<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 19, 1997
REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
ERP OPERATING LIMITED PARTNERSHIP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
ILLINOIS 6513 36-3894853
(STATE OR OTHER (PRIMARY STANDARD (IRS EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
TWO NORTH RIVERSIDE PLAZA, SUITE 400
CHICAGO, IL 60606
(312) 474-1300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
DOUGLAS CROCKER II
PRESIDENT AND CHIEF EXECUTIVE OFFICER
OF THE GENERAL PARTNER, EQUITY RESIDENTIAL PROPERTIES TRUST
TWO NORTH RIVERSIDE PLAZA, SUITE 400
CHICAGO, IL 60606
(312) 474-1300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
ERROL R. HALPERIN, ESQ. KENNETH M. DORAN, ESQ.
HAL M. BROWN, ESQ. GIBSON, DUNN & CRUTCHER LLP
RUDNICK & WOLFE 333 SOUTH GRAND AVENUE
203 NORTH LASALLE STREET, SUITE 1800 LOS ANGELES, CALIFORNIA 90071
CHICAGO, ILLINOIS 60601 (213) 229-7000
(312) 368-4000 (213) 229-7520 (TELECOPIER)
(312) 236-7516 (TELECOPIER)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the
same offering. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT PRICE(2) FEE
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<S> <C> <C> <C> <C>
Limited Partnership Interests............. 620,831 $ (2) $15,942,928 $4,832
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</TABLE>
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(1) Represents the estimated maximum number of units of limited partnership
interest to be issued to the limited partners of Evans Withycombe
Residential, L.P. pursuant to the registration statement.
(2) Pursuant to Rule 457(f), the filing fee has been computed based on the
book value, as of June 30, 1997 of the units of limited partnership
interest of Evans Withycombe Residential, L.P. to be contributed to
registrant pursuant to the registration statement.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.,
CONSENT SOLICITATION
---------------
ERP OPERATING LIMITED PARTNERSHIP
PROSPECTUS
---------------
ERP OPERATING LIMITED PARTNERSHIP
INFORMATION STATEMENT
This Consent Solicitation/Prospectus/Information Statement is being
furnished to the holders of the units of limited partnership interest of Evans
Withycombe Residential, L.P., a Delaware limited partnership ("EWRLP"), in
connection with the consent solicitation on behalf of the Board of Directors
("EWR Board of Directors") of Evans Withycombe Residential, Inc., a Maryland
corporation ("EWR"), as general partner, of EWRLP on the following proposals:
(i) the contribution of all of the assets, subject to its liabilities
("Asset Contribution") of EWRLP in exchange for units of limited
partnership interest ("ERP Units") in ERP Operating Limited Partnership, an
Illinois limited partnership ("ERP"), pursuant to an Asset Contribution
Agreement dated August 27, 1997 by and between ERP and EWRLP (the "Asset
Contribution Agreement") on the terms and conditions set forth herein;
(ii) approval of an amendment to the Amended and Restated Agreement of
Limited Partnership of EWRLP ("EWRLP Partnership Agreement") dated August
17, 1994 (the "EWRLP Amendment") in connection with the merger of EWR into
Equity Residential Properties Trust, a Maryland real estate investment
trust ("EQR"), (the "Merger") and the Asset Contribution; and
(iii) the dissolution of EWRLP on the terms and conditions stated herein.
This Consent Solicitation/Prospectus/Information Statement is also being
furnished to holders of units of limited partnership interests in EWRLP
("EWRLP Units") who are hereby offered the opportunity to contribute their
EWRLP Units to ERP in exchange for ERP Units.
This Consent Solicitation/Prospectus/Information Statement is being
furnished to holders of ERP Units to inform such holders of the proposed
adoption by the Chairman of the Board of EQR, as attorney in fact for the
limited partners of ERP, of an amendment to the Fourth Amended and Restated
Limited Partnership Agreement of ERP (the "ERP Partnership Agreement") to
expand the ability of EQR to conduct business other than as the general
partner of ERP.
This Consent Solicitation/Prospectus/Information Statement is first being
mailed to all of the holders of ERP Units and all of the holders of EWRLP
Units on or about , 1997.
In considering whether to approve the Merger and the Asset Contribution and
whether to participate in the offer to holders of EWRLP Units to contribute
their EWRLP Units to ERP in exchange for a number of ERP Units equal to the
number of EWRLP Units so exchanged multiplied by 0.5 (the "Unit Exchange
Offer"), (collectively, the "Transactions"), the limited partners of EWRLP
should consider, in addition to the other information in this Consent
Solicitation/Prospectus/Information Statement, the matters discussed under
"Risk Factors" on page 15 herein. Such matters include:
. Possible conflicts of interest due to the fact that certain directors
and members of management of EWR, pursuant to existing agreements, have
certain interests that arise in connection with the Merger that are in
addition to the interests of limited partners of EWRLP and shareholders
of EWR generally.
. The ability of EQR/ERP to maintain the growth rate which it has
experienced since 1993.
. The risk that the distributions with respect to each ERP Unit will be
$2.50 per annum compared to $3.18 per annum with respect to two EWRLP
Units (based upon the distributions per unit of ERP Units and EWRLP
Units declared for the four quarters ending September 30, 1997).
. Adverse consequences normally associated with debt or preferred equity
financing, including the risk that ERP's cash flow will be insufficient
to meet required payments of principal and interest.
. Possible change in share prices of common shares of beneficial interest,
par value $0.01 per share, of EQR ("EQR Common") and common stock, par
value $0.01 per share of EWR ("EWR Common") prior to the time the Merger
becomes effective.
<PAGE>
. Possible payment of liquidated damages and expenses: the Agreement and
Plan of Merger dated August 27, 1997 by and between EQR and EWR (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 EWR to EQR if the Merger Agreement is
terminated by either EQR or EWR under certain circumstances and, within
one year thereafter, if EWR enters into an agreement regarding an
"Acquisition Proposal," as defined herein, which is consummated. If the
Merger Agreement is terminated by either EQR or EWR under certain other
circumstances, either EQR or EWR will be required to pay the other
party's Break-Up Expenses of up to $2.5 million. See "The Transactions--
Termination Provisions."
. Certain differences between the rights of limited partners in EWRLP and
ERP under their respective partnership agreements and Delaware and
Illinois state law, which currently govern EWRLP and ERP, respectively.
. Lack of control by the limited partners of ERP over the management and
affairs of ERP. Under the terms of the ERP Partnership Agreement, all
decisions regarding the business and operations of ERP are made by EQR,
which serves as sole general partner of ERP. The ERP Partnership
Agreement provides that the limited partners may not remove EQR as
general partner, which may not necessarily be in the limited partners'
interest.
. Lack of liquidity of investment in ERP Units. There is and there will be
no public market for ERP Units. In addition, the ERP Partnership
Agreement provides for certain restrictions on a limited partner's
ability to transfer their ERP Units.
. A number of federal income tax risks associated with an investment in
ERP, more fully described in "Federal Income Tax Considerations."
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS
WHICH SHOULD BE CONSIDERED BY THE LIMITED PARTNERS OF ERP AND EWRLP.
---------------
THE SECURITIES TO WHICH THIS CONSENT SOLICITATION/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 CONSENT
SOLICITATION/PROSPECTUS/INFORMATION STATEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Consent Solicitation/Prospectus/Information Statement is
September , 1997.
<PAGE>
AVAILABLE INFORMATION
ERP 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
ERP Units described herein. As permitted by the rules and regulations of the
Commission, this Consent Solicitation/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.
ERP and EWRLP 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. Reports, proxy statements and other information filed by
ERP and EWRLP 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 500 West Madison Street, Suite 1400,
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. Neither the ERP Units nor the
EWRLP Units are currently listed or authorized for listing on any national or
regional securities exchange.
All information contained in this Consent
Solicitation/Prospectus/Information Statement with respect to EWR and its
subsidiaries, including EWRLP, has been supplied by EWR, and all information
with respect to EQR and its subsidiaries, including ERP, has been supplied by
EQR.
No person is authorized to give any information or to make any
representation not contained in this Consent
Solicitation/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 Consent
Solicitation/Prospectus/Information Statement does not constitute an offer to
sell, or a solicitation of an offer to purchase, the securities offered by
this Consent Solicitation/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 Consent
Solicitation/Prospectus/Information Statement nor any distribution of the
securities offered pursuant to this Consent
Solicitation/Prospectus/Information Statement shall, under any circumstances,
create an implication that there has been no change in the affairs of ERP or
EWRLP since the date of this Consent Solicitation/Prospectus/Information
Statement.
All documents incorporated by reference in this Consent
Solicitation/Prospectus/Information Statement but 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 ERP, Two North Riverside Plaza, Suite 400, Chicago,
Illinois 60606, Attention: Cynthia McHugh, telephone (312) 474-1300, and, in
the case of documents relating to EWRLP, 6991 East Camelback Road, Suite A-
200, Scottsdale, Arizona 85251, Attention: Paul R. Fannin, telephone (602)
840-1040. In order to insure timely delivery of the documents, any request
should be made by , 1997.
i
<PAGE>
INFORMATION INCORPORATED BY REFERENCE
IN THIS CONSENT SOLICITATION/PROSPECTUS/INFORMATION STATEMENT
The following documents filed with the Commission by ERP pursuant to the
Exchange Act are hereby incorporated in this Consent
Solicitation/Prospectus/Information Statement by reference:
1. ERP's current report on Form 8-K dated May 23, 1996.
2. ERP's current report on Form 8-K dated November 15, 1996.
3. ERP's annual report on Form 10-K for the year ended December 31, 1996.
4. ERP's quarterly report on Form 10-Q for the quarter ended March 31,
1997.
5. ERP's current report on Form 8-K dated May 20, 1997.
6. ERP's current report on Form 8-K dated June 2, 1997.
7. Description of ERP Units contained in ERP's Registration Statement on
Form 8-A dated August 13, 1997.
8. ERP's quarterly report on Form 10-Q for the quarter ended June 30, 1997.
9. ERP's current report on Form 8-K dated August 15, 1997.
10. ERP's current report on Form 8-K dated August 21, 1997.
11. ERP's current report on Form 8-K dated August 29, 1997.
12. ERP's current report on Form 8-K dated September 10, 1997.
13. All documents subsequently filed by ERP pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the date of the
consummations of the Asset Contribution.
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 Consent Solicitation/Prospectus/Information
Statement to the extent that a statement contained in this Consent
Solicitation/Prospectus/Information Statement or in any other subsequently
filed document that also is or is deemed to be incorporated by reference in
this Consent Solicitation/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 Consent Solicitation/Prospectus/Information Statement.
ii
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
AND
EVANS WITHYCOMBE RESIDENTIAL, L.P.
CONSENT SOLICITATION/PROSPECTUS/INFORMATION STATEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
SECTION NO.
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<S> <C>
SUMMARY................................................................... 1
CONSENT SOLICITATION INFORMATION.......................................... 15
RISK FACTORS.............................................................. 15
Conflicts of Interest................................................... 15
Size and Rapid Growth of EQR............................................ 15
Decrease in Distributions Per Unit to EWRLP Unitholders................. 16
Potential Change in Relative Stock Prices............................... 16
Termination Payments if Merger Fails to Occur........................... 16
Potential Adverse Effects of Combining the Companies.................... 16
Adverse Consequences of Debt Financing and Preferred Shares............. 16
Control and Influence by Significant Shareholders....................... 17
Potential Environmental Liability....................................... 17
General Real Estate Investment Considerations; Changes in Laws.......... 18
Ownership Limit and Limits on Changes in Control........................
Consequences of Failure to Qualify as a REIT............................ 19
Dependence on Key Personnel............................................. 20
Limited Control Over Business of ERP and EWRLP.......................... 20
Loss of Limited Liability............................................... 20
Reliance on General Partner to Declare Distributions.................... 20
Inability to Remove General Partner..................................... 20
Risks of Ownership of ERP Units......................................... 21
Issuance of Preferred Units............................................. 21
No Dissenters' Rights................................................... 21
Distribution Requirements Potentially Increasing Indebtedness of EQR.... 21
Exemptions for Mr. Zell and Others from Maryland Business Combination
Law which Tend to Inhibit Takeovers.................................... 21
THE TRANSACTIONS.......................................................... 22
Terms of the Transactions............................................... 22
Background of the Transactions.......................................... 22
Reasons for the Transactions; Recommendation of the EQR Board of
Trustees............................................................... 25
Reasons for the Transactions; Recommendation of the EWR Board of
Directors.............................................................. 26
Opinion of Financial Advisor--EQR....................................... 27
Description of Opinion of EWR Financial Advisor Given with Respect to
the Merger............................................................. 31
Effective Time of the Transactions...................................... 33
Representations and Warranties; Conditions to the Transactions.......... 34
Dissolution of EWRLP.................................................... 35
Appraisal Rights........................................................ 35
Regulatory Matters...................................................... 35
Termination Provisions.................................................. 35
Termination Fee and Expenses............................................ 36
No Solicitation of Other Transactions................................... 37
Conversion of Shares/Units.............................................. 37
Conduct of Business Pending the Transactions............................ 37
Limitations on the Sale or Refinancing of Certain Properties............ 39
Waiver and Amendment.................................................... 39
Anticipated Accounting Treatment........................................ 39
Restrictions on Transfer of ERP Units; Shares Available for Resale......
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
PAGE
SECTION NO.
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<C> <S> <C>
THE AMENDMENTS............................................................ 40
ERP Amendment.......................................................... 40
EWRLP Amendment........................................................ 40
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS.......................... 41
ERP UNAUDITED PRO FORMA COMBINED FINANCIAL DATA........................... 44
CAPITALIZATION............................................................ 54
FEDERAL INCOME TAX CONSIDERATIONS......................................... 54
POLICIES OF ERP WITH RESPECT TO CERTAIN ACTIVITIES........................ 72
Business Objectives and Operating Strategies........................... 72
Acquisition Strategies................................................. 72
Disposition Strategies................................................. 72
Investment Policies.................................................... 73
Financing Policies..................................................... 73
Lending Policies....................................................... 74
Development Policies................................................... 74
Policies with Respect to Other Activities.............................. 74
MANAGEMENT AND OPERATION OF EQR AFTER THE MERGER.......................... 74
ADDITIONAL INFORMATION REGARDING THE BUSINESS OF EWRLP.................... 74
Financial Information Regarding EWRLP.....................................
Management's Discussion and Analysis of Financial Condition and Results of
Operations of EWRLP......................................................
EWRLP Properties..........................................................
Financial Statements and Supplementary Data...............................
COMPARISON OF RIGHTS OF UNITHOLDERS....................................... 90
Issuance of Units...................................................... 90
Unit Option Plan....................................................... 90
Indemnification........................................................ 91
Financial Statements and Reports....................................... 91
Mergers................................................................ 91
Transfer or Pledge of Units............................................ 91
Redemption/Exchange of Units........................................... 92
Amendments to Partnership Agreements................................... 92
Transactions and Related Dispositions.................................. 92
Meetings............................................................... 93
PRINCIPAL HOLDERS EWRLP................................................... 93
LEGAL MATTERS............................................................. 94
EXPERTS................................................................... 94
GLOSSARY.................................................................. 95
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES...............................
APPENDIX A ASSET CONTRIBUTION AGREEMENT..................................
APPENDIX B FORM OF EWRLP AMENDMENT.......................................
APPENDIX C FORM OF ERP AMENDMENT.........................................
APPENDIX D FORM OF UNIT CONTRIBUTION AGREEMENT...........................
APPENDIX E OPINION OF J.P. MORGAN SECURITIES, INC........................
</TABLE>
iv
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in the Summary and under captions "Risk Factors," "The
Transactions--Reasons for the Transactions; Recommendation of the EQR Board of
Trustees" "--Reasons for the Transactions; Recommendation of the EWR Board of
Directors," "--Opinion of Financial Advisor--EQR" and "--Description of Opinion
of Financial Advisor of EWR Given with Respect to the Merger" and elsewhere in
this Consent Solicitation/Prospectus/Information Statement constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements of EQR or EWR 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
creditworthiness 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 Transactions; and other changes and factors referenced in
this Consent Solicitation/Prospectus/ Information Statement and the documents
incorporated herein by reference.
SUMMARY
The following is a summary of certain information contained elsewhere in this
Consent Solicitation/ 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 Consent
Solicitation/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
Consent Solicitation/Prospectus/ Information Statement. As used in this Consent
Solicitation/Prospectus/Information Statement, except where the context
requires otherwise, "EQR" means Equity Residential Properties Trust, a Maryland
real estate investment trust and its subsidiaries, including ERP (as defined
herein) as the survivor of the merger between Wellsford Residential Property
Trust ("Wellsford") and Equity Residential Properties Trust and both Equity
Residential Properties Trust and Wellsford as predecessors to EQR; "ERP" means
ERP Operating Limited Partnership, an Illinois limited partnership of which EQR
is the sole general partner, and its subsidiaries; "EWR" means Evans Withycombe
Residential, Inc., a Maryland corporation, and its subsidiaries, including
EWRLP (as defined herein); "EWRLP" means Evans Withycombe Residential, L.P., a
Delaware limited partnership of which EWR is the sole general partner, and its
subsidiaries.
PARTIES TO THE TRANSACTIONS
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 "EQR 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
June 30, 1997, EQR owned or had interests in a portfolio of 346 multifamily
properties containing 100,636 apartment units and managed approximately 9,573
additional units owned by affiliated entities. As of June 30, 1997, the
properties EQR owned or had interests in had an average occupancy rate of
approximately 95%. These properties are located in the following 32 states:
Arizona, Arkansas, California, Colorado, Florida, Georgia, Idaho, Illinois,
Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Michigan, Minnesota,
Missouri, New Hampshire, New Jersey, New Mexico, Nevada, North Carolina, Ohio,
Oklahoma, Oregon, South Carolina, Tennessee, Texas, Utah, Virginia, Washington
and Wisconsin.
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. EQR controls ERP as the sole general partner and, as of
June 30, 1997, owned approximately 91% of ERP's outstanding partnership
interests (excluding preference units) ("ERP Units"), which may be exchanged by
the holders thereof for either EQR Common, on a one-for-one basis or, at EQR's
option, the cash equivalent thereof.
<PAGE>
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 and Stockton, California; Ypsilanti, Michigan; Raleigh, North Carolina;
Ft. Lauderdale, Florida; Nashville, Tennessee; and Kansas City, Kansas.
EWR. EWR is a publicly traded, self-administered and self-managed equity
REIT, which commenced operations as a publicly traded company in August 1994.
EWR owns and operates multifamily properties located in Arizona and Southern
California. EWR was formed to continue and expand the multifamily apartment
operations of Evans Withycombe, Inc. As of June 30, 1997, EWR owned or had
interests in a portfolio of 52 multifamily properties containing 15,443
apartment units (including stabilized communities and communities under
development) and managed 1,759 additional units owned by affiliated entities.
EWR's average occupancy rate on June 30, 1997 was approximately 87.7%.
All of EWR's interests in its properties are held directly or indirectly by,
and substantially all of its operations relating to the properties are
conducted through, EWRLP. EWR controls EWRLP as its sole general partner, is
also a limited partner of EWRLP and, as of August 31, 1997, owned approximately
81.7% of EWRLP's outstanding partnership interests ("EWRLP Units"), which may
be exchanged by the holders thereof for either shares of common stock, $.01 par
value per share of EWR ("EWR Common"), on a one-for-one basis or, at EWR's
option, the cash equivalent thereof.
EWR's corporate headquarters and executive offices are located at 6991 East
Cambelback Road, Suite A200, Scottsdale, Arizona 85251, and its telephone
number is (602) 840-1040.
TERMS OF THE TRANSACTIONS
The Unit Exchange Offer. Holders of EWRLP Units are hereby offered (the "Unit
Exchange Offer") the opportunity to contribute, effective immediately following
the effectiveness of the Merger (as defined herein), their EWRLP Units to ERP
in exchange for a number of ERP Units equal to the number of EWRLP Units so
exchanged multiplied by 0.5. See "The Transactions--The Unit Exchange Offer."
The Merger. Pursuant to an Agreement and Plan of Merger dated August 27, 1997
(the "Merger Agreement"), and upon the terms and conditions set forth therein,
EWR will merge with and into EQR (the "Merger"). The Asset Contribution and
Unit Exchange Offer (together with the Merger, the "Transactions") will be
effectuated in connection with the Merger, resulting in the acquisition by EQR
of EWR. The EQR Board of Trustees and EWR Board of Directors have each approved
the Transactions as set forth in the Merger Agreement. The Merger is subject to
approval by the holders of EQR Common and EWR Common. Upon consummation of the
Merger, each outstanding share of EWR Common will be converted into 0.5 (the
"Exchange Ratio") of a share of EQR Common. See "The Transactions--Terms of the
Transactions." At the Effective Time, approximately 2.3% of EQR Common will be
beneficially owned by affiliates of the EQR (assuming that no outstanding
options are exercised and no ERP Units are exchanged for shares of EQR Common).
The Asset Contribution. Pursuant to, and subject to the terms and conditions
of the Asset Contribution Agreement, EWRLP has agreed, subsequent to the
effectiveness of the Merger and at the option of ERP, to contribute all of
EWRLP's assets (the "Asset Contribution") to ERP in exchange for a number of
ERP Units equal to the number of EWRLP Units then outstanding multiplied by the
Exchange Ratio. Following the Asset Contribution, EWRLP will distribute such
ERP Units to the holders of EWRLP Units (the "Distribution"). As a result of
the Distribution, the remaining holders of EWRLP Units (i.e., those holders who
have not previously contributed their EWRLP Units to ERP pursuant to the Unit
Exchange Offer) will receive a number of ERP Units equal to the number of EWRLP
Units held by such holder, multiplied by the Exchange Ratio. Unless certain
conditions are met, the Asset Contribution will not be consummated for at least
one year following the effectiveness of the Merger. EQR reserves the right to
not consummate the Asset Contribution or to change the terms thereof if,
subsequent to the Unit Exchange Offer, EQR and ERP are the only limited
partners of EWRLP. See "The Transactions--Terms of the Asset Contribution."
Although the Asset Contribution Agreement is subject to approval by the
holders of EWRLP Units, the Asset Contribution Agreement has already been
approved by EWR, which holds a majority of the outstanding EWRLP Units.
Therefore, holders of EWRLP Units can either (i) exchange their EWRLP Units for
ERP Units pursuant to the Unit Exchange Offer or (ii) retain their EWRLP Units
and receive ERP Units pursuant to the Distribution. Whether EWRLP Unitholders
receive ERP Units pursuant to the Unit Exchange Offer or the Distribution, each
such holder will receive an amount of ERP Units equal to the number of EWRLP
Units held by such holder multiplied by the Exchange Ratio.
2
<PAGE>
TERMS OF THE AMENDMENT TO THE ERP PARTNERSHIP AGREEMENT
The ERP Amendment will amend Section 6.2 of the ERP Partnership Agreement to
allow EQR to serve as general partner of EWRLP upon the effectiveness of the
Merger.
TERMS OF THE AMENDMENT TO THE EWRLP PARTNERSHIP AGREEMENT
The proposed EWRLP Amendment will amend the EWRLP Partnership Agreement to
(i) allow EQR and ERP to serve as co-general partners of EWRLP upon the
effectiveness of the Merger, (ii) adjust each outstanding EWRLP Unit by one
half to give effect to the Exchange Ratio, (iii) eliminate certain restrictions
that the EWRLP Partnership Agreement would place upon EQR and ERP as co-general
partners of EWRLP, (iv) permit the Asset Contribution pursuant to the Asset
Contribution Agreement, (v) permit the dissolution of EWRLP upon the terms
contained in the Asset Contribution Agreement and (vi) ratify the revocation of
the 11.2 Amendment (as defined below). The text of the EWRLP Amendment is
attached as Appendix B hereto.
FIDUCIARY RESPONSIBILITY OF GENERAL PARTNERS
EQR, as the sole general partner of ERP, EWR, as the sole general partner of
EWRLP and EQR and ERP, as co-general partners of EWRLP after the effectiveness
of Merger and prior to the dissolution of EWRLP following the Asset
Contribution, will be accountable to limited partners of ERP and EWRLP as
fiduciaries. This is a rapidly developing and changing area of the law and
limited partners of ERP and EWRLP who have questions regarding these matters
should consult with their counsel.
3
<PAGE>
Pre-Merger Structure
--------------------
------------------------- -------------------------
Public Shareholders Public Shareholders
------------------------- -------------------------
------------------------- -------------------------
Equity Residential Evans Withycombe
Properties Trust Residential, Inc.
------------------------- -------------------------
General General Partner
Partner 91% and Limited
Partner 82%*
Limited Limited
Partners 9% Partners 18%
ERP Evans
Operating Withycombe
Limited Partnership Residential, L.P.
100,636 15,443
Apartment Units** Apartment Units**
* Owns 1% as General Partner and 81% as a limited partner.
** As of June 30, 1997. Includes stabilized communities and communities under
development.
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<PAGE>
Merger Transactions
-------------------
------------------------- -------------------------
Equity Residential Merger Evans Withycombe
Properties Trust Residential, Inc.
------------------------- -------------------------
Limited Limited
Partners Partners*
ERP Contribution** Evans
Operating ERP Units Withycombe
Limited Partnership Residential, L.P.
100,636 15,443
Apartment Units*** Apartment Units***
* Immediately following the effectiveness of the Merger, each Limited Partner
of EWRLP may contribute and certain limited partners of EWRLP have agreed
to contribute their limited partnership units in EWRLP to ERP in exchange
for ERP OP Units based on the Exchange Ratio.
** It is the intention of ERP that the Contribution will occur when permitted
under the Asset Contribution Agreement. Subsequent to the effectiveness of
the Merger and consummation of the Contribution, EQR and ERP will be co-
general partners of EWRLP.
*** As of June 30, 1997. Includes stabilized communities and communities under
development.
5
<PAGE>
Post-Merger Transactions Structure
----------------------------------
Equity Residential Properties Trust Former Evans Withycombe
Public Shareholders Residential, Inc. Public Shareholders
Equity Residential
Properties Trust
Former Evans
ERP Operating Withycombe
Limited Partnership Residential, L.P.
Limited Partners Limited Partners
ERP
Operating
Limited Partnership
116,079
Apartment Units*
* As of June 30, 1997.
6
<PAGE>
REASONS FOR THE TRANSACTIONS; RECOMMENDATIONS OF EQR AND EWR
The EQR Board of Trustees believes that the Transactions, including the
consideration to be paid by ERP, are fair and in the best interests of EQR, ERP
and their shareholders and Unitholders, respectively. The EQR Trustees who
voted on the Transactions unanimously approved the Transactions.
The EQR Board of Trustees considered certain potentially negative factors
which could arise from the Transactions. These negative factors included the
following: (i) the risk that the anticipated benefits of the Transactions might
not be fully realized, (ii) the substantial management time and effort required
to effectuate the Transactions and integrate the businesses of EQR and EWR,
(iii) the Transactions would increase the debt of EQR by the assumption of all
of EWR's outstanding debt of approximately $445,441,000 at June 30, 1997, (iv)
the increase in outstanding debt could adversely affect the ability of EQR to
obtain additional debt financing for additional growth and would subject EQR to
the risks of higher leverage, (v) the increase in the total debt of the EQR,
(vi) 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 Transactions were not consummated and
(vii) the significant costs involved in connection with consummating the
Transactions.
The favorable factors the EQR Board of Trustees considered in approving the
Transactions were the beliefs that (a) the Transactions would solidify EQR's
leadership position in the multifamily property industry through the
acquisition of a high quality portfolio of approximately 16,000 apartment
units, (b) the Transactions would increase operating efficiencies through
economies of scale, (c) the Transactions would provide greater access to the
public equity and debt markets, (d) as a result of the Transactions, EQR would
be a larger and financially stronger company, which would facilitate
combinations with other entities, (e) the combination of the EWR properties
with those of EQR would expand the geographic focus of EQR's operations in
Arizona and Southern California, (f) the Transactions would provide EQR with
the capability to supervise third-party development projects, (g) the Unaudited
Pro Forma Combined Financial Statements for the six months ended June 30, 1997
on a pro forma basis illustrated the effects of the Transactions and indicated
that EQR's FFO (as such term is defined under "The Transactions--Opinion of
Financial Advisor--EQR" herein) available for distribution to holders of ERP
Units and EQR Common would most likely increase and (h) the Transactions could
be effectuated through the issuance of new equity rather than through the use
of cash or a public offering of equity or debt securities. The EQR Board of
Trustees also received the written opinion, dated August 27, 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 Transactions was fair, from a financial
point of view, to EQR. See "The Transactions--Reasons for the Transactions;
Recommendation of the EQR Board of Trustees" and "Opinion of Financial
Advisor--EQR."
The EWR Board of Directors believes that the Transactions are fair to, and in
the best interests of, EWR, EWRLP and their shareholders and Unitholders,
respectively. By unanimous vote, the EWR Board of Directors approved the
Transactions. The EWR Board of Directors 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) after
the Transactions, the distributions payable to former EWRLP Unitholders with
respect to each ERP Unit will be $2.50 per annum compared to $3.18 per annum
with respect to two EWRLP Units based upon the distributions per ERP Unit and
EWRLP Unit declared for the four quarters ending September 30, 1997, (ii) the
possibility that EWR may be required, if the Merger Agreement is terminated
under certain circumstances, to pay EQR a Break-Up Fee (as defined herein) of
$14 million and to reimburse EQR for Break-Up Expenses (as defined herein) of
up to $2.5 million, and (iii) the substantial management time and effort
required to effectuate the Transactions.
In making its determination with respect to the Transactions the EWR Board of
Directors also considered, among other things, the following advantages: (a)
the Exchange Ratio was more favorable than the then-current market price of EWR
Common, (b) the Transactions would afford EWR shareholders and EWRLP
Unitholders 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, (c) the Transactions were
the best alternatives reasonably available to EWRLP Unitholders and EWR
shareholders, providing the greatest feasibility and potential to maximize
shareholder value, (d) the market capitalization of EQR following the Merger is
expected to be approximately $6,639,000,000 greater than the then-current
market capitalization of EWR, (e) the Exchange Ratio fairly reflected the
relative contributions of both companies to the combined entity and (f) the
Merger would be tax-free. See "The Transactions--Reasons for the Transactions"
and "Opinion of Financial Advisor--EWR."
7
<PAGE>
OPINION OF FINANCIAL ADVISORS
EQR. At the meeting of the Board of Trustees of EQR on August 27, 1997, J.P.
Morgan delivered its oral opinion to the Board of Trustees of EQR, dated August
27, 1997, that, as of such date, and subject to the assumptions made,
procedures followed, matters considered and limits of its review, as set forth
in such opinion 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 Transactions--Opinion of Financial Advisor--EQR."
EWR. Morgan Stanley Realty Incorporated ("Morgan Stanley"), EWR's financial
advisor in connection with the Transactions, rendered an opinion as to the
fairness of the Merger, from a financial point of view, to holders of EWR
Common. A financial advisor was not engaged to render an opinion with respect
to the Unit Exchange Offer or Asset Contribution Agreement.
RISK FACTORS
In considering whether to approve the Transactions, the EWRLP Unitholders
should consider, in addition to the other information contained in this Consent
Solicitation/Prospectus/Information Statement, the matters discussed under
"Risk Factors." Such matters include:
. Possible conflicts of interest due to the fact that certain members of
management of EWR, pursuant to existing agreements, have certain
interests that arise in connection with the Transactions that are in
addition to the interests of shareholders of EWR generally.
. The ability of EQR to maintain the growth rate which it has experienced
since 1993.
. Expectations that the distributions payable to former EWR Unitholders
with respect to each ERP Unit will be $2.50 per annum compared to $3.18
per annum with respect to two EWRLP Units (based upon the distributions
per of EQR Unit and ERP Unit declared for the four quarters ending
September 30, 1997).
. Adverse consequences normally associated with debt or preferred equity
financing, including the risk that EQR's cash flow will be insufficient
to meet required payments of principal and interest.
. Share prices of EQR Common and EWR Common may change 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 EWR to EQR if the Merger Agreement is terminated by either EQR
or EWR under certain circumstances and, if EWR, within one year
thereafter, enters into an agreement regarding an "Acquisition Proposal,"
as defined herein, which is consummated. If the Merger Agreement is
terminated by either EQR or EWR under certain other circumstances, either
EQR or EWR will be required to pay the other party's Break-Up Expenses of
up to $2.5 million. See "The Transactions--Termination Provisions."
. Certain differences between the rights of EWRLP Unitholders and ERP
Unitholders under their respective partnership agreements and Delaware
and Illinois state law, which currently govern EWRLP and ERP,
respectively.
. Lack of control by the limited partners over the management and affairs
of ERP. Under the terms of the ERP Partnership Agreement, all decisions
regarding the business and operations of ERP are made by EQR, the sole
general partner of ERP. The ERP Partnership Agreement provides that the
limited partners may not remove EQR as general partner, which may not
necessarily be in the limited partners' interest.
. Lack of liquidity of investment in ERP Units. There will be no public
market for ERP Units. In addition, the ERP Partnership Agreement provides
for certain restrictions on a limited partner's ability to transfer his
or her ERP Units.
. A number of federal income tax risks associated with an investment in
ERP, more fully described in "Federal Income Tax Considerations."
When considering the ERP Amendment, the limited partners of ERP should
consider, in addition to the risks set forth above, the other information
contained in this Consent Solicitation/Prospectus/Information Statement, and
that, as a result of the Transactions, EQR will serve as both the sole general
partner of ERP and co-general partner of EWRLP. Although EQR does not plan to
conduct any new business through EWRLP, and intends to continue to use ERP as
its sole investment and operations vehicle, and to combine EWRLP into ERP
through the consummation of the Asset Contribution Agreement, there can be no
assurance that such intentions will be realized, and limited partners of ERP
could suffer a loss in the value of their ERP Units as a result thereof.
INTERESTS OF CERTAIN PERSONS
In considering whether to approve the Transactions, limited partners should
be aware that certain members of the management of EWR and certain members of
the EWR Board of Directors have certain interests that arise in connection with
the Transactions that are in addition to the interests of shareholders of EWR
generally. The EWR Board of Directors
8
<PAGE>
considered these interests and deliberated upon any resulting conflicts of
interest unanimously concluding that the advantages of the Transactions and the
benefits thereof to the limited partners outweighed any conflicts of interest.
These additional interests arise under existing agreements with, and annual
compensation awards from EWR and agreements relating to, among other things,
(i) the Consulting Agreement dated August 27, 1997 between Equity Residential
Properties Management Limited Partnership, an Illinois limited partnership and
an affiliate of EQR ("EQR Properties Management LP"), and Stephen O. Evans
which shall become effective upon completion of the Merger pursuant to which
Mr. Evans will be elected as a Trustee and Executive Vice President--Strategic
Investments of EQR and will provide consulting services to EQR Properties
Management LP until December 31, 1999, subject to certain early termination
provisions provided therein, (ii) the appointment of Richard G. Berry,
President, Chief Operating Officer and Director of EWR, to the office of
Executive Vice President--Development of EQR upon completion of the Merger
pursuant to the terms of an Employment Agreement which shall expire on December
31, 2000, (iii) termination of Change in Control Agreements between EWR and
Messrs. Evans and Berry, (iv) amendments to the Change in Control Agreements
between EWR and six officers of EWR which provide that (a) a payment obligation
will arise as of the Closing Date notwithstanding the fact that each officer
may perform services for a transitional period thereafter, (b) payment be made
within five days after termination of employment (or earlier if required by
law) unless such termination occurs during the last two months of a calendar
year in which case payment will be made on the January 2 of the immediately
following calendar year (or earlier if required by law), (c) payments of money
shall be made in lieu of the vesting of employer contributions to such
executives' accounts in the EWR 401(k) plan and (d) the definition of "change
in control" in the Change in Control Agreements shall be amended to refer only
to the Merger of EWR into EQR and not to any future transactions involving EQR,
(v) an amendment to the Change in Control Agreement between EWR and a certain
officer which provides that, (a) a payment of money shall be made in lieu of
the vesting of employer contributions to such executive's account in the EWR
401(k) plan, (b) the definition of "change in control" in the Change in Control
Agreement shall be amended to refer only to the Merger of EWR into EQR and not
to any future transactions involving EQR and (c) the officer's new position
with EQR will not trigger payments under his Change in Control Agreement and
(vi) EQR's agreement that all restricted share grants of EWR Common previously
made by EWR shall become vested and will participate in the Merger on the same
basis as all other shares of EWR Common.
Certain directors, executive officers and employees of EWR who hold options
to purchase shares of EWR Common will agree not to exercise such options in
exchange for a cash payment equal to the difference between (i) the Exchange
Ratio multiplied by the closing price of a share of EQR Common on the New York
Stock Exchange ("NYSE") on the Closing Date (the "Closing Price") and (ii) the
applicable exercise price of the option, multiplied by the number of shares of
EWR Common subject to the option. After the Effective Date, all employees of
EWR who become employees of EQR and receive a cash payment in exchange for
agreeing not to exercise outstanding options to purchase EWR Common will
receive a nonqualified option to purchase a number of shares of EQR Common
equal to the number of shares of EWR Common subject to each employee's
respective EWR options which they agreed not to exercise for cash multiplied by
the Exchange Ratio. Each such option to purchase shares of EQR Common shall
vest in three equal annual installments, with an exercise price per share equal
to the Closing Price. See "Interests of Certain Persons."
In addition, pursuant to the terms of the Merger Agreement, EQR has agreed to
pay the 1997 bonuses to certain employees of EWR under the existing bonus plan
of EWR on the date such bonus would have been paid by EWR had the Merger not
occurred; provided, however, that EQR shall have no obligation to pay such
bonus to (i) any person who voluntarily terminated his or her employment with
EWR prior to the effectiveness of the Merger or (ii) any person who received
payment of a pro rata bonus under the terms and conditions set forth under any
of the Change in Control Agreements described above.
EQR will indemnify each director and officer of EWR for all actions taken by
such person on or prior to the Effective Time to the same extent such
individuals were indemnified by EWR prior to the Effective Time, and expects to
obtain "tail insurance" providing for the extension of the directors and
officers liability insurance currently maintained by EWR for a period of six
years after the Closing Date.
THE CONSENT SOLICITATION
The limited partners of EWRLP are being asked to consent to the following
proposals (the "Proposals"):
. Following the effectiveness of the Merger, the contribution of all the
assets of EWRLP to ERP in exchange for a number of ERP Units equal to the
number of EWRLP Units then outstanding multiplied by the Exchange Ratio,
pursuant to the Asset Contribution Agreement.
. The amendment to the EWRLP Partnership Agreement to (i) allow EQR and ERP
to serve as co-general partners of EWRLP upon the effectiveness of the
Merger, (ii) subsequent to the Asset Contribution, permit EQR and ERP, as
co-general partners of EWRLP, to dissolve EWRLP upon the terms set forth
in the Asset Contribution Agreement and (iii) make additional amendments
to permit the Transactions to be effected without the further approval of
the limited partners of EWRLP.
9
<PAGE>
. Following the effectiveness of the Asset Contribution, the dissolution of
EWRLP on the terms and conditions set forth herein.
Only limited partners of record of EWRLP will be entitled to consent to the
Proposals. As of August 27, 1997, EWRLP had 47 limited partners holding an
aggregate of 24,923,586 EWRLP Units.
As of August 27, 1997, EWR, as a limited partner of EWRLP, owned 20,372,163
EWRLP Units. Under the EWRLP Partnership Agreement, EWR is permitted to consent
to the Proposals in the same manner as all other EWRLP Unitholders, and,
although EWR has not entered into any binding agreements in this regard, EWR
currently contemplates consenting to the Proposals. In addition, F. Keith
Withycombe and Stephen O. Evans, affiliates of EWR, and two affiliates of
Messrs. Withycombe and Evans, own a total of 3,309,762 EWRLP Units, and have
entered into a binding agreement with EQR to consent to the Proposals.
Therefore, withholding consent to the Proposals will have no effect.
Approval of each Proposal requires the consent of a majority in interest of
the EWRLP Unitholders. Therefore, withholding consent to the Proposals will
have no effect.
For additional information with respect to the consent solicitations, see
"Consent Solicitation Information."
EFFECTIVE TIME OF THE TRANSACTIONS
The Unit Exchange Offer. The contribution of EWRLP Units of the EWRLP
Unitholders who accept the Unit Exchange Offer prior to the effectiveness of
the Merger will be consummated as soon as practicable after the effectiveness
of the Merger. The Unit Exchange Offer will remain open to EWRLP Unitholders
until the consummation of the Asset Contribution.
The Merger. The closing ("Closing") of the Merger will take place at 10:00
a.m. on the date to be specified by EQR and EWR, 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 EWR 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 become
effective on or about December , 1997.
The Asset Contribution. The Asset Contribution will occur upon ERP giving
notice to EWRLP at any time following the first to occur of (i) the date twelve
months after the consummation of the Merger, (ii) the date on which EQR
receives an opinion of a nationally recognized tax counsel satisfactory to it
or a ruling from the Internal Revenue Service that the Asset Contribution may
be effected without adversely affecting the qualification of the Merger as a
tax-free reorganization within the meaning of Section 368 of the Internal
Revenue Code of 1986, as amended (the "Code"), or (iii) the date on which
regulations are promulgated by the Department of the Treasury which, in the
opinion of a nationally recognized tax counsel satisfactory to EQR, would
permit the Asset Contribution to occur without adversely affecting the
qualification of the Merger as a tax-free reorganization within the meaning of
Section 368 of the Code. If ERP fails to give such notice by December 31, 1999,
the Asset Contribution Agreement shall terminate and EWRLP shall have no
further obligations thereunder.
CONDITIONS TO THE TRANSACTIONS
Unit Exchange Offer. As to each limited partner of EWRLP who chooses to
participate in the Unit Exchange Offer, such offer is conditioned upon (i) the
effectiveness of the Merger, (ii) ERP's receipt of a completed Unit
Contribution Agreement, in the form attached hereto as Appendix D, from each
such limited partner and (iii) the surrender of such limited partner's
certificates representing EWRLP Units to ERP in accordance with the Unit
Contribution Agreement. The Unit Exchange Offer shall remain open to limited
partners of EWRLP until the consummation of the Asset Contribution.
Merger. The obligations of EQR and EWR to consummate the Merger are subject
to the satisfaction or waiver of certain conditions, including, among others,
(i) obtaining the requisite approval of the holders of EQR Common and EWR
Common, (ii) the absence of any material adverse change in the financial
condition, business or operations of EWR 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 and (v) the execution of
certain agreements between each of EWR and EQR and their respective affiliates.
Each of EQR and EWR have the right to waive any conditions to its obligations
to consummate the Merger. See "The Transactions--Conditions of the Merger."
10
<PAGE>
Asset Contribution. The consummation of the Asset Contribution is conditioned
on (i) receiving the requisite consent of the limited partners of EWRLP, (ii)
the effectiveness of the Merger and (iii) EWRLP's receipt of notice by December
31, 1999 from ERP that ERP desires to effectuate the Asset Contribution.
APPRAISAL RIGHTS
Limited partners of EWRLP are not entitled to dissenters' appraisal rights
under Delaware law or the EWRLP Partnership Agreement in connection with the
Asset Contribution or the EWRLP Amendment.
Limited partners of ERP are not entitled to dissenters' appraisal rights
under Illinois law or the ERP Partnership Agreement in connection with the ERP
Amendment.
FEDERAL INCOME TAX CONSIDERATIONS
As described more fully in "Federal Income Tax Considerations" below, in
general, no gain or loss will be recognized by EWRLP or the EWRLP Unitholders
in connection with the Unit Exchange Offer, Asset Contribution or Distribution.
See "Federal Income Tax Considerations--Tax Consequences of Asset Contribution
and Distribution" and "Unit Exchange Offer." However, because of the particular
tax attributes of partners of EWRLP, and the effect of the Transactions on the
amount of liabilities of ERP that will be allocated to the former EWRLP
Unitholders after the Transactions are consummated, the Unit Exchange Offer,
Asset Contribution and Distribution may have differing tax implications for
EWRLP Unitholders. Thus, EWRLP Unitholders should consult with their own tax
advisors to determine the tax consequences of the Unit Exchange Offer, the
Asset Contribution, the Distribution and the subsequent ownership of ERP Units
or EQR Common in light of their particular circumstances.
TERMINATION
The Merger Agreement provides that it may be terminated under 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 EWR.
See "The Transactions--Termination Provisions." If the Merger Agreement is
terminated for any reason, the Asset Contribution Agreement, Unit Contribution
Agreement and Unit Exchange Offer also terminate.
TERMINATION FEES
Depending on the reason for the termination of the Merger Agreement, EWR may
be required to pay EQR the Break-Up Fee and/or Break-Up Expenses, or EQR may be
required to pay EWR the Break-Up Expenses. Payment of such fees by EWR could
adversely effect EWR's ability to engage in other transactions should the
Transactions not take place. See "The Transactions--Termination Fees and
Expenses."
ANTICIPATED ACCOUNTING TREATMENT
The Transactions will be treated as a purchase in accordance with Accounting
Principles Board Opinion No. 16.
EXCHANGE OF UNITS
Pursuant to the Unit Exchange Offer, holders of EWRLP Units may contribute
such units to ERP in exchange for a number of ERP Units equal to the number of
EWRLP Units contributed multiplied by the Exchange Ratio. Each EWRLP Unitholder
who chooses to participate in the Unit Exchange Offer must execute a Unit
Contribution Agreement, in the form attached hereto as Appendix D. EWRLP
Unitholders who execute Unit Contribution Agreements prior to the effectiveness
of the Merger (i) will transfer their EWRLP Units to ERP in accordance with the
Unit Contribution Agreement and (ii) become ERP Unitholders and hold a number
of ERP Units equal to the number of EWRLP Units contributed multiplied by the
Exchange Ratio, immediately after the effectiveness of the Merger. EWRLP
Unitholders who execute Unit Contribution Agreements subsequent to the
effectiveness of the Merger shall transfer their EWRLP Units and become limited
partners of ERP effective as of the close of business on the date of ERP's
acceptance of such Unit Contribution Agreements. Limited partners of EWRLP who
choose not to contribute their EWRLP Units to ERP pursuant to the Unit Exchange
Offer will receive ERP Units upon the dissolution of EWRLP pursuant to the
Asset Contribution Agreement.
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<PAGE>
MANAGEMENT OF EQR
As general partner of ERP and, following the Merger, co-general partner (with
ERP) of EWRLP, management and control of ERP and EWRLP will be vested in EQR.
The EQR Board of Trustees will be made up of the current trustees of EQR and
Stephen O. Evans, Chairman of the Board of Directors and Chief Executive
Officer of EWR. The EQR Board of Trustees will be divided into three classes
serving staggered three-year terms.
Pursuant to the Merger, Richard G. Berry has entered into an employment
agreement, and Stephen O. Evans has entered into a consulting agreement, with
Equity Residential Properties Management Limited Partnership, an affiliate of
EQR. J. Donald Couvillion, a Vice President of EWR, will be employed as Vice
President-Development of ERP. In addition, other officers of EWR, including Mr.
Anthony V. Pusateri, a Senior Vice-President of EWR and Mr. G. Edward O'Clair,
a Senior Vice President of EWR, are expected to continue as employees of ERP,
but will not be subject to employment agreements. See "Management of EQR
Following the Transactions; Interests of Certain Persons in the Transactions."
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ERP OPERATING LIMITED PARTNERSHIP
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following tables set forth the summary unaudited pro forma combined
financial data for ERP, 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 Consent Solicitation/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 is presented as if the
Merger had occurred on June 30, 1997. The Merger has been accounted for 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 summary pro forma financial information should be read in conjunction
with, and is qualified in its entirety by, the historical financial statements
and notes thereto of ERP incorporated by reference into the Consent
Solicitation/Prospectus/ Information Statement and the historical financial
statements and notes thereto of EWRLP and the ERP unaudited pro forma financial
statements and notes thereto included elsewhere in the Consent
Solicitation/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 ERP and EWRLP would have been for the
period and dates presented. Nor does such data purport to represent the results
of future periods.
13
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
OPERATING DATA:
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
---------------- -----------------
(AMOUNTS IN THOUSANDS
EXCEPT PER UNIT DATA)
<S> <C> <C>
REVENUES
Rental Income............................... $345,664 $548,762
Fee and asset management.................... 3,340 7,906
Interest income--investment in mortgage
notes...................................... 8,011 12,819
Interest and other income................... 7,909 10,524
-------- --------
Total revenues.......................... 364,924 580,011
-------- --------
EXPENSES
Property and maintenance.................... 85,194 152,333
Real estate taxes and insurance............. 34,451 52,249
Property management......................... 13,505 20,883
Fee and asset management.................... 1,569 3,837
Depreciation................................ 79,036 125,669
Interest:
Expense incurred.......................... 65,602 104,272
Amortization of deferred financing costs.. 1,220 4,242
General and administrative.................. 6,711 10,867
-------- --------
Total expenses.......................... 287,287 474,352
-------- --------
Income before gain on disposition of
properties, extraordinary items............ 77,637 105,659
Gain on disposition of properties......... 8,885 22,402
(Loss) on early extinguishment of debt.... (1,500) --
-------- --------
Income before extraordinary items........... 85,022 128,061
Extraordinary item:
Write-off of unamortized costs on
refinanced debt.......................... -- (3,512)
-------- --------
Net income.................................. $ 85,022 $124,549
======== ========
ALLOCATION OF NET INCOME:
Redeemable Preference Interests............. -- 263
9 3/8% Series A Cumulative Redeemable
Preference Units........................... 7,172 7,172
9 1/8% Series B Cumulative Redeemable
Preference Units........................... 5,704 5,704
9 1/8% Series C Cumulative Redeemable
Preference Units........................... 5,246 5,246
8.60% Series D Cumulative Redeemable
Preference Units........................... 1,714 --
Series E Cumulative Convertible Preference
Units...................................... 615 --
9.65% Series F Cumulative Redeemable
Preference Units........................... 488 --
General Partner............................. 55,326 82,442
Limited Partners (Minority interest)........ 8,757 12,829
-------- --------
$ 64,083 $ 95,271
======== ========
Net income per weighted average OP Unit
outstanding................................ $ 0.85 $ 1.50
======== ========
Weighted average OP Units outstanding....... 75,230 63,551
======== ========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
JUNE 30,
BALANCE SHEET DATA: 1997
(at end of period) ----------
(AMOUNTS
IN
THOUSANDS)
<S> <C>
Real Estate, after accumulated depreciation.......................... $5,199,606
==========
Total assets......................................................... $5,765,302
==========
Total debt........................................................... $2,106,021
==========
Total partners' capital.............................................. $2,722,807
==========
</TABLE>
14
<PAGE>
CONSENT SOLICITATION INFORMATION
PURPOSE
The EWRLP Unitholders are being asked by EWR, in its capacity as sole general
partner of EWRLP, to consent to the Proposals. Consent to the Proposals by the
EWRLP Unitholders is required for consummation of the Transactions.
RECORD DATE; CONSENTS REQUIRED
Neither the EWRLP Partnership Agreement nor Delaware law requires the setting
of a record date for limited partners entitled to consent to the Proposals.
However, only limited partners of record of EWRLP may consent to the Proposals.
Approval of each Proposal requires the affirmative consent of the holders of
a majority of limited partnership interest in EWRLP. At August 27, 1997, EWRLP
had issued and outstanding 24,923,586 EWRLP Units. Accordingly, approval of
each Proposal requires the affirmative consent of EWRLP Unitholders holding
12,461,794 EWRLP Units.
As of August 27, 1997, EWR owned, as a EWRLP Unitholder 20,372,163 EWRLP
Units, and, although EWR has not entered into any binding agreements in this
regard, EWR currently intends to consent to the Proposals. In addition, F.
Keith Withycombe and Stephen O. Evans, both affiliates of EWR, and two
affiliates of Messrs. Withycombe and Evans, own a total of 3,309,762 EWRLP
Units, and have entered into a binding agreement with EQR to consent to the
Proposals. Therefore, withholding consent to the Proposals will have no effect.
SOLICITATION OF CONSENTS
Consents will be solicited by mail, telephone and in person. Solicitations
may be made by certain employees of EWR, none of whom will receive additional
compensation for such solicitations. EWRLP will bear its own expenses in
connection with the consent solicitation. Consents must be received prior to
the execution and delivery of the Articles to the Department (the "Consent
Period").
REVOCATION OF CONSENTS
EWRLP Unitholders may revoke consents until the expiration of the Consent
Period by dating, signing and delivering a written notice, which clearly
expresses the revocation of consent, to EWRLP, or by delivering a properly
executed, subsequently dated consent card withholding a previously granted
consent.
RISK FACTORS
In considering whether to consent to the Proposals, the EWRLP Unitholders
should consider, in addition to the other information in this Consent
Solicitation/Prospectus/Information Statement, the matters described in this
section.
CONFLICTS OF INTEREST
EWRLP Unitholders should be aware that certain officers, directors and
members of the management of EWR have certain interests that arise in
connection with the Transactions that are in addition to the interests of
limited partners generally. These interests arise under existing agreements
with, and annual compensation awards from, EWR, and agreements relating to,
among other things, (i) a consulting agreement dated August 27, 1997 between
EQR Properties Management LP and Stephen O. Evans pursuant to which Stephen O.
Evans shall provide consulting services until December 31, 1999, (ii) the
appointment of Stephen O. Evans as a Trustee of EQR and Executive Vice
President-Strategic Investments, (iii) the appointment of Richard G. Berry,
President, Chief Operating Officer and Director of EWR, to the office of
Executive Vice President-Development of EQR upon effectiveness of the Merger
pursuant to the terms of an employment agreement which shall expire on December
31, 2000, (iv) amendments to certain Change in Control Agreements between EWR
and certain of its officers, (v) the right to exercise options to purchase
shares of EWR Common which right will be forfeited in exchange for a cash
payment in lieu thereof and (vi) EQR's agreement that all restricted share
grants in EWR Common previously made by EWR shall become vested and shall
participate in the Merger on the same basis as all other
shares of EWR Common.
