daily closing price per share of Wellsford Common to the
daily closing price per share of EQR Common for the period from January 9,
1996 to January 8, 1997. To compensate in the value of Wellsford's share price
for the loss of income resulting from the contribution of the Sonterra Loan to
WRP Newco, J.P. Morgan calculated the First Call 1996 FFO multiple for each of
Wellsford's daily closing prices beginning August 1, 1996 (the commencement
date of the mortgage loan). Adjusting Wellsford's First Call 1996 FFO
downwards by $0.09, J.P. Morgan multiplied the above FFO multiple times the
adjusted First Call 1996 FFO to arrive at an adjusted Wellsford share price
for each closing price from August 1, 1996 to January 8, 1997. This adjusted
share price was then used in the calculation of the historical exchange
ratios. The exchange ratios of the daily closing prices of one share of
Wellsford Common, as adjusted for the Sonterra Loan, to one share of EQR
Common on January 9, 1996 and on January 8, 1997, were 0.777 and 0.575,
respectively. J.P. Morgan noted a one-year low to high range (adjusted for the
Sonterra mortgage) of between 0.569 and 0.780; an average one-year unadjusted
exchange ratio of 0.662 versus an adjusted ratio of 0.658; an average six-
month unadjusted exchange ratio of 0.626 versus an adjusted ratio of 0.623;
and an average one-month unadjusted exchange ratio of 0.583 versus an adjusted
ratio of 0.579. In addition, such analysis implied a one-year historical share
price range for Wellsford of $24.18 to $33.15, as calculated by multiplying
EQR Common's January 8, 1997 closing price of $42.50 by the 52-week low and
high values for the exchange ratios, respectively.
Net Asset Value Analysis. Using the publicly available unaudited results for
each company for the period ending September 30, 1996, J.P. Morgan calculated
the Net Asset Value ("NAV") per share for both Wellsford Common and EQR
48
<PAGE>
Common. In so doing, J.P. Morgan applied a range of capitalization rates from
8.5% to 9.5% to projections by Wellsford and EQR for the stabilized 1997 net
operating income ("NOI") of the properties, calculated as the average of the
estimated 1997 NOI for each company as projected by the REIT analyst
community, including projected acquisitions related NOI, in order to calculate
a gross real estate value, to which was added the gross value of other assets,
excluding the Wellsford assets to be contributed to WRP Newco, less each
company's respective outstanding debt and liabilities, to arrive at an equity
NAV. The equity NAV per share was then calculated by dividing the equity NAV
by the number of common shares outstanding for each company. This analysis
indicated an NAV exchange ratio range for the two companies of between 0.470
to 0.742, and an implied range for the price of Wellsford Common of $19.96 to
$31.54 per share, assuming a January 8, 1997 closing price of $42.50 per share
for EQR Common.
WRP Newco Analysis. As a part of its opinion, J.P. Morgan reviewed the terms
of EQR's investments in and commitments to WRP Newco. These include the
following items: an agreement by EQR to invest $3.5 million in WRP Newco
Common at the time of the Merger in return for receiving an approximately 7.5%
interest in WRP Newco; a commitment to purchase up to $25 million of preferred
stock with an 8.0% dividend and 8.0% conversion premium; a 20.0% interest in
the Palomino Park development (10.0% received through the purchase of
Wellsford, and an additional 10.0% purchased for $1.5 million in cash); credit
enhancement for $14.8 million in bonds outstanding on Palomino Park; and a
two-part standby purchase obligation for Palomino Park Phases I and II. J.P.
Morgan noted that EQR is to be compensated at competitive market based rates
for its investments in WRP Newco.
The summary set forth above does not purport to be a complete description of
the analyses or data presented by J.P. Morgan. The preparation of a fairness
opinion is a complex process and is not necessarily susceptible to partial
analysis or summary description. J.P. Morgan believes that the summary set
forth above and their analyses must be considered as a whole and that
selecting portions thereof, without considering all of its analyses, could
create an incomplete view of the processes underlying its analyses and
opinion. J.P. Morgan based its analyses on assumptions that it deemed
reasonable, including assumptions concerning general business and economic
conditions and industry-specific factors. The other principal assumptions upon
which J.P. Morgan based its analyses are set forth above under the description
of each such analysis. J.P. Morgan's analyses are not necessarily indicative
of actual values or actual future results that might be achieved, which values
may be higher or lower than those indicated. Moreover, J.P. Morgan's analyses
are not and do not purport to be appraisals or otherwise reflective of the
prices at which businesses actually could be bought or sold.
As a part of its investment banking business, J.P. Morgan and its affiliates
are continually engaged in the valuation of businesses and their securities in
connection with Mergers and acquisitions, investments for passive and control
purposes, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements, and valuations for estate, corporate
and other purposes. J.P. Morgan was selected to deliver an opinion to EQR's
Board of Trustees with respect to the Merger on the basis of such experience
and its familiarity with EQR.
For the delivery of its opinion, J.P. Morgan received a fee of $600,000 from
EQR. In addition, EQR reimbursed J.P. Morgan for its reasonable expenses
incurred in connection with its services, including the fees and disbursements
of counsel, and agreed to indemnify J.P. Morgan against certain liabilities,
including liabilities arising under the Federal securities laws.
J.P. Morgan and its affiliates (including Morgan Guaranty Trust Company of
New York) maintain banking and other business relationships with EQR and its
affiliates pursuant to which J.P. Morgan has received an aggregate of
approximately $490,000 in fees over the past two years, and with Wellsford and
its affiliates pursuant to which J.P. Morgan has received an aggregate of
approximately $638,000 in fees over the past two years. In the ordinary course
of their businesses, affiliates of J.P. Morgan may actively trade the debt and
equity securities of EQR or Wellsford for their own accounts or for the
accounts of customers and, accordingly, they may at any time hold long or
short positions in such securities.
OPINION OF FINANCIAL ADVISOR--WELLSFORD
Wellsford. At the meeting of the Board of Trustees of Wellsford on January
16, 1997, Merrill Lynch rendered its oral opinion to the Wellsford Board of
Trustees, and subsequently on such date Merrill Lynch delivered its written
opinion (the "Merrill Lynch Opinion"), to the effect that, as of such date and
based upon the assumptions made, matters considered and limits of review, the
proposed consideration to be received by Wellsford Common Shareholders
pursuant to the Merger and the Distribution was fair to such shareholders from
a financial point of view. Merrill Lynch has not been requested to, and will
not, update its opinion prior to Closing. No limitations were imposed by
Wellsford's Board of Trustees upon Merrill Lynch with respect to the
investigations made or procedures followed by it in rendering its opinion.
A copy of the Merrill Lynch Opinion which sets forth the assumptions made,
matters considered and certain limitations on the scope of review undertaken
by Merrill Lynch, is attached hereto as Appendix D and is incorporated by
reference
49
<PAGE>
herein. The description of the written opinion set forth herein is qualified
in its entirety by reference to the full text of the written opinion.
Shareholders of Wellsford are urged to read such opinion in its entirety. In
the opinion of Wellsford, no events or significant changes in information have
occurred that would alter the opinion of Merrill Lynch. However, if such an
event or change does occur, including, without limitation, an amendment to the
Merger Agreement or Contribution and Distribution Agreement which materially
affects the financial terms of either of such agreements, a revised fairness
opinion will be requested.
THE MERRILL LYNCH OPINION IS ADDRESSED TO THE WELLSFORD BOARD OF TRUSTEES
AND ADDRESSES ONLY THE FAIRNESS FROM A FINANCIAL POINT OF VIEW OF THE PROPOSED
CONSIDERATION TO BE RECEIVED BY WELLSFORD COMMON SHAREHOLDERS PURSUANT TO THE
MERGER AND THE DISTRIBUTION AND DOES NOT CONSTITUTE, NOR SHOULD IT BE
CONSTRUED AS, A RECOMMENDATION TO ANY WELLSFORD COMMON SHAREHOLDER AS TO HOW
SUCH SHAREHOLDER SHOULD VOTE AT THE WELLSFORD SPECIAL MEETING. THE PROPOSED
CONSIDERATION TO BE RECEIVED BY WELLSFORD COMMON SHAREHOLDERS PURSUANT TO THE
MERGER AND THE DISTRIBUTION WAS DETERMINED ON THE BASIS OF NEGOTIATIONS
BETWEEN WELLSFORD AND EQR AND WAS APPROVED BY THE WELLSFORD BOARD OF TRUSTEES.
In connection with the preparation of the Merrill Lynch Opinion, Merrill
Lynch, among other things: (i) reviewed Wellsford's Annual Report on Form 10-K
and related financial information for the fiscal year ended December 31, 1995
and Wellsford's Reports on Form 10-Q and the related unaudited financial
information for the quarterly periods ended March 31, 1996, June 30, 1996 and
September 30, 1996; (ii) reviewed EQR's Annual Report on Form 10-K and related
financial information for the fiscal year ended December 31, 1995 and EQR's
Reports on Form 10-Q and the related unaudited financial information for the
quarterly periods ended March 31, 1996, June 30, 1996 and September 30, 1996;
(iii) reviewed certain information, including certain financial forecasts and
assumptions, relating to the business, earnings, cash flow, assets and
prospects of (A) Wellsford and WRP Newco and (B) EQR, furnished to it by
Wellsford and EQR, respectively; (iv) reviewed estimates of prospective
synergies resulting from the Merger prepared by the managements of Wellsford
and EQR and discussed such estimates with the managements of both companies;
(v) conducted discussions with members of senior management of Wellsford and
EQR concerning the respective businesses and prospects of (A) Wellsford and
WRP Newco and (B) EQR; (vi) reviewed the historical market prices and trading
activity for Wellsford Common and EQR Common and compared them with that of
certain companies which Merrill Lynch deemed to be reasonably similar to
Wellsford and EQR, respectively; (vii) compared the results of operations of
Wellsford and EQR with that of certain companies which Merrill Lynch deemed to
be reasonably similar to Wellsford and EQR, respectively; (viii) compared the
proposed financial terms of the Merger with the financial terms of certain
other mergers and acquisitions which Merrill Lynch deemed to be relevant; (ix)
considered the pro forma effect of the Merger on the combined entity's
capitalization ratios and earnings, cash flow and book value per share; (x)
reviewed the Merger Agreement; (xi) reviewed the financial terms of the
Contribution and Distribution as set forth in the Merger Agreement and the
forms of Contribution and Distribution Agreement and Stock Purchase Agreement
attached as exhibits thereto; and (xii) reviewed such other financial studies
and analyses and performed such other investigations and took into account
such other matters as Merrill Lynch deemed necessary, including its assessment
of general economic, market and monetary conditions.
In preparing the Merrill Lynch Opinion, Merrill Lynch relied on the accuracy
and completeness of all information supplied or otherwise made available to it
by Wellsford and EQR, and did not independently verify such information or
undertake an independent appraisal or evaluation of the assets or liabilities
of Wellsford or EQR. With respect to the financial forecasts, assumptions and
estimates of prospective synergies resulting from the Merger furnished by
Wellsford and the financial forecasts, assumptions and estimates of
prospective synergies resulting from the Merger furnished by EQR, Merrill
Lynch assumed that they had been reasonably prepared and reflected the best
currently available estimates and judgment of Wellsford's or EQR's management
as to the expected future financial performance of Wellsford, WRP Newco or
EQR, as the case may be. Merrill Lynch further assumed that the Merger will
qualify as a tax-free reorganization to the holders of Wellsford Common
(except to the extent, if any, of cash received in lieu of fractional shares).
In addition, Merrill Lynch further assumed that the Distribution will be
consummated without any material modification to the terms set forth in the
forms of Contribution and Distribution Agreement and Stock Purchase Agreement
reviewed by it. As a matter of policy, Wellsford does not publicly disclose
internal management forecasts, projections or estimates of the type furnished
to Merrill Lynch in connection with its analysis of the Merger, and such
forecasts, projections and estimates were not prepared with a view towards
public disclosure. These forecasts, projections and estimates were based on
numerous variables and assumptions which are inherently uncertain and which
may not be within the control of management of Wellsford, including, without
limitation, general economic, regulatory and competitive conditions.
Accordingly, actual results could vary materially from those set forth in such
forecasts, projections and estimates.
In connection with rendering its opinion, Merrill Lynch was not authorized
to, and did not, solicit indications of interest from third parties to
purchase the outstanding Wellsford Common or otherwise enter into a business
combination with
50
<PAGE>
Wellsford. Merrill Lynch's opinion as to the fairness from a financial point
of view of the proposed consideration to be received by holders of Wellsford
Common addresses the ownership position in the combined entity to be received
by the holders of Wellsford Common pursuant to the Merger on the terms set
forth in the Merger Agreement based upon the relative contributions of
Wellsford and EQR to the combined entity and after giving effect to the
Contribution and Distribution. Merrill Lynch expressed no opinion as to prices
at which the Survivor Common or the WRP Newco Common will trade following the
consummation of the Contribution and Distribution and the Merger or prices
which could be obtained for the Survivor Common in a sale of the combined
entity following the consummation of the Merger. Merrill Lynch did not
consider, and its opinion does not address, the tax consequences of the
Distribution to the holders of Wellsford Common. The Merrill Lynch Opinion
does not address the relative merits of the Merger as compared with any other
business plan or opportunity that might be presented to Wellsford, including
alternative business combinations with third parties, or the effect of any
other arrangement in which Wellsford might engage.
At the meeting of the Wellsford Board of Trustees held on January 16, 1997,
Merrill Lynch presented certain financial analyses accompanied by written
materials in connection with the delivery of its fairness opinion. The
following is a summary of the material financial and comparative analyses
performed by Merrill Lynch in arriving at its opinion.
Historical Trading Performance and Current Capitalization. Merrill Lynch
reviewed certain trading information for each of Wellsford and EQR and, on the
basis thereof, calculated their respective market values, market
capitalizations and trading multiples based on stock prices as of January 14,
1997 of $24.63 for Wellsford and $42.88 for EQR. For this purpose, Merrill
Lynch defined "total market capitalization" as market value of the relevant
company's common equity (including operating partnership units), plus
preferred stock at liquidation value plus total debt less cash. Merrill Lynch
then calculated the market value of each of Wellsford and EQR as a multiple of
projected FFO (based on mean First Call estimates) and Adjusted Funds From
Operations ("AFFO") (based on estimates from Merrill Lynch Research). For
Wellsford, the FFO multiples for 1996 and 1997 were 11.7x and 11.0x,
respectively, and the AFFO multiples for 1996 and 1997 were 12.6x and 11.8x,
respectively. For EQR, the FFO multiples for 1996 and 1997 were 13.8x and
12.5x, respectively, and the AFFO multiples for 1996 and 1997 were 16.0x and
14.4x, respectively.
Merrill Lynch also reviewed the share price history for Wellsford for the
period January 7, 1996 through January 10, 1997, and for EQR for the period
January 7, 1996 through January 9, 1997 and noted certain events and public
announcements made by the respective companies during such periods.
Analysis of Selected Comparable Publicly Traded Companies. Using publicly
available information and estimates of future financial results published by
First Call and taken from Merrill Lynch Research, Merrill Lynch compared
certain financial and operating information and ratios for both Wellsford and
EQR with the corresponding financial and operating information for a group of
publicly traded companies engaged primarily in the ownership, management,
operation and acquisition of multifamily properties which Merrill Lynch deemed
to be reasonably comparable to Wellsford and EQR. For the purpose of its
analyses, the following companies were used as comparable companies to
Wellsford: Evans Withycombe Residential, Inc., Amli Residential Properties
Trust, Camden Property Trust, Oasis Residential, Inc. and Apartment Investment
& Management Co. (collectively, the "Wellsford Comparable Companies"); and the
following companies were used as comparable companies to EQR: Security Capital
Pacific Trust, United Dominion Realty Trust, Inc., Wellsford, Merry Land &
Investment Co., Inc., Security Capital Atlantic, Inc. and Apartment Investment
& Management Co. (collectively, the "EQR Comparable Companies").
Merrill Lynch's calculations resulted in the following relevant ranges for
the Wellsford Comparable Companies and for Wellsford as of January 14, 1997: a
range of debt to total market capitalization of 32.3% to 43.1%, with a mean of
40.8% (with Wellsford at 37.2%); a range of dividend yields of 6.4% to 7.5%,
with a mean of 7.1% (with Wellsford at 7.9%); a range of 1996 AFFO payout
ratios of 87.6% to 102.6%, with a mean of 95.4% calculated on the basis of
projected results for 1996 (with Wellsford at 99.0%); a range of market value
as a multiple of projected 1996 FFO of 11.1x to 11.9x, with a mean of 11.5x
(with Wellsford at 11.7x); a range of market value as a multiple of projected
1997 FFO of 10.1x to 11.3x, with a mean of 10.7x (with Wellsford at 11.0x); a
range of market value as a multiple of projected 1996 AFFO of 12.6x to 13.9x,
with a mean of 13.2x (with Wellsford at 12.6x); and a range of market value as
a multiple of projected 1997 AFFO of 11.5x to 13.1x, with a mean of 12.2x
(with Wellsford at 11.8x).
Merrill Lynch's calculations resulted in the following relevant ranges for
the EQR Comparable Companies and for EQR as of January 14, 1997: a range of
dividend yields of 5.8% to 7.9%, with a mean of 6.5% (with EQR at 5.8%); a
range of debt to total market capitalization of 11.5% to 42.9%, with a mean of
31.7% (with EQR at 27.9%); a range of 1996 AFFO payout ratios of 82.2% to
99.0%, with a mean of 90.2% calculated on the basis of projected results for
1996 (with EQR at 93.3%); a range of market value as a multiple of projected
1996 FFO of 10.9x to 15.5x, with a mean of 12.6x (with EQR at 13.8x); a range
of market value as a multiple of projected 1997 FFO of 10.1x to 14.6x, with a
mean of 11.8x (with EQR at
51
<PAGE>
12.5x); a range of market value as a multiple of projected 1996 AFFO of 12.2x
to 15.5x, with a mean of 13.7x (with EQR at 16.0x); and a range of market
value as a multiple of projected 1997 AFFO of 11.8x to 14.0x, with a mean of
13.0x (with EQR at 14.4x).
None of the companies utilized in the above analysis for comparative
purposes is, of course, identical to Wellsford or EQR. Accordingly, a complete
analysis of the results of the foregoing calculations cannot be limited to a
quantitative review of such results and involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the Wellsford Comparable Companies and the EQR Comparable Companies, and other
factors that could affect the public trading value of the Wellsford Comparable
Companies and the EQR Comparable Companies, as well as that of Wellsford or
EQR. In addition, the multiples of market value to estimated 1996 and
projected 1997 FFO and AFFO for the Wellsford Comparable Companies and the EQR
Comparable Companies are based on projections prepared by research analysts
using only publicly available information. Accordingly, such estimates may or
may not prove to be accurate.
Comparable Transactions Analysis. Merrill Lynch also compared certain
financial ratios of the Merger with those of selected other mergers and
strategic transactions involving REITs which Merrill Lynch deemed to be
reasonably comparable to the Merger. These transactions were Camden Property
Trust's proposed merger with Paragon Group, Inc., Chateau Properties, Inc.'s
merger with ROC Communities, Inc., United Dominion Realty, Inc.'s merger with
South West Property Trust Inc., Highwoods Properties Inc.'s acquisition of
Crocker Realty Trust, Inc., Simon Property Group, Inc.'s merger with DeBartolo
Realty Corporation, Bradley Real Estate Inc.'s merger with Tucker Properties
Corp., BRE Properties Inc.'s Merger with REIT of California, Horizon Outlet
Center Inc.'s merger with McArthur Glen Realty Corp., Mid America Apartment
Communities Inc.'s merger with America First REIT, Inc. and Wellsford's merger
with Holly Residential Properties, Inc.
Using publicly available information and estimates of financial results as
published by First Call, Merrill Lynch calculated the premium of the implied
offer value per share relative to the acquired company's stock price on the
day before announcement of the respective transaction and the implied offer
value per share for the acquired company, as of the day before the
announcement of the respective transaction, as a multiple of the projected FFO
per share for such company. This analysis yielded a range of
premiums/(discounts) of (0.8%) to 38.0% with a mean of 12.2% and a range of
transaction FFO multiples of 6.6x to 15.5x with a mean of 10.2x.
Merrill Lynch observed that, based on the closing price of EQR Common on the
NYSE of $42.88 per share as of January 14, 1997, the Exchange Ratio yielded an
implied offer value in the Merger of $26.80 per share of Wellsford Common.
Together with the per share valuation range for Newco Common of $2.43 to
$2.82, the implied premium range of the aggregate consideration to be received
in the Merger and the Distribution over the closing market price of Wellsford
Common on January 14, 1997 was 18.7% to 20.3% and represented a range of
implied offer values in the Merger and the Distribution for the Wellsford
Common as a multiple of Wellsford's projected 1997 FFO of 12.2x to 12.4x.
Discounted Cash Flow Analysis. Merrill Lynch performed discounted cash flow
analyses (i.e., an analysis of the present value of the projected levered cash
flows for the periods and using the discount rates indicated) of Wellsford
based upon projections provided by Wellsford's management of Wellsford's
dividends, FFO and AFFO for the years 1997 through 2001, inclusive, using
discount rates reflecting an equity cost of capital ranging from 15.0% to
17.0% and terminal value multiples of calendar year 2001 FFO ranging from
10.5x to 12.5x and terminal value multiples of calendar year 2001 AFFO ranging
from 11.5x to 13.5x. Based upon Wellsford Management's projection of FFO per
share of $2.39 in 1997 increasing gradually to $3.27 in 2001 (assuming a
compound annual growth rate of 9.1%) and AFFO per share of $2.25 in 1997
increasing gradually to $3.10 in 2001 (assuming a compound annual growth rate
of 9.2%), the range of present values per Wellsford share was $22.07 to $27.85
using the FFO and AFFO discounted dividend methods and $24.50 to $29.47 based
upon the discounted AFFO method.
Merrill Lynch also performed discounted cash flow analyses of EQR based upon
projections and assumptions provided by EQR's management of EQR's dividends,
FFO and AFFO for the years 1997 through 2001, inclusive, using discount rates
reflecting an equity cost of capital ranging from 14.0% to 16.0% and terminal
value multiples of calendar year 2001 FFO ranging from 12.5x to 14.5x and
terminal value multiples of calendar year 2001 AFFO ranging from 14.0x to
16.0x. The range of present values per EQR share was $36.63 to $44.51 using
the FFO and AFFO discounted dividend methods and $39.89 to $47.41 based upon
the discounted AFFO method.
Net Asset Valuation Analysis. Merrill Lynch performed a net asset valuation
for Wellsford based on an asset-by-asset real estate valuation of Wellsford's
properties, an estimation of the current value for Wellsford's other assets
and liabilities, and an estimation of Wellsford's debt balances as of December
31, 1996. The real estate valuation utilized property specific
52
<PAGE>
projections prepared by Wellsford's management for the year 1997. For the
operating portfolio of Wellsford, the valuation utilized the direct
capitalization method on 1997 property net operating income after capital
reserves and a range of capitalization rates of 8.50% to 9.25%. These
calculations indicated a per share net asset valuation range for Wellsford of
$25.58 to $28.27.
Merrill Lynch also performed a net asset valuation for EQR based on an
asset-by-asset real estate valuation of EQR's properties, an estimation of the
current values for EQR's other assets and liabilities, and an estimation of
EQR's debt balances as of December 31, 1996. The real estate valuation
utilized property specific projections prepared by EQR's management for the
year 1997. For the operating portfolio of EQR, the valuation utilized the
direct capitalization method on 1997 property net operating income after
capital reserves and a range of capitalization rates of 8.25% to 9.25%. These
calculations indicated a per share net asset valuation range for EQR of $32.53
to $35.95.
Merrill Lynch also performed a net asset valuation for WRP Newco based on an
asset-by-asset valuation. Merrill Lynch arrived at a range of values by
summing the following: (i) the implied value range for WRP Newco's interest in
the Sonterra Assets, (ii) the implied value range for WRP Newco's interest in
Palomino Park, net of associated liabilities, and (iii) cash and cash
equivalents less total debt. These calculations indicated a net asset
valuation range for WRP Newco Common allocable to each share of Wellsford
Common in the Distribution of $2.43 to $2.82, of which amount $1.45 was
attributable to cash and cash equivalents.
Relative Discounted Cash Flow Analysis. Merrill Lynch utilized the results
of the discounted cash flow analyses of Wellsford and EQR described above
after adjusting the projections relating to Wellsford to give effect to the
Distribution (as so adjusted, the "Post-Distribution Wellsford") to calculate
a range of implied exchange ratios based on a comparison of the relative
ranges of value for EQR and Post-Distribution Wellsford. When the low Post-
Distribution Wellsford discounted cash flow value was compared to the high EQR
discounted cash flow value and the high Post-Distribution Wellsford discounted
cash flow value was compared to the low EQR discounted cash flow value, the
analysis yielded an implied exchange ratio range of 0.442 to 0.660. The
Exchange Ratio under the Merger Agreement is set at .625, subject to
adjustment as set forth in the Merger Agreement.
Contribution Analysis. Merrill Lynch observed that Wellsford Common
Shareholders would own 15.3% of the common shares of the combined entity
outstanding after the Merger and Distribution (assuming an Exchange Ratio of
.625), after giving effect to the issuance of the Merger consideration.
Merrill Lynch reviewed certain projected operating and financial information,
including, among other things, FFO and AFFO for Post-Distribution Wellsford,
EQR and the pro forma combined entity without giving effect to potential
transaction synergies. Merrill Lynch observed that in 1997, 1998 and 1999
Post-Distribution Wellsford would contribute (without giving effect to
potential transaction synergies) 16.0%, 14.1% and 13.2% to the combined
entity's FFO, respectively, and 16.6%, 14.6% and 13.6% to the combined
entity's AFFO, respectively. Merrill Lynch also reviewed the relative
contributions to the pro forma combined net asset valuation. The analysis
indicated that Post-Distribution Wellsford would contribute 17.1% of the
combined net asset value based upon the midpoints of the net asset value
ranges.
Pro Forma Combination Analysis. Merrill Lynch analyzed the pro forma effects
resulting from the Merger, including the potential impact on EQR's projected
stand alone FFO per share and the anticipated accretion (i.e., the incremental
increase) to EQR's FFO per share resulting from the Merger. Merrill Lynch
observed that, after giving effect to Wellsford management's estimates of
potential transaction synergies, the Merger would be accretive to EQR's
projected FFO per share in each of the years 1997 through 1999, inclusive.
Merrill Lynch also observed that the indicated annual dividend per Wellsford
share pro forma for the Merger would be $1.56 per Wellsford share, or a 19.5%
implied reduction in Wellsford's current indicated dividend rate.
Capitalization. In addition, Merrill Lynch compared EQR's book
capitalization as of December 31, 1996 to (i) its book capitalization as of
December 31, 1996 pro forma for the Merger and (ii) based on projections of
Wellsford and EQR managements, EQR's book capitalization as of December 31,
1997 pro forma for the Merger. The total debt to book equity ratio was 87.1%,
79.4% and 80.5% as of December 31, 1996, pro forma December 31, 1996 and pro
forma December 31, 1997, respectively. The total debt to capitalization ratio
was 46.6%, 44.2% and 44.6% as of such respective dates. EBITDA as a multiple
of interest expense was 3.2x, 3.3x and 3.5x as of such respective dates,
EBITDA as a multiple of fixed charges was 2.4x, 2.4x and 2.5x as of such
respective dates, EBITDA less capital expenditures as a multiple of interest
expense was 3.0x, 3.1x and 3.2x as of such respective dates and EBITDA less
capital expenditures as a multiple of fixed charges was 2.2x, 2.3x and 2.3x as
of such respective dates. Additionally, based on projections of Wellsford's
management for WRP Newco, Merrill Lynch observed that the total debt to
capitalization ratio of WRP Newco as of December 31, 1997 was 25.4%.
53
<PAGE>
The summary set forth above does not purport to be a complete description of
the analyses performed by Merrill Lynch in arriving at its opinion. The
preparation of a fairness opinion is a complex process and not necessarily
susceptible to partial or summary description. Merrill Lynch believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and of the factors considered by it, without considering all factors
and analyses, could create a misleading view of the processes underlying its
analyses set forth in its opinion. In its analyses, Merrill Lynch made
numerous assumptions with respect to industry performance, general business
and economic conditions and other matters, many of which are beyond EQR's,
Wellsford's and Merrill Lynch's control. Any estimates contained in Merrill
Lynch's analyses are not necessarily indicative of actual values, which may be
significantly more or less favorable than as set forth therein. Estimated
values do not purport to be appraisals and do not necessarily reflect the
prices at which businesses or companies may be sold in the future, and such
estimates are inherently subject to uncertainty.
The Wellsford Board of Trustees selected Merrill Lynch to render a fairness
opinion because Merrill Lynch is an internationally recognized investment
banking firm with substantial experience in transactions similar to the Merger
and because it is familiar with Wellsford and its business. Merrill Lynch has
from time to time rendered investment banking, financial advisory and other
services to Wellsford and EQR for which it has received aggregate compensation
in the amount of $6.7 million from EQR and $2.3 million from Wellsford, in
each case since January 1, 1995. Merrill Lynch is continually engaged in the
valuation of businesses and their securities in connection with Mergers and
acquisitions, leveraged buyouts, negotiated underwritings, secondary
distributions of listed and unlisted securities and private placements.
Pursuant to a letter agreement dated January 14, 1997, Wellsford has agreed
to pay Merrill Lynch fees as follows: (i) a cash fee of $500,000 payable upon
the delivery of the Merrill Lynch Opinion, and (ii) an additional cash fee of
$2 million (less the fees paid to Merrill Lynch pursuant to (i) above) to be
paid contingent upon the Closing of the Merger. WRP Newco has agreed with
Wellsford to be responsible for $250,000 of such fees. Wellsford also agreed
to reimburse Merrill Lynch for its reasonable out-of-pocket expenses incurred
in connection with its advisory work, including the reasonable fees and
disbursements of its legal counsel, subject to certain limitations, and to
indemnify Merrill Lynch and certain related persons against certain
liabilities arising out of or in conjunction with its rendering of services
under its engagement, including certain liabilities under the federal
securities laws.
In the ordinary course of its business, Merrill Lynch may actively trade in
the securities of Wellsford and EQR for its own account and the account of its
customers and, accordingly, may at any time hold a long or short position in
such securities.
EFFECTIVE TIME OF THE MERGER
If the Merger is approved by the requisite vote of shareholders of Wellsford
and shareholders of EQR, and the other conditions to the Merger are satisfied
or waived, the Merger will become effective at the time the Department accepts
the Articles for record or at a different time established in the Articles,
not to exceed 30 days after the Articles are accepted for record by the
Department. It is presently anticipated that such filing and acceptance will
be made on or about May 30, 1997, and that the Effective Time of the Merger
will occur on such date unless a different date is specified in the Articles,
as discussed above, although there can be no assurance as to whether or when
the Merger will occur. The Articles are attached hereto as Appendix B. See "--
Representation and Warranties; Conditions to the Merger."
REPRESENTATIONS AND WARRANTIES; CONDITIONS TO THE MERGER
The Merger Agreement contains representations and warranties by EQR and
Wellsford regarding, among other things, their organization and good standing,
capitalization, ownership and capitalization of their subsidiaries,
qualification to do business, authority to enter into the Merger Agreement and
related agreements, filings with the Commission, reliability of financial
statements, compliance with applicable laws and regulations, taxation and
qualification as a REIT, properties, development rights (with respect to
Wellsford only), environmental matters, contracts, debt instruments, employee
benefit plans, undisclosed liabilities and the absence of certain legal
proceedings and other events, including material adverse changes in the
parties' businesses, financial condition or results of operations. These
representations and warranties will not survive the Effective Time.
The respective obligations of EQR and Wellsford to effect the Merger are
subject to the following conditions: (i) approval of the Merger Agreement, and
the transactions contemplated therein, by the shareholders of Wellsford and
EQR, (ii) approval by the NYSE of the listing of the shares of Survivor Common
to be issued in the Merger, (iii) the Registration Statement shall not be the
subject of any stop order or proceeding by the Commission seeking a stop
order, (iv) no injunctions or restraints shall have been issued by any court
of competent jurisdiction preventing the consummation of the Merger, (v) all
state securities laws shall have been complied with, (vi) execution of the
Contribution and Distribution
54
<PAGE>
Agreement, (vii) execution of the Common and Preferred Stock Purchase
Agreement between ERP Operating Partnership and WRP Newco (the "Stock Purchase
Agreement"), (viii) execution of the Palomino Credit Enhancement Agreement
between ERP Operating Partnership and WRP Newco, (ix) execution of the
Sonterra Right of First Offer Agreement between WRP Newco and ERP Operating
Partnership, (x) execution of the Palomino Agreement between WRP Newco and ERP
Operating Partnership, (xi) execution of the Transaction and Termination Costs
Agreement among EQR, Wellsford and WRP Newco, (xii) execution of the
Consulting Agreements of Jeffrey H. Lynford and Edward Lowenthal and (xiii)
the receipt of the opinion of Ballard Spahr Andrews & Ingersoll to the effect
that the Merger Agreement and Articles are enforceable under Maryland law.
The obligations of Wellsford and EQR to effect the Merger are subject to the
following additional conditions: (i) all representations and warranties made
by the parties shall be true and correct as of the Closing Date, which shall
be deemed the case unless the breach of such representations and warranties,
in the aggregate, could reasonably be expected to have a material adverse
effect with respect to such parties, (ii) each party shall have performed its
obligations under the Merger Agreement, (iii) as of the Closing Date, neither
party, nor any of their subsidiaries, will have suffered a material adverse
change in its business, financial condition or results of operations taken as
a whole (a "Material Adverse Change"), (iv) each party shall have received an
opinion of counsel from counsel to the other party stating that commencing
with its taxable year ended December 31, 1993, its client was organized and
has operated in conformity with the requirements for qualification as a REIT
under the Code, (v) each party shall have received an opinion of counsel dated
as of the closing date, to the effect that the Merger will qualify as a
reorganization under the provisions of Section 368(a) of the Code, (vi) each
party shall have received a "comfort letter" from the other party's
accountants, (vii) each party shall have received an opinion from counsel to
the other party addressing certain issues as set out in the Merger Agreement,
and (viii) the receipt of all consents and waivers from third parties
necessary in connection with the consummation of the transactions contemplated
by the Merger Agreement.
The obligation of EQR to effect the Merger is further subject to the
following conditions: (i) unless Wellsford Holly Management, Inc. ("Wellsford
Management Inc.") is dissolved before the Closing Date, the voting shares of
Wellsford Management Inc. shall have been transferred to EQR's designees as
provided for in the Merger Agreement, (ii) certain executives of Wellsford who
have agreed to the conversion of their options to purchase Wellsford Common
into options to purchase WRP Newco Common will have executed agreements
releasing the Surviving Trust from any obligations of Wellsford to them under
options to purchase Wellsford Common which are exchanged for or converted into
options to purchase WRP Newco Common, (iii) the Articles of Incorporation of
WPHC shall have been amended to modify its equity structure as provided in the
Merger Agreement and (iv) Wellsford's ownership interest in WPHC immediately
prior to the Distribution by Wellsford of WRP Newco Common shall consist
solely of 80 voting shares of WPHC and 20 non-voting shares of WPHC.
APPRAISAL RIGHTS
Shareholders of Wellsford and shareholders of EQR are not entitled to
dissenting shareholders' appraisal rights under Maryland law. Maryland law
does not provide appraisal rights to shareholders of a real estate investment
trust in connection with a merger if their shares are listed on a national
securities exchange, such as the NYSE, on the record date for determining
shareholders entitled to vote on such merger. All of the shares of EQR and
Wellsford outstanding on the record date for determining the shareholders
entitled to vote on the Merger were listed on the NYSE.
REGULATORY MATTERS
EQR and Wellsford believe that the Merger may be consummated without
notification being given or certain information being furnished to the Federal
Trade Commission (the "FTC") or the Antitrust Division of the Department of
Justice (the "Antitrust Division") pursuant to the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended ("HSR Act"), and that no waiting period
requirements under the HSR Act are applicable to the Merger. However, at any
time before or after the Effective Time, either the Antitrust Division or the
FTC could take such action under the antitrust laws as it deems necessary or
desirable in the public interest, or certain other persons could take action
under the antitrust laws, including seeking to enjoin the Merger. EQR and
Wellsford believe that consummation of the Merger would not violate any
antitrust laws. However, there can be no assurance that a challenge to the
Merger on antitrust grounds will not be made or, if a challenge is made, what
the result will be.
TERMINATION PROVISIONS
The Merger Agreement provides that it may be terminated at any time prior to
the filing of the Articles with the Department, whether before or after
approval of the Merger by the shareholders of Wellsford and EQR, by mutual
written
55
<PAGE>
consent, duly authorized by the Boards of Trustees of EQR and Wellsford. In
addition, the Merger Agreement may be terminated by EQR or Wellsford (i) if
the Merger has not been consummated by August 1, 1997 (provided the
terminating party will not have breached in any material respect its
obligations under the Merger Agreement in any manner that will have
proximately contributed to the occurrence of such failure), (ii) upon a breach
of any representation, warranty, covenant, obligation or agreement, on the
part of the non-terminating party set forth in the Merger Agreement, such that
certain conditions set forth in the Merger Agreement would be incapable of
being satisfied by August 1, 1997, (iii) if the requisite vote of the
shareholders of EQR or Wellsford will not have been obtained at the meeting of
such shareholders, or (iv) if an order, decree, ruling or other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by the Merger Agreement will have become final and non-
appealable.
The Merger Agreement may be terminated by Wellsford, if prior to the
Wellsford Special Meeting, the Wellsford Board of Trustees withdraws or
modifies its approval or recommendation of the Merger in connection with, or
approves or recommends, a Superior Acquisition Proposal (as defined
hereinafter). The Merger Agreement may be terminated by EQR if (i) prior to
the Wellsford Special Meeting, the Wellsford Board of Trustees withdraws or
modifies in any manner adverse to EQR its approval or recommendation of the
Merger or the Merger Agreement in connection with, or approves or recommends,
a Superior Acquisition Proposal, or (ii) Wellsford enters into a definitive
agreement with respect to any Acquisition Proposal.
The Merger Agreement defines an "Acquisition Proposal" as a merger,
acquisition, tender offer, exchange offer, consolidation, sale of assets or
similar transaction involving all or any significant portion of the assets or
any equity securities of, Wellsford or any of its subsidiaries, other than the
transactions contemplated by the Merger Agreement. The Merger Agreement
defines a "Superior Acquisition Proposal" as a bona fide acquisition proposal
by a third party which a majority of the members of the Wellsford Board of
Trustees determines in good faith to be more favorable to Wellsford's
shareholders from a financial point of view than the Merger and which the
Board of Trustees of Wellsford determines is reasonably capable of being
consummated.
TERMINATION FEE AND EXPENSES
The Merger Agreement provides for certain payments by Wellsford to EQR in
connection with the termination of the Merger Agreement. These payments are
(i) a Break-Up Fee of $14 million, plus (ii) Break-Up Expenses equal to the
out-of-pocket expenses incurred in connection with the Merger Agreement and
the transactions contemplated thereunder, up to a maximum of $2.5 million. If
the Merger Agreement is terminated due to the Wellsford Board of Trustees
having withdrawn or modified its approval or recommendation of the Merger or
the Merger Agreement in connection with, or having approved or recommended a
Superior Acquisition Proposal, or if Wellsford will have entered into a
definitive agreement with respect to any Acquisition Proposal, Wellsford is
obligated to pay EQR the Break-Up Fee. Additionally, if the Merger Agreement
is terminated due to a breach of any representation, warranty, covenant,
obligation or agreement by Wellsford or EQR, or failure by either Wellsford or
EQR to obtain the required shareholder approval, then the breaching party, or
the party which failed to obtain such shareholder approval, shall pay to the
other party an amount equal to the Break-Up Expenses. If the Merger is not
consummated, other than due to the termination of the Merger Agreement by (i)
the mutual written consent of the respective Boards of Trustees of EQR and
Wellsford, (ii) either party, upon the failure by EQR to obtain the required
shareholder approval, or (iii) Wellsford, upon a breach of any representation,
warranty, covenant, obligation or agreement on the part of EQR resulting in a
"material adverse effect" to EQR, and either prior to the termination of the
Merger Agreement or within 12 months thereafter, Wellsford or any of its
subsidiaries enters into any written Acquisition Proposal which is
subsequently consummated, Wellsford is required to pay the Break-Up Fee to
EQR, as compensation and liquidated damages for the loss suffered by EQR as a
result of the failure of the Merger to be consummated and to avoid the
difficulty of determining damages under the circumstances. Neither party shall
have any liability to the other after payment of the Break-Up Fee.
Except as described above, all costs and expenses incurred in connection
with the Merger Agreement and the transactions contemplated thereby (the
"Transaction Costs") will be allocated between EQR and the Surviving Trust. If
the portion of the Transaction Costs allocated to the Surviving Trust exceeds
an amount specified in the Merger Agreement, WRP Newco will be obligated to
reimburse the Surviving Trust for such excess amount. If WRP Newco becomes
obligated to reimburse the Surviving Trust in the manner described above, the
funds contributed to WRP Newco by Wellsford under the Contribution and
Distribution Agreement will be decreased by an amount equal to the amount
which WRP Newco is obligated to reimburse the Surviving Trust.
NO SOLICITATION OF OTHER TRANSACTIONS
Wellsford has agreed that (i) it and its subsidiaries will not, and it will
use its best efforts not to permit its officers, trustees, employees, agents
or financial advisors to initiate, solicit or encourage, directly or
indirectly, any inquiries or the
56
<PAGE>
making or implementation of any proposal or offer (including, without
limitation, any proposal or offer to its shareholders) with respect to a
merger, acquisition, tender offer, exchange offer, consolidation, sale of
assets or similar transactions involving all or any significant portion of the
assets or any equity securities of, it or any of its subsidiaries, other than
the transactions contemplated by the Merger Agreement and (ii) it will notify
EQR immediately if Wellsford receives any such inquiries or proposals, or any
requests for such information, or if any negotiations or discussions are
sought to be initiated or continued with it with respect to any of the
foregoing. The Merger Agreement does not, however, prohibit a party from
entering into discussion with respect to an unsolicited proposal if the Board
of Trustees of that party determines that such action is required by its
duties to its shareholders imposed by law.
EQR has agreed that if it enters into negotiations with another entity
having a class of equity securities registered under the Exchange Act
regarding the acquisition of such entity (whether effected through a merger,
consolidation, share exchange, tender offer or other form), then at least
three business days prior to executing any definitive agreement with such
entity with respect to such acquisition or making a tender offer for the
shares or other ownership interests of such entity, EQR shall notify Wellsford
of such transaction and consult with Wellsford with respect thereto, it being
understood, however, that Wellsford shall have no approval rights with respect
thereto.
CONVERSION OF SHARES
Each share of Wellsford Common outstanding immediately prior to the
Effective Time will be converted into .625 of a share of Survivor Common. All
such shares of Wellsford Common, when so converted, will cease to be
outstanding and will automatically be cancelled and retired and each holder of
a certificate representing any such shares will cease to have any rights with
respect thereto, except the right to receive the shares of Survivor Common and
any cash, without interest, in lieu of fractional shares to be issued or paid
in consideration therefor upon the surrender of such certificate in accordance
with the Merger Agreement, as well as dividends and distributions declared
with a record date after the Effective Time.
Each share of Wellsford Preferred, consisting of Wellsford Series A and
Wellsford's Series B Cumulative Redeemable Preferred Shares of Beneficial
Interest ("Wellsford Series B"), outstanding immediately prior to the
Effective Time will continue as a preferred share of the Surviving Trust with
its same preferences and other terms except that each share of Wellsford
Series A will be redesignated as one share of Series D Convertible Preferred
Share of Beneficial Interest in the Surviving Trust ("Survivor Series D") and
each share of Wellsford Series B will be redesignated as one share of Series E
Cumulative Redeemable Preferred Share of Beneficial Interest in the Surviving
Trust ("Survivor Series E"); provided, however, that the conversion ratio for
Survivor Series D shall be adjusted in accordance with its terms. At the
Effective Time, each certificate representing outstanding shares of Wellsford
Series A and Wellsford Series B will cease to have any rights with respect to
such shares, except the right to receive a certificate of the Surviving Trust
representing an equal number of Survivor Series D or Survivor Series E, as the
case may be.
Each share of EQR Common outstanding immediately prior to the Effective Time
will be converted into and continue as one share of Survivor Common. At the
Effective Time, each certificate representing shares of EQR Common will
thereafter represent an equal number of shares of Survivor Common.
Each share of EQR Preferred, consisting of 9 3/8% Series A Cumulative
Redeemable Preferred Shares of Beneficial Interest, $.01 par value per share
(the "Series A Preferred Shares"), 9 1/8% Series B Cumulative Redeemable
Preferred Shares of Beneficial Interest, $.01 par value per share (the "Series
B Preferred Shares"), and 9 1/8% Series C Cumulative Redeemable Preferred
Shares of Beneficial Interest, $.01 par value per share (the "Series C
Preferred Shares"), outstanding immediately prior to the Effective Time will
be converted into and continue with its same preferences as one share of the
Surviving Trust's 9 3/8% Series A Cumulative Redeemable Preferred Shares of
Beneficial Interest ("Survivor Series A"), the Surviving Trust's 9 1/8% Series
B Cumulative Redeemable Preferred Shares of Beneficial Interest ("Survivor
Series B"), and the Surviving Trust's 9 1/8% Series C Cumulative Redeemable
Preferred Shares of Beneficial Interest ("Survivor Series C"), respectively.
At the Effective Time, each certificate evidencing outstanding shares of
Series A Preferred Shares, Series B Preferred Shares or Series C Preferred
Shares will thereafter evidence an equal number of shares of Survivor Series
A, Survivor Series B or Survivor Series C, respectively.
The issuance, terms and conditions of the Survivor Common and the Survivor
Preferred (collectively, the "Survivor Shares") will be governed by the
Surviving Trust's Declaration. For a detailed description of the provisions of
the Surviving Trust's Declaration, see "Proposal Regarding Additional
Declaration of Trust Provisions" and "Comparison of Rights of Shareholders."
APPOINTMENT OF EXCHANGE AGENT
In order to facilitate distribution of certificates representing shares of
the Surviving Trust to Wellsford shareholders, the Surviving Trust will
appoint Boston EquiServe LLP, an affiliate of First National Bank of Boston,
to act as Exchange Agent
57
<PAGE>
in connection with the Merger. The Exchange Agent will enter into an agreement
with EQR and Wellsford pursuant to which it will agree to act as agent for
purposes of distributing the certificates representing shares of the Surviving
Trust to Wellsford shareholders.
EXCHANGE OF CERTIFICATES
Wellsford shareholders should not tender their certificates representing
Wellsford shares with their proxy. Promptly after the Effective Time, the
Exchange Agent will mail to all Wellsford shareholders transmittal materials,
including a letter of transmittal (the "Letter of Transmittal") for use in
exchanging certificates evidencing Wellsford Shares for certificates
evidencing Survivor Shares. As soon as practicable after the Letter of
Transmittal is properly completed and returned, along with the certificates
evidencing Wellsford Shares, to the Exchange Agent, the person specified in
the Letter of Transmittal will receive certificates for the number of whole
shares of Survivor Shares and, to the extent applicable, any cash in lieu of
fractional shares of Survivor Common, to which such person is entitled as a
result of the Merger. The Letter of Transmittal is expected to provide
instructions for shareholders who have lost or misplaced their certificates
and wish to tender their shares.
Each Survivor Share for which Wellsford Shares are exchanged in the Merger
will be deemed to have been issued at the Effective Time. Accordingly,
Wellsford shareholders who receive Survivor Shares in the Merger will be
entitled to receive any dividends or other distributions which may be payable
to all holders of record of Survivor Shares with respect to any record date
after the Effective Time. No holder of Wellsford Shares will be entitled to
receive Survivor Shares or cash in lieu of fractional Survivor Common, and no
dividends or other distributions will be paid with respect to any Survivor
Shares, until the certificate or certificates formerly representing such
holder's Wellsford Shares have been surrendered in accordance with the
procedures described above. At the time such surrender has been accomplished,
a certificate representing the appropriate number of Survivor Shares will be
issued and accrued dividends and other distributions on such Survivor Shares
will be paid without interest. Existing shareholders of EQR are not required
to tender their certificates representing EQR Shares. Certificates for EQR
Shares will represent the same number and type of Survivor Shares.
CONDUCT OF BUSINESS PENDING THE MERGER
Except as (i) contemplated by the Merger Agreement, (ii) necessary to
accomplish the Distribution, (iii) as disclosed to EQR, or (iv) consented to
in writing by EQR, Wellsford will, and will cause each of its subsidiaries to:
(a) conduct its business only in the usual, regular and ordinary course and in
substantially the same manner as before the date of the Merger Agreement, (b)
use reasonable efforts to preserve intact its business organizations and
goodwill and keep available the services of its officers and employees, (c)
confer on a regular basis with one or more representatives of EQR to report
operational matters of materiality and, subject to certain qualifications, any
proposals to engage in material transactions, (d) promptly notify EQR of any
material emergency or other material change in the condition (financial or
otherwise), business, properties, assets, liabilities, prospects or the normal
course of its businesses or in the operation of its properties, or of any
material governmental complaints, investigations or hearings (or
communications indicating that the same may be contemplated), (e) promptly
deliver to EQR true and correct copies of any report, statement or schedule
filed with the Commission subsequent to the date of the Merger Agreement, (f)
maintain its books and records in accordance with generally accepted
accounting principles ("GAAP") consistently applied and not change in any
material manner any of its methods, principles or practices of accounting in
effect at the "Financial Statement Date" (as defined in the Merger Agreement),
except as may be required by the Commission, applicable law or GAAP, (g) 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 Wellsford notifies EQR that it is availing itself
of such extensions and provided such extensions do not adversely affect
Wellsford's status as a qualified REIT under the Code, (h) not make or rescind
any express or deemed election relative to taxes (unless required by law or
necessary to preserve Wellsford's status as a REIT or the status of any
Wellsford subsidiaries as a partnership for Federal income tax purposes), (i)
not acquire, enter into any option to acquire, or exercise an option or
contract to acquire, additional real property, incur additional indebtedness
except for working capital under its revolving line(s) of credit, encumber
assets or commence construction of, or enter into any agreement or commitment
to develop or construct, other real estate projects, except in the ordinary
course of business, which shall include all activities necessary to proceed
with the acquisition, ownership and construction of Phases I, II and III of
Palomino Park in accordance with the agreements in existence on the date of
the Merger Agreement and previously furnished to EQR, (j) not amend its
Declaration of Trust, Bylaws, or the articles of incorporation, bylaws,
partnership agreement, joint venture agreement or comparable charter or
organization document of any subsidiary without EQR's prior written consent;
provided that EQR will not unreasonably withhold or delay its consent to non-
material amendments to organizational documents of such subsidiaries, (k) make
no change in the number of shares of beneficial interest or capital stock,
other than pursuant to (i) the exercise of options, rights or similar
securities outstanding as of the date hereof and disclosed to EQR, (ii) the
conversion
58
<PAGE>
ratio of Wellsford Series A pursuant to the terms of the Articles
Supplementary for the Wellsford Series A, (iii) options to purchase Wellsford
Common which are issued, and (iv) the Dividend Reinvestment and Share Purchase
Plan of Wellsford, (l) grant no options or other right or commitment relating
to its shares of beneficial interest or capital stock, membership interests or
units of limited partnership interest or any security convertible into its
shares of beneficial interest or capital stock, membership interests or units
of limited partnership interest, 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, (m) not (i) authorize, declare, set aside or
pay any dividend or make any other distribution or payment with respect to any
shares of its beneficial interest or capital stock, except as provided in the
Merger Agreement and in connection with the use of shares of beneficial
interest to pay the exercise price or tax withholding in connection with
equity-based employee benefit plans, or (ii) directly or indirectly redeem,
purchase or otherwise acquire any shares of beneficial interest, membership
interests or units of limited partnership interest or any option, warrant or
right to acquire, or security convertible into, shares of beneficial interest,
membership interests, or units of limited partnership interest, (n) not sell,
lease, mortgage, subject to lien or otherwise dispose of any material part of
its assets, individually or in the aggregate, except in the ordinary course of
business or as disclosed to EQR, (o) not make any loans, advances or capital
contributions to, or investments in, any other person or entity, other than
(i) loans, advances and capital contributions to Wellsford subsidiaries in
existence on the date of the Merger Agreement (other than WRP Newco) and (ii)
loans to WRP Newco and WRP Newco subsidiaries bearing interest at a rate per
annum equal to the rate of interest payable under the Second Amended and
Restated Revolving Credit Agreement dated June 30, 1995 between Wellsford and
First National Bank of Boston; (p) not pay, discharge or satisfy any claims,
liabilities or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge or satisfaction,
in the ordinary course of business consistent with past practice or in
accordance with their terms, of liabilities reflected or reserved against in,
or contemplated by, the most recent consolidated financial statements (or the
notes thereto) furnished to EQR or incurred in the ordinary course of business
consistent with past practice, (q) not enter into any commitment, contractual
obligation, capital expenditure or transaction (each, a "Commitment") which
may result in total payments or liability by or to it in excess of $1 million
or aggregate Commitments in excess of $5 million, (r) not guarantee the
indebtedness of another person or entity, enter into any "keep well" or other
agreement to maintain any financial statement condition of another person or
entity or enter into any arrangement having the economic effect of any of the
foregoing, other than guarantees of indebtedness of WRP Newco and its
subsidiaries provided, that on the Closing Date, the Surviving Trust is
released from any obligations with respect to such guarantees, or the
indebtedness so guaranteed is paid in full without payment by the Surviving
Trust or its subsidiaries, (s) not enter into any Commitment with any officer,
trustee, consultant or affiliate of Wellsford or any of the Wellsford's
subsidiaries, except as contemplated by the Merger Agreement, (t) not increase
any compensation or enter into or amend any employment agreement with any of
its officers, directors or employees earning more than $50,000 per annum,
other than waivers by employees of benefits under such agreements, (u) not
adopt any new employee benefit plan or amend any existing plans or rights,
except for changes which are required by law and changes which are not more
favorable to participants than provisions presently in effect, and (v) not
settle any shareholder derivative or class action claims arising out of or in
connection with any of the transactions contemplated by the Merger Agreement,
(w) not change the ownership of any of its subsidiaries except pursuant to the
Contribution Agreement and (x) not accept a promissory note in payment of the
exercise price payable under any option to purchase shares of Wellsford
Common. Wellsford has agreed to cause WRP Newco and its subsidiaries to repay,
on the Closing Date, all its loans made to any of them and to procure, on the
Closing Date, the release of Wellsford and its subsidiaries from any
guarantees of the obligations of WRP Newco and its subsidiaries other than the
guarantees contemplated under the Credit Enhancement Agreement and Palomino
Agreement by Wellsford. In the event WRP Newco is unable to repay such loans
to Wellsford on the Closing Date, EQR may, at its option, and in lieu of
terminating the Merger Agreement, require WRP Newco to execute and deliver to
the Surviving Trust a promissory note in the amount of such indebtedness,
payable in 12 equal consecutive monthly installments together with interest
thereon.
For purposes of this section, the Merger Agreement provides that any
contract, transaction or other event will be deemed to be material if it would
result or is expected to result in a net impact on Wellsford's consolidated
income statement in excess of $1 million, or on Wellsford's consolidated
balance sheet in excess of $1 million.
Prior to the Effective Time, WRP Newco and its subsidiaries will not be
bound by the restrictions which would otherwise be applicable under (a), (b),
(c), (d), (i), (j), (k), (l), (m)(ii), (n), (o), (p), (q), (r), (s), (t), (u),
or (w) above; provided, however, that in no event may WRP Newco: (i) issue any
of its shares to any person or entity other than Wellsford prior to the
Distribution for less than fair value; (ii) take any action or fail to take
any action which would reasonably be expected to result in the termination of
or a challenge to Wellsford's status as a REIT within the meaning of Section
856 of the Code, or result in a Material Adverse Effect to Wellsford; (iii)
enter into any contract which creates or imposes any obligation on, or
otherwise purports to bind, Wellsford or any of the other Wellsford
subsidiaries; (iv) take any action or omit to take any action which causes a
default under any loan agreement to which Wellsford is a party; (v) amend its
Articles of Incorporation or By-laws in any manner which is inconsistent with
the provisions of the WRP Newco Stock Purchase Agreement.
59
<PAGE>
Prior to the Effective Time, except as (i) contemplated by the Merger
Agreement, or (ii) consented to in writing by Wellsford, EQR will, and will
cause each of its subsidiaries to: (a) use its reasonable efforts to preserve
intact its business organizations and goodwill and keep available the services
of its officers and employees, (b) confer on a regular basis with one or more
representatives of Wellsford to report operational matters of materiality
which could have a EQR Material Adverse Effect (as defined in the Merger
Agreement), (c) promptly notify Wellsford of any material emergency or other
material change in the condition (financial or otherwise), business,
properties, assets, liabilities, prospects or the normal course of its
businesses or in the operation of its properties, or of any material
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), (d) promptly deliver to
Wellsford true and correct copies of any report, statement or schedule filed
with the Commission subsequent to the date of the Merger Agreement, (e)
maintain its books and records in accordance with GAAP consistently applied,
and (f) duly and timely file all reports, tax returns and other documents
required to be filed with Federal, state, local and other authorities.
In addition, during the period beginning the day after the fifth (5th)
trading day prior to the date of this Joint Proxy Statement/Prospectus/
Information Statement and ending on (but including) the Closing Date, EQR will
not (a) issue any EQR Common or other securities convertible into EQR Common
in any single transaction or series of transactions having an aggregate
issuance price in excess of $250 million, or (b) announce any merger with or
acquisition of all or substantially all the assets of another entity which has
net assets in excess of $250 million.
WAIVER AND AMENDMENT
The Merger Agreement provides that, at any time prior to the Effective Time,
either party may, to the extent legally allowed and set forth in a written
instrument signed on behalf of such party, (i) extend the time for the
performance of any of the obligations or other acts of the other party, (ii)
waive any inaccuracies in the representations and warranties contained in the
Merger Agreement or in any document delivered pursuant thereto and (iii) waive
compliance with any of the agreements or conditions for the benefit of such
party contained in the Merger Agreement.
The Merger Agreement provides that it may be amended by the parties by
action taken by the Boards of Trustees of EQR and Wellsford, at any time
before or after approval of the Merger Agreement by the shareholders of EQR or
Wellsford and prior to the filing of the Articles of Merger with the
Department. After any such approval by the shareholders of EQR or Wellsford,
no amendment may be made which by law requires the further approval of
shareholders or partners without obtaining such further approval.
STOCK EXCHANGE LISTING
The Surviving Trust will apply to list the Survivor Shares issuable in
connection with the Merger on the NYSE. Approval of the listing of such shares
on the NYSE, subject to official notice of issuance, is a condition to the
respective obligations of the parties to consummate the Merger.
ANTICIPATED ACCOUNTING TREATMENT
The Merger will be treated as a purchase in accordance with Accounting
Principles Board Opinion No. 16. Purchase accounting for a merger is the same
as the accounting treatment used for the acquisition of any group of assets.
The fair market value of the consideration given by the Surviving Trust in the
Merger will be used as the valuation basis of the combination. The assets
acquired and liabilities assumed of Wellsford will be recorded at their
relative fair market values as of the Effective Date. The financial statements
of the Surviving Trust will reflect the combined operations of EQR and
Wellsford from the date of the Merger.
SHARES AVAILABLE FOR RESALE
The issuance of Survivor Common upon consummation of the Merger will be
registered under the Securities Act. Such shares may be traded freely and
without restriction by those shareholders not deemed to be "affiliates" of
Wellsford as that term is defined in the rules and regulations promulgated
pursuant to the Securities Act. "Affiliates" are generally defined as persons
who control, are controlled by or are under common control with an issuer.
This Joint Proxy Statement/Prospectus /Information Statement does not cover
any resales of Survivor Common received by affiliates of Wellsford.
CONTRIBUTION OF ASSETS OF WELLSFORD TO ERP OPERATING PARTNERSHIP
Immediately after the Effective Time, the assets of Wellsford at the
Effective Time, subject to the liabilities of Wellsford, will be contributed
by the Surviving Trust to ERP Operating Partnership, in exchange for general
partner units of
60
<PAGE>
ERP Operating Partnership equal in number to the number of shares of Survivor
Common issued to the Wellsford Common Shareholders and preferred units of ERP
Operating Partnership equal in number to the number of outstanding shares of
Wellsford Preferred. In connection with the contribution of assets to ERP
Operating Partnership by the Surviving Trust, all of Wellsford's senior
unsecured indebtedness will become the obligation of ERP Operating
Partnership. ERP Operating Partnership will assume the Surviving Trust's full
and complete obligations with respect to Wellsford's senior unsecured debt
which will become an unconditional obligation of ERP Operating Partnership.
ERP Operating Partnership will execute and deliver a legally binding
assumption agreement in connection with the assumption of such Wellsford
unsecured debt.
FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of the material United States Federal
income tax consequences of the Merger to EQR, Wellsford and their respective
shareholders. The following summary is based upon current provisions of the
Code, existing, temporary and final regulations thereunder and current
administrative rulings and court decisions, all of which are subject to change
(possibly on a retroactive basis). No attempt has been made to comment on all
United States Federal income tax consequences of the Distribution and the
Merger that may be relevant to particular holders of Wellsford Shares and EQR
Shares, including holders that are subject to special tax rules such as
dealers in securities, mutual funds, insurance companies, tax-exempt entities,
holders who do not hold their Wellsford Shares or EQR Shares as capital assets
and holders that, for United States Federal income tax purposes, are non-
resident alien individuals, foreign corporations, foreign partnerships or
foreign estates or trusts.
The tax discussion set forth below is included for general information only.
It is not intended to be, nor should it be construed to be, legal or tax
advice to any particular holder of Wellsford Shares or EQR Shares. Because of
the particular tax attributes of holders of Wellsford Shares or EQR Shares,
the Merger may have differing tax implications for such holders. Accordingly,
holders of Wellsford Shares or EQR Shares are urged to consult with their own
legal and tax advisers regarding the United States federal income tax
consequences of the Merger and any other consequences to them of the Merger
under state, local and foreign tax laws.
Tax Consequences of Merger. Rudnick & Wolfe, counsel to EQR in connection
with the Merger, has rendered an opinion to EQR that on the basis of the
facts, representations and assumptions set forth in such opinion:
(i) the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code, and EQR and Wellsford will each be a party to
such reorganization within the meaning of Section 368(b) of the code;
(ii) no gain or loss will be recognized by EQR as a result of the Merger;
(iii) no gain or loss will be recognized by the shareholders of EQR upon
the exchange of their EQR Common solely for Survivor Common pursuant to the
Merger;
(iv) no gain or loss will be recognized by the shareholders of EQR upon
the exchange of their EQR Preferred solely for Survivor Preferred pursuant
to the Merger;
(v) the tax basis of the Survivor Common received or deemed to be
received by any holder of EQR Common in exchange for EQR Common pursuant to
the Merger will be the same as the tax basis of such EQR Common exchanged
therefor;
(vi) the tax basis of the Survivor Preferred received or deemed to be
received by any holder of EQR Preferred in exchange for EQR Preferred
pursuant to the Merger will be the same as the tax basis of such EQR
Preferred exchanged therefor;
(vii) the holding period for Survivor Common and Survivor Preferred
received in exchange for EQR Common and EQR Preferred, respectively,
pursuant to the Merger will include the period that such EQR Common and EQR
Preferred were held by the holder, provided that such EQR Common and EQR
Preferred were held as capital assets by such holder at the Effective Time;
(viii) subsequent to the Merger, the proposed method of operation
described in this Joint Proxy Statement/ Prospectus/Information Statement
and as represented by EQR should enable the Surviving Trust to satisfy the
requirements under the Code to qualify as a REIT for federal income tax
purposes; and
(ix) ERP Operating Partnership will be classified as a partnership for
federal income tax purposes.
Robinson Silverman Pearce Aronsohn & Berman LLP, counsel to Wellsford in
connection with the Merger, has rendered an opinion to Wellsford that on the
basis of the facts, representations and assumptions set forth in such opinion:
(i) the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code, and EQR and Wellsford will each be a party to
such reorganization within the meaning of Section 368(b) of the Code;
61
<PAGE>
(ii) no gain or loss for federal income tax purposes will be recognized
by Wellsford as a result of the Merger;
(iii) no gain or loss will be recognized by the shareholders of Wellsford
upon the exchange of their Wellsford Common solely for Survivor Common
pursuant to the Merger;
(iv) no gain or loss will be recognized by the shareholders of Wellsford
upon the exchange of their Wellsford Preferred solely for Survivor
Preferred pursuant to the Merger;
(v) the tax basis of the Survivor Common received or deemed to be
received by any holder of Wellsford Common in exchange for Wellsford Common
pursuant to the Merger will be the same as the tax basis of such Wellsford
Common exchanged therefor;
(vi) the tax basis of the Survivor Preferred received or deemed to be
received by any holder of Wellsford Preferred in exchange for Wellsford
Preferred pursuant to the Merger will be the same as the tax basis of such
Wellsford Preferred exchanged therefor;
(vii) the holding period for Survivor Common and Survivor Preferred
received in exchange for Wellsford Common and Wellsford Preferred,
respectively, pursuant to the Merger will include the period that such
shares of Wellsford Common and Wellsford Preferred, respectively, were held
by the holder, provided that such Wellsford Common and Wellsford Preferred
were held as capital assets by such holder at the Effective Time; and
(viii) a shareholder of Wellsford Common who receives cash in lieu of a
fractional share of Wellsford Common pursuant to the Merger will recognize
gain or loss equal to the difference, if any, between such shareholder's
basis in the fractional share and the amount of cash received.
Shareholders of EQR and Wellsford should be aware that such opinions of
counsel are not binding on the United States IRS, and no assurance is or will
be given that the IRS would not adopt a contrary position or that the IRS
position would not be sustained by a court.
QUALIFICATION OF SURVIVING TRUST AS A REIT
General. Wellsford elected REIT status commencing with its taxable year
ending December 31, 1992. In the opinion of Robinson Silverman Pearce Aronsohn
& Berman LLP, which has acted as counsel to Wellsford, Wellsford was organized
and has operated in conformity with the requirements for qualification and
taxation as a REIT under the Code for its taxable years ended December 31,
1992 through December 31, 1996. Rudnick & Wolfe has opined that, (i) EQR was
organized and has operated in conformity with the requirements for
qualification and taxation as a REIT under the Code for its taxable years
ended December 31, 1993 through December 31, 1996, and (ii) subsequent to the
Merger, the Surviving Trust's proposed method of operation described in this
Joint ProxyStatement/Prospectus/ Information Statement and as represented by
EQR should enable it to meet the requirements for qualification and taxation
as a REIT. It must be emphasized that this opinion is based on various
assumptions relating to the organization and operation of the Surviving Trust,
ERP Operating Partnership, the Management Partnerships, Equity Residential
Properties Management Corp., Equity Residential Properties Management Corp.
II, Equity Residential Properties Management Corp. III and Wellsford
Management Corp. (collectively, the "Management Corps."), the limited
partnerships and limited liability companies (the "Financing Partnerships")
that own the beneficial interest of certain properties encumbered by mortgage
financing, and various qualified REIT subsidiaries wholly owned by the
Surviving Trust (each a "QRS Corporation") (collectively, the Management
Partnerships, the Management Corps., the Financing partnerships and the QRS
Corporations may be referred to as the "Subsidiary Entities"), and is
conditioned upon certain representations made by EQR and ERP Operating
Partnership as to certain relevant factual matters, including matters related
to the organization, expected operation, and assets of the Surviving Trust,
ERP Operating Partnership and the Subsidiary Entities. The Surviving Trust's
qualification and taxation as a REIT depend upon the Surviving Trust's ability
to meet on a continuing basis, through actual annual operating and other
results, the various requirements under the Code and described in the
Prospectus with regard to, among other things, the sources of its gross
income, the composition of its assets, the level of its dividends to
shareholders, and the diversity of its share ownership. Neither Rudnick &
Wolfe nor Robinson Silverman Pearce Aronsohn & Berman LLP will review the
Surviving Trust's compliance with these requirements on a continuing basis. No
assurance can be given that the actual results of the operations of the
Surviving Trust, ERP Operating Partnership, and the Subsidiary Entities, the
sources of their income, the nature of their assets, the level of the
Surviving Trust's dividends to shareholders and the diversity of its share
ownership for any given taxable year will satisfy the requirements under the
Code for qualification and taxation as a REIT.
In any year in which the Surviving Trust qualifies as a REIT, generally it
will not be subject to Federal income tax on that portion of its REIT taxable
income or capital gain which is distributed to shareholders. This treatment
substantially eliminates the "double taxation" (at both the corporate and
shareholder levels) that generally results from the use of corporate
investment vehicles. The Surviving Trust may, however, be subject to tax at
normal corporate rates upon any taxable income or capital gain not
distributed.
62
<PAGE>
If the Surviving Trust should fail to satisfy either the 75% or the 95%
gross income test (as discussed below), and nonetheless maintains its
qualification as a REIT because certain other requirements are met, it will be
subject to a 100% tax on the greater of the amount by which it fails the 75%
or the 95% test, multiplied by a fraction intended to reflect its
profitability. The Surviving Trust will also be subject to a 100% tax on net
income derived from any "prohibited transaction," as described below. In
addition, if the Surviving Trust should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain net income for such year, and (iii)
any undistributed taxable income from prior years, the Surviving Trust would
be subject to a 4% excise tax on the excess of such required distribution over
the amounts actually distributed. The Surviving Trust may also be subject to
the corporate "alternative minimum tax," as well as tax in certain situations
and on certain transactions not presently contemplated. The Surviving Trust
will use the calendar year both for Federal income tax purposes and for
financial reporting purposes.
