-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pd2ggU0sUTD+55uU3PCICtHXB8Yt8OJhZsvxY4D50rtoIIs4TjOZb4qCRFAv5Mp0 ikHX/TfKWSQWAp0EIhyR3A== 0000897069-99-000511.txt : 19991026 0000897069-99-000511.hdr.sgml : 19991026 ACCESSION NUMBER: 0000897069-99-000511 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19991025 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WELLINGTON PROPERTIES TRUST CENTRAL INDEX KEY: 0000928953 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 396594066 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: SEC FILE NUMBER: 333-84953 FILM NUMBER: 99732804 BUSINESS ADDRESS: STREET 1: 18650 W CORPORATE DRIVE CITY: BROOKFIELD STATE: WI ZIP: 53045 BUSINESS PHONE: 4147928930 MAIL ADDRESS: STREET 1: 18650 W CORPORATE DRIVE STREET 2: SUITE 300 CITY: BROOKFIELD STATE: WI ZIP: 53045 SB-2/A 1 FORM SB-2 AMENDMENT NO. 5 As filed with the Securities and Exchange Commission on October 25, 1999 Registration Statement No. 333-84953 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------------- AMENDMENT NO. 5 to FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------ Wellington Properties Trust (Name of Small Business Issuer in its Charter) Maryland 6798 39-6594066 State or Other (Primary Standard (I.R.S. Employer Jurisdiction of Industrial Classification Identification No.) Incorporation Code Number) or Organization) 18650 West Corporate Drive, Suite 300 P.O. Box 0919 Brookfield, Wisconsin 53008-0919 (414) 792-8900 (Address and telephone Number of Principal Executive Offices) -------------------------- Robert F. Rice President 18650 West Corporate Drive P.O. Box 0919 Brookfield, Wisconsin 53008-0919 (414) 792-8900 (Name, Address, and Telephone number of agent for service) Copies to: Jay O. Rothman Albert A. Woodward Foley & Lardner Maun & Simon, PLC 777 East Wisconsin Avenue 2000 Midwest Plaza Building West Milwaukee, Wisconsin 53202 801 Nicollet Mall (414) 271-2400 Minneapolis, Minnesota 54402 (612) 904-7400 Approximate date of commencement of proposed sale to the Public: As soon as practicable after the effective date of this Registration Statement. 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(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] 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, as amended, or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine. THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS (Subject to Completion - Dated October 25, 1999) 700,000 Class A Cumulative Convertible Preferred Shares ----------------------- WELLINGTON PROPERTIES TRUST ----------------------- We are a real estate investment trust, formed to acquire, develop, own and operate investment real estate, principally office buildings, light industrial facilities, community shopping centers and apartment communities. This prospectus relates to the public offering of our Class A Cumulative Convertible Preferred Shares (the "Class A Preferred Shares"), on which dividends will accrue at an annual rate of 9.5%. The Class A Preferred Shares may be converted by the holder into our common shares at any time. Our board of trustees may, but has no obligation to, declare dividends on our common shares from time to time, provided accrued dividends on our preferred shares have then been paid. Our common shares are currently listed for quotation on the Nasdaq SmallCap Market(sm) under the symbol "WLPT." Our common shares have been approved for listing on the American Stock Exchange under the symbol "RPP" following the closing of the offering and once so listed, will no longer be listed on the Nasdaq SmallCap Market(sm). No market currently exists for our Class A Preferred Shares, but they have been approved for listing on the American Stock Exchange under the symbol "RPP.A" upon the closing of the offering. The public offering price of our Class A Preferred Shares will be $10.00 per share. An investment by you in our Class A Preferred Shares involves a high degree of risk. Before making an investment decision, you should carefully consider the risks described under the heading "Risk Factors," beginning on page 10 of this prospectus. The Offering Per Share Total --------------------------------- ------------ --------------- Public offering price $10.00 $7,000,000 Underwriting discount $ 0.75 $ 525,000 Proceeds to us (before deduction of other offering expenses) $ 9.25 $6,475,000 We are also offering our underwriters a 45-day option to purchase up to 105,000 additional shares, solely to cover any overallotments. In addition to the underwriters' discount, we will pay the underwriters an aggregate of 2% of total proceeds of this offering as payment for expenses they incur. We will also issue the underwriters' representative a warrant to purchase 35,500 Class A Preferred Shares. In considering an investment in our Class A Preferred Shares, you should rely only on the information in this prospectus. We have not authorized anyone to provide you with information that is different. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of our Class A Preferred Shares or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. [logo of R. J. Steichen & Company] [logo of Miller, Johnson & Kuehn, Incorporated] ______________________, 1999 PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. To understand this offering fully, you should read the entire prospectus carefully, including the risk factors and financial statements contained in this prospectus. All information in this prospectus has been adjusted, where appropriate, to reflect a common share split on March 24, 1999, whereby every holder of our common shares was issued 4.75 shares for each 3 shares held. The Trust Wellington Properties Trust is a self-administered real estate investment trust or "REIT" formed on March 15, 1994 under Maryland law. In November 1998, we became an umbrella partnership REIT when we formed an operating partnership called Wellington Properties Investments, L.P., of which we are the sole general partner. Through the operating partnership and our subsidiaries, we acquire, develop, own and operate our investment properties. We seek to develop a diversified portfolio of investment real estate, including office buildings, light industrial facilities, community shopping centers and apartment communities. Our operating partnership or our subsidiaries currently own five properties: o a 119,722 square-foot office building in Minneapolis, Minnesota; o a 77,533 square-foot office building in St. Cloud, Minnesota; o a 50,291 square-foot light industrial facility in Burnsville, Minnesota; o a 304-unit apartment community in Madison, Wisconsin; and o a 72-unit apartment community in Schofield, Wisconsin. Our Madison, Wisconsin apartment community is currently subject to sale under a land purchase agreement. Currently, each of our investment properties are managed by one of our REITPLUS(sm) affiliates. We developed our REITPLUS(sm) strategy to create a unique investment partnership with potential sellers of real estate properties in order to expand our operations and attract quality properties from real estate owners. REITPLUS(sm) provides potential sellers with traditional benefits of an umbrella partnership REIT or "UPREIT," such as capital access, diversification and tax deferral, PLUS it creates an entrepreneurial opportunity uncommon in our industry, in that the sellers retain management and leasing responsibility of the property, and participate in the equity appreciation of our properties. Organizations looking to sell, but not "sell out," will be incented to complete UPREIT transactions as a means to diversify holdings and form strategic alliances. We designed the REITPLUS(sm) ownership and management structure to attract these organizations and to provide them with the following benefits: o the seller becomes a partner, not an employee; o the seller retains franchise value and name recognition of its existing organization; o the seller realizes benefits of our REIT tax status; o the seller aligns itself with a publicly-traded entity, with access to public capital markets; and o the seller maintains autonomy and entrepreneurial focus. 3 Key elements of the REITPLUS(sm) program include: o REITPLUS(sm) Investment Strategies (External Growth). Our investment strategy is to enter new markets and increase our penetration in existing markets by procuring REITPLUS(sm) affiliates with a significant market presence and operating history. Typically, our REITPLUS(sm) investments include the issuance of our common shares or operating partnership units, thereby creating an ongoing incentive for our REITPLUS(sm) affiliates to maximize long-term shareholder value. We believe we have certain advantages which will enhance our ability to identify and capitalize on REITPLUS(sm) opportunities, including: (1) our management's multiple-market expertise in identifying, structuring and closing acquisitions; (2) management's experience in successfully growing and operating a public real estate company; (3) management's long-standing relationship with customers, real estate brokers and institutional and other owners of real estate assets, which collectively help us identify investment opportunities; and (4) our ability to offer tax deferred consideration to REITPLUS(sm) affiliates. o REITPLUS(sm) Operating Strategies (Internal Growth). Our operating strategy is to serve the real estate needs of our existing customers and expand our customer base. We intend to implement proactive property management and leasing programs, achieve operating efficiencies through increasing economies of scale, and complete ongoing maintenance and value enhancement improvements. We believe our operating strategy will provide increasing cash flow from our properties through rental increases and expense savings. As we make future acquisitions of investment properties, including through the application of the proceeds of this offering, we intend to diversify our portfolio of investment real estate by acquiring properties throughout the United States and by targeting, as opportunities present themselves, each of the office, light industrial, retail and residential market segments. Our principal offices are located at 18650 W. Corporate Drive, Suite 300, Brookfield, Wisconsin 53045 and 11000 Prairie Lakes Drive, Suite 610, Minneapolis, Minnesota 55344. The telephone numbers of our offices are (414) 792-8900 (Brookfield) and (612) 826-6968 (Minneapolis). The Offering Class A Preferred Shares offered................. 700,000 of our Class A Cumulative Convertible Preferred Shares, $0.01 par value per share. Underwriters' overallotment option......................... The underwriters of this offering will have an option to purchase and sell up to an additional 105,000 Class A Preferred Shares solely to cover overallotments. Trading symbols................. Our common shares are currently listed for quotation on the Nasdaq SmallCap Market(sm) under the symbol "WLPT," but will be listed only on the American Stock Exchange under the symbol "RPP" upon completion of the offering. The Class A Preferred Shares have been approved for listing on the American Stock Exchange under the symbol "RPP.A" following completion of the offering. 4 Equity to be outstanding after the offering............. 1,372,152 of our common shares (not including (1) 261,773 shares subject to outstanding warrants and share options, (2) an estimated 1,645,000 shares issuable upon conversion of the Class A Preferred Shares, (3) an estimated 822,030 shares issuable upon conversion of our Class B Junior Cumulative Convertible Preferred Shares, and (4) 1,719,335 shares issuable upon conversion of common units of our operating partnership); 700,000 Class A Preferred Shares (not including an additional 105,000 Class A Preferred Shares subject to our underwriters' overallotment option or warrants we will issue to our underwriters' representative to purchase up to 35,500 Class A Preferred Shares), as well as 700,000 Class A preferred units of our operating partnership that we will receive when we contribute the net proceeds of this offering to the operating partnership (up to 805,000 Class A preferred units if our underwriters' overallotment option is exercised in full); 349,800 of our Class B Junior Cumulative Convertible Preferred Shares, as well as 349,800 Class B preferred units our operating partnership has issued to us. Voting rights................... Each of our Class A Preferred Shares will be entitled, at all meetings of our shareholders, to the number of votes equal to the number of common shares into which they are then convertible. Based on a closing bid price of $3.875 on October 5, 1999, we estimate that each Class A Preferred Share will initially entitle its holder to approximately 2.35 votes. Holders of our Class A Preferred Shares will generally vote together with holders of our common shares and holders of our Class B Junior Cumulative Convertible Preferred Shares as a single class. However, on matters directly affecting the rights and preferences of the Class A Preferred Shares, the holders of our Class A Preferred Shares will vote as a single class. Liquidation..................... In the event of our dissolution or liquidation, holders of our Class A Preferred Shares will be entitled to receive $10.00 per share, plus any accrued but unpaid dividends on the Class A Preferred Shares, before we make any distributions to holders of any other existing class of our shares. 5 Dividends....................... A dividend on our Class A Preferred Shares equal to $0.475 per share will accrue and be payable every six months, beginning six months after the initial closing date of this offering. Dividends that we pay to you as a holder of Class A Preferred Shares, to the extent of our current and accumulated earnings and profits for federal income tax purposes, will be taxable to you as ordinary dividend income. Distributions in excess of earnings and profits generally will be treated as a non-taxable reduction of your basis in the Class A Preferred Shares to the extent thereof, and thereafter as taxable gain. Such distributions will have the effect of deferring taxation until the sale of your Class A Preferred Shares. If, at any time, we fail to declare or pay a dividend on the Class A Preferred Shares as it accrues, such dividend will be cumulative, without interest, with future dividends. If, at any time, we fail to pay a full year's accrued dividends on the Class A Preferred Shares, then the holders of the Class A Preferred Shares will be entitled, voting as a class, to elect a majority of the members of our board of trustees, who will then serve on the board for so long as a full year's dividends remain unpaid. In the past, our board of trustees has declared dividends on the common shares into which the Class A Preferred Shares are convertible. In considering whether to exercise their right to convert Class A Preferred Shares into our common shares, investors should bear in mind that future dividends on our common shares, if any, may only be declared after payment of preferred dividends on the Class A Preferred Shares and our Class B Junior Cumulative Convertible Preferred Shares. Future dividends on our common shares, if any, may be less than the dividends we have declared on our common shares in the past. Conversion...................... Each of our Class A Preferred Shares will be convertible at any time, at the option of the holder, into a number of our common shares equal to the quotient obtained by dividing (1) $10.00, plus any dividends then accrued but unpaid on the Class A Preferred Shares, by (2) a price equal to 110% of the average closing bid price for our common shares over the 10 trading days preceding the effective date of the registration statement covering the Class A Preferred Shares, or $____. Redemption...................... We will have the option, after 30 days' notice, to redeem our Class A Preferred Shares (in whole or in part) at a per-share price equal to $10.00, plus any dividends then accrued but unpaid. However, we will not have the right to redeem the Class A Preferred Shares until two years after the initial closing of this offering and only if the closing bid price of our common shares equals or exceeds 150% of the then effective conversion price for 20 consecutive trading days before the date of the redemption notice. 6 Use of proceeds of this offering....................... We intend to contribute all of the proceeds from the sale of our Class A Preferred Shares in this offering to our operating partnership, principally to finance acquisitions of additional investment properties or equity securities of other real estate investment entities. A portion of the proceeds may be used for general working capital purposes. Tax Status of the Trust We are and currently intend to remain a real estate investment trust under Sections 856 through 860 of the Internal Revenue Code. As a result, we are generally not subject to federal income tax if we distribute at least 95% of our taxable income (excluding net capital gains) to our shareholders. REITs are subject to a number of organizational and operational requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. We have received a written opinion of Grant Thornton LLP that we are qualified as a REIT under the Internal Revenue Code. 7 SUMMARY CONSOLIDATED FINANCIAL INFORMATION We have set forth in the table below certain of our summary consolidated financial information for the periods and at the dates indicated. Historical data for the years 1994 through 1998 have been derived from our audited consolidated financial statements for those years. Since this information is only a summary, you should read such data in conjunction with our financial statements, including the accompanying notes, and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus. Wellington Properties Trust (Dollars in thousands, except per share data)
Six Months Ended June 30, Year Ended December 31, ------------------------------ ------------------------------------------------------------ Pro Pro Forma Historical(d) Forma Historical(d) ------------------------------------------------ (Unaudited) (Unaudited) (Unaudited) 1999(a) 1999 1998 1998(a) 1998 1997 1996 1995 1994 ------- ---- ---- ------- ---- ---- ---- ---- ---- Operating Data: Revenue: Rental revenue $ 2,153 $ 3,414 $ 1,517 $ 4,229 $ 3,488 $ 2,981 $ 2,557 $ 1,209 $ 196 Other 248 31 -- 512 21 199 9 12 1 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total Revenue 2,401 3,445 1,517 4,741 3,509 3,180 2,566 1,221 197 ------- ------- ------- ------- ------- ------- ------- ------- ------- Expenses: Interest 770 1,295 634 1,657 1,417 1,398 1,339 580 103 Depreciation and amortization 430 681 294 773 694 606 552 236 34 Property expenses 1,007 1,589 589 1,840 1,555 1,278 1,200 671 70 General and administrative 379 388 148 340 289 174 188 104 17 Other nonrecurring -- 2,613 -- -- 1,010 -- -- -- -- Provision for uncollectible advance related party -- -- -- -- 240 -- -- -- -- Termination of advisory agreement -- 950 -- -- 310 -- -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total expenses 2,586 7,516 1,665 4,610 5,515 3,456 3,279 1,591 224 ------- ------- ------- ------- ------- ------- ------- ------- ------- Income (loss) before minority interests (185) (4,071) (148) 131 (2,006) (276) (713) (370) (27) Loss allocated to minority interests 383 2,664 -- 490 1,065 -- -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- ------- Net income (loss) 198 (1,407) (148) 621 (941) (276) (713) (370) (27) Net income allocated to Preferred Shares (499) -- -- (997) -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- ------- Net loss allocated to Common Shares $ (301) $(1,407) $ (148) $ (376) $ (941) $ (276) $ (713) $ (370) $ (27) ======= ======= ======= ======= ======= ======= ======= ======= ======= Net loss per Common Share $ (0.22) $ (1.04) $ (0.13) $ (0.28) $ (0.80) $ (0.24) $ (0.68) $ (0.71) $ (0.23) ======= ======= ======= ======= ======= ======= ======= ======= ======= Cash dividends/distributions declared $298 $253 $534 $543 $571 $259 $30 ==== ==== ==== ==== ==== ==== === Cash dividends/distributions per share $0.22 $0.22 $0.44 $0.49 $0.54 $0.52 $0.13 ===== ===== ===== ===== ===== ===== ===== Balance Sheet Data (as of period end): Real estate investments, net of accumulated depreciation $34,141 $49,250 $18,964 $49,747 $19,193 $21,249 $13,713 $ 1,704 Total assets 43,796 51,016 19,919 53,527 19,785 21,871 14,679 2,201 Mortgages payable 19,369 32,049 15,840 32,505 14,666 9,376 7,550 1,313 Total liabilities 21,753 38,599 16,718 36,522 16,308 17,974 11,504 1,353 Minority interests 7,689 8,755 -- 12,248 -- -- -- -- Shareholders' equity 14,354 3,662 3,201 4,758 3,477 3,897 3,175 848
8 Wellington Properties Trust (Dollars in thousands, except property data)
Six Months Ended June 30, Year Ended December 31, --------------------------- -------------------------------------------------------------- Pro Pro Forma Historical(d) Forma Historical(d) --------------- ------------------------------------------------- (Unaudited) (Unaudited) (Unaudited) 1999(a) 1999 1998 1998(a) 1998 1997 1996 1995 1994 ------- ---- ---- ------- ---- ---- ---- ---- ---- Other Data: Cash flows provided (used in): Operating activities (b) $520 $129 (b) $(1,187) $(5) $68 $225 $47 Investing activities (b) (20) (86) (b) (662) 1,814 (992) (8,921) (1) Financing activities (b) (555) (188) (b) 1,889 (1,894) 504 8,820 449 Funds from operations (c) (325) 82 122 (145) 170 118 (240) (162) 7 Weighted average shares outstanding (in thousands) 1,351 1,351 1,145 1,322 1,175 1,129 1,050 520 116 Property Data (as of period end): Number of properties owned 4 5 2 4 5 2 3 3 1 Total rentable square feet Owned (in thousands) 247 247 - 247 247 - - - - Total apartment units owned 72 376 376 72 376 376 410 398 34 - -------------------- (a) The pro forma data reflects the effect, for the whole of the periods indicated, of the offering of the Class A Preferred Shares, the proposed sale of our Madison, Wisconsin apartment community and the various transactions described elsewhere in this prospectus, beginning at page 61. For a further description of the pro forma adjustments reflected in the data, you should read the notes and management's assumptions to pro forma condensed consolidated financial statements, beginning on page F-7 of this prospectus. (b) Pro forma information relating to cash flows from operating, investing and financing activities has not been included because we believe that the information would not be meaningful, due to the number of assumptions required in order to calculate this information. (c) The White Paper on Funds from Operations ("FFO") approved by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT") in March 1995 defines FFO as net income (loss) (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sales of properties, plus real estate related depreciation and amortization and after all adjustments for unconsolidated partnerships and joint ventures. We believe that FFO is helpful to investors as a measure of the financial performance of an equity REIT because, along with the cash flow from operating activities, financing activities and investing activities, it provides investors with an indication of our ability to incur and service debt, to make capital expenditures and to fund other cash needs. We compute FFO in accordance with standards established by NAREIT, which may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than we do. FFO does not represent cash generated from operating activities determined in accordance with generally accepted accounting principles and should not be considered as an alternative to net income (determined in accordance with generally accepted accounting principles) as an indication of our financial performance or to cash flow from operating activities (determined in accordance with generally accepted accounting principles) as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make cash distributions. (d) The historical summary consolidated financial information was derived from our audited financial statements, unless otherwise specifically noted.
9 RISK FACTORS In deciding whether to purchase our Class A Preferred Shares in this offering, you should consider all information in this prospectus, including particularly each of the following risk factors: We may be unable to pay accrued dividends on the Class A Preferred Shares If our properties do not generate revenue sufficiently in excess of operating expenses, our cash flow and our ability to make distributions to our shareholders, including to holders of our Class A Preferred Shares, may be adversely affected. Our properties are subject to all operating risks common to real estate investment properties and a number of risks specific to us, including the other factors described below, each of which could adversely affect our revenues or costs and our ability to pay dividends. Future dividends on the common shares into which the Class A Preferred Shares are convertible cannot be predicted. Following the offering, dividends on our common shares will be contingent on the prior payment of preferred dividends on the Class A Preferred Shares and our Class B Junior Cumulative Convertible Preferred Shares and will be dependent on the sufficiency of our excess cash flows and the decision of our board of trustees to declare such dividends. For these reasons, future dividends on our common shares, if any, may be less than the dividends we have declared and paid in the past and investors who convert their Class A Preferred Shares may realize no dividends or a reduced dividend yield as a result. We do not own all of our investment properties directly Each of our Minnesota properties is owned by our operating partnership, Wellington Properties Investments, L.P., in which we currently own approximately a 8.8% of the common units and all of the 349,800 Class B preferred units, or its subsidiaries. We also anticipate that future investment properties will be acquired by the operating partnership or its subsidiaries. To enable such acquisitions, we will deliver all of the net proceeds of this offering to the operating partnership as an additional capital contribution. While our status as the sole general partner of the operating partnership gives us management and investment control over the operating partnership, we will likely retain only a minority equity interest in the operating partnership for the foreseeable future. In part, this means that, while we will be able to sell individual investment properties from time to time, the sale of substantially all of our properties in a single transaction would require the approval of a majority of the limited partners of the operating partnership. In addition, if the operating partnership were to be liquidated, its assets would be distributed among its partners generally, not among our shareholders. Our future investments have not been identified We intend to invest a substantial portion of the proceeds of this offering in additional properties, and we have not yet identified specific acquisition targets. We may face significant competition from other investors in attempting to acquire properties. We cannot be certain that attractive properties will be available, that such properties may be acquired on terms favorable to us or that any properties we ultimately acquire will perform to our expectations. If, during this offering, we identify likely material acquisitions, we will supplement this prospectus to discuss such properties. You should not rely on the initial disclosure of any proposed investment in a supplement as an assurance that we will ultimately consummate the proposed transaction or that the information provided concerning the proposed investment will not change between the date of the supplement and the actual investment. 10 We have a history of losses We have reported net losses for each year since our inception. We had an accumulated deficit of approximately $5.4 million at June 30, 1999. While we have implemented a strategy to increase revenues and control costs through improved efficiency, there can be no assurance that we will become profitable in the future. Dependence on External Sources of Capital As with many other REITs, but unlike corporations generally, our ability to reduce our debt and finance growth must be funded largely by external sources of capital because we generally will have to distribute to our shareholders 95% of our taxable income from the operation of our properties in order to qualify as a REIT. Our access to external capital will depend upon a number of factors, including the market's perception of our growth potential, our current and potential future cash distributions and the market price of our equity securities. The failure to obtain future sources of capital would have an adverse effect on our ability to grow in accordance with our business strategy and pay dividends on the Class A Preferred Shares as they become due. We are dependent on our REITPLUS(sm) affiliates Each of our current investment properties and some or all of our future acquisitions will be managed on a day-to-day basis by our REITPLUS(sm) affiliates. Therefore, the revenues and costs associated with our business will remain largely out of our immediate control. The bankruptcy or failure to perform to our expectations of any of these affiliates could have a material adverse effect on the results of our operations and our ability to pay distributions to our shareholders, including periodic dividends on our Class A Preferred Shares. We are dependent on our key personnel Our ability to achieve our strategic business objectives and operate profitably is dependent on identifying, attracting and retaining qualified key management personnel. In particular, our strategic growth and operating results will depend on the performance and retention of Duane H. Lund, our chief executive officer, and Robert F. Rice, our president. Shareholders' Agreement may make management changes more difficult A number of our affiliated shareholders have entered into a shareholders' agreement that expires in November 2008. The parties to the agreement own or control an aggregate of 26.9% of our common shares as of September 30, 1999 and assuming conversion of exercisable share options held by them. The parties to the agreement also own or control 349,800 of our Class B Preferred Shares. Under the terms of the agreement, each of the signing shareholders agrees to vote his or her shares to cause Paul T. Lambert and Steven B. Hoyt to remain members of our board of trustees, to fill vacancies on the board with persons mutually selected by Wellington Management Corporation and American Real Estate Equities, LLC, and to cause the board of trustees to retain Arnold K. Leas as our chairman of the board, Duane H. Lund as our chief executive officer and Robert F. Rice as our president. This agreement could make changes in our management less likely, even if such changes might be in the best interests of our business and shareholders. 11 Delays in investing proceeds will have an adverse effect Upon the closing of this offering, the proceeds we receive may not be invested in real estate for some time as we identify and negotiate suitable acquisitions. A delay in investing the proceeds from this offering will delay the receipt of any returns from such investments. Moreover, until we invest in properties, our investment returns will be limited to the rates of return available on short-term, highly liquid investments that provide appropriate safety of principal. We expect these rates of return, which affect the amount of cash available to make distributions to our shareholders, to be considerably lower than we would receive from property investments and considerably lower than the periodic dividend that will accrue on the Class A Preferred Shares. We are currently dependent on the Wisconsin and Minnesota markets All of our existing properties are located in Wisconsin or Minnesota. While we intend to seek acquisition targets in other regions of the United States, our financial performance is currently dependent upon economic conditions in these states in general and the specific local markets where our existing properties are located. A decline in the economy in these markets generally could adversely affect our ability to pay accrued dividends to holders of our Class A Preferred Shares and the value of the common shares into which our Class A Preferred Shares are convertible. In addition, the degree to which we can achieve geographical diversification will depend on the funds available to us for acquisitions. Real estate investments entail particular risks Effect of Economic and Real Estate Conditions. 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 our properties do not generate revenues sufficiently in excess of operating expenses, including debt service and capital expenditures, our cash flow and ability to pay distributions to our shareholders will be adversely affected. An investment property's revenues and value may be adversely affected by a number of factors, including: o the national economic climate; o the local economic climate (which may be adversely impacted by plant closings, local industry slowdowns and other factors); o local real estate conditions (such as an oversupply of or a reduced demand for rental properties); o the perceptions by prospective tenants of the safety, convenience and attractiveness of properties; o our ability to provide adequate management, maintenance and insurance; and o increased operating costs (including real estate taxes). Fixed expenses. Certain significant expenditures associated with each equity investment (such as mortgage payments, if any, real estate taxes and maintenance costs) are generally not reduced when circumstances cause a reduction in income from the investment. If we mortgage a property to secure payments of indebtedness, and if we are unable to meet our mortgage payments, a loss could be sustained as a result of foreclosure on the property by the mortgagee. 12 Market Illiquidity. Equity real estate investments are relatively illiquid. Such illiquidity will limit our ability to alter our portfolio, whether necessary to sell our properties, to raise capital, or in response to changes in economic or other conditions. In addition, the Internal Revenue Code discourages REITs from selling properties held for a short period of time, which may affect our ability to sell properties and to pay distributions to holders of our Class A Preferred Shares and may adversely affect the value of the common shares issuable upon conversion of our Class A Preferred Shares. Operating Risks. Our properties will be subject to all operating risks common to investment real estate properties in general, all of which might adversely affect occupancy or rental rates of our properties. In addition, increases in our operating costs due to inflation and other factors may not necessarily be offset by increased rents. Nor can we be assured that our tenants will be able and willing to pay increased rent or that rent control laws or other laws regulating rental properties will not be adopted in our markets. Renewals. The profitable operation of our investment properties will depend, in part, on our ability to renew leases as they expire and to relet commercial and residential space as it becomes available. Acquisition Risks. Acquisitions of investment properties entail risks that unforeseen liabilities will be assumed or that our investments will fail to perform in accordance with expectations. In addition, improvements to acquired properties will be costly and may not result in increases in revenue or profits. Competition. Our present and future properties will compete with other rental and ownership properties in attracting occupants. In addition, many of our competitors for acquisitions and development projects have far greater management, financial and other resources than we do. Our acquisition activities entail special risks We will incur special risks associated with our acquisition of investment properties, including the risks that: o we may assume unanticipated liabilities; o occupancy rates and rents at an acquired property may not be sufficient to make the property profitable; o we may not be able to obtain, or may experience delays in obtaining, necessary zoning, land use, building, occupancy and other governmental and utility company authorizations; o the relevant market may experience an economic downturn; o financing may not be available on favorable terms; and o lease-ups (if any) may not be completed on schedule, resulting in increased debt service expense and construction costs. 13 Advantageous transactions may be prevented General. Certain provisions contained in our declaration of trust and bylaws and under federal and Maryland laws may have the effect of discouraging a third party from making any acquisition proposal for us. For example, such provisions may: o deter attractive tender offers for our shares, or o deter purchases of large blocks of our shares, thereby limiting the opportunity for our shareholders (including the holders of our Class A Preferred Shares) to receive a premium for their shares over then-prevailing market prices. Preferred Shares. In addition to our Class A Preferred Shares being offered in this offering and our existing Class B Junior Cumulative Convertible Preferred Shares, our declaration of trust authorizes our board of trustees to issue up to 8,132,200 preferred shares and to establish the preferences and rights of any preferred shares issued. With the approval of two-thirds of the outstanding Class A Preferred Shares, such preferences and rights could be superior to those of the Class A Preferred Shares. The authority of our board of trustees to issue additional series of preferred shares could also be used by the board to further deter takeovers. Ownership Limit. In order for us to maintain our qualification as a REIT, not more than 50% in value of our outstanding shares may be owned, directly or indirectly, by five or fewer individuals. Further, no person may own more than 9.9% of our outstanding common shares. However, AREE is subject to a separate contractual ownership limitation of 32.0%. Our debt service obligations will entail additional risks We will continue to be subject to the risks normally associated with debt financing, including the risk that our funds from operations will be insufficient to meet required payments of principal and interest, or, even if sufficient to service our debt, will be insufficient to pay dividends on the Class A Preferred Shares as they accrue, the risk that existing indebtedness on our properties (which in most cases will not have been fully amortized at maturity) will not be able to be refinanced or that the terms of such refinancing will not be as favorable as the terms of the existing indebtedness. Our existing properties secure approximately $32.0 million of outstanding aggregate mortgage indebtedness, of which $24.6 million is fixed at a weighted average annual rate of 7.7% and $7.4 million is variable at a weighted average annual rate of 9.6%. Present and future variable rate financing and the need to refinance our holdings from time to time subjects us to the risk that fluctuations in prevailing interest rates may increase our debt service obligations beyond current expectations. We do not have any presently defined source of refinancing upon the maturity of our existing debt. We are also likely to acquire additional debt that requires balloon payments and there is no limit as to the amount of the debt our board of trustees can approve or the ratio of debt to total market capitalization that we must maintain. Typically only a small portion of the principal of our indebtedness may be repaid prior to maturity and we may not have sufficient funds on hand to repay such indebtedness, in which case it will be necessary for us to refinance such debt, either through additional debt financing secured by individual properties or groups of properties, by unsecured private or public debt offerings or additional equity offerings. If prevailing interest rates on refinancing exceed their current rates, interest expense would increase, which would adversely affect our funds from operations and our ability to pay dividends to holders of our shares, including our Class A Preferred Shares. In addition, in the event that we are unable to secure refinancing of our indebtedness on acceptable terms, we might be forced to dispose of properties upon disadvantageous terms, which could result in losses and might adversely affect cash flow available for distribution as dividends. Further, if a property or properties are mortgaged to secure payment of indebtedness and we are unable to meet 14 mortgage payments, such property could be foreclosed upon by or otherwise transferred to the mortgagee with a consequent loss of income and asset value to us. Prevailing interest rates could also have a dramatic effect on our financial condition and the price of our shares Because we intend to maintain a leveraged position following the closing of the offering and because $7.4 million of our outstanding debt obligations is subject to variable interest rates, increases in interest rates could increase our interest expense, which could adversely affect our funds from operations and our ability to pay dividends to our shareholders. An increase in market interest rates may also lead prospective holders of our shares to demand a higher anticipated annual yield than ownership of our shares offers. Such an increase in the required anticipated distribution yield may adversely affect the market price of our Class A Preferred Shares and of our common shares. Conflicts of interest Wellington Management Corporation. Arnold K. Leas, the chairman of our board of trustees, owns, together with his affiliates, 41.8% of the outstanding stock of Wellington Management Corporation and Mr. Leas serves as its president and chief executive officer. In connection with a series of acquisitions that we intended to complete in November 1998, Wellington Management agreed to terminate an agreement we had with them for advisory services and to transfer ownership of the office building housing our executive offices in Brookfield, Wisconsin. In exchange, we agreed to (1) pay Wellington Management $1.6 million for the termination of the advisory agreement, (2) pay $2.5 million in cash and 745,098 common units of our operating partnership for the Brookfield office building, and to assume the existing mortgage obligations on the property, (3) hire Robert F. Rice, who was then our executive vice president and a vice president of Wellington Management, as our president, (4) contract with Wellington Realty, Inc., a wholly-owned subsidiary of Wellington Management, for day-to-day management of our Wisconsin apartment communities, and (5) issue a warrant to Wellington Management allowing it to purchase up to 791,667 of our common shares. Due to the failure to close many of the related acquisitions with third parties and our inability to finance the $2.5 million cash payment on favorable terms, we agreed with Wellington Management that (1) the advisory agreement would be terminated, but that Wellington would receive only cash payments of $550,000 we made in 1998 and 95,000 of our Class B Junior Cumulative Convertible Preferred Shares, (2) we would not acquire the Brookfield property at that time, (3) we would retain Mr. Rice to serve as our president, (4) Wellington Realty, Inc. would manage our existing Wisconsin properties for 5% of the gross revenues those properties generate, a fee we believe is consistent with norms in the industry, and (5) Wellington Management would return the warrant to purchase common shares to us for cancellation. Since we maintain a small corporate staff, we have contracted with Wellington Management Corporation for accounting and certain other administrative systems and services at fees which we believe are no greater than an unaffiliated third party would be likely to charge. We have in the past and may continue to contract with Wellington Realty, Inc., a wholly-owned subsidiary of Wellington Management Corporation, for real estate brokerage services. Under such agreements, Wellington Realty will be entitled to receive real estate brokerage commissions. Currently, we have entered into a listing agreement with Wellington Realty for the sale of our Maple Grove and Lake Pointe apartment communities. Under the listing agreement, we would pay Wellington Realty 3% of the sale price as a commission upon sale. Typically, real estate brokerage commissions are paid by the seller of a property, but some or all of such costs may be reflected in higher sale prices. Though we are not actively 15 marketing the Lake Pointe property at this time, the Maple Grove apartment community is currently subject to a sale contract. Based on the terms of the Maple Grove contract, Wellington would receive a commission of approximately $501,000 upon closing. From time to time, we may also purchase insurance from another wholly-owned subsidiary of Wellington Management Corporation, Wellington Insurance Services, Inc. If we do so, Wellington Insurance would be entitled to a commission from the insurance companies of 15% of the premium we pay. American Real Estate Equities, LLC. American Real Estate Equities, LLC is owned in equal thirds by WLPT Funding, LLC, Lambert Equities II, LLC and Steven B. Hoyt. Duane Lund, our chief executive officer, owns 100% of WLPT Funding and is its sole manager. Paul T. Lambert, one of our trustees, is a majority owner and sole manager of Lambert Equities. Steven Hoyt is also one of our trustees. In November 1998, our shareholders approved a transaction whereby American Real Estate Equities would purchase 166,666 of our common shares for $1,000,000, or $6.00 per share and would contribute certain assets, principally our Cold Springs office center in St. Cloud, Minnesota and contracts for the purchase of 29 other real estate investment properties (some of which Mr. Hoyt had an ownership interest in), to our operating partnership. As consideration for such assets, we agreed to (1) hire Mr. Lund as our chief executive officer and nominate Mr. Lambert and Mr. Hoyt for election to our board of trustees; (2) issue 4,933,233 units of beneficial interest in our operating partnership to American Real Estate Equities or its members; (3) issue an additional 9,934,663 operating partnership units to the owners of the properties to be acquired (including 4,510,671 units to Mr. Hoyt and his affiliates); (4) pay cash to the owners of the properties to be acquired and assume all third-party mortgage indebtedness on the properties to be acquired; (5) issue to American Real Estate Equities a warrant to purchase 791,667 of our common shares; and (6) reimburse certain of American Real Estate Equities' costs, including costs they incurred in obtaining the contractual rights contributed to the operating partnership, upon the completion of the transaction. When most of the property acquisitions were not completed due to increased financing costs, we and American Real Estate Equities consummated a much smaller transaction pursuant to which the operating partnership acquired only the Cold Springs office center and two other investments properties in Minnesota. We still agreed to hire Mr. Lund as our chief executive officer and Mr. Lambert and Mr. Hoyt were elected to our board of trustees. Subsequently, American Real Estate Equities returned the warrant to us for cancellation and we paid no cash to American Real Estate Equities in reimbursement of the $1,356,000 they spent in connection with the proposed transactions; instead, we issued them, in the third quarter of 1999, 135,600 of our Class B Junior Cumulative Convertible Preferred Shares, which we may redeem after two years for $1 if we fail to meet certain financial goals. Among the units our operating partnership issued to sellers of the acquired properties, Mr. Hoyt and his wife received a total of 860,107 common units in consideration of their ownership interests in those properties. Apart from the foregoing transactions, American Real Estate Equities advanced us an aggregate of $1,392,000 during the summer and fall of 1998 for working capital purposes. We have since issued 119,200 of our Class B Junior Cumulative Convertible Preferred Shares to them in discharge of $1,192,000 of the repayment obligation. If we complete the sale of our Madison, Wisconsin apartment community, which is currently subject to a sale contract, we plan to use a portion of the proceeds of the sale to repay the $200,000 balance. Hoyt Properties Inc. Steven B. Hoyt, one of our trustees, is the controlling stockholder of Hoyt Properties Inc., whom we have retained to manage our existing commercial properties in Minnesota. As with Wellington Realty, this agreement was not negotiated at arm's length, but we believe that the stipulated management fee of 5% of gross income from the managed properties is consistent with industry norms for similar properties. 