SIZE AND RAPID GROWTH OF EQR
EQR has experienced rapid growth since the completion of its IPO on August
18, 1993 at which time EQR held 69 multifamily properties containing 21,725
units. Upon completion of the Transactions, EQR will own and operate 398
properties, consisting of 116,079 units and EQR will be the largest publicly
traded multifamily REIT. There can be no assurances that EQR will continue to
be able to continue to maintain the growth rate which it has experienced since
1993.
15
<PAGE>
DECREASE IN DISTRIBUTIONS PER UNIT TO EWRLP UNITHOLDERS
Upon the completion of the Merger, it is expected that the distributions
payable with respect to each ERP Unit will be $2.50 per annum compared to $3.18
per annum with respect to two EWRLP Units, based upon the current distributions
per ERP Unit and EWRLP Unit declared for the four quarters ending September 30,
1997.
POTENTIAL CHANGE IN RELATIVE STOCK PRICES
In considering whether to consent to the Proposals, EWRLP Unitholders should
consider the risks associated with (i) a potential change in the relative
prices of EQR Common and EWR Common, into which ERP Units and EWRLP Units are
redeemable, respectively, prior to the effectiveness of the Merger and (ii) a
possible reduction in the market price of EQR Common following the Merger, due
to future sales of shares of EQR Common or the availability of such shares for
future sales, government regulatory action, tax laws, interest rates, the
operating performance of EQR and market conditions in general.
Sales of a substantial number of shares of EQR Common or the perception that
such sales could occur, could adversely affect prevailing market prices for
shares of EQR Common.
Neither EQR nor EWR may terminate the Merger Agreement due to a change in the
prevailing market price of EQR Common or EWR Common.
TERMINATION PAYMENTS IF MERGER FAILS TO OCCUR
The Merger Agreement provides for a Break-Up Fee payable by EWR of $14
million plus Break-Up Expenses of up to $2.5 million if the Merger Agreement is
terminated by either EQR or EWR under certain circumstances and, within one
year after such termination, EWR enters into an agreement regarding an
"Acquisition Proposal" (as defined herein), which is consummated. In addition,
if the Merger Agreement is terminated for certain reasons, EQR or EWR will be
required to pay the other party's Break-Up Expenses of up to $2.5 million. See
"The Transactions -- Termination Fee and Expenses." EWR will be required to pay
the other party's Break-Up Expenses of up to $2.5 million. See "The
Transactions -- Termination Fee and Expenses."
The obligation to pay the Break-Up Fee and/or Break-Up Expenses may adversely
affect the ability of EWR to engage in another transaction in the event the
Merger is not consummated.
POTENTIAL ADVERSE EFFECTS OF COMBINING THE COMPANIES
EQR and EWR 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 groups would not adversely affect future combined
results of operations or the benefits of expected costs savings.
ADVERSE CONSEQUENCES OF DEBT FINANCING AND PREFERRED SHARES
General Risks. As of June 30, 1997, the properties of EQR were subject to
approximately $961 million of mortgage indebtedness and EQR's total debt
equaled approximately $1.7 billion, $361.5 million of which was floating rate
debt. In addition, in June 1995, EQR issued 6,120,000 Series A Preferred Shares
pursuant to a preferred share offering; in November 1995, EQR issued 5,000,000
depository shares each representing a 1/10 fractional interest in a Series B
Preferred Share pursuant to a depository share offering; in September 1996, EQR
issued 4,600,000 depository shares each representing a 1/10 fractional interest
in a Series C Preferred Share pursuant to a depository share offering; in May
1997, EQR issued 7,000,000 depository shares each representing a 1/10
fractional interest in a Series D Preferred Share pursuant to a depository
share offering and also in May 1997, subsequent to the merger of EQR with
Wellsford Residential Property Trust ("Wellsford"), Wellsford's 3,999,800
Series A Cumulative Convertible Preferred Shares of Beneficial Interest were
redesignated as EQR's 3,999,800 Series E Preferred Shares and Wellsford's
2,300,000 Series B Cumulative Redeemable Preferred Shares of Beneficial
Interest were redesignated as EQR's 2,300,000 Series F Preferred Shares
(collectively, the "Preferred Share Offerings"). EQR used the proceeds from the
Preferred Share Offerings to repay indebtedness and to acquire additional
properties. EQR is subject to the risks normally associated with debt or
preferred equity financing, including the risk that EQR's cash flow will be
insufficient to meet required payments of principal and interest, 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
16
<PAGE>
on favorable terms or at all. If EQR were unable to refinance its indebtedness
on acceptable terms, or at all, EQR might be forced to dispose of one or more
of the properties on disadvantageous terms, which might result in losses to EQR
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, EQR's interest expense would
increase, which would affect EQR's ability to make distributions to its
shareholders. Furthermore, if a property is mortgaged to secure payment of
indebtedness and EQR is unable to meet mortgage payments, the mortgagee could
foreclose upon the property, appoint a receiver and receive an assignment of
rents and leases or pursue other remedies, all with a consequent loss of income
and asset value to EQR. Foreclosures could also create taxable income without
accompanying cash proceeds, thereby hindering EQR's ability to meet the REIT
distribution requirements of the Code.
Restrictions on EQR's Activities. A substantial portion of EQR's debt was
issued pursuant to certain indentures (the "Indentures") which restrict the
amount of indebtedness (including acquisition financing) EQR may incur.
Accordingly, in the event that EQR is unable to raise additional equity or
borrow money because of the debt restrictions in the indentures, EQR's ability
to acquire additional properties may be limited. If EQR is unable to acquire
additional properties, its ability to increase the distributions with respect
to EQR Common, as it has done in the past, will be limited to management's
ability to increase funds from operations, and thereby cash available for
distributions, from the existing properties in EQR's portfolio at such time.
Bond Compliance Requirements. EQR owns several 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 several additional
properties. EQR 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 EQR's income from certain of these properties if EQR is required to
lower its rental rates to attract low or moderate income tenants, or
eligible/qualified tenants.
CONTROL AND INFLUENCE BY SIGNIFICANT SHAREHOLDERS
As of September 11, 1997, Mr. Zell, certain current holders (the "Zell
Holders") of ERP OP Units issued at the time of the initial public offering of
shares of EQR Common (the "EQR IPO") to certain affiliates of Mr. Zell which
contributed 33 of the properties at the time of the EQR IPO (the "Zell Original
Owners"), Equity Properties Management Corp. ("EPMC") and other affiliates of
Mr. Zell owned in the aggregate approximately 5.8% of the shares of EQR Common
(assuming that all of the partnership interests in ERP OP Units are exchanged
for EQR Common), and certain entities controlled by Starwood Capital Partners
L.P. ("Starwood") and its affiliates which contributed 23 of the properties at
the time of the EQR IPO (the "Starwood Original Owners") owned in the aggregate
approximately 2.3% of EQR Common (assuming that all of the ERP OP Units are
exchanged for EQR Common). The Starwood Original Owners, together with the Zell
Original Owners, shall be referred to collectively as the "Original Owners." As
of September 11, 1997, EQR had options outstanding to purchase approximately
3.8 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 4.5% of
the shares of EQR Common (assuming that all such options are exercised for
shares of EQR Common and all of the outstanding ERP OP Units 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 the ERP OP's Fourth Amended and Restated ERP Operating Limited Partnership
Agreement of Limited Partnership (the "Partnership Agreement"). Accordingly,
Mr. Zell and the Starwood Original Owners may continue to have substantial
influence over EQR, which influence might not be consistent with the interests
of other shareholders, and on the outcome of any matters submitted to EQR'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 EQR if they were to act together in the future.
POTENTIAL ENVIRONMENTAL LIABILITY
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
17
<PAGE>
with the ownership (direct or indirect), operation, management and development
of real properties, EQR or EWR may consider 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 the properties of EQR and EWR have been the subject of a Phase I and,
in certain cases, a supplemental environmental assessment completed by
qualified independent environmental consultant companies. The most recent
environmental assessments for each of such properties were conducted within the
last five years. Environmental assessments were obtained prior to the
acquisition by EQR and EWR of their respective properties. These environmental
assessments have not revealed, nor is EQR or EWR aware of, any environmental
liability that EQR's or EWR's management believes would have a material adverse
effect on EQR's or EWR's business, results of operations, financial condition
or liquidity.
No assurance can be given that existing environmental assessments with
respect to any of EQR's or EWR's properties reveal all environmental
liabilities, that any prior owner of a property did not create any material
environmental condition not known to EQR or EWR, or that a material
environmental condition does not otherwise exist as to any one or more
properties.
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 EQR'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 to tenants, zoning or other
regulatory restrictions, the ability of EQR to provide adequate maintenance and
insurance, and increased operating costs (including insurance premiums and real
estate taxes). EQR's income would also be adversely affected if tenants were
unable to pay rent or EQR were unable to rent apartment units on favorable
terms. If EQR 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 EQR'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 EQR 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 EQR'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 EQR's
funds from operations and its ability to make distributions to shareholders.
OWNERSHIP LIMIT AND LIMITS ON CHANGES IN CONTROL
5% 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 EQR may be owned,
directly or indirectly, by five or fewer individuals (as defined in the Code to
include certain entities). Certain beneficial owners of the Zell Holders and
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")), of the
Starwood Original Owners and Mr. Henry H. Goldberg, a trustee of EQR (through
their potential ownership of EQR Common) together constitute five individuals
for purposes of this test, and under the Code, will be deemed to own
approximately 6.2% of the value of the outstanding shares of beneficial
interest of EQR upon exchange of all of their ERP Units. Due to such potential
concentration of ownership of EQR, ownership of more than 5% of the lesser of
the number or value of the outstanding shares of beneficial interest of EQR by
any single shareholder has been restricted, with certain exceptions, for the
purpose of maintaining EQR's qualification as a REIT under the Code. Such
restrictions in EQR's Declaration of Trust do not apply to the ownership of the
5,541,331 shares of EQR Common subject to acquisition by the holders of ERP OP
Units and EPMC through the exchange of Original ERP Units. Additionally, EQR's
Declaration of Trust allows certain transfers of such shares of EQR Common
without the transferees being subject to the 5% ownership limit, provided such
transfers do not result in an increased concentration in the ownership of EQR.
EQR's Board of Trustees, upon receipt of a ruling from 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.
18
<PAGE>
The 5% ownership limit, as well as the ability of EQR to issue additional
shares of EQR Common or other shares of beneficial interest (which may have
rights and preferences senior to shares of EQR Common), may discourage a change
of control of EQR and may also (i) deter tender offers for shares of EQR
Common, which offers may be advantageous to shareholders, and (ii) limit the
opportunity for shareholders to receive a premium for their shares of EQR
Common that might otherwise exist if an investor were attempting to assemble a
block of shares of EQR Common in excess of 5% of the outstanding shares of
beneficial interest of EQR or otherwise effect a change of control of EQR.
Possible Adverse Consequences of Ownership Limit. To maintain its
qualification as a REIT for federal income tax purposes, not more than 50% in
value of the outstanding shares of beneficial interest of EQR may be owned,
directly or indirectly, by five or fewer individuals (as defined in the Code,
to include certain entities). See "Federal Income Tax Considerations--Share
Ownership Test." Certain beneficial owners of the Zell Holders (i.e.,
beneficiaries of trusts established for benefit of Mr. Zell and his family and
the family of Mr. Robert Lurie, a deceased partner of Mr. Zell) and EPMC,
together with the Starwood Original Owners and Mr. Goldberg (through their
potential ownership of EQR Common) together constitute five individuals for
purposes of this test, and under the Code, will be deemed to own approximately
6.2% of the value of the outstanding shares of beneficial interest of EQR upon
exchange of all of their ERP Units for EQR Common. To facilitate maintenance of
its qualification as a REIT for federal income tax purposes, EQR generally will
prohibit ownership, directly or by virtue of the attribution provisions of the
Code, by any single shareholder of more than 5% of the issued and outstanding
shares of EQR Common and generally will prohibit ownership, directly or by
virtue of the attribution provisions of the Code, by any single shareholder of
more than 5% of the issued and outstanding shares of any class or series of EQR
Preferred Shares (collectively, the "Ownership Limit"). The Board of Trustees
may, in its reasonable discretion, waive or modify the Ownership Limit with
respect to one or more persons who would not be treated as "individuals" for
purposes of the Code if it is satisfied, based upon information required to be
provided by the party seeking the waiver, that ownership in excess of this
limit will not cause a person who is an individual to be treated as owning EQR
Common or EQR Preferred in excess of the Ownership Limit, applying the
applicable constructive ownership rules, and will not otherwise jeopardize
EQR's status as a REIT for federal income tax purposes. EQR's Declaration of
Trust also exempts from the Ownership Limit certain of the beneficial owners of
the Original Owners and EPMC, who would exceed the Ownership Limit as a result
of the exchange of the ERP OP Units for shares of EQR Common, which ERP OP
Units were received by them at the time of the formation of EQR. Absent any
such exemption or waiver, EQR Common or EQR Preferred acquired or held in
violation of the Ownership Limit will be transferred to a trust for the benefit
of a designated charitable beneficiary, with the person who acquired such EQR
Common and/or EQR Preferred in violation of the Ownership Limit not entitled to
receive any distributions thereon, to vote such EQR Common or EQR Preferred, or
to receive any proceeds from the subsequent sale thereof in excess of the
lesser of the price paid therefore or the amount realized from such sale. A
transfer of EQR Common and/or EQR Preferred to a person who, as a result of the
transfer, violates the Ownership Limit may be void under certain circumstances.
See "Description of Shares of Beneficial Interest--Restrictions on Ownership
and Transfer." The Ownership Limit may have the effect of delaying, deferring
or preventing a change in control and, therefore, could adversely affect the
shareholder's ability to realize a premium over the then-prevailing market
price for EQR Common in connection with such transaction.
Staggered Board. The Board of Trustees of EQR has been divided into three
classes of trustees. 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 EQR even if a change in control were
in the shareholders' interest.
Preferred Shares. EQR's Declaration of Trust authorizes the Board of Trustees
to issue up to 100,000,000 preferred shares of beneficial interest, $.01 par
value per share ("EQR Preferred"), and to establish the preferences and rights
(including the right to vote and the right to convert into EQR Common) of any
EQR Preferred issued. The power to issue EQR Preferred could have the effect of
delaying or preventing a change in control of EQR even if a change in control
were in the shareholders' interest. As of September 11, 1997, 14,079,800 shares
of EQR Preferred were issued and outstanding.
CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
Taxation as a Corporation. EQR believes that it has qualified and will
continue to qualify as a REIT under the Code, commencing with its taxable year
ended December 31, 1993. However, no assurance can be given that EQR was
organized and has been operated and will be able to operate in a manner so as
to qualify or remain so qualified. Qualification 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
EQR's control.
19
<PAGE>
If EQR were to fail to qualify as a REIT in any taxable year, EQR 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, EQR 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 EQR
available for investment or distribution to shareholders because of the
additional tax liability to EQR 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 EQR qualifies as a REIT, it will be subject to
certain federal, state and local taxes on its income and property. See "Federal
Income Tax Considerations--Other Tax Considerations--State and Local Taxes." In
addition, EQR's management operations, which are conducted through EQR
Properties Management LP and Equity Residential Properties Management Limited
Partnership II (collectively, the "EQR Properties Management Partnerships")
generally will be subject to federal income tax at regular corporate rates. See
"Federal Income Tax Considerations--Tax Aspects of Investment in EQR--Other Tax
Considerations."
Consequences of Failure to Qualify as Partnerships. EQR believes that the ERP
Operating Partnership, the EQR Properties Management Partnerships and each of
the other partnership and limited liability company subsidiaries have been
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, EQR 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 "Federal Income Tax Considerations--Entity
Classification--Classification of ERP and Subsidiary Partnerships."
Each of EQR and EWR believes it has operated in a manner so as to qualify as
a REIT under the Code for all taxable years ended on or before December 31,
1996 and for the period beginning January 1, 1997 and ending on the date
hereof.
DEPENDENCE ON KEY PERSONNEL
EQR is dependent on the efforts of its executive officers. While EQR 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 EQR. Except
for Stephen O. Evans and Richard G. Berry, who will be employed by EQR upon the
effectiveness of the Merger, none of these officers has entered or will enter
into employment or consulting agreements with EQR.
LIMITED CONTROL OVER BUSINESS OF ERP AND EWRLP
All decisions regarding the business and operations of EWRLP following the
Merger and ERP ("the Partnerships") will be made by EQR, which continue to will
serve as general partner of ERP and, until EWRLP's dissolution pursuant to the
Asset Contribution Agreement, will serve as co-general partner (with ERP) of
EWRLP.
The limited partners of the Partnerships will have little or no control over
actions of EQR as general partner, and may not take part in the operation,
management or control of the business of the Partnerships. The limited partners
of the Partnerships have no rights with respect to the election of the Board of
Trustees of EQR.
LOSS OF LIMITED LIABILITY
Any participation in the management of the Partnerships may subject a limited
partner to the loss of limited liability by the limited partner with respect to
the obligations of the Partnerships. The loss of such limited liability may
subject the limited partner to obligations that exceed the investment of such
limited partner in the Partnerships as represented by such limited partner's
partnership units.
RELIANCE ON GENERAL PARTNER TO DECLARE DISTRIBUTIONS
Under the partnership agreements of the Partnerships, amounts of the
distributions paid to the limited partners are and will be within the
discretion of EQR, as general partner of ERP, and EQR and ERP as co-general
partners of EWRLP. If EQR, as general partner of ERP, and EQR and ERP as co-
general partners of EWRLP, determine to reduce or otherwise limit the amount of
such distributions by the Partnerships, the limited partners may not receive
anticipated distributions, which may adversely affect the financial planning of
such limited partners.
INABILITY TO REMOVE GENERAL PARTNER
Under the ERP Partnership Agreement, the limited partners of ERP may not
remove EQR as general partner, and under the EWRLP Partnership Agreement, the
limited partners of EWRLP will be unable to remove EQR and ERP as co-general
partners. The inability to remove EQR and ERP from such positions may not
necessarily be in the limited partners' interest because the general partner(s)
may pursue policies or actions that the limited partners believe are adverse to
their interests.
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RISKS OF OWNERSHIP OF ERP UNITS
Restrictions on Transfer of Units. The ERP Partnership Agreement provides for
certain restrictions on a limited partner's ability to transfer his or her ERP
Units. Subject to certain exceptions, a limited partner may not transfer all or
any portion of his or her ERP Units without obtaining the prior written consent
of the general partner, which consent may be withheld in the sole and absolute
discretion of the general partner, and meeting certain other requirements set
forth in the ERP Partnership Agreement. Notwithstanding this general
prohibition, a limited partner of ERP may transfer his, her or its ERP Units by
(i) operation of law, testamentary disposition, gift (outright or in trust) or
by sale in each case to or for the benefit of his or her parent(s), spouse or
descendants, (ii) pledges or other collateral transfers effected by a limited
partner to secure the repayment of a loan or other obligation, provided,
however, that each such pledgee will agree in writing, concurrent with such
pledge or other collateral transfer, to (y) subordinate his, her or its rights
with respect to the pledged interest to any and all rights granted by the
pledging limited partner to ERP and (z) to defer the exercise of its rights as
a secured creditor to realize upon the collateral in the case of an event of
default until the expiration of any applicable "lock-up" period under the terms
of any agreement between ERP and the pledging limited partner, (iii) the
exchange of ERP Units for shares of EQR Common, and (iv) the distribution of
ERP Units or Preference Units to any of its direct or indirect constituent
partners or owners. A "transfer" does not include the conversion of a
Preference Unit (as defined herein) into one or more ERP Units nor the
conversion of a ERP Unit into a share of EQR Common. While these restrictions
may limit a limited partner's ability to liquidate his, her or its investment
in ERP Units quickly, the ERP Units are redeemable into shares of EQR Common,
for which there is an active market.
No Public Market. There is no public market for ERP Units. However, the ERP
Partnership Agreement provides that limited partners may, subject to certain
limitations, redeem their ERP Units for (i) shares of EQR Common on a one-for-
one basis or (ii) cash equal to the fair market value of the shares of EQR
Common into which such ERP Units would otherwise have been converted. The
determination of whether the redeeming party receives cash or shares of EQR
Common is within the sole discretion of the general partner.
ISSUANCE OF PREFERRED UNITS
The ERP Partnership Agreement provides that the general partner may, in its
sole discretion, issue additional units of partnership interest with rights and
preferences that may be senior to those of ERP Units. Such preferred units are
available for issuance without further action by the limited partners of ERP.
To the extent preferred units are issued, the holders of ERP Units may be
adversely affected because the holders of such additional units may have a
priority on distributions with respect to ERP Units or priority upon the
liquidation of the assets of ERP. The rights and preferences associated with
such additional units may also prevent distributions to the holders of ERP
Units until the obligations of ERP with respect to such additional units are
satisfied. As of August 15, 1997, ERP had 14,079,800 preferred units
outstanding.
NO DISSENTERS' RIGHTS
Limited partners of EWRLP are not entitled to dissenters' appraisal rights
under Delaware law or the EWRLP Partnership Agreement in connection with the
Transactions. Limited partners of ERP are not entitled to dissenters' appraisal
rights under Illinois law or the ERP Partnership Agreement in connection with
the ERP Amendment.
DISTRIBUTION REQUIREMENTS POTENTIALLY INCREASING INDEBTEDNESS OF EQR
EQR 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 EQR of principal on debt, EQR could have
taxable income without sufficient cash to enable EQR to meet the distribution
requirements of a REIT. Accordingly, EQR could be required to borrow funds or
liquidate investments on adverse terms in order to meet such distribution
requirements. See "Federal Income Tax Considerations--Distributions from EQR."
EXEMPTIONS FOR MR. ZELL AND OTHERS FROM MARYLAND BUSINESS COMBINATION LAW WHICH
TEND TO INHIBIT TAKEOVERS
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
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combination must be recommended by the board of trustees of such trust and
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 EQR Common 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 EQR Common. As
permitted by the MGCL, EQR has exempted any business combination involving Mr.
Zell, the Zell Original Owners, 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 EQR. As a result, Mr. Zell, the
Zell Original Owners, 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 EQR,
which may not be in the best interest of the shareholders, without compliance
by EQR with the super-majority vote requirements and other provisions of the
MGCL.
THE TRANSACTIONS
TERMS OF THE TRANSACTIONS
The Unit Exchange Offer. Holders of EWRLP Units are hereby offered the
opportunity to contribute, effective immediately following the Merger, their
EWRLP Units to ERP in exchange for a number of ERP Units equal to the number
of EWRLP Units so exchanged multiplied by the Exchange Ratio. The Unit
Exchange Offer will remain open to holders of EWRLP Units until the
effectiveness of the Asset Contribution.
The Merger. Pursuant to the Merger Agreement and upon the terms and
conditions set forth therein, EWR will merge into EQR. The Asset Contribution
and Unit Exchange Offer are proposed in connection with the Merger as a method
for EQR to complete the acquisition of EWR. The EQR Board of Trustees and EWR
Board of Directors have each approved the Transactions as set forth in the
Merger Agreement. Upon the consummation of the Merger, each outstanding share
of EWR Common will be converted into 0.5 share of EQR Common. Upon the
effectiveness of the Merger, approximately 2.3% of EQR Common will be
beneficially owned by affiliates of the EQR (assuming that no outstanding
options for shares of EQR Common are exercised and no ERP Units are exchanged
for shares of EQR Common).
The Asset Contribution. Pursuant to, and subject to the terms and conditions
of the Asset Contribution Agreement, EWRLP has agreed, subsequent to the
effectiveness of the Merger and at the option of ERP, to contribute all of
EWRLP's assets (the "Asset Contribution") to ERP in exchange for a number of
ERP Units equal to the number of EWRLP Units then outstanding multiplied by
the Exchange Ratio. Following the Asset Contribution, EWRLP will distribute
such ERP Units to the remaining EWRLP Unitholders (i.e., those holders who did
not previously exchange their EWRLP Units pursuant to the Unit Exchange Offer)
(the "Distribution"). As a result of the Distribution, holders of EWRLP Units
will receive a number of ERP Units equal to the number of EWRLP Units held by
such holder, multiplied by the Exchange Ratio. Unless certain conditions are
met, the Asset Contribution will not take place for at least one year
following the effectiveness of the Merger. EQR reserves the right to not
consummate the Asset Contribution or to change the terms thereof if,
subsequent to the Unit Exchange Offer EQR and ERP are the only limited
partners of EWRLP. See "The Transactions--Terms of the Asset Contribution."
Although the Asset Contribution Agreement is subject to approval by the
limited partners of EWRLP, the Asset Contribution Agreement has already been
approved by EWR, which holds a majority of outstanding EWRLP Units. Therefore,
Holders of EWRLP Units can either (i) exchange their EWRLP Units for ERP Units
pursuant to the Unit Exchange Offer or (ii) retain their EWRLP Units and
receive ERP Units pursuant to the Asset Contribution Agreement. Regardless of
whether holders of EWRLP Units receive ERP Units pursuant to the Unit Exchange
Offer or Asset Contribution Agreement, each such holder will receive an amount
of ERP Units equal to the number of EWRLP Units held by such holder multiplied
by the Exchange Ratio.
BACKGROUND OF THE TRANSACTIONS
Since 1993, Douglas Crocker, the President and Chief Executive Officer of
EQR and Stephen O. Evans, the Chief Executive Officer of EWR, have had a
personal relationship arising out of their participation in the multifamily
property business. Since 1994, Mr. Crocker and Mr. Evans have discussed the
general status of the multifamily property industry. Messrs. Crocker and Evans
each 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.
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On April 16, 1997, Mr. Evans met with Samuel Zell, Chairman of EQR, Mr.
Crocker and Gerald Spector, EQR's Chief Operating Officer, to discuss
preliminarily the possibility of a business combination.
On May 6, 1997, at a regular quarterly meeting of the EWR Board of Directors,
Mr. Evans reported to the directors of EWR on multifamily industry
consolidation trends.
Pursuant to an engagement letter dated May 7, 1997, EWR retained Morgan
Stanley to assist it in a review of strategic alternatives.
On June 10, 1997, at a meeting of the EWR's Board of Directors, Morgan
Stanley presented a review of potential strategic alternatives available to
EWR.
Through early July 1997, Mr. Evans had conversations with members of the EWR
Board of Directors to review the possibility of approaching EQR to assess EQR's
preliminary interest in pursuing a business combination with EWR on mutually
acceptable terms.
On July 7, 1997, Messrs. Crocker and Spector and David J. Neithercut, Chief
Financial Officer of EQR, met with Mr. Evans specifically to discuss each
company's interest in pursuing merger discussions. During such meeting, Mr.
Crocker and Mr. Evans considered whether a merger would be in the best
interests of both companies and their respective shareholders. Among the issues
considered were whether a merger would combine the talents of their respective
companies, reduce corporate overhead by eliminating redundancies, create a
larger company which might be attractive to institutional investors and
increase access to public equity and debt markets and provide EQR with access
to proven development expertise. Concluding that a merger might be in the best
interests of both companies and their shareholders, Mr. Crocker and Mr. Evans
decided to pursue merger discussions.
Subsequent to the meeting on July 7, 1997, Mr. Evans updated the EWR Board of
Directors regarding his discussions with EQR. Members of the EWR Board of
Directors encouraged Mr. Evans to continue these discussions.
On July 24, 1997, Mr. Evans contacted Mr. Crocker and indicated a willingness
to commence substantive discussions of a business combination, such discussions
to occur pursuant to a confidentiality agreement with a 30-day exclusivity
provision. A Confidentiality and Exclusivity Agreement was executed on July 25,
1997.
On July 31 and August 1, 1997, Mr. Crocker, Mr. Evans, Paul Fannin, Chief
Financial Officer of EWR, Bruce C. Strohm, Executive Vice President, Secretary
and General Counsel of EQR, Mr. Neithercut, David Lee, Senior Vice President--
Capital Markets of EQR and representatives of Morgan Stanley and legal
representatives of both EQR and EWR met at Morgan Stanley's offices in New York
to discuss the structure of a possible merger transaction, and the possible
pricing matrix for the EWR Common and EWR LP Units. General terms were
discussed. The tentative exchange ratio was determined by establishing relative
values for the EQR Common and EWR Common. The value for EQR Common was based on
its then market value of $51.25 per share. No one specific valuation method was
utilized in connection with the determination of the value of the EWR Common.
The value for EWR Common was negotiated based upon, among other things, (a) its
then market price of $21.125 per share and each party's evaluation of the value
of EWR's assets to be acquired in the merger, which were estimated at
approximately $1.1 million, (b) 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 $80.1 million, $82.7 million and $53.9 million,
respectively, and (c) the cost of savings anticipated from the Merger which
were estimated at $1.1 million per year and the costs associated with the
Merger, which, including employee severance and retention costs, which were
estimated at $17.2 million. It was tentatively agreed, subject to satisfactory
resolution of the material issues and completion of due diligence, that the
exchange ratio would be determined based upon a value of $26.00 per share for
the EWR Common and EWRLP Units and $52.00 per share for the EQR Common, subject
to adjustment in the event of a decline in the market price of EQR Common.
Although discussions were still ongoing, EQR and EWR 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.
Reciprocal due diligence commenced on August 4, 1997 and was completed the
week of August 25, 1997.
From August 4, 1997 through August 20, 1997, the management of EQR and EWR
and each company's respective counsel had numerous discussions regarding
various business and legal issues. At a regular meeting of the EWR Board of
Directors on August 6, 1997, the Merger was discussed and the directors of EWR
were advised of the status of the negotiations.
On August 21, 1997, Mr. Crocker, Mr. Neithercut, Mr. Strohm and Fred Tuomi,
Executive Vice President of EQR, met with Mr. Evans, Richard Berry, President
and Chief Operating Officer of EWR, and Tony Pusateri, Senior Vice President--
Operations of EWR, at EQR's corporate offices. The parties discussed the
structure of the transaction, the current operations of the companies,
potential synergies expected by management to result from the proposed
transaction, the structure of existing and future development transactions,
certain governance, tax and employee transition matters and the time table for
completion of the transaction.
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On August 22, 1997, Messrs. Crocker and Evans discussed by telephone certain
open issues in connection with the Merger, including the employment
arrangements with certain key employees of EWR after the completion of the
proposed merger.
On August 22, 1997, a special EQR board meeting of the EQR Board of Trustees
was held at which members of management and representatives of EQR's financial
and legal advisors were present in person or by conference telephone call. At
such meeting, the EQR Board of Trustees were informed of the status of
discussions with EWR's management and the reasons that a combination with EWR
would be beneficial to EQR. In addition, the trustees discussed with management
and EQR's legal advisors the current operations of EQR and EWR, 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 Financial Advisor--EQR"), 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 EWR.
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 EWR and set forth in detail the reasons he believed a possible
business combination with EWR would be appropriate for EQR. The reasons
discussed included (i) the resulting size of the combined entity as compared to
other REITs, (ii) the combined market capitalization would increase to
approximately $7.6 billion and would not significantly alter EQR's existing
Debt to Total Market Capitalization Ratios, (iii) the merger would improve
access to the public debt and equity markets to support EQR's continued growth
and (iv) the merger would allow EQR access to proven development expertise.
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 its fiduciary obligations.
A discussion among the EQR Board of Trustees followed concerning the
advantages and disadvantages of the proposed Merger, including the factors
raised by Mr. Crocker. The principal negative factors considered by the EQR
Board of Trustees were the significant cost 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 EWR. The EQR
Board of Trustees did not find the negative factors sufficient to outweigh
advantages of the merger, particularly in light of the expected lower payout
ratio that EQR would have following the merger based upon funds from operations
and the similar expected Debt to Total Market Capitalization Ratio that EQR
would have following the merger as compared with EQR's current ratios.
From August 23, 1997 through August 27, 1997, representatives of management
of EQR and EWR and their respective counsel discussed and resolved the
remaining open business and legal issues.
On August 27, 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 EQR. 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 (a) an outline of J.P. Morgan's
fairness opinion process, (b) a pro forma merger analysis, (c) a fully loaded
share price analysis, (d) a public trading multiples analysis, (e) a selected
transactions analysis, (f) a share trading history analysis, (g) an historical
exchange ratio analysis and (h) a net asset value analysis.
Following J.P. Morgan's presentation, 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 the 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 August 27, 1997.
On August 27, 1997, the EWR Board of Directors held a special meeting at
which members of management, representatives of Morgan Stanley and legal
counsel were present. At the meeting, the EWR Board of Directors was updated on
the status of discussions with EQR regarding the potential merger transaction
between EWR and EQR. Mr. Evans and Morgan Stanley reviewed with the EWR Board
of Directors (i) the background of the proposed Merger, (ii) the status of
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EWR's financial and business plans with and without the proposed Merger, (iii)
due diligence findings with respect to EQR and (iv) the potential benefits as
well as the risks of the proposed Merger transaction as described below under
"Reasons for the Transactions; Recommendation of the EWR Board of Directors."
EWR's legal counsel made a presentation to the EWR Board of Directors in
which it explained the material terms of the proposed Merger, briefed the EWR
Board of Directors on certain legal issues raised by the proposed Merger
transaction and advised the EWR Board of Directors of its fiduciary duties in
connection with such transaction.
Morgan Stanley presented its financial analysis of the merger transaction.
Morgan Stanley concluded its presentation by orally advising the EWR Board of
Directors that as of that date and subject to the assumptions made, factors
considered and limits on the review, the consideration to be received by the
holders of EWR Common, pursuant to the Merger, was fair, from a financial point
of view, to such shareholders.
Following such presentations, and after extensive discussion of the
advantages and disadvantages of the proposed Merger transaction as described
under "Reasons for the Transactions; Recommendations of the EWR Board of
Directors," the Board of Directors of EWR concluded that the advantages of the
Merger outweighed the potential risks, and unanimously approved the Merger, the
Merger Agreement and all transactions contemplated thereby.
EQR and EWR did not believe that the Merger would have a material adverse
effect on the results of operations, liquidity or capital resources of EQR and
believed that the advantages of such transactions outweighed the disadvantages.
The Merger Agreement was executed on August 27, 1997.
REASONS FOR THE TRANSACTIONS; RECOMMENDATION OF THE EQR BOARD OF TRUSTEES
The Board of Trustees of EQR, the sole general partner of ERP, believes that
the Transactions, including the consideration, are fair to and in the best
interests of EQR, ERP and their respective Shareholders and Unitholders.
Accordingly, the EQR Trustees who voted on the Transactions unanimously
approved the Transactions. 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
Transactions and unanimously recommending approval of the Transactions are
that:
(i) The EQR Board of Trustees believes that the Transactions would
solidify EQR's leadership position in the multifamily property industry.
The EQR Board of Trustees viewed this as favorable because, based upon the
number of properties owned by EQR and EWR as of June 30, 1997, EQR would
own or have interests in and operate approximately 398 multifamily
properties consisting of approximately 116,079 apartment units; would have
FFO (as such term is defined in "Opinion of Financial Advisor--EQR" herein)
on a pro forma basis for the six months ended June 30, 1997 of
approximately $134.9 million and would have a combined market
capitalization, as of the Effective Time, of approximately $7.6 billion
with an initial Debt to Total Market Capitalization Ratio of approximately
28%.
(ii) The EQR Board of Trustees believes that the Transactions would
increase operating efficiency through economies of scale, which the EQR
Board of Trustees viewed as favorable as the combined entity would realize
significant savings in overhead and expenses (such savings are initially
estimated to be approximately $1.1 million per annum).
(iii) The EQR Board of Trustees believed that the Transactions would
provide greater access to the public equity and debt markets. 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 holders of EQR Common with enhanced liquidity and
make EQR Common a more attractive investment for institutional investors.
(iv) The EQR Board of Trustees believes that as a result of the
Transactions, EQR will be a larger and financially stronger company, which
would facilitate combinations 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 EWR
properties (15,443 units as of June 30, 1997) with those of EQR will expand
EQR's ownership and operation of properties and enhance EQR's operations in
the areas of Arizona and Southern California. The EQR Board of Trustees
viewed this as favorable particularly because the EQR Board of Trustees
believes that the properties located in these markets should increase in
value.
(vi) The EQR Board of Trustees believes that the Transactions will
enhance EQR's ability to supervise development projects undertaken by
third-party developers because the EWR executive officers joining EQR have
substantial experience in the area of property development.
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(vii) The Transactions could be effectuated through the issuance of new
equity valued at $628 million (based upon a market price of $50.44 per
share of EQR Common on June 30, 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 a written opinion dated August 27, 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 Transactions 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 Transactions to
be fair to EQR and its shareholders.
(x) Under generally accepted accounting principles, the Transactions will
be accounted for as purchases, and for federal income tax purposes the
Transactions will be a tax-free transaction, which the EQR Board of
Trustees viewed as favorable because, with certain possible exceptions, no
gain or loss will be recognized by EQR, EWR or a shareholder or unit holder
of EWR who receives EQR Common or ERP Units for EWR Common or EWRLP Units
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 Transactions. These included, among others,
the risk that the anticipated benefits of the Transactions might not be fully
realized. The EQR Board of Trustees considered that the Transactions would
increase the debt of the EQR. EQR will assume all of EWR's outstanding debt
which, at June 30, 1997, was approximately $445,441,000. The EQR Board of
Trustees recognized this increase could adversely affect the ability of EQR 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 and the increase in the ratio of Debt to Total Market
Capitalization for EQR as of June 30, 1997 from approximately 26% to
approximately 28% on a pro forma basis 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 and upon
EQR's ability to raise capital and issue equity in both the public and private
markets which might result if the Transactions were not consummated. The EQR
Board of Trustees also considered the significant costs involved in connection
with consummating the Transactions and the substantial management time and
effort required to effectuate the Transactions and integrate the businesses of
EQR and EWR. Finally, the EQR Board of Trustees considered the ability of EQR
to manage approximately 16,000 additional apartment units. The EQR Board of
Trustees did not believe that the negative factors were sufficient, either
individually or collectively, to outweigh the advantages of the Transactions.
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 EWR will have occurred that would have a
material adverse effect, other than a change which affects EQR and EWR in a
substantially similar manner.
In view of the wide variety of factors considered in connection with its
evaluation of the Transactions, 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 EWR
directors and officers as a continuing responsibility and approved of the
continuation of the indemnification of the EWR directors and officers as part
of the negotiated transaction.
The EQR Board of Trustees believes that the Transactions are fair to and in
the best interests of ERP, EQR and its Unitholders and shareholders,
respectively.
In the event the Transactions are not consummated for any reason, EQR will
continue to pursue its business objectives.
REASONS FOR THE TRANSACTIONS; RECOMMENDATION OF THE EWR BOARD OF DIRECTORS
The Board of Directors of EWR, the sole general partner of EWRLP, believes
that the Transactions are fair to, and in the best interests, of EWR, EWRLP and
its shareholders and Unitholders, respectively. At a special meeting of the EWR
Board of Directors held on August 27, 1997, members of EWR management,
representatives of Morgan Stanley and legal counsel made presentations
concerning the Transactions and the business and prospects of EWR and EQR. As
part of its deliberations, the EWR Board of Directors 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 EWR. The EWR Board of Directors also reviewed
the terms of the Merger Agreement with EWR's management and EWR's financial and
legal advisors. By unanimous vote, the EWR Board of Directors determined that
the Transactions were fair to, and in the best interests of, EWR, EWRLP and its
shareholders and Unitholders, respectively, approved the Transactions
contemplated thereby and resolved to recommend, among other things, that
EWRLP's Unitholders approve the Asset Contribution, certain amendments to the
EWRLP Partnership Agreement and the transactions contemplated thereby.
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The EWR Board of Directors believes that the Transactions offer EWRLP's
limited partners an opportunity to take advantage of the general trend in the
real estate industry towards consolidation, by affording limited partners 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 Transactions, the EWR Board
of Directors also considered, among other things:
(i) that the Transactions offer the greatest potential to maximize value
to EWR's shareholders and EWRLP's limited partners (together, "EWR
Equityholders"). In this regard, the Board considered the discussions
management conducted with its advisor, Morgan Stanley, other investment
banking firms and other publicly traded REITs regarding industry
consolidation, as well as EQR's size, financial, resources, geographic
diversification and credit rating and the expertise and experience of EQR's
management;
(ii) that after reviewing EWR's strategic alternatives, the Transactions
were the best alternatives reasonably available to EWR Equityholders. 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 Transactions;
(iii) the terms of the Merger Agreement, which the EWR Board of Directors
viewed as favorable because it believed them to be fair to EWR and its
shareholders and because the terms were reached through extensive arms-
length negotiations. In this regard, the EWR Board of Directors noted that
the Exchange Ratio represented an attractive opportunity for EWR
shareholders to continue their investment and maintain their receipt of
quarterly dividends (albeit at a reduced level), but with significantly
expanded geographic diversification;
(iv) 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 EWR Equityholders to
participate in any future appreciation of EQR; and
(v) the opinion, analyses and presentations of Morgan Stanley, including
the opinion that, subject to certain considerations, the consideration to
be received by EWR Common shareholders pursuant to the Merger was fair,
from a financial point of view, to such shareholders.
The EWR Board of Directors also considered certain potentially negative
factors in its deliberations concerning the Merger, including, among others:
(i) the risk that the anticipated benefits of the Transactions might not
be fully realized;
(ii) the significant costs involved in connection with consummating the
Transactions;
(iii) the substantial management time and effort required to effectuate
the Transactions;
(iv) the possibility that EWR 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 EWR Common.
In addition to the above factors, the Board of Directors was mindful of and
evaluated the actual and potential conflicts of interest. In view of the wide
variety of factors considered by the EWR Board of Directors, the Board of
Directors did not quantify or otherwise attempt to assign relative weights to
the specific factors considered in making its determination. However, after
due consideration of its fiduciary obligations, in the unanimous view of the
EWR Board of Directors, 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 Transactions.
OPINION OF FINANCIAL ADVISOR--EQR
At the meeting of the Board of Trustees of EQR on August 27, 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 confirmed
its August 27, 1997 oral opinion by delivering its written opinion to the
Board of Trustees of EQR, dated August 27, 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.
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The full text of the written opinion of J.P. Morgan, which sets forth the
assumptions made, matters considered and limits on the review undertaken, is
attached as Appendix E to this Consent Solicitation/Prospectus/Information
Statement and is incorporated herein by reference. Limited partners of ERP are
urged to read the opinion in its entirety. J.P. Morgan's written opinion is
addressed to the Board of Trustees of EQR, and is directed only to the
consideration to be paid in connection with the Merger. The summary of the
opinion of J.P. Morgan set forth in this Consent
Solicitation/Prospectus/Information Statement is qualified in its entirety by
reference to the full text of such opinion.
In arriving at its opinion, J.P. Morgan reviewed, among other things, the
Merger Agreement, certain publicly available information concerning the
business of EWR and of certain other companies engaged in businesses comparable
to those of EWR, and the reported market prices for certain other companies'
securities deemed comparable; publicly available terms of certain transactions
involving companies comparable to EWR and the consideration received for such
companies; current and historical market prices of the EQR Common and EWR
Common; the audited financial statements contained in the Annual Report on Form
10-K of EQR and EWR for the fiscal year ended December 31, 1996, and the
unaudited financial statements contained in the Quarterly Report on Form 10-Q
of EQR and EWR for the six months ended June 30, 1997; certain agreements with
respect to outstanding indebtedness or obligations of EQR and EWR; certain
internal financial analyses and estimates of budgeted 1998 funds from
operations ("FFO") and net operating income ("NOI") prepared by EQR and EWR and
their respective managements; and the terms of other business combinations
deemed relevant by J.P. Morgan. J.P. Morgan also held discussions with certain
members of the managements of EQR and EWR with respect to certain aspects of
the Merger, and the past and current business operations of EQR and EWR, the
financial condition and future prospects and operations of EQR and EWR, 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 EWR 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 EWR 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 of (i) total rental revenues, (ii) NOI, (iii) earnings before
interest, taxes, depreciation and amortization ("EBITDA") and (iv) FFO utilized
by J.P. Morgan in connection with its opinion were, in the case of EQR, based
on estimates prepared by J.P. Morgan's equity research department, as augmented
by discussions with management of EQR, and, in the case of EWR, based on
estimates prepared by EQR. The projections of FFO per share for EQR were
provided by First Call, an online data service available to subscribers which
compiles earnings estimates by research analysts and, in the case of EWR, based
on estimates prepared by EQR. This resulted in projected 1998 total rental
revenues, NOI, EBITDA, FFO and FFO per share of approximately $1,089.5 million,
$648.9 million, $666.3 million, $379.2 million, and $4.10 per share,
respectively, for EQR, and approximately $117.5 million, $78.4 million, $80.0
million, $49.3 million and $1.98 per share, respectively, for EWR.
No representation or warranty was or is 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 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
August 27, 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 EWR Common will trade at any future time.
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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 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 FFO per share of EQR Common for
the year ended December 31, 1998. In doing so, J.P. Morgan combined the
estimated 1998 operating results for EWR and EQR and assumed certain savings
in accounting and general and administrative expense per estimates provided by
the management of EQR. J.P. Morgan observed a total projected post-Merger
incremental accretion of 0.5% to EQR's First Call 1998 FFO estimates of $4.10
per share. The analysis assumed the August 25, 1997 closing price of $50.44
per share for EQR Common in calculating the purchase price for EWR Common.
J.P. Morgan also analyzed the effect of the Merger on EQR's pro forma equity
market capitalization and total capitalization immediately following the
Merger. In this regard, J.P. Morgan noted that the pro forma equity market
capitalization for EQR would be approximately $4.72 billion, assuming a share
price of $50.44 (EQR's closing share price on August 25, 1997) and 93.6
million shares of EQR Common outstanding after completion of the Merger, and a
total post-transaction pro forma capitalization of approximately $7.63
billion. J.P. Morgan further analyzed EQR's 1998 pro forma leverage ratios and
dividend payout ratio and noted that (i) EQR's ratio of debt to total
capitalization would increase, upon completion of the Merger, from 26.3% prior
to the Merger to 28.6% after the assumption of EWR's outstanding debt plus the
incremental debt incurred from the payment of certain transaction costs and
(ii) the ratio of debt plus preferred stock to total capitalization would also
increase from 37.4% to 38.1%.
Fully-Loaded Share Price. J.P. Morgan calculated the fully-loaded share
price being paid by EQR for EWR Common. The fully-loaded share price adjusts
the implied share price of $25.22 (calculated as the August 25, 1997 closing
price of $50.44 per share for EQR Common multiplied by the 0.50 exchange
ratio) for certain additional amounts being paid by EQR for share options.
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 $25.43 per share of EWR Common. Based on the fully-
loaded share price, J.P. Morgan calculated a range of estimated FFO multiples
being paid for EWR from a high of 12.9x (excluding synergies and accounting)
to a low of 11.9x (including synergies and accounting).
Public Trading Multiples Analysis. Using publicly available information,
J.P. Morgan compared selected financial and stock market data of EWR 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 EWR's. The companies
selected by J.P. Morgan were Security Capital Pacific Trust, United Dominion
Realty Trust, Inc., Post Properties, Inc., Avalon Properties, Inc., Merry Land
& Investment Company, Inc., Security Capital Atlantic Trust, Gables
Residential Trust, Camden Property Trust, Irvine Apartment Communities, Inc.,
Summit Properties, Inc., and Oasis Residential, Inc. 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 six months ended June 30, 1997 was measured. J.P. Morgan
calculated the multiples of current stock price, as of August 25, 1997, to
analysts' estimates for 1998 consensus FFO as reported by First Call for each
of the Comparable Companies to determine the 1998 FFO trading multiples. J.P.
Morgan's calculations resulted in a range of 1998 FFO multiples from 9.3x to
13.0x. These multiples were then applied to EWR's 1998 FFO per share estimate
prepared by EQR, yielding a range of implied trading values for EQR's common
stock of approximately $18.34 to $25.76 per share.
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 eight transactions (collectively, the "Transaction Comparables")
that it deemed relevant: Post Properties, Inc./Columbus Realty Trust, Equity
Residential Properties Trust/Wellsford Residential Property Trust, Camden
Property Trust/Paragon Group, Inc., United Dominion Realty Trust, Inc./South
West Property Trust, Inc., BRE Properties, Inc./California Real Estate
Investment Trust, Mid-America Apartment Communities, Inc./America First REIT,
Inc., Property Trust of America/Security Capital Pacific Trust, and Wellsford
Residential Property Trust/Holly Residential Properties, Inc. J.P. Morgan
observed a range of transaction multiples from 8.3x to 12.4x based on
consensus First Call FFO estimates for the acquired companies. This range was
then applied to EQR's estimate of EWR's 1998 FFO per share, resulting in a
range of equity values for EWR's common stock of between $16.41 and $24.53 per
share. J.P. Morgan noted that this range was below both the implied and fully-
loaded prices for EWR Common.
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 $16.32 to $26.47 per share for
EWR's common stock. These additional transactions were Highwoods Properties
Inc./Crocker Realty Investors, Inc., Simon Property Group, Inc./DeBartolo
Realty Corporation, Horizon Outlet Centers, Inc./McArthur/Glen Realty Corp.,
and Omega Healthcare Investors, Inc./Health Equity Properties, Inc.
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Average Transaction Premia Analysis. J.P. Morgan reviewed mergers and
acquisitions of U.S. public companies in negotiated transactions with values
over $50 million to derive a range of premia paid over the public trading
prices per share five days prior to the announcement of such transactions for
the periods from 1988 to 1992 and from 1993 to 1996. J.P. Morgan noted that the
reasons for, and circumstances surrounding, each of the transactions analyzed
were diverse and that premia fluctuate among different industry sectors and
based on perceived growth, synergies, strategic value and the type of
consideration utilized in the transaction.
The analyses indicated that the medians of premia paid over the public
trading prices were 46.7% in the period from 1988-1992 and 29.2% in the period
from 1993 to 1996. J.P. Morgan applied these median premia to EWR's closing
price of $20.50 on August 25, 1997, to derive implied prices per EWR share of
$30.07 and $26.49, respectively.
Historical Exchange Ratio Analysis. J.P. Morgan reviewed the historical
exchange ratio of the daily closing price per share of EWR Common to the daily
closing price per share of EQR Common for the period from August 22, 1996 to
August 25, 1997. J.P. Morgan noted a one-year low to high range of between 0.40
and 0.61, and an average one-year exchange ratio of 0.49. In addition, such
analysis implied a one-year historical share price range for EWR of $20.18 to
$30.77, as calculated by multiplying EQR's Common August 25, 1997 closing price
of $50.44 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 June 30, 1997, J.P. Morgan calculated the
Net Asset Value ("NAV") per share for both EWR Common and EQR Common. In so
doing, J.P. Morgan applied a range of capitalization rates from 8.0% to 9.0% to
projections for the stabilized 1997 NOI of the properties, in order to
calculate a gross real estate value, to which was added the book value of other
assets, 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 as of June 30, 1997. This analysis indicated an NAV exchange ratio
range for the two companies of between 0.43 to 0.53, and an implied range for
the price of EWR Common of $21.82 to $26.67 per share, assuming an August 25,
1997 closing price of $50.44 per share for EQR Common.
Discounted Cash Flow Analysis. J.P. Morgan performed discounted cash flow
analysis (i.e, an analysis of the present value of the projected levered cash
flows for the periods and using the discount rates indicated) of EWR based upon
projections provided by management of EQR of EWR's funds available for
distribution ("FAD") for the years 1998 through 2002, inclusive, using discount
rates reflecting an equity cost of capital ranging from 14.0% to 16.0% and
terminal value multiples of calendar year 2003 FAD ranging from 11.5x to 13.0x.
Based upon EQR's projection of EWR's FAD per share of $1.86 in 1998 increasing
gradually to $2.88 in 2003, the range of present values per EWR share was
$23.90 to $27.35.
Contribution Analysis. J.P. Morgan reviewed certain estimated future
operating and financial information (including, among other things, total
rental revenues, NOI, EBITDA and FFO) for EQR and EWR for 1997 and 1998.
Financial statistics for 1997 were derived, for EQR, by annualizing EQR pro
forma results for the six months ended June 30, 1997 from EQR's Quarterly
Report on Form 10-Q, as supplemented by EQR, and, for EWR, from financial
results for the six months ended June 30, 1997, from EWR's Quarterly Report on
Form 10-Q, as supplemented by EWR's budget for the third and fourth quarters of
1997. J.P. Morgan analyzed the relative contributions of EWR and EQR to the
combined entity based upon these time periods. These analyses indicated that,
based upon EQR's and EWR's contribution in 1997, excluding synergies and
accounting adjustments, EWR would contribute 13.8% of total rental revenues,
14.2% of NOI, 14.6% of EBITDA, and 12.3% of FFO, while having a 13.3% equity
ownership in the combined entity. Based upon 1998 contribution, including
synergies and accounting adjustments, EWR would contribute 9.4% of total rental
revenues, 10.9% of NOI, 11.0% of EBITDA and 12.3% of FFO, while maintaining an
11.9% equity ownership in the combined entity.
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 its 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.
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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 $500,000 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 $1,374,000 in fees over the past two years, and with EWR and its
affiliates pursuant to which J.P. Morgan has received an aggregate of
approximately $300,000 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 EWR 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.