In order to qualify as a REIT, the Surviving Trust must meet, among others,
the following requirements:
Share Ownership Test. Shares of beneficial interest of the Surviving
Trust must be held by a minimum of 100 persons for at least 335 days of a
taxable year that is 12 months, or during a proportionate part of a taxable
year of less than 12 months. In addition, no more than 50% in value of the
shares of beneficial interest of the Surviving Trust may be owned, directly
or indirectly and by applying certain constructive ownership rules, by five
or fewer individuals during the last half of each taxable year. EQR and
Wellsford believe that they have each satisfied both of these tests, and
EQR believes the Surviving Trust will continue to do so. In order to help
comply with the second of these tests, the Surviving Trust has placed
certain restrictions on the transfer of the Survivor Common and Survivor
Preferred that are intended to prevent further concentration of share
ownership.
Asset Tests. At the close of each quarter of the Surviving Trust's
taxable year, the Surviving Trust must satisfy two tests relating to the
nature of its assets. First, at least 75% of the value of the Surviving
Trust's total assets must be represented by any combination of interests in
real property, interests in mortgages on real property, shares in other
REITs, cash, cash items and certain government securities. Second, although
the remaining 25% of the Surviving Trust's assets generally may be invested
without restriction, securities in this class may not exceed either (i) 5%
of the value of the Surviving Trust's total assets as to any one issuer, or
(ii) 10% of the outstanding voting securities of any one issuer. Where the
Surviving Trust invests in a partnership, it will be deemed to own a
proportionate share of the partnership's assets. The Surviving Trust's
investment in the properties of Wellsford through its interest in ERP
Operating Partnership will constitute qualified assets for purposes of the
75% asset test.
ERP Operating Partnership will own none of the voting stock of the
Management Corps. except for Wellsford Management Inc., in which ERP
Operating Partnership will own 10% of the voting stock. ERP Operating
Partnership will own 100% of the non-voting stock of each of the Management
Corps. ERP Operating Partnership will also own 100% of the Class A Common
Stock of WRP Newco and 100% of the Series A 8% Convertible Redeemable
Preferred Stock of WRP Newco. By virtue of its partnership interest in ERP
Operating Partnership, the Surviving Trust will be deemed to own its pro
rata share of the assets of ERP Operating Partnership, including the stock
of the Management Corps. and WRP Newco as described above. ERP Operating
Partnership has not and does not intend to own more than 10% of the voting
securities of the Management Corps. or WRP Newco.
In addition, based upon its analysis of the estimated value of the stock
of the Management Corps. and WRP Newco owned by ERP Operating Partnership
relative to the estimated value of the other assets owned by ERP Operating
Partnership, EQR believes that its pro rata share of the stock of WRP Newco
and each Management Corp. held by ERP Operating Partnership will not exceed
5% of the total value of the Surviving Trust's assets. No independent
appraisals, however, have been obtained to support this conclusion. This 5%
limitation must be satisfied not only on the date that the Surviving Trust
first acquires stock of WRP Newco or a Management Corp., but also at the
end of each quarter in which the Surviving Trust increases its interest in
WRP Newco or any of the Management Corps. (including as a result of
increasing its interest in ERP Operating Partnership as the holders of OP
Units exercise their exchange rights). Although the Surviving Trust plans
to take steps to ensure that it satisfies the 5% value test for any quarter
with respect to which retesting is to occur, there can be no assurance that
such steps will always be successful or will not require a reduction in ERP
Operating Partnership's overall interest in the Management Corps.
The Surviving Trust's indirect interests as a general partner in the
Financing Partnerships are held through the QRS Corporations, each of which
is organized and operated as a "qualified REIT subsidiary" within the
meaning of the Code. Qualified REIT subsidiaries are not treated as
separate entities from their parent REIT. Instead, all assets, liabilities
and items of income, deduction and credit of each QRS Corporation will be
treated as assets, liabilities and items of the Surviving Trust. Each QRS
Corporation therefore will not be subject to Federal corporate income
taxation, although it may be subject to state or local taxation. In
addition, the Surviving Trust's ownership of the voting stock of each QRS
Corporation will not violate the general restriction against ownership of
more than 10% of the voting securities of any issuer.
63
<PAGE>
Gross Income Tests. There are three separate percentage tests relating to
the sources of the Surviving Trust's gross income which must be satisfied
for each taxable year. For purposes of these tests, where the Surviving
Trust invests in a partnership, the Surviving Trust will be treated as
receiving its share of the income and loss of the partnership, and the
gross income of the partnership will retain the same character in the hands
of the Surviving Trust as it has in the hands of the partnership.
1. The 75% Test. At least 75% of the Surviving Trust's gross income for
each taxable year must be "qualifying income." Qualifying income generally
includes (i) rents from real property (except as modified below); (ii)
interest on obligations collateralized by mortgages on, or interests in,
real property; (iii) gains from the sale or other disposition of interests
in real property and real estate mortgages, other than gain from property
held primarily for sale to customers in the ordinary course of the
Surviving Trust's trade or business ("dealer property"); (iv) distributions
on shares in other REITs, as well as gain from the sale of such shares; (v)
abatements and refunds of real property taxes; (vi) income from the
operation, and gain from the sale, of property acquired at or in lieu of a
foreclosure of a mortgage collateralized by such property ("foreclosure
property"); (vii) commitment fees received for agreeing to make loans
collateralized by mortgages on real property or to purchase or lease real
property; and (viii) certain qualified temporary investment income
attributable to the investment of new capital received by the Surviving
Trust in exchange for its shares (including the Securities offered hereby)
during the one-year period following the receipt of such new capital.
Rents received from a tenant will not, however, qualify as rents from
real property in satisfying the 75% test (or the 95% gross income test
described below) if the Surviving Trust, or an owner of 10% or more of the
Surviving Trust, directly or constructively owns 10% or more of such
tenant. 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. Finally, for rents received to qualify as rents from real
property, the Surviving Trust generally must not operate or manage the
property or furnish or render services to tenants, other than through an
"independent contractor" from whom the Surviving Trust derives no revenue.
The "independent contractor" requirement, however, does not apply to the
extent that the services provided by the Surviving Trust are "usually or
customarily rendered" in connection with the rental of space for occupancy
only, and are not otherwise considered "rendered to the occupant."
The Surviving Trust, through the Management Partnerships, will provide
certain services with respect to the properties of Wellsford and any newly
acquired multifamily residential properties. The Surviving Trust believes
that the services provided by the Management Partnerships are usually or
customarily rendered in connection with the rental of space for occupancy
only, and therefore that the provision of such services has not caused, and
will not in the future cause the rents received with respect to the
Properties to fail to qualify as rents from real property for purposes of
the 75% and 95% gross income tests.
2. The 95% Test. At least 95% of the Surviving Trust's 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
(including the Surviving Trust's share of dividends paid by the Management
Corps.) and interest on any obligations not collateralized by an interest
in real property and any payments made on behalf of the Surviving Trust by
a financial institution pursuant to a rate protection agreement will be
included as qualifying income for purposes of the 95% gross income test,
but not for purposes of the 75% test. For purposes of determining whether
the Surviving Trust complies with the 75% and 95% income tests, qualifying
income does not include income from prohibited transactions. A "prohibited
transaction" is a sale of dealer property, excluding certain dealer
property held by the Surviving Trust for at least four years and excluding
foreclosure property.
The Surviving Trust's investment in the Properties, through ERP Operating
Partnership, in major part will give rise to rental income qualifying under
the 75% and 95% gross income tests. Gains on sales of the Properties or of
the Surviving Trust's interest in ERP Operating Partnership will generally
qualify under the 75% and 95% gross income tests. EQR believes that the
income on its other investments, including its indirect investment in WRP
Newco and the Management Corps., will not cause the Surviving Trust to fail
the 75% or 95% gross income test for any year, and the Surviving Trust
anticipates that this will continue to be the case.
Even if the Surviving Trust fails to satisfy one or both of the 75% or
95% gross income tests for any taxable year, it may still qualify as a REIT
for such year if it is entitled to relief under certain provisions of the
Code. These relief provisions will generally be available if: (i) the
Surviving Trust's failure to comply was due to reasonable cause and not to
willful neglect; (ii) the Surviving Trust reports the nature and amount of
each item of its income included in the tests on a schedule attached to its
tax return; and (iii) any incorrect information on this schedule is not due
to fraud with intent to evade tax. If these relief provisions apply, the
Surviving Trust, however, will still be subject to a 100% tax
64
<PAGE>
based upon the greater of the amount by which it fails either the 75% or
95% gross income test for that year, less certain adjustments.
3. The 30% Test. The Surviving Trust must derive less than 30% of its
gross income for each taxable year from the sale or other disposition of
(i) real property held for less than four years (other than foreclosure
property and involuntary conversions), (ii) stock or securities held for
less than one year, and (iii) property in a prohibited transaction. EQR
does not anticipate that it will have any substantial difficulty in
complying with this test.
Annual Distribution Requirements. The Surviving Trust, in order to
qualify as a REIT, is required to make dividend distributions (other than
capital gain dividends) to its shareholders each year in an amount at least
equal to (A) the sum of (i) 95% of the Surviving Trust's REIT taxable
income (computed without regard to the dividends paid deduction and the
Surviving Trust's net capital gain) and (ii) 95% of the net income (after
tax), if any, from foreclosure property, minus (B) the sum of certain items
of 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 the
Surviving Trust 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 the Surviving Trust does not distribute all of its net capital
gain or distributes at least 95%, but less than 100%, of its REIT taxable
income, as adjusted, it will be subject to tax on the undistributed amount
at regular capital gains or ordinary corporate tax rates, as the case may
be.
The Surviving Trust has made and intends to continue to make timely
distributions sufficient to satisfy the annual distribution requirements.
In this regard, the partnership agreement of ERP Operating Partnership
authorizes the Surviving Trust, as general partner, to take such steps as
may be necessary to cause ERP Operating Partnership to distribute to its
partners an amount sufficient to permit the Surviving Trust to meet these
distribution requirements. It is possible that the Surviving Trust may not
have sufficient cash or other liquid assets to meet the 95% dividend
requirement, due to the payment of principal on debt or 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 the Surviving Trust's REIT taxable income on the
other hand. To avoid any problem with the 95% distribution requirement, the
Surviving Trust will closely monitor the relationship between its REIT
taxable income and cash flow and, if necessary, will borrow funds (or cause
ERP Operating Partnership or other affiliates to borrow funds) in order to
satisfy the distribution requirement.
Failure to Qualify. If the Surviving Trust fails to qualify for taxation
as a REIT in any taxable year and the relief provisions do not apply, the
Surviving Trust will be subject to tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates.
Distributions to shareholders in any year in which the Surviving Trust
fails to qualify will not be required and, if made, will not be deductible
by the Surviving Trust. 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 certain limitations in the
Code, corporate distributees may be eligible for the dividends received
deduction. Unless entitled to relief under specific statutory provisions,
the Surviving Trust also will be ineligible for qualification as a REIT for
the four taxable years following the year during which qualification was
lost.
TAX ASPECTS OF THE SURVIVING TRUST'S INVESTMENTS IN PARTNERSHIPS
General. The Surviving Trust will hold direct or indirect interests in ERP
Operating Partnership, WRP Newco, the Management Partnerships and certain
Financing Partnerships (each individually a "Partnership" and, collectively,
the "Partnerships"). The Surviving Trust believes that each of the
Partnerships qualifies as a partnership (as opposed to an association taxable
as a corporation) for Federal income tax purposes. If any of the Partnerships
were to be treated as an association, it would be taxable as a corporation and
therefore subject to an entity-level tax on its income. In such a situation,
the character of the Surviving Trust's assets and items of gross income would
change, which would preclude the Surviving Trust from satisfying the asset
tests and possibly the income tests (see "Certain Federal Income Tax
Consequences--Taxation of the Surviving Trust--Asset Tests" and "--Gross
Income Tests"), and in turn would prevent the Surviving Trust from qualifying
as a REIT.
Tax Termination of ERP Operating Partnership. Pursuant to Section
708(b)(1)(B) of the Code, if within a twelve-month period, there is a sale or
exchange of 50 percent or more of the total interest in a partnership's
capital and profits, the partnership terminates for federal income tax
purposes. Treasury Regulations under Code Section 708(b)(1)(B) (the "Section
708 Regulations") provide that if a partnership is deemed terminated by a sale
or exchange of an interest, the following is deemed to occur: (a) the
partnership distributes all of its assets subject to all of its liabilities to
the purchaser and the other remaining partners in proportion to their
respective interests in the partnership assets; and, (b) immediately
thereafter, the purchaser and the other remaining partners contribute the
assets, subject to the liabilities encumbering such assets, to a new
partnership. Under the Section 708 Regulations, the deemed termination of a
partnership will result in the closing of the
65
<PAGE>
partnership's taxable year and recognition of gain under Code Section 731 if
the amount of money deemed distributed to the partner (including any money
deemed distributed upon a shift in the liabilities of the partnership under
Code Section 752) exceeds such partner's adjusted basis in his partnership
interest. Any built-in gain or loss attributable to the assets re-contributed
to the partnership must be allocated among the partners of the new partnership
under Code Section 704(c). See "Tax Aspects of Surviving Trusts Investment in
Partnerships--Tax Allocations With Respect to the Properties." In addition,
the deemed termination requires the partnership to depreciate its assets as if
they were newly acquired by the partnership at the time of termination. As a
result, such assets must be depreciated over each asset's depreciable life
beginning as of the date of the deemed termination.
In connection with the Merger, more than 50 percent of the total interest in
ERP Operating Partnership's capital and profits will be exchanged. Therefore,
the Merger will result in the termination of ERP Operating Partnership under
Code Section 708(b)(1)(B). Accordingly, under the Section 708 Regulations, all
of the assets of ERP Operating Partnership will be deemed to be distributed to
the partners of ERP Operating Partnership (including the Surviving Trust) and
re-contributed by such partners to a newly formed partnership. Such deemed
distribution and re-contribution is not expected to cause gain recognition to
the Surviving Trust under Code Section 731(a) because the amount of cash
deemed distributed to the Surviving Trust as a result of the deemed
liquidation (including any deemed distribution occurring under Code Section
752 as a result of a shifting of liabilities among the partners of the ERP
Operating Partnership) is not expected to exceed the Surviving Trusts's
adjusted basis in the ERP Operating Partnership. Moreover, because the taxable
years of both the ERP Operating Partnership and the Surviving Trust end on the
same date, the closing of the ERP Operating Partnership's taxable year should
have no adverse tax consequences to the Surviving Trust. However, the
termination of the ERP Operating Partnership will cause the assets of the ERP
Operating Partnership to be depreciated as if they were newly acquired by the
ERP Operating Partnership, possibly resulting in lower annual depreciation
deductions to the Surviving Trust for federal income tax purposes. In
addition, the deemed re-contribution of the assets to the ERP Operating
Partnership could result in a reallocation of the built-in gain attributable
to the properties owned by the ERP Operating Partnership. See "Tax Aspects of
Surviving Trusts Investment in Partnerships--Tax Allocations With Respect to
the Properties."
Proposed Treasury Regulations recently promulgated by the Treasury
Department (the "Proposed 708 Regulations") would alter the tax consequences
of a termination under Code Section 708(b)(1)(B). Under the Proposed Section
708 Regulations, if a partnership is terminated by a sale or exchange of an
interest, the following would be deemed to occur: (a) the partnership
transfers all of its assets and liabilities to a new partnership in exchange
for an interest in the new partnership; and (b) immediately thereafter, the
terminated partnership distributes all of the interests in the new partnership
to the purchasing partner and the other remaining partners in liquidation of
the terminated partnership. The effect of the Proposed Regulations would be to
(i) eliminate any possibility of gain recognition to the partners of the ERP
Operating Partnership under Code Section 731, and (ii) eliminate any potential
reallocation of ERP Operating Partnership's basis and any Section 704(c)
built-in gain with respect to the properties currently held by the ERP
Operating Partnership. However, under the Proposed 708 Regulations, the ERP
Operating Partnership would still be required to depreciate its properties as
newly acquired assets, possibly resulting in lower depreciation deductions to
the Surviving Trust for federal income tax purposes. The Proposed Section 708
Regulation will apply to the deemed termination of ERP Operating Partnership
if the Proposed Section 708 Regulations shall have been published as final
regulations in the Federal Register as of the effective date of the Merger.
Tax Allocations with Respect to the Properties. Pursuant to Section 704(c)
of the Code, income, gain, loss and deduction attributable to appreciated or
depreciated property that is contributed to a partnership in exchange for an
interest in the partnership (such as certain of the Properties contributed to
ERP Operating Partnership in connection with both the initial public offering
of EQR and the Merger) (the "Contributed Properties") must be allocated in a
manner such that the contributing partner is charged with, or benefits from,
respectively, the unrealized gain or unrealized loss associated with the
property at the time of the contribution. The amount of such unrealized gain
or unrealized loss is generally equal to the difference between the fair
market value and the adjusted tax basis of contributed property at the time of
contribution (a "Book-Tax Difference"). Such allocations are solely for
Federal income tax purposes and do not affect the book capital accounts or
other economic or legal arrangements among the partners. ERP Operating
Partnership Agreement (as well as the Financing Partnerships agreements)
require such allocations to be made in a manner consistent with Section
704(c). As a result, certain limited partners of ERP Operating Partnership
will be allocated lower amounts of depreciation deductions for tax purposes
and increased taxable income and gain on sale by the Partnerships of the
contributed assets (including certain of the Contributed Properties). These
allocations will tend to eliminate the Book-Tax Difference over the lives of
the Partnerships. However, the special allocation rules of Section 704(c) as
applied by the Surviving Trust will not always entirely rectify the Book-Tax
Difference on an annual basis or with respect to a specific taxable
transaction such as a sale. Thus, the carryover basis of the contributed
assets in the hands of the Partnerships will cause the Surviving Trust to be
allocated lower depreciation and other deductions, and possibly greater
amounts of taxable income in the event of a sale of
66
<PAGE>
such contributed assets in excess of the economic or book income allocated to
it as a result of such sale. This may cause the Surviving Trust to recognize
taxable income in excess of cash proceeds, which might adversely affect the
Surviving Trust's ability to comply with the REIT distribution requirements.
See "Qualification of the Surviving Trust as a REIT--Annual Distribution
Requirements."
Sale of the Properties. The Surviving Trust's share of any gain realized by
ERP Operating Partnership on the sale of any dealer property generally will be
treated as income from a prohibited transaction that is subject to a 100%
penalty tax. See "Qualification of the Surviving Trust as a REIT--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. The Partnerships have held and intend
to continue to hold the Properties for investment with a view to long-term
appreciation, to engage in the business of acquiring, developing, owning and
operating the Properties and other multifamily residential properties and to
make such occasional sales of the Properties as are consistent with the
Surviving Trust's investment objectives. Based upon such investment
objectives, the Surviving Trust believes that in general the Properties should
not be considered dealer property and that the amount of income from
prohibited transactions, if any, will not be material.
Taxation of Taxable Domestic Shareholders.
General. As long as the Surviving Trust qualifies as a REIT, distributions
made to the Surviving Trust's taxable domestic shareholders, with respect to
their shares 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 shareholders that are corporations. For purposes of determining whether
distributions on the Securities are out of current or accumulated earnings and
profits, the earnings and profits of the Surviving Trust will be allocated
first to the Survivor Preferred Shares and second to the Survivor Common
Shares. There can be no assurance, however, that the Surviving Trust will have
sufficient earnings and profits to cover distributions on the Survivor
Preferred Shares. Dividends that are designated as capital gain dividends will
be taxed as long-term capital gains (to the extent that they do not exceed the
Surviving Trust's actual net capital gain for the taxable year) without regard
to the period for which the shareholder has held its Securities. However,
corporate shareholders may be required to treat up to 20% of certain capital
gain dividends as ordinary income. For a discussion on the manner in which
that portion of any dividends designated by the Surviving Trust as capital
gains dividends will be allocated among the holders of Survivor Preferred
Shares and Survivor Common Shares, see "Description of Shares of Beneficial
Interest--Survivor Preferred Shares--Distributions." To the extent that the
Surviving Trust makes distributions in excess of current and accumulated
earnings and profits, these distributions are treated first as a tax-free
return of capital to the shareholder, reducing the tax basis of a
shareholder's Securities 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 Securities are held as a capital asset). In addition,
any dividend declared by the Surviving Trust in October, November or December
of any year and payable to a shareholder of record on a specific date in any
such month will be treated as both paid by the Surviving Trust and received by
the shareholder on December 31 of such year, provided that the dividend is
actually paid by the Surviving Trust during January of the following calendar
year. Shareholders may not include in their individual income tax returns any
net operating losses or capital losses of the Surviving Trust.
In general, any loss upon a sale or exchange of securities by a shareholder
who has held such securities for six months or less (after applying certain
holding period rules) will be treated as a long-term capital loss, to the
extent of distributions from the Surviving Trust received by such shareholder
are required to be treated by such shareholder as long-term capital gains.
Taxation of Tax-Exempt Shareholders.
Most tax-exempt employees' pension trusts are not subject to Federal income
tax except to the extent of their receipt of "unrelated business taxable
income" as defined in Section 512(a) of the Code ("UBTI"). Distributions by
the Surviving Trust to a shareholder that is a tax-exempt entity should not
constitute UBTI, provided that the tax-exempt entity has not financed the
acquisition of its securities with "acquisition indebtedness" within the
meaning of the Code and the securities are not otherwise used in an unrelated
trade or business of the tax-exempt entity. In addition, for taxable years
beginning on or after January 1, 1994, certain pension trusts that own more
than 10% of a "pension-held REIT" must report a portion of the distribution
that they receive from such a REIT as UBTI. The Surviving Trust has not been
and does not expect to be treated as a pension-held REIT for purposes of this
rule.
Taxation of Foreign Shareholders.
The following is a discussion of certain anticipated U.S. Federal income tax
consequences of the ownership and disposition of securities applicable to Non-
U.S. Holders of such securities. A "Non-U.S. Holder" is any person other than
67
<PAGE>
(i) a citizen or resident of the United States, (ii) a corporation or
partnership created or organized in the United States or under the laws of the
United States or of any state thereof, or (iii) an estate or trust whose
income is includible in gross income for U.S. Federal income tax purposes
regardless of its source. The discussion is based on current law and is for
general information only.
Distributions From the Surviving Trust.
1. Ordinary Dividends. The portion of dividends received by Non-U.S. Holders
payable out of the Surviving Trust's earnings and profits which are not
attributable to capital gains of the Surviving Trust or of ERP Operating
Partnership and which are not effectively connected with a U.S. trade or
business of the Non-U.S. Holder will be subject to U.S. withholding tax at the
rate of 30% (unless reduced by an applicable treaty). In general, Non-U.S.
Holders will not be considered engaged in a U.S. trade or business solely as a
result of their ownership of securities. In cases where the dividend income
from a Non-U.S. Holder's investment in securities is (or is treated as)
effectively connected with the Non-U.S. Holder's conduct of a U.S. trade or
business, the Non-U.S. Holder generally will be subject to U.S. tax at
graduated rates, in the same manner as U.S. shareholders are taxed with
respect to such dividends (and may also be subject to the 30% branch profits
tax in the case of a Non-U.S. Holder that is a foreign corporation).
2. Non-Dividend Distributions. Distributions by the Surviving Trust which
are not dividends out of the earnings and profits of the Surviving Trust will
not be subject to U.S. income or withholding tax. If it cannot be determined
at the time a distribution is made whether or not such distribution will be in
excess of the Surviving Trust's current and accumulated earnings and profits,
the entire distribution will be subject to withholding at the rate applicable
to dividends. However, the Non-U.S. Holder may seek a refund of such amounts
from the Service if it is subsequently determined that such distribution was,
in fact, in excess of current and accumulated earnings and profits of the
Surviving Trust.
3. Capital Gain Dividends. Under the Foreign Investment in Real Property Tax
Act of 1980 ("FIRPTA"), a distribution made by the Surviving Trust to a Non-
U.S. Holder, to the extent attributable to gains from dispositions of United
States Real Property Interests ("USRPIs") such as the Properties beneficially
owned by the Surviving Trust will be considered effectively connected with a
U.S. trade or business of the Non-U.S. Holder and subject to U.S. income tax
at the rate applicable to U.S. individuals or corporations, without regard to
whether such distribution is designated as a capital gain dividend. In
addition, the Surviving Trust will be required to withhold tax equal to 35% of
the amount of dividends to the extent such dividends constitute gains from any
USRPI. Distributions subject to FIRPTA may also be subject to a 30% branch
profits tax in the hands of a foreign corporate shareholder that is not
entitled to treaty exemption.
Dispositions of Securities.
Unless securities constitute a USRPI, a sale of securities by a Non-U.S.
Holder generally will not be subject to U.S. taxation under FIRPTA. The
securities will not constitute a USRPI if the Surviving Trust is a
"domestically controlled REIT." A domestically controlled REIT is a REIT in
which, at all times during a specified testing period, less than 50% in value
of its securities is held directly or indirectly by Non-U.S. Holders. The
Surviving Trust believes that it has been and anticipates that it will
continue to be a domestically controlled REIT, and therefore that the sale of
securities will not be subject to taxation under FIRPTA. Because the
securities will be publicly traded, however, no assurance can be given the
Surviving Trust will continue to be a domestically controlled REIT. If the
Surviving Trust does not constitute a domestically controlled REIT, a Non-U.S.
Holder's sale of securities generally will still not be subject to tax under
FIRPTA as a sale of a USRPI provided that (i) the securities are "regularly
traded" (as defined by applicable Treasury regulations) on an established
securities market and (ii) the selling Non-U.S. Holder held 5% or less of the
Surviving Trust's outstanding securities at all times during a specified
testing period.
If gain on the sale of securities were subject to taxation under FIRPTA, the
Non-U.S. Holder would be subject to the same treatment as a U.S. shareholder
with respect to such gain (subject to applicable alternative minimum tax and a
special alternative minimum tax in the case of nonresident alien individuals)
and the purchaser of securities could be required to withhold 10% of the
purchase price and remit such amount to the Service. Capital gains not subject
to FIRPTA will nonetheless be taxable in the United States to a Non-U.S.
Holder in two cases: (i) if the Non-U.S. Holder's investment in securities is
effectively connected with a U.S. trade or business conducted by such Non-U.S.
Holder, the Non-U.S. Holder will be subject to the same treatment as a U.S.
shareholder with respect to such gain, or (ii) if the Non-U.S. Holder is a
nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and has a "tax home" in the United States, the
nonresident alien individual will be subject to a 30% tax on the individual's
capital gain.
Other Tax Considerations.
WRP Newco and the Management Corps. A portion of the cash to be used by ERP
Operating Partnership to fund distributions to its partners, including the
Surviving Trust, is expected to come from WRP Newco and the Management
68
<PAGE>
Corps. through payments of dividends on the stock of WRP Newco and the
Management Corps. held by ERP Operating Partnership. The Management Corps.
will pay Federal and state income tax at the full applicable corporate rates
on their taxable income. The Management Corps. 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 that
WRP Newco and/or the Management Corps. are required to pay Federal, state or
local taxes, the cash available to WRP Newco for distribution by the Surviving
Trust, among its shareholders will be reduced accordingly.
State and Local Taxes. The Surviving Trust and its shareholders may be
subject to state or local taxation in various jurisdictions, including those
in which it or they transact business or reside. The state and local tax
treatment of the Surviving Trust 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 shares of beneficial interest
of the Surviving Trust.
INTERESTS OF CERTAIN PERSONS IN THE MERGER AND DISTRIBUTION
In considering whether to approve the Merger, shareholders should be aware
that certain members of the management of Wellsford and the Wellsford Board of
Trustees have certain interests that arise in connection with the Merger and
the Distribution that are in addition to the interests of shareholders of
Wellsford generally. These interests arise under existing agreements with, and
previously approved annual compensation awards from, Wellsford and proposed
agreements with WRP Newco and the Surviving Trust.
BENEFITS OF KEY EXECUTIVES
Each key executive of Wellsford, consisting of Messrs. Lynford, Lowenthal,
Kelley, MacKenzie, Hughes and Strong, has an existing employment agreement
with Wellsford that entitles him to certain benefits as described below. In
addition, in prior years each of the executives has earned and received
additional compensation in the form of share loans, grants of restricted
shares and share options. Members of the Board of Trustees of Wellsford have
also been granted share options over the years. Set forth below is a
discussion of the treatment of the various benefits and other compensation to
be paid in connection with the Merger to the key executives and the Trustees
by reason of these pre-existing agreements.
A. Severance Payments. Certain executive officers (but not Messrs. Lynford
and Lowenthal) will be entitled to receive severance payments under their
employment agreements as follows: $1,149,000 for Mr. Kelley, $764,070 for
Mr. MacKenzie, $692,440 for Mr. Hughes, and $585,000 for Mr. Strong.
B. Share Loans. Under the existing agreements, Wellsford's key executives
previously purchased Wellsford Common over the years at their then fair market
value, the purchase price of which was borrowed from Wellsford and evidenced
by a ten-year promissory note. Under the agreements, 5% of the principal
balance of the promissory notes is forgiven each year provided the executive
remains in the employ of Wellsford and the remaining 50% is due at the end of
the ten year term of the promissory note. Upon a change of control, such as
the Merger, the then remaining principal balance of the loans will be forgiven
for Messrs. Lynford, Lowenthal, Kelley, MacKenzie, Hughes, and Strong in the
amounts of approximately $1.5 million, $1.5 million, $281,000, $1.1 million,
$1.1 million and $369,000, respectively.
C. Change in Control Share Grants. In accordance with the terms of the
existing agreements between Wellsford and Messrs. Lynford, Lowenthal and
Kelley, immediately prior to the Merger and Distribution, Messrs. Lynford,
Lowenthal and Kelley will each be issued 22,346 shares of Wellsford Common,
which shares will participate in the Distribution and Merger on the same basis
as all other shares of Wellsford Common.
D. Restricted Share Grants. Restricted share grants have previously been
made to Messrs. Lynford, Lowenthal, MacKenzie and Hughes, portions of which
have vested and portions of which remain subject to forfeiture. All restricted
shares, whether vested or not, will participate in the Distribution and Merger
on the same basis as all other shares of Wellsford Common. Messrs. Lynford and
Lowenthal each hold restricted share grants for 11,375 shares of Wellsford
Common that will continue to remain subject to forfeiture restrictions. The
shares of Survivor Common and the shares of WRP Newco Common to be received by
Messrs. Lynford and Lowenthal on account of the 11,375 restricted shares of
Wellsford Common held by each of them will be forfeited (as to 50% on January
1, 1998 and 50% on January 1, 1999) unless the Surviving Trust achieves on a
consolidated basis a minimum 5% increase in funds from operations per share
for the twelve-month period ending on the December 31 immediately preceding
the applicable vesting date over FFO per share for the preceding twelve-month
period. The portions of the restricted share grants issued to Messrs.
MacKenzie and Hughes that remain subject to forfeiture will become fully
vested at the Effective Time. Accordingly, 2,843 shares of Wellsford Common
will vest upon the Merger for each of Messrs. MacKenzie and Hughes, which
shares will participate in the Distribution and the Merger.
69
<PAGE>
E. Tax Payments. Pursuant to the existing employment agreements with the key
executives of Wellsford, in connection with the Merger the Surviving Trust
will pay on behalf of Messrs. Lynford, Lowenthal, Kelley, MacKenzie, Hughes
and Strong approximately $2.6 million, $2.4 million, $420,000, $1.0 million,
$1.1 million and $500,000, respectively, on account of the Federal, state and
local income and excise tax liabilities to the Internal Revenue Service and
the various state and local tax authorities. These payments are based on an
estimated value of Wellsford Common at the Effective Time of $27.50 per share
and will be adjusted based upon the actual value of Wellsford Common at the
Effective Time.
F. Wellsford Options. Over the years, the key executives of Wellsford have
been granted share options in connection with services previously rendered by
them. The treatment of both the vested options and the nonvested options are
described below.
(a) Vested Options.
All vested options (both incentive share options and nonqualified options)
held by Messrs. Lynford, Lowenthal, Kelley, Hughes and Strong were exercised
prior to the Merger by tendering existing shares of Wellsford Common in
payment of the exercise price. The tendered shares of Wellsford Common were
valued at $27.50 per share for purposes of payment of the exercise price
regardless of their actual value on the date of exercise, and will be
accounted for as a cost of the Merger. Pursuant to existing agreements, each
executive officer that exercised a vested option was granted a new option to
purchase additional shares of Wellsford Common at $27.50 per share (a "Reload
Option"). These Reload Options issued to Messrs. Lynford, Lowenthal, Kelley,
Hughes and Strong will be assumed by WRP Newco and amended, thereby becoming
options to purchase WRP Newco Common, as more fully described in (c) below.
(b) Nonvested Options.
The nonvested portion of each Wellsford option held by Messrs. Lynford,
Lowenthal, Hughes and Strong will be assumed by WRP Newco and amended thereby
becoming an option to purchase WRP Newco Common, as more fully described in
(c) below.
(c) Assumed Options.
For each of Messrs. Lynford, Lowenthal, Kelley, Hughes and Strong, WRP Newco
will assume and amend their Wellsford nonvested options (other than Mr.
Kelley) and Reload Options so that they become options to purchase WRP Newco
Common. With respect to Wellsford nonvested nonqualified options and Reload
Options, the number of WRP Newco nonqualified options will be calculated by
dividing the value of such Wellsford options by the value of the option to
purchase one share of WRP Newco Common. Reload Options will be valued using an
exercise price of $27.50 per share. The exercise price of each WRP Newco
nonqualified option will be the Issuance Price (as defined under "Certain
Agreements between WRP Newco and ERP Operating Partnership--Common Stock and
Preferred Stock Purchase Agreement") and the term of each such WRP Newco
option will be for an initial term of six years with a four year extension if
the optionee is employed by WRP Newco at the end of four years. These options
will become exercisable as follows: 25% after two years, an additional 25%
after three years, an additional 25% after four years and the remaining 25%
after five years from the date of the Merger. All options will be valued using
a mathematical option pricing formula that incorporates certain assumptions,
including an estimated value of the underlying shares, share option exercise
prices, the duration of the share options and the volatility of the underlying
shares (the "Option Pricing Formula"). Based on the foregoing, the total
number of shares of WRP Newco Common subject to options with respect to
Wellsford nonvested options (other than Mr. Kelley) and Reload Options assumed
by WRP Newco will be approximately as follows: 427,534, 427,534, 162,049,
78,410 and 24,159, for Messrs. Lynford, Lowenthal, Kelley, Hughes and Strong,
respectively. These amounts will be adjusted based upon the actual value of
Wellsford Common (and the actual value of the Wellsford options assumed by WRP
Newco) at the Effective Time.
The nonvested incentive share options held by Messrs. Lynford, Lowenthal,
Hughes and Strong will also be assumed by WRP Newco and amended to become WRP
Newco incentive stock options. These amended options will continue to be
nonvested incentive stock options just as they were before the Merger and will
maintain the same vesting schedule as the Wellsford incentive share options
assumed. These WRP Newco nonvested incentive stock options will reflect the
inherent value of, and have a term equal to the remaining term of, the
Wellsford incentive share options assumed, as required by Treasury Regulation
Section 1.425-1(a). Based on the foregoing, the total number of shares of WRP
Newco Common subject to options with respect to Wellsford nonvested incentive
share options assumed by WRP Newco will be approximately as follows: 25,171,
25,171, 24,195, and 16,467 for Messrs. Lynford, Lowenthal, Hughes and Strong,
respectively.
G. Options Held by Trustees. Outstanding options of Wellsford held by
persons whose benefits are not described above will vest at the Effective Time
and each such optionee will have the right to continue their option subject to
adjustment for
70
<PAGE>
the Exchange Rate or the right to relinquish all option rights in exchange for
a cash payment of $27.50 per share for each option relinquished less the
exercise price per share. All existing options to purchase Wellsford Common
granted to the non-employee Trustees of Wellsford (other than Mr. Du Bois)
will be assumed by WRP Newco and amended thereby becoming options to purchase
WRP Newco Common. The number of options to purchase WRP Newco Common will be
calculated by dividing the value of each Trustee's existing options to
purchase Wellsford Common by the value of the option to purchase one share of
WRP Newco Common. The options to purchase WRP Newco Common will be exercisable
immediately, and will have an initial term of six years (regardless of whether
or not the optionee remains a director of WRP Newco) with a four-year
extension if the optionee is a trustee or director of WRP Newco at the end of
four years. The exercise price of the options to purchase WRP Newco Common
shall be the Issuance Price. All options will be valued using the Option
Pricing Formula. Options to purchase 15,000 shares of Wellsford Common have
been previously granted to each of Messrs. Germain, Hoenemeyer and Sixt,
respectively. These options will be assumed by WRP Newco and amended to become
options to purchase approximately 38,515, 38,515 and 38,515 shares of WRP
Newco Common, respectively, at the Effective Time, assuming a fair market
value of Wellsford Common of $29.75 per share at the Effective Time. Options
to purchase 15,000 shares of Wellsford Common previously held by Mr. Du Bois
have been exercised by paying the exercise price.
AGREEMENTS WITH THE SURVIVING TRUST AND ERP OPERATING PARTNERSHIP
Consulting Agreements. Messrs. Lynford and Lowenthal will each execute a
consulting agreement with ERP Operating Partnership. The consulting agreements
will each be for a term of five years from the Effective Time. Pursuant to the
consulting agreements each of Messrs. Lynford and Lowenthal will serve as a
senior management consultant to ERP Operating Partnership and, in all events,
will receive compensation at the rate of $200,000 per year plus reimbursement
for reasonable out-of-pocket expenses.
Appointment to Board of Trustees of Surviving Trust. At or shortly after the
Effective Time, each of Messrs. Lynford and Lowenthal will be appointed to the
Board of Trustees of the Surviving Trust for a term ending at the annual
meeting of the Surviving Trust in the year 1997. EQR has agreed to cause
Messrs. Lynford and Lowenthal to be nominated for election as trustees at the
1997 annual meeting of the Surviving Trust for a term ending at the annual
meeting of the Surviving Trust in the year 2000.
Indemnification. The Surviving Trust will indemnify each trustee and officer
of Wellsford to the same extent after the Effective Time as such individuals
were indemnified by Wellsford prior to the Effective Time.
Severance and Retention Benefits. As of the Effective Time, the Surviving
Trust will adopt a severance and retention program (the "Retention Program")
for specified employees of Wellsford who are not officers. The aggregate
obligations of the Surviving Trust under the Retention Program will not exceed
$544,575. Pursuant to the Retention Program, any employee who stays for 6
months after the Effective Time or is terminated without cause by the
Surviving Trust will be entitled to a bonus in a specified amount. The
Retention Program will not require the Surviving Trust to continue the
employment of any employee of Wellsford after the Effective Time.
Senior Officer. Mr. MacKenzie will be a Senior Vice President of the
Surviving Trust at an initial salary of $175,000 per annum. Under his proposed
employment arrangement, on the Effective Date, Mr. MacKenzie intends to
exchange all rights under all of his existing Wellsford options for an option
to purchase 52,903 shares of Survivor Common . These options will be fully
vested on the date of issuance and will have an exercise price equal to the
fair market value of Survivor Common on the date of issuance. In addition, on
the Effective Date Mr. MacKenzie will receive an option to purchase 35,000
shares of Survivor Common. These options will vest over a period of three
years and will have an exercise price equal to the fair market value of
Survivor Common on the date of the grant. Mr. MacKenzie will also receive on
the Effective Date an option to purchase an additional number of shares of
Survivor Common which will be calculated by multiplying (i) the difference in
value, if any, between a share of EQR Common on the date of his initial
agreement to work for EQR (February 7, 1997) and a share of Survivor Common on
the date of the grant by (ii) 87,903, and then dividing the resulting number
by eight. These additional options will vest over three years and will have an
exercise price equal to the fair market value of Survivor Common on the date
of the grant.
AGREEMENTS WITH WRP NEWCO
Employment Agreements. WRP Newco will enter into employment agreements as of
the Effective Time with Messrs. Lynford and Lowenthal, which will expire on
December 31, 2002 and will provide for cash compensation to be paid to each of
them of $275,000 per annum. WRP Newco will also enter into employment
agreements as of the Effective Time with Messrs. Hughes and Strong, which will
expire two years after the Effective Time, and will provide for annual cash
71
<PAGE>
compensation to be paid to each of them of $175,000 and $125,000,
respectively. Each of Messrs. Lynford, Lowenthal, Hughes and Strong are also
entitled to incentive compensation as determined by the Compensation
Committee. In addition, Mr. Hughes is entitled to incentive compensation equal
to at least 50% of his annual base salary. See "Management of WRP Newco--
Employment Agreements."
Split Dollar Life Insurance. The existing split dollar life insurance
arrangements between Wellsford and Messrs. Lynford and Lowenthal will be
assumed by WRP Newco.
Consultant. Upon completion of the Merger, William Cockrum, a consultant to
Wellsford, will receive a consulting fee of $500,000, payable $250,000 in cash
and $250,000 by the issuance of shares of WRP Newco Common.
New Options. In addition to the stock options in WRP Newco Common referred
to in "--Benefits to Key Executives," immediately following the Distribution
and Merger, WRP Newco intends to grant new stock options to purchase shares of
WRP Newco Common to WRP Newco's non-employee directors and certain executive
officers. WRP Newco intends to grant options to purchase 42,750 shares of WRP
Newco Common to each of Messrs. Du Bois, Germain, Hoenemeyer and Sixt, options
to purchase 21,375 shares of WRP Newco Common to Mr. Crocker, and options to
purchase 85,500 shares of WRP Newco Common to each of Messrs. Lynford,
Lowenthal, Hughes and Strong.
SURVIVING TRUST
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following tables set forth the selected unaudited pro forma combined
financial data for the Surviving Trust as a combined entity, giving effect to
the Merger as if it had occurred on the dates indicated herein, after giving
effect to the pro forma adjustments described in the notes to the unaudited
pro forma financial statements included elsewhere in the Joint Proxy
Statement/Prospectus/Information Statement.
The selected unaudited pro forma combined operating data are presented as if
the Merger had been consummated at the beginning of the period presented.
The selected unaudited pro forma combined balance sheet data is presented as
if the Merger had occurred on December 31, 1996. The Merger has been accounted
for under the purchase method of accounting in accordance with the Accounting
Principles Board Opinion No. 16. In the opinion of management, all significant
adjustments necessary to reflect the effects of the Merger have been made.
The selected pro forma financial information should be read in conjunction
with, and is qualified in its entirety by, the respective historical audited
financial statements and notes thereto of EQR and Wellsford incorporated by
reference into this Joint Proxy Statement/Prospectus/Information Statement and
the unaudited pro forma financial statements and notes thereto included
elsewhere in the Joint Proxy Statement/Prospectus/Information Statement.
The selected unaudited pro forma operating and balance sheet data are
presented for comparative purposes only and are not necessarily indicative of
what the actual combined results of EQR and Wellsford would have been for the
period and dates presented. Nor does such data purport to represent the
results of future periods.
72
<PAGE>
SURVIVING TRUST
OPERATING DATA:
<TABLE>
<CAPTION>
PRO FORMA YEAR ENDED
DECEMBER 31, 1996
----------------------
(AMOUNT IN THOUSANDS
EXCEPT PER SHARE DATA)
<S> <C>
REVENUES:
Rental income........................................... $578,820
Fee and asset management................................ 6,749
Interest income-investment in mortgage notes............ 12,819
Interest and other income............................... 11,061
--------
Total revenues...................................... 609,449
--------
EXPENSES:
Property and maintenance................................ 167,526
Real estate taxes and insurance......................... 54,010
Property management..................................... 21,506
Fee and asset management................................ 3,837
Depreciation............................................ 124,211
Interest:
Expense incurred...................................... 103,538
Amortization of deferred financing costs.............. 4,242
General and administrative............................ 10,353
--------
Total Expenses...................................... 489,223
--------
Income before gain on disposition of properties and
(loss) on joint venture communities.................... 120,226
Gain on disposition of properties....................... 22,336
(Loss) on joint venture communities..................... (58)
--------
Income before extraordinary item and allocation to
Minority Interests..................................... 142,504
Extraordinary Item:
Write-off of unamortized cost on refinanced debt........ (3,512)
--------
Income before allocation to Minority Interests.......... 138,992
Income allocated to Minority Interests.................. (15,706)
--------
Net income.............................................. 123,286
Preferred distributions................................. 41,563
--------
Net income available for Common Shares.................. $ 81,723
========
Net income per weighted average Common Share
outstanding............................................ $ 1.53
========
Weighted average Common Shares outstanding.............. 53,317
========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, 1996
-----------------
<S> <C>
BALANCE SHEET DATA:
(at end of period)
Real estate, after accumulated depreciation................... $3,708,310
==========
Total assets.................................................. $3,968,482
==========
Total debt.................................................... $1,576,869
==========
Minority Interests............................................ $ 190,793
==========
Shareholders' Equity.......................................... $2,048,133
==========
</TABLE>
73
<PAGE>
EQUITY RESIDENTIAL PROPERTIES TRUST
SELECTED HISTORICAL AND COMBINED FINANCIAL DATA
The following tables set forth selected historical and combined financial
data for EQR. The selected historical combined financial data for each of the
years ended December 31, 1992, 1993, 1994, 1995 and 1996 are derived from the
audited financial statements of EQR as reported in its Annual Reports on Form
10-K. The selected historical financial data should be read in conjunction
with, and is qualified in its entirety by, the historical and combined
financial statements and notes thereto of EQR incorporated by reference into
this Joint Proxy Statement/Prospectus/Information Statement.
74
<PAGE>
EQUITY RESIDENTIAL PROPERTIES TRUST
CONSOLIDATED AND COMBINED HISTORICAL FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
REVENUES
Rental income......... $ 454,412 $ 373,919 $ 220,727 $104,388 $ 86,597
Fee and asset
management........... 6,749 7,030 4,739 4,651 4,215
Interest income-
investment in
mortgage notes....... 12,819 4,862 -- -- --
Interest and other
income............... 4,405 4,573 5,568 3,031 2,161
---------- ---------- ---------- -------- ---------
Total revenues.... 478,385 390,384 231,034 112,070 92,973
---------- ---------- ---------- -------- ---------
EXPENSES
Property and
maintenance.......... 127,172 112,186 66,534 35,324 30,680
Real estate taxes and
insurance............ 44,128 37,002 23,028 11,403 10,274
Property management... 17,512 15,213 10,249 4,938 2,912
Property management--
non-recurring........ -- -- 879 -- --
Fee and asset
management........... 3,837 3,887 2,056 2,242 2,403
Depreciation.......... 93,253 72,410 37,273 15,384 13,442
Interest:
Expense incurred.... 81,351 78,375 37,044 26,042 31,926
Amortization of
deferred financing
costs.............. 4,242 3,444 1,930 3,322 2,702
Refinancing costs..... -- -- -- 3,284 --
General and
administrative....... 9,857 8,129 6,053 1,994 1,915
---------- ---------- ---------- -------- ---------
Total expenses.... 381,352 330,646 185,046 103,933 96,254
---------- ---------- ---------- -------- ---------
Income (loss) before
gain on disposition of
properties,
extraordinary items and
allocation to Minority
Interests.............. 97,033 59,738 45,988 8,137 (3,281)
Gain on disposition of
properties............. 22,402 21,617 -- -- --
---------- ---------- ---------- -------- ---------
Income (loss) before
extraordinary items and
allocation to Minority
Interests.............. 119,435 81,355 45,988 8,137 (3,281)
Extraordinary Items:
Write-off of unamortized
costs on refinanced
debt................... (3,512) -- -- -- --
Gain on early
extinguishment of debt. -- 2,000 -- -- --
Gain on discharge of
indebtedness........... -- -- -- 1,792 18,203
---------- ---------- ---------- -------- ---------
Income before allocation
to Minority Interests.. 115,923 83,355 45,988 9,929 14,922
Income allocated to
Minority Interests..... (14,299) (15,636) (11,570) (3,834) --
---------- ---------- ---------- -------- ---------
Net income.............. 101,624 67,719 34,418 6,095 14,922
Preferred distributions. (29,015) (10,109) -- -- --
---------- ---------- ---------- -------- ---------
Net income available for
Common Shares.......... $ 72,609 $ 57,610 $ 34,418 $ 6,095 $ 14,922
========== ========== ========== ======== =========
Net income per weighted
average Common Share
outstanding............ $ 1.70 $ 1.68 $ 1.34 $ .42 --
Weighted average Common
Shares outstanding..... 42,586 34,358 25,621 14,601 --
BALANCE SHEET DATA (AT
END OF PERIOD):
Real estate, after
accumulated
depreciation......... $2,983,510 $2,186,636 $1,963,476 $634,577 $ 358,212
Real estate, after
accumulated
depreciation......... $2,681,998 $1,969,453 $1,770,735 $478,210 $ 218,825
Total assets.......... $2,986,127 $2,141,260 $1,847,685 $535,914 $ 238,878
Total debt............ $1,254,274 $1,002,219 $ 994,746 $278,642 $ 343,282
Minority Interests.... $ 150,637 $ 168,963 $ 177,438 $ 83,159 $ --
Shareholders' Equity
(Net Deficit)........ $1,458,830 $ 884,517 $ 609,936 $146,485 $(122,094)
</TABLE>
75
<PAGE>
WELLSFORD RESIDENTIAL PROPERTY TRUST
SELECTED HISTORICAL FINANCIAL DATA
The following tables set forth selected historical financial data for
Wellsford. The selected historical financial data for each of the years ended
December 31, 1992, 1993, 1994, 1995 and 1996 are derived from the audited
financial statements of Wellsford as reported in its Annual Reports on Form
10-K. The selected historical financial data should be read in conjunction
with, and is qualified in its entirety by, the historical financial statements
and notes thereto of Wellsford incorporated by reference into this Joint Proxy
Statement/Prospectus/Information Statement. Certain reclassifications have
been made to Wellsford's historical financial data to conform to EQR's
presentation.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
HISTORICAL (000S EXCEPT PER SHARE DATA)
--------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues................... $ 131,821 $ 131,232 $ 82,794 $ 42,007 $ 26,229
Expenses................... (109,035) (113,712) (73,299) (34,816) (26,991)
Gain (loss) on sale of
investment communities.... (66) (819) -- 882 --
Loss on joint venture
communities............... (58) (279) -- -- --
--------- --------- -------- -------- --------
Income (loss) before
extraordinary item........ $ 22,662 $ 16,422 $ 9,495 $ 8,073 $ (762)
========= ========= ======== ======== ========
Net income (loss).......... $ 22,662 $ 10,869 $ 9,495 $ 8,073 $ (762)
Preferred dividends........ (12,548) (8,973) (7,000) (972) --
--------- --------- -------- -------- --------
Net income (loss) available
for common shareholders... $ 10,114 $ 1,896 $ 2,495 $ 7,101 $ (762)
========= ========= ======== ======== ========
Net income (loss) per
common share.............. $ 0.59 $ 0.11 $ 0.25 $ 0.91 $ (0.34)
========= ========= ======== ======== ========
Weighted average number of
common shares outstanding. 17,057 16,938 10,070 7,813 2,273
========= ========= ======== ======== ========
Real Estate assets before
accumulated depreciation.. $ 795,580 $ 736,399 $747,519 $301,389 $156,568
Real estate assets after
accumulated depreciation.. 711,614 677,908 712,742 282,224 143,787
Total Assets............... 756,289 729,638 745,754 322,400 165,963
Mortgages Payable.......... 82,731 77,137 208,858 24,203 17,155
Convertible note payable... -- -- -- 46,070 55,358
Unsecured credit facility.. 18,075 -- 140,000 -- --
Senior unsecured notes..... 248,496 223,307 -- -- --
Shareholders' equity....... 376,686 398,359 371,655 239,775 89,986
Cash dividends declared per
Series A preferred share.. $ 1.75 $ 1.75 $ 1.75 $ 0.24 $ --
========= ========= ======== ======== ========
Cash dividends declared per
Series B preferred share.. $ 2.41 $ 0.86 $ -- $ -- $ --
========= ========= ======== ======== ========
Cash dividends declared per
common share.............. $ 1.94 $ 1.92 $ 1.80 $ 1.68 $ 0.16
========= ========= ======== ======== ========
</TABLE>
76
<PAGE>
SURVIVING TRUST
BASIS OF PRESENTATION TO UNAUDITED PRO FORMA
COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1996
The Unaudited Pro Forma Combined Balance Sheet gives effect to the proposed
Merger of Equity Residential Properties Trust ("EQR") and Wellsford
Residential Property Trust ("Wellsford") as if the Merger had occurred on
December 31, 1996. The Unaudited Pro Forma Combined Balance Sheet gives effect
to the Merger under the purchase method of accounting in accordance with
Accounting Principles Board Opinion No. 16. In the opinion of management, all
significant adjustments necessary to reflect the effects of the Merger have
been made.
The Unaudited Pro Forma Combined Balance Sheet is presented for comparative
purposes only and is not necessarily indicative of what the actual combined
financial position of EQR and Wellsford would have been at December 31, 1996,
nor does it purport to represent the future combined financial position of EQR
and Wellsford. This Unaudited Pro Forma Combined Balance Sheet should be read
in conjunction with, and is qualified in its entirety by, the respective
historical financial statements and notes thereto of EQR and Wellsford
incorporated by reference into the Joint Proxy
Statement/Prospectus/Information Statement.
77
<PAGE>
SURVIVING TRUST
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA SURVIVING TRUST
EQR WRP MERGER PRO FORMA
HISTORICAL HISTORICAL(A) ADJUSTMENTS(B) COMBINED
---------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
ASSETS
Rental property, net.... $2,681,998 $689,403 $336,909 (C) $3,708,310
Construction in
progress............... -- 22,211 (21,306)(D) 905
Investment in mortgage
notes, net............. 86,596 17,800 (17,800)(E) 86,596
Cash and cash
equivalents............ 147,271 10,811 (67,112)(F) 90,970
Rents receivables....... 1,450 -- -- 1,450
Deposits-restricted..... 20,637 7,667 (5,520)(G) 22,784
Escrows deposits-
mortgage............... 15,434 -- -- 15,434
Deferred financing
costs, net............. 14,555 5,401 (5,401)(H) 14,555
Other assets............ 18,186 2,996 6,296 (I) 27,478
---------- -------- -------- ----------
Total assets.......... $2,986,127 $756,289 $226,066 $3,968,482
========== ======== ======== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable.. $ 755,434 $ 82,731 $ (8,632)(J) $ 829,533
Line of credit.......... -- 18,075 (18,075)(K) --
Notes, net.............. 498,840 248,496 -- 747,336
Accounts payable and
accrued expenses....... 33,117 15,617 -- 48,734
Accrued interest
payable................ 12,737 -- -- 12,737
Due to affiliates....... 628 -- -- 628
Rents received in
advance and other
liabilities............ 15,838 -- -- 15,838
Security deposits....... 14,128 3,250 -- 17,378
Distributions payable... 45,938 11,434 -- 57,372
---------- -------- -------- ----------
Total liabilities..... 1,376,660 379,603 (26,707) 1,729,556
---------- -------- -------- ----------
Commitments and
contingencies (L)
Minority Interests...... 150,637 -- 40,156 (M) 190,793 (M)
---------- -------- -------- ----------
Shareholders' equity:
Common shares......... 512 171 (64)(N) 619
Preferred shares...... 393,000 63 (63)(O) 393,000
Series D Convertible
Preferred Shares..... -- -- 99,995 (O) 99,995
Series E Preferred
Shares............... -- -- 57,500 (O) 57,500
Employee notes........ (5,255) (6,553) 6,553 (P) (5,255)
Paid in capital....... 1,146,989 461,290 (29,589)(Q) 1,578,690
Distributions in
excess of accumulated
earnings............. (76,416) (78,285) 78,285 (R) (76,416)
---------- -------- -------- ----------
Total Shareholders'
Equity............. 1,458,830 376,686 212,617 2,048,133
---------- -------- -------- ----------
Total liabilities
and shareholders'
equity............. $2,986,127 $756,289 $226,066 $3,968,482
========== ======== ======== ==========
</TABLE>
78
<PAGE>
SURVIVING TRUST
BASIS OF PRESENTATION TO UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
The Unaudited Pro Forma Combined Statement of Operations for the year ended
December 31, 1996 is presented as if the Merger had occurred on January 1,
1996. The Unaudited Pro Forma Combined Statement of Operations gives effect to
the Merger under the purchase method of accounting in accordance with
Accounting Principles Board Opinion No. 16, and the combined entity qualifying
as a REIT, distributing at least 95% of its taxable income, and therefore,
incurring no federal income tax liability for the year. In the opinion of
management, all significant adjustments necessary to reflect the effects of
these transactions have been made.
The Unaudited Pro Forma Combined Statement of Operations is presented for
comparative purposes only and is not necessarily indicative of what the actual
combined results of EQR and Wellsford would have been for the year ended
December 31, 1996, nor does it purport to be indicative of the results of
operations in future periods. The Unaudited Pro Forma Combined Statement of
Operations should be read in conjunction with, and are qualified in their
entirety by, the respective historical financial statements and notes thereto
of EQR and Wellsford incorporated by reference into this Joint Proxy
Statement/Prospectus/Information Statement.
79
<PAGE>
SURVIVING TRUST
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SURVIVING
TRUST
EQR WELLSFORD MERGER PRO FORMA
HISTORICAL HISTORICAL(S) ADJUSTMENTS COMBINED
---------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES
Rental Income................ $454,412 $124,408 $ (757)(T) $578,820
Fee and asset management..... 6,749 -- 6,749
Interest income-investment in
mortgage notes.............. 12,819 757 12,819
Interest and other income.... 4,405 6,656 11,061
-------- -------- ------- --------
Total revenues............. 478,385 131,821 (757) 609,449
-------- -------- ------- --------
EXPENSES
Property and maintenance..... 127,172 40,354 167,526
Real estate taxes and
insurance................... 44,128 9,882 54,010
Property management.......... 17,512 4,770 (776)(U) 21,506
Fee and asset management..... 3,837 -- 3,837
Depreciation................. 93,253 25,179 5,779 (V) 124,211
Interest:
Expense incurred........... 81,351 23,599 (1,412)(W) 103,538
Amortization of deferred
financing costs........... 4,242 1,386 (1,386)(X) 4,242
General and administrative... 9,857 3,865 (3,369)(Y) 10,353
-------- -------- ------- --------
Total expenses............. 381,352 109,035 (1,164) 489,223
-------- -------- ------- --------
Income before gain on
disposition of properties,
(loss) on joint venture
communities, extraordinary
items and allocation to
Minority Interests.......... 97,033 22,786 407 120,226
Gain (loss) on disposition
of properties............. 22,402 (66) -- 22,336
(Loss) on joint venture
communities............... -- (58) -- (58)
-------- -------- ------- --------
Income before extraordinary
items....................... 119,435 22,662 407 142,504
Extraordinary item:
Write-off of unamortized
costs on refinanced debt.. (3,512) -- -- (3,512)
-------- -------- ------- --------
Income before allocation to
Minority Interests.......... 115,923 22,662 407 138,992
(Income) allocated to
Minority Interests........ (14,299) -- (1,407)(Z) (15,706)
-------- -------- ------- --------
Net income................... 101,624 22,662 (1,000) 123,286
Preferred distributions...... (29,015) (12,548) (41,563)
-------- -------- ------- --------
Net income available to
common shares............... $ 72,609 $ 10,114 $(1,000) $ 81,723
======== ======== ======= ========
Net income per weighted
average Common Shares
outstanding................. $ 1.70 $ 0.59 $ 0.16 $ 1.53
======== ======== ======= ========
Weighted average Common
Shares Outstanding.......... 42,586 17,057 (6,326)(AA) 53,317
======== ======== ======= ========
</TABLE>
80
<PAGE>
SURVIVING TRUST
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(A) Certain reclassifications have been made to Wellsford's historical balance
sheet to conform to EQR's balance sheet presentation.
(B) Represents adjustments to record the Merger in accordance with the
purchase method of accounting, based upon the assumed purchase price of
$1,032,226 assuming a market value of $44.00 per share of EQR's common
shares, as follows:
<TABLE>
<S> <C>
Issuance of 10,731 common shares of beneficial interest of
EQR, based on the .625 exchange rate, in exchange for 17,169
common shares of Wellsford, which includes 67 common shares
of Wellsford issued immediately prior to the merger.......... $ 472,164
Issuance of EQR Series D Preferred Shares of Beneficial
Interest..................................................... 99,995
Issuance of EQR Series E Preferred Shares of Beneficial
Interest..................................................... 57,500
Assumption of Wellsford's liabilities, net of spin-off to WRP
Newco of $6,786.............................................. 372,817
Adjustment to increase the assumed Wellsford debt to its fair
value (see Note J)........................................... 6,123
Merger costs (see calculation below).......................... 23,627
----------
$1,032,226
==========
</TABLE>
The value of the issuance of the EQR Series D Preferred Shares of Beneficial
Interest and the EQR Series E Preferred Shares of Beneficial Interest is based
upon Wellsford's outstanding shares of 3,999.8 Series A Convertible Preferred
Shares with a liquidation preference at $25 per share and Wellsford's
outstanding shares of 2,300 Series B Preferred Shares with a liquidation
preference at $25 per share, respectively.
The following is a calculation of the estimated fees and other expenses
related to the Merger:
<TABLE>
<S> <C>
Employee termination costs......................................... $10,063
Buyout of stock options............................................ 4,227
Advisory fees...................................................... 2,350
Legal and accounting fees.......................................... 2,225
Consulting contracts............................................... 2,000
Other, including printing, filing, transfer and spin-off costs..... 2,762
-------
Total............................................................ $23,627
=======
</TABLE>
(C) Represents the estimated increase in Wellsford's rental property, net
based upon EQR's purchase price and the adjustment to eliminate the basis
of Wellsford's net assets acquired:
<TABLE>
<S> <C>
Purchase Price (see Note B).................................... $1,032,226
Less: Historical basis of Wellsford's net assets acquired
Rental property, net........................................... 689,403
Construction in progress, net of spin-off to WRP Newco of
$21,306....................................................... 905
Restricted deposits, net of spin-off to WRP Newco of $5,520.... 2,147
Other assets, net of spin-off to WRP Newco of $134............. 2,862
----------
Step-up to record fair value of Wellsford rental property...... $ 336,909
==========
</TABLE>
(D) Decrease reflects the spin-off of costs related to the Palomino Park
project to WRP Newco.
(E) Decrease results from the spin-off of the Sonterra mortgage notes
receivable to WRP Newco.
(F) Decrease to Cash and Cash Equivalents reflects the following:
<TABLE>
<S> <C>
Spin-off of WRP Newco, including an investment of $2,930 for EQR's
20% interest in the Palomino Park project (see Note I)........... $21,710
The expected payment for Merger (see Note B) and registration
costs (see Note Q)............................................... 23,827
Repayment of Wellsford's line of credit........................... 18,075
EQR's purchase of WRP Newco common stock.......................... 3,500
-------
$67,112
=======
</TABLE>
81
<PAGE>
SURVIVING TRUST
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(G) Decrease results from the spin-off of restricted cash to WRP Newco for the
Palomino Park project.
(H) Decrease due to elimination of Wellsford deferred loan costs in connection
with the Merger.
(I) Increase to Other Assets reflects the following:
<TABLE>
<S> <C>
EQR purchase of WRP Newco common stock............................ $3,500
EQR's 20% investment in the Palomino Park project................. 2,930
Spin-off to WRP Newco of interest receivable related to the
Sonterra mortgage notes receivable............................... (134)
------
$6,296
======
</TABLE>
(J) Decrease to Mortgage Notes Payable reflects the following:
<TABLE>
<S> <C>
Spin-off of bonds on the Palomino Park project to WRP Newco...... $14,755
Premium required to adjust Wellsford's debt to its estimated fair
value........................................................... (6,123)
-------
$ 8,632
=======
</TABLE>
(K) Reflects the repayment of Wellsford's line of credit from EQR's cash
balances. It is assumed that additional Wellsford borrowings of $7,969
that would be incurred in connection with the spin-off of WRP Newco are
repaid from EQR's cash balances.
(L) ERP Operating Partnership has committed to acquire up to 1,000 shares of
WRP Newco Series A 8% Convertible Redeemable Preferred Stock; has provided
stand-by obligations with respect to a $36,800 agreement with respect to
the construction financing of Phase I of Palomino Park and $30,000
pursuant to an agreement expected to be entered into with respect to the
construction financing for Phase II of Palomino Park; and a $14,800 credit
enhancement with respect to bonds issued to finance certain public
improvements at Palomino Park.
(M) The pro forma allocation to the Minority Interests is based upon the
percentage owned by such Minority Interests as follows:
<TABLE>
<S> <C>
Total Shareholders' Equity and Minority Interests............. $2,238,926
Less: Preferred Shares, Series D Convertible and Series E
Preferred shares............................................. (550,495)
----------
1,688,431
Minority Interests percentage ownership in ERP Operating
Partnership (see Note Q)..................................... 11.3%
----------
Pro Forma Combined Minority Interests ownership in ERP
Operating Partnerships....................................... 190,793
EQR historical Minority Interests ownership in ERP Operating
Partnership.................................................. 150,637
----------
Adjustment to Minority Interests ownership in ERP Operating
Partnership.................................................. $ 40,156
==========
</TABLE>
(N) Decrease results from elimination of Wellsford common shares at $.01 par
value ($171) net of the issuance of EQR common shares at $.01 par value
$107 (see Note C).
(O) Elimination of $63 of Wellsford Preferred Shares and the issuance of
$99,995 of EQR Series D Convertible Preferred Shares and of $57,500 of EQR
Series E Preferred Shares (see Note C).
(P) Reflects the elimination of restricted stock and the forgiveness of all of
Wellsford's employee notes as a result of the Merger.
82
<PAGE>
SURVIVING TRUST
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(Q) Decrease to paid in capital to reflect the following:
<TABLE>
<S> <C> <C>
Issuance of
10,731 EQR
common shares
at $44.00 per
share......... $ 472,164
Par value of
common shares
issued........ (107)
Registration
costs incurred
in connection
with the
Merger........ (200)
Wellsford's
historical
shareholders'
equity........ (461,290)
Adjustment to
Minority
Interests
ownership in
ERP Operating
Partnership
(see Note M).. (40,156)
---------
$ (29,589)
=========
</TABLE>
The 11.3% Minority Interests ownership in EQR, is calculated as follows:
<TABLE>
<CAPTION>
SHARES UNITS
------ ------
<S> <C> <C>
Wellsford's historical Shares outstanding.................. 17,169 --
====== ======
EQR's Shares/Units to be issued based on the .625 Merger
exchange ratio............................................ 10,731 10,731
EQR's historical Shares/Units outstanding.................. 51,155 59,013
------ ------
EQR's proforma Shares/Units outstanding.................... 61,886 69,744
====== ======
EQR ownership percentage of ERP Operating Partnership...... 88.7%
======
Minority Interests ownership percentage of ERP Operating
Partnership............................................... 11.3%
======
</TABLE>
(R) Reflects the elimination of Wellsford's distribution in excess of
accumulated earnings to paid in capital, as a result of the Merger.
83
<PAGE>
SURVIVING TRUST
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(S) Certain reclassifications have been made to Wellsford's Historical
Statement of Operations to conform to EQR's Statement of Operations
presentation.
(T) Decrease results from the loss of interest income related to the spin-off
of the $17,800 Sonterra mortgage notes receivable to WRP Newco.
(U) Decrease results from operating efficiencies expected to occur as a
result of the Merger.
(V) Represents the net increase in depreciation of real estate owned as a
result of recording the Wellsford real estate assets at fair value versus
historical cost. Depreciation is computed on a straight-line basis over
the estimated useful lives of the related assets which have a useful life
of approximately 30 years.
The calculation of the fair value of depreciable real estate assets at
December 31, 1996 is as follows:
<TABLE>
<S> <C>
Historical basis of Wellsford's rental property.............. $ 689,403
Plus: Step up to Wellsford's rental property, net (see Note
C).......................................................... 336,909
----------
Pro forma basis of Wellsford's rental property at fair value. 1,026,312
Less: Fair value allocated to land........................... (102,631)
----------
Pro forma basis of Wellsford's depreciable rental property at
fair value.................................................. $ 923,681
==========
</TABLE>
Calculation of depreciation of rental property for the year ended December 31,
1996 is as follows:
<TABLE>
<S> <C>
Depreciation expense based upon an estimated useful life of
approximately 30 years....................................... $ 30,789
Less: historic Wellsford depreciation of rental property...... (25,010)
--------
Pro forma adjustment.......................................... $ 5,779
========
</TABLE>
(W) Decrease results from the amortization of the premium required to record
Wellsford's debt at it's estimated fair value.
(X) Decrease results from the elimination of amortization of Wellsford's
deferred financing costs, which costs would be eliminated in connection
with the Merger.
(Y) Decrease results from identified historic costs of certain items which
are anticipated to be eliminated or reduced as a result of the Merger as
follows:
<TABLE>
<S> <C>
Duplication of public company expenses............................ $ 626
Net reduction in salary, benefits and occupancy................... 1,732
Other............................................................. 1,011
------
Total........................................................... $3,369
======
</TABLE>
(Z) A portion of income was allocated to Minority Interests representing
interests in ERP Operating Partnership not owned by EQR. The pro forma
allocation to Minority Interests (represented by OP Units) is based upon
the percentage estimated to be owned by such Minority Interests as a
result of the pro forma transactions.