16 Future Acquisitions. We anticipate that we will enter into property management arrangements like those described above with new REITPLUS(sm) affiliates in connection with future acquisitions and may also agree to nominate principals of our new REITPLUS(sm) affiliates for election to our board of trustees. Failure to continue to qualify as a REIT We believe that we are a qualified REIT under the Internal Revenue Code and currently intend to maintain such qualification, although no assurance can be given that we will be able to remain qualified as a REIT in the future and our board of trustees could elect, without the approval of our shareholders, to discontinue such qualification at any time. Qualification under the Internal Revenue Code as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which there are only limited judicial or administrative interpretations. The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT in the future. For example, in order to qualify as a REIT, at least 95% of our gross income in any year must be derived from qualifying sources, and we must pay distributions to our shareholders aggregating annually at least 95% of our REIT income (excluding net capital gains). In addition, no assurance can be given that new legislation, regulations, administrative interpretations or court decisions will not significantly change the tax laws with respect to qualification as a REIT or the federal income tax consequences of such qualification. If we were to fail to qualify as a REIT in the future, we would not be allowed a deduction for distributions to our shareholders in computing our taxable income and would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Unless entitled to relief under certain statutory provisions, we would also be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost. As a result, the funds available for distribution to our shareholders, including holders of our Class A Preferred Shares, would be reduced for each of the years involved. In such a circumstance, we could even be required to borrow funds or to liquidate certain of our investments to pay the applicable tax. For our 1996 and 1997 taxable years, we unintentionally failed to demand certain share ownership information of our shareholders as required in order to meet the share ownership tests for REITs. As a consequence of that failure, the IRS could contend that we did not qualify as a REIT for 1996 and 1997, even though we did not (but for the failure to send the demand letters) fail the share ownership tests. The IRS has given no indication that it intends to challenge our qualification as a REIT for failure to send such letters. If the IRS were successfully to challenge our status as a REIT, it could require us to pay tax on our income as a regular corporation, and deny our ability to re-elect REIT status until possibly as late as 2002. Given that we would have reported a net taxable loss for 1996 and 1997 as an ordinary corporation, we believe that the requirement to pay tax for those years on income as a regular corporation would be of little consequence. Our inability to reelect status as a REIT until 2002, however, could adversely affect our ability to pay scheduled dividends to holders of our Class A Preferred Shares and could adversely affect the value of the common shares into which our Class A Preferred Shares are convertible. We are subject to possible environmental liabilities Under various federal, state and local environmental laws, ordinances, and regulations, we may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at property we currently own or previously owned, and may be held liable to a governmental entity or to third parties for property damage and for investigation and cleanup costs incurred by such parties in connection with the contamination. Such laws typically impose cleanup responsibility and liability without regard to whether the owner knows of or caused the presence of the contaminants, and the liability under such laws has been interpreted to be joint and several among potentially responsible parties unless the harm is devisable and there is a reasonable basis for allocation of responsibility. The costs of investigation, remediation or removal of hazardous or toxic substances may be very substantial, and the presence of such substances, or the failure to properly remediate such property, could adversely affect our ability to sell or rent such property or to borrow using such property as collateral. 17 Some environmental laws can create liens on contaminated sites in favor of the government for damages and costs it incurs in connection with contamination. Persons who arrange for the disposal or treatment of hazardous or toxic substances also may be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not the person owns or operates the facility. Also, the owner of a site may be subject to common law claims by third parties based on damages resulting from environmental contamination emanating from a site. Other federal, state and local laws, regulations and ordinances govern the removal, encapsulation or disturbance of asbestos-containing materials when they are in poor condition or in the event of building remodeling, renovation or demolition. These laws may impose liability for release of asbestos and may allow third parties to seek recovery from owners or operators of real properties for personal injury associated with asbestos. In connection with our ownership and operation of our properties, we may be liable for such costs. Our limited assessments of our existing properties have not revealed any environmental liability that we believe would have a material adverse effect on our business, assets or results of operations, nor are we aware of any such environmental liability. We also intend to condition future acquisitions on satisfactory environmental assessments. Nevertheless, it is possible that our past and future assessments will not reveal all environmental liabilities or that there are existing or future material environmental liabilities of which we will be unaware. Compliance with applicable laws, rules and regulations, including the Americans with Disabilities Act, can be costly All places of public accommodation are required to meet certain federal requirements, including but not limited to those associated with the Americans with Disabilities Act. A number of additional federal, state and local laws exist which also may require modifications to our present and future properties or restrict certain further renovations thereof, with respect to access by disabled persons. For example, the Fair Housing Amendments Act of 1988 requires apartment communities first occupied after March 13, 1990 to be accessible to the handicapped. Noncompliance with the Americans with Disabilities Act or the Fair Housing Amendments Act could result in the imposition of fines or an award of damages to private litigants. While we believe that our existing properties are substantially in compliance with present requirements, we have received notice of a Department of Justice investigation of the architect and developer of our Maple Grove apartment community in Madison, Wisconsin. In the event of a determination of noncompliance, we may have some responsibility with respect to the last 60 units constructed there, for which we acted as the developer, though we cannot presently determine the costs of any actions that may ultimately be required of us. We have entered into an agreement to sell the Maple Grove property. However, the closing of the sale is subject to a number of conditions, including the buyer's satisfactory completion of its due diligence review. Liability or the threat of liability to remediate conditions at the property in order to comply with the Americans With Disabilities Act could have the effect of delaying or preventing the sale, or forcing us to make price or other concessions to the buyer. Future legislation may impose additional burdens or restrictions on owners with respect to access by disabled persons. Although the costs of compliance with any additional legislation are not currently ascertainable, the costs could be substantial. Limitations or restrictions on the completion of certain renovations may also limit application of our investment strategy in certain instances or reduce overall returns on our investments. 18 Uninsured losses could occur We expect to continue to carry comprehensive liability, fire, extended coverage and rental loss insurance with respect to all of our properties, with policy specifications, insured limits and deductibles that we believe are customarily carried for similar properties. There are, however, certain types of losses (such as losses arising from wars) that are not generally insured because insurance is unavailable or unavailable at a reasonable cost. Should an uninsured loss or a loss in excess of insured limits occur, we could lose our capital invested in the affected property, as well as the anticipated future revenues from such property and could continue to be obligated on any mortgage indebtedness or other obligation related to the property. The offering price of the Class A Preferred Shares is arbitrary While we have based the public offering price for the Class A Preferred Shares on an assessment of current market conditions and have tied the conversion ratio of the Class A Preferred Shares to prevailing trading prices for our common shares, the offering price is arbitrary and does not reflect the prices at which the Class A Preferred Shares or our common shares will trade following the closing of this offering. There is no prior public market for our Class A Preferred Shares Prior to this offering, there has been no public market for our Class A Preferred Shares and there can be no assurance that an active trading market will develop or be sustained or that our Class A Preferred Shares may ever be resold at or above the offering price. The market value of our Class A Preferred Shares and the common shares into which they are convertible could be substantially affected by all of the foregoing risk factors. While the common shares into which the Class A Preferred Shares are convertible are currently listed on the Nasdaq SmallCap Market(sm) and have been approved for listing on the American Stock Exchange following the offering, we might not be able to meet continued listing qualifications in the future. In addition, trading volumes in our common shares have typically been very low, which is typical of equity securities of comparable REITs. As a result, investors may have difficulty in selling our common shares at generally prevailing prices. We make forward-looking statements in this prospectus which may prove to be inaccurate This prospectus contains "forward-looking statements" within the meaning of the federal securities laws, which are intended to be covered by the safe harbors created by those laws. You can generally identify these forward-looking statements because we use words such as we "believe," "anticipate," "expect" or similar words when we make them. These statements include our plans and objectives for future operations, including plans and objectives relating to future growth. These forward-looking statements are based on current expectations that involve numerous risks and uncertainties, including changes in interest rates, our ability to borrow necessary investment capital, changes in demand for commercial and residential space, tenant creditworthiness, possible declines in property values or occupancy rates, changes in general economic conditions and changes in the federal or state tax laws affecting REITs. You should be aware that assumptions relating to our forward-looking statements also involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to accurately predict and many of which are beyond our control. Although we believe the assumptions underlying our forward-looking statements in this prospectus, and the forward-looking statements themselves are reasonable, circumstances could change and any of our assumptions could prove to be inaccurate and actual results may differ materially from our forward-looking statements. In light of the significant uncertainties inherent in these forward-looking statements, the inclusion of this information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. 19 USE OF PROCEEDS After deducting the underwriters' discount, as well as our other offering expenses, we expect to receive approximately $5,825,000 from the sale of our Class A Preferred Shares, approximately $6,796,000 if the underwriters' overallotment option is exercised in full. We intend to contribute all of the net proceeds of this offering to our operating partnership for use in obtaining additional investment properties or equity securities of other real estate investment entities. Our operating partnership will then issue us 700,000 of its Class A preferred units (up to 805,000 Class A preferred units if our underwriters' overallotment option is exercised in full), which are economically equivalent to the Class A Preferred Shares. While we review prospective investment opportunities on a continual basis, we have not entered into agreements or begun negotiations toward the acquisition of any specific properties at this time. Until our operating partnership uses the proceeds from this offering as described above, we intend to cause our operating partnership to invest the proceeds in short-term, interest-bearing securities, including money market funds. 20 DIVIDEND POLICY Dividends on our shares are declared from time to time by our board of trustees in their discretion. However, as a qualified REIT, we are required to distribute no less than 95% of our REIT taxable income (excluding net capital gains) to our shareholders. Under the terms of the Class A Preferred Shares, we will not be able to make distributions to holders of our common shares or holders of our Class B Junior Cumulative Convertible Preferred Shares until first paying a cumulative dividend of $0.95 per share per year on the Class A Preferred Shares. Dividends on the Class A Preferred Shares will accrue and be payable in equal semi-annual installments, beginning with a first dividend six months after the initial closing of the offering. Assuming dividends on the Class A Preferred Shares and on our Class B Junior Cumulative Convertible Preferred Shares are paid when accrued, our board of trustees may declare dividends on our common shares in which our existing classes of preferred shares will not participate. In considering whether to convert your Class A Preferred Shares into common shares, you should bear in mind that future dividends on our common shares, if any, may be less than dividends paid on our common shares in the past and that investors who elect to convert their Class A Preferred Shares could realize no dividends, or a reduced dividend yield on their investment as a result of such conversion. Dividends that we pay to you as a holder of Class A Preferred Shares or the common shares into which you may convert your Class A Preferred Shares, to the extent of our current and accumulated earnings and profits for federal income tax purposes, will be taxable to you as ordinary dividend income. Distributions in excess of earnings and profits generally will be treated as a non-taxable reduction of your basis in the shares to the extent thereof, and thereafter as taxable gain. Such distributions will have the effect of deferring taxation until the sale of your shares. If, at any time, we fail to declare or pay a dividend on the Class A Preferred Shares as it accrues, such dividend will be cumulative, without interest, with future dividends. If we should fail to pay a full year's accrued dividends on the Class A Preferred Shares ($0.95), then the holders of the Class A Preferred Shares will be entitled, voting as a class, to elect a majority of the members of our board of trustees, who will then serve on the board for so long as a full year's dividends remain unpaid. 21 CAPITALIZATION The following table sets forth, at June 30, 1999: o our actual capitalization; and o our capitalization as it would have been, giving effect to (1) the sale of 700,000 Class A Preferred Shares at a price of $10.00 per share and the receipt of the proceeds from such sale, net of underwriters' discount and other estimated offering expenses, (2) the issuance of 349,800 Class B Junior Cumulative Preferred Shares in satisfaction of certain liabilities to related parties and (3) the sale of the Maple Grove apartment property and application of a portion of the proceeds to the related mortgage loans payable. You should read the following table in conjunction with the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements, including the accompanying notes, appearing elsewhere in this prospectus. The following table is based on the number of our common shares outstanding as of June 30, 1999. It therefore does not reflect common shares issuable upon the exercise of outstanding warrants and share options or upon conversion of our Class A Preferred Shares, Class B Junior Cumulative Preferred Shares or operating partnership units. As of June 30, 1999 ------------------- Historical Proforma Mortgage loans payable $ 32,049,000 $ 19,369,000 Minority interests 8,755,000 7,689,000 SHAREHOLDERS' EQUITY: Preferred Shares: $0.01 par value: 10,000,000 authorized, no shares issued and outstanding on a historical basis, -- -- 700,000 Class A Cumulative Convertible Preferred Shares issued and outstanding on a pro forma basis -- 7,000 349,800 Class B Junior Cumulative Convertible Preferred Shares issued and outstanding on a pro forma basis -- 3,000 Common Shares, $0.01 par value; 100,000,000 authorized; 1,351,935 issued and outstanding 14,000 14,000 Additional paid-in capital 9,070,000 19,449,000 Accumulated deficit (5,422,000) (5,119,000) ------------- ------------- Total shareholders' equity 3,662,000 14,354,000 ------------- ------------- Total capitalization $ 44,466,000 $ 41,412,000 ============= ============= 22 PRICE RANGE OF COMMON SHARES AND DIVIDENDS Our common shares are listed on the Nasdaq SmallCap Market(sm) under the symbol "WLPT" and have been approved for listing on the American Stock Exchange under the symbol "RPP" following the closing of the offering. The following table sets forth, for the periods indicated, the high and low bid prices per share for our common shares and dividends declared on our common shares: 1997 High Low Dividend(1) - ---- ---- --- -------- First Quarter.......................... $6.45 $4.59 $0.1345 Second Quarter......................... 6.01 4.59 0.1345 Third Quarter.......................... 5.85 4.59 0.1108 Fourth Quarter......................... 5.78 4.51 0.1103 1998 First Quarter.......................... 5.62 3.96 0.1105 Second Quarter......................... 10.60 4.59 0.1108 Third Quarter.......................... 6.80 5.54 0.1108 Fourth Quarter......................... 6.25 4.19 0.1108 1999 First Quarter.......................... 6.33 3.48 0.1100 Second Quarter......................... 4.75 4.38 0.1100 Third Quarter.......................... 4.94 3.00 0.1100 - ------------------ (1) Future dividends on our common shares will be contingent on prior payment of dividends on our preferred shares and will be dependent on the sufficiency of our excess cash flows and the decision of our board of trustees to declare such dividends. In deciding whether to invest in the Class A Preferred Shares or whether to convert Class A Preferred Shares you hold into our common shares, you should bear in mind that future dividends on our common shares, if any, may be lower than the historic dividends shown. The last reported sale price of our common shares on the Nasdaq SmallCap Market(sm) as of October 5, 1999 was $3.875 per share. As of October 5, 1999, there were 303 holders of record of our common shares. 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview As of June 30, 1999, we owned a portfolio of two residential and three commercial properties. Our residential properties are located in Wisconsin and contain an aggregate of 376 units. Our commercial properties are located in Minnesota and contain an aggregate of 247,546 square feet of rental space. Our interest in the commercial properties is held through our operating partnership. We are the sole general partner of the operating partnership and, as of June 30, 1999, we held a 8.8% interest in the operating partnership. The pro forma information below reflects the effect of the offering of the Class A Preferred Shares, the proposed sale of our Madison, Wisconsin apartment community and the various transactions described elsewhere (beginning on page 61) in this prospectus. It may be helpful as you read this section to refer to our summary financial information and consolidated financial statements, including the notes thereto, included elsewhere in this prospectus. Results of Operations Pro Forma Operating Results Comparison of the Six Months Ended June 30, 1999 on a Pro Forma Basis to the Six Months Ended June 30, 1999 on a Historical Basis. Our pro forma revenue was approximately $2,401,000 for the six months ended June 30, 1999 as compared to $3,445,000 total historical revenue for the six months ended June 30, 1999. The decrease results from our exclusion of pro forma revenue related to the anticipated sale of our Maple Grove property of $1,197,000 offset in part by an increase in interest income of $153,000 related to our investment of cash we would have received from our issuance of the Class A Preferred Shares. Our pro forma expenses for the six months ended June 30, 1999 were approximately $2,586,000 as compared to approximately $7,516,000 total historical expenses for the six months ended June 30, 1999. The decrease is due primarily to our exclusion of pro forma expenses totaling $1,367,000 relating to the sale of our Maple Grove property and our exclusion of costs relating to the termination of our advisory agreement with Wellington Management and other nonrecurring expenses aggregating $3,563,000, since such costs are not expected to have a continuing impact. As a result of the above, our pro forma net loss before minority interests for the six-month period ended June 30, 1999 was approximately $185,000, as compared to historical net loss before minority interest of $4,071,000, and our pro forma net loss allocated to our common shares was $301,000 as compared to historical net loss allocated to common shares of $1,407,000. Comparison of the Year Ended December 31, 1998 on a Pro Forma Basis to the Year Ended December 31, 1998 on a Historical Basis. Our pro forma revenue was approximately $4,741,000 for the year ended December 31, 1998 as compared to $3,509,000 total historical revenue for the year ended December 31, 1998. The increase results from the following items: (1) our inclusion of pro forma revenue of $3,392,000 from our acquisitions of the commercial properties in Minnesota, and (2) inclusion of interest income totaling $306,000 related to our investment of expected net cash proceeds received from our issuance of the Class A 24 Preferred Shares, partially offset by (3) our exclusion of pro forma revenue totaling $2,466,000 from the sale of our Maple Grove property. Our pro forma expenses for the year ended December 31, 1998 were approximately $4,610,000 as compared to approximately $5,515,000 total historical expenses for the year ended December 31, 1998. The decrease is due primarily to: (1) our exclusion of pro forma expenses totaling $2,669,000 relating to our sale of the Maple Grove property, and (2) our exclusion of costs relating to the termination of the advisory agreement with Wellington Management and other nonrecurring expenses aggregating $1,560,000, since such costs are not expected to have a continuing impact, partially offset by (3) our inclusion of pro forma expenses of $3,249,000 relating to our acquisitions of the commercial properties in Minnesota, and (4) our inclusion of additional pro forma general and administrative expenses totaling $75,000 relating to our acquisitions. As a result of the above, our pro forma net income before minority interests for the year ended December 31, 1998 was approximately $131,000 as compared to a historical net loss before minority interest of $2,006,000, and our pro forma net loss allocated to common shares was $376,000 as compared to historical net loss allocated to common shares of $941,000. Historical Operating Results Comparison of the Six Months Ended June 30, 1999 to the Six Months Ended June 30, 1998. Our rental revenue increased by approximately $1,897,000 or 125% for the six-month period ended June 30, 1999 compared to the six-month period ended June 30, 1998. The increased revenue was primarily a result of our acquisitions in 1998. Interest and other income increased by $31,000 during these same periods, primarily due to interest earned on escrowed funds relating to our acquisitions in 1998. Our total expenses increased from $1,665,000 for the six-month period ended June 30, 1998 to $7,516,000 for the six-month period ended June 30, 1999, an increase of $5,851,000 of which $3,563,000 represents non-recurring charges related to the termination of our advisory agreement and write-off of deferred costs associated with our 1998 acquisition efforts. The remaining $2,288,000 was attributable to increased property expenses of $904,000, increased management fees of $96,000, increased depreciation and amortization of $387,000, increased interest expense of $661,000, and increased general and administrative expenses of $240,000, primarily as a result of our 1998 acquisition efforts. Our depreciation and amortization increased from $294,000 for the six-month period ended June 30, 1998 to $681,000 for the comparable period in 1999, an increase of 132%, as a result of our acquisitions in 1998. Our interest expense increased from $634,000 for the six-month period ended June 30, 1998 to $1,295,000 for the comparable period in 1999, an increase of 104%, primarily as a result of additional borrowings associated with our acquisitions in 1998. Our general and administrative expenses increased from $148,000 for the six-month period ended June 30, 1998 to $388,000 for the comparable period in 1999, an increase of 162%. In November 1998, we converted from an externally managed REIT to a self-administered REIT and commenced administrative operations and, as a result, incurred payroll expenses of $150,000 for the six-month period ended June 30, 1999 not incurred in the previous comparable period. As a result of the above, our net loss before minority interests increased from $148,000 for the six-month period ended June 30, 1998 to a loss of $4,071,000 for the six-month period ended June 30, 1999. Our net loss increased from $148,000 for the six-month period ended June 30, 1998 to $1,407,000 for the six-month period ended June 30, 1999, attributable primarily to the existence of minority interests resulting from our new structure following our 1998 acquisitions, as well as the other factors described above. 25 Comparison of the Year Ended December 31, 1998 to the Year Ended December 31, 1997. Our rental revenue increased by approximately $507,000 or 17.0% for the year ended December 31, 1998 compared to the year ended December 31, 1997. The increased revenue was primarily a result of our acquisitions in 1998. Our interest and other income decreased by $178,000 or 89.5%, during these same periods, primarily due to our gain on the sale of a residential property during the second quarter of 1997. Our total expenses increased from $3,456,000 for the year ended December 31, 1997 to $5,515,000 for the year ended December 31, 1998, an increase of 59.6%, of which $1,560,000 represented non-recurring charges related to the abandonment of certain potential transactions associated with our 1998 acquisitions, the provision for uncollectible advances, and our termination of the advisory agreement with Wellington Management. The remaining $499,000 was attributable to increased property expenses of $277,000, increased depreciation and amortization of $88,000, increased interest expense of $19,000 and increased general and administrative expenses of $115,000, primarily as a result of our 1998 acquisitions. Our depreciation and amortization increased from $606,000 in 1997 to $694,000 in 1998, an increase of 14.5%, as a result of our acquisitions in 1998. Interest expenses increased from $1,398,000 in 1997 to $1,417,000 in 1998, an increase of 1.3%, primarily as a result of additional borrowings associated with our acquisitions in 1998. Our general and administrative expenses increased from $174,000 in 1997 to $289,000 in 1998, an increase of 66.1%. During 1998, we converted from an externally managed REIT to a self-administered REIT and commenced administrative operations and incurred payroll expenses of $92,000 not incurred in previous years. As a result of the above factors, our net loss before minority interests increased from $276,000 for the year ended December 31, 1997 to a loss of $2,006,000 for the year ended December 31, 1998. Our net loss increased from $276,000 for 1997 to $941,000 for 1998, attributable primarily to the existence of minority interests resulting from our new structure following our 1998 acquisitions, as well as the other factors described above. Liquidity and Capital Resources Short-Term and Long-Term Liquidity Cash provided by operations and borrowings from affiliates and lending institutions have generally provided the primary sources of our liquidity. Historically, we have used these sources to fund operating expenses, satisfy debt service obligations and fund distributions to shareholders. In connection with the offering, we expect to sell 700,000 Class A Preferred Shares. We expect the net cash proceeds to us from the offering, after estimated underwriting discounts and commissions and estimated expenses of the offering, to be approximately $5,825,000 (approximately $6,796,000 if the underwriter's over-allotment option is exercised in full). Our Maple Grove apartment community is presently under contract for sale to an independent third party. The contract is subject to certain closing conditions and contingencies and provides for a purchase price of $16,700,000, to be paid by assuming the first mortgage of approximately $12,680,000 and paying the balance in cash at closing. After costs associated with the sale, we expect net cash proceeds, on a pro forma basis, to be $2,437,000. The buyer has advanced $400,000 of the cash purchase price in exchange for our 10% promissory note. If the sale of the property is not completed by October 31, 1999, we will be required to begin making payments under the note to the extent of excess 26 cash flow from the property. The closing of the sale of the Maple Grove property (which we describe more fully on page 35 of this prospectus) is contingent on certain conditions, including the satisfactory resolution of the U.S. Department of Justice's investigation of the property for compliance with laws regarding accessibility by disabled persons. No assurance can be given that the sale of the Maple Grove property will be consummated and, if consummated, that it will be on terms described above. Currently, we have no contractual obligations for property acquisition or material capital expenditures, other than tenant improvements in the ordinary course of business. We expect to meet our long-term capital needs through a combination of cash from operations, net cash proceeds from sales of real estate, additional borrowings, additional equity issuances of common or preferred shares, and/or units of our operating partnership. Cash Flows Comparison of the Six Months Ended June 30, 1999 to the Six Months Ended June 30, 1998. During the six-month period ended June 30, 1999, we generated $520,000 in cash flows from operating activities and $163,000 from decreased escrowed cash reserves. These cash flows were used primarily for (1) repayments of debt obligations aggregating $465,000; (2) payment of cash dividends, net of our dividend reinvestment plan, totaling $90,000; (3) investment in real estate ventures aggregating $90,000; and (4) additions to fixed assets totaling $93,000. As a result, our cash balances decreased by $55,000 to $99,000 at June 30, 1999 from $154,000 at December 31, 1998. Comparison of the Year Ended December 31, 1998 to the Year Ended December 31, 1997. During the year ended December 31, 1998, we generated approximately $4,494,000 in net proceeds from borrowings and $1,246,000 from the issuance of common shares. These cash flows were used primarily for (1) repayments of debt obligations and financing costs aggregating $3,345,000; (2) payment of cash dividends aggregating approximately $506,000; (3) payment of costs associated with new ventures aggregating $98,000; (4) payment of costs associated with our 1998 acquisitions aggregating $564,000; and (5) cash used in operating activities of approximately $1,187,000. As a result, our cash balances increased by approximately $40,000 to $154,000 at December 31, 1998 from $114,000 at December 31, 1997. Funds from Operations We consider funds from operations ("FFO") to be meaningful to investors as a measure of the financial performance of an equity REIT when considered with the financial data presented under generally accepted accounting principles. Under the National Association of Real Estate Investment Trusts' definition, FFO means net income (loss) computed using generally accepted accounting principles, excluding gains (or losses) from debt restructuring and sales of property, plus real estate-related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. Further, if the conversion of securities into common shares is dilutive, we exclude any income allocated to these securities in computing FFO. The FFO we present may not be comparable to the FFO of other REITs, since they may interpret this definition of FFO differently or they may use another definition of FFO. FFO is not the same as cash generated from operating activities or net income determined in accordance with generally accepted accounting principles. FFO is not necessarily an indication of our cash flow available to fund cash needs. Additionally, it should not be used as an alternative to net income when evaluating our financial performance or to cash flow from operating, investing and financing when evaluating our liquidity or ability to make cash distributions or pay debt service. 27 Our FFO, on a pro forma basis for the year ended December 31, 1998 and the six months ended June 30, 1999, is summarized in the following table. Pro Forma -------------------------------------------- Year Ended Six-Month Period December 31, 1998 Ended June 30, 1999 Income (loss) before minority interests $ 131,000 $(185,000) Less: net income allocated to preferred shares (997,000) (499,000) Add: real estate related depreciation and amortization 721,000 359,000 ---------- ------------- Funds from operations - basic $ (145,000) $(325,000) ========== ============= Weighted average number of shares and units: basic(1) 3,041,378 3,070,065 ========== ============= - ---------------------- (1) Assumes exchange of all units, calculated on a weighted average basis for common shares. Year 2000 Issues Many older computer software programs refer to years in terms of their final two digits only. Such programs may interpret the year 2000 to mean the year 1900 instead. If not corrected, this could result in a system failure or miscalculations causing disruption of operations, including a temporary inability to process transactions, prepare financial statements, send invoices or engage in similar normal business activities. We rely on information technology systems of Wellington Management Corporation, Wellington Realty, Inc. and Hoyt Properties Inc. on a contract basis. Wellington Management Corporation and Wellington Realty, whose systems we rely on for corporate and Wisconsin property management, completed installation and testing of new hardware and software that is certified as Year 2000 ready by their manufacturers in November 1998. Hoyt Properties, whose systems we rely on for the management of our Minnesota properties, completed installation and testing of hardware and software that is certified as Year 2000 ready by their manufacturers in July 1999. Accordingly, we do not anticipate material problems in processing the billing and collection of revenue, the payment of expenditures, the recording of financial transactions, the preparation of financial statements and maintaining and generating system-driven managerial information. Our property management team has been evaluating the impact of the Year 2000 issue on the various facets of property operating systems since July 1998. Based on the current status of this evaluation process, we do not anticipate any material adverse consequences of the Year 2000 on property operations. However, we rely on third-party suppliers for a number of key services. Interruption of supplier operations due to the Year 2000 issue could affect our operations. We also are dependent upon our tenants for revenue and cash flow. Interruptions in tenant operations due to the Year 2000 issue could result in reduced revenue, increased receivable levels and cash flow reductions. 