DESCRIPTION OF OPINION OF EWR FINANCIAL ADVISOR GIVEN WITH RESPECT TO THE
MERGER
Morgan Stanley was not retained to, and did not, render an opinion regarding
the Asset Contribution Agreement or Unit Exchange Offer. The following is a
discussion of Morgan Stanley's opinion to the Board of Directors of EWR in
connection with the Merger. Morgan Stanley has expressed no view as to whether
holders of EWRLP Units should consent to the Proposals.
EWR retained Morgan Stanley to act as EWR's financial advisor in connection
with the Merger and related matters based upon Morgan Stanley's qualifications,
reputation and expertise. At the Board of Directors meeting of EWR on August
27, 1997, Morgan Stanley rendered its oral opinion to the EWR Board of
Directors, subsequently confirmed in writing on August 27, 1997 (the "Morgan
Stanley Opinion"), that as of such date, the consideration to be received by
the holders of EWR Common pursuant to the Merger Agreement is fair from a
financial point of view to such holders.
For purposes of the Morgan Stanley opinion, Morgan Stanley, among other
things: (i) analyzed certain publicly available financial statements and other
information of EWR and EQR; (ii) analyzed certain internal financial statements
and other financial and operating data concerning EWR and EQR prepared by the
managements of EWR and EQR; (iii) discussed the past and current operations and
financial condition and the prospects of EWR and EQR and certain of the real
property assets of each company with senior executives of EWR and EQR; (iv)
reviewed the reported prices and trading activity of EWR Common and EQR Common;
(v) compared the financial performance of EWR and the prices and trading
activity of EWR Common with that of certain other comparable publicly-traded
companies and their securities; (vi) compared the financial performance of EQR
and the prices and trading activity of EQR Common with that of certain other
comparable publicly-traded companies and their securities; (vii) discussed with
senior management of each of EWR and EQR their estimates for the synergies and
other cost savings to be realized pursuant to the Merger; (viii) participated
in discussions and negotiations among representatives of EWR and EQR and their
financial and legal advisors; (ix) reviewed drafts of the Merger Agreement and
drafts of certain related documents; and (x) performed such other analyses and
considered such other factors as Morgan Stanley deemed appropriate.
In rendering the Morgan Stanley Opinion, Morgan Stanley assumed and relied
upon without independent verification the accuracy and completeness of the
information reviewed by Morgan Stanley for the purposes of its opinion. With
respect to the financial projections, Morgan Stanley assumed that such
information has been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the future financial performance of EWR
and of EQR. Further, Morgan Stanley relied upon EWR's and EQR's estimates of
the synergies and other cost savings to be realized pursuant to the Merger.
Morgan Stanley did not make any independent valuation or appraisal of the
assets or liabilities of EWR or of EQR, nor was Morgan Stanley provided with
any such appraisals. The Morgan Stanley Opinion is necessarily based on
economic, market and other conditions as in effect on, and the information made
available to Morgan Stanley as of such date.
At the meeting of the EWR Board held on August 27, 1997, Morgan Stanley
presented certain financial analyses accompanied with written materials in
connection with the delivery of the Morgan Stanley Opinion. The following is a
summary of the material financial and comparative analyses performed by Morgan
Stanley in arriving at its August 27, 1997 opinion.
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Stock Trading History
Morgan Stanley reviewed the historical trading prices for the common stock of
EWR and noted that the average of the daily closing prices of the company from
the initial public offering through August 22, 1997 was $20.47, with a low and
a high of $18.00 and $23.25, respectively, and that the average for the 12
months ended August 22, 1997 was $20.91, with a low and a high of $18.375 and
$23.25, respectively. Morgan Stanley also reviewed the historical trading
prices for the common stock of Equity Residential and noted that the average of
the daily closing prices of the company from the initial offering of EWR
through August 22, 1997 was $33.72, with a low and a high of $25.00 and $52.50,
respectively, and that the average for the 12 months ended August 22, 1997 was
$43.24, with a low and a high of $28.00 and $52.50, respectively.
Morgan Stanley reviewed the premium obtained by computing the percentage
excess of the product of the closing prices of EQR Common and 0.5 over the
closing prices of EWR Common for each day of the six-month period ended August
22, 1997 and computed the average values of these premia for the entire period
and for the last one and three months of this period. This premium ranged from
approximately 4% to 24% and averaged 20.5%, 16.1% and 12.9% for the one, three
and six months ended on August 22, 1997, and was 23.0% on August 22, 1997.
Historical Implied Exchange Ratios
Morgan Stanley computed the historical ratios of the closing share prices of
EWR to Equity Residential from the beginning of 1995 through August 22, 1997
and noted that the approximate averages of such ratios were 0.70 in 1995, 0.63
in 1996, and 0.46 in 1997 through August 22, as compared to the Exchange Ratio
of 0.50.
Analyses of Selected Comparable Publicly Traded Companies
Morgan Stanley reviewed the trading statistics of selected comparable
publicly traded apartment REITs, selected on the basis of size, portfolio
characteristics and geographic diversity. For EWR, comparable companies
selected consisted of Bay Apartment Communities, BRE Properties, Gables
Residential, Irvine Apartment Communities, Oasis Residential, Post Properties
and Summit Properties. Based on consensus security analyst estimates for 1998,
as reported by First Call, and August 22, 1997 closing share prices, the
trading multiples of 1998 projected FFO per share ranged from 9.5x to 13.4x,
with an average of 11.4x. Morgan Stanley selected a range of multiples of 1998
FFO of 9.5x to 12.5x, noting that all multiples in excess of 11.3x represented
California-based apartment companies. Applying this range of multiples to the
First Call consensus 1998 FFO for EWR of $2.03 resulted in a range of values
for each share of EWR Common from $19.29 to $25.38.
For EQR, comparable companies selected consisted of Security Capital Pacific
Trust and Security Capital Atlantic Trust. Based on consensus security analyst
estimates for 1998, as reported by First Call, and August 22, 1997 closing
share prices, the trading multiples of 1998 projected FFO per share ranged from
11.4x to 12.4x, with an average of 11.9x. Applying this range of multiples to
the First Call consensus 1998 FFO for Equity Residential of $4.10, and
multiplying this result by the Exchange Ratio, resulted in a range of values
from $23.58 to $25.63.
Analyses of Selected Comparable Transactions
Morgan Stanley compared the principal terms of the Merger with those of
selected other comparable transactions. These transactions, all involving
combinations of two public apartment REITs, were the mergers of REIT of
California with BRE Properties in 1996, of South West Property Trust with
United Dominion Realty in 1996, of Paragon Group with Camden Property Trust in
1996, of Wellsford Residential with EQR in 1997, and the pending merger of
Columbia Realty with Post Properties. Based on the average trading prices for
the ten trading days ending five trading days before the public announcement of
each of these transactions, the average premium paid for the company being
acquired by the surviving company was 11.7%, and ranged from 7.0% to 14.2% for
the selected transactions. On the same computation basis, the premium pursuant
to the Merger for EWR is 20.7%.
No transaction utilized as a comparison in a comparable transaction analysis
is identical to the Merger in both timing and size, and, accordingly, an
analysis of the results of the foregoing necessarily involves complex
considerations and judgements concerning financial and operating
characteristics of EWR and other factors that would affect the acquisition
value of companies to which it is being compared. In evaluating the selected
comparable transactions, Morgan Stanley made judgements and assumptions with
regard to industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
EWR, such as the absence of any adverse material change in the financial
conditions and prospects of EWR or the industry or in the financial markets in
general.
Discounted Cash Flow
Morgan Stanley performed discounted cash flow analyses of EQR based upon
projections and assumptions provided by EQR's management of EQR's FFO and
dividends per share of EQR Common for the years ending December 31, 1998
through December 31, 2002, using discount rates reflecting an expected equity
total return of 12.0% to 16.0% and terminal multiples of 2002 FFO of 12.0x to
15.0x. The range of present values per EQR share, multiplied by the Exchange
Ratio was $22.28 to $31.19, with a present value at the midpoint of the
discount rate and multiple ranges of $26.42.
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Pro Forma Merger Analysis
Morgan Stanley performed an analysis of the effect of the Merger on EQR's
Pro Forma FFO per share for the projected years ended December 31, 1997 and
December 31, 1998, which assumed that the Merger had been consummated on
January 1, 1997. Morgan Stanley combined the projected operating results of
EWR and EQR and estimated cost savings, based on internal estimates provided
by each company, to arrive at the pro forma projected FFO per share of EQR
Common. Morgan Stanley's analysis was based upon the Exchange Ratio of 0.50
and estimated annual expense savings resulting from the Merger and expected to
arise primarily from savings in duplicative public company and general and
administrative expenses. Morgan Stanley then compared this result with the
stand-alone FFO per share of EQR Common to determine the projected pro forma
impact of the Merger on the pro forma FFO per share of EQR Common. This
analysis indicated that the pro forma FFO per share of EQR Common in each of
1997 and 1998 would be higher than the stand-alone projections of FFO for each
such year were the Merger not to occur.
Morgan Stanley noted that the Merger resulted in a slight increase in the
leverage ratios and slight decrease in the debt service coverage ratios for
EQR, and an improvement in these ratios for EWR shareholders in the surviving
entity. Specifically, EQR's ratio of debt to total market capitalization as of
June 30, 1997 increased from 26.1% to 28.0% on a pro forma basis. On a pro
forma basis, EWR's debt to total market capitalization decreased from 46.1% to
28.0%.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. Morgan
Stanley believes that its analyses must be taken as a whole and that selecting
portions of its analyses, without considering all analyses, would create an
incomplete view of the process underlying its opinion. In addition, Morgan
Stanley may have given various analyses more or less weight than other
analyses, and may have deemed various assumptions more or less probable than
other assumptions, so that the ranges of valuations resulting for a particular
analysis described above should not be taken to be Morgan Stanley's view of
EWR and EQR.
In performing its analyses, Morgan Stanley made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of EWR and EQR. The
analyses performed by Morgan Stanley are not necessarily indicative of actual
value, which may be significantly more or less favorable than suggested by
such analyses. Such analyses were prepared solely as a part of Morgan
Stanley's analysis of whether the consideration to be received by the holders
of EWR Common in connection with the Merger (the "Merger Consideration") is
fair from a financial point of view to such holders, and were conducted in
connection with the delivery of the Morgan Stanley Opinion. The analyses do
not purport to be appraisals or to reflect the prices at which EWR might
actually be sold. Because such estimates are inherently subject to
uncertainty, none of EWR, Morgan Stanley, or any other person assumes
responsibility for their accuracy. The Morgan Stanley analyses described above
should not be viewed as determinative of the opinion of the EWR Board of
Directors or the management of EWR with respect to the value of EWR or of
whether Morgan Stanley would have rendered an opinion of fairness with respect
to, or the EWR Board of Directors or the management of EWR would have been
willing to agree to, any consideration other than the Merger Consideration.
The EWR Board of Directors retained Morgan Stanley based upon its experience
and expertise. Morgan Stanley is an internationally recognized investment
banking and advisory firm. As part of its investment banking business, Morgan
Stanley is regularly engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted
securities, private placements and valuation for estate, corporate and other
purposes. In the ordinary course of its business, Morgan Stanley and its
affiliates may actively trade the debt and equity securities or senior loans
of EWR and EQR for their own account and for the accounts of customers and,
accordingly, may at any time hold long or short positions in such securities
or senior loans.
Pursuant to the terms of a May 7, 1997 letter agreement, as amended, Morgan
Stanley is entitled to a total fees for its representation of EWR in the
Merger of approximately $5.15 million, which is payable upon consummation of
the Merger, as well as to reimbursement for reasonable expenses. In addition,
EWR has agreed to indemnify Morgan Stanley and certain related persons against
certain liabilities arising out of or in conjunction with its rendering of
services under its engagement, including liabilities under federal securities
laws.
EFFECTIVE TIME OF THE TRANSACTIONS
The Merger. The Closing of the Merger will take place at 10:00 a.m. on the
date to be specified by EQR and EWR, 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 EWR 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 become effective
on or about December , 1997.
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The Unit Exchange Offer. The Unit Exchange Offer will remain open to limited
partners of EWRLP from the date hereof until the consummation of the Asset
Contribution.
The Asset Contribution. The Asset Contribution shall occur upon ERP giving
notice to EWRLP at any time following the first to occur of (i) the date twelve
months after the consummation of the Merger, (ii) the date on which EQR
receives an opinion of a nationally recognized tax counsel satisfactory to it
or a ruling from the Internal Revenue Service that the Asset Contribution may
be effected without adversely affecting the qualification of the Merger as a
tax-free reorganization within the meaning of Section 368 of the Code or (iii)
the date on which regulations are promulgated by the Department of the Treasury
which, in the opinion of a nationally recognized tax counsel satisfactory to
EQR, would permit the Asset Contribution to occur without adversely affecting
the qualification of the Merger as a tax-free reorganization within the meaning
of Section 368 of the Code. If ERP fails to give such notice by December 31,
1999, the Asset Contribution Agreement shall terminate and EWRLP shall have no
further obligations thereunder. See "--Representations and Warranties;
Conditions to the Transactions."
REPRESENTATIONS AND WARRANTIES; CONDITIONS TO THE TRANSACTIONS
The Merger. The Merger Agreement contains representations and warranties by
EQR and EWR 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, environmental matters, contracts, debt
instruments, employee benefit plans (with respect to EWR only), 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 EWR 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 EWR and EQR, (ii)
approval by the NYSE of the listing of the shares of EQR Common to be issued in
connection with 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 issued by any court of competent jurisdiction
or other legal restraints or prohibitions preventing the consummation of the
Merger shall be in effect on the Closing Date, (v) all necessary state
securities permits and authorizations shall have been received by EQR and (vi)
the delivery 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 EQR are subject to the following additional conditions:
(i) execution of the Asset Contribution Agreement and Unit Contribution
Agreement, (ii) the voting shares of Evans Withycombe Management, Inc., an
Arizona corporation ("EW Management") shall have been transferred in accordance
with the Stock Purchase Agreement dated as of August 27, 1997 among Stephen O.
Evans ("Evans") and F. Keith Withycombe ("Withycombe") and David Neithercut
("Neithercut") and Bruce C. Strohm ("Strohm") (collectively, the "Stock
Purchase Agreement"), (iii) the Consulting Agreement by and between Equity
Properties Management LP and Evans, currently an employee and owner of direct
and indirect equity interest in EWR shall remain in full force and effect and
Evans shall not have breached any obligations thereunder, (iv) the Employment
Agreement by and between Equity Properties Management LP and Richard G. Berry
("Berry"), currently an owner of direct and indirect equity interest in EWR and
EWRLP shall remain in full force and effect and Berry shall not have breached
any obligations thereunder, (v) the Voting Agreement between EQR and Evans,
Withycombe and their respective affiliates shall remain in full force and
effect and no default shall have occurred thereunder, (vi) the voting shares of
Evans Withycombe, Inc. have been transferred to EQR's designees in accordance
with the Evans Withycombe, Inc. Stock Purchase Agreement, (vii) the Change in
Control Agreements shall have been amended in accordance with the Merger
Agreement and (viii) each of the Affiliates (as defined in the Merger
Agreement) shall have delivered to EQR the written agreement contemplated by
Section 4.4 of the Merger Agreement.
The obligations of EWR 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 in all material respects as of the
Closing Date, (ii) each party shall have performed in all material respects its
obligations under the Merger Agreement, (iii) as of the Closing Date, neither
party 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) EWR shall have received an opinion of counsel from EQR's counsel
stating that commencing with its taxable year ended December 31, 1993, EQR was
organized and has operated in conformity with the requirements for
qualification as a REIT under the Code, (v) EQR shall have received an opinion
of EWR's counsel stating that commencing with its taxable year ended December
31, 1994, EWR was organized and has operated in conformity with the
requirements for a REIT under the Code, (vi) each party shall have received an
opinion of counsel dated as of the
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Closing Date, to the effect that the Merger will qualify as a reorganization
under the provisions of Section 368(a) of the Code, (vii) each party shall
have received an opinion from counsel to the other party addressing certain
issues set forth in the Merger Agreement and (viii) the receipt of all
consents and waivers from third parties necessary to consummate the
transactions contemplated by the Merger Agreement.
The Asset Contribution. The Asset Contribution Agreement does not contain
any representation or warranty whatsoever, including as to title or legal
sufficiency, except that title to all real estate included in the assets
contributed to ERP is warranted and will be conveyed by warranty deed. The
effectiveness of the Asset Contribution and the obligations of ERP under the
Asset Contribution Agreement are conditioned on (i) receipt of the requisite
consent of the limited partners of EWRLP and (ii) EWRLP's receipt of notice by
December 31, 1999 from ERP that ERP desires to consummate the Asset
Contribution.
DISSOLUTION OF EWRLP
The Asset Contribution Agreement provides that EWRLP shall dissolve pursuant
to the terms of the EWRLP Partnership Agreement and distribute the ERP Units
to the holders of EWRLP Units. Each holder of EWRLP Units who did not already
contribute his, her or its EWRLP Units in exchange for ERP Units pursuant to
the Unit Exchange Offer shall become a holder of ERP Units in accordance with
a Registration Rights Agreement entered into by EQR and certain former holders
of EWRLP Units (the "Registration Rights Agreement") upon the effectiveness of
the Merger to the extent the holders of EWRLP Units will receive Registrable
Securities (as defined in the Registration Rights Agreement) upon the
distribution of ERP Units to the holders of EWRLP Units. In the event that
EWRLP is required to continue to hold any asset pursuant to the Asset
Contribution Agreement, EWRLP shall distribute to the holders of EWRLP Units,
other than EQR and ERP, their pro rata share of the ERP Units received by
EWRLP in the partial dissolution of EWRLP and the partners receiving such ERP
Units shall have no further interest in EWRLP as a partner, including any
interest in its assets, profits and losses.
APPRAISAL RIGHTS
The Merger. Shareholders of EWR 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 or corporation in connection with a merger if their respective 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. The Merger
Agreement specifically provides that the holders of EWR Common are not
entitled to appraisal rights as a result of the Merger.
The Asset Contribution. EWRLP was organized under the Delaware Revised
Uniform Limited Partnership Act ("DRULPA"). Under DRULPA a limited partnership
agreement or a merger agreement may contractually provide for appraisal rights
with respect to limited partnership interests. The EWRLP Partnership Agreement
does not contain a provision granting appraisal rights to holders of EWRLP
Units. ERP was organized under the Illinois Revised Uniform Limited
Partnership Act ("IRULPA"). Neither IRULPA nor the ERP Partnership Agreement
grant to the holders of ERP Units rights of appraisal with respect to their
ERP Units.
REGULATORY MATTERS
EQR and EWR believe that the Transactions 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 Transactions. 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 Transactions.
The ERP Group and EWR believe that consummation of the Transactions would not
violate any antitrust laws. However, there can be no assurance that a
challenge to the Transactions on antitrust grounds will not be made or, if a
challenge is made, what the result will be.
TERMINATION PROVISIONS
The Merger. 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 EWR and EQR, by mutual
written consent, duly authorized by the Board of Trustees of EQR and the Board
of Directors of EWR. In addition, the Merger Agreement may be terminated by
EQR or EWR (i) if the Merger has not been consummated by February 15, 1998
(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 February 15, 1998, (iii) if the requisite vote of the
shareholders of EQR or EWR will not have been obtained at the meeting of such
shareholders or (iv) if a judgment, injunction, order, decree, ruling or other
action by a governmental entity of competent jurisdiction preventing the
consummation of the Merger will have become final and non-appealable.
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The Merger Agreement may be terminated by EWR, if prior to a special meeting
of shareholders of EWR to be held at , Scottsdale, Arizona, on
, 1997, at .m., Arizona time (the "EWR Special Meeting"), the
EWR Board of Directors withdraws or modifies its approval or recommendation of
the Merger or Merger Agreement 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 EWR Special Meeting, the EWR Board
of Directors 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, (ii) EWR enters into a
definitive agreement with respect to any Acquisition Proposal or (iii) if Evans
terminates his Consulting Agreement (other than by reason of his death) or
Berry terminates his Employment Agreement (other than by reason of his death)
of if any of Evans, Withycombe or their respective affiliates defaults in the
performance of his or its obligations under the Voting Agreement.
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 EWR 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 EWR Board of Directors
determines in good faith to be more favorable to EWR's shareholders from a
financial point of view than the Merger and which the Board of Directors of EWR
determines is reasonably capable of being consummated.
The Asset Contribution. The Asset Contribution Agreement terminates if the
Merger Agreement is terminated prior to the consummation of the Merger.
The Unit Exchange Offer. The Unit Exchange Offer terminates upon termination
of the Merger Agreement.
TERMINATION FEE AND EXPENSES
The Merger Agreement provides for certain payments by EWR or EQR in
connection with the termination of the Merger Agreement. These payments include
(i) a Break-Up Fee of up to $14 million, plus Break-Up Expenses (as defined in
the following clause) and/or (ii) Break-Up Expenses equal to the recipient's
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 because, prior to the EWR Special Meeting, the
EWR Board of Directors withdraws or modifies its approval or recommendation of
the Merger or the Merger Agreement in connection with, or approves or
recommends a Superior Acquisition Proposal, or if EWR enters into a definitive
agreement with respect to any Acquisition Proposal, EWR is obligated to pay EQR
the Break-Up Fee and Break-Up Expenses. Additionally, if the Merger Agreement
is terminated due to a breach of any representation, warranty, covenant,
obligation or agreement by EWR or EQR set forth in the Merger Agreement, or
failure by either EWR or EQR to obtain the required shareholder approval of the
Merger, 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 duly
authorized by the Board of Trustees of EQR and Board of Directors of EWR, (ii)
either party, upon the failure by EQR to obtain the required shareholder
approval of the Merger, or (iii) EWR, upon a material breach of the
representations, warranties, covenants, obligations or agreements of EQR, as
set forth in the Merger Agreement and at the time of termination of the Merger
Agreement, an Acquisition Proposal has been received by EWR and either prior to
the termination of the Merger Agreement or within 12 months thereafter, EWR or
any of its subsidiaries enters into any written Acquisition Proposal which is
subsequently consummated, EWR is required to pay the Break-Up Fee and Break-Up
Expenses 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 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 and Break-Up Expenses.
Except as described above, all costs and expenses incurred in connection with
the Merger Agreement and the transactions contemplated thereby will be
allocated between EQR and EWR.
NO SOLICITATION OF OTHER TRANSACTIONS
EWR has agreed that (i) it and its subsidiaries will not, and it will 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 an
Acquisition Proposal and (ii) it will notify EQR immediately if it 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 EWR from furnishing information to or entering into
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discussions or negotiations with any person or entity that makes an unsolicited
proposal if the Board of Directors of EWR determines that such action is
required by its fiduciary duties to its shareholders imposed by law.
CONVERSION OF SHARES/UNITS
The Merger. Under the Merger Agreement, each share of EWR Common outstanding
immediately prior to the Effective Time will be converted into 0.5 of a share
of EQR Common. All such shares of EWR 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 certificates representing the
shares of EQR 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.
The Asset Contribution. The Asset Contribution Agreement provides that solely
in exchange for the contribution of the Contributed Assets, EWRLP will receive
such number of common units of ERP as shall equal the number of EWRLP units of
partnership interest issued and outstanding immediately prior to the effective
time of the Contribution multiplied by the Exchange Ratio (as defined in the
Merger Agreement). No fractional ERP Units will be issued in connection with
the contribution by any Contributor. Instead, at the time of the effectiveness
of the Contribution, EWRLP will be paid an amount in cash equal to the Closing
Price (as hereinafter defined) multiplied by the fraction of an ERP Unit to
which EWRLP would otherwise be entitled. For purposes of this and the following
paragraph, "Closing Price" means the unweighted average closing price of a
share of EQR Common as reported on the NYSE (Composite Tape) for the five (5)
trading days preceding the Effective Time (as defined in the Merger Agreement),
and "Trading Days" means any day on which the EQR common shares of beneficial
interest is traded on the NYSE and reported on its Composite Tape.
The Unit Contribution. Pursuant to the Unit Contribution Agreement, certain
individuals and entities (collectively "Contributors" and each a "Contributor")
have agreed to contribute each EWRLP Unit they own to ERP free and clear of all
liens and encumbrances in exchange for a number of ERP Units equal to one (1)
multiplied by the Exchange Ratio. No fractional ERP Units shall be issued in
connection with the contribution by any Contributor. Instead, each Contributor
of EWRLP Units shall be paid an amount in cash equal to the Closing Price
multiplied by the fraction of an ERP Unit to which the Contributor would
otherwise be entitled.
The issuance, terms and conditions of the EQR Common and ERP Units will be
governed by EQR's Declaration and the ERP Partnership Agreement, respectively.
For a detailed description of the provisions of the ERP's Partnership
Agreement, see "Comparison of Rights of Holders of ERP Units and EWRLP Units."
CONDUCT OF BUSINESS PENDING THE TRANSACTIONS
EWR. Prior to the Effective time, except as (i) contemplated by the Merger
Agreement or (ii) consented to in writing by EQR, EWR 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 and take all actions necessary to continue to qualify as a
REIT, (b) preserve intact its business organizations and goodwill and use its
reasonable efforts to 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, 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 EWR notifies EQR that it is availing itself of such extensions and
provided such extensions do not adversely affect EWR'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 EWR's status
as a REIT or the status of any EWR 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 the
multi-family residential projects described in the EWR SEC
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Documents (as defined in the Merger Agreement) as being under development as
well as projects which have been budgeted and previously described in the EWR
Capital Budget (as defined in the Merger Agreement) in accordance with the
agreements in existence on the date of the Merger Agreement and previously
furnished to EQR, (j) not amend its Charter, Bylaws, or the articles of
incorporation, bylaws, partnership agreement, joint venture agreement or
comparable charter or organization document of any subsidiary (k) make no
change in the number of shares of capital stock, membership interests of units
of limited partnership interest issued and outstanding other than pursuant to
(A) the exercise of outstanding options to purchase shares of EWR Common, (B)
the conversion of EWRLP Units pursuant to the terms of the EWRLP Partnership
Agreement for shares of EWR Common, and (C) the issuance of shares of EWR
Common to Paul Fannin in lieu of the cash bonus to which he is entitled as
approved by the Compensation Committee of the EWR Board of Directors on July
11, 1997, (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 capital stock, or any security subordinated to the claim of its general
creditors and not waive or amend any rights under any of the EWR Options (as
defined in the Merger Agreement), (m) 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, not (A) authorize, declare, set aside or pay any
dividend or make any other distribution or payment with respect to any shares
of EWR Common or EWRLP Units, or (B) directly or indirectly redeem, purchase or
otherwise acquire any shares of capital stock, membership interests or units of
limited partnership interest or any option, warrant or right to acquire, or
security convertible into, shares of capital stock, membership interests, or
units of limited partnership interest, except for redemptions of shares of EWR
Common in order to preserve the status of EWR as REIT under the Code, (n) not
sell, lease, mortgage, subject to lien or otherwise dispose of any of its
properties except the sale of properties which are the subject of binding
contracts to sell in existence on the date of the Merger Agreement and
disclosed to EQR, (o) not make any loans, advances or capital contributions to,
or investments in, any other person or entity, other than loans, advances and
capital contributions to subsidiaries in existence on the date of the Merger
Agreement, (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 $500,000 or aggregate
Commitments in excess of $1 million, except (A) purchases of real estate
necessary to complete a like kind exchange, provided such purchase has been
approved by EQR, and (B) capital expenditures disclosed in the EWR Capital
Budget, (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, (s) not enter into any Commitment with
any officer, trustee, consultant or affiliate of EWR or any of EWR'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 Asset
Contribution Agreement and Unit Contribution Agreement and (x) not accept a
promissory note in payment of the exercise price payable under any option to
purchase shares of EWR Common.
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 EWR's consolidated income statement in excess of $500,000, or on
EWR's consolidated balance sheet in excess of $1 million.
EQR. Prior to the Effective Time, except as (i) contemplated by the Merger
Agreement or (ii) consented to in writing by EWR, 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 EQR to report operational matters of materiality which could
have an EQR Material Adverse Effect (as defined in the Merger Agreement), (c)
promptly notify EWR 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 EWR 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.
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<PAGE>
LIMITATIONS ON THE SALE OR REFINANCING OF CERTAIN PROPERTIES
The Merger Agreement provides that EQR will not sell, transfer or otherwise
dispose of any of 42 EWR properties (or any property acquired in a like-kind
exchange under Section 1031 or 1033 of the Code in replacement of any such
properties) in a transaction resulting in the recognition of gain for federal
income tax purposes on or before January 1, 2003, unless and until the first to
occur of (a) the date on which an aggregate of at least 50% of the ERP Units
issued to EWRLP Unitholders have been transferred in taxable transactions or
(b) the date on which an amendment to the Code is enacted which eliminates tax-
free transfers, exchanges, conveyances or other dispositions of real property
under Section 1031 or 1033 of the Code. EQR has also agreed that it will not
voluntarily prepay the securitized debt of EWR Finance Partnership L.P. or the
fixed rate loan from Northwestern Mutual Life Insurance Company to EWR
Partnership (each a "EWR Debt") until the date the EWR Debt in question can be
prepaid without penalty or premium.
WAIVER AND AMENDMENT
The Merger. 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 or (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 Board of Trustees of EQR and the Board of Directors of EWR, at any
time before or after approval of the Merger Agreement by the shareholders of
EQR or EWR and prior to the filing of the Articles with the Department. After
any such approval by the shareholders of EQR or EWR, no amendment may be made
which by law requires the further approval of shareholders or partners without
obtaining such further approval.
The Asset Contribution. The Asset Contribution Agreement may be amended or
modified by written agreement of the parties.
ANTICIPATED ACCOUNTING TREATMENT
The Transactions 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 EQR and ERP in the
Transactions will be used as the valuation basis of the combination. The assets
acquired and liabilities assumed of EWRLP will be recorded at their relative
fair market values as of the Effective Date. The financial statements of ERP
will reflect the combined operations of ERP and EWRLP from the date of the
Transactions.
RESTRICTIONS ON TRANSFER OF ERP UNITS; SHARES AVAILABLE FOR RESALE
Notwithstanding the registration of ERP units, ERP units are not transferable
under the ERP Partnership Agreement without the consent of EQR in its capacity
as general partner except an ERP limited partner may do the following: (i)
transfer all or any portion of its ERP Units to ERP, (ii) transfer all or any
portion of its ERP Units to an affiliate, another limited partner or to an
immediate family member, (iii) if such limited partner is a natural person,
transfer all or any portion of his or her ERP Units upon his or her death to
such limited partner's estate, executor, administrator or personal
representative or to such limited partner's beneficiaries pursuant to a devise
or bequest or by the laws of descent and distribution or to a trust of which
such limited partner is a settlor or co-settlor with a member or his or her
immediate family and the beneficiaries of which include no person or entity
other than such limited partner and/or such limited partner's immediate family,
(iv) transfer all or any portion of its ERP Units pursuant to the exercise of a
redemption right under the ERP Partnership Agreement, (v) transfer all or any
portion of its ERP Units to a lending institution, which is not an affiliate of
such limited partner, as collateral or security for a bona fide loan or other
extension of credit, and transfer such pledged ERP Units to such lending
institution in connection with the exercise of remedies under such loan
extension or credit, and (vi) if such limited partner is an entity, transfer
all or any portion of its ERP Units to one or more entities that are wholly-
owned and controlled by such limited partner or by distributing ERP Units in a
liquidation, winding up or otherwise without consideration to the equity owners
of such entity. In order to effect such transfer, the limited partner must
deliver to EWR as general partner a duly executed copy of the instrument making
such transfer and such instrument must evidence the written acceptance by the
assignee of all of the terms and conditions of the ERP Partnership Agreement
and represent that such assignment was made in accordance with all applicable
laws and regulations.
39
<PAGE>
The issuance of shares of EQR Common upon consummation of the Transactions
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
EWR 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
Consent Solicitation/Prospectus/Information Statement does not cover any
resales of shares of EQR Common received by affiliates of EWR.
THE AMENDMENTS
ERP AMENDMENT
The Chairman of the Board of Trustees of EQR as general partner of ERP, will
amend, immediately prior to the effectiveness of the Merger, the ERP
Partnership Agreement to permit EQR to engage in activities as the co-general
partner of EWRLP and to acquire an ownership interest in the Financing
Partnership (as defined herein), as contemplated under the terms of the Merger
Agreement, in addition to performing its duties as general partner of ERP. The
ERP Partnership Agreement currently provides that in addition to fulfilling
its duties as a general partner of ERP, EQR is permitted to (a) own any
wholly-owned subsidiary or other entity of EQR which is a general partner of a
partnership having ERP as a partner, (b) borrow (including the issuance of
debt securities) where the net proceeds thereof are loaned or contributed to
ERP and (c) engage in activities incidental to EQR's status and existence as a
REIT. The ERP Amendment will provide that, in addition to performing its
duties as general partner of ERP, EQR may (i) have an ownership interest in a
partnership or a limited liability company of which ERP is a partner or a
member, respectively, (ii) own any qualified REIT subsidiary (within the
meaning of the Code) or any other entity which is a partner of a partnership
or a member of a limited liability company having ERP as a partner or member,
respectively, (iii) own any entity that owns no more than an one percent (1%)
interest in any partnership, limited liability company or other entity, (iv)
borrow (including the issuance of debt securities) where the net proceeds
thereof are loaned or contributed to ERP, (v) engage in any activity which the
EQR Board of Trustees, in its sole discretion, has determined will have a
material benefit to EQR and will not have a material adverse effect on ERP,
and (vi) engage in activities incidental to EQR's status and existence as a
REIT.
EWRLP AMENDMENT
The holders of EWRLP Units are being asked to consent to an amendment to the
EWRLP Partnership Agreement, which will, among other things, (i) allow EQR and
ERP to serve as co-general partners of EWRLP upon the effectiveness of the
Merger, (ii) adjust each outstanding EWRLP Unit by one-half to give effect to
the Exchange Ratio, (iii) eliminate certain restrictions that the EWRLP
Partnership Agreement would place upon EQR and ERP as co-general partners of
EWRLP, (iv) permit the Asset Contribution pursuant to the Asset Contribution
Agreement, (v) permit the dissolution of EWRLP upon the terms contained in the
Asset Contribution Agreement and (vi) ratify the revocation of the 11.2
Amendment (as defined below). The text of the EWRLP Amendment is attached as
Appendix B hereto.
The Merger Agreement provides that EQR and ERP shall become co-general
partners of EWRLP upon the effectiveness of the Merger, thereby succeeding EWR
as general partner of EWRLP. The EWRLP Partnership Agreement requires the
consent of the limited partners to a new general partner. Accordingly, the
EWRLP Amendment will permit EQR and ERP to act as the co-general partners of
EWRLP.
The EWRLP Partnership Agreement provides for adjustments in the number of
outstanding EWRLP Units to maintain the economic relationship between an EWRLP
Unit and the shares of the general partner. The proposed amendment will
specify the amount of such adjustment is 50% to reflect the Exchange Ratio.
EWRLP Partnership Agreement currently limits the activities of the general
partner to the management of EWRLP Partnership with specific exceptions. The
proposed EWRLP Amendment would eliminate such limitations. EQR and ERP as co-
general partners of EWRLP may engage in any and all activities without such
limitations.
The EWRLP Partnership Agreement prohibits EWRLP from selling property to the
general partner except on terms that are fair and reasonable and no less
favorable to EWRLP than would be obtained from unaffiliated third parties.
While ERP and EWRLP believe the Asset Contribution satisfies such criteria,
the EWRLP Amendment will specifically permit the contribution of EWRLP's
assets, subject to its liabilities to ERP pursuant to the Asset Contribution
Agreement to ERP in exchange for the number of ERP Units equal to the number
of EWRLP Units then outstanding.
The EWRLP Partnership Agreement contemplates that the assets of EWRLP would
be sold before dissolution so that cash would be distributed to the holders of
EWRLP Units. The EWRLP Amendment will permit, following the Asset
Contribution, the dissolution of EWRLP and the distribution to the partners of
EWRLP a number of ERP Units equal to the number of EWRLP Units held by such
holder. The EWRLP Amendment also specifically authorizes the dissolution of
EWRLP in the manner set forth in the Asset Contribution Agreement.
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<PAGE>
The EWRLP Partnership Agreement prohibits the general partner from
transferring its general partnership interest except in certain limited
instances. The EWRLP Amendment prohibits the general partners from
transferring their general partnership interests except by operation of law.
Section 11.2(c) of the EWRLP Partnership Agreement provides, among other
things, that EWR in its capacity as general partner of EWRLP may not engage in
a merger, consolidation or other combination with or into another entity or a
sale of all or substantially all of its assets or similar transaction unless
(i) under the terms of such a transaction the limited partners of EWRLP will
not engage in a sale or exchange under the Code of their EWRLP Units, or (ii)
such a transaction includes a merger of EWRLP or sale of substantially all of
its assets and as a result of which all limited partners of EWRLP will receive
for each EWRLP Unit an amount equal to the amount of consideration paid to a
holder of one share of EWR Common in consideration of one share of EWR Common
in connection with such a transaction; provided that in connection with such a
transaction, a purchase, tender or exchange offer shall have been made to and
is accepted by the holders of more than 50% of the outstanding shares of EWR
Common, the holders of EWRLP Units will receive the greatest amount of
consideration which a limited partner of EWRLP would have received had it
exercised its right of redemption and received shares of EWR Common in
exchange for its EWRLP Units immediately prior to such a transaction. Since
the Unit Exchange Offer and Asset Contribution Agreement do not comply with
such requirements, the EWRLP Amendment will delete Section 11.2(c) in its
entirety.
On June 18, 1997, the EWR Board of Directors, in its capacity as general
partner of EWRLP, adopted an amendment to Section 11.2 of the EWRLP
Partnership Agreement (the "11.2 Amendment") with the intent to propose the
11.2 Amendment to the EWRLP limited partners for their approval pursuant to
the terms of the EWRLP Partnership Agreement. Prior to the proposal of the
11.2 Amendment to the EWRLP limited partners for approval, EWR commenced
active negotiations of a transaction with EQR. In light of the proposed
Merger, the EWR Board of Directors concluded that the 11.2 Amendment was not
in the best interests of EWRLP and decided not to propose said amendment to
the EWRLP limited partners for approval. The 11.2 Amendment is no longer being
proposed by the EWR Board of Directors to the EWRLP limited partners for
approval.
The 11.2 Amendment provided that in the event EWR was the subject of a
business combination, (i) the redemption right of the holders of EWRLP Units
would be protected by specifying the securities into which EWRLP Units would
be exchangeable, (ii) the business combination be structured in such a manner
so that the limited partners of EWRLP will not engage in a sale or exchange
for Federal income tax purposes of their EWRLP Units and as a transaction
which includes the merger of EWRLP or the sale of substantially all its assets
as a result of which the holders of EWRLP Units would receive the same or
greater consideration as EWR shareholders pursuant to such business
combination, (iii) substantially all the assets of the surviving entity, other
than EWRLP Units held by the general partner must be owned directly or
indirectly by EWRLP or its successor, (iv) required the successor to EWR to
guaranty the obligations of general partner of EWRLP under the 11.2 Amendment,
(v) that the rights and privileges of the holders of EWRLP Units must be at
least as favorable as the rights granted to other limited partners of the
surviving partnership, (vi) the general partner shall use its best reasonable
efforts to structure such business combination to avoid causing the limited
partners of EWRLP to recognize gain for Federal income tax purposes by virtue
of the occurrence of or their participation in such combination, and (vii)
EWRLP to use its best reasonable efforts to cooperate with the limited
partners of EWRLP to minimize any taxes payable in connection with any
repayment, refinancings, replacement or restructuring of indebtedness or any
sale, exchange or other disposition of the assets of EWRLP. The 11.2 Amendment
would apply to a subsequent business combination of any successor to EWRLP.
The Transactions described herein could not be effected in compliance with
the 11.2 Amendment.
The EWRLP Amendment includes a provision which ratifies, approves and
confirms the decision of the EWR Board of Directors not to propose the 11.2
Amendment to the limited partners of EWRLP for approval, with the same force
and effect as if the 11.2 Amendment had been proposed to the limited partners
of EWRLP and rejected.
INTERESTS OF CERTAIN PERSONS
IN THE TRANSACTIONS
Certain executive officers, directors and key employees of EWR have been
granted stock options and/or, restricted shares and/or have entered agreements
providing them with certain rights upon a change in control of EWR. The
following sets forth the cash payments and other benefits which will be
provided to key executives, directors and key employees of EWR in connection
with the Merger.
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<PAGE>
CONSULTING AGREEMENT
EQR Properties Management LP, an affiliate of EQR, has entered into a
consulting agreement to be effective as of the Effective Time with Mr. Evans
which will expire on December 31, 1999 and will provide for cash compensation
to be paid to him of $225,000 per annum. Mr. Evans will also receive an option
(an "EQR Option") to purchase 115,500 shares of EQR Common. The EQR Option
will vest in three equal annual installments and will have an exercise price
equal to the Closing Price for a share of EQR Common on the Closing Date. Mr.
Evans will receive the following additional benefits under his consulting
agreement: (1) consideration for an option award under EQR's Second Amended
and Restated Share Option and Share Award Plan, (2) payment in shares of EQR
Common valued at the time of payment equal to the value of the bonus he would
have received for the 1997 calendar year under his existing employment
agreement with EWR, (3) eligibility for a performance bonus under EQR's
Incentive Compensation Plan and (4) eligibility to participate in other EQR
employee benefit plans in which persons in comparable positions participate.
EMPLOYMENT AGREEMENT
EQR Properties Management LP has entered into an employment agreement to be
effective as of the Effective Time with Mr. Berry which will expire on
December 31, 2000 and will provide for cash compensation to be paid to him of
$250,000 per annum. Mr. Berry will also receive an EQR Option to purchase
77,500 shares of EQR Common. The EQR Option will vest in three equal annual
installments and will have an exercise price equal to the Closing Price of a
share of EQR Common on the Closing Date. Mr. Berry will also receive the
following benefits under his employment agreement: (1) consideration for an
option award under EQR's Second Amended and Restated Share Option and Share
Award Plan, (2) payment in shares of EQR Common valued at the time of payment
equal to the value of the bonus he would have received for the 1997 calendar
year under his existing employment agreement with EWR, (3) eligibility for a
performance bonus under EQR's Incentive Compensation Plan and (4) eligibility
to participate in other EQR employee benefit plans in which persons in
comparable positions participate.
SENIOR OFFICERS
Mr. J. Donald Couvillion, a Vice President of EWR, will be the Vice
President--Development of ERP. Other officers of EWR, including Mr. Anthony V.
Pusateri, a Senior Vice-President of EWR and Mr. G. Edward O'Clair, a Senior
Vice President of EWR are expected to continue as employees of ERP, but will
not be subject to employment agreements.
CHANGE IN CONTROL AGREEMENTS
Messrs. Evans, Berry, Fannin, O'Clair, Couvillion, Pusateri, Mr. Kevin M.
Burnett, a Vice President and Controller of EWR, Mr. Gail B. Peterson, a Vice
President of EWR, and Mr. G. Grant Lyon, a Vice President of EWR, have entered
into agreements, dated June 18, 1997 and Mr. Pusateri has entered into an
agreement dated July 21, 1997 ("Change in Control Agreements") with EWR which
provide that change in control payments and pro rata bonus payments shall be
paid to and the vesting of certain options and restricted stock held by such
individuals shall occur upon a termination of employment following a change in
control (as defined in the Change in Control Agreements) of EWR. Messrs. Evans
and Berry will terminate their respective Change in Control Agreements as of
the Effective Date. Mr. Couvillion will amend his Change in Control Agreement
to (1) eliminate vesting of employer contributions under the EWR 401(k) plan
in exchange for a cash payment increased to cover income taxes on the cash
payment, (2) acknowledge that his new position with EQR will not trigger the
payments provision under his Change in Control Agreement and (3) acknowledge
that the term "change in control" applies only to the Merger of EWR into EQR
and not to any future transactions involving EQR. Messrs. Fannin, Burnett,
Peterson, Pusateri, O'Clair and Lyon will amend their Change in Control
Agreements to (1) eliminate vesting of employer contributions under the EWR
401(k) Plan in exchange for a cash payment increased to cover income taxes on
the cash payment, (2) impose the payment obligation as of the Closing Date
notwithstanding the fact that each officer may perform services for a
transitional period thereafter, (3) acknowledge that the term "change in
control" applies only to the Merger of EWR into EQR and not to any future
transactions involving EQR and (4) require payment be made within five days of
termination of employment (or earlier if required by law) unless such
termination occurs during the last two months of a calender year in which case
payment will be made on January 2 of the immediately following calendar year
(or earlier if required by law). Messrs. Fannin, Burnett, Peterson, Pusateri,
O'Clair and Lyon will receive cash payments under their Change in Control
Agreements of $546,000, $197,000, $206,300, $392,000, $246,990 and $190,000,
respectively. Mr. Fannin will receive an estimated additional payment of
$442,000 to offset any excise tax payment.
RESTRICTED SHARE GRANTS
Outstanding restricted share grants were previously made to Messrs. Evans,
Berry, Pusateri, O'Clair, Fannin and other employees of EWR. In connection
with the Merger, as of the Effective Time all restricted shares of EWR Common
will become vested and will participate in the Merger on the same basis as all
other shares of EWR Common.
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<PAGE>
EWR OPTIONS
As of the Effective Time, all rights under all existing vested and nonvested
options to purchase shares of EWR Common will terminate unless each holder of
options to purchase shares of EWR Common shall have entered into an agreement
(an "Option Cash Out Agreement") with EWR not to exercise such option in
consideration for a cash payment equal to the difference between (i) the
Exchange Ratio multiplied by the Closing Price of a share of EQR Common on the
NYSE on the Closing Date and (ii) the applicable exercise price of such option,
multiplied by the number of shares of EWR Common subject to such option.
Assuming a share price of $51.0625 for EQR Common on the Closing Date, the
cash payments which will be made to key executives, directors and key employees
of EWR who enter into an Option Cash Out Agreement are as follows: $1,158,469
for Mr. Evans, $717,844 for Mr. Berry, $100,781 for Mr. Pusateri, $317,734 for
Mr. O'Clair, $417,813 for Mr. Fannin, $182,484 for Mr. Couvillion, $47,531 for
Mr. Lyon, $127,375 for Mr. Burnett, $109,531 for Mr. Peterson, $989,922 for Mr.
Withycombe, $49,038 for Mr. Bidstrup, $49,038 for Mr. Theobald, $49,038 for Mr.
O'Connor and $526,662 for all other employees.
EQR OPTIONS
After the Effective Time, all employees including key employees of EWR who
become employees of EQR and who receive a cash payment in consideration for
their agreement not to exercise their outstanding options to purchase shares of
EWR Common will receive a nonqualified option to purchase a number of shares of
EQR Common equal to the number of shares of EWR Common subject to their EWR
Option Cash Out Agreement multiplied by the Exchange Ratio. The new EQR option
shall vest in three equal annual installments and have an exercise price per
share to equal the Closing Price of a share of EQR Common on the Closing Date.
Assuming all holders of options to purchase shares of EWR Common elect to
receive a cash payment in consideration for their agreement not to exercise
such options respective options, the number of shares of EQR Common subject to
option which will be issued is as follows: 115,500 for Mr. Evans pursuant to
his consulting agreement, 77,500 for Mr. Berry pursuant to his employment
agreement, 12,500 for Mr. Pusateri, 33,750 for Mr. O'Clair, 21,750 for Mr.
Couvillion, and 283,188 for all other employees.
UNIT CONTRIBUTION AGREEMENT
Mr. Evans and Mr. Withycombe and certain of their respective affiliates hold
an aggregate of 3,309,762 units of limited partnership interests in EWRLP which
will be contributed to ERP in exchange for 1,654,881 units of limited
partnership interest in ERP pursuant to a Unit Contribution Agreement.
SALE OF STOCK
Messrs. Evans and Withycombe shall sell all of their respective shares of
Evans Withycombe Management Inc. to Messrs. Neithercut and Strohm for an
aggregate consideration of $10,000.
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ERP OPERATING LIMITED PARTNERSHIP
BASIS OF PRESENTATION TO UNAUDITED PRO FORMA
COMBINED BALANCE SHEET
AS OF JUNE 30, 1997
The Unaudited Pro Forma Combined Balance Sheet gives effect to the proposed
Merger of ERP Operating Limited Partnership ("ERP") and Evans Withycombe
Residential, Limited Partnership. ("EWRLP") as if the Merger had occurred on
June 30, 1997. 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 ERP and EWRLP would have been at June 30, 1997, nor does
it purport to represent the future combined financial position of ERP and
EWRLP. 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 ERP and EWRLP incorporated
by reference into the Consent Solicitation/Prospectus/ Information Statement.
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<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
PRO FORMA ERP
ERP EWRLP MERGER PRO FORMA
HISTORICAL HISTORICAL (A) ADJUSTMENTS (B) COMBINED
---------- -------------- --------------- ----------
<S> <C> <C> <C> <C>
ASSETS
Rental property, cost... $4,482,434 $803,861 $319,835 (C) $5,606,130
Less: Accumulated
Depreciation........... (357,599) (48,925) -- (406,524)
Rental property, net.... 4,124,835 754,936 319,835 5,199,606
Real Estate held for
disposition............ 3,947 -- -- 3,947
Construction in
progress............... -- 43 -- 43
Investment in mortgage
notes, net............. 174,764 15,120 (7,932)(D) 181,952
Cash and cash
equivalents............ 311,358 1,051 (69,068)(E) 243,341
Rents receivable........ 2,078 371 -- 2,449
Deposits-restricted..... 6,112 6,787 -- 12,899
Escrow deposits-
mortgage............... 28,698 1,731 -- 30,429
Deferred financing
costs, net............. 14,306 4,489 (4,489)(F) 14,306
Other assets............ 72,636 3,694 -- 76,330
---------- -------- -------- ----------
Total assets........ $4,738,734 $788,222 $238,346 $5,765,302
========== ======== ======== ==========
LIABILITIES AND
PARTNERS' CAPITAL
Liabilities:
Mortgage notes
payable.............. $ 960,879 $277,231 $(15,166)(G) $1,222,944
Line of credit........ -- 44,000 (44,000)(H) --
Notes, net............ 754,508 124,210 4,359 (I) 883,077
Accounts payable and
accrued expenses..... 43,001 13,322 -- 56,323
Accrued interest
payable.............. 22,210 2,860 -- 25,070
Due to affiliates..... 649 -- -- 649
Rents received in
advance and other
liabilities.......... 31,844 870 -- 32,714
Security deposits..... 19,231 2,408 -- 21,639
Distributions payable. 64,506 10,078 -- 74,584
---------- -------- -------- ----------
Total liabilities... 1,896,828 474,979 (54,807) 2,317,000
---------- -------- -------- ----------
Commitments and
contingencies
9 3/8% Series A
Cumulative Redeemable
Preference Units..... 153,000 -- -- 153,000
9 1/8% Series B
Cumulative Redeemable
Preference Units..... 125,000 -- -- 125,000
9 1/8% Series C
Cumulative Redeemable
Preference Units..... 115,000 -- -- 115,000
8.60% Series D
Cumulative Redeemable
Preference Units..... 175,000 -- -- 175,000
Series E Cumulative
Convertible
Preference Units..... 99,995 -- -- 99,995
9.65% Series F
Cumulative Redeemable
Preference Units..... 57,500 -- -- 57,500
Partners' capital:
General Partner....... 1,937,189 312,442 192,727 (J) 2,442,358
Limited Partners
(Minority interest).. 179,222 801 100,426 (K) 280,449
---------- -------- -------- ----------
Total partners'
capital............ 2,116,411 313,243 293,153 2,722,807
---------- -------- -------- ----------
Total liabilities
and partners'
capital............ $4,738,734 $788,222 $238,346 $5,765,302
========== ======== ======== ==========
</TABLE>
45
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
BASIS OF PRESENTATION TO UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
The Unaudited Pro Forma Combined Statement of Operations for the six months
ended June 30, 1997 is presented as if the Merger had occurred on January 1,
1997. 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. 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 ERP and EWRLP would have been for the six months ended June
30, 1997, 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 ERP and EWRLP
incorporated by reference into this Consent Solicitation/Prospectus/
Information Statement.
46
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(AMOUNTS IN THOUSANDS EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
ERP
ERP EWRLP MERGER PRO FORMA
HISTORICAL HISTORICAL (L) ADJUSTMENTS COMBINED
---------- -------------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES
Rental Income.............. $290,799 $54,865 $ -- $345,664
Fee and asset management... 3,110 230 -- 3,340
Interest income-investment
in mortgage notes......... 8,011 -- -- 8,011
Interest and other income.. 4,404 3,505 -- 7,909
-------- ------- ------- --------
Total revenues......... 306,324 58,600 -- 364,924
-------- ------- ------- --------
EXPENSES
Property and maintenance... 70,760 14,434 -- 85,194
Real estate taxes and
insurance................. 29,667 4,784 -- 34,451
Property management........ 11,819 1,540 146 (M) 13,505
Fee and asset management... 1,569 -- -- 1,569
Depreciation............... 62,775 12,637 3,624 (N) 79,036
Interest:
Expense incurred......... 50,924 14,948 (270)(O) 65,602
Amortization of deferred
financing costs......... 1,220 454 (454)(P) 1,220
General and administrative. 6,206 624 (119)(Q) 6,711
-------- ------- ------- --------
Total expenses......... 234,940 49,421 2,926 287,287
-------- ------- ------- --------
Income before gain on
disposition of properties
and (loss) on early
extinguishment of debt...... 71,384 9,179 (2,926) 77,637
Gain on disposition of
properties................ 3,632 5,253 -- 8,885
(Loss) on early
extinguishment of debt.... -- (1,500) -- (1,500)
-------- ------- ------- --------
Net income................... $ 75,016 $12,932 $(2,926) $ 85,022
======== ======= ======= ========
ALLOCATION OF NET INCOME:
9 3/8% Series A Cumulative
Redeemable Preference
Units..................... 7,172 -- -- 7,172
9 1/8% Series B Cumulative
Redeemable Preference
Units..................... 5,704 -- -- 5,704
9 1/8% Series C Cumulative
Redeemable Preference
Units..................... 5,246 -- -- 5,246
8.60% Series D Cumulative
Redeemable Preference
Units..................... 1,714 -- -- 1,714
Series E Cumulative
Convertible Preference
Units..................... 615 -- -- 615
9.65% Series F Cumulative
Redeemable Preference
Units..................... 488 -- -- 488
General Partner............ 47,732 12,902 (5,308) 55,326
Limited Partners (Minority
interest)................. 6,345 30 2,382 (R) 8,757
-------- ------- ------- --------
$ 54,077 $12,932 $(2,926) $ 64,083
======== ======= ======= ========
Net income per weighted
average OP Unit outstanding. $ 0.86 $ 0.53 $ 0.24 $ 0.85
======== ======= ======= ========
Weighted average OP Units
outstanding................. 62,787 24,415 (11,972)(S) 75,230
======== ======= ======= ========
</TABLE>
47
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
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. 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 ERP and EWRLP 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 ERP and EWRLP
incorporated by reference into this Consent Solicitation/Prospectus/Information
Statement.