(AA) Decrease of Weighted Average Common Shares Outstanding based on the
conversion of Wellsford common shares to EQR common shares at a
conversion ratio of .625 Wellsford shares per EQR share and a par value
of $.01.
84
<PAGE>
POLICIES OF THE SURVIVING TRUST WITH RESPECT TO CERTAIN ACTIVITIES
The following section sets forth the policies expected to be implemented by
the Surviving Trust upon the effectiveness of the Merger with respect to
certain matters. These policies may be amended or revised from time to time at
the discretion of the Board of Trustees of the Surviving Trust without a vote
of the shareholders of the Surviving Trust.
BUSINESS OBJECTIVES AND OPERATING STRATEGIES
The Surviving Trust will seek to maximize both current income and long-term
growth in income. The Surviving Trust will focus on acquiring multifamily
properties that have strong cash flow potential with the intent to hold such
properties for long-term investment and capital appreciation.
The Surviving Trust's primary business objectives are to increase
distributions on a per share of Survivor Common basis, to increase the value
of its properties and to increase shareholders' value.
The Surviving Trust's strategies for accomplishing these objectives will be:
.maintaining and increasing property occupancy while increasing rental
rates;
. controlling expenses, providing regular preventive maintenance, making
periodic renovations and enhancing amenities;
.maintaining a Debt to Total Market Capitalization Ratio of less than 50%;
and
. pursuing acquisitions that: (i) are available at prices below estimated
replacement costs; (ii) have potential for rental rate and/or occupancy
increases; (iii) have attractive locations in their respective markets;
and (iv) provide anticipated total returns that will increase the
Surviving Trust's distributions per share of Survivor Common and the
Surviving Trust's overall market value.
The Surviving Trust will be committed to tenant satisfaction by striving to
anticipate industry trends and implementing strategies and policies consistent
with providing quality tenant services. In addition, the Surviving Trust will
continuously survey rental rates of competing properties and conduct
satisfaction surveys of residents to determine the factors they consider most
important in choosing a particular apartment unit.
ACQUISITION STRATEGIES
The Surviving Trust anticipates that future property acquisitions will be
located in the continental United States. Management will use market
information to evaluate acquisition opportunities. The Surviving Trust's
market data base will allow it to review the primary economic indicators of
the markets where the Surviving Trust currently manages properties and where
it expects to expand its operations. Acquisitions may be financed from various
sources of capital, which may include undistributed funds from operations,
issuance of additional equity securities, sales of properties and
collateralized and uncollateralized borrowings. In addition, the Surviving
Trust may acquire additional multifamily properties in transactions that
include the issuance of OP Units as consideration for the acquired properties.
Such transactions may, in certain circumstances, partially defer the sellers'
tax consequences.
When evaluating potential acquisitions, the Surviving Trust will consider:
(i) the geographic area and type of community; (ii) the location, construction
quality, condition and design of the property; (iii) the current and projected
cash flow of the property and the ability to increase cash flow; (iv) the
potential for capital appreciation of the property, (v) the terms of resident
leases, including the potential for rent increases; (vi) the potential for
economic growth and the tax and regulatory environment of the community in
which the property is located; (vii) the occupancy and demand by residents for
properties of a similar type in the vicinity (the overall market and
submarket); (viii) the prospects for liquidity through sale, financing or
refinancing of the property; and (ix) competition from existing multifamily
properties and the potential for the construction of new multifamily
properties in the area. The Surviving Trust expects to purchase multifamily
properties with physical and market characteristics similar to the properties.
DISPOSITION STRATEGIES
Management will use market information to evaluate dispositions. The
Surviving Trust intends to dispose of its properties in cities or markets
where the level of new construction is increasing or the economy is expected
to decline substantially. The Surviving Trust will also dispose of properties
in markets where it does not intend to establish long-term concentrations. The
Surviving Trust will reinvest the proceeds received from property dispositions
to fund property acquisitions. In addition, when feasible the Surviving Trust
will structure these transactions as tax deferred exchanges.
85
<PAGE>
INVESTMENT POLICIES
Investments in Real Estate or Interests in Real Estate. The Surviving
Trust's investment objectives will be to increase cash flow and the value of
the properties, and to acquire established income-producing multifamily
properties with cash flow growth potential. Additionally, where prudent and
possible, the Surviving Trust will seek to upgrade its existing properties and
any newly acquired multifamily properties. The Surviving Trust's business is
focused on multifamily properties, although such properties may include retail
and recreational facilities. The Surviving Trust's policy will be to acquire
assets primarily for current income generation and long-term value
appreciation; however, where appropriate, the Surviving Trust will sell
certain of its properties.
The Surviving Trust expects to pursue its investment objectives through the
direct and indirect ownership of properties and the ownership of interests in
other entities. The Surviving Trust will focus on properties in those markets
where the Surviving Trust currently has operations and in new markets targeted
by management. Future investments, including the activities described below,
will not be limited to any geographic area or to a specified percentage of the
Surviving Trust's assets. The Surviving Trust also may participate with other
entities in property ownership through joint ventures or other types of co-
ownership. Equity investments may be subject to existing mortgage financing
and other indebtedness or such financing or indebtedness may be incurred in
connection with acquiring investments. Any such financing or indebtedness will
have priority over the Surviving Trust's equity interest in such property.
Investments in Real Estate Mortgages. While the Surviving Trust will
emphasize equity real estate investments in multifamily properties, it may, in
its discretion, invest in mortgages and other interests related to multifamily
properties. The Surviving Trust does not intend to invest to a significant
extent in mortgages or deeds of trust, but may acquire mortgages as a strategy
for acquiring a property, subject to the investment restrictions applicable to
REITs. The mortgages in which the Surviving Trust may invest may be either
first mortgages or junior mortgages, and may or may not be insured by a
governmental agency. The Surviving Trust may also invest in mortgage-related
securities. Furthermore, the Surviving Trust may seek to issue securities
representing interest in such mortgage-related securities as a method of
raising additional funds.
Securities of or Interests in Persons Primarily Engaged in Real Estate
Activities and Other Issuers. Subject to the gross income and asset tests for
REIT qualification, the Surviving Trust also may invest in securities of
entities engaged in real estate activities or securities of other issuers,
including for the purpose of exercising control over such entities. The
Surviving Trust may acquire all or substantially all of the securities or
assets of other REITs or similar entities where such investments would be
consistent with the Surviving Trust's investment policies. In any event, the
Surviving Trust does not intend that its investments in securities will
require it to register as an "investment company" under the Investment
Surviving Trust Act of 1940, and the Surviving Trust would intend to divest
securities before any such registration would be required.
FINANCING POLICIES
The Surviving Trust intends to maintain a Debt to Total Market
Capitalization Ratio of 50% or less. The Surviving Trust, however, may from
time to time re-evaluate this policy and decrease or increase such ratio in
light of then current economic conditions, relative costs to the Surviving
Trust of debt and equity capital, market values of the properties, growth and
acquisition opportunities and other factors. There will be no limit on the
Surviving Trust's Debt to Total Market Capitalization Ratio imposed by the
Surviving Trust's Declaration of Trust or Bylaws. To the extent that the Board
of Trustees of the Surviving Trust determines to obtain additional capital,
the Surviving Trust may issue debt or equity securities, or cause ERP
Operating Partnership to issue additional OP Units, or retain earnings
(subject to provisions in the Code requiring distributions of income to
maintain REIT status), or a combination of these methods. As long as ERP
Operating Partnership is in existence, the proceeds of all equity capital
raised by the Surviving Trust will be contributed to ERP Operating Partnership
in exchange for additional interests in ERP Operating Partnership, which will
dilute the ownership interest of holders of OP Units. It is the Surviving
Trust's policy that it shall not incur indebtedness other than short-term
trade, employee compensation, dividends payable or similar indebtedness that
will be paid in the ordinary course of business, and that indebtedness shall
instead be incurred by the ERP Operating Partnership to the extent necessary
to fund the business activities conducted by the ERP Operating Partnership.
The Surviving Trust owns several properties that are subject to restrictive
covenants or deed restrictions relating to current or previous tax-exempt bond
financings and owns the bonds collateralized by several additional properties.
The Surviving Trust has retained an independent outside consultant to monitor
compliance with the restrictive covenants and deed restrictions that affect
these properties. The bond compliance requirements may have the effect of
limiting the Surviving Trust's income from these properties if the Surviving
Trust is required to lower its rental rates to attract low or moderate income
tenants, or eligible/qualified tenants.
86
<PAGE>
To the extent that the Board of Trustees determines to obtain debt financing
the Surviving Trust intends to do so generally through mortgages on its
properties and through lines of credit; however, the Surviving Trust may also
issue additional debt securities in the future. Such indebtedness may be
recourse, non-recourse or cross-collateralized and may contain cross-default
provisions. The Surviving Trust will not have a policy limiting the number or
amount of mortgages that may be placed on any particular property, but
mortgage financing instruments usually limit additional indebtedness on such
properties. In the future, the Surviving Trust may seek to extend, expand,
reduce or renew its lines of credit, or obtain new credit facilities or lines
of credit, subject to its general policy on debt capitalization, for the
purpose of making acquisitions or capital improvements or providing working
capital to the Surviving Trust or meeting the taxable income distribution
requirements for REITs under the Code if the Surviving Trust has taxable
income without receipt of cash sufficient to enable the Surviving Trust to
meet such distribution requirements.
LENDING POLICIES
Although it is not presently contemplated, the Surviving Trust may consider
offering purchase money financing in connection with the sale of multifamily
properties where the provision of such financing will increase the value
received by the Surviving Trust for the property sold.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
Although it is not presently contemplated, the Surviving Trust may make
investments other than as previously described. All investments will be
related to the multifamily residential business. The Surviving Trust will have
authority to offer Survivor Common or other equity or debt securities in
exchange for property or other REITS and to repurchase or otherwise reacquire
Survivor Common or any other securities and may engage in such activities in
the future. Similarly, the Surviving Trust may offer additional OP Units or
other equity interests in ERP Operating Partnership that are exchangeable into
Survivor Common in exchange for property. The Surviving Trust may also make
loans to joint ventures in which it may participate in the future. The
Surviving Trust will not engage in trading, underwriting or the agency
distribution or sale of securities of other issuers. At all times, the
Surviving Trust intends to make investments in such a manner as to be
consistent with the requirements of the Code to qualify as a REIT unless,
because of circumstances or changes in the Code (or the regulations
promulgated thereunder), the Board of Trustees determines that it is no longer
in the best interests of the Surviving Trust to continue to have the Surviving
Trust qualify as a REIT. The Surviving Trust's policies with respect to such
activities may be reviewed and modified from time to time by the Surviving
Trust's trustees without notice to or the vote of the shareholders.
87
<PAGE>
MANAGEMENT AND OPERATION OF THE SURVIVING TRUST AFTER THE MERGER
TRUSTEES AND EXECUTIVE OFFICERS
The following table sets forth as of the consummation of the Merger the
names, positions and ages of the executive officers and trustees of the
Surviving Trust.
<TABLE>
<CAPTION>
NAME POSITION AGE
---- -------- ---
<C> <S> <C>
Chairman of the Board of Trustees (term expires
Samuel Zell............. in 1999) 55
President, Chief Executive Officer and Trustee
Douglas Crocker II...... (term expires in 1998) 56
Executive Vice President and Chief Financial
David J. Neithercut..... Officer 41
Gregory H. Smith........ Executive Vice President--Asset Management 46
Executive Vice President, Chief Operating
Gerald A. Spector....... Officer and Trustee (term expires in 1998) 50
Bruce C. Strohm......... Executive Vice President, General Counsel and
Secretary 42
Frederick C. Tuomi...... Executive Vice President--Property Management 42
Alan W. George.......... Executive Vice President--Acquisitions 39
Michael J. McHugh....... Senior Vice President, Chief Accounting Officer
and Treasurer 41
John W. Alexander....... Trustee (term expires in 1999) 50
Henry H. Goldberg....... Trustee (term expires in 1999) 58
Errol R. Halperin....... Trustee (term expires in 1999) 56
James D. Harper, Jr..... Trustee (term expires in 1998) 63
Sheli Z. Rosenberg...... Trustee (term expires in 1998) 55
Barry S. Sternlicht..... Trustee (term expires in 1997) 36
B. Joseph White......... Trustee (term expires in 1997) 49
Jeffrey H. Lynford...... Trustee (term expires in 1997)* 49
Edward Lowenthal........ Trustee (term expires in 1997)* 52
</TABLE>
- -------
* After the Effective Time, each of Messrs. Lynford and Lowenthal will be
appointed to the Board of Trustees of the Surviving Trust for a term ending
at the annual meeting of the Surviving Trust in the year 1997. EQR has
agreed to cause Messrs. Lynford and Lowenthal to be nominated for election
as trustees at the Surviving Trust's 1997 annual meeting for a term ending
at the annual meeting of the Surviving Trust in the year 2000.
The following is a biographical summary as of March 1, 1997 of the
experience of the executive officers and trustees of the Surviving Trust.
Samuel Zell has been Chairman of the Board of EQR since March 1993. Mr. Zell
is chairman of the board of directors of Equity Group Investments, Inc., an
owner, manager and financier of real estate and corporations ("EGI"), American
Classic Voyages Co., an owner and operator of cruise lines ("American
Classic"), and Anixter International Inc., a provider of integrated network
and cabling systems ("Anixter"). Mr. Zell is chairman of the board and chief
executive officer of both Capsure Holdings Corp., a holding company whose
principal subsidiaries are specialty property and casualty insurers
("Capsure"), and Manufactured Home Communities, Inc., a REIT specializing in
the ownership and management of manufactured home communities ("MHC"). He is
co-chairman of the board of directors of Revco D.S., Inc., a drugstore chain
("Revco"), and is a director of Quality Food Centers, Inc., an owner and
operator of supermarkets, Sealy Corporation, a bedding manufacturer ("Sealy"),
Ramco Energy PLC, an independent oil company based in the United Kingdom, and
TeleTech Holdings, Inc., a provider of telephone and computer based customer
care solutions.
Douglas Crocker II has been President, Chief Executive Officer and a Trustee
of EQR since March 1993. Mr. Crocker is a director of Horizon Group, Inc., an
owner, developer and operator of outlet retail properties. Mr. Crocker has
been president and chief executive officer of First Capital Financial
Corporation, a sponsor of public limited real estate partnerships ("First
Capital"), since December 1992 and a director since January 1993. He has been
an executive vice president of Equity Financial and Management Company
("EF&M"), a subsidiary of EGI, providing strategic direction and services for
EGI's real estate and corporate activities since November 1992. From September
1992 until November 1992, Mr. Crocker was a managing director of investment
banking with Prudential Securities, an investment banking firm. He was a
director and president of Republic Savings Bank, a national chartered savings
and loan association ("Republic"), from December 1988 to June 1992, at which
time the Resolution Trust Corporation took control of Republic.
David J. Neithercut has been Executive Vice President and Chief Financial
Officer of EQR since February 1995. Mr. Neithercut had been Vice President--
Financing of EQR from September 1993 until February 1995. Mr. Neithercut was a
senior vice president--finance of EGI from January 1995 until February 1995.
He was a vice president--finance of Equity Assets Management, Inc., a
subsidiary of EGI providing real estate ownership services ("EAM"), from
October 1990 until December 1994.
88
<PAGE>
Gregory H. Smith has been Executive Vice President--Asset Management of EQR
since December 1994. Mr. Smith was a senior vice president of Strategic Realty
Advisors, Inc., a real estate and advisory company, from January 1994 until
December 1994. Mr. Smith had been employed at VMS Realty Partners, a sponsor
of public and private real estate limited partnerships, from June 1989 until
December 1993, most recently serving as first vice president.
Gerald A. Spector has been a Trustee and Executive Vice President of EQR
since March 1993 and Chief Operating Officer of EQR since February 1995. Mr.
Spector was the Treasurer of EQR from March 1993 through February 1995.
Mr. Spector had been an officer of EF&M since January 1973, most recently
serving as vice president from November 1994 through January 1996. Mr. Spector
was executive vice president and chief operating officer of EF&M from
September 1990 through November 1994. Mr. Spector had been an officer of EGI
since January 1998, most recently serving as vice president from November 1994
through January 1996. Mr. Spector was executive vice president and chief
operating officer of EGI from January 1991 through January 1994.
Bruce C. Strohm has been Executive Vice President and General Counsel of EQR
since March 1995 and Secretary since November 1995. Mr. Strohm was an
Assistant Secretary since March 1995 and Vice President of EQR since its
formation. Mr. Strohm was a vice president of Rosenberg & Liebentritt, P.C., a
law firm ("R&L"), most recently serving as a member of the firm's management
committee.
Frederick C. Tuomi has been Executive Vice President--Property Management of
EQR since January 1994. Mr. Tuomi had been president of RAM Partners, Inc., a
subsidiary of Post Properties, Inc., a REIT, from March 1991 to January 1994.
Mr. Tuomi was president of Pilot Property Company, a property management
company, from July 1988 until March 1991.
Alan W. George has been Executive Vice President--Acquisitions of EQR since
February 1997, Senior Vice President--Acquisitions of EQR from December 1995
until February 1997 and Vice President--Acquisitions and asset manager of EQR
from December 1993 to December 1995. Mr. George was vice president-asset
management of EAM from June 1992 until August 1993. He was vice president-
asset management for American Real Estate Group, a real estate investment
company, from 1990 to 1992.
Michael J. McHugh has been Senior Vice President of EQR since November 1994
and Chief Accounting Officer and Treasurer of EQR since February 1995. From
May 1990 until January 1995, Mr. McHugh was senior vice president and chief
financial officer of First Capital.
John W. Alexander has been a Trustee of EQR since May 1993. Mr. Alexander
has been the president of Mallard Creek Capital Partners, Inc., primarily an
investment company with interests in real estate and development entities,
since February 1994. He is a partner of Meringoff Equities, a real estate
investment and development company, and is a director of Jacor Communications,
Inc., an owner and operator of radio stations ("Jacor").
Henry H. Goldberg has been a Trustee of EQR since January 1995. Mr. Goldberg
is chairman of the board, chief executive officer and founder of Artery
Properties, Inc. Founded in 1959, Artery Properties, Inc. is a diversified
real estate company. Mr. Goldberg was the direct or indirect general partner
(or an executive thereof) of seven partnerships owning residential apartment
communities and one commercial office building, each of which filed petitions
under the Federal bankruptcy laws during 1992 and 1993. Each of the
partnerships is now out of bankruptcy through a reorganization plan agreed to
by the project lender.
Errol R. Halperin became a Trustee of EQR in May 1993. Mr. Halperin has been
an attorney at Rudnick & Wolfe, a law firm, since 1979, serving as a senior
partner and a member of such firm's policy committee since 1981, specializing
in Federal income tax counseling and real estate and corporate transactions.
James D. Harper, Jr. became a Trustee of EQR in May 1993. Since 1982, Mr.
Harper has been president of JDH Realty Co., a real estate development and
investment company. Since 1988, he has been a co-managing partner in AH
Development, S.E. and AH HA Investments, S.E., special limited partnerships
formed to develop over 400 acres of land in Puerto Rico.
Sheli Z. Rosenberg has been a Trustee of EQR since March 1993. She is a
principal of the law firm of R&L. Ms. Rosenberg is chief executive officer,
president and a director of EGI. Ms. Rosenberg has been a director of Jacor
since 1994 and has been the chairman of its board of directors since February
1996. Ms. Rosenberg is a director of Capsure, Falcon Building Products, Inc.,
a manufacturer and supplier of building products ("Falcon"), American Classic,
MHC, Anixter, Sealy, and Revco.
Barry S. Sternlicht became a Trustee of EQR in May 1993. Mr. Sternlicht has
been chief executive officer and president of Starwood Capital Group, L.P.
since 1993 and president of Starwood Capital Partners, L.P., a privately owned
real estate
89
<PAGE>
investment firm, since its formation in 1991. Mr. Sternlicht is chairman of
the board and chief executive officer of Starwood Lodging Trust, a REIT
specializing in the ownership of hotels, and co-chairman of the board of
Westin Hotels & Resorts Company, an owner and operator of hotels. Mr.
Sternlicht is a director of Angeles Participating Mortgage Trust, a mortgage
REIT, U.S. Franchise Systems, a hotel franchise company, and Starwood Lodging
Corporation, which manages hotels owned by Starwood Lodging Trust.
B. Joseph White became a Trustee of EQR since May 1993. Mr. White has been a
professor at the University of Michigan Business School since 1987 and has
served as Dean since 1991. Mr. White is a director of Falcon, Union Pump
Company, a manufacturer of pumps, and Kelly Services, Inc., an employment
agency.
For biographical descriptions of Jeffrey H. Lynford and Edward Lowenthal see
"Management of WRP Newco-- Directors and Executive Officers."
COMMITTEES OF THE BOARD OF TRUSTEES
There will be three standing committees of the Board of Trustees of the
Surviving Trust: the Executive Committee, the Compensation Committee and the
Audit Committee, which are described further below.
Executive Committee: The Executive Committee will be comprised of Messrs.
Alexander, Crocker and Zell. The Executive Committee will have the authority
within certain parameters to acquire, dispose of and finance investments for
the Surviving Trust and execute contracts and agreements, including those
related to the borrowing of money by the Surviving Trust, and generally
exercise all other powers of the Board, except as prohibited by law.
Compensation Committee: The Compensation Committee will be comprised of
Messrs. Halperin and Harper and Ms. Rosenberg. Mr. Harper will be the
chairman. The Compensation Committee will review and make recommendations
concerning proposals by management with respect to compensation, bonuses,
employment agreements and other benefits and policies respecting such matters
for the executive officers of the Surviving Trust.
Audit Committee: The Audit Committee will be comprised of Messrs. White,
Alexander, Halperin, Sternlicht and Goldberg. Mr. White will be the chairman.
The Audit Committee will make recommendations concerning the engagement of
independent public accountants, review the plans and results of the audit
engagement with the independent public accountants, approve professional
services provided by the independent public accountants, review the
independence of the independent public accountants, consider the range of
audit and non-audit fees and review the adequacy of the Surviving Trust's
internal accounting controls.
COMPENSATION OF TRUSTEES
Trustees who are not employees of the Surviving Trust receive an annual fee
of $20,000 for serving as trustees. In addition, trustees who serve on the
Audit Committee, the Executive Committee or the Compensation Committee will
receive an additional $1,000 per annum for each committee on which they serve.
Committee chairs receive an additional $500 per annum. The Surviving Trust
will also reimburse the trustees of each committee for travel expenses
incurred in connection with their activities on behalf of the Surviving Trust.
Each trustee will also be granted options to purchase 5,000 shares of Survivor
Common at the fair market value of such shares at the close of business on the
date of the first trustees' meeting following each annual meeting of
shareholders.
CONSULTING AGREEMENTS
Messrs. Lynford and Lowenthal will each execute a consulting agreement with
ERP Operating Partnership. The consulting agreements will each be for a term
of five years from the Effective Time. Pursuant to the consulting agreements,
each of Messrs. Lynford and Lowenthal will serve as a senior management
consultant to ERP Operating Partnership and, in all events, will receive
compensation at the rate of $200,000 per year plus reimbursement for
reasonable out-of-pocket expenses.
90
<PAGE>
COMPARISON OF RIGHTS OF SHAREHOLDERS
At the Effective Time, the shareholders of Wellsford and EQR will become
shareholders of the Surviving Trust. The rights of Wellsford's shareholders
are presently governed by Title 8 of the Corporations and Associations Article
of the Annotated Code of Maryland ("Title 8"), the Wellsford Declaration, and
the Wellsford Bylaws. The rights of EQR's shareholders are presently governed
by Title 8, the EQR Declaration and EQR Bylaws. The rights of the shareholders
of the Surviving Trust will be governed by Title 8, the Surviving Trust's
Declaration and the Surviving Trust's Bylaws. Upon approval of the Merger by
the Wellsford Common Shareholders and at the Effective Time, the Wellsford
Declaration will be amended and restated to substantially conform the
Wellsford Declaration to the terms of the EQR Declaration (except for the
Additional Provisions that require approval by a two-thirds vote of the
Wellsford Common Shareholders, which are being voted upon separately). The
Wellsford Declaration, as amended and restated (including, if so approved, the
Additional Provisions) will serve as the Surviving Trust's Declaration.
The following discussion summarizes certain significant differences between
the rights of shareholders of EQR, Wellsford and the Surviving Trust as a
result of certain of these amendments. This summary does not purport to be
complete and is subject to and qualified in its entirety by reference to the
EQR Declaration and Bylaws, the Wellsford Declaration and Bylaws and the
Surviving Trust's Declaration and Bylaws. In addition, upon the separate
approval by an affirmative vote of the holders of not less than two-thirds of
the outstanding shares of Wellsford Common, the Declaration of the Surviving
Trust will be modified to include the Additional Provisions. See "Proposal
Regarding Additional Declaration of Trust Provisions." This summary does not
take into account the modifications contemplated by the Additional Provisions,
which are discussed in "Proposal Regarding Additional Declaration of Trust
Provisions." Rights of the shareholders of EQR and Wellsford which are and
will remain the same after the Merger are not discussed.
AUTHORIZED AND ISSUED SHARES
The Wellsford Declaration authorizes the issuance of 100,000,000 shares of
beneficial interest, which consists of shares of Wellsford Common and such
other types or classes as the Wellsford Board of Trustees may create and
authorize from time to time and designate as representing a beneficial
interest in Wellsford. The designation and number of outstanding shares of
beneficial interest of Wellsford as of April 21, 1997, was as follows: (i)
17,261,897 of Wellsford Common; (ii) 3,999,800 shares of Wellsford Series A;
and (iii) 2,300,000 shares of Wellsford Series B.
The EQR Declaration authorizes the issuance of 110,000,000 shares of
beneficial interest, of which 100,000,000 are EQR Common and 10,000,000 are
Preferred Shares which may be issued from time to time, in one or more series.
The designation and number of outstanding shares of beneficial interest in EQR
as of April 1, 1997, was as follows: (i) 53,713,158 of EQR Common; (ii)
6,120,000 shares of EQR Series A; (iii) 500,000 shares of EQR Series B
represented by 5,000,000 depository shares; (iv) 460,000 shares of EQR Series
C represented by 4,600,000 depository shares; and (v) no excess shares of
beneficial interest.
The Declaration of the Surviving Trust will authorize the issuance of
300,000,000 shares of beneficial interest, of which 200,000,000 will be shares
of Survivor Common and 100,000,000 will be preferred shares of beneficial
interest of the Surviving Trust, of which (a) 6,900,000 shares have been
designated as 9 3/8% Series A Cumulative Redeemable Preferred Shares of
Beneficial Interest, (b) 575,000 shares have been designated as 9 1/8% Series
B Cumulative Redeemable Shares of Beneficial Interest, (c) 460,000 shares have
been designated as 9 1/8% Series C Cumulative Redeemable Preferred Shares of
Beneficial Interest, (d) 4,600,000 shares have been designated as Series D
Cumulative Convertible Preferred Shares of Beneficial Interest and (e)
2,300,000 shares have been designated as Series E Cumulative Redeemable
Preferred Shares of Beneficial Interest. Shares of beneficial interest may be
issued from time to time, as authorized by the Board of Trustees of the
Surviving Trust. As of the Effective Date, the designation and number of the
outstanding shares of beneficial interest in the Surviving Trust, based upon
the shares outstanding as of April 1, 1997, will be as follows: (i) 64,483,878
of Survivor Common; (ii) 6,120,000 of Survivor Series A; (iii) 500,000 of
Survivor Series B represented by 5,000,000 depository shares; (iv) 460,000 of
Survivor Series C represented by 4,600,000 depository shares; (v) 3,999,800 of
Survivor Series D; and (vi) 2,300,000 of Survivor Series E.
AMENDMENT TO DECLARATION AND BYLAWS
As permitted by Title 8, the Wellsford Declaration provides that the
Wellsford Board of Trustees may, by a two-thirds vote, amend the Wellsford
Declaration from time to time in order to enable Wellsford to qualify and
remain qualified as a REIT under the Code and Title 8. Except as set forth in
the preceding sentence and in the Articles Supplementary that set forth the
rights and preferences of the holders of Wellsford Preferred, the Wellsford
Declaration may be amended only by the affirmative vote of the holders of not
less than a majority of the shares of beneficial interest then outstanding and
entitled
91
<PAGE>
to vote thereon, and in certain cases may be amended only by the affirmative
vote of the holders of not less than two-thirds of such shares. Amendments to
the provisions of the Wellsford Declaration relating to the removal of
trustees, the restrictions on ownership of its shares of beneficial interest,
the reorganization of Wellsford and mergers, consolidations and sales of all
or substantially all of Wellsford's property must be approved by the
affirmative vote of holders of not less than two-thirds of the shares of
beneficial interest then outstanding and entitled to vote on the matter.
As permitted by Title 8, the EQR Declaration provides that the EQR Board of
Trustees may, by a two-thirds vote, amend the EQR Declaration from time to
time in order to enable EQR to qualify and remain qualified as REIT under the
Code and under Title 8. Except as set forth in the previous sentence and in
the terms of preferred shares of beneficial interest, the EQR Declaration may
be amended only by the affirmative vote of the holders of not less than two-
thirds of the shares of beneficial interest then outstanding and entitled to
vote thereon.
The Declaration of the Surviving Trust will provide for its amendment in the
same manner as the Wellsford Declaration. The amendment provisions of the
Declaration of the Surviving Trust will also be affected by the Additional
Provisions, if approved. See "Proposal Regarding Additional Declaration of
Trust Provisions."
SPECIAL MEETINGS
The Wellsford Bylaws provide that the chairman, the president or one-third
of the trustees of Wellsford may call a special meeting of Wellsford's
shareholders. A special meeting shall also be called by the secretary of
Wellsford upon the written request of holders of shares entitled to cast not
less than a majority of all the votes entitled to be cast at such meeting.
The EQR Bylaws provide that the chairman, the president or one-third of the
trustees of EQR may call a special meeting of EQR's shareholders. A special
meeting shall be called by the secretary of EQR upon the written request of
EQR Shareholders entitled to cast not less than 25% of all the votes entitled
to be cast at such meeting.
The Bylaws of the Surviving Trust will provide for special meetings in the
same manner as the EQR Bylaws.
BOARDS OF TRUSTEES
The Wellsford Declaration states that the trustees of Wellsford shall be
divided into three classes as nearly equal in number as possible, with the
term of each class of trustees expiring at the annual meeting of shareholders
in the third year following the year of their election. This classified Board
of Trustees could have the effect of making the removal of incumbents more
time consuming and difficult, which could delay, defer or prevent a third
party from making a timely offer or otherwise attempting to obtain control,
even though such an attempt might be beneficial to the company and its
shareholders. Thus, the classified board could increase the likelihood that
incumbents will retain their positions.
The Wellsford Declaration provides that a trustee may be removed, with or
without cause, by the affirmative vote of the holders of not less than two-
thirds of the shares of beneficial interest then outstanding and entitled to
vote in the election of trustees. Amendments to this section of the Wellsford
Declaration must be approved by the holders of not less than two-thirds of the
shares of beneficial interest outstanding and entitled to vote on the matter.
The EQR Declaration contains substantially similar provisions regarding the
classification of trustees as the Wellsford Declaration; however, the EQR
Declaration provides that a trustee may be removed only with cause, by the
vote of the holders of not less than two-thirds of the shares of beneficial
interest then outstanding and entitled to vote in the election of trustees.
The EQR Declaration defines cause as (i) material theft, fraud or embezzlement
or active and deliberate dishonesty by a trustee, (ii) habitual neglect of
duty by a trustee having a material and adverse significance to the trust, or
(iii) the conviction of a trustee for a felony or of any crime involving moral
turpitude.
The Declaration of the Surviving Trust will contain provisions paralleling
those of the Wellsford Declaration relating to the classification and removal
of trustees. The method of removing trustees under the Declaration of the
Surviving Trust will also be affected by the Additional Provisions, if
approved. See "Proposal Regarding Additional Declaration of Trust Provisions."
MERGERS, CONSOLIDATIONS, AND SALE OF SUBSTANTIALLY ALL ASSETS
Declaration Provisions. Under the Wellsford Declaration, any merger or
consolidation involving Wellsford or any sale or other disposition of all or
substantially all of Wellsford's property must be approved by its trustees and
submitted to its shareholders for approval, such approval to be obtained by
the affirmative vote of (i) holders of not less than two-thirds of all the
shares of beneficial interest then outstanding and entitled to vote thereon,
if Wellsford is not the surviving entity in
92
<PAGE>
any merger or consolidation or in the event of a proposed sale or disposition
of all or substantially all of Wellsford's property, or (ii) holders of not
less than a majority of all the shares of beneficial interest then outstanding
and entitled to vote thereon, in all other cases. Amending this section of the
Wellsford Declaration requires the affirmative vote of the holders of two-
thirds of the shares of beneficial interest outstanding and entitled to vote
on the matter.
The EQR Declaration does not address the vote required for a merger or
consolidation involving EQR or EQR's property. Under Title 8, a merger must be
approved by the affirmative vote of two-thirds of all the shareholders
entitled to vote on the matter unless otherwise provided in the declaration of
trust.
The Declaration of the Surviving Trust will contain provisions paralleling
those of the Wellsford Declaration relating to shareholder approval of
mergers, consolidations and sales of assets. The Declaration of the Surviving
Trust will provide that the Surviving Trust may sell or otherwise dispose of
all or substantially all of its property only upon the affirmative vote of the
holders of not less than two-thirds of all the shares then outstanding and
entitled to vote on the matter. These shareholder approval requirements for
mergers, consolidations and sales of assets under the Declaration of the
Surviving Trust will also be affected by the Additional Provisions, if
approved. See "Proposal Regarding Additional Declaration of Trust Provisions."
Statutory Restrictions. Under the MGCL, certain "business combinations"
(including a merger, consolidation, share exchange or, in certain
circumstances, an asset transfer or issuance or reclassification of equity
securities) between a Maryland REIT and (i) any person who beneficially owns
10% or more of the voting power of the REIT's shares or an affiliate of the
REIT who, at any time within the two-year period prior to the date in
question, was the beneficial owner of 10% or more of the voting power of the
then outstanding voting shares of beneficial interest of the REIT (an
"Interested Shareholder") or (ii) an affiliate of an Interested Shareholder
are prohibited for five years after the most recent date on which the
Interested Shareholder becomes an Interested Shareholder. Thereafter, any such
business combination must be recommended by the Board of Trustees of such REIT
and approved by the affirmative vote of at least (a) 80% of the votes entitled
to be cast by holders of outstanding shares of the REIT and (b) two-thirds of
the votes entitled to be cast by holders of voting shares of the REIT other
than shares held by the Interested Shareholder with whom (or with whose
affiliate) the business combination is to be effected, unless, among other
conditions, the REIT's common shareholders receive a minimum price (as defined
in the MGCL) for their shares and the consideration is received in cash or in
the same form previously paid by the Interested Shareholder for its shares.
These provisions of Maryland law do not apply, however, to business
combinations that are approved or exempted by the board of trustees of the
REIT prior to the time that the Interested Shareholder becomes an Interested
Shareholder. The Surviving Trust will exempt any business combination
involving Mr. Zell, the Zell Holders, EPMC and their respective affiliates and
associates, present or future, or any other person acting in concert or as a
group with any of the foregoing persons and, consequently, the five-year
prohibition and the super-majority vote requirements will not apply to a
business combination between any of them and the Surviving Trust.
In addition to the restrictions on certain business combinations, the MGCL
also provides that "control shares" of a Maryland REIT acquired in a "control
share acquisition" have no voting rights except to the extent approved by a
vote of two-thirds of the votes entitled to be cast on the matter, excluding
shares owned by the acquiror, by officers or by directors who are employees of
the REIT. "Control Shares" are voting shares which, if aggregated with all
other such shares previously acquired by the acquiror, or in respect of which
the acquiror is able to exercise or direct the exercise of voting power
(except solely by virtue of a revocable proxy), would entitle the acquiror to
exercise voting power in electing trustees within one of the following ranges
of voting power: (i) one-fifth or more but less than one-third, (ii) one-third
or more but less than a majority, or (iii) a majority or more of all voting
power. A "control share acquisition" means the acquisition of control shares,
subject to certain exceptions. Despite these restrictions on Control Share
acquisitions, the MGCL provides that a REIT may effectively exempt itself from
such restrictions by a provision contained in its Declaration or Bylaws. The
Wellsford Bylaws and EQR Bylaws both contain provisions stating that the
restrictions regarding Control Shares will not apply to any acquisition of its
shares by any person, and the Bylaws of the Surviving Trust will contain a
similar provision.
RESTRICTIONS ON THE OWNERSHIP, TRANSFER OR ISSUANCE OF SHARES
The Wellsford Declaration, subject to certain exceptions, provides that no
holder (other than (i) Edward Lowenthal and Jeffrey H. Lynford, and (ii) any
other person approved by the trustees) may own more than 9.8% (the "WRP
Ownership Limit") of the lesser of the number or value (in either case as
determined in good faith by the trustees) of the total outstanding shares of
beneficial interest. The Wellsford Declaration provides that the trustees may
waive the WRP Ownership Limit if evidence satisfactory to the trustees and to
Wellsford's tax counsel is presented that such ownership will not then or in
the future jeopardize Wellsford's status as a REIT. As a condition of such
waiver, the intended transferee must give written notice to Wellsford of the
proposed transfer and must furnish such opinions of counsel, affidavits,
undertakings, agreements and information as may be required by the trustees no
later than the 15th day prior to any transfer which, if consummated, would
result in the intended transferee owning shares in excess of the WRP Ownership
Limit. The
93
<PAGE>
foregoing restrictions on transferability and ownership will not apply if the
Wellsford Board of Trustees determines that it is no longer in the best
interests of Wellsford to attempt to qualify, or to continue to qualify, as a
REIT. Any transfer of shares of beneficial interest that would (i) create a
direct or indirect ownership of shares of beneficial interest in excess of the
WRP Ownership Limit, (ii) result in the shares of beneficial interest being
owned by fewer than 100 persons, or (iii) result in Wellsford being "closely
held" within the meaning of Section 856(h) of the Code, will be null and void,
and the intended transferee will acquire no rights to such shares of
beneficial interest. The Wellsford Declaration provides that Wellsford, by
notice to the holder thereof, may purchase any or all shares of beneficial
interest of Wellsford (the "Excess Shares") that are proposed to be
transferred pursuant to a transfer which, if consummated, would result in the
intended transferee owning shares of beneficial ownership in excess of the WRP
Ownership Limit or would otherwise jeopardize Wellsford's REIT status. The
purchase price of any Excess Shares will be equal to the fair market value of
such excess Shares as reflected in the closing sales price for the shares of
beneficial interest, if then listed on a national securities exchange. From
and after the date fixed for purchase by the trustees, the holder of such
shares of beneficial interest to be purchased by Wellsford will cease to be
entitled to dividends, distributions, voting rights and other benefits with
respect to such shares except the right to payment of the purchase price for
the shares. Any dividend or distribution paid to a proposed transferee on
Excess Shares prior to the discovery by Wellsford that such shares of
beneficial interest have been transferred in violation of the provisions of
the Wellsford Declaration shall be repaid to Wellsford upon demand. 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 Shares may be deemed, at Wellsford's option, to have
acted as an agent on behalf of Wellsford in acquiring such Excess Shares and
to hold such Excess Shares on behalf of Wellsford.
The Wellsford Declaration requires that all persons who own, directly or
indirectly, more than 5% in number or value of the total outstanding shares of
beneficial interest of Wellsford must give a written notice to Wellsford
containing the information specified in the Wellsford Declaration by January
31 of each year. In addition, each shareholder irrespective of such
shareholder's ownership shall upon demand be required to disclose to Wellsford
in writing such information with respect to the direct, indirect and
constructive ownership of beneficial interests as the trustees deem necessary
to comply with the provisions of the Code applicable to a REIT, to comply with
the requirements of any taxing authority or governmental agency or to
determine any such compliance.
The EQR Declaration, subject to certain exceptions, provides that no holder
may own, or be deemed to own by virtue of the attribution provisions of the
Code, more than 5% (the "EQR Ownership Limit") of the lesser of the number of
shares or value of the issued and outstanding shares of beneficial interest of
EQR. The EQR Board of Trustees, upon receipt of a ruling from the Service, an
opinion of counsel or other evidence satisfactory to the EQR Board of Trustees
and upon such other conditions as the EQR Board of Trustees may direct, may
also exempt a proposed transferee from the EQR Ownership Limit. As a condition
of such exemption, the intended transferee must give written notice to EQR of
the proposed transfer no later than the fifteenth day prior to any transfer
which, if consummated, would result in the intended transferee owning shares
in excess of the EQR Ownership Limit. Any transfer of EQR Common or EQR
Preferred that would (i) create a direct or indirect ownership of shares of
beneficial interest in excess of the EQR Ownership Limit, (ii) result in the
shares of beneficial interest being owned by fewer than 100 persons, or (iii)
result in EQR being "closely held" within the meaning of Section 856(h) of the
Code, will be void ab initio, and the intended transferee will acquire no
rights to the shares of beneficial interest. The foregoing restrictions on
transferability and ownership will not apply if the EQR Board of Trustees
determines that it is no longer in the best interests of EQR to attempt to
qualify, or to continue to qualify, as a REIT.
EQR's Declaration exempts from the Ownership Limit certain persons and
entities who would exceed the Ownership Limit as a result of the exchange of
the OP Units for EQR Common, which OP Units were received by them at the time
of the formation of EQR. These persons may also acquire additional EQR Shares
through EQR's Second Amended and Restated 1993 Share Option and Share Award
Plan (the "Option and Award Plan"), but in no event will such persons be
entitled to acquire additional shares of beneficial interest such that the
five largest beneficial owners of EQR's shares of beneficial interest hold
more than 50% in number or value of the total outstanding EQR Shares.
Any EQR Shares the transfer of which would result in a person owning shares
of beneficial interest in excess of the Ownership Limit or cause EQR to become
"closely held" under Section 856(h) of the Code that is not otherwise
permitted as provided above will constitute excess shares ("Excess Shares"),
which will be transferred by operation of law to EQR as trustee for the
exclusive benefit of the person or persons to whom the Excess Shares are
ultimately transferred, until such time as the intended transferee retransfers
the Excess Shares. While these Excess Shares are held in trust, they will not
be entitled to vote or to share in any distributions (except upon
liquidation). Subject to the Ownership Limit, the Excess Shares may be
retransferred by the intended transferee to any person (if the Excess Shares
would not be Excess Shares in the hands of such person) at a price not to
exceed the price paid by the intended transferee or, if the intended
transferee did not give value for such Excess Shares (e.g., a transfer by gift
or devise), the fair market value (as described below) at the time of the
purported transfer that resulted in the Excess Shares, at which point the
Excess Shares will automatically be exchanged for
94
<PAGE>
the shares of beneficial interest to which the Excess Shares are attributable.
In addition, such Excess Shares held in trust are subject to purchase by EQR
at a purchase price equal to the lesser of the price paid for the Excess
Shares in the transaction that created such Excess Shares (or, in the case of
a devise or gift, the fair market value at the time of such devise or gift)
and the fair market value of the EQR Preferred or EQR Common to which such
Excess Shares relate on the date EQR exercises its right to purchase. Fair
market value will be the last sales price of such shares of beneficial
interest reported on the NYSE on the trading day immediately preceding the
relevant date, or if not then traded on the NYSE, the last reported sales
price of such shares of beneficial interest on the trading day immediately
preceding the relevant date as reported on any exchange or quotation system
over which such shares of beneficial interest may be traded, or if not then
traded over any exchange or quotation system, then the fair market value of
such shares of beneficial interest on the relevant date as determined in good
faith by the EQR Board of Trustees. EQR's right to purchase shall be for a
period of 90 days after the later of the date of the purported transfer which
resulted in the Excess Shares and the date the EQR Board of Trustees
determines in good faith that such a transfer has occurred. From and after the
intended transfer to the intended transferee of the Excess Shares, the
intended transferee will cease to be entitled to distributions (except upon
liquidation), voting rights and other benefits with respect to such shares
except the right to payment of the purchase price for the shares or the
retransfer of shares as provided above. Any distribution paid to a proposed
transferee on Excess Shares prior to the discovery by EQR that such shares of
beneficial interest have been transferred in violation of the provisions of
EQR's Declaration will be repaid to EQR upon demand. 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 Shares may be deemed, at the option of EQR, to have acted as an agent
on behalf of EQR in acquiring such Excess Shares and to hold such Excess
Shares on behalf of EQR.
All certificates representing shares of beneficial interest of EQR shall
bear a legend referring to the restrictions described above.
All persons who own, directly or by virtue of the attribution provisions of
the Code, more than 5% (or such other percentage between 1/2 of 1% and 5% as
provided in the rules and regulations promulgated under the Code) of the
lesser of the number or value of the outstanding shares of beneficial interest
of EQR must give a written notice to EQR by January 31 of each year. In
addition, each shareholder will upon demand be required to disclose to EQR in
writing such information with respect to the direct, indirect and constructive
ownership of EQR Shares as the EQR Board of Trustees deems reasonably
necessary to comply with the provisions of the Code applicable to a REIT, to
comply with the requirements of any taxing authority or governmental agency or
to determine any such compliance.
The Declaration of the Surviving Trust will contain restrictions on the
ownership, transfer and issuance of Survivor Shares generally similar to those
restrictions contained in the EQR Declaration. The provisions relating to
restrictions on the ownership, transfer or issuance of shares contained in the
Surviving Trust will also be affected by the Additional Provisions, if
approved. See "Proposal Regarding Additional Declaration of Trust Provisions."
PROPOSAL REGARDING ADDITIONAL DECLARATION OF TRUST PROVISIONS
The Wellsford Common Shareholders are being asked to separately approve the
Additional Provisions to the Surviving Trust Declaration (defined herein) to
further conform the Surviving Trust Declaration to the terms of the EQR
Declaration and to update the Surviving Trust Declaration to reflect the
current approaches in the REIT industry regarding share ownership restrictions
necessary to maintain REIT status. The Wellsford Declaration, as amended and
restated to include or exclude the Additional Provisions depending on the
requisite approval of the Wellsford Common Shareholders ("Surviving Trust
Declaration"), will constitute the declaration of the Surviving Trust. As
described in the following summary of the Additional Provisions, the Board of
Trustees of each of Wellsford and EQR believe that the Additional Provisions
would be in the best interests of the shareholders of the Surviving Trust. The
Wellsford Common Shareholders are therefore being asked to separately approve
modifications to certain sections, including Sections 2.3, 6.6, 9.1, 9.2 and
9.3 of, and the addition of Article VII to, the Surviving Trust Declaration.
The following is a summary of the Additional Provisions as to which the
approval of the Wellsford Common Shareholders is being requested.
Removal of Trustees. Section 2.3 of the Wellsford Declaration currently
provides for the removal of trustees, with or without cause, by the
affirmative vote of the holders of not less than two-thirds of the shares of
Wellsford Common then outstanding and entitled to vote on the election of
trustees. Upon approval of the Additional Provisions, the Surviving Trust
Declaration will provide for the removal of trustees only with cause by the
same vote previously required. "Cause" will be defined as (a) material theft,
fraud or embezzlement or active and deliberate dishonesty by a trustee; (b)
habitual neglect of
95
<PAGE>
duty by a trustee having a material and adverse significance to the Surviving
Trust; or (c) the conviction of a trustee for a felony or for any crime
involving mortal turpitude. The Board of Trustees of each of Wellsford and EQR
believe that the increased stability of management that would result from this
amendment is in the best interest of the shareholders of the Surviving Trust.
Restrictions on Transfer and Ownership of Shares. In order to maintain its
status as a REIT under the Code and Title 8, Section 6.6 of the Wellsford
Declaration currently imposes a number of restrictions on the transfer and
ownership of Wellsford Shares. See "Comparison of Rights of Shareholders--
Restrictions on the Ownership, Transfer or Issuance of Shares." Since the
adoption of the Wellsford Declaration in 1992, the comparable section of the
declarations of other REITs has evolved into a more detailed provision
relating to the applicable ownership limits and compliance with the Code. Upon
approval of the Additional Provisions, these provisions will be modified to
reflect the effects of the Merger and the Surviving Trust's relationship with
ERP Operating Partnership. Among the specific amendments to be made will be
the inclusion of provisions exempting the exchange of OP Units into Survivor
Shares from the definition of "transfer." In addition, certain persons and
entities who would otherwise exceed the ownership limits placed on Survivor
Shares will be exempted from such ownership restrictions in order to avoid
their forced divestment of such shares or OP Units. Upon approval of the
Additional Provisions, any transfer of shares resulting in a person owning
shares in excess of the ownership limits placed on the Survivor Shares shall
be automatically transferred to a charitable trust for the benefit of a
charitable beneficiary. For the reasons stated above, the Board of Trustees of
each of Wellsford and EQR believe that the Additional Provisions affecting the
ownership and transfer of Survivor Shares are in the best interest of the
shareholders of the Surviving Trust.
Amendment to Declaration. Section 9.1 of the Wellsford Declaration currently
provides for its amendment by the affirmative vote of the holders of not less
than a majority of the Wellsford Shares outstanding and entitled to vote
thereon, except that amendments related to the removal of trustees, the
restrictions on the ownership of Wellsford Shares, the reorganization of
Wellsford and the merger, consolidation or sale of all or substantially of
Wellsford's property must be approved by the affirmative vote of the holders
of two-thirds of the Wellsford's Shares then outstanding and entitled to vote
on the matter. In addition, the Wellsford Board of Trustees may, by a two-
thirds vote, amend the Wellsford Declaration in order to enable Wellsford to
qualify and remain qualified as a REIT under the Code and Title 8.
Upon approval of the Additional Provisions, Section 9.2 of the Surviving
Trust Declaration will provide that it may be amended by the Board of Trustees
of the Surviving Trust, by a two-thirds vote, to enable the Surviving Trust to
qualify as a REIT. The Surviving Trust Declaration as modified will also
provide for amendment of all its provisions by the affirmative vote of the
holders of not less than two-thirds of the Survivor Shares then outstanding
and entitled to vote thereon. The Board of Trustees of each of Wellsford and
EQR believe that this consistent requirement of approval by not less than two-
thirds of the Survivor Shares to amend all provisions of the Surviving Trust
Declaration is in the best interest of the shareholders of the Surviving
Trust.
Mergers, Consolidation, or Sale of Trust Property. Section 9.2 of the
Wellsford Declaration currently states that, upon the affirmative vote of the
holders of not less than two-thirds of the Wellsford Shares then outstanding
and entitled to vote thereon, the trustees of Wellsford may reorganize
Wellsford by creating a separate entity into which Wellsford will merge or
sell its assets. In addition, Section 9.3 of the Wellsford Declaration
currently provides that if Wellsford is not the surviving entity in a merger
or consolidation, or in the event of a sale of all or substantially all of
Wellsford's property, that transaction must be approved by two-thirds of the
Wellsford Shares then outstanding and entitled to vote thereon. In all other
cases, such a merger or consolidation need only be approved by a majority of
the Wellsford Shares then outstanding and entitled to vote thereon. Upon
approval of the Additional Provisions, any merger, consolidation, or sale of
all or substantially all of the Surviving Trust's property will be required to
be approved by the holders of a majority of the Survivor Shares then
outstanding and entitled to vote thereon. The Board of Trustees of each of
Wellsford and EQR believe that this threshold of shareholder approval, which
would facilitate the merger, consolidation or sale of all or substantially all
of the Surviving Trust's property, would be in the best interest of the
shareholders of the Surviving Trust.
96
<PAGE>
THE CONTRIBUTION AND DISTRIBUTION
The following describes certain aspects of the Contribution and the
Distribution. To the extent that they relate to the Contribution and
Distribution Agreement, the following descriptions do not purport to be
complete and are qualified in their entirety by reference to the Contribution
and Distribution Agreement, which is filed as an exhibit to the registration
statement of which this Joint Proxy Statement/Prospectus/Information Statement
is a part.
BACKGROUND OF AND REASONS FOR THE DISTRIBUTION
EQR is in the business of acquiring, owning and operating multifamily
properties. It does not currently engage in any development activities and
generally does not hold debt instruments for investment. In the course of
discussions with respect to the Merger it became clear that EQR did not wish
to acquire all of Wellsford's interest in its development project near Denver,
Colorado, known as Palomino Park or its interests in the Sonterra Assets. If
EQR were to acquire such assets, Wellsford would not be able to receive what
it considered to be adequate value for such assets. Wellsford's management
believes that it can maximize the value of those assets for its shareholders
by not conveying them in the Merger or pursuant to an asset sale to a third
party and by retaining such assets and their long-term value for Wellsford
Common Shareholders by contributing them to WRP Newco and distributing all of
the shares of WRP Newco owned by Wellsford to the Wellsford Common
Shareholders pro rata. It has also been agreed that to provide initial working
capital for WRP Newco, Wellsford would contribute approximately $18 million in
cash to WRP Newco. Pursuant to the Merger, EQR will acquire the remaining
assets of Wellsford, subject to certain liabilities. See "--Contribution and
Distribution Agreement."
Although the Contribution and Distribution will not be effected unless the
Merger is approved and all conditions thereto have been satisfied or waived,
Wellsford Common Shareholders are not being asked to approve the Contribution
and Distribution, which are not subject to shareholder approval under Maryland
law because they do not constitute a sale of all or substantially all of the
assets of Wellsford.
MANNER OF EFFECTING THE CONTRIBUTION AND DISTRIBUTION
The Contribution was approved and the Distribution was declared by the Board
of Trustees of Wellsford on January 16, 1997, the date on which it also
approved the Merger. The Contribution will be made immediately prior to the
Distribution, and both the Contribution and the Distribution will occur on the
same date as the Effective Date (the "Distribution Date") and immediately
prior to the Merger. The Distribution will be made to Wellsford Common
Shareholders of record as of the close of business on the Distribution Date.
On or prior to the Distribution Date, a share certificate evidencing all the
shares of WRP Newco Common owned by Wellsford will be delivered to the United
States Trust Company of New York, as Distribution Agent. Commencing on the
Distribution Date, the Distribution Agent will begin mailing to Wellsford
Common Shareholders as of the close of business on the Distribution Date one
share of WRP Newco Common for every four shares of Wellsford Common held on
the Distribution Date. See "Description of Capital Stock of WRP Newco--Common
Stock." Wellsford Common Shareholders who would be entitled to receive
fractional shares of WRP Newco Common will receive cash in the Distribution in
lieu of such fractional shares. To accomplish this, the Distribution Agent
will determine the number of whole and fractional shares of WRP Newco Common
to which each Wellsford Common Shareholder as of the Distribution Date is
entitled. Next, the Distribution Agent will aggregate these fractional share
interests and sell them on the open market at then-prevailing prices. The
Distribution Agent will distribute to each Wellsford Common Shareholder its
ratable share of such proceeds after deducting appropriate amounts for federal
income tax withholding purposes and any applicable transfer taxes.
No holder of Wellsford Common Shareholder will be required to pay any cash
or other consideration for the shares of WRP Newco Common to be received in
the Distribution or to surrender or exchange shares of Wellsford Common or to
take any other action in order to receive WRP Newco Common.
LISTING AND TRADING OF WRP NEWCO COMMON
WRP Newco has applied for listing of the WRP Newco Common on the ASE.
Initially, WRP Newco will have approximately 629 stockholders of record and
the outstanding shares of WRP Newco Common will be held on behalf of
approximately 13,500 beneficial owners, based on the number of record holders
and beneficial owners of Wellsford Common as of April 18, 1997.
There is currently no trading market for the WRP Newco Common. Prices at
which WRP Newco Common may trade after the Distribution cannot be predicted.
Until the WRP Newco Common is fully distributed and an orderly market
develops, the prices at which trading in such stock occurs may fluctuate
significantly. The prices at which WRP Newco Common trades will be determined
by the marketplace and may be influenced by many factors, including, among
others, the
97
<PAGE>
depth and liquidity of the market for WRP Newco Common, investor perception of
WRP Newco and its businesses, WRP Newco's dividend policy, interest rates and
general economic and market conditions.
Shares of WRP Newco Common distributed to Wellsford Common Shareholders in
the Distribution will be freely transferable, except for shares received by
persons who may be deemed to be "affiliates" of WRP Newco under the Securities
Act. Persons who may be deemed to be affiliates of WRP Newco after the
Distribution generally include individuals or entities that control, are
controlled by, or are under common control with, WRP Newco, and may include
certain officers and directors of WRP Newco as well as certain principal
stockholders of WRP Newco, if any. Persons who are affiliates of WRP Newco
will be permitted to sell their shares of WRP Newco Common only pursuant to an
effective registration statement under the Securities Act or an exemption from
the registration requirements of the Securities Act.
CONDITIONS; TERMINATION
The Contribution and Distribution are subject to certain conditions as set
forth in the Contribution and Distribution Agreement including, but not
limited to, each condition to the closing of the Merger set forth in the
Merger Agreement shall have been satisfied or waived. The Contribution and
Distribution may be abandoned at any time prior to their occurrence by and in
the sole discretion of the Board of Trustees of Wellsford without the approval
of WRP Newco or the Wellsford Common Shareholders.
CONTRIBUTION AND DISTRIBUTION AGREEMENT
Wellsford and WRP Newco have entered into a Contribution and Distribution
Agreement providing for, among other things, the principal corporate
transactions required to effect the contribution by Wellsford of certain of
its assets to WRP Newco.
Wellsford will transfer, without representation or warranty, all of its
right, title and interest in and to the following assets, among others (the
"Contributed Assets"):
(a) the Sonterra Assets. See "WRP Newco's Business and Properties";
(b) 80% of the outstanding shares of Wellsford Park Highlands Corp.
("WPHC"), which represents an approximate 80% interest in Palomino Park,
together with certain additional ownership and financing agreements relating
to Palomino Park. See "WRP Newco's Business and Properties";
(c) cash in the amount of approximately $18 million, subject to adjustment
as described in the Merger Agreement and the Transaction and Termination Costs
Agreement attached as an exhibit thereto;
(d) the lease of the premises currently occupied by Wellsford in New York
City, together with the furniture, fixtures, equipment and personalty located
at such premises; and
(e) the name "Wellsford."
Simultaneously with the Contribution, WRP Newco will assume, among others,
the following liabilities:
(i) All liabilities of Wellsford with respect to the Contributed Assets;
(ii) the obligations to executive officers and trustees of Wellsford
arising under certain Wellsford share option certificates, which will be
satisfied by (A) amending the option certificates, as described in
"Interests of Certain Persons in the Merger and Distribution--Benefits of
Key Executives--Wellsford Options" (as amended, the "Amended WRP Newco
Options") and (B) issuing shares of WRP Newco Common pursuant to the
Amended WRP Newco Options; and
(iii) any other obligation of Wellsford under any agreement relating to
the Sonterra Assets, the bonds relating to Palomino Park, or Palomino Park
except the obligations of ERP Operating Partnership under the Credit
Enhancement Agreement and the Palomino Agreement, each between ERP
Operating Partnership and WRP Newco.
Mutual Indemnities. Pursuant to the Contribution and Distribution Agreement,
Wellsford and WRP Newco will each be responsible for all claims and
liabilities relating to its own business (whether or not such claims and
liabilities arise from activities occurring prior to the Distribution) and
will each indemnify the other against such claims and liabilities, subject to
certain limited exceptions relating to the Credit Enhancement Agreement,
Palomino Agreement and Transaction and Termination Costs Agreement.
98
<PAGE>
TAX CONSEQUENCES OF THE DISTRIBUTION
The following discussion concerns the material United States Federal income
tax consequences of the receipt of shares of WRP Newco Common by Wellsford
Common Shareholders in the Distribution. The discussion is based on current
law, which is subject to change retroactively or prospectively, and is for
general information only. Robinson Silverman Pearce Aronsohn & Berman LLP has
reviewed the discussion set forth herein under the caption "Tax Consequences
of the Distribution" and believes that such discussion, as it pertains to
matters of law, is correct in all material respects. The discussion does not
address all aspects of Federal income taxation and does not address any
aspects of state, local or non-U.S. tax laws, except as set forth below. The
discussion does not consider any specific facts or circumstances that may
apply to a particular Wellsford shareholder. Accordingly, Wellsford Common
Shareholders are urged to consult their tax advisors regarding the United
States Federal, state, local and non-U.S. income and other tax consequences of
the Distribution and of holding and disposing of shares of WRP Newco Common.
General. To the extent the fair market value of the shares of WRP Newco
Common distributed in the Distribution to Wellsford Common Shareholders
exceeds Wellsford's tax basis in such shares, gain will be recognized by
Wellsford. Assuming Wellsford qualifies as a REIT and has a dividends paid
deduction for distributions to its shareholders at least equal to its REIT
taxable income (as computed before taking into account the dividends paid
deduction), no REIT level tax will be incurred on account of the Distribution.
The distribution of WRP Newco Common will, however, be taxable to Wellsford
Common Shareholders to the same extent as any other distribution made by
Wellsford to its shareholders. Thus, so long as Wellsford qualifies for
taxation as a REIT, distributions with respect to its shares, including the
Distribution, made out of current earnings and profits (computed as of the
close of its taxable year without taking into account any distributions made
during such year) or accumulated earnings and profits allocable thereto (and
not designated as capital gain dividends) will be includible by the
shareholders as ordinary income for Federal income tax purposes. For this
purpose, the current and accumulated earnings and profits of Wellsford will be
allocated first to distributions with respect to shares of Wellsford Preferred
and then to distributions with respect to Common Shares. None of these
distributions will be eligible for the dividends received deduction for
corporate shareholders. Distributions that are designated as capital gain
dividends will be taxed as long-term capital gains (to the extent they do not
exceed Wellsford's actual net capital gain for the taxable year) without
regard to the period for which the shareholder has held his share. Corporate
shareholders, however, may be required to treat up to 20% of certain capital
gain dividends as ordinary income.
Distributions in excess of current or accumulated earnings and profits will
not be taxable to a shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's shares. Shareholders will be required to
reduce the tax basis of their shares by the amount of such distributions until
such basis has been reduced to zero, after which such distributions will be
taxable as capital gain (ordinary income in the case of a shareholder who
holds his shares as a dealer). The tax basis as so reduced will be used in
computing the capital gain or loss, if any, realized upon sale of the shares
of Wellsford Common (or shares of Survivor Common received in exchange
therefor in the Merger). Any loss upon a sale or exchange of shares of
Wellsford Common (or shares of Survivor Common received in exchange therefor
in the Merger) by a shareholder who held such shares of Wellsford Common (or
shares of Survivor Common received in exchange therefor in the Merger) for six
months or less (after applying certain holding period rules) will generally be
treated as a long-term capital loss to the extent such shareholder previously
received capital gain distributions with respect to such shares of Wellsford
Common (or shares of Survivor Common received in exchange therefor in the
Merger).
The current earnings and profits of the Surviving Trust will include all
pre-Merger earnings and profits of Wellsford, all pre-Merger undistributed
earnings and profits of EQR and all post-Merger earnings and profits of the
Surviving Trust. The total earnings and profits at the close of the Surviving
Trust's taxable year will be allocated among pre-Merger Wellsford
distributions, including the Distribution, and all post-Merger distributions
of the Surviving Trust. Management estimates that approximately 50% of the
value of the shares of WRP Newco Common received in the Distribution will be
taxable as ordinary income. Because this estimate is based, in part, on future
events, there can be no assurance as to the portion of the value of the
Distribution that will be taxable as ordinary income. The remainder of the
value of the shares of WRP Newco Common received in the Distribution will
either constitute a return of capital (reducing basis in the shares of
Wellsford Common that converted in the Merger into Survivor Common) or capital
gain. A Wellsford shareholder's tax basis in the WRP Newco Common received in
the Distribution will equal their fair market value on the date of
Distribution. The holding period of the WRP Newco Common received in the
Distribution will begin on the day following the date of the Distribution.
Upon the sale or exchange of WRP Newco Common to or with a person other than
WRP Newco, a holder will recognize capital gain or loss equal to the
difference between the amount realized on such sale or exchange and the
holder's adjusted tax basis in such shares. Any capital gain or loss
recognized will generally be treated as long-term capital gain or loss if the
holder held such shares for more than one year.
99
<PAGE>
Backup Withholding and Information Reporting
A noncorporate holder of WRP Newco Common who is not otherwise exempt from
backup withholding may be subject to backup withholding at the rate of 31%
with respect to distributions paid on, or the proceeds of a sale, exchange or
redemption of, the WRP Newco Common. Generally, backup withholding applies
only when the taxpayer (i) fails to furnish or certify his correct taxpayer
identification number to the payor in the manner requested, (ii) is notified
by the United States Internal Revenue Service ("IRS") that he has failed to
report payments of interest or dividends properly, or (iii) under certain
circumstances, fails to certify that he has not been notified by the IRS that
he is subject to backup withholding for failure to report interest or dividend
payments. Any amounts withheld under the backup withholding rules from a
payment to a holder will be allowed as a credit against the holder's Federal
income tax liability or as a refund, provided that the required information is
furnished to the IRS. Holders of WRP Newco Common should consult their own tax
advisors regarding their qualification for exemption from backup withholding
and the procedure for obtaining any applicable exemption.
State, Local and Foreign Taxation
WRP Newco and its shareholders may be subject to state, local or foreign
taxation in various state, local or foreign jurisdictions, including those in
which it or they transact business or reside. Such state, local or foreign
taxation may differ from the Federal income tax treatment described above.
Consequently, prospective holders of WRP Newco Common should consult their own
tax advisors regarding the effect of state, local and foreign tax laws on the
ownership of WRP Newco Common.
100
<PAGE>
WELLSFORD REAL PROPERTIES, INC.
GENERAL
WRP Newco was organized to create and realize value by identifying and
making opportunistic real estate investments through the direct acquisition,
rehabilitation, development, financing and management of real properties
and/or participation in these activities through the purchase of debt or
equity securities of entities engaged in such real estate businesses.
Management will concentrate its efforts on defining and building focused
operating businesses with recurring sources of income. WRP Newco intends to
maximize shareholder value over time through growth in cash flow and net asset
value per share.
WRP Newco believes that while liquidity has returned to many real estate
markets and that the supply and demand of many real estate asset classes are
in relative equilibrium, there are specific opportunities which are expected
to continue to exist because of market inefficiencies and impediments to
investment, such as transactional complexity, time-consuming regulatory
approvals, the prospect of no or limited immediate cash flow and a lack of
available property information and market information analysis. In this
regard, WRP Newco will initially focus its investments on three distinct
aspects of the real estate business which management believes currently offer
such opportunities. They are (i) acquiring underperforming office and other
commercial properties below replacement cost, renovating and/or repositioning
them, and owning, operating and/or reselling such properties, (ii) investing
in real estate-related debt instruments with the potential for high-yields or
returns more characteristic of equity ownership and (iii) engaging in
selective property development when justified by expected returns. As
opportunities emerge, WRP Newco may in the future expand its real estate-
related businesses and activities.
WRP Newco currently does not intend to qualify as a REIT under the Code.
Consequently, WRP Newco will have the flexibility to respond quickly to
opportunities without the structural limitations inherent in REITs and to
operate, when deemed advantageous by management, on a more highly leveraged
basis than most REITs. By not qualifying as a REIT under the Code (which would
require WRP Newco to distribute each year at least 95% of its net taxable
income, excluding capital gains), WRP Newco will have the ability and
currently intends to retain for reinvestment its cash flow generated from
operations and to sell properties without the substantial income tax penalties
which may be imposed on REITs in such transactions. In addition, WRP Newco
will differ from opportunity funds that are typically structured as private
partnerships. In that regard, the business of WRP Newco will be conducted
without the payment of acquisition, disposition or advisory fees to general
partners which should result in additional cash flow being available for
reinvestment as well as mitigate the potential for conflicts of interest. In
addition, unlike investors in opportunity funds, WRP Newco's shareholders are
expected to have enhanced liquidity through their ability to sell or margin
their stock. WRP Newco also hopes to attract a broader range of investors
because there will be no stipulated investment minimum. However, unlike REITs
and opportunity funds, WRP Newco will be subject to corporate level taxation.
WRP Newco's management will include Jeffrey H. Lynford, Chairman, and Edward
Lowenthal, President and Chief Executive Officer, who were co-founders of, and
served in the same capacities at, Wellsford supported by a management team
with experience in real estate acquisitions, development, asset management and
financing. WRP Newco believes that the over 50 years of combined experience of
management in real estate, capital markets and public company operations,
their knowledge, credibility, and business relationships, and their
demonstrated track record of recognizing and profiting from emerging real
estate trends should help WRP Newco accomplish its business objectives. Since
the Wellsford IPO in November 1992, Messrs. Lynford and Lowenthal, through
Wellsford, acquired 69 multifamily properties containing 16,332 units. From
calendar year 1992 through calendar year 1996, Wellsford's revenues increased
from $26 million to $131.8 million, representing a compounded annual growth
rate of approximately 49%, and Wellsford EBITDA increased from $13.8 million
to $72.8 million, representing a compounded annual growth rate of
approximately 52%. In analyzing potential investments and market trends and
inefficiencies, management has reviewed, and will continue to review, current
economic and market information.
WRP Newco is a Maryland corporation which was incorporated in January 1997.
WRP Newco's executive offices are located at 610 Fifth Avenue, New York, New
York 10020 and its telephone number is (212) 333-2300.
BUSINESS STRATEGY
In furtherance of its business strategy, WRP Newco will initially focus on
investments in three distinct aspects of the real estate business. As
opportunities emerge and in response to changes in market, real estate and
general economic conditions, WRP Newco may in the future expand, retract from
or discontinue its real estate related business and activities.