28 Inflation Inflation has historically not had a significant impact on our business because of the relatively low rates of inflation in the markets in which we have operated. We do not anticipate that inflation will have a direct, material negative impact on our results of operations in the future, because residential tenants typically enter into short-term leases and because most commercial leases provide that tenants must pay their share of operating expenses. An increase in prevailing inflation rates could, however, have a very dramatic impact on mortgage interest rates and the yields of alternative investments, with the effect of increasing our finance costs and adversely impacting real estate markets and the market for our debt and equity securities. 29 BUSINESS Introduction We are a self-administered real estate investment trust or "REIT," formed March 15, 1994 pursuant to Maryland law to acquire, own and operate investment real estate. We operate under the direction of our board of trustees. Our chief executive officer and our president have day-to-day management responsibilities, including identifying prospective property acquisitions, marketing, finance, overseeing third-party managers and general administrative responsibilities. In November 1998, we converted to an umbrella partnership REIT structure by forming an operating partnership, Wellington Properties Investments, L.P., of which we are the sole general partner. On November 20, 1998, the operating partnership acquired its initial three properties. We expect future acquisitions to be made through the operating partnership. Our operating partnership and our other subsidiaries currently own five properties: o a 119,722 square-foot office building in Minneapolis, Minnesota, o a 77,533 square-foot office building in St. Cloud, Minnesota, o a 50,291 square-foot light industrial facility in Burnsville, Minnesota, o a 304-unit apartment community in Madison, Wisconsin, and o a 72-unit apartment community in Schofield, Wisconsin. Currently, our REITPLUS(sm) affiliates manage each of our investment properties. Our Madison, Wisconsin apartment community is currently subject to sale under a land purchase agreement. We first qualified as a REIT for federal income tax purposes for the taxable year ended December 31, 1996. Our principal offices are located at 18650 W. Corporate Drive, Suite 300, Brookfield, Wisconsin 53045 and 11000 Prairie Lakes Drive, Suite 610, Minneapolis, Minnesota 55344, and our telephone numbers are (414) 792-8900 (Brookfield) and (612) 826-6968 (Minneapolis). The Operating Partnership and Operating Partnership Agreement Our interests and those of all limited partners in the operating partnership are represented by partnership units. Currently, the operating partnership has issued ordinary common units (which are economically equivalent to our common shares) and Class B common units, which have no current economic value, but which will automatically convert to ordinary common units upon the determination of our board of trustees that our funds from operations (as defined by the National Association of Real Estate Investment Trusts) equal or exceed $0.55 per share, assuming exercise of all outstanding rights to purchase our equity securities and conversion of all securities convertible into our common shares. If necessary, however, the number of Class B units that will convert to ordinary common units will be limited so that the current holder of the operating partnership's outstanding Class B units, American Real Estate Equities, 30 LLC, will not become a greater than 10% owner, assuming exercise of all outstanding rights to purchase our equity securities and conversion of all securities convertible into our common shares. The operating partnership has also issued 349,800 Class B preferred units to us, which are economically equivalent to our Class B Junior Cumulative Convertible Preferred Shares. Upon the closing of this offering and our contribution of our net proceeds to the operating partnership, the operating partnership will also issue us 700,000 Class A preferred units (up to 805,000 Class A preferred units if our underwriters exercise their overallotment option in full), which will be economically equivalent to the Class A Preferred Shares. The operating partnership may also issue additional classes or series of preferred units on such terms as we, as sole general partner, may determine. Management. The operating partnership was formed on July 28, 1998 as a limited partnership under the Delaware Revised Uniform Limited Partnership Act. We are the sole general partner of the operating partnership and expect to own only a minority interest in the operating partnership for the foreseeable future. We will use the proceeds from the sale of the Class A Preferred Shares to make an additional capital contribution to the operating partnership in exchange for an equal number of Class A preferred units of the operating partnership. As sole general partner, we have the exclusive power and authority to conduct the business of the operating partnership, subject to the consent of the limited partners in certain limited circumstances. Limited partners have no right or authority to act for or to bind the operating partnership. No limited partner may take part in the conduct or control of the business or affairs of the operating partnership by virtue of being a holder of units. In particular, the limited partners expressly acknowledge in the operating partnership agreement that we, as sole general partner, are acting on behalf of the operating partnership's limited partners and our shareholders, collectively, and are under no obligation to consider the tax consequences to limited partners when making decisions for the benefit of the operating partnership. The limited partners further agree that, in the event of a conflict between the interests of our shareholders and the limited partners, we, as sole general partner, will discharge our fiduciary duties to the limited partners by acting in the best interests of our shareholders. Removal of the General Partner. The operating partnership agreement provides that the limited partners may not remove us, with or without cause, as general partner of the operating partnership. In addition, we may not transfer any of our interests as general partner in the operating partnership, except in connection with a merger or sale of all or substantially all of our assets. Redemption, Exchange and Conversion of Units. Subject to certain limitations in the operating partnership agreement and, in the case of any preferred units, following the conversion of such preferred units into common units, holders of common units generally will have the right to require the redemption of their common units at any time one year after the original issuance date of such units. Limited partners that hold preferred units will have the right to convert such preferred units into common units at a conversion rate established at the time any particular class or series of preferred units is established. Once the conversion has occurred, a converted preferred limited partner will also have a right to require redemption of its common units. Unless we elect to assume and perform the operating partnership's obligation with respect to redemption of common units, a limited partner demanding redemption will receive cash from the operating partnership in an amount equal to the market value of the units to be redeemed. The market value of a unit, for this purpose, will be equal to the average of the closing bid and ask prices of our common shares for the ten trading days before the day on which the redemption notice was given. Instead of the operating partnership acquiring the units for cash, we will have the right to elect to acquire the units directly from a limited partner demanding redemption, in exchange for either cash or an equal number of our common shares, and, upon such acquisition, we will become the owner of such units. This one-for-one conversion rate will be adjusted appropriately in the event of a share split, share dividend or similar event. No fewer 31 than 1,000 units (or all remaining units owned by the limited partner if less than 1,000 units) must be redeemed or exchanged each time units are redeemed. We will always reserve a sufficient number of our authorized but unissued common shares, solely for the purpose of unit redemptions. As of the date of this prospectus, our operating partnership had outstanding 1,214,086 common units, 505,249 Class B common units and 349,800 Class B preferred units. When we contribute the net proceeds of this offering to the operating partnership (assuming no exercise of the underwriters' overallotment option), the operating partnership will issue us 700,000 Class A preferred units. If a limited partner receives common shares upon redemption of units, the limited partner will receive registration rights for the common shares in accordance with our master registration rights agreement. Under the agreement, every time the operating partnership issues units, we agree to register the common shares issuable in exchange for the units within one year and to use commercially reasonable efforts to register those shares for public resale by the former unit holder. Holders of partnership units also have the right under the agreement, subject to certain limitations, to include common shares they receive in exchange for units in registrations we may make for other purposes. Sales of Assets. Under the operating partnership agreement, we, as sole general partner, have the exclusive authority to determine whether, when and on what terms the assets of the operating partnership will be sold. However, a sale of all or substantially all of the assets of the operating partnership or a merger of the operating partnership with another entity generally requires an affirmative vote of the holders of a majority of the outstanding units held by limited partners. Conduct of Our Business and Distributions. Unless we first get the consent of the limited partners, we may not enter into or conduct any business other than in connection with managing the business of the operating partnership. Generally, we and the operating partnership will make distributions of cash to partners and our common shareholders, respectively, at the same time and in equal per-share amounts, subject, of course, to the dividend preferences of our preferred shares. To do so, we may be required to borrow funds from the operating partnership from time to time. Reimbursement; Transactions with Affiliates. We will not receive any compensation for our services as general partner of the operating partnership. We will, however, as a partner in the operating partnership, have the same right to allocations and distributions as other partners holding common units. In addition, the operating partnership will reimburse us for all our expenses incurred in connection with our activities as general partner, our continued existence and qualification as a REIT, and all other liabilities incurred by us in connection with the pursuit of our business and affairs as they may relate to the operating partnership. Except as expressly permitted by the operating partnership agreement, our affiliates will not engage in any transactions with the operating partnership, except on terms that are fair and reasonable and no less favorable to the operating partnership than terms that would be obtained from an unaffiliated third party. Issuance of Additional Units. We have broad discretion to cause the operating partnership to issue additional units to the limited partners or others (including us) for such consideration and on such terms and conditions as we, as sole general partner, deem appropriate. However, if we issue common shares, we must contribute the net proceeds to the operating partnership, and the operating partnership must issue a number of common units to us equal to the number of common shares we issued. The operating partnership agreement also allows the operating partnership to issue preferred units of different classes and series, having rights, preferences and other privileges, variations and designations as we may determine. Any such preferred units may have terms, provisions and rights which are preferential to the terms, provisions and rights of the common units and existing preferred units. Preferred units, however, may be issued to us only in connection with an offering of our securities having the same terms and rights as the preferred units and 32 the contribution by us to the operating partnership of the net proceeds of the offering. No limited partner of the operating partnership has preemptive, preferential or other similar rights with respect to additional capital contributions or loans to the operating partnership or the issuance or sale of any units. Capital Contributions. No partner of the operating partnership will be required to make additional capital contributions to the operating partnership, except that we are generally required to contribute net proceeds of the sale of our equity securities to the operating partnership. Except in the case of certain limited partners who may agree to contribute capital to restore any deficits in their respective capital accounts at liquidation, no limited or general partner will be required to pay to the operating partnership any deficit or negative balance which may exist in its capital account. Exculpation and Indemnification. The operating partnership agreement generally provides that we, as sole general partner, will incur no liability to the operating partnership or any limited partner for losses sustained, liabilities incurred, or benefits not derived as a result of errors in judgment or for anything that we may do or refrain from doing in connection with the business and affairs of the operating partnership if we carried out our duties in good faith. We also have no liability for the loss of any limited partner's capital and are not responsible for any misconduct, negligent act or omission of any consultant, contractor, or agent that we select in good faith. The operating partnership agreement also requires the operating partnership to indemnify us, our trustees and officers against any loss or damage, including reasonable legal fees and court costs, incurred by such person by reason of anything it may do or refrain from doing for or on behalf of the operating partnership, or in connection with its business or affairs, unless: (1) the act or omission either was committed in bad faith or was the result of active and deliberate dishonesty; (2) the indemnified person actually received an improper personal benefit in money, property or services; or (3) the indemnified person had reasonable cause to believe that the act or omission was unlawful. Any such indemnification claims must be satisfied only out of the assets of the operating partnership and any applicable insurance proceeds. Amendment of the Operating Partnership Agreement. Amendments to the operating partnership agreement may be proposed by us or by limited partners owning at least 25% of the then outstanding units. Generally, the operating partnership agreement can only be amended with our approval, and a majority of all outstanding units. Our Business Objectives and Operating Strategies Our primary business objective is to grow our company by strategically deploying and implementing our proprietary REITPLUS(sm) program. We believe that our REITPLUS(sm) program provides the capital, legal and tax advantages of the REIT structure, plus preserves the entrepreneurial opportunities required to attract and retain talented, local real estate operators. Key elements of the REITPLUS(sm) program include o REITPLUS(sm) Investment Strategies (External Growth). Our investment strategy is to enter new markets and increase our penetration in existing markets by procuring REITPLUS(sm) affiliates with a significant market presence and operating history. Typically, our REITPLUS(sm) investments include the issuance of our common shares or operating partnership units, thereby creating an ongoing incentive for our REITPLUS(sm) affiliates to maximize long-term shareholder value. We believe we have certain advantages which will enhance our ability to identify and capitalize on REITPLUS(sm) opportunities including: (1) our multiple-market expertise in identifying, structuring and closing acquisitions; (2) our experience in successfully growing and operating a public real estate company; (3) our long-standing relationship with customers, real estate brokers and institutional and other owners of 33 real estate assets, which collectively help us identify investment opportunities; and (4) our ability to offer tax deferred consideration to REITPLUS(sm) partners. o REITPLUS(sm) Operating Strategies (Internal Growth). Our operating strategy is to serve the real estate needs of our existing customers and expand our customer base. We intend to implement proactive property management and leasing programs, achieve operating efficiencies through increasing economies of scale, and complete ongoing maintenance and value enhancement improvements. We believe our operating strategy will provide increasing cash flow from our properties through rental increases and expense savings. Whenever possible, we intend to use our operating partnership to acquire properties. For many acquisitions, we anticipate that a portion of the purchase price will be paid in operating partnership units. The initial operating partnership transaction consisted of the acquisition of two office buildings and a light industrial building. Prior to that transaction, we owned only apartment communities. We also intend to continue to utilize the marketing and management expertise of our trustees, our property managers and their affiliates. We will continue to conduct market studies to identify tenant preferences and acquisition and development opportunities. In the future, we will likely continue to incur or guarantee indebtedness in connection with the development and acquisition of real estate assets. We currently intend to maintain a debt-to-total-market-capitalization ratio of approximately 70%, although this is subject to change based on market conditions. The amount of leverage will vary among investment properties that we own. Our current leverage is approximately 65%. Acquisition and Development Strategy Directly and through our REITPLUS(sm) partners, we have established a network of relationships with real estate owners, developers, brokers, lenders, insurance companies, governmental agencies, and other institutions. We hope that this network and our independent research will provide us with access to acquisition opportunities before they become widely marketed. We seek to invest in properties with one or more of the following characteristics: o ownership by potential REITPLUS(sm) affiliates with considerable expertise in local markets; o location in regions where geographic factors or governmental policies restrict or reduce competition; and o a history of poor management and/or occupancy and financial problems. In general, we seek to acquire properties that are not more than 10 years old and offer above average amenities. One of our goals is to provide a diversified portfolio of investment properties that will resist market fluctuations. We believe that by creating a portfolio of properties that is diverse as to type and location, we will be better insulated against fluctuations within specific market segments. Specifically, we will consider investment opportunities in office buildings, light industrial properties, multi-family housing, well-anchored shopping centers, community-based residential facilities and other types of investment real estate. With respect to new construction projects, we believe that, on a selective basis, we may have an opportunity to achieve rental rates that justify the risks associated with new development. We believe that expertise procured through joint ventures with our REITPLUS(sm) affiliates in the development of new 34 properties may provide us with a competitive advantage as the value of existing properties approaches replacement cost and new development becomes more attractive. In the ordinary course of our business, we and our agents engage in preliminary discussions with potential sellers and buyers of investment properties on a continual basis. At the present time, we do not have any properties under contract but are engaged in preliminary discussions with potential sellers. Our Maple Grove apartment community is presently under contract for sale to an independent third party. The contract provides for a purchase price of $16,700,000 to be paid by assuming the first mortgage of approximately $12,680,000 and the balance being paid in cash at closing. The contract is subject to closing conditions and contingencies including: o approval and consent of the holder of the first mortgage; o our ability to deliver clear title; o the purchaser inspecting the property; and o a satisfactory resolution of the issues raised by the United States Department of Justice concerning our compliance with fair housing laws as they relate to access by disabled persons. The buyer has advanced $400,000 of the cash purchase price in exchange for our 10% promissory note. If the sale of the Maple Grove property is not consummated by October 31, 1999, we will be required to begin making payments under the note to the extent of excess cash flow from the property. Property Management We intend to contract for management of our properties through the staff of professionals and support personnel, including certified property managers, apartment managers, apartment maintenance technicians and leasing agents of our REITPLUS(sm) affiliates. We intend that the depth of the REITPLUS(sm) affiliates will enable us to deliver quality services on an uninterrupted basis, thereby promoting tenant satisfaction and improving tenant retention. Each of our properties will be operated by a staff specifically selected by us, based on the size, location, age, management plan and marketing plan of the individual property. We seek personnel that are carefully trained in their appropriate areas of expertise, such as property management, marketing, leasing, resident relations, income generation, curb appeal and maintenance. Our Minnesota office buildings and light industrial facility are currently managed by Hoyt Properties Inc. and our Wisconsin apartment communities are managed by another REITPLUS(sm) affiliate, Wellington Realty, Inc. Our established policies and procedures specify reporting requirements and management guidelines to be applied at each of our properties. The computer network we use through our services agreement with Wellington Management Corporation, using customized and conventional software programs, has the capacity to connect our corporate headquarters with each property manager, providing management with rapid access to all marketing and accounting information. With respect to the apartment properties, on-site managers prepare weekly marketing reports of each property's occupancy, lease expiration, prospective resident traffic, unit availability, renewal, rental rate and tenant profile information. We also regularly monitor accounting elements such as receivables, payables, rent roll status and budget compliance through the system. 35 We have designed our marketing and leasing activities and procedures with the intent of complying with all established federal, state and local laws and regulations. We seek to offer leases of appropriate terms, consistent with individual property marketing plans structured to respond to local market conditions. We establish qualifying standards for prospective tenants to comply with the Fair Housing Amendments Act and the Americans with Disabilities Act and attempt to stabilize service levels and income streams through lower tenant turnover. None of our existing properties are currently subject to rent control or rent stabilization regulations. Each of our property managers receives a property management fee no greater than 5% of gross rental income collected in connection with the operation of our properties, a fee rate we believe is consistent with prevailing market rates. Property Marketing Through our property managers, we conduct certain marketing and leasing activities for our properties. Several of our officers and property managers actively participate in various owners' organizations, including the Building Owners and Managers Association, the Institute of Real Estate Management, the National Apartment Association and the International Council of Shopping Centers. Such organizations regularly provide market information and rent studies which we use to supplement our own studies. The Properties The properties that we currently own are: Name & Location Type Units/Square Feet Cold Spring Center Office 77,533 square feet St. Cloud, MN Thresher Square East/West Office 119,722 square feet Minneapolis, MN Nicollet VI Light Industrial 50,291 square feet Burnsville, MN Lake Pointe Apartments 72 units Schofield, WI Maple Grove Apartments 304 units Madison, WI We describe each of the above properties and their locations in greater detail below. Minnesota Properties Cold Spring Center Our Cold Spring Center is a 77,533 square-foot office building located in St. Cloud, Minnesota. The Class A, five-story building was built in 1990 and is 100% leased. The property also has a surface parking lot which holds 318 cars. 36 St. Cloud is located in central Minnesota, approximately 60 miles northwest of the Minneapolis/St. Paul metropolitan area. St. Cloud is the largest municipality in the St. Cloud Standard Metropolitan Statistical Area which is comprised of three central Minnesota counties with a combined population of 191,000. The city of St. Cloud is located at the junction of the three counties and serves as the regional commerce centers for central Minnesota and is one of the fastest growing municipalities in Minnesota, with a population of approximately 60,000. Cold Spring Center is located approximately 2.5 miles west of the central business district of St. Cloud. The St. Cloud office market is currently experiencing stable overall vacancy rates and it is difficult to find large blocks of contiguous space. No new development is expected over the next couple of years and, therefore, we believe that the market will be experiencing an increase in rents. Nicollet VI Nicollet Business Center VI is a 50,291 square-foot office/warehouse building located in Burnsville, Minnesota. The property is currently 100% leased and was built in 1997. Burnsville is a suburb of Minneapolis/St. Paul, located approximately 15 miles south of Minneapolis. The property is located in the southeastern portion of central Minnesota. The Twin Cities are ranked the 15th largest metropolitan area and the eighth fastest growing area in the United States, with an overall annual growth rate of 1.4%. As of 1996, the Twin Cities metropolitan population was approximately 2.8 million, with 58% of the state's population residing in the Twin Cities area. The Twin Cities have approximately 284 million square feet of industrial space with an availability rate of 5.27%. Overall availability in the Twin Cities has averaged less than 5% over the last five years. The overall industrial market in the Twin Cities is comprised of 40% office/warehouse, 30% manufacturing, 20% bulk warehouse and 10% office showroom. Thresher Square East/West Thresher Square, which is located in Minneapolis, consists of two buildings which are separated by a common wall with interior access between the buildings on each floor. The seven-story East building was built in 1904 and contains 64,020 square feet. The West building was built in 1900 and contains 55,845 square feet. The buildings were renovated in the mid 1990's, are currently 100% occupied and are on the National Register of Historic Places. Thresher Square is located in Minneapolis' central business district and is characterized by the real estate industry as a Class B office building. As of the first quarter 1999, the metropolitan area had an overall vacancy rate of 6.25% and an office base of 53.76 million square feet. The Minneapolis central business district contains 38% of that total square footage and has a current vacancy rate of 4.38%. 37 Commercial Property Tables The following tables present additional information related to commercial properties in Minnesota:
TOTALS OR Light WEIGHTED Office Properties Industrial Property AVERAGE --------------------------------------------------------- Cold Springs Thresher Square Office Center East/West Nicollet Business VI St. Cloud, MN Minneapolis, MN Burnsville, MN Year Acquired 1998 1998 1998 Year Built/ Renovated 1990 1900/1987 1997 Rentable Square Feet 77,533 119,722 N/A 197,255 GLA N/A N/A 50,291 50,291 Sq. Ft. % Leased (as of July 1, 1999) 100% 100% 100% 100% Annual Total Rental Revenue(1) $1,438,190 $1,610,431 $529,777 $3,578,398 Annual Total Rental Revenue Per Rentable Sq. $18.55 $13.45 $10.53 $14.46 Tenants Leasing 10%or Cold Spring Granite BRW, Inc.(48%) - Wakata Design More of Rentable Square (55%) - 4/02; Central 7/01; Search Institute Systems (19%) Footage as of July 1, MN ECSU (14%) - (16%) - 8/02 3/02; Quickdraw 1999 and Lease Expiration 9/02; First American Design, Inc. Date Bank (17%) - 4/05 (30%)- 8/02; Xata Corporation (41%) - 6/04 - ------------------- (1) Total rental revenue is the monthly contractual base rent as of July 31, 1999, multiplied by 12, plus the estimated annualized expense reimbursements under existing leases.
38 Tenants We currently lease our Minnesota properties to approximately 25 tenants that engage in a variety of businesses. The following table sets forth information regarding leases with the 5 largest tenants of our Minnesota properties, based upon annualized base rent for the relevant properties as of July 31, 1999:
% of Remaining Aggregate % of Aggregate Number of Lease Term Net Rentable Aggregate Annualized Annualized Tenant Name Leases in Months Sq. Ft. Leased Leased Sq. Ft. Base Rent Base Rent - ----------- ------ --------- -------------- -------------- --------- --------- Cold Spring Granite 1 34 42,394 54.68% $540,523 61.66% BRW, Inc.(1) 4 24 55,443 46.25% $436,322 40.79% Xata Corp 1 60 25,388 50.80% $185,328 55.3% Search Institute 2 38 21,781 39.00% $241,718 51.36% First American Bank 1 70 13,520 17.44% $195,548 22.31% TOTALS 9 158,526 64.08%(2) $1,599,439 44.70%(2) = ======= ========= ========== ====== - ------------------- (1) Space is leased in Thresher Square East and Thresher Square West. (2) Figures are as to all of our Minnesota commercial properties, taken as a whole.
39 Lease Expirations The following table sets forth detailed lease expiration information for each of our Minnesota properties for leases in place as of July 31, 1999, assuming that none of the tenants exercise renewal options or termination rights, if any, at or prior to the scheduled expirations.
2009 Year of Lease Expiration and Property Information 1999(1) 2000 2001 2002 2003 2004 2005 2006 2007 2008 thereafter Total -------------------- ------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---------- ----- Cold Springs Office Center Square Footage of Expiring Leases -- 6,145 3,980 53,605 -- -- 13,520 -- -- -- -- 77,250 Percentage of Total Leased Sq. Ft. -- 7.9% 5.1% 69.6% -- -- 17.4% -- -- -- -- 100% Final Annual Base Rent Under Expiring Leases(2) -- $37,463 $58,307 $585,367 -- -- $195,548 -- -- -- -- $876,685 Final Annual Base Rent per Sq. Ft. Under Expiring Leases(3) -- $6.10 $14.65 $10.92 -- -- $14.46 -- -- -- -- $11.35 Percentage of Total Final Annual Base Rent Represented by Expiring Leases -- 4.3% 6.7% 66.8% -- -- 22.2% -- -- -- -- 100% Number of Leases Expiring -- 2 1 2 -- -- 1 -- -- -- -- 6 - ------------------- (1) Represents lease expirations from August 1, 1999 to December 31, 1999. (2) Represents annual base rent for the first annual period in accordance with lease terms. (3) Calculated by dividing the annual base rent for the final annual period by the net rentable square feet subject to such leases.
40
2009 Year of Lease Expiration and Property Information 1999(1) 2000 2001 2002 2003 2004 2005 2006 2007 2008 thereafter Total -------------------- ------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---------- ----- Nicollet Business VI Square Footage of Expiring Leases -- -- -- 24,586 -- 25,388 -- -- -- -- -- 49,974 Percentage of Total Leased Sq. Ft. -- -- -- 49.2% -- 50.8% -- -- -- -- -- 100% Final Annual Base Rent Under Expiring Leases(2) -- -- -- $149,748 -- $185,328 -- -- -- -- -- $335,076 Final Annual Base Rent per Sq. Ft. Under Expiring Leases(3) -- -- -- $6.09 -- $7.30 -- -- -- -- -- $6.71 Percentage of Total Final Annual Base Rent Represented by Expiring Leases -- -- -- 44.7% -- 55.3% -- -- -- -- -- 100% Number of Leases Expiring -- -- -- 2 -- 1 -- -- -- -- -- 3 - ------------------- (1) Represents lease expirations from August 1, 1999 to December 31, 1999. (2) Represents annual base rent for the first annual period in accordance with lease terms. (3) Calculated by dividing the annual base rent for the final annual period by the net rentable square feet subject to such leases.
41
2009 Year of Lease Expiration and Property Information 1999(1) 2000 2001 2002 2003 2004 2005 2006 2007 2008 thereafter Total -------------------- ------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---------- ----- Nicollet Business VI Thresher Square West Square Footage of Expiring Leases -- 686 33,378 21,781 -- -- -- -- -- -- -- 55,845 Percentage of Total Leased Sq. Ft. -- 1.2% 59.8% 39.0% -- -- -- -- -- -- -- 100% Final Annual Base Rent Under Expiring Leases(2) -- $7,546 $249,462 $213,625 -- -- -- -- -- -- -- $470,633 Final Annual Base Rent per Sq. Ft. Under Expiring Leases(3) -- $11.00 $7.47 $9.81 -- -- -- -- -- -- -- $8.43 Percentage of Total Final Annual Base Rent Represented by Expiring Leases -- 1.6% 53.0% 45.4% -- -- -- -- -- -- -- 100% Number of Leases Expiring -- 1 2 2 -- -- -- -- -- -- -- 5 - ------------------- (1) Represents lease expirations from August 1, 1999 to December 31, 1999. (2) Represents annual base rent for the first annual period in accordance with lease terms. (3) Calculated by dividing the annual base rent for the final annual period by the net rentable square feet subject to such leases.
42
2009 Year of Lease Expiration and Property Information 1999(1) 2000 2001 2002 2003 2004 2005 2006 2007 2008 thereafter Total -------------------- ------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---------- ----- Thresher Square East Square Footage of Expiring Leases 8,090(4) 4,216 27,508 13,787 10,419 -- -- -- -- -- -- 64,020 Percentage of Total Leased Sq. Ft. 12.6% 6.6% 43.0% 21.5% 16.3% -- -- -- -- -- -- 100% Final Annual Base Rent Under Expiring Leases(2) $25,169 $34,798 $238,932 $155,775 $144,301 -- -- -- -- -- -- $598,975 Final Annual Base Rent per Sq. Ft. Under Expiring Leases(3) $3.11 $8.25 $8.69 $11.3 $13.85 -- -- -- -- -- -- $9.36 Percentage of Total Final Annual Base Rent Represented by Expiring Leases 4.2% 5.8% 39.9% 26.0% 24.1% -- -- -- -- -- -- 100% Number of Leases Expiring 17 3 5 4 2 -- -- -- -- -- -- 31 - ------------------- (1) Represents lease expirations from August 1, 1999 to December 31, 1999. (2) Represents annual base rent for the first annual period in accordance with lease terms. (3) Calculated by dividing the annual base rent for the final annual period by the net rentable square feet subject to such leases. (4) Includes month-to-month tenants and storage leases.
43
Year of Lease Expiration 2009 Property and Information 1999(1) 2000 2001 2002 2003 2004 2005 2006 2007 2008 thereafter Total ---------------- ------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---------- ----- Consolidated Totals for All Commercial Properties Square Footage of Expiring Leases 8,090(4) 11,047 64,866 113,759 10,419 25,388 13,520 -- -- -- -- 247,089 Percentage of Total Leased Sq. Ft. 3.3% 4.5% 26.3% 46.0% 4.2% 10.3% 5.4% -- -- -- -- 100% Final Annual Base Rent Under Expiring Leases(2) $25,169 $79,807 $546,701 $1,104,515 $144,301 $185,328 $195,548 -- -- -- -- $2,281,369 Final Annual Base Rent per Sq. Ft. Under Expiring Leases(3) $3.11 $7.22 $8.43 $9.71 $13.85 $7.30 $14.46 -- -- -- -- $9.23 Percentage of Total Final Annual Base Rent Represented by Expiring Leases 1.1% 3.5% 24.0% 48.4% 6.3% 8.1% 8.6% -- -- -- -- 100% Number of Leases Expiring 17 6 8 10 2 1 1 -- -- -- -- 45 - ------------------- (1) Represents lease expirations from August 1, 1999 to December 31, 1999. (2) Represents annual base rent for the first annual period in accordance with lease terms. (3) Calculated by dividing the annual base rent for the final annual period by the net rentable square feet subject to such leases. (4) Includes month-to-month leases and storage leases.
44 Wisconsin Properties Lake Pointe Lake Pointe is located on a point of land at the confluence of the Eau Claire River and Lake Wausau, in Schofield, Wisconsin. Schofield is a southern suburb of Wausau, Wisconsin and is considered a part of the Wausau urban area. The City of Wausau is situated in north central Wisconsin approximately 140 miles north of Madison, 150 miles east of Minneapolis and 180 miles northwest of Milwaukee. Wausau, located in Marathon County, is the retail, industrial and business hub of north central Wisconsin. While much of the county is home to productive dairy and crop farms, the local economy is diversified, including industries such as insurance, wood products and paper mills. The greater Wausau area, with a population of over 115,000, is an attractive site for new business and industry, aided by incentives such as affordable industrial land, revolving loan funds offering lower than market rates, job training funds, and an industrial mall complete with a laser lab. There are two industrial parks in the Wausau area. One is on the west side and the other is in the City of Schofield. Major industrial employers include Weyerhauser Paper Company, Wausau Paper Mills and Land O' Lakes, Inc. Lake Pointe has a unique location on a point, with Lake Wausau on the west and the Eau Claire River on the east. A private marina is immediately adjacent to the entrance to the property. The apartment community is situated on a peninsula of approximately 4.13 acres and consists of 72 units with 72 garages, plus 72 additional parking spaces. It was built in 1990. The property's 26 boat slips offer opportunities for power boating, sailing and water skiing. The sunning deck offers a place to relax and socialize with neighbors. Lake Pointe won the Wausau Chamber of Commerce's Beautification Award in 1991. The buildings at Lake Pointe are of a soft, contemporary design with a light grey vinyl and white aluminum trim exterior. The property is extensively landscaped and has an underground sprinkling system, picnic area and community deck. Each building is equipped with elevators and laundry facilities on every floor. All units have a water view, patio or balcony, garage and fully-equipped kitchen. Each unit has been professionally decorated with color coordinated carpeting, drapes and mini blinds, oak wood trim, European-style cabinetry and individual air conditioning and heating units. Some individual units have walk-in closets and have a sink and mirror in the bedroom. Maple Grove Maple Grove is a 304-unit apartment community located in Madison, Wisconsin. It was constructed in phases between 1991 and 1996. There are 144 two-bedroom apartments and 160 one-bedroom apartments. Maple Grove is presently under contract for sale to an independent third party. The contract provides for a purchase price of $16,700,000 to be paid by assuming the first mortgage of approximately $12.7 million and paying the balance in cash at closing. While we did not solicit offers to buy the Maple Grove property, we think that the proposed transaction is in our best interests because of (1) our near-term capital requirements, and (2) our belief that other investment opportunities may provide a better return on capital. 45 The contract is subject to closing conditions and contingencies including: o approval and consent of the holder of the first mortgage; o our ability to deliver clear title; o the purchaser inspecting the property; and o a resolution of the issues raised by the United States Department of Justice concerning our compliance with fair housing laws as they relate to access by disabled persons. The buyer has advanced $400,000 of the cash purchase price in exchange for our 10% promissory note. Maple Grove is located in southwestern Madison and is approximately 10 minutes from downtown Madison. It is situated on a 13.23-acre parcel in a neighborhood which includes single family homes, duplexes, senior housing, a commercial site, a day care center and a neighborhood shopping center. It has 14 buildings. Nine of the buildings include underground parking. There is a club house with a swimming pool, enclosed whirlpool, exercise facility and party rooms. The average size of the one-bedroom units is 756 square feet and the two-bedroom units average 1,059 square feet. The units offer superior amenities with many including fireplaces, two balconies, whirlpool tubs, creative floor plans, oversized closets and in-unit washers and dryers. Madison is located in Dane County, Wisconsin and is the state's capital and second largest city. Madison is located approximately 140 miles from Chicago, 80 miles from Milwaukee and 250 miles from Minneapolis. Overall, Madison's economy is weighted heavily to government and services. This tends to provide stability in economic cycles. Employment levels, building activity, and consumer demand all tend to be rather stable compared to cities more dependent upon industrial employment. According to a study conducted by the Madison Gas and Electric Company, occupancy of rental units in the area during the first three months of 1999 was 93.6%. 46 Apartment Property Tables The following table presents additional information concerning our apartment properties:
Property and Location Maple Grove, Lake Pointe Madison, Wisconsin Schofield, WI Totals/Weighted Average Year Acquired 1995-1996 1996 N/A Number of Units 304 72 376 Approximate Rentable Area (Sq. Ft.) 276,496 65,184 341,680 Total Acreage 13.23 4.13 17.36 Year Placed in Service 1991-1996 1990 N/A Average Unit Size (Sq. Ft.) 910 905 909 1998 Average Occupancy 91.1% 97.2% 92.3% Occupancy at July 1, 1999 98.6% 100% 98.9% 1998 Average Monthly Rental Rates - Per Unit $735 $602 $710 1998 Average Monthly Rental Rates - Per Sq. Ft. $0.81 $0.66 $0.78
47 Mortgage Indebtedness The following chart summarizes the mortgage indebtedness of each of our properties.
Principal Interest Rate Amount Face Amount Balance as of At Amortization Maturity Due at Prepayment of Mortgage July 1, 1999 July 1, 1999 (Years) Date Maturity Penalty ----------- ------------ ------------ ------- ---- -------- ------- Property Location Nicollet Business VI $2,350,000 $2,317,794 7.0% 30 2/8/08 $2,012,720 Yield Burnsville, MN Maintenance Thresher Square East $4,335,000 $3,955,000 5.5% 19 5/1/15 $0 Minneapolis, MN Thresher Square West $3,805,000 $2,965,000 6.5% 18 6/1/10 $0 June 1, 2000 Minneapolis, MN @ 101%; June 1, 2000 @ 100.5%; June 2002 @ par Cold Springs Office $7,500,000 $7,408,491 9.25% on 20 9/30/00 $7,285,826 $20,000 Cntr., St. Cloud, MN $5,533,491(1); 10.75% on $1,875,000(1) Maple Grove $12,900,700 $12,680,308 8.1% 30 6/01/04 $11,960,225 Yield Madison, WI Maintenance Lake Pointe $ 2,750,000 $ 2,722,891 7.6% 30 3/11/28 $0 Yield Schofield, WI Maintenance TOTAL/WEIGHTED AVERAGE % $33,640,000 $32,049,484 7.9% - ------------------- (1) Represents a variable-rate mortgage.