48
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
ERP
ERP EWRLP MERGER PRO FORMA
HISTORICAL HISTORICAL (T) ADJUSTMENTS COMBINED
---------- -------------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES
Rental Income............... $454,412 $ 94,350 $ -- $548,762
Fee and asset management.... 6,749 1,157 -- 7,906
Interest income-investment
in mortgage notes.......... 12,819 -- -- 12,819
Interest and other income... 4,405 6,119 -- 10,524
-------- -------- -------- --------
Total revenues.......... 478,385 101,626 -- 580,011
-------- -------- -------- --------
EXPENSES
Property and maintenance.... 127,172 25,161 -- 152,333
Real estate taxes and
insurance.................. 44,128 8,121 -- 52,249
Property management......... 17,512 3,225 146 (U) 20,883
Fee and asset management.... 3,837 -- -- 3,837
Depreciation................ 93,253 20,885 11,531 (V) 125,669
Interest:
Expense incurred.......... 81,351 23,460 (539)(W) 104,272
Amortization of deferred
financing costs.......... 4,242 765 (765)(X) 4,242
General and administrative.. 9,857 1,204 (194)(Y) 10,867
-------- -------- -------- --------
Total expenses.......... 381,352 82,821 10,179 474,352
-------- -------- -------- --------
Income before gain on
disposition of properties
and extraordinary item..... 97,033 18,805 (10,179) 105,659
Gain on disposition of
properties................. 22,402 -- -- 22,402
-------- -------- -------- --------
Income before extraordinary
item....................... 119,435 18,805 (10,179) 128,061
Extraordinary item:
Write-off of unamortized
costs on refinanced debt... (3,512) -- -- (3,512)
-------- -------- -------- --------
Net income.................. $115,923 $ 18,805 $(10,179) $124,549
======== ======== ======== ========
ALLOCATION OF NET INCOME:
Redeemable Preference
Interests.................. 263 -- -- 263
9 3/8% Series A Cumulative
Redeemable Preference
Units...................... 7,172 -- -- 7,172
9 1/8% Series B Cumulative
Redeemable Preference
Units...................... 5,704 -- -- 5,704
9 1/8% Series C Cumulative
Redeemable Preference
Units...................... 5,246 -- -- 5,246
General Partner............. 72,609 18,730 (8,897) 82,442
Limited Partners (Minority
interest).................. 14,036 75 (1,282)(Z) 12,829
-------- -------- -------- --------
$ 86,645 $ 18,805 $(10,179) $ 95,271
======== ======== ======== ========
Net income per weighted
average OP Unit
outstanding................ $ 1.70 $ 0.84 $ 1.04 $ 1.50
======== ======== ======== ========
Weighted average OP Units
outstanding................ 51,108 22,184 (9,741)(AA) 63,551
======== ======== ======== ========
</TABLE>
49
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER UNIT DATA)
(A) Certain reclassifications have been made to EWRLP's historical balance
sheet to conform to ERP'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 $1,103,568
assuming a market value of $48.75 per share of EQR's common shares, as
follows:
<TABLE>
<S> <C>
Issuance of 10,167 and 2,276 EQR Common Shares and OP Units,
respectively, based on the .50 exchange rate, in exchange
for 20,335 and 4,551 EWR Common Shares and OP Units,
respectively................................................ $606,596
Assumption of EWRLP's liabilities............................ 474,979
Adjustment to increase the assumed EWRLP debt to its fair
value (see Note I).......................................... 4,359
Merger costs (see calculation below)......................... 17,634
----------
$1,103,568
==========
</TABLE>
The following is a calculation of the estimated fees and other expenses
related to the Merger:
<TABLE>
<S> <C>
Employee termination costs........................................ $ 1,915
Buyout of stock options........................................... 5,628
Investment Banking Fee............................................ 5,650
Legal and accounting fees......................................... 2,120
Other, including printing, filing, title and transfer costs....... 2,321
-------
Total estimated merger costs.................................... $17,634
=======
</TABLE>
(C) Represents the estimated increase in EWRLP's rental property, net based
upon ERP's purchase price and the adjustment to eliminate the basis of
EWRLP's net assets acquired:
<TABLE>
<S> <C>
Purchase Price (see Note B).................................... $1,103,568
Less: Historical basis of EWRLP's net assets acquired
Rental property, net......................................... 754,936
Construction in progress..................................... 43
Investment in mortgage notes, net............................ 15,120
Cash and cash equivalents.................................... 1,051
Rents receivable............................................. 371
Restricted deposits.......................................... 6,787
Escrow deposits--mortgage.................................... 1,731
Other assets................................................. 3,694
----------
Step-up to record fair value of EWRLP's rental property........ $ 319,835
==========
</TABLE>
(D) Decrease to Investment in mortgage notes reflects the receipt by EWRLP of
$7.9 million mortgage note receivable on July 23, 1997.
(E) Decrease to Cash and cash equivalents reflects the following:
<TABLE>
<S> <C>
The expected payment for Merger costs (see Note B) and
registration costs (see Note M)............................... $ 17,834
Repayment of EWRLP's line of credit (see Note H)............... 44,000
Repayment of two of EWRLP's Mortgage notes payable in July,
1997 (see Note G)............................................. 15,166
The receipt of notes receivable (see Note D)................... (7,932)
--------
$ 69,068
========
</TABLE>
50
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER UNIT DATA)
(F) Decrease due to elimination of EWRLP's deferred loan costs in connection
with the Merger.
(G) Decrease to Mortgage notes payable reflects the payoff of two of EWRLP's
mortgage notes payable totaling $15.2 million in July, 1997.
(H) Reflects the repayment of EWRLP's line of credit from ERP's cash balances.
(I) Increase to Notes, net reflects the premium required to adjust EWRLP's
notes to their estimated fair value.
(J) Increase to General Partner's capital reflects the following:
<TABLE>
<S> <C>
Issuance of EQR Common Shares and OP Units (see Note B)......... $ 606,596
Registration costs incurred in connection with the Merger....... (200)
EWRLP's historical Partner's capital............................ (313,243)
Adjustment to Limited Partners' ownership in ERP (see Note J)... (100,426)
---------
$ 192,727
=========
</TABLE>
The 10.30% Limited Partners' ownership in ERP, is calculated as follows:
<TABLE>
<CAPTION>
SHARES UNITS
------ ------
<S> <C> <C>
EWR's historical Shares/Units outstanding.................. 20,335 24,886
====== ======
EQR's Shares/Units to be issued based on the .50 Merger
exchange ratio............................................ 10,167 12,443
EQR's historical Shares/Units outstanding.................. 73,633 80,953
------ ------
EQR's proforma Shares/Units outstanding.................... 83,800 93,396
====== ======
EQR ownership percentage of ERP............................ 89.7%
======
Limited Partners' ownership percentage of ERP.............. 10.3%
======
</TABLE>
(K) The pro forma allocation to the Limited Partners is based upon the
percentage owned by such Limited Partners as follows:
<TABLE>
<S> <C>
Total partners' capital........................................ $2,722,807
Limited Partners' percentage ownership in ERP (see Note M)..... 10.3%
----------
Pro Forma Combined Limited Partners' ownership in ERP.......... 280,449
ERP historical Limited Partners' ownership in ERP.............. (179,222)
EWRLP historical Limited Partners' ownership in EWRLP.......... (801)
----------
Adjustment to Limited Partners' ownership in ERP............... $ 100,426
==========
</TABLE>
51
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER UNIT DATA)
(L) Certain reclassifications have been made to EWRLP's Historical Statement of
Operations to conform to ERP's Statement of Operations presentation.
(M) Increase results from additional costs expected to be incurred as a result
of the Merger.
(N) Represents the net increase in depreciation of real estate owned as a
result of recording EWRLP's 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 June
30, 1997 is as follows:
<TABLE>
<S> <C>
Historical basis of EWRLP's rental property................... $ 754,936
Plus: Step up to EWRLP's rental property, net (see Note C).... 319,835
----------
Pro forma basis of EWRLP's rental property at fair value...... 1,074,771
Less: Fair value allocated to land............................ (107,477)
----------
Pro forma basis of EWRLP's depreciable rental property at fair
value........................................................ $ 967,294
==========
Calculation of depreciation of rental property for the six months ended June
30, 1997 is as follows:
Depreciation expense based upon an estimated useful life of
approximately 30 years....................................... $ 16,122
Less: EWRLP's historic depreciation of rental property........ (12,498)
----------
Pro forma adjustment.......................................... $ 3,624
==========
</TABLE>
(O) Decrease results from the amortization of the premium required to record
EWRLP's debt at its estimated fair value.
(P) Decrease results from the elimination of amortization of EWRLP's deferred
financing costs, which costs would be eliminated in connection with the
Merger.
(Q) Decrease results from operating efficiencies expected to occur as a result
of the Merger.
(R) A portion of income was allocated to the Limited Partners representing
interests in ERP not owned by EQR and interests in EWRLP not owned by EWR.
The pro forma allocation to the Limited Partners (represented by OP Units)
is based upon the percentage estimated to be owned by such Limited Partners
as a result of the pro forma transactions.
(S) Decrease of Weighted Average OP Units Outstanding is based on the
conversion of EWRLP's OP Units to ERP OP Units at a conversion ratio of .50
EWRLP OP Unit per ERP OP Unit.
52
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER UNIT DATA)
(T) Certain reclassifications have been made to EWRLP's Historical Statement of
Operations to conform to ERP's Statement of Operations presentation.
(U) Increase results from additional costs expected to be incurred as a result
of the Merger.
(V) Represents the net increase in depreciation of real estate owned as a
result of recording EWRLP's 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 EWRLP's rental property................... $ 754,936
Plus: Step up to EWRLP's rental property, net (see Note C).... 319,835
----------
Pro forma basis of EWRLP's rental property at fair value...... 1,074,771
Less: Fair value allocated to land............................ (107,477)
----------
Pro forma basis of EWRLP's depreciable rental property at fair
value........................................................ $ 967,294
==========
</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........................................ $ 32,243
Less: EWRLP's historic depreciation of rental property......... (20,712)
--------
Pro forma adjustment........................................... $ 11,531
========
</TABLE>
(W) Decrease results from the amortization of the premium required to record
EWRLP's debt at its estimated fair value.
(X) Decrease results from the elimination of amortization of EWRLP's deferred
financing costs, which costs would be eliminated in connection with the
Merger.
(Y) Decrease results from operating efficiencies expected to occur as a result
of the Merger.
(Z) A portion of income was allocated to Limited Partners representing
interests in ERP not owned by EQR and interests in EWRLP not owned by EWR.
The pro forma allocation to Limited Partners (represented by OP Units) is
based upon the percentage estimated to be owned by such Limited Partners as
a result of the pro forma transactions.
(AA) Decrease of Weighted Average OP Units Outstanding is based on the
conversion of EWRLP's OP Units to ERP OP Units at a conversion ratio of
.50 EWRLP OP Units per ERP OP Unit.
53
<PAGE>
CAPITALIZATION
The following table sets forth the pro forma capitalization of ERP, as
adjusted to reflect the Transactions. The information set forth in the
following table should be read in conjunction with the unaudited combined pro
forma financial statements and notes thereto included elsewhere in this Consent
Solicitation/Prospectus/Information Statement.
<TABLE>
<CAPTION>
JUNE 30, 1997
PRO FORMA (IN THOUSANDS)
------------------------
<S> <C>
Mortgage notes payable......................... $1,222,944
Notes, net..................................... 883,077
Partners' Capital.............................. 2,722,807
----------
Total capitalization....................... $4,828,828
==========
</TABLE>
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain federal income tax considerations
material to (i) the Unit Exchange Offer, whereby holders of EWRLP Units
("Exchanging Partners") will contribute their EWRLP Units to ERP in exchange
for a number of ERP Units equal to the number of EWRLP Units so exchanged
multiplied by the Exchange Ratio, (ii) the Asset Contribution and Distribution,
whereby EWRLP will contribute its assets, subject to its liabilities, to ERP,
with EWRLP receiving 0.5 ERP Units for each EWRLP Unit outstanding at the
Effective Time, (iii) the ownership of ERP Units by an EWRLP Unitholder, and
(iv) the ownership of EQR Shares. The following discussions were prepared based
on consultation with Gibson, Dunn & Crutcher LLP, special counsel to EWRLP, and
Rudnick & Wolfe, special counsel to ERP, in connection with the Unit Exchange
Offer, the Asset Contribution and Distribution. In the opinion of Rudnick &
Wolfe and Gibson, Dunn & Crutcher, the following discussion, to the extent it
constitutes matters of law or legal conclusions, is accurate in all material
respects. Opinions of counsel are not binding on the Internal Revenue Service
("IRS" or "Service"). Thus, there can be no assurance that the IRS will agree
with the following discussion and positions described therein, or that the IRS
will not seek to challenge such positions, which challenge may be sustained by
the courts.
The information set forth below is based on the Code, existing and proposed
Treasury Department regulations promulgated thereunder (such existing
regulations are hereafter referred to as the "Regulations") and current
administrative interpretations and court decisions. No assurance can be given
that future legislation, Regulations, administrative interpretations and court
decisions will not significantly change the law, and thereby affect the
accuracy of this discussion. Any such change in law could apply retroactively.
Neither ERP, EQR, EWRLP nor EWR intend to obtain a ruling from the IRS
concerning the tax consequences of the Unit Exchange Offer, the Asset
Contribution, the Distribution or any of the other matters set forth herein
(except with regard to their impact on the Merger qualifying for tax-free
treatment under Code Section 368(a) of the Code). The discussions in this
section do not constitute tax advice to any person.
The following summary is not intended to be comprehensive. It does not
address the state, local or foreign tax consequences of the Unit Exchange
Offer, the Asset Contribution, or the Distribution, nor does it discuss all
aspects of federal income taxation that may be relevant to EWRLP Unitholders in
light of their particular circumstances. Except where indicated, the discussion
below describes general federal income tax considerations applicable to
individuals who are citizens or residents of the United States, and therefore
has limited application to domestic corporations and persons subject to special
federal income tax treatment, such as foreign persons, tax-exempt entities,
regulated investment companies and insurance companies.
BECAUSE OF THE PARTICULAR TAX ATTRIBUTES OF PARTNERS OF EWRLP, THE UNIT
EXCHANGE OFFER AND THE ASSET CONTRIBUTION MAY HAVE DIFFERING TAX IMPLICATIONS
FOR SUCH PARTNERS. THUS, PARTNERS ARE STRONGLY URGED TO CONSULT WITH THEIR OWN
TAX ADVISORS TO DETERMINE THE TAX CONSEQUENCES OF THE UNIT EXCHANGE OFFER, THE
ASSET CONTRIBUTION, THE DISTRIBUTION AND THE SUBSEQUENT OWNERSHIP OF ERP UNITS
OR EQR COMMON IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES. THE FOLLOWING
DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING, AND
PARTNERS MUST DEPEND UPON THE ADVICE OF THEIR OWN TAX ADVISORS WITH RESPECT TO
THE EFFECTS OF THE UNIT EXCHANGE OFFER, THE ASSET CONTRIBUTION, THE
DISTRIBUTION AND THE SUBSEQUENT OWNERSHIP OF ERP UNITS OR EQR COMMON IN LIGHT
OF THEIR PARTICULAR SITUATIONS.
54
<PAGE>
TAX CONSEQUENCES OF ASSET CONTRIBUTION AND DISTRIBUTION
General. Pursuant to, and subject to the terms and conditions of the Asset
Contribution Agreement, EWRLP has agreed, subsequent to the effectiveness of
the Merger, and at the option of ERP, to contribute all of its assets to ERP in
exchange for a number of ERP Units equal to the number of EWRLP Units then
outstanding multiplied by the Exchange Ratio. Following the Asset Contribution
and pursuant to the Distribution, EWRLP will distribute such ERP Units to the
partners of EWRLP in liquidation. See "The Transactions--Terms of the
Transactions--The Asset Contribution."
Contribution of Assets to ERP/Termination of EWRLP. The Service regards
transactions whereby the businesses of two or more partnerships are combined in
a single partnership, regardless of the form of the transaction and regardless
of whether the transaction constitutes a merger or consolidation under state
law, as mergers or consolidations for purposes of Code Section 708. In Revenue
Ruling 77-458, the Service concluded that where a partnership transferred all
of its assets, subject to all of its liabilities, to another partnership in
exchange for interests in the other partnership, and such interests were
distributed to the partners of the partnership transferring its assets and
liabilities, such transaction constituted a merger of the two partnerships for
purposes of Code Section 708. Therefore, the Asset Contribution and subsequent
liquidation of EWRLP should constitute a merger of ERP and EWRLP for purposes
of Code Section 708. Under Code Section 708(b)(2)(A), in the case of a merger
of two or more partnerships, the resulting partnership shall be considered the
continuation of the merging partnership whose members own an interest of more
than 50% in the capital and profits of the resulting partnership. After the
Asset Contribution and Distribution, partners of ERP (prior to the Asset
Contribution) will own more than 50% in the capital and profits of the
resulting partnership. Therefore, ERP will be considered the surviving
partnership under Code Section 708. In Revenue Ruling 68-289, the Service
concluded that regardless of the actual form of the transaction, a partnership
that terminates as a result of a merger is treated as contributing its assets
to the resulting partnership and then liquidating, distributing interests in
the resulting partnership to its partners. Thus, as a result of the Asset
Contribution and Distribution, EWRLP will be treated for federal income tax
purposes as if it had directly contributed all of its assets, subject to all of
its liabilities, to ERP in exchange for ERP Units and subsequently liquidated,
distributing all of such ERP Units to its partners. Subject to those exceptions
discussed below, under Code Section 721(a), no gain or loss will be recognized
by EWRLP upon the contribution of its assets, subject to its liabilities, to
ERP in consideration for ERP Units.
Basis in ERP Units Received by EWRLP Unitholders. Code Section 732(b)
provides that the basis of property (other than money) distributed to a partner
in liquidation of the partner's interest in the partnership shall be an amount
equal to the adjusted basis of such partner's interest in the partnership
reduced by any cash distributed in the same transaction. Therefore, each EWRLP
Unitholder will have an adjusted basis in his ERP Units received in the
Distribution equal to such partner's basis in the EWRLP Units held by such
partner, subject to adjustment as described below. Code Section 752 provides
that a reduction in a partner's share of partnership liabilities is treated as
a distribution of cash to the partner, and an increase in a partner's share of
partnership liabilities is treated as a contribution of cash by the partner to
the partnership. Under Code Section 722, a contribution of cash by a partner
increases a partner's adjusted basis in his partnership interest, and under
Code Section 733, a distribution of cash to a partner reduces such partner's
adjusted basis in his partnership interest. As a result of the Asset
Contribution and liquidation of EWRLP, each EWRLP Unitholder will receive an
allocation of liabilities from ERP that may be greater than or less than the
amount of liabilities that was allocated to such partner by EWRLP. See "--
Allocation of ERP Liabilities." Accordingly, a partner who receives ERP Units
in connection with the liquidation of EWRLP will have an adjusted basis in his
ERP Units equal to such partner's adjusted basis in his EWRLP Units immediately
prior to the liquidation of EWRLP, increased or decreased by any actual or
deemed contribution or distribution, respectively, of cash in connection with
the Asset Contribution and Distribution.
Consequences of Deemed Distribution of Cash. Under Code Section 731, a
distribution of money by a partnership to a partner results in gain recognition
only to the extent the amount of money exceeds the partner's adjusted basis in
his partnership interest. In connection with the Asset Contribution and
Distribution, EWRLP will distribute ERP Units to the partners of ERP. Under
Code Section 752, the EWRLP Unitholders will be deemed to be relieved of the
liabilities of EWRLP assumed by ERP, and will receive an allocation of
liabilities by ERP pursuant to Code Section 752 and the ERP Partnership
Agreement. See "--Allocation of ERP Liabilities" and "--Basis in ERP Units
Received by EWRLP Unitholders." Accordingly, an EWRLP Unitholder who receives
ERP Units in connection with the Distribution will recognize gain to the extent
that any deemed distribution of cash arising from a reduction in partnership
liabilities exceeds such partner's adjusted basis in his partnership interest.
EWRLP Unitholders are strongly urged to consult with their own tax advisor to
determine the adjusted bases in their EWRLP Units and the extent (if any) of
any deemed cash distribution to such partner as a result of the Asset
Contribution and Distribution.
Subsequent Adjustments to Adjusted Tax Basis of ERP Units. An ERP
Unitholder's adjusted basis in his ERP Units generally will be increased by (a)
his share of ERP taxable income, (b) his contributions to the capital of ERP
and (c) increases in his allocable share of the liabilities of ERP. Generally,
such Exchanging Partner's adjusted basis in his ERP Units will be decreased
(but not below zero) by (1) his share of ERP's taxable losses and ERP
nondeductible expenditures which are not chargeable to capital, (2) cash
distributions made to such partner by ERP and (3) decreases in his allocable
share of the liabilities of ERP.
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Distributions of Cash/Marketable Securities. Under Code Section 731, a
distribution of money by a partnership to a partner results in gain recognition
only to the extent the amount of money exceeds the partner's adjusted basis in
his partnership interest. A distribution of property, other than money, by a
partnership to a partner does not result in taxable gain to the partner. The
term "money" for purposes of Code Section 731 includes marketable securities.
The term "marketable securities" includes financial instruments, such as stock
and other equity interests, that are actively traded as of the date of the
distribution, and financial instruments that are readily convertible into or
exchangeable for money or marketable securities. ERP Units received by partners
of EWRLP pursuant to the Distribution and liquidation of EWRLP may be
considered "marketable securities" subject to the gain recognition requirements
of Code Section 731. Under Code Section 731(c), marketable securities include
"financial instruments" which, in turn, include "other equity interests" which
are "actively traded." In cases where the value of a financial instrument is
determined substantially by reference to marketable securities, such financial
instrument is deemed to be actively traded. Because each ERP Unit can be
redeemed for one share of EQR common or the cash equivalent, the value of the
ERP Units are determined by reference to the value of EQR Common. Therefore,
such ERP Units may be considered marketable securities for purposes of Code
Section 731(c). However, an exception to the foregoing rule provides that a
distribution of property that would otherwise constitute a "marketable
security" will not constitute a marketable security for purposes of Code
Section 731 if such property was acquired by the partnership in a non-
recognition transaction, and the partnership distributes the marketable
securities received within 5 years of receipt. EWRLP will receive the ERP Units
in a non-recognition transaction governed by Code Section 721(a). Accordingly,
a distribution of ERP Units to a partner of EWRLP in connection with the Asset
Contribution and Distribution should not constitute a distribution of money to
the EWRLP Unitholders under Code Section 731.
UNIT EXCHANGE OFFER
Contribution of EWRLP Units to ERP. EWR Unitholders who elect to contribute
their EWRLP Units to ERP in exchange for a number of ERP Units equal to the
number of EWRLP Units so exchanged multiplied by the Exchange Ratio will be
treated as contributing assets to a partnership in exchange for interest in a
partnership in a transaction governed by Code Section 721. Under Code Section
721(a), subject to those exceptions discussed below, no gain or loss will be
recognized by a EWRLP Unitholder upon the contribution of EWRLP Units to ERP.
Exchanging Partners' Adjusted Tax Basis in ERP Units. In general, an
Exchanging Partner of EWRLP will have an initial tax basis ("Initial Basis") in
his ERP Units equal to his basis in his EWRLP Units, increased or decreased by
any deemed contribution or distribution, respectively, of cash arising under
Code Section 752. Code Section 752 provides that a reduction in a partner's
share of partnership liabilities is treated as a distribution of cash to the
partner, and an increase in a partner's share of partnership liabilities is
treated as a contribution of cash by the partner to the partnership. Under Code
Section 722, a contribution of cash by a partner increases a partner's adjusted
basis in his partnership interest, and under Code Section 733, a distribution
of cash to a partner reduces such partner's adjusted basis in his partnership
interest. As a result of the contribution of EWRLP Units to ERP, an Exchanging
Partner will be deemed to have been relieved of the liabilities previously
allocated to him by EWRLP and to have assumed liabilities of ERP allocated to
such partner by ERP. Accordingly, an Exchanging Partner's basis in his ERP
Units will be reduced to the extent the amount of liabilities allocated to him
by ERP are less than the amount of liabilities allocated to such partner by
EWRLP, and will be increased to the extent the amount of liabilities allocated
to him by ERP are greater than the amount of liabilities allocated to such
partner by EWRLP. For a discussion of the allocation of liabilities of ERP, see
"--Allocation of ERP Liabilities."
Consequences of Deemed Distribution of Cash. Under Code Section 731, a
distribution of money by a partnership to a partner results in gain recognition
only to the extent the amount of cash exceeds the partner's adjusted basis in
his partnership interest. Upon the contribution of EWRLP Units to ERP, the
Exchanging Partner will be deemed to be relieved of the liabilities previously
allocated to him by EWRLP and will receive an allocation of liabilities of ERP,
resulting in a net increase or decrease in the amount of liabilities allocated
to such EWRLP Unitholder. An Exchanging Partner will recognize gain to the
extent that any deemed distribution arising from a reduction in partnership
liabilities exceeds such partner's adjusted basis in his partnership interest.
Exchanging Partners of EWRLP are strongly urged to consult with their own tax
advisor to determine the adjusted bases in their EWRLP Units and the extent (if
any) of any deemed cash distribution to such partner as a result of the
exchange of their EWRLP Units for ERP Units and the corresponding increase or
reduction in the amount of liabilities allocated to such partner.
Subsequent Adjustments to Adjusted Tax Basis of ERP Units. An Exchanging
Partner's adjusted basis in his ERP Units generally will be increased by (a)
his share of ERP taxable income, (b) his contributions to the capital of ERP
and (c) increases in his allocable share of the liabilities of ERP. Generally,
such Exchanging Partner's adjusted basis in his ERP Units will be decreased
(but not below zero) by (1) his share of ERP's taxable losses and ERP
nondeductible expenditures which are not chargeable to capital, (2) cash
distributions made to such partner by ERP and (3) decreases in his allocable
share of the liabilities of ERP.
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ALLOCATION OF ERP LIABILITIES
ERP's recourse and nonrecourse liabilities will be allocated among ERP
Unitholders in accordance with Code Section 752 and the regulations thereunder
in the manner set forth below.
Recourse Liabilities. A partnership liability is a recourse liability to the
extent that any partner or a related person bears the economic risk of loss
for that liability. A partner's share of recourse liabilities equals the
portion of that liability, if any, for which that partner or a related person
bears such economic risk of loss. EWRLP Unitholders are not expected to bear
the economic risk of loss for any liabilities of ERP. However, EQR, as the
sole general partner of ERP, currently does and will bear the economic risk of
loss for certain liabilities of ERP. Accordingly, under Code Section 752, such
liabilities will constitute recourse liabilities which are allocable to EQR.
Nonrecourse Liabilities. A partnership liability is a nonrecourse liability
to the extent that no partner or related person bears the economic risk of
loss for that liability. A partner's share of nonrecourse liabilities equals
the sum of: (1) the partner's share of partnership "minimum gain" determined
in accordance with the rules of Code Section 704(b) and Regulations
thereunder; (2) the amount of any taxable gain that would be allocated to the
partner under Code Section 704(c) if the partnership (in a taxable
transaction) disposed of all partnership property subject to one or more
partnership nonrecourse liabilities in full satisfaction of those liabilities
and for no other consideration ("Code Section 704(c) Minimum Gain"); and (3)
the partner's share of excess nonrecourse liabilities of the partnership
(i.e., those liabilities not allocated under (1) and (2) above) as determined
in accordance with the partner's share of profits. ERP believes that it
allocates its nonrecourse liabilities in accordance with the foregoing
Regulations. The allocation of excess nonrecourse liabilities by ERP is
determined by taking into account facts and circumstances relating to the
partner's interest in the profits of ERP. EQR, as general partner of ERP, will
have discretion in any fiscal year to allocate excess nonrecourse liabilities
among the partners in any manner permitted under Code Section 752 and the
Regulations thereunder.
EWRLP Unitholders are strongly urged to consult with their own tax advisor
to determine the extent (if any) of any increase or reduction in the amount of
nonrecourse liabilities allocated to such partner as a result of the exchange
of their EWRLP Units for ERP Units (either through the Unit Exchange Offer or
the Distribution) and the implications of any corresponding deemed cash
distributions to such partner. See "--Unit Exchange Offer--Consequences of
Deemed Distributions of Cash" and "--Tax Consequences of Asset Contribution
and Distribution--Consequences of Deemed Distribution of Cash."
ENTITY CLASSIFICATION
Substantially all of EQR's investments are held indirectly through ERP and
the Subsidiary Partnerships (as defined herein). In general, partnerships are
"pass-through" entities which are not subject to federal income tax. Rather,
partners are allocated their proportionate shares of the items of income,
gain, loss, deduction and credit of a partnership, and are potentially subject
to tax thereon, without regard to whether the partners receive a distribution
from the partnership. EQR includes in its income its proportionate share of
the foregoing partnership items for purposes of the various REIT income tests
and in the computation of its REIT taxable income. Moreover, for purposes of
the REIT asset tests, EQR includes its proportionate share of assets held by
ERP and the partnerships.
Classification of ERP and Subsidiary Partnerships. EQR's interests in ERP,
EWRLP, and certain partnerships and limited liability companies that own the
beneficial interest of certain properties encumbered by mortgage financing
(collectively, the "EQR Financing Partnerships"), EQR Properties Management
LP, Equity Residential Properties Management, L.P. II ("EQR Properties
Management LP II"), and Evans Withycombe Finance, L.P. ("EW Finance LP")
(collectively, the "Subsidiary Partnerships") involve special tax
considerations, including the possibility of a challenge by the IRS of the
status of such entities as partnerships (as opposed to an association taxable
as a corporation) for federal income tax purposes. If ERP, EWRLP or any of the
Subsidiary Partnerships were treated as an association, such partnership would
be taxable as a corporation and therefore be subject to an entity-level tax on
its income. In such a situation, the character of EQR's assets and items of
gross income would change and preclude EQR from satisfying the asset tests and
possibly the income tests (see "--Tax Aspects of Investment in EQR--
Qualification of EQR as a REIT"), and in turn would prevent EQR from
qualifying as a REIT. In addition, a change in ERP, EWRLP or a Subsidiary
Partnership's status for tax purposes might be treated as a taxable event in
which case EQR might incur a tax liability without any related cash
distributions.
The IRS recently finalized and published certain Treasury Regulations (the
"Final Regulations") which provide that a domestic business entity not
otherwise classified as a corporation and which has at least two members (an
"Eligible Entity") may elect to be taxed as a partnership for federal income
tax purposes. The Final Regulations apply for tax periods beginning on or
after January 1, 1997 (the "Regulations Effective Date"). Unless it elects
otherwise, an Eligible Entity in existence prior to the Regulations Effective
Date will have the same classification for federal income tax purposes that it
claimed under the entity classification Treasury Regulations in effect prior
to the Regulations Effective Date. In addition, an Eligible Entity which did
not exist, or did not claim a classification, prior to the Regulations
Effective Date, will be classified as a partnership for federal income tax
purposes unless it elects otherwise. Each of ERP, EWRLP and the Subsidiary
Partnerships in existence prior to the Regulations Effective Date claimed
classification as a partnership for federal tax purposes.
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Publicly Traded Partnerships. Code Section 7704 provides that publicly
traded partnerships will be taxed as corporations, unless a certain percentage
of their income consists of "qualifying income." A partnership is "a publicly
traded partnership" if interests in such partnership are either traded on an
established securities market or are "readily tradable on a secondary market
(or the substantial equivalent thereof)." Under the Regulations promulgated
under Code Section 7704, interests in a partnership are readily tradable on a
secondary market or substantial equivalent thereof if, "taking into account
all of the facts and circumstances, the partners are readily able to buy,
sell, or exchange their partnership interests in a manner that is comparable,
economically, to trading on an established securities market." Furthermore,
interests in a partnership are tradeable as such if (i) interests in the
partnership are regularly quoted by any person, such as a broker or dealer,
making a market in the interests; (ii) any person regularly makes available to
the public (including customers or subscribers) bid or offer quotes with
respect to interests in the partnership and stands ready to effect buy or sell
transactions at the quoted prices for itself or on behalf of others; (iii) the
holder of an interest in the partnership has a readily available, regular, and
ongoing opportunity to sell or exchange the interest through a public means of
obtaining or providing information of offers to buy, sell, or exchange
interests in the partnership; or (iv) prospective buyers and sellers otherwise
have the opportunity to buy, sell, or exchange interests in the partnership in
a time frame and with the regularity and continuity that is comparable to that
described in (i), (ii) or (iii). The Regulations provide several safe harbors,
which if met, a partnership will not be treated as though its interests are
readily tradeable on a secondary market or the substantial equivalent thereof.
ERP believes that based on the number of partners it currently has and
provisions of the ERP Partnership Agreement and ERP's operations, ERP will not
be a publicly traded partnership at the Effective Time nor upon consummation
of the Asset Contribution.
Even if ERP were deemed to be a publicly traded partnership, depending on
circumstances at the time, it still might avoid taxation as a corporation
under Code Section 7704, based on the nature of its income. A publicly traded
partnership is not taxed as a corporation if at least 90% of its gross income
for each taxable year consists of certain passive income, including interest,
dividends, real property rents, and gains from the sale or other disposition
of real property. These are predominantly the types of income that ERP expects
to earn. If ERP satisfied the 90% gross income test but was classified as a
publicly traded partnership, it would not be taxed as a corporation but would
be subject to certain special rules under Code Section 469(k). In such event,
a ERP Unitholder would be unable to use losses from other passive activities
against his allocable share of ERP passive activity losses allocable to a ERP
Unitholder could be offset only against his allocable share of ERP passive
activity income or gains, and not against income or gains from other passive
activities.
If ERP at any time were considered a publicly traded partnership and did not
satisfy the qualifying income test, then it will be considered as having
transferred its assets at that time to a corporation, and would be taxed as a
corporation for federal income tax purposes, which would result in adverse
consequences to the ERP Unitholders and would jeopardize EQR's status as a
REIT for federal income tax purposes. This deemed transfer of assets to a
corporation may also result in the recognition of taxable income to ERP and
its partners, to the extent that its liabilities at that time have exceeded
the adjusted tax bases of its assets, without the receipt of any cash with
which to pay the income tax liability resulting from such income.
ALLOCATIONS OF PARTNERSHIP ITEMS
Requirements Under Code Section 704(b). Under Code Section 704(b), a
partnership's allocation of any item of income, gain, loss or deduction to a
partner will be respected for federal income tax purposes so long as it has
"substantial economic effect," or is otherwise deemed to be allocated in
accordance with the partner's "interest in the partnership." If the allocation
does not satisfy this standard, the item will be reallocated among the
partners on the basis of their respective interests in the partnership,
determined by taking into account all the facts and circumstances. Taxable
income and losses of ERP are generally allocated among the partners of ERP in
proportion to their partnership interests (based on the number of ERP Units
held by such partner). The allocations of partnership items under the ERP
Partnership Agreement are intended to have substantial economic effect, based
on the applicable Regulations. Notwithstanding such intention, however, there
can be no assurance that the allocations under the ERP Partnership Agreement
will not be challenged by the IRS or that partnership items will not be
required to be reallocated as a result of such challenge.
Tax Allocations with Respect to the Properties. Pursuant to Code Section
704(c), 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 and EWRLP in connection with their initial public offering, the interests
in EWRLP contributed to ERP in connection with the Unit Exchange Offer, and
the properties contributed to ERP pursuant to the Asset Contribution) (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
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difference between the fair market value and the adjusted tax basis of
contributed property at the time of initial 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. The ERP Partnership Agreement requires such
allocations to be made in a manner consistent with Code Section 704(c). As a
result, certain limited partners of ERP will be allocated lower amounts of
depreciation deductions for tax purposes and increased taxable income and gain
on sale by ERP of certain of the Contributed Properties. These allocations
will tend to eliminate the Book-Tax Difference over the useful lives of these
assets. However, the special allocation rules of Code Section 704(c), as
applied by EQR, 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 ERP may
cause EQR to be allocated lower depreciation and other deductions.
Sale of the Properties. Gain or loss recognized by ERP upon disposition of
an item of Contributed Property which has Built-in Gain or Built-in Loss,
respectively, remaining after prior adjustments for depreciation and other
items will be allocated to the Contributing Partners, as required under Code
Section 704(c). Any additional gain or loss with respect to the Contributed
Property will be allocated among all of the ERP Unitholders in the manner
provided under the ERP Partnership Agreement for allocations of profits and
losses, as described above. Thus, if an asset of ERP is sold after the Asset
Contribution, the partners who contributed or are deemed to have contributed
such asset to ERP will be allocated all of the remaining Built-in Gain or
Built-in Loss with respect to such asset under Code Section 704(c). Under the
ERP Partnership Agreement, to the extent the Regulations under Code Section
704(c) permit ERP to elect alternative methods to eliminate Built-in Gain or
Built-in Loss with respect to Contributed Property or any item thereof, EQR,
as general partner of ERP, will have the authority to elect the method to be
used, and such election will be binding on all partners. Pursuant to the
Merger Agreement, EQR has agreed to cause ERP to use the "traditional method"
under Code Section 704(c) with respect to the properties of or interests in
EWRLP contributed to ERP.
ERP DISTRIBUTIONS
Under Code Section 731, distributions of money (and marketable securities)
by ERP to a ERP Unitholder generally will not be taxable to such ERP
Unitholder to the extent such distributions do not exceed the ERP Unit
holder's adjusted basis in its ERP Units immediately before the distribution.
Distributions in excess of an ERP Unit holder's basis in his ERP Units
(arising from either an actual distribution of cash or a deemed distribution
of cash resulting from a shifting of partnership liabilities) will be
considered gain recognized from the sale or disposition of the partner's ERP
Units.
DISPOSITIONS AND EXCHANGES/REDEMPTIONS OF ERP UNITS
Disposition of ERP Units. If an ERP Unit is sold or otherwise disposed of,
the determination of gain or loss will be based on the difference between the
amount realized and the adjusted tax basis for such ERP Unit. Upon the sale of
an ERP Unit, an ERP Unitholder's "amount realized" will be the sum of the cash
and fair market value of other property received, plus the portion of ERP's
liabilities allocated to the ERP Unit sold. Upon a gift of an ERP Unit, the
amount realized will be the portion of ERP's liabilities allocable to such ERP
Unit. To the extent that the amount realized exceeds the adjusted basis of the
ERP Unit disposed of, the ERP Unitholder will recognize gain. The tax
liability resulting from such gain could exceed the amount of cash received
upon such disposition. In general, any loss upon a sale or exchange of ERP
Units held for six months or less (after applying certain holding period
rules) will be treated as long-term capital loss.
Exchange/Redemption of ERP Units. Under the ERP Partnership Agreement, each
ERP Unit may be exchanged for one share of EQR Common or the cash equivalent.
Such right may be exercised by an ERP Unitholder at any time and from time to
time upon not less than ten (10) days notice to EQR. Upon receipt of such
request, EQR, as general partner of ERP, may, in its discretion, issue one
share of EQR Common for each ERP Unit redeemed or cause ERP to pay to such ERP
Unitholder the cash equivalent of the value of the ERP Units requested to be
exchanged. An exchange of ERP Units will constitute a sale of ERP Units by
such ERP Unitholder to EQR. Such sale will be fully taxable to the ERP
Unitholder, and such ERP Unitholder will be treated as realizing for tax
purposes an amount equal to the sum of the cash or the value of the EQR Common
received in the exchange plus the amount of any ERP liabilities allocable to
the redeemed ERP Units at the time of the exchange.
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TAX RETURNS AND OTHER TAX MATTERS AFFECTING ERP UNITHOLDERS
ERP must file with the IRS an annual information return for federal income
tax purposes. Within 90 days after the close of each ERP taxable year, ERP
intends to furnish to each ERP Unitholder a Schedule K-1 which sets forth the
allocable share of ERP's income, gains, losses, deductions and credits, if
any, as well as certain other information to be used in the ERP Unitholder's
tax return. The information return filed by ERP may be audited by the IRS.
Adjustments (if any) resulting from such an audit may result in adjustments to
the ERP Unitholder's tax return, and possibly may result in an audit of that
return, which would not necessarily be limited to ERP items.
The Code contains special procedures that specify the manner in which IRS
audit adjustments of partnership items are resolved. Partnerships generally
are treated as separate entities for purposes of federal tax audits, judicial
review of IRS adjustments and tax settlement proceedings. The tax treatment of
partnership items is determined at the partnership level in a unified
partnership proceeding rather than in separate proceedings with each partner.
The Code provides for one partner to be designated as the "Tax Matters
Partner" ("TMP") for these purposes. The ERP Partnership Agreement appoints
EQR as its TMP. As the TMP, EQR has all the rights and obligations of the TMP
under the Code. The ERP Unitholders generally will be required to treat ERP
items on their federal income tax returns in a manner consistent with the
treatment of the items on the ERP information return. In general, that
consistency requirement will be waived if the ERP Unitholder files a statement
with the IRS identifying the inconsistency. Failure to satisfy the consistency
requirement, if not waived, will result in an adjustment to conform the
treatment of the item by the ERP Unitholder to the treatment on the ERP
return. Even if the consistency requirement is waived, adjustments to the ERP
Unitholder's tax liability with respect to partnership items may result from
an audit of ERP's or the ERP Unitholder's tax return. Intentional or negligent
disregard of the consistency requirement may subject an ERP Unitholder to
substantial penalties.
LIMITATIONS ON DEDUCTIBILITY OF LOSSES
Passive Activity Rules. The passive activity rules of Code Section 469
generally provide that individuals, estates, trusts and certain closely held
corporations and personal service corporations can deduct losses from passive
activities (including rental activities, as well as trade or business
activities in which the taxpayer does not materially participate) only to the
extent of the taxpayer's income from passive activities. Most of ERP's income
or loss is likely to be treated as passive activity income or loss (although
ERP also may have a substantial amount of portfolio income from earnings on
reserves). However, if ERP or any Subsidiary Partnership were to be classified
as a publicly traded partnership under Code Section 469(k), any passive
activity losses arising from the publicly traded partnership that are
allocable to an ERP Unitholder could be used to offset passive activity gains
or income from ERP, but not income from other passive activities, and any
passive activity income or gain allocable to a ERP Unitholder from ERP could
not be offset with losses from other passive activities. See""--Entity
Classification."
Other Loss Limitations. An ERP Unitholder may not deduct his share of ERP
losses to the extent that such losses exceed the lesser of (1) the adjusted
tax basis of his ERP Units at the end of ERP's taxable year in which the loss
occurs, and (2) the amount for which the ERP Unitholder is considered "at
risk" at the end of that year under Code Section 465. In general, a partner
will initially be "at risk" to the extent of the cash investment in his
respective partnership interest (unless he borrowed an amount on a nonrecourse
basis to acquire such interest) plus such partner's share (as determined under
Code Section 752) of such partnership's "qualified nonrecourse financing"
(within the meaning of Code Section 465(b)(6)). Losses disallowed to an ERP
Unitholder as a result of these rules can be carried forward and may be
allowable to the extent that such partner's adjusted basis or "at risk" amount
(whichever was the limiting factor) is increased in a subsequent year. The "at
risk" rules apply to (a) an individual, (b) a shareholder of a corporation
that is an S corporation, and (c) a corporation if more than 50% of the value
of stock of such corporation is owned directly or indirectly by five or fewer
individuals during the last half of the taxable year.
STATE AND LOCAL TAXES
ERP will own properties and conduct business operations in a number of
states, and, thus, ERP and its partners may be subject to income tax,
withholding and tax reporting requirements in a number of jurisdictions. ERP
intends to provide its partners with sufficient and timely state and local
income tax information upon which they may rely in reporting and otherwise
complying with their state and local income tax obligations.
ALTERNATIVE MINIMUM TAX
The Code contains different sets of minimum tax rules applicable to
corporate and noncorporate taxpayers. The discussion below relates only to the
alternative minimum tax applicable to noncorporate taxpayers. CORPORATE
INVESTORS SHOULD CONSULT WITH THEIR TAX ADVISORS WITH RESPECT TO THE EFFECT OF
THE CORPORATE MINIMUM TAX PROVISIONS FOLLOWING CONSUMMATION OF THE ASSET
CONTRIBUTION.
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Noncorporate taxpayers are subject to an alternative minimum tax to the
extent the tentative minimum tax ("TMT") exceeds the regular income tax
otherwise payable. The highest rate of tax imposed on alternative minimum
taxable income ("AMTI") in computing TMT is 28%. AMTI consists of the
taxpayer's taxable income, as adjusted under Code Sections 56 and 58, plus his
items of tax preference, reduced by an exemption amount.
In computing AMTI, for all depreciable property placed in service after
December 31, 1986, an alternative cost recovery (i.e., depreciation) system is
substituted for the cost recovery system used in calculating the regular tax.
Cost recovery for most real property of the type to be owned by ERP (including
shopping center structures) is computed under the straight-line method over a
40-year life rather than the 31.5-year life used for most nonresidential real
property under the regular tax system. (For regular tax and AMT purposes,
different recovery periods will apply to personal property and parking lot
improvements owned by ERP.)
The limitation on the deduction of passive activity losses applies to the
calculation of AMTI as well as the regular tax, although the amount of passive
activity deductions disallowed for AMTI purposes will be less than the amount
disallowed for regular tax purposes to the extent that the lower depreciation
rates used in computing AMTI depreciation produce smaller passive activity
losses.
ERP itself will not be subject to the alternative minimum tax, but each ERP
Unitholder will be required to take into account his share of ERP's tax
preference items and adjustments in order to compute AMTI. Since the impact of
this tax depends on each ERP unit-holder's particular situation, partners of
EWRLP and ERP are urged to consult their own tax advisors as to the
applicability of the alternative minimum tax following consummation of the
Asset Contribution.
TAX ASPECTS OF INVESTMENT IN EQR
Qualification of EQR as a REIT
General. EQR elected REIT status commencing with its taxable year ending
December 31, 1993. In the opinion of Rudnick & Wolfe, special counsel to EQR,
EQR was organized and has operated in conformity with the requirements for
qualification and taxation as a REIT under the Code, and its method of
operation has enabled it and will enable it to continue to meet the
requirements for qualification and taxation as a REIT under the Code. Rudnick
& Wolfe has opined that, subsequent to the Merger, EQR's proposed method of
operation described in this Consent Solicitation/Prospectus/ Information
Statement and as represented by EQR should enable it to meet the requirements
for qualification and taxation as a REIT.
EWR elected REIT status commencing with its taxable year ending December 31,
1994. In the opinion of Gibson, Dunn & Crutcher LLP which has acted as special
counsel to EWR, commencing with its taxable year ended December 31, 1994, EWR
was organized in conformity with the requirements for qualification and
taxation as a REIT under the Code, and its method of operation has enabled it
and will enable it to continue to meet the requirements for qualification and
taxation as a REIT under the Code.
It must be emphasized that these opinions are based on various assumptions
relating to the organization and operation of various entities. In general,
Rudnick & Wolfe's opinion is based on various assumptions relating to the
organization and operation of various entities, including EQR, ERP, EQR
Properties Management LP, and EQR Properties Management LP II (collectively,
the "EQR Properties Management Partnerships"), Equity Residential Properties
Management, Inc. ("EQR Management Corp.") and Equity Residential Properties
Management, Inc. II ("EQR Management Corp. II") (collectively, the "EQR
Management Corps."), the limited partnerships and limited liability companies
that own the beneficial interest of certain properties encumbered by mortgage
financing (the "EQR Financing Partnerships") and various qualified REIT
subsidiaries wholly owned by EQR (each a "QRS Corporation") (collectively, the
EQR Properties Management Partnerships, the EQR Management Corps., the EQR
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 as to factual matters relating to the organization, operation,
income, assets, distributions and share ownership of EQR and ERP. EQR's
qualification as a REIT depends on its having met and continuing to meet,
through actual operating results, distribution levels and diversity of share
ownership, the various qualifications tests imposed under the Code and
discussed below, the results of which have not been and will not be reviewed
by Rudnick & Wolfe. Accordingly, no assurance can be given that the actual
results of EQR's operations for any particular taxable year have satisfied or
will satisfy such requirements.
Gibson, Dunn & Crutcher's opinion is based on various assumptions relating
to the organization and operation of various entities, including EWR, EWRLP,
Evans Withycombe Management, Inc. ("EW Management, Inc."), Evans
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Withycombe Finance, Inc. ("EW Finance, Inc."), and Evans Withycombe Finance
Partnership, L.P. ("EW Finance LP"), and is conditioned upon the accuracy of
certain representations made by EWR and EWRLP as to factual matters relating to
the organization, operation, income, assets, distributions and stock ownership
of EWR and EWRLP. EWR's qualification as a REIT depends on its having met and
continuing to meet, through actual operating results, distribution levels and
diversity of stock ownership, the various qualifications tests imposed under
the Code and discussed below, the results of which have not been and will not
be reviewed by Gibson, Dunn & Crutcher LLP. Accordingly, no assurance can be
given that the actual results of EWR's operations for any particular taxable
year have satisfied or will satisfy such requirements.
An opinion of counsel is not binding on the IRS or the courts, and no
assurance can be given that the IRS will not challenge EQR's or EWR's
eligibility for taxation as a REIT. Further, the federal income tax treatment
described herein may be changed, perhaps retroactively, by legislative,
administrative or judicial action at any time.
In any year in which EQR 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. EQR may,
however, be subject to tax at normal corporate rates upon any taxable income or
capital gain not distributed.
If EQR 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. EQR will also be subject to a
100% tax on net income derived from any "prohibited transaction," as described
below. In addition, if EQR 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, EQR would be subject to a 4% excise tax on the
excess of such required distribution over the amounts actually distributed. EQR
may also be subject to the corporate "alternative minimum tax," as well as tax
in certain situations and on certain transactions not presently contemplated.
EQR will use the calendar year both for federal income tax purposes and for
financial reporting purposes.
In order to qualify as a REIT, EQR must meet, among others, the following
requirements:
Share Ownership Test. Shares of beneficial interest of EQR 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 EQR 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 EWR believe that they have each satisfied both of
these tests, and EQR believes EQR will continue to do so. In order to comply
with the second of these tests, EQR has placed certain restrictions on the
transfer of the EQR Common and EQR Preferred that are intended to prevent
further concentration of share ownership.
Asset Tests. At the close of each quarter of EQR's taxable year, EQR must
satisfy two tests relating to the nature of its assets. First, at least 75% of
the value of EQR'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 EQR's assets generally may be invested without
restriction, securities in this class may not exceed either (i) 5% of the value
of EQR's total assets as to any one issuer, or (ii) 10% of the outstanding
voting securities of any one issuer. Where EQR invests in a partnership, it
will be deemed to own a proportionate share of the partnership's assets. EQR
believes that its investment in the properties of EWR through its interest in
EWRLP and ERP will constitute qualified assets for purposes of the 75% asset
test.
ERP will own 1% of the voting stock of the EW Management, Inc. ERP will also
own 100% of the non-voting stock of EW Management, Inc., the EQR Management
Corps. and Wellsford Real Properties, Inc. By virtue of its partnership
interest in ERP, EQR will be deemed to own its pro rata share of the assets of
ERP, including the stock of the EQR Management Corps., EW Management, Inc. and
Wellsford Real Properties, Inc., as described above. ERP has not and does not
intend to own more than 10% of the voting securities of any of the above
mentioned corporations.
In addition, based upon its analysis of the estimated value of the stock of
the EW Management, Inc.,the EQR Management Corps. and Wellsford Real
Properties, Inc. owned by ERP relative to the estimated value of the other
assets owned by ERP, EQR believes that its pro rata share of the stock of EW
Management, Inc., the EQR Management Corps. and Wellsford Real Properties, Inc.
held by ERP will not exceed 5% of the total value of EQR'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 EQR first
acquires stock of EW Management, Inc., but also at the end of each quarter in
which EQR increases its interest
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in EW Management, Inc. or any other interest in an issuer of securities
(including as a result of increasing its interest in ERP as the holders of ERP
Units exercise their exchange rights). Although EQR 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's overall interest
in EW Management, Inc., the EQR Management Corps. or Wellsford Real Properties,
Inc.