Commercial Properties. WRP Newco will seek to acquire office and other
commercial properties below replacement cost and operate and/or resell such
properties after renovation, redevelopment and/or repositioning. WRP Newco
believes
101
<PAGE>
that appropriate well-located commercial properties which are currently
underperforming can be acquired on advantageous terms and repositioned with
the expectation of achieving enhanced returns which are greater than returns
which could be achieved by acquiring a stabilized property. WRP Newco also
believes that there are opportunities available to acquire properties that are
not attractive to REITs and institutional investors because the properties
have no or limited cash flow as a result of required rehabilitation and their
not being substantially leased. WRP Newco's acquisitions to date demonstrate
that WRP Newco is able to take advantage of existing opportunities in this
area. WRP Newco has hired Richard R. Previdi, a former partner at Trammell
Crow Co. with significant leasing and redevelopment experience in major
metropolitan areas from Washington, D.C. to New York, to seek out such
opportunities. Initially, WRP Newco will seek to apply its business strategy
to suburban office properties. In this regard, WRP Newco has acquired five
suburban office properties, consisting of six buildings, all of which are
located in Northern New Jersey. As opportunities arise, WRP Newco may seek to
acquire other types of commercial properties, including industrial properties.
See "Business and Properties".
High Yield Debt Investments. WRP Newco will make loans that constitute, or
will invest in real estate-related senior, junior or otherwise subordinated
debt instruments, which may be unsecured or secured by liens on real estate or
the economic benefits thereof. WRP Newco will focus on investments of this
type which have the potential for high yields or returns more characteristic
of equity ownership. These investments may contain options to acquire, or be
convertible into the right to acquire, all or a portion of the underlying real
estate, or contain the right to participate in the cash flow and economic
return which may be derived from the real estate. These investments may
include debt that is acquired at a discount, mezzanine financing, commercial
mortgage-backed securities, secured and unsecured lines of credit, distressed
loans, and loans previously made by foreign and other financial institutions.
In some cases WRP Newco may only acquire a participating interest in the debt
instrument. WRP Newco believes that there are opportunities to acquire real
estate debt, especially in the low or below investment grade tranches, at
significant returns as a result of inefficiencies in pricing. WRP Newco will
initially focus on opportunities arising in the following areas, among others.
First, where traditional CMBS buyers cannot or will not invest, such as the
purchase of subordinated real estate debt secured not by a mortgage but by
other indicia of ownership of an asset. Second, where WRP Newco believes that
the market has mispriced an outstanding tranche of debt because of
insufficient asset specific information. WRP Newco's investment in the
Sonterra Loan and its expected investment in the 277 Park Loan in April 1997
demonstrate its ability to take advantage of opportunities in this area. See
"Business and Properties".
Property Development. WRP Newco will engage in selective development
activities as opportunities arise and when justified by expected returns. WRP
Newco believes that by pursuing selective development activities it can
achieve returns which are greater than returns which could be achieved by
acquiring a stabilized property. Initially, WRP Newco will continue the
development of Palomino Park, its five-phase residential community begun by
Wellsford, taking advantage of the fixed-price purchase options for the land
underlying such residential community obtained by Wellsford two years ago.
This development may be retained for investment and operated by WRP Newco,
sold, or converted to condominium ownership. WRP Newco may also acquire land
for speculation, future development or subdivision. Certain development
activities may be conducted in joint ventures with local developers who may
bear the substantial portion of the economic risks associated with the
construction, development and initial rent-up of properties. As part of its
strategy, WRP Newco may seek to obtain bond financing from local governmental
authorities which generally bear interest at rates substantially below rates
with respect to conventional financing. See "Business and Properties".
WRP Newco may in the future make equity investments in entities owned by
third parties and which engage in real estate-related businesses and
activities or businesses that service the real estate business. Some of the
entities in which WRP Newco may invest may be start-up companies or companies
in need of additional capital. WRP Newco may also in the future invest in
retail, residential, hotel and other types of properties and may also manage
and lease properties owned by it or in which it has an equity or debt
investment.
In analyzing potential investments and market trends and inefficiencies,
management has reviewed, and will continue to review, current economic and
market information. Much of this information has been, and will continue to
be, provided by REIS Reports, Inc., a nationally recognized real estate market
database firm.
INITIAL CAPITAL AND FINANCING
Upon completion of the Distribution and consummation of the Merger and
certain of the other transactions described in this Joint Proxy
Statement/Prospectus/Information Statement, WRP Newco expects to have
available the following sources of capital, financing and credit support:
. $3.5 million of proceeds from the sale to ERP Operating Partnership of
shares of the WRP Newco Class A Common at a price equal to the Issuance
Price.
102
<PAGE>
. $25 million pursuant to the ERP Preferred Commitment to acquire up to
1,000,000 shares of the WRP Newco Series A Preferred at the request of
WRP Newco and subject to certain limited conditions. Each share of WRP
Newco Series A Preferred is convertible into shares of WRP Newco Common
Stock at a premium equal to 8% of the Issuance Price. The ERP Preferred
Commitment will be pledged as security for the WRP Newco Line of Credit.
. $50 million under a two-year WRP Newco Line of Credit as to which Bank
of Boston and Morgan Guaranty have issued a commitment. The WRP Newco
Line of Credit will bear interest at an annual rate equal to LIBOR plus
175 basis points and will be extendible for an additional one-year
period.
. $36.8 million, pursuant to an agreement with respect to the construction
financing for Phase I of Palomino Park, and approximately $30 million,
pursuant to an agreement expected to be entered into with respect to the
construction financing for Phase II of Palomino Park, in each case
guaranteed by a third-party developer and supported by the credit of ERP
Operating Partnership pursuant to its stand-by obligations.
. Approximately $14.8 million of credit enhancement from ERP Operating
Partnership with respect to the bonds issued to finance certain public
facilities at Palomino Park.
See "Description of Capital Stock of WRP Newco" and "Certain Agreements
Between WRP Newco and ERP Operating Partnership".
In addition to the foregoing, WRP Newco will receive from Wellsford at the
time of the Contribution approximately $18 million of cash (subject to
adjustment as provided in the Merger Agreement), substantially all of which
will be applied to the repayment of loans made by Wellsford to WRP Newco to
acquire certain office properties and make its expected investment in the 277
Park Loan.
WRP Newco's other sources of capital to finance its acquisition, investment,
development and other activities, may include retained earnings, funds derived
from the issuance of debt and equity securities, sales of investments and bank
borrowings. See "Policies with Respect to Certain Activities of WRP Newco".
WRP NEWCO LINE OF CREDIT
WRP Newco has received a commitment for a revolving line of credit in the
amount of up to $50 million from Bank of Boston and Morgan Guaranty as to
which each has agreed to lend up to $25 million. The WRP Newco Line of Credit
will be secured inter alia by WRP Newco's interest in the Sonterra Loan, the
277 Park Loan and the ERP Preferred Commitment. Under the WRP Newco Line of
Credit, WRP Newco will pay interest only, monthly, at an annual rate equal to,
at WRP Newco's option, either (i) LIBOR plus 175 basis points or (ii) the base
rate of Bank of Boston. The WRP Newco Line of Credit will be for a term of two
years and be extendible by WRP Newco with the consent of Bank of Boston and
Morgan Guaranty for one additional year. It will include customary covenants,
including, among others, (i) maintaining a ratio of liabilities to assets of
not in excess of .60 to 1.0, (ii) maintaining a debt service coverage ratio of
not less than 1.3 to 1.0, until the earlier to occur of (A) 12 months from
consummation of the line of credit, (B) WRP Newco raises at least $50 million
of equity, or (C) certain lease up tests are met with respect to certain of
WRP Newco's properties, at which time the required ratio will be not less that
1.5 to 1, (iii) a prohibition on the payment of dividends during the first
year of the WRP Newco Line of Credit and (iv) a prohibition of ground-up
development (other than Palomino Park).
MANAGEMENT
The management of WRP Newco will be led by substantially all of the current
senior management of Wellsford, including Jeffrey H. Lynford, Chairman, and
Edward Lowenthal, President and Chief Executive Officer, of WRP Newco, who
held the same offices at Wellsford. Joining them are Gregory F. Hughes and
David Strong, who are Chief Financial Officer and Vice President-Development,
respectively, of Wellsford, and Richard R. Previdi, who was previously a
managing director of Emmes & Company, a real estate investment company and a
managing director of Trammell Crow N.E., Inc. and Chief Executive Officer of
that company's Northern Virginia Commercial Division.
At the time of the Wellsford IPO in November 1992, Wellsford was the only
REIT dedicated exclusively to the ownership of multifamily properties.
Wellsford has sought to maximize long term profitability for its shareholders
by acquiring, developing, and operating multifamily properties in target
markets, applying sophisticated management and operating techniques, and
maintaining a conservative capital structure.
Wellsford Acquisitions
Messrs. Lynford and Lowenthal formed Wellsford Group, Inc. ("WGI") with an
initial capitalization of $1 million provided primarily by William E. Simon,
Raymond Chambers and Frank Walsh, former principals of Wesray, a private
103
<PAGE>
leveraged buy-out firm, and by principals of Eastdil Realty, Inc., a private
real estate investment banking firm. During the period from 1986 through
November 1992, WGI and its affiliates acquired 19 multifamily properties
consisting of 5,255 units. After WGI and its affiliates transferred their
properties to Wellsford in 1992, Wellsford commenced an aggressive acquisition
strategy by purchasing 69 properties containing 16,332 multifamily units which
increased the historical cost of its total assets from $147 million at the
time of the Wellsford IPO, to $756 million at December 31, 1996. These
acquisitions included 14 properties containing 5,100 units in Oklahoma
purchased for $133 million in May 1994, and the $250 million acquisition by
merger in December 1994 of Holly Residential Properties, Inc., a real estate
investment trust publicly traded on the New York Stock Exchange which
developed, owned and operated 34 properties containing over 5,000 multifamily
units in the Seattle/Tacoma area.
Wellsford Management and Development of Properties
During 1995 and 1996 Wellsford focused its efforts on its core portfolio and
the development of new properties. Property management, which had previously
been contracted to third parties, was substantially internalized. Wellsford
currently provides direct management for 84% of its properties. In addition,
Wellsford developed three new properties consisting of 548 multifamily units
during this period, helping to reduce the average age of its portfolio.
Wellsford also commenced development of Palomino Park, a 182-acre master
planned class A multifamily residential community in Highlands Ranch, a suburb
of Denver, Colorado. See "WRP Newco's Business and Properties--Palomino Park".
Wellsford Equity and Debt Financings
Wellsford funded its acquisition and development activities with various
sources of capital including public and private debt and equity. In November
1992, Wellsford raised $100 million in the Wellsford IPO. Wellsford was one of
the first REITs to obtain a corporate credit rating, when it received an
implied senior rating of BBB- from S&P and Duff & Phelps in September 1993.
This rating facilitated the issuance by Wellsford in November 1993 of $100
million of convertible preferred shares. In January 1995 Wellsford became one
of the first REITs to access the unsecured debt markets with a $100 million
issuance. In August 1995 Wellsford's senior credit rating was upgraded to BBB
by S&P and Duff & Phelps, which helped facilitate the issuance of $125 million
of unsecured notes and $57.5 million of perpetual preferred shares.
Wellsford's commitment to a conservative corporate capital structure,
including a 35% debt to total market capitalization ratio, resulted in the
investment grade rating and a gradual reduction of its costs of capital, as
reflected by the borrowing costs on its line of credit. At the time of the
Wellsford IPO, Wellsford's line of credit was secured and bore an annual
interest rate of LIBOR plus 3.75%. Wellsford's line of credit in the amount of
$150 million is now unsecured with an annual interest rate of LIBOR plus
1.50%. Most recently, Wellsford issued 3-year medium term notes at an annual
interest rate of LIBOR plus .32%.
Wellsford Return to Shareholders
As a result of the above accomplishments, Wellsford has raised its dividend
15% since the Wellsford IPO. Assuming the consummation of the Merger investors
who bought their shares of Wellsford Common in the Wellsford IPO would have
received an average annual return of approximately 22.8% on their initial
investment, based upon the April 1, 1997 closing market price of a common
share of beneficial interest of EQR on the New York Stock Exchange, and
assuming (i) all distributions received on such shares of Wellsford Common
were immediately reinvested in Wellsford Common and (ii) a value for each
share of WRP Newco Common Stock distributed in the Distribution equal to the
book value (which is currently estimated to be $10.43 per share).
There can be no assurance that WRP Newco's future performance or average
rate of return achieved by its investors will be similar to Wellsford's past
accomplishments or the average rate of return achieved by its shareholders.
WRP Newco's business strategy differs substantially from that of Wellsford's,
which operated as a REIT and invested only in multifamily properties.
104
<PAGE>
WRP NEWCO PRO FORMA CAPITALIZATION
The following table sets forth the pro forma capitalization of WRP Newco as
of December 31, 1996 on an historical basis and as adjusted to give effect to
the Merger and Distribution, the sale of shares of WRP Newco Class A Common to
ERP Partnership for an aggregate purchase price of $3.5 million and the
application of the net proceeds therefrom, and the funding of a portion of WRP
Newco's $50 million credit facility with Bank of Boston and Morgan Guaranty
for the purchase of five commercial office properties and the origination of a
loan. The information set forth in the table should be read in conjunction
with the WRP Newco financial statements and notes thereto, the WRP Newco pro
forma financial information and notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" of WRP Newco included elsewhere in this Joint Proxy
Statement/Prospectus/ Information Statement.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
DEBT:
Tax exempt mortgage note payable........................ $14,755 $ 14,755
Credit facility......................................... 45,000
------- --------
Total debt.......................................... $14,755 $ 59,755
======= ========
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value per share; 200,000,000
shares
authorized--4,899,965 shares issued and outstanding, as
adjusted............................................... $ -- $ 49
Capital in excess of par value.......................... 51,060
------- --------
Total stockholders' equity.......................... 30,005 51,109
------- --------
Total capitalization................................ $44,760 $110,864
======= ========
</TABLE>
WRP NEWCO DIVIDEND POLICY
WRP Newco does not currently contemplate paying dividends on WRP Newco
Common. Earnings from the investments of WRP Newco are currently expected to
be used by WRP Newco to finance future acquisitions and investments. The Board
of Directors of WRP Newco may determine in its discretion to pay dividends on
WRP Newco Common in the future, and any such determination will be dependent
upon WRP Newco's results of operations, financial condition, contractual
restrictions and other factors deemed relevant at that time by the WRP Newco
Board of Directors.
WRP NEWCO'S BUSINESS AND PROPERTIES
WRP Newco's initial assets will consist primarily of five office properties
consisting of six buildings; the 277 Park Loan; the Sonterra Loan and the
Sonterra Option; and an approximately 80% interest in Phases I and II of, and
in options to acquire and develop Phases III, IV and V of, Palomino Park. Set
forth below is a brief description of these assets and WRP Newco's plans with
respect thereto.
In the opinion of WRP Newco's management, all of the properties described
below are adequately covered by insurance.
WELLSFORD COMMERCIAL PROPERTIES
WRP Newco recently completed the acquisition of four commercial properties
and expects to acquire a fifth commercial property in April 1997 pursuant to
an existing contract. All the properties are located in suburban areas of
Northern New Jersey. These properties contain in the aggregate six office
buildings with approximately 940,400 gross square feet (or approximately
913,000 net rentable square feet) located on approximately 260 acres. The
aggregate purchase price for these properties is approximately $47.6 million
or approximately $50 per gross square foot of building area. None of the
properties is encumbered by mortgage liens. It is currently anticipated that
WRP Newco will invest approximately $13.7 million (approximately $15 per gross
square foot of building) for renovation and repositioning of the properties,
and will pay approximately $18.5 million (approximately $20 per gross square
foot of building) for tenant improvements and leasing costs, for a total cost
to WRP Newco of approximately $80 million. These acquisitions represent
opportunities which WRP Newco believes are impractical for REITs because they
provide little or no immediate cash return.
105
<PAGE>
Point View Office Complex
WRP Newco acquired the Point View office complex ("Point View") located in
Wayne, N.J. in February 1997. Point View, formerly the international
headquarters for American Cyanamid Company, consists of (i) a main campus
consisting primarily of two office buildings (the "Main Campus"); and (ii) two
smaller office buildings, located at 1700 and 1800 Valley Road. All the
buildings are currently vacant. It is expected that renovations to each of
these buildings will be completed by the end of 1997.
The Main Campus
The Main Campus consists of two parcels: (i) one parcel of approximately 194
acres on which two buildings consisting of an aggregate of approximately
560,000 gross square feet (approximately 530,000 net rentable square feet) are
situated and (ii) an approximately 10 acre site directly across from the
entrance to the two buildings which is zoned for approximately 7-8 single
family houses and has no existing structures. The 194-acre parcel is zoned for
the development of an additional 1 million square feet of office or research
space. The larger of the two buildings on the Main Campus (the "Serpentine
Building") was constructed in 1962, is of class B+ quality, four stories high
and contains approximately 400,000 gross square feet. The Serpentine Building
contains a fully functional cafeteria area seating 800, separate executive
officer tower, separate executive dining area and overlooks a large reservoir
and the heliport for the complex. The smaller building (the "West Building")
was constructed in 1976, is of class A quality, six stories high and contains
approximately 160,000 gross square feet. The West Building is connected to the
Serpentine Building by an underground passageway and has a (primarily)
moveable wall interior partitioning system, a fitness center and an
auditorium. There are 1,720 parking spaces currently serving both buildings.
On a pro forma basis, the Main Campus had a federal tax basis equal to its
purchase price of $15.8 million at December 31, 1996, and will be depreciated
straight-line over a 40-year estimated life. The current annual real estate
taxes on the Main Campus are $1.2 million, subject to pending negotiations
with the municipality of Wayne to reduce such taxes.
WRP Newco currently contemplates a number of renovations to the Serpentine
Building and the West Building to, among other things, refurbish the exterior,
add new elevators, and renovate the lobby and other common areas. Other
renovations will (i) enable the buildings to comply with current life safety
and ADA requirements and become more energy efficient; and (ii) eliminate
potentially hazardous materials (such as spray-on asbestos fireproofing in the
Serpentine Building's structure). Removal of the spray-on asbestos fire
proofing will cost approximately $3.5 million, and the estimated total cost of
all planned renovations will be approximately $9.1 million. WRP Newco will
finance the renovations from its working capital and its WRP Newco Line of
Credit.
The purchase price for the Main Campus was $15.8 million, or $28.00 per
gross square foot of building area, and together with the cost of planned
renovations, is expected to be $44.00 per gross square foot.
1700 Valley Road
The 1700 Valley Road building consists of 70,600 gross square feet
(approximately 67,000 net rentable square feet), is of class B+ quality, is
two stories high and is situated on a wooded nine acre site. The building was
constructed in two stages, during 1972 and 1979, and the interior was
completely refurbished in 1993. The building contains a full service dining
area and 294 parking spaces. WRP Newco contemplates renovation of the
building's facade, upgrading of the HVAC system and various cosmetic
improvements. The estimated cost of planned renovations is $200,000, and WRP
Newco will finance such renovations from its working capital and its WRP Newco
Line of Credit. The property is zoned for the development of an additional
50,000 square feet of office space.
The purchase price for 1700 Valley Road was $1.0 million, or $14.00 per
gross square foot of building area, and together with the cost of planned
renovations, is expected to be $17.00 per gross square foot.
1800 Valley Road
The 1800 Valley Road building consists of 54,800 gross square feet
(approximately 53,000 net rentable square feet), is of class B+ quality, is
two stories high and is situated on a wooded 14 acre site. The building was
constructed in 1980, contains a full service dining area and has 260 parking
spaces. WRP Newco contemplates replacing the roof and upgrading the HVAC
system, and other renovations to comply with existing life safety and ADA
codes. The estimated cost of planned renovations is $800,000, and WRP Newco
will finance such renovations from its working capital and its WRP Newco Line
of Credit. WRP Newco currently contemplates marketing this building primarily
for sale.
The purchase price for 1800 Valley Road was $2.0 million, or $36.00 per
gross square foot of building area, and together with the cost of planned
renovations, is expected to be $51.00 per gross square foot.
106
<PAGE>
Greenbrook Corporate Center
WRP Newco acquired The Greenbrook Corporate Center ("Greenbrook") in
Fairfield, N.J. in April 1997. Greenbrook consists of (i) a class A suburban
three-story office building with approximately 190,000 gross square feet
situated on approximately 20 acres and (ii) a contiguous undeveloped
approximately seven acre parcel zoned for development of an additional 50,000
square feet of office and light industrial use. The entrance to the building
is a 35-foot atrium lobby and the second and third floors have terraces
overlooking a park and country club which border the rear of the site. WRP
Newco intends to spend approximately $500,000 to renovate the building, and
WRP Newco will finance such renovations from its working capital and its WRP
Newco Line of Credit. The renovations are expected to be completed by October
1997.
Greenbrook, as WRP Newco's only occupied commercial property, accounted for
50% of WRP Newco's pro forma revenues during the year ended December 31, 1996.
The occupancy rate for Greenbrook as of April 1, 1997 was approximately 85.7%,
and the average annual gross rent per square foot as of such date was
approximately $20. The current asking gross rental rate per square foot is
approximately $23. On a pro forma basis, Greenbrook had a federal tax basis
equal to its purchase price of $23.7 million at December 31, 1996, and will be
depreciated straight-line over a 40-year estimated life. The current annual
real estate taxes on Greenbrook are approximately $428,000.
Greenbrook's two largest tenants are Information Resources, Inc. ("IRI"), a
market research firm, and S.B. Thomas Division of CPC International, whose
principal business is producing baked foods. IRI occupies 64,676 rentable
square feet, with an annual rent of approximately $1.3 million (or
approximately $20 per rentable square foot), under a lease that expires
December 2003. The annual rent to be paid by IRI increases over the term of
the lease to approximately $1.5 million (or approximately $23.5 per rentable
square foot) by its expiration in December 2003. S.B. Thomas occupies 49,384
rentable square feet with an annual rent of approximately $.9 million (or $19
per rentable square foot), under a lease that expires in 2005. S.B. Thomas has
the right to renew for two successive periods of five years each, at 95% of
the fair market value rent as of October 1st of the last lease year prior to
commencement of each renewal term. Greenbrook has nine additional tenants,
with aggregate annual rents of approximately $1.2 million.
The purchase price for this property was $23.7 million payable in cash, or
$125.00 per gross square foot of building area, and together with the cost of
planned renovations, is expected to be $127.00 per gross square foot.
Chatham, New Jersey
In January 1997, WRP Newco acquired a class A three-story suburban office
building consisting of approximately 65,000 gross square feet (approximately
63,300 net rentable square feet) located on approximately five acres in
Chatham, New Jersey.
WRP Newco currently intends to spend approximately $3.1 million to make
various renovations to upgrade the building's status including, among other
things, to add a first class lobby and improve other common areas, renovate
the facade and replace the HVAC system and provide landscaping. WRP Newco will
finance such renovations from its working capital and the WRP Newco Line of
Credit, and the renovations are expected to be completed by the end of the
third quarter of 1997. WRP Newco is currently marketing the building for
rental.
WRP Newco has entered into a lease with Quadrant HealthCom Inc., a publisher
of medical specialty magazines, for approximately 22,000 gross square feet in
the building which is approximately 33% of the gross leasable area of the
building. The lease is for a term of ten years (terminable after seven years
upon payment of six months' rent) at $26.00 per gross square foot for years 1-
5 and at approximately $28.00 per gross square foot for years 6-10.
The purchase price for the property was $5.1 million, or $78.00 per gross
square foot of building area, and together with the cost of planned
renovations, is expected to be $126.00 per gross square foot.
WELLSFORD HIGH YIELD INVESTMENT PORTFOLIO
277 Park Loan
WRP Newco and Bank of Boston are expected to enter into an $80 million loan
transaction (the "277 Park Loan") in April 1997 with entities which own
substantially all of the equity interests (the "Equity Interests") in the
entity which owns a 52-story, approximately 1.75 million square foot gross
leasable area, class A office building located in New York City in mid-town
Manhattan at 277 Park Avenue (the "277 Park Property"). WRP Newco and Bank of
Boston will lend $20 million and $60 million, respectively, pursuant to the
277 Park Loan. The 277 Park Loan will be secured primarily by a pledge of the
Equity Interests owned by the borrowers. There will also be a limited
guarantee from the individual who indirectly owns all the Equity Interests.
The 277 Park Loan will be subordinated to a 10-year $345 million first
mortgage loan (the "REMIC
107
<PAGE>
Loan") on the 277 Park Property, the proceeds for which will be obtained by
the sale of investment grade rated commercial mortgage pass-through
certificates in a real estate mortgage investment conduit. The notes
representing the REMIC Loan will bear interest at different rates which are
expected to equate to a weighted average interest rate of approximately 7 3/4%
per annum. The 277 Park Loan will bear interest at the rate of approximately
12% per annum for the first nine years of its term and at a floating annual
rate during the tenth year equal to LIBOR plus 5.15% or Bank of Boston base
rate plus 5.15%, as elected by the borrowers. Interest on the 277 Park Loan
will be payable monthly to the extent of available cash after payment of
interest on the REMIC Loan and the funding of various reserve accounts under
the REMIC Loan and provided there is no event of default under the REMIC Loan.
To the extent funds are not available to pay interest at a rate in excess of
10% per annum, such excess interest will accrue and be added to the principal
amount of the 277 Park Loan. The principal amount of the 277 Park Loan and all
accrued interest will be payable on May 1, 2007 which is also the due date of
the REMIC Loan. The 277 Park Loan will be prepayable only in full and then
only after the fifth year of the loan and must be repaid if the REMIC Loan is
repaid or the 277 Park Property is sold. Any prepayment during the sixth
through ninth years of the loan must be accompanied by a yield maintenance
payment.
The 277 Park Property is currently 100% leased to 33 tenants, including
Donaldson, Lufkin & Jenrette, Inc. which has leased approximately 47% of the
gross leasable area pursuant to a lease expiring in 2016. The 277 Park
Property was appraised for $555 million as of July 1, 1996 by an independent
nationally recognized appraiser. The appraisal was not prepared on behalf of
WRP Newco. An appraisal is an opinion of value made by experts, subject to the
assumptions and limiting conditions contained therein (including assumptions
relating to the discounted cash flow analysis contained therein).
Sonterra Assets
Sonterra Loan
WRP Newco will hold a $17.8 million mortgage loan made to the owner of
Sonterra, a 344-unit class A multifamily apartment complex located in Tucson,
Arizona, construction of which was completed in June, 1996. The Sonterra Loan
was originated in July, 1996 and the principal amount thereof is due on July
1, 1999. Until the maturity date, the borrower is to pay interest only,
monthly, at the rate of 9% percent per annum. The loan is non-recourse and
repayment of the loan is secured by a first mortgage on Sonterra and by a
personal guaranty of an individual affiliated with the owner. Under certain
circumstances, prepayment of the loan is subject to a prepayment premium equal
to 5% percent of the principal amount of the loan.
Sonterra Option Agreement
WRP Newco will also own an option to acquire Sonterra free and clear of all
mortgages and other material liens for approximately $20.5 million through
December 31, 1997 and for approximately $21 million if the sale is consummated
during 1998. ERP Operating Partnership will have a right of first offer to
acquire the Sonterra Option and a right to acquire the option if WRP Newco
does not exercise it. If WRP Newco acquires Sonterra, then WRP Newco and ERP
Operating Partnership will enter into a "Right of First/Last Offer Agreement"
in substantially the same form as the Right of First/Last Offer Agreement
entered into pursuant to the Agreement Regarding Palomino Park. See "Certain
Agreements Between WRP Newco and ERP Operating Partnership--Agreement
Regarding Palomino Park".
WELLSFORD PROPERTY DEVELOPMENT
Palomino Park
Palomino Park is a master planned five-phase multifamily development project
comprising approximately 182 acres, of which 65 acres have been developed, in
suburban South East Denver, Colorado, about 14 miles from Denver's central
business district. It is situated within Highlands Ranch, a 22,000 acre master
planned community. Palomino Park is intended to be developed as an integrated
project comprising an 1,880-unit, class A multifamily apartment community
constructed around a centrally located 24 acre park which will feature tennis
courts, athletic fields, a putting green and an amphitheater. There is also a
29,000 square foot recreation center which has been completed and which
includes a full-size gymnasium, fitness center, indoor golf range, racquet
ball courts, and a baby-sitting facility and has an adjacent swimming pool.
Palomino Park will also have a perimeter wall with a guard at the entry gate.
Wellsford Park Highlands Corp. ("WPHC"), a wholly-owned subsidiary of
Wellsford, acquired fixed-price options in 1995 to purchase the land
underlying each of the phases (hereinafter referred to collectively as
"Phases" or individually as a "Phase" or specifically as "Phase I," "Phase
II," "Phase III," "Phase IV" or "Phase V") of Palomino Park. The land
underlying Phases I and II has been acquired, and WRP Newco intends to acquire
the land underlying Phase III, which is subject to an option which expires in
May, 1997. The land underlying Phases IV and V is subject to options which
expire in May, 1998 and May, 1999, respectively. There can be no assurance
that Phase III, Phase IV or Phase V will be commenced
108
<PAGE>
or if commenced, that it will be completed. See "WRP Newco Risk Factors--Risks
of Acquisition, Development, Construction and Renovation Activities". The
purchase price for land acquired with respect to any Phase is $73,500 per
acre, subject to an increase of the purchase price by 6% per annum from and
after November 30, 1994. The land options should reduce WRP Newco's exposure
to market cycles in Denver while enabling WRP Newco to develop a signature
residential community in one of the fastest growing counties in the country.
Upon completion of any or all of the Phases, WRP Newco will either operate
and rent apartment units or convert all or a portion of them to condominium
ownership which a REIT also could not do because of the adverse tax
consequences thereof.
The development of Palomino Park calls for construction of the 1,880 units
over a period of five years at a total estimated cost of $194 million. WRP
Newco currently has invested $21.3 million in the development of Palomino
Park.
Phase I, referred to as Blue Ridge, will consist of 456 units of which 192
are constructed, 175 are leased and 143 are occupied. Rents range from $760
per month for a one bedroom, one bathroom to $1,375 per month for a three
bedroom, two bathroom unit. Garages are available and washer and dryer hook-
ups exist in all the apartments. Completion of construction of this Phase is
expected in late 1997. The total estimated cost of Blue Ridge is approximately
$42.5 million.
Phase II, referred to as Red Canyon, is expected to consist of 304 units.
The total estimated cost of Red Canyon is approximately $33.6 million. Site
preparation for construction of Phase II has recently begun and construction
of Phase II is expected to be completed in late 1998.
Blue Ridge is owned by Park at Highlands LLC ("Phase I LLC"), a limited
liability company, the members of which are WPHC (99%) and Al Feld ("Feld")
(1%). Red Canyon is owned by Red Canyon at Palomino Park LLC ("Phase II LLC"),
a limited liability company, the members of which are WPHC (99%) and Feld
(1%). Al Feld is a Denver-based developer specializing in the construction of
luxury residential properties. He has constructed over 3,000 units since 1984.
Various development, construction and property management and guarantee
fees, as well as certain other fees designed to provide cost savings
incentives in connection with property construction and stabilization, are
paid to Feld and his affiliates. These amounts are included in the cost
estimates for Phase I and Phase II described above. Feld has unconditionally
guaranteed completion of Phase I within 30 months and Phase II within 24
months, in each case after closing of the construction loan, and has agreed to
a one-year guarantee of such Phases against construction defects. In addition,
in the case of both Blue Ridge and Red Canyon, Feld has agreed, subject to
certain conditions, to fund deficits in development and operating costs. To
secure his obligations to make deficit payments and perform all of his other
obligations under the operating agreements, Feld has pledged his interests in
Phase I LLC and Phase II LLC to WPHC.
The operating agreements provide that neither member may transfer, pledge or
assign its interest in the Phase I LLC or Phase II LLC without the consent of
the other member, except that (i) WPHC may transfer a portion of its interest
provided it retains at least a 21% interest in Phase I LLC or Phase II LLC, as
the case may be, and (ii) WPHC has an option to acquire Feld's 1% interest for
fair market value at any time after completion of the Phase, and Feld has an
option to compel WPHC to buy his 1% interest for fair market value upon
completion of the Phase.
The construction loan on Blue Ridge is for approximately $36.8 million,
matures on December 31, 1998, and bears interest at the prime rate, except
that the Phase I LLC may elect to cause a portion of the previously advanced
principal to bear interest at LIBOR plus 175 basis points. Feld has guaranteed
repayment of this loan. Phase II LLC expects to obtain a construction loan for
approximately $30 million to finance construction of Red Canyon.
Wellsford has agreed with the Phase I construction lender (the "Tri-Party
Agreement") to purchase the loan when due, assuming completion of
construction, if it is not paid off by the Phase I LLC or by Feld pursuant to
his guaranty, for the lesser of the loan balance or the final agreed upon
budget. Concurrently with the Merger, ERP Operating Partnership has agreed to
substitute itself for Wellsford under the Tri-Party Agreement, with the
consent of the Phase I construction lender. ERP Operating Partnership has
agreed to provide substantially similar credit support for the Phase II
construction loan as it has agreed to provide for the Phase I construction
loan. See "Certain Agreements Between WRP Newco and ERP Operating
Partnership--Agreement Regarding Palomino Park".
Palomino Park Public Improvements Corporation ("PPPIC"), a Colorado non-
profit corporation, has issued $14.8 million of tax exempt bonds due on
December 1, 2035 (the "Bonds") to finance the development of the park and
certain parts of the infrastructure within Palomino Park, which have a total
cost of approximately $18.3 million. The Bonds bear interest at a floating
rate, which is currently approximately 4% per annum, but may be converted to a
term rate or a fixed rate. Subject to certain restrictions, revenue assessment
liens are imposed against the Phases to secure the obligation of the Phase
owners to repay the portion of the Bonds' debt service attributed by PPPIC to
their respective Phases.
109
<PAGE>
If it is determined to proceed with Phases III, IV and/or V, the ownership
and transaction structure of each such Phase is expected to be similar to that
of Phases I and II, although neither Wellsford nor Feld has any obligation to
continue the relationship for future Phases.
CASH
Approximately $18 million of cash will be contributed by Wellsford to WRP
Newco, a substantial portion of which will be applied to repay indebtedness
incurred to acquire WRP Newco's commercial properties.
LEGAL PROCEEDINGS
Neither WRP Newco nor the Properties are presently subject to any material
litigation nor, to WRP Newco's knowledge, is any material litigation
threatened against WRP Newco or the Properties, other than routine litigation
arising in the ordinary course of business and which is expected to be covered
by liability insurance.
CERTAIN AGREEMENTS BETWEEN
WRP NEWCO AND ERP OPERATING PARTNERSHIP
The following describes certain aspects of the agreements to be entered into
by WRP Newco and ERP Operating Partnership on the Effective Date. The
following descriptions do not purport to be complete and are qualified in
their entirety by reference to the full text of the agreements, which are
filed as exhibits to the registration statement on Form 10 filed by WRP Newco.
COMMON STOCK AND PREFERRED STOCK PURCHASE AGREEMENT
Following the Distribution and upon consummation of the Merger, WRP Newco
will enter into the Stock Purchase Agreement with ERP Operating Partnership,
providing for the sale of WRP Newco Class A Common and WRP Newco Series A
Preferred to ERP Operating Partnership on the terms described below.
WRP Newco Class A Common Stock
Pursuant to the terms of the Stock Purchase Agreement, ERP Operating
Partnership will purchase from WRP Newco upon the Closing Date shares of WRP
Newco Class A Common for an aggregate purchase price of $3.5 million at a
price per share equal to the Issuance Price. The "Issuance Price" is defined
in the Stock Purchase Agreement as (a) the average gross purchase price of WRP
Newco Common Stock sold to institutional purchasers on or prior to the Closing
Date or subject to written commitments to purchase WRP Newco Common Stock from
institutional purchasers received on or prior to the Closing Date
(collectively "Institutional Sales") or (b) if there are no Institutional
Sales, the net book value per share of WRP Newco Common Stock on the Closing
Date.
For a description of the WRP Newco Class A Common, see "Description of
Capital Stock of WRP Newco--Class A Common Stock".
WRP Newco Series A Preferred Stock.
Pursuant to the terms of the Stock Purchase Agreement, ERP Operating
Partnership will agree to purchase from WRP Newco up to 1,000,000 shares of
WRP Newco Series A Preferred at $25.00 per share as requested by WRP Newco
over the three-year period (the "Commitment Period") commencing on the Closing
Date. Purchases of Class A Preferred are to be in minimum aggregate amounts of
$1 million and in multiples of $500,000 in excess thereof. The obligations of
ERP Operating Partnership to acquire WRP Newco Series A Preferred are subject
to, among other matters, certain representations and warranties being true and
correct in all material respects and there being no event of default existing
under the Stock Purchase Agreement.
For a description of the WRP Newco Series A Preferred, see "Description of
Capital Stock of WRP Newco--Series A 8% Convertible Redeemable Preferred
Stock".
WRP Newco Board Member Elected by ERP Operating Partnership.
On the Closing Date, ERP Operating Partnership, as the holder of WRP Newco
Class A Common, is entitled to elect Douglas Crocker II, President of EQR, to
the WRP Newco Board of Directors. In the event Mr. Crocker (or other person
subsequently elected by ERP Operating Partnership to the WRP Newco Board of
Directors) is unable or unwilling to serve
110
<PAGE>
as a director or is no longer employed by ERP Operating Partnership, ERP
Operating Partnership and WRP Newco will agree to the election of another
member of senior management of ERP Operating Partnership to the WRP Newco
Board of Directors (Crocker or such other individual elected by WRP Newco
Class A Common shareholders, called the "Purchaser Director").
Voting of WRP Newco Class A Common and WRP Newco Series A Preferred.
For ten years after the Closing Date, WRP Newco has the right to direct the
voting of all shares of WRP Newco Series A Preferred, WRP Newco Class A Common
and WRP Newco Common owned by ERP Operating Partnership or any of its
affiliates, except as to the election of the Purchaser Director or any matter
relating to the rights, preferences and privileges of the WRP Newco Series A
Preferred or the WRP Newco Class A Common.
Sale of Stock.
For ten years after the Closing Date, ERP Operating Partnership shall first
offer, in writing (a "Notice of Proposed Sale"), to sell any shares of WRP
Newco Common, WRP Newco Class A Common, WRP Newco Series A Preferred or
warrants to purchase WRP Newco Common owned by it to WRP Newco prior to
selling such shares to any other entity. If WRP Newco has not agreed to
purchase such shares within 20 days of receipt of such notice, ERP Operating
Partnership shall have the right to sell such shares to any other entity for a
period of 90 days provided any sale is made on terms and conditions no more
favorable to such entity than specified in the Notice of Proposed Sale.
Events of Default.
An event of default occurs under the Stock Purchase Agreement upon the
occurrence of any of the following events, among others: (i) a judgment for
the payment of money in an aggregate amount in excess of $250,000 is rendered
against WRP Newco and such judgement remains undischarged for 30 days; (ii) a
change in control of WRP Newco (as defined in the Stock Purchase Agreement);
(iii) WRP Newco fails to pay the dividend on the WRP Newco Series A Preferred
on three separate instances; or (iv) a change resulting in or that could
reasonably be expected to result in a material adverse effect on WRP Newco.
Remedies.
Upon the occurrence of an event of default, all obligations of ERP Operating
Partnership to purchase shares of WRP Newco Series A Preferred automatically
terminate unless WRP Newco delivers a notice to ERP Operating Partnership
requesting the purchase by ERP Operating Partnership of WRP Newco Series A
Preferred, and the proceeds of such sale would cure such event of default. In
addition, in the event of the bankruptcy of WRP Newco or if WRP Newco fails to
pay the dividend on the WRP Newco Series A Preferred on three separate
instances, ERP Operating Partnership has the right to cause WRP Newco to
purchase the WRP Newco Series A Preferred then held by ERP Operating
Partnership.
REGISTRATION RIGHTS AGREEMENT
Upon issuance of the WRP Newco Class A Common, WRP Newco and ERP Operating
Partnership will enter into a Registration Rights Agreement providing for
registration rights at WRP Newco's expense with respect to shares of WRP Newco
Class A Common, WRP Newco Series A Preferred and WRP Newco Common.
Demand Registration.
After the Effective Date, upon request (a "Demand Notice") of ERP Operating
Partnership, WRP Newco has agreed to file a registration statement providing
for the resale by ERP Operating Partnership of Registrable Securities and will
use its best efforts to cause any such registration statement to be declared
effective by the Commission. "Registrable Securities" means any of: (i) WRP
Newco Series A Preferred issuable or issued; (ii) WRP Newco Common issuable or
issued upon conversion of shares of WRP Newco Series A Preferred or WRP Newco
Class A Common, or (iii) WRP Newco Common issuable or issued upon the exercise
of warrants issued pursuant to the Articles Supplementary. WRP Newco is
entitled to postpone for a reasonable period of time (but not in excess of 60
days) the filing of any registration statement, if the Board of Directors of
WRP Newco determines that such registration and offering would materially
interfere with any proposed material transaction involving WRP Newco.
ERP Operating Partnership has the right to deliver one Demand Notice during
any calendar year, but not more than four Demand Notices during the period
ending five years from the Effective Date.
111
<PAGE>
Incidental Registration.
If WRP Newco proposes to register any WRP Newco Common for public sale
pursuant to an underwritten offering it will give prompt written notice (a
"Registration Notice") to ERP Operating Partnership and upon request from ERP
Operating Partnership, WRP Newco will include Registrable Securities in the
registration statement. WRP Newco will not be required to effect any
registration if WRP Newco is advised by a nationally recognized independent
investment banking firm selected by WRP Newco to act as lead underwriter, that
a registration at that time of additional securities would materially and
adversely affect the offering.
ERP Operating Partnership has the right to deliver one Registration Notice
during any calendar year, but not more than four Registration Notices during
the period ending five years from the Effective Date.
Limit in Aggregate Amount.
WRP Newco need not register Registrable Securities pursuant to a Demand
Notice or Registration Notice unless the Registrable Securities being
registered have an aggregate fair market value of (i) $5,000,000 during the
period ending three years from the Effective Date ("Initial Period"), or (ii)
$7,500,000 at any time after the Initial Period.
Lockup.
In the event WRP Newco proposes to effect the distribution of its securities
through an underwritten public offering, beginning seven days prior to the
pricing of such offering and ending thirty days after such pricing, ERP
Operating Partnership, in the event it beneficially owns in excess of 100,000
shares, will cease any sale or other disposition of any of the Registrable
Securities, if requested by WRP Newco; provided, however, that ERP Operating
Partnership will not be subject to more than one lockup period during any 12
month period.
AGREEMENT REGARDING PALOMINO PARK
General.
Upon consummation of the Merger, WRP Newco and ERP Operating Partnership
will become the shareholders in WPHC. Pursuant to the Contribution and
Distribution Agreement, Wellsford will contribute to WRP Newco 80% of its
shares of WPHC, consisting of voting Class A Shares (the "Class A Shares").
The remaining 20% of Wellsford's shares in WPHC, consisting of non-voting
Class B Shares (the "Class B Shares"), will be retained by Wellsford and,
following the Merger, will be owned by ERP Operating Partnership. WPHC,
together with Feld, are the two members of the limited liability companies--
Park at Highlands LLC and Red Canyon at Palomino Park LLC--which own Phase I
and Phase II, respectively. WRP Newco and ERP Operating Partnership will enter
into an agreement (the "Palomino Agreement") regarding their rights and
obligations as shareholders of WPHC and certain aspects of the development of
Palomino Park, including Phases I (Blue Ridge) and II (Red Canyon). Certain of
the terms are summarized below.
Capital Contributions.
WPHC is obligated to make capital contributions to the Phase I LLC and Phase
II LLC for certain acquisition costs, and to fund the deficit between
construction costs and construction loan proceeds, respectively. These
subsequent capital contribution obligations ("Phase Contributions") are
limited to the deficits as projected in the budgets originally adopted for
each Phase. Wellsford has guaranteed the Phase Contributions, which
guarantees, following the Merger and with the consent of Feld, will be assumed
by WRP Newco.
ERP Operating Partnership has no obligation to contribute capital to WPHC.
Issuance of Additional WPHC Shares to WRP Newco; Anti-Dilution Provisions.
If additional shares of WPHC are issued to WRP Newco or to one of its
subsidiaries, ERP Operating Partnership will have the right to purchase a
sufficient number of such shares to retain a 20% interest in WPHC. Any Class A
Shares acquired by ERP Operating Partnership will be converted into Class B
Shares.
Offers to Purchase Class A Shares or Class B Shares; Rights of First Refusal;
WRP Newco's Drag Along Right.
ERP Operating Partnership may transfer all, but not part, of its Class B
Shares, except in a Tag Along transaction (described below).
WRP Newco may transfer all or part of its Class A Shares after the
expiration of the lock-up period (i.e., the period during which ERP Operating
Partnership is liable to the construction lender under a Tri-Party Agreement,
as described below).
112
<PAGE>
If WRP Newco receives an offer to purchase all of the Class A Shares, WRP
Newco has the right ("Drag Along Right") to compel ERP Operating Partnership
to sell all of its Class B Shares as part of that transaction to enable WRP
Newco to effectuate a total sale of WPHC to a third party.
If ERP Operating Partnership or WRP Newco shall receive an offer from a bona
fide third party to purchase all (or in the case of WRP Newco any part) of
their shares in WPHC, then the selling shareholder shall be obligated to offer
to sell its shares to the other shareholder (i.e. the non-selling shareholder)
who shall have a preemptive right ("Right of First Refusal") to purchase the
offered shares on the same terms.
ERP Operating Partnership may exercise its Right of First Refusal as to the
Class A Shares, notwithstanding that WRP Newco may have exercised its Drag
Along Right. In such event and for such purpose, WRP Newco's Class A Shares
shall be valued as if all of the shares of WPHC had been sold, and not only
the Class A Shares alone.
ERP Operating Partnership's Tag Along Right.
ERP Operating Partnership has a right ("Tag Along Right") to compel WRP
Newco to include ERP Operating Partnership's Class B Shares in a sale of the
Class A Shares, in such amount as will preserve the 80%-20% ratio between the
Class A Shares held by WRP Newco and Class B Shares held by ERP Operating
Partnership.
The Put/Call Feature of One-Half of the Class B Shares.
One-half of ERP Operating Partnership's Class B Shares (the "Put/Call
Shares") are subject to a Put/Call agreement in favor of either ERP Operating
Partnership (the Put feature) or WRP Newco (the Call feature) at the Put/Call
Price.
Pursuant to its Put right, ERP Operating Partnership may compel WRP Newco to
purchase from ERP Operating Partnership the Put/Call Shares at any time after
the fifth year for the Put/Call Price.
Pursuant to its Call right, WRP Newco may compel ERP Operating Partnership
to sell to WRP Newco the Put/Call Shares at any time for the Put/Call Price.
The Put/Call Price equals $1.9 million (adjusted, in the case of the Call,
for inflation after the fifth year), less any amounts previously received by
ERP Operating Partnership from sale and refinancing proceeds.
Consistent with the foregoing, one-half of the Class B Shares in any sale
transaction effected by means of either the Drag Along Right or the Tag Along
Right is deemed Put/Call Stock and entitled to receive the greater of the
purchase price in such transaction or a pro-rated portion of the Put/Call
Price.
Future Acquisitions of the Remaining Overall Property.
Any future Phase acquired by WPHC will be acquired in a Colorado limited
liability company substantially similar to the Phase II LLC.
ERP Operating Partnership's Right of First Offer if WPHC Elects to Assign its
Interest in the Land Contract.
If WRP Newco, through WPHC, decides not to acquire a future Phase and
instead to assign the land contract to a third party for such future Phase,
then ERP Operating Partnership, subject to the similar interests of Feld, has
a preemptive right of first offer with respect to such proposed assignment.
ERP Operating Partnership's Right of First/Last Offer for Sale of Blue Ridge
and Red Canyon.
With the exception of sales pursuant to a condominium or townhome plan, ERP
Operating Partnership is accorded certain rights of first and last offer with
respect to a sale of either WPHC's interest in the Phase I LLC or the Phase II
LLC, or the sale of fee title to Phase I or Phase II by either of said
entities.
WRP Newco and WHPC Loss of Control.
WRP Newco has agreed not to lose its controlling interest in WPHC nor to
permit WPHC to lose its controlling interest in Phase I LLC, Phase II LLC or
any future entity formed with respect to another phase of Palomino Park
without first releasing ERP Operating Partnership from its obligations with
respect to the Credit Enhancement Agreement and ERP Guaranty (as defined
below).
Tri-Party Agreements and Standby Agreements.
Phase I Tri-Party Agreement. With respect to the development of Phase I,
NationsBank, N.A. ("NationsBank") has provided a construction loan of
approximately $36.7 million. Wellsford, PPPIC and NationsBank have entered
into an
113
<PAGE>
agreement ("Phase I Tri-Party Agreement") under which Wellsford has agreed,
assuming completion of construction, if the loan is not paid when due, to pay
NationsBank the lesser of the loan balance or the final agreed upon budget.
Upon consummation of the Merger, ERP Operating Partnership will, with the
consent of NationsBank, assume Wellsford's obligations under the Phase I Tri-
Party Agreement.
Phase II Tri-Party Agreement. With respect to the development of Phase II, a
construction loan has not yet been obtained. ERP Operating Partnership has
agreed to provide substantially similar credit support for the Phase II
construction loan ("Phase II Tri-Party Agreement") as it has agreed to provide
pursuant to the Phase I Tri-Party Agreement. ERP Operating Partnership will
receive a fee of (i) 1% of the committed construction loan amount for each of
the first two years and (ii) 1 1/2% of such amount for the third year. The
parties anticipate a construction loan of approximately $30 million.
The Standby Agreements. If ERP Operating Partnership does, in fact, pay off
the construction loan pursuant to its obligations under the Phase I Tri-Party
Agreement or Phase II Tri-Party Agreement, ERP Operating Partnership shall be
entitled to acquire fee title to the corresponding Phase for $100.
Events of Default. Upon an event of default (as described below), ERP
Operating Partnership may exercise all remedies available to it and shall have
no obligation to enter into the Phase II Tri-Party Agreement; provided,
however, ERP Operating Partnership may not disaffirm its obligations under the
Phase I Tri-Party Agreement or, if entered into prior to the event of default,
the Phase II Tri-Party Agreement. An event of default includes, among other
things, a material misrepresentation by WRP Newco, failure to make payments
after a material default by WRP Newco under the Palomino Agreement or any
document entered into pursuant to the Palomino Agreement, an undischarged
judgment against WRP Newco in excess of $250,000 and a change in control of
WRP Newco.
CREDIT ENHANCEMENT AGREEMENT
At the time of the Contribution and Distribution, with the consent of
Dresdner Bank, AG, NY Branch ("Dresdner"), WRP Newco will assume Wellsford's
obligations under a certain agreement (the "Bank Reimbursement Agreement")
entered into between PPPIC, Wellsford and Dresdner pursuant to which (i)
Dresdner has issued its letter of credit ("Dresdner Letter of Credit") to
insure the repayment of the Bonds and (ii) Wellsford has undertaken to
reimburse Dresdner if the Dresdner Letter of Credit is drawn upon.
ERP Operating Partnership has agreed to enter into a Credit Enhancement
Agreement with WRP Newco (the "Credit Enhancement Agreement") under which,
assuming the satisfaction of certain conditions, ERP Operating Partnership
will make its own credit available to Dresdner in the form of a guaranty to
Dresdner of WRP Newco's obligations under the Bank Reimbursement Agreement for
a period of eight years from the consummation of the Merger (the "ERP
Guaranty").
The ERP Guaranty will be revised and made available with respect to any
similar letter of credit or credit facility issued in lieu or replacement of
the Dresdner Letter of Credit.
WRP Newco has agreed to pay ERP Operating Partnership for the ERP Guaranty
an annual credit enhancement fee, payable quarterly, equal to .5% of the face
amount of the Dresdner Letter of Credit (or the face amount of any alternate
credit arrangement). Following an event of default by WRP Newco, ERP Operating
Partnership will have the right, among other remedies, to select an alternate
interest rate on the Bonds and to direct the actions of PPPIC under the Credit
Enhancement Agreement. In addition, pursuant to the Credit Enhancement
Agreement there are certain restrictions on the ability to convert the rate
mode of the Bonds. WRP Newco has agreed to reimburse ERP Operating Partnership
for any amounts it pays under the ERP Guaranty or any revision thereof,
together with interest on such amount.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES OF WRP NEWCO
The following is a discussion of WRP Newco's investment policies, financing
policies and policies with respect to certain other activities. WRP Newco's
policies with respect to these activities have been determined by the
directors of WRP Newco and may be amended or revised from time to time at the
discretion of the directors without a vote of the stockholders of WRP Newco.
INVESTMENT POLICIES
WRP Newco intends to invest in real estate directly or indirectly through
entities that engage in real estate-related activities. These investments may
be in the form of debt or equity.
114
<PAGE>
Debt investments may include the purchasing of mortgage loans, other
financial instruments collateralized by real estate or real estate interests,
or participations therein, real property tax liens or tax-exempt bonds
collateralized by real estate or tax-increment finance districts. These debt
instruments may be senior, junior or otherwise subordinated to the interests
of others. Further, WRP Newco may provide credit enhancement or guarantees of
the obligations of others involved in real estate-related activities. WRP
Newco may also invest in participating or convertible mortgages if WRP Newco
concludes that it may benefit from the cash flow and/or any appreciation in
the value of the property. Such mortgages may be similar to equity
participations. WRP Newco may also make mortgage loans or participate in such
loans and contemporaneously or otherwise obtain related property purchase
options.
Equity investments may include development projects directly or through
joint ventures, as well as the purchase of general or limited partnership
interests in limited partnerships, shares in publicly-traded or privately-held
corporations or interests in other entities that own real estate, make real
estate-related loans or invest in real estate-related debt instruments or
provide services or products to the real estate industry. WRP Newco intends to
engage in active real estate businesses, which may include land subdivisions,
condominium conversions, property sales, and other businesses considered
ineligible or impractical investments for REITs. WRP Newco may also hold real
estate or interests therein for investment. WRP Newco may purchase
substantially leased, mostly unleased or vacant properties of any type or
geographic location. WRP Newco intends to renovate and re-lease the mostly
unleased or vacant properties.
The activities described above often do not generate immediate cash flow,
and cash flow generated may be non-recurring. These investments may be subject
to existing debt financing and any such financing will have a priority over
the equity interests of WRP Newco.
WRP Newco may offer to exchange its securities for properties and securities
of other entities. Further, it may, from time to time, repurchase its shares.
WRP Newco will seek investments generally with a duration of one to five
years.
FINANCING POLICIES
WRP Newco will seek to finance its investments through both public and
private secured and unsecured debt financings, as well as public and private
placements of its equity securities. The equity securities will include both
common and preferred equity issuances. WRP Newco does not have a policy
limiting the number or amount of mortgages that may be placed on any
particular property, but mortgage financing instruments usually limit
additional indebtedness on such properties. There are currently no
restrictions on the amount of debt that WRP Newco may incur.
Also, WRP Newco does not plan to distribute dividends for the foreseeable
future, which will permit it to accumulate for reinvestment cash flow from
investments, disposition of investments and other business activities.
WRP Newco has obtained a written commitment from Bank of Boston and Morgan
Guaranty for a $50 million two-year line of credit. This facility is subject
to certain financial and other covenants. In the future, WRP Newco may seek to
extend, expand, reduce or renew such facility, or obtain an additional or a
replacement facility. See "Wellsford Real Properties, Inc.--Initial Capital
and Financing".
POLICIES WITH RESPECT TO OTHER ACTIVITIES
WRP Newco does not intend to qualify as a REIT, but it may, from time to
time, invest in REITs, sell properties or entities to REITs for cash and/or
securities. Further, it may spin-off to its common stockholders, shares of its
subsidiaries or shares of other entities it has acquired through the sale of
its properties, investments or otherwise. These spin-offs may be taxable or
non-taxable, depending upon the facts and circumstances. WRP Newco's policies
with respect to its activities may be reviewed and modified from time to time
by WRP Newco's directors without notice to or vote of its stockholders.
115
<PAGE>
MANAGEMENT OF WRP NEWCO
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of WRP Newco, their ages and their
positions are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
---- --- -------------
<S> <C> <C>
Jeffrey H. Lynford................ 49 Chairman of the Board, Secretary
and Director**
President, Chief Executive Officer and
Edward Lowenthal.................. 52 Director*
Gregory F. Hughes................. 33 Chief Financial Officer
David Strong...................... 38 Vice President for Development
Rodney F. Du Bois................. 60 Director*
Mark S. Germain................... 46 Director**
Frank J. Hoenemeyer............... 77 Director***
Frank J. Sixt..................... 45 Director***
Douglas J. Crocker II(1).......... 56 Proposed Director**
</TABLE>
- -------
*Term expires 1998
**Term expires 1999
***Term expires 2000
(1) Mr. Crocker will become a director upon consummation of the Distribution
and Merger and the purchase by ERP Operating Partnership of WRP Newco
Class A Common. Mr. Crocker will remain a director for a minimum of two
years, and thereafter so long as certain conditions are met. See
"Description of Capital Stock of WRP Newco--Class A Common Stock".
Jeffrey H. Lynford has been the Chairman of the Board, Secretary and
Director of WRP Newco since its formation in January 1997 and has been the
Chairman of the Board and Secretary of Wellsford since its formation in July
1992 and was the Chief Financial Officer of Wellsford from July 1992 until
December 1994. Mr. Lynford was the Chairman of the Board of WGI since its
formation in 1986. Mr. Lynford currently serves as a trustee emeritus of the
National Trust for Historic Preservation and as a director of four mutual
funds: Cohen & Steers Total Return Realty Fund, Inc., Cohen & Steers Realty
Shares, Inc., Cohen & Steers Realty Income Fund, Inc. and Cohen & Steers
Special Equity Fund, Inc. He is also a member of the New York bar. Prior to
founding WGI, Mr. Lynford gained real estate and investment banking experience
as a partner of Bear Stearns & Co. and a managing director of A.G. Becker
Paribas, Inc.
Edward Lowenthal has been the President, Chief Executive Officer and
Director of WRP Newco since its formation in January 1997 and has been the
President and Chief Executive Officer and a trustee of Wellsford since its
formation in July 1992 and was President of WGI since its formation in 1986.
Mr. Lowenthal currently serves as a director of United American Energy
Corporation, a developer, owner and operator of hydroelectric and other
alternative energy facilities, a director of Corporate Renaissance Group,
Inc., a mutual fund, a director of Omega Healthcare, Inc., a REIT, a director
of Great Lakes REIT, Inc., a REIT that owns and operates office buildings, and
a trustee of Corporate Realty Income Trust, a REIT. He is also a member of the
executive committee and The Board of Governors of the NAREIT. Prior to
founding WGI, Mr. Lowenthal gained real estate and investment banking
experience as a partner of Bear Stearns & Co., a managing director of A.G.
Becker Paribas, Inc., and a partner in the law firm of Robinson Silverman
Pearce Aronsohn & Berman.
Gregory F. Hughes has been the Chief Financial Officer of WRP Newco since
its formation in January 1997 and has been a Vice President--Chief Financial
Officer of Wellsford since December 1994. From March 1993 until December 1994
he was a Vice President and Chief Accounting Officer of Wellsford. During
1992, Mr. Hughes was a controller with Jones Lang Wootton Realty Advisors, a
firm that provides real estate asset management and investment consultation
services. From 1985 to 1991, Mr. Hughes was a manager with Kenneth Leventhal &
Company, a public accounting firm specializing in real estate and financial
services. Mr. Hughes is a certified public accountant.
David M. Strong has been a Vice President for Development of WRP Newco since
its formation in January 1997 and has been a Vice President of Wellsford since
July 1995. From July 1994 until July 1995 he was Acquisitions and Development
Associate of Wellsford. From 1991 to 1994, Mr. Strong was President and owner
of LPI Management, Inc., a commercial real estate company providing management
and consulting services. From 1984 to 1991, he was a senior executive with the
London Pacific Investment Group, a real estate development, investment and
management firm active in Southern California and Western Canada. From 1979 to
1984, Mr. Strong was a manager with Arthur Young, a public accounting firm.
Mr. Strong is a member of the Canadian Institute of Chartered Accountants.
116
<PAGE>
Rodney F. Du Bois will become a director of WRP Newco upon consummation of
the Distribution and has been a trustee of Wellsford since November 1992. Mr.
Du Bois also has been President and co-owner of Goshawk Corporation, which
provides finance and general corporate services, since 1982. Mr. Du Bois was a
founder of Mountain Cable Company, a cable TV multiple system operator, and
its Chairman from 1985 until the company's sale in 1988. Previously Mr. Du
Bois served as Executive Vice President and a director of C. Brewer and Co.,
Chairman of Alexander and Baldwin Agribusiness, Inc., a managing director of
Warburg, Paribas, Becker, Inc. and a Professor of Real Estate at the Amos Tuck
School of Business Administration at Dartmouth College.
Mark S. Germain will become a director of WRP Newco upon consummation of the
Distribution and has been a trustee of Wellsford since November 1992.
Currently he is employed by Olmstead Group L.L.C., which is a consultant to
biotechnology and other high technology companies. Mr. Germain also serves as
a board member of several privately held biotechnology companies. Previously,
from 1990 to 1994, Mr. Germain was employed by D. Blech & Company,
Incorporated, a merchant bank. From 1986 to 1989, he was President and Chief
Operating Officer of The Vista Organization, Ltd., and from 1989 to 1990, its
President and Chief Executive Officer. Mr. Germain was a partner in a New York
law firm prior to 1986.
Frank J. Hoenemeyer will become a director of WRP Newco upon consummation of
the Distribution and has been a trustee of Wellsford since November 1992. Mr.
Hoenemeyer also currently serves as a director of American International
Group, Inc., Mitsui Trust Bank (U.S.A.), W.P. Carey Advisors, Inc. and Carey
Fiduciary Advisors, Inc. (subsidiaries of W.P. Carey & Co., Inc.) and ARIAD
Pharmaceuticals, Inc. and as Vice Chairman of the Investment Committee of W.P.
Carey & Co., Inc. From 1947 to 1984, he was employed by The Prudential
Insurance Company of America where he served as Vice Chairman and Chief
Investment Officer prior to his retirement.
Frank J. Sixt will become a director of WRP Newco upon consummation of the
Distribution and has been a trustee of Wellsford since November 1992. Mr. Sixt
also currently serves as an executive director of Cheung Kong (Holdings)
Limited, Cheung Kong Infrastructure Holdings Limited and Hutchinson Whampoa
Limited Group of Companies. He also serves as a director of Husky Oil Limited,
Concord Property and Financial Company Limited and World Financial Properties
Limited. He is also a director of and Chairman of the Executive Committee of
the Board of Directors of Gordon Capital Corporation. Previously, from 1987 to
1990, Mr. Sixt was a partner in the law firm of Stikeman Elliot.
For a biographical description of Douglas J. Crocker II, see "Management and
Operation of the Surviving Trust After the Merger--Trustees and Executive
Officers."
KEY EMPLOYEE
Richard R. Previdi has been active in seeking to acquire commercial
properties on behalf of WRP Newco and its predecessor since September, 1996.
From May 1994 until June 1996, he was a managing director of Emmes & Company,
a real estate investment company. From April 1990 until May 1994, Mr. Previdi
was a managing director of Trammell Crow N.E., Inc., and Chief Executive
Officer of that company's Northern Virginia Commercial Division. Previously,
from October 1985 until April 1990, he was first a marketing principal, and
later a partner, of Trammell Crow Company. From October 1982 until October
1985, Mr. Previdi was a manager with Arthur Young and Company, a public
accounting firm.
COMPENSATION OF DIRECTORS
WRP Newco will pay to each of its directors who are not employees of WRP
Newco (i) an annual fee of $16,000, payable quarterly in shares of WRP Newco
Common, and (ii) a fee of $2,250 payable in cash for each regular quarterly
Board of Directors meeting at which such director is present in person or by
telephone. Messrs. Du Bois, Germain, Hoenemeyer and Sixt will also each
receive options to purchase 42,750 shares of WRP Newco Common and Mr. Crocker
will receive options to purchase 21,375 shares of WRP Newco Common, all under
WRP Newco's 1997 Management Incentive Plan and each will be eligible along
with other present and future directors to receive additional share options.
Directors who are employees of WRP Newco will not be paid any directors' fees.
In addition, WRP Newco will reimburse the directors for travel expenses
incurred in connection with their activities on behalf of WRP Newco.
WRP Newco also intends to grant options to purchase 85,500 shares of WRP
Newco Common under the 1997 Management Investment Plan to each of Messrs.
Lynford, Lowenthal, Hughes and Strong.
BOARD COMMITTEES
The Board of Directors of WRP Newco will establish, following consummation
of the Distribution, an Audit Committee, a Compensation Committee and an
Executive Committee. The Board will not have a nominating committee or a
committee performing the functions of a nominating committee; the entire Board
will perform the usual functions of such committee.
117
<PAGE>
Executive Committee. The Executive Committee will consist of Messrs.
Lynford, Lowenthal and Hoenemeyer. The Executive Committee has the authority
to acquire, dispose of and finance investments for WRP Newco and execute
contracts and agreements, including those related to the borrowing of money by
WRP Newco, and generally to exercise all other powers of the directors except
for those which require action by all directors or the independent directors
under the Articles of Incorporation or Bylaws of WRP Newco or under applicable
law.
Compensation Committee. The Compensation Committee will consist of Messrs.
Du Bois, Germain, Hoenemeyer and Sixt, none of whom are employees of WRP
Newco. The Compensation Committee will review WRP Newco's compensation and
employee benefit plans, programs and policies, approve employment agreements
and monitor the performance and compensation of the Executive Officers and
other employees.
Audit Committee. The Audit Committee will consist of Messrs. Du Bois,
Germain, Hoenemeyer and Sixt and will make recommendations concerning the
engagement of independent public accountants, review with the independent
public accountants the plans and results of the audit engagement, approve the
professional services provided by the independent public accountants, review
the independence of the independent public accountants, consider the range of
audit and non-audit fees, review the adequacy of WRP Newco's internal
accounting controls and review related party transactions.
EXECUTIVE COMPENSATION
WRP Newco was organized as a Maryland corporation in January, 1997. Its
executive officers will not be entitled to receive any separate salary or
other cash compensation from WRP Newco for any period prior to the
Distribution. Prior to the Distribution, WRP Newco's executive officers will
only receive compensation from Wellsford for services rendered by them to
Wellsford.
The following table sets forth certain information with respect to the Chief
Executive Officer and each of the other executive officers of WRP Newco
(collectively, the "Executive Officers") whose cash compensation from WRP
Newco is expected to exceed $100,000 on an annualized basis during the fiscal
year ending December 31, 1997, and all executive officers as a group.
<TABLE>
<CAPTION>
CASH
NAME OF INDIVIDUAL OR NUMBER IN GROUP CAPACITIES IN WHICH SERVE COMPENSATION
------------------------------------- ------------------------- ------------
<S> <C> <C>
Jeffrey H. Lynford............................ Chairman of the Board and Secretary $275,000
Edward Lowenthal.............................. President and Chief Executive Officer $275,000
Gregory F. Hughes............................. Chief Financial Officer $175,000
David M. Strong............................... Vice President for Development $125,000
All executive officers as a group (consisting
of the four persons named above)............. $850,000
</TABLE>
For information regarding options to purchase shares of WRP Newco Common to
be granted to executive officers and directors, see "--Compensation of
Directors".
EMPLOYMENT AGREEMENTS
WRP Newco will enter into employment agreements with Messrs. Lynford and
Lowenthal (the "Senior Executives"), pursuant to which Mr. Lynford will serve
as the Chairman of the Board of WRP Newco and Mr. Lowenthal will serve as its
President and Chief Executive Officer. WRP Newco will also enter into
employment agreements with Messrs. Hughes and Strong. The employment
agreements with Messrs. Lynford and Lowenthal will expire on December 31,
2002, and the employment agreements with Messrs. Hughes and Strong will expire
two years from the Effective Time.
Each of the employment agreements is automatically extended for additional
one-year periods unless either the Executive Officer or WRP Newco gives prior
notice not to extend the employment agreement, as specified in the agreement.
Pursuant to the employment agreements, each of the Executive Officers is
also entitled to incentive compensation to be determined by the Compensation
Committee. Mr. Hughes is entitled to incentive compensation equal to at least
50% of his annual base salary.
In the event that either of the Senior Executives dies during the term of
his employment agreement, or if WRP Newco elects to terminate his employment
agreement as a result of the Senior Executive's total disability, WRP Newco is
required to pay additional compensation for the longer of 36 months after such
termination or for the remaining term of his agreement at the rate of his then
annual base salary.
118
<PAGE>
Following a "change in control of the Company" (as defined in the
agreements), if a Senior Executive's employment agreement is terminated (a) by
WRP Newco, other than for "proper cause" (as defined in the agreements) or
death or disability or (b) by the Senior Executive, then in either case the
Senior Executive shall be entitled to receive a lump sum cash payment
generally equal to the sum of (i) the amount of compensation that he would
have been entitled to had the agreement not been so terminated and (ii) 299%
of his average annual compensation of every type and form includible in gross
income received during the three year period preceding the calendar year in
which employment is terminated. The Senior Executives are also entitled to
reimbursement of income taxes on certain non-cash taxable income resulting
from a change in control of WRP Newco, including taxable income resulting from
accelerated loan forgiveness or vesting of restricted shares or options. In
addition, each Senior Executive is entitled to receive an additional sum to
cover certain resulting income and excise tax liabilities that may be incurred
on all of the foregoing.
The employment agreements with the Senior Executives will indemnify and hold
harmless the Senior Executives for any income and excise tax liabilities that
arise from any benefits described in this Joint Proxy
Statement/Prospectus/Information Statement and are not otherwise provided for
in the payments to be made to them by the Surviving Trust on the date of the
Merger.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee will consist of five independent directors of WRP
Newco: Rodney F. Du Bois, Mark S. Germain, Frank J. Hoenemeyer and Frank J.