48 Employees We intend to maintain a small corporate staff. At the present time, our only employees are our chief executive officer, Duane H. Lund, and our president, Robert F. Rice. Currently, we have contracted with Wellington Management Corporation for accounting services for a fee of $500.00 per month. As we acquire additional assets, we expect to hire additional staff to provide accounting services internally. We have entered into a property management agreement with Wellington Realty, Inc. with respect to our Wisconsin properties and with Hoyt Properties Inc. with respect to our Minnesota properties. Each of these agreements provides for the payment of management fees equal to 5% of gross rental income, which we believe is consistent with prevailing market rates. We anticipate that, as we add new REITPLUS(sm) affiliates, we will enter into similar property management agreements. Competition Our office building properties compete with numerous alternatives for tenants in the local markets in which they are located. The apartment community properties compete directly with other multifamily properties and single family homes that are available for rent in the markets in which our properties are located. The apartment community properties also compete for tenants with the new and existing home market. Other office buildings, community shopping centers, light industrial facilities and residential communities that we may acquire in the future will also compete for tenants with other similar properties in the same local markets. In addition, we compete with other investors for acquisitions and development projects, and many such competitors have greater resources than we do, including greater cash resources, greater access to debt and equity markets and greater management and leasing resources and expertise. Legal Proceedings Neither we, nor any of our properties, are presently subject to any material litigation nor, to our knowledge, is any material litigation threatened against us or our properties, other than routine litigation arising in the ordinary course of business and which is expected to be covered by liability insurance. We have received notice of a Department of Justice investigation of the architect and developer of our Maple Grove apartment community related to handicap accessibility. If our Maple Grove property is not in compliance with applicable laws, we may be responsible for any deficiencies. Though we expect that our liability, if any, would be limited to the last 60 units constructed, as to which we acted as the developer, we cannot presently determine the costs of any actions that may ultimately be required of us. Regulation General. Apartment community properties are subject to various laws, ordinances and regulations, including regulations relating to recreational facilities such as swimming pools, activity centers and other common areas. We believe that, under present laws, ordinances and regulations, each of our existing properties has the permits and approvals necessary to operate. Commercial and other properties are also subject to regulation. Community-based residential facilities are extensively regulated and are generally licensed by the state in which they are located. Americans with Disabilities Act. All of our properties, as well as any newly developed or acquired properties, must comply with the Americans with Disabilities Act to the extent that the properties are "public accommodations" and/or "commercial facilities" as defined by the statute. Compliance with the Americans with Disabilities Act requirements could require removal of structural barriers to handicapped access in certain public areas of our properties where such removal is readily achievable. The act does not, however, consider residential properties, such as multifamily properties or community-based residential 49 facilities, to be public accommodations or commercial facilities, except to the extent portions of such facilities, such as a leasing office, are open to the public. Commercial properties, such as shopping centers or office buildings are considered public accommodations. To the extent possible through leases, we intend to require that our commercial tenants comply with the Americans with Disabilities Act. We will, of course, remain responsible for compliance with respect to common areas in commercial properties. Although we believe that each of our existing properties substantially complies with all present requirements under the Americans with Disabilities Act and applicable state laws, final regulations under the Act have not yet been promulgated. Noncompliance could result in imposition of fines or an award of damages to private litigants. If required changes involve greater expenditures than we currently anticipate, or if the changes must be made on a more accelerated basis than we anticipate, our ability to pay accrued dividends could be adversely affected. We believe that our competitors face similar costs to comply with the requirements of the Americans with Disabilities Act. Fair Housing Amendments Act of 1988. The Fair Housing Amendments Act requires multifamily properties first occupied after March 13, 1990 to be accessible to the handicapped. Noncompliance with the act could result in the imposition of fines or an award of damages to private litigants. While we believe that our existing properties are substantially in compliance with present requirements under the Fair Housing Amendments Act, we have received notice of a Department of Justice investigation of the architect and developer of our Maple Grove apartment community in Madison, Wisconsin. If our Maple Grove property is not in compliance with applicable laws, we believe that we may be responsible for any deficiencies. Though we expect that our liability, if any, should be limited to the last 60 units constructed, as to which we acted as the developer, we cannot presently determine the costs of any actions that may ultimately be required of us. Rent Control Legislation. State and local rent control laws in certain jurisdictions limit a property owner's ability to increase rents and to recover from tenants increases in operating expenses and the costs of capital improvements. Enactment of such laws has been considered from time to time in some jurisdictions, although none of the jurisdictions in which we presently operate has adopted such laws. We do not presently intend to develop or acquire multifamily properties in markets that are either subject to rent control or in which rent limiting legislation exists. Environmental Matters Under various federal, state, and local environmental laws, regulations, and ordinances, a current or previous owner 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 cleanup costs incurred by such parties in connection with the contamination. Such laws typically impose cleanup responsibility without regard to whether the owner or operator knew of, or caused the presence of the contaminants. The costs of investigation, remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to properly remediate such substances, may adversely affect an owner's ability to sell or rent such real estate or to borrow using such real estate as collateral. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. Persons who arrange for the disposal or treatment of hazardous or toxic substances may be held liable for the costs of investigation, remediation, or removal of such hazardous or toxic substances at or from the disposal or treatment facility, regardless of whether such facility is owned or operated by such person. Finally, the owner of a site may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site. 50 Certain federal, state and local laws, regulations and ordinances govern the removal, encapsulation or disturbance of asbestos containing materials when such materials are in poor condition or in the event of building remodeling, renovation or demolition. Such laws may impose liability for the release of such materials and may provide for third parties to seek recovery from owners or operators of real estate for personal injury associated with asbestos. In connection with our ownership and operation of our properties, we may be potentially liable for costs in connection with these matters. All of our properties were subject to Phase I environmental assessments at the time we acquired them in order to discover information regarding, and to evaluate the environmental condition of, the surveyed property and surrounding properties. The Phase I assessments included a historical review, a public records review, a preliminary investigation of the site and surrounding properties, screening for the presence of asbestos and equipment containing polychlorinated biphenyls ("PCBs"), and underground storage tanks and the preparation and issuance of a written report, but did not include soil sampling or subsurface investigations. In addition, we conducted a Phase II environmental assessment of our historical Thresher Square office buildings, which were constructed between 1900 and 1904, at the time we acquired them. None of our original environmental assessments have revealed any environmental liability that we believe would have a material adverse effect on our business, assets or results of operations, and our lenders have not requested additional environmental assessments. Nevertheless, it is possible that these assessments do not reveal all environmental liabilities or that there are material environmental liabilities of which we are unaware. Moreover, no assurances can be given that: (1) future laws, ordinances or regulations will not require or impose any material expenditures or liabilities in connection with environmental conditions by or on us or our properties, (2) the current condition of properties in the vicinity of our properties (such as the presence of underground storage tanks) may not impact us adversely, or (3) prior owners of our properties did not create environmental problems of which we are not aware. We believe that our properties are each in compliance in all material respects with all federal, state and local laws, ordinances and regulations regarding hazardous or toxic substances or petroleum products. We have not been notified by any governmental authority, and are not otherwise aware, of any material noncompliance, liability or claim relating to hazardous or toxic substances or petroleum products in connection with any of our properties. Insurance We carry comprehensive liability, fire, extended coverage and rental loss insurance with respect to all of our properties, with policy specifications, insured limits and deductibles customarily carried for similar properties. There are, however, certain types of losses (such as losses arising from wars) that are not generally insurable. Should an uninsured loss or a loss in excess of insured limits occur, we could lose our capital invested in the affected property, as well as the anticipated future revenues from such property and could also continue to be obligated on any mortgage indebtedness or other obligations related to the property. 51 Certain Property Tax Information Tenants of apartment communities generally are not required to pay their proportionate share of any real estate taxes; tenants of commercial properties do generally pay their proportionate share of real estate taxes. The 1998 property taxes for our properties were as follows: Cold Springs $ 241,270 Thresher Square East/West $ 296,571 Nicollet VI $ 49,439 (1) Maple Grove $ 371,990 Lake Pointe $ 72,985 - ---------------------- (1) The Nicollet VI property should be fully assessed in 2000. 52 MANAGEMENT Board of Trustees The following biographical descriptions set forth certain information with respect to our trustees and executive officers, based on information furnished to us by them. The following information is as of September 30, 1999, unless otherwise specified. Name Age Title(s) Arnold K. Leas................. 65 Chairman of the Board of Trustees Steven B. Hoyt................. 47 Trustee Paul T. Lambert................ 47 Trustee Peter Ogden.................... 41 Trustee Robert P. Ripp................. 72 Trustee Robert D. Salmen............... 44 Trustee Mark S. Whiting (1)............ 42 Trustee Duane H. Lund.................. 35 Chief Executive Officer and Treasurer Robert F. Rice................. 48 President and Secretary - ------------------------ (1) Mr. Whiting has agreed to serve as a trustee upon the closing of the offering. Class I Trustees - Terms to Expire in 2001 Paul T. Lambert, has been a trustee since November 1998. Mr. Lambert has been a private investor since 1995. He served on the board of directors and was the chief operating officer of First Industrial Realty Trust, Inc., from its initial public offering in June 1994 to the end of 1995. Mr. Lambert was one of the largest contributors to the formation of First Industrial and one of its founding shareholders. Prior to forming First Industrial, Mr. Lambert was managing partner of the Midwest region for The Shidler Group, a national private real estate investment company. Prior to joining Shidler, Mr. Lambert was a commercial real estate developer with Dillingham Corporation and, prior to that, was a consultant with The Boston Consulting Group. Mr. Lambert was also a founding stockholder of CGA Group, Ltd., a holding company whose subsidiary is a AAA-rated financial guarantor based in Bermuda. Arnold K. Leas, our chairman of the board of trustees, served as our original president/chief executive officer from our inception in 1994 until November 1998. Mr. Leas has also served as a director, chief executive officer and president of Wellington Management Corporation since its inception in 1988. Wellington Management and its subsidiary, Wellington Investment Services Corp., currently manage over $100 million dollars of investors' funds. From 1984 to 1988, Mr. Leas was executive vice president of Decade Securities, Inc., a Milwaukee, Wisconsin-based company that was involved primarily in the syndication of multi-family apartment communities throughout the United States. Mr. Leas has transacted real estate acquisitions and sales, directly or indirectly, in excess of $200,000,000. Mr. Leas is on the board of directors of the Metropolitan Milwaukee Association of Commerce Council of Small Business Executives and is a graduate of the Realtors Institute. Class II Trustees - Terms to Expire in 2000 Steven B. Hoyt became a trustee in November 1998. He has served as managing general partner of Hoyt Development (from 1979 to 1989) and chief executive officer of Hoyt Properties Inc. (from 1989 to present). Hoyt Properties currently owns over 1,000,000 square feet of industrial and office property in Minnesota and has developed over 5,000,000 square feet of commercial property since its inception. From 1994 to 1995, Mr. Hoyt served as a senior regional director of First Industrial Realty Trust, Inc. Mr. Hoyt 53 is a member of the board of directors of the Better Business Bureau and has served in numerous state and national positions for the National Association of Industrial and Office Parks (NAIOP). Robert P. Ripp has served as one of our trustees since our inception in 1994. Mr. Ripp is the owner of RESI Realtor, a Milwaukee-based real estate brokerage firm. Prior to forming RESI Realtor in 1985, Mr. Ripp was the vice president/general sales manager for Wauwatosa Realty, a real estate brokerage firm with 27 offices in the State of Wisconsin. Class III Trustees - Terms to Expire in 1999 Peter Ogden has been a trustee since our inception in 1994. Mr. Ogden has served as the president and owner of Ogden & Company since 1990 and the vice president, treasurer and owner of Ogden Development Group, Inc. since 1986, both of which are Milwaukee-based providers of real estate brokerage, leasing and property management services and which together manage over 2,500 apartment and condominium units, in addition to shopping centers and office, industrial and mixed-use buildings. Robert D. Salmen joined our board of trustees in August 1999. Mr. Salmen founded Equity Financial Services in 1993. While continuing to operate Equity Financial's investment services company, he co-founded Equity Commercial Services in 1996 to incorporate leasing and then property management services for Equity Financial and currently serves as its president. Prior to founding Equity Financial Services, Mr. Salmen was vice president of institutional investment sales with Welsh Companies for eight years. He established the Institutional Investment division at Welsh Companies in 1985. From its inception through 1992, he directed Welsh's sales marketing force. Prior to joining Welsh, Mr. Salmen spent over nine years with Towle Real Estate. Mr. Salmen is a graduate of the University of Minnesota. Mark S. Whiting has agreed to join our board of trustees upon the completion of the offering of the Class A Preferred Shares. Mr. Whiting has an extensive public REIT background, having served as the President and a member of the board of directors of TriNet Corporate Realty Trust, Inc. (NYSE: TRI) from 1993 until 1998 and as its Chief Executive Officer from 1996 until 1998. At the time, TriNet owned a commercial real estate portfolio consisting of over 20 million square feet located in 26 states and a total market capitalization of $1.6 billion. Mr. Whiting holds an M.B.A. from the Stanford University Graduate School of Business. Executive Officers Duane H. Lund has been our chief executive officer since November 1998. Mr. Lund was a founding stockholder of First Industrial Realty Trust, Inc. and served as a senior regional director of First Industrial from 1994 to June 1998. In such capacity, Mr. Lund acquired and managed over 11,000,000 square feet of commercial property with a value in excess of $750 million. From 1989 to 1994, Mr. Lund was an acquisition partner with The Shidler Group, where he was involved in coordinating the underwriting and due diligence for over $200 million of commercial property. Mr. Lund was a tax consultant with Peat Marwick Main & Company from 1986 until 1988. Mr. Lund is a member of the boards of directors of the Wisconsin Real Estate Alumni Association and National Association of Industrial and Office Properties, Minnesota Chapter and is a member of the advisory boards of the Midwest Real Estate News, the Minnesota Real Estate Journal and the KPMG Peat Marwick Alumni Association. Robert F. Rice, our president and corporate secretary, has served as secretary since our inception in 1994 and as executive vice president from May 1997 until becoming president in November 1998. Prior to November 1998, Mr. Rice served as vice president and general counsel to Wellington Management Corporation beginning in November 1993. From 1989 to October 1993, Mr. Rice provided advice with respect to Resolution Trust Corporation matters through Resource Alternatives, Inc., a provider of legal and 54 consulting services to the real estate industry. From 1984 to 1989, Mr. Rice served as a director, officer and general counsel for various affiliates of St. Francis Bank, F.S.B. Mr. Rice graduated from Marquette University Law School in 1976. Our board of trustees held seven meetings during 1998. Each of the trustees attended at least 75% of the total meetings of the board of trustees and the committees of the board of trustees on which he served. There are no familial relationships among any of our trustees or executive officers. We are currently seeking to identify and retain additional qualified candidates with national commercial real estate and capital markets expertise and experience to serve as non-employee members of our board of trustees. Messrs. Ogden and Ripp have executed written agreements to resign as members of our board of trustees once we have identified candidates that would be willing to serve in their stead on the board. In accordance with our bylaws, the remaining members of the board of trustees may fill the vacancies created by such resignations without submission of the matter to a vote of our shareholders. Committees of the Board of Trustees Our board of trustees has appointed an Audit Committee and a Compensation Committee. Audit Committee. Our Audit Committee, which held one meeting during 1998, currently consists of Messrs. Ogden and Salmen. The committee reviews related party transactions, makes recommendations concerning the engagement of independent public accountants, reviews with our independent public accountants the plans and results of our audit engagement, approves professional services provided by our independent public accountants, reviews the independence of the independent public accountants, considers the range of audit and non-audit fees that we pay to our independent accountants and reviews the adequacy of the our internal accounting controls. Compensation Committee. Our Compensation Committee, which held one meeting during 1998, currently consists of Messrs. Leas, Hoyt and Lambert. The committee makes recommendations and exercises all powers of the board of trustees in connection with certain compensation matters, including incentive compensation and benefit plans. The Compensation Committee administers and has authority to grant awards under our 1998 stock incentive plan. Trustee Compensation Our trustees receive a fee of $250 for each board or committee meeting attended, plus the reimbursement of all reasonable out-of-pocket expenses incurred in connection with such attendance. Shareholders' Agreement In November 1998, we entered into a ten-year shareholders' agreement with each of American Real Estate Equities, LLC, Duane H. Lund, WLPT Funding, Paul T. Lambert, Lambert Equities II, LLC, Steven B. Hoyt, Wellington Management Corporation, Robert F. Rice, Arnold K. Leas, Rose Marie Leas and Gregory S. Leas. Under the shareholders' agreement, the signing shareholders have agreed to take whatever actions are necessary (including, but not limited to, the voting of all shares owned, from time to time, by each of them, whether directly or indirectly) in order to: (1) cause Messrs. Lambert and Hoyt to be, and to continue to be, elected to our board of trustees; (2) cause our board of trustees to fill any vacancies on the board with a person mutually selected by American Real Estate Equities and Wellington Management Corporation; and (3) cause the board of trustees to elect Mr. Lund as our chief executive officer, Mr. Rice as our president, and Mr. Leas as our chairman of the board of trustees. 55 Executive Compensation Summary Compensation From its inception in 1994 through the year ended December 31, 1997, we were externally managed and paid no compensation to any of our executive officers. In 1998 the following compensation was paid: Name and Principal Securities Underlying Position Year Salary Options Duane H. Lund 1998 $18,750(1) -- Chief Executive Officer Robert F. Rice 1998 $62,500(2) 7,917(3) President and Secretary Arnold K. Leas 1998 -- 9,500(3) Chairman of the Board - --------------- (1) Amount reflects base annual salary of $150,000. Mr. Lund became our chief executive officer on November 20, 1998. (2) Amount reflects base annual salary of $150,000. Mr. Rice was paid commencing August 1, 1998. (3) All options were granted on May 27, 1998 and have an exercise price of $5.37 per common share, which was the fair market value per share on the date of grant. All such options are currently exercisable.
Options/SAR Grants in Last Fiscal Year Number of Common Percentage of Total Shares Underlying Options Granted to Exercise Price Expiration Name and principal position Options Granted Employees in Fiscal Year Date Duane H. Lund Chief Executive Officer -- -- -- -- Robert F. Rice President and Secretary 7,917 18.98% $5.37 5-26-08 Arnold K. Leas Chairman of the Board 9,500 22.77% $5.37 5-26-08
56
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year End Option/SAR Values # of Securities Underlying Value of unexercised Common Shares Options/SARs at in-the-money options/SARs at Acquired on Value Fiscal year End Fiscal Year End ($) Name and principal position Exercise Realized Exercisable(1) Exercisable/Unexercisable(2) - --------------------------- ------------ -------- -------------- ---------------------------- Duane H. Lund -- -- -- -- Chief Executive Officer Robert F. Rice -- -- 7,917 $0/-- President and Secretary Arnold K. Leas -- -- 9,500 $0/-- Chairman of the Board - --------------- (1) All of the options held by the named executive officers are currently exercisable. (2) Calculations are based upon the closing bid price of $4.30 per share as of December 31, 1998.
Employment Agreements We have entered into new employment agreements with Duane H. Lund, our chief executive officer, and Robert F. Rice, our president. The employment agreements, which became effective as of October 1, 1999, each provide for an initial base salary of $80,000 and, if we achieve progressive annual targets of earnings per share, our board of trustees may elect to award Mr. Lund and Mr. Rice a bonus of up to 100% of base salary. In addition, each employment agreement provides that the officers shall receive those health, life and disability and other benefits extended by the board of trustees to other similarly situated executives. Each of the employment agreements extends through December 31, 2000, subject to our right to terminate the agreement at any time. In the event that we terminate either officer's employment without cause or in the event such person's employment discontinues upon the expiration of the employment agreement or following a change in control, we or, in the case of a change in control, our successor, will be obligated to pay to such officer an amount equal to one year's base salary and continue his benefits for one year. In connection with the approval of the new employment agreements, we also issued each of Mr. Lund and Mr. Rice options to purchase 80,000 of our common shares at a price equal to 110% of the average closing bid price for our common shares over the 10 trading days preceding the effective date of the registration statement covering the Class A Preferred Shares. These options will become exercisable as to 40,000 shares on December 31, 1999 and, if we meet specified financial goals for the preceding periods, as to an additional 40,000 shares on December 31, 2000. 57 Indemnification and Insurance Our trustees are accountable to us and our shareholders as fiduciaries and consequently must exercise good faith and integrity in handling company affairs. Pursuant to Maryland law and our organizational documents, no trustee shall be liable to us for any act, omission, loss, damage or expense arising from the performance of his or her duty as trustee unless such trustee received an improper personal benefit or acted in bad faith, with deliberate dishonesty or with reason to believe that his actions were unlawful. Our declaration of trust and bylaws provide that we will indemnify every eligible indemnitee against all judgements, penalties, fines, amounts paid in settlement and reasonable expenses actually incurred by the indemnitee in connection with any proceeding in which such indemnitee was, is or is threatened to be named as defendant or respondent or called as a witness, by reason of his or her serving or having served us if it is determined that the indemnitee conducted himself or herself in good faith, received no improper personal benefit, did not act with deliberate dishonesty and, in the case of any criminal proceeding, had no reasonable cause to believe that his or her conduct was unlawful. For purposes of these provisions, an "eligible indemnitee" is (1) any of our present or former trustees or officers, (2) any person who, while serving in any of such capacities, served at our request as a trustee, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another trust or other enterprise, (3) any person nominated or designated by our board of trustees or any committee thereof to serve in any of the capacities referred to in the preceding clauses (1) or (2), and (4) any employee of Wellington Realty, Inc. providing services to us. It is the position of the Securities and Exchange Commission that indemnification for liabilities arising under the Securities Act of 1933 is contrary to public policy and therefore unenforceable. 58 PRINCIPAL SHAREHOLDERS The following table describes the beneficial ownership of our voting shares at September 30, 1999 by: o each person that we know beneficially owns more than 5% of our outstanding voting shares; o each of our trustees; o our chief executive officer and president; and o all of our trustees and executive officers as a group. Except as described in the notes to the table, each person named has sole voting and investment power with respect to all shares beneficially owned.
Class B Junior Common Shares Cumulative Convertible Beneficially Owned Preferred Shares Owned as of as of Name September 30, 1999 September 30, 1999 - --------------------------------------------------- -------------------------- -------------------------- Number(1) Percent(1) Number(2) Arnold K. Leas (3)(4)(5)........................... 197,178 14.3% 95,000 Steven B. Hoyt (3)(4)(6)(7)....................... 166,666 12.1% 254,800 Paul T. Lambert (3)(4)(7)(8)....................... 166,666 12.1% 254,800 Duane H. Lund (2)(3)(4)(7)(9)...................... 166,666 12.1% 254,800 American Real Estate Equities, LLC (4)(10)......... 166,666 12.1% 254,800 Lambert Equities II, LLC (4)(11)................... 166,666 12.1% 254,800 WLPT Funding, LLC (4)(12).......................... 166,666 12.1% 254,800 Wellington Management Corporation (4)(13).......... 150,321 11.0% 95,000 Esor and Company (14).............................. 70,693 5.2% 0 Peter Ogden (3)(15)................................ 3,167 * 0 Robert P. Ripp (3)(16)............................. 4,199 * 0 Mark S. Whiting (3) ............................... 0 * 0 Robert D. Salmen (3)(7)............................ 0 * 0 Robert F. Rice (3)(4)(7)(17)....................... 9,500 * 0 All trustees and current executive officers as a group (8 persons) (18)........................ 380,710 27.3% 349,800 - ------------------------------------ * Indicates less than one percent. (1) Based on 1,372,152 common shares outstanding as of September 30, 1999. Also assumes exercise by only the shareholder or group named in each row of all options and warrants for the purchase of our common shares held by such shareholder or group and exercisable within 60 days of September 30, 1999. (2) Our Class B Cumulative Convertible Preferred Shares are each convertible, at the option of the holder, into a number of our common shares equal to the quotient obtained by dividing (a) $10.00, plus any dividends then accrued but unpaid on the Class B preferred shares, by (b) a price equal to 110% of the average closing bid price for our common shares over the 10 trading days preceding the effective date of the registration statement covering the Class A Preferred Shares. As a result, the number of common shares into which the Class B preferred shares will be convertible cannot be determined at this time. (3) The business address for each of our current trustees and executive officers is 18650 W. Corporate Drive, Suite 300, Brookfield, Wisconsin 53045. (4) All of these parties have entered into a ten-year agreement providing for the election of trustees and certain other matters. Each such party disclaims beneficial ownership of our common shares owned by each other party. 59 (5) Includes 990 common shares held by a trust for the benefit of Mr. Leas' wife and options to purchase 9,500 common shares exercisable within 60 days of September 30, 1999. All shares held by Mr. Leas or for the benefit of his wife have been transferred to an excess share trust and may not be voted on any matter coming before our shareholders. Also includes 150,321 common shares held by Wellington Management Corporation, of which Mr. Leas is the president and chief executive officer and with respect to which Mr. Leas, members of his immediate family and trusts for the benefit of such persons own approximately 41.8% of the outstanding capital stock. The Class B Junior Cumulative Convertible Preferred Shares indicated are also owned of record by Wellington Management and include 66,531 shares which have been transferred to an excess share trust and may not be voted by Wellington Management Corporation on any matter coming before our shareholders. Mr. Leas disclaims beneficial ownership of common shares held for the benefit of his wife. (6) Does not reflect 691,690 ordinary common units and 168,417 Class B common units of our operating partnership held by Mr. Hoyt or members of his immediate family. The common shares and the Class B Cumulative Convertible Preferred Shares indicated are held by American Real Estate Equities, LLC, of which Mr. Hoyt is a member. (7) These parties have indicated an interest in buying some of the Class A Preferred Shares offered by this prospectus. (8) Does not reflect 168,416 Class B common units of our operating partnership held by Lambert Equities II, LLC, of which Mr. Lambert is the controlling majority member and sole manager. The common shares and the Class B Junior Cumulative Convertible Preferred Shares indicated are held by American Real Estate Equities, LLC, of which Lambert Equities II, LLC is a member. (9) Does not reflect 375,666 ordinary common units and 168,416 Class B common units of our operating partnership held by WLPT Funding, LLC, of which Mr. Lund is the owner and the sole manager. The common shares and the Class B Junior Cumulative Convertible Preferred Shares indicated are held by American Real Estate Equities, LLC, of which Mr. Lund is the president and of which WLPT Funding, LLC is a member. (10) The business address for American Real Estate Equities, LLC is 300 First Avenue North, Suite 115, Minneapolis, Minnesota 55401. (11) The business address from Lambert Equities II, LLC is 4155 East Jewel, Suite 103, Denver, Colorado 80222. Figures indicated do not reflect ownership of 168,416 Class B common units of our operating partnership. The common shares and Class B Junior Cumulative Convertible Preferred Shares indicated are held by American Real Estate Equities, LLC, of which Lambert Equities II, LLC is a member. (12) The business address for WLPT Funding, LLC is c/o Golden Acres Incorporated, 15315 Masons Pointe, Eden Prairie, Minnesota 55347. Figures do not reflect 375,666 ordinary common units and 168,416 Class B common units of our operating partnership. The common shares and Class B Junior Cumulative Convertible Preferred Shares indicated are held by American Real Estate Equities, LLC, of which WLPT Funding, LLC is a member. (13) Includes 66,531 Class B Junior Cumulative Convertible Preferred Shares which have been transferred to an excess share trust; Wellington Management Corporation may not vote such shares on any matter coming before our shareholders. The business address for Wellington Management Corporation is 18650 W. Corporate Drive, Suite 300, P.O. Box 0919, Brookfield, Wisconsin 53045. (14) Includes 30,000 Class B Junior Cumulative Convertible Preferred Shares which havve been transferred to an excess share trust; American Real Estate Equities, LLC may not vote such shares on any matter coming before our shareholders. The business address for Esor and Company is 1100 W. Wells Street, Milwaukee, Wisconsin 53233. (15) Consists solely of options to purchase common shares exercisable within 60 days of September 30, 1999. (16) Includes options to purchase 3,167 common shares exercisable within 60 days of September 30, 1999. (17) Includes options to purchase 7,917 common shares exercisable within 60 days of September 30, 1999. (18) Includes options to purchase an aggregate of 23,651 common shares exercisable within 60 days of September 30, 1999. Figures do not reflect an aggregate of 1,067,356 common units and 505,249 Class B common units of our operating partnership.