EQR's indirect interest in EW Finance LP will be held through EWRLP and EW
Finance, Inc., which is organized and operated as a "qualified REIT subsidiary"
("QRS") 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 EQR. The QRS Corporation,
therefore, will not be subject to Federal corporate income taxation, although
it may be subject to state or local taxation. In addition, EQR's ownership of
the voting stock of the QRS Corporation will not violate the general
restriction against ownership of more than 10% of the voting securities of any
issuer.
Gross Income Tests. There are three separate percentage tests relating to the
sources of EQR's gross income which must be satisfied for each taxable year.
For purposes of these tests, where EQR invests in a partnership, EQR 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 EQR as it has in the hands of the partnership.
1. The 75% Test. At least 75% of EQR'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 EQR'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 EQR 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 EQR, or an owner of 10% or more of EQR, 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, EQR generally must not operate or manage the property or furnish or
render services to tenants, other than through an "independent contractor" from
whom EQR derives no revenue. The "independent contractor" requirement, however,
does not apply to the extent that the services provided by EQR are "usually or
customarily rendered" in connection with the rental of space for occupancy
only, and are not otherwise considered "rendered to the occupant."
EQR, through its Management Partnerships, the EQR Management Corps. and EW
Management, Inc. will provide certain services with respect to the properties
of EQR and any newly acquired multifamily residential properties. EQR believes
that the services provided by the EQR Properties Management Partnerships, the
EQR Management Corps. and EW Management, Inc. are usually or customarily
rendered in connection with the rental of space for occupancy only, and
therefore 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 EQR'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 EQR's share of dividends
paid by the EQR Management Corps. and EW Management, Inc.) and interest on any
obligations not collateralized by an interest in real property and any payments
made on behalf of EQR 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 EQR 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 EQR for at
least four years and excluding foreclosure property.
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EQR's investment in its properties, through ERP, 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 EQR's interest in ERP and EWRLP 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 the EQR Management Corps. and EW Management, Inc., will not cause EQR to
fail the 75% or 95% gross income test for any year, and EQR anticipates
that this will continue to be the case.
Even if EQR 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) EQR's failure to comply was
due to reasonable cause and not to willful neglect; (ii) EQR 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, EQR, however, will still be subject to a 100% tax 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. EQR 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. EQR, 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 EQR's REIT taxable income (computed without regard to the
dividends paid deduction and EQR'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 EQR 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 EQR 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.
EQR has made and intends to continue to make timely distributions
sufficient to satisfy the annual distribution requirements. In this regard,
the partnership agreements of ERP and EWRLP authorize EQR, as general
partner, to take such steps as may be necessary to cause ERP and EWRLP,
respectively, to distribute to its partners an amount sufficient to permit
EQR to meet these distribution requirements. It is possible that EQR 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 EQR's REIT taxable income on the other hand. To
avoid any problem with the 95% distribution requirement, EQR will closely
monitor the relationship between its REIT taxable income and cash flow and,
if necessary, will borrow funds (or cause ERP or other affiliates to borrow
funds) in order to satisfy the distribution requirement.
Failure to Qualify. If EQR fails to qualify for taxation as a REIT in any
taxable year and the relief provisions do not apply, EQR 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 EQR fails to qualify will not be required and, if made, will
not be deductible by EQR. 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,
EQR also will be ineligible for qualification as a REIT for the four
taxable years following the year during which qualification was lost.
Taxation of Taxable U.S. Shareholders
As long as EQR qualifies as a REIT, distributions made to EQR's taxable "U.S.
Shareholders" (as defined herein), 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 EQR will be allocated first to the holders of EQR Preferred and
second to the holders of EQR Common. There can be no assurance, however, that
EQR will have sufficient earnings and profits to cover distributions on the EQR
Preferred. Dividends that are designated as capital gain dividends will be
taxed as capital gains (to the extent that they do not exceed EQR'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%
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of certain capital gain dividends as ordinary income. To the extent that EQR
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 EQR 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 EQR and
received by the shareholder on December 31 of such year, provided that the
dividend is actually paid by EQR 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 EQR.
As used herein, the term "U.S. Shareholder" means a holder of EQR Common or
EQR Preferred who (for United States federal income tax purposes) (i) is a
citizen or resident of the United States, (ii) is a corporation, partnership or
other entity created or organized in or under the laws of the United States or
of any political subdivision thereof, (iii) is an estate, the income of which
is subject to United States federal income taxation regardless of its source or
(iv) is a trust, if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more United
States fiduciaries have the authority to control all substantial decisions of
the trust. Pursuant to the Taxpayer Relief Act of 1997 (the "Act"), for taxable
years of EQR that begin on or after January 1, 1998, EQR may elect to retain
and pay income tax on its net long-term capital gain attributable to such
taxable year. If EQR makes this election, its U.S. Shareholders will be
required to include in their income as long-term capital gain their
proportionate share of such amount so designated by EQR. A U.S. Shareholder
will be treated as having paid his or her share of the tax paid by EQR in
respect of such amount so designated by EQR, for which such U.S. Shareholder
will be entitled to a credit or refund. Additionally, each U.S. Shareholder's
adjusted basis in EQR Common will be increased by the excess of the amount so
includible in income over the tax deemed paid on such amount. EQR must pay tax
on its designated long-term capital gain within 30 days of the close of any
taxable year in which it designates long-term capital gain pursuant to this
rule, and it must mail a written notice of its designation to its shareholders
within 60 days of the close of the taxable year.
Distributions made by EQR and gain arising from the sale or exchange by a
U.S. Shareholder of EQR Common will not be treated as passive activity income,
and, as a result, U.S. Shareholders will not be able to apply any "passive
losses" against such income or gain. Distributions made by EQR (to the extent
that they do not constitute a return of capital) generally will be treated as
investment income for purposes of computing the investment income limitation.
Gain arising from the sale or other disposition of EQR Common (and
distributions treated as such), however, will not be treated as investment
income unless a U.S. Shareholder so elects, in which case such capital gains
will be taxed at ordinary income rates.
Upon any sale or other disposition of shares of EQR Common, a U.S.
Shareholder will recognize gain or loss for Federal income tax purposes in an
amount equal to the difference between (i) the amount of cash and the fair
market value of any property received on such sale or other disposition and
(ii) the holder's adjusted basis in such shares of EQR Common for tax purposes.
Such gain or loss will be capital gain or loss if the shares have been held by
the U.S. Shareholder as a capital asset, and will be mid-term or long-term gain
or loss if such shares have been held for more than one year or eighteen
months, respectively. In general, any loss recognized by a U.S. Shareholder
upon the sale or other disposition of shares of EQR Common that have been held
for six months or less (after applying certain holding period rules) will be
treated as a long-term capital loss, to the extent of capital gain dividends
received by such U.S. Shareholders from EQR which were required to be treated
as long-term capital gains.
As a result of other changes made by the Act to the Code, capital gains of
non-corporate taxpayers derived in respect of capital assets held for at least
one year are eligible for reduced rates of taxation. Although the Act did not
make conforming changes to other provisions of the Code, the Act authorizes the
issuance of regulations coordinating these capital gains provisions with other
rules involving the treatment of sales and exchanges by "pass-through"
entities, such as REITs and partnerships, and of sales and exchanges of
interests therein. Due to the complexity of these provisions and in the absence
of the coordinating regulations, each prospective investor should consult his
or her own tax advisor concerning the tax consequences to him or her of the
changes made by the Act.
Backup Withholding
EQR reports to its U.S. Shareholders and the IRS the amount of dividends paid
during each calendar year, and the amount of tax withheld, if any. Under the
backup withholding rules, a shareholder may be subject to backup withholding at
the rate of 31% with respect to dividends paid unless such shareholder (a) is a
corporation or comes within one of the exempt categories and, when required,
demonstrates this fact, or (b) provides a taxpayer identification number,
certifies as to no loss
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of exemption from backup withholding, and otherwise complies with applicable
requirements of the backup withholding rules. A U.S. shareholder that does not
provide EQR with its correct taxpayer identification number may also be subject
to penalties imposed by the IRS. Backup withholding is not an additional tax.
Any amount paid as backup withholding will be creditable against the
shareholder's income tax liability. In addition, EQR may be required to
withhold a portion of capital gain distributions to any shareholders who fail
to certify their non-foreign status to EQR. See "--Taxation of Shareholders--
Taxation of Foreign Shareholders".
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 EQR
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. EQR 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
(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.
1. Ordinary Dividends. The portion of dividends received by Non-U.S. Holders
payable out of EQR's earnings and profits which are not attributable to capital
gains of EQR or of ERP 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 EQR which are not dividends
out of the earnings and profits of EQR 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 EQR'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 IRS if it is subsequently determined
that such distribution was, in fact, in excess of current and accumulated
earnings and profits of EQR.
3. Capital Gain Dividends. Under the Foreign Investment in Real Property Tax
Act of 1980 ("FIRPTA"), a distribution made by EQR 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 EQR 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, EQR 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.
4. 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 EQR 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. EQR
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 EQR
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will continue to be a domestically controlled REIT. If EQR 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 EQR'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
IRS. 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.
Tax Legislation
The Taxpayer Relief Act of 1997 (H.R. 2014), signed by President Clinton on
August 5, 1997, will modify certain REIT-related Code provisions for tax years
beginning on or after January 1, 1998.
Some of the potentially significant changes contained in the legislation
relating to REITs include: (i) the rule disqualifying a REIT for any year in
which it fails to comply with certain regulations requiring the REIT to monitor
its stock ownership is replaced with an intermediate financial penalty; (ii)
the rule disqualifying a REIT in any year that it is "closely-held" will not
apply if during such year the REIT complied with certain regulations which
require the REIT to monitor its stock ownership, and the REIT did not know or
have reason to know that it was closely-held; (iii) a REIT is permitted to
render a de minimus amount of impermissible services to tenants in connection
with the management of property and still treat amounts received with respect
to such property (other than certain amounts relating to such services) as
qualified rent; (iv) the 30% gross income test is repealed; (v) any corporation
wholly-owned by a REIT is permitted to be treated as a qualified REIT
subsidiary regardless of whether such subsidiary has always been owned by the
REIT; and (vi) certain other Code provisions relating to REIT's are amended.
Some or all of the provisions could affect both EQR's operations and its
ability to maintain its REIT status for its taxable years beginning in 1998.
Other Tax Considerations
EW Management, Inc. and the EQR Management Corps. A portion of the cash to be
used by ERP to fund distributions to its partners, including EQR, is expected
to come from EW Management, Inc. and the EQR Management Corps. through payments
of dividends on the stock of the EW Management, Inc. and the EQR Management
Corps. held by ERP. The EW Management, Inc. and the EQR Management Corps. will
pay Federal and state income tax at the full applicable corporate rates on
their taxable income. To the extent that such companies are required to pay
Federal, state or local taxes, the cash available for distribution by EQR,
among its shareholders will be reduced accordingly.
State and Local Taxes. EQR 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 EQR 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
EQR Common or EQR Preferred.
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<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following tables set forth the selected unaudited pro forma combined
financial data for ERP, 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 Consent Solicitation/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 is presented as if
the Merger had occurred on June 30, 1997. The Merger has been accounted for
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 selected pro forma financial information should be read in conjunction
with, and is qualified in its entirety by, the historical financial statements
and notes thereto of ERP incorporated by reference into the Consent
Solicitation/Prospectus/ Information Statement and the historical financial
statements and notes thereto of EWRLP and the ERP unaudited pro forma
financial statements and notes thereto included elsewhere in the Consent
Solicitation/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 ERP and EWRLP would have been for the
period and dates presented. Nor does such data purport to represent the
results of future periods.
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<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
OPERATING DATA:
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
---------------------- -----------------
(AMOUNTS IN THOUSANDS
EXCEPT PER UNIT DATA)
<S> <C> <C>
REVENUES
Rental Income......................... $ 345,664 $548,762
Fee and asset management.............. 3,340 7,906
Interest income--investment in
mortgage notes....................... 8,011 12,819
Interest and other income............. 7,909 10,524
---------- --------
Total revenues.................... 364,924 580,011
---------- --------
EXPENSES
Property and maintenance.............. 85,194 152,333
Real estate taxes and insurance....... 34,451 52,249
Property management................... 13,505 20,883
Fee and asset management.............. 1,569 3,837
Depreciation.......................... 79,036 125,669
Interest:
Expense incurred.................... 65,602 104,272
Amortization of deferred financing
costs.............................. 1,220 4,242
General and administrative............ 6,711 10,867
---------- --------
Total expenses.................... 287,287 474,352
---------- --------
Income before gain on disposition of
properties, extraordinary items...... 77,637 105,659
Gain on disposition of properties... 8,885 22,402
(Loss) on early extinguishment of
debt............................... (1,500) --
---------- --------
Income before extraordinary items..... 85,022 128,061
========== ========
Extraordinary item:
Write-off of unamortized costs on
refinanced debt.................... -- (3,512)
---------- --------
Net income............................ $ 85,022 $124,549
========== ========
ALLOCATION OF NET INCOME:
Redeemable Preference Interests....... -- 263
9 3/8% Series A Cumulative Redeemable
Preference Units..................... 7,172 7,172
9 1/8% Series B Cumulative Redeemable
Preference Units..................... 5,704 5,704
9 1/8% Series C Cumulative Redeemable
Preference Units..................... 5,246 5,246
8.60% Series D Cumulative Redeemable
Preference Units..................... 1,714 --
Series E Cumulative Convertible
Preference Units..................... 615 --
9.65% Series F Cumulative Redeemable
Preference Units..................... 488 --
General Partner....................... 55,326 82,442
Limited Partners (Minority interest).. 8,757 12,829
---------- --------
$ 64,083 $ 95,271
========== ========
Net income per weighted average OP
Unit outstanding..................... $ 0.85 $ 1.50
========== ========
Weighted average OP Units outstanding. 75,230 63,551
========== ========
<CAPTION>
PRO FORMA
JUNE 30, 1997
----------------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
(at end of period)
Real Estate, after accumulated
depreciation......................... $5,199,606
==========
Total assets.......................... $5,765,302
==========
Total debt............................ $2,106,021
==========
Total partners' capital............... $2,722,807
==========
</TABLE>
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<PAGE>
COMPARATIVE SHARE PRICES
There is no market for either ERP Units or EWRLP Units, and such units are
subject to restrictions on transfer. However, ERP Units and EWRLP Units are
redeemable for shares of EQR Common and EWR Common, respectively. The following
tables set forth certain information regarding the high and low prices, as well
as the distributions declared, on EQR Common and EWR Common.
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 ERP Unit, from January 1, 1995 through
September 12, 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 27 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............................ 48 7/8 39 3/4 .625
Second Quarter........................... 47 1/2 41 1/4 .625
Third Quarter (through September 12,
1997)................................... 53 47 1/8 .625
</TABLE>
On September 12, 1997, the last reported sale price of a share of EQR Common
on the NYSE was $50 1/16 per share. On August 27, 1997, the last full trading
day prior to the public announcement of the Transactions, the last reported
sale price of a share of EQR Common on the NYSE was $50 3/8. As of September
10, 1997, EQR's transfer agent reported 1,039 record holders of EQR Common and,
as of July, 1997, certain depository entities held shares of EQR Common on
behalf of approximately 24,000 beneficial owners at such date.
EWR. The EWR Common has been traded on the NYSE under the symbol "EWR" since
August 11, 1994. The following table sets forth the quarterly high and low
sales prices per share of EWR Common reported on the NYSE, as well as the
quarterly distributions declared per EWRLP Unit from January 1, 1995 through
September 12, 1997.
<TABLE>
<CAPTION>
HIGH LOW DISTRIBUTIONS
------- ------- -------------
<S> <C> <C> <C>
1995
First Quarter............................ $20 7/8 $19 1/2 $.37
Second Quarter........................... 20 7/8 18 3/8 .37
Third Quarter............................ 20 3/8 18 1/2 .38
Fourth Quarter........................... 21 5/8 18 7/8 .38
1996
First Quarter............................ 23 1/4 20 3/4 .39
Second Quarter........................... 23 1/4 20 1/4 .39
Third Quarter............................ 21 7/8 19 3/4 .40
Fourth Quarter........................... 22 1/4 20 1/8 .40
1997
First Quarter............................ 20 1/4 20 3/8 .405
Second Quarter........................... 21 1/8 19 1/2 .405
Third Quarter (through September 12,
1997)................................... 25 3/8 20 1/2 .38*
</TABLE>
- -------
* In connection with the Transactions, EWRLP reduced its distribution for
the third quarter of 1997 to $0.38 per unit and is required to limit its
dividend per unit for the fourth quarter of 1997 and thereafter to 50% of
the distribution per ERP unit declared for the same quarter.
70
<PAGE>
On September 12, 1997, the last reported sale price of a share of EWR Common
on the NYSE was $25 1/8 share. On August 27, 1997, the last full trading day
prior to the public announcement of the Transactions, the last reported sale
price of a share of EWR Common on the NYSE was $22 1/16. As of September 15,
1997, EWR's transfer agent reported 276 record holders of EWR Common and, as of
September 15, 1997, The Depository Trust Company held shares of EWR Common on
behalf of approximately 9,100 beneficial owners at such date.
BECAUSE THE EXCHANGE RATIO IS FIXED AND THE MARKET PRICE OF EQR COMMON IS
SUBJECT TO FLUCTUATION, THE MARKET VALUE OF THE EQR COMMON TO WHICH HOLDERS OF
ERP UNITS ARE ENTITLED UPON REDEMPTION OF SUCH ERP UNITS MAY INCREASE OR
DECREASE PRIOR TO AND FOLLOWING THE TRANSACTIONS. UNITHOLDERS ARE URGED TO
OBTAIN CURRENT MARKET QUOTATIONS FOR EQR COMMON AND EWR COMMON.
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<PAGE>
POLICIES OF EQR WITH RESPECT TO CERTAIN ACTIVITIES
Upon effectiveness of the Merger, management and control of EWRLP will vest
in EQR and ERP, as co-general partners of EWRLP. The following section sets
forth the policies expected to be implemented by EQR upon the effectiveness of
the Transactions. These policies may be amended or revised from time to time at
the discretion of the EQR Board of Trustees without a vote of either the ERP
Unitholders or the shareholders of EQR.
BUSINESS OBJECTIVES AND OPERATING STRATEGIES
EQR will seek to maximize both current income and long-term growth in income.
EQR 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.
EQR's primary business objectives are to increase distributions on a per
share of EQR Common basis, to increase the value of its properties and to
increase shareholders' value.
EQR'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%;
. 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 EQR's
distributions per share of EQR Common and EQR's overall market value; and
. expanding EQR's relationships with third-party developers who will build
multifamily properties for EQR to purchase upon completion.
EQR 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, EQR 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
EQR anticipates that future property acquisitions will be located in the
continental United States. Management will use market information to evaluate
acquisition opportunities. EQR's market data base will allow it to review the
primary economic indicators of the markets where EQR 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, EQR may
acquire additional multifamily properties in transactions that include the
issuance of ERP Units as consideration for the acquired properties. Such
transactions may, in certain circumstances, partially defer the sellers' tax
consequences.
When evaluating potential acquisitions, EQR 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. EQR expects to
purchase multifamily properties with physical and market characteristics
similar to the properties.
DISPOSITION STRATEGIES
Management will use market information to evaluate dispositions. EQR 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.
EQR will also dispose of properties in markets where it does not intend to
establish long-term concentrations. EQR will reinvest the proceeds received
from property dispositions to fund property acquisitions. In addition, when
feasible EQR will structure these transactions as tax deferred exchanges.
72
<PAGE>
INVESTMENT POLICIES
Investments in Real Estate or Interests in Real Estate. EQR's investment
objectives will be to increase cash flow and the value of its properties, and
to acquire established income-producing multifamily properties with cash flow
growth potential. Additionally, where prudent and possible, EQR will seek to
upgrade its existing properties and any newly acquired multifamily properties.
EQR's business is focused on multifamily properties, although such properties
may include retail and recreational facilities. EQR's policy will be to acquire
assets primarily for current income generation and long-term value
appreciation; however, where appropriate, EQR will sell certain of its
properties.
EQR expects to pursue its investment objectives through the direct and
indirect ownership of properties and the ownership of interests in other
entities. EQR will focus on properties in those markets where EQR 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 EQR's assets. EQR 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 EQR's equity interest in such property.
Investments in Real Estate Mortgages. While EQR will emphasize equity real
estate investments in multifamily properties, it may, in its discretion, invest
in mortgages and other interests related to multifamily properties. EQR 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 EQR may
invest may be either first mortgages or junior mortgages, and may or may not be
insured by a governmental agency. EQR may also invest in mortgage-related
securities. Furthermore, EQR 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, EQR 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. EQR may acquire all or
substantially all of the securities or assets of other REITs or similar
entities where such investments would be consistent with EQR's investment
policies. In any event, EQR does not intend that its investments in securities
will require it to register as an "investment company" under the Investment
Company Act of 1940, and EQR would intend to divest securities before any such
registration would be required.
FINANCING POLICIES
EQR intends to maintain a Debt to Total Market Capitalization Ratio of 50% or
less. EQR, 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 EQR of debt and equity capital, market values of the properties,
growth and acquisition opportunities and other factors. There will be no limit
on the EQR's Debt to Total Market Capitalization Ratio imposed by EQR's
Declaration of Trust or Bylaws. To the extent that the Board of Trustees of EQR
determines to obtain additional capital, EQR may issue debt or equity
securities, or cause ERP to issue additional ERP 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 is in
existence, the proceeds of all equity capital raised by EQR will be contributed
to ERP in exchange for additional interests in ERP, which will dilute the
ownership interest of holders of ERP Units. It is EQR'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
to the extent necessary to fund the business activities conducted by the ERP.
EQR 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. EQR 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 EQR's income from
these properties if EQR is required to lower its rental rates to attract low or
moderate income tenants, or eligible qualified tenants.
To the extent that the EQR Board of Trustees determines to obtain debt
financing EQR intends to do so generally through mortgages on its properties
and through lines of credit; however, EQR 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. EQR 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, EQR 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 EQR or meeting the taxable income distribution
requirements for REITs under the Code if EQR has taxable income without receipt
of cash sufficient to enable EQR to meet such distribution requirements.
73
<PAGE>
LENDING POLICIES
Although it is not presently contemplated, EQR 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 EQR for the
property sold.
DEVELOPMENT POLICIES
EQR intends to expand its relationships with third-party developers who will
build multifamily properties for EQR to purchase upon completion through the
utilization of the skills and experience in the area of development project
supervision of executives joining EQR.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
Although it is not presently contemplated, the EQR may make investments other
than as previously described. All investments will be related to the
multifamily residential business. EQR will have authority to offer EQR Common
or other equity or debt securities in exchange for property or other REITs and
to repurchase or otherwise reacquire EQR Common or any other securities and may
engage in such activities in the future. Similarly, EQR may offer additional
ERP Units or other equity interests in ERP that are exchangeable into shares of
EQR Common in exchange for property. EQR may also make loans to joint ventures
in which it may participate in the future. EQR will not engage in trading,
underwriting or the agency distribution or sale of securities of other issuers.
At all times, EQR 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 EQR Board of Trustees determines that it is no longer in the
best interests of EQR to continue to have EQR qualify as a REIT. EQR's policies
with respect to such activities may be reviewed and modified from time to time
by EQR's trustees without notice to or the vote of the shareholders.
MANAGEMENT AND OPERATION OF EQR AFTER THE MERGER
Upon the consummation of the Transactions the executive officers and trustees
of EQR shall continue to serve for the balance of their unexpired terms or
their earlier death, resignation or removal. In addition, Stephen O. Evans
shall become a trustee on the EQR Board of Trustees for a term expiring at the
annual meeting of shareholders of EQR held in the year 2000 and shall be
appointed as Executive Vice President-Strategic Investments and Richard G.
Berry shall be appointed as Executive Vice President-Development.
Stephen O. Evans, age 52 as of September 11, 1997, served as the Chairman of
the Board and Chief Executive Officer of EWR since its formation in May 1994.
Mr. Evans founded the predecessor of EWR in 1977 and served as Chairman of the
Board and Chief Executive Officer. From 1973 to 1977, Mr. Evans was Investment
Vice President of W.R. Schulz & Associates, at that time Arizona's largest
apartment development company. He earned his Bachelor of Science in Business
Administration and Masters of Business Administration degrees from Arizona
State University. He also served as an officer in the United States Air Force
for four years. Mr. Evans' affiliations include National Multi-Housing Council;
National Association for Real Estate Investment Trusts (NAREIT); Lambda Alpha,
a National Land Economic Fraternity; and the Urban Land Institute.
Richard G. Berry, age 53 as of September 11, 1997, served as a director on
the Board of Directors of EWR since EWR's formation in May 1994 and was
appointed President and Chief Operating Officer of EWR on January 21, 1997.
Prior to that time, Mr. Berry served as the Executive Vice President of EWR
since May 1994 and served as the Executive Vice President of Evans Withycombe,
Inc. since 1992. From 1983 to 1992, Mr. Berry served as Chairman of the Board
of Berry and Boyle, a real estate investment and development management
company. Prior to 1983, Mr. Berry served as Executive Vice President of Hutton
Real Estate Services and was responsible for that firm's real estate investment
and management activities. Mr. Berry earned a Bachelor of Architecture degree
and a Masters of Business Administration degree from the University of
Michigan. He served as an officer of a United States Navy mobile construction
battalion for three years.
ADDITIONAL INFORMATION REGARDING THE BUSINESS OF EWRLP
FINANCIAL
In August 1994, EWR completed an initial public offering of 8,685,000 shares
of its common stock (the "Initial Public Offering"), and subsequently completed
the sale of an additional 1,302,750 shares of common stock upon exercise of the
underwriters' over-allotment option that resulted in net proceeds to EWR of
approximately $181.3 million. Concurrent with completing the Initial Public
Offering, EWR engaged in various formation transactions designed to transfer
the ownership of its properties ("Communities") and certain development rights
and the business of EWR's predecessor, Evans Withycombe, Inc., and its
affiliates, predecessors and partners (collectively, "Evans Withycombe") and
other assets to EWRLP. In May 1996 EWR completed a second public offering of
2,000,000 shares of its common stock (an additional 2,500,000 shares
74
<PAGE>
were sold by two institutional stockholders) and an additional 88,889 shares
pursuant to the partial exercise of the underwriters' over-allotment option
(111,111 additional shares were sold by the institutional stockholders pursuant
to such exercise). The net proceeds to EWR from the second public offering of
approximately $41 million were used to pay down EWR's revolving credit
facility.
On February 14, 1997, EWR completed a public offering of 1,800,000 shares of
its common stock. Net proceeds to EWR were approximately $35,820,000 and were
contributed to EWRLP in exchange for 1,800,000 Units. EWRLP used the net
proceeds to pay down its revolving credit facility.
OPERATIONS
EWRLP has focused on becoming a major presence in each of its markets,
allowing it to capitalize on its superior customer service, product design and
property locations while establishing and maintaining a strong brand identity.
EWRLP owns and manages 44 stabilized multifamily apartment communities located
in Arizona and seven stabilized multifamily communities in Southern California,
containing a total of 14,523 apartments, of which 12,125 are in Arizona and
2,398 are in Southern California. The 51 stabilized communities in Arizona and
California are referred to herein as the "Stabilized Communities." The
Communities are located in growing sub-markets in Phoenix and Tucson, Arizona
and in Riverside/San Bernardino, California. The Communities are in submarkets
close to areas of employment, transportation and shopping, and in master
planned communities.
Arizona. EWRLP's size and prominence in its primary Arizona markets provide
it with a number of competitive advantages, including superior market knowledge
resulting in choice site selection, product differentiation, economies of scale
in operations and the ability to utilize specialized marketing techniques.
California. After conducting an extensive study of a number of potential
markets within its region, EWRLP has determined that certain selected sub-
markets in Riverside/San Bernardino and San Diego, California present
significant opportunities for growth and attractive investment opportunities.
EWRLP has acquired 2,398 units in these markets and believes that properties
continue to be available for purchase in such markets at prices below
replacement costs which could result in attractive yields and growth for EWRLP.
RISKS RELATED TO AN INVESTMENT IN EWRLP
EWRLP's results of operations are subject to certain risks and uncertainties,
including, for example, population and employment growth rates and household
formations, the availability of properties for purchase, the actual timing of
EWRLP's planned acquisitions and developments, the strength of the local
economies in the sub-markets in which EWRLP operates and EWRLP's ability to
successfully manage its planned expansion into Southern California. No
assurance can be given that actual results will meet EWRLP's expectations and
projections with respect to such uncertainties.
GENERAL REAL ESTATE INVESTMENT RISKS
Real property investments are subject to varying degrees of risk. The yields
available from equity investments in real estate depend on the amount of income
generated and expenses incurred. If EWRLP's Communities do not generate
revenues sufficient to meet operating expenses, including debt service and
capital expenditures, EWRLP's cash flow and ability to make distributions will
be adversely affected.
A multifamily apartment community's revenues and value may be adversely
affected by a number of factors including: the national economic climate; the
local economic climate (which may be adversely impacted by plant closings,
industry slowdowns, changing demographics and military base closings); local
real estate conditions (such as oversupply of or reduced demand for
apartments); the perceptions by prospective residents of the safety,
convenience and attractiveness of the communities or neighborhoods in which
they are located and the quality of local schools and other amenities; the
ability of the owner to provide adequate management, maintenance and insurance;
and increased operating costs (including real estate taxes and utilities).
Certain significant expenditures associated with each equity investment (such
as mortgage payments, if any, real estate taxes, insurance and maintenance
costs) are generally not reduced when circumstances cause a reduction in income
from the investment. If a property is mortgaged to secure payment of
indebtedness, and if EWRLP 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 applicable laws, including
tax laws, interest rate levels and the availability of financing.
DEPENDENCE ON PRIMARY MARKETS
The Communities are located in Arizona and selected sub-markets in Southern
California, and EWRLP's performance could be adversely affected by economic
conditions in these geographic areas, including supply and demand for
apartments in these areas, zoning or other regulatory conditions and
competition from other available apartments and alternative forms of housing.
These factors or a decline in the economy or real estate values in the Arizona
markets and selected sub-markets of Southern California may adversely affect
the ability of EWRLP to make distributions to holders of Units.
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<PAGE>
OPERATING RISKS
The Communities are subject to all operating risks common to multifamily
apartment communities in general, any and all of which might adversely affect
apartment occupancy or rental rates. Increases in unemployment in the areas in
which the communities owned or managed by EWRLP are located might adversely
affect multifamily apartment occupancy or rental rates. Increases in operating
costs due to inflation may not necessarily be offset by increased rents.
Residents may be unable or unwilling to pay rent increases. 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. If any of the above occurs, EWRLP's ability to make distributions to
holders of Units could be adversely affected.
RISKS OF DEVELOPMENT ACTIVITIES
EWRLP intends to continue to actively pursue development projects, including
the expansion of existing apartment communities. Such projects generally
require the expenditure of capital as well as various forms of government and
other approvals, the receipt of which cannot be assured. Consequently, there
can be no assurance that any such projects will be completed or that such
projects will prove to be profitable. The failure of EWRLP to complete or to
profitably operate planned development projects may have a material adverse
effect on EWRLP's financial position and results of operations.
RISKS RELATED TO COMPETITION
There are numerous housing alternatives that compete with the Communities in
attracting residents. The Communities compete directly with other multifamily
rental apartments and single family homes that are available for rent in the
markets in which the Communities are located. The Communities also compete for
residents with new and existing homes and condominiums. In addition, other
competitors for development and acquisitions of properties may have greater
resources than EWRLP. If such competition results in a reduced demand for
EWRLP's Communities or if EWRLP's competitors develop and/or acquire competing
communities on a more cost-effective basis than EWRLP, EWRLP may experience a
drop in rental rates, which may have a material adverse effect on EWRLP's
financial position and results of operations.
ENVIRONMENTAL RISKS
Under various federal, state and local laws, ordinances and regulations,
EWRLP may be considered an owner or operator of real property or may have
arranged for the disposal or treatment of hazardous or toxic substances and,
therefore, may become liable for the costs of removal or remediation of
certain hazardous substances released on or in its property or disposed of by
it, as well as certain other potential costs which could relate to hazardous
or toxic substances (including governmental fines and injuries to persons and
property). Such liability may be imposed whether or not EWRLP knew of, or was
responsible for, the presence of such hazardous or toxic substances. Any such
liability could materially adversely affect EWRLP and its ability to make
distributions.
RISK OF UNINSURED LOSS
EWRLP carries comprehensive liability, fire, extended coverage and rental
loss insurance with respect to all of the Communities, 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 from earthquakes) 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, EWRLP could lose
its capital invested in a property, as well as the anticipated future revenues
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 EWRLP and its ability to make distributions.
NO LIMITATION ON INCURRENCE OF DEBT
EWR currently has a policy of incurring debt only if upon such incurrence
the ratio of debt to total market capitalization (i.e., the total consolidated
debt of EWR as a percentage of the market value of issued and outstanding
Common Stock and Units plus total consolidated debt) would be 50% or less, but
the organizational documents of neither EWR nor EWRLP contain any limitation
on the amount of indebtedness EWR and EWRLP may incur. Accordingly, the Board
of Directors of EWR could alter or eliminate this policy. If this policy were
changed, EWRLP could become more highly leveraged, resulting in an increase in
debt service that could adversely affect EWRLP's cash available for
distribution to shareholders and could increase the risk of default on EWRLP's
indebtedness.
76
<PAGE>
OVERVIEW
EWRLP's portfolio consists of Stabilized Communities and Communities Under
Construction and in Lease Up:
Stabilized Communities. EWRLP owns and manages 44 Stabilized Communities
located in the Phoenix and Tucson, Arizona areas, containing a total of
12,125 apartments. In addition, EWRLP owns and manages seven Stabilized
Communities in Southern California, which contain a total of 2,398
apartments.
Communities Under Construction and in Lease-up. EWRLP owns five apartment
Communities Under Construction and in Lease-Up in Arizona with a total of
1,198 apartments. Four of these Communities were new developments and one
is an expansion of an existing Community owned by EWRLP.
COMPETITION
The Communities are located in areas that include other apartment communities
and that may include new apartment communities that are under construction. The
number of competitive communities in a particular area could have an effect on
EWRLP's ability to lease apartments at the Communities or at any newly
developed or acquired properties and on the rents charged by EWRLP. Also, other
forms of housing provide alternatives to potential residents of high quality
apartment complexes like the Communities.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property, and may be held liable to a governmental
entity or to third parties for property damage and for investigation and clean-
up costs incurred by such parties in connection with the contamination.
EWRLP believes that the Communities are in compliance in all material
respects with all federal, state and local laws, ordinances and regulations
regarding hazardous or toxic substances or petroleum products. EWRLP has not
been notified by any governmental authority, and is not otherwise aware, of any
material noncompliance, liability or claim relating to hazardous or toxic
substances or petroleum products in connection with any of its present
properties.
EMPLOYEES
As of February 28, 1997, EWRLP, primarily through the Management Company,
employed, in the aggregate, a total of 583 persons. The Management Company
and/or EWRLP employ substantially all of the professional employees that are
currently engaged in the residential property management, development and
construction businesses of EWR. EWRLP believes that its relations with its
employees are good.
REGULATION
Apartment communities are subject to various laws, ordinances and
regulations, including laws, ordinances and regulations related to fair
housing, Americans with disabilities and building safety. EWRLP believes that
each Community has the necessary permits and approvals to operate its business
and that each Community is in material compliance with present laws, ordinances
and regulations.
SEASONALITY
The fall and winter months in EWRLP's primary markets generally experience
somewhat higher seasonal occupancies.
77
<PAGE>
FINANCIAL INFORMATION REGARDING EWRLP
The following table sets forth certain financial and operating data on a
consolidated basis for EWRLP and on a combined historical basis for Evans
Withycombe. The following information should be read in conjunction with all of
the consolidated financial statements and notes thereto included elsewhere in
this Consent Solicitation/Prospectus/Information Statement.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER UNIT AND
PROPERTY INFORMATION)
<S> <C> <C> <C> <C> <C>
OPERATING INFORMATION:
REVENUES:
Rental..................... $ 94,350 $ 68,864 $ 51,097 $ 38,613 $ 26,876
Third party management
fees...................... 1,157 1,268 1,668 2,213 2,204
Interest and other......... 6,119 4,399 4,194 3,112 2,373
--------- --------- --------- -------- --------
Total revenues.......... 101,626 74,531 56,959 43,938 31,453
EXPENSES:
Repairs and maintenance.... 11,607 8,293 6,288 4,730 3,272
Other property operating... 12,713 8,699 7,834 6,593 4,684
Advertising................ 1,864 1,244 966 1,022 783
Real estate taxes.......... 6,915 4,723 3,204 2,869 2,307
Property management........ 3,225 2,825 2,505 2,605 2,417
General and administrative. 1,387 1,321 1,175 1,466 1,360
Interest................... 24,225 12,650 7,836 6,361 5,909
Depreciation and
amortization.............. 20,885 13,762 10,333 10,319 7,146
Write-down of real estate
assets(1)................. -- -- -- 1,361 10,284
Other(2)................... -- -- 5,233 -- --
--------- --------- --------- -------- --------
Total expenses.......... 82,821 53,517 45,374 37,326 38,162
--------- --------- --------- -------- --------
Income (loss) before
minority interest and
extraordinary item........ 18,805 21,014 11,585 6,612 (6,709)
Minority interest (3)...... (75) (89) (42) -- --
Extraordinary item-gain on
extinguishment of debt
(1)....................... -- -- -- 6,061 12,569
--------- --------- --------- -------- --------
Net income................. $ 18,730 $ 20,925 $ 11,543 $ 12,673 $ 5,860
========= ========= ========= ======== ========
Earnings per unit (4)...... $ 0.84 $ 1.02
========= =========
Earnings per unit for the
period August 17 to
December 31, 1994(4).......... $ 0.38
=========
OTHER INFORMATION:
Cash flows from:
Operating activities...... $ 38,721 $ 36,983 $ 21,998 $ 20,897 $ 13,271
Investing activities...... (129,461) (118,061) (211,651) (79,511) (61,829)
Financing activities...... 89,674 82,273 189,614 57,417 50,792
Total rental communities
(end of period)........... 49 41 32 31 27
Total number of apartments
(end of period)........... 13,905 11,053 7,924 7,695 6,502
Physical occupancy (end of
period) (5)............... 93% 96% 97% 97% 97%
Weighted average number of
apartments (6)............ 12,887 9,798 7,740 6,641 4,998
Weighted average monthly
revenue per unit (7)...... $ 715 $ 641 $ 586 $ 532 $ 498
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET INFORMATION:
Real estate, before
accumulated depreciation.. $ 761,550 $ 587,183 $ 399,987 $292,513 $215,549
Total assets............... 735,467 579,564 402,486 271,055 204,836
Total debt................. 436,172 297,456 127,787 106,545 64,792
Minority interest.......... 827 889 1,247 -- --
Equity..................... $ 283,954 $ 259,055 $ 253,867 $142,886 $122,135
</TABLE>
- -------
(1) During 1993, EWRLP negotiated a discounted payoff of a mortgage loan
secured by The Meadows and Promontory Pointe (1992). The excess of the
amounts owed for principal and interest over the amount paid to pay off the
loan is recorded as an extraordinary item-gain on extinguishment of debt.
EWRLP determined that the carrying values of the communities were in excess
of net realizable value. The excess of $1,361 and $10,284 was charged to
write down of real estate assets.
(2) In connection with the repayment of existing indebtedness at the time of
the Initial Public Offering, prepayment penalties and lender participation
(additional interest) totaling $2,594 were paid. Prior to the Initial
Public Offering, an Executive Incentive Deferred Compensation Plan was
canceled and the $2,639 that was funded by EWRLP was expensed during 1994.
78
<PAGE>
(3) Net income includes an adjustment for Evans Withycombe Finance, Inc.'s one
percent interest in the Financing Partnership for the years ended December
31, 1996 and 1995 and the period from August 17 to December 31, 1994,
respectively.
(4) Net income per Unit is based on 22,184,395, 20,590,873 and 20,086,884
weighted average number of Units outstanding for the years ended December
31, 1996 and 1995 and the period from August 17 to December 31, 1994,
respectively.
(5) Physical Occupancy is defined as the number of apartments occupied or
leased (including models and employee apartments) divided by the total
number of leasable apartments within the community, expressed as a
percentage. Physical occupancy has been calculated using the average of the
occupancy that existed on the last day of each month over each period.
(6) Weighted average number of apartments is the average of all apartments
during the period. For stabilized properties, all apartments are included
in the calculation of the weighted average. For communities in the lease-up
phase, only apartments that are completed and occupied are included in the
weighted average calculation.
(7) Weighted average monthly revenue per apartment is derived by dividing
rental income by the weighted average number of apartments.
79
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF EWRLP
(DOLLARS IN THOUSANDS, EXCEPT APARTMENT DATA)
OVERVIEW
The following discussion, which is based primarily on the consolidated
financial statements of Evans Withycombe Residential, L.P. and the combined
financial statements of its predecessor, should be read in conjunction with the
"Selected Financial Data" and all financial statements appearing elsewhere in
this Registration Statement on Form 10. The consolidated financial statements
of EWRLP consist of the Stabilized Communities, Communities Under Construction
and in Lease-up and the Management Company.
When used in the following discussion, the words "believes," "anticipates,"
"expects" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties
which could cause actual results to differ materially from those projected,
including, but not limited to, the actual timing of EWRLP's planned
acquisitions and developments, the strength of the local economies in the sub-
markets in which EWRLP operates, and EWRLP's ability to successfully manage its
planned expansion into Southern California. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. EWRLP undertakes no obligation to publicly release any revisions
to these forward-looking statements which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RESULTS OF OPERATIONS--CONSOLIDATED FINANCIAL STATEMENTS
The results of operations for the years ended December 31, 1996 and 1995,
respectively, were significantly affected by acquisitions, developments and
expansions.
Comparison of Results of Operations for the Year Ended December 31, 1996 to
the Year Ended December 31, 1995
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------- PERCENTAGE
1996 1995 CHANGE
-------- ------- ----------
<S> <C> <C> <C>
Rental income............................ $ 94,350 $68,864 37.0%
Third party management fees.............. 1,157 1,268 (8.8)
Interest and other....................... 6,119 4,399 39.1
-------- ------- -----
Total revenues....................... 101,626 74,531 36.4
Property operating and maintenance (1)... 26,184 18,236 43.6
Real estate taxes........................ 6,915 4,723 46.4
Property management...................... 3,225 2,825 14.2
General and administrative............... 1,387 1,321 5.0
Interest................................. 24,225 12,650 91.5
Depreciation and amortization............ 20,885 13,762 51.8
-------- ------- -----
Total expenses....................... 82,821 53,517 54.8
-------- ------- -----
Income before minority interest.......... $ 18,805 $21,014 (10.5)%
======== ======= =====
Weighted average monthly rental revenue
per unit................................ $ 715 $ 641
======== =======
Weighted average number of apartments.... 12,887 9,798
======== =======
Economic occupancy (2)................... 90.0% 91.6%
======== =======
</TABLE>
- -------
(1) EWRLP defines property operating and maintenance expense as repairs and
maintenance, other property operating and advertising expense.
(2) Stabilized properties only.
Rental revenues increased by $25,486 or 37.0 percent for the year ended
December 31, 1996 as compared to the similar period in 1995, respectively as a
result of increases in the weighted average number of apartments and weighted
average monthly revenue per occupied apartment. EWRLP believes that the
increase in rental income was largely attributable to the acquisitions and
stabilization of properties developed by EWRLP in its rental markets.
Third party management fees decreased $111 or 8.7 percent due to the sale of
several properties from the management portfolio. Included in third party
management fees is a non recurring $500 fee received in exchange for
terminating the management contract on nine apartment communities containing
1298 apartment units in the second quarter 1996.
80
<PAGE>
Interest and other income increased $1,720 for the year ended December 31,
1996 compared to the year ended December 31, 1995 as a result of the sale of
telephone servicing rights on certain properties and an increase in ancillary
income such as redecoration and application fees as a result of the increase in
the weighted average number of apartments.
Property operating and maintenance expense increased due to the increase in
the weighted average number of apartments for the year ended December 31, 1996
as compared to the same period in 1995, respectively. Real estate taxes
increased primarily due to the increase in the number of properties for the
year ended December 31, 1996.
Interest expense increased due to an increase in debt resulting from
acquisitions and the increase in weighted average number of units in the
portfolio. EWRLP capitalized $2,714 of interest for the year ended December
31,1996 compared to $5,048 for the year ended December 31, 1995 due to a
decrease in construction activity. Interest costs incurred during construction
of a new property are capitalized until completion of construction on a
building-by-building basis.
"SAME STORE" PORTFOLIO
EWRLP defines same store portfolio as those communities that reached
stabilized occupancy prior to January 1, 1995. Same store portfolio consists of
32 stabilized properties containing 7,924 apartment units that were owned by
EWRLP for the years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------- PERCENTAGE
1996 1995 CHANGE
------- ------- ----------
<S> <C> <C> <C>
Rental income............................. $55,074 $55,202 (.2)%
Other income.............................. 3,296 2,581 27.7
------- ------- ----
58,370 57,783 1.0
------- ------- ----
Property operating and maintenance........ 16,134 14,619 10.4
Real estate taxes......................... 3,995 3,906 2.3
------- ------- ----
20,129 18,525 8.7
------- ------- ----
Property net operating income............. $38,241 $39,258 (2.6)%
======= ======= ====
Weighted average monthly rental revenue
per unit................................. $ 654 $ 638
======= =======
Economic occupancy........................ 89.7% 91.1%
======= =======
</TABLE>
Rental income for the year ended December 31, 1996 was comparable with the
same period in 1995 as a result of the increase in the weighted average monthly
rental revenue per unit being offset by a decline in the average economic
occupancy during the year ended December 31, 1996 as compared to the year ended
December 31, 1995. Other income for the year ended December 31, 1996 increased
as a result of gains from the sale of telephone servicing rights at various
communities.
Property operating and maintenance expense increased $1,515 or 10.4 percent
over 1995 due to higher apartment turnover and utility costs associated with an
increased number of vacant apartments and higher advertising costs incurred by
EWRLP in its "same store" portfolio.
COMMUNITIES STABILIZED LESS THAN TWO YEARS
Communities stabilized less than two years consist of the development of five
new apartment communities and the expansion of two existing apartment
communities by EWRLP, containing 1,521 apartment units that reached stabilized
occupancy during the year ended December 31, 1995. Increases in the year ended
December 31, 1996 as compared to the year ended December 31, 1995 are the
result of the increase in the weighted average number of apartments.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1996 1995
------- ------
<S> <C> <C>
Rental income........................................... $12,606 $7,113
Other income............................................ 680 541
------- ------
13,286 7,654
------- ------
Property operating and maintenance...................... 2,532 1,734
Real estate taxes....................................... 1,011 407
------- ------
3,543 2,141
------- ------
Property net operating income........................... $ 9,743 $5,513
======= ======
Weighted average number of apartments................... 1,521 888
======= ======
</TABLE>
81
<PAGE>
DEVELOPMENT AND LEASE UP PROPERTIES
Development and lease up properties consist of the development of 13 new
apartment communities or the expansion of existing apartment communities
containing 2,522 apartment units that were in the "construction," "development"
or "lease up" stage during 1996 and therefore, not considered to have achieved
stabilized occupancy for all of the periods presented. Increases in the year
ended December 31, 1996 as compared to the year ended December 31, 1995 are the
result of an increase in the weighted average number of apartments.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1996 1995
------- ------
<S> <C> <C>
Rental income........................................... $11,276 $1,281
Other income............................................ 720 128
------- ------
11,996 1,409
------- ------
Property operating and maintenance...................... 3,203 700
Real estate taxes....................................... 790 30
------- ------
3,993 730
------- ------
Property net operating income........................... $ 8,003 $ 679
======= ======
Weighted average number of apartments in lease up....... 1,398 174
======= ======
</TABLE>
ACQUISITIONS
Acquisitions consist of eight properties containing 3,016 apartment units,
which have been acquired by EWRLP since January 1, 1995. Increase in the year
ended December 31, 1996, as compared to the year ended December 31, 1995, are
the result of the increase in the weighted average number of apartments.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1996 1995
------- ------
<S> <C> <C>
Rental income........................................... $15,394 $5,268
Other income............................................ 727 193
------- ------
16,121 5,461
------- ------
Property operating and maintenance...................... 4,315 1,183
Real estate taxes....................................... 1,119 380
------- ------
5,434 1,563
------- ------
Property net operating income........................... $10,687 $3,898
======= ======
Weighted average number of apartments................... 2,044 769
======= ======
</TABLE>
Comparison of Results of Operations for the Year Ended December 31, 1995 to
the Year Ended December 31, 1994
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- PERCENTAGE
1995 1994 CHANGE
------- ------- ----------
<S> <C> <C> <C>
TOTAL PORTFOLIO
Rental income.............................. $68,864 $51,097 34.8%
Third party management fees................ 1,268 1,668 (24.0)%
Interest and other......................... 4,399 4,194 4.9%
------- ------- -----
74,531 56,959 30.9%
------- ------- -----
Property operating and maintenance......... 18,236 15,088 20.9%
Real estate taxes.......................... 4,723 3,204 47.4%
Property management........................ 2,825 2,505 12.8%
General and administrative................. 1,321 1,175 12.4%
Interest................................... 12,650 7,836 61.4%
Depreciation and amortization.............. 13,762 10,333 33.2%
Other...................................... -- 5,233 --
------- ------- -----
53,517 45,374 17.9%
------- ------- -----
Income before minority interest............ $21,014 $11,585 81.4%
======= ======= =====
Weighted average number of apartments 9,798 7,740
Economic occupancy......................... 91.6% 92.3%
======= =======
</TABLE>
82
<PAGE>
Rental revenues increased by $17,767 or 34.8 percent as a result of increases
in the weighted average number of apartments and weighted average monthly
revenue per occupied apartment. EWRLP believes that the increase in rental
income, other than that attributable to the acquisitions and developments, was
achieved as a result of EWRLP's ability to capitalize on continuing improvement
in EWRLP's rental markets.
The decrease in third party management fees of $400, a 24.0 percent decrease
from the 1994 period, is due to the sale of several properties from the
management portfolio, including 508 units which EWRLP purchased.
Property operating and maintenance expense increased $3,148 or 20.9 percent
(versus a 26.6 percent increase in the weighted average number of units) due to
the increase in the number of properties. Real estate taxes increased $1,519 or
47.4 percent (versus a 26.6 percent increase in the weighted average number of
units) primarily due to the increase in the number of properties and higher
values placed on properties due to improved market conditions.
Property management expense increased $320 or 12.8 percent due to the
increase in the number of properties under management.
Interest expense increased $4,814 or 61.4 percent due to an increase in debt
resulting from acquisitions and more units under construction. EWRLP
capitalized $5,048 of interest in 1995 compared to $2,724 in 1994 due to an
increase in construction activity. Interest costs incurred during construction
of a new property are capitalized until completion of construction on a
building-by-building basis.
"SAME STORE" PORTFOLIO
In 1995, EWRLP defined the same store portfolio as those communities that
reached stabilization prior to January 1, 1994.
Same store portfolio consists of 30 stabilized operating properties
containing 7,559 apartment units that were owned by EWRLP for the years ended
December 31, 1995 and 1994.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- PERCENTAGE
1995 1994 CHANGE
------- ------- ----------
<S> <C> <C> <C>
Rental income............................. $52,940 $49,712 6.5 %
Other income.............................. 2,568 3,180 (19.2)%
------- ------- -----
55,508 52,892 4.9 %
------- ------- -----
Property operating and maintenance........ 14,213 14,589 (2.6)%
Real estate taxes......................... 3,671 3,180 15.4 %
------- ------- -----
17,884 17,769 .6 %
------- ------- -----
Property net operating income............. $37,624 $35,123 7.1 %
======= ======= =====
Weighted average monthly rental revenue
per unit................................. $638 $586
======= =======
Economic occupancy........................ 91.5% 92.5%
======= =======
</TABLE>
Rental income for the year ended December 31, 1995 increased $3,228 or 6.5
percent as a result of an increase in the weighted average monthly revenue per
occupied unit which increased $52 or 8.9 which was partially offset by a
decline in the average economic occupancy from 92.5 percent during the year
ended December 31, 1994 and 91.5 percent during the year ended December 31,
1995.
Property operating and maintenance expense decreased $376 or 2.6 percent due
to EWRLP beginning to realize economies of scale from consolidated operations
of the integrated property portfolio.
Real estate taxes increased $491 or 15.4 percent due to higher values placed
on properties due to improved market conditions and property values.
83
<PAGE>
DEVELOPMENT AND LEASE UP PROPERTIES
Development properties consist of 15 developments or expansion of existing
properties containing 2,878 apartment units that have been developed by EWRLP
since the Initial Public Offering in August 1994. Increases in 1995 as compared
to 1994 are the result of development units stabilized or in lease-up
increasing to 15 properties and 2,878 apartment units in 1995 as compared to
three properties and 661 apartment units in 1994.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1994
------ ------
<S> <C> <C>
Rental income............................................ $9,766 $1,248
Other income............................................. 636 84
------ ------
10,402 1,332
------ ------
Property operating and maintenance....................... 2,604 459
Real estate taxes........................................ 560 18
------ ------
3,164 477
------ ------
Property net operating income............................ $7,238 $ 855
====== ======
</TABLE>
ACQUISITIONS
Acquisitions consist of five properties containing 1,756 apartment units
which have been acquired by EWRLP since the Initial Public Offering in August
1994. Increases in 1995 as compared to 1994 are the result of acquiring four
properties in 1995 consisting of 1,608 apartment units compared to one property
consisting of 148 apartment units in 1994.