Sixt, none of whom is, or has been, an officer or employee of WRP Newco.
119
<PAGE>
PRINCIPAL STOCKHOLDERS OF WRP NEWCO
The following table sets forth information regarding the beneficial
ownership of WRP Newco Common by each person anticipated by WRP Newco to be
the beneficial owner of more than 5% of WRP Newco Common, by each director or
proposed director of WRP Newco, by certain executive officers of WRP Newco and
by all directors, proposed directors and executive officers of WRP Newco as a
group after giving effect to the Distribution, the Merger and certain other
transactions described herein (excluding the Additional Share Offering). Each
person named in the table has sole voting and investment power with respect to
all WRP Newco Common shown as beneficially owned by such person.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL AMOUNT AND NATURE OF
OWNER(1) BENEFICIAL OWNERSHIP PERCENT OF CLASS
------------------------------ -------------------- ----------------
<S> <C> <C>
Jeffrey H. Lynford(2)................. 622,529 11.50%
Edward Lowenthal(2)................... 626,605 11.58%
Gregory F. Hughes(3).................. 202,074 3.99%
David Strong(4)....................... 130,487 2.61%
Rodney F. Du Bois(5).................. 44,500 *
32 Rip Road
Hanover, New Hampshire 03755
Mark S. Germain(6).................... 110,858 2.24%
Olmsted Road
Scarsdale, New York 10583
Frank J. Hoenemeyer(5)................ 43,683 *
7 Harwood Drive
Madison, New Jersey 07940
Frank J. Sixt(6)...................... 81,265 1.64%
c/o Cheung Kung (Holdings), Ltd.
Ching Building, 18-22 Floors
29 Queen's Road Central
Hong Kong
Douglas J. Crocker II(7).............. 21,375 *
c/o Equity Residential Properties
Trust
Two North Riverside Plaza
Chicago, Illinois 60606
ERP Operating Limited Partnership..... 334,062(8) 7.22%
Two North Riverside Plaza
Chicago, Illinois 60606
All directors, proposed directors
and executive officers as a group (9
persons)............................. 1,883,376 28.82%
</TABLE>
- -------
* Less than 1.0%
(1) Unless otherwise indicated, the address of each person is c/o Wellsford
Real Properties, Inc., 610 Fifth Avenue, New York, New York 10020.
(2) Includes 538,205 shares of WRP Newco Common issuable upon the exercise of
options, all of which will be either issued or amended as of the Effective
Time, and none of which will be exercisable as of the Effective Time.
Options to purchase 452,705 of these shares represent replacement options
for Wellsford share options having exercise prices ranging from $18.94 to
$26.375.
(3) Includes 188,105 shares of WRP Newco Common issuable upon the exercise of
options, all of which will either be issued or amended as of the Effective
Time, and none of which will be exercisable as of the Effective Time.
Options to purchase 102,605 of these shares represent replacement options
for Wellsford share options having exercise prices ranging from $18.94 to
$29.375.
(4) Includes 126,126 shares of WRP Newco Common issuable upon the exercise of
options, all of which will either be issued or amended as of the Effective
Time, and none of which will be exercisable as of the Effective Time.
Options to purchase 40,626 of these shares represent replacement options
for Wellsford share options having exercise prices ranging from $18.94 to
$22.50.
(5) Includes 42,750 shares of WRP Newco Common issuable upon the exercise of
options, all of which will either be issued or amended as of the Effective
Time and will then be immediately exercisable.
(6) Includes 81,265 shares of WRP Newco Common issuable upon the exercise of
options, all of which will either be issued or amended as of the Effective
Time and will then be immediately exercisable.
(7) Includes 21,375 shares of WRP Newco Common issuable upon exercise of
options, all of which will be issued as of the Effective Time and will
then be immediately exercisable. Excludes 334,062 shares of WRP Newco
Common (estimated) to be issued to ERP Operating Partnership pursuant to
the Stock Purchase Agreement. Mr. Crocker is President and Chief Executive
Officer of EQR, the general partner of ERP Operating Partnership, and
disclaims beneficial ownership of such shares.
(8) Estimated number of shares of WRP Newco Common to be issued to ERP
Operating Partnership pursuant to the Stock Purchase Agreement.
120
<PAGE>
WRP NEWCO'S CERTAIN TRANSACTIONS
The contracts to purchase Chatham, the Point View office complex and
Greenbrook were transferred to WRP Newco by an entity ("Wellsford Commercial")
of which Messrs. Lynford and Lowenthal, the wife of Mark Germain who will be a
director of WRP Newco, and three unaffiliated parties are owners, for shares
of WRP Newco Common having an aggregate value of approximately $2.25 million
and WRP Newco's agreement to repay a $1.0 million advance used for the down
payment on the Point View office complex. The number of shares of WRP Newco
Common issued to Wellsford Commercial was approximately 225,000, subject to
adjustment based upon the Issuance Price. Upon liquidation of Wellsford
Commercial, Mr. Lynford, Mr. Lowenthal and the wife of Mark Germain will each
receive approximately 16.4%, 16.4% and 13.8%, respectively, of the shares of
WRP Newco Common to be issued to Wellsford Commercial, and the other three
unaffiliated owners will receive the remainder of the shares. The aggregate
purchase price for these commercial properties paid by WRP Newco is
approximately $47.6 million, including the approximately $2.25 million
referred to above. The above transfers to WRP Newco, along with the
Contribution and the purchase of stock by ERP Operating Partnership under the
Stock Purchase Agreement, are being made as part of a single plan intended to
qualify as a tax-free transaction.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
WELLSFORD REAL PROPERTIES, INC. (PREDECESSOR)
OVERVIEW
The following discussion should be read in conjunction with the Wellsford
Real Properties Inc. (Predecessor) (the "Company") financial statements
contained herein.
RESULTS OF OPERATIONS
The Company's operations during the year ended December 31, 1996 consisted
of owning a mortgage note receivable, upon which the Company earned $757,000
of interest income, and developing two multifamily communities located in a
suburb of Denver, Colorado with a total of 760 units under development.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to meet its short-term liquidity requirements generally
through its working capital and cash flow provided by operations. The Company
considers its ability to generate cash to be adequate and expects it to
continue to be adequate to meet operating requirements both in the short and
long terms.
The Company expects to meet its long-term liquidity requirements such as
refinancing mortgages, financing acquisitions and development, and financing
capital improvements and debt and equity investments in real estate companies
by long-term borrowings, through the issuance of debt and the offering of
additional debt and equity securities.
The Company has received a commitment from the Bank of Boston and Morgan
Guaranty that they will provide a $50 million credit facility, subject to
customary conditions, which would be available to fund acquisitions, debt and
equity investments, development, capital expenditures, repayment of
indebtedness and related expenditures. The Company expects to obtain this
credit facility concurrently with the closing of the Merger and Distribution.
The commitment received is subject to customary conditions and documentation.
In December 1995, the Company marketed and sold $14.8 million of tax-exempt
bonds to fund construction at Palomino Park. The bonds have a variable rate of
interest and a term of 40 years. At December 31, 1996, $5.5 million of the
bond proceeds were being held in escrow pending their use for the funding of
development.
In July 1996, the Company originated the Sonterra Loan. The Sonterra Loan
bears interest at 9% per annum and matures in July 1999. The Company also has
the exclusive option to purchase the community for $20.5 million through
December 1997 and for $21 million during 1998.
121
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees of
Wellsford Residential Property Trust and Subsidiaries
We have audited the accompanying combined balance sheets of the Predecessor
to Wellsford Real Properties, Inc. (the "Company") as of December 31, 1996 and
1995, and the related combined statements of income and equity for the year
ended December 31, 1996, and cash flows for the year ended December 31, 1996
and for the period from March 22, 1995 (the date the assets were acquired and
liabilities incurred) to December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As described in Note 1, no operating revenues or expenses were incurred in
the period from March 22, 1995 through December 31, 1995. Accordingly, the
statement of income for the period ended December 31, 1995 has been omitted.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Company at December 31, 1996 and 1995, and the combined results of its
operations for the year ended December 31, 1996 and its cash flows for the
year ended December 31, 1996 and for the period from March 22, 1995 to
December 31, 1995, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
-----------------------------------------
Ernst & Young LLP
New York, New York
February 28, 1997
122
<PAGE>
WELLSFORD REAL PROPERTIES, INC. (PREDECESSOR)
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Construction in process............................... $21,306 $ 7,955
Restricted cash....................................... 5,520 10,414
Mortgage note and interest receivable................. 17,934 0
------- -------
Total Assets........................................ $44,760 $18,369
======= =======
<CAPTION>
LIABILITIES AND EQUITY
<S> <C> <C>
Tax exempt mortgage note payable...................... $14,755 $14,755
------- -------
Total Liabilities................................... 14,755 14,755
------- -------
Commitments and contingencies......................... -- --
Equity................................................ 30,005 3,614
------- -------
Total Equity........................................ 30,005 3,614
------- -------
Total Liabilities and Equity........................ $44,760 $18,369
======= =======
</TABLE>
See accompanying notes.
123
<PAGE>
WELLSFORD REAL PROPERTIES, INC. (PREDECESSOR)
COMBINED STATEMENT OF INCOME AND EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Interest income.................................................... $ 757
-------
Net income......................................................... 757
-------
Equity, January 1, 1996............................................ 3,614
Contributions...................................................... 25,634
-------
Equity, December 31, 1996.......................................... $30,005
=======
</TABLE>
See accompanying notes.
124
<PAGE>
WELLSFORD REAL PROPERTIES, INC. (PREDECESSOR)
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED MARCH 22 TO
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income.......................................... $ 757 $ 0
Adjustments to reconcile net income to net cash
provided by operating activities:
Decrease (increase) in assets:
Debt service reserve............................ 4,894 4,341
Interest receivable............................. (134) 0
-------- --------
Net cash provided by operating activities......... 5,517 4,341
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in real estate assets................... (13,351) (7,955)
Investment in mortgage note receivable.............. (17,800) 0
-------- --------
Net cash (used) in investing activities........... (31,151) (7,955)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from tax exempt mortgage note payable...... 0 14,755
Funding of restricted cash accounts................. 0 (14,755)
Equity contributions................................ 25,634 3,614
-------- --------
Net cash provided by financing activities......... 25,634 3,614
-------- --------
Net increase (decrease) in cash and cash
equivalents........................................ 0 0
Cash and cash equivalents, beginning of period...... 0 0
-------- --------
Cash and cash equivalents, end of period............ $ 0 $ 0
======== ========
Cash paid during the period for interest............ $ 663 $ 335
</TABLE>
See accompanying notes.
125
<PAGE>
WELLSFORD REAL PROPERTIES, INC. (PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BASIS OF PRESENTATION
Wellsford Real Properties, Inc. ("WRP Newco"), a C corporation formed on
January 8, 1997, is a wholly owned subsidiary of Wellsford Residential
Property Trust ("Wellsford"). On January 16, 1997 Wellsford announced its
intention to merge with Equity Residential Properties Trust ("EQR").
Immediately prior to the Merger, Wellsford intends to contribute certain of
its assets to WRP Newco and have WRP Newco assume certain liabilities of
Wellsford. Immediately after the contribution of assets to WRP Newco and
immediately prior to the Merger, Wellsford intends to distribute to its common
shareholders all the outstanding shares of WRP Newco owned by Wellsford. The
common shareholders of Wellsford will receive one common share of WRP Newco
for each four common shares of Wellsford owned.
The accompanying combined financial statements of the predecessor to WRP
Newco (the "Company") include the assets and liabilities to be contributed and
assumed by WRP Newco from the time the assets and liabilities were acquired or
incurred, respectively, by Wellsford or the majority owned or controlled
subsidiary of Wellsford. Such financial statements have been prepared using
the historical basis of the assets and liabilities and historical results of
operations related to the Company's assets.
For the purpose of the Company, the assets were acquired and liabilities
incurred beginning on March 22, 1995. During the period from March 22, 1995
through December 31, 1996 the Company was principally involved in the initial
phase of construction development activities with no operating revenues or
expenses incurred. Accordingly, the income statement for the period ended
December 31, 1995 has been omitted. The Company has earned interest income on
the Sonterra Mortgage (see Note 4) during the year ended December 31, 1996.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination. All significant intercompany transactions between
Wellsford and the majority owned or controlled subsidiaries relating to the
assets and liabilities that are to be contributed or assumed by WRP Newco have
been eliminated in combination.
Income Recognition. Residential communities are leased under operating
leases with terms generally one year or less; rental revenue is recognized
monthly as it is earned.
Commercial properties are leased under operating leases; rental revenue is
recognized on a straight-line basis over the terms of the leases.
Cash and Cash Equivalents. The Company considers all demand and money market
accounts and short term investments in government funds with an original
maturity of three months or less to be cash and cash equivalents.
Real Estate and Depreciation. Costs directly related to the acquisition and
improvement of real estate are capitalized, including interest expense
incurred during and related to construction and including all improvements
identified during the underwriting of a property acquisition.
Depreciation is computed over the expected useful lives of depreciable
property on a straight line basis, principally 40 years for buildings and
improvements and 5 to 12 years for furnishings and equipment.
The Company has adopted Statement of Financial Accounting Standard ("SFAS")
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of" which requires that long-lived assets to be held and
used be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable and that
long-lived assets to be disposed of be measured at the lower of carrying
amount or net realizable value. The adoption of SFAS 121 has not had an impact
on the Company's combined financial position or results of operations.
Mortgage Note Receivable Impairment. The Company considers a note impaired
if, based on current information and events, it is probable that all amounts
due under the note agreement are not collectable. Impairment is measured based
upon the fair value of the underlying collateral. No impairment has been
recorded through December 31, 1996.
Financing Costs. Financing and refinancing costs are capitalized and
amortized over the term of the related loan under the interest method. Credit
facility fees are capitalized and amortized over the term of the commitment on
a straight-line basis.
126
<PAGE>
WELLSFORD REAL PROPERTIES, INC. (PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(3) RESTRICTED CASH
Restricted cash primarily consists of the remaining proceeds from the
Palomino Park tax-exempt mortgage note (Note 5) which are restricted in their
use to construction costs and capitalized interest related to the Palomino
Park development project (Note 4).
(4) MULTIFAMILY COMMUNITIES AND MORTGAGE NOTE RECEIVABLE
The Company holds a $17.8 million mortgage on a 344 unit, newly constructed
community in Tucson, Arizona known as Sonterra at Williams Centre (the
"Sonterra Mortgage"). The Sonterra Mortgage was originated in July 1996, bears
interest at 9% per annum and matures in July 1999. The Company also has the
exclusive option to purchase the community for $20.5 million through December
1997 and $21 million during 1998. Interest receivable of $0.1 million is
included in the December 31, 1996 balance. The fair market value of the
Company's mortgage note receivable, estimated by using a discounted cash flow
analysis, approximates the carrying amount. In connection with the Sonterra
Mortgage, a $0.2 million origination fee was paid to Wellsford by the
borrower.
The Company currently has two multifamily projects under development in a
suburb of Denver, Colorado, totaling 760 apartment units (collectively, the
"Development Communities"). The Development Communities are the first of five
communities at Palomino Park, a 1,880 unit master-planned, security controlled
apartment/townhome community. The Company has the option to develop phases
three through five, but is not obligated to do so. The 181.8 acre master site
surrounds an amenity-filled, 24 acre park and an approximately 29,000 square
foot recreational center to be shared by all phases. The Development
Communities are being constructed pursuant to fixed-price contracts, with a
local developer, and are estimated to cost approximately $76.1 million in
total, including certain development and incentive fees payable to the
developer. The Company is committed to purchase 100% of the Development
Communities upon completion and the achievement of certain occupancy levels.
At December 31, 1996 the Company had invested $21 million related to the land
for the Development Communities, the recreation center and general
infrastructure work. A portion of such infrastructure will become the property
of certain local governmental entities at the date of completion and
retirement of the tax-exempt mortgage note payable described in Note 5. In
addition, approximately $21.8 million was outstanding at December 31, 1996 on
a construction loan to the developer, which the Company would repay upon
purchase assuming completion and achievement of certain occupancy levels.
During the periods ended December 31, 1996, and December 31, 1995,
respectively, the Company capitalized $0.7 million and $0.3 million of
interest to the Development Communities. The Company expects to fund the
construction of its Development Communities from its working capital and with
proceeds from a credit facility and a $14.8 million tax-exempt mortgage note
(Note 5).
Subsequent to December 31, 1996, the Company entered into contracts on five
commercial office properties for $47.6 million in aggregate, and has closed on
four of the properties. The purchase prices for these commercial properties
include approximately $2.25 million in value of shares of WRP Newco Common to
be issued to an entity in consideration for the assignment of the purchase
contracts entered into by such entity. Upon liquidation of such entity, each
of the Chairman of the Board and President of Wellsford, Messrs. Lynford and
Lowenthal, will receive approximately 16.4% of such shares, and the wife of
Mark Germain, a trustee of Wellsford, will receive approximately 13.8% of such
shares. Each are owners of such entity.
Greenbrook Corporate Center ($23.7 million) is a Class A, three-story office
building with a 35 foot atrium, located in Fairfield, NJ, and comprising
approximately 190,000 rentable square feet. It is situated on a 20 acre
developed site with 7 acres of additional, contiguous undeveloped land.
Point View ($15.8 million) consists of 194 acres containing two office
buildings, totaling approximately 560,000 square feet, an adjacent 10-acre
undeveloped site, and a central utility plant located in Wayne, NJ. The site
is currently undergoing a major renovation. The purchase of this building was
closed in February 1997.
1700 Valley Road ($1.0 million) is a Class B+, two-story vacant office
building located in Wayne, NJ and comprising approximately 70,600 square feet.
It is situated on a nine acre site. The purchase price of this building was
closed in February 1997.
127
<PAGE>
WELLSFORD REAL PROPERTIES, INC. (PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
1800 Valley Road ($2.0 million) is a Class B+, two-story vacant office
building located in Wayne, NJ and comprising approximately 54,800 square feet.
It is situated on a 14 acre site. The purchase of this building was closed in
February 1997.
The Chatham Building ($5.1 million) is a three-story office building located
in Chatham, NJ and comprising approximately 65,000 square feet. The site is
currently undergoing a major renovation. The purchase of this building was
closed in January 1997.
(5) TAX EXEMPT MORTGAGE NOTES PAYABLE
At December 31, 1996 and 1995, the Company had $14.8 million of tax exempt
mortgage notes payable outstanding. The Company's tax exempt mortgage note
payable is secured by certain infrastructure at the Company's Palomino Park
development and bears interest-only payments at a variable rate (which
approximates the Standard & Poor's/J.J. Kenney index for short-term high grade
tax-exempt bonds, currently 3.65%) until it matures in December 2035.
The tax-exempt mortgage note payable is security for tax-exempt bonds which
are backed by a letter of credit from a AAA rated financial institution.
Wellsford has guaranteed the reimbursement of the financial institution in the
event that the letter of credit is drawn upon. It is anticipated that as a
result of the Merger, this guaranty will be replaced by the guarantees of WRP
Newco and EQR. These bonds require the Company to obtain the approval of both
the trustee, as defined in the bond documents, and the above mentioned
financial institution for transactions such as those anticipated in connection
with the Merger and Distribution. The Company expects to receive such
approvals.
The fair market value of the variable rate tax exempt mortgage note is
considered to be the carrying amount.
(6) COMMITMENTS AND CONTINGENCIES
WRP Newco will enter into employment agreements with certain of its
officers. Such agreements will be for terms which expire between 1999 and
2002, and will provide for aggregate annual base salaries of $0.8 million,
$0.8 million and $0.6 million in 1997, 1998 and 1999 through 2002,
respectively. The Company is obligated under an operating lease covering its
corporate headquarters for $0.2 million in 1997, $0.2 million in 1998, and
$0.2 million in 1999, plus certain operating expense escalations.
As a commercial real estate owner, the Company is subject to potential
environmental costs. The Company's Point View site contains asbestos
containing materials ("ACMs"); upon acquisition of the property, the Company
intends to proceed with the removal of all ACMs in such property which is
anticipated to cost $3.5 million. At this point in time, management of the
Company is not aware of any environmental concerns that would have a material
adverse effect on the Company's financial position or future results of
operations except as just described.
In 1997 WRP Newco will adopt a defined contribution savings plan pursuant to
Section 401 of the Internal Revenue Code. Under such a plan there are no prior
service costs. All employees will be eligible to participate in the plan after
one year of service. Employer contributions will be made based on a
discretionary amount determined by WRP Newco's management. Employer
contributions, if any, will be based upon the amount contributed by an
employee.
The Company will lend $20 million of an $80 million subordinated mezzanine
loan to entities which own the equity interests (the "Equity Interests") in
the owner of a 52-story approximately 1.74 million sq. ft. Class A office
building located at 277 Park Avenue, New York City (the "277 Park Loan"). The
loan will be secured primarily by the pledge of the Equity Interests. The 277
Park Loan will be due in April 2007 and will bear interest at the rate of
approximately 11.75% per annum.
128
<PAGE>
WELLSFORD REAL PROPERTIES, INC. (PREDECESSOR)
PRO FORMA COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
During the period from January 1, 1996 to March 31, 1997, Wellsford Real
Properties, Inc. (Predecessor) (the "Company") acquired a mortgage note
receivable, committed to originate a mortgage receivable, purchased four
commercial office properties, and contracted to purchase one additional
commercial office property. One of the commercial office properties, the
Greenbrook Corporate Center, is currently occupied.
This unaudited Pro Forma Combined Income Statement is presented as if the
Company's transactions, each as referred to above, and the Merger and
Distribution had been consummated on January 1, 1996, as if the mortgage
receivable upon which the Company has committed to originate had been
originated on January 1, 1996, and as if the commercial office properties
under contract were actually purchased as of January 1, 1996. All of the pro
forma adjustments shown are solely attributed to the transactions described.
In the opinion of the Company's management, all adjustments necessary to
reflect the effects of these transactions have been made.
This unaudited Pro Forma Combined Income Statement is presented for
comparative purposes only, and is not necessarily indicative of what the
actual results of operations of the Company would have been for the period
presented; nor does it purport to represent the results for future periods.
This unaudited Pro Forma Combined Income Statement should be read in
conjunction with, and is qualified in its entirety by, the respective
historical financial statements and notes thereto of Wellsford and the
Company, incorporated by reference into, and included in, this Joint Proxy
Statement/Prospectus/ Information Statement, respectively.
129
<PAGE>
WELLSFORD REAL PROPERTIES, INC. (PREDECESSOR)
PRO FORMA COMBINED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
REVENUE
Rental income.............................. $3,632(A) $3,632
Other income............................... 250(A) 250
Interest income............................ $757 3,195(B) 3,952
---- ------ ------
Total Revenue............................ 757 7,077 7,834
---- ------ ------
EXPENSES
Property operating and maintenance......... 852(A) 852
Real estate taxes.......................... 428(A) 428
Interest................................... 1,550(C) 1,550
General and administrative................. 1,750(D) 1,750
Depreciation............................... 510(E) 510
Property management........................ 181(A) 181
---- ------ ------
Total Expenses........................... 0 5,271 5,271
---- ------ ------
Income before income taxes................... $757 $1,806 2,563
==== ======
Provision for income taxes................... 1,047(F)
------
Net income................................... $1,516
======
Net income per common share.................. $ 0.31(G)
======
Weighted average common shares outstanding... 4,900(G)
======
</TABLE>
130
<PAGE>
WELLSFORD REAL PROPERTIES, INC. (PREDECESSOR)
NOTES TO UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
DECEMBER 31, 1996
(A) Represents historical operating revenues and expenses of Greenbrook
Corporate Center, which was acquired in January 1997, for the year ended
December 31, 1996. The Company's other four commercial properties are
currently vacant.
(B) Represents interest income from the Sonterra Loan for the period from
January 1, 1996 to the date of origination (July 10, 1996), plus interest
on the 277 Park Loan for one year ($20 million at approximately 11.75%).
(C) Represents interest expense on the $20 million credit facility draw used
to fund the 277 Park Loan, at 7.75%.
(D) Represents the estimated general and administrative costs of WRP Newco for
one year.
(E) Represents depreciation on Greenbrook Corporate Center for the year ended
December 31, 1996 utilizing a 40 year estimated useful life.
(F) Represents provision for federal and state income taxes at rates of 35%
and 9%, respectively.
(G) Represents the aggregate of the shares of WRP Newco Common issued in
connection with the Distribution (one share for every four shares of
Wellsford Common), the 225,000 shares to be issued in connection with the
acquisition of the commercial properties, and 350,000 shares (estimated)
of WRP Newco Class A Common to be purchased by ERP Operating Partnership
for $3.5 million.
131
<PAGE>
WELLSFORD REAL PROPERTIES, INC. (PREDECESSOR)
PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS)
(UNAUDITED)
This unaudited Pro Forma Combined Balance Sheet is presented as if the
Merger, Contribution and Distribution and the proposed credit facility
agreement with Bank of Boston and Morgan Guaranty had been consummated on
December 31, 1996, the mortgage receivable to be originated had been
originated on December 31, 1996 and the commercial office properties purchased
by, or under contract with, Wellsford Real Properties, Inc. (Predecessor) (the
"Company") had been purchased on December 31, 1996, utilizing proceeds from
the Merger and Contribution and a draw from the credit facility. All of the
assets and liabilities of the Company which are being transferred to the
Company in connection with the Merger, Contribution and Distribution are
recorded at their respective historical costs.
This unaudited Pro Forma Combined Balance Sheet is presented for comparative
purposes only, and is not necessarily indicative of what the actual financial
position of the Company would have been at December 31, 1996; nor does it
purport to represent the future financial position of the Company. This
unaudited Pro Forma Combined Balance Sheet should be read in conjunction with,
and is qualified in its entirety by, the respective historical financial
statements and notes thereto of Wellsford and the Company, incorporated by
reference into, and included in, this Joint Proxy Statement/Prospectus/
Information Statement, respectively.
132
<PAGE>
WELLSFORD REAL PROPERTIES, INC. (PREDECESSOR)
PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Real estate assets, at cost:
Land....................................... $ 0 $ 6,720 $ 6,720
Buildings and improvements................. 38,080 38,080
------- -------- --------
0 44,800 44,800
Construction in process.................... 21,306 21,306
------- -------- --------
21,306 44,800 66,106
Property held for sale..................... 2,800 2,800
------- -------- --------
21,306 47,600(A) 68,906
Cash and cash equivalents.................... 832(B) 832
Restricted cash.............................. 5,520 5,520
Mortgage notes and interest receivable....... 17,934 20,000(C) 37,934
------- -------- --------
Total Assets............................... $44,760 $ 68,432 $113,192
======= ======== ========
LIABILITIES AND EQUITY
Liabilities:
Tax exempt mortgage note payable........... $14,755 $ 14,755
Credit facility............................ $ 45,000(D) 45,000
------- -------- --------
Total Liabilities.......................... 14,755 45,000 59,755
------- -------- --------
Commitments and contingencies................ -- -- --
Minority Interest............................ 2,328(E) 2,328
Equity:
Equity..................................... 30,005 (30,005) 0
Common stock, $.01 par value per share,
4,899,965 shares issued and outstanding as
adjusted.................................. 49 49
Paid in capital in excess of par value..... 51,060 51,060
------- -------- --------
Total Equity............................... 30,005 21,104(F) 51,109
------- -------- --------
Total Liabilities and Equity............... $44,760 $ 68,432 $113,192
======= ======== ========
</TABLE>
133
<PAGE>
WELLSFORD REAL PROPERTIES, INC. (PREDECESSOR)
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1996
(A) Reflects the acquisition of five commercial office properties, previously
acquired or currently under contract for $47.6 million summarized as
follows:
<TABLE>
<CAPTION>
PURCHASE
PURCHASE PRICE &
PRICE PLANNED
SQUARE PURCHASE PER PLANNED IMPR. ACTUAL/SCHEDULED
NAME LOCATION FOOTAGE PRICE SQ. FT. IMPROVEMENTS PER SQ. FT. CLOSING DATE
---- -------- ------- -------- -------- ------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Point View.............. Wayne, NJ 560,000 $15.8 million $ 28 $ 9.1 million $ 44 February 1997
Chatham Building........ Chatham, NJ 65,000 5.1 million 78 3.1 million 126 January 1997
Greenbrook Corp. Ctr.... Fairfield, NJ 190,000 23.7 million 125 0.5 million 127 April 1997
1700 Valley Road........ Wayne, NJ 70,600 1.0 million 14 0.2 million 17 February 1997
1800 Valley Road........ Wayne, NJ 54,800 2.0 million 36 0.8 million 51 February 1997
------- ------------- -------------
940,400 47.6 million $13.7 million
</TABLE>
Greenbrook Corporate Center is currently in operation. The Company's other
four commercial properties are currently vacant. The purchase price of
$47.6 million is being funded with $20.4 million of cash-on-hand, $25.0
million of proceeds from the credit facility, and the balance from the
issuance of approximately 225,000 shares of WRP Newco Common, each of which
is described below.
(B) Reflects the net cash effect of the following transactions (in thousands):
<TABLE>
<S> <C>
.Cash contribution to WRP Newco at Contribution.................... $ 17,732
.ERP Operating Partnership's purchase of WRP Newco Common.......... 3,500
.Acquisition of properties......................................... (20,400)
--------
$ 832
========
</TABLE>
(C) Represents the 277 Park Loan, a $20 million portion of an $80 million
subordinated mezzanine loan bearing interest at approximately 11.75% per
annum.
(D) Represents draws on the credit facility to fund acquisitions and the 277
Park Loan.
(E) Represents ERP Operating Partnership's 20% minority interest in Palomino
Park, which has been combined in the Company's Pro Forma Combined Balance
Sheet.
(F) Represents the aggregate of the shares of WRP Newco Common issued in
connection with the Distribution (one share for every four shares of
Wellsford Common), the approximately 225,000 shares to be issued in
connection with the acquisition of the commercial properties, and the
350,000 shares (estimated) of WRP Newco Class A Common to be purchased by
ERP Operating Partnership for $3.5 million.
134
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF WRP NEWCO
The following summary of the terms of WRP Newco's stock does not purport to
be complete and is subject to and qualified in its entirety by reference to
Maryland law, WRP Newco's Charter and Bylaws, copies of which are exhibits to
the registration statement on Form 10 filed by WRP Newco. See "Additional
Information."
GENERAL
The Charter of WRP Newco (the "Newco Charter") authorizes up to 200,000,000
shares of Common Stock, par value $.01 per share. The Board of Directors may
reclassify any unissued shares of stock in one or more classes or series of
stock. Upon completion of the Distribution and the other transactions to be
entered into upon consummation of the Merger, there will be 4,899,965 shares
of WRP Newco Common issued and outstanding (excluding the Additional Share
Offering) and 350,000 shares (estimated) of WRP Newco Class A Common issued
and outstanding. The Board of Directors has also authorized the issuance of up
to 2,000,000 shares of WRP Newco Series A Preferred of which 1,000,000 shares
are subject to issuance pursuant to the Stock Purchase Agreement and 1,000,000
shares are subject to issuance pursuant to WRP Newco's right to pay dividends
on the WRP Newco Series A Preferred by the issuance of additional shares of
WRP Newco Series A Preferred. In addition, up to 1,750,000 shares of WRP Newco
Common have been reserved for issuance under WRP Newco's 1997 Management
Incentive Plan, subject to approval of the Wellsford Common Shareholders. See
"Approval of WRP Newco's 1997 Management Incentive Plan."
WRP Newco also intends to issue up to approximately 10,000,000 shares of WRP
Newco Common, excluding any over-allotment option, if any, in connection with
WRP Newco's Additional Share Offering upon which the shareholders of Wellsford
are being asked to vote. See "Approval of WRP Newco Additional Share
Offering."
At present, there is no established trading market for the WRP Newco Common.
WRP Newco has applied for listing of the WRP Newco Common on the ASE under the
symbol "WRP." The United States Trust Company of New York will act as transfer
agent and registrar of the WRP Newco Common.
Under Maryland law, stockholders generally are not liable for the
corporation's debts and obligations.
WRP Newco intends to furnish to its stockholders an annual report containing
audited consolidated financial statements and an opinion thereon expressed by
an independent public accounting firm.
COMMON STOCK
All shares of WRP Newco Common to be issued in connection with the
Distribution and the other transactions to be entered into upon consummation
of the Merger have been duly authorized, and will be fully paid, validly
issued and nonassessable. Subject to the preferential rights of any other
class or series of stock, holders of shares of WRP Newco Common are entitled
to receive dividends on such stock if, as and when authorized and declared by
the Board of Directors of WRP Newco out of assets legally available therefor
and to share ratably in the assets of WRP Newco legally available for
distribution to its stockholders in the event of its liquidation, dissolution
or winding up after payment of or adequate provision for all known debts and
liabilities of WRP Newco and payment of liquidation preferences to holders of
preferred stock.
Each outstanding share of WRP Newco Common entitles the holder to one vote
on all matters submitted to a vote of stockholders, including the election of
directors, and, except as provided with respect to any other class or series
of stock, the holders of such shares will possess exclusive voting power.
There is no cumulative voting in the election of directors, which means that,
except with respect to the director elected by the holders of the WRP Newco
Class A Common, the holders of a majority of the outstanding shares of WRP
Newco Common can elect all of the directors then standing for election and the
holders of the remaining shares will not be able to elect any directors. See
"--Class A Common Stock."
Holders of shares of WRP Newco Common have no preference, conversion,
exchange, sinking fund, redemption or appraisal rights and have no preemptive
rights to subscribe for any securities of WRP Newco. Except for the rights of
WRP Newco Class A Common described below, shares of WRP Newco Common will have
equal dividend, liquidation and other rights.
Under the MGCL, a Maryland corporation generally may not dissolve, amend its
charter, merge, sell all or substantially all of its assets, engage in a share
exchange or engage in similar transactions outside the ordinary course of
business unless approved by the affirmative vote of stockholders holding at
least two-thirds of the shares entitled to vote on the matter unless a lesser
percentage (but not less than a majority of all of the votes entitled to be
cast on the matter) is set forth in the corporation's charter. The Newco
Charter provides for approval of consolidations, share exchanges, mergers in
which WRP
135
<PAGE>
Newco is the successor, and amendments to the charter (except amendments to
the provisions relating to the classification and removal of directors or any
amendment reducing supermajority voting requirements) by the affirmative vote
of holders of shares entitled to cast a majority of the votes entitled to be
cast on the matter.
PREFERRED STOCK
The Newco Charter authorizes the Board of Directors to issue preferred stock
in one or more series. Thus, the Board of Directors could authorize the
issuance of shares of preferred stock with terms and conditions which could
have the effect of delaying, deferring or preventing a transaction or a change
in control of WRP Newco that might involve a premium price for holders of WRP
Newco Common or otherwise be in their best interest.
CLASSIFICATION OR RECLASSIFICATION OF COMMON STOCK OR PREFERRED STOCK
The Newco Charter authorizes the Board of Directors to classify or
reclassify any unissued stock by setting or changing the numbers,
designations, preferences, conversion or other rights, voting powers,
restrictions, limitations as to distributions, qualifications or terms or
conditions of redemption of any of such shares.
POWER TO ISSUE ADDITIONAL SHARES OF COMMON STOCK AND PREFERRED STOCK
WRP Newco believes that the power of the Board of Directors to issue
additional authorized but unissued shares of WRP Newco Common and to
reclassify any unissued shares of WRP Newco Common and thereafter to cause WRP
Newco to issue such reclassified shares of stock will provide WRP Newco with
increased flexibility in structuring possible future financings and
acquisitions and in meeting other needs which might arise. The additional
classes or series, as well as the WRP Newco Common, will be available for
issuance without further action by WRP Newco's stockholders, unless such
action is required by applicable law or the rules of any stock exchange or
automated quotation system on which WRP Newco's securities may be listed or
traded. Although the Board of Directors has no intention at the present time
of doing so, it could authorize WRP Newco to issue a class or series that
could, depending on the terms of such class or series, delay, defer or prevent
a transaction or a change of control of WRP Newco that might involve a premium
price for holders of common stock or otherwise be in their best interest.
CLASS A COMMON STOCK
Rights Generally.
Each share of WRP Newco Class A Common entitles its holder to all the rights
of a share of WRP Newco Common in addition to the rights described below.
Holders of WRP Newco Class A Common will not have any preemptive rights to
acquire other securities of WRP Newco.
Voting Rights.
Holders of WRP Newco Class A Common, as a class, may elect one director to
the WRP Newco Board of Directors (the "Class A Director") until the longer of
two years from the Closing Date or so long as (i) ERP Operating Partnership is
obligated to purchase preferred stock in WRP Newco pursuant to the Stock
Purchase Agreement; (ii) ERP Operating Partnership has obligations pursuant to
the Agreement Regarding Palomino Park or pursuant to the Credit Enhancement
Agreement; or (iii) the aggregate liquidation value of the shares of WRP Newco
Series A Preferred owned by ERP Operating Partnership is greater than $10
million. The WRP Newco Class A Director may be removed without cause, only by
the affirmative vote of a majority of the WRP Newco Class A Common electing
such director.
For ten years after the Effective Time, WRP Newco has the right to direct
the voting of all shares of WRP Newco Class A Common owned by ERP Operating
Partnership or any of its affiliates, except as to the election of the Class A
Director or any matter relating to the rights, preferences and privileges of
the WRP Newco Class A Common.
Optional and Automatic Conversion.
Holders of WRP Newco Class A Common have the right, exercisable at any time
and from time to time, to convert all or any of such WRP Newco Class A Common
into WRP Newco Common at a conversion rate of one share of WRP Newco Common
for each share of WRP Newco Class A Common so converted, subject to
adjustment. Any outstanding shares of WRP Newco Class A Common will
automatically convert, at the conversion rate, into shares of WRP Newco Common
upon the sale, transfer, pledge or other disposition ("Transfer") of such
shares of WRP Newco Class A Common to any entity other than an affiliate of
EQR or ERP Operating Partnership.
136
<PAGE>
Adjustment of Conversion Rate.
The conversion rate in effect at any time for the WRP Newco Class A Common
is subject to adjustment from time to time as follows:
In case WRP Newco (a) reclassifies the outstanding WRP Newco Common into
shares of some other class or series of shares, (b) subdivides the outstanding
WRP Newco Common into a greater number of shares of WRP Newco Common or (c)
combines the outstanding WRP Newco Common into a smaller number of shares of
WRP Newco Common, the conversion rate immediately prior to such action shall
be adjusted so that the holder of any shares of WRP Newco Class A Common
thereafter surrendered for conversion shall be entitled to receive the number
of shares of WRP Newco Common which he would have owned immediately following
such action had such WRP Newco Class A Common been converted immediately prior
thereto.
Purchase of Shares of Voting Stock in Excess of REIT Ownership Limit.
If, an event which is undertaken or caused by WRP Newco occurs resulting in
ERP Operating Partnership, EQR or any of their affiliates owning shares of WRP
Newco Class A Common in excess of the REIT ownership limits (initially 9.9% of
the value of the voting stock of WRP Newco), then WRP Newco will purchase such
shares of WRP Newco Class A Common in excess of the REIT ownership limit at
the market price thereof.
SERIES A 8% CONVERTIBLE REDEEMABLE PREFERRED STOCK
General.
The Board of Directors of WRP Newco has established a series of preferred
stock designated Series A 8% Convertible Redeemable Preferred Stock, par value
$25.00 per share. The maximum number of authorized shares of WRP Newco
Series A Preferred is 2,000,000.
Seniority.
With respect to the right to receive dividends and to participate in
distributions or payments in the event of any liquidation, dissolution or
winding up of WRP Newco, the WRP Newco Series A Preferred will rank on a
parity with any other preferred stock of WRP Newco, and will rank senior to
the WRP Newco Common and any other class or series of shares of stock of WRP
Newco ranking, as to dividends and upon liquidation, junior to the WRP Newco
Series A Preferred (collectively the "Junior Shares"). Notwithstanding the
foregoing, WRP Newco may make distributions or pay dividends in WRP Newco
Common or in any other shares of WRP Newco ranking junior to the WRP Newco
Series A Preferred as to distribution rights and liquidation preference at any
time.
Dividends.
The holders of WRP Newco Series A Preferred are entitled to receive, when
and as declared by the WRP Newco Board of Directors out of any funds legally
available therefor, dividends at the rate of $2.00 per share per year, payable
in cash, except as provided below, in equal amounts quarterly on the fifteenth
(or, if not a business day, the next succeeding business day) of January,
April, July and October each year (each such day being called a "Quarterly
Dividend Date" and each period ending on a Quarterly Dividend Date being
called a "Dividend Period"). The amount of any dividend payable for the
initial Dividend Period and for any Dividend Period, shorter than a full
Dividend Period shall be prorated.
Notwithstanding the foregoing, for any 12 Dividend Periods, WRP Newco has
the right to pay the dividend in additional shares of WRP Newco Series A
Preferred determined by dividing the total amount of the dividend to be paid
in shares by $25.00.
In the event WRP Newco fails to pay any dividend on the WRP Newco Series A
Preferred on any Quarterly Dividend Date, WRP Newco shall not pay any
dividends on any other class of stock of WRP Newco other than (i) pro rata
with other securities of WRP Newco ranking pari passu with the WRP Newco
Series A Preferred or (ii) with Junior Shares, until such dividend on the WRP
Newco Series A Preferred has been paid.
Distributions Upon Liquidation, Dissolution or Winding Up.
Upon the voluntary or involuntary dissolution, liquidation or winding up of
WRP Newco, the holders of the WRP Newco Series A Preferred will be entitled to
receive and to be paid out of the assets of WRP Newco available for
distribution to its shareholders, before any payment or distribution is made
on any Junior Shares, the amount of $25.00 per share of
137
<PAGE>
WRP Newco Series A Preferred ("Liquidation Value"), plus any accrued and
unpaid dividends thereon. If, upon any dissolution, liquidation, or winding up
of WRP Newco, the amounts payable with respect to the preference value of the
WRP Newco Series A Preferred and any other shares of stock of WRP Newco
ranking as to any such distribution on a parity with the WRP Newco Series A
Preferred are not paid in full, the holders of the WRP Newco Series A
Preferred and of such other shares will share ratably in such distribution of
assets of WRP Newco in proportion to the full respective preference amounts to
which they are entitled.
Redemption
Optional Redemption. On and after the fifth anniversary of the Closing Date,
WRP Newco may, at its option, redeem at any time all or any part of the
outstanding WRP Newco Series A Preferred at a price per share (the "Redemption
Price") equal to $25.00 per share of WRP Newco Series A Preferred, together
with all accrued and unpaid dividends to and including the date fixed for
redemption (the "Redemption Date"); provided, however, that no partial
redemption of the WRP Newco Series A Preferred may be effected if after giving
effect thereto the aggregate Liquidation Value of the WRP Newco Series A
Preferred outstanding is less than $10,000,000. The Redemption Price and all
accrued and unpaid dividends will be paid in cash; provided, however, that if
(a) a holder of WRP Newco Series A Preferred desires to convert any of its WRP
Newco Series A Preferred called for redemption but such conversion would cause
any direct or indirect holder which is classified as a REIT under Section 856
of the Code, to own, directly or indirectly, more than 9.9% of the outstanding
voting stock of WRP Newco or would otherwise cause any direct or indirect
holder of such outstanding voting stock to lose its status as a REIT under the
Code, and (b) such holder has so notified WRP Newco in writing prior to the
Redemption Date, stating the number of shares of WRP Newco Series A Preferred
which have been called for redemption which such holder is unable to convert
for such reason (such shares being referred to as the "Unconvertible Shares"),
then WRP Newco shall pay, in cash, the Redemption Price plus all accrued and
unpaid dividends for each Unconvertible Share and shall issue to such holder a
warrant to purchase the number of shares of WRP Newco Common equal to (i) the
fair market value of a share of WRP Newco Common on the Redemption Date
(calculated pursuant to the terms of the Articles Supplementary) over the
Redemption Price, multiplied by (ii) the number of shares of WRP Newco Common
into which the Unconvertible Shares redeemed from such holder were convertible
immediately prior to such redemption, and divided by (iii) the fair market
value of a share of WRP Newco Common on the Redemption Date. Such warrant
shall be exercisable without cost to the holder thereof at any time and from
time to time for a period of 10 years from the date of issuance of such
warrant. The warrant shall be on such terms and conditions as are customarily
contained in like warrants, including provisions to protect the holder of the
warrant from dilution. WRP Newco shall have the right, at any time, to redeem
such warrant at a price equal to the fair market value of such warrant on the
date of any such redemption.
Required Redemption. Upon the (A) (i) non-payment by WRP Newco of any
dividend on the Quarterly Dividend Date applicable to such dividend for three
Dividend Periods which need not be consecutive or (ii) failure by WRP Newco to
comply with any term or obligations under the Articles Supplementary (the
occurrences in (i) and (ii) each called an "Event of Default") or (B) on and
after the fifteenth anniversary of the Closing Date, whichever comes first,
the holder of any shares of WRP Newco Series A Preferred may, at its option,
cause WRP Newco to redeem at any time all of the WRP Newco Series A Preferred
held by such holder at $25.00 per share, payable in cash, together with all
accrued and unpaid dividends to and including the Redemption Date.
Notwithstanding the provisions of the previous sentence, provided an Event of
Default has not occurred, WRP Newco has the right to extend the date during
which a required redemption is not permitted for three separate additional
five year periods if the dividend rate on the WRP Newco Series A Preferred is
changed to the then market rate of comparable preferred stock (the "Market
Rate") on the first day of each such additional five year period; provided,
however, in no event shall the dividend be reduced to less than $2.00 per
share of WRP Newco Series A Preferred. The Market Rate shall be determined by
mutual agreement of the holders of WRP Newco Series A Preferred Stock and WRP
Newco or, if they cannot agree, by an investment banking firm under the
procedure set forth in the Articles Supplementary.
Voting Rights
The holders of WRP Newco Series A Preferred are not entitled to vote on any
matter except as provided below; provided, however, the holders of WRP Newco
Series A Preferred are not to have any voting rights to the extent such rights
will cause any holder of WRP Newco Series A Preferred to own more than 9.9% of
the outstanding voting stock of WRP Newco or otherwise cause any holder of WRP
Newco Series A Preferred that is classified as a REIT under Section 856 of the
Code to lose its status as a REIT under the Code.
So long as any shares of WRP Newco Series A Preferred remain outstanding,
WRP Newco will not, without the affirmative vote of the holders of at least
two-thirds of the shares of WRP Newco Series A Preferred outstanding at the
time, (i) authorize, create or issue, or increase the authorized or issued
amount of, any class or series of shares of capital stock
138
<PAGE>
ranking prior to the WRP Newco Series A Preferred with respect to the payment
of dividends or the distribution of assets upon liquidation, dissolution or
winding up or reclassify any authorized shares of stock of WRP Newco into such
shares, or create, authorize or issue any obligation or security convertible
into or evidencing the right to purchase any such shares; or (ii) amend, alter
or repeal the provisions of the WRP Newco Charter or the Articles
Supplementary classifying the WRP Newco Series A Preferred, whether by merger,
consolidation or otherwise (an "Event"), so as to materially and adversely
affect any right, preference, privilege or voting power of the WRP Newco
Series A Preferred or the holders thereof; provided, however, with respect to
the occurrence of any of the Events set forth in (ii) above, so long as the
shares of WRP Newco Series A Preferred remain outstanding with the terms
thereof materially unchanged, taking into account that upon the occurrence of
an Event, WRP Newco may not be the surviving entity, the occurrence of any
such Event will not be deemed to materially and adversely affect such rights,
preferences, privileges or voting power of holders of WRP Newco Series A
Preferred and provided further that (x) any increase in the amount of the
authorized or issued shares of preferred stock of WRP Newco or the creation or
issuance of any other preferred stock of WRP Newco, or (y) any increase in the
amount of authorized or issued shares of WRP Newco Series A Preferred or any
other preferred stock of WRP Newco, in each case ranking on a parity with or
junior to the WRP Newco Series A Preferred with respect to payment of
dividends or the distribution of assets upon liquidation, dissolution or
winding up, shall not be deemed to materially and adversely affect such
rights, preferences, privileges or voting powers.
Rights of Conversion.
Holders of WRP Newco Series A Preferred shall have the right, exercisable at
any time and from time to time, except in the case of WRP Newco Series A
Preferred called for redemption, to convert all or any of such WRP Newco
Series A Preferred into WRP Newco Common at a conversion price per share of
WRP Newco Common equal to (a) (i) the net book value per share of WRP Newco
Common on the Closing Date or (ii) in the event any sales of WRP Newco Common
to any institutional purchasers have taken place on or prior to the Closing
Date or are subject to a commitment to purchase from an institutional
purchaser made on or prior to the Closing Date, the average per share sale
price of WRP Newco Common sold to institutional purchasers on or prior to the
Closing Date and subject to written commitments to purchase from institutional
purchasers received on or prior to the Closing Date, multiplied by (b) 1.08
(the "Conversion Price"). In the case of WRP Newco Series A Preferred called
for redemption, conversion rights will expire at the close of business on the
last business day preceding the Redemption Date.
Adjustments of Conversion Rate.
The conversion rate in effect at any time for the WRP Newco Series A
Preferred is subject to adjustment from time to time to protect against
certain dilutive events.
In case WRP Newco (1) pays or makes a distribution in shares of WRP Newco
Common to holders of the WRP Newco Common, (2) reclassifies the outstanding
WRP Newco Common into shares of some other class or series of shares,
(3) subdivides the outstanding WRP Newco Common into a greater number of
shares of WRP Newco Common or (4) combines the outstanding WRP Newco Common
into a smaller number of shares of WRP Newco Common, the conversion rate
immediately prior to such action shall be adjusted so that the holder of any
shares of WRP Newco Series A Preferred thereafter surrendered for conversion
will be entitled to receive the number of shares of WRP Newco Common which he
would have owned immediately following such action had such WRP Newco Series A
Preferred been converted immediately prior to such event.
In case WRP Newco issues rights, options or warrants to all holders of the
WRP Newco Common entitling them to subscribe for or purchase WRP Newco Common
(or securities convertible into WRP Newco Common) at a price per share less
than the current market price (as determined pursuant to the Articles
Supplementary) of the WRP Newco Common on such record date, the number of
shares of WRP Newco Common into which each share of WRP Newco Series A
Preferred is convertible will be adjusted so that the same shall be equal to
the number determined by multiplying the number of shares of WRP Newco Common
into which such share of WRP Newco Series A Preferred was convertible
immediately prior to such record date by a fraction of which the numerator
shall be the number of shares of WRP Newco Common outstanding on such record
date plus the number of additional shares of WRP Newco Common offered (or into
which the convertible securities so offered are convertible), and of which the
denominator shall be the number of shares of WRP Newco Common outstanding on
such record date, plus the number of shares of WRP Newco Common which the
aggregate offering price of the additional shares of WRP Newco Common offered
(or into which the convertible securities so offered are convertible) would
purchase at such current market price.
In case WRP Newco distributes to all holders of WRP Newco Common any class
of shares of capital stock other than WRP Newco Common, evidences of
indebtedness or assets of WRP Newco (other than cash distributions out of
current or
139
<PAGE>
retained earnings), or distributes to all holders of WRP Newco Common rights
or warrants to subscribe for securities other than those referred to in the
immediately preceding paragraph, then in each case the number of shares of WRP
Newco Common into which each share of WRP Newco Series A Preferred will be
convertible will be adjusted so that the same shall equal the number
determined by multiplying the number of shares of WRP Newco Common into which
such share of WRP Newco Series A Preferred was convertible immediately prior
to the date of such distribution by a fraction of which the numerator shall be
the current market price of the WRP Newco Common on the record date mentioned
below, and of which the denominator shall be such current market price of the
WRP Newco Common, less the then fair market value (as determined by the Board
of Directors) of the portion of the securities or assets so distributed or of
such subscription rights or warrants applicable to one share of WRP Newco
Common. Notwithstanding the foregoing, in the event that WRP Newco distributes
rights or warrants (other than those referred to in the immediately preceding
paragraph) ("Rights") pro rata to holders of the WRP Newco Common, WRP Newco
may, in lieu of making any adjustment pursuant to this paragraph make proper
provision so that each holder of a share of WRP Newco Series A Preferred who
converts such share after the record date for such distribution and prior to
the expiration or redemption of the Rights shall be entitled to receive upon
such conversion, in addition to the WRP Newco Common issuable upon such
conversion (the "Conversion Shares"), a number of Rights to be determined as
follows: (1) if such conversion occurs on or prior to the date for the
distribution to the holders of Rights of separate certificates evidencing such
Rights (the "Distribution Date"), the same number of Rights to which a holder
of a number of shares of WRP Newco Common equal to the number of Conversion
Shares is entitled at the time of such conversion in accordance with the terms
and provisions of and applicable to the Rights; and (2) if such conversion
occurs after the Distribution Date, the same number of Rights to which a
holder of the number of shares of WRP Newco Common into which a share of WRP
Newco Series A Preferred so converted was convertible immediately prior to the
Distribution Date would have been entitled on the Distribution Date in
accordance with the terms and provisions of and applicable to the Rights.
Options.
So long as any WRP Newco Series A Preferred is outstanding, WRP Newco may
not issue any options to purchase shares of WRP Newco ("Employee Stock
Options") to officers, directors or employees of or consultants to, WRP Newco,
whether pursuant to employee stock option or purchase plans of WRP Newco or
employment or consulting agreements or otherwise for an exercise price which
is less than the fair market value of such shares on the date of grant. In the
event the number of shares of WRP Newco Common subject to Employee Stock
Options (excluding any Employee Stock Options granted in exchange for
Wellsford share options existing at the Effective Time) at any time exceeds,
in the aggregate, 10% of the WRP Newco Common outstanding at such time, all
Employee Stock Options outstanding at such time in excess of such 10%, shall
be deemed for certain anti-dilution purposes to have an exercise price per
share equal to 20% of the average fair market value of a share of WRP Newco
Common on the date of grant of those shares subject to Employee Stock Options
most recently granted in excess of such 10%.
CERTAIN PROVISIONS OF MARYLAND LAW AND OF
WRP NEWCO'S CHARTER AND BYLAWS
The following is a summary of certain provisions of Maryland law and WRP
Newco's Charter and Bylaws and is qualified in its entirety by reference to
the Newco Charter and Bylaws, copies of which are attached as exhibits to the
registration statement on Form 10 filed by WRP Newco. See "Additional
Information."
CLASSIFICATION OF THE BOARD OF DIRECTORS
The Bylaws provide that the number of directors of WRP Newco may be
established by the Board of Directors but may not be fewer than the minimum
number required by Maryland law, which is three, nor more than 15. Any vacancy
will be filled, at any regular meeting or at any special meeting called for
that purpose, by a majority of the remaining directors. A vacancy resulting
from an increase in the number of directors must be filled by a majority of
the entire Board of Directors.
Pursuant to the Newco Charter, the Board of Directors is divided into three
classes of directors. The initial terms of the first, second and third classes
will expire at the annual meetings of stockholders to be held in 1998, 1999
and 2000, respectively. Beginning in 1998, directors of each class will be
chosen for three-year terms upon the expiration of their current terms and
each year one class of directors will be elected by the stockholders. The
members of each such class will hold office until their successors are duly
elected and qualified. WRP Newco believes that classification of the Board of
Directors will help to assure the continuity and stability of WRP Newco's
business strategies and policies as determined by the Board of Directors.
Holders of shares of WRP Newco Common have no right to cumulative voting in
the election of directors. Consequently, at each annual meeting of
stockholders, the holders of a majority of the shares of WRP Newco Common are
able to elect all of the successors of the class of directors whose terms
expire at that meeting.
140
<PAGE>
Classification of the Board of Directors could have the effect of making the
removal of incumbent directors more time-consuming and difficult, which could
discourage a third party from making a tender offer or otherwise attempting to
obtain control of WRP Newco, even though such an attempt might be beneficial
to WRP Newco and its stockholders. At least two annual meetings of
stockholders, instead of one, will generally be required to effect a change in
a majority of the Board of Directors. Thus, the classified board provision
could increase the likelihood that incumbent directors will retain their
positions.
REMOVAL OF DIRECTORS
The Newco Charter provides that, except as provided in the next sentence, a
director may be removed only for cause and by the affirmative vote of at least
two-thirds of the votes entitled to be cast for the election of directors
(i.e., the votes attributable to all outstanding shares of WRP Newco Common).
The Class A Director may be removed, without cause, only by the affirmative
vote of at least a majority of the WRP Newco Class A Common electing such
Class A Director.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and (i) any person who beneficially owns 10% or more of the voting
power of the corporation's shares or (ii) an Interested Stockholder or (iii)
an affiliate of an Interested Stockholder are prohibited for five years after
the most recent date on which the Interested Stockholder becomes an Interested
Stockholder. Thereafter, any such business combination must be recommended by
the board of directors of such corporation and approved by the affirmative
vote of at least (a) 80% of the votes entitled to be cast by holders of
outstanding shares of voting stock of the corporation and (b) two-thirds of
the votes entitled to be cast by holders of voting stock of the corporation
other than shares held by the Interested Stockholder with whom (or with whose
affiliate) the business combination is to be effected, unless, among other
conditions, the corporation's common stockholders receive a minimum price (as
defined in the MGCL) for their shares and the consideration is received in
cash or in the same form previously paid by the Interested Stockholder for its
shares. These provisions of Maryland law do not apply, however, to business
combinations that are approved or exempted by the board of directors of the
corporation prior to the time that the Interested Stockholder becomes an
Interested Stockholder. The directors of WRP Newco have exempted from the
Maryland statute any business combinations with Jeffrey H. Lynford or Edward
Lowenthal or any of their affiliates or any other person acting in concert or
as a group with any of such persons.
AMENDMENT TO THE CHARTER AND BYLAWS
The Newco Charter may be amended only by the affirmative vote of a majority
of all of the votes entitled to be cast on the matter, except that any
amendment to the sections of the charter that address the number,
classification or removal of directors, or any amendment providing that the
stockholders may approve an action by a lesser percentage of votes than that
required by law will be valid only if approved by the affirmative vote of two-
thirds of all of the votes entitled to be cast on the matter. The Board of
Directors of WRP Newco has the exclusive power to adopt, alter or repeal any
provision of the Bylaws and to make new Bylaws.
MERGER, CONSOLIDATION, SALE OF ASSETS
A sale of all or substantially all of the assets of WRP Newco or a merger in
which WRP Newco is not the successor must be approved by the affirmative vote
of two-thirds of all of the votes entitled to be cast on the matter. A
consolidation or share exchange or a merger in which WRP Newco is the
successor need be approved only by the affirmative vote of holders of shares
entitled to cast a majority of all votes entitled to be cast on the matter.
DISSOLUTION OF WRP NEWCO
The dissolution of WRP Newco must be approved by the affirmative vote of the
holders of not less than two-thirds of all the votes entitled to be cast on
the matter.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws of WRP Newco provide that (a) with respect to an annual meeting
of stockholders, nominations of persons for election to the Board of Directors
and the proposal of business to be considered by stockholders may be made only
(i) pursuant to WRP Newco's notice of the meeting, (ii) by or at the direction
of the Board of Directors or (iii) by a stockholder who is entitled to vote at
the meeting and has complied with the advance notice procedures set forth in
the Bylaws and (b) with respect to special meetings of stockholders, only the
business specified in WRP Newco's notice of
141
<PAGE>
meeting may be brought before the meeting of stockholders and nominations of
persons for election to the Board of Directors may be made only (i) pursuant
to WRP Newco's notice of the meeting, (ii) by or at the direction of the Board
of Directors, or (iii) provided that the Board of Directors has determined
that directors shall be elected at such meeting, by a stockholder who is
entitled to vote at the meeting and has complied with the advance notice
provisions set forth in the Bylaws.
MEETINGS OF STOCKHOLDERS
WRP Newco's Bylaws provide that annual meetings of stockholders shall be
held on a date and at the time set by the Board of Directors during the month
of May each year (commencing in May 1998). Special meetings of the
stockholders may be called by (i) the Chairman of the Board of WRP Newco, (ii)
the President of WRP Newco, (iii) the Chief Executive Officer of WRP Newco or
(iv) the Board of Directors. As permitted by the MGCL, the Bylaws provide that
special meetings must be called by the Secretary of WRP Newco upon the written
request of the holders of shares entitled also to cast not less than a
majority of all of the votes entitled to be cast at the meeting.
WRP Newco's Bylaws provide that any stockholder of record wishing to
nominate a director or have a stockholder proposal considered at an annual
meeting (except for stockholder proposals included in WRP Newco proxy
materials pursuant to Rule 14a-8 under the securities Exchange Act of 1934, as
amended) must provide written notice and certain supporting documentation to
WRP Newco relating to the nomination or proposal not later than 60 days nor
earlier than 90 days prior to the anniversary date of the prior year's annual
meeting or special meeting in lieu thereof (the "Anniversary Date"). In the
event that the annual meeting is advanced by more than 30 calendar days before
or delayed more than 60 days from the Anniversary Date, stockholders generally
must provide written notice no earlier than 90 days prior to such annual
meeting nor later than the later of 60 days prior to such annual meeting or 10
days following the date on which notice of the meeting is mailed to
stockholders.
The purpose of requiring stockholders to give WRP Newco advance notice of
nominations and other business is to afford the Board of Directors a
meaningful opportunity to consider the qualifications of the proposed nominees
or the advisability of the other proposed business and, to the extent deemed
necessary or desirable by the Board of Directors, to inform stockholders and
make recommendations about the qualifications or business, as well as to
provide a more orderly procedure for conducting meetings of stockholders.
Although WRP Newco's Bylaws do not give the Board of Directors any power to
disapprove stockholder nominations for the election of directors or proposals
for action, they may have the effect of precluding a contest for the election
of directors or the consideration of stockholder proposals if the proper
procedures are not followed, and of discouraging or deterring a third party
from conducting a solicitation of proxies to elect its own slate of directors
or to approve its own proposal, without regard to whether consideration of the
nominees or proposals might be harmful or beneficial to WRP Newco and its
stockholders.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Newco Charter
contains such a provision which eliminates such liability to the maximum
extent permitted by Maryland law.
The Newco Charter authorizes WRP Newco, to the maximum extent permitted by
Maryland law, to obligate itself to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
present or former director or officer or (b) any individual who, while a
director of WRP Newco, and at the request of WRP Newco, serves or has served
another corporation, partnership, joint venture, trust, employee benefit plan,
limited liability company or any other enterprise as a director, officer,
partner, trustee, manager or member of such corporation, partnership, joint
venture, trust, employee benefit plan, limited liability company or other
enterprise. The Bylaws of WRP Newco obligate it, to the maximum extent
permitted by Maryland law, to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to (a) any present or
former director or officer who is made a party to the proceeding by reason of
his service in that capacity or (b) any individual who, while a director of
WRP Newco and at the request of WRP Newco, serves or has served another
corporation, partnership, joint venture, trust, employee benefit plan, limited
liability company or any other enterprise as a director, officer, partner,
trustee, manager or member of such corporation, partnership, joint venture,
trust, employee benefit plan, limited liability company or other enterprise
and who is made a party to the proceeding by reason of his service in that
capacity. The Newco Charter and Bylaws also permit WRP Newco to indemnify and
advance expenses to any person who served a predecessor of WRP Newco in any of
the capacities described above and to any employee or agent of WRP Newco or a
predecessor of WRP Newco.
142
<PAGE>
The MGCL requires a corporation (unless its charter provides otherwise,
which the Newco Charter does not) to indemnify a director or officer who has
been successful, on the merits or otherwise, in the defense of any proceeding
to which he is made a party by reason of his service in that capacity. The
MGCL permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any
proceeding to which they may be made a party by reason of their service in
those or other capacities unless it is established that (a) the act or
omission of the director or officer was material to the matter giving rise to
the proceeding and (i) was committed in bad faith or (ii) was the result of
active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money, property or services or (c) in
the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. However, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation. In addition, the MGCL requires WRP Newco, as a
condition to advancing expenses, to obtain (a) a written affirmation by the
director or officer of his good faith belief that he has met the standard of
conduct necessary for indemnification by WRP Newco as authorized by the Bylaws
and (b) a written statement by or on his behalf to repay the amount paid or
reimbursed by WRP Newco if it shall ultimately be determined that the standard
of conduct was not met.
PROPOSAL TO
APPROVE WRP NEWCO ADDITIONAL SHARE OFFERING
The Board of Trustees of Wellsford and the Board of Directors of WRP Newco
have approved the issuance by WRP Newco of up to 12,000,000 shares of WRP
Newco Common (the "Additional Shares"), subject to further approval by the
Wellsford Common Shareholders solely to satisfy the requirements of the ASE.
Such approval would not constitute approval of any other related transactions
by Wellsford, WRP Newco or any of their affiliates. The purchase price for the
Additional Shares will be determined by the Board of Directors of WRP Newco
based upon prevailing market conditions. WRP Newco anticipates that the
offering of the Additional Shares will be made to a limited number of
investors in a private placement or in a registered offering to be filed with
the Commission under the Securities Act.
The Board of Trustees of Wellsford and the Board of Directors of WRP Newco
believe that the WRP Newco Additional Share Offering will provide more capital
available for investment, enhance WRP Newco's capital structure and increase
the liquidity of WRP Newco Common. However, the equity of existing
stockholders would be diluted if the purchase price for the Additional Shares
is less than the book value of WRP Newco Common on the date of the
Distribution.
In addition, if all of the Additional Shares are issued and no other shares
have been issued after the Distribution and prior to the WRP Newco Additional
Share Offering, the owners of the Additional Shares will own approximately 70%
of the then outstanding shares of WRP Newco Common. The nature and
concentration of ownership of such Additional Shares could result in a change
of control of the Company.
The proceeds of this offering, after payment of underwriters' commissions
and other offering expenses, will be used to repay loans of up to $50 million
to be made to WRP Newco, and interest thereon, and for investments, other
business activities and working capital. The loans are expected to be made
under the WRP Newco Line of Credit. As of the date hereof, WRP Newco does not
have any agreements, understandings or commitments to make any specific
investments with such proceeds. In the normal course of business, however, WRP
Newco is continually evaluating a number of potential investments and entering
into non-binding letters of intent. In accordance with the Newco Charter, WRP
Newco may make additional investments without the consent of its stockholders.
WRP Newco anticipates that purchasers of Additional Shares will be able to
sell such shares in the public market immediately or shortly after purchase.
The existence of the Additional Shares in the public market could adversely
affect the market price for shares of WRP Newco Common.
The Additional Shares will have the same terms as all other shares of WRP
Newco Common with respect to dividends, voting, ownership and any other
right(s) and limitation(s) pertaining to shares of WRP Newco Common generally.
However, as would be the case with respect to any issuance of equity voting
securities, the Additional Shares, if issued, will dilute the relative voting
power of the issued and outstanding shares of WRP Newco Common.
THE BOARD OF TRUSTEES OF WELLSFORD AND THE BOARD OF DIRECTORS OF WRP NEWCO
RECOMMEND THAT YOU VOTE FOR THE PROPOSAL TO APPROVE THE WRP NEWCO ADDITIONAL
SHARE OFFERING.
143
<PAGE>
PROPOSAL TO
APPROVE WRP NEWCO'S 1997 MANAGEMENT INCENTIVE PLAN
General. The Board of Directors of WRP Newco has approved, subject to the
approval of the shareholders, the 1997 Management Incentive Plan (the
"Management Incentive Plan"). The purpose of the Management Incentive Plan is
to align the interests of WRP Newco's directors, executive officers and
employees with those of the stockholders and to enable WRP Newco to attract,
compensate and retain directors, executive officers and employees and provide
them with appropriate incentives and rewards for their performance. The
existence of the Management Incentive Plan should enable the Company to
compete more effectively for the services of such individuals. The officers,
directors and employees of WRP Newco who receive awards under the Management
Incentive Plan may receive a greater economic benefit to the extent the fair
market value of WRP Newco Common increases. However, the equity of existing
stockholders would be diluted if shares of WRP Newco Common were issued
pursuant to the Management Incentive Plan at prices less than their then
current fair market value. In addition, the issuance of a substantial number
of shares of WRP Newco Common under the Management Incentive Plan or their
sale in the public market might adversely affect prevailing market prices for
such shares.
Awards to directors, executive officers and other employees under the
Management Incentive Plan may take the form of share options ("Options"),
including corresponding share appreciation rights ("SARs") and reload options,
restricted share awards and share purchase awards. The maximum number of
shares of WRP Newco Common that may be the subject of awards under the
Management Incentive Plan is 1,750,000 shares.
Share Authorization. Shares of WRP Newco Common covered by any unexercised
portions of terminated Options, shares of WRP Newco Common forfeited by
participants and shares of WRP Newco Common subject to any awards that are
otherwise surrendered by a participant without receiving any payment or other
benefit with respect thereto may again be subject to new awards under the
Management Incentive Plan. In the event the purchase price of an Option is
paid in whole or in part through the delivery of shares of WRP Newco Common,
the number of shares of WRP Newco Common issuable in connection with the
exercise of the Option shall not again be available for the grant of awards
under the Management Incentive Plan. Shares of WRP Newco Common subject to
Options, or portions thereof, with respect to which SARs are exercised, are
not again available for the grant of awards under the Management Incentive
Plan. The shares of WRP Newco Common to be issued or delivered under the
Management Incentive Plan are authorized and unissued shares, or issued shares
of WRP Newco Common that have been reacquired by WRP Newco.