60 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS American Real Estate Equities, LLC. American Real Estate Equities, LLC is owned in equal thirds by WLPT Funding, LLC, Lambert Equities II, LLC and Steven B. Hoyt. Duane Lund, our chief executive officer, owns 100% of WLPT Funding and is its sole manager. Paul T. Lambert, one of our trustees, is a majority owner and sole manager of Lambert Equities. Steven Hoyt is also one of our trustees. In November 1998, our shareholders approved a transaction whereby American Real Estate Equities would purchase 166,666 of our common shares for $1,000,000, or $6.00 per share, and would contribute certain assets, principally our Cold Springs office center in St. Cloud, Minnesota and contracts for the purchase of 29 other real estate investment properties (some of which Mr. Hoyt had an ownership interest in), to our operating partnership, Wellington Properties Investments, L.P. As consideration for such assets, we agreed to: o hire Mr. Lund as our chief executive officer and nominate Mr. Lambert and Mr. Hoyt for election to our board of trustees; o issue 4,933,233 common units of our operating partnership to American Real Estate Equities or its members; o issue an additional 9,934,663 common units to the owners of the properties to be acquired (including 4,510,671 units to Mr. Hoyt and his affiliates); o assume $64.0 million in third-party mortgage indebtedness on the properties to be acquired; o pay $31.2 million in cash to the owners of the properties to be acquired (none of which was to be paid to Mr. Hoyt); o issue to American Real Estate Equities a warrant to purchase 791,667 of our common shares at a price of $5.37 per share with respect to 395,833 shares, $6.47 with respect to 197,917 shares, $7.74 per share with respect to 118,750 shares and $9.32 per share with respect to 79,167 shares; and o reimburse certain of American Real Estate Equities' costs, including costs in obtaining the contractual rights contributed to the operating partnership, upon the completion of the transaction. Following shareholder approval of the proposed arrangement in November 1998, due principally to increased financing costs, we and American Real Estate Equities consummated a much smaller transaction pursuant to which the operating partnership acquired only the Cold Springs office center and two other investments properties in Minnesota. Under the final terms of the smaller transaction we negotiated: o we issued 2,557,707 units of our operating partnership; o we assumed only $17.1 million in third-party mortgage indebtedness on the properties acquired; o we paid no cash to the owners of the properties acquired; and o we hired Mr. Lund as our chief executive officer and Mr. Lambert and Mr. Hoyt were elected to our board of trustees. 61 During the second quarter of 1999, we entered into further discussions with American Real Estate Equities because the original contemplated transactions could not be consummated. As a result of these discussions: o Mr. Lund remained our chief executive officer and Mr. Lambert and Mr. Hoyt remained on our board of trustees; o the recipients of the operating partnership units returned 838,372 units to us for cancellation; of the 1,719,335 operating partnership units still outstanding after the cancellation, 1,214,086 units are ordinary common units and 505,249 are Class B common units, which have no direct economic value, but which will convert to ordinary common units upon the determination of our board of trustees that our funds from operations equal or exceed $0.55 per share, assuming the exercise of all outstanding rights to purchase our equity securities and conversion of all securities convertible into our common shares; o only 1,719,335 operating partnership units remain outstanding with the owners of the three properties acquired (including only 860,107 units to Mr. Hoyt and his affiliates); o American Real Estate Equities returned the warrant covering 791,667 of our common shares to us for cancellation; and o we paid no cash to American Real Estate Equities in reimbursement of the $1,356,000 it spent in connection with the transaction; instead, we issued American Real Estate Equities, in the third quarter of 1999, 135,600 of our Class B Junior Cumulative Convertible Preferred Shares (generally having the same rights, terms and preferences as the Class A Preferred Shares, but ranking junior as to payment of dividends and distributions upon our liquidation), all of which we have the right to redeem for $1 if we do not have total assets in excess of $150,000,000 or have not achieved funds from operations equal to at least $0.55 per share (on a fully-diluted basis) prior to June 30, 2002. Apart from the foregoing transactions, American Real Estate Equities advanced us an aggregate of $1,392,000 during the summer and fall of 1998 for working capital purposes. Pursuant to the an agreement with American Real Estate Equities, we have issued 119,200 of our Class B Junior Cumulative Convertible Preferred Shares to them in discharge of $1,192,000 of the repayment obligation. Wellington Management Corporation. Our chairman of the board, Arnold Leas, is the president and chief executive officer of Wellington Management Corporation and owns, together with certain members of his family and family trusts, 41.8% of Wellington Management Corporation's outstanding stock. Our president, Robert Rice, was a vice president and general counsel of Wellington Management before joining us. Mr. Rice has no ownership interest in Wellington Management Corporation. In connection with the contemplated American Real Estate Equities transactions of November 1998 described above, we also entered into a number of agreements with Wellington Management Corporation pursuant to which: o Mr. Rice would be appointed our president; o Wellington Management would contribute the office building housing our executive offices in Brookfield, Wisconsin to our operating partnership in exchange for $2.5 million in cash, the assumption of $7.3 million in mortgage indebtedness on the property, and 745,098 operating partnership units; 62 o we would issue to Wellington Management a warrant to purchase 791,667 of our common shares at a price of $5.37 per share with respect to 395,833 shares, $6.47 with respect to 197,917 shares, $7.74 per share with respect to 118,750 shares and $9.32 per share with respect to 79,167 shares; o we would terminate our obligations to Wellington Management under certain advisory fee arrangements in exchange for $1.6 million; and o our operating partnership would enter into a property management agreement with Wellington Realty, Inc., a wholly-owned subsidiary of Wellington Management Corporation, whereby Wellington Realty would manage the day-to-day operations of our current apartment community properties in Wisconsin for a management fee equal to 5% of gross income from such properties. Subsequent to November 1998, we and Wellington Management agreed that the transfer of the Brookfield office building could not occur because we were unable to arrange financing to provide the stipulated $2.5 million cash payment on acceptable terms. In connection with the discussions described previously, we entered into an agreement during the second quarter of 1999 with Wellington Management whereby: o Mr. Rice remained our president; o Wellington Management returned the warrant covering 791,667 of our common shares to us for cancellation; o the advisory fee arrangement was still terminated, but we agreed that Wellington Management would retain cash payments received in 1998 totaling $550,000 and that we would issue, in the third quarter of 1999, 95,000 Class B Junior Cumulative Convertible Preferred Shares as consideration for the termination; and o we entered into the new property management agreement with Wellington Realty, Inc. on the terms contemplated by the original agreement. In January 1998, we also entered into a listing agreement with Wellington Realty, Inc. whereby we agreed to pay 3% of the sale price of our Maple Grove and Lake Pointe apartment communities in the event of a sale. Though we are not presently marketing the Lake Pointe property, we have entered into a sale contract with respect to the Maple Grove property. In connection with the pending contract for the sale of Maple Grove Apartments, Wellington Realty, Inc., is expected to receive a fee totaling $501,000 upon consummation of the sale. From time to time, we may purchase insurance through another affiliate of Wellington Management Corporation, Wellington Insurance Services, Inc., which will receive a commission of those sales equal to 15% of scheduled premiums. Hoyt Properties Inc. Steven Hoyt, one of our trustees is the principal of Hoyt Properties Inc. On November 20, 1998, our operating partnership entered into a property management agreement with Hoyt Properties. Under this agreement, Hoyt Properties manages the day-to-day operations of our current commercial properties in Minnesota for a management fee equal to 5% of gross income from such properties, a fee we believe is consistent with industry norms. As mentioned above, Steven Hoyt also owns a one-third membership interest in American Real Estate Equities, LLC. 63 Additional advances of working capital. In April 1999, our operating partnership borrowed $50,000 from each of American Real Estate Equities, LLC and Wellington Management Corporation for working capital purposes under term loans that are currently due December 31, 1999. An interest rate of 10% per year accrues on the principal balance of each of these loans until repayment. Deferred Salaries. As a result of our completion of only a small number of the acquisitions proposed in November 1998, our chief executive officer and our president have agreed to defer their salaries. As of September 30, 1999, the deferral amounted to $106,250 as to Mr. Lund and $87,500 as to Mr. Rice. Of the total amount deferred by Mr. Rice, Wellington Management has advanced $62,500 to Mr. Rice. We intend to pay salaries in arrears and reimburse Wellington Management with a portion of the proceeds of the Maple Grove sale. If, for any reason, the sale of Maple Grove is prevented or delayed, we will not use any of the proceeds of the offering of the Class A Preferred Shares to pay any deferred salaries or to repay Wellington Management for any related advances. 64 UNDERWRITING Subject to the terms and conditions of an underwriting agreement, dated __________, 1999, our underwriters, for whom R.J. Steichen & Company will act as representative, have agreed to purchase from us on a firm-commitment basis, 700,000 Class A Preferred Shares for resale to the public. Our underwriting agreement provides that the underwriters will be obligated to purchase all of those shares if any are purchased. The underwriters have agreed severally, but not jointly, to purchase the numbers of Class A Preferred Shares set forth opposite their respective names: Underwriter Number of Shares R.J. Steichen & Company................................... Miller, Johnson & Kuehn, Incorporated..................... ---------- Total 700,000 ========== The underwriters have reserved the right to reoffer the Class A Preferred Shares to selected securities dealers at the offering price set forth on the cover page of this prospectus, less customary concessions. We have agreed to pay the underwriters a discount of 7.5% of the gross proceeds of this offering, including the gross proceeds from the sale of any overallotment shares. In addition, we have agreed to pay to the underwriters a non-accountable expense allowance of 2% of the gross proceeds of the offering, including proceeds from the sale of overallotment shares. We have granted to the underwriters an overallotment option, exercisable for 45 days from the date of this prospectus, to purchase up to an additional 105,000 of our Class A Preferred Shares at the public offering price, less the 7.5% underwriting discount. The underwriters may exercise this option solely to cover overallotments in the sale of the Class A Preferred Shares being offered by this prospectus. At the closing of the offering, we will sell to the underwriters' representative, for nominal consideration, warrants to purchase 35,500 Class A Preferred Shares. The underwriters' warrants will become exercisable one year after the effective date of the registration statement covering the Class A Preferred Shares and will be exercisable for a period of four years thereafter at a price of $10.00. The underwriter's warrants will contain provisions for (1) "cashless exercise," whereby the underwriters may forfeit a portion of the warrants at the time of exercise in lieu of the cash payment of the exercise price, (2) appropriate adjustment in the event of a merger, consolidation, recapitalization, reclassification, share dividend, share split or similar transaction, (3) a one-time right to demand registration of the common shares underlying the warrants under the Securities Act of 1933, and (4) participation of the common shares underlying such warrant, on a "piggy-back" basis, in specified registrations by us during the duration of the underwriters' warrant and for two years thereafter. In order to facilitate the offering of our Class A Preferred Shares, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of our Class A Preferred Shares. Specifically, the underwriters may sell or allot more Class A Preferred Shares than the 700,000 shares we have agreed to sell them. This overallotment would create a short position in our Class A Preferred Shares for the account of the underwriters. To cover any overallotments or to stabilize the price of our Class A Preferred Shares, the underwriters may bid for, and purchase our Class A Preferred Shares in the open market. Finally, the 65 underwriters may reclaim selling concessions allowed to dealers for distributing our Class A Preferred Shares in the offering, if the underwriters repurchase previously distributed Class A Preferred Shares in transactions to cover short positions, in stabilization transactions or otherwise. The underwriters have reserved the right to reclaim selling concessions in order to encourage dealers to distribute our Class A Preferred Shares for investment, rather than for short-term speculation. Increasing the proportion of the offering held for investment may reduce the supply of our Class A Preferred Shares available for short-term trading. Any of these activities may stabilize or maintain the market price of our Class A Preferred Shares above independent market levels. The underwriter is not required to engage in these activities, and may end any of these activities at any time. The underwriters have conditioned their performance under the underwriting agreement on receipt of agreements from certain of our officers, trustees and other shareholders prohibiting market sales of our securities by such persons for a period of 180 days following the initial closing of this offering. We have agreed to indemnify the underwriters against any costs or liabilities incurred by the underwriter by reason of misstatements or omissions to state material facts in connection with the statements made in the registration statement we filed and this prospectus. The underwriters have, in turn, agreed to indemnify us against any costs or liabilities by reason of misstatements or omissions to state material facts in connection with the statements made in the registration statement filed and this prospectus, based on information relating to the underwriters and provided by them. To the extent that these provisions may purport to provide exculpation from possible liabilities arising under the federal securities laws, in the opinion of the Securities and Exchange Commission, such indemnification is contrary to public policy and therefore unenforceable. For a more complete description of the underwriting arrangements for this offering, you should read the underwriting agreement included as an exhibit to the registration statement of which this prospectus is a part. 66 DESCRIPTION OF SECURITIES General Our declaration of trust provides that we may issue up to 110,000,000 shares of beneficial interest, consisting of 100,000,000 common shares, par value $0.01 per share, and 10,000,000 preferred shares, par value $0.01 per share. After this offering, 1,049,800 preferred shares will be issued and outstanding, or 1,154,800 shares if our underwriters' overallotment option is exercised in full. Firstar Bank Milwaukee, N.A. is the transfer agent for our common shares and will be the transfer agent for the Class A Preferred Shares following the closing of this offering. The Class A Preferred Shares We have designated 1,518,000 of our preferred shares as Class A Cumulative Convertible Preferred Shares, $0.01 par value per share. Subject to the provisions of our declaration of trust regarding "excess shares" (as described under the heading "Restrictions on Transfer" beginning on page 70), a dividend on each Class A Preferred Shares equal to $0.475 will accrue and be payable every six months, beginning six months after the initial closing date of the offering. We may pay no dividends on any other existing class or series of our shares unless we have paid all dividends then accrued on the Class A Preferred Shares. The Class A Preferred Shares will not participate in dividends declared on our common shares. Upon our liquidation, no distribution of our assets will be made to holders of any other existing class or series of our shares until we have first paid the holders of the Class A Preferred Shares $10.00 per share, plus the amount of all dividends on the Class A Preferred Shares that are then accrued but unpaid. Subject to the provisions of our declaration of trust regarding excess shares, each of the Class A Preferred Shares will be entitled to the number of votes at all meetings of our shareholders equal to the number of our common shares into which they are then convertible. Holders of Class A Preferred Shares will generally vote together with holders of our common shares and holders of our Class B Junior Cumulative Convertible Preferred Shares as a single class, provided that holders of Class A Preferred Shares will vote as a separate class on proposals specifically affecting the relative rights and privileges of the Class A Preferred Shares. Each of our Class A Preferred Shares will be convertible at any time, at the option of the holder, into a number of common shares equal to the quotient obtained by dividing (1) $10.00, plus any dividends then accrued but unpaid on the Class A Preferred Shares; by (2) a price equal to 110% of the average closing bid price for our common shares over the 10 trading days preceding the effective date of the registration statement covering the Class A Preferred Shares, or $____. We will have the option to redeem the Class A Preferred Shares at a per-share price equal to the public offering price, plus any dividends then accrued but unpaid, after 30 days' notice, any time after two years following the initial closing of the offering if the closing bid price of our common shares exceeds 150% of the then effective conversion price of the Class A Preferred Shares for 20 consecutive trading days. If, at any time, we fail to declare or pay a dividend on the Class A Preferred Shares as it accrues, such dividend will be cumulative, without interest, with future dividends. If we should fail to pay a full year's accrued dividends on the Class A Preferred Shares, then the holders of the Class A Preferred Shares will be entitled, voting as a class, to elect a majority of the members of our board of trustees, who will then serve on the board for so long as a full year's dividends remain unpaid. When issued, the Class A Preferred Shares will be legally issued, fully-paid and nonassessable. 67 The Class B Junior Cumulative Convertible Preferred Shares We have designated 349,800 of our preferred shares as Class B Junior Cumulative Convertible Preferred Shares, $0.01 par value per share, all of which are issued and outstanding. The terms of the Class B preferred shares are identical to those of the Class A Preferred Shares as to rights to dividends, rights to distributions upon liquidation, voting rights, optional conversion and redemption. The Class B preferred shares, however, rank junior to the Class A Preferred Shares as to dividends and distributions upon liquidation, so that we may not pay dividends on the Class B shares unless all dividends on the Class A Preferred Shares then accrued have been paid, and we will not distribute assets to the holders of Class B shares upon our liquidation until the full amount of the liquidation preference on the Class A Preferred Shares has been paid in full. The Class B Junior Cumulative Convertible Preferred Shares also differ from the Class A Preferred Shares in that their holders will not be entitled to elect a majority of our board of trustees in the event that a full year's dividends are not paid when accrued. Holders of Class B shares will vote as a separate class only on proposals specifically affecting the relative rights and privileges of the Class B shares. The Common Shares Subject to the preferential rights of our preferred shares (including the Class A Preferred Shares offered by this prospectus and our Class B Junior Cumulative Convertible Preferred Shares) or any other class or series of shares and to the provisions of our declaration of trust regarding "excess shares," holders of our common shares are entitled to receive distributions on such shares if, as and when authorized and declared by the board of trustees out of assets legally available therefor and to share ratably in our assets legally available for distribution to shareholders in the event of liquidation, dissolution or winding up after payment of, or adequate provision for, all of our known debts and liabilities. We have generally paid quarterly distributions on our common shares, though the amount of dividends and the timing of payment have varied. After completion of the offering, dividends on our common shares will be contingent on prior payment of dividends on our preferred shares and on the sufficiency of our excess cash flows and the decision of our board of trustees to declare such dividends. In deciding whether to convert Class A Preferred Shares into common shares, you should bear in mind that past payment of dividends on our common shares is not an indication that we will pay dividends on our common shares in the future. Subject to the provisions of our declaration of trust regarding excess shares, each outstanding common share entitles the holder to one vote on all matters on which our shareholders are entitled to vote, including the election of trustees, and, except as otherwise required by law or except as provided with respect to any other class or series of shares, the holders of such shares will possess the exclusive voting power. There is no cumulative voting in the election of trustees, which means that the holders of a majority of our outstanding common shares can elect all of the trustees then standing for election and the holders of our remaining shares are not able to elect any trustees. Warrants to Purchase Our Shares In connection with prior transactions, we issued warrants to purchase 47,500 of our common shares. These warrants are currently exercisable and have an exercise price of $5.37 per share. In connection with the offering of the Class A Shares, we have also agreed to issue our underwriters' representative a warrant to purchase 35,500 Class A Preferred Shares at a price of $10.00 per share. The underwriters' representatives warrant will become exercisable one year after the effective date of the registration statement covering the Class A Preferred Shares and will be exercisable for a period of four years thereafter. The warrants will contain provisions for "cashless exercise," whereby the underwriters may forfeit a portion of the warrants at the time of exercise in lieu of the cash payment of the exercise price and will also provide for customary adjustments in the event of a merger, consolidation, recapitalization, reclassification, share dividend, share split or similar transaction. 68 Employee Share Options We have issued options to purchase a total of 214,273 common shares to certain of our employees under our 1998 stock incentive plan. A total of 54,273 of these outstanding options are all currently exercisable. The weighted average exercise price of all our options is approximately $5.21 per share. The incentive plan is designed to attract and retain competent personnel and to provide to officers and other key employees long-term incentives for high levels of performance by providing them with a means to acquire a proprietary interest in our success. A total of 2,952,393 common shares may be subject to dditional awards under the plan, which may include incentive or non-qualified options. Dividend Reinvestment Plan Since 1996, we have maintained a dividend reinvestment plan whereby holders of our common shares may automatically reinvest cash dividends we pay in additional common shares. Under the plan, investors may also make optional cash payments on a quarterly basis to acquire even more shares. The price of shares sold under the plan is the average of the high and low sale prices of our common shares on the scheduled date of reinvestment. We have not instituted a dividend reinvestment plan with respect to the Class A Preferred Shares. Operating Partnership Units Our interests and those of all limited partners in the operating partnership are represented by partnership units. Currently, the operating partnership has issued ordinary common units, which are economically equivalent to our common shares and Class B common units, which have no direct economic value, but which will automatically convert to ordinary common units upon the determination of our board of trustees that our funds from operations (as defined by the National Association of Real Estate Investment Trusts) equal or exceed $0.55 per share, assuming exercise of all outstanding rights to purchase our equity securities and conversion of all securities convertible into our common shares. If necessary, however, the number of Class B units that will convert to ordinary common units will be limited so that the current holder of the operating partnership's outstanding Class B units, American Real Estate Equities, LLC, will not become a greater than 10% owner, assuming exercise of all outstanding rights to purchase our equity securities and conversion of all securities convertible into our common shares. The operating partnership has also issued Class B preferred units to us, which are economically equivalent to our Class B Junior Cumulative Convertible Preferred Shares. Upon the closing of this offering and our contribution of our net proceeds to the operating partnership, the operating partnership will also issue us 700,000 Class A preferred units (up to 805,000 Class A preferred units if our underwriters exercise their overallotment option in full), which will be economically equivalent to the Class A Preferred Shares. The operating partnership may also issue additional classes or series of preferred units on such terms as we, as sole general partner, may determine. Subject to certain limitations in our operating partnership agreement and, in the case of any preferred units, following the conversion of such preferred units into common units, holders of common units generally have the right to require the redemption of their common units at any time one year after the original issuance date of such units. Unless we elect to assume and perform the operating partnership's obligation with respect to redemption of common units, a limited partner demanding redemption will receive cash from the operating partnership in an amount equal to the market value of the units to be redeemed. Instead of the operating partnership acquiring the units for cash, we will have the right to elect to acquire the units directly from a limited partner demanding redemption, in exchange for either cash or an equal number of our common shares, and, upon such acquisition, we will become the owner of such units. This one-for-one conversion rate will be adjusted appropriately in the event of a share split, share dividend or similar event. 69 Registration Rights On March 5, 1998, we entered into a registration rights agreement in connection with the issuance to Credit Suisse First Boston of a warrant to purchase up to 47,500 of our common shares at a price of $5.37 per share. Under the agreement, the holders of a majority of the shares represented by the Credit Suisse First Boston warrant have the right to require us to prepare and file one or more registration statements, under certain circumstances, with respect to our common shares purchasable under the Credit Suisse First Boston warrant and all other common shares owned by Credit Suisse First Boston or the then-holder(s) of the Credit Suisse First Boston warrant. Every holder of our operating partnership units also has registration rights, under our master registration rights agreement, with respect to the common shares that we might issue in exchange for the units. Under the agreement, every time the operating partnership issues units, we agree to register the common shares issuable in exchange for the units within one year and to use commercially reasonable efforts to register those shares for public resale by the former unit holder. Holders of partnership units also have the right under the agreement, subject to certain limitations, to include common shares they receive in exchange for units in registrations we may make for other purposes. The underwriters' representative's warrant will provide for a one-time right to demand registration of the shares underlying the warrants under the Securities Act of 1933, and participation of the common shares issuable upon conversion of the Class A Preferred Shares underlying such warrant, on a "piggy-back" basis, in specified registrations by us during the duration of the warrant and for two years thereafter. Restrictions on Transfer General. For us to continue to qualify as a REIT under the Internal Revenue Code, our common shares must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year. Also, not more than 50% of the value of our issued and outstanding shares, including the Class A Preferred Shares, may be owned, directly or indirectly, by five or fewer individuals during the last half of a taxable year or during a proportionate part of a shorter taxable year. Because our board of trustees believes it is essential for us to qualify as a REIT, our declaration of trust, subject to certain exceptions, provides that no holder may own, or be deemed to own by virtue of the attribution provisions of the Internal Revenue Code, more than 9.9% of the value of our issued and outstanding shares. The board of trustees, upon receipt of a ruling from the Internal Revenue 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 exempt a proposed transferee from the 9.9% ownership limit. As a condition of such exemption, the intended transferee must give written notice to us of the proposed transfer no later than the 50th day prior to any transfer which, if consummated, would result in the intended transferee owning shares in excess of the 9.9% ownership limit. The board of trustees may require such opinions of counsel, affidavits, undertakings or agreements as it may deem necessary or advisable in order to determine or ensure our status as a REIT. Any transfer of shares that would (1) create a direct or indirect ownership of shares of shares in excess of the 9.9% ownership limit, (2) result in our shares being owned by fewer than 100 persons, or (3) result in our being "closely held" within the meaning of Section 856(h) of the Internal Revenue Code, shall be null and void, and the intended transferee will acquire no rights to the shares. The foregoing restrictions on transferability and ownership will not apply if our board of trustees determines that it is no longer in our best interests to continue to qualify as a REIT. Any purported transfer of shares that would result in a person owning shares in excess of the 9.9% ownership limit or cause us to become "closely held" under Section 856(h) of the Internal Revenue Code that is not otherwise permitted as provided above will constitute "excess shares," which will be transferred by operation of law to us as trustee for the exclusive benefit of the person or persons to whom the excess shares are ultimately transferred, until such time as the intended transferee retransfers the excess shares. While these excess shares are held in trust, they will not be entitled to vote or to share in any distributions (except upon 70 liquidation). Subject to the 9.9% ownership limit, the excess shares may be retransferred by the intended transferee to any person (if the excess shares would not be excess shares in the hands of such person) at a price not to exceed the price paid by the intended transferee (or, if no consideration was paid, fair market value), at which point the excess shares will automatically be exchanged for the shares to which the excess shares are attributable. In addition, such excess shares held in trust are subject to purchase by us at a purchase price equal to the price paid for the shares by the intended transferee or, if no consideration was paid, fair market value as reflected in the last reported sales price reported on the stock exchange or quotation system on which the shares are listed on the trading day immediately preceding the relevant date, or if not then listed on any exchange or quotation system, then the market price of such shares on the relevant date as determined in good faith by our board of trustees. From and after the intended transfer to the intended transferee of the excess shares, the intended transferee shall cease to be entitled to distributions (except upon liquidation), voting rights and other benefits with respect to such shares, except the right to payment of the purchase price for the shares or the retransfer of shares as provided above. Any distribution paid to a proposed transferee on account of excess shares prior to the discovery by us that such shares have been transferred in violation of the provisions of the declaration of trust shall be repaid to us upon demand. If the foregoing transfer restrictions are determined to be void or invalid by virtue of any legal decision, statute, rule or regulation, then the intended transferee of any excess shares may be deemed, at our option, to have acted as an agent on our behalf in acquiring such excess shares and to hold such excess shares on our behalf. All certificates representing our shares, including the Class A Preferred Shares, will bear a legend that references the restrictions described above. All persons who own, directly or by virtue of the attribution provisions of the Internal Revenue Code, more than 5% (or such other percentage between 1/2 of 1% and 5%, as provided in the rules and regulations promulgated under the Internal Revenue Code) of the number or value of our then outstanding shares must give a written notice to us by January 31 of each year. In addition, each shareholder shall, upon demand, be required to disclose to us in writing such information with respect to the direct, indirect and constructive ownership of our shares as the board of trustees deems reasonably necessary to comply with the provisions of the Internal Revenue Code applicable to a REIT, to comply with the requirements of any taxing authority or governmental agency or determine any such compliance. These ownership limitations could have the effect of discouraging a takeover or other transaction in which holders of some, or a majority, of the Class A Preferred Shares might receive a premium for their shares over the then prevailing market price or which such holders might otherwise believe to be in their best interest. 71 CERTAIN PROVISIONS OF MARYLAND LAW AND OF OUR DECLARATION OF TRUST AND BYLAWS The following summary highlights certain provisions of Maryland law, our declaration of trust and our bylaws. It is not complete and is subject to and qualified in its entirety by reference to Maryland law, the declaration of trust and our bylaws for complete information. Number of Trustees Our declaration of trust provides that the number of trustees may be established by the board of trustees, but may not be fewer than three nor more than fifteen. Any vacancy of the board of trustees may be filled, at any regular meeting or at any special meeting called for that purpose, by a majority of the remaining trustees. Removal of Trustees Our declaration of trust provides that a trustee may be removed only by the affirmative vote of at least a majority of the votes entitled to be cast in the election of trustees. Amendment to the Declaration of Trust With certain exceptions, our declaration of trust, including its provisions on removal of trustees, may be amended only by the affirmative vote of the holders of not less than a majority of all of the votes entitled to be cast on the matter. Dissolution of the Trust The voluntary dissolution of the trust must be approved by the affirmative vote of the holders of not less than a majority of all of the votes entitled to be cast on the matter or the written consent of all holders of shares entitled to vote on the matter. Business Combinations Under Maryland law, certain "business combinations" (including certain mergers, consolidations, share exchanges, or, in certain circumstances, asset transfers or issuances or reclassifications of equity securities) between a Maryland real estate investment trust and an "interested shareholder" or an affiliate of the interested shareholder are prohibited for 5 years after the most recent date on which the interested shareholder becomes an interested shareholder. An interested shareholder includes a person who beneficially owns, and an affiliate or associate of the trust who, at any time during the two-year period prior to the date in question, who was the beneficial owner of ten percent of more of the voting power of the trust's then outstanding voting shares. Thereafter, any such business combination must be: (a) recommended by the trustees of such trust and (b) approved by the affirmative vote of at least: (1) 80% of the votes entitled to be cast by holders of outstanding voting shares of beneficial interest of the trust; and (2) two-thirds of the votes entitled to be cast by holders of outstanding voting shares of beneficial interest other than shares held by the interested shareholder with whom (or with whose affiliate or associate) the business combination is to be effected, unless, among other conditions, the trust's common shareholders receive a minimum price (as defined under Maryland law) for their shares and the consideration is received in cash or in the same form as previously paid by the interested shareholder for its shares. These provisions of Maryland law do not apply, however, to business combinations that are approved or exempted by the board of trustees of the trust prior to the time that the interested shareholder becomes an interested shareholder. An amendment to a Maryland REIT's declaration of trust electing not to be subject to the foregoing requirements must be approved by the affirmative vote of at least 80% of the votes entitled to be cast by holders of outstanding voting shares of beneficial interest of the trust, voting together as a single voting group, and two-thirds of the votes entitled to be cast by holders of 72 outstanding voting shares of beneficial interest other than shares of beneficial interest held by interested shareholders. Any such amendment shall not be effective until 18 months after the vote of shareholders and will not apply to any business combination of the trust with an interested shareholder on the date of the shareholder vote. Maryland's business combination statute could have the effect of delaying, deferring or preventing offers to acquire us and of increasing the difficulty of acting on any such offer. Control Share Acquisitions Maryland law, as applicable to Maryland REITs, provides that "control shares" of a Maryland real estate investment trust acquired in a "control share acquisition" have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter by shareholders, excluding shares owned by the acquiror, by officers or by trustees who are employees of the trust in question. "Control shares" are voting shares of beneficial interest which, if aggregated with all other shares previously acquired by such acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to exercise the voting power in the election of trustees within one of the following ranges of voting power: (a) one-fifth or more but less than one-third, (b) one-third or more but less than a majority, or (c) a majority or more of all voting power. Control shares do not include shares that the acquiring person is then entitled to vote as a result of having previously obtained shareholder approval. A "control share acquisition" generally means the acquisition of control shares. Advance Notice of Trustee Nominations and New Business Our bylaws provide that (1) with respect to an annual meeting of shareholders, nominations of persons for election to the board of trustees and the proposal of business to be considered by shareholders may be made only (a) pursuant to our notice of the meeting, (b) by the board of trustees, or (c) by a shareholder who is entitled to vote at the meeting and has complied with the advance notice procedures set forth in our bylaws, and (2) with respect to special meetings of shareholders, only the business specified in our notice of meeting may be brought before the meeting of shareholders, and nominations of persons for election to the board of trustees may be made only (a) pursuant to our notice of the meeting, (b) by the board of trustees, or (c) provided that the board of trustees has determined that trustees shall be elected at such meeting, by a shareholder who is entitled to vote at the meeting and has complied with the advance notice provisions set forth in our bylaws. Limitation of Liability and Indemnification The Maryland REIT law permits a Maryland REIT to include in its declaration of trust and bylaws a provision limiting the liability of its trustees and officers to the trust and its shareholders for money damages, except for liability resulting from (1) actual receipt of an improper benefit or profit in money, property or services or (2) active and deliberate dishonesty or actions taken in bad faith or (3) unlawful acts that the trustee or officer had reason to know were unlawful. Our declaration of trust contains such a provision which eliminates liability of our trustees and officers to the maximum extent permitted by Maryland law. Our bylaws require us to indemnify, without requiring a preliminary determination of the ultimate entitlement to indemnification, (1) any present or former trustee or officer against any claim or liability to which he may become subject by reason of such status unless it is established that (a) his act or omission was committed in bad faith or was the result of active and deliberate dishonesty, (b) he actually received an improper personal benefit in money, property or services or (c) in the case of a criminal proceeding, he had reasonable cause to believe that his act or omission was unlawful; and (2) each shareholder or former shareholder against any claim or liability to which he may be subject by reason of such status as a shareholder or former shareholder. However, under Maryland law, we may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that personal benefit was improperly received unless, in either case, a court orders indemnification and then only for expenses. In addition, our bylaws require us to pay or reimburse, in advance 73 of final disposition of a proceeding, reasonable expenses incurred by a present or former trustee, officer or shareholder made a party to a proceeding by reason of his status as a trustee, officer or shareholder provided that, in the case of a trustee or officer, we shall have received (1) a written affirmation by the trustee or officer of his good faith belief that he has met the applicable standard of conduct necessary for indemnification as authorized by the bylaws and (2) a written undertaking by him or on his behalf to repay the amount paid or reimbursed by us if it shall ultimately be determined that the applicable standard of conduct was not met. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our trustees and officers, we have been advised that, although the validity and scope of the governing statute has not been tested in court, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy and is, therefore, unenforceable. In addition, indemnification may be limited by state securities laws. Maryland Asset Requirements To maintain our qualification as a Maryland REIT, the Maryland REIT law requires that we hold, either directly or indirectly, at least 75% of the value of our assets in real estate assets, mortgages or mortgage related securities, government securities, cash and cash equivalent items. The Maryland REIT law also prohibits us from using or applying land for farming, agricultural, horticultural or similar purposes. 