<TABLE>
<CAPTION>
DECEMBER
31,
-----------
1995 1994
------ ----
<S> <C> <C>
Rental income.............................................. $6,158 $137
Other income............................................... 239 5
------ ----
6,397 142
------ ----
Property operating and maintenance......................... 1,419 40
Real estate taxes.......................................... 492 6
------ ----
1,911 46
------ ----
Property net operating income.............................. $4,486 $ 96
====== ====
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
EWRLP's net cash provided by operating activities increased from $37.0
million for the year ended December 31, 1995 to $38.7 million for the year
ended December 31, 1996 principally due to increased rental operations from
additional properties acquired and developed subsequent to December 31, 1995.
Net cash used in investing activities increased from $118.1 million for the
year ended December 31, 1995 to $129.5 million for the year ended December 31,
1996. Cash used in investing activities largely relates to EWRLP's development
and construction of new apartment communities in Phoenix and Tucson, Arizona
and acquisitions of apartment communities in its markets. Net cash provided by
financing activities increased from $82.3 million for the year ended December
31, 1995 to $89.7 million for the year ended December 31, 1996 due to the
proceeds from the sale of 2,088,889 shares of common stock of EWR and
borrowings under EWRLP's Revolving Credit Facility ("Revolving Credit
Facility") which were used to fund the development and acquisition of apartment
communities.
EWRLP expects to meet its short-term liquidity requirements, including
capital expenditures relating to maintaining Stabilized Communities, generally
through its net cash provided by operations and borrowings under its credit
arrangements and anticipates meeting long-term liquidity requirements, such as
scheduled debt maturities, financing of construction and development activities
and possible acquisitions through long-term unsecured borrowings, issuance of
additional equity securities of EWR or debt securities of EWRLP, or, possibly
in connection with acquisitions of land or existing properties, Units of EWRLP.
EWRLP believes that its net cash provided by operations will be adequate and
anticipates that it will continue to be adequate to meet both operating
requirements and payment of dividends by EWRLP in accordance with REIT
requirements in both the short and the long-term.
84
<PAGE>
The information in the immediately preceding paragraph is forward looking and
involves risks and uncertainties that could significantly impact EWRLP's
expected liquidity requirements in the short and long term. While it is
impossible to itemize the many factors and specific events that could affect
EWRLP's outlook for its liquidity requirements, such factors would include the
actual timing of EWRLP's planned development of new, and expansion of existing,
communities; acquisitions of existing apartment communities; the actual costs
associated with such developments and acquisitions; and the strength of the
local economies in the sub-markets in which EWRLP operates. EWRLP is further
subject to risks relating to the limited geographic area in which it operates
and its ability to successfully manage its planned expansion into Southern
California, a market in which it did not have any operating history prior to
1995. Higher than expected costs, delays in development of communities, a
downturn in the local economies and/or the lack of growth of such economies
could reduce EWRLP's revenues and increase its expenses, resulting in a greater
burden on EWRLP's liquidity than that which EWRLP has described above.
Capital Resources
At December 31, 1996, EWRLP's total debt was approximately $436.2 million and
EWRLP's debt to total market capitalization (market equity plus debt) was
approximately 47.4 percent. EWRLP received an investment grade rating of "BBB-"
from Standard & Poor's Corporation, "Baa3" from Moody's Investor Service Inc.
and "BBB-" from Fitch Investors Service, Inc. in December 1996.
A security rating is not a recommendation to buy, sell, or hold securities
and may be subject to revision or withdrawal at any time by the assigning
rating organization, and each rating should be evaluated independently of any
other rating. A rating of (a) BBB- from Standard & Poor's Corporation indicates
that the obligations of EWRLP are in the lower range of those obligations that
exhibit adequate protection parameters, (b) Baa3 from Moody's Investor Service
Inc. indicates that the obligations of EWRLP are considered to be in the lower
range of medium-grade obligations, which are not considered to be highly
protected or poorly secured and (c) BBB- from Fitch Investors Service, Inc.
indicates that the obligations of EWRLP are considered to be in the lower range
of obligations considered to be of investment grade and of satisfactory credit
quality and that its ability to pay interest and to repay principal is
considered to be adequate.
Conventional Mortgage Loans
Conventional mortgage loans were comprised of six fixed rate loans at
December 31, 1996, each of which is collateralized by a first mortgage lien on
an apartment community included in real estate assets. The mortgages are
payable in monthly installments of principal and interest and mature at various
dates through 1997. The conventional mortgage loans aggregated $40.1 million at
December 31, 1996 with interest rates ranging from 8.0 percent to 9.95 percent.
On January 9, 1997, EWRLP extinguished the debt on three mortgages with unpaid
principal balances of approximately $18.7 million with proceeds from the
Revolving Credit Facility. As a result, EWRLP incurred a loss from the early
extinguishment of debt of approximately $1.2 million. EWRLP prepaid a $6.2
million mortgage note on January 31, 1997 which resulted in an additional loss
from the early extinguishment of debt of approximately $300. The loss from the
early extinguishment of debt was recorded by EWRLP in the first quarter of
1997.
In December 1995, EWRLP entered into a ten year $50 million fixed rate loan
from an insurance company that bears interest at 7.17 percent, with principal
and interest due monthly based on a 25-year amortization schedule beginning
January 1, 1996 through January 1, 2006, and the remaining unpaid principal
balance due January 1, 2006. The loan is secured by a first deed of trust on
five apartment communities. Proceeds from the loan were used to pay down
outstanding balances on the Revolving Credit Facility. The outstanding debt was
$49.5 million at December 31, 1996. The loan is convertible to unsecured upon
EWRLP achieving an investment grade rating of "BBB" or better.
Mortgage Loan Certificates
EWRLP, through the Financing Partnership, borrowed $102.0 million under a
securitized loan in August 1994. During January 1995, EWRLP borrowed the
balance of $29.0 million (increasing the total to $131.0 million). The loan is
secured by the first mortgage liens on 22 of the Communities. The $102.0
million was issued at 99.97 percent of its face amount and the $29.0 million
was issued at 97.9375 percent of its face amount and will mature on August 1,
2001. Although both amounts bear interest at 7.98 percent, the $29.0 million
has an effective interest rate of 8.40 percent due to the discount. The
weighted average effective interest rate of the total $131 million loan is 8.05
percent. The bonds have been rated "AA" by Standard and Poor's Corporation.
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<PAGE>
Tax Exempt Bonds
Tax exempt bonds were comprised of three floating rate bonds based on the
tax exempt note rate set by the respective remarketing agents (or at the
option of EWRLP at a fixed rate determined by the remarketing agents). The
bonds are secured by letters of credit which are secured by first mortgage
liens on four apartment communities. The tax exempt bonds have monthly
interest only payments and mature at various dates through 2016. The tax
exempt bonds aggregated $64 million at December 31, 1996 with interest rates
ranging from 5.16 percent to 6.14 percent.
Revolving Credit Facility
On September 25, 1996, EWRLP expanded its existing $125 million unsecured
Revolving Credit Facility to $225 million with a bank group. The Revolving
Credit Facility bears interest at a floating rate of the London Interbank
Offered Rate ("LIBOR") plus 150 basis points (100 basis points equals one
percent) (or, at the option of EWRLP, at the prime rate announced by the
banks). The interest rate was reduced 25 basis points upon EWRLP achieving an
investment grade rating of "Baa3" or "BBB-." The Revolving Credit Facility has
a term of three years, with an option to extend for one year, subject to
certain conditions, and provides for monthly payments of interest only. It
will be used to finance acquisitions, to fund construction and development and
renovation costs, and for working capital purposes. At December 31, 1996,
there was $152 million outstanding on the Revolving Credit Facility, with an
effective interest rate of 7.20 percent. The Revolving Credit Facility
contains customary representations, covenants and events of default, including
a limitation which restricts distributions to 95 percent of Funds From
Operations, as defined under "Funds From Operations" below. EWRLP does not
expect that the covenants will affect its ability to pay distributions in
accordance with its current distribution policy.
The table below outlines EWRLP's debt structure as of December 31, 1996
(amounts in thousands).
<TABLE>
<CAPTION>
OUTSTANDING WEIGHTED AVERAGE
BALANCE INTEREST RATE
----------- ----------------
<S> <C> <C>
FIXED RATE DEBT:
Mortgage Debt
Conventional............................. $ 89,652 7.87%
Mortgage Loan Certificates............... 130,520 8.05
-------- ----
Total Fixed Rate Debt.................. 220,172 7.98
VARIABLE RATE DEBT:
Tax Exempt Bonds......................... 64,000 5.70
Revolving Credit Facility................ 152,000 7.20
-------- ----
Total Variable Rate Debt............... 216,000 6.76
-------- ----
Total Debt............................. $436,172 7.37%
======== ====
</TABLE>
EWRLP had 4,806 unencumbered apartment units related to the Stabilized
Communities (including properties with debt that was repaid in January 1997)
and 1,198 unencumbered apartment units related to the Communities Under
Construction and in Lease Up at December 31, 1996.
SUBSEQUENT OFFERINGS AND REGISTRATION STATEMENTS
In September 1995, EWR filed a shelf registration statement with the
Securities and Exchange Commission ("SEC") for up to $200 million of debt
securities, common stock and warrants. The registration statement was declared
effective by the SEC in December 1995.
In January 1997, EWR and EWRLP filed a shelf registration statement with the
SEC for up to $125 million of common stock, preferred stock and warrants
issuable by EWR and $200 million of debt securities issuable by EWRLP. This
registration statement, which has not been declared effective by the SEC,
subsumed $125 million of available securities under the September 1995
registration statement. These registration statements will provide EWR and
EWRLP with the ability to issue and sell a portion of such securities from
time to time.
On May 28, 1996, EWR completed a public offering of 4,500,000 shares of
common stock of which 2,000,000 shares were sold by EWR and an aggregate of
2,500,000 shares were sold by two institutional stockholders. On June 25,
1996, EWR issued an additional 88,889 shares of its common stock and the
institutional stockholders sold an additional 111,111 shares pursuant to a
partial exercise of an over-allotment option granted to the underwriters. Net
proceeds to EWR from the second offering were approximately $40,891,000. EWR
used the proceeds from the sale of common stock offering to pay down the
Revolving Credit Facility.
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<PAGE>
In February 1997, EWR completed a public offering of 1,800,000 shares of
common stock. Net proceeds to EWR of approximately $35,820,000 were contributed
to EWRLP in exchange for 1,800,000 Units. EWRLP used the proceeds to pay down
the Revolving Credit Facility.
INFLATION
Most of the leases at the Communities are for a term of one year or less,
which may enable EWRLP to seek increased rents upon renewal of existing leases
or commencement of new leases. The short-term nature of the leases generally
serves to reduce the risk to EWRLP of the adverse effects of inflation.
FUNDS FROM OPERATIONS
EWRLP and industry analysts consider Funds from Operations ("FFO") to be an
appropriate measure of the performance of an equity REIT because it is
predicated on cash flow analyses. EWRLP computes FFO in accordance with
standards established by the National Association of Real Estate Investment
Trusts ("NAREIT"). FFO is defined as net income (loss) determined in accordance
with GAAP, excluding gains (or losses) from debt restructuring and sales of
property plus depreciation and amortization, excluding depreciation on non-real
estate assets and amortization of deferred financing costs. FFO should not be
considered as an alternative to net income (determined in accordance with GAAP)
as an indicator of EWRLP's financial performance or to cash flow from operating
activities (determined in accordance with GAAP) as a measure of EWRLP's needs.
EWRLP believes that in order to facilitate a clear understanding of the
consolidated historical operating results of EWRLP, FFO should be examined in
conjunction with net income, as presented in the consolidated financial
statements and elsewhere in this Registration Statement on Form 10.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994 (A) 1993 1992
------- ------- ------- ------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Income (loss) before
extraordinary items and
minority interest.......... $18,805 $21,014 $16,818 $ 6,612 $(6,709)
Depreciation and
amortization............... 20,712 13,624 10,333 10,319 7,146
Amortization of executive
deferred compensation
expense.................... 390 693 267 -- --
------- ------- ------- ------- -------
Funds from operations....... $39,907 $35,331 $27,418 $16,931 $ 437
======= ======= ======= ======= =======
</TABLE>
- -------
(a) 1994 FFO has been adjusted to include other expenses ($5,233) that were
incurred relating to the repayment of existing indebtedness at the time of
the Initial Public Offering, prepayment penalties and lender participation
(additional interest) totaling $2,594. Prior to the Initial Public
Offering, an Executive Incentive Deferred Compensation Plan was canceled
and the $2,639 that was funded by EWRLP was expensed in 1994. EWRLP
believes it is appropriate to add back other expenses to net income for the
FFO calculation in 1994 as these expenses represent nonrecurring costs
directly related to the Initial Public Offering rather than recurring
expenses from operations.
NUMBER OF UNITS
EWRLP had 22,184,395 and 20,590,873 weighted average number of units for the
years ended December 31, 1996 and 1995, respectively.
CAPITALIZATION OF FIXED ASSETS AND COMMUNITY IMPROVEMENTS
EWRLP has established a policy of capitalizing those expenditures relating to
acquiring new assets, materially enhancing the value of an existing asset, or
substantially extending the useful life of an existing asset. All expenditures
necessary to maintain a Community in ordinary operating condition are expensed
as incurred.
Acquisition of assets and community expenditures for the years ended December
31 are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
New community development............................ $ 82,177 $107,223
Acquisitions......................................... 88,648 77,895
Nonrecurring capital expenditures:
Vehicle access control gates....................... 551 --
Computer upgrade................................... 413 202
Recurring capital expenditures:
Community additions and improvements............... 2,374 1,547
Corporate additions and improvements............... 348 549
-------- --------
$174,511 $187,416
======== ========
</TABLE>
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<PAGE>
EWRLP PROPERTIES
STABILIZED PROPERTIES
The following sets forth certain information regarding the current Stabilized
Communities. All of the Communities are owned 100 percent in fee by EWR
(indirectly through EWRLP or the Financing Partnership). For a description of
liens on certain of the Communities listed below, see Schedule III--Real Estate
Investments and Accumulated Depreciation on page F-17.
<TABLE>
<CAPTION>
AVERAGE AVERAGE PHYSICAL
UNIT PHYSICAL OCCUPANCY AS
SIZE OCCUPANCY OF
NUMBER OF YEAR DEVELOPED (SQUARE DURING DECEMBER 31,
STABILIZED COMMUNITIES CITY APARTMENTS DEVELOPED/ACQUIRED OR ACQUIRED FEET) 1996(1) 1996(1)
---------------------- ------------ ---------- ------------------ -------------- ------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ARIZONA:
PHOENIX:
Acacia Creek............ Scottsdale 508 Acquired 1995 910 97% 98%
Bayside at the Islands.. Gilbert 272 Developed 1988 870 93% 94%
Country Brook (4)....... Chandler 396 Acq/Dev 1991/1993/1996 961 93% 92%
Deer Creek Village...... Phoenix 308 Acquired 1991 819 97% 92%
Gateway Villas.......... Scottsdale 180 Developed 1995 998 96% 97%
Greenwood Village....... Tempe 270 Acquired 1993 884 96% 93%
Heritage Point.......... Mesa 148 Acquired 1994 773 95% 91%
La Mariposa............. Mesa 222 Acquired 1990 928 95% 93%
La Valencia............. Mesa 361 Acquired 1990 950 92% 87%
Ladera.................. Phoenix 248 Developed 1996 1,012 95% 98%
Little Cottonwoods...... Tempe 379 Acq/Acq/Dev 1989/89/90 1,023 91% 85%
Los Arboles (2)......... Chandler 232 Developed 1985 851 95% 92%
Mirador................. Phoenix 316 Developed 1996 987 85% 94%
Miramonte............... Scottsdale 151 Developed 1983 782 98% 99%
Morningside............. Scottsdale 160 Acquired 1992 1,019 95% 99%
Mountain Park Ranch..... Phoenix 240 Developed 1995 961 93% 93%
Park Meadow (4)......... Gilbert 224 Acq/Dev 1992/1996 880 96% 93%
Preserve at Squaw Peak.. Phoenix 108 Acquired 1991 952 96% 90%
Promontory Pointe (3)... Phoenix 304 Acquired 1988 986 91% 83%
Rancho Murietta......... Tempe 292 Acquired 1995 866 97% 87%
Scottsdale Courtyards... Scottsdale 274 Developed 1993 1,044 97% 100%
Scottsdale Meadows...... Scottsdale 168 Developed 1984 888 95% 99%
Shadow Brook............ Phoenix 224 Acquired 1993 1,010 97% 98%
Shores at Andersen
Springs................ Chandler 299 Developed 1989/1993 889 97% 97%
Silver Creek............ Phoenix 174 Acquired 1991 775 98% 97%
Sonoran................. Phoenix 429 Developed 1995 965 93% 89%
Sun Creek............... Glendale 175 Acquired 1993 762 98% 98%
Superstition Vista...... Mesa 316 Acquired 1995 950 97% 96%
The Enclave............. Tempe 204 Developed 1995 952 97% 100%
The Heritage............ Phoenix 204 Developed 1995 973 93% 92%
The Ingleside........... Phoenix 120 Developed 1995 987 96% 94%
The Meadows............. Mesa 306 Acquired 1987 809 94% 92%
The Palms............... Phoenix 132 Developed 1990 1,026 93% 96%
The Pines............... Mesa 194 Acquired 1992 887 96% 94%
Towne Square (4)........ Chandler 584 Acq/Dev 1992/1995/1996 960 92% 90%
Villa Encanto........... Phoenix 382 Developed 1983 810 99% 99%
Village at Lakewood..... Phoenix 240 Developed 1988 857 94% 98%
------
9,744
------
TUCSON:
Harrison Park (3)....... Tucson 172 Acquired 1991/1996 809 87% 85%
La Reserve.............. Oro Valley 240 Developed 1988 900 91% 92%
Orange Grove Village
(4).................... Tucson 400 Acq/Dev 1991/1996 714 93% 87%
Suntree Village......... Oro Valley 424 Acquired 1992 831 91% 93%
The Arboretum........... Tucson 496 Acq/Dev 1992/1995 886 93% 89%
The Legends............. Tucson 312 Developed 1995 1,041 94% 94%
Village at Tanque Verde. Tucson 217 Acq/Dev 1990/1995 694 90% 83%
------
2,261
------
Total Arizona.......... 12,005
CALIFORNIA:
The Ashton.............. Corona Hills 492 Acquired 1995 850 94% 92%
Canyon Crest Views (5).. Riverside 178 Acquired 1996 1,193 97% 96%
Portofino (6)........... Chino Hills 176 Acquired 1996 873 99% 98%
Parkview Terrace (6).... Redlands 558 Acquired 1996 801 96% 95%
Redlands Lawn & Tennis
(7).................... Redlands 496 Acquired 1996 795 89% 89%
------ ------
Total California........ 1,900
======
Total.................. 13,905 44,343
====== ======
Weighted Average....... 283 905
====== ======
</TABLE>
88
<PAGE>
- -------
(1) Physical occupancy is defined as apartments occupied or leased (including
models and employee apartments) divided by the total number of leasable
apartments within the Community, expressed as a percentage.
(2) EWR owns approximately a 10 percent interest in the joint venture that
owns Los Arboles II, as well as two promissory notes with an outstanding
balance of approximately $760,000, secured by subordinated liens on such
property. Los Arboles II contains 200 apartments, was developed in 1987,
has an average unit size of 843 square feet and had average physical
occupancy during 1996 of 95 percent and physical occupancy as of December
31, 1996 of 92 percent.
(3) Another phase of this community is currently under development. See
"Development and Construction Activity" below.
(4) A new phase of this community was completed and reached stabilized
occupancy in 1996.
(5) Property was acquired June 1996.
(6) Property was acquired July 1996.
(7) Property was acquired December 1996.
Of the current Stabilized Communities included in the table, 37 are located
in the greater Phoenix area, seven are located in the Tucson area and five are
located in California. All of the Stabilized Communities are managed and
operated by EWR and have an average size of 283 units. The Stabilized
Communities are primarily oriented to upscale residents seeking high levels of
amenities, such as clubhouses, exercise rooms, tennis courts, swimming pools,
therapy pools and covered parking. The average unit size of the Stabilized and
Communities under Construction combined is 905 square feet. All have fully-
equipped kitchens with upgraded cabinets, individual utility metering,
dishwashers, microwave ovens, separate dining areas, individual storage,
spacious patios and balconies, and ceramic tile entries. Most have
washers/dryers; and many offer high ceilings, fireplaces, and alarm system
prewiring.
DEVELOPMENT AND CONSTRUCTION ACTIVITY
The apartment Communities under Construction and in Lease Up are listed
below:
<TABLE>
<CAPTION>
QUARTER
------------------------------------
ESTIMATED ACTUAL ACTUAL OR ESTIMATED
AVERAGE CONSTRUCTION DATE OF ESTIMATED DATE OF
TOTAL UNIT SIZE COST CONSTRUCTION COMMENCEMENT STABILIZED
NAME CITY UNITS (SQ. FT.) (MILLIONS) COMMENCEMENT OF LEASE-UP OCCUPANCY
---- -------- ----- --------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
PHOENIX
The Hawthorne........... Phoenix 276 904 $17 4:95 3:96 3:97
The Isle at Arrowhead
Ranch.................. Glendale 256 940 17 2:96 4:96 4:97
Promontory Pointe II
Expansion.............. Phoenix 120 1,013 8 4:95 3:76 2:97
----- ---
652 42
TUCSON
Bear Canyon............. Tucson 238 973 15 3:95 2:96 2:97
Harrison Park II
Expansion.............. Tucson 188 974 10 3:95 2:96 2:97
----- ---
426 25
----- ---
Total............... 1,078 $67
===== ===
</TABLE>
EWR owns sites in the Phoenix area intended for the development of four
additional multifamily apartment communities, which, if completed, are
expected to contain approximately 1115 apartment units. In February 1997, EWR
began the construction at one of the sites of the first phase of The Retreat,
which will contain 240 apartment units. EWR currently anticipates that the
first phase of the Retreat will achieve stabilized occupancy in the third
quarter of 1998. EWR currently anticipates that it will develop three
additional communities in the Phoenix area (with approximately an aggregate of
635 units) and the second phase of the Retreat (with an additional 240 units)
over the course of the next two years. EWR currently estimates that such
developments, if completed, would reach stabilized occupancy during the latter
part of 1998 through the end of 1999. There can be no assurance that EWR will
succeed in obtaining any necessary governmental approvals or any financing
required to develop the remaining sites or the completion of phase II of the
Retreat, or that EWR will decide to develop any particular project.
The forward-looking information set forth in the table and paragraph above
is based upon a number of estimates and assumptions that are inherently
subject to business, economic and competitive uncertainties and contingencies,
many of which are beyond EWR's control. The actual development cost,
completion date and stabilization date of any project will be dependent upon a
variety of factors beyond the control of EWR including, for example, labor and
other personnel costs, material costs, weather conditions, government fees and
leasing rates.
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<PAGE>
LEGAL PROCEEDINGS
Neither EWR, EWRLP, the Management Company, the Financing Partnership, or any
of the Communities is presently subject to material litigation nor, to EWR's
knowledge, is any litigation threatened against EWR or any of the Communities,
other than routine actions for negligence or other claims and administrative
proceedings arising in the ordinary course of business, some of which are
expected to be covered by liability insurance and all of which collectively are
not expected to have a material adverse effect on the business or financial
condition of EWR.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements on page F-1.
COMPARISON OF RIGHTS OF THE UNITHOLDERS
At the Effective Time, holders of EWRLP Units will become holders of ERP
Units. The rights of EWRLP's limited partners are presently governed by DRULPA
and the EWRLP Partnership Agreement. The rights of ERP's limited partners are
presently governed by IRULPA and the ERP Partnership Act. Upon approval of the
Transactions by the holders of EWRLP Units and at the Effective Time, the EWRLP
Partnership Agreement will remain in full force and effect. Upon exchange of
EWRLP Units pursuant to the Unit Exchange Agreements to be entered into by
certain holders of EWRLP Units, the rights of the former holders of EWRLP Units
approving the Transactions will be governed by IRULPA and the ERP Partnership
Agreement. Upon dissolution of EWRLP following consummation of the Asset
Contribution and the dissolution of ERP Units in liquidation of all then
outstanding EWRLP Units, the rights of the former holders of EWRLP Units will
be governed by IRULPA and ERP Partnership Agreement.
The following discussion summarizes certain significant differences between
the rights of holders of limited partnership interests of ERP and EWRLP as a
result of certain of these transactions. This summary does not purport to be
complete and is subject to and qualified in its entirety by reference to the
ERP Partnership Agreement and the EWRLP Partnership Agreement. Rights of the
holders of ERP Units which are and will remain the same after the Asset
Contribution are not discussed.
ISSUANCE OF OTHER UNITS
The EWRLP Partnership Agreement authorizes EWR as general partner to cause
EWRLP to issue additional EWRLP Units for any EWRLP purpose, from time to time.
EWR is authorized to cause EWRLP to issue to EWR EWRLP Units which are
convertible or exchangeable into shares of EWR Common. EWRLP may issue to EWR
one or more classes, or one or more series of such classes, and to fix the
designations, preferences, special rights, powers and duties, including rights,
powers and duties senior to the EWRLP Units held by limited partners as
determined by EWR as general partner.
Under the ERP Partnership Agreement, EQR as general partner may cause ERP to
issue additional units as follows: (i) ERP Units to EQR upon the issuance by
EQR of additional EQR Common (other than in exchange for ERP Units) and the
contribution of the net proceeds from such additional issuance as a capital
contribution to ERP, however, EQR may issue shares of EQR Common in connection
with share option plans, dividend reinvestment plans without receiving any
proceeds and that the issuance of such EQR Common will nonetheless entitle EQR
to additional ERP Units under this section, (ii) ERP Units to the partners that
hold Preference Units that are convertible into ERP Units, upon the exercise of
such conversion in accordance with the terms and conditions of the Preference
Unit term sheet or other securities, (iii) ERP Units to partners holding ERP
Units if and to the extent of each such partner's participation in any
reinvestment program, (iv) Preference Units to EQR upon the issuance by EQR of
securities other than EQR Common and the contribution of the net proceeds
thereof as a capital contribution to ERP and (v) in all other cases, ERP Units
and/or Preference Units, as determined by EQR as general partner, in its
discretion, to existing or newly-admitted partners, in exchange for the
contribution by a partner of additional capital contributions to ERP.
UNIT OPTION PLAN
Under the EWRLP Partnership Agreement, EWR as general partner may cause EWRLP
to adopt option plans pursuant to which employees of EWRLP or EW Management
(including any successors) may acquire EWR Common or EWRLP Units to employees
of EWRLP or any of EWR's subsidiaries.
The ERP Partnership Agreement provides that EQR as general partner may cause
ERP to issue ERP Units to EQR upon the issuance by EQR of additional EQR Common
(other than in exchange for ERP Units) and the contribution of the net proceeds
from such additional issuance as a capital contribution to ERP, however, EQR
may issue EQR Common in connection with share option plans, dividend
reinvestment plans without receiving any proceeds and that the issuance of such
EQR Common will nonetheless entitle EQR to additional ERP Units.
90
<PAGE>
INDEMNIFICATION
The EWRLP Partnership Agreement provides that EWRLP will indemnify EWR as
general partner, or an officer of EWRLP or EWR and certain other persons or
entities (collectively, "Indemnitees") from and against any and all losses,
claims, damages, liabilities, joint or several, expenses (including legal fees
and expenses), judgments, fines, settlements and other amounts arising from
proceedings, whether they are civil, criminal, administrative, or
investigative, that relate to the operations of EWRLP in which any Indemnitees
may be involved, or is threatened to be involved, as a party or otherwise,
unless it is established that: (i) the act or omission of the Indemnitees was
material to the matter giving rise to the proceeding and either was committed
in bad faith or was the result of active and deliberate dishonesty; (ii) the
Indemnitees actually received an improper personal benefit in money, property
or services or (iii) in the case of a criminal proceeding, the Indemnitees have
reasonable cause to believe that the act or omission was unlawful. Under the
EWRLP Partnership Agreement, any indemnification is to be made only out of the
assets of EWRLP. Limited partners are not subject to personal liability by
reason of the indemnification provisions. The ERP Partnership Agreement
contains similar indemnification provisions.
FINANCIAL STATEMENTS AND REPORTS
EWR as general partner is required to deliver to the limited partners (i) no
later than 120 days after the close of each EWRLP fiscal year, an annual report
containing financial statements of EWRLP, or of EWR if such statements are
prepared solely on a consolidated basis with EWR, for such EWRLP fiscal year
and (ii) no later than 60 days after the close of each calendar quarter, a
report containing unaudited financial statements of EWRLP, or of EWR, if such
statements are prepared solely on a consolidated basis with EWR, and such other
information as may be required by applicable law or regulation, or as EWR as
general partner deems appropriate. Under the ERP Partnership Agreement, EQR as
general partner is required to cause ERP to prepare and distribute to the
partners of ERP annual financial data sufficient to reflect the status and
operations of ERP and its assets and to enable each partner to file its federal
income tax return. The ERP Partnership Agreement does not require or provide
for the distribution of quarterly financial information to the partners.
MERGERS
DRULPA provides that limited partnerships may enter into mergers,
consolidations or similar transactions with other limited partnerships or
business entities. IRULPA does not contain a similar provision.
TRANSFER OR PLEDGE OF UNITS
Limited partners of EWRLP may, without the prior written consent of EWR as
general partner, subject to any applicable securities laws and certain other
restrictions: (i) transfer all or any portion of its EWRLP Units to EWR, (ii)
transfer all or any portion of its EWRLP Units to an affiliate, another limited
partner or to an immediate family member, (iii) if such limited partner is a
natural person, transfer all or any portion of his or her EWRLP Units upon his
or her death to such limited partner's estate, executor, administrator or
personal representative or to such limited partner's beneficiaries pursuant to
a devise or bequest or by the laws of descent and distribution or to a trust of
which such limited partner is a settlor or co-settlor with a member or his or
her immediate family and the beneficiaries of which include no person or entity
other than such limited partner and/or such limited partner's immediate family,
(iv) transfer all or any portion of its EWRLP Units pursuant to the exercise of
a redemption right under the EWRLP Partnership Agreement, (v) transfer all or
any portion of its EWRLP Units to a lending institution, which is not an
affiliate of such limited partner, as collateral or security for a bona fide
loan or other extension of credit, and transfer such pledged EWRLP Units to
such lending institution in connection with the exercise of remedies under such
loan extension or credit, and (vi) if such limited partner is an entity,
transfer all or any portion of its EWRLP Units to one or more entities that are
wholly-owned and controlled by such limited partner or by distributing EWRLP
Units in a liquidation, winding up or otherwise without consideration to the
equity owners of such entity. In order to effect such transfer, the limited
partner must deliver to EWR as general partner a duly executed copy of the
instrument making such transfer and such instrument must evidence the written
acceptance by the assignee of all of the terms and conditions of the EWRLP
Partnership Agreement and represent that such assignment was made in accordance
with all applicable laws and regulations.
Under the ERP Partnership Agreement, no limited partner (including
substituted limited partners) may, without the prior written consent of EQR
(which consent may be given or withheld in the sole discretion of ERP), sell,
assign, distribute or otherwise transfer (a "Transfer") all or any part of his,
her or its interest in ERP, except (i) by operation of law, testamentary
disposition, gift (outright or in trust), or by sale, in each case to or for
the benefit of his parent(s), spouse or descendants, (ii) pledges or other
collateral transfers effected by a limited partner to secure the repayment of a
loan or other obligation,
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provided, however, that each such pledgee will agree in writing, concurrent
with such pledge or other collateral transfer, to (y) subordinate his, her or
its rights with respect to the pledged interest to any and all rights granted
by the pledging limited partner to ERP and (z) to defer the exercise of its
rights as a secured creditor to realize upon the collateral in the case of an
event of default until the expiration of any applicable "lock-up" period under
the terms of any agreement between ERP and the pledging limited partner, (iii)
the exchange of ERP Units for shares of in EQR Common, and (iv) the
distribution of ERP Units or Preference Units (as hereinafter defined) by a
limited partner to any of its direct or indirect constituent partners or
owners. A Transfer does not include the conversion of a Preference Unit (as
hereinafter defined) into one or more ERP Units nor the conversion of a ERP
Unit into an EQR Common.
The ERP Partnership Agreement also provides that EQR as general partner
reserves the right to require an opinion of counsel regarding such matters in
form and substances reasonably acceptable to EQR as a condition to any
Transfer. Limited partners of ERP must notify ERP of any Transfer of
beneficial interest or other interest which occurs without a transfer of
record ownership, as well as any pledge or other collateral transfer. No part
of the interest of a limited partner may be subject to the claims of any
creditor, any spouse for alimony or support, or to legal process, and may not
be voluntarily alienated or encumbered except as may be specifically provided
for in the ERP Partnership Agreement.
REDEMPTION/EXCHANGE OF UNITS
Under the EWRLP Partnership Agreement each limited partner has the right to
cause the EWRLP to redeem ("EWRLP Right of Redemption") all or any portion of
such limited partner's EWRLP Units for cash equal to the average daily market
price of share of EWR Common for ten consecutive trading days immediately
preceding the date EWR receives from the limited partner a notice of
redemption ("Redemption Amount"). EWR may satisfy the EWRLP's Right of
Redemption by exchanging EWRLP Units and shares of EWR Common at a ratio of
one for one ("Unit Adjustment Factor"), or cash equal to the Redemption EWR
Amount, at EWR's option. If a change is necessary to adjust the Unit
Adjustment Factor, the adjustment must have the effect to cause each EWRLP
Unit to be exchangeable for one share of EWR Common, without dilution.
AMENDMENTS TO PARTNERSHIP AGREEMENTS
Except for certain circumstances described below and certain amendments
permitted to be made without the consent of the limited partners, amendments
to the EWRLP Partnership Agreement require the consent EWR as general partner
and a majority of the limited partners interests (including those held by EWR
as general partner). Consent of the limited partners is required to amend the
EWRLP Partnership Agreement if such amendment would (i) convert a limited
partner's EWRLP Units into a general partner's interest, (ii) modify the
limited liability of a limited partner, (iii) alter the rights of a partner to
receive distributions, or allocations, (iv) alter or modify the EWRLP Right of
Redemption or Redemption Amount, (v) cause the termination of EWRLP, prior to
the end of the term of EWRLP, or (vi) amend the section in the EWRLP
Partnership Agreement entitled "Amendments of Partnership Agreement;
Meetings."
Under the ERP Partnership Agreement, except for certain restrictions, the
Chairman of the Board of EQR is empowered to amend the ERP Partnership
Agreement, without the consent of the limited partners, in any respect other
than: (i) to enlarge the obligation of any partner to make contributions to
the capital of ERP, (ii) except as otherwise provided in the ERP Partnership
Agreement or as required by law, to modify the allocation of profits or losses
or distributions among the partners, (iii) to amend the sections of the ERP
Partnership Agreement entitled "Partnership," "Issuance and Conversion of
Units," "Limitations on Powers and Authorities of Partners," or "Transfer of
Partnership Units," and (iv) to amend the section of the ERP Partnership
Agreement entitled "Amendment of Agreement." However, with respect to
subparagraphs (ii) and (iii) of this paragraph, the ERP Partnership Agreement
may be amended with the written consent of EQR, Zell Partners (as defined in
the ERP Partnership Agreement), and the Starwood Partners (as defined in the
ERP Partnership Agreement) or their respective successors in interest, as
applicable, so long as they remain partners of ERP and those limited partners
holding not less that 67% of the aggregate partnership interests held by all
limited partners. With respect to subparagraphs (i) and (iv) of this
paragraph, the ERP Partnership Agreement may be amended only with the written
consent of all partners.
TRANSACTIONS AND RELATED DISPOSITIONS
Under the EWRLP Partnership Agreement, EWR as general partner may not engage
in any merger, consolidation or other combination with or into another entity
or sale of all or substantially all of its assets, or any reclassification, or
recapitalization or change of outstanding shares of EWR Common ("Partnership
Transaction") unless (i) under the terms of the Partnership Transaction, the
limited partners will not engage in a sale or exchange for federal income tax
purposes of their EWRLP Units or (ii) the Partnership Transaction also
includes a merger of EWRLP or sale of substantially all of the assets of EWRLP
and as a result of which all of the limited partners will receive for each
EWRLP Unit (after application of
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the Unit Adjustment Factor) an amount of cash, securities or other property
equal to, without taking into account any tax considerations, the greatest
amount of cash, securities or other property paid to a holder of one share of
EWR Common in consideration of one share of EWR Common in connection with the
Partnership Transaction. The ERP Partnership Agreement does not include a
similar provision. However, EQR as the general partner is authorized to
acquire any assets, and encumber, sell, ground lease or otherwise dispose of
any or all of the assets of ERP.
MEETINGS
Meetings of the partners of EWRLP may be called by EWR as general partner
and shall be called upon the receipt by EWR of a written request by the
limited partners holding 25% or more of the EWRLP Units, which request states
the nature of the business to be transacted. Notice of any such meeting must
be given to all partners not less than seven (7) nor more than 30 days prior
to the date of such meeting. Any action required or permitted to be taken at a
meeting of the partners may be taken without a meeting if a written consent
setting forth the action so taken is signed by a majority of the percentage
interests of the partners. The ERP Partnership Agreement does not contain a
provision relating to meetings of the partners.
PRINCIPAL HOLDERS OF EWRLP
The following table sets forth the beneficial ownership of EWRLP Units as of
September 8, 1997 for (i) the Chief Executive Officer and each of the four
other most highly compensated executive officers of EWR, (ii) directors of the
EWR, (iii) each person who is a holder of EWRLP Units holding more than a 5%
interest in EWRLP and (iv) the directors and executive officers of EWR, as a
group. Unless otherwise indicated in the footnotes, all of such units are
owned directly, and the indicated person or entity has sole voting and
disposition power. EWRLP has no directors.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF ALL UNITS
NAME AND ADDRESS OF BENEFICIAL OWNER (1) UNITS OUTSTANDING
- ---------------------------------------- ---------- --------------------
<S> <C> <C>
Stephen O. Evans (2)........................... 2,859,450 11.5%
F. Keith Withycombe (3)........................ 2,726,200 10.9%
Richard G. Berry (4)........................... 110,000 *
G. Edward O'Clair.............................. 4,724 *
Paul Fannin.................................... -- --
Gadi Kaufmann.................................. -- --
Joseph W. O'Connor............................. -- --
G. Peter Bidstrup.............................. -- --
John O. Theobald............................... -- --
Evans Withycombe Residential, Inc.............. 20,372,163 81.7%
EW Investments Limited Partnership............. 1,632,114 6.5%
All Executive Officers and Directors as a Group
(12 persons).................................. 3,746,373 15.0%
</TABLE>
- -------
* Less than 1%
(1) The address for each of the persons or entities listed above, except Mr.
O'Connor, is 6991 East Camelback Road, Suite A-200, Scottsdale, Arizona
85251. The address for Mr. O'Connor is 225 Franklin Street, Boston,
Massachusetts 02110.
(2) Stephen O. Evans directly owns 769,899 EWRLP Units, representing 3.1% of
the outstanding EWRLP Units. Mr. Evans, as the Chairman of the general
partner of EW Investments Limited Partnership ("EWILP"), may be deemed the
beneficial owner with shared voting and dispositive power of 1,632,114
Units held by EWILP. Additionally, Mr. Evans, as a manager of The Evans
Family Limited Liability Company ("Evans LLC"), may be deemed the
beneficial owner with shared voting and dispositive power of 135,550 EWRLP
Units held by Evans LLC. Mr. Evans may also be deemed the beneficial owner
with shared voting and dispositive power of an aggregate of 321,887 EWRLP
Units held by EW Cottonwood/Tempe Limited Partnership, EW Lakewood Limited
Partnership, EW/SWS Investors Limited Partnership and EW Kachina Limited
Partnership (collectively, the "EW LPs"). Mr. Evans is the Chairman of
Evans Withycombe Communities, Inc., an Arizona corporation
("Communities"), which is the general partner of each of the EW LPs. In
the aggregate, Mr. Evans may be deemed to beneficially own 2,859,450 EWRLP
Units, which represents 11.5% of the outstanding EWRLP Units.
(3) F. Keith Withycombe directly owns 772,199 Units, representing 3.1% of the
outstanding EWRLP Units. Mr. Withycombe, as the President and Treasurer of
the general partner of EWILP, may be deemed the beneficial owner with
shared voting and dispositive power of 1,632,114 EWRLP Units held by
EWILP. Mr. Withycombe may also be deemed the beneficial owner with shared
voting and dispositive power of an aggregate of 321,887 EWRLP Units held
by the EW LPs. Mr. Withycombe is the President and Treasurer of
Communities. In the aggregate, Mr. Withycombe may be deemed to
beneficially own 2,726,200 EWRLP Units, which represents 10.9% of the
outstanding EWRLP Units.
(4) Richard G. Berry, a limited partner of EWILP, may be deemed the beneficial
owner of 110,000 Units held by EWILP.
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LEGAL MATTERS
Certain legal matters in connection with the Transactions will be passed
upon for EQR by Rudnick & Wolfe in Chicago, Illinois and Rosenberg &
Liebentritt, P.C. in 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 Transactions will be passed upon for EWR by Gibson, Dunn &
Crutcher LLP, Los Angeles, California. Ballard Spahr Andrews & Ingersoll in
Baltimore, Maryland, will pass upon certain matters of Maryland law relating
to the Merger Agreement and Articles of Merger under Maryland law.
EXPERTS
The consolidated financial statements of EWRLP appearing in the Current
Report of ERP on Form 8-K, dated September 10, 1997 and appearing in this
Consent Solicitation/Prospectus/Information Statement; the consolidated
financial statements of ERP appearing in ERP's 1996 Annual Report (Form 10-K)
for the year ended December 31, 1996; the Combined Statement of Revenue and
Certain Expenses for the year ended December 31, 1995 of the 1996 Acquired
Properties and Probable Properties, appearing in the Current Report of ERP on
Form 8-K, as amended by Form 8-K/A, dated May 23, 1996; the Combined Statement
of Revenue and Certain Expenses for the year ended December 31, 1995 of the
1996 Acquired Properties, appearing in the Current Report of ERP on Form 8-K,
as amended by Form 8-K/A, dated November 15, 1996; the Combined Statements of
Revenue and Certain Expenses of certain of the properties either acquired or
which may be acquired in 1997 for the three years in the period ended December
31, 1996 and the Statements of Revenue and Certain Expenses of certain other
properties acquired in 1997 for the year ended December 31, 1996, each of
which appear in the Current Report of ERP on Form 8-K, dated May 20, 1997; and
the Statements of Revenue and Certain Expenses of certain properties acquired
in 1997 for the year ended December 31, 1996, in the Current Report of ERP on
Form 8-K, dated August 15, 1997; 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 are incorporated
herein by reference in reliance upon such reports given upon the authority of
such firm as experts in accounting and auditing.
The consolidated financial statements of ERP and its subsidiaries appearing
in ERP's 1996 Annual Report (Form 10-K) at December 31, 1995 and 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 report with respect thereto, and are incorporated in this Joint Proxy
Statement/Prospectus in reliance upon the authority of said firm as experts in
accounting and auditing.
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GLOSSARY
The following list of capitalized terms used in this Consent Solicitation/
Prospectus/Information Statement are defined as follows. See "Summary" at page
1 for definitions of the principals involved in the Transactions.
"ACMs" means asbestos-containing materials.
"Acquisition Proposal" means 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, EWR or any
of its subsidiaries, other than the transactions contemplated by the Merger
Agreement.
"Affiliates" means persons who control, are controlled by or are under the
common control with an issuer.
"Agreed Value" means the fair market value of partnership assets contributed
or revalued by ERP at the time of the Asset Contribution.
"Antitrust Division" means the Antitrust Division of the Department of
Justice.
"AMTI" means alternative minimum taxable income.
"Articles" means the Articles of Merger with respect to the Merger
Agreement.
"Asset Contribution" means the contribution of all of the assets (subject to
its liabilities) of EWRLP to ERP in exchange for ERP Units.
"Asset Contribution Agreement" means the Asset Contribution Agreement dated
August 27, 1997 by and between ERP and EWRLP.
"Berry" means Richard G. Berry, an individual.
"Break-up Expenses" means 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.
"Break-up Fee" means an amount equal to the lesser of (i) $14 million 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 Section 856(c)(2) and (3) of the Code determined as if the
payment of such amount did not constitute income described in Sections
856(2)(A)-(H) and 856(c)(3)(A)-(I) of the Code ("Qualifying Income"), as
determined by independent accountants of EQR, and (B) in the event EQR
receives a letter from outside counsel indicating that EQR has received a
ruling from the IRS holding that EQR's base 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 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.
"Book-Tax Difference" means the difference between the fair market value of
property contributed to ERP and its tax basis at the time of contribution.
"Built-in Gain" or "Built-in Loss" means the disparity (positive or
negative) between the Agreed Value of contributed property credited to the
capital accounts of the contributing partners and the partnership's initial
tax basis in the property.
"Change in Control Agreements" means agreements entered to by certain
officers of EWR which provide severance payments, pro rata bonus, payments,
vesting of stock options and restricted shares, vesting of employer
contributions to the EWR 401(k) Plan, and tax payments to offset the impact of
any excise tax resulting from the above payments upon a termination of
employment following a change in control.
"Closing" means the closing of the Merger as set forth in the Merger
Agreement.
"Closing Date" means the third business day after the satisfaction or waiver
of the conditions set forth in the Merger Agreement.
"Closing Price" means the closing price of a share of EQR Common as reported
on the NYSE on the Closing Date.
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"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Commitment" means any commitment, contractual obligation, capital
expenditure or transaction.
"Comparable Companies" means companies engaged in businesses which J. P.
Morgan judged to be analogous to that of EWR's.
"Contemplated Transactions" means a merger, consolidation, sale or transfer
of all or substantially all of the assets or earning power of EWRLP and EWR in
connection with the EWRLP Transfer Amendment.
"Contributors" means certain persons and entities which have agreed to
contribute their EWRLP Units in accordance with the Unit Contribution
Agreement.
"Consent Period" means the period of time during which consents will be
solicited prior to the execution and delivery of the Articles regarding the
Merger to the Department.
"Department" means the State Department of Assessments and Taxation of
Maryland.
"DRULPA" means the Delaware Revised Uniform Limited Partnership Act, as
amended.
"11.2 Amendment" means the Amendment to the EWRLP Partnership Agreement dated
June 18, 1997 which relates to Section 11.2.
"EBITDA" means earnings before interest, taxes, depreciation and
amortization.
"EQR Common" means common shares of beneficial interest, par value $0.01 per
share, of EQR.
"EQR Financing Partnerships" means the limited partnerships and limited
liability companies that own the beneficial interest of certain properties
encumbered by mortgage financing.
"EQR IPO" means the initial public offering of EQR Common by EQR.
"EQR Management Corps." means Equity Residential Properties Management, Inc.,
a Delaware corporation, and Equity Residential Properties Management, Inc. II,
a Delaware corporation, collectively.
"EQR Preferred" means preferred shares of beneficial interest $0.01 par
value, of EQR.
"EQR Properties Management, LP" means Equity Residential Properties
Management, Limited Partnership, an Illinois limited partnership.
"EQR Properties Management, LP II" means Equity Residential Properties
Management, L.P. II, an Illinois limited partnership.
"EQR Properties Management Partnerships" means EQR Properties Management, LP,
and EQR Properties Management, LP II, collectively.
"ERP Amendment" means the amendment to the ERP Partnership Agreement to
expand the ability of EQR to conduct business other than as the general partner
of ERP.
"ERP Partnership Agreement" means the Fourth Amended and Restated Limited
Partnership Agreement dated September 30, 1995 by and among EQR and certain
limited partners.
"ERP Unitholder" means a holder of units of limited partnership interest in
ERP.
"ERP Units" means units of limited partnership interest in ERP.
"Evans" means Stephen O. Evans, an individual.
"EW Finance, Inc." means Evans Withycombe Finance, Inc., a Delaware
corporation.
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"EW Finance LP" means Evans Withycombe Finance Partnership, LP, a Delaware
limited partnership.
"EW Management, Inc." means Evans Withycombe Management, Inc., an Arizona
corporation.
"EWR Board of Directors" means the board of directors of EWR.
"EWR Common" means common stock, par value $0.01 per share, of EWR.
"EWRLP Amendment" means the amendment to the EWRLP Partnership Agreement to
allow (i) EQR and ERP to serve as co-general partners of EWRLP upon the
effectiveness of the Merger, (ii) subsequent to the Asset Contribution, to
permit EQR and ERP, as co-general partners of EWRLP, to dissolve EWRLP upon the
terms stated in the Asset Contribution Agreement and (iii) certain additional
amendments to permit the Transactions to be effected without further approval
of the limited partners of EWRLP.
"EWRLP Partnership Agreement" means the Amended and Restated Agreement of
Limited Partnership of EWRLP dated as of August 17, 1994 by and among EWR and
certain limited partners.
"EWRLP Right of Redemption" means the right of each limited partner of EWRLP
to cause EWRLP to redeem all of any portion of such limited partners EWRLP
Units for the Redemption Amount.
"EWRLP Unitholder" means holders of limited partnership units in EWRLP.
"EWRLP Units" means units of limited partnership interest in EWRLP.
"EWR Special Meeting" means a special meeting of shareholders of EWR to be
held at , Scottsdale, Arizona, on , 1997, at
.m., Arizona time.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Ratio" means the ratio of 0.5 at which outstanding shares of EWR
Common will be converted into shares of EQR Common pursuant to the Merger.
"FAD" means funds available for distribution.
"FFO" or "funds from operations" means net income (computed in accordance
with GAAP), excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation and amortization, and after adjustments from
unconsolidated partnerships and joint ventures.
"Financing Partnership" means Evans Withycombe Finance Partnership, L.P., a
Delaware limited partnership.
"FIRPTA" means the Foreign Investment in Real Property Tax Act, as amended.
"FTC" means the Federal Trade Commission.
"GAAP" means generally accepted accounting principles.
"HSR Act" means the Hart-Scott Rodino Act of 1976, as amended.
"Interested Shareholder" means any person who beneficially owns 10% or more
of the voting power of a Maryland REIT's or corporation'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 REIT's or corporation's shares of beneficial
interest.
"Initial Basis" means a partner's initial basis in ERP Units, which generally
will be equal to his partnership interest in ERP, as the case may be, such
partnership interest reduced by any cash received and any reduction of his
share of ERP liabilities and increased by the increase in his share of
partnership liabilities.
"Inside Basis" means a partner's share of the basis of ERP in its assets,
plus any basis adjustment pursuant to Section 743(b) of the Code.
"IRULPA" means the Illinois Revised Uniform Limited Partnership Act, as
amended.
"J.P. Morgan" means J. P. Morgan Securities, Inc., EQR's financial advisor.
"Lurie Family Trusts" means trusts established for the benefit of the family
of Mr. Robert Lurie, as deceased partner of Mr. Sam Zell.
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"Material Adverse Change" means a material adverse change in business,
financial condition or results of operations taken as a whole.
"MGCL" means the Maryland General Corporation Law, as amended.
"Merger" means the merger of EWR into EQR as set forth in the Merger
Agreement.
"Merger Agreement" means the Agreement and Plan of Merger dated August 27,
1997 by and between EQR and EWR.
"NAV" means net asset value.
"Neithercut" means David Neithercut, an individual.
"NOI" means net operating income equal to total revenues less certain
operating expenses.
"NYSE" means the New York Stock Exchange.
"Option Cash Out Agreement" means an agreement entered into by the holders of
options to purchase shares of EWR Common not to exercise such option in
consideration for a cash payment equal to the difference between (i) the
Exchange Ratio multiplied by the closing price of a share of EQR Common on the
NYSE on the Closing Date and (ii) the applicable exercise price of such option,
multiplied by the number of shares of EWR Common subject to such option.
"Original ERP Units" means certain ERP Units held by the Zell Holders issued
at the time of the IPO.
"Original Owners" means the Starwood Original Owners and the Zell Original
Owners.
"Other Securities" means securities of EQR other than EQR Common.
"Partnerships" means EWRLP and ERP.
"Partnership Transaction" means any merger, consolidation or other
combination with or into another entity or sale of all or substantially all of
its assets, or any reclassification, or recapitalization or change of
outstanding EWR Common as contemplated by the EWRLP Partnership Agreement.
"Preference Units" means ERP Units with those designated preferences as set
forth in the ERP Partnership Agreement.
"Proposals" means the proposals submitted to the limited partners of EWRLP
for their consent with respect to the Asset Contribution and the EWRLP
Amendment.
"QRS Corporation" means qualified REIT subsidiary.
"Redemption Amount" means the amount equal to the average daily market price
of EWR Common for ten consecutive trading days immediately preceding the date
EWR receives from the limited partners a notice of redemption.
"Redemption Right" means the right of a holder of ERP Units to require
redemption of ERP Units.
"Reform Act" means the Private Securities Litigation Reform Act of 1995, as
amended.
"Registration Statement" means the registration statement on Form S-4 filed
by ERP.
"Regulations" means existing and proposed United States Treasury Department
regulations promulgated under the Code.
"REIT" means a real estate investment trust, as such term is defined in the
Code.
"RIC" means regulated investment company.
"Securities Act" means the Securities Act of 1933, as amended.
"Service" means the Internal Revenue Service.
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"Starwood Original Partners" means certain entities controlled by Starwood
Capital Partners L.P., an Illinois limited partnership, and its affiliates
which contributed 23 of the properties to EQR at the time of the IPO.