Management Incentive Plan Administration. The Management Incentive Plan will
be administered by a committee of two or more non-employee directors (the
"Committee"), which will initially consist of Messrs. Du Bois and Germain. The
Committee will determine the directors, executive officers and other employees
who will be eligible for and granted awards, determine the amount and type of
awards, establish rules and guidelines relating to the Management Incentive
Plan, establish, modify and terminate the terms and conditions of awards and
take such other action as may be necessary for the proper administration of
the Management Incentive Plan. All employees and non-employee directors are
currently eligible to participate in the Management Incentive Plan.
Options. "Incentive Options" meeting the requirements of Section 422 of the
Code, and "Nonqualified Options" that do not meet such requirements are both
available for grant under the Management Incentive Plan. The term of each
Option will be determined by the Committee, but no Incentive Option will be
exercisable more than ten years after the date of grant. Options may also be
subject to restrictions on exercise, such as exercise in periodic
installments, as determined by the Committee. The exercise price for Incentive
Options must be at least equal to 100% of the fair market value of the shares
of WRP Newco Common on the date of grant and the exercise price for
Nonqualified Options will be determined by the Committee at the time of grant.
The exercise price can be paid in cash, or if approved by the Committee, by
tendering shares (actually or constructively) of WRP Newco Common owned by a
participant.
Incentive Options are not transferable except by will or the laws of descent
and distribution and may be exercised only by the participant (or his guardian
or legal representative) during his or her lifetime, except as provided below.
Nonqualified Options may be transferable to family members and entities for
the benefit of the participant or his family members. If a participant's
employment with WRP Newco or service as a director terminates for any reason
(other than death or disability), any unexercised or unexpired Options held by
the participant (or its permitted transferee) will be deemed cancelled and
terminated on the date of such termination, unless the Committee decides to
extend the term of such Options for a period not exceeding three months. In
the case of a non-employee director, however, if such participant's service as
a director terminates by reason of death, disability, or under mutually
satisfactory conditions, any unexercised or unexpired Nonqualified Options
held by the participant (or its permitted transferee) will be exercisable for
a period of five years from the date of such termination or until the
expiration of the Option, whichever is shorter. If a participant dies while
employed by WRP Newco, including an employee who is also a director, any
unexercised or unexpired Options will, to the extent
144
<PAGE>
exercisable on the date of death, be exercisable by the holder or by the
participant's estate or by any person who acquired such Options by bequest or
inheritance, at any time generally within one year after such death. If a
participant becomes totally disabled and his employment terminates as a result
of such disability, including an employee who is also a director, the holder
or the participant (or his guardian or legal representative) will have the
unqualified right to exercise any unexercised and unexpired Options held by
the participant (or its permitted transferee) generally for one year after
such termination.
Share Appreciation Rights. The Management Incentive Plan provides that SARs
may be granted in connection with a grant of Options. Each SAR must be
associated with a specific Option and must be granted at the time of grant of
such Option. A SAR is exercisable only to the extent the related Option is
exercisable. Upon the exercise of a SAR, the recipient is entitled to receive
from WRP Newco, without the payment of any cash (except for any applicable
withholding taxes), up to, but no more than, an amount in cash or shares of
WRP Newco Common equal to the excess of (A) the fair market value of one
Common Share on the date of such exercise over (B) the exercise price of any
related Option, times the number of shares of WRP Newco Common in respect of
which such SAR shall have been exercised. Upon the exercise of a SAR, the
related share Option, or the portion thereof in respect of which such SAR is
exercised, will terminate. Upon the exercise of an Option granted in tandem
with a SAR, such tandem SAR will terminate.
Reload Options. The Committee may grant, concurrently with the award of any
Option (each an "Underlying Option") to such participants, one or more reload
options (each a "Reload Option") to purchase for cash or, if permissible under
the Underlying Option, shares of WRP Newco Common, a number of shares of WRP
Newco Common equal to the number of shares of WRP Newco Common delivered (or
deemed delivered) by the participant to WRP Newco to exercise the Underlying
Option. Although an Underlying Option may be an Incentive Option, a Reload
Option is not intended to qualify as an Incentive Option. A Reload Option may
be granted in connection with the exercise of an Option that is itself a
Reload Option. Each Reload Option will have the same expiration date as the
Underlying Option and an exercise price equal to the fair market value of the
shares of WRP Newco Common on the date of grant of the Reload Option. A Reload
Option is exercisable immediately.
Reload Options permit a participant to retain, through the term of the
original Option, his or her economic interest in the sum of the shares of WRP
Newco Common covered by such Options as well as the already-owned shares of
WRP Newco Common that could be used to exercise such Option, by granting
options on the number of shares of WRP Newco Common used to pay the exercise
price of the original Option and subsequent Reload Options. In this way,
Reload Options provide a participant with the opportunity to build up
ownership of shares of WRP Newco Common covered by an original Option earlier
during the Option term rather than through a single exercise at or near the
end of the Option term.
Restricted Shares. WRP Newco may award restricted shares of WRP Newco Common
to a participant. Such a grant gives a participant the right to receive shares
of WRP Newco Common subject to a risk of forfeiture based upon certain
conditions. The forfeiture restrictions on the shares of WRP Newco Common may
be based upon performance standards, length of service or other criteria as
the Committee may determine. Until all restrictions are satisfied, lapsed or
waived, WRP Newco will maintain custody over the restricted shares of WRP
Newco Common but the participant will be able to vote the shares of WRP Newco
Common and will be entitled to an amount equal to all distributions, if any,
paid with respect to the shares of WRP Newco Common, as provided by the
Committee. During such restrictive period, the restricted shares of WRP Newco
Common may not be sold, assigned, transferred, pledged or otherwise
encumbered. Upon termination of employment, the participant generally forfeits
the right to the shares of WRP Newco Common to the extent the applicable
performance standards, length of service requirements, or other measurement
criteria have not been met.
Share Purchase Awards. The Management Incentive Plan also permits the grant
of share purchase awards to participants. Participants who are granted a share
purchase award are provided with a share purchase loan to enable them to pay
the purchase price for the shares of WRP Newco Common acquired pursuant to the
award. The terms of each share purchase loan will be determined by the
Committee. The purchase price of shares of WRP Newco Common acquired with a
share purchase loan is the fair market value on the date of the award. The
Management Incentive Plan provides that some or all of a share purchase loan
can be forgiven under terms determined by the Committee. At the end of the
loan term, the remainder of the share purchase loan will be due and payable.
The interest rate, if any, on a share purchase loan will be determined by the
Committee. Share purchase loans may be recourse or nonrecourse under terms
determined by the Committee.
If a participant's employment with WRP Newco is terminated for any reason
other than death, disability or termination without "cause," the balance of
the share purchase loans to such participant will be immediately due and
payable. If a participant's employment terminates by reason of death,
disability or termination without "cause," the balance of such participant's
share purchase loans may be forgiven in full at the discretion of the
Committee.
145
<PAGE>
Antidilution Provisions. The number of shares of WRP Newco Common authorized
to be issued under the Management Incentive Plan and subject to outstanding
awards (and the grant or exercise price thereof) may be adjusted to prevent
dilution or enlargement of rights in the event of any dividend or other
distribution, recapitalization, stock split, reverse stock split,
reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase or exchange of shares of WRP Newco Common or other securities, or
other similar capitalization change.
Certain Federal Income Tax Consequences of the Management Incentive
Plan. The following is a brief summary of the principal federal income tax
consequences of awards under the Management Incentive Plan. The summary is
based upon current federal income tax laws and interpretations thereof, all of
which are subject to change at any time, possibly with retroactive effect. The
summary is not intended to be exhaustive and, among other things, does not
describe state, local or foreign tax consequences.
In general, a participant is not subject to federal income tax either at the
time of grant or at the time of exercise of an Incentive Option. However, upon
exercise, the difference between the fair market value of the shares of WRP
Newco Common and the exercise price is a tax preference item subject to the
possible application of the alternative minimum tax. If a participant does not
dispose of shares of WRP Newco Common acquired through the exercise of an
Incentive Option in a "disqualifying disposition" (i.e., no disposition occurs
within two years from the date of grant of the share option nor within one
year of the transfer of the shares of WRP Newco Common to the participant),
then the participant will be taxed only upon the gain, if any, from the sale
of such shares of WRP Newco Common, and such gain will be taxable as gain from
the sale of a capital asset.
WRP Newco will not receive any tax deduction on the exercise of an Incentive
Option or, if the above holding period requirements are met, on the sale of
the underlying shares of WRP Newco Common. If there is a disqualifying
disposition (i.e., one of the holding period requirements is not met), the
participant will be treated as receiving compensation subject to ordinary
income tax in the year of the disqualifying disposition and WRP Newco will be
entitled to a deduction for compensation expense in an amount equal to the
amount included in income by the participant. The participant generally will
be required to include in income an amount equal to the difference between the
fair market value of the shares of WRP Newco Common at the time of exercise
and the exercise price. Any appreciation in value after the time of exercise
will be taxed as capital gain and will not result in any deduction by WRP
Newco.
If Nonqualified Options are granted to a participant, there are no federal
income tax consequences at the time of grant. Upon exercise of the Option, the
participant must report as ordinary income an amount equal to the difference
between the exercise price and the fair market value of the shares of WRP
Newco Common on the date of exercise. WRP Newco will receive a tax deduction
in like amount. Any appreciation in value after the time of exercise will be
taxed as capital gain and will not result in any deduction by WRP Newco.
No income will be realized by a participant in connection with the grant of
any SAR. The participant must include in ordinary income the amount of cash
received and the fair market value on the exercise date of any shares of WRP
Newco Common received upon the exercise of a SAR. WRP Newco will be entitled
to a deduction equal to the amount included in such participant's income by
reason of the exercise of any SAR.
The receipt of a Reload Option by a holder of an Incentive Option or a
Nonqualified Option (including a Reload Option) who pays the exercise price in
full or in part with previously acquired shares of WRP Newco Common should not
affect the tax treatment of the exercise of such Incentive or Nonqualified
Option (including the amount of ordinary income, if any, recognized upon
exercise). A participant will not be subject to tax at the time a Reload
Option is granted (except for any income recognized upon the exercise of a
Nonqualified Option at the time of grant of the Reload Option). A Reload
Option will constitute a Nonqualified Option for federal income tax purposes
and will be taxed as such in the manner set forth above.
A grant of restricted shares of WRP Newco Common does not constitute a
taxable event for either a participant or WRP Newco. However, the participant
will be subject to tax, at ordinary income rates, when the shares of WRP Newco
Common are no longer subject to a substantial risk of forfeiture or they
become transferable. WRP Newco will be entitled to take a commensurate
deduction at that time.
A participant may elect to recognize taxable ordinary income at the time
restricted shares of WRP Newco Common are awarded in an amount equal to the
fair market value of the shares of WRP Newco Common at the time of grant,
determined without regard to any forfeiture restrictions. If such an election
is made, WRP Newco will be entitled to a deduction at that time in the same
amount. Future appreciation on the shares of WRP Newco Common will be taxed at
the capital gains rate when the shares of WRP Newco Common are sold. However,
if, after making such an election, the shares of WRP Newco Common are
forfeited, the participant will be unable to claim a deduction.
146
<PAGE>
In general, a participant who receives a share purchase award incurs no tax
liability and WRP Newco does not receive any deduction at the time shares of
WRP Newco Common are acquired through a share purchase award. However, as the
share purchase loan is forgiven, the participant will be required to recognize
income in an amount equal to the forgiven portion of the loan. WRP Newco will
be entitled to take a commensurate deduction at such time.
Applicable withholding taxes may be withheld in connection with any award
under the Management Incentive Plan. In that regard, the Committee has the
discretion to allow a participant to satisfy its withholding tax obligations
with shares of WRP Newco Common.
Change in Control. Depending on the terms of a particular award as
determined by the Committee, upon the occurrence of a change in control of WRP
Newco, all options and related SARs may become immediately exercisable, the
restricted shares of WRP Newco Common may fully vest and share purchase loans
may be forgiven in full.
Termination, Amendment and ERISA Status. The Management Incentive Plan will
terminate by its terms and without any action by the Board on the tenth
anniversary of the date of its effectiveness. No awards may be made after that
date. Awards outstanding on such date will remain valid in accordance with
their terms.
The Committee may amend or alter the terms of awards under the Management
Incentive Plan, including to provide for the forgiveness in whole or in part
of share purchase loans, the release of the shares of WRP Newco Common
securing such loans or the termination or modification of the vesting or
performance provisions of the grants of restricted shares of WRP Newco Common
but no such action shall in any way impair the rights of a participant under
any award without such participant's consent.
The Committee may amend or terminate the Management Incentive Plan. No such
amendments or termination of the Management Incentive Plan shall in any way
impair the rights of a participant under any award previously granted without
such participant's consent. In addition, any amendment or termination will be
subject to shareholder approval if approval is required by Federal or state
law or regulation or rule of any stock exchange or quotation system on which
the shares of WRP Newco Common are listed or quoted.
The Management Incentive Plan is not subject to the provisions of the
Employee Retirement Income Security Act of 1976, as amended.
THE BOARD OF TRUSTEES OF WELLSFORD AND THE BOARD OF DIRECTORS OF WRP NEWCO
RECOMMEND THAT YOU VOTE FOR THE PROPOSAL TO APPROVE WRP NEWCO'S 1997
MANAGEMENT INCENTIVE PLAN.
LEGAL MATTERS
Certain legal matters in connection with the Merger will be passed upon for
EQR by Rudnick & Wolfe, Chicago, Illinois and Rosenberg & Liebentritt, P.C.,
Chicago, Illinois. Errol R. Halperin, a partner of Rudnick & Wolfe, is a
trustee of EQR. Attorneys of Rudnick & Wolfe beneficially own less than 1% of
the outstanding EQR Common, either directly or upon the exercise of options.
Sheli Z. Rosenberg, a principal of Rosenberg & Liebentritt, P.C., is a trustee
of EQR. Attorneys of Rosenberg & Liebentritt, P.C. beneficially own less than
1% of the outstanding EQR Common, either directly or upon the exercise of
options. Certain legal matters in connection with the Merger will be passed
upon for Wellsford by Robinson Silverman Pearce Aronsohn & Berman LLP, New
York, New York. Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland, will
pass upon certain matters of Maryland law relating to the Merger Agreement and
Articles under Maryland law.
EXPERTS
The consolidated financial statements of EQR and its subsidiaries for the
years ended December 31, 1995 and 1994 incorporated herein by reference have
been audited by Grant Thornton LLP, independent public accountants, as
indicated in their reports with respect thereto, and are incorporated in this
Joint Proxy Statement/Prospectus/Information Statement in reliance upon the
authority of said firm as experts in accounting and auditing.
The combined financial statements of WRP Newco (Predecessor), at December
31, 1996 and 1995 and for the year ended December 31, 1996, and for the period
from March 22 to December 31, 1995, appearing in this Joint Proxy Statement/
Prospectus/Information Statement; the consolidated financial statements of
Wellsford and its subsidiaries appearing in Wellsford's Annual Report (Form
10-K) for the year ended December 31, 1996 and the consolidated financial
statements of
147
<PAGE>
EQR appearing in EQR's Annual Report (Form 10-K/A) for the year ended December
31, 1996; the Combined Statement of Revenue and Certain Expenses of the 1996
Acquired Properties and Probable Properties for the year ended December 31,
1995, appearing in the Current Report of EQR on Form 8-K, as amended by Form
8-K/A, dated May 23, 1996; and the Combined Statement of Revenue and Certain
Expenses of the 1996 Acquired Properties for the year ended December 31, 1995,
appearing in the Current Report of EQR on Form 8-K/A, dated November 15, 1996;
have all been audited by Ernst & Young LLP, independent auditors, as set forth
in their reports thereon appearing elsewhere herein or incorporated herein by
reference, and in reliance upon such reports given upon the authority of such
firm as experts in accounting and auditing.
SHAREHOLDER PROPOSALS
Any proposal which a shareholder of EQR intends to present at the 1997
Annual Meeting of Shareholders of EQR, if the Merger has not been consummated
prior to the date such meeting is to be held, must have been received by the
Secretary of EQR no later than November 29, 1996 to have been eligible for
inclusion in EQR's proxy statement and proxy form relating to such meeting.
Any proposal which a shareholder of Wellsford intends to present at the 1997
Annual Meeting of Shareholders of Wellsford, if the Merger has not been
consummated prior to the date such meeting is to be held, must have been
received by Wellsford at its principal executive offices on or before November
29, 1996 to have been eligible for inclusion in Wellsford's proxy statement
and proxy form relating to such meeting.
148
<PAGE>
APPENDIX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
BETWEEN
EQUITY RESIDENTIAL PROPERTIES TRUST
AND
WELLSFORD RESIDENTIAL PROPERTY TRUST
DATED AS OF JANUARY 16, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE PAGE
------- ----
<C> <C> <S> <C>
1 The Merger........................................................... A-1
1.1 The Merger..................................................... A-1
1.2 Newco Transactions............................................. A-1
1.3 Closing........................................................ A-2
1.4 Effective Time................................................. A-2
1.5 Amendments and Restatements of Wellsford's Declaration of
Trust......................................................... A-2
1.6 Amendment and Restatement of Wellsford's Bylaws................ A-2
1.7 Trustees....................................................... A-2
1.8 Effect on Shares of Beneficial Interest and Options............ A-2
1.9 Exchange Ratio................................................. A-2
1.10 Completion of Contribution Agreement........................... A-2
1.11 Reversal of Direction of Merger................................ A-3
1.12 Change in Number of Spin-Off Shares............................ A-3
2 Representations and Warranties of Wellsford.......................... A-3
2.1 Organization, Standing and Power of Wellsford.................. A-3
2.2 Wellsford Subsidiaries......................................... A-4
2.3 Capital Structure.............................................. A-4
2.4 Authority; Noncontravention; Consents.......................... A-5
2.5 SEC Documents; Financial Statements; Undisclosed Liabilities... A-6
2.6 Absence of Certain Changes or Events........................... A-6
2.7 Litigation..................................................... A-7
2.8 Properties..................................................... A-7
2.9 Environmental Matters.......................................... A-8
2.10 Related Party Transactions..................................... A-8
2.11 Absence of Changes in Benefit Plans; ERISA Compliance.......... A-8
2.12 Employee Policies.............................................. A-9
2.13 Taxes.......................................................... A-9
2.14 No Payments to Employees, Officers, Trustees or Directors...... A-9
2.15 Brokers; Schedule of Fees and Expenses......................... A-9
2.16 Compliance with Laws........................................... A-10
2.17 Contracts; Debt Instruments.................................... A-10
2.18 Opinion of Financial Advisor................................... A-10
2.19 State Takeover Statutes........................................ A-10
2.20 Registration Statement......................................... A-10
2.21 Development Properties......................................... A-10
2.22 EQR Shares of Beneficial Interest.............................. A-10
2.23 Investment Company Act of 1940................................. A-11
2.24 Intentionally Omitted.......................................... A-11
2.25 Definition of Knowledge of Wellsford........................... A-11
3 Representations and Warranties of EQR................................ A-11
3.1 Organization, Standing and Power of EQR........................ A-11
3.2 Capital Structure.............................................. A-11
3.3 Organization, Standing and Power of ERP Operating Partnership.. A-12
3.4 Capital Structure of ERP Operating Partnership................. A-12
3.5 Authority; Noncontravention; Consents.......................... A-12
3.6 SEC Documents; Financial Statements; Undisclosed Liabilities... A-13
3.7 Absence of Certain Changes or Events........................... A-13
3.8 Litigation..................................................... A-13
3.9 Properties..................................................... A-14
3.10 Environmental Matters.......................................... A-14
3.11 Taxes.......................................................... A-14
3.12 Brokers; Schedule of Fees and Expenses......................... A-15
3.13 Compliance with Laws........................................... A-15
3.14 Contracts; Debt Instruments.................................... A-15
3.15 Opinion of Financial Advisor................................... A-15
3.16 State Takeover Statutes........................................ A-15
3.17 Registration Statement......................................... A-15
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
ARTICLE PAGE
------- ----
<C> <C> <S> <C>
3.18 Wellsford Shares of Beneficial Interest........................ A-15
3.19 Intentionally Omitted.......................................... A-15
3.20 Investment Company Act of 1940................................. A-15
3.21 Definition of Knowledge of EQR................................. A-15
4 Covenants............................................................ A-15
4.1 Acquisition Proposals.......................................... A-15
4.2 Conduct of Wellsford's Business Pending Merger................. A-16
4.3 Conduct of EQR's Business Pending Merger....................... A-18
4.4 Covenant of EQR................................................ A-19
4.5 Other Actions.................................................. A-19
4.6 Filing of Certain Reports...................................... A-19
5 Additional Covenants................................................. A-19
5.1 Preparation of the Registration Statement and the Proxy
Statement; Wellsford Shareholders Meeting and EQR Shareholders
Meeting....................................................... A-19
5.2 Access to Information: Confidentiality......................... A-20
5.3 Best Efforts; Notification..................................... A-20
5.4 Costs of Transaction........................................... A-21
5.5 Tax Treatment.................................................. A-21
5.6 Public Announcements........................................... A-21
5.7 Listing........................................................ A-21
5.8 Letters of Accountants......................................... A-21
5.9 Transfer and Gains Taxes....................................... A-21
5.10 Benefit Plans and Other Employee Arrangements.................. A-21
5.11 Indemnification................................................ A-22
5.12 Contribution Agreement......................................... A-23
5.13 Declaration of Dividends and Distributions..................... A-23
5.14 Consulting Agreements.......................................... A-23
5.15 Transfer of Management Company Shares.......................... A-23
5.16 Transfer of Wellsford Assets After Effective Time.............. A-23
5.17 Notices........................................................ A-24
5.18 Resignations................................................... A-24
5.19 Third Party Management Agreements.............................. A-24
5.20 Repayment of Certain Indebtedness.............................. A-24
5.21 10B-17 Notice.................................................. A-24
5.22 Denver Lease................................................... A-24
5.23 New York Lease................................................. A-24
5.24 Amendment to Articles of WPHC.................................. A-24
5.25 Completion of Articles of Merger............................... A-25
6 Conditions........................................................... A-25
6.1 Conditions to Each Party's Obligation to Effect the Merger..... A-25
6.2 Conditions to Obligations of EQR............................... A-25
6.3 Conditions to Obligations of Wellsford......................... A-27
7 Termination, Amendment and Waiver.................................... A-28
7.1 Termination.................................................... A-28
7.2 Certain Fees and Expenses...................................... A-28
7.3 Effect of Termination.......................................... A-29
7.4 Amendment...................................................... A-29
7.5 Extension; Waiver.............................................. A-29
8 General Provisions................................................... A-30
8.1 Nonsurvival of Representations and Warranties.................. A-30
8.2 Notices........................................................ A-30
8.3 Interpretation................................................. A-30
8.4 Counterparts................................................... A-30
8.5 Entire Agreement; No Third-Party Beneficiaries................. A-30
8.6 Governing Law.................................................. A-31
8.7 Assignment..................................................... A-31
8.8 Enforcement.................................................... A-31
8.9 Severability................................................... A-31
8.10 Non-Recourse................................................... A-31
</TABLE>
ii
<PAGE>
EXHIBITS
<TABLE>
<C> <S>
Exhibit "A" --Articles of Merger
Exhibit "B" --Contribution Agreement
Exhibit "C" --Newco Stock Purchase Agreement
Exhibit "D" --Palomino Agreement
Exhibit "E" --Palomino Credit Enhancement Agreement
Exhibit "F" --Sonterra Right of First Offer Agreement
Exhibit "G" --Adjustment to Exchange Ratio
Exhibit "H" --Transaction Costs Agreement
Exhibit "I" --Retention Program Letter
Exhibit "J" --Key Executives
Exhibit "K" --Form of Consulting Agreement
Exhibit "L" --Form of Letter for EQR Tax Opinion
Exhibit "M" --Opinion of Counsel to Wellsford
Exhibit "N" --Form of Letter for Wellsford Tax Opinion
Exhibit "O" --Opinion of Counsel to EQR
</TABLE>
iii
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
DEFINED TERM SECTION
- ------------ ---------
<S> <C>
Acquisition Proposal.................................................. 4.1(a)
Affiliate............................................................. 2.10
Agreement............................................................. Preamble
Articles of Merger.................................................... Recital C
Average Closing Price................................................. 1.9
Base Amount........................................................... 7.2
Break-Up Expenses..................................................... 7.2
Break-Up Fee.......................................................... 7.2
Break-Up Fee Tax Opinion.............................................. 7.2
Change in Control Share Grants........................................ 2.3(b)
Closing............................................................... 1.3
Closing Date.......................................................... 1.3
Code.................................................................. Recital E
Commitment............................................................ 4.2(q)
Confidentiality Agreement............................................. 5.2
Contribution Agreement................................................ Recital D
Denver Lease.......................................................... 5.22
Department............................................................ 1.4
Effective Time........................................................ 1.4
employee benefit plan................................................. 2.11(b)
Encumbrances.......................................................... 2.8(a)
EQR................................................................... Preamble
EQR Common Shares..................................................... 1.9
EQR Disclosure Letter................................................. Article 3
EQR Employee Share Plans.............................................. 3.2(a)
EQR Financial Statement Date.......................................... 3.7
EQR Material Adverse Change........................................... 3.7
EQR Material Adverse Effect........................................... 3.1
EQR Options........................................................... 3.2(a)
EQR Preferred Shares.................................................. 3.2(a)
EQR Properties........................................................ 3.9
EQR SEC Documents..................................................... 3.6
EQR Series A Preferred Shares......................................... 3.2(a)
EQR Series B Preferred Shares......................................... 3.2(a)
EQR Series C Preferred Shares......................................... 3.2(a)
EQR Shareholder Approvals............................................. 3.5(a)
EQR Shareholders Meeting.............................................. 5.1(b)
EQR Subsidiaries...................................................... 3.1
EQR Units............................................................. 3.2(c)
ERISA................................................................. 2.11(b)
ERP Operating Partnership............................................. 1.2
ERP Operating Partnership Agreement................................... 3.2(a)
Exchange Act.......................................................... 2.4(b)
Exchange Ratio........................................................ 1.9
GAAP.................................................................. 2.5
Governmental Entity................................................... 2.4(b)
Hazardous Materials................................................... 2.9
include, includes or including........................................ 8.3
Indebtedness.......................................................... 2.7(b)
Indemnified Parties................................................... 5.11(a)
IRS................................................................... 1.11
Laws.................................................................. 2.4(b)
Liens................................................................. 2.2(b)
Management Corp....................................................... 5.15
Merger................................................................ Recital B
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM SECTION
- ------------ ---------
<S> <C>
New York Stock Exchange Composite Transactions........................ 1.9
Newco................................................................. Recital D
Newco Stock Purchase Agreement........................................ 1.2(b)
NYSE.................................................................. 2.4(b)
1940 Act.............................................................. 2.23
Palomino Agreement.................................................... 1.2(c)
Palomino Credit Enhancement Agreement................................. 1.2(d)
Palomino Development Agreements....................................... 4.2(i)
Payor................................................................. 7.2
Person................................................................ 2.2(a)
Property Restrictions................................................. 2.8(a)
Proxy Statement....................................................... 2.4(b)
Qualifying Income..................................................... 7.2
Recipient............................................................. 7.2
Registration Statement................................................ 5.1(a)
REIT.................................................................. 2.13(b)
REIT Requirements..................................................... 7.2
Restricted Share Grants............................................... 2.3(b)
Retention Program..................................................... 5.10(c)
Revolver Rate......................................................... 4.2
Retention Program Letter.............................................. 5.10(c)
Schedule 5.10 Employees............................................... 5.10(c)
SEC................................................................... 2.4(b)
Securities Act........................................................ 2.4(b)
Share Loan and Acquisition Agreements................................. 2.3(b)
Shareholder Approvals................................................. 3.5(a)
Sonterra Right of First Offer Agreement............................... 1.2(e)
Spin-Off.............................................................. 1.2
Springing Shares...................................................... 2.3(b)
Subsidiary............................................................ 2.2(a)
Superior Acquisition Proposal......................................... 4.1
Surviving Trust....................................................... 1.1
Takeover Statute...................................................... 2.19
Taxes................................................................. 2.13(a)
Third Party Management Agreements..................................... 2.17(d)
Title 8............................................................... 1.1
to the Knowledge of EQR............................................... 3.21
to the Knowledge of Wellsford......................................... 2.25
Transaction Costs Agreement........................................... 5.4
Transfer and Gains Taxes.............................................. 5.9
Wellsford............................................................. Preamble
Wellsford Benefit Plans............................................... 2.11(a)
Wellsford Common Shares............................................... 1.2(f)
Wellsford Disclosure Letter........................................... Article 2
Wellsford Financial Statement Date.................................... 2.6
Wellsford Material Adverse Change..................................... 2.6
Wellsford Material Adverse Effect..................................... 2.1
Wellsford Options..................................................... 2.3(b)
Wellsford Properties.................................................. 2.8(a)
Wellsford SEC Documents............................................... 2.5
Wellsford Series A Preferred Shares................................... 2.3(a)
Wellsford Series B Preferred Shares................................... 2.3(a)
Wellsford Shareholder Approvals....................................... 2.4(a)
Wellsford Shareholder Meeting......................................... 5.1(c)
Wellsford Subsidiaries................................................ 2.2
WPHC.................................................................. 1.10
WPHC Non-Voting Shares................................................ 5.24
WPHC Voting Shares.................................................... 5.24
</TABLE>
v
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of January 16,
1997 by and between EQUITY RESIDENTIAL PROPERTIES TRUST, a Maryland real
estate investment trust ("EQR"), and WELLSFORD RESIDENTIAL PROPERTY TRUST, a
Maryland real estate investment trust ("Wellsford").
RECITALS:
A. The Boards of Trustees of EQR and Wellsford deem it advisable and in the
best interests of their respective shareholders, subject to the conditions and
other provisions contained herein, that EQR acquire the assets and business of
Wellsford and operate the business under the name "Equity Residential
Properties Trust."
B. The acquisition of the assets and business of Wellsford shall be effected
by the merger of EQR and Wellsford (the "Merger").
C. Upon the terms and conditions set forth herein, EQR and Wellsford shall
execute Articles of Merger in substantially the form attached hereto as
Exhibit "A" (the "Articles of Merger") and shall file such articles in
accordance with Maryland law to effectuate the Merger.
D. Immediately prior to the Merger, it is contemplated that Wellsford shall
contribute certain of its assets to Wellsford Real Properties, Inc., a
Maryland corporation ("Newco"), and that Newco shall assume certain
obligations of Wellsford, all as provided in the Contribution and Distribution
Agreement in substantially the form attached hereto as Exhibit "B" (the
"Contribution Agreement").
E. Immediately prior to the Merger, it is contemplated that Wellsford shall
distribute to its common shareholders all the outstanding shares of Newco
owned by it in a distribution subject to income tax under the Internal Revenue
Code of 1986, as amended (the "Code").
F. For federal income tax purposes, it is intended that the Merger shall
qualify as a tax-free reorganization within the meaning of Section 368(a) of
the Code.
G. EQR and Wellsford have each received a fairness opinion relating to the
transactions contemplated hereby as more fully described herein.
H. EQR and Wellsford desire to make certain representations, warranties and
agreements in connection with the Merger.
NOW, THEREFORE, in consideration of the premises, and the mutual
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE 1
The Merger
1.1 THE MERGER. Upon the terms and subject to the conditions of this
Agreement, and in accordance with Title 8 of the Corporations and Associations
Article of the Annotated Code of Maryland, as amended ("Title 8"), EQR shall
be merged with and into Wellsford, with Wellsford as the surviving real estate
investment trust (the "Surviving Trust").
1.2 NEWCO TRANSACTIONS. Wellsford, on January 8, 1997, formed Newco.
Immediately prior to the time of effectiveness of the Merger:
(a) Wellsford shall, and shall cause Newco to, execute and deliver the
Contribution Agreement and consummate the transactions contemplated
thereby;
(b) EQR will cause ERP Operating Limited Partnership, an Illinois limited
partnership of which EQR is the sole general partner (the "ERP Operating
Partnership"), to execute and deliver, and Wellsford shall cause Newco to
execute and deliver, the Common Stock and Preferred Stock Purchase
Agreement in substantially the form annexed hereto as Exhibit "C" (the
"Newco Stock Purchase Agreement");
(c) EQR will cause ERP Operating Partnership to execute and deliver, and
Wellsford shall cause Newco to execute and deliver, the Agreement Regarding
Palomino Park in substantially the form annexed hereto as Exhibit "D" (the
"Palomino Agreement");
A-1
<PAGE>
(d) EQR will cause ERP Operating Partnership to execute and deliver, and
Wellsford shall cause Newco to execute and deliver, the Credit Enhancement
Agreement in substantially the form annexed hereto as Exhibit "E" (the
"Palomino Credit Enhancement Agreement");
(e) EQR will cause ERP Operating Partnership to execute and deliver, and
Wellsford shall cause Newco to execute and deliver, the Sonterra Right of
First Offer Agreement in substantially the form annexed hereto as Exhibit
"F" (the "Sonterra Right of First Offer Agreement"); and
(f) Wellsford will distribute to its common shareholders, as a
distribution taxable under Code Section 301, all the outstanding shares of
Newco owned by Wellsford as further described in the Contribution
Agreement, so that each holder of common shares of beneficial interest of
Wellsford, $0.01 par value per share ("Wellsford Common Shares"), receives
one common share of Newco for each Wellsford Common Share held by such
holder
(such transactions being referred to collectively as the "Spin-Off").
Immediately after the Effective Time (as defined below), the transactions
contemplated by the Newco Stock Purchase Agreement, the Palomino Agreement and
the Palomino Credit Enhancement Agreement which are to occur on the Closing
Date (as defined below) shall be consummated.
1.3 CLOSING. The closing of the Merger ("Closing") will take place at 10:00
a.m. on the date to be specified by the parties, which (subject to
satisfaction or waiver of the conditions set forth in Article 6) shall be no
later than the third business day after satisfaction or waiver of the
conditions set forth in Section 6.1(a) (the "Closing Date"), at the offices of
Rudnick & Wolfe, 203 North LaSalle Street, Chicago, Illinois 60601, unless
another date or place is agreed to in writing by the parties.
1.4 EFFECTIVE TIME. As soon as practicable following the satisfaction or
waiver of the conditions set forth in Article 6, the parties shall execute and
file the Articles of Merger, executed in accordance with Title 8, with the
State Department of Assessments and Taxation of Maryland (the "Department"),
and shall make all other filings and recordings required under Title 8. The
Merger shall become effective ("Effective Time") at such time as the
Department accepts the Articles of Merger for record, or at such time as EQR
and Wellsford shall agree should be specified in the Articles of Merger (not
to exceed thirty (30) days after the Articles of Merger are accepted for
record by the Department). Unless otherwise agreed, the parties shall cause
the Effective Time to occur on the Closing Date.
1.5 AMENDMENTS AND RESTATEMENTS OF WELLSFORD'S DECLARATION OF TRUST. The
Amended and Restated Declaration of Trust, as amended, of Wellsford shall be
amended and restated at the Effective Time as provided in the Articles of
Merger.
1.6 AMENDMENT AND RESTATEMENT OF WELLSFORD'S BYLAWS. From and after the
Effective Time, the Bylaws of the Surviving Trust shall be the Bylaws of EQR
as in effect immediately prior to the Merger, until further amended or
restated in accordance therewith and Title 8.
1.7 TRUSTEES. The trustees of the Surviving Trust shall be the persons named
in the Articles of Merger, each of whom shall serve for the term specified in
the Articles of Merger.
1.8 EFFECT ON SHARES OF BENEFICIAL INTEREST AND OPTIONS. The effect of the
Merger on the shares of beneficial interest, options to purchase shares of
beneficial interest and restricted share awards of each of EQR and Wellsford
shall be as provided in the Articles of Merger.
1.9 EXCHANGE RATIO. The exchange ratio to be set forth in the Articles of
Merger ("Exchange Ratio") shall be 0.625 of a common share of beneficial
interest of the Surviving Trust, $0.01 par value per share, for each Wellsford
Common Share outstanding immediately prior to the Effective Time. In the event
that the Average Closing Price (as defined below) is less than $40.00 per
share, the Exchange Ratio shall be the rate per share specified in Exhibit "G"
hereto. For the purposes of this Agreement, "Average Closing Price" shall mean
the average of the daily closing prices of a common share of beneficial
interest of EQR, $0.01 par value per share ("EQR Common Share"), reported as
"New York Stock Exchange Composite Transactions" by The Wall Street Journal
(Midwest Edition) during the consecutive twenty (20) trading day period ending
at the end of the fifth (5th) trading day prior to the date which the proxy
statements required by Section 5.1 hereof are dated.
1.10 COMPLETION OF CONTRIBUTION AGREEMENT. At the time the Contribution
Agreement is executed, the parties shall complete the blank presently in the
Contribution Agreement for the amount of Contribution Funds (as defined in the
Contribution Agreement). The amount of the Contribution Funds shall be
$13,355,600, adjusted as follows:
(a) such amount shall be decreased by:
(i) 80% of any cash (excluding loans) invested by Wellsford or any of
its Subsidiaries in Wellsford Park Highlands Corp., a Colorado
corporation ("WPHC"), and its Subsidiaries after September 30, 1996 and
prior to the Spin-Off;
A-2
<PAGE>
(ii) 100% of any accrued interest on the Promissory Note dated June
28, 1996 made by Specified Properties VIII, L.P., a Texas limited
partnership, to Wellsford remaining unpaid as of the Closing Date; and
(iii) $2.50 for each share of Newco distributed to the shareholders of
Wellsford in the Spin-Off less than 17,104,359 shares; and
(b) such amount shall be increased by:
(i) 80% of the accrued interest on the Bonds (as defined in the Credit
Enhancement Agreement) which remains unpaid as of the Closing Date;
(ii) $2.50 for each share of Newco distributed to the shareholders of
Wellsford in the Spin-Off in excess of 17,104,359 shares; and
(iii) the amount, if any, provided for in Section 1(b) of the
Transaction Costs Agreement (as defined in Section 5.4).
1.11 REVERSAL OF DIRECTION OF MERGER. In order to allow counsel to opine
that the Merger, for federal income tax purposes, will qualify as a tax-free
reorganization within the meaning of the Code, the parties have agreed that
EQR shall be merged into Wellsford and that Wellsford shall be the Surviving
Trust. The parties will jointly file a request for a private letter ruling
with the Internal Revenue Service ("IRS"), as soon as practicable after the
date hereof, to obtain a private letter ruling from the IRS to the effect that
a merger of Wellsford into EQR with EQR being the Surviving Trust will not
adversely affect the tax-free nature of the reorganization. If such a private
letter ruling is received or in the event the IRS publishes a revenue ruling
or other published announcement (including the promulgation of a Treasury
regulation) to the effect that, and counsel for the parties are reasonably
willing to opine that, a merger of Wellsford into EQR with EQR being the
Surviving Trust will not adversely affect the tax-free nature of the
reorganization, the parties will amend this Agreement, the Articles of Merger
and all other agreements as may be necessary or desirable solely for the
purposes of providing for the merger of Wellsford into EQR with EQR being the
Surviving Trust; provided, however, that such amendments shall not modify the
substantive provisions or economic terms of this Agreement and the
transactions contemplated hereby; and further provided that both the Merger
and the merger of Wellsford into EQR with EQR being the Surviving Trust are
submitted to and approved by the shareholders of EQR and Wellsford in the
manner required by applicable law. Any such amendment may be made before or
after the approval of the Merger by the respective shareholders of EQR and
Wellsford. The costs and expenses of seeking and obtaining any private letter
ruling as contemplated by this Section 1.11 shall be borne by EQR.
Any conditions to the Merger set forth in Article 6 that would be satisfied
but for the reversal of direction of the Merger shall be deemed satisfied.
1.12 CHANGE IN NUMBER OF SPIN-OFF SHARES. If for any reason Wellsford shall
determine to distribute in the Spin-Off less than one common share of Newco
for each outstanding Wellsford Common Share, the parties will amend this
Agreement and all other agreements contemplated hereby solely for the purpose
of appropriately adjusting all numbers and dollar amounts which were based on
one common share of Newco being distributed in the Spin-Off for each
outstanding Wellsford Common Share.
ARTICLE 2
Representations and Warranties of Wellsford
Except as set forth in the letter of even date herewith signed by the
Chairman of the Board or President of Wellsford in his capacity as such and
delivered to EQR prior to the execution hereof (the "Wellsford Disclosure
Letter"), Wellsford represents and warrants to EQR as follows:
2.1 ORGANIZATION, STANDING AND POWER OF WELLSFORD. Wellsford is a real
estate investment trust duly organized and validly existing under the laws of
Maryland and has the requisite power and authority to carry on its business as
now being conducted. Wellsford is duly qualified or licensed to do business as
a foreign trust and is in good standing in each jurisdiction in which the
nature of its business or the ownership or leasing of its properties makes
such qualification or licensing necessary, other than in such jurisdictions
where the failure to be so qualified or licensed, individually or in the
aggregate, would not have a material adverse effect on the business,
properties, assets, financial condition or results of operations of Wellsford
and the Wellsford Subsidiaries (as defined below), taken as a whole (a
"Wellsford Material Adverse Effect"). Wellsford has delivered to EQR complete
and correct copies of its Amended and Restated Declaration of Trust (including
all Articles Supplementary thereto) and Amended and Restated Bylaws, in each
case, as amended to the date of this Agreement.
A-3
<PAGE>
2.2 WELLSFORD SUBSIDIARIES.
(a) Schedule 2.2 to the Wellsford Disclosure Letter sets forth (i) each
Subsidiary of Wellsford (the "Wellsford Subsidiaries"), (ii) the ownership
interest therein of Wellsford, (iii) if not wholly-owned by Wellsford, the
identity and ownership interest of other owners of such Wellsford Subsidiary,
and (iv) each apartment community owned by such Subsidiary. As used in this
Agreement, "Subsidiary" of any Person means any corporation, partnership,
limited liability company, joint venture or other legal entity of which such
Person (either directly or through or together with another Subsidiary of such
Person) owns any of the capital stock or other equity interests of such
corporation, partnership, limited liability company, joint venture or other
legal entity. As used herein, "Person" means an individual, corporation,
partnership, limited liability company, joint venture, association, trust,
unincorporated organization or other entity.
(b) Except as set forth in Schedule 2.2 to the Wellsford Disclosure Letter,
(i) all the outstanding shares of capital stock of each Wellsford Subsidiary
that is a corporation have been validly issued and are (A) fully paid and
nonassessable, (B) owned by Wellsford or by another Wellsford Subsidiary, and
(C) owned free and clear of all pledges, claims, liens, charges, encumbrances
and security interests of any kind or nature whatsoever (collectively,
"Liens"), and (ii) all equity interests in each Wellsford Subsidiary that is a
partnership, joint venture, limited liability company or trust which are owned
by Wellsford, by another Wellsford Subsidiary or by Wellsford and another
Wellsford Subsidiary are owned free and clear of all Liens. Each Wellsford
Subsidiary that is a corporation is duly incorporated and validly existing
under the laws of its jurisdiction of incorporation and has the requisite
corporate power and authority to carry on its business as now being conducted,
and each Wellsford Subsidiary that is a partnership, limited liability company
or trust is duly organized and validly existing under the laws of its
jurisdiction of organization and has the requisite power and authority to
carry on its business as now being conducted. Each Wellsford Subsidiary is
duly qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or leasing
of its properties makes such qualification or licensing necessary, other than
in such jurisdictions where the failure to be so qualified or licensed,
individually or in the aggregate, would not have a Wellsford Material Adverse
Effect. Copies of the Articles of Incorporation, Bylaws, organization
documents and partnership, joint venture and operating agreements of each
Wellsford Subsidiary, as amended to the date of this Agreement, have been
previously delivered or made available to EQR.
2.3 CAPITAL STRUCTURE.
(a) The authorized shares of beneficial interest of Wellsford consist of
100,000,000 shares of beneficial interest, of which 4,600,000 are Series A
Cumulative Convertible Preferred Shares of Beneficial Interest, $.01 par value
per share ("Wellsford Series A Preferred Shares"), and 2,300,000 are Series B
Cumulative Redeemable Preferred Shares of Beneficial Interest, $.01 par value
per share ("Wellsford Series B Preferred Shares"). On January 14, 1997, (i)
17,111,937 Wellsford Common Shares, 3,999,800 Wellsford Series A Preferred
Shares and 2,300,000 Wellsford Series B Preferred Shares were issued and
outstanding, (ii) 1,000,000 Wellsford Common Shares have been reserved for the
Dividend Reinvestment and Share Purchase Plan of Wellsford, (iii) 979,325
Wellsford Common Shares were issuable upon exercise of outstanding options to
purchase Wellsford Common Shares, (iv) 582,900 Wellsford Common Shares were
reserved for issuance upon the exercise of options which may be granted under
the 1992 Share Option Plan, (v) 750,000 Wellsford Common Shares were reserved
for issuance under the Long-Term Management Incentive Plan of Wellsford, and
(vi) a sufficient number of Wellsford Common Shares were reserved for issuance
to permit the conversion of the then outstanding Wellsford Series A Preferred
Shares.
(b) Set forth in Schedule 2.3 of the Wellsford Disclosure Letter is a true
and complete list of the following: (i) each qualified or nonqualified option
to purchase Wellsford Common Shares granted under the 1992 Share Option Plan,
Long-Term Management Incentive Plan, or any other formal or informal
arrangement ("Wellsford Options"); (ii) each grant of Wellsford Common Shares
to employees which are subject to any risk of forfeiture ("Restricted Share
Grants"); (iii) any obligation of Wellsford to issue Wellsford Common Shares
as a result of the transactions contemplated hereby ("Change in Control Share
Grants"); and (iv) each loan made by Wellsford with respect to the purchase of
Wellsford Common Shares which will be forgiven as a result of the transactions
contemplated by this Agreement (the "Share Loan and Acquisition Agreements").
The Restricted Share Grants are included in the number of outstanding
Wellsford Common Shares set forth in Section 2.3(a). For each Wellsford Option
held by the executive officers of Wellsford, Schedule 2.3 of the Wellsford
Disclosure Letter sets forth the name of the grantee, the date of the grant,
status of the option as qualified or nonqualified under Section 422 of the
Code, the number of Wellsford Common Shares subject to such option, the number
of shares subject to options that are currently exercisable, the exercise
price per share, those options granting reload options, and the number of such
shares subject to share appreciation rights. For each option to purchase
Wellsford Common Shares held by employees of Wellsford or any of the Wellsford
Subsidiaries who are not executive officers of Wellsford, Schedule 2.3 to the
Wellsford Disclosure Letter sets forth the name of the grantee, the date of
the grant, the number of Wellsford Common Shares subject to such option and
the exercise price per share. For each Restricted Share Grant, Schedule 2.3 of
the Wellsford Disclosure Letter sets forth the name of the grantee, the date
of the grant and the number of Wellsford Common Shares granted. For
A-4
<PAGE>
each Change in Control Share Grant, Schedule 2.3 to the Wellsford Disclosure
Letter sets forth the aggregate number of Wellsford Common Shares to be issued
immediately prior to the Spin-Off and the Merger. For each Share Loan and
Acquisition Agreement, Schedule 2.3 of the Wellsford Disclosure Letter sets
forth the name of the borrower, the date of the loan, the aggregate principal
amount of the loan, the number of shares originally pledged as security for
each loan the number of shares that have been released from such pledge and
the outstanding loan balance as of the date of the Wellsford Disclosure
Letter. On the date of this Agreement, except as set forth in this Section 2.3
or Schedule 2.3 of the Wellsford Disclosure Letter, no shares of beneficial
interest or other voting securities of Wellsford were issued, reserved for
issuance, or outstanding.
(c) All outstanding shares of beneficial interest of Wellsford are duly
authorized, validly issued, fully paid and nonassessable and not subject to
preemptive rights, except that the shareholders may be subject to further
assessment with respect to certain claims for tort, contract, taxes, statutory
liability and otherwise in some jurisdictions to the extent such claims are
not satisfied by Wellsford. There are no bonds, debentures, notes or other
indebtedness of Wellsford having the right to vote (or convertible into, or
exchangeable for, securities having the right to vote) on any matters on which
shareholders of Wellsford may vote.
(d) Except as set forth in this Section 2.3 or in Schedule 2.3 of the
Wellsford Disclosure Letter, as of the date of this Agreement there are no
outstanding securities, options, warrants, calls, rights, commitments,
agreements, arrangements or undertakings of any kind to which Wellsford or any
Wellsford Subsidiary is a party or by which such entity is bound, obligating
Wellsford or any Wellsford Subsidiary to issue, deliver or sell, or cause to
be issued, delivered or sold, additional shares of beneficial interest, voting
securities or other ownership interests of Wellsford or any Wellsford
Subsidiary or obligating Wellsford or any Wellsford Subsidiary to issue,
grant, extend or enter into any such security, option, warrant, call, right,
commitment, agreement, arrangement or undertaking (other than to Wellsford or
a Wellsford Subsidiary).
2.4 AUTHORITY; NONCONTRAVENTION; CONSENTS.
(a) Wellsford has the requisite power and authority to enter into this
Agreement and, subject to the requisite shareholder approval of the Merger
(the "Wellsford Shareholder Approvals"), to consummate the transactions
contemplated by this Agreement to which Wellsford is a party. The execution
and delivery of this Agreement by Wellsford and the consummation by Wellsford
of the transactions contemplated by this Agreement to which Wellsford is a
party have been duly authorized by all necessary action on the part of
Wellsford, subject to the Wellsford Shareholder Approvals. This Agreement has
been duly executed and delivered by Wellsford and constitutes a valid and
binding obligation of Wellsford, enforceable against Wellsford in accordance
with its terms, subject to applicable bankruptcy, insolvency, moratorium or
other similar laws relating to creditors' rights and general principles of
equity.
(b) Except as set forth in Schedule 2.4 to the Wellsford Disclosure Letter,
the execution and delivery of this Agreement by Wellsford do not, and the
consummation of the transactions contemplated by this Agreement to which
Wellsford is a party and compliance by Wellsford with the provisions of this
Agreement will not, conflict with, or result in any violation of, or default
(with or without notice or lapse of time, or both) under, or give rise to a
right of termination, cancellation or acceleration of any material obligation
or to loss of a material benefit under, or result in the creation of any Lien
upon any of the properties or assets of Wellsford or any Wellsford Subsidiary
under, (i) the Amended and Restated Declaration of Trust or the Amended and
Restated Bylaws of Wellsford or the comparable charter or organizational
documents or partnership or similar agreement (as the case may be) of any
Wellsford Subsidiary, each as amended or supplemented to the date of this
Agreement, (ii) any loan or credit agreement, note, bond, mortgage, indenture,
reciprocal easement agreement, lease or other agreement, instrument, permit,
concession, franchise or license applicable to Wellsford or any Wellsford
Subsidiary or their respective properties or assets or (iii) subject to the
governmental filings and other matters referred to in the following sentence,
any judgment, order, decree, statute, law, ordinance, rule or regulation
(collectively, "Laws") applicable to Wellsford or any Wellsford Subsidiary, or
their respective properties or assets, other than, in the case of clause (ii)
or (iii), any such conflicts, violations, defaults, rights, loss or Liens that
individually or in the aggregate would not (x) have a Wellsford Material
Adverse Effect or (y) prevent the consummation of the transactions
contemplated by this Agreement. No consent, approval, order or authorization
of, or registration, declaration or filing with, any federal, state or local
government or any court, administrative or regulatory agency or commission or
other governmental authority or agency, domestic or foreign (a "Governmental
Entity"), is required by or with respect to Wellsford or any Wellsford
Subsidiary in connection with the execution and delivery of this Agreement by
Wellsford or the consummation by Wellsford of the transactions contemplated by
this Agreement, except for (i) the filing with the Securities and Exchange
Commission (the "SEC") of (x) a joint proxy statement relating to the approval
by Wellsford's shareholders and EQR's shareholders of the transactions
contemplated by this Agreement (as amended or supplemented from time to time,
the "Proxy Statement"), (y) registration statements on appropriate forms under
the Securities Act of 1933, as amended (the "Securities Act"), and the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and (z) such
reports under Section 13(a) of the
A-5
<PAGE>
Exchange Act as may be required in connection with this Agreement and the
transactions contemplated by this Agreement, (ii) the filing of listing
applications with the New York Stock Exchange Inc. ("NYSE") with respect to
the shares of beneficial interest of the Surviving Trust to be issued in the
Merger, (iii) the filing of the Articles of Merger with the Department and
(iv) such other consents, approvals, orders, authorizations, registrations,
declarations and filings (A) as are set forth in Schedule 2.4 to the Wellsford
Disclosure Letter, (B) as may be required under (y) federal, state or local
environmental laws, or (z) the "blue sky" laws of various states, to the
extent applicable, or (C) which, if not obtained or made, would not prevent or
delay in any material respect the consummation of any of the transactions
contemplated by this Agreement or otherwise prevent Wellsford from performing
its obligations under this Agreement in any material respect or have,
individually or in the aggregate, a Wellsford Material Adverse Effect.
(c) For purposes of determining compliance with the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, Wellsford confirms that the
conduct of its business consists solely of investing in, owning and operating
real estate for the benefit of its shareholders.
2.5 SEC DOCUMENTS; FINANCIAL STATEMENTS; UNDISCLOSED LIABILITIES. Wellsford
has filed all required reports, schedules, forms, statements and other
documents with the SEC since November 27, 1992 through the date hereof (the
"Wellsford SEC Documents"). Schedule 2.5 of the Wellsford Disclosure Letter
contains a complete list of all Wellsford SEC Documents filed by Wellsford
with the SEC since January 1, 1996 and on or prior to the date of this
Agreement. All of the Wellsford SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Wellsford SEC Documents. None of the Wellsford
SEC Documents at the time of filing contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later Wellsford SEC
Documents filed and publicly available prior to the date of this Agreement.
The consolidated financial statements of Wellsford included in the Wellsford
SEC Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC
with respect thereto, have been prepared in accordance with generally accepted
accounting principles ("GAAP") (except, in the case of unaudited statements,
as permitted by the applicable rules and regulations of the SEC) applied on a
consistent basis during the periods involved (except as may be indicated in
the notes thereto) and fairly presented, in accordance with the applicable
requirements of GAAP and the applicable rules and regulations of the SEC, the
consolidated financial position of Wellsford and the Wellsford Subsidiaries,
taken as a whole, as of the dates thereof and the consolidated results of
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments). Wellsford has no
Subsidiaries which are not consolidated for accounting purposes. Except for
liabilities and obligations set forth in the Wellsford SEC Documents or in
Schedule 2.5 to the Wellsford Disclosure Letter, neither Wellsford nor any of
the Wellsford Subsidiaries has any liabilities or obligations of any nature
(whether accrued, absolute, contingent or otherwise) required by GAAP to be
set forth on a consolidated balance sheet of Wellsford or in the notes thereto
and which, individually or in the aggregate, would have a Wellsford Material
Adverse Effect. Management Corp. (as defined in Section 5.15) has assets of
less than $1,000. On the date of this Agreement, Newco has no material assets.
2.6 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the
Wellsford SEC Documents or the Wellsford Disclosure Letter, since the date of
the most recent audited financial statements included in Wellsford SEC
Documents (the "Wellsford Financial Statement Date") Wellsford and the
Wellsford Subsidiaries have conducted their business only in the ordinary
course (taking into account prior practices, including the acquisition of
properties and issuance of securities) and there has not been (a) any material
adverse change in the business, financial condition or results of operations
of Wellsford and the Wellsford Subsidiaries taken as a whole (a "Wellsford
Material Adverse Change"), nor has there been any occurrence or circumstance
that with the passage of time would reasonably be expected to result in a
Wellsford Material Adverse Change, (b) except for regular quarterly
distributions (in the case of Wellsford) not in excess of $0.485 per Wellsford
Common Share, $0.4375 per Wellsford Series A Preferred Share, and $0.603125
per Wellsford Series B Preferred Share, in each case with customary record and
payment dates, any declaration, setting aside or payment of any dividend or
other distribution (whether in cash, stock or property) with respect to any of
Wellsford's shares of beneficial interest, (c) any split, combination or
reclassification of any of Wellsford's shares of beneficial interest or any
issuance or the authorization of any issuance of any other securities in
respect of, in lieu of or in substitution for, or giving the right to acquire
by exchange or exercise, shares of its beneficial interest or any issuance of
an ownership interest in, any Wellsford Subsidiary except as contemplated by
this Agreement, (d) any damage, destruction or loss, whether or not covered by
insurance, that has or would have a Wellsford Material Adverse Effect or (e)
any change in accounting methods, principles or practices by Wellsford or any
Wellsford Subsidiary materially affecting its assets, liabilities or business,
except insofar as may have been disclosed in Wellsford SEC Documents or
required by a change in GAAP or (f) any amendment of any
A-6
<PAGE>
employment, consulting, severance, retention or any other agreement between
Wellsford and any officer or trustee of Wellsford. There are no distributions
in arrears which have been scheduled for payment or unpaid distributions with
respect to the Wellsford Series A Preferred Shares and Wellsford Series B
Preferred Shares.
2.7 LITIGATION. Except as disclosed in the Wellsford SEC Documents or in
Schedule 2.7 to the Wellsford Disclosure Letter, and other than personal
injury and other routine tort litigation arising from the ordinary course of
operations of Wellsford and the Wellsford Subsidiaries (a) which are covered
by adequate insurance or (b) for which all material costs and liabilities
arising therefrom are reimbursable pursuant to common area maintenance or
similar agreements, there is no suit, action or proceeding pending or, to the
Knowledge of Wellsford, threatened in writing against or affecting Wellsford
or any Wellsford Subsidiary that, individually or in the aggregate, could
reasonably be expected to (i) have a Wellsford Material Adverse Effect or (ii)
prevent the consummation of any of the transactions contemplated by this
Agreement, nor is there any judgment, decree, injunction, rule or order of any
Governmental Entity or arbitrator outstanding against Wellsford or any
Wellsford Subsidiary having, or which, insofar as reasonably can be foreseen,
in the future would have, any such effect. Notwithstanding the foregoing,
Schedule 2.7 to the Wellsford Disclosure Letter sets forth each and every
uninsured claim, equal employment opportunity claim and claim relating to
sexual harassment and/or discrimination pending or, to the Knowledge of
Wellsford, threatened as of the date hereof, in each case with a brief summary
of such claim or threatened claim.
2.8 PROPERTIES.
(a) Except as provided in Schedule 2.8 of the Wellsford Disclosure Letter,
Wellsford or the Wellsford Subsidiary set forth on Schedule 2.2 of the
Wellsford Disclosure Letter owns fee simple title to each of the real
properties identified in Schedule 2.8 of the Wellsford Disclosure Letter (the
"Wellsford Properties"), which are all of the real estate properties owned by
them, in each case (except as provided below) free and clear of liens,
mortgages or deeds of trust, claims against title, charges which are liens,
security interests or other encumbrances on title ("Encumbrances"). Except as
set forth in Schedule 2.2 or Schedule 2.8 of the Wellsford Disclosure Letter,
no other Person has any ownership interest in any of the Wellsford Properties,
and any such ownership interest so scheduled does not materially detract from
the value of, or materially interfere with the present use of, any of the
Wellsford Properties subject thereto or affected thereby. The Wellsford
Properties are not subject to any rights of way, written agreements, laws,
ordinances and regulations affecting building use or occupancy, or
reservations of an interest in title (collectively, "Property Restrictions"),
except for (i) Encumbrances and Property Restrictions set forth in the
Wellsford Disclosure Letter, (ii) Property Restrictions imposed or promulgated
by law or any governmental body or authority with respect to real property,
including zoning regulations, provided they does not materially adversely
affect the current use of any Wellsford Property, (iii) Encumbrances and
Property Restrictions disclosed on existing title reports or existing surveys
(in either case copies of which title reports and surveys have been delivered
or made available to EQR and listed in the Wellsford Disclosure Letter), which
Encumbrances and Property Restrictions, in any event, do not materially
detract from the value of, or materially interfere with the present use of,
any of the Wellsford Properties subject thereto or affected thereby, and (iv)
mechanics', carriers', workmen's, repairmen's liens and other Encumbrances,
Property Restrictions and other limitations of any kind, if any, which,
individually or in the aggregate, do not materially detract from the value of
or materially interfere with the present use of any of the Wellsford
Properties subject thereto or affected thereby, and do not otherwise
materially impair business operations conducted by Wellsford and the Wellsford
Subsidiaries. Except as provided in Schedule 2.8 of the Wellsford Disclosure
Letter, no portion of any of the Wellsford Properties is located in a flood
zone area "V".
(b) Except as provided in Schedule 2.8 of the Wellsford Disclosure Letter,
valid policies of title insurance have been issued insuring Wellsford's or the
applicable Wellsford Subsidiaries' fee simple title to the Wellsford
Properties in amounts at least equal to the purchase price thereof paid by
Wellsford therefor, subject only to the matters disclosed above and on the
Wellsford Disclosure Letter, and such policies are, at the date hereof, in
full force and effect and no claim has been made against any such policy.
(c) Except as provided in Schedule 2.8 of the Wellsford Disclosure Letter,
Wellsford has no Knowledge (as defined in Section 2.25) (i) that, any
certificate, permit or license from any governmental authority having
jurisdiction over any of the Wellsford Properties or any agreement, easement
or other right which is necessary to permit the lawful use and operation of
the buildings and improvements on any of the Wellsford Properties or which is
necessary to permit the lawful use and operation of all driveways, roads and
other means of egress and ingress to and from any of the Wellsford Properties
has not been obtained and is not in full force and effect, or of any pending
threat of modification or cancellation of any of same; (ii) of any written
notice of any violation of any federal, state or municipal law, ordinance,
order, regulation or requirement materially and adversely affecting any of the
Wellsford Properties issued by any governmental authority; (iii) of any
material structural defects relating to any Wellsford Property which costs
more than $100,000 to repair; (iv) of any Wellsford Property whose building
systems are not in working order in any material respect and costs more than
$100,000 to repair; (v) of any
A-7
<PAGE>
physical damage to any Wellsford Property in excess of $100,000 for which
there is no insurance in effect covering the cost of the restoration; (vi) of
any current renovation or uninsured restoration to any Wellsford Property the
cost of which exceeds $100,000; or (vii) of items referred to in Section
2.8(c)(iii)-(vi) which aggregate for Wellsford and its Subsidiaries more than
$5,000,000.
(d) Neither Wellsford nor any of the Wellsford Subsidiaries has received any
written notice to the effect that (i) any condemnation or rezoning proceedings
are pending or threatened with respect to any of the Wellsford Properties or
(ii) any zoning, building or similar law, code, ordinance, order or regulation
is or will be violated by the continued maintenance, operation or use of any
buildings or other improvements on any of the Wellsford Properties or by the
continued maintenance, operation or use of the parking areas. All work to be
performed, payments to be made and actions to be taken by Wellsford or the
Wellsford Subsidiaries prior to the date hereof pursuant to any agreement
entered into with a governmental body or authority in connection with a site
approval, zoning reclassification or other similar action relating to any
Wellsford Properties (e.g., Local Improvement District, Road Improvement
District, Environmental Mitigation) has been performed, paid or taken, as the
case may be, and Wellsford has no Knowledge of any planned or proposed work,
payments or actions that may be required after the date hereof pursuant to
such agreements.
(e) Except as set forth in Schedule 2.8 of the Wellsford Disclosure Letter,
all of the Wellsford Properties are managed by Wellsford or a wholly- owned
Wellsford Subsidiary.
2.9 ENVIRONMENTAL MATTERS. None of Wellsford, any of the Wellsford
Subsidiaries or, to Wellsford's Knowledge, any other Person has caused or
permitted (a) the unlawful presence of any hazardous substances, hazardous
materials, toxic substances or waste materials (collectively, "Hazardous
Materials") on any of the Wellsford Properties, or (b) any unlawful spills,
releases, discharges or disposal of Hazardous Materials to have occurred or be
presently occurring on or from the Wellsford Properties as a result of any
construction on or operation and use of such properties, which presence or
occurrence would, individually or in the aggregate, have a Wellsford Material
Adverse Effect; and in connection with the construction on or operation and
use of the Wellsford Properties, Wellsford and the Wellsford Subsidiaries have
not failed to comply in any material respect with all applicable local, state
and federal environmental laws, regulations, ordinances and administrative and
judicial orders relating to the generation, recycling, reuse, sale, storage,
handling, transport and disposal of any Hazardous Materials, except to the
extent such failure to comply, individually or in the aggregate, would not
have a Wellsford Material Adverse Effect.
2.10 RELATED PARTY TRANSACTIONS. Set forth in Schedule 2.10 of the Wellsford
Disclosure Letter is a list of all arrangements, agreements and contracts
entered into by Wellsford or any of the Wellsford Subsidiaries with (a) any
consultant, (b) any person who is an officer, trustee, director or Affiliate
(as defined below) of Wellsford or any of the Wellsford Subsidiaries, any
relative of any of the foregoing or any entity of which any of the foregoing
is an Affiliate or (c) any person who acquired Wellsford Common Shares in a
private placement, except those of a type available to Wellsford employees
generally. Such documents, copies of all of which have previously been
delivered or made available to EQR, are listed in Schedule 2.10 of the
Wellsford Disclosure Letter. As used in this Agreement, the term "Affiliate"
shall have the same meaning as such term is defined in Rule 405 promulgated
under the Securities Act.
2.11 ABSENCE OF CHANGES IN BENEFIT PLANS; ERISA COMPLIANCE.
(a) Except as disclosed in the Wellsford SEC Documents or in Schedule 2.11
to the Wellsford Disclosure Letter and except as contemplated by this
Agreement, since the date of the most recent audited financial statements
included in the Wellsford SEC Documents, there has not been any adoption or
amendment in any respect by Wellsford or any Wellsford Subsidiary of any
bonus, pension, profit sharing, deferred compensation, incentive compensation,
stock ownership, stock purchase, stock option, phantom stock, retirement,
vacation, severance, disability, death benefit, hospitalization, medical or
other employee benefit plan, arrangement or understanding (whether or not
legally binding) providing benefits to any current or former employee, officer
or director of Wellsford, any Wellsford Subsidiary, or any person Affiliated
with Wellsford under Section 414 (b), (c), (m) or (o) of the Code
(collectively, "Wellsford Benefit Plans").
(b) Except as described in the Wellsford SEC Documents or in Schedule 2.11
to the Wellsford Disclosure Letter, (i) all Wellsford Benefit Plans of
Wellsford and the Wellsford Subsidiaries, including any such plan that is an
"employee benefit plan" as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), are in compliance in all
material respects with all applicable requirements of law, including but not
limited to ERISA and the Code, and (ii) neither Wellsford nor any Wellsford
Subsidiary has any material liabilities or obligations with respect to any
such Wellsford Benefit Plan, whether accrued, contingent or otherwise. Except
as set forth in Schedule 2.11 to the Wellsford Disclosure Letter, the
execution of, and performance of the transactions contemplated in, this
Agreement will not (either alone or upon the occurrence of any additional or
subsequent events) constitute an event under any Wellsford Benefit Plan,
policy, arrangement or agreement or any trust or loan that will or may result
in any payment (whether of severance pay or
A-8
<PAGE>
otherwise), acceleration, forgiveness of indebtedness, vesting, distribution,
increase in benefits or obligation to fund benefits with respect to any
employee, trustee or director. The only severance agreements or severance
policies applicable to employees of Wellsford or any of the Wellsford
Subsidiaries are the agreements and policies specifically referred to in
Schedule 2.11 to the Wellsford Disclosure Letter and the severance program
referred to in Section 5.10(c).
2.12 EMPLOYEE POLICIES. Schedule 2.12 of the Wellsford Disclosure Letter
lists the employee handbooks of Wellsford and each of the Wellsford
Subsidiaries currently in effect. A copy of each such employee handbook has
previously been made available to EQR. Except as set forth in Schedule 2.12 of
the Wellsford Disclosure Letter, such handbooks fairly and accurately
summarize all material employee policies, vacation policies and payroll
practices of Wellsford and the Wellsford Subsidiaries.
2.13 TAXES.
(a) Each of Wellsford and the Wellsford Subsidiaries has filed all tax
returns and reports required to be filed by it (after giving effect to any
filing extension properly granted by a Governmental Entity having authority to
do so) and has paid (or Wellsford has paid on its behalf) all Taxes (as
defined below) shown on such returns and reports as required to be paid by it
except (i) as set forth in Schedule 2.13 of the Wellsford Disclosure Letter,
or (ii) real estate taxes that are being contested in good faith by
appropriate proceedings and for which Wellsford or the applicable Wellsford
Subsidiary shall have set aside on its books adequate reserves. The most
recent audited financial statements contained in the Wellsford SEC Documents
reflect an adequate reserve for all material Taxes payable by Wellsford and
the Wellsford Subsidiaries for all taxable periods and portions thereof
through the date of such financial statements. Since the Wellsford Financial
Statement Date, Wellsford has incurred no liability for taxes under Sections
857(b), 860(c) or 4981 of the Code, including without limitation any tax
arising from a prohibited transaction described in Section 857(b)(6) of the
Code, and neither Wellsford nor any Wellsford Subsidiary has incurred any
liability for taxes other than in the ordinary course of business. No event
has occurred, and no condition or circumstance exists, which presents a
material risk that any material Tax described in the preceding sentence will
be imposed upon Wellsford. To the Knowledge of Wellsford, no deficiencies for
any Taxes have been proposed, asserted or assessed against Wellsford or any of
the Wellsford Subsidiaries, and no requests for waivers of the time to assess
any such Taxes are pending. As used in this Agreement, "Taxes" shall include
all federal, state, local and foreign income, property, sales, franchise,
employment, excise and other taxes, tariffs or governmental charges of any
nature whatsoever, together with penalties, interest or additions to Tax with
respect thereto.