74 FEDERAL INCOME TAX CONSIDERATIONS We currently intend to continue to operate so as to meet the Internal Revenue Code requirements for qualification as a REIT. However, no assurance can be given that we will continue to meet such requirements. Such qualification depends upon our ability to meet the various requirements imposed under the Internal Revenue Code through actual operating results and actions taken, as discussed below. The following is a general summary of the Internal Revenue Code provisions governing the federal income tax treatment of REITs and is not tax advice. These provisions are highly technical and complex, and this summary is qualified in its entirety by the applicable Internal Revenue Code provisions, rules and regulations promulgated thereunder, and administrative and judicial interpretations thereof. Moreover, this summary does not deal with all tax aspects that might be relevant to you in light of your personal circumstances; nor does it deal with particular types of shareholders that are subject to special treatment under the Internal Revenue Code, such as tax-exempt organizations, insurance companies, financial institutions, broker-dealers, foreign corporations and persons who are not citizens or residents of the United States. YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISOR WITH RESPECT TO YOUR SPECIFIC FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF THE PURCHASE, HOLDING AND SALE OF THE CLASS A PREFERRED SHARES. Taxation of the Trust as a Real Estate Investment Trust General. As a REIT, in general we are not subject to federal corporate income taxes on that portion of our ordinary income or capital gain that is currently distributed to shareholders. The REIT provisions of the Internal Revenue Code generally allow a REIT to deduct distributions paid to its shareholders. This deduction for distributions paid to shareholders substantially eliminates the federal "double taxation" on earnings (once at the corporate level and once again at the shareholder level) that generally results from investment in a corporation. We are subject to federal income tax, however, as follows: o First, we are taxed at regular corporate rates on our undistributed REIT taxable income, including undistributed net capital gains. o Second, under certain circumstances, we are subject to the "alternative minimum tax" on our items of tax preference to the extent that the tax exceeds our regular tax. o Third, if we have net income from the sale or other disposition of "foreclosure property" that is held primarily for sale to customers in the ordinary course of business or other non-qualifying income from foreclosure property, it will be subject to tax at the highest corporate rate on such income. o Fourth, any net income that we have from prohibited transactions (which are, in general, certain sales or other dispositions of property other than foreclosure property held primarily for sale to customers in the ordinary course of business) is subject to a 100% tax. Losses from prohibited transactions may not offset gains in computing the 100% tax. Such losses, however, may offset taxable REIT income. o Fifth, if we should fail to satisfy either the 75% or 95% gross income tests (as discussed below), and have nonetheless maintained our qualification as a REIT because certain other requirements have been met, we will be subject to a 100% tax on the net income attributable to the greater of the amount by which we fail the 75% or 95% test, multiplied by a fraction intended to reflect our profitability. 75 o Sixth, if we fail to distribute, during each year, at least the sum of (1) 85% of our REIT ordinary income for such year, (2) 95% of our REIT capital gain net income for such year, and (3) any undistributed taxable income from preceding periods, we will be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. o Seventh, if an election is made pursuant to IRS Notice 88-19 and during the 10-year period (1) commencing on the first day of the first taxable year that we qualified as a REIT, we recognize a gain from the disposition of an asset held by us at the beginning of such period, or (2) commencing on the day on which an asset acquired by us from a C corporation in a transaction in which we inherit the tax basis of the asset from the C corporation, we recognize a gain from the disposition of such asset, then we will be subject to tax at the highest regular corporate rate on the excess, if any, or the fair market value over the adjusted basis of any such asset as of the beginning of its recognition period. Requirements for Qualification To qualify as a REIT, we must continue to meet the requirements, discussed below, relating to our organization, sources of income, nature of assets and distributions of income to shareholders. The Internal Revenue Code defines a REIT as a corporation, trust, or association: (1) that is managed by one or more trustees; (2) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest; (3) that would be taxable as a domestic corporation but for the REIT section of the Internal Revenue Code; (4) that is neither a financial institution nor an insurance company within the meaning of certain provisions of the Internal Revenue Code; (5) the beneficial ownership of which is held by 100 or more persons; (6) during the last half of each taxable year not more than 50% in value of the outstanding shares of which is owned, directly or indirectly, through the application of certain attribution rules, by five or fewer individuals (as defined in the Internal Revenue Code to include certain business entities); and (7) which meets certain other tests, described below, regarding the nature of its income and assets. The Internal Revenue Code provides that conditions (1) through (4), inclusive, must be met during the entire taxable year and that condition (5) must exist during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. For purposes of conditions (5) and (6), pension funds and certain other tax-exempt entities are treated as individuals. However, a trust described in section 401(a) of the Internal Revenue Code and exempt from tax under section 501(a) is not generally treated as a single individual for purposes of the five or fewer requirement. Rather, beneficiaries of such trust are treated as holding shares in the REIT in proportion to their interests in the trust. Our declaration of trust includes certain restrictions regarding transfer of our shares, which restrictions are intended (among other things) to assist us in continuing to satisfy the share ownership requirements described in (5) and (6) above. 76 Income Tests. There are two percentage tests relating to the sources of our gross income. o First, at least 75% of our gross income (excluding gross income from certain sales of property held primarily for sale) must be directly or indirectly derived each taxable year from investments relating to real property or mortgages on real property or certain temporary investments. o Second, at least 95% of our gross income (excluding gross income from certain sales of property held primarily for sale) must be directly or indirectly derived each taxable year from any of the sources qualifying for the 75% test and from distributions, interest, and gain from the sale or disposition of shares or securities. In applying these tests, if we invest in a partnership, such as our operating partnership, we will be treated as realizing our share of the income and bearing our share of the loss of the partnership (using special rules for determining a REIT's share for this purpose), and the character of such income or loss, as well as other partnership items, will be determined at the partnership level. Rents received by us will qualify as "rents from real property" for purposes of satisfying the gross income tests for a REIT only if several conditions are met: o First, the amount of rent must not be based, in whole or in part, on the income or profits of any person, although rents generally will not be excluded merely because they are based on a fixed percentage of receipts or sales. o Second, rents received from a tenant will not qualify as "rents from real property" if the REIT, or an owner of 10% or more of the REIT, directly or constructively owns 10% or more of such tenant. o Third, 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." o Finally, for rents to qualify as "rents from real property," a REIT generally must not operate or manage the property or furnish or render services to the tenants of such property, other than through an independent contractor from whom the REIT derives no revenue, except that a REIT may directly perform services which are "usually or customarily rendered" in connection with the rental of space for occupancy, other than services which are considered to be rendered to the occupant of the property. However, a REIT is currently permitted to earn up to one percent of its gross income from tenants, determined on a property-by-property basis, by furnishing services that are non customary or provided directly to the tenants, without causing the rental income to fail to qualify as rents from real property. The term "interest" generally does not include any amount if the determination of such amount depends, in whole or in part, on the income or profits of any person, although an amount generally will not be excluded from the term "interest" solely by reason of being based on a fixed percentage of receipts or sales. The term "prohibited transaction" means a sale or other disposition of property (other than foreclosure property) that is held primarily for sale to customers in the ordinary course of the taxpayer's trade or business. Any gross income derived from a prohibited transaction is subject to a 100% tax. We may wish to occasionally dispose of selected rental property assets. We believe such assets will not be considered as held primarily for sale to customers and that the occasional sale of such assets should not be considered to be in the ordinary course of our business. Whether property is held "primarily for sale to customers in the ordinary course of the taxpayer's trade or business" depends, however, on the facts and circumstances in effect from time to time, including those relating to a particular property. As a result, complete assurance cannot be given that we can avoid being deemed to own property that the IRS later characterizes as property held "primarily for sale to 77 customers in the ordinary course of its trade or business." The Internal Revenue Code provides a limited safe harbor pursuant to which certain sales by a REIT of real estate assets held for at least four years will not constitute prohibited transactions. There can be no assurance, however, that a sale of rental property will qualify for this safe harbor. The determination of whether a sale not qualifying for the safe harbor constitutes a prohibited transaction will be made under the general rule described above. To the extent that we determine that it is beneficial to sell properties that we have held for less than four years, such dispositions will not qualify for the prohibited transaction safe harbor described above. If we fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, we may nevertheless qualify as a REIT for such year if we are eligible for relief under certain provisions of the Internal Revenue Code. These relief provisions will be generally available if our failure to meet such tests is due to reasonable cause and not due to willful neglect, we attach a schedule of the sources of our income to our return, and any incorrect information on our schedule was not due to fraud with intent to evade tax. It is not now possible to determine the circumstances under which we may be entitled to the benefit of these relief provisions. For example, if we fail to satisfy the gross income tests because non-qualifying income that we intentionally incur exceeds the limits on such income, the Internal Revenue Service could conclude that our failure to satisfy the tests was not due to reasonable cause. If these relief provisions apply, a 100% tax is imposed on the net income attributable to the greater of the amount by which we failed the 75% test or the 95% test, multiplied by a fraction intended to reflect our profitability. Asset Tests. At the close of each quarter of our taxable year, we must also satisfy several tests relating to the nature and diversification of our assets. o First, at least 75% of the value of our total assets must be represented by real estate assets, cash, cash items (including receivables arising in the ordinary course of our operation) and government securities. o Second, not more than 25% of our total assets may be represented by securities other than those includible in the 75% asset class. o Third, the value of any one issuer's securities owned by us may not exceed 5% of our total assets. o Finally, we may not own more than 10% of any one issuer's outstanding voting securities. For purposes of the asset tests, we will be treated as owning our share of the assets of any partnership in which we invest. After initially meeting the asset tests at the close of any quarter, we will not lose our status as a REIT for failure to satisfy the asset tests at the end of a later quarter solely by reasons of changes in asset values. If the failure to satisfy the asset tests results from an acquisition of securities or other property during a quarter, the failure can be cured by disposition of sufficient non-qualifying assets within 30 days after the close of any quarter as may be required to cure any noncompliance. Annual Distribution and Information Requirements. In order to qualify as a REIT, we are required to make distributions (other than capital gain distributions) to our shareholders in an amount at least equal to (1) the sum of (a) 95% of our "real estate investment trust taxable income" (computed without regard to the distributions-paid deduction and our net capital gain) and (b) 95% of the after-tax net income, if any, from foreclosure property, minus (2) 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 we timely file our tax return for such year and if paid on or before the date of the first regular distribution payment after such declaration. To the extent that we do not distribute all of our net capital gain or distribute at least 95%, but less than 100%, of our "real estate investment trust taxable income," as adjusted, we will be subject to tax thereon at regular corporate tax rates. In order for us to qualify as a REIT, we are also required to keep certain records and to demand, by January 30 of each year, certain information from our shareholders of record. 78 In addition, during our recognition period, if applicable, we dispose of any asset subject to the built-in gain rules, we will be required, pursuant to guidance issued by the Internal Revenue Service, to distribute at least 95% of the built-in gains (after tax), if any, recognized on the disposition of the asset. Moreover, if we should fail to distribute, during each calendar year, at least the sum of (1) 85% of our REIT ordinary income for that year, (2) 95% of our REIT capital gain net income for that year, and (3) any undistributed taxable income from prior periods, we would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. We intend to make timely distributions sufficient to satisfy this annual distribution requirement. It is possible that we, from time to time, may not have sufficient cash or other liquid assets to meet the 95% distribution requirement, or to distribute such greater amount as may be necessary to avoid income and excise taxation, due to (among other reasons) timing differences between (1) the actual receipt of income and actual payment of deductible expenses, and (2) the inclusion of such income and deduction of such expenses in arriving at our taxable income. In the event that such timing differences occur, we may find it necessary to arrange for borrowings or, if possible, pay taxable distributions in order to meet the distribution requirement. Under certain circumstances, if as a result of a deficiency determined by the Internal Revenue Service, we may be able to rectify a resulting failure to meet the distribution requirement for a year by paying "deficiency distributions" to shareholders in a later year, which may be included in our deduction for distributions paid for the earlier year. Thus, although we may be able to avoid being taxed on amounts distributed as deficiency distributions, we will be required to pay interest (and penalties, if any) based upon the amount of any deduction taken for deficiency distributions. Failure to Qualify as a Real Estate Investment Trust Our election to be treated as a REIT will be automatically terminated if we fail to meet the requirements described above. In that event, we will be subject to tax (including any applicable minimum tax) on our taxable income at regular corporate rates, and our distributions to shareholders will not be deductible. All distributions to shareholders will be taxable as ordinary income to the extent of current and accumulated earnings and profits and will be eligible for the 70% distributions-received deduction for corporate shareholders. We will not be eligible again to elect REIT status until the fifth taxable year which begins after the year for which our election was terminated unless we did not willfully fail to file a timely return with respect to the termination taxable year, inclusion of any incorrect information in such return was not due to fraud with intent to evade tax, and we establish that failure to meet the requirement was due to reasonable cause and not willful neglect. Failure to qualify for even one year could result in our incurring substantial indebtedness (to the extent borrowings are feasible) or liquidating substantial investments in order to pay the resulting taxes. Federal Taxation of Shareholders General. As long as we qualify for taxation as a REIT, distributions made to our shareholders out of current or accumulated earnings and profits (and not designated as capital gain distributions) will be includible by you as ordinary income for federal income tax purposes. The distributions will not be eligible for the distributions-received deduction for corporate shareholders. Distributions in excess of current or accumulated earnings and profits will not be taxable to you to the extent that they do not exceed the adjusted basis of your shares. You will be required to reduce the tax basis of your shares by the amount of such distributions until such basis has been reduced to zero, after which such distributions will generally be taxable as capital gain. The tax basis, as so reduced, will be used in computing the capital gain or loss, if any, realized upon sale of your shares. Any loss upon a sale or exchange of your shares held for six months or less (after applying certain holding period rules) will generally be treated as a long-term capital loss to the extent you previously received capital gain distributions with respect to such shares. 79 Capital Gain Distributions. Distributions to our U.S. shareholders that are properly designated by us as capital gain distributions will be treated as long-term capital gains (to the extent they do not exceed our actual net capital gain for the taxable year), without regard to the period for which such shareholder has held his or her shares. Capital gain distributions are also not eligible for the distributions-received deduction for corporations. In addition, corporate shareholders may be required to treat up to 20% of certain capital gain distributions as ordinary income. In addition, we may elect to retain and pay income tax on our net long-term capital gains. If we so elect, each shareholder will take into income the shareholder's share of the retained capital gain as long-term capital gain and will receive a credit or refund for that shareholder's share of the tax paid by us. The shareholder will increase the basis of such shareholder's shares by an amount equal to the excess of the retained capital gain included in the shareholder's income over the tax deemed paid by such shareholder. You may not include in your individual federal income tax returns any of our net operating losses or capital losses. In addition, any distribution declared by us in October, November or December of any year payable to you on a specified date in any such month shall be treated as both paid by us and received by you on December 31 of such year, provided that the distribution is actually paid by us no later than January 31 of the following year. We may be required to withhold a portion of capital gain distributions to you if you fail to certify your non-foreign status to us. Passive Activity Loss and Investment Interest Limitations. Distributions from us and gain from the disposition of our shares will not be treated as passive activity income, and therefore, you will not be able to apply any "passive activity losses" against such income. Distributions from us (to the extent they do not constitute a return of capital or capital gain distributions) will generally be treated as investment income for purposes of the rule limiting the deduction of investment interest to investment income. Backup Withholding. We will report to you and the Internal Revenue Service the amount of distributions paid during each calendar year, and the amount of tax withheld, if any. Under the backup withholding rules, you may be subject to backup withholding at the rate of 31% with respect to distributions paid unless you (1) are a corporation or come within certain other exempt categories and, when required, demonstrate this fact, or (2) have provided a correct taxpayer identification number, certify as to no loss of exemption from backup withholding, and otherwise comply with applicable requirements of the backup withholding rules. If you do not provide us with a correct taxpayer identification number, you may also be subject to penalties imposed by the Internal Revenue Service. Any amount paid as backup withholding will be credited against your income tax liability. Tax-Exempt Shareholders. The Internal Revenue Service has ruled that amounts distributed by a REIT to a tax exempt pension trust did not constitute unrelated business taxable income ("UBTI"). Although rulings are merely interpretations of law by the Internal Revenue Service and may be revoked or modified, based on this analysis, indebtedness incurred by us in connection with the acquisition of an investment should not cause any income derived from the investment to be treated as UBTI to a tax exempt entity. A tax exempt entity that incurs indebtedness to finance its purchase of shares, however, will be subject to UBTI by virtue of the acquisition indebtedness rules. The Internal Revenue Code requires qualified trusts that hold more than 10% of the shares of a REIT to treat a percentage of REIT distributions as UBTI for taxable years beginning after December 31, 1993. The requirement applies only if (1) the qualification of the REIT depends upon the application of a "look-through" exception to the restriction on REIT shareholdings by five or fewer individuals, including qualified trusts, and (2) the REIT is "predominantly held" by qualified trusts. A REIT is predominantly held if either (1) a single qualified trust held more than 25% by value of the interests in the REIT or (2) one or more qualified trusts, each owning more than 10% by value, held, in the aggregate, more than 50% of the interests in the REIT. The percentage of any distribution paid (or treated as paid) to the qualified trust that would be treated as UBTI is determined by the amount of UBTI earned by the REIT (treating the REIT as if it were a qualified trust, and therefore subject to tax on UBTI) as a percentage of the total gross income of the REIT. A de minimis exception applies where the percentage determined under the preceding sentence is less than 5%. For purposes 80 of these provisions, the term "qualified trust" means any trust described at ss.401(a) and exempt from tax under ss.501(a) of the Internal Revenue Code. Conversion of Series A Preferred Shares to Common Shares. Assuming that Series A Preferred Shares will not be converted at a time when there are distributions in arrears, in general, no gain or loss will be recognized for federal income tax purposes upon the conversion of the Series A Preferred Shares at the option of the holder solely into common shares. The basis that a holder will have for tax purposes in the common shares received will be equal to the adjusted basis the holder had in the Series A Preferred Shares so converted and, provided that the Series A Preferred Shares were held as a capital asset, the holding period for the common shares received will include the holding period for the Series A Preferred Shares converted. If a conversion occurs when there is a dividend arrearage on the Series A Preferred Shares and the fair market value of the common shares exceeds the issue price of the Series A Preferred Shares, a portion of the common shares received might be treated as a dividend distribution, taxable as ordinary income. State and Local Taxation We as well as you may be subject to state or local taxation in various state or local jurisdictions, including those in which we or you transact business or reside. Consequently, you should consult your own tax advisors regarding the effect of state and local tax laws on an investment in the Class A Preferred Shares. LEGAL MATTERS On our behalf, Foley & Lardner, Milwaukee, Wisconsin, will pass upon the validity of the issuance of the securities being offered by this prospectus. Maun & Simon, PLC, Minneapolis, Minnesota, will pass upon certain matters for our underwriters. EXPERTS The financial statements included in this prospectus, to the extent and for the periods indicated in their reports, have been audited by Grant Thornton LLP, independent accountants, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing. In addition, Grant Thornton has provided us their written opinion that we are a qualified REIT for purposes of the Internal Revenue Code. 81 ADDITIONAL INFORMATION We have filed a registration statement on Form SB-2 under the Securities Act of 1933 with the Securities and Exchange Commission in Washington, D.C. with respect to the Class A Preferred Shares and the common shares that may be issued upon conversion of the Class A Preferred Shares. This prospectus, which is part of the registration statement, does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. For further information about us and the securities offered by this prospectus, you should refer to the registration statement and the exhibits and schedules filed with it. Statements contained in this prospectus as to the contents of any agreement or any other document referred to are not necessarily complete, and in each instance, if such agreement or document is filed as an exhibit, you should refer to the copy of the agreement or document filed as an exhibit to the registration statement, each such statement being qualified in all respects by reference to the exhibit. The registration statement, including exhibits and schedules thereto, may be inspected and copied at the principal office of the Securities and Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of materials may also be obtained at prescribed rates from the Public Reference Section of the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, we are required to file electronic versions of these documents with the Securities and Exchange Commission through its Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. The Securities and Exchange Commission maintains a World Wide Web site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file public documents electronically. 82 WELLINGTON PROPERTIES TRUST INDEX TO FINANCIAL STATEMENTS I. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Introduction to Pro Forma Condensed Consolidated Financial Information F-2 Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1999 F-4 Pro Forma Condensed Consolidated Statements of Operations for the Year Ended December 31, 1998 and the Six Month Period Ended June 30, 1999 F-5 Notes and Management's Assumptions to Unaudited Pro Forma Condensed Consolidated Financial Statements F-7 II. CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY Report of Independent Certified Public Accountants F-12 Consolidated Balance Sheet as of December 31, 1998 F-13 Consolidated Statements of Operations for the Years Ended December 31, 1998 and December 31, 1997 F-14 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1998 and December 31, 1997 F-15 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998 and December 31, 1997 F-17 Notes to Consolidated Financial Statements F-19 Unaudited Consolidated Balance Sheet as of June 30, 1999 F-25 Unaudited Consolidated Statements of Operations for the Six and Three Month Periods Ended June 30, 1999 and June 30, 1998 F-26 Unaudited Consolidated Statements of Cash Flows for the Six Month Period Ended June 30, 1999 and June 30, 1998 F-28 Notes to Consolidated Financial Statements F-29 F-1 WELLINGTON PROPERTIES TRUST I. PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION The following sets forth the unaudited pro forma condensed consolidated balance sheet of Wellington Properties Trust (the "Company") and its consolidated affiliates, including Wellington Properties Investments, L.P. (the "Operating Partnership") as of June 30, 1999, and the unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 1998 and the six-month period ended June 30, 1999. In November 1998, the Operating Partnership acquired three commercial properties (the "1998 Acquisition Properties") in exchange for (a) issuance by the Operating Partnership of 2,557,707 limited partnership units ("Units") (convertible, under certain circumstances, on a one-for-one basis such that one Unit is convertible into one Common Share, as defined below); and (b) the assumption of debt aggregating $17,066,000. In connection with the 1998 Acquisition Properties, the Company issued 166,666 common shares of beneficial interest (the "Common Shares") to American Real Estate Equities, LLC ("AREE"), or representatives thereof, in exchange for $1,000,000 in cash and the Company received 166,666 Units from the Operating Partnership in exchange for contributing $1,000,000 in cash. Simultaneous with the 1998 Acquisition Properties, Wellington Management Corporation ("WMC") received a termination fee and the advisory agreement between the Company and WMC was terminated. (The above transactions are collectively referred to herein as the "1998 Transactions.") The 1998 Transactions are reflected in the Company's historical consolidated balance sheet as of June 30, 1999 for balance sheet purposes, and are included in the pro forma condensed consolidating statements of operations as if they occurred on January 1, 1998. The pro forma condensed consolidating financial information is presented as if the following transactions have been consummated on June 30, 1999 for balance sheet purposes, and at the beginning of the period presented for purposes of the statements of operations: o The future disposition of Maple Grove Apartments for $16,700,000. o The future issuance of 700,000 Class A Cumulative Preferred Shares ("Class A Preferred Shares") to the public ("Preferred Offering"). The Class A Preferred Shares will bear a liquidation value of $10.00 per share and will accrue a dividend equal to $0.475 per share, with such dividend payable every six months. The Class A Preferred Shares will be convertible into the number of Common Shares equal to the quotient obtained by dividing (1) $10.00 plus any dividends then accrued but unpaid on the Class A Preferred Shares, by (2) a price equal to 110% of the average closing bid price of Common Shares over the 10 trading days preceding the effective date of the registration statement covering the Class A Preferred Shares. The Company will have the right to redeem the Class A Preferred Shares, under certain circumstances, after the two year anniversary date of the initial closing of the Preferred Offering. o The agreement in the second quarter of 1999 between the Company and AREE whereby: o AREE returned a warrant covering 791,667 Common Shares to the Company for cancellation. o Recipients of 838,372 Units returned such Units to the Company for cancellation. o The Company agreed to the future issuance of 254,800 Class B Cumulative Preferred Shares ("Class B Preferred Shares") to AREE. F-2 o The Class B Preferred Shares will bear the same rights, terms and preferences as the Class A Preferred Shares, but will rank junior as to payment of dividends and distributions upon liquidations. o The agreement in the second quarter of 1999 between the Company and WMC whereby, as consideration for termination of the advisory agreement: o WMC returned a warrant covering 791,667 Common Shares to the Company for cancellation. o The Company agreed to the future issuance of 95,000 Class B Preferred Shares to WMC and WMC will retain cash payments of $550,000 received during 1998. This pro forma condensed consolidated financial information should be read in conjunction with the historical financial statements of the Company included elsewhere in this prospectus. In management's opinion, all adjustments necessary to reflect the effects of the above transactions have been made. This pro forma condensed consolidated financial information is unaudited and is not necessarily indicative of what the actual financial position would have been at June 30, 1999, nor does it purport to represent the future financial position and the results of operations of the Company. F-3 Wellington Properties Trust Pro Forma Condensed Consolidated Balance Sheet As of June 30, 1999 (Unaudited) (Dollars in thousands, except per share data)
Issuance of Issuance of Adjustment to Historical Maple Grove Class A Class B Minority Consolidated Apartments Preferred Preferred Interests Pro Forma (A) (B) Shares Shares (E) Consolidated (C) (D) Assets Net investments in real estate $ 49,250 $ (15,109) $ - $ - $ - $ 34,141 Cash and cash equivalents 98 2,437 5,825 - - 8,360 Escrowed cash 681 (254) - - - 427 Deferred costs, net 816 (119) - - - 697 Other assets 171 - - - - 171 ------------ ---------- ---------- ---------- ---------- ------------ Total Assets $ 51,016 $ (13,045) $ 5,825 $ - $ - $ 43,796 ============ ========== ========== ========== ========== ============ Liabilities and shareholders' equity Liabilities Mortgage loans payable $ 32,049 $ (12,680) $ - $ - $ - $ 19,369 Other liabilities 6,550 (668) - (3,498) - 2,384 ------------ ---------- ---------- ---------- ---------- ------------ Total liabilities 38,599 (13,348) - (3,498) - 21,753 ------------ ----------- ---------- ---------- ---------- ------------ Minority Interests 8,755 - - - (1,066) 7,689 Shareholders' equity Common shares of beneficial interest 14 - - - - 14 Preferred shares of beneficial interest - - 7 3 - 10 Additional paid in capital 9,070 - 5,818 3,495 1,066 19,449 Accumulated deficit (5,422) 303 - - - (5,119) ----------- ---------- ---------- ---------- ---------- ------------ Total shareholders' equity 3,662 303 5,825 3,498 1,066 14,354 ------------ ----------- ---------- ---------- ---------- ------------ Total liabilities and shareholders' equity $ 51,016 $ (13,045) $ 5,825 $ - $ - $ 43,796 ============ ========== ========== ========== ========== ============
See accompanying notes to pro forma financial statements F-4 Wellington Properties Trust Pro Forma Condensed Consolidated Statement of Operations For the Year Ended December 31, 1998 (Unaudited) (Dollars in thousands, except per share data)
Maple Grove Issuance of Historical 1998 Acquired Apartments Preferred Shares Pro Forma Pro Forma Consolidated (A) Properties (B) (C) (D) Adjustments Consolidated Revenue: Rental revenue $ 3,488 $ 3,335 (i) $ (2,594)(i) $ - $ - $ 4,229 Other 21 57 (i) 128(ii) 306 - 512 ------------- ------------ ------------- ---------- ------------ --------- Total revenue 3,509 3,392 (2,466) 306 - 4,741 ------------- ------------ ------------- ---------- ------------ --------- Expenses: Property operating 1,564 1,404 (i) (1,128)(i) - - 1,840 General and administrative 280 - (15)(i) - 75 (E) 340 Interest expense 1,417 1,275 (ii) (1,035)(i) - - 1,657 Depreciation and amortization 694 570 (iii) (491)(i) - - 773 Nonrecurring expenses 1,560 - - - (1,560) (F) - ------------- ------------ ------------- ---------- ------------ ---------- Total expenses 5,515 3,249 (2,669) - (1,485) 4,610 ------------- ------------ ------------- --------- ------------ ---------- Income (loss) before minority interests (2,006) 143 203 306 1,485 131 Minority interests in (income) loss 1,065 - - - (575) (G) 490 ------------- ------------ ------------- ---------- ------------ --------- Net income (loss) (941) 143 203 306 910 621 Net income allocated to Preferred Shares - - - - (997) (G) (997) ------------- ------------ ------------- ---------- ------------ --------- Net income (loss) allocated to Common Shares $ (941) $ 143 $ 203 $ 559 $ (87) $ (376) ============ ============ ============ ========== ============ =========== Net loss per share: Basic and diluted $ (0.80) $ (0.28) ============ =========== Weighted average number of shares: Basic and diluted 1,175,438 1,322,043 ============= ===========
See accompanying notes to pro forma financial statements F-5 Wellington Properties Trust Pro Forma Condensed Consolidated Statement of Operations For the Six Month Period Ended June 30, 1999 (Unaudited) (Dollars in thousands, except per share data)
Historical 1998 Acquired Maple Grove Issuance of Pro Forma Pro Forma Consolidated (A) Properties (B) Apartments (C) Preferred Shares (D) Adjustments Consolidated Revenue: Rental revenue $ 3,414 $ - $ (1,261) (i) $ - $ - $ 2,153 Other 31 - 64 (ii) 153 - 248 ----------- ------------- ------------ -------------- ------------- ---------- Total revenue 3,445 - (1,197) 153 - 2,401 ----------- ------------- ------------ -------------- ------------- ---------- Expenses: Property operating 1,590 - (583) (i) - - 1,007 General and administrative 387 - (8) (i) - - 379 Interest expense 1,295 - (525) (i) - - 770 Depreciation and amortization 681 - (251) (i) - - 430 Nonrecurring expenses 3,563 - - - (3,563) (F) - ----------- ------------- ------------ -------------- ------------- --------- Total expenses 7,516 - (1,367) - (3,563) 2,586 ----------- ------------ ----------- ------------- ------------- --------- Income (loss) before minority interests (4,071) - 170 153 3,563 (185) Minority interests in (income) loss 2,664 - - - (2,281) (G) 383 ----------- ------------- ------------ -------------- ------------- ---------- Net income (loss) (1,407) - 170 153 1,282 198 Net income allocated to Preferred Shares - - - - (499) (G) (499) ----------- ------------- ------------ -------------- ------------- ---------- Net income (loss) allocated to Common Shares $ (1,407) $ - $ 170 $ 153 $ 783 $ (301) ========== ============= ============ ============== ============ ========= Net loss per share: Basic and diluted $ (1.04) $ (0.22) ========== ========= Weighted average number of shares: Basic and diluted 1,350,730 1,350,730 =========== ===========
See accompanying notes to pro forma financial statements F-6 WELLINGTON PROPERTIES TRUST NOTES AND MANAGEMENT'S ASSUMPTIONS TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 1. Basis of Presentation: The Company is a self-administered Maryland real estate investment trust. As of June 30, 1999, the Company owned a portfolio of two residential and three commercial properties. The residential properties are located in Wisconsin and contain an aggregate of 376 units. The commercial properties are located in Minnesota and contain an aggregate of 247,546 square feet. The Company is the sole general partner of and, as of June 30, 1999, holds an approximately 8.8% interest in the Operating Partnership which holds the commercial properties. Because the Company controls the Operating Partnership, the Company consolidates the net assets of the Operating Partnership with the Company. These pro forma condensed consolidated financial statements should be read in conjunction with the historical financial statements and notes thereto of the Company included elsewhere in this prospectus. In management's opinion, all adjustments necessary to reflect the effects of the consummated 1998 Transactions and the transactions to be consummated have been made. 2. Adjustments to Pro Forma Condensed Consolidated Balance Sheet: (A) Reflects the historical consolidated balance sheet of the Company as of June 30, 1999. (B) Reflects the sale of the Maple Grove Apartments based upon a gross sales price of $16,700 net of $1,169 used for costs associated with the sale and $12,680 used to pay off the mortgage loan payable on the property. In connection with the sale, escrowed cash reserves released total $254 and general liabilities satisfied in connection with the property total $668. Gain recognized on the sale is estimated to be $422 and is calculated as net sales proceeds less basis of the property of $15,109. Additionally in connection with the sale of the property, deferred costs of $119 are written off. (C) Reflects the proceeds of the Preferred Offering, based upon an offering of 700,000 Class A Preferred Shares, at an offering price of $10.00 per share, net of underwriting discounts and offering expenses aggregating approximately $1,175. (D) Reflects the issuance of 95,000 Class B Preferred Shares to WMC and 254,800 Class B Preferred Shares to AREE at a price of $10.00 per share. (E) Reflects the adjustment to minority interests. After giving effect to the transactions to be consummated, the Company will hold an approximately 8.8% interest in the Operating Partnership, calculated as follows: F-7 Company Transaction (1) Consolidated Minority interests Common Units $ - $ 7,689 91.2% $ 7,689 Shareholders' equity (2) Common Shares 3,114 741 8.8% 3,855 ---------- ---------- ------ ----------- $ 3,114 $ 8,430 100.0% $ 11,544 ========== ========== ====== =========== (1) Reflects the impact of all effects of the 1998 Transactions and the transactions to be consummated to minority interests and total shareholders' equity. (2) Excludes Class A Preferred Shares and Class B Preferred Shares aggregating $10,499. 3. Adjustments to Pro Forma Condensed Consolidated Statements of Operations: (A) Reflects the historical consolidated operations of the Company. (B) Reflects the combined operations of the 1998 Acquisition Properties. For the Year For the Six Month Ended Period Ended December 31, 1998 June 30, 1999 (i) Reflects the combined historical operations of the 1998 Acquisition Properties for the period January 1, 1998 through date of acquisition, November 20, 1998: Rental revenue $ 3,335 $ - ============= ============== Other revenue 57 - ============= ============== Property operating expense 1,404 - ============= ============== (ii) Reflects the increase in interest expense resulting from the debt assumed in connection with the 1998 Acquisition Properties which debt bears interest at an average rate of 8.3% per annum. $ 1,275 $ - ============= ============== F-8 For the Year For the Six Month Ended Period Ended December 31, 1998 June 30, 1999 (iii) Reflects the increase in depreciation and amortization expense as follows: Depreciation of buildings acquired over a 40-year useful life (allocating 20% to land and 80% to depreciable basis), net of historical depreciation expense of the 1998 Acquisition Properties. $ 555 $ - Amortization of deferred financing fees related to debt assumed in connection with the 1998 Acquisition Properties, net of historical amortization expense of the 1998 Acquisition Properties. 15 - ------------- ------------- $ 570 $ - ============= ============= (C) Reflects the adjustments as a result of the sale of the Maple Grove Apartments. For the Year For the Six Month Ended Period Ended December 31, 1998 June 30, 1999 (i) Reflects the historical operations of Maple Grove Apartments: Rental revenue $ (2,594) $ (1,261) ============= ============= Property operating expense (1,128) (583) ============= ============= General and administrative expense (15) (8) ============= ============= Interest expense (1,035) (525) ============= ============= Depreciation and amortization expense (491) (251) ============= ============== (ii) Reflects the increase in interest income from the investment of net cash proceeds resulting from the sale of Maple Grove Apartments at an assumed rate of 5.25% per annum (which rate approximates that earned on United States Treasury Bonds maturing in August 2000). $ 128 $ 64 ============= ============= (D) Reflects the increase in interest income from the investment of net cash proceeds resulting from the Preferred Offering at an assumed rate of 5.25% per annum (which rate approximates that earned on United States Treasury Bonds maturing in August 2000). (E) Reflects additional pro forma general and administrative costs expected to be incurred as a result of the 1998 Transactions. Such costs are expected to have a continuing impact on the Company. F-9 (F) In connection with the 1998 Transactions and the settlements between the Company and AREE and the Company and WMC, the Company incurred nonrecurring costs totaling $1,560 and $3,563 during the year ended December 31, 1998 and the six month period ended June 30, 1999, respectively. Such costs represent a combination of the aggregate termination fee paid to WMC for the termination of the advisory contract between the Company and WMC and costs incurred in connection with the 1998 Transactions. Such adjustments have been omitted from the pro forma condensed consolidated statements of operations for the year ended December 31, 1998 and for the six month period ended June 30, 1999 as the events are not expected to have a continuing impact on the Company. (G) Minority interest in income (loss) has been reflected, on a pro forma basis, in accordance with the Operating Partnership Agreement. Consolidated income or loss is allocated between the Company and the remaining partners pari passu based upon total weighted average Common Shares and Units. The adjustments to record the income (loss) effect of the minority interest share of income (loss) in the pro forma statements of operations were computed as follows: For the Year For the Six Month Ended Period Ended December 31, 1998 June 30, 1999 Income (loss) before minority interests $ 131 $ (185) Net income allocated to Preferred Shares (997) (499) ------------- ------------ Net income (loss) allocated to Units and Common Shares $ (866) $ (684) ============= ============ Pro forma minority share 1,719,335 Units for the year ended December 31, 1998 and the six month period ended June 30, 1999 $ (490) $ (383) ============= ============ Net loss allocated to Common Shareholders 1,322,043 Common Shares for the year ended December 31, 1998 and 1,350,730 Common Shares for the six months ended June 30, 1999 $ (376) $ (301) ============= ============ F-10 WELLINGTON PROPERTIES TRUST II. CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY F-11 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Trustees Wellington Properties Trust and Subsidiaries We have audited the accompanying consolidated balance sheet of Wellington Properties Trust and Subsidiaries as of December 31, 1998, and the related consolidated statements of operations, equity and cash flows for the years ended December 31, 1998 and 1997. These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Wellington Properties Trust and Subsidiaries as of December 31, 1998, and the consolidated results of their operations and their consolidated cash flows for the years ended December 31, 1998 and 1997, in conformity with generally accepted accounting principles. /s/ Grant Thornton LLP Fond du Lac, Wisconsin April 9, 1999 F-12 Wellington Properties Trust and Subsidiaries CONSOLIDATED BALANCE SHEET December 31, 1998 ASSETS Real estate property - at cost (notes A2, C, D and F) Land and land improvements $ 9,013,206 Buildings 41,540,244 Appliances and equipment 924,353 ------------ 51,477,803 Accumulated depreciation 1,730,601 ------------ 49,747,202 Cash 153,901 Accounts receivable 15,861 Advance-related party, net of reserve of $240,000 (note F) -- Prepaid expenses 111,751 Property tax and other escrow 843,868 Deferred costs (note A4) 1,748,255 Organization costs and loan fees, net of accumulated amortization of $231,995 (note A3) 906,241 ------------ Total Assets $ 53,527,079 ============ LIABILITIES AND EQUITY Mortgage loans payable (note C) $ 32,505,152 Line of credit (note D) 200,000 Related party payable (note F) 1,744,423 Accounts payable 166,127 Tenant security deposits 156,373 Deferred rental revenue 65,372 Accrued liabilities 1,241,239 Dividends/distributions payable 443,018 ------------ 36,521,704 MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 12,247,574 EQUITY Common shares-authorized, 100,000,000 shares of $.01 par value; issued 13,392 and outstanding 1,339,210 shares Preferred shares-authorized, 10,000,000 shares of $.01 par value; no shares issued or outstanding Common share warrants 1,510,000 Additional paid-in capital 7,497,426 Accumulated deficit (4,263,017) ------------ 4,757,801 ------------ Total Liabilities and Equity $ 53,527,079 ============ The accompanying notes are an integral part of this statement. F-13 Wellington Properties Trust and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS Year ended December 31, 1998 1997 Revenues (note A5) Rental revenue $ 3,488,481 $ 2,980,800 Gain on sale of real estate property -- 166,753 Interest and other 20,955 33,443 ----------- ----------- 3,509,436 3,180,996 Expenses Property, operating and maintenance 738,972 656,591 Advertising and promotion 66,968 68,491 Property taxes and insurance 568,905 430,057 Depreciation and amortization 694,366 606,388 Interest Expense 1,417,194 1,398,457 General and administrative 287,871 174,200 Management fees (note F) 180,889 122,391 Other nonrecurring 1,010,154 -- Provision for uncollectible advance- related party (note F) 240,000 -- Termination of advisory agreement (note F) 310,000 -- ----------- ----------- 5,515,319 3,456,575 ----------- ----------- Net loss before minority interest in net loss of consolidated subsidiary (2,005,883) (275,579) Minority interest in net loss of consolidated subsidiary 1,064,501 -- ----------- ----------- NET LOSS ALLOCATED TO COMMON SHARES $ (941,382) $ (275,579) =========== =========== Loss per common share Net loss-Basic and diluted $ (0.80) $ (0.24) =========== =========== Weighted average number of common shares outstanding(note A7) 1,175,438 1,129,061 =========== =========== The accompanying notes are an integral part of these statements. F-14 Wellington Properties Trust and Subsidiaries Consolidated Statement of Equity Years Ended December 31, 1998 and 1997