"Strohm" means Bruce C. Strohm, an individual.
"Subsidiary Entities" means the EQR Properties Management Partnerships, the
EQR Management Corps., the EQR Financing Partnerships and the QRS Corporations.
"Subsidiary Partnerships" means ERP, EWRLP, the EQR Financing Partnerships,
EQR Properties Management, LP, EQR Properties Management, LP II, EW Finance LP,
collectively.
"Superior Proposal" means a bona fide acquisition proposal by a third party
in which a majority of the members of the EWR Board of Directors determines in
good faith to be more favorable to EWR's shareholders from a financial point of
view than the Merger and the EWR Board of Directors determines is reasonably
capable of being consummated.
"TMP" means the Tax Matters Partner, the partner who represents the
partnership in tax matters.
"TMT" means tentative minimum tax.
"Trading Day(s)" means any day on which shares of EWR Common and EQR Common
are traded on the NYSE and reported on its Composite Tape.
"Transactions" means the Merger, Asset Contribution and Unit Exchange Offer.
"Transaction Comparables" means transactions selected by J. P. Morgan with
respect to purchase price per share to calculate FFO transaction multiples.
"UBTI" means unrelated business taxable income, as defined in Section 512(a)
of the Code.
"Unit Adjustment Factor" means the ratio of 1.0 at which EWRLP Units are
converted into shares of EWR Common in accordance with the EWRLP Partnership
Agreement.
"Unit Exchange Offer" means that holders of EWRLP Units are offered the
opportunity to contribute their EWRLP Units to ERP in exchange for a number of
ERP Units equal to the number of EWRLP Units so exchanged multiplied by the
Exchange Ratio.
"USRPIs" means United States Real Property Interests.
"Withycombe" means F. Keith Withycombe, an individual.
"Zell Holders" means certain beneficial holders affiliated with Mr. Sam Zell.
"Zell Original Owners" means certain affiliates of Mr. Sam Zell which
contributed 33 of the properties to EQR at the time of the EQR IPO.
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INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995............. F-3
Consolidated Statements of Income for the years ended December 31, 1996,
1995 and 1994........................................................... F-4
Consolidated Statements of Partners' Capital for the years ended December
31, 1996, 1995 and 1994................................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994..................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
Schedule III--Real Estate Investments and Accumulated Depreciation as of
December 31, 1996. All other schedules for which provision is made in
the applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or are
inapplicable and therefore have been omitted............................ F-17
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Partners
Evans Withycombe Residential, L.P.
We have audited the accompanying consolidated balance sheets of Evans
Withycombe Residential, L.P. ("EWRLP") as of December 31, 1996 and 1995 and the
related consolidated statements of income, partners' capital and cash flows for
each of the three years in the period ended December 31, 1996. Our audits also
included the financial statement schedule listed in the Index on page F-1.
These financial statements and the schedule are the responsibility of EWRLP's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of EWRLP at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Also in our opinion the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents
fairly, in all material respects the information set forth therein.
Ernst & Young LLP
Phoenix, Arizona
January 31, 1997
F-2
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Real Estate:
Land............................................... $121,915 $ 95,908
Buildings and improvements......................... 543,839 389,846
Furniture and fixtures............................. 29,567 23,736
Construction-in-progress........................... 66,229 77,693
-------- --------
761,550 587,183
Less accumulated depreciation...................... (38,331) (17,511)
-------- --------
723,219 569,672
Cash and cash equivalents............................ 2,568 3,634
Restricted cash...................................... 1,622 522
Accounts and notes receivable........................ 2,702 1,346
Deferred costs, net of accumulated amortization of
$1,265 and $507 at December 31, 1996 and 1995,
respectively........................................ 3,838 2,946
Other assets......................................... 1,518 1,444
-------- --------
Total assets..................................... $735,467 $579,564
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Mortgage and notes payable........................... $436,172 $297,456
Accounts payable and other liabilities............... 7,782 9,365
Distributions payable................................ -- 7,901
Accrued interest..................................... 1,417 605
Accrued property taxes............................... 2,912 2,358
Resident security deposits........................... 1,818 1,497
Prepaid rent......................................... 585 438
-------- --------
Total liabilities.................................... 450,686 319,620
Minority interest.................................... 827 889
Partners' capital.................................... 283,954 259,055
-------- --------
Total liabilities and partners' capital.......... $735,467 $579,564
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT FOR NUMBER OF UNITS AND PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
EVANS WITHYCOMBE EVANS WITHYCOMBE EVANS WITHYCOMBE
RESIDENTIAL, RESIDENTIAL, RESIDENTIAL, L.P.
L.P. L.P. AND GROUP
---------------- ---------------- -----------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1996 1995 1994
---------------- ---------------- -----------------
<S> <C> <C> <C>
Revenues:
Rental................... $ 94,350 $ 68,864 $ 51,097
Third party management
fees.................... 1,157 1,268 1,668
Interest and other....... 6,119 4,399 4,194
---------- ---------- ----------
Total revenues......... 101,626 74,531 56,959
---------- ---------- ----------
Expenses:
Repairs and maintenance.. 11,607 8,293 6,288
Property operating....... 12,713 8,699 7,834
Advertising.............. 1,864 1,244 966
Real estate taxes........ 6,915 4,723 3,204
Property management...... 3,225 2,825 2,505
General and
administrative.......... 1,387 1,321 1,175
Interest................. 24,225 12,650 7,836
Depreciation and
amortization............ 20,885 13,762 10,333
Other.................... -- -- 5,233
---------- ---------- ----------
Total expenses......... 82,821 53,517 45,374
---------- ---------- ----------
Income before minority
interest.................. 18,805 21,014 11,585
Minority interest.......... (75) (89) (42)
---------- ---------- ----------
Net income................. $ 18,730 $ 20,925 $ 11,543
========== ========== ==========
Earnings per unit.......... $ 0.84 $ 1.02
========== ==========
Earnings per unit, period
from August 17 to
December 31, 1994......... $ 0.38
==========
Weighted average units
outstanding .............. 22,184,395 20,590,873 20,086,884
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(AMOUNTS IN THOUSANDS, EXCEPT FOR NUMBER OF UNITS AND PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
UNAMORTIZED
EVANS OTHER RESTRICTED
WITHYCOMBE LIMITED UNITS
NUMBER OF RESIDENTIAL, PARTNERS EMPLOYEE
UNITS INC. CAPITAL COMPENSATION TOTAL
---------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C>
Partners' capital,
December 31, 1993...... -- $ -- $142,886 $ -- $142,886
Capital contributions. -- -- 9,660 -- 9,660
Distributions......... -- -- (15,204) -- (15,204)
Net income, January 1
to August 16, 1994... -- -- 4,012 -- 4,012
---------- -------- -------- ------- --------
-- -- 141,354 -- 141,354
The Offering and
formation of EWRLP... 20,140,530 205,664 (88,011) -- 117,653
Minority interest in
Financing Partnership
at date of offering.. -- (1,594) -- -- (1,594)
Net Income, August 17
to December 31, 1994. -- 5,983 1,548 -- 7,531
Distributions ($.55
per unit)............ -- (8,812) (2,265) -- (11,077)
---------- -------- -------- ------- --------
Partners' capital,
December 31, 1994...... 20,140,530 201,241 52,626 -- 253,867
Net income............ -- 16,331 4,594 -- 20,925
Distributions ($1.50
per unit)............ -- (24,102) (6,801) -- (30,903)
Issuance of units for
acquisition of
apartment
communities.......... 710,550 -- 14,207 -- 14,207
Conversion of limited
partners' units into
common stock......... -- 390 (390) -- --
Issuance of restricted
units for executive
deferred
compensation......... 82,802 1,657 -- (1,657) --
Amortization of
deferred
compensation......... -- -- -- 959 959
---------- -------- -------- ------- --------
Partners' capital,
December 31, 1995...... 20,933,882 195,517 64,236 (698) 259,055
Net income............ -- 14,720 4,010 -- 18,730
Distributions on units
($1.58 per unit)..... -- (28,040) (7,545) -- (35,585)
Purchase of units by
Evans Withycombe
Residential, Inc.
from proceeds of
second offering, net
of underwriting
discount and offering
costs of $3,237...... 2,088,889 40,891 -- -- 40,891
Conversion of limited
partners' units into
common stock......... -- 2,583 (2,583) -- --
Purchase of units from
proceeds from the
exercise of stock
options.............. 19,500 390 -- -- 390
Issuance of restricted
units................ 10,895 240 -- (240) --
Forfeiture of
restricted units..... (8,729) -- -- -- --
Amortization of
deferred
compensation......... -- -- -- 473 473
---------- -------- -------- ------- --------
Partners' capital,
December 31, 1996...... 23,044,712 $226,301 $ 58,118 $ (465) $283,954
========== ======== ======== ======= ========
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
EVANS
EVANS EVANS WITHYCOMBE
WITHYCOMBE WITHYCOMBE RESIDENTIAL,
RESIDENTIAL, RESIDENTIAL, L.P. AND
L.P. L.P GROUP
------------ ------------ ------------
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................. $ 18,730 $ 20,925 $ 11,543
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization........ 21,578 14,420 10,703
Minority Interest.................... 75 89 42
Amortization of executive deferred
comp................................ 390 693 267
Write-off of real estate assets...... 227 -- --
Write-off of deferred loan costs..... -- 172 --
Decrease (increase) in assets
Restricted cash...................... (1,100) 561 (129)
Accounts and notes receivable........ (1,356) (934) (468)
Other assets......................... (74) (1,051) 3,279
(Decrease) increase in liabilities
Accounts payable and other
liabilities......................... (1,583) 540 4,043
Due to related parties and owners.... -- -- (6,482)
Accrued interest..................... 812 505 (818)
Accrued property taxes............... 554 825 62
Resident security deposits........... 321 500 54
Prepaid rent......................... 147 (262) (98)
--------- --------- ---------
Net cash provided by operating
activities........................ 38,721 36,983 21,998
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of real estate assets......... (127,811) (116,716) (207,978)
Payment for organization and loan
costs................................. (1,650) (1,345) (3,673)
--------- --------- ---------
Net cash (used) in investing
activities........................ (129,461) (118,061) (211,651)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Public Offering, net of
expenses.............................. 40,891 -- 181,262
Proceeds from exercise of options...... 390 -- --
Proceeds from mortgage notes and credit
facility.............................. 269,778 315,653 122,522
Principal payments on mortgage notes... (177,762) (202,477) (101,280)
Minority interest distributions........ (137) (447) (389)
Distributions paid..................... (43,486) (30,456) (5,149)
Distributions to owners................ -- -- (17,012)
Capital contributions.................. -- -- 9,660
--------- --------- ---------
Net cash provided by financing
activities........................ 89,674 82,273 189,614
Net increase (decrease) in cash and
cash equivalents...................... (1,066) 1,195 (39)
--------- --------- ---------
Cash and cash equivalents, beginning of
year.................................. 3,634 2,439 2,478
--------- --------- ---------
Cash and cash equivalents, end of year. $ 2,568 $ 3,634 $ 2,439
========= ========= =========
SUPPLEMENTAL INFORMATION
Cash paid during the year for interest. $ 22,648 $ 11,487 $ 8,284
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
ACTIVITY
Assumption of debt related to the
acquisition of apartment communities.. $ 46,700 $ 56,493 $ --
Acquisition of apartment communities
through issuance of units in EWRLP.... $ -- $ 14,207 $ --
Issuance of stock under restricted
stock incentive plan.................. $ 83 $ 957 $ --
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS, EXCEPT FOR NUMBER OF UNITS OR SHARES AND PER UNIT
AMOUNTS)
1. ORGANIZATION AND FORMATION OF EWRLP
Evans Withycombe Residential, L.P. (the "Operating Partnership") is one of
the largest developers and managers of upscale apartment communities in Arizona
and is expanding its operation into selected sub-markets in Southern
California. EWRLP owns and manages 49 stabilized multifamily apartment
communities containing 13,905 units, of which 44 stabilized multifamily
apartment communities are located in Phoenix and Tucson, Arizona, containing a
total of 12,005 units and five stabilized multifamily apartment communities are
located in the Riverside/San Bernardino, California market containing a total
of 1,900 units. EWRLP considers an apartment community stabilized when it
reaches 93 percent physical occupancy. EWRLP is also in the process of
developing or expanding five multifamily apartment communities comprising 1,078
units in its Arizona markets. EWRLP is fully integrated with expertise in
development, acquisitions, construction and management of apartment
communities. EWRLP had approximately 580 employees at December 31, 1996.
EWRLP was formed in June 1994 to develop, acquire, own and manage upscale
multifamily apartment communities for Evans Withycombe Residential, Inc. On
August 17, 1994, Evans Withycombe Residential, Inc. completed an Initial Public
Offering and engaged in various formation transactions designed to transfer
ownership of the communities and other assets of the predecessor company to
EWRLP or Evans Withycombe Finance Partnership, L.P. (the "Financing
Partnership"). EWRLP owns 99.0 percent of Evans Withycombe Finance Partnership
L.P. and has a 99.0 percent economic interest in Evans Withycombe Management,
Inc. (the "Management Company"). Evans Withycombe Residential, Inc. is the sole
general partner of and owned a 79.7 percent, 77.02 percent and 79.50 percent
interest in EWRLP at December 31, 1996, 1995 and 1994, respectively.
In the second quarter of 1996 Evans Withycombe Residential, Inc. completed
the Second Offering. The net proceeds from the Second Offering were used to
repay a portion of the Revolving Credit Facility.
EWRLP elected to be taxed as a partnership for Federal income tax purposes.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements of Evans Withycombe
Residential, L.P. include the consolidated accounts of EWRLP, the Financing
Partnership and the Management Company from the date of the Initial Public
Offering, August 17, 1994. The accompanying financial statements of Evans
Withycombe Residential Group (the "Predecessor") prior to August 17, 1994,
include the accounts of various partnerships sponsored by Evans Withycombe. The
Predecessor was a combination of affiliated entities that had ownership in
multifamily communities in the Phoenix and Tucson, Arizona area; it was not a
separate legal entity. The predecessor accounts are presented on a combined
basis because all of the communities were managed by Evans Withycombe which had
a significant ownership interest in each of the communities and because these
communities were the subject of business combination in connection with the
formation of EWRLP.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Real Estate Assets and Depreciation
EWRLP records its real estate assets in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and Long Lived Assets to be Disposed of", which was issued
by the Financial Accounting Standards Board in March 1995 and EWRLP adopted in
1996. SFAS No. 121 requires that long-lived assets such as real estate assets,
be reviewed whenever events or changes in circumstances indicate that the book
value of the asset may not be recoverable. If the sum of the expected future
net cash flows (undiscounted and without interest charges) from an asset to be
held and used is less than the book value of the asset, an impairment loss must
be recognized in the amount of the difference between book value and fair value
as opposed to the difference between book value and net realizable value under
the previous accounting standard. For long-term assets like apartment
communities, the determination of whether there is an impairment loss is
dependent primarily on EWRLP's estimates on occupancy, rent and expense
increases, which involves numerous assumptions and judgments as to future
events over a period of many years. At December 31, 1996 EWRLP does not hold
any assets that meet the impairment criteria of SFAS No. 121.
F-7
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Costs related directly to the acquisition and improvement of real estate are
capitalized. Interest costs incurred during construction of a new property are
capitalized until completion of construction on a building-by-building basis.
Interest capitalized was $2,714, $5,048 and $2,724, for the years ended
December 31, 1996, 1995 and 1994, respectively.
Ordinary repairs, maintenance and costs incurred in connection with resident
turnover such as unit cleaning, painting, and carpet cleaning are expensed as
incurred; major replacements and betterment's are capitalized and depreciated
over their estimated useful lives. Depreciation is computed on a straight-line
basis over the expected useful lives of depreciable property, which ranges from
10 to 40 years for buildings and improvements and five to eight years for
furnishings and equipment.
EWRLP reports developments and lease-up properties as construction-in-
progress until construction on the apartment community has been completed and
the apartment community has reached stabilized occupancy.
EWRLP also reports land relating to construction-in-progress as land on its
balance sheet. Land associated with construction-in-progress was $16,542 and
$16,414 at December 31, 1996 and 1995, respectively.
Revenue Recognition
Rental income attributable to residential leases is recorded when due from
residents. Leases are for periods of up to one year, with rental payments due
monthly.
Cash and Cash Equivalents
Cash and cash equivalents include all cash and cash equivalent investments
with original maturities of three months or less, primarily consisting of
demand deposits in banks.
Restricted Cash
Restricted cash includes restricted deposits for sinking fund accounts
related to tax exempt bonds, property taxes and escrow accounts.
Deferred Costs
Costs incurred in obtaining long-term financing are deferred. These costs are
amortized on the effective interest method over the terms of the related debt
agreements.
Income Taxes
EWRLP has made an election to be taxed as a partnership and accordingly, no
federal or state income taxes have been provided in the accompanying
consolidated financial statements.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Earnings Per Unit
Earnings per unit has been computed by dividing net income for the years
ended December 31, 1996 and 1995 and the period ended December 31, 1994,
respectively, by the weighted average number of units outstanding. Historical
earnings per unit data for the periods ended prior to the Offering on August
17, 1994 are not relevant since the financial information prior to such date is
comprised of combined operations of partnerships and corporations.
4. OTHER
Prior to the Initial Public Offering, Evans Withycombe, Inc. had in place an
Executive Incentive Deferred Compensation Plan (the "Executive Plan"). Pursuant
to the Executive Plan, certain executives of Evans Withycombe, Inc. (the
"Participants") were granted unfunded, unsecured rights to receive cash
payments based on the distributions from certain partnerships in which Evans
Withycombe owned an interest. The awards would have vested over a six-year
period from the date of grant. In connection with the Initial Public Offering,
all rights of Participants under the Executive Plan were canceled, and the
participants received (a) an aggregate of approximately $2,600 in cash which
was funded by Evans Withycombe, Inc. prior to the Initial Public Offering and
(b) the right to receive an aggregate of 98,500 shares of restricted stock from
Evans Withycombe Residential, Inc. one year following the Offering if they
remain as employees of EWRLP during such
F-8
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
period. One third of the shares vest on each of the second, third and fourth
anniversaries of the Initial Public Offering based on an offering price per
share of $20 (See Stock Incentive Plan footnote). The $2,600 cash payment,
which represents an estimate of the executives' vested share of the gain, was
expensed by Evans Withycombe, Inc. during the third quarter of 1994 prior to
the Offering.
In connection with the repayment of existing indebtedness at the time of the
offering, prepayment penalties and lender participation (additional interest)
totaling $2,600 were paid.
5. MORTGAGE AND NOTES PAYABLE
EWRLP's mortgage notes and notes payable consists of the following at
December 31:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Mortgage note payable at fixed interest rate of 7.2
percent, monthly principal and interest payments through
August 18, 1996. The unpaid principal balance was repaid
on August 18, 1996...................................... $ -- $ 5,457
Mortgage note payable at fixed interest rate of 8.0
percent, monthly principal and interest payments. The
unpaid principal balance was repaid on January 9, 1997.. 5,380 5,463
Mortgage note payable at fixed interest rate of 8.0
percent, monthly principal and interest payments. The
unpaid principal balance was repaid on January 9, 1997.. 4,340 4,406
Mortgage note payable at fixed interest rate of 8.0
percent, monthly principal and interest payments. The
unpaid principal balance was repaid on January 9, 1997.. 8,951 9,063
Mortgage note payable at fixed interest rate of 8.28
percent, monthly principal and interest payments. The
unpaid principal balance was repaid on January 31,
1997.................................................... 6,225 6,339
Mortgage note payable at fixed interest rate of 9.95
percent, monthly principal and interest payments through
September 15, 1997, remaining balance due September 15,
1997.................................................... 12,065 12,184
Mortgage note payable at fixed interest rate of 9.3
percent, monthly principal and interest payments through
September 15, 1997, remaining balance due September 15,
1997.................................................... 3,182 3,212
$50 million securitized debt at a fixed interest rate of
7.17 percent, monthly principal and interest payments
through January 1, 2006, remaining balance due January
1, 2006. Secured by first mortgage liens on 5
communities............................................. 49,509 50,000
Securitized debt at a fixed stated interest rate of 7.98
percent, with an effective interest rate of 8.05
percent, monthly interest only payments through August
1, 2001. The face amount of $131 million is due August
1, 2001. Secured by first mortgage liens on 22
communities, the balance is net of unamortized discount
of $480 and $561 at December 31, 1996 and 1995,
respectively............................................ 130,520 130,439
$13 million short term note payable at a fixed interest
rate of 6.0 percent. Interest only payments, matured on
January 5, 1996. The unpaid principal balance was repaid
on January 5, 1996...................................... -- 13,000
$17.3 million tax exempt bonds with a floating interest
rate based on the tax exempt note rate set by the
remarketing agent, or at the option of EWRLP can convert
to a fixed rate as determined by the remarketing agent.
Secured by a $17.5 million direct pay letter of credit
agreement, interest payments only, matures December 1,
2007 (Effective interest rate of 5.16 percent at
December 31, 1996)...................................... 17,300 17,300
$22.6 million tax exempt bonds with a floating interest
rate based on the tax exempt note rate set by the
remarketing agent, interest payments only. Secured by a
$22.8 million direct pay letter of credit, matures
February 1, 2016. (Effective interest rate of 5.65
percent at December 31, 1996)........................... 22,650 --
$24.05 million tax exempt bonds with a floating interest
rate based on the tax exempt note rate set by the
remarketing agent. Interest payments only. Secured by a
$24.4 million direct pay letter of credit agreement,
matures August 1, 2005. (Effective interest rate of 6.14
percent at December 31, 1996)........................... 24,050 --
$225 million unsecured Revolving Credit Facility with
floating interest rate based on LIBOR plus 1.50 percent
or at the option of EWR at prime, interest payments
only. Matures September 24, 1999 (Effective interest
rate of 7.2 percent at December 31, 1996)............... 152,000 40,593
-------- --------
$436,172 $297,456
======== ========
</TABLE>
Each of the mortgage loans is secured by a first mortgage on separate
communities.
F-9
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Principal maturities as of December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997..................................... $ 40,625
1998..................................... 563
1999..................................... 152,605
2000..................................... 650
2001..................................... 131,218
Thereafter............................... 110,511
--------
$436,172
========
</TABLE>
The $225 million Revolving Credit Facility provides funding for working
capital, construction activities and acquisitions.
EWRLP has three direct pay letters of credit of $17,500, $22,800 and $24,400
which serve as a credit enhancement for the tax exempt bonds. The letters of
credit are secured by a first mortgage on four apartment communities.
On January 9, 1997, EWRLP extinguished the debt on three mortgages with
unpaid principal balances of approximately $18,700 with proceeds from the
Revolving Credit Facility. As a result, EWRLP incurred a loss from the early
extinguishment of debt of approximately $1,200. EWRLP prepaid the $6,225
mortgage note on January 31, 1997 with proceeds from the Revolving Credit
Facility which resulted in an additional loss from the early extinguishment of
debt of approximately $300. The loss from the early extinguishment of debt was
recorded by EWRLP in the first quarter of 1997.
6. DISTRIBUTIONS
On December 31, 1996, EWRLP paid a distribution of $.40 per share ($9,217) to
Unitholders of record as of December 24, 1996. Approximately 36 percent and 30
percent of the distributions paid during 1996 and 1995 represented return of
capital to the Unitholders.
7. MANAGEMENT AND DEVELOPMENT FEES
EWRLP, through Evans Withycombe Management, Inc. performs management services
for certain unaffiliated communities. Management fees received from managed
communities were $1,157, $1,268, and $1,668 for the years ended December 31,
1996, 1995 and 1994, respectively. Included in 1996 third party management fees
is a non recurring $500 fee received in exchange for terminating the management
contract on nine apartment communities containing 1,298 apartment units in the
second quarter 1996.
Prior to the Offering, in conjunction with development of projects, the
communities paid development fees to affiliates of $4,554 for the period ended
August 16, 1994.
8. RETIREMENT PLAN
EWRLP has a defined contribution wealth accumulation plan and trust (the
"Plan") covering all employees who have elected to participate in the Plan.
Each participant may make pretax contributions to the Plan up to the maximum
allowed by the IRS. EWRLP makes a matching contribution of 25 percent of the
participant's contribution up to 1 percent of a participant's salary, which
totaled $113, $53, and $91 for 1996, 1995, and 1994, respectively.
9. COMMITMENTS AND CONTINGENCIES
EWRLP leases office space in buildings and certain equipment under
noncancelable operating leases. Future minimum payments under these leases with
initial terms of one year or more consist of the following at December 31,
1996:
<TABLE>
<S> <C>
1997......................................... $358
1998......................................... 364
1999......................................... 224
2000......................................... 4
----
$950
====
</TABLE>
Rent expense for the years ended December 31, 1996, 1995 and 1994 was $360,
$300, and $288, respectively.
F-10
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. STOCK INCENTIVE PLAN
Stock Option Plan
Evans Withycombe Residential, Inc. (the "Company") has elected to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related interpretations in accounting for its employee
stock options because, as discussed below, the alternative fair value
accounting provided for under FASB Statement No. 123, "Accounting for Stock-
Based Compensation," requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of EWR's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required
by Statement 123, and has been determined as if EWR had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted-average assumptions
for 1995 and 1996, respectively: risk-free interest rates of 6.5% and 6.5%;
dividend yields of 7.5% and 7.4%; volatility factors of the expected market
price of EWR's common stock of 0.18 and 0.18; and a weighted-average expected
life of the option of 5 years. Because Statement 123 is applicable only to
options granted subsequent to December 31, 1994, its pro forma effect will not
be fully reflected until 1997.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because EWR's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. EWR's pro
forma information follows (amounts in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Pro forma net income..................................... $18,727 $20,925
Pro forma primary earnings per share..................... $ 0.83 $ 1.02
</TABLE>
Exercise prices for options outstanding as of December 31, 1996 ranged from
$18.25 to $22.25. The weighted-average remaining contractual life of those
options is 7.6 years.
Initially 1,830,000 shares of EWR's common stock were reserved for issuance
under the plan. Information with respect to stock options granted during 1996,
1995 and 1994 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE PRICE
SHARES PER SHARE
-------- --------------
<S> <C> <C>
Options granted on August 17, 1994............. 685,200 $20.00
Exercised.................................... -- --
Granted...................................... 16,000 19.65
Forfeited.................................... (4,840) 20.00
-------- ------
Options outstanding at December 31, 1994....... 696,360 19.99
Exercised.................................... -- --
Granted...................................... 21,000 19.74
Forfeited.................................... (18,185) 20.00
-------- ------
Options outstanding at December 31, 1995....... 699,175 19.98
Exercised.................................... (19,500) 20.00
Granted...................................... 345,000 21.96
Forfeited.................................... (115,825) 20.00
-------- ------
Options outstanding at December 31, 1996....... 908,850 $20.63
======== ======
Options exercisable:
December 31, 1994............................ -- --
December 31, 1995............................ 175,300 $20.00
December 31, 1996............................ 357,700 $19.98
</TABLE>
F-11
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Options to purchase 901,650, 1,130,825 and 1,133,640 shares of common stock
were available for grant under the plan at December 31, 1996, 1995 and 1994,
respectively.
Executive Stock Incentive Plan
Prior to the Initial Public Offering, EWR's predecessor Evans Withycombe,
Inc. had in place an Executive Incentive Deferred Compensation Plan (the
"Executive Plan"). Pursuant to the Executive Plan, certain executives of Evans
Withycombe, Inc. (the "Participants") were granted the right to receive an
aggregate of 98,500 shares of restricted stock from EWR one year following the
Initial Public Offering if they remain employees of EWR during such period.
One-third of the shares will vest on each of the second, third and fourth
anniversaries of the Initial Public Offering based on an offering price per
share of $20. The expense will be amortized ratably over the periods in which
the shares vest and an expense of $390 and $698 and $267 for the years ended
December 31, 1996, 1995 and 1994 is included in general and administrative
expense. Information with respect to the executive restricted stock incentive
plan is as follows:
<TABLE>
<CAPTION>
SHARES
-------
<S> <C>
Restricted stock at December 31, 1994.......................... 98,500
Forfeited.................................................... (15,698)
-------
Restricted stock at December 31, 1995.......................... 82,802
Forfeited.................................................... (8,454)
-------
Restricted stock at December 31, 1996.......................... 74,348
=======
Number of shares vested........................................ 27,600
=======
</TABLE>
Restricted Stock Program
In 1996, EWR awarded 10,895 shares of restricted stock to certain employees
of EWRLP under its 1994 Stock Incentive Plan. The restricted stock vests
ratably over periods ranging from one to four years from the date of the award
and are based on the price of the stock at the award date which ranges from
$20.75 to $22.25. The expense will be amortized ratably over the periods in
which the shares vest and an expense of $83 is included in general and
administrative expense for the year ended December 31, 1996.
EWR uses the proceeds from exercise of stock options and the issuance of
restricted stock to acquire a similar number of units in EWRLP.
11. MINORITY INTEREST
Evans Withycombe Finance, Inc. owns a one percent interest in the Financing
Partnership at December 31, 1996, 1995 and 1994, respectively, as follows:
<TABLE>
<CAPTION>
DOLLARS
-------
<S> <C>
Minority interest in the Financing
Partnership at date of offering............................... $1,594
Allocation of net income...................................... 42
Distributions................................................. (389)
------
Balance at December 31, 1994.................................. 1,247
Allocation of net income...................................... 89
Distributions................................................. (447)
------
Balance at December 31, 1995.................................. 889
Allocation of net income...................................... 75
Distributions................................................. (137)
------
Balance at December 31, 1996.................................. $ 827
======
</TABLE>
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of estimated fair value were determined by
management using available market information and appropriate valuation
methodologies. Judgment is necessary to interpret market data and develop
estimated fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts EWRLP could realize on disposition of the
financial instruments. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
F-12
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash equivalents, accounts receivable, accounts payable and other accruals
are carried at amounts that reasonably approximate their fair values as of
December 31, 1996 and 1995. EWRLP's debt has an estimated aggregate fair value
of approximately $437,800 at December 31, 1996 compared to the carrying value
of $436,172. At December 31, 1995, EWRLP's debt had an estimated fair value of
approximately $298,800 compared to the carrying value of $297,456. Fair values
were estimated using discounted cash flow analyses, based on interest rates
currently available to EWRLP for issuance of debt with similar terms and
remaining maturities.
13. 1994 RESULTS OF OPERATIONS
The 1994 results of operations of EWRLP and its Predecessor are as follows:
<TABLE>
<CAPTION>
EVANS WITHYCOMBE EVANS WITHYCOMBE
RESIDENTIAL, L.P. RESIDENTIAL GROUP
AUGUST 17 TO JANUARY 1 TO
DECEMBER 31, 1994 AUGUST 16, 1994
----------------- -----------------
<S> <C> <C>
Revenues:
Rental.................................... $20,185 $30,912
Third party management fees............... 560 1,108
Interest and other........................ 1,028 3,166
------- -------
Total revenues.......................... 21,773 35,186
Expenses:
Repairs and maintenance................... 2,642 3,646
Property operating........................ 2,392 5,442
Advertising............................... 345 621
Real estate taxes......................... 1,251 1,953
Property management....................... 1,104 1,401
General and administrative................ 410 765
Interest.................................. 2,302 5,534
Depreciation and amortization............. 3,754 6,579
Other..................................... -- 5,233
------- -------
Total expenses.......................... 14,200 31,174
Net income before minority interest......... 7,573 4,012
Minority interest........................... (42) --
------- -------
Net income.................................. $ 7,531 $ 4,012
======= =======
</TABLE>
14. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED, AMOUNTS IN THOUSANDS,
EXCEPT PER UNIT AMOUNTS).
<TABLE>
<CAPTION>
QUARTER
----------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
<S> <C> <C> <C> <C>
1996
Revenue........................... $24,161 $24,085 $25,938 $27,442
Net operating income.............. 16,840 16,287 16,724 18,676
Income before minority interest... 5,341 4,748 3,986 4,730
Minority interest................. (23) (16) (15) (21)
Net income........................ 5,318 4,732 3,971 4,709
Earnings per unit................. $ .25 $ .22 $ .17 $ .20
1995
Revenue........................... $16,276 $17,531 $19,061 $21,663
Net operating income.............. 11,413 11,999 12,296 15,864
Income before minority interest... 5,692 4,975 4,723 5,624
Minority interest................. (26) (19) (16) (28)
Net income........................ 5,666 4,956 4,707 5,596
Earnings per unit................. $ .28 $ .23 $ .23 $ .28
</TABLE>
EWRLP defines net operating income as earnings before property management,
general and administrative expense, interest and depreciation.
F-13
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
SCHEDULE III--REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS
CAPITALIZED
SUBSEQUENT TO GROSS AMOUNTS AT
ACQUISITION/ WHICH CARRIED AT
INITIAL COST CONSTRUCTION CLOSE OF PERIOD
---------------- ----------------- ----------------
BUILDINGS BUILDINGS BUILDINGS ACCUMU-
AND AND AND LATED DEPRECIABLE
ENCUM- IMPROVE- IMPROVE- IMPROVE- DEPRE- YEAR YEAR LIVES
DESCRIPTION BRANCES LAND MENTS LAND MENTS LAND MENTS TOTAL CIATION DEVELOPED ACQUIRED IN YEARS
----------- ------- ------ --------- ------ --------- ------ --------- ------- ------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SAME STORE
Phoenix
Bayside at the
Islands
Gilbert, AZ.... $ 6,589 $1,877 $6,623 $1,429 $3,491 $3,306 $10,114 $13,420 $ 815 1988-1989 5 to 40 years
Country Brook
Chandler, AZ... 7,792 937 3,886 25 6,578 962 10,464 11,426 954 1991 5 to 40 years
Deer Creek
Village
Phoenix, AZ.... 5,116 919 5,454 506 3,465 1,425 8,919 10,344 912 1991 5 to 40 years
Greenwood
Village
Tempe, AZ...... 6,553 1,770 7,119 349 2,322 2,119 9,441 11,560 961 1993 5 to 40 years
Heritage Point
Mesa, AZ....... -- 666 5,125 -- 397 666 5,522 6,188 424 1994 5 to 40 years
La Mariposa
Mesa, AZ....... 4,750 1,440 3,962 608 2,620 2,048 6,582 8,630 528 1990 5 to 40 years
La Valencia
Mesa, AZ....... 7,792 2,485 6,569 1,068 4,283 3,553 10,852 14,405 829 1990 5 to 40 years
Little
Cottonwoods
Tempe, AZ...... 9,424 2,834 6,655 216 7,161 3,050 13,816 16,866 939 1989 5 to 40 years
Los Arboles
Chandler, AZ... -- 1,160 7,836 -- 237 1,160 8,073 9,233 895 1993 5 to 40 years
Miramonte
Scottsdale, AZ. 4,340 1,133 3,711 -- 123 1,133 3,834 4,967 481 1993 5 to 40 years
Morningside
Scottsdale, AZ. 4,542 533 6,316 137 2,115 670 8,431 9,101 731 1992 5 to 40 years
Park Meadow
Gilbert, AZ.... 2,936 607 2,828 225 1,275 832 4,103 4,935 450 1992 5 to 40 years
Preserve at
Squaw Peak
Phoenix, AZ.... 3,172 377 4,252 141 1,939 518 6,191 6,709 500 1991 5 to 40 years
Promontory
Pointe
Phoenix, AZ.... 7,610 2,038 6,987 (379) 7,861 1,659 4,943 6,602 392 1988 5 to 40 years
(9,905)*
Scottsdale
Courtyards
Scottsdale, AZ. 10,442 2,946 8,385 33 3,087 2,979 11,472 14,451 1,035 1993 5 to 40 years
Scottsdale
Meadows
Scottsdale, AZ. 5,381 1,512 4,203 -- 113 1,512 4,316 5,828 539 1993 5 to 40 years
Shadow Brook
Phoenix, AZ.... 7,922 2,440 9,320 625 3,388 3,065 12,708 15,773 1,157 1993 5 to 40 years
Shores at
Andersen
Springs
Chandler, AZ... 8,196 2,095 9,682 649 3,949 2,744 13,631 16,375 1,078 1993 5 to 40 years
Silver Creek
Phoenix, AZ.... 3,211 484 3,157 228 2,429 712 5,586 6,298 546 1991 5 to 40 years
Sun Creek
Glendale, AZ... 3,811 715 3,950 182 1,648 897 5,598 6,495 624 1993 5 to 40 years
The Meadows
Mesa, AZ....... -- 650 4,797 -- 2,795 650 6,231 6,881 532 1987 5 to 40 years
(1,361)*
The Palms
Phoenix, AZ.... 4,895 2,152 4,455 1,133 2,764 3,285 7,219 10,504 512 1990 5 to 40 years
The Pines
Mesa, AZ....... 3,707 577 3,725 351 2,559 928 6,284 7,212 679 1992 5 to 40 years
Towne Square
Chandler, AZ... -- 1,042 8,413 277 3,614 1,319 12,027 13,346 1,607 1992 5 to 40 years
Villa Encanto
Phoenix, AZ.... 8,951 2,884 8,558 -- 844 2,884 9,402 12,286 983 1991 5 to 40 years
Village at
Lakewood
Phoenix, AZ.... 8,317 1,652 5,776 1,514 5,897 3,166 11,673 14,839 915 1991 5 to 40 years
Tucson
Harrison Park
Tucson, AZ..... 3,315 516 3,511 -- 743 516 4,254 4,770 393 1991 5 to 40 years
La Reserve
Oro, Valley.... 6,409 2,309 6,356 956 3,656 3,265 10,012 13,277 732 1988 5 to 40 years
</TABLE>
F-14
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
SCHEDULE III--REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS CAPITALIZED
SUBSEQUENT TO GROSS AMOUNTS AT
ACQUISITION/ WHICH CARRIED AT
INITIAL COST CONSTRUCTION CLOSE OF PERIOD
----------------- ----------------- -----------------
BUILDINGS BUILDINGS BUILDINGS ACCUMU-
AND AND AND LATED DEPRECIABLE
ENCUM- IMPROVE- IMPROVE- IMPROVE- DEPRE- YEAR YEAR LIVES
DESCRIPTION BRANCES LAND MENTS LAND MENTS LAND MENTS TOTAL CIATION DEVELOPED ACQUIRED IN YEARS
----------- -------- ------- --------- ------- --------- ------- --------- -------- ------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Orange Grove
Village
Tucson, AZ..... $ 3,786 $ 814 $ 3,233 $ 906 $ 2,575 $ 1,720 $ 5,808 $ 7,528 $ 605 1991 5 to 40 years
Suntree Village
Oro, Valley.... 8,550 1,246 8,862 326 3,713 1,572 12,575 14,147 1,348 1992 5 to 40 years
The Arboretum
Tucson, AZ..... 16,684 1,014 8,323 1,526 3,349 2,540 11,672 14,212 1,584 1992 5 to 40 years
Village at
Tanque Verde
Tucson, AZ..... 6,436 690 1,280 745 4,895 1,435 6,175 7,610 589 1990 5 to 40 years
-------- ------- -------- ------- ------- ------- -------- -------- -------
Subtotal Same
Store.......... 180,629 44,514 183,309 13,776 84,619 58,290 267,928 326,218 25,269
COMMUNITIES STABILIZED
LESS THAN TWO YEARS
Phoenix
Gateway Villas
Phoenix, AZ.... -- 1,431 11,238 -- (50) 1,431 11,188 12,619 561 1994-1995 5 to 40 years
Mountain Park
Ranch
Phoenix, AZ.... 9,704 1,662 12,540 -- 28 1,662 12,568 14,230 1,032 1994-1995 5 to 40 years
Sonoran
Phoenix, AZ.... -- 2,362 20,802 -- 17 2,362 20,819 23,181 1,142 1994-1995 5 to 40 years
The Enclave
Tempe, AZ...... 8,367 1,500 10,527 -- 26 1,500 10,553 12,053 860 1994-1995 5 to 40 years
The Heritage
Phoenix, AZ.... -- 1,211 12,370 -- (13) 1,211 12,357 13,568 769 1994-1995 5 to 40 years
Towne Square
Expansion
Phase II
Chandler, AZ... -- -- 6,061 -- -- -- 6,061 6,061 -- 1994-1995 5 to 40 years
Tucson
Arboretum
Expansion
Phase II
Tucson, AZ..... -- 914 8,383 -- -- 914 8,383 9,297 -- 1994-1995 5 to 40 years
-------- ------- -------- ------- ------- ------- -------- -------- -------
Subtotal
Communities
Stabilized Less
than Two Years. 18,071 9,080 81,921 -- 8 9,080 81,929 91,009 4,364
DEVELOPMENTS AND
LEASE-UP PROPERTIES
Phoenix
Country Brook
Expansion
Phase III
Chandler, AZ... -- 543 6,779 -- -- 543 6,779 7,322 136 1995 5 to 40 years
The Hawthorne
Phoenix, AZ.... -- 2,695 14,087 -- -- 2,695 14,087 16,782 122 1995 5 to 40 years
Ingleside
Phoenix, AZ.... -- 1,204 6,242 -- -- 1,204 6,242 7,446 386 1995 5 to 40 years
The Isle at
Arrowhead Ranch
Glendale, AZ... -- 1,652 9,806 -- -- 1,652 9,806 11,458 3 1996 5 to 40 years
Ladera
Phoenix, AZ.... -- 2,979 14,884 -- -- 2,979 14,884 17,863 727 1994-1995 5 to 40 years
Mirador
Phoenix, AZ.... -- 2,597 20,885 -- -- 2,597 20,885 23,482 921 1994-1995 5 to 40 years
Park Meadow
Expansion Phase
II
Gilbert, AZ.... -- 4 3,998 -- -- 4 3,998 4,002 100 1995 5 to 40 years
Promontory
Pointe
Expansion
Phoenix, AZ.... -- 665 8,141 -- -- 665 8,141 8,806 68 1995 5 to 40 years
Towne Square
Expansion Phase
III
Chandler, AZ... -- 605 6,092 -- -- 605 6,092 6,697 177 1995 5 to 40 years
</TABLE>
F-15
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
SCHEDULE III--REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS CAPITALIZED
SUBSEQUENT TO GROSS AMOUNTS AT
ACQUISITION/ WHICH CARRIED AT
INITIAL COST CONSTRUCTION CLOSE OF PERIOD
------------------ ----------------- ------------------
BUILDINGS BUILDINGS BUILDINGS ACCUMU-
AND AND AND LATED
ENCUM- IMPROVE- IMPROVE- IMPROVE- DEPRE- YEAR YEAR
DESCRIPTION BRANCES LAND MENTS LAND MENTS LAND MENTS TOTAL CIATION DEVELOPED ACQUIRED
----------- -------- -------- --------- ------- --------- -------- --------- -------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
The Retreat (1)
Phoenix, AZ..... $ -- $ 3,477 $ 2,578 $ -- $ -- $ 3,477 $ 2,578 $ 6,055 $ -- 1997
Scottsdale &
Mountain View
(1)
Scottsdale, AZ.. -- 3,456 508 -- -- 3,456 508 3,964 -- 1997
Vista Grove (1)
Mesa, AZ........ -- 1,343 1,897 -- -- 1,343 1,897 3,240 -- 1997
The Gates Project
(2)
Various
Locations....... -- -- 551 -- -- -- 551 551 -- Various
Laguna at
Arrowhead (1)
Glendale, AZ.... -- 879 592 -- -- 879 592 1,471 -- 1997
Tucson
Bear Canyon
Tucson, AZ...... -- 1,645 12,926 -- -- 1,645 12,926 14,571 237 1995
Harrison Park
Expansion Phase
II
Tucson, AZ...... -- 749 8,912 -- -- 749 8,912 9,661 235 1995
The Legends
Tucson, AZ...... -- 2,728 17,893 -- -- 2,728 17,893 20,621 1,235 1994-1995
Orange Grove
Expansion Phase
II
Tucson, AZ...... -- 93 7,213 -- -- 93 7,213 7,306 312 1995
-------- -------- -------- ------- ------- -------- -------- -------- -------
Subtotal
Developments
and Lease-Up
Properties...... -- 27,314 143,984 -- -- 27,314 143,984 171,298 4,644
ACQUISITIONS
Phoenix
Acacia Creek
Scottsdale, AZ.. 15,247 6,122 24,382 -- 599 6,122 24,981 31,103 1,486 1995
Rancho Murietta
Tempe, AZ....... 6,225 1,766 10,208 -- 993 1,766 11,201 12,967 698 1995
Superstition
Vista
<CAPTION>Mesa, AZ........ -- 1,641 12,272 -- 1,512 1,641 13,784 15,425 480 1995
DEPRECIABLE
LIVES
DESCRIPTION IN YEARS
----------- -------------
<S> <C>
The Retreat (1)
Phoenix, AZ..... 5 to 40 years
Scottsdale &
Mountain View
(1)
Scottsdale, AZ.. 5 to 40 years
Vista Grove (1)
Mesa, AZ........ 5 to 40 years
The Gates Project
(2)
Various
Locations....... 5 to 40 years
Laguna at
Arrowhead (1)
Glendale, AZ.... 5 to 40 years
Tucson
Bear Canyon
Tucson, AZ...... 5 to 40 years
Harrison Park
Expansion Phase
II
Tucson, AZ...... 5 to 40 years
The Legends
Tucson, AZ...... 5 to 40 years
Orange Grove
Expansion Phase
II
Tucson, AZ...... 5 to 40 years
Subtotal
Developments
and Lease-Up
Properties......
ACQUISITIONS
Phoenix
Acacia Creek
Scottsdale, AZ.. 5 to 40 years
Rancho Murietta
Tempe, AZ....... 5 to 40 years
Superstition
Vista
Mesa, AZ........ 5 to 40 years
California
Canyon Crest
Views
Riverside, CA... -- 1,745 12,163 -- -- 1,745 12,163 13,908 141 1996
The Ashton
Corona Hills,
CA.............. 17,300 2,594 18,679 -- 2,185 2,594 20,864 23,458 510 1995
Portofino
Chino Hills, CA. -- 3,572 9,031 -- -- 3,572 9,031 12,603 91 1996
Parkview
Terrace Club
Redlands, CA.... 22,650 4,969 28,301 -- -- 4,969 28,301 33,270 286 1996
Redlands Lawn and
Tennis Club
Redlands, CA.... 24,050 4,822 24,045 -- -- 4,822 24,045 28,867 50 1996
-------- -------- -------- ------- ------- -------- -------- -------- -------
Subtotal
Acquisitions.... 85,472 27,231 139,081 -- 5,289 27,231 144,370 171,601 3,742
Canyon Crest
Views
Riverside, CA... 5 to 40 years
The Ashton
Corona Hills,
CA.............. 5 to 40 years
Portofino
Chino Hills, CA. 5 to 40 years
Parkview
Terrace Club
Redlands, CA.... 5 to 40 years
Redlands Lawn and
Tennis Club
Redlands, CA.... 5 to 40 years
Subtotal
Acquisitions....
CORPORATE OFFICE
Scottsdale, AZ.. -- -- 325 -- 1,099 -- 1,424 1,424 312 1994
-------- -------- -------- ------- ------- -------- -------- -------- -------
Total........... $284,172 $108,139 $548,620 $13,776 $91,015 $121,915 $639,635 $761,550 $38,331
======== ======== ======== ======= ======= ======== ======== ======== =======
Scottsdale, AZ.. 5 to 8 years
Total...........
</TABLE>
- -------
(1) Projects are currently in the early planning stage.
(2) The Gates Project represents the costs associated with EWR's investment in
constructing security gate systems at all its apartment communities.
*Write-down of real estate assets.
F-16
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
SCHEDULE III--REAL ESTATE INVESTMENTS AND
ACCUMULATED DEPRECIATION
A summary of activity for real estate investments and accumulated
depreciation is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period......... $587,183 $399,987 $292,513
Acquisitions........................... 88,648 77,895 5,849
Improvements, including construction
costs................................. 85,719 109,301 66,604
Elimination of accumulated depreciation
at date of acquisition................ -- -- (38,360)(1)
Fair value adjustment.................. -- -- 73,381
-------- -------- --------
Balance at close of period............. $761,550 $587,183 $399,987
======== ======== ========
Accumulated depreciation
Balance at beginning of period........ $ 17,511 $ 3,749 $ 32,065
Depreciation......................... 20,885 13,762 10,333
Accumulated depreciation on
disposals........................... (65) -- (289)
Elimination of accumulated
depreciation
at date of acquisition.............. -- -- (38,360)
-------- -------- --------
Balance at close of period............. $ 38,331 $ 17,511 $ 3,749
======== ======== ========
</TABLE>
Amount represents decrease in basis due to acquiring real estate at net book
value at the time of the Offering.
F-17
<PAGE>
APPENDIX A
ASSET CONTRIBUTION AGREEMENT
THIS AGREEMENT is made as of August 27, 1997 by and between EVANS WITHYCOMBE
RESIDENTIAL, L.P., a Delaware limited partnership ("EWOP"), and ERP OPERATING
LIMITED PARTNERSHIP, an Illinois limited partnership ("ERP").
RECITALS:
A. To induce the general partner of ERP to enter into an agreement of merger
with the general partner of EWOP pursuant to the Agreement and Plan of Merger
dated August 27, 1997 between the general partners of ERP and EWOP (the
"Merger Agreement"), EWOP desires to contribute to ERP, at the option of ERP,
all of its assets pursuant to the terms and conditions of this Agreement.
Section 5.18 of the Merger Agreement provides certain assurances given to
induce EWOP to enter into this Agreement.
B. EWOP intends to dissolve after the contribution of its assets to ERP.
AGREEMENTS:
In consideration of the foregoing premises and the respective agreements,
covenants and obligations herein contained and other good and valuable
consideration, the parties agree as follows:
1. CONTRIBUTION. Subject to Section 6 of this Agreement, EWOP hereby agrees
to contribute all of its assets (the "Contributed Assets"), subject to its
liabilities (including liabilities which are non-recourse in nature), to ERP
in exchange for units of partnership interest in ERP of the type and in the
amount set forth in Sections 3 hereof.
The aforesaid contribution is made without any representation or warranty,
express or implied, all of which are expressly disclaimed.
2. ASSUMPTION OF LIABILITIES. Subject to Section 6 of this Agreement, ERP
shall assume the liabilities of EWOP (other than liabilities which are non-
recourse in nature) and agrees to pay and perform such liabilities when due
and when required to be performed. Such liabilities include, without
limitation, all obligations under the Indenture dated as of April 2, 1997
between EWOP and Bank One, Columbus, N.A., as trustee. The liabilities assumed
pursuant to this Section are referred to collectively as the "Assumed
Liabilities."
3. CONSIDERATION FOR CONTRIBUTION TO ERP. Solely in exchange for the
contribution of the Contributed Assets, EWOP shall receive such number of
common units of ERP as shall equal the number of EWOP units of partnership
interest issued and outstanding immediately prior to the effective time of the
Contribution multiplied by the Exchange Ratio (as defined in the Merger
Agreement). No fractional ERP Units shall be issued in connection with the
contribution by any Contributor. Instead, at the time of the effectiveness of
the Contribution, EWOP shall be paid an amount in cash equal to the Closing
Price (as hereinafter defined) multiplied by the fraction of a ERP Unit to
which EWOP would otherwise be entitled. For purposes of this Paragraph 2,
"Closing Price" shall mean the unweighted average closing price of a share of
Equity Residential Properties Trust ("EQR") common stock as reported on the
New York Stock Exchange (Composite Tape) for the five (5) trading days
preceding the Effective Time (as defined in the Merger Agreement), and
"Trading Days" shall mean any day on which the EQR common shares of beneficial
interest is traded on the New York Stock Exchange and reported on its
Composite Tape.
4. TRANSFER DOCUMENTS. At the Closing (as defined herein), EWOP shall
execute a Warranty Deed for each of the EWR Properties (as defined in the
Merger Agreement) owned by it and a general assignment and assumption
agreement, in form and substance satisfactory to ERP, as assignor, for EWR
Properties owned by it and ERP shall sign such general assignment and
assumption agreement as assignee.
5. ADDITIONAL AGREEMENTS. EWOP and ERP shall execute, deliver (or cause to
be executed or delivered) and record, all agreements, documents and
instruments necessary or appropriate to effect the contribution and assumption
contemplated hereby, including any assignments, assumptions, supplemental
indentures, deeds, agreements or instruments.
6. LIMITATION ON CONTRIBUTION. To the extent any assignment, transfer,
conveyance or delivery of a Contributed Asset or the assumption of an Assumed
Liability shall violate or cause an event of default under any agreement
between EWOP or ERP on one hand, and any other person on the other hand, such
asset shall not be contributed or such
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liability shall not be assumed pursuant to the terms of this Agreement and the
parties shall cooperate to effect the contributions promptly following the
Effective Time hereof as practicable. Nothing herein shall be deemed to require
the contribution of any asset or the assumption of any liability which by its
term or operation cannot be assigned, transferred, conveyed or delivered,
provided the parties shall use their reasonable efforts to seek or obtain any
such approvals as soon as practicable after the date hereof. In the event any
contribution of an asset has not been consummated on the date hereof, EWOP
shall continue in existence and hold such asset in trust for the use and
benefit of ERP and shall take any other action as reasonably requested by ERP,
as applicable, in order to place ERP, as applicable, as reasonably possible, in
the same position that would have existed had such Contributed Asset been
contributed immediately following the Effective Time as contemplated by this
Agreement. If any assumption of a liability has not been consummated on the
date hereof, then ERP which was to assume such liability shall reimburse the
Contributor for all amounts paid by the Contributor with respect to such
liability until such liability has been assigned to ERP, as the case may be. As
and when any such Contributed Asset or Assumed Liability is able to be
assigned, transferred, conveyed or delivered, as the case may be, such
contribution and assumption shall be effective forthwith. The parties agree
that, as of the Closing, ERP shall be deemed to have acquired complete and sole
beneficial ownership of all Contributed Assets to be contributed to it
hereunder, together with all rights, powers and privileges incident thereto and
all duties and obligations and responsibilities incident thereto including,
without limitation, the liabilities assumed by ERP hereunder. The failure to
contribute any Contributed Asset hereunder shall not reduce the consideration
to be received by EWOP.