(b) Wellsford (i) for all taxable years commencing with 1993 through the
most recent December 31, has been subject to taxation as a real estate
investment trust (a "REIT") within the meaning of Section 856 of the Code and
has satisfied all requirements to qualify as a REIT for such years, (ii) has
operated, and intends to continue to operate, in such a manner as to qualify
as a REIT for the taxable year ending December 31, 1997, and (iii) has not
taken or omitted to take any action which would reasonably be expected to (A)
result in any rents paid by the tenants of the Properties to be excluded from
the definition of "rents from real property" under Section 856(d)(2)(C) of the
Code, or (B) otherwise result in a challenge to its status as a REIT, and to
Wellsford's Knowledge, no such challenge is pending or threatened. Each
Wellsford Subsidiary which is a partnership, joint venture or limited
liability company (i) has been since its formation and continues to be treated
for federal income tax purposes as a partnership and not as a corporation or
an association taxable as a corporation, and (ii) has not since its formation
owned any assets (including, without limitation, securities) that would cause
Wellsford to violate Section 856(b)(5) of the Code. Each Wellsford Subsidiary
which is a corporation has been since its formation a qualified REIT
subsidiary under Section 856(i) of the Code.
2.14 NO PAYMENTS TO EMPLOYEES, OFFICERS, TRUSTEES OR DIRECTORS. Set forth in
Exhibit "J" to this Agreement (and the Exhibits referenced therein) and
Schedule 2.3 of the Wellsford Disclosure Letter is a true and complete list of
all cash and non-cash payments which will become payable to each employee,
officer, trustee or director of Wellsford or any Wellsford Subsidiary as a
result of the Spin-Off and Merger. Except as described in Exhibit "J" to this
Agreement (and the Exhibits referenced therein) and in Schedule 2.3 to the
Wellsford Disclosure Letter, or as otherwise provided for in this Agreement,
there is no employment or severance contract, or other agreement requiring
payments, cancellation of indebtedness or other obligation to be made on a
change of control or otherwise as a result of the consummation of any of the
transactions contemplated by this Agreement, with respect to any employee,
officer, trustee or director of Wellsford or any Wellsford Subsidiary.
2.15 BROKERS; SCHEDULE OF FEES AND EXPENSES. No broker, investment banker,
financial advisor or other person, other than Merrill Lynch & Co. and William
Cockrum, the fees and expenses of which have previously been disclosed to EQR,
is entitled to any broker's, finder's, financial advisor's or other similar
fee or commission in connection with the transactions contemplated hereby
based upon arrangements made by or on behalf of Wellsford or any Wellsford
Subsidiary.
A-9
<PAGE>
2.16 COMPLIANCE WITH LAWS. Except as disclosed in the Wellsford SEC
Documents, neither Wellsford nor any of the Wellsford Subsidiaries has
violated or failed to comply with any statute, law, ordinance, regulation,
rule, judgment, decree or order of any Governmental Entity applicable to its
business, properties or operations, except to the extent that such violation
or failure would not have a Wellsford Material Adverse Effect.
2.17 CONTRACTS; DEBT INSTRUMENTS.
(a) Neither Wellsford nor any Wellsford Subsidiary has received a written
notice that Wellsford or any Wellsford Subsidiary is in violation of or in
default under (nor to the Knowledge of Wellsford does there exist any
condition which upon the passage of time or the giving of notice or both would
cause such a violation of or default under) any material loan or credit
agreement, note, bond, mortgage, indenture, lease, permit, concession,
franchise, license or any other material contract, agreement, arrangement or
understanding, to which it is a party or by which it or any of its properties
or assets is bound, except as set forth in Schedule 2.17 to the Wellsford
Disclosure Letter, nor to the Knowledge of Wellsford does such a violation or
default exist, except to the extent that such violation or default,
individually or in the aggregate, would not have a Wellsford Material Adverse
Effect.
(b) Except for any of the following expressly identified in Wellsford SEC
Documents, Schedule 2.17 to the Wellsford Disclosure Letter sets forth a list
of each loan or credit agreement, note, bond, mortgage, indenture and any
other agreement and instrument pursuant to which any indebtedness of Wellsford
or any of Wellsford Subsidiaries, other than indebtedness payable to Wellsford
or a Wellsford Subsidiary, in an aggregate principal amount in excess of
$250,000 per item is outstanding or may be incurred. For purposes of this
Section 2.17, "Indebtedness" shall mean, with respect to any Person, without
duplication, (A) all indebtedness of such person for borrowed money, whether
secured or unsecured, (B) all obligations of such person under conditional
sale or other title retention agreements relating to property purchased by
such person, (C) all capitalized lease obligations of such person, (D) all
obligations of such person under interest rate cap, swap, collar or similar
transaction or currency hedging transactions (valued at the termination value
thereof) and (E) all guarantees of such person of any such indebtedness of any
other person.
(c) To the extent not set forth in response to the requirements of Paragraph
2.17(b), Schedule 2.17 to the Wellsford Disclosure Letter sets forth each
interest rate cap, interest rate collar, interest rate swap, currency hedging
transaction, and any other agreement relating to a similar transaction to
which Wellsford or any Wellsford Subsidiary is a party or an obligor with
respect thereto.
(d) Neither Wellsford nor any of the Wellsford Subsidiaries is a party to
any agreement relating to the management of any of the Wellsford Properties by
any Person other than a wholly-owned Wellsford Subsidiary, except the
agreements described in Schedule 2.17 to the Wellsford Disclosure Letter (the
"Third Party Management Agreements"). True and complete copies of the Third
Party Management Agreements have previously been furnished to EQR.
2.18 OPINION OF FINANCIAL ADVISOR. Wellsford has received the opinion of
Merrill Lynch & Co., dated January 16, 1997, satisfactory to Wellsford, a
signed copy of which has been provided to EQR, to the effect that the proposed
consideration to be received by the holders of common shares of beneficial
interest of Wellsford pursuant to the Merger and Spin-Off is fair to such
holders from a financial point of view.
2.19 STATE TAKEOVER STATUTES. Wellsford has taken all action necessary to
exempt the transactions contemplated by this Agreement between EQR and
Wellsford and its Affiliates from the operation of any "fair price,"
"moratorium," "control share acquisition" or any other anti-takeover statute
or similar statute enacted under the state or federal laws of the United
States or similar statute or regulation (a "Takeover Statute").
2.20 REGISTRATION STATEMENT. The information relating to Wellsford and the
Wellsford Subsidiaries included in the Registration Statement (as defined in
Section 5.1) will not, as of the effective date of the Registration Statement,
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
2.21 DEVELOPMENT PROPERTIES. Schedule 2.21 of the Wellsford Disclosure
Letter lists all agreements entered into by Wellsford or any of the Wellsford
Subsidiaries relating to the development or construction of, or additions or
expansions to, any real properties which are currently in effect and under
which Wellsford or any of the Wellsford Subsidiaries currently has, or expects
to incur, an obligation in excess of $250,000. True and correct copies of such
agreements have previously been delivered or made available to EQR.
2.22 EQR SHARES OF BENEFICIAL INTEREST. Neither Wellsford nor any of
Wellsford Subsidiaries owns any shares of beneficial interest of EQR or other
securities convertible into shares of beneficial interest of EQR.
A-10
<PAGE>
2.23 INVESTMENT COMPANY ACT OF 1940. Neither Wellsford nor any of Wellsford
Subsidiaries is, or at the Effective Time will be, required to be registered
under the Investment Company Act of 1940, as amended (the "1940 Act").
2.24 INTENTIONALLY OMITTED.
2.25 DEFINITION OF KNOWLEDGE OF WELLSFORD. As used in this Agreement, the
phrase "to the Knowledge of Wellsford" (or words of similar import) means the
knowledge of those individuals identified in Schedule 2.25 of the Wellsford
Disclosure Letter.
ARTICLE 3
Representations and Warranties of EQR
Except as set forth in the letter of even date herewith signed by the
President of EQR and delivered to Wellsford prior to the execution hereof (the
"EQR Disclosure Letter"), EQR represents and warrants to Wellsford as follows:
3.1 ORGANIZATION, STANDING AND POWER OF EQR. EQR is a real estate investment
trust duly organized and validly existing under the laws of Maryland and has
the requisite power and authority to carry on its business as now being
conducted. EQR is duly qualified or licensed to do business as a foreign trust
and is in good standing in each jurisdiction in which the nature of its
business or the ownership or leasing of its properties makes such
qualification or licensing necessary, other than in such jurisdictions where
the failure to be so qualified or licensed, individually or in the aggregate,
would not have a material adverse effect on the business, properties, assets,
financial condition or results of operations of EQR and the Subsidiaries of
EQR ("EQR Subsidiaries"), taken as a whole ("EQR Material Adverse Effect").
EQR has delivered to Wellsford complete and correct copies of its Amended and
Restated Declaration of Trust and Amended and Restated Bylaws as amended or
supplemented to the date of this Agreement.
3.2 CAPITAL STRUCTURE.
(a) The authorized shares of beneficial interest of EQR consist of
100,000,000 EQR Common Shares, and 10,000,000 preferred shares of beneficial
interest ("EQR Preferred Shares"), of which 6,120,000 EQR Preferred Shares
have been designated as 9 3/8% Series A Cumulative Redeemable Preferred Shares
of Beneficial Interest, $0.01 par value per share (the "EQR Series A Preferred
Shares"), 500,000 EQR Preferred Shares have been designated as 9 1/8% Series B
Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 par value
per share, that are represented by 5,000,000 depository shares (the "EQR
Series B Preferred Shares"), and 460,000 EQR Preferred Shares have been
designated as 9 1/8% Series C Cumulative Redeemable Preferred Shares of
Beneficial Interest, $0.01 par value per share, that are represented by
4,600,000 depository shares (the "EQR Series C Preferred Shares"). As of
January 14, 1997, (a) 51,155,813 EQR Common Shares, 6,120,000 EQR Series A
Preferred Shares, 500,000 EQR Series B Preferred Shares (represented by
5,000,000 depositary shares) and 460,000 EQR Series C Preferred Shares
(represented by 4,600,000 depositary shares) were outstanding, (b) 960,542 EQR
Common Shares were available for issuance under EQR's 1996 Non-Qualified
Employee Share Purchase Plan (the "EQR Employee Share Plans"), (c) 2,328,715
EQR Common Shares were issuable upon exercise of outstanding share options
(the "EQR Options") to purchase EQR Common Shares, and 975,353 EQR Common
Shares were available for grant, under EQR's Second Amended and Restated 1993
Share Option and Share Award Plan (the "Employee Share Award and Option
Plan"), (d) 21,541 EQR Common Shares are restricted and subject to forfeiture,
and (e) 7,857,933 EQR Common Shares were reserved for issuance upon exchange
of EQR Units (as defined below) for EQR Common Shares pursuant to the Fourth
Amended and Restated Agreement of Limited Partnership (the "ERP Operating
Partnership Agreement") of the ERP Operating Partnership. On January 14, 1997,
except as set forth in this Section 3.2, no shares of beneficial interest or
other voting securities of EQR were issued, reserved for issuance or
outstanding.
(b) All outstanding shares of beneficial interest of EQR are duly
authorized, validly issued, fully paid and nonassessable and not subject to
preemptive rights, except that the shareholders may be subject to further
assessment with respect to certain claims for tort, contract, taxes, statutory
liability and otherwise in some jurisdictions to the extent such claims are
not satisfied by EQR. There are no bonds, debentures, notes or other
indebtedness of EQR having the right to vote (or convertible into, or
exchangeable for, securities having the right to vote) on any matters on which
shareholders of EQR may vote.
(c) Except (i) for the EQR Options, (ii) for the units ("EQR Units") of
partnership interest held by partners in the ERP Operating Partnership (which,
subject to certain restrictions, may be exchanged by the holders thereof for
either EQR Common Shares on a one-for-one basis or, at EQR's option, cash), as
are disclosed in Schedule 3.2 to the EQR Disclosure Letter or (iii) as set
forth in Schedule 3.2 to the EQR Disclosure Letter, as of the date of this
Agreement there are no outstanding securities, options, warrants, calls,
rights, commitments, agreements, arrangements or undertakings of any kind to
which EQR or any EQR Subsidiary is a party or by which such entity is bound,
obligating EQR or any EQR Subsidiary
A-11
<PAGE>
to issue, deliver or sell, or cause to be issued, delivered or sold,
additional shares of beneficial interest, voting securities or other ownership
interests of EQR or of any EQR Subsidiary or obligating EQR or any EQR
Subsidiary to issue, grant, extend or enter into any such security, option,
warrant, call, right, commitment, agreement, arrangement or undertaking (other
than to EQR or an EQR Subsidiary). Except as set forth on Schedule 3.2 to the
EQR Disclosure Letter or as required under the ERP Operating Partnership
Agreement, there are no outstanding contractual obligations of EQR or any EQR
Subsidiary to repurchase, redeem or otherwise acquire any shares of beneficial
interest of EQR or any capital stock, voting securities, or other ownership
interests in any EQR Subsidiary or make any material investment (in the form
of a loan, capital contribution or otherwise) in any person (other than an EQR
Subsidiary).
(d) EQR owns all of its partnership interests in ERP Operating Partnership
free and clear of all Liens.
3.3 ORGANIZATION, STANDING AND POWER OF ERP OPERATING PARTNERSHIP. ERP
Operating Partnership is a limited partnership duly organized and validly
existing under the laws of Illinois and has the requisite power and authority
to carry on its business as now being conducted. ERP Operating Partnership is
duly qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or leasing
of its properties makes such qualification or licensing necessary, other than
in such jurisdictions where the failure to be so qualified or licensed,
individually or in the aggregate, would not have an EQR Material Adverse
Effect. EQR has delivered to Wellsford complete and correct copies of its
Fourth Amended and Restated Agreement of Limited Partnership as amended or
supplemented to the date of this Agreement.
3.4 CAPITAL STRUCTURE OF ERP OPERATING PARTNERSHIP. As of January 14, 1997,
the number of outstanding units of partnership interest in ERP Operating
Partnership consists of (a) 51,155,813 units of general partnership interest,
(b) 7,857,933 units of limited partnership interest, (c) 6,120,000 9 3/8%
Series A Cumulative Redeemable Preference Units, (d) 500,000 9 1/8% Series B
Cumulative Redeemable Preference Units, and (e) 460,000 9 1/8% Series C
Cumulative Redeemable Preference Units. Except for the units of limited
partnership interest, all of the units of partnership interest in ERP
Operating Partnership are owned by EQR free and clear of all Liens.
3.5 AUTHORITY; NONCONTRAVENTION; CONSENTS.
(a) EQR has the requisite power and authority to enter into this Agreement,
and subject to the requisite shareholder approval of the Merger (the "EQR
Shareholder Approvals" and, together with the Wellsford Shareholder Approvals,
the "Shareholder Approvals") to consummate the transactions contemplated by
this Agreement to which EQR is a party. The execution and delivery of this
Agreement by EQR and the consummation by EQR of the transactions contemplated
by this Agreement to which EQR is a party have been duly authorized by all
necessary action on the part of EQR, subject to the EQR Shareholder Approvals.
This Agreement has been duly executed and delivered by EQR and constitutes a
valid and binding obligation of EQR, enforceable against EQR in accordance
with its terms, subject to applicable bankruptcy, insolvency, moratorium or
other similar laws relating to creditors' rights and general principles of
equity.
(b) Except as set forth in Schedule 3.5 to the EQR Disclosure Letter, the
execution and delivery of this Agreement by EQR do not, and the consummation
of the transactions contemplated by this Agreement to which EQR is a party and
compliance by EQR with the provisions of this Agreement will not, conflict
with, or result in any violation of or default (with or without notice or
lapse of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any material obligation or to loss of a
material benefit under, or result in the creation of any Lien upon any of the
properties or assets of EQR or any EQR Subsidiary under, (i) the Amended and
Restated Declaration of Trust or Amended and Restated Bylaws of EQR or the
comparable charter or organizational documents or partnership or similar
agreement (as the case may be) of any other EQR Subsidiary, each as amended or
supplemented to the date of this Agreement, (ii) any loan or credit agreement,
note, bond, mortgage, indenture, reciprocal easement agreement, lease or other
agreement, instrument, permit, concession, franchise or license applicable to
EQR or any EQR Subsidiary or their respective properties or assets or
(iii) subject to the governmental filings and other matters referred to in the
following sentence, any Laws applicable to EQR or any EQR Subsidiary or their
respective properties or assets, other than, in the case of clause (ii) or
(iii), any such conflicts, violations, defaults, rights, loss or Liens that
individually or in the aggregate would not (x) have an EQR Material Adverse
Effect or (y) prevent the consummation of the transactions contemplated by
this Agreement. No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is required
by or with respect to EQR or any EQR Subsidiary in connection with the
execution and delivery of this Agreement or the consummation by EQR of any of
the transactions contemplated by this Agreement, except for (i) the filing
with the SEC of (x) the Proxy Statement and (y) such reports under Section 13
(a) of the Exchange Act as may be required in connection with this Agreement
and the transactions contemplated by this Agreement, (ii) the filing of the
Articles of Merger with the Department, (iii) such filings as may be required
in connection with the payment of any transfer and gains taxes and (iv) such
other consents, approvals, orders, authorizations, registrations, declarations
and filings (A) as are set forth in Schedule 3.5 to the EQR Disclosure Letter
or (B) as may be required under (x) federal, state or local environmental laws
or (y) the securities laws of the State of
A-12
<PAGE>
Maryland or (C) which, if not obtained or made, would not prevent or delay in
any material respect the consummation of any of the transactions contemplated
by this Agreement or otherwise prevent EQR from performing its obligations
under this Agreement in any material respect or have, individually or in the
aggregate, an EQR Material Adverse Effect.
(c) For purposes of determining compliance with the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, EQR confirms that the conduct
of its business consists solely of investing in, owning and operating real
estate for the benefit of its shareholders.
3.6 SEC DOCUMENTS; FINANCIAL STATEMENTS; UNDISCLOSED LIABILITIES. EQR and
ERP Operating Partnership have filed all required reports, schedules, forms,
statements and other documents with the SEC since August 18, 1993 through the
date hereof (the "EQR SEC Documents"). Schedule 3.6 of the EQR Disclosure
Letter contains a complete list of all EQR SEC Documents filed by EQR under
the Exchange Act since January 1, 1996 and on or prior to the date of this
Agreement. All of the EQR SEC Documents (other than preliminary material), as
of their respective filing dates, complied in all material respects with all
applicable requirements of the Securities Act and the Exchange Act and, in
each case, the rules and regulations promulgated thereunder applicable to such
EQR SEC Documents. None of the EQR SEC Documents at the time of filing
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except to the extent such statements have been modified or
superseded by later EQR SEC Documents filed and publicly available prior to
the date of this Agreement. The consolidated financial statements of EQR and
the EQR Subsidiaries included in the EQR SEC Documents complied as to form in
all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with GAAP (except, in the case of unaudited statements,
as permitted by the applicable rules and regulations of the SEC) applied on a
consistent basis during the periods involved (except as may be indicated in
the notes thereto) and fairly presented, in accordance with the applicable
requirements of GAAP and the applicable rules and regulations of the SEC, the
consolidated financial position of EQR and the EQR Subsidiaries, taken as a
whole, as of the dates thereof and the consolidated results of operations and
cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments). Except for liabilities and
obligations set forth in the EQR SEC Documents or in Schedule 3.6 to the EQR
Disclosure Letter, neither EQR nor any EQR Subsidiary has any liabilities or
obligations of any nature (whether accrued, absolute, contingent or otherwise)
required by GAAP to be set forth on a consolidated balance sheet of EQR or in
the notes thereto and which, individually or in the aggregate, would have an
EQR Material Adverse Effect.
3.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the EQR SEC
Documents or in Section 3.7 to the EQR Disclosure Letter, since the date of
the most recent audited financial statements included in the EQR SEC Documents
(the "EQR Financial Statement Date"), EQR and the EQR Subsidiaries have
conducted their business only in the ordinary course (taking into account
prior practices, including the acquisition of properties and issuance of
securities) and there has not been (a) any material adverse change in the
business, financial condition or results of operations of EQR and the EQR
Subsidiaries taken as a whole (a "EQR Material Adverse Change"), nor has there
been any occurrence or circumstance that with the passage of time would
reasonably be expected to result in an EQR Material Adverse Change, (b) except
for regular quarterly distributions (in the case of EQR) not in excess of
$.625 per EQR Common Share, $.5859 per EQR Series A Preferred Share, $5.703
per EQR Series B Preferred Share and $5.703 per EQR Series C Preferred Share,
in each case subject to rounding adjustments as necessary and with customary
record and payment dates, any declaration, setting aside or payment of any
dividend or other distribution (whether in cash, stock or property) with
respect to any of EQR's shares of beneficial interest, (c) any split,
combination or reclassification of any of EQR's shares of beneficial interest,
(d) any damage, destruction or loss, whether or not covered by insurance, that
has or would have an EQR Material Adverse Effect, or (e) any change made prior
to the date of this Agreement in accounting methods, principles or practices
by EQR or any EQR Subsidiary materially affecting its assets, liabilities or
business, except insofar as may have been disclosed in the EQR SEC Documents
or required by a change in GAAP. EQR is not in default in the payment of
distributions on the EQR Series A Preferred Shares, EQR Series B Preferred
Shares or EQR Series C Preferred Shares.
3.8 LITIGATION. Except as disclosed in the EQR SEC Documents or in Schedule
3.8 to the EQR Disclosure Letter, and other than personal injury and other
routine tort litigation arising from the ordinary course of operations of EQR
and the EQR Subsidiaries (a) which are covered by adequate insurance, or (b)
for which all material costs and liabilities arising therefrom are
reimbursable pursuant to common area maintenance or similar agreements, there
is no suit, action or proceeding pending or, to the Knowledge of EQR,
threatened in writing against or affecting EQR or any EQR Subsidiary that,
individually or in the aggregate, could reasonably be expected to (i) have an
EQR Material Adverse Effect, or (ii) prevent the consummation of any of the
transactions contemplated by this Agreement, nor is there any judgment,
decree, injunction, rule or order of any Governmental Entity or arbitrator
outstanding against EQR or any EQR Subsidiary having, or which, insofar as
reasonably can be foreseen, in the future would have, any such effect.
A-13
<PAGE>
3.9 PROPERTIES.
(a) EQR or one of the EQR Subsidiaries owns fee simple title to each of the
real properties listed in the EQR SEC Filings as owned by it (the "EQR
Properties"), except where the failure to own such title would not have an EQR
Material Adverse Effect.
(b) The EQR Properties are not subject to any Encumbrances or Property
Restrictions which could cause an EQR Material Adverse Affect.
(c) Valid policies of title insurance have been issued insuring EQR's or the
applicable EQR Subsidiaries' fee simple title to the EQR Properties in amounts
at least equal to the purchase price thereof paid by EQR or the applicable EQR
Subsidiaries therefor, except where the failure to obtain such title insurance
would not have an EQR Material Adverse Effect.
(d) EQR has no Knowledge (i) that it has failed to obtain a certificate,
permit or license from any governmental authority having jurisdiction over any
of the EQR Properties where such failure would have an EQR Material Adverse
Effect, or of any pending threat of modification or cancellation of any of the
same which would have an EQR Material Adverse Effect, (ii) of any written
notice of any violation of any federal, state or municipal law, ordinance,
order, rule, regulation or requirement affecting any of the EQR Properties
issued by any governmental authorities which would have an EQR Material
Adverse Effect, or (iii) of any structural defects relating to EQR Properties,
EQR Properties whose building systems are not in working order, physical
damage to any EQR Property for which there is no insurance in effect covering
the cost of restoration, any current renovation or uninsured restoration,
except such structural defects, building systems not in working order,
physical damage, renovation and restoration which, in the aggregate, would not
have an EQR Material Adverse Effect.
(e) Neither EQR nor any of the EQR Subsidiaries has received any written
notice to the effect that (i) any condemnation or rezoning proceedings are
pending or threatened with respect to any of the EQR Properties, or (ii) any
zoning, building or similar law, code, ordinance, order or regulation is or
will be violated by the continued maintenance, operation or use of any
buildings or other improvements on any of the EQR Properties or by the
continued maintenance, operation or use of the parking areas, other than such
notices which, in the aggregate, would not have an EQR Material Adverse
Effect.
(f) All work to be performed, payments to be made and actions to be taken by
EQR or the EQR Subsidiaries prior to the date hereof pursuant to any agreement
entered into with a governmental body or authority in connection with a site
approval, zoning reclassification or similar action relating to any EQR
Properties (e.g., Local Improvement District, Road Improvement District,
Environmental Mitigation), has been performed, paid or taken, as the case may
be, except where the failure to do so would, in the aggregate, not have an EQR
Material Adverse Effect, and EQR has no Knowledge of any planned or proposed
work, payments or actions that may be required after the date hereof pursuant
to such agreements which would have an EQR Material Adverse Effect.
3.10 ENVIRONMENTAL MATTERS. None of EQR, any of the EQR Subsidiaries or, to
EQR's Knowledge, any other Person has caused or permitted (a) the unlawful
presence of any hazardous substances, hazardous materials, toxic substances or
waste materials (collectively, "Hazardous Materials") on any of the EQR
Properties, or (b) any unlawful spills, releases, discharges or disposal of
Hazardous Materials to have occurred or be presently occurring on or from the
EQR Properties as a result of any construction on or operation and use of such
properties, which presence or occurrence would, individually or in the
aggregate, have an EQR Material Adverse Effect; and in connection with the
construction on or operation and use of the EQR Properties, EQR and the EQR
Subsidiaries have not failed to comply in any material respect with all
applicable local, state and federal environmental laws, regulations,
ordinances and administrative and judicial orders relating to the generation,
recycling, reuse, sale, storage, handling, transport and disposal of any
Hazardous Materials, except to the extent such failure to comply, individually
or in the aggregate, would not have an EQR Material Adverse Effect.
3.11 TAXES.
(a) Each of EQR and the EQR Subsidiaries has filed all tax returns and
reports required to be filed by it (after giving effect to any filing
extension properly granted by a Governmental Entity having authority to do so)
and has paid (or EQR has paid on its behalf) all Taxes shown on such returns
and reports as required to be paid by it except where the failure to file such
tax returns or reports and failure to pay such Taxes would not have an EQR
Material Adverse Effect. The most recent audited financial statements
contained in the EQR SEC Documents reflect an adequate reserve for all
material Taxes payable by EQR and the EQR Subsidiaries for all taxable periods
and portions thereof through the date of such financial statements. Since the
EQR Financial Statement Date, EQR has incurred no liability for taxes under
Sections 857(b), 860(c) or 4981 of the Code, including without limitation any
tax arising from a prohibited transaction described in Section 857(b)(6) of
the Code, and neither EQR nor any EQR Subsidiary has incurred any liability
for taxes other than in the ordinary course of business. No event has
occurred, and no condition or circumstance exists, which presents a material
risk that any material Tax described in the preceding sentence will be imposed
upon EQR. To the Knowledge of EQR, no deficiencies for any
A-14
<PAGE>
Taxes have been proposed, asserted or assessed against EQR or any of the EQR
Subsidiaries, and no requests for waivers of the time to assess any such Taxes
are pending.
(b) EQR (i) for all taxable years commencing with 1993 through the most
recent December 31, has been subject to taxation as a REIT within the meaning
of Section 856 of the Code and has satisfied all requirements to qualify as a
REIT for such years, (ii) has operated, and intends to continue to operate, in
such a manner as to qualify as a REIT for the tax year ending December 31,
1997, and (iii) has not taken or omitted to take any action which would
reasonably be expected to (A) result in any rents paid by tenants to the EQR
Properties to be excluded from the definition of "rents from real property"
under Section 856(d)(2) of the Code, or (B) otherwise result in a challenge to
its status as a REIT, and to EQR's Knowledge, no such challenge is pending or
threatened. Each EQR Subsidiary which is a partnership, joint venture or
limited liability company has been treated since its formation and continues
to be treated for federal income tax purposes as a partnership and not as a
corporation or as an association taxable as a corporation.
3.12 BROKERS; SCHEDULE OF FEES AND EXPENSES. No broker, investment banker,
financial advisor or other person, other than J.P. Morgan Securities, Inc.,
the fees and expenses of which have previously been disclosed to Wellsford and
will be paid by EQR, is entitled to any broker's, finder's, financial
advisor's or other similar fee or commission in connection with the
transactions contemplated hereby based upon arrangements made by or on behalf
of EQR or any EQR Subsidiary.
3.13 COMPLIANCE WITH LAWS. Except as disclosed in the EQR SEC Documents,
neither EQR nor any of the EQR Subsidiaries has violated or failed to comply
with any statute, law, ordinance, regulation, rule, judgment, decree or order
of any Governmental Entity applicable to its business, properties or
operations, except to the extent that such violation or failure would not have
an EQR Material Adverse Effect.
3.14 CONTRACTS; DEBT INSTRUMENTS. Neither EQR nor any EQR Subsidiary has
received a written notice that EQR or any EQR Subsidiary is in violation of or
in default under (nor to the Knowledge of EQR does there exist any condition
which upon the passage of time or the giving of notice or both would cause
such a violation of or default under) any material loan or credit agreement,
note, bond, mortgage, indenture, lease, permit, concession, franchise, license
or any other material contract, agreement, arrangement or understanding, to
which it is a party or by which it or any of its properties or assets is
bound, nor to the Knowledge of EQR does such a violation or default exist,
except to the extent such violation or default, individually or in the
aggregate, would not have an EQR Material Adverse Effect, except as set forth
in Schedule 3.14 to the EQR Disclosure Letter.
3.15 OPINION OF FINANCIAL ADVISOR. EQR has received the opinion of J.P.
Morgan Securities, Inc., dated January 15, 1997, satisfactory to EQR, a signed
copy of which has been provided to Wellsford, to the effect that the
consideration to be paid by EQR in connection with the Merger is fair, from a
financial point of view, to EQR.
3.16 STATE TAKEOVER STATUTES. EQR has taken all action necessary to exempt
transactions between EQR and Wellsford and its Affiliates from the operation
of Takeover Statutes.
3.17 REGISTRATION STATEMENT. The information with respect to EQR and the EQR
Subsidiaries included in the Registration Statement will not, as of the
effective date of the Registration Statement, contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein,
or necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading.
3.18 WELLSFORD SHARES OF BENEFICIAL INTEREST. Neither EQR nor any of the EQR
Subsidiaries owns any shares of beneficial interest of Wellsford or other
securities convertible into shares of beneficial interest of Wellsford.
3.19 INTENTIONALLY OMITTED.
3.20 INVESTMENT COMPANY ACT OF 1940. Neither EQR nor any of the EQR
Subsidiaries is, or at the Effective Time will be, required to be registered
under the 1940 Act.
3.21 DEFINITION OF KNOWLEDGE OF EQR. As used in this Agreement, the phrase
"to the Knowledge of EQR" (or words of similar import) means the knowledge of
those individuals identified in Schedule 3.21 of the EQR Disclosure Letter.
ARTICLE 4
Covenants
4.1 ACQUISITION PROPOSALS. Except as set forth in the Wellsford Disclosure
Letter, prior to the Effective Time, Wellsford agrees that:
(a) neither it nor any of the Wellsford Subsidiaries shall initiate, solicit
or encourage, directly or indirectly, any inquiries or the making or
implementation of any proposal or offer (including, without limitation, any
proposal or offer
A-15
<PAGE>
to its shareholders) with respect to a merger, acquisition, tender offer,
exchange offer, consolidation, sale of assets or similar transaction
involving all or any significant portion of the assets or any equity
securities of, Wellsford or any of the Wellsford Subsidiaries, other than
the transactions contemplated by this Agreement (any such proposal or offer
being hereinafter referred to as an "Acquisition Proposal") or engage in
any negotiations concerning or provide any confidential information or data
to, or have any discussions with, any person relating to an Acquisition
Proposal, or otherwise facilitate any effort or attempt to make or
implement an Acquisition Proposal;
(b) it will use its best efforts not to permit any of its officers,
trustees, employees, agents or financial advisors to engage in any of the
activities described in Section 4.1(a);
(c) it will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted
heretofore with respect to any of the foregoing and will take the necessary
steps to inform the individuals or entities referred to in Section 4.1(b)
of the obligations undertaken in this Section 4.1; and
(d) it will notify EQR immediately if Wellsford receives any such
inquiries or proposals, or any requests for such information, or if any
such negotiations or discussions are sought to be initiated or continued
with it;
provided, however, that nothing contained in this Section 4.1 shall prohibit
the Board of Trustees of Wellsford from (i) furnishing information to or
entering into discussions or negotiations with, any person or entity that
makes an unsolicited Acquisition Proposal, if, and only to the extent that (A)
the Board of Trustees of Wellsford determines in good faith that such action
is required for the Board of Trustees to comply with its duties to
shareholders imposed by law, (B) prior to furnishing such information to, or
entering into discussions or negotiations with, such person or entity,
Wellsford provides written notice to EQR to the effect that it is furnishing
information to, or entering into discussions with, such person or entity, and
(C) subject to any confidentiality agreement with such person or entity (which
Wellsford determined in good faith was required to be executed in order for
the Board of Trustees to comply with its duties to shareholders imposed by
law), Wellsford keeps EQR informed of the status (not the terms) of any such
discussions or negotiations; and (ii) to the extent applicable, complying with
Rule 14e-2 promulgated under the Exchange Act with regard to an Acquisition
Proposal. Nothing in this Section 4.1 shall (x) permit Wellsford to terminate
this Agreement (except as specifically provided in Article 7 hereof), (y)
permit Wellsford to enter into an agreement with respect to an Acquisition
Proposal during the term of this Agreement (it being agreed that during the
term of this Agreement, Wellsford shall not enter into an agreement with any
Person that provides for, or in any way facilitates, an Acquisition Proposal
(other than a confidentiality agreement in customary form executed as provided
above)) or (z) affect any other obligation of Wellsford under this Agreement;
provided, however, that the Board of Trustees of Wellsford may approve and
recommend a Superior Acquisition Proposal and, in connection therewith,
withdraw or modify its approval or recommendation of this Agreement and the
Merger. As used herein, "Superior Acquisition Proposal" means a bona fide
Acquisition Proposal made by a third party which a majority of the members of
the Board of Trustees of Wellsford determines in good faith to be more
favorable to Wellsford's shareholders from a financial point of view than the
Merger and which the Board of Trustees of Wellsford determines is reasonably
capable of being consummated.
4.2 CONDUCT OF WELLSFORD'S BUSINESS PENDING MERGER. Prior to the Effective
Time, except as (i) contemplated by this Agreement, (ii) necessary to
accomplish the Spin-Off, (iii) disclosed in the Wellsford Disclosure Letter or
Exhibit "J" or (iv) consented to in writing by EQR, Wellsford shall, and shall
cause each of the Wellsford Subsidiaries to:
(a) conduct its business only in the usual, regular and ordinary course
and in substantially the same manner as heretofore;
(b) use its reasonable efforts to preserve intact its business
organizations and goodwill and keep available the services of its officers
and employees;
(c) confer on a regular basis with one or more representatives of EQR to
report operational matters of materiality and, subject to Section 4.1, any
proposals to engage in material transactions;
(d) promptly notify EQR of any material emergency or other material
change in the condition (financial or otherwise), business, properties,
assets, liabilities, prospects or the normal course of its businesses or in
the operation of its properties, or of any material governmental
complaints, investigations or hearings (or communications indicating that
the same may be contemplated);
(e) promptly deliver to EQR true and correct copies of any report,
statement or schedule filed with the SEC subsequent to the date of this
Agreement;
(f) maintain its books and records in accordance with GAAP consistently
applied and not change in any material manner any of its methods,
principles or practices of accounting in effect at the Financial Statement
Date, except as may be required by the SEC, applicable law or GAAP;
A-16
<PAGE>
(g) 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 Wellsford notifies EQR
that it is availing itself of such extensions and provided such extensions
do not adversely affect Wellsford's status as a qualified REIT under the
Code;
(h) not make or rescind any express or deemed election relative to Taxes
(unless required by law or necessary to preserve Wellsford's status as a
REIT or the status of any Wellsford Subsidiary as a partnership for federal
income tax purposes or as a qualified REIT subsidiary under Section 856(i)
of the Code, as the case may be);
(i) not acquire, enter into any option to acquire, or exercise an option
or contract to acquire, additional real property, incur additional
indebtedness except for working capital under its revolving line(s) of
credit, encumber assets or commence construction of, or enter into any
agreement or commitment to develop or construct, other real estate
projects, except in the ordinary course of the multi-family apartment
business, which shall include all activities necessary to proceed with the
acquisition, ownership and construction of Phases I, II and III of the
multi-family residential project in Douglas County, Colorado referred to as
"Palomino Park" in accordance with the agreements in existence on the date
of this Agreement and previously furnished to EQR (the "Palomino
Development Agreements");
(j) not amend its Amended and Restated Declaration of Trust, Articles or
Certificate of Incorporation, Bylaws, code of regulations or partnership
agreement or comparable charter or organizational document or the articles
of incorporation, by-laws, partnership agreement, joint venture agreement
or comparable charter or organization document of any Wellsford Subsidiary
without EQR's prior written consent, which shall not be unreasonably
withheld or delayed;
(k) make no change in the number of shares of beneficial interest or
capital stock, membership interests or units of limited partnership
interest issued and outstanding, other than pursuant to (i) the exercise of
options disclosed in Schedule 2.3 to the Wellsford Disclosure Letter and
the issuance of shares and options described in Exhibit "J" to this
Agreement, (ii) the conversion of Wellsford Series A Preferred Shares
pursuant to the terms of the Articles Supplementary for the Wellsford
Series A Preferred Shares, (iii) options to purchase Wellsford Common
Shares which are issued, and (iv) the Dividend Reinvestment and Share
Purchase Plan of Wellsford;
(l) grant no options or other right or commitment relating to its shares
of beneficial interest or capital stock, membership interests or units of
limited partnership interest or any security convertible into its shares of
beneficial interest or capital stock, membership interests or units of
limited partnership interest, 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;
(m) except as provided in Section 5.13 hereof and in connection with the
use of shares of beneficial interest of Wellsford to pay the exercise price
or tax withholding in connection with equity-based employee benefit plans
by the participants therein, not (i) authorize, declare, set aside or pay
any dividend or make any other distribution or payment with respect to any
shares of its beneficial interest or capital stock, or (ii) directly or
indirectly redeem, purchase or otherwise acquire any shares of beneficial
interest, shares of capital stock, membership interests or units of
partnership interest or any option, warrant or right to acquire, or
security convertible into, shares of beneficial interest, shares of capital
stock, membership interests, or units of partnership interest;
(n) not sell, lease, mortgage, subject to Lien or otherwise dispose of
any material part of its assets, individually or in the aggregate, except
in the ordinary course of business;
(o) not make any loans, advances or capital contributions to, or
investments in, any other Person, other than (i) loans, advances and
capital contributions to Wellsford Subsidiaries in existence on the date
hereof (other than Newco and Subsidiaries of Newco), and (ii) loans to
Newco and Subsidiaries of Newco bearing interest at a rate per annum equal
to the rate of interest payable under the Second Amended and Restated
Revolving Credit Agreement dated June 30, 1995 between Wellsford and First
National Bank of Boston, as agent for itself and other banks ("Revolver
Rate"), which loans to Newco and its Subsidiaries shall become due and
payable in full on the Closing Date; provided the proceeds of such loans
are not applied to activities which are not permitted under this Section
4.2;
(p) not pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction, in the ordinary course of
business consistent with past practice or in accordance with their terms,
of liabilities reflected or reserved against in, or contemplated by, the
most recent consolidated financial statements (or the notes thereto)
furnished to EQR or incurred in the ordinary course of business consistent
with past practice;
(q) not enter into any commitment, contractual obligation, capital
expenditure or transaction (each, a "Commitment") which may result in total
payments or liability by or to it in excess of $1,000,000 or aggregate
Commitments in excess of $5,000,000;
(r) not guarantee the indebtedness 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
economic effect of any of
A-17
<PAGE>
the foregoing, other than guarantees of indebtedness of Newco and
Subsidiaries of Newco; provided, that on the Closing Date, the Surviving
Trust is unconditionally and irrevocably released from any obligations with
respect to such guarantees or the indebtedness so guaranteed is paid in
full without the payment of any consideration by the Surviving Trust and
its Subsidiaries;
(s) not enter into any Commitment with any officer, trustee, consultant
or Affiliate of Wellsford or any of the Wellsford Subsidiaries;
(t) not increase any compensation or enter into or amend any employment
agreement with any of its officers, directors or employees earning more
than $50,000 per annum, other than waivers by employees of benefits under
such agreements;
(u) not adopt any new employee benefit plan or amend any existing plans
or rights, except for changes which are required by law and changes which
are not more favorable to participants than provisions presently in effect;
(v) not settle any shareholder derivative or class action claims arising
out of or in connection with any of the transactions contemplated by this
Agreement;
(w) not change the ownership of any of its Subsidiaries except pursuant
to the Contribution Agreement on the Closing Date; and
(x) not accept a promissory note in payment of the exercise price payable
under any option to purchase Wellsford Common Shares.
For purposes of this Section 4.2 only, any contract, transaction or other
event shall be deemed to be material if it would result or is expected to
result in a net impact on Wellsford's consolidated income statement in excess
of $1,000,000, or on Wellsford's consolidated balance sheet in excess of
$1,000,000.
Notwithstanding anything to the contrary herein contained, prior to the
Effective Time, Newco and its Subsidiaries shall not be bound by the
restrictions which would otherwise be applicable under Sections 4.2(a), (b),
(c), (d), (i), (j), (k), (l), (m)(ii), (n), (o), (p), (q), (r), (s), (t), (u),
or (w); provided, however, that in no event may Newco:
(i) issue any of its shares to any Person other than Wellsford prior to
the Spin-Off for less than fair value;
(ii) take any action or fail to take any action which would reasonably be
expected to result in the termination of or a challenge to Wellsford's
status as a REIT within the meaning of Section 856 of the Code, or result
in a Wellsford Material Adverse Effect;
(iii) enter into any contract which creates or imposes any obligation on,
or otherwise purports to bind, Wellsford or any of the other Wellsford
Subsidiaries;
(iv) take any action or omit to take any action which causes a default
under any loan agreement to which Wellsford is a party;
(v) amend its Articles of Incorporation or By-laws in any manner which is
inconsistent with the provisions of the Newco Stock Purchase Agreement.
Notwithstanding anything to the contrary herein contained, prior to the
Effective Time, WPHC and its Subsidiaries may:
(A) amend the existing operating agreements of the Subsidiaries of WPHC
in a manner which is not adverse to the interests of WPHC in such
Subsidiaries;
(B) purchase the interest of Al Feld in the Subsidiaries of WPHC in
accordance with the agreements granting such right in effect on the date of
this Agreement and previously furnished to EQR; and
(C) fulfill their respective obligations under the Palomino Development
Agreements.
4.3 CONDUCT OF EQR'S BUSINESS PENDING MERGER. Prior to the Effective Time,
except as (i) contemplated by this Agreement, or (ii) consented to in writing
by Wellsford, EQR shall, and shall cause each of the EQR Subsidiaries to:
(a) use its reasonable efforts to preserve intact its business
organizations and goodwill and keep available the services of its officers
and employees;
(b) confer on a regular basis with one or more representatives of
Wellsford to report operational matters of materiality which would have an
EQR Material Adverse Effect;
(c) promptly notify Wellsford of any material emergency or other material
change in the condition (financial or otherwise), business, properties,
assets, liabilities, prospects or the normal course of its businesses or in
the operation of its properties, or of any material governmental
complaints, investigations or hearings (or communications indicating that
the same may be contemplated);
A-18
<PAGE>
(d) promptly deliver to Wellsford true and correct copies of any report,
statement or schedule filed with the SEC subsequent to the date of this
Agreement;
(e) maintain its books and records in accordance with GAAP consistently
applied; and
(f) duly and timely file all reports, tax returns and other documents
required to be filed with federal, state, local and other authorities.
For purposes of this Section 4.3 only, an emergency, change, complaint,
investigation or hearing shall be deemed material if it would reasonably be
expected to have an EQR Material Adverse Effect.
In addition, during the period beginning the day after the fifth (5th)
trading day prior to the date which the proxy statements required by Section
5.1 hereof are dated and ending on (but including) the Closing Date, EQR will
not (a) issue any EQR Common Shares or other securities convertible into EQR
Common Shares in any single transaction or series of transactions having an
aggregate issuance price in excess of $250,000,000, or (b) announce any merger
with or acquisition of all or substantially all the assets of another entity
which has net assets in excess of $250,000,000.
4.4 COVENANT OF EQR. If EQR enters into negotiations with another Person who
has a class of equity securities registered under the Exchange Act regarding
the acquisition of such Person (whether effected through a merger,
consolidation, share exchange, tender offer or other form), then at least
three (3) business days prior to executing any definitive agreement with such
Person with respect to such acquisition or making a tender offer for the
shares or other ownership interests of such Person, EQR shall notify Wellsford
of such transaction and consult with Wellsford with respect thereto, it being
understood, however, that Wellsford shall have no approval rights with respect
thereto.
4.5 OTHER ACTIONS. Each of Wellsford on the one hand and EQR on the other
hand shall not, and shall use commercially reasonable efforts to cause their
Subsidiaries not to take, any action that would result in (i) any of the
representations and warranties of such party (without giving effect to any
"knowledge" qualification) set forth in this Agreement that are qualified as
to materiality becoming untrue, (ii) any of such representations and
warranties (without giving effect to any "knowledge" qualification) that are
not so qualified becoming untrue in any material respect or (iii) except as
contemplated by Section 4.1, any of the conditions to the Merger set forth in
Article 6 not being satisfied.
4.6 FILING OF CERTAIN REPORTS. The Surviving Trust shall file the reports
required to be filed by it under the Exchange Act and the rules and
regulations adopted by the SEC thereunder, and it will take such further
action as any Affiliate of Wellsford or EQR may reasonably request, all to the
extent required from time to time to enable such Affiliate to sell shares of
beneficial interest of the Surviving Trust received by such Affiliate in the
Merger without registration under the Securities Act pursuant to (i) Rule
145(d)(1) under the Securities Act, as such Rule may be amended from to time,
or (ii) any successor rule or regulation hereafter adopted by the SEC.
ARTICLE 5
Additional Covenants
5.1 PREPARATION OF THE REGISTRATION STATEMENT AND THE PROXY STATEMENT;
WELLSFORD SHAREHOLDERS MEETING AND EQR SHAREHOLDERS MEETING.
(a) As soon as practicable following the date of this Agreement, Wellsford
and EQR shall prepare and file with the SEC a preliminary Proxy Statement in
form and substance satisfactory to each of EQR and Wellsford and such
registration statements under the Securities Act and Exchange Act as may be
required (collectively, the "Registration Statement"). To the extent
practicable, the parties shall utilize one document for transmittal to their
respective shareholders to meet applicable legal requirements. Each of
Wellsford and EQR shall use its reasonable best efforts to (i) respond to any
comments of the SEC and (ii) have the Registration Statement declared
effective under the Securities Act and the rules and regulations promulgated
thereunder as promptly as practicable after such filing and to keep the
Registration Statement effective as long as is necessary to consummate the
Merger. Each of Wellsford and EQR will use its reasonable best efforts to
cause the Proxy Statement to be mailed to Wellsford's shareholders and EQR's
shareholders, respectively, as promptly as practicable after the Registration
Statement is declared effective under the Securities Act. Each party agrees to
date its Proxy Statement as of the same date, which shall be the approximate
date of mailing to the shareholders of the respective parties. Each party will
notify the other promptly of the receipt of any comments from the SEC and of
any request by the SEC for amendments or supplements to the Registration
Statement or the Proxy Statement or for additional information and will supply
the other with copies of all correspondence between such party or any of its
representatives and the SEC, with respect to the Registration Statement or the
Proxy Statement. The Registration Statement and the Proxy Statement shall
comply in all material respects with all applicable requirements of law. Prior
to mailing the Proxy Statement to their respective
A-19
<PAGE>
shareholders, EQR and Wellsford shall have received the letters from their
respective accountants provided for by Section 5.8. Whenever any event occurs
which is required to be set forth in an amendment or supplement to the
Registration Statement or the Proxy Statement, EQR or Wellsford, as the case
may be, shall promptly inform the other of such occurrences and cooperate in
filing with the SEC and/or mailing to the shareholders of EQR and the
shareholders of Wellsford such amendment or supplement to the Proxy Statement.
Wellsford or EQR, whichever shall become the Surviving Trust, also shall take
any action required to be taken under any applicable state securities or "blue
sky" laws in connection with the issuance of shares of beneficial interest of
the Surviving Trust pursuant to the Merger, and the other party shall furnish
all information concerning such party and the holders of the shares of
beneficial interest of such party and rights to acquire shares of beneficial
interest as may be reasonably requested in connection with any such action.
(b) EQR will, as soon as practicable following the date of this Agreement
(but in no event sooner than 20 business days following the date the Proxy
Statement is mailed to the shareholders of Wellsford), duly call, give notice
of, convene and hold a meeting of its shareholders (the "EQR Shareholders
Meeting") for the purpose of obtaining the EQR Shareholder Approvals. EQR
will, through its Board of Trustees, recommend to its shareholders approval of
this Agreement, the Merger, and the transactions contemplated by this
Agreement.
(c) Wellsford will, as soon as practicable following the date of this
Agreement (but in no event sooner than 20 business days following the date the
Proxy Statement is mailed to the shareholders of Wellsford), duly call, give
notice of, convene and hold a meeting of its shareholders (the "Wellsford
Shareholders Meeting") for the purpose of obtaining Wellsford Shareholder
Approvals. Wellsford will, through its Board of Trustees, recommend to its
shareholders approval of this Agreement, the Merger and the transactions
contemplated by this Agreement; provided, that prior to the Wellsford
Shareholders Meeting, such recommendation may be withdrawn, modified or
amended to the extent that, as a result of the commencement or receipt of a
proposal constituting a Superior Acquisition Proposal, the Board of Trustees
of Wellsford determines in good faith that such withdrawal, modification or
amendment is appropriate.
(d) EQR and Wellsford shall use their best efforts to hold their respective
shareholder meetings on the same day, which day, subject to the provisions of
Sections 5.1(b) and 5.1(c), shall be a day not later than 45 days after the
date the Proxy Statement is mailed.
(e) If on the date for the EQR Shareholders Meeting and Wellsford
Shareholders Meeting established pursuant to Section 5.1(d) of this Agreement,
either EQR or Wellsford has not received a sufficient number of proxies to
approve the Merger (but less than 1/3rd of the outstanding common shares of
beneficial interest of such party have voted against the Merger), then both
parties shall adjourn their respective shareholders meetings until the first
to occur of (i) the date ten (10) days after the originally scheduled date of
the shareholders meetings or (ii) the date on which the requisite number of
proxies approving the Merger has been obtained or proxies have been received
representing more than one-third of its outstanding common shares of
beneficial interest which voted against the Merger.
5.2 ACCESS TO INFORMATION: CONFIDENTIALITY. Subject to the requirements of
confidentiality agreements with third parties, each of Wellsford and EQR
shall, and shall cause each of its Subsidiaries to, afford to the other party
and to the officers, employees, accountants, counsel, financial advisors and
other representatives of such other party, reasonable access during normal
business hours prior to the Effective Time to all their respective properties,
books, contracts, commitments, personnel and records and, during such period,
each of Wellsford and EQR shall, and shall cause each of its Subsidiaries to,
furnish promptly to the other party (a) a copy of each report, schedule,
registration statement and other document filed by it during such period
pursuant to the requirements of federal or state securities laws and (b) all
other information concerning its business, properties and personnel as such
other party may reasonably request. Each of Wellsford and EQR, shall cause its
Subsidiaries to, and shall use commercially reasonable efforts to cause its
officers, employees, accountants, counsel, financial advisors and other
representatives and affiliates to, hold any nonpublic information in
confidence to the extent required by, and in accordance with, and will comply
with the provisions of the letter agreement dated as of October 9, 1996
between Wellsford and EQR (the "Confidentiality Agreement").
5.3 BEST EFFORTS; NOTIFICATION.
(a) Subject to the terms and conditions herein provided, Wellsford and EQR
shall: (i) use all reasonable best efforts to cooperate with one another in
(A) determining which filings are required to be made prior to the Effective
Time with, and which consents, approvals, permits or authorizations are
required to be obtained prior to the Effective Time from, governmental or
regulatory authorities of the United States, the several states and foreign
jurisdictions and any third parties in connection with the execution and
delivery of this Agreement, and the consummation of the transactions
contemplated by such agreements and (B) timely making all such filings and
timely seeking all such consents, approvals, permits and authorizations; (ii)
use all reasonable best efforts to obtain in writing any consents required
from third parties to effectuate the Merger, such consents to be in form
reasonably satisfactory to Wellsford and EQR; and (iii) use all reasonable
best efforts
A-20
<PAGE>
to take, or cause to be taken, all other action and do, or cause to be done,
all other things necessary, proper or appropriate to consummate and make
effective the transactions contemplated by this Agreement. If, at any time
after the Effective Time, any further action is necessary or desirable to
carry out the purpose of this Agreement, the proper officers and trustees of
Wellsford and EQR shall take all such necessary action.
(b) Wellsford shall give prompt notice to EQR, and EQR shall give prompt
notice to Wellsford, (i) if any representation or warranty made by it
contained in this Agreement that is qualified as to materiality becomes untrue
or inaccurate in any respect or any such representation or warranty that is
not so qualified becomes untrue or inaccurate in any material respect or (ii)
of the failure by it to comply with or satisfy in any material respect any
covenant, condition or agreement to be complied with or satisfied by it under
this Agreement; provided, however, that no such notification shall affect the
representations, warranties, covenants or agreements of the parties or the
conditions to the obligations of the parties under this Agreement.
5.4 COSTS OF TRANSACTION. On the Closing Date, Wellsford and EQR shall
execute, and Wellsford shall cause Newco to execute, the Transaction and
Termination Costs Agreement in substantially in the form attached as Exhibit
"H" hereto (the "Transaction Costs Agreement").
5.5 TAX TREATMENT. Each of EQR and Wellsford shall use its reasonable best
efforts to cause the Merger to qualify as a reorganization under the
provisions of Sections 368(a) of the Code and to obtain the opinions of
counsel referred to in Sections 6.2(e) and 6.3(f).
5.6 PUBLIC ANNOUNCEMENTS. EQR and Wellsford will consult with each other
before issuing, and provide each other the opportunity to review and comment
upon, any press release or other written public statements with respect to the
transactions contemplated by this Agreement, including the Merger and the
Spin-Off, and shall not issue any such press release or make any such written
public statement prior to such consultation, except as may be required by
applicable law, court process or by obligations pursuant to any listing
agreement with any national securities exchange. The parties agree that the
initial press release to be issued with respect to the transactions
contemplated by this Agreement will be in the form agreed to by the parties
hereto prior to the execution of this Agreement.
5.7 LISTING. Prior to the Effective Time, EQR or Wellsford (whichever shall
be the Surviving Trust), shall use its best efforts to have the NYSE approve
for listing, upon official notice of issuance, the shares of beneficial
interest to be issued in the Merger.
5.8 LETTERS OF ACCOUNTANTS.
(a) Wellsford shall use its reasonable best efforts to cause to be delivered
to EQR the "comfort" letter of Ernst & Young, Wellsford's independent public
accountants, dated and delivered the date on which the Registration Statement
shall become effective and as of the Effective Time, and addressed to EQR, in
form and substance reasonably satisfactory to EQR and reasonably customary in
scope and substance for letters delivered by independent public accountants in
connection with transactions such as those contemplated by this Agreement.
(b) EQR shall use its reasonable best efforts to cause to be delivered to
Wellsford the "comfort" letter of Ernst & Young, EQR's independent public
accountants, dated the date on which the Registration Statement shall become
effective and as of the Effective Time, and addressed to Wellsford, in form
and substance reasonably satisfactory to Wellsford and reasonably customary in
scope and substance for letters delivered by independent public accountants in
connection with transactions such as those contemplated by this Agreement.
5.9 TRANSFER AND GAINS TAXES. EQR and Wellsford shall cooperate in the
preparation, execution and filing of all returns, questionnaires, applications
or other documents regarding any real property transfer or gains, sales, use,
transfer, value added stock transfer and stamp taxes, any transfer, recording,
registration and other fees and any similar taxes which become payable in
connection with the transactions contemplated by this Agreement (together with
any related interests, penalties or additions to tax, "Transfer and Gains
Taxes"). From and after the Effective Time, the Surviving Trust shall, or
shall cause ERP Operating Partnership, as appropriate, to pay or cause to be
paid, without deduction or withholding from any amounts payable to the holders
of beneficial interests in the Surviving Trust, all Transfer and Gains Taxes.
5.10 BENEFIT PLANS AND OTHER EMPLOYEE ARRANGEMENTS.
(a) BENEFIT PLANS. After the Effective Time, all employees of Wellsford who
are employed by the Surviving Trust shall, at the option of the Surviving
Trust, either continue to be eligible to participate in an "employee benefit
plan", as defined in Section 3(3) of ERISA, of Wellsford which is, at the
option of the Surviving Trust, continued by the Surviving Trust, or
alternatively shall be eligible to participate in the same manner as other
similarly situated employees of the
A-21
<PAGE>
Surviving Trust who were formerly employees of EQR in any "employee benefit
plan," as defined in Section 3(3) of ERISA, sponsored or maintained by the
Surviving Trust after the Effective Time. With respect to each such employee
benefit plan, service with EQR or any EQR Subsidiary or with Wellsford or any
Wellsford Subsidiary (as applicable) shall be included for purposes of
determining eligibility to participate, vesting (if applicable) and
entitlement to benefits. With respect to medical benefits provided by the
Surviving Trust on and after the Closing Date, coverage that would otherwise
be denied due to a preexisting illness shall be provided to those employees
who were covered by a plan sponsored by EQR, Wellsford or any of their
Subsidiaries before the Closing Date, but only to the extent that such illness
was covered under such a plan before the Closing Date.
(b) SHARE INCENTIVE PLANS. The share incentive plans of Wellsford and EQR,
respectively, shall be terminated or continued, as specifically set forth in
the Articles of Merger.
(c) RETENTION PROGRAM. As of the Effective Time, the Surviving Trust shall
adopt a severance and retention program (the "Retention Program") with respect
to those employees of Wellsford and the Wellsford Subsidiaries set forth in
Schedule 5.10 to the Wellsford Disclosure Letter (the "Schedule 5.10
Employees") by issuing to such Schedule 5.10 Employees a letter substantially
in the form attached hereto as Exhibit "I" (the "Retention Program Letter");
provided, however, that in no event may the aggregate obligations of Wellsford
and the Surviving Trust under the Retention Program exceed $544,575. The
Surviving Trust shall maintain the Retention Program in accordance with the
terms thereof. In no event shall Wellsford adopt or agree to any other
severance or retention program in addition to the Retention Program, except as
otherwise specifically set forth in this Agreement. Neither the Retention
Program nor any other term of this Agreement shall require the Surviving Trust
to continue the employment of any employee of Wellsford after the Effective
Time. The Surviving Trust shall pay the amount set forth in Schedule 5.10 to
the Wellsford Disclosure Letter to each Schedule 5.10 Employee whose
employment is involuntarily terminated by the Surviving Trust without cause
prior to such employee's receipt of the Retention Program Letter.
(d) AGREEMENT OF OPTIONEES. Prior to the Closing, Wellsford shall use its
best efforts to obtain the written agreement of each employee (other than the
Executives of Wellsford as set forth in Exhibit "J" to this Agreement) holding
an option to purchase Wellsford Common Shares described in Schedule 2.3 to the
Wellsford Disclosure Letter and of David Kelley to the cancellation of such
option at the Effective Time for cash in an amount equal to the difference
between $27.50 and the applicable exercise price set forth in such option,
multiplied by the number of Wellsford Common Shares subject to such option.
(e) RELEASE OF SURVIVING TRUST. At the Closing, each of (i) Jeffrey H.
Lynford, (ii) Edward Lowenthal, and (iii) each of the other Key Executives set
forth in Exhibit "J" who have agreed to the conversion of their options to
purchase Wellsford Common Shares into options to purchase common shares of
Newco, shall release the Surviving Trust from any obligations of Wellsford to
him under options to purchase Wellsford Common Shares which are exchanged for
or converted into options to purchase common shares of Newco.
(f) WITHHOLDING. Wellsford shall require each employee who exercises an
option to purchase Wellsford Common Shares or who receives Wellsford Common
Shares pursuant to any existing commitment to pay to Wellsford in cash or
Wellsford Common Shares an amount sufficient to satisfy in full Wellsford's
obligation to withhold Taxes incurred by reason of such exercise or issuance.
(g) EXECUTIVES. The compensation, benefits, payments, accelerations, share
options and share appreciation rights of the "Executives" and the trustees of
Wellsford, as set forth in Exhibit "J" to this Agreement, shall be satisfied
at the Effective Time in accordance with the terms set forth in Exhibit "J"
and Schedule 5.10(g) to the Wellsford Disclosure Letter. For purposes of
valuing all existing options to be converted into options to purchase common
shares of Newco, Wellsford has utilized the Merrill Lynch trading desk formula
pricing model and take into account the number of options held, the exercise
price and duration thereof, the volatility of the market price of the shares
involved, and other required factors.
(h) COMMITTEE ACTION. Wellsford shall cause the appropriate committee to
take the appropriate action under Wellsford's 1992 Share Option Plan and under
its Long-Term Management Incentive Plan to cause each option to purchase
Wellsford Common Shares which remains unexercised as of the Effective Time to
be amended to adjust the number of shares for which such option is thereafter
exercisable and the exercise price by the Exchange Ratio, as provided for in
the Articles of Merger.
5.11 INDEMNIFICATION.
(a) From and after the Effective Time, the Surviving Trust shall provide
exculpation and indemnification for each person who is now or has been at any
time prior to the date hereof or who becomes prior to the Effective Time, an
officer or
A-22
<PAGE>
trustee of Wellsford or any Wellsford Subsidiary (the "Indemnified Parties")
which is the same as the exculpation and indemnification provided to the
Indemnified Parties by Wellsford and the Wellsford Subsidiaries immediately
prior to the Effective Time in its Amended and Restated Declaration of Trust
and Bylaws, as in effect on the date hereof; provided, that such exculpation
and indemnification covers actions on or prior to the Effective Time,
including, without limitation, all transactions contemplated by this
Agreement. In no event shall the Surviving Trust be obligated to provide
directors' and officers' liability insurance. If the Surviving Trust has
directors and officers' insurance, such insurance shall apply to all directors
and officers of the Surviving Trust serving as such during the period such
coverage is in effect.
(b) The Surviving Trust shall continue in force and effect after the
Effective Time each Indemnification Agreement between EQR and any Person which
was in force and effect immediately prior to the Effective Time.
(c) The provisions of this Section 5.11 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party, his or her heirs and
his or her personal representatives and shall be binding on all successors and
assigns of EQR and Wellsford.
(d) In the event that the Surviving Trust or any of its respective
successors or assigns (i) consolidates with or merges into any other person
and shall not be the continuing or surviving corporation or entity of such
consolidation or merger or (ii) transfers all or substantially all of its
properties and assets to any person, then, and in each such case the
successors and assigns of such entity shall assume the obligations set forth
in this Section 5.11, which obligations are expressly intended to be for the
irrevocable benefit of, and shall be enforceable by, each trustee and officer
covered hereby.
5.12 CONTRIBUTION AGREEMENT. Wellsford shall cause Newco to execute the
Contribution Agreement and any other agreement related to the transactions
contemplated hereby to which Newco is a party provided that Wellsford has
obtained all material consents required to be obtained by Wellsford and the
Wellsford Subsidiaries from third parties in order to perform their respective
obligations under the Contribution Agreement and the other agreements
contemplated hereby to which Newco is a party. Wellsford shall diligently seek
and use its best efforts to obtain such consents prior to the Closing Date.
Wellsford shall keep EQR currently apprised of its progress in obtaining such
consents. Wellsford shall inform EQR promptly if it appears unlikely that any
given consent will be obtained. Wellsford shall cooperate with EQR in taking
any action to either obtain such consents or to put Wellsford and the
Wellsford Subsidiaries in a position so that such consents are no longer
required; provided such action does not cost Wellsford a material amount or
materially adversely affect Wellsford and the Wellsford Subsidiaries.
5.13 DECLARATION OF DIVIDENDS AND DISTRIBUTIONS. From and after the date of
this Agreement, Wellsford shall not make any dividend or distribution to its
shareholders without the prior written consent of EQR; provided, however, the
written consent of EQR shall not be required for the distribution of Newco
shares pursuant to the Spin-Off and for the authorization and payment of
quarterly distributions with respect to the Wellsford Common Shares of up to
$0.485 per share, the Wellsford Series A Preferred Shares of up to $0.4375 per
share and the Wellsford Series B Preferred Shares of up to $0.603125 per
share; provided, however, the record date for each distribution with respect
to the Wellsford Common Shares shall be the same date as the record date for
the quarterly distribution for the Common Shares of EQR as provided to
Wellsford by notice not less than twenty (20) business days prior to the
record date for any quarterly EQR distribution; provided, however, in the
event EQR has not notified Wellsford of the record date for a quarterly
distribution with respect to the EQR Common Shares for any quarter prior to
the last twenty (20) business days of such quarter, Wellsford may authorize a
distribution on the Wellsford Common Shares, subject to the terms and
conditions of this Section 5.13. Notwithstanding the foregoing, if EQR is to
be the Surviving Trust, Wellsford may make distributions to its shareholders
in excess of the foregoing amounts without the consent of EQR but only to the
extent such distributions are required to comply with the minimum distribution
requirements set forth in Section 857(b) of the Code.
5.14 CONSULTING AGREEMENTS. ERP Operating Partnership shall enter into a
consulting agreement with each of Jeffrey H. Lynford and Edward Lowenthal
which shall become effective as of the Effective Time and shall be in
substantially the forms attached hereto as Exhibit "K".
5.15 TRANSFER OF MANAGEMENT COMPANY SHARES. At the Closing, Wellsford shall
cause the owners (other than Wellsford or a wholly-owned subsidiary of
Wellsford) to transfer to such person or persons as EQR shall designate by
written notice delivered to Wellsford prior to the Closing, all of the shares
of Wellsford Holly Management Inc. ("Management Corp.") owned by them,
constituting all the outstanding shares of the Management Corp. which are not
owned by Wellsford or a wholly-owned subsidiary of Wellsford for an aggregate
consideration of $1.00, unless Management Corp. was dissolved prior to the
Closing Date.
5.16 TRANSFER OF WELLSFORD ASSETS AFTER EFFECTIVE TIME. Wellsford
acknowledges that immediately after the Effective Time, the real properties
owned by Wellsford and the Wellsford Subsidiaries and the equity interests in
A-23
<PAGE>
certain of the Wellsford Subsidiaries shall be transferred to ERP Operating
Partnership, subject to all liabilities of Wellsford and the Wellsford
Subsidiaries, as a capital contribution in exchange for a number of units and
preferred units of ERP Operating Partnership equal to the number of common
shares of beneficial interest and preferred shares of beneficial interest of
the Surviving Trust issued in the Merger to the owners of the shares of
beneficial interest of Wellsford in the Merger; provided, however, that
Wellsford makes no representation or warranty regarding EQR's ability to
accomplish the foregoing, the costs that would be incurred in connection
therewith or any consents or approvals that may be required therefor.
5.17 NOTICES.
(a) Within the time period provided for in the Amended and Restated
Declaration of Trust of the Surviving Trust, the Surviving Trust shall notify
the holders of Wellsford Series A Preferred Shares (which have been converted
into Series D Preferred Shares of the Surviving Trust) of the conversion rate
applicable to such shares after giving effect to the Merger.
(b) Each party shall provide such notice to its shareholders of the Merger
as is required under Maryland law.
5.18 RESIGNATIONS. On the Closing Date, Wellsford shall cause the trustees,
directors and officers of Wellsford and each of the Wellsford Subsidiaries
(excluding Newco and its Subsidiaries) to submit their resignations from such
positions, effective as of the Effective Time.
5.19 THIRD PARTY MANAGEMENT AGREEMENTS. Wellsford shall not amend the
existing Third Party Management Agreement which provides that such agreement
may be cancelled by Wellsford on thirty days' notice or less without any
charge, penalty or other cost for such cancellation. Wellsford shall not renew
the other existing Third Party Management Agreement which expires in April,
1997 except on terms which permit its cancellation by Wellsford on thirty
days' notice or less without any charge, penalty or other cost for such
cancellation, and shall not thereafter amend such terms.
5.20 REPAYMENT OF CERTAIN INDEBTEDNESS. Wellsford covenants that on the
Closing Date it shall cause Newco and its Subsidiaries to repay all loans made
to any of them by Wellsford or the other Wellsford Subsidiaries and to procure
on the Closing Date the unconditional and irrevocable release of Wellsford and
such other Wellsford Subsidiaries from any guaranties of the obligations of
Newco and its Subsidiaries (whether effected directly or indirectly through
the repayment of the indebtedness so guaranteed), other than the guaranties
contemplated under the Credit Enhancement Agreement and the Palomino
Agreement. Wellsford covenants that it shall cause Newco to apply the
Contribution Funds (as defined in the Contribution Agreement) and shall cause
Newco to request purchases of shares of Newco under the Newco Stock Purchase
Agreement to the extent that Newco does not repay such indebtedness from other
sources and obtain such releases by other means.
5.21 10B-17 NOTICE. Wellsford shall give any notice required under Rule 10b-
17 promulgated under the Exchange Act of the record date for determining the
holders of Wellsford Common Shares entitled to receive the distribution of the
shares of Newco owned by Wellsford. The parties shall co-operate in
establishing the date for the Closing Date in order to facilitate compliance
with said Rule.