Excess of purchase price over Common Additional affiliate's Common share Paid-in basis in Accumulated Treasury shares warrants Capital property acquired deficit shares Total Balance at January 1, 1997 $ 6,848 $ -- $ 6,018,071 $ (152,615) $(1,968,930) $ (6,818) $ 3,896,556 Cash dividends declared -- -- -- -- (543,482) -- (543,482) Issuance of common shares in connection with dividend reinvestments 307 -- 274,793 -- -- -- 275,100 Release of the excess of purchase price over affiliate's basis in property acquired due to Forest Downs sale -- -- -- 152,615 -- -- 152,615 Retirement of 1,080 shares of common shares in treasury (7) -- (6,811) -- -- 6,818 -- Cost of 4,750 shares of common shares acquired for treasury -- -- -- -- -- (27,764) (27,764) Net loss -- -- -- -- (275,579) -- (275,579) --------- ------- ----------- ----------- ----------- --------- ----------- Balance at December 31, 1997 7,148 -- 6,286,053 -- (2,787,991) (27,764) 3,477,446
The accompanying notes are an integral part of this statement. F-15 Wellington Properties Trust and Subsidiaries Consolidated Statement of Equity-Continued Years ended December 31, 1998 and 1997
Excess of purchase price over Common Additional affiliate's Common share Paid-in basis in Accumulated Treasury shares warrants Capital property acquired deficit shares Total Balance at January 1, 1998 $ 7,148 $ -- $ 6,286,053 $ -- $(2,787,991) $ (27,764) $ 3,477,446 Cash dividends declared -- -- -- -- (533,644) -- (533,644) Issuance of common shares in connection with dividend reinvestments 257 -- 245,453 -- -- -- 245,710 Issuance of common shares to AREE 1,053 -- 998,947 -- -- -- 1,000,000 Issuance of warrants (note E) -- 1,510,000 -- -- -- -- 1,510,000 Cost of 66 common shares acquired for treasury -- -- -- -- -- (329) (329) Retirement of 4,816 shares of common shares in treasury -- -- (28,093) -- -- 28,093 -- Net loss -- -- -- -- (941,382) -- (941,382) Reclassification due to effect of common share split 4,934 -- (4,934) -- -- -- -- -------- ----------- ----------- ------------ ----------- --------- ----------- Balance at December 31, 1998 $ 13,392 $ 1,510,000 $ 7,497,426 $ -- $(4,263,017) $ -- $ 4,757,801 ======== =========== =========== ============ =========== ========= ===========
The accompanying notes are an integral part of this statement. F-16 Wellington Properties Trust and Subsidiaries Consolidated Statements of Cash Flows Year ended December 31, 1998 1997 ---- ---- Cash flows from operating activities: Net loss $ (941,382) $ (275,579) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 694,366 606,388 Gain on sale of real estate property -- (166,753) Minority interest (1,064,501) -- (Increase) decrease in accounts receivable 4,084 (11,460) Increase in prepaid expenses (75,268) (30,047) (Increase) decrease in property tax and other escrow (192,081) 147,137 Increase (decrease) in accounts payable 106,216 (205,223) Increase (decrease) in tenant security deposits 34,913 (9,470) Decrease in deferred rental revenue (25,624) (4,591) Increase (decrease) in accrued liabilities 271,835 (55,582) ----------- ----------- (246,060) 270,399 ----------- ----------- Net cash used in operating activities (1,187,442) (5,180) Cash flows from investing activities: Proceeds from sale of real estate property -- 1,898,962 Acquisitions of and additions to real estate properties (563,413) (84,548) Increase in deferred costs-net (98,437) -- ----------- ----------- Net cash provided by (used in) investing activities (661,850) 1,814,414 The accompanying notes are an integral part of these statements. F-17 Wellington Properties Trust and Subsidiaries Consolidated Statements of Cash Flows - Continued Year ended December 31, 1998 1997 ---- ---- Cash flows from financing activities: Proceeds from mortgage loans payable $ 2,750,000 $ 12,900,700 Proceeds from line of credit -- 815,270 Proceeds from related party payable 1,744,423 -- Repayments of mortgage loans payable (1,978,038) (7,610,011) Repayments of line of credit (600,000) (800,000) Repayments on land contract and business note obligations -- (6,676,911) Payment of financing costs (766,550) (205,958) Issuance of Common Shares 1,245,710 275,100 Cash dividends paid-common shares (505,968) (564,421) Purchase of treasury shares (329) (27,764) ------------ ------------ Net cash provided by (used in) financing activities 1,889,248 (1,893,995) ------------ ------------ NET INCREASE (DECREASE) IN CASH 39,956 (84,761) Cash at beginning of year 113,945 198,706 ------------ ------------ Cash at end of year $ 153,901 $ 113,945 ============ ============ Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 1,326,606 $ 1,509,569 ============ ============ Supplemental non-cash investing and financing activities: The Trust has dividends/distributions payable of $443,018 and $124,571 as of December 31, 1998 and 1997, respectively. On November 20, 1998, the Trust through its subsidiary, Wellington Properties Investments, L.P., acquired two office properties and one light industrial property for $30,797,781 plus direct costs of acquisition. The acquisition were financed by the assumption of various long-term debt in the amount of $17,066,935 and by issuing $13,730,846 of Wellington Properties Investments, L.P. units (note B). On November 16, 1998, the Trust issued warrants to acquire up to 791,667 Common shares to each of American Real Estate Equities, LLC and Wellington Management Corporation. These warrants were valued at $1,510,000 (note E). The accompanying notes are an integral part of this statement. F-18 Wellington Properties Trust and Subsidiaries Notes to Consolidated Financial Statements December 31, 1998 and 1997 NOTE A - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General Wellington Properties Trust (Trust) is a real estate investment trust organized under the laws of the state of Maryland. It was formed on March 15, 1994 to acquire, develop, own and operate investment real estate. The Trust owns two residential and three commercial properties as of December 31, 1998. The Trust is also the general partner and owns an approximately 6.1% interest, as of December 31, 1998, of Wellington Properties Investments, L.P. (WPI), a Delaware limited partnership formed in 1998. A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows: 1. Principles of Consolidation The consolidated financial statements include all the accounts of Wellington Properties Trust, its wholly-owned subsidiaries, Maple Grove Apartment Homes, Inc. and Lake Pointe Apartment Homes, Inc. and WPI. Because the Trust controls WPI, the Trust has consolidated the accounts of WPI with the Trust. Minority interest consists of limited partnership interests in WPI. All intercompany accounts and transactions have been eliminated in the preparation of the consolidated financial statements. 2. Real Estate Property Real estate property is recorded at cost less accumulated depreciation. Depreciation is computed on a straight-line basis over a 40-year estimated life for buildings and seven-year estimated life for appliances and equipment. Expenditures for ordinary maintenance and repairs are expensed to operations as incurred and significant renovations and improvements that improve and/or extend the useful life of the asset are capitalized and depreciated over their estimated useful life. A combination of straight-line and accelerated methods is used for income tax purposes. 3. Organization Costs and Loan Fees The costs incurred in connection with the formation of the Trust are amortized on a straight-line basis for over a period of fifteen years. Costs incurred in obtaining and securing financing for mortgage notes or bonds payable are amortized over the life of the respective loan using the straight-line method. 4. Deferred Costs The Trust has incurred costs in connection with the potential purchase of properties by WPI. These costs, which total approximately $1,748,000 as of December 31, 1998 consist primarily of legal and accounting fees and warrant costs (note E), and are expected to be allocated among the properties purchased and capitalized as part of the cost of the property. 5. Revenue Recognition Rental income attributable to leases is recorded when due from tenants and interest income is recorded on an accrual basis. F-19 Wellington Properties Trust and Subsidiaries Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 6. Income Taxes The Trust has made an election to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with its taxable year ending December 31, 1996. As a REIT, the Trust generally will not be subject to Federal income tax if it distributes at least 95% of its REIT taxable income (excluding capital gains) to its shareholders. All dividends distributions for 1998 and 1997 were return of capital. 7. Loss Per Share Net loss per share is computed based on the weighted average number of shares of common shares outstanding for the period. Common share equivalents, to include outstanding warrants and stock options, are not included in fully diluted earnings per share as they would be anti-dilutive. 8. Financial Instruments The carrying amount of financial instruments at December 31, 1998 approximates fair value. 9. Use of Estimates In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE B - ACQUISITION OF PROPERTIES On November 20, 1998, the Trust through WPI, acquired two office properties and one light industrial property in the Minneapolis, Minnesota metropolitan area. The combined purchase price of such properties totaled approximately $30.8 million, excluding closing costs. Such purchase price was funded through the issuance of an aggregate of 2,557,707 limited partnership units ("Units") in WPI (valued at $5.37 per Unit, or an aggregate value of approximately $13.7 million) and the assumption of certain third-party indebtedness of approximately $17.1 million secured by such properties. The Units are exchangeable, under certain circumstances, on a one-for-one basis for common shares of beneficial interest, $.01 par value per share from and after the one-year anniversary of the date of issuance. The following represents certain pro forma information for 1998 as if these properties were acquired effective January 1, 1998. Total revenue $ 7,007,000 Net loss before minority interest in net loss of consolidated subsidiary (431,000) Net loss allocated to common shares (148,000) Net loss per common share-basic and diluted $ (0.11) F-20 Wellington Properties Trust and Subsidiaries Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 NOTE C - LONG-TERM DEBT Long-term debt consists of the following at December 31, 1998: 8.095% mortgage note payable to American Property Financing, Inc. in monthly installments of $95,517 including interest; final balloon payment due June 1, 2004; collateralized by the Maple Grove Apartment Complex and an assignment of rents and security agreement $ 12,738,783 7.600% mortgage note payable to First Union National Bank in monthly installments of $19,417 including interest; final balloon payment due March 11, 2008; collateralized by the Lake Pointe Apartment Complex and an assignment of rents and security agreement 2,734,512 7.000% mortgage note payable to GMAC Commercial Mortgage Corporation in monthly installments of $15,635 including interest; final balloon payment due February 1, 2008; collateralized by the Nicollet Business Campus VI Complex and an assignment of rents and security agreement 2,330,224 Commercial Development Revenue Refunding Bonds-Series 1996A issued by the City of Minneapolis, Minnesota; interest payable semi-annually at variable rates ranging from 5.25% to 7.25%; principal payable annually on or before May 1 in amounts ranging from $140,000 to $395,000 with a final payment due May 1, 2015; collateralized by a letter of credit, the Thresher Square East Office Complex, equipment and an assignment of rents 4,095,000 Commercial Development Revenue Refunding Bonds - dated October 1, 1992 issued by the City of Minneapolis, Minnesota; interest payable semi-annually at variable rates ranging from 6.50% to 7.60%; principal payable annually on or before June 1 in amounts ranging from $170,000 to $375,000 with a final payment due June 1, 2010; collateralized by a letter of credit, the Thresher Square West Office Complex and an assignment of rents and security agreement 3,135,000 Note payable to Bremer Bank, N.A. in monthly installments of $51,518 including interest at a variable rate (effective rate of 8.75% at December 31, 1998) with a final balloon payment due on October 1, 2000; collateralized by the Cold Springs Office Complex and fixtures 5,596,633 Note payable to Bremer Business Financial Corp., interest payments due monthly at a variable interest rate (effective rate of 10.75% at December 31, 1998) with principal balance due on September 30, 2000; collateralized by the Cold Springs Office Complex and fixtures 1,875,000 ----------- $ 32,505,152 =========== F-21 Wellington Properties Trust and Subsidiaries Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 Aggregate maturities on long-term debt after December 31, 1998 are as follows: 1999 $ 575,856 2000 7,884,414 2001 551,249 2002 592,284 2003 634,634 Thereafter 22,266,715 ---------- $ 32,505,152 ========== NOTE D - LINE OF CREDIT During 1998, the Trust obtained a line of credit for $300,000 with Milwaukee Western Bank. Interest-only payments are due monthly with an interest rate of .5% above the bank's reference rate (effective rate at December 31, 1998 of 8.25%). At December 31, 1998 the outstanding balance was $200,000. The due date of this line of credit is March 31, 1999. The line of credit is collateralized by the guarantee of WMC. NOTE E - EQUITY During 1998, the Trust entered into agreements with American Real Estate Equities, LLC (AREE) and Wellington Management Corporation (WMC). Pursuant to the agreements the Trust entered into transactions with AREE and WMC related to issuance of warrants, issuance of Common Shares and contribution agreements for various properties (note B). The Trust issued warrants to acquire up to 791,667 Common Shares to each of AREE and WMC. The Warrants will become exercisable one year after the date of issuance (November 16, 1999) and will be exercisable for a nine-year period thereafter, at an exercise price of $5.37 per Common Share with respect to 395,833 Warrants held by each of AREE and WMC, $6.47 per Common Share with respect to 197,917 Warrants held by each of AREE and WMC, $7.74 per Common Share with respect to 118,750 Warrants held by each of AREE and WMC and $9.32 per Common Share with respect to 79,167 Warrants held by each of AREE and WMC. A value of $0.954 per warrant (based on a modified Black Scholes calculation) for a total of $1,510,000 has been recognized at December 31, 1998. The Trust issued 166,666 Common Shares to AREE in exchange for $1,000,000 during 1998. In March 1998, in connection with the refinancing of debt, the Trust entered into an agreement with Credit Suisse First Boston Mortgage Capital LLC which provides for the granting of warrants to purchase 47,500 Common Shares on any date through March 5, 2008 at a price of $3.949 per share. The warrants were not exercised during the year ended December 31, 1998. The value attributable to the detachable warrants was not material as of and for the year ended December 31, 1998. The Trust has a stock option plan (the "Old Plan") which provides for the granting of share options to officers, trustees and employees at a price determined by a formula in the Plan agreement. There are F-22 Wellington Properties Trust and Subsidiaries Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 54,387 options outstanding as of December 31, 1998. There were no options exercised under the plan during the year ending December 31, 1998. In November 1998, the Trust's shareholders approved a Share Option Plan (the "New Plan") which provides for the granting of share options to officers, trustees and employees at a price determined by a formula in the Plan agreement. The options are exercisable over a period of time determined by the Plan Committee, but no longer than ten years after the date they are granted. Compensation resulting from the share options is initially measured at grant date based on fair market value of the shares. The Plan was adopted as of November 16, 1998, and there are 54,387 options outstanding as of December 31, 1998. There were no options exercised under the Plan during the year ending December 31, 1998. The Trust has elected to implement the disclosure provisions of SFAS 123, "Accounting for Stock-Based Compensation" in its financial statements. SFAS 123 requires that if not implemented, the impact be disclosed in the footnotes to the financial statements on a pro-forma basis. The impact of SFAS 123 on the net loss and loss per share of the Trust was not material as of and for the year ended December 31, 1998. NOTE F - RELATED PARTY TRANSACTIONS Management Fees The Trust has entered into Property Management Agreements with WMC Realty, Inc. (WRI), a wholly-owned subsidiary of Wellington Management Corporation (WMC), an affiliate of the Trust in which Arnold Leas (Chairman of the Board of Trustees) is President and Chief Executive Officer, and Hoyt Properties, Inc. (Hoyt), an entity controlled by Steve Hoyt (a trustee of the Trust) to serve as Property Managers of properties owned by the Trust. The Property Managers will manage the day to day operations of properties owned by the Trust and will receive a management fee for this service. Management fees consisted of $31,503 to Hoyt and $149,386 to WRI for the year ended December 31, 1998 and $122,391 to WRI for the year ended December 31, 1997. Advisor Fees On August 2, 1994, the Trust contracted to retain WMC to serve as Advisor to the Trust. In payment for these services, the Advisor receives a fee equal to 5% of the gross proceeds of the public share offering. Advisor fees for the years ended December 31, 1998 and 1997 were $0. In addition, the Advisor is entitled to receive an Incentive Advisory Fee equal to 10% of the realized gain with respect to each sale or refinancing of property owned by the Trust. In the event a property is sold at a loss, no incentive advisory fees will be paid until the amount of the loss has been offset by gains from other sales. Incentive advisory fees for the years ended December 31, 1998 and 1997 were $0 and $18,265, respectively. In addition, the Advisor is entitled to recover certain expenses including travel, legal, accounting and insurance. These expenses totaled $149,178 and $114,133 for the years ended December 31, 1998 and 1997, respectively. Fees for services, such as legal and accounting, provided by the Advisor's employees, in the opinion of the Advisor may not exceed fees that would have been charged by independent third parties. Termination Fees In connection with the purchase of properties by WPI (note B), the Trust terminated the advisory agreement with WMC on November 20, 1998. The termination fee, payable to WMC, is determined by taking 1% of the first $150,000,000 of the aggregate gross purchase price for properties acquired by WPI plus .25% of the aggregate gross purchase price for properties acquired in excess of $150,000,000. F-23 Wellington Properties Trust and Subsidiaries Notes to Consolidated Financial Statements - Continued December 31, 1998 and 1997 Termination fees paid to WMC, which are expensed as incurred, amounted to $310,000 and $0 for the years ended December 31, 1998 and 1997, respectively. Reimbursement of Certain Expenses by Related Parties WPI is in negotiations with AREE regarding the reimbursement by WPI to AREE of certain expenses incurred by AREE in the potential acquisition of properties and certain administrative expenses. The accompanying consolidated financial statements reflect all expenses incurred by AREE on behalf of WPI in connection with the acquisitions, with a corresponding liability to AREE totaling $1,504,423. In the event that the negotiations result in reimbursement of certain expenses at a later date, that recovery will then be reflected in the financial statements. In connection with the negotiation by the Trust of the contribution agreement between AREE and WPI, a $240,000 advance was paid to WMC by AREE for the benefit of WPI. This amount was reflected as an advance to related party in accompanying financial statements, with a related liability recorded due to AREE. Under the terms of the contribution agreement, the advance was to be repaid to AREE in the event certain transactions closed before December 31, 1998. In connection with the negotiations discussed above, WMC management has stated that the advance from WPI represents reimbursement from WPI for services rendered by WMC in the organization of WPI and the acquisition of properties. WMC management has stated that it does not intend to reimburse WPI for the $240,000 advance. Due to the uncertainty of the collectibility of this advance, the entire amount has been reserved as uncollectible in the accompanying financial statements. NOTE G - OPERATING LEASES The Trust and its subsidiaries lease residential and commercial space to individual and corporate tenants. These leases expire at various times through 2005. The following is a schedule by year of minimum operating lease receipts under such operating leases. Year 1999 $3,733,271 2000 2,197,655 2001 1,923,698 2002 995,421 2003 426,689 Thereafter 358,477 ---------- TOTAL $9,635,211 ========== One of the commercial properties has one primary tenant who leases 55% of the property's rentable square footage. The future minimum operating lease receipts from this tenant represent approximately 19% of the above total. NOTE H - SUBSEQUENT EVENT In March 1999, the Trust declared a Common Share split of 4.75 shares for 3 shares. All Common Share amounts in the accompanying financial statements have been restated to reflect the Common Share split. F-24 Wellington Properties Trust Consolidated Balance Sheet June 30, 1999 (Unaudited) Assets Real Estate Property Land $ 9,009,936 Building 41,540,143 Tenant improvements 43,809 Appliances and equipment 976,096 ------------ 51,569,984 Accumulated depreciation (2,319,925) ------------ 49,250,059 Cash 98,397 Escrowed cash 680,511 Accounts receivable 32,458 Prepaid expenses 23,550 Investment in unconsolidated subsidiary 90,000 Deferred financing costs, net 815,662 Other assets 25,000 ------------ Total Assets $ 51,015,637 ============ Liabilities and shareholders' equity Liabilities Mortgage loans payable $ 32,049,484 Line of credit 190,000 Accounts payable and accrued liabilities 1,336,559 Related party payable 3,926,878 Deferred rental revenue 66,648 Tenant security deposits 158,744 Dividends/distributions payable 871,100 ------------ Total liabilities 38,599,413 ------------ Minority interests in consolidated subsidiary 8,755,376 Shareholders' equity Common shares - 100,000,000 authorized; 1,351,935 shares issued and outstanding; par value $0.01 13,519 Preferred Stock - 10,000,000 authorized; no shares issued and outstanding; par value $0.01 --- Additional paid in capital 9,069,682 Accumulated deficit (5,422,353) ------------ Total shareholders' equity 3,660,848 ------------ Total liabilities and shareholders' equity $ 51,015,637 ============ The accompanying notes are an integral part of these statements. F-25 Wellington Properties Trust Consolidated Statements of Operations (Unaudited) For the Six Month Period Ended June 30, 1999 June 30, 1998 Revenue: Rental revenue and tenant reimbursements $ 3,414,376 $ 1,516,511 Interest and other 30,513 273 ----------- ----------- Total revenue 3,444,889 1,516,784 ----------- ----------- Expenses: Property operating and maintenance 822,468 295,608 Real estate taxes and insurance 596,233 219,290 Depreciation and amortization 681,103 293,879 Interest expense 1,295,213 633,928 General and administrative 387,480 147,745 Management fees 170,015 74,515 Termination of advisory agreement 950,000 -- Nonrecurring expenses 2,613,383 -- ----------- ----------- Total expenses 7,515,895 1,664,965 ----------- ----------- Loss before minority interests (4,071,006) (148,181) Less: Minority interests 2,664,093 -- ----------- ----------- Loss allocated to Common Shares $(1,406,913) $ (148,181) =========== =========== Loss per share: Basic and diluted $ (1.04) $ (0.13) =========== =========== Weighted average number of shares: Basic and diluted 1,350,730 1,144,793 =========== =========== The accompanying notes are an integral part of these statements. F-26 Wellington Properties Trust Consolidated Statements of Operations (Unaudited) For the Three Month Period Ended June 30, 1999 June 30, 1998 Revenue: Rental revenue and tenant reimbursements $ 1,756,158 $ 750,581 Interest and other 16,076 210 ----------- ----------- Total revenue 1,772,234 750,791 ----------- ----------- Expenses: Property operating and maintenance 450,153 135,118 Real estate taxes and insurance 279,368 109,645 Depreciation and amortization 357,526 148,283 Interest expense 650,225 319,511 General and administrative 192,721 74,598 Management fees 87,390 36,907 Termination of advisory agreement 950,000 -- Nonrecurring expenses 2,613,383 -- ----------- ----------- Total expenses 5,580,766 824,062 ----------- ----------- Loss before minority interests (3,808,532) (73,271) Less: Minority interests 2,491,018 -- ----------- ----------- Loss allocated to Common Shares $(1,317,514) $ (73,271) =========== =========== Loss per share: Basic and diluted $ (0.97) $ (0.06) =========== =========== Weighted average number of shares: Basic and diluted 1,351,891 1,144,793 =========== =========== The accompanying notes are an integral part of these statements. F-27 Wellington Properties Trust Consolidated Statements of Cash Flows (Unaudited) For the Six Month Period Ended
June 30, 1999 June 30, 1998 Cash flows from operating activities: Net Loss $(4,071,006) $ (148,181) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 681,103 293,879 Changes in assets and liabilities: Decrease (increase) in accounts receivable and prepaid expenses 71,604 (50,861) Decrease in deferred costs 1,723,255 -- Decrease in accounts payable and accrued liabilities (70,809) (13,423) Increase in accounts payable related party 2,182,455 41,883 Increase in tenant security deposits and deferred rents 3,409 5,308 ----------- ----------- Net cash provided by operating activities $ 520,011 $ 128,605 ----------- ----------- Cash flows from investing activities: Capital expenditures paid (93,380) (40,806) Investment in unconsolidated subsidiary (90,000) -- Decrease (increase) in escrowed cash 163,357 (45,137) ----------- ----------- Net cash flow used in investing activities (20,023) (85,943) ----------- ----------- Cash flows from financing activities: Proceeds from mortgage loans payable -- 2,750,000 Loan fees -- (436,285) Payments on mortgage note (455,668) (2,376,180) Payments on line of credit (10,000) -- Dividends paid (89,824) (125,794) ----------- ----------- Net cash flow used in financing activities (555,492) (188,259) ----------- ----------- Net decrease in cash (55,504) (145,597) Cash at beginning of period 153,901 113,945 ----------- ----------- Cash at end of period $ 98,397 $ (31,652) =========== =========== Supplemental Data: Interest paid $ 1,318,972 $ 641,035 Dividends paid through issuance of Common Shares $ (62,383) $ (124,287) Issuance of Common Shares $ 62,383 $ 124,287 ----------- ----------- $ -- $ -- =========== ===========
The accompanying notes are an integral part of these statements. F-28 WELLINGTON PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1999 (Unaudited) NOTE A - ORGANIZATION Wellington Properties Trust ("Company") is a real estate investment trust ("REIT") organized in the state of Maryland. The Company was formed on March 15, 1994 to acquire, develop, own and operate investment real estate. As of June 30, 1999, the Company owned two residential and three commercial properties that contain a total of 376 apartment units and 247,546 commercial rentable square feet. The Company's interest in the commercial properties is held through Wellington Properties Investments, LP (the "Operating Partnership"), a Delaware limited partnership formed in 1998. The Company is the general partner of, and as of June 30, 1999, owns an approximately 8.8% interest in the Operating Partnership. On March 4, 1999, the Company acquired an 8% interest in Highlander Acquisition Company, LLC ("Highlander") which owns a 154 unit apartment community. NOTE B - BASIS OF PRESENTATION The consolidated financial statements have been prepared by the Company without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the included disclosures are adequate to make the information presented not misleading. In the opinion of the Company, all adjustments (consisting solely of normal recurring matters, except with respect to the nonrecurring expense) necessary to fairly present the financial position of the Company as of June 30, 1999, the results of its operations for the six month periods and three month periods ended June 30, 1999 and 1998, and its cash flows for the six month periods ended June 30, 1999 and 1998 have been included. During the second quarter of 1999, the Company concluded that costs incurred and deferred in 1998 in connection with the potential acquisition of 27 properties had no future value because such potential acquisitions would not occur. Such costs approximated $2.6 million and were expensed in the second quarter along with the costs to terminate the advisory agreement of $950,000 (See Note H). The results of operations for such interim periods are not necessarily indicative of the results for a full year. For further information, refer to the Company's consolidated financial statements and footnotes included in the Annual Report of Form 10-KSB/Amendment No. 1 for the year ended December 31, 1998. NOTE C - ACQUISITION OF PROPERTIES On March 4, 1999, the Company acquired an 8% interest in Highlander at a cost of $90,000 funded in cash. The Company believes that cost approximates fair value. On November 20, 1998, the Company through the Operating Partnership, acquired two office properties and one light industrial property in the Minneapolis, Minnesota metropolitan area. The combined purchase price of such properties totaled approximately $31.1 million, including closing costs. Such purchase price was funded through the issuance of an aggregate of 2,557,707 limited partnership units ("Units") in the Operating Partnership (valued at $5.37 per Unit, or an aggregate value of approximately $13.7 million) and the assumption of certain third-party indebtedness of approximately $17.1 million secured by such properties. The Units are exchangeable, under certain circumstances, on a one-for-one basis for common shares of beneficial interest, $.01 par value per share from and after the one-year anniversary of the date of issuance. (See Note H). F-29 WELLINGTON PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1999 NOTE D - MORTGAGE NOTES PAYABLE AND OTHER FINANCING Maple Grove The mortgage payable with respect to Maple Grove is collateralized by Maple Grove and an assignment of rents and had a principal balance as of June 30, 1999 of $12,680,308. The interest rate is fixed at 8.095%. Payments are due in monthly installments of principal and interest of $95,517 with a final balloon payment due June 1, 2004. (See Note I.) Lake Pointe As of June 30, 1999, the Company was liable on a mortgage note payable of $2,722,891. The note requires monthly payments of $19,417 including interest at 7.6%. The mortgage is due March 2008 and is secured by Lake Pointe and an assignment of rents. Thresher Square East The financing consists of Commercial Development Revenue Refunding Bonds - Series 1996A issued by the City of Minneapolis, Minnesota; interest payable semi-annually at variable rates ranging from 5.25% to 7.25%; principal payable annually on or before May 1 in amounts ranging from $140,000 to $395,000 with a final payment due May 1, 2015; collateralized by a letter of credit, the Thresher Square East Office Complex, equipment and an assignment of rents. As of June 30, 1999 the principal balance was $3,955,000. Thresher Square West The financing consists of Commercial Development Revenue Refunding Bonds - dated October 1, 1992 issued by the City of Minneapolis, Minnesota; interest payable semi-annually at variable rates ranging from 6.50% to 7.60%; principal payable annually on or before June 1 in amounts ranging from $170,000 to $375,000 with a final payment due June 1, 2010; collateralized by a letter of credit, the Thresher Square West Office Complex and an assignment of rents and security agreement. As of June 30, 1999 the principal balance was $2,965,000. Cold Springs The financing consists of a note payable to Bremer Bank, N.A. in monthly installments of $51,518 including interest at a variable rate (effective rate of 9.25% at June 30, 1999) with a final balloon payment due on October 1, 2000; and collateralized by the Cold Springs Office Complex and fixtures. As of June 30, 1999 the principal balance was $5,533,491. Additionally there is a note payable to Bremer Business Financial Corp., interest payments due monthly at a variable interest rate (effective rate of 10.75% at June 30, 1999) with principal balance due on September 30, 2000; and collateralized by the Cold Springs Office Complex and fixtures. As of June 30, 1999 the principal balance was $1,875,000. F-30 WELLINGTON PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1999 NOTE D - MORTGAGE NOTES PAYABLE AND OTHER FINANCING - Continued Nicollet VI The financing consists of a 7.000% mortgage note payable to GMAC Commercial Mortgage Corporation in monthly installments of $15,635 including interest; final balloon payment due February 1, 2008; and collateralized by the Nicollet Business Campus VI Complex and an assignment of rents and security agreement. As of June 30, 1999 the principal balance was $2,317,794. Line of Credit During 1998, the Company obtained a line of credit for $300,000 with Milwaukee Western Bank. Payments of $5,000 of principal plus interest are due monthly with the final principal payment due on September 30, 1999. The interest rate is at 0.5% above the bank's reference rate (effective rate at June 30, 1999 of 8.75%). At June 30, 1999, the outstanding balance was $190,000. The line of credit is collateralized by the guarantee of Wellington Management Corporation ("WMC"). NOTE E - EQUITY During 1998, the Company entered into agreements with American Real Estate Equities, LLC ("AREE") and WMC. Pursuant to the agreements the Company entered into transactions with AREE and WMC related to issuance of warrants, issuance of Common Shares and contribution agreements for various properties. On November 16, 1998, the Company issued warrants to acquire up to 791,667 Common Shares to each of AREE and WMC. The Warrants were to become exercisable one year after the date of issuance (November 16, 1999) and would be exercisable for a nine-year period thereafter, at an exercise price of $5.37 per Common Share with respect to 395,833 Warrants held by each of AREE and WMC, $6.47 per Common Share with respect to 197,917 Warrants held by each of AREE and WMC, $7.74 per Common Share with respect to 118,750 Warrants held by each of AREE and WMC and $9.32 per Common Share with respect to 79,167 Warrants held by each of AREE and WMC. Effective June 30, 1999, all such warrants were returned to the Company and canceled. (See Note H). F-31 WELLINGTON PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1999 NOTE F - DISTRIBUTIONS On March 16, 1999, the Board of Trustees declared a split of 4.75 Common Shares for each 3.00 Common Shares effective on March 24, 1999 to shareholders of record as of March 22, 1999 ("Stock Split"). The Operating Partnership simultaneously declared a split of 4.75 Units for each 3.00 Units effective on March 24, 1999 to unitholders of record as of March 22, 1999. All amounts herein have been adjusted to give effect to the Stock Split. On March 30, 1999, the Board of Trustees declared a cash distribution of $0.11 per share totaling approximately $148,679 to shareholders of record as of March 31, 1999. The Operating Partnership simultaneously declared a $0.11 per unit cash distribution to holders of Units. Such distribution totals $189,127. (See Note H.) On July 15, 1999, the Board of Trustees declared a cash distribution of $0.11 per share totaling approximately $148,679 to shareholders of record as of June 30, 1999. The Operating Partnership simultaneously declared a $0.11 per unit cash distribution to holders of Units. Such distribution totals $189,127. (See Note H.) The Board of Trustees further voted to defer payment of both 1999 cash distributions. NOTE G - LOSS PER COMMON SHARE Net loss per Common Share is computed based on the weighted average number of Common Shares outstanding for the period. Common share equivalents, consisting of outstanding warrants and options, are not included in the diluted loss per Common Share as they would be anti-dilutive. NOTE H - RELATED PARTY TRANSACTIONS Reimbursement of Certain Expenses by Related Parties The Operating Partnership has been in negotiations with AREE regarding the reimbursement by the Operating Partnership to AREE of certain expenses incurred by AREE in the potential acquisition of properties and certain administrative expenses. In connection with the negotiations during 1998 by the Company of the contribution agreement between AREE and the Operating Partnership, a $240,000 advance was paid to WMC by AREE for the benefit of the Operating Partnership. As of December 31, 1998, this amount was reflected as an advance to related party in accompanying financial statements, with a related liability recorded due to AREE. Under the terms of the contribution agreement, the advance was to be repaid to AREE in the event certain transactions closed before December 31, 1998. Due to the uncertainty of the collectibility of this advance, the entire amount was reserved as uncollectible as of December 31, 1998 and in connection with the agreement discussed below, has been written off as of June 30, 1999. Of the 30 properties to be acquired, three properties have been acquired as of June 30, 1999. Further, in connection with the agreements discussed below, WMC will retain cash received totaling $550,000 as partial consideration for termination of the advisory agreement. F-32 WELLINGTON PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1999 Management Fees The Company has entered into Property Management Agreements with WMC Realty, Inc. ("WRI"), a wholly-owned subsidiary of WMC, an affiliate of the Company in which Arnold Leas (Chairman of the Board of Trustees) is President and Chief Executive Officer, and Hoyt Properties Inc. ("Hoyt"), an entity controlled by Steve Hoyt (a trustee of the Company) to serve as Property Managers of properties owned by the Company. The Property Managers manage the day to day operations of properties owned by the Company and receive a management fee for this service. Management fees for the period January 1, 1999 through June 30, 1999 totaled $95,112 to Hoyt and $74,903 to WRI. Management fees for the period January 1, 1998 through June 30, 1998 totaled $0 to Hoyt (management agreement commenced November 1998) and $74,515 to WRI. Advisor Fees On August 2, 1994, the Company contracted to retain WMC to serve as Advisor to the Company. In payment for these services, the Advisor receives a fee equal to 5% of the gross proceeds of the public offering of common shares, which terminated October 1995. No advisor fees have been paid during 1999. In addition, the Advisor is entitled to receive an Incentive Advisory Fee equal to 10% of the realized gain with respect to each sale or refinancing of property owned by the Company. In the event a property is sold at a loss, no Incentive Advisory Fees will be paid until the amount of the loss has been offset by gains from other sales. No Incentive Advisory Fees have been paid during 1999. In addition, the Advisor is entitled to recover certain expenses including travel, legal, accounting, and insurance. Fees for services, such as legal and accounting, provided by the Advisor's employees, in the opinion of the Advisor, may not exceed fees that would have been charged by independent third parties. The initial term of the agreement ended on December 31, 1995 and had been renewed automatically each year. The agreement was subject to termination without cause, by either party, on 60 days written notice and by the Company for cause immediately upon written notice. Termination of Advisory Agreement In connection with the purchase of properties by the Operating Partnership, the Company terminated the advisory agreement with WMC on November 20, 1998. The termination fee, payable to WMC, was estimated at $1.6 million and was to be determined by taking 1% of the first $150,000,000 of the aggregate gross purchase price for properties acquired by the Operating Partnership plus 0.25% of the aggregate gross purchase price for properties acquired in excess of $150,000,000. See agreement as of June 30, 1999 discussed below. F-33 WELLINGTON PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1999 NOTE H - RELATED PARTY TRANSACTIONS - Continued Agreements: June 30, 1999 In the second quarter of 1999, due principally to the fact that the Operating Partnership was able to acquire only three properties since November 1998, the Company entered into discussion with AREE and WMC. As a result of these discussions, effective as of June 30, 1999: o Recipients of 838,372 Units, received in the November 1998 acquisitions as described in Note C, have returned such Units to the Company for cancellation. o AREE has returned the warrant covering 791,667 Common Shares to the Company. Further, the Company has agreed to issue 254,800 Class B Junior Cumulative Convertible Preferred Shares ("Class B Preferred Shares") to AREE in the third quarter of 1999 as consideration for an aggregate of $2,548,000 representing advances to the Company for working capital purposes and costs incurred in connection with the 1998 Transactions. The Class B Preferred Shares will bear the same rights, terms and preferences as the Class A Preferred Shares (defined below), but will rank junior as to payment of dividends and distributions upon liquidations. Of the total Class B Preferred Shares to be issued to AREE, 135,600 will be redeemable by the Company for $1.00 if certain conditions are not met prior to June 30, 2002. o As consideration for the Termination of the Advisory Agreement between the Company and WMC, WMC has returned the warrant covering 791,667 Common Shares to the Company, the Company has agreed to issue 95,000 Class B Preferred Shares to WMC in the third quarter of 1999 and WMC will retain cash payments of $550,000 received during 1998. The obligation by the Company to issue the Class B Preferred Shares has been reflected as a liability aggregating $3,498,000 on the Company's balance sheet as of June 30, 1999. Listing Agreement In January 1998, the Company entered into a listing agreement with WRI. The agreement provides that WRI would receive a fee equal to 3% of the sales price in the event of a sale of either of the Company's residential properties. In connection with the pending contract for the sale of Maple Grove Apartments, discussed below, WRI is expected to receive a fee totaling $501,000 upon consummation of the sale. NOTE I - SUBSEQUENT EVENTS The Company anticipates filing a Preliminary Registration Statement in August 1999 under the Securities Act of 1933 on Form SB-2 in order to commence the sale of 700,000 Class A Cumulative Convertible Preferred Shares ("Class A Preferred Shares") to the public ("Preferred Offering"). The Class