7. LACK OF REPRESENTATION. Each of the parties hereto understands and agrees
that no party hereto is, in this Agreement or any other agreement or document
contemplated by this Agreement or otherwise, making any representation or
warranty whatsoever including, without limitation, as to title, value or legal
sufficiency, except that title to all real estate included in the Contributed
Assets is warranted and shall be conveyed by warranty deeds.
8. FURTHER ASSURANCES. Each of the parties hereto shall use its reasonable
best efforts, on and after the date hereof, to take or cause to be taken, all
actions, and to do, or cause to be done all things, necessary, proper or
desirable under applicable laws and regulations to carry out the purposes of
this Agreement and to vest ERP, with full title to all Contributed Assets as of
the Closing. Without limiting the foregoing, ERP shall use its best efforts to
obtain all consents and approvals, to enter into all amendatory agreements and
to make all filings and applications and take all other actions which may be
required for the consummation of the transactions contemplated by this
Agreement, including, without limitation, all applicable regulatory filings.
9. CLOSING. The Closing of the transaction shall occur at such date after the
Transfer Date (as hereinafter defined), as ERP may give notice to EWOP that it
desires to consummate the transaction contemplated by this Agreement. As used
in this Agreement, "Transfer Date" shall mean the first to occur of (i) the
date twelve months after the Effective Time, (ii) the date on which EQR
receives an opinion of Rudnick & Wolfe or other nationally recognized tax
counsel satisfactory to it or a ruling from the Internal Revenue Service that
the transaction to be undertaken pursuant to this Agreement may be effected
without adversely affecting the qualification of the Merger as a tax-free
reorganization within the meaning of Section 368 of the Code or (iii) the date
on which regulations are promulgated by the Department of the Treasury which,
in the opinion of Rudnick & Wolfe or other nationally recognized tax counsel to
EQR, would permit the transaction contemplated by this Agreement without
adversely affecting the qualification of the Merger as a tax-free
reorganization within the meaning of Section 368 of the Code. Notwithstanding
the provisions of this Paragraph 9, in no event shall ERP be required to give
any notice with respect to the Contribution and if ERP fails to give such
notice by December 31, 1999, this Agreement shall terminate and EWOP shall have
no further obligations pursuant to this Agreement.
10. APPROVAL BY LIMITED PARTNERS OF EWOP. The parties acknowledge and agree
that the obligations of ERP pursuant to this Agreement shall be subject to the
approval of this Agreement and the transaction contemplated hereby by the
limited partners of EWOP pursuant to the terms of the partnership agreement of
EWOP. EWOP agrees to present this Agreement, the transaction contemplated
hereby and any other matter specified in Section 1.8(e) of the Merger Agreement
for approval by the partners of EWOP pursuant to the terms of the partnership
agreement of EWOP as soon as practicable after the date hereof in the manner
contemplated by the Merger Agreement. In the event that the Merger Agreement is
terminated for any reason prior to the consummation of the Merger (as defined
in the Merger Agreement), this Agreement shall terminate.
11. DISTRIBUTION OF UNITS RECEIVED FROM ERP. The parties acknowledge and
agree that the consummation of the Contribution contemplated by this Agreement,
subject to the provisions of Section 6 hereof, EWOP shall dissolve pursuant to
the terms of its Partnership Agreement and distribute the ERP units to the
partners of EWOP pursuant to the terms of the Amended and Restated Partnership
Agreement of EWOP. Each holder of units shall become a holder under that
certain Registration Rights Agreement entered into by EQR and certain former
holders of units of EWOP upon the effectiveness of the merger of EQR and Evans
Withycombe Residential, Inc. to the extent the holders of units of EWOP will
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receive Registrable Securities (as defined in the Registration Rights
Agreement) upon the distribution of ERP Units to the partners of EWOP. In the
event that EWOP is required to continue to hold any asset pursuant to Section 6
hereof after the Closing for the benefit of ERP, EWOP shall distribute to the
partners of EWOP, other than EQR and ERP, their pro rata share of the ERP Units
received by EWOP in partial dissolution of the EWOP and the partners receiving
such ERP Unit shall have no further interest in EWOP as a partner, including
any interest in its assets, profits and losses.
12. COMPLETE AGREEMENT; CONSTRUCTION. This Agreement, including the exhibits,
constitutes the entire agreement between the parties with respect to the
subject matter hereof, and supersedes all previous negotiations, commitments
and writings with respect to such subject matter.
13. SURVIVAL OF AGREEMENTS. Except as otherwise contemplated by this
Agreement, all covenants and agreements of the parties contained in this
Agreement will survive the consummation of the transactions contemplated
hereby.
14. GOVERNING LAW. This Agreement will be governed by and construed in
accordance with the laws of the State of Illinois, without regard to the
principles of conflicts of laws thereof.
15. NOTICES. All notices and other communications hereunder must be in
writing and must be delivered by hand, mailed by registered or certified mail
(return receipt requested) or sent by facsimile transmission to the party for
whom it is intended at the following address (or at such other address for a
party as may be specified by like notice) and will be deemed given on the date
on which such notice is received:
(a) If to ERP:
Two North Riverside Plaza
Suite 400
Chicago, IL 60606
Attention: General Counsel
Fax: (312) 454-0039
With a copy to:
Rudnick & Wolfe
203 North LaSalle Street
Chicago, Illinois 60601
Attention: Errol R. Halperin
Fax: (312) 236-7516
(b) If to EWOP:
Evans Withycombe Residential, L.P.
6991 East Camelback Road
Suite A-200
Scottsdale, Arizona 85251
Attention: General Partner
Fax: (602) 423-8843
With a copy to:
Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, CA 90071
Attention: Kenneth M. Doran
Fax: (213/229-6537)
16. AMENDMENTS. This Agreement may not be modified or amended except by an
agreement in writing signed by the parties.
17. SUCCESSORS AND ASSIGNS. This Agreement shall not be assignable, in whole
or in part, directly or indirectly, by any party hereto without the prior
written consent of the other, and any attempt to assign any rights or
obligations arising under this Agreement without such consent shall be void;
provided, however, that the provisions of this Agreement shall be binding upon,
inure to the benefit of and be enforceable by the parties and their respective
successors and permitted assigns.
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18. NO THIRD-PARTY BENEFICIARIES. The provisions of this Agreement are
solely for the benefit of the parties hereto and their respective successors
and permitted assigns and should not be deemed to confer upon third parties
any remedy, claim, liability, reimbursement, claim of action or other right in
excess of those existing without reference to this Agreement.
19. TITLE AND HEADINGS. Titles and headings to sections herein are inserted
for the convenience of reference only and are not intended to be a part of or
to affect the meaning or interpretation of this Agreement.
20. LEGAL ENFORCEABILITY. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof. Any
such prohibition or unenforceability in any jurisdiction shall not invalidate
or render unenforceable such provision in any other jurisdiction. Without
prejudice to any rights or remedies otherwise available to any party hereto,
each party hereto acknowledges that damages would be an inadequate remedy for
any breach of the provisions of this Agreement and agrees that the obligations
of the parties hereunder are specifically enforceable.
21. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which when executed shall be deemed an original, but all
of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
ERP OPERATING LIMITED PARTNERSHIP
By: Equity Residential Properties Trust,
its general partner
/s/ Bruce C. Strohm
By: __________________________________
Executive Vice President
EVANS WITHYCOMBE RESIDENTIAL, L.P.
By: Evans Withycombe Residential, Inc.,
its general partner
/s/ Stephen O. Evans
By: _____________________________________
Its: Chairman & Chief Executive Officer
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APPENDIX B
FORM OF EWRLP AMENDMENT
AMENDMENT NO. 1 TO AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF
EVANS WITHYCOMBE RESIDENTIAL, L.P.
THIS AMENDMENT NO. 1 TO AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP OF EVANS WITHYCOMBE RESIDENTIAL, L.P. (this "Amendment"),
effective as of the Effective Time (as defined in the Agreement and Plan of
Merger dated as of August 27, 1997 ("Merger Agreement") between Equity
Residential Properties Trust and Evans Withycombe Residential, Inc.).
RECITALS:
A. Evans Withycombe Residential, L.P., a Delaware limited partnership (the
"Partnership"), is governed by that certain Amended and Restated Agreement of
Limited Partnership of Evans Withycombe Residential, L.P. dated as of August
17, 1994 (the "Agreement").
B. Evans Withycombe Residential, Inc., a Maryland corporation ("EWR") and
the general partner of the Partnership, and Equity Residential Properties
Trust, a Maryland real estate investment ("EQR"), have merged pursuant to the
Merger Agreement (the "Merger").
C. Pursuant to the Merger Agreement, the limited partners of the Partnership
have approved the contribution of all the assets of the Partnership, subject
to its liabilities, to ERP Operating Partnership, an Illinois limited
partnership, on the terms and conditions provided for in the Merger Agreement
(the "Asset Contribution").
D. In connection with the Merger and the Asset Contribution, the limited
partners of the Partnership desire to amend the Agreement as hereinafter set
forth.
E. The limited partners of the Partnership further desire to ratify and
confirm the decision of the Board of Directors of Evans Withycombe
Residential, Inc., in its capacity as general partner of the Partnership, not
to present for consideration by the limited partners of the Partnership that
certain proposed Amendment to the Agreement dated as of June 18, 1997 (the
"11.2 Amendment").
AGREEMENTS:
1. AMENDMENTS TO ARTICLE 1: PROVISIONS RELATING TO DEFINED TERMS.
(a) Article 1 of the Partnership Agreement is hereby amended by adding
thereto the following definitions:
"ASSET CONTRIBUTION AGREEMENT" means the Asset Contribution Agreement
dated August 27, 1997 between the Partnership and ERP.
"EFFECTIVE TIME" means the time the State Department of Assessments and
Taxation of Maryland accepts for record the Articles of Merger between EQR
and Evans Withycombe Residential, Inc.
"EQR" means Equity Residential Properties Trust, a Maryland real estate
investment trust, as successor by merger to Evans Withycombe Residential,
Inc., a Maryland corporation.
"ERP" means ERP Operating Limited Partnership, an Illinois limited
partnership of which EQR is the general partner.
"ERP COMMON UNITS" mean units of common partnership interest in ERP.
"ERP UNITS" mean units of partnership interest in ERP.
(b) The definitions of "Option Plans", "Partnership Record Date" and "Value"
are hereby amended to change the references therein to "General Partner" to
"EQR."
(c) The definition of "Common Shares" is hereby amended to read as follows:
"COMMON SHARES" mean common shares of beneficial interest, $.01 par value
per share, of EQR.
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(d) The definition of "General Partner" is hereby amended to read as
follows:
"GENERAL PARTNER" means EQR and ERP, as co-general partners, and their
respective successors as co-general partners of the Partnership.
(e) The definition of "Transaction" in Article I is hereby deleted.
(f) The definition of "Unit Adjustment Factor" is hereby amended to read as
follows:
"UNIT ADJUSTMENT FACTOR" means 1.00 until the Effective Time and from and
after the Effective Time 0.50; provided that in the event that EQR (a)
declares or pays a dividend on its outstanding Common Shares in Common
Shares or makes a distribution to all holders of its outstanding Common
Shares in Common Shares, (b) subdivides its outstanding Common Shares or
(c) combines its outstanding Common Shares into a smaller number of Common
Shares, the Unit Adjustment Factor shall be adjusted by multiplying the
Unit Adjustment Factor by a fraction, the numerator of which shall be the
number of Common Shares issued and outstanding on the record date (assuming
for such purpose that such dividend, distribution, subdivision or
combination has occurred as of such time), and the denominator of which
shall be the actual number of Common Shares (determined without the above
assumption) issued and outstanding on the record date for such dividend,
contribution, subdivision or combination. In addition, while Section 7.5
hereof provides that EQR shall not directly or indirectly enter into or
conduct any business except as permitted in said Section, if an event were
to occur that would significantly affect the economic relationship between
a Partnership Unit and a Common Share, the Unit Adjustment Factor shall
also be appropriately adjusted. Any such adjustment to the Unit Adjustment
Factor shall be determined by the Board of Trustees of EQR, whose
determination as to whether an adjustment is necessary and the amount of
such adjustment shall be conclusive absent manifest error. Any adjustment
to the Unit Adjustment Factor shall become effective immediately after the
effective date of such event retroactive to the record date, if any, for
such event.
2. CHANGE OF PRINCIPAL OFFICE. The second sentence of Section 2.3 of the
Agreement is hereby amended to read as follows:
"The principal office of the Partnership is located at Two North
Riverside Plaza, Suite 400, Chicago, Illinois 60606, or such other place as
the General Partner may from time to time designate by notice to the
Limited Partners."
3. AMENDMENTS TO CHANGE REFERENCES FROM GENERAL PARTNER TO EQR. The
following Sections of the Agreement are hereby amended to change references
therein to "General Partner" to references to "EQR."
(a) Section 3.1;
(b) Section 3.2;
(c) Section 4.2(e) (renumbered pursuant to this Amendment as Section
4.2(b));
(d) the last sentence of Section 4.5;
(e) Section 7.1(a)(1);
(f) the penultimate sentence of Section 7.7(a);
(g) Section 8.3(a);
(h) Section 9.3;
(i) Section 10.3; and
(j) Section 14.1(b)(6).
4. GENERAL PARTNERSHIP INTERESTS. The last sentence of Section 4.1(a) is
hereby amended to read as follows:
"A number of Partnership Units held by EQR equal to one percent (1%) of all
outstanding Partnership Units shall be deemed to be a General Partnership
Interest and a number of Partnership Units held by ERP equal to one percent
(1%) of all outstanding Partnership Units shall be deemed to be a General
Partnership Interest."
5. DELETION OF REQUIREMENT TO CONTRIBUTE FUNDS. Section 4.1(b)(2) of the
Agreement is hereby deleted in its entirety.
6. EQR'S SHARES NOT EQUATED TO PARTNERSHIP UNITS. Sections 4.2(b), 4.2(c)
and 4.2(d) of the Agreement are hereby deleted in their entirety and paragraph
(e) of Section 4.2 is hereby redesignated as paragraph (b) of Section 4.2.
7. DISTRIBUTION OF ERP COMMON UNITS IN LIQUIDATION. The Agreement is hereby
amended by adding thereto a new Section 5.5, which shall read as follows:
"5.5 DISTRIBUTION OF ERP COMMON UNITS. Notwithstanding anything to the
contrary in this Agreement, the ERP Common Units which may be received by
the Partnership pursuant to the Asset Contribution Agreement may
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be distributed to the Partners in liquidation of the Partnership on the
basis of one ERP Common Unit for each Partnership Unit then outstanding."
8. CONFORMING AMENDMENT. The proviso at the end of Section 7.1(a)(3) is
hereby amended to read as follows:
"provided, further, that the sale of all or substantially all of the assets
of the Partnership shall require the Consent of a majority of the
Percentage Interests of the Limited Partnership Interests (including
Limited Partnership Interests held by the General Partner)."
9. SALE OF ALL ASSETS PERMITTED. Section 7.2(a) of the Agreement is hereby
amended to read as follows:
"(a) take any action which would make it impossible to carry on the
ordinary business of the Partnership, except as otherwise provided in this
Agreement (it being understood and agreed that, subject to Section
7.1(a)(3), a sale of any or all of the assets of the Partnership, for
example, would be an ordinary part of the Partnership's business and
affairs and is specifically permitted hereby);"
10. OUTSIDE ACTIVITIES OF EQR. Section 7.5 of the Agreement is hereby deleted
in its entirety and the following is substituted in lieu thereof:
"Section 7.5 INTENTIONALLY OMITTED."
11. ASSET CONTRIBUTION AGREEMENT PERMITTED. Section 7.6(c) of the Agreement
is hereby amended to read as follows:
"(c) CONTRACT WITH GENERAL PARTNER. Except as expressly permitted by this
Agreement and except as contemplated by the Asset Contribution Agreement,
neither the General Partner nor any of its Affiliates shall sell, transfer
or convey any property to, or purchase any property from, the Partnership,
directly or indirectly, except pursuant to transactions that are on terms
that are fair and reasonable and no less favorable to the Partnership than
would be obtained from an unaffiliated third party in connection
therewith."
12. ACTION TO MAINTAIN REIT STATUS OF EQR. Section 7.9(d) of the Agreement is
hereby amended to read as follows:
"(d) ACTIONS TO MAINTAIN REIT STATUS OR AVOID TAXATION OF
EQR. Notwithstanding any other provisions of this Agreement or the Act, any
action of the General Partner on behalf of the Partnership or any decision
of the General Partner to refrain from acting on behalf of the Partnership,
undertaken in the good faith belief that such action or omission is
necessary or advisable in order (i) to protect the ability of EQR to
continue to qualify as a REIT or (ii) to avoid the incurrence of any taxes
by EQR under Section 857 or Section 4981 of the Code, is expressly
authorized under this Agreement and is deemed approved by all of the
Limited Partners."
13. TITLE TO PARTNERSHIP ASSETS TRANSFERRED TO ERP PURSUANT TO ASSET
CONTRIBUTION AGREEMENT. The third sentence of Section 7.10 of the Agreement is
hereby amended to read as follows:
"The General Partner hereby declares and warrants that, except for
Partnership assets contributed to ERP pursuant to the Asset Contribution
Agreement, any Partnership assets for which legal title is held in the name
of the General Partner or any nominee or Affiliate of the General Partner
shall be held by the General Partner for the use and benefit of the
Partnership in accordance with the provisions of this Agreement; provided,
however, that the General Partner shall use its best efforts to cause
beneficial and record title to such assets to be vested in the Partnership
as soon as reasonably practicable."
14. ADJUSTMENT TO OUTSTANDING UNITS. Section 8.5(b) of the Agreement is
hereby amended to read as follows:
"(b) ADJUSTMENTS TO OUTSTANDING PARTNERSHIP UNITS AND NOTIFICATION OF
CHANGES IN UNIT ADJUSTMENT FACTOR. The number of outstanding Partnership
Units shall be subject to adjustment from time to time by the Unit
Adjustment Factor. The Partnership shall notify each Limited Partner in
writing of any change made to the Unit Adjustment Factor within ten (10)
Business Days of the date such change becomes effective."
15. TRANSFER OF GENERAL PARTNER'S PARTNERSHIP INTEREST.
(a) Section 11.2(a) of the Agreement is hereby amended to read as follows:
"(a) GENERAL. In no event may the General Partner at any time assign,
sell, transfer, pledge, hypothecate or otherwise dispose of all or any
portion of its General Partnership Interest except by operation of law."
(b) Section 11.2(c) of the Agreement is hereby deleted in its entirety.
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16. NO REQUIREMENT TO SELL ERP UNITS RECEIVED UPON LIQUIDATION. Section 13.2
of the Agreement is hereby amended by adding at the end thereof a new sentence
which reads as follows:
"Notwithstanding anything to the contrary contained herein (including,
without limiting the generality of the foregoing, Section 13.2(a)(4)), the
General Partner shall cause the Partnership to distribute the ERP Common
Units received by the Partnership pursuant to the Asset Contribution
Agreement in liquidation of the Partnership Units on the basis of one ERP
Unit for each outstanding Partnership Unit. The General Partner shall be
under no obligation to sell such ERP Common Units. The Partnership may
remain in existence and undertake the activities as contemplated by Section
6 of the Asset Contribution Agreement as part of its winding up."
17. NO PRIOR AMENDMENT. The Limited Partners of the Partnership hereby
ratify, approve and confirm in all respects the decision of the Board of
Directors of Evans Withycombe Residential, Inc. not to present the 11.2
Amendment to the Limited Partners of the Partnership, with the same force and
effect as if the Limited Partners of the Partnership had voted against the
adoption of the 11.2 Amendment.
18. ELIMINATION OF CERTIFICATES FOR UNIT.
(a) The definition of Partnership Unit is hereby amended by deleting the
second sentence thereof.
(b) The Agreement is hereby amended by deleting Exhibit D thereof in its
entirety.
19. REFERENCE TO AND EFFECT ON THE PARTNERSHIP AGREEMENT.
(a) At and after the Effective Time, each reference in the Partnership
Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of
like import referring to the Partnership Agreement shall mean and be a
reference to the Partnership Agreement as amended by this Amendment.
(b) The Partnership Agreement as amended and restated as of August 17, 1994
and as amended by this Amendment shall remain in full force and effect and is
hereby ratified and confirmed.
20. HEADINGS. Section and subsection headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of
this Amendment for any other purpose or be given any substantive effect.
21. APPLICABLE LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO
CONFLICTS OF LAWS PRINCIPLES.
22. COUNTERPARTS. This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed and delivered shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument;
signature pages may be detached from multiple separate counterparts and
attached to a single counterpart so that all signature pages are physically
attached to the same document.
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IN WITNESS WHEREOF, the Partners have executed this Amendment as of the
Effective Time.
GENERAL PARTNERS:
EQUITY RESIDENTIAL PROPERTIES TRUST, a
Maryland real estate investment trust,
General Partner
By:______________________________________
Title:_________________________________
ERP OPERATING LIMITED PARTNERSHIP, an
Illinois limited partnership
By: EQUITY RESIDENTIAL PROPERTIES TRUST,
a Maryland real estate investment
trust, its general partner
By:___________________________________
Title:______________________________
LIMITED PARTNERS:
EQUITY RESIDENTIAL PROPERTIES TRUST, a
Maryland real estate investment trust,
Limited Partner, as attorney-in-fact for
the Limited Partners
By:______________________________________
Title:_________________________________
ERP OPERATING LIMITED PARTNERSHIP, an
Illinois limited partnership, Limited
Partner, as attorney-in-fact for the
Limited Partners
By: EQUITY RESIDENTIAL PROPERTIES TRUST,
a Maryland real estate investment
trust, its general partner
By:___________________________________
Title:______________________________
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APPENDIX C
FORM OF ERP AMENDMENT
AMENDMENT TO FOURTH AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP FOR
ERP OPERATING LIMITED PARTNERSHIP
THIS AMENDMENT TO FOURTH AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP FOR ERP OPERATING LIMITED PARTNERSHIP (this "Amendment"), effective
as of the Effective Time (as defined in the Agreement and Plan of Merger dated
as of August 27, 1997 between Equity Residential Properties Trust and Evans
Withycombe Residential, Inc.).
RECITALS:
A. ERP Operating Limited Partnership, an Illinois limited partnership (the
"Partnership"), is governed by that certain Fourth Amended and Restated
Agreement of Limited Partnership for ERP Operating Limited Partnership dated as
of September 30, 1995 (the "Partnership Agreement").
B. The limited partners of the Partnership desire to amend the Agreement as
hereinafter set forth.
AGREEMENTS:
1. AMENDMENT TO SECTION 9.6.
Section 9.6 of the Partnership Agreement is hereby amended and restated to
read as follows:
9.6 OTHER ACTIVITIES OF PARTNERS AND AGREEMENTS WITH RELATED PARTIES. The
General Partner shall devote its full-time efforts in furtherance of the
Partnership business, it being expressly understood that, except for (i)
EWR's ownership interest in a partnership or a limited liability company of
which the Partnership is a partner or a member, respectively; (ii) EWR's
ownership of any qualified REIT subsidiary (within the meaning of the Code)
or any other entity which is a partner of a partnership or a member of a
limited liability company having the Partnership as a partner or member,
respectively; (iii) EWR's ownership of any entity that owns no more than a
one percent (1%) interest in any partnership, limited liability company or
other entity; (iv) borrowing (including the issuance of debt securities)
where the net proceeds thereof are loaned or contributed to the
Partnership; (v) any activity which the Board of Trustees of the General
Partner, in its sole discretion, has determined will have a material
benefit to the General Partner and will not have a material adverse effect
on the Partnership; and (vi) activities incidental to EWR's status and
existence as a real estate investment trust, the General Partner shall
conduct all of its activities with respect to the multifamily residential
property business exclusively through the Partnership and shall not conduct
or engage in any way in any other business.
2. REFERENCE TO AND EFFECT ON THE PARTNERSHIP AGREEMENT.
(a) At and after the Effective Time, each reference in the Partnership
Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like
import referring to the Partnership Agreement shall mean and be a reference to
the Partnership Agreement as amended by this Amendment.
(b) The Partnership Agreement as amended and restated as of September 30,
1995 and as amended by this Amendment shall remain in full force and effect and
is hereby ratified and confirmed.
3. HEADINGS. Section and subsection headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of
this Amendment for any other purpose or be given any substantive effect.
4. APPLICABLE LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO
CONFLICTS OF LAWS PRINCIPLES.
C-1
<PAGE>
IN WITNESS WHEREOF, the Partners have executed this Amendment as of the
Effective Time.
GENERAL PARTNERS:
EQUITY RESIDENTIAL PROPERTIES TRUST, a
Maryland real estate investment trust,
General Partner
By:______________________________________
Title:_________________________________
LIMITED PARTNERS:
EQUITY RESIDENTIAL PROPERTIES TRUST, a
Maryland real estate investment trust,
Limited Partner, as attorney-in-fact for
the Limited Partners
By:______________________________________
Title:_________________________________
C-2
<PAGE>
APPENDIX D
FORM OF UNIT CONTRIBUTION AGREEMENT
The undersigned ("Contributor") is the legal and beneficial owner of the
aggregate units of limited partnership interest (the "EWRLP Units") in Evans
Withycombe Residential, L.P., a Delaware limited partnership ("EWRLP") set
forth on the signature page hereof.
1. Contribution of the Units. Pursuant to the terms hereof, Contributor
hereby agrees to contribute all of the EWRLP Units owned by Contributor to ERP
(the "Contribution"), ERP hereby agrees to accept such EWRLP Units from
Contributor, in exchange for common units of limited partnership interest in
ERP ("ERP Units") in an amount as calculated pursuant to Paragraph 2 hereof.
Upon the issuance of ERP Units to each Contributor, such Contributor shall be
admitted as a limited partner of ERP.
2. Exchange Ratio. In exchange for each EWRLP Unit contributed to ERP,
Contributor shall receive 0.5 ERP Units. No fractional ERP Units shall be
issued in connection with the Contribution. For any fractional interest,
Contributor shall receive an amount in cash equal to the Closing Price (as
defined in the Consent Solicitation/Prospectus/Information Statement, dated
, 1997, as amended to date, including the latest supplement thereto (if
any) ("Consent Solicitation") multiplied by the fraction of a ERP Unit to which
the Contributor would otherwise be entitled.
3. Closing. This Agreement shall be consummated ("Closing") as soon as
practicable after the effectiveness of the merger between Equity Residential
Properties Trust ("EQR") and Evans Withycombe Residential, Inc. ("EWR")
pursuant to that certain Agreement and Plan of Merger between EQR and EWR dated
as of August 27, 1997, as such agreement may be hereafter amended, and if the
Merger has been consummated prior to the date of acceptance of this Agreement,
the Closing Date shall be the date of acceptance of this Agreement by ERP.
Contributor shall deliver the certificate(s) representing the contributor's
EWRLP units, an assignment in form and substance satisfactory to EQR and an
executed counterpart to the Fourth Amended and Restated Agreement of Limited
Partnership for ERP Operating Limited Partnership, as amended ("ERP Partnership
Agreement") agreeing to be bound by the terms of the ERP Partnership Agreement,
including the power of attorney set forth in Section 16 of the ERP Partnership
Agreement.
4. Contributor's Representations and Warranties. Contributor hereby
represents and warrants to ERP, as of the date hereof and as of the date of the
Closing, as follows:
(a) Contributor is the sole legal and beneficial owner of the EWRLP Units
and has the full power and authority to sell the EWRLP Units to ERP
hereunder;
(b) The EWRLP Units are owned by Contributor free and clear of any and
all liens claims, equities, security interests or encumbrances whatsoever;
(c) Upon the contribution of the EWRLP Units to ERP, such EWRLP Units
will be owned by ERP free and clear of any and all liens, claims, equities,
security interests or encumbrances whatsoever;
(d) There are no judgments of record or inchoate tax liens against or
relating to Contributor or the EWRLP Units, nor any litigation or other
proceedings pending or, to Contributor's knowledge, threatened against or
relating to Contributor or the EWRLP Units;
(e) Contributor is not subject to any restriction, agreement, law,
judgment or decree which would prohibit or be violated by the execution and
delivery hereof or by the consummation of the transaction contemplated
hereby; and
(f) Contributor has received the Consent
Solicitation/Prospectus/Information Statement, dated , 1997,
as amended to date, including the latest supplement thereto (if any)
("Consent Solicitation").
5. Indemnification. The warranties and representations set forth in Paragraph
4 shall survive the Closing. Contributor hereby agrees to indemnify, defend and
hold ERP harmless from and against any and all loss, cost, damage, liability or
expense (including, without limitation, reasonable attorneys fees, court costs
and reasonable litigation expenses) which the other party may suffer, sustain
or incur as a result of, arising under or in connection with any breach of
warranty or agreement contained herein or any failure of performance hereunder.
6. Entire Agreement. This Agreement contains the entire agreement between the
parties hereto with respect to the subject matter hereof. This Agreement may
not be modified or rescinded except pursuant to a written instrument signed by
the party against whom enforcement is sought.
7. Governing Law. This Agreement and the rights and obligations of the
parties hereto shall be governed by and construed in accordance with the laws
of the State of Illinois, without regard to its conflicts of laws provisions.
D-1
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Unit Contribution
Agreement as of the day of September, 1997.
CONTRIBUTOR:
--------------------------------------
Name
--------------------------------------
Number of EWRLP Units
ACCEPTED:
ERP OPERATING LIMITED
PARTNERSHIP
By: Equity Residential Properties
Trust, its General Partner
By: ______________________________
Its: _____________________________
D-2
<PAGE>
APPENDIX E
JPMORGAN
J.P. Morgan Securities Inc.
August 27, 1997
60 Wall Street The Board of Trustees
New York NY Equity Residential Properties Trust
10260-0060 Two North Riverside Plaza
Chicago, Illinois 60606
Attention: Mr. Douglas Crocker II
President, Chief Executive Officer
Ladies and Gentlemen:
You have requested our opinion as to the fairness, from a
financial point of view, to Equity Residential Properties
Trust (together with its subsidiaries and affiliates, the
"EWR") of the consideration proposed to be paid by EWR in
connection with the proposed merger (the "Merger") of EWR
with Evans Withycombe Residential, Inc. (the "Seller").
Pursuant to the Agreement and Plan of Merger, dated as of
August 27, 1997 (the "Agreement"), between EWR and the
Seller, each common share of the Seller, $0.01 par value per
share, will be converted into 0.50 common shares of
beneficial interest of EWR, and each unit of limited
partnership interest in Evans Withycombe Residential L.P.
will be exchangeable for 0.50 common units of ERP Operating
Limited Partnership.
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 shares of
beneficial interest of EWR and the common shares of the
Seller; (v) audited financial statements of EWR and the
Seller for the fiscal year ended December 31, 1996, and
unaudited financial statements of EWR and the Seller for the
six months ended June 30, 1997; (vi) certain agreements with
respect to outstanding indebtedness or obligations of EWR and
the Seller; (vii) certain internal financial analyses and
estimates of budgeted 1998 funds from operations and net
operating income prepared by EWR 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 EWR and the Seller with respect to certain
aspects of the Merger, and the past and current business
operations of EWR and the Seller, the financial condition and
future prospects and operations of EWR and the Seller, the
effects of the Merger on the financial condition and future
prospects of EWR 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 EWR 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
E-1
<PAGE>
JPMORGAN
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 EWR 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 EWR, 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 EWR's or the Seller's
shares will trade at any future time.
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
EWR's perspective that could under the circumstances be
negotiated among the parties to such transactions.
We will receive a fee from EWR for the delivery of this
opinion. Our affiliate, Morgan Guaranty Trust Company of New
York ("MGT"), is a co-arranger on EWR's revolving credit
facility. We have also provided other financial advisory
services to EWR and its affiliates in the past and have
received fees for such services. In addition, in the past we
have assisted the Seller in raising debt capital and MGT has
entered into derivatives transactions with the Seller. In the
ordinary course of their businesses, our affiliates may
actively trade the debt and equity securities of EWR 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 EWR in connection with the proposed Merger is fair,
from a financial point of view, to EWR.
This letter is provided to the Board of Trustees of EWR in
connection with and for the purposes of its evaluation of the
Merger. This opinion does not constitute a recommendation to
any stockholder of EWR 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 EWR 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/ Peter E. Baccile
By:
Name: Peter E. Baccile
Title: Managing Director
E-2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF TRUSTEES AND OFFICERS
Under Maryland law, a REIT organized in Maryland is permitted to eliminate,
by provision in its Declaration of Trust, the liability of its trustees,
officers and shareholders for money damages except for liability resulting
from (a) actual receipt of an improper benefit or profit in money, property or
services or (b) acts or omissions established by final judgment as involving
active and deliberate dishonesty and being material to the matter giving rise
to the proceeding. The Declaration of Trust of EQR, as general partner of ERP,
includes such a provision eliminating such liability to the maximum extent
permitted by Maryland law.
The Maryland REIT law, effective October 1, 1994, permits a Maryland REIT to
indemnify and advance expenses to its trustees, officers, employees and agents
to the same extent as permitted by the MGCL for directors and officers of
Maryland corporations. In accordance with the MGCL, the bylaws of EQR require
it to indemnify (a) any present or former trustee, officer or shareholder of
any individual who, while a trustee, officer or shareholder, served or is
serving as a trustee, officer, director, shareholder or partner or otherwise,
in the defense of a proceeding to which he was made a party by reason of
service in such capacity, against reasonable expenses incurred by him in
connection with the proceeding, (b) any present or former trustee or officer
or any individual who, while a trustee or officer served or is serving as a
trustee, officer, director, shareholder or partner of another entity at EQR's
express request against any claim or liability to which he may become subject
by reason of service in such capacity unless it is established that (i) his
act or omission was material to the matter giving rise to the proceeding and
was committed in bad faith or was the result of active and deliberate
dishonesty, (ii) he actually received an improper personal benefit in money,
property or services or (iii) in the case of a criminal proceeding, he had
reasonable cause to believe that his act or omission was unlawful and (c) any
present or former shareholder against any claim or liability to which he may
become subject by reason of such status. In addition, EQR's bylaws require it
to pay or reimburse, in advance of final disposition of a proceeding,
reasonable expenses incurred by a present or former trustee, officer or
shareholder or any individual who, while a trustee, officer or shareholder,
served or is serving as a trustee, officer, director, shareholder or partner
of another entity at EQR's express request made a party to a proceeding by
reason of such status, however, provided, that in the case of a trustee or
officer, EQR shall have received (1) a written affirmation by such person of
his good faith belief that he has met the standard of conduct necessary for
indemnification by EQR as authorized by its bylaws and (2) a written
undertaking by or on his behalf to repay the amount paid or reimbursed by EQR
if it shall ultimately be determined that the applicable standard of conduct
was not met. EQR's bylaws also (x) permit EQR to provide indemnification and
payment or reimbursement of expenses to a present or former trustee, officer
or shareholder who served as a predecessor of EQR or to any employee or agent
of EQR or a predecessor of EQR, (y) provide that any indemnification and
payment or reimbursement of the expenses permitted in the bylaws shall be
furnished in accordance with the procedures providing for indemnification and
payment or reimbursement of expenses under Section 2-418 of the MGCL for
directors of Maryland corporations and (z) permit EQR to provide to the
trustees and officers such other and further indemnification or payment or
reimbursement of expenses to the fullest extent permitted by Section 2-418 of
the MGCL for directors of Maryland corporations.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to trustees and officers of EQR pursuant to the foregoing
provisions or otherwise, EQR has been advised that, although the validity and
scope of the governing statute have not been challenged in a court of law, in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In addition, indemnification may be limited by state securities
laws.
The partnership agreements of ERP and the Management Partnerships also
provide for indemnification of EQR and its officers and trustees to the same
extent that indemnification is provided to officers and trustees of EQR in its
Declaration of Trust, and limit the liability of EQR and its officers and
trustees to ERP and the Management Partnerships and their respective partners
to the same extent that the liability of the officers and trustees of EQR to
EQR and its shareholders is limited under EQR's Declaration of Trust.
ITEM 21. EXHIBITS
<TABLE>
<CAPTION>
<C> <S> <C>
2.1 Asset Contribution Agreement between ERP Operating Limited
Partnership and Evans Withycombe Residential, L.P. dated as of
August 27, 1997 (Included as Appendix A to the Prospectus con-
tained in the Registration Statement)
2.2 Agreement and Plan of Merger made and entered into on August
27, 1997 by and between Equity Residential Properties Trust
and Evans Withycombe Residential, Inc. [incorporated by refer-
ence to Exhibit 10 to EQR's current report on Form 8-K dated
August 29, 1997 (SEC File No. 1-2252)]
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
5.1* Opinion of Rudnick & Wolfe regarding legality of securities
being registered
10.1 Unit Contribution Agreement, dated as of August 27, 1997, by
and among ERP Operating Limited Partnership, Stephen O. Evans,
F. Keith Withycombe, The Evans Limited Liability Company and
EW Investments Limited Partnership [incorporated by reference
to Exhibit 10(b) to ERP's current report on 8-K dated August
29, 1997 (SEC File No. 0-24920)]
10.2 Form of Unit Contribution Agreement to be entered into by lim-
ited partners of EWRLP (included as Appendix E to the Prospec-
tus contained in the Registration Statement)
23.1* Consent of Rudnick & Wolfe (included in Exhibit 5.1 hereof)
23.2 Consent of J.P. Morgan Securities Inc.
23.3 Form of consent of Morgan Stanley Realty Incorporated
23.4 Consent of Grant Thornton, LLP
23.5 Consent of Ernst & Young LLP (Chicago)
23.6 Consent of Ernst & Young LLP (Phoenix)
99.1 Amendment to the Amended and Restated Agreement of Limited
Partnership (included as Appendix B to the Prospectus con-
tained in the Registration Statement of Evans Withycombe Resi-
dential, L.P.)
99.2 Amendment to the Fourth Amended and Restated Limited Partner-
ship Agreement of ERP Operating Limited Partnership (included
as Appendix C to the Prospectus contained in the Registration
Statement)
99.3 Form of Consent Card for Consent Solicitation of Holders of
Units of Limited Partnership Interest in Evans Withycombe Res-
idential, L.P.
99.6 Opinion of J.P. Morgan Securities (included as Appendix D to
the Prospectus contained in the Registration Statement)
</TABLE>
- -------
*To be filed by amendment.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
. To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
. To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
. To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
. That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
. To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing
of the registrant's annual report pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to Section 15(d) of
the Securities Exchange Act of 1934) that is incorporated by reference in
the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
. The undersigned registrant hereby undertakes as follows: that prior to
any public re-offering of the securities registered hereunder through use
of a prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of
Rule 145(c), the issuer undertakes that such re-offering prospectus will
contain the information called for by the applicable registration form
with respect to re-offerings by persons who may be deemed underwriters,
in addition to the information called for by the other items of the
applicable form.
II-2
<PAGE>
. The registrant undertakes that every prospectus (A) that is filed
pursuant to paragraph (a) immediately preceding, or (B) that purports to
meet the requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be
filed as part of an amendment to the registration statement and will not
be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1993, each such
post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
. The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11, or 13 of this form, within one business
day of receipt of such request, and to send the incorporation documents
by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date
of the registration statement through the date of responding to the
request.
. The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject of
and included in the registration statement when it became effective.
. The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is
sent or given, the latest annual report, to security holders that is
incorporated by reference in the prospectus and furnished pursuant to and
meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities
Exchange Act of 1934; and, where interim financial information required
to be presented by Article 3 of Regulation S-X is not set forth in the
prospectus, to deliver, or cause to be delivered to each person to whom
the prospectus is sent or given, the latest quarterly report that is
specifically incorporated by reference in the prospectus to provide such
interim financial information.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THIS 19TH DAY OF SEPTEMBER 1997.
ERP OPERATING LIMITED PARTNERSHIP
By: Equity Residential Properties
Trust, General Partner
/s/ Douglas Crocker II
By: __________________________________
Douglas Crocker II
President, Chief Executive Officer
and Trustee
S-1
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW, HEREBY CONSTITUTES AND APPOINTS DOUGLAS CROCKER II, DAVID NEITHERCUT AND
BRUCE C. STROHM, OR ANY OF THEM, HIS OR HER ATTORNEYS-IN-FACT AND AGENTS, WITH
FULL POWER OF SUBSTITUTION AND RESUBSTITUTION FOR HIM OR HER IN ANY AND ALL
CAPACITIES, TO SIGN ANY OR ALL AMENDMENTS OR POST-EFFECTIVE AMENDMENTS TO THIS
REGISTRATION STATEMENT, AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO AND
OTHER DOCUMENTS IN CONNECTION THEREWITH OR IN CONNECTION WITH THE REGISTRATION
OF THE SECURITIES UNDER THE EXCHANGE ACT, WITH THE SECURITIES AND EXCHANGE
COMMISSION, GRANTING UNTO EACH OF SUCH ATTORNEYS-IN-FACT AND AGENTS FULL POWER
AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING REQUISITE AND
NECESSARY IN CONNECTION WITH SUCH MATTERS AS FULLY TO ALL INTENTS AND PURPOSES
AS HE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT
EACH OF SUCH ATTORNEYS-IN-FACT AND AGENTS OR HIS SUBSTITUTE OR SUBSTITUTES MAY
LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Samuel Zell Chairman of the Board of Trustees of September 19, 1997
____________________________________ the general partner of the Registrant
Samuel Zell
/s/ Douglas Crocker II President, Chief Executive Officer and September 19, 1997
____________________________________ Trustee of the general partner of the
Douglas Crocker II Registrant
/s/ David J. Neithercut Executive Vice President and Chief September 19, 1997
____________________________________ Financial Officer of the general
David J. Neithercut partner of the Registrant
/s/ Michael J. McHugh Senior Vice President, Chief September 19, 1997
____________________________________ Accounting Officer and Treasurer of
Michael J. McHugh the general partner of the Registrant
Trustee of the general partner of the September , 1997
____________________________________ Registrant
John W. Alexander
/s/ Henry H. Goldberg Trustee of the general partner of the September 19, 1997
____________________________________ Registrant
Henry H. Goldberg
/s/ Errol R. Halperin Trustee of the general partner of the September 19, 1997
____________________________________ Registrant
Errol R. Halperin
/s/ James D. Harper, Jr. Trustee of the general partner of the September 19, 1997
____________________________________ Registrant
James D. Harper, Jr.
Trustee of the general partner of the September , 1997
____________________________________ Registrant
Edward Lowenthal
/s/ Jeffrey H. Lynford Trustee of the general partner of the September 19, 1997
____________________________________ Registrant
Jeffrey H. Lynford
/s/ Sheli Z. Rosenberg Trustee of the general partner of the September 19, 1997
____________________________________ Registrant
Sheli Z. Rosenberg
/s/ Gerald A. Spector Trustee of the general partner of the September 19, 1997
____________________________________ Registrant
Gerald A. Spector
/s/ Barry S. Sternlicht Trustee of the general partner of the September 19, 1997
____________________________________ Registrant
Barry S. Sternlicht
/s/ B. Joseph White Trustee of the general partner of the September 19, 1997
____________________________________ Registrant
B. Joseph White
</TABLE>
S-2
<PAGE>
EXHIBIT 23.2
CONSENT OF J.P. MORGAN SECURITIES INC.
We hereby consent to (i) the use of our opinion letter dated August 27, 1997 to
the Board of Trustees of Equity Residential Properties Trust (the "Company")
included as Appendix E to the Consent Solicitation/Prospectus/Information
Statement which forms a part of the Registration Statement of Form S-4 relating
to the proposed merger of the Company and Evans Withycombe Residential, Inc.,
and (ii) the references to such opinion in such Consent
Solicitation/Prospectus/Information Statement. In giving such consent, we do not
admit that we come within the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder, nor do we
hereby admit that we are experts with respect to any part of such Registration
Statement within the meaning of the term "experts" as used in the Securities Act
of 1933, as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder.
J.P. MORGAN SECURITIES INC.
By: /s/ Peter E. Baccile
------------------------
Name: Peter E. Baccile
Title: Managing Director
September 17, 1997
<PAGE>
EXHIBIT 23.3
FORM OF CONSENT OF MORGAN STANLEY REALTY INCORPORATED
We hereby consent to the references made to our opinion letter dated August
27, 1997 to the Board of Directors of Evans Withycombe Residential, Inc. (the
"Company") contained in the Consent Solicitation/Prospectus/Information
Statement which forms a part of the Registration Statement on Form S-4 relating
to the proposed merger of the Company and Equity Residential Properties Trust.
In giving such consent, we do not admit that we come within the category of
persons whose consent is required under Section 7 of the Securities Act of 1933,
as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder, nor do we hereby admit that we are experts with respect
to any part of such Registration Statement within the meaning of the term
"experts" as used in the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder.
MORGAN STANLEY REALTY INCORPORATED
By:_______________________
Name:
Title:
September ___, 1997
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have issued our report dated February 14, 1996 accompanying the consolidated
financial statements of ERP Operating Limited Partnership as of December 31,
1995 and for each of the two years in the period then ended. We consent to the
incorporation by reference of the above report in the Registration Statement of
ERP Operating Limited Partnership on Form S-4, and to the use of our name as
it appears under the caption "Experts".
/s/ GRANT THORNTON LLP
GRANT THORNTON LLP
Chicago, Illinois
September 15, 1997
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4) and related Prospectus of ERP Operating
Limited Partnership for the registration of 620,831 units of limited
partnership interest and to the incorporation by reference therein of our
reports indicated below with respect to the financial statements indicated below
included or incorporated by reference in ERP Operating Limited Partnership's
filings as indicated below, filed with the Securities and Exchange Commission.
<TABLE>
<CAPTION>
Date of
-------
Financial Statements Auditor's Report Filing
-------------------- ---------------- ------
<S> <C> <C>
Consolidated financial statements February 12, 1997 except Annual Report on
and schedule of ERP Operating Limited for Note 19, as to which Form 10-K
Partnership at December 31, the date is March 20, 1997
1996 and for the year then ended
Statement of Revenue and Certain July 17, 1997 Current Report
Expenses of Cascade at Landmark on Form 8-K
for the year ended December 31, dated August 15,
1996 1997
Statement of Revenue and Certain July 2, 1997 Current Report
Expenses of Sabal Palm Club on Form 8-K
(formerly known as Post Crossing dated August 15,
(Pompano)) for the year ended 1997
December 31, 1996
Statement of Revenue and Certain July 23, 1997 Current Report
Expenses of Wood Creek (Pleasant on Form 8-K
Hill) for the year ended December dated August 15,
31, 1996 1997
Statement of Revenue and Certain July 25, 1997 Current Report
Expenses of LaMirage for the year on Form 8-K
ended December 31, 1996 dated August 15,
1997
Statement of Revenue and Certain May 16, 1997 Current Report
Expenses of Harborview for the on Form 8-K dated
year ended December 31, 1996 May 20, 1997
Statement of Revenue and Certain May 6, 1997 Current Report
Expenses of Trails at Dominion for on Form 8-K dated
the year ended December 31, 1996 May 20, 1997
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Date of
-------
Financial Statements Auditor's Report Filing
-------------------- ---------------- ------
<S> <C> <C>
Statement of Revenue and Certain May 7, 1997 Current Report
Expenses of Rincon for the year on Form 8-K dated
ended December 31, 1996 May 20, 1997
Statement of Revenue and Certain May 12, 1997 Current Report on
Expenses of Waterford at the Lakes Form 8-K dated
for the year ended December 31, May 20, 1997
1996
Statement of Revenue and Certain May 16, 1997 Current Report on
Expenses of Lincoln Harbour for Form 8-K dated
the year ended December 31, 1996 May 20, 1997
Combined Statement of Revenue and May 9, 1997 Current Report on
Certain Expenses of Knights Castle Form 8-K dated
and Club at the Green for the year May 20, 1997
ended December 31, 1996
Combined Statements of Revenue and March 25, 1997 Current Report on
Certain Expenses of the Form 8-K dated
Zell/Merrill Properties for each May 20, 1997
of the three years in the period
ended December 31, 1996
Combined Statement of Revenue and May 17, 1996 Current Report on
Certain Expenses of the 1996 Form 8-K, as amended
Acquired Properties and Probable by Form 8-K/A, dated
Properties for the year ended May 23, 1996
December 31, 1995
Combined Statement of Revenue and November 7, 1996 Current Report on
Certain Expenses for the 1996 Form 8-K, as amended
Acquired Properties for the year by Form 8-K/A, dated
ended December 31, 1995 November 15, 1996
</TABLE>
Ernst & Young LLP
Chicago, Illinois
September 18, 1997
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4) and related Prospectus of ERP Operating
Limited Partnership for the registration of 620,831 units of limited partnership
interest and to the use of our report dated January 31, 1997, with respect to
the consolidated financial statements and schedule of Evans Withycombe
Residential, L.P. and Subsidiaries for the three years in the period ended
December 31, 1996, included in this Consent Solicitation/Prospectus/Information
Statement and included in the Current Report on Form 8-K, dated September 10,
1997, of ERP Operating Limited Partnership, filed with the Securities and
Exchange Commission.
Ernst & Young LLP
Phoenix, Arizona
September 18, 1997
<PAGE>
Exhibit 99.3
------------
CONSENT OF LIMITED PARTNER OF
EVANS WITHYCOMBE RESIDENTIAL, L.P.
This Consent is solicited on behalf of Evans Withycombe Residential, Inc., the
General Partner of Evans Withycombe Residential, L.P., a Delaware limited
partnership ("EWRLP").
Instructions: To consent, withhold consent or abstain with respect to the
proposals set forth below, please check the appropriate boxes.
The undersigned, a holder of units of limited partnership interests of
EWRLP, acting with respect to all of the units held by the undersigned, hereby:
1. [_] Consents
[_] Withholds Consent
[_] Abstains
to the contribution of all of the assets (subject to its liabilities) of EWRLP
in exchange for units of limited partnership interest in ERP Operating Limited
Partnership, an Illinois limited partnership ("ERP"), (the "Asset Contribution")
pursuant to that certain Asset Contribution Agreement dated August 27, 1997, by
and between ERP and EWRLP ("Asset Contribution Agreement") on the terms and
conditions stated therein.
2. [_] Consents
[_] Withholds Consent
[_] Abstains
to the proposed amendment to the EWRLP Partnership Agreement dated August 17,
1994 in the form appended as Appendix B to the Consent
Solicitation/Prospectus/Information Statement dated September ___, 1997 which
amendment, among other things, (i) allows EQR and ERP to serve as co-general
partners of EWRLP upon the effectiveness of the Merger, (ii) adjusts each
outstanding EWRLP Unit by one-half to give effect to the exchange of one EWRLP
Unit for ERP Units equal to the number of EWRLP Units so exchanged multiplied by
0.5, (iii) eliminates certain restrictions that the EWRLP Partnership Agreement
would place upon EQR and ERP as co-general partners of EWRLP, (iv) permits the
Asset Contribution pursuant to the Asset Contribution Agreement, (v) permits
the liquidation of EWRLP upon the terms contained in the Asset Contribution
Agreement and (vi) ratifies the revocation of an amendment adopted on June 18,
1997, by EWR, in its capacity as general partner of EWRLP, to Section 11.2 of
the EWRLP
<PAGE>
Partnership Agreement (the "11.2 Amendment"), which amendment EWR intended to
propose to the EWRLP limited partners for their approval, but which the EWR
Board of Directors concluded was not in the best interests of EWRLP in light of
the Merger.
3. [_] Consents
[_] Withholds Consent
[_] Abstains
to the dissolution of EWRLP on the terms and conditions stated in the Asset
Contribution Agreement.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE CONSENT
SOLICITATION/PROSPECTUS/INFORMATION STATEMENT DATED _____________, 1997.
The undersigned hereby revokes any consent or consents given with respect to the
subject matter of this consent.
Dated:________________, 1997 By:
----------------------------------------
----------------------------------------
Please Print Name
If held jointly:
By:
----------------------------------------
----------------------------------------
Please Print Name
<PAGE>
THIS CONSENT, WHEN PROPERLY EXECUTED, WILL BE ACTED UPON IN THE MANNER DIRECTED
HEREIN BY THE LIMITED PARTNER. A SIGNED BUT UNMARKED CONSENT CARD WILL BE
DEEMED TO CONSENT TO THE PROPOSALS SET FORTH ABOVE.
Please sign exactly as you hold your EWRLP Units. When signing as an attorney,
administrator, trustee or guardian, please give your full title. If an interest
is jointly held, each holder should sign.
<PAGE>
EXHIBIT 99.7
CONSENT OF PERSON TO BE NAMED AS TRUSTEE
----------------------------------------
I hereby agree to become a trustee of Equity Residential Properties Trust
("EQR") upon the effectiveness of the merger of Evans Withycombe Residential,
Inc. with and into EQR, and consent to the reference thereto under the headings
"Interests of Certain Persons in the Transactions" and "Management and Operation
of EQR After the Merger" in the Consent Solicitation/Prospectus/Information
Statement constituting a part of the foregoing Registration Statement on Form
S-4.
/s/ Stephen O. Evans
-----------------------------------------
Stephen O. Evans
Scottsdale, Arizona
Dated: September 17, 1997