5.22 DENVER LEASE. Prior to the Closing Date, Wellsford may sublease the
office space in Denver, Colorado currently leased by Wellsford (the "Denver
Space") to a subtenant with EQR's prior consent, which consent shall not be
withheld if such prospective tenant is financially capable of making the
rental payments under the sublease. If the Denver Space has not been subleased
by Wellsford by the Closing Date, the Surviving Trust shall use reasonable
commercial efforts to sublease the Denver Space; provided that the Surviving
Trust shall not be required to sublease such space to any Person which is not
financially capable of making the payments required under the sublease. Newco
may refer potential tenants to the Surviving Trust and may sublease the Denver
Space itself. If the Denver Space is not subleased by the Closing Date, but is
thereafter subleased by the Surviving Trust, the Surviving Trust shall pay to
Newco the present value (determined using an interest rate of 8%) of all base
rent payable under such sublease (net of third party brokers' commissions)
promptly after such sublease is executed by the parties.
5.23 NEW YORK LEASE. If prior to the Effective Time Wellsford is unable to
obtain the consent of the landlord under the lease of the office space in New
York, New York currently leased by Wellsford (the "New York Lease") to either
(a) the assignment of the New York Lease to Newco and the release of the
Surviving Trust from all liability under the New York Lease, or (ii) the
sublease to Newco of the space leased under the New York Lease, then the
Surviving Trust will reasonably co-operate with Newco to provide Newco with
the benefits of the New York Lease, including becoming a 50% joint venture
partner with Newco in an entity formed to sublease such space.
5.24 AMENDMENT TO ARTICLES OF WPHC. Prior to the Closing Date, Wellsford
shall cause: (a) the Articles of Incorporation of WPHC to be amended so as to
provide (i) for two classes of common shares which shall be identical in all
A-24
<PAGE>
respects except that (A) one class shall be voting (the "WPHC Voting Shares")
and one class shall be non-voting (the "WPHC Non-Voting Shares"), and (B) each
WPHC Non-Voting Share shall be convertible at any time into one WPHC Voting
Share, and (ii) that no dividend may be declared or paid on the outstanding
shares of either class of common shares of WPHC unless the same dividend is
declared on both classes of common shares of WPHC, except that any stock
dividend payable solely in common shares of WPHC shall be paid in WPHC Voting
Shares, as to such dividends on WPHC Voting Shares, or WPHC Non-Voting Shares,
as to dividends on WPHC Non-Voting Shares, and (b) the shares of WPHC owned by
Wellsford to be converted or exchanged for 80 WPHC Voting Shares, which shall
be contributed to Newco pursuant to the Contribution Agreement, and 20 WPHC
Non-Voting Shares, which shall continue to be owned by the Surviving Trust
after the Effective Time.
5.25 COMPLETION OF ARTICLES OF MERGER. If the Closing Date occurs on or
after the annual meeting of the shareholders of EQR for 1997, Exhibit "B" to
the Articles of Merger shall be completed prior to the execution thereof by
the parties in such a manner so that each of Jeffrey H. Lynford and Edward
Lowenthal shall be designated as trustees whose terms expire at the annual
meeting of the shareholders of the Surviving Trust held in 2000. If the
Closing Date occurs before the annual meeting of the shareholders of EQR for
1997, (a) Exhibit "B" to the Articles of Merger shall be completed prior to
the execution thereof by the parties in such a manner so that each of Jeffrey
H. Lynford and Edward Lowenthal shall be designated as trustees whose terms
expire at the annual meeting of the shareholders of the Surviving Trust held
in 1998, and (b) Jerry H. Lynford and Edward Lowenthal shall be designated as
management's designees in the Surviving Trust's proxy material for its annual
meeting of shareholders held in 1998 to serve as trustees of the Surviving
Trust with terms expiring at the annual meeting of shareholders of the
Surviving Trust held in 2000. The terms of the remaining trustees of the
Surviving Trust shall be completed in Exhibit "B" in the manner designated by
EQR.
ARTICLE 6
Conditions
6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
obligations of each party to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions:
(a) SHAREHOLDER APPROVALS. This Agreement, the Merger and the
transactions contemplated by this Agreement shall have been approved and
adopted by the Shareholder Approvals.
(b) LISTING OF SHARES. The NYSE shall have approved for listing the
shares of beneficial interest of the Surviving Trust to be issued in the
Merger, subject in each case to official notice of issuance.
(c) REGISTRATION STATEMENT. The Registration Statement shall have become
effective under the Securities Act and shall not be the subject of any stop
order or proceedings by the SEC seeking a stop order.
(d) NO INJUNCTIONS OR RESTRAINTS. 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 consummation of the Merger or any of the other transactions
contemplated hereby shall be in effect.
(e) BLUE SKY LAWS. The Surviving Trust shall have received all state
securities or "blue sky" permits and other authorizations necessary to
issue shares of beneficial interest to the shareholders of EQR and
Wellsford.
(f) OPINION OF MARYLAND COUNSEL. EQR and Wellsford shall have received
the opinion of Ballard Spahr Andrews & Ingersoll to the effect that this
Agreement and the Articles of Merger are enforceable under Maryland law,
that all requisite approval of the Merger by the shareholders of EQR and
Wellsford has been obtained, and as to such other matters as are customary
in a transaction such as the Merger.
6.2 CONDITIONS TO OBLIGATIONS OF EQR. The obligations of EQR to effect the
Merger and to consummate the other transactions contemplated to occur on the
Closing Date are further subject to the following conditions, any one or more
of which may be waived by EQR:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
Wellsford set forth in this Agreement shall be true and correct as of the
Closing Date (other than changes thereto which occurred solely by reason of
the Spin-Off), as though made on and as of the Closing Date, except to the
extent the representation or warranty is expressly limited by its terms to
another date, and EQR shall have received a certificate (which certificate
may be qualified by Knowledge to the same extent as the representations and
warranties of Wellsford contained herein are so qualified) signed on behalf
of Wellsford by the chief executive officer or the chief financial officer
of Wellsford, in such capacity, to such effect; provided, however, that no
representation or warranty shall be deemed to have been breached as a
result of any act of Newco and its Subsidiaries taken or omitted to be
taken after the date of this Agreement, if such act or omission was taken
or omitted to be taken without causing Newco to breach Section 4.2 of
A-25
<PAGE>
this Agreement. For the purposes of Section 6.2(a), the representations and
warranties of Wellsford shall be deemed true and correct unless the breach
of such representations and warranties, in the aggregate, could reasonably
be expected to have a Wellsford Material Adverse Effect.
(b) PERFORMANCE OF OBLIGATIONS OF WELLSFORD. Wellsford shall have
performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Effective Time, and EQR shall
have received a certificate signed on behalf of Wellsford by the chief
executive officer or the chief financial officer of Wellsford, in such
capacity, to such effect. For purposes of this Agreement, the inability of
Newco to (i) repay all of the loans and advances made to it by Wellsford or
any of the other Wellsford Subsidiaries, after giving effect to all cash to
be received by Newco on the Closing Date (including any amounts to be
received under the Newco Stock Purchase Agreement), shall be deemed to be a
material default, and (ii) the inability of Newco to obtain the
unconditional and irrevocable release from any obligations of Newco and its
Subsidiaries issued after the date of this Agreement (whether directly
through a release or indirectly through the payment of the indebtedness so
guaranteed) shall be deemed to be a material default. Notwithstanding the
foregoing, if Newco is unable to repay such indebtedness to Wellsford on
the Closing Date, after giving effect to all cash to be received by Newco
on the Closing Date (including any amounts to be received under the Newco
Stock Purchase Agreement), EQR may, at its option, and in lieu of
terminating this Agreement, require Newco to execute and deliver to the
Surviving Trust a promissory note in the amount of such indebtedness which
Newco is unable to pay, payable in twelve (12) equal consecutive monthly
installments on the last day of each month, commencing with the month next
following the month in which the Merger occurs, together with interest
thereon at a rate equal to the Revolver Rate plus 2%, payable with each
installment of principal.
(c) MATERIAL ADVERSE CHANGE. Since the date of this Agreement, there
shall have been no Wellsford Material Adverse Change and EQR shall have
received a certificate of the chief executive officer or chief financial
officer of Wellsford, in such capacity, certifying to such effect.
(d) OPINIONS RELATING TO REIT AND PARTNERSHIP STATUS. EQR shall have
received an opinion of counsel to Wellsford, reasonably satisfactory to
EQR, that, commencing with its taxable year ended December 31, 1993,
Wellsford was organized and has operated in conformity with the
requirements for qualification as a REIT under the Code (with customary
exceptions, assumptions and qualifications and based upon customary
representations).
(e) OTHER TAX OPINION. EQR shall have received an opinion dated the
Closing Date from counsel to EQR, based upon certificates and letters,
which letters and certificates are substantially in the form set forth in
Exhibit "L" hereto and dated the Closing Date, to the effect that the
Merger will qualify as a reorganization under the provisions of Section
368(a) of the Code.
(f) COMFORT LETTER. EQR shall have received the letter from the
accountants for Wellsford required by Section 5.8 hereof.
(g) OPINION OF COUNSEL. EQR shall have received an opinion from Robinson
Silverman Pearce Aronsohn & Berman LLP or other counsel to Wellsford
reasonably satisfactory to EQR dated the Closing Date in form and substance
reasonably satisfactory to EQR addressing the matters set forth in Exhibit
"M" hereto.
(h) CONSENTS. All consents and waivers (including, without limitation,
waivers of rights of first refusal) from third parties necessary in
connection with the consummation of the transactions contemplated by this
Agreement shall have been obtained, other than such consents and waivers
from third parties, which, if not obtained, would not result, individually
or in the aggregate, in an EQR Material Adverse Effect or a Wellsford
Material Adverse Effect.
(i) CONSULTING AGREEMENTS. Jeffrey H. Lynford and Edward Lowenthal shall
have executed and delivered their respective Consulting Agreements.
(j) SHARES OF MANAGEMENT CORP. Unless Management Corp. was dissolved
before the Closing Date, the voting shares of Management Corp. shall have
been transferred to EQR's designees in accordance with Section 5.15.
(k) RELEASES. The Key Executives shall have executed the releases
described in Section 5.10(e).
(l) WPHC ARTICLES. The Articles of Incorporation of WPHC shall have been
amended as provided in Section 5.24 and immediately prior to the Spin-off,
Wellsford's ownership interest in WPHC shall consist solely of 80 WPHC
Voting Shares and 20 WPHC Non-Voting Shares.
(m) CONTRIBUTION AGREEMENT. Wellsford and Newco shall have entered into
the Contribution Agreement and each of the transactions contemplated
thereby shall have been completed to the extent required to be completed
thereunder as of such time.
(n) NEWCO STOCK PURCHASE AGREEMENT. Newco shall have executed and
delivered the Newco Stock Purchase Agreement.
A-26
<PAGE>
(o) PALOMINO CREDIT ENHANCEMENT AGREEMENT. Newco shall have executed and
delivered the Palomino Credit Enhancement Agreement.
(p) PALOMINO AGREEMENT. Newco shall have executed and delivered the
Palomino Agreement.
(q) SONTERRA RIGHT OF FIRST OFFER. Newco shall have executed and
delivered the Sonterra Right of First Offer Agreement.
(r) TRANSACTION COSTS AGREEMENT. Each of Wellsford and Newco shall have
executed and delivered the Transaction Costs Agreement.
6.3 CONDITIONS TO OBLIGATIONS OF WELLSFORD. The obligation of Wellsford to
effect the Merger and to consummate the other transactions contemplated to
occur on the Closing Date is further subject to the following conditions, any
one or more of which may be waived by Wellsford:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
EQR set forth in this Agreement shall be true and correct as of the date of
this Agreement and as of the Closing Date, as though made on and as of the
Closing Date, except to the extent the representation or warranty is
expressly limited by its terms to another date, and Wellsford shall have
received a certificate (which certificate may be qualified by Knowledge to
the same extent as the representations and warranties of EQR contained
herein are so qualified) signed on behalf of EQR by the chief executive
officer and the chief financial officer of such party to such effect. For
the purposes of this Section 6.3(a), the representations and warranties of
EQR shall be deemed true and correct unless the breach of such
representations and warranties, in the aggregate, could reasonably be
expected to have an EQR Material Adverse Effect.
(b) PERFORMANCE OF OBLIGATIONS OF EQR. EQR shall have performed in all
material respects all obligations required to be performed by it under this
Agreement at or prior to the Effective Time, and Wellsford shall have
received a certificate of EQR signed on behalf of EQR by the chief
executive officer or the chief financial officer of EQR, in such capacity,
to such effect.
(c) MATERIAL ADVERSE CHANGE. Since the date of this Agreement, there
shall have been no EQR Material Adverse Change and Wellsford shall have
received a certificate of the chief executive officer or chief financial
officer of EQR, in such capacity, certifying to such effect.
(d) COMFORT LETTER. Wellsford shall have received the letter from the
accountants for EQR required by Section 5.8 hereof.
(e) OPINION RELATING TO REIT STATUS AND PARTNERSHIP STATUS. Wellsford
shall have received an opinion of counsel to EQR, reasonably satisfactory
to Wellsford, that, commencing with its taxable year ended December 31,
1993, (A) EQR was organized and has operated in conformity with the
requirements for qualification as a REIT under the Code and (B) ERP
Operating Partnership has been during and since 1993 and continues to be,
treated of federal income tax purposes as a partnership, and not as a
corporation or association taxable as a corporation (with customary
exceptions, assumptions and qualifications and based upon customary
representations).
(f) OTHER TAX OPINION. Wellsford shall have received an opinion dated the
Closing Date from counsel to Wellsford, based upon certificates and
letters, which letters and certificates are substantially in the form set
forth in Exhibit "N" hereto and dated the Closing Date, to the effect that
the Merger will qualify as a reorganization under the provisions of Section
368(a) of the Code.
(g) OPINION OF COUNSEL. Wellsford shall have received an opinion from
Rudnick & Wolfe or other counsel to EQR reasonably satisfactory to
Wellsford dated the Closing Date in form and substance reasonably
satisfactory to Wellsford addressing the matters set forth in Exhibit "O"
hereto dated the Closing Date.
(h) CONSENTS. All consents and waivers (including, without limitation,
waivers or rights of first refusal) from third parties necessary in
connection with the consummation of the transactions contemplated hereby
shall have been obtained, other than such consents and waivers from third
parties, which, if not obtained, would not result, individually or in the
aggregate, in an EQR Material Adverse Effect or a Wellsford Material
Adverse Effect.
(i) CONSULTING AGREEMENT. ERP Operating Partnership shall have executed
the Consulting Agreements with each of Jeffrey H. Lynford and Edward
Lowenthal.
(j) NEWCO STOCK PURCHASE AGREEMENT. ERP Operating Partnership shall have
executed and delivered the Newco Stock Purchase Agreement.
(k) PALOMINO CREDIT ENHANCEMENT AGREEMENT. ERP Operating Partnership
shall have executed and delivered the Palomino Credit Enhancement
Agreement.
(l) PALOMINO AGREEMENT. ERP Operating Partnership shall have executed and
delivered the Palomino Agreement.
A-27
<PAGE>
(m) SONTERRA RIGHT OF FIRST OFFER. ERP Operating Partnership shall have
executed and delivered the Sonterra Right of First Offer Agreement.
(n) TRANSACTION COSTS AGREEMENT. EQR shall have executed and delivered
the Transaction Costs Agreement.
ARTICLE 7
Termination, Amendment and Waiver
7.1 TERMINATION. This Agreement may be terminated at any time prior to the
filing of the Articles of Merger with the Department, whether before or after
either of the Shareholder Approvals are obtained:
(a) by mutual written consent duly authorized by the respective Boards of
Trustees of EQR and Wellsford;
(b) by EQR, upon a breach of any representation, warranty, covenant,
obligation or agreement on the part of Wellsford set forth in this
Agreement, in either case such that the conditions set forth in Section
6.2(a) or Section 6.2(b), as the case may be, would be incapable of being
satisfied by August 1, 1997 (or as otherwise extended);
(c) by Wellsford, upon a breach of any representation, warranty, covenant
obligation or agreement on the part of EQR set forth in this Agreement, in
either case such that the conditions set forth in Section 6.3(a) or Section
6.3(b), as the case may be, would be incapable of being satisfied by August
1, 1997 (or as otherwise extended);
(d) by either EQR or Wellsford, if any judgment, injunction, order,
decree or action by any Governmental Entity of competent authority
preventing the consummation of the Merger shall have become final and
nonappealable;
(e) by either EQR or Wellsford, if the Merger shall not have been
consummated before August 1, 1997; provided, in the case of termination
pursuant to this Section 7.1(e), the terminating party shall not have
breached in any material respect its obligations under this Agreement in
any manner that shall have proximately contributed to the occurrence of the
failure referred to in this Section;
(f) by either EQR or Wellsford if, upon a vote at a duly held Wellsford
Shareholders Meeting or any adjournment thereof, Wellsford Shareholder
Approvals shall not have been obtained as contemplated by Section 5.1;
(g) by either EQR or Wellsford if, upon a vote at a duly held EQR
Shareholders Meeting or any adjournment thereof, the EQR Shareholder
Approvals shall not have been obtained as contemplated by Section 5.1;
(h) by Wellsford, if prior to the Wellsford Shareholders Meeting, the
Board of Trustees of Wellsford shall have withdrawn or modified its
approval or recommendation of the Merger or this Agreement in connection
with, or approved or recommended, a Superior Acquisition Proposal;
(i) by EQR if (i) prior to the Wellsford Shareholders Meeting, the Board
of Trustees of Wellsford shall have withdrawn or modified in any manner
adverse to EQR its approval or recommendation of the Merger or this
Agreement in connection with, or approved or recommended, any Superior
Acquisition Proposal, or (ii) Wellsford shall have entered into a
definitive agreement with respect to any Acquisition Proposal; and
(j) by Wellsford or EQR if the Average Closing Price is less than $37.00
per share; provided, however, any notice of termination given pursuant to
this Section 7.1(j) shall be given within three (3) business days after the
date that such right of termination accrues.
7.2 CERTAIN FEES AND EXPENSES. If this Agreement shall be terminated (i)
pursuant to Section 7.1(h) or 7.1(i), then Wellsford will pay EQR (provided
Wellsford was not entitled to terminate this Agreement pursuant to Section
7.1(c) at the time of such termination) a fee equal to the Break-Up Fee (as
defined below), (ii) pursuant to Section 7.1(b) or 7.1(f), then Wellsford will
pay EQR (provided Wellsford was not entitled to terminate this Agreement
pursuant to Section 7.1(c) at the time of such termination) an amount equal to
the Break-Up Expenses (as defined below). If this Agreement shall be
terminated pursuant to Section 7.1(c) or 7.1(g), then EQR will pay Wellsford
(provided EQR was not entitled to terminate this Agreement pursuant to Section
7.1(b) at the time of such termination), an amount equal to the Break-Up
Expenses. If the Merger is not consummated (other than due to the termination
of this Agreement pursuant to Section 7.1(a), 7.1(g) or 7.1(j) or EQR's
failure to perform its obligations under this Agreement in such a manner so as
to entitle Wellsford to terminate this Agreement pursuant to Section 7.1(c))
and at the time of the termination of this Agreement an Acquisition Proposal
has been received by Wellsford, and either prior to the termination of this
Agreement or within twelve (12) months thereafter Wellsford or any Wellsford
Subsidiary enters into any written Acquisition Proposal which is subsequently
consummated (whether or not such Acquisition Proposal is the same Acquisition
Proposal which had been received at the time of the termination of this
Agreement), then Wellsford shall pay the Break-Up Fee to EQR. The payment of
the Break Up Fee shall be compensation and liquidated damages for the loss
suffered by EQR as a result of the failure of the Merger
A-28
<PAGE>
to be consummated and to avoid the difficulty of determining damages under the
circumstances and neither party shall have any other liability to the other
after the payment of the Break-Up Fee. The Break- Up Fee shall be paid by
Wellsford to EQR, or the Break-Up Expenses shall be paid by Wellsford to EQR
or EQR to Wellsford (as applicable), in immediately available funds within
fifteen (15) days after the date the event giving rise to the obligation to
make such payment occurred. As used in this Agreement, "Break-Up Fee" shall be
an amount equal to the lesser of (i) $14,000,000 plus Break-Up Expenses (the
"Base Amount") and (ii) the sum of (A) the maximum amount that can be paid to
EQR without causing it to fail to meet the requirements of Sections 856(c)(2)
and (3) of the Code determined as if the payment of such amount did not
constitute income described in Sections 856(c)(2)(A)-(H) and 856(c)(3)(A)-(I)
of the Code ("Qualifying Income"), as determined by independent accountants to
EQR, and (B) in the event EQR receives a letter from outside counsel (the
"Break-Up Fee Tax Opinion") indicating that EQR has received a ruling from the
IRS holding that EQR's receipt of the Base Amount would either constitute
Qualifying Income or would be excluded from gross income within the meaning of
Sections 856(c)(2) and (3) of the Code (the "REIT Requirements") or that the
receipt by EQR of the remaining balance of the Base Amount following the
receipt of and pursuant to such ruling would not be deemed constructively
received prior thereto, the Base Amount less the amount payable under clause
(A) above. Wellsford's obligation to pay any unpaid portion of the Break-Up
Fee shall terminate three years from the date of this Agreement. In the event
that EQR is not able to receive the full Base Amount, Wellsford shall place
the unpaid amount in escrow and shall not release any portion thereof to EQR
unless and until Wellsford receives any one or combination of the following:
(i) a letter from EQR's independent accountants indicating the maximum amount
that can be paid at that time to EQR without causing EQR to fail to meet the
REIT Requirements or (ii) a Break-Up Fee Tax Opinion, in which event Wellsford
shall pay to EQR the lesser of the unpaid Base Amount or the maximum amount
stated in the letter referred to in (i) above. The "Break-Up Expenses" payable
to EQR or Wellsford, as the case may be (the "Recipient"), shall be an amount
equal to the lesser of (i) $2,500,000, (ii) the Recipient's out-of-pocket
expenses incurred in connection with this Agreement and the transactions
contemplated hereby (including, without limitation, all attorneys',
accountants' and investment bankers' fees and expenses) and (iii) the sum of
(A) the maximum amount that can be paid to the Recipient without causing it to
fail to meet the requirements of Sections 856(c)(2) and (3) of the Code
determined as if the payment of such amount did not constitute Qualifying
Income, as determined by independent accountants to the Recipient, and (B) in
the event the Recipient receives a Break Up Fee Tax Opinion indicating that
the Recipient has received a ruling from the IRS holding that the Recipient's
receipt of the Expense Fee would either constitute Qualifying Income or would
be excluded from gross income within the meaning of the REIT Requirements or
that receipt by the Recipient of the remaining balance of the Expense Fee
following the receipt of and pursuant to such ruling would not be deemed
constructively received prior thereto, the Expense Fee less the amount payable
under clause (A) above. The obligation of EQR or Wellsford, as applicable
("Payor"), to pay any unpaid portion of the Break Up Expenses shall terminate
three years from the date of this Agreement. In the event that the Recipient
is not able to receive the full Expense Fee, the Payor shall place the unpaid
amount in escrow and shall not release any portion thereof to the Recipient
unless and until the Payor receives any one or combination of the following:
(i) a letter from the Recipient's independent accountants indicating the
maximum amount that can be paid at that time to the Recipient without causing
the Recipient to fail to meet the REIT Requirements or (ii) a Break-Up Fee Tax
Opinion, in which event the Payor shall pay to the Recipient the lesser of the
unpaid Expense Fee or the maximum amount stated in the letter referred to in
(i) above.
7.3 EFFECT OF TERMINATION. In the event of termination of this Agreement by
either Wellsford or EQR as provided in Section 7.1, this Agreement shall
forthwith become void and have no effect, without any liability or obligation
on the part of EQR, or Wellsford, other than the last sentence of Section 5.2,
Section 7.2, this Section 7.3 and Article 8; provided that (a) if this
Agreement is terminated by EQR pursuant to Section 7.1(b), Wellsford shall not
be entitled to any of the benefits of Section 7.2, or (b) if this Agreement is
terminated by Wellsford pursuant to Section 7.1(c), EQR shall not be entitled
to any of the benefits of Section 7.2.
7.4 AMENDMENT. This Agreement may be amended by the parties in writing by
action of their respective Boards of Trustees at any time before or after any
Shareholder Approvals are obtained and prior to the filing of the Articles of
Merger with the Department; provided, however, that, after the Shareholder
Approvals are obtained, no such amendment, modification or supplement shall be
made which by law requires the further approval of shareholders without
obtaining such further approval.
7.5 EXTENSION; WAIVER. At any time prior to the Effective Time, the parties
may (a) extend the time for the performance of any of the obligations or other
acts of the other party, (b) waive any inaccuracies in the representations and
warranties of the other party contained in this Agreement or in any document
delivered pursuant to this Agreement or (c) subject to the proviso of Section
7.4, waive compliance with any of the agreements or conditions of the other
party contained in this Agreement. Any agreement on the part of a party to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. The failure of any party to this
Agreement to assert any of its rights under this Agreement or otherwise shall
not constitute a waiver of those rights.
A-29
<PAGE>
ARTICLE 8
General Provisions
8.1 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties in this Agreement or in any instrument
delivered pursuant to this Agreement confirming the representations and
warranties in this Agreement shall survive the Effective Time. This Section
8.1 shall not limit any covenant or agreement of the parties which by its
terms contemplates performance after the Effective Time.
8.2 NOTICES. All notices, requests, claims, demands and other communications
under this Agreement shall be in writing and shall be delivered personally,
sent by overnight courier (providing proof of delivery) to the parties or sent
by telecopy (providing confirmation of transmission) at the following
addresses or telecopy numbers (or at such other address or telecopy number for
a party as shall be specified by like notice):
(a) if to EQR, to:
Equity Residential Properties Trust
Two North Riverside Plaza, Suite 400
Chicago, Illinois 60606
Attention: President
Fax No. (312) 207-5243
with a copy to:
Equity Residential Properties Trust
Two North Riverside Plaza, Suite 400
Chicago, Illinois 60606
Attention: Bruce C. Strohm, Esq.
Fax No. (312) 454-0039
Rudnick & Wolfe
203 N. LaSalle St., Suite 1800
Chicago, Illinois 60601
Attention: Errol R. Halperin, Esq.
Fax No. (312) 236-7516
(b) if to Wellsford, to:
Wellsford Residential Property Trust
610 Fifth Avenue, 7th Floor
New York, New York 10020
Attention: President
Fax No. (212) 333-2323
with a copy to:
Robinson Silverman Pearce Aronsohn & Berman LLP
1290 Avenue of the Americas
New York, New York 10104-0053
Attention: Alan S. Pearce, Esq.
Fax No. (212) 541-1411
All notices shall be deemed given only when actually received.
8.3 INTERPRETATION. When a reference is made in this Agreement to a Section,
such reference shall be to a Section of this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include", "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation."
8.4 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other party.
8.5 ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES. This Agreement, the
Wellsford Disclosure Letter, the EQR Disclosure Letter, the Confidentiality
Agreement and the other agreements entered into in connection with the
A-30
<PAGE>
Transactions (a) constitute the entire agreement and supersede all prior
agreements and understandings, both written and oral, between the parties with
respect to the subject matter of this Agreement and (b) except as provided in
Section 5.10 (with respect to the Schedule 5.10 Employees who do not receive
Retention Program Letters) and Section 5.11 ("Third Party Provisions"), are
not intended to confer upon any person other than the parties hereto any
rights or remedies. The Third Party Provisions may be enforced by the
beneficiaries thereof or on behalf of the beneficiaries thereof by the
trustees of Wellsford who had been trustees of Wellsford prior to the
Effective Time.
8.6 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF MARYLAND, REGARDLESS OF THE LAWS
THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICT OF LAWS
THEREOF.
8.7 ASSIGNMENT. Neither this Agreement nor any of the rights, interests or
obligations under this Agreement shall be assigned or delegated, in whole or
in part, by operation of law or otherwise by any of the parties without the
prior written consent of the other parties. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of, and be
enforceable by, the parties and their respective successors and assigns.
8.8 ENFORCEMENT. The parties agree that irreparable damage would occur in
the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the State of Illinois or New York or in any Illinois or New York
State court located in Illinois or New York, this being in addition to any
other remedy to which they are entitled at law or in equity. In addition, each
of the parties hereto (a) consents to submit itself (without making such
submission exclusive) to the personal jurisdiction of any federal court
located in the State of Illinois or New York or any Illinois or New York State
court in the event any dispute arises out of this Agreement or any of the
transactions contemplated by this Agreement and (b) agrees that it will not
attempt to deny or defeat such personal jurisdiction by motion or other
request for leave from any such court.
8.9 SEVERABILITY. Any term or provision of this Agreement which is invalid
or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
8.10 NON-RECOURSE.
(a) This Agreement and all documents, agreements, understandings and
arrangements relating hereto have been entered into or executed on behalf of
Wellsford by the undersigned in his capacity as a trustee or officer of
Wellsford, which has been formed as a Maryland real estate investment trust
pursuant to an Amended and Restated Declaration of Trust of Wellsford dated as
of November 2, 1992, as amended and restated, and not individually, and
neither the trustees, officers nor shareholders of Wellsford shall be
personally bound or have any personal liability hereunder. EQR shall look
solely to the assets of Wellsford for satisfaction of any liability of
Wellsford with respect to this Agreement and any other agreements to which it
is a party. EQR will not seek recourse or commence any action against any of
the shareholders of Wellsford or any of their personal assets, and will not
commence any action for money judgments against any of the trustees or
officers of Wellsford or seek recourse against any of their personal assets,
for the performance or payment of any obligation of Wellsford hereunder or
thereunder.
(b) This Agreement and all documents, agreements, understandings and
arrangements relating hereto have been entered into or executed on behalf of
EQR by the undersigned in his capacity as a trustee or officer of EQR, which
has been formed as a Maryland real estate investment trust pursuant to an
Amended and Restated Declaration of Trust of EQR dated as of August 10, 1993,
as amended and restated, and not individually, and neither the trustees,
officers nor shareholders of EQR shall be personally bound or have any
personal liability hereunder. Wellsford shall look solely to the assets of EQR
for satisfaction of any liability of EQR with respect to this Agreement and
any other agreements to which it is a party. Wellsford will not seek recourse
or commence any action against any of the shareholders of EQR or any of their
personal assets, and will not commence any action for money judgments against
any of the trustees or officers of EQR or seek recourse against any of their
personal assets, for the performance or payment of any obligation of EQR
hereunder or thereunder.
A-31
<PAGE>
IN WITNESS WHEREOF, EQR and Wellsford have caused this Agreement to be
signed by their respective officers thereunto duly authorized all as of the
date first written above.
EQUITY RESIDENTIAL PROPERTIES TRUST
/s/ Douglas J. Crocker II
By: _____________________________________
Name: Douglas J. Crocker II
Title: Chief Executive Officer &
President
WELLSFORD RESIDENTIAL PROPERTY TRUST
/s/ Edward Lowenthal
By: _____________________________________
Name: Edward Lowenthal
Title: President
A-32
<PAGE>
EXHIBIT "G"
ADJUSTMENT TO EXCHANGE RATIO
<TABLE>
<CAPTION>
IF AVERAGE PRICE IS: EXCHANGE RATIO IS:
-------------------- ------------------
<S> <C>
$40.000 0.625
$39.875 0.627
$39.750 0.629
$39.625 0.631
$39.500 0.633
$39.375 0.635
$39.250 0.637
$39.125 0.639
$39.000 0.641
$38.875 0.643
$38.750 0.645
$38.625 0.647
$38.500 0.649
$38.375 0.651
$38.250 0.654
$38.125 0.656
$38.000 0.658
$37.875 0.659
$37.750 0.660
$37.625 0.661
$37.500 0.662
$37.375 0.663
$37.250 0.664
$37.125 0.665
$37.000 0.666
</TABLE>
G-1
<PAGE>
APPENDIX B
EQUITY RESIDENTIAL PROPERTIES TRUST
WELLSFORD RESIDENTIAL PROPERTY TRUST
ARTICLES OF MERGER
Wellsford Residential Property Trust, a Maryland real estate investment
trust ("Wellsford"), and Equity Residential Properties Trust, a Maryland real
estate investment trust ("Equity"), certify to the State Department of
Assessments and Taxation of Maryland:
1. The Merger. Equity and Wellsford agree to merge in the manner hereinafter
set forth. Subject to the acceptance for record of these Articles by the State
Department of Assessments and Taxation of Maryland (the "Department"), Equity
shall be merged with and into Wellsford in accordance with Section 8.501.1 of
the Corporations and Associations Article of the Annotated Code of Maryland
(the "Maryland Code"), and the separate existence of Equity shall thereupon
cease (the "Merger").
2. The Surviving Trust. Wellsford is the real estate investment trust to
survive the Merger and shall be known as Equity Residential Properties Trust.
When used in these Articles, the term "Surviving Trust" shall mean Wellsford,
thereinafter known as "Equity Residential Properties Trust", as the trust
surviving in the Merger as of the Effective Time (as defined below) and
thereafter.
3. Formation. Both Wellsford and Equity are formed under Title 8 of the
Maryland Code.
4. Principal Offices. The principal office of each of Wellsford and Equity
in the State of Maryland is located in Baltimore City.
5. Ownership of Land Interests. Equity owns interests in land in the
following counties located within the State of Maryland: Montgomery, Prince
George, Anne Arundel and Fredrick County.
6. Declaration of Trust. Effective as of the Effective Time, the Amended and
Restated Declaration of Trust of the Surviving Trust (the "Declaration") shall
be amended and restated in its entirety as set forth in Exhibit "A" to these
Articles, until duly amended in accordance with its terms and applicable law.
The name and address of the Surviving Trust's Resident Agent is as set forth
in Section 1.2 of Exhibit "A".
7. Effective Time. The Merger shall be effective at the time the Department
accepts these Articles for Record (the "Effective Time") (The date on which
the Effective Time occurs is herein referred to as the "Effective Date").
8. Effects. The Merger shall have the effects specified in Section
8.501.1(n) of the Maryland Code. If at any time the Surviving Trust shall
consider or be advised that any further assignments, conveyances or assurances
in law are necessary or desirable to vest, perfect or confirm in the Surviving
Trust the title to any property or rights of Equity or Wellsford or otherwise
to carry out the provisions hereof, the persons who are the proper officers
and trustees of Equity or Wellsford immediately prior to the Effective Time
(or their successors in office) shall execute and deliver any and all proper
deeds, assignments and assurances in law, and do all things necessary or
proper, to vest, perfect or confirm title to such property or rights in the
Surviving Trust and otherwise to carry out the provisions hereof. The
Surviving Trust shall be governed by the laws of the State of Maryland.
9. Approval of Merger. The terms and conditions of the Merger were duly
advised, authorized and approved by Equity in the manner and by the vote
required by the laws of the State of Maryland and the Amended and Restated
Declaration of Trust of Equity as follows:
(a) The Board of Trustees of Equity, at a meeting duly called and held,
adopted a resolution declaring that the terms and conditions of the Merger
described herein were advisable and directing that the proposed transaction
be submitted for consideration by the shareholders of Equity.
(b) The shareholders of Equity entitled to vote on the proposed merger,
at a meeting duly called and held, adopted a resolution approving the
Merger.
The terms and conditions of the Merger were duly advised, authorized and
approved by the Wellsford in the manner and by the vote required by the laws
of the State of Maryland and the Amended and Restated Declaration of Trust of
Wellsford as follows:
B-1
<PAGE>
(a) The Board of Trustees of Wellsford, at a meeting duly called and
held, adopted a resolution declaring that the terms and conditions of the
Merger described herein were advisable and directing that the proposed
transaction be submitted for consideration by the shareholders of
Wellsford.
(b) The shareholders of Wellsford entitled to vote on the proposed
merger, at a meeting duly called and held, adopted a resolution approving
the Merger.
10. Trustees. As of the Effective Time, the trustees of the Surviving Trust
and their terms of office shall be as set forth on Exhibit "B" attached
hereto. If any of the individuals named in Exhibit "B" are unable to serve as
a trustee of the Surviving Trust at the Effective Time, his successor will be
nominated and elected in accordance with the Bylaws of the Surviving Trust.
11. Capital.
(a) Wellsford's Declaration authorizes the issuance of 100,000,000 shares
of beneficial interest, which consists of common shares, $.01 par value per
share ("Wellsford Common") and such other types or classes as the trustees
may create and authorize from time to time. Wellsford has established the
following classes of preferred shares: (i) 4,600,000 shares of Series A
Convertible Preferred Shares of Beneficial Interest, par value $.01 per
share ("Wellsford Series A") and (ii) 2,300,000 shares of Series B
Cumulative Redeemable Preferred Shares of Beneficial Interest, par value
$.01 per share ("Wellsford Series B").
(b) Equity's Declaration authorizes the issuance of 110,000,000 shares,
of which 100,000,000 are common shares, $.01 par value per share ("Equity
Common"), and 10,000,000 are preferred shares. Equity has established the
following series of preferred shares: (i) 6,900,000 shares of 9 3/8% Series
A Cumulative Redeemable Preferred Shares of Beneficial Interest, par value
$.01 per share ("Equity Series A"); (ii) 575,000 shares of 9 1/8% Series B
Cumulative Redeemable Preferred Shares of Beneficial Interest, par value
$.01 per share ("Equity Series B"); and (iii) 460,000 shares of 9 1/8%
Series C Cumulative Redeemable Preferred Shares, par value $.01 per share
("Equity Series C").
(c) Effective at the Effective Time, the Declaration of the Surviving
Trust will be amended and restated to, among other things, increase the
number of authorized shares of beneficial interest to 300,000,000, of which
200,000,000 shall be common shares ("Survivor Common") and 100,000,000
shall be preferred shares. Shares of Survivor Common will have a par value
of $.01 per share. The Declaration of the Surviving Trust will establish
the following classes of preferred shares: (i) 6,900,000 shares of 9 3/8%
Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, par
value $.01 per share ("Survivor Series A"); (ii) 575,000 shares of 9 1/8%
Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, par
value $.01 per share ("Survivor Series B"); (iii) 460,000 shares of 9 1/8%
Series C Cumulative Redeemable Preferred Shares, par value $.01 per share
("Survivor Series C"); (iv) 4,600,000 shares of Series D Convertible
Preferred Shares of Beneficial Interest, par value $.01 per share
("Survivor Series D"); and (v) 2,300,000 shares of Series E Cumulative
Redeemable Preferred Shares of Beneficial Interest, par value $.01 per
share ("Survivor Series E").
12. Conversion. The manner of converting the shares of Wellsford and Equity
shall be as follows:
(a) At the Effective Time, each share of Equity Common outstanding
immediately prior to the Effective Time shall without any action on the
part of the holder thereof, be converted in the Merger into, and continue
as, one legally and validly issued, fully paid and nonassessable common
share of Survivor Common.
(b) Subject to the provisions of Section 12(j) hereof, at the Effective
Time, each share of Wellsford Common outstanding immediately prior to the
Effective Time shall, without any action on the part of the holder thereof,
be converted into 0.625 of a share of Survivor Common.
(c) At the Effective Time, each share of Equity Series A shall, without
any action on the part of the holder thereof, be converted in the Merger
into, and continue as, one share of Survivor Series A.
(d) At the Effective Time, each share of Equity Series B shall, without
any action on the part of the holder thereof, and be converted in the
Merger into, and continue as, one share of Survivor Series B.
(e) At the Effective Time, each share of Equity Series C shall, without
any action on the part of the holder thereof, be converted in the Merger
into, and continue as, one share of Survivor Series C.
(f) At the Effective Time, each share of Wellsford Series A shall,
without any action on the part of the holder thereof, continue as a
preferred share of the Surviving Trust with its same preferences, rights
and powers, and be converted in the Merger into one share of Survivor
Series D.
B-2
<PAGE>
(g) At the Effective Time, each share of Wellsford Series B shall,
without any action on the part of the holder thereof, continue as a
preferred share of the Surviving Trust with its same preferences, rights
and powers, and be converted in the Merger into one share of Survivor
Series E.
(h) At the Effective Time, each certificate representing outstanding
shares of Equity Common, Equity Series A, Equity Series B and Equity Series
C will, without any action on the part of the holder thereof, thereafter
represent an equal number of shares of Survivor Common, Survivor Series A,
Survivor Series B or Survivor Series C, as the case may be.
(i) At the Effective Time, each share of Wellsford Common shall cease to
be outstanding and shall be cancelled and retired, and each holder of a
certificate representing such shares of Wellsford Common shall thereafter
cease to have any rights with respect to such shares, except the right to
receive, without interest, the Survivor Common as calculated pursuant to
Section 12(b) above and cash in lieu of fractional shares of the Survivor
Common in accordance with Section 12(j), upon the surrender of such
Wellsford certificate. At the Effective Time each certificate representing
outstanding shares of Wellsford Series A and Wellsford Series B will cease
to have any rights with respect to such shares, except the right to receive
a certificate of the Surviving Trust representing an equal number of
Survivor Series D or Survivor Series E, as the case may be.
(j) Notwithstanding any other provision hereof, no fractional shares of
Survivor Common shall be issued in connection with the Merger. Instead,
each holder of outstanding Wellsford Common having a fractional interest
arising upon the conversion or exchange of such shares in connection with
the Merger shall, at the time of surrender of its Wellsford certificate, be
paid an amount in cash equal to the Closing Price (as hereinafter defined)
multiplied by the fraction of a share of Survivor Common to which such
holder would otherwise be entitled. No such holder shall be entitled to
dividends or other distributions, voting rights or any other shareholder
rights in respect of any fractional share. For purposes of this Section
12(j), "Closing Price" shall mean the unweighted average closing price of a
share of Equity Common (as reported in the New York Stock Exchange, Inc.
Composite Tape) for the five (5) Trading Days immediately preceding the
Effective Date, and "Trading Day" shall mean any day on which Equity Common
is traded on the New York Stock Exchange and reported on its Composite
Tape.
(k) At the Effective Time, each outstanding option to acquire shares of
Wellsford Common shall be converted and exchanged, without any action on
the part of the holder thereof, into (i) an option to acquire, upon payment
of the exercise price (which shall equal the exercise price per share for
the option immediately prior to the Merger, divided by the Exchange Ratio
(as defined in the Merger Agreement) multiplied by the number of shares to
which the option relates), the number of shares of Survivor Common the
option holder would have received pursuant to the Merger if the holder had
exercised his or her option immediately prior thereto, rounded to the next
lowest whole number and (ii) cash in lieu of the portion of any option that
would have related to any fractional shares of Survivor Common absent the
rounding required by the previous clause; provided, however, that in
respect of any stock option which is an "incentive stock option" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended
("Code"), the conversion hereinabove provided for shall comply with the
requirements of Section 424(a) of the Code, including the requirement that
such converted options shall not give to the holder thereof any benefits
additional to those which such holder had prior to such conversion under
the option as originally granted. The amount payable in lieu of the portion
of any option that would have related to each fractional share pursuant to
this Section 12(m) shall be payable on the Effective Date, and shall be
calculated by applying the formula set forth in Section 12(j) hereof to
that fraction of Survivor Common which the holder would otherwise have been
entitled and reducing such calculated amount by an amount equal to the
exercise price per share for the options as adjusted in clause (i) above
times the fraction of unit of Survivor Common to which such holder would
otherwise have been entitled.
(l) As of the date hereof, Equity has in effect the Second Amended and
Restated 1993 Share Option and Share Award Plan (the "1993 Plan") and the
1996 Non-Qualified Employee Share Purchase Plan (the "1996 Plan", and,
collectively with the 1993 Plan, the "Equity Plans"). The Equity Plans
shall continue in existence in full force and effect in accordance with
their terms following the Effective Time as share option plans of the
Surviving Trust and all options issued under the Equity Plans outstanding
as of the Effective Time shall continue in full force and effect in
accordance with its terms as options to purchase shares of the Surviving
Trust.
13. Exchange of Certificates.
(a) As of the Effective Time, Equity shall deposit, or shall cause to be
deposited, with an exchange agent selected by Equity (the "Exchange
Agent"), for the benefit of the holders of certificates (the "Wellsford
Certificates") representing Wellsford Common, Wellsford Series A and
Wellsford Series B (collectively, the "Wellsford Shares") for exchange in
accordance with this Section 13, certificates (the "Survivor Certificates")
representing Survivor Common, Survivor Series D and Survivor Series E
(collectively, the "Survivor Shares") to be issued pursuant to this Section
13.
B-3
<PAGE>
(b) Promptly after the Effective Time, the Surviving Trust shall cause
the Exchange Agent to mail to each holder of record of Wellsford Shares a
letter of transmittal which shall specify (i) that delivery shall be
effected, and risk of loss and title to Wellsford Certificates shall pass,
only upon delivery of such Wellsford Certificates to the Exchange Agent,
and shall be in such form and have such other provisions as the Surviving
Trust may reasonably specify, and (ii) instructions for use in effecting
the surrender of such Wellsford Certificates in exchange for Survivor
Certificates and cash in lieu of fractional shares. Upon surrender of a
Wellsford Certificate for cancellation to the Exchange Agent, duly executed
and completed in accordance with the instructions thereto, together with
such letter of transmittal, the holder of such Wellsford Certificate shall
be entitled to receive in exchange therefor (x) a Survivor Certificate
representing the number of whole shares of Survivor Shares and (y) a check
representing the amount of cash in lieu of fractional shares of Survivor
Common, if any, and unpaid dividends and distributions, if any, which such
holder has the right to receive pursuant to the provisions of Section 13(c)
in respect of the Wellsford Certificate surrendered, after giving effect to
any required withholding tax, and the Wellsford Certificate so surrendered
shall forthwith be cancelled. No interest will be paid or accrued on the
cash in lieu of fractional shares of Survivor Common and unpaid dividends
and distributions, if any, payable to holders of Wellsford Certificates. In
the event of a transfer of ownership of Wellsford Shares which is not
registered in the transfer records of Wellsford, a Survivor Certificate
representing the proper number of Survivor Shares, together with a check
for the cash to be paid in lieu of any fractional shares of Survivor
Common, if any, and unpaid dividends and distributions, if any, which such
holder has the right to receive pursuant to the provisions of Section 13(c)
in respect of the Wellsford Certificate so surrendered, after giving effect
to any required withholding tax, may be issued to such a transferee if the
Wellsford Certificate is presented to the Exchange Agent, accompanied by
all documents required to evidence and effect such transfer and to evidence
that any applicable stock transfer taxes have been paid. All Wellsford
Certificates so surrendered will be cancelled forthwith. Notwithstanding
the foregoing, neither the Exchange Agent nor any party hereto shall be
liable to a holder of Wellsford Shares for any Survivor Shares or dividends
or other distributions thereon, or cash in lieu of any fractional Survivor
Common, delivered to a public official pursuant to applicable escheat law.
(c) Notwithstanding any other provisions of these Articles of Merger, no
dividends or other distributions on Survivor Shares shall be paid with
respect to any Wellsford Shares represented by a Wellsford Certificate
until such Wellsford Certificate is surrendered for exchange as provided
herein. Subject to the effect of applicable laws, following surrender of
any such Wellsford Certificate, there shall be paid to the holder of the
Survivor Certificate issued in exchange therefor, without interest, (i) at
the time of such surrender, the amount of dividends or other distributions
with a record date after the Effective Time theretofore payable with
respect to such whole shares of Survivor Shares and not paid, less the
amount of any withholding taxes which may be required thereon, and (ii) at
the appropriate payment date, the amount of dividends or other
distributions with a record date after the Effective Time but prior to
surrender and a payment date subsequent to surrender payable with respect
to such whole shares of Survivor Shares, less the amount of any withholding
taxes which may be required thereon.
(d) At and after the Effective Time, there shall be no transfers on the
share transfer books of Wellsford of the Wellsford Shares which were
outstanding immediately prior to the Effective Time. If, after the
Effective Time, Wellsford Certificates are presented to the Surviving
Trust, they shall be cancelled and exchanged for certificates representing
Survivor Shares and cash in lieu of fractional Survivor Common, if any, and
unpaid dividends and distributions deliverable in respect thereof pursuant
to these Articles of Merger in accordance with the procedures set forth in
this Section 13. Wellsford Certificates surrendered for exchange by any
person constituting an "affiliate" of Wellsford for purposes of Rule 145(c)
under the Securities Act of 1933, as amended (the "Securities Act"), shall
not be exchanged until the Surviving Trust has received a written agreement
from such person as provided in Section 5.4 of the Merger Agreement.
(e) Any portion of the Survivor Certificates made available to the
Exchange Agent pursuant to Section 13(a) which remains unclaimed by the
holders of Wellsford Shares for one hundred twenty (120) days after the
Effective Time shall be delivered to the Surviving Trust, upon demand of
the Surviving Trust, and any former shareholders of Wellsford who have not
theretofore complied with this Section 13 shall look only to the Surviving
Trust for payment of their shares of Survivor Shares, cash in lieu of
fractional shares and unpaid dividends and distributions on the Survivor
Shares deliverable in respect of each share of Wellsford Shares such
shareholder holds as determined pursuant to these Articles, in each case,
without any interest thereon.
(f) None of Wellsford, Equity, the Exchange Agent or any other person
shall be liable to any former holder of Wellsford Shares for any amount
properly delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws.
(g) In the event any Wellsford Certificate shall have been lost, stolen
or destroyed, upon the making of an affidavit of that fact by the person
claiming such certificate to be lost, stolen or destroyed and, if required
by the Surviving Trust, the posting by such person of a bond in such
reasonable amount as the Surviving Trust may direct as indemnity against
B-4
<PAGE>
any claim that may be made against it with respect to such Certificate, the
Exchange Agent or the Surviving Trust will issue in exchange for such lost,
stolen or destroyed Wellsford Certificate the Survivor Shares and cash in
lieu of fractional Survivor Common, and unpaid dividends and distributions
on Survivor Shares as provided in Section 13(c), deliverable in respect
thereof pursuant to these Articles.
14. Conditions. The obligations of the parties hereto to effect the Merger
as herein provided shall be subject to satisfaction, unless duly waived, of
the conditions set forth in that certain Agreement and Plan of Merger dated as
of January 16, 1997, by and between Equity and Wellsford.
15. Amendment. The parties hereto may amend, modify or supplement these
Articles in whole or in part and in such manner as may be agreed upon by them
in writing at any time before or after the adoption of these Articles by the
shareholders contemplated hereby; provided, however, that after any such
shareholder approval, any such amendment will be subject to further approval
of such shareholders if such further approval is required under the
Declaration of Trust or Bylaws of Equity, or the Declaration of Trust or
Bylaws of Wellsford, as the case may be, or under applicable law.
16. Waiver. Any term or provision of these Articles (other than any matter
which cannot under applicable law be waived) may be waived in writing at any
time by the party which is, or whose shareholders are, entitled to the
benefits thereof. The failure of any party at any time or times to require
performance of any provision hereof shall in no manner affect such party's
right at a later time to enforce the same. No waiver by any party of a
condition or of the breach of these Articles, whether by conduct or otherwise,
in any one or more instances shall be deemed to be construed as a further or
continuing waiver of any such condition or breach or a waiver of any other
condition or of the breach of any other term, covenant, representation or
warranty of these Articles.
17. Notice. Any notice or other communication required or permitted under
these Articles shall be given, and shall be effective, in accordance with the
provisions of the Merger Agreement.
18. Governing Law. These Articles shall be governed by and construed in
accordance with the laws of the State of Maryland.
19. Counterparts. These Articles may be executed in multiple counterparts,
each of which shall be deemed an original and all of which together shall
constitute one agreement.
IN WITNESS WHEREOF, Each of Equity and Wellsford have caused these Articles
of Merger to be signed in its name by the undersigned and attested to on this
day of , 1997, and each of the undersigned acknowledges these Articles
of Merger to be the trust act of the entity on whose behalf he has signed, and
as to all matters or facts required to be verified under oath, each of the
undersigned acknowledges that to the best of his knowledge, information, and
belief, the matters and facts relating to the real estate investment trust on
behalf of which he has signed are true in all material respects and this
statement is made under the penalties for perjury.
Equity Residential Properties Trust Wellsford Residential Property Trust
By: __________________________________
By: __________________________________
Title: ______________________________
Title: ______________________________
Attest: ______________________________ Attest: ______________________________
B-5
<PAGE>
APPENDIX C
[LETTERHEAD OF JP MORGAN]
January 16, 1997
The Board of Trustees
Equity Residential Properties Trust
Two North Riverside Plaza
Chicago, Illinois 60606
Ladies and Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to Equity Residential Properties Trust (the "Company") of the
consideration proposed to be paid by the Company in connection with the
proposed merger (the "Merger") of the Company with Wellsford Residential
Property Trust (the "Seller"). Pursuant to the Agreement and Plan of Merger,
dated as of January 16, 1997 (the "Agreement"), between the Company and the
Seller, each share of common beneficial interest of the Seller, $0.01 par
value per share, will be converted into 0.625 shares of common beneficial
interest of the surviving trust, subject to adjustment as provided in the
Agreement, after distribution of Newco (as defined in the Agreement). In
addition, the Company will pay certain amounts to key executives of the Seller
in compensation, benefits, payments, accelerations, share options and share
appreciation rights, as more particularly described in the Agreement.
In arriving at our opinion set forth below, we have reviewed, among other
things: (i) the Agreement; (ii) certain publicly available information
concerning the business of the Seller and of certain other companies engaged
in businesses comparable to those of the Seller, and the reported market
prices for certain other companies' securities deemed comparable; (iii)
publicly available terms of certain transactions involving companies
comparable to the Seller and the consideration received for such companies;
(iv) current and historical market prices of the common stock of the Company
and the Seller; (v) audited financial statements of the Company and the Seller
for the fiscal year ended December 31, 1995, and unaudited financial
statements of the Company and the Seller for the nine months ended September
30, 1996; (vi) certain agreements with respect to outstanding indebtedness or
obligations of the Company and the Seller; (vii) certain internal financial
analyses and estimates of budgeted 1997 funds from operations and net
operating income prepared by the Company and the Seller and their respective
managements; and (viii) the terms of other business combinations that we
deemed relevant.
In addition, we have held discussions with certain members of the management
of the Company and the Seller with respect to certain aspects of the Merger,
and the past and current business operations of the Company and the Seller,
the financial condition and future prospects and operations of the Company and
the Seller, the effects of the Merger on the financial condition and future
prospects of the Company and the Seller, and certain other matters we believed
necessary or appropriate to our inquiry. We have reviewed such other financial
studies and analyses and considered such other information as we deemed
appropriate for the purposes of this opinion.
In giving our opinion, we have relied upon and assumed, without independent
verification, the accuracy and completeness of all information that was
publicly available or was furnished to us by the Company and the Seller or
otherwise reviewed by us, and we have not assumed any responsibility or
liability therefor. We have not conducted any valuation or appraisal of any
assets or liabilities, nor have any such valuations or appraisals been
provided to us. In relying on financial analyses and forecasts provided to us,
we have assumed that they have been reasonably prepared based on assumptions
reflecting the best currently available estimates and judgments by management
as to the expected future results of operations and financial condition of the
Company and the Seller to which such analyses or forecasts relate. We have
also assumed that the Merger will have the tax consequences described in
discussions with, and materials furnished to us by, representatives of the
Company, and that the other transactions contemplated by the Agreement will be
consummated as described in the Agreement. We have relied as to all legal
matters relevant to rendering our opinion upon the advice of counsel.
Our opinion is necessarily based on economic, market and other conditions as
in effect on, and the information made available to us as of, the date hereof.
It should be understood that subsequent developments may affect this opinion
and that we do not have any obligation to update, revise, or reaffirm this
opinion. We are expressing no opinion herein as to the price at which the
Company's or the Seller's stock will trade at any future time.
C-1
<PAGE>
In addition, we were not requested to and did not provide advice concerning
the structure, the specific amount of the consideration, or any other aspects
of the Merger, or to provide services other than the delivery of this opinion.
We did not participate in negotiations with respect to the terms of the Merger
and related transactions. Consequently, we have assumed that such terms are
the most beneficial terms from the Company's perspective that could under the
circumstances be negotiated among the parties to such transactions.
We will receive a fee from the Company for the delivery of this opinion. Our
affiliate, Morgan Guaranty Trust Company of New York, is a co-agent on the
Company's revolving credit facility. We have also provided other financial
advisory services to the Company and its affiliates in the past and have
received fees for such services. In the ordinary course of their businesses,
our affiliates may actively trade the debt and equity securities of the
Company or the Seller for their own account or for the accounts of customers
and, accordingly, they may at any time hold long or short positions in such
securities.
On the basis of and subject to the foregoing, it is our opinion as of the
date hereof that the consideration to be paid by the Company in connection
with the proposed Merger is fair, from a financial point of view, to the
Company.
This letter is provided to the Board of Trustees of the Company in
connection with and for the purposes of its evaluation of the Merger. This
opinion does not constitute a recommendation to any stockholder of the Company
as to how such stockholder should vote with respect to the Merger. This
opinion may not be disclosed, referred to, or communicated (in whole or in
part) to any third party for any purpose whatsoever except with our prior
written consent in each instance. This opinion may be reproduced in full in
any proxy or information statement mailed to stockholders of the Company but
may not otherwise be disclosed publicly in any manner without our prior
written approval and must otherwise be treated as confidential.
Very truly yours,
J.P. Morgan Securities INC.
/s/ Nicholas B. Paumgarten
By_______________________________________
Name: Nicholas B. Paumgarten
Title: Managing Director
C-2
<PAGE>
APPENDIX D
[LETTERHEAD OF MERRILL LYNCH]
January 16, 1997
Board of Trustees
Wellsford Residential Property Trust
610 Fifth Avenue
New York, New York 10020
Gentlemen:
Wellsford Residential Property Trust (the "Company") and Equity Residential
Properties Trust ("Equity Residential") have entered into an agreement dated
January 16, 1997 (the "Agreement") pursuant to which Equity Residential will
be merged with and into the Company in a transaction (the "Merger") in which
each common share of beneficial interest, par value $.01 per share, of Equity
Residential (the "Shares") will be converted into the right to receive 1
common share of beneficial interest, par value $.01 per share, of the Company
(the "Company Shares") and each Company Share outstanding immediately prior to
the effective time of the Merger (the "Effective Time") will be converted into
the right to receive 0.625 (the "Exchange Ratio") Company Shares (the Company
Shares issued to the holders of Company Shares outstanding immediately prior
to the Effective Time are referred to herein as the "Surviving Company
Shares"). In the event that the average of the closing prices of the Shares
for the twenty consecutive trading days ending on the fifth trading day prior
to the date of the joint proxy statement/prospectus that will be used to
solicit the votes of the shareholders of the Company and Equity Residential to
approve the Merger is less than $40.00 per share but not less than $37.00 per
Share, the Exchange Ratio shall be incrementally adjusted as set forth in
Exhibit "G" to the Agreement. We understand that in the event Equity
Residential and the Company receive a ruling from the Internal Revenue Service
and opinions of counsel to the effect that a merger of the Company into Equity
Residential will not adversely affect the tax-free nature of the Merger, the
Company and Equity Residential will amend the Agreement to provide that the
Merger will be restructured such that the Company will be merged with and into
Equity Residential, as a result of which each Company Share would be converted
into the right to receive 0.625 Shares, subject to adjustment to give effect
to the adjustment provision described above, and each Share outstanding
immediately prior to the Effective Time would remain outstanding and
unaffected by the Merger (the Shares issuable to the holders of Company Shares
in such event are referred to herein as the "Reverse Merger Shares").
We further understand that the Agreement provides, and for purposes of
arriving at the opinion expressed below we have assumed, that immediately
prior to the Merger the Company will contribute certain assets and assign
certain obligations to its wholly owned subsidiary Wellsford Real Properties,
Inc., a Maryland corporation ("Newco"), pursuant to a contribution,
distribution and assumption agreement to be entered into between the Company
and Newco immediately prior to the Effective Time (the "Contribution
Agreement"), and that the Company will declare a special dividend consisting
of all outstanding shares of Newco common stock, par value $.01 per share (the
"Newco Common Stock"), owned by it and that such dividend will be distributed
pro rata to the Company's existing shareholders immediately prior to the
Merger (the "Distribution"). You have advised us that the Distribution will
result in the imposition of federal income tax liability to the Company's
shareholders. In addition, pursuant to the Agreement, ERP Operating Limited
Partnership, an Illinois limited partnership of which Equity Residential is
the sole general partner ("Equity Residential OP"), and Newco will enter into
a preferred stock and common stock purchase agreement immediately prior to the
Effective Time (the "Stock Purchase Agreement") pursuant to which Equity
Residential OP has agreed to purchase (i) on the closing date under the Stock
Purchase Agreement a number of shares of Newco Class A common stock determined
in accordance with Section 2.1 of the Stock Purchase Agreement for an
aggregate purchase price of $3,500,000 in cash and (ii) from time to time as
requested by Newco up to the third anniversary of the closing date under the
Stock Purchase Agreement, a maximum of $25,000,000 of Newco's Series A
Convertible Redeemable Preferred Stock on the terms and conditions set forth
in the Stock Purchase Agreement. The terms and conditions of the Merger and
the Distribution are more fully set forth in the Agreement, the Contribution
Agreement and the Stock Purchase Agreement.
You have asked us whether, in our opinion, the proposed consideration
(defined as the Newco Common Stock received in the Distribution plus the
Surviving Company Shares or the Reverse Merger Shares, as applicable) to be
received by the holders of the Company Shares pursuant to the Merger and the
Distribution is fair to such shareholders from a financial point of view.
D-1
<PAGE>
In arriving at the opinion set forth below, we have, among other things:
1. Reviewed the Company's Annual Report on Form 10-K and related
financial information for the fiscal year ended December 31, 1995, and the
Company's Forms 10-Q and the related unaudited financial information for
the quarterly periods ending March 31, 1996, June 30, 1996 and September
30, 1996;
2. Reviewed Equity Residential's Annual Report on Form 10-K and related
financial information for the fiscal year ended December 31, 1995, and
Equity Residential's Forms 10-Q and the related unaudited financial
information for the quarterly periods ending March 31, 1996, June 30, 1996
and September 30, 1996;
3. Reviewed certain information, including certain financial forecasts
and assumptions, relating to the business, earnings, cash flow, assets and
prospects of (i) the Company and Newco and (ii) Equity Residential,
furnished to us by the Company and Equity Residential, respectively;
4. Reviewed estimates of prospective synergies resulting from the Merger
prepared by the managements of the Company and Equity Residential and
discussed such estimates with the managements of both companies;
5. Conducted discussions with members of senior management of the Company
and Equity Residential concerning the respective businesses and prospects
of (i) the Company and Newco and (ii) Equity Residential;
6. Reviewed the historical market prices and trading activity for the
Shares and the Company Shares and compared them with that of certain
publicly traded companies which we deemed to be reasonably similar to
Equity Residential and the Company, respectively;
7. Compared the results of operations of Equity Residential and the
Company with that of certain companies which we deemed to be reasonably
similar to Equity Residential and the Company, respectively;
8. Compared the proposed financial terms of the Merger with the financial
terms of certain other mergers and acquisitions which we deemed to be
relevant;
9. Considered the pro forma effect of the Merger on the combined entity's
capitalization ratios and earnings, cash flow and book value per share;
10. Reviewed the Agreement;
11. Reviewed the financial terms of the Distribution as set forth in the
Agreement and the forms of Contribution Agreement and Stock Purchase
Agreement attached as exhibits thereto; and
12. Reviewed such other financial studies and analyses and performed such
other investigations and took into account such other matters as we deemed
necessary, including our assessment of general economic, market and
monetary conditions.
In preparing our opinion, we have relied on the accuracy and completeness of
all information supplied or otherwise made available to us by the Company and
Equity Residential, and we have not independently verified such information or
undertaken an independent appraisal or evaluation of the assets or liabilities
of the Company or Equity Residential. With respect to the financial forecasts
and estimates of prospective synergies resulting from the Merger furnished by
the Company and the financial forecasts, assumptions and estimates of
prospective synergies resulting from the Merger furnished by Equity
Residential, we have assumed that they have been reasonably prepared and
reflect the best currently available estimates and judgment of the Company's
or Equity Residential's management as to the expected future financial
performance of the Company, Newco or Equity Residential, as the case may be.
We have further assumed that the Merger will qualify as a tax-free
reorganization to the Company's shareholders (except to the extent, if any, of
cash received in lieu of fractional shares). In addition, we have further
assumed that the Distribution will be consummated without any material
modification to the terms set forth in the forms of Contribution Agreement and
Stock Purchase Agreement reviewed by us.
In connection with the preparation of this opinion, we have not been
authorized to, and did not, solicit indications of interest from third parties
to purchase the outstanding Company Shares or otherwise enter into a business
combination with the Company. Our opinion expressed herein as to the fairness
to the Company's shareholders from a financial point of view of the proposed
consideration to be received by the holders of the Company Shares addresses
the ownership position in the combined entity to be received by the Company's
shareholders pursuant to the Merger on the terms set forth in the Agreement
based upon the relative contributions of the Company and Equity Residential to
the combined entity and after giving effect to the Distribution, and we
express no opinion as to prices at which the Company Shares (or, if
applicable, the Shares) and the Newco Common Stock will trade following the
consummation of the Distribution and the Merger or prices which could be
obtained for the Company Shares (or, if applicable, the Shares) in a sale of
the combined entity following the consummation of the Merger. In addition, our
opinion does not address the relative merits of the Merger and alternative
business combinations with third parties.
D-2
<PAGE>
This opinion is addressed to the Board of Trustees of the Company and does
not constitute a recommendation to any shareholder as to how such shareholder
should vote on the proposed Merger.
We have in the past provided financial advisory and financing services to
both the Company and Equity Residential and have received fees for the
rendering of such services. In the ordinary course of our business, we
actively trade in the securities of the Company and Equity Residential for our
own account and the accounts of our customers and, accordingly, may at any
time hold a long or short position in such securities.
On the basis of, and subject to the foregoing, we are of the opinion that
the proposed consideration to be received by the holders of the Company Shares
pursuant to the Merger and the Distribution is fair to such shareholders from
a financial point of view.
Very truly yours,
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
/s/ Michael F. Profenius
By: _____________________________________
Managing Director
Investment Banking Group
D-3
<PAGE>
FORM OF PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
OF WELLSFORD RESIDENTIAL PROPERTY TRUST
The undersigned shareholder of Wellsford Residential Property Trust, a
Maryland real estate investment trust (the "Company"), hereby appoints Edward
Lowenthal and Jeffrey H. Lynford, and each of them, as proxy for the
undersigned, with full power of substitution to attend the Special Meeting of
Shareholders of the Company to be held on May 28, 1997, at 10:00 a.m., local
time, at The Princeton Club, 15 West 43rd Street, New York, New York, and at any
adjournment(s) or postponement(s) thereof, and to vote and otherwise represent
all the shares that the undersigned is entitled to vote with the same effect as
if the undersigned were present and voting such shares, on the following matters
and in the following manner as further described in the accompanying Joint Proxy
Statement/Prospectus/Information Statement. The undersigned hereby revokes any
proxy previously given with respect to such shares.
The undersigned acknowledges receipt of the Notice of Special Meeting of
Shareholders and the Joint Proxy Statement/Prospectus/Information Statement of
the Company dated April 16, 1997.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
SPECIFICATIONS MADE. IF THIS PROXY IS EXECUTED BUT NO SPECIFICATION IS MADE, THE
SHARES REPRESENTED BY THIS PROXY WILL BE VOTED "FOR" THE APPROVAL OF THE
PROPOSALS SET FORTH IN PARAGRAPHS 1 THROUGH 4 BELOW, EACH AS DESCRIBED IN THE
JOINT PROXY STATEMENT/PROSPECTUS/INFORMATION STATEMENT OF THE COMPANY DATED
APRIL 16, 1997 HERETOFORE RECEIVED BY THE UNDERSIGNED, AND IN THE DISCRETION OF
THE PROXY HOLDERS ON ANY OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE MEETING
OR ANY ADJOURNMENTS(S) OR POSTPONEMENT(S) THEREOF.
1. The approval of the merger (the "Merger") of Equity Residential Properties
Trust, a Maryland real estate investment trust ("EQR"), into the Company,
pursuant to an Agreement and Plan of Merger entered into by the Company and
EQR on January 16, 1997, including the adoption of an amended and restated
declaration of trust for the surviving trust (the "Amended and Restated
Declaration of Trust").
/ / FOR / / AGAINST / / ABSTAIN
2. The approval of modifications to Sections 2.3, 6.6, 6.7, 6.8, 9.1, 9.2,
9.3, 13.1, 13.2 and 13.3 of, and of the addition of a new Article VII to,
the Amended and Restated Declaration of Trust.
/ / FOR / / AGAINST / / ABSTAIN
3. The issuance by Wellsford Real Properties, Inc. ("WRP Newco"), a subsidiary
of the Company, shares of which are to be distributed to the common
shareholders of Wellsford, pro rata, immediately prior to the Merger, of up
to 12,000,000 additional shares of common stock, $.01 par value per share,
of WRP Newco.
/ / FOR / / AGAINST / / ABSTAIN
4. The adoption of WRP Newco's 1997 Management Incentive Plan.
<PAGE>
/ / FOR / / AGAINST / / ABSTAIN
5. To vote and otherwise represent the shares on any other matters which may
properly come before the meeting or any adjournment(s) or postponement(s)
thereof in their discretion.
/ / MARK HERE IF YOU PLAN TO ATTEND THE MEETING
Please sign exactly as name appears hereon and
date. If the shares are held jointly, each holder
should sign. When signing as an attorney,
executor, administrator, trustee, guardian or as
an officer signing for an entity, please give the
full title under signature.
___________________________________________
Signature
___________________________________________
Signature, if held jointly
Dated:_______________________________, 1997
-2-