A Preferred Shares will bear a liquidation value of $10.00 per share and will accrue a dividend equal to $0.475 per share, with such dividend payable every six months. The Class A Preferred Shares will be convertible into the number of Common Shares equal to the quotient obtained by dividing (1) $10.00 plus any dividends then accrued but unpaid on the Class A Preferred Shares, by (2) a price equal to 110% of the average closing bid price of Common Shares over the 10 trading days preceding the effective date of the registration statement covering the Class A Preferred Shares. The Company F-34 WELLINGTON PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1999 NOTE I - SUBSEQUENT EVENTS - Continued will have the right to redeem the Class A Preferred Shares, under certain circumstances, after the two year anniversary date of the initial closing of the Preferred Offering. The Company expects to use the net proceeds from the Preferred Offering to fund the continued growth of the Company. Maple Grove is presently under contract for sale to an independent third party. The contract is subject to normal closing conditions and contingencies and provides for a purchase price of $16,700,000 to be paid by assuming the first mortgage of approximately $12,680,000 and paying the balance in cash at closing. The proposed buyer has advanced $400,000 of the cash purchase price in exchange for the Company's 10% promissory note. No assurance can be given that the Preferred Offering or the sale of Maple Grove will be consummated and if consummated, would be on terms described above or otherwise. F-35 ======================================== ====================================== No dealer, salesperson or other individual has been authorized to give any information or make any representation not contained in this prospectus in connection with the offering covered by this prospectus. If given or made, such information or representations must not be relied upon as having been authorized by us. This prospectus does not constitute an offer 700,000 Shares to sell, or a solicitation. Neither the Class A Cumulative Convertible delivery of this prospectus nor any sale Preferred Shares made hereunder shall, under any circumstances, create an implication that there has not been any change in the facts set forth in this prospectus or in our affairs since the date hereof. TABLE OF CONTENTS Prospectus Summary.................3 Risk Factors......................10 Use of Proceeds...................20 Dividend Policy...................21 Capitalization....................22 Price Range of Common Shares and Dividends.............23 Management Discussion and Analysis of Financial Condition and Results of Operations....................24 Business..........................30 Management........................53 Principal Shareholders............59 Certain Relationships and Related Transactions.............61 WELLINGTON PROPERTIES TRUST Underwriting......................65 Description of Securities.........67 Certain Provisions of Maryland Law and of Our Declaration of Trust and Bylaws..72 Federal Income Tax Consequences...75 Legal Matters.....................81 Experts...........................81 Additional Information............82 Financial Statements..............F-1 Until ______, 1999 (25 days after the date of this prospectus), all dealers effecting transactions in the Class A [logo of R.J. Steichen & Company] Preferred Shares, whether or not participating in this distribution, may [logo of Miller Johnson & Kuehn, be required to deliver a current Incorporated] prospectus with respect to those Class A Preferred Shares to purchasers thereof prior to or concurrent with the receipt of the confirmation of the sale of those Class A Preferred Shares. ________________, 1999 ========================================= ===================================== PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 24. Indemnification of Directors and Officers. The Declaration of Trust and the Bylaws of the Trust provide that the Trust may indemnify officers, directors, employees and agents of the Trust to the fullest extent permitted by Maryland law. Pursuant to Maryland law, the Trust generally has the power to indemnify its present and former directors, officers, agents and employees, or persons serving as such in another entity at the Trust's request, against expenses (including attorneys' fees) and liabilities incurred by them in any action, suit, or proceeding to which they are, or are threatened to be made, a party by reason of their serving in such positions, so long as they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the Trust, or in the case of a criminal proceeding, had no reasonable cause to believe their conduct was unlawful. In respect of suits by or in the right of the Trust, the indemnification is generally limited to expenses (including attorneys' fees) and is not available in respect of any claim where such person is adjudged liable to the Trust, unless the court determines that indemnification is appropriate. To the extent such person is successful in the defense of any suit, action or proceeding, indemnification against expenses (including attorneys' fees) is mandatory. The Trust has the power to purchase and maintain insurance for such persons and indemnification. The indemnification provided by Maryland law is not exclusive of other rights to indemnification which any person may otherwise be entitled under any bylaw, agreement, shareholder or disinterested director vote, or otherwise. Item 25. Other Expenses of Issuance and Distribution. The estimated expenses payable by the Trust in connection with the offering described in this Registration Statement (other than underwriters' discounts and expenses) are as follows: SEC registration fee $ 3,836 NASD filing fee 1,880 Printing, engraving & Edgar expenses 30,000 -------- Legal fees and expenses 500,000 -------- Accounting fees and expenses 65,000 Transfer agent's fees 5,000 -------- Other 44,284 -------- Total $ 650,000 -------- Item 26. Recent Sales of Unregistered Securities. In the third quarter of 1999, the Registrant issued 95,000 of its Class B Junior Cumulative Convertible Preferred Shares to Wellington Management Corporation ("WMC") as partial consideration for termination of an agreement retaining WMC to provide certain advisory services to the Registrant. Such issuance was exempt from registration under the Securities Act pursuant to Section 4(2) thereof. In November 1998, the Registrant sold 166,666 of its Common Shares to American Real Estate Equities, LLC ("AREE") for $6.00 per share. In a related transaction, AREE contributed certain real estate and contractual rights to acquire certain other real estate to an operating partnership of which the Registrant is the sole general partner in exchange for 135,600 of the Registrant's Class B Junior Cumulative Convertible Preferred Shares. All such issuances were exempt from registration under the Securities Act pursuant to Section 4(2) thereof. In the third quarter of 1999, pursuant to a cost-sharing agreement with AREE, the Registrant also issued 119,200 shares of its Class B Junior Cumulative Convertible Preferred Shares. Such issuance was exempt from registration under the Securities Act pursuant to Section 4(2) thereof. II-1 On November 20, 1998, the Registrant issued to certain investors, upon their contribution of real estate assets to the Registrant's operating partnership, 1,214,086 Units of the Registrant's operating partnership, which Units may be converted under certain circumstances, at the option of the Registrant, into the Registrant's Common Shares. All such issuances were exempt from registration under the Securities Act pursuant to Section 4(2) thereof. On March 5, 1998, the Registrant issued a warrant to purchase 47,500 of its Common Shares to Credit Suisse First Boston in partial consideration of the extension of credit to the Registrant. Such issuance was exempt from registration under the Securities Act pursuant to Section 4(2) thereof. Item 27. Exhibits. The exhibits to this Registration Statement appear on the Index to Exhibits hereto. Item 28. Undertakings. The Registrant hereby undertakes that it will: (1) file, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) include any prospectus required by section 10(a)(3) of the Securities Act; (ii) reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) of this chapter (ss. 230.424(b) of this chapter) if, in the aggregate, the changes in the volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (iii) include any additional or changed material information on the plan of distribution. (2) for determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) file a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") 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 of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-2 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorized this amendment to the registration statement to be signed on its behalf by the undersigned, in the City of Minneapolis, State of Minnesota, on October 25, 1999. WELLINGTON PROPERTIES TRUST By: /s/ Duane H. Lund Duane H. Lund Chief Executive Officer (Principal Executive Officer) In accordance with 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 stated. /s/ Duane H. Lund Chief Executive Officer October 25, 1999 Duane H. Lund (Principal Executive Officer) /s/ Robert F. Rice President October 25, 1999 - ------------------------ Robert F. Rice /s/ Arnold K. Leas* Chairman of the Board October 25, 1999 - ------------------------ Arnold K. Leas /s/ Steven B. Hoyt* Trustee October 25, 1999 - ------------------------ Steven B. Hoyt /s/ Paul T. Lambert* Trustee October 25, 1999 - ------------------------ Paul T. Lambert /s/ Peter Ogden* Trustee October 25, 1999 Peter Ogden /s/ Robert P. Ripp* Trustee October 25, 1999 - ------------------------ Robert P. Ripp /s/ Robert D. Salmen* Trustee October 25, 1999 - ------------------------ Robert D. Salmen * By: /s/ Duane H. Lund Duane H. Lund Attorney-in-Fact II-3 INDEX TO EXHIBITS Exhibit Description 1 Underwriting Agreement (filed on August 11, 1999 as Exhibit 1 to this Registration Statement) 2 Amended and Restated Contribution Agreement between the Company, the Operating Partnership, AREE and other limited partnership Unit recipients dated as of August 31, 1998 (filed as Exhibit A with the Company's Schedule 14A on November 6, 1998 and incorporated herein by reference) 3.1 Articles of Amendment and Restatement of the Declaration of Trust and Articles Supplementary thereto (filed on October 14, 1999 as Exhibit 3.1 to this Registration Statement 3.2 Amended and Restated Bylaws of the Company (filed on October 14, 1999 as Exhibit 3.2 to this Registration Statement) 4.1 Common Stock Purchase Warrant by the Company to Credit Suisse First Boston Mortgage Capital LLC, dated as of March 5, 1998 (filed with the Company's Current Report on Form 8-K on August 31, 1998 and incorporated herein by reference) 4.2 Form of Class A Preferred Stock Purchase Warrant to be issued to underwriters pursuant to the Underwriting Agreement included as Exhibit 1 to this Registration Statement (filed on August 11, 1999 as Exhibit 4.2 to this Registration Statement) 4.3 Shareholders' Agreement, dated as of November 16, 1998 between the Company and the shareholders identified on the signature page thereto 4.4 Common Share certificate specimin 4.5 Class A Cumulative Convertible Preferred Share certificate specimin 5 Opinion Letter of Foley & Lardner (filed on August 11, 1999 as Exhibit 5 to this Registration Statement) 8 Tax Opinion Letter of Grant Thornton LLP 10.1 Agreement of Limited Partnership of the Operating Partnership dated as of August 31, 1998 (filed as Exhibit C with the Company's Schedule 14A on November 6, 1998 and incorporated herein by reference) 10.2 Master Registration Rights Agreement dated as of August 31, 1998 (filed as Exhibit E of Exhibit C with the Company's Schedule 14A on November 6, 1998 and incorporated herein by reference) 10.3 Business Credit Agreement between Milwaukee Western Bank and the Company dated as of March 6, 1998 (filed with the Company's Current Report on Form 8-K on August 31, 1998, and incorporated herein by reference) 10.4 Guaranty by the Company for the benefit of Credit Suisse First Boston Mortgage Capital LLC dated as of March 5, 1998 (filed with the Company's Current Report on Form 8-K on August 31, 1998 and incorporated herein by reference) 10.5 Promissory Note for $2,750,000 by Lake Pointe Apartment Homes, Inc., to Credit Suisse First Boston Mortgage Capital, LLC dated as of March 5, 1998 (filed with the Company's Current Report on Form 8-K on August 31, 1998 and incorporated herein by reference) II-4 10.6 Mortgage, Assignment of Leases and Rents and Security Agreement between Lake Pointe Apartment Homes, Inc. to Credit Suisse First Boston Mortgage Capital, LLC dated as of March 5, 1998 (filed with the Company's Current Report on Form 8-K on August 31, 1998 and incorporated herein by reference) 10.7 Registration Rights Agreement between the Company and Credit Suisse First Boston Mortgage Capital, LLC dated as of March 5, 1998 (filed with the Company's Current Report on Form 8-K on August 31, 1998 and incorporated herein by reference) 10.8 Note between Maple Grove Apartment Homes, Inc. and American Property Financing, Inc. dated as of May 6, 1997 (filed with the Company's Current Report on Form 8-K on August 31, 1998 and incorporated herein by reference) 10.9 Mortgage, Assignment of Leases and Rents and Security Agreement between Maple Grove Apartment Homes, Inc. and American Property Financing, Inc., dated as of May 6, 1997 (filed with the Company's Current Report on Form 8-K on August 31, 1998 and incorporated herein by reference) 10.10 Wellington Properties Trust 1998 Stock Option Plan (filed as Exhibit F with the Company's Schedule 14A on November 6, 1998 and incorporated herein by reference) 10.11 Wellington Properties Trust Dividend Reinvestment and Share Purchase Plan (filed with the Company's Registration Statement on Form S-3 on January 3, 1996 and incorporated herein by reference) 10.12 Subscription Agreement, dated as of June 30, 1999, between the Company and Wellington Management Corporation 10.13 Subscription Agreement, dated as of June 30, 1999, between the Company and American Real Estate Equities, LLC 10.14 Employment Agreement, dated as of November 16, 1998, between the Company and Duane H. Lund. 10.15 Employment Agreement, dated as of November 16, 1998, between the Company and Robert F. Rice. 10.16 Purchase Agreement, dated as of July 2, 1999, between Maple Grove Apartment Home, Inc. and The Shelard Group, Inc. (filed on August 11, 1999 as Exhibit 10.16 to this Registration Statement) 10.17 Promissory Note, dated August 20, 1999, of the Company to The Shelard Group, Inc. (filed on October 14, 1999 as Exhibit 10.17 to this Registration Statement) 21 List of subsidiaries 23.1 Consent of Grant Thornton LLP (filed on August 11, 1999 as Exhibit 23.1 to this Registration Statement) 23.2 Consent of Foley & Lardner (Included in Exhibit 5 hereto) 24 Power of Attorney (Included on the signature page hereof as filed on August 11, 1999) II-5 EX-4.3 2 SHAREHOLDERS' AGREEMENT SHAREHOLDERS' AGREEMENT THIS SHAREHOLDERS' AGREEMENT (this "Agreement"), made as of the 11th day of November, 1998, by and among Wellington Properties Trust, a Maryland real estate investment trust (the "Company") and the parties identified as "Subject Shareholders" on the signature page hereto (hereinafter referred to collectively as the "Subject Shareholders" and individually as a "Subject Shareholder"); WITNESSETH: THAT WHEREAS, the Company is authorized to issue ____ common shares of beneficial interest, no par value per share, ____ shares of which are currently issued and outstanding (and of which ____ are presently owned by the Subject Shareholders); WHEREAS, the Company has entered into a certain Master Contribution Agreement (the "Master Contribution Agreement") with American Real Estate Equities, LLC ("AREE"), Steve Hoyt ("Hoyt"), Paul Lambert ("Lambert"), and Duane Lund ("Lund") dated _____________, 1998, pursuant to which AREE has agreed to contribute certain contracts to the Company in exchange for the issuance of limited partnership interests (the "LP Units") in Wellington Properties, L.P. (the "UPREIT"), a Delaware limited partnership, of which the Company is the sole general partner; WHEREAS, Hoyt, Lambert and Lund are all of the members of AREE and, in that capacity, will receive LP Units pursuant to the Master Contribution Agreement; WHEREAS, pursuant to the terms of the limited partnership agreement (the "OP Agreement") of the UPREIT, the LP Units are convertible into common shares of beneficial interest of the Company; and WHEREAS, the Subject Shareholders desire to exercise the voting rights of their shares in the Company, and to restrict the transferability of their shares in the Company, as set forth in this Agreement; NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained, and of other good and valuable considerations, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. For purposes of this Agreement, the following terms shall have the respective meanings stated: 1.1. "Affiliate" shall mean, (i) with respect to any individual or entity (the "First Person"), any entity (the "Second Person"), directly or indirectly, (A) controlled or more than 50% owned (directly or indirectly) by the First Person, (B) if the First Person is an entity, controlling or owning (directly or indirectly) more than 50% of the First Person, or (C) if the First Person is an entity, controlled or more than 50% owned (directly or indirectly) by an individual or entity which controls or owns (directly or indirectly) more than 50% of the First Person, and (ii) with respect to any First Person who is an individual, any members of the immediate family of such individual and any trusts established exclusively for the benefit of such individual and/or any such immediate family members. If the First Person is an individual, any ownership and/or control of the Second Person by immediate family members and/or trusts who are Affiliates of such First Person pursuant to clause (ii) above shall be attributed to, and deemed exercised and owned by, such First Person. If the First Person is the successor to a subject Shareholder by reason of death of such Subject Shareholder, any person who was an Affiliate of the decedent Subject Shareholder shall be deemed to be an Affiliate of such First Person. For purposes of this Section 1.1, "immediate family" of an individual shall mean such individual's siblings, spouse and his lineal ancestors and descendants. 1.2. "AREE Shareholders" shall mean AREE, Hoyt, Lambert and Lund. 1.3. "Shareholders" shall mean, as of any date, all beneficial holders of any or all of the Shares. 1.4. "Shares" shall mean, as of any date, any and all shares of beneficial interest of the Company, of whatever class, issued and outstanding, including, but not limited to, shares issued or created in connection with any share dividend, share split or other capital readjustment. 1.5. "Subject Shareholder" shall mean any person (other than the Company) who is or becomes a party to, or bound by, this Agreement, whether or not such person owns any Shares. 1.6. "Subject Shares" shall mean any and all Shares owned (whether directly or through a trust for the benefit of the Subject Shareholder) or controlled by any Subject Shareholder, from time to time, now or hereafter, including, without limitation any shares issued in connection with the conversion of LP Units into Shares pursuant to the OP Agreement. 1.7. "Transfer" shall mean and include any sale, assignment, transfer, gift, pledge, encumbrance, hypothecation, distribution pursuant to a liquidation, or other disposition or alienation, direct or indirect, of any of the Shares or any interest of a Shareholder, legal, equitable or beneficial therein. 1.8. "Wellington Shareholders" shall mean Wellington Management Corporation, Arnold Leas, Gregory Leas, and Robert Rice. 2. Issuance of Additional Shares. In the event the Company intends to issue additional Shares (whether pursuant to a secondary offering, share dividend, share split or otherwise) to any or all of the Subject Shareholders or their Affiliates, whether or not such Shares are currently authorized by the Articles or Amendment and Restatement of the Company, such Shares, upon issuance, shall automatically become Subject Shares. As a condition to the issuance of any additional Shares to any Affiliate of a Subject Shareholder who -2- is not already a Subject Shareholder, the Company shall require that the proposed holder of such additional Shares execute and deliver to the Company a joinder (a "Joinder") to this Agreement in the form attached hereto as Exhibit A. 3. Management of the Company. 3.1. Election of Trustees. The Subject Shareholders acknowledge that upon the closing of the transactions contemplated by the Master Contribution Agreement, the board of trustees of the Company will be expanded to seven members and Lambert and Hoyt shall be elected as trustees to fill the vacancies created by such expansion. Each Subject Shareholder (and its successors, transferees and assigns entitled to exercise such rights) shall take all action necessary or appropriate (including, without limitation, voting all Subject Shares, calling special meetings of Shareholders and executing and delivering proxies and written consents) to ensure that Hoyt and Lambert are and continue to be elected to the board of trustees of the Company, each Subject Shareholder shall use its best efforts to cause the board of trustees of the Company to fill any such vacancy with a person selected by AREE and Wellington Management Corporation ("WMC"). In the event that any trustee decides not to stand for re-election, each Subject Shareholder shall use its best efforts to cause the board of trustees of the Company to present to the Shareholders, at the next Shareholders meeting, a person selected by AREE and Wellington Management Corporation as a nominee for election to such position. 3.2. Election of Officers. Each Subject Shareholder shall use its best efforts to cause the board of trustees of the Company to elect Lund as the Chief Executive Officer of the Company, Robert Rice as the President of the Company and Arnold Leas as Chairman of the Board of the Company. 3.3. Certain Proxies. In the event that (i) any Subject Shareholder shall fail to vote its Subject Shares in accordance with the terms of this Section 3 with respect to any matter provided for in this Section 3, (ii) such Subject Shareholder has been given written notice of such failure, and (iii) if such failure is subject to cure, such failure has not been cured within five days after such notice has been effectively given to such Subject Shareholder, then, in addition to all other remedies available at law and in equity with respect to such failure, such Subject Shareholder (the "Defaulting Shareholder") shall be deemed to have granted the other Subject Shareholders (the "Nondefaulting Shareholders") an irrevocable proxy coupled with an interest to vote all the Subject Shares of the Defaulting Shareholder in accordance with the terms of this Section 3 as to which the Defaulting Shareholder has failed to so vote, and the Nondefaulting Shareholders shall not be entitled to vote the Subject Shares of the Defaulting Shareholder with respect to any other matter. 4. General Restrictions on Transfer. In the event a Subject Shareholder attempts to Transfer any or all of its Shares to any person, such Transfer shall be valid only as provided in and permitted by Section 5. Any purported Transfer made any time hereafter in violation of the provisions of Sections 4 or 5 shall be absolutely null and void and shall confer no rights whatsoever on the purported transferee as against the Company or any other -3- Shareholders. The Company shall not transfer on its books any certificates for any shares owned by any Subject Shareholder, nor issue any certificate in lieu of any such Shares, nor issue any new Shares, unless each and all of the conditions hereof affecting such Shares or certificates and the transfer thereof have been complied with. Until the certificates representing the Shares to be transferred (either properly endorsed for transfer or accompanied by the necessary stock powers, with all necessary stock transfer stamps attached thereto) are delivered to the Company, no such Transfer of Subject Shares shall be made and title shall remain in the transferring Shareholder. 5. Affiliate Transfers. 5.1. To Subject Shareholders. A Subject Shareholder may Transfer Subject Shares to any other Subject Shareholder. 5.2. To Affiliates. A Subject Shareholder may Transfer Subject Shares to any Affiliate of any Subject Shareholder, which Affiliate is not already a Subject Shareholder, provided the transferring Subject Shareholder delivers a Joinder executed by the transferee to the Company prior to such Transfer. 6. Legend on Certificates. In addition to any other legends required by agreement or by law, each certificate representing one or more of the Subject Shares now or hereafter held by any of the Subject Shareholders shall be endorsed with the following legend (the "Required Legend") in substantially the following form: "The voting, transfer, pledge or other encumbrance of the securities represented by this certificate is restricted under the terms of a certain Shareholders' Agreement dated as of [the date hereof] a copy of which is on file at the office of the Company." In the event that the Company at any time or times shall distribute any Shares as a dividend upon the Subject Shares or shall issue any Shares in lieu of, or in exchange for, or in addition to, the Subject Shares, or shall have had a reclassification of Shares, then all certificates evidencing the same shall bear the Required Legend. Promptly after execution and delivery of this Agreement, each Subject Shareholder shall deliver certificates representing all of its Subject Shares to the Company, whereupon the Company shall endorse such certificates with the Required Legend or shall reissue such certificates with the Required Legend. 7. Representations and Warranties. Each of the parties hereto represents and warrants to the others that as of the date of its entry into this Agreement: 7.1. General. Such party has full power, authority and legal capacity to execute and deliver this Agreement and to perform its obligations hereunder, in each capacity in which such party is executing this Agreement, and no consent, approval or other authorization of, notice to or registration with any governmental authority, or other person, is required in connection with the execution, delivery and performance of this Agreement by such party, which has not been obtained, given or made. With respect to any party which is not a -4- natural person, the execution, delivery and performance of the Agreement have been duly authorized by all requisite action by such entity, and are not in conflict with the terms of any organizational instruments of such entity. 7.2. Ownership of Shares. Such party is the true and lawful owner, beneficially and of record, of that number of Shares indicated below such parties signature. 8. Termination. 8.1. General. This Agreement shall terminate upon the first of any of the following events to occur: (i) the date is 10 years after the date hereof; (ii) the written agreement of AREE and WMC to terminate this Agreement; (iii) there ceasing to be any Shares of the Company outstanding other than those held by a single Shareholder, (iv) the dissolution of the Company, or (v) the consummation of a merger or consolidation of the Company as to which an entity other than the Company is a surviving entity, unless the stock of such surviving entity is owned by substantially the same parties and in substantially in the same proportions as the stock of the Company was owned prior to any such merger or consolidation. The termination of this Agreement shall not impair or affect any obligations or liabilities accrued prior to any such termination. 8.2. Election Obligations. The obligations to elect Arnold Leas, Gregory Lease, Robert Rice, Hoyt, Lambert and/or Lund set forth in Section 3 shall terminate with respect to any of the foregoing individuals upon such individual's death, disability or resignation from the Company. 9. Miscellaneous 9.1. Notices. All notices given pursuant to or in connection with this Agreement shall be in writing and shall be served by United States registered or certified mail, return receipt requested, proper postage prepaid, or by a reputable express delivery service which guarantees next business day delivery, addressed, as appropriate, to the Company at its registered office, and to any Shareholder at the last address of such Shareholder shown on the records of the Company. Any such notice shall be deemed given and effective (a) if by registered or certified mail, five days after deposit thereof in the U.S. mail, and (b) if by such express delivery service, on the next business day following deposit thereof with such express delivery service. 9.2. Benefit and Assignment. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, legal representatives, successors, and assigns and to no other persons or entities. No person may assign any of his rights or obligations under this Agreement without the unanimous written consent of all other parties hereto. If any original Subject Shareholder or any other subsequent Subject Shareholder transfer any of its Shares to any Affiliate of any Subject Shareholder, for any reason whatsoever, then, without limitation of Section 4, such transferee shall become and be conclusively deemed to be a party to this Agreement and be bound by its terms, without further action on his part. In addition, as a condition to the -5- issuance of a replacement certificate to said transferee, again without limitation of Section 4, said transferee shall execute and deliver a Joinder to the Company, if such transferee has not already delivered such Joinder. 9.3. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto pertaining to the subject matter hereof, and supersedes all prior and contemporaneous agreements and understandings of the parties. The parties hereto may amend or modify this Agreement in such manner as may be agreed upon only by a written instrument executed by all such parties. 9.4. No Waiver. No waiver of any provision or condition of this Agreement by any party shall be valid unless in writing signed by such party. No such waiver shall be taken as a waiver of any other or similar provision or of any future event, act, or default. 9.5. Severability. In the event any provision of this Agreement shall be unenforceable in whole or in part, such provision shall be limited to the extent necessary to render the same valid, or shall be excised from this Agreement, as circumstances require, and this Agreement shall be construed as if said provision had been incorporated herein as so limited, or as if said provision had not been included herein, as the case may be. 9.6. Construction. This Agreement shall be governed by the laws of the State of Maryland, without reference to its statutory or judicially pronounced rules regarding conflicts of law or choice of law. Wherever used in this Agreement, the singular shall be construed to include the plural and vice versa, where applicable, and the use of the masculine, feminine or neuter gender shall include the other genders. The term "person" shall refer to both natural persons and legal entities. The headings used in this Agreement are for convenience only and do not define, limit or construe the contents thereof. 9.7. Counterparts. This Agreement may be executed in any number of identical counterparts, any or all of which may contain the signatures of less than all of the parties, and all of which shall be construed together as but a single instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written. SUBJECT SHAREHOLDERS: AMERICAN REAL ESTATE EQUITIES, LLC. a Delaware limited liability company By: /s/ Duane H. Lund Duane H. Lund Its:________________________________ ________ Shares -6- /s/ Steve Hoyt Steve Hoyt ________ Shares /s/ Paul Lambert Paul Lambert ________ Shares /s/ Duane Lund Duane Lund ________ Shares WELLINGTON MANAGEMENT CORPORATION By: /s/ Arnold K. Leas Arnold K. Leas Its:________________________________ ________ Shares /s/ Arnold Leas Arnold Leas ________ Shares /s/ Gregory Leas Gregory Leas ________ Shares COMPANY: WELLINGTON PROPERTIES TRUST, a Maryland real estate investment trust By: /s/ Robert F. Rice Robert F. Rice Its:________________________________ -7- EXHIBIT A Form of Joinder The undersigned hereby joins in and agrees to be bound by all of the terms and provisions applicable to "Subject Shareholders" under that certain Shareholders' Agreement between Steve Hoyt, Paul Lambert, Duane Lund, American Real Estate Equities, LLC, Arnold Leas, Gregory Leas, Robert Rice, Wellington Management Corporation and Wellington Properties Trust dated _____________, 1998 (as amended from time to time, the "Agreement"). The Shares (as defined in the Agreement) of the undersigned shall be subject to all of the terms and provisions of the Agreement relating to Subject Shares (as defined in the Agreement). The undersigned shall be deemed to be a party to the Agreement. ____________________________________ ________ Shares -8- EX-4.4 3 COMMON SHARE CERTIFICATE PA WELLINGTON PROPERTIES TRUST CUSIP 949622 10 4 This certificate is transferable in ORGANIZED UNDER THE LAWS OF THE STATE OF MARYLAND Milwaukee, Wisconsin COMMON SHARES and New York, New York This is to certify that is the owner or FULLY PAID AND NON-ASSESSABLE COMMON SHARES, PAR VALUE $.01 PER SHARE, OF WELLINGTON PROPERTIES TRUST transferable on the books of the Company in person or by duly authorized Attorney upon surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are issued and shall be subject to all the provisions of the Declaration of Trust and Bylaws of the Company and the amendments from time to time made thereto, copies which are on file at the principal office of the Company, to all of which the holder of this Certificate by acceptance hereof assents. This Certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. WITNESS, the facsimile seal of the Company and the facsimile signatures of its duly authorized officers. Dated SECRETARY [SEAL] CHAIRMAN Countersigned and Registered: FIRSTAR TRUST COMPANY (Milwaukee, WI) Transfer Agent By Authorized Signature WELLINGTON PROPERTIES TRUST The following abbreviations, when used in the inscription on the face of this certificate shall be construed as though they were written out in full according to applicable laws or regulations: UNIF GIFT MIN ACT ______ Custodian ________ (Cust) (Minor) Under Uniform Gift to Minors Act-__________ TEN COM - as tenants in common (State) TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common Additional abbreviations may also be used though not in the above list. For Value Received, ____________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE _____________________________________ - -------------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - --------------------------------------------------------------------- Class A Cumulative Convertible Preferred Shares represented by the within Certificate, and do hereby irrevocably constitute and appoint _____________________________ Attorney, to transfer the said shares on the books of the within-named Company with full power of substitution in the premises. Date ______________________________ X_________________________________________ Signature NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER The shares of Wellington Properties Trust (the "Trust") represented by this certificate are subject to restrictions on transfer for the purpose, among other things, of the Trust's maintenance of its status as a real estate investment trust under the internal Revenue Code of 1986, as amended (the "Code"). No Person may (1) Beneficially Own or Constructively Own Equity Shares in excess of (a) 8% (or such other percentage as may be determined by the Board of Trustees of the Trust) of the value of the outstanding Equity Shares of the Trust, (b) 9.9% of the total combined voting classes of Equity Shares, unless such Person is an Existing Holder (in which case the Existing Holder Limit shall be applicable); or (2) Beneficially Own Equity Shares which would result in the Trust being "closely held" under Section 856(b) of the Code. Any Person who attempts to Beneficially Own or Constructively Own Equity Shares in excess of the above limitations must immediately notify the Trust in writing. If the restrictions above are violated, the Equity Shares represented hereby will be transferred automatically and by operation of law to an Excess Shares Trust and shall be designated Excess Shares. All capitalized terms in this legend have the meanings defined in the Trust's Declaration of Trust, as the same may be further amended from time to time, a copy of which, including the restrictions on transfer, will be sent without charge to each Shareholder who so requests. EX-4.5 4 CLASS A CERTIFICATE PA WELLINGTON PROPERTIES TRUST CUSIP 949622 20 3 This certificate is transferable in ORGANIZED UNDER THE LAWS OF THE STATE OF MARYLAND Milwaukee, Wisconsin CLASS A CUMULATIVE CONVERTIBLE PREFERRED SHARES and New York, New York This is to certify that is the owner or FULLY PAID AND NON-ASSESSABLE CLASS A CUMULATIVE CONVERTIBLE PREFERRED SHARES, PAR VALUE $.01 PER SHARE, OF WELLINGTON PROPERTIES TRUST transferable on the books of the Company in person or by duly authorized Attorney upon surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are issued and shall be subject to all the provisions of the Declaration of Trust and Bylaws of the Company and the amendments from time to time made thereto, copies which are on file at the principal office of the Company, to all of which the holder of this Certificate by acceptance hereof assents. This Certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. WITNESS, the facsimile seal of the Company and the facsimile signatures of its duly authorized officers. Dated SECRETARY [SEAL] CHAIRMAN Countersigned and Registered: FIRSTAR TRUST COMPANY (Milwaukee, WI) Transfer Agent By Authorized Signature WELLINGTON PROPERTIES TRUST The following abbreviations, when used in the inscription on the face of this certificate shall be construed as though they were written out in full according to applicable laws or regulations: UNIF GIFT MIN ACT ______ Custodian ________ (Cust) (Minor) Under Uniform Gift to Minors Act-__________ TEN COM - as tenants in common (State) TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common Additional abbreviations may also be used though not in the above list. For Value Received, ____________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE _____________________________________ - -------------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - --------------------------------------------------------------------- Class A Cumulative Convertible Preferred Shares represented by the within Certificate, and do hereby irrevocably constitute and appoint _____________________________ Attorney, to transfer the said shares on the books of the within-named Company with full power of substitution in the premises. Date ______________________________ X_________________________________________ Signature NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER The shares of Wellington Properties Trust (the "Trust") represented by this certificate are subject to restrictions on transfer for the purpose, among other things, of the Trust's maintenance of its status as a real estate investment trust under the internal Revenue Code of 1986, as amended (the "Code"). No Person may (1) Beneficially Own or Constructively Own Equity Shares in excess of (a) 8% (or such other percentage as may be determined by the Board of Trustees of the Trust) of the value of the outstanding Equity Shares of the Trust, (b) 9.9% of the total combined voting classes of Equity Shares, unless such Person is an Existing Holder (in which case the Existing Holder Limit shall be applicable); or (2) Beneficially Own Equity shares which would result in the Trust being "closely held" under Section 856(b) of the Code. Any Person who attempts to Beneficially Own or Constructively Own Equity Shares in excess of the above limitations must immediately notify the Trust in writing. If the restrictions above are violated, the Equity Shares represented hereby will be transferred automatically and by operation of law to an Excess Shares Trust and shall be designated Excess Shares. All capitalized terms in this legend have the meanings defined in the Trust's Declaration of Trust, as the same may be further amended from time to time, a copy of which, including the restrictions on transfer, will be sent without charge to each Shareholder who so requests. A written recitation of the rights and preferences of the Class A Cumulative Convertible Preferred Shares and all other classes of the capital shares of the Trust is available without charge upon written request to Wellington Properties Trust, 18650 West Corporate Drive, Suite 300, P.O. Box 0919, Brookfield, WI 53008-0919, Attention: President. EX-8 5 TAX OPINION OF GRANT THORNTON LLP October 22, 1999 Mr. Robert Rice President Wellington Properties Trust 18650 West Corporate Drive Suite 300 Brookfield, WI 53008-0919 Dear Mr. Rice: Wellington Properties Trust ("Wellington" or "the Company") has requested our conclusions with respect to certain federal income tax issues pursuant to the proposed public offering of the Company's Class A Cumulative Convertible Preferred Shares (the "Offering"). Specifically, we have been requested to advise the Company regarding the Company's qualification as a real estate investment trust ("REIT") for the period immediately before and after the Offering. On October 20, 1998, we provided similar advice regarding the Company's REIT status prior to and after the transaction with American Real Estate Equities ("1998 Tax Letter"). We incorporate our 1998 Tax Letter and the conclusions contained therein by reference. FACTS: Wellington Wellington was formed as a trust on March 15, 1994 under the Maryland real estate investment trust law and has in effect an Amended and Restated Declaration of Trust dated November 18, 1998 (the "Amended Declaration of Trust") with the State of Maryland. The Company was formed for the primary purpose of acquiring, operating, and holding income producing investment real estate. Effective January 1, 1996 the Company has operated as a real estate investment trust ("REIT") and expects to continue to operate as a REIT under Sections 856 through 860 of the Internal Revenue Code. Under such provisions, the Company must distribute at least 95% of its taxable income to its shareholders and meet certain other asset and income tests. As a REIT, the Company generally is not subject to federal income tax. As of December 31, 1998, the Company owns two residential and three commercial properties. The Company owns the residential properties through two wholly owned qualified REIT subsidiaries, Maple Grove Apartment Homes, Inc. ("Maple Grove") and Lake Point Apartment Homes, Inc. The Company's interests in the commercial properties are held through its subsidiary partnership, Wellington Properties Investments, L.P., a Delaware limited partnership (the "Operating Partnership" or "OP"). The Company is the sole general partner of, and as of June 30, 1999, owns approximately 8.8% interest in the OP. On March 4, 1999, the Company acquired an 8% interest in Wellington Properties Trust REIT Status October 22, 1999 Highlander Acquisition Company, LLC ("Highlander") which owns a 154 unit apartment community. Effective August 31, 1998, the Company entered into a certain Amended and Restated Master Contribution Agreement by and among the Company, the OP, American Real Estate Equities, a Delaware limited liability company ("AREE") and certain other unrelated parties (the "Master Contribution Agreement or "MCA"). Further, effective August 31, 1998, the Company entered into a certain Contribution Agreement (the "WMC Contribution Agreement") by and between the OP and Wellington Management Corporation, a Wisconsin corporation ("WMC"). In connection therewith, the Company held a special meeting of Shareholders on November 16, 1998, at which the Shareholders approved, among other things, the transactions contemplated by the Master Contribution Agreement and the WMC Contribution Agreement. (A full description of the contemplated transaction is contained in the 1998 Tax Opinion). As a result, the Company expanded its Board of Trustees from five to seven members. Currently, the Company has six Trustees, but this will increase to seven upon the closing of the Offering. The shareholders of the Company elected Paul T. Lambert and Steven B. Hoyt to fill these two newly created positions, with terms expiring in 2001 and 2002, respectively. Also in connection with the Master Contribution Agreement, Duane H. Lund was elected Chief Executive Officer of the Company and Robert F. Rice was elected President. Arnold K. Leas, formerly the President of the Company, is the Chairman of the Board of Trustees of the Company. As contemplated by the Master Contribution Agreement, on November 16, 1998, the Company issued to AREE 166,666 common shares of beneficial interest, $0.01par value per share ("Common Shares") in exchange for $1,000,000. Furthermore, the Company issued warrants to acquire up to 791,667 Common Shares to each of AREE and WMC. The Warrants will become exercisable one year after the date of issuance (November 16, 1999) and will be exercisable for a nine-year period thereafter, at an exercise price of $5.37 per Common Share with respect to 395,833 Warrants held by each of AREE and WMC, $6.47per Common Share with respect to 197,917 Warrants held by each of AREE and WMC, $7.74 per Common Share with respect to 118,750 Warrants held by each of AREE and WMC and $9.32 per Common Share with respect to 79,167 Warrants held by each of AREE and WMC. Arnold K. Leas, the Chairman of the Board of Trustees of the Company, is the President and Chief Executive Officer of WMC and owns, together with members of his immediate family and trusts for the benefit of such persons, approximately 41.8% of the outstanding capital stock of WMC. Also as contemplated by the Master Contribution Agreement and the WMC Contribution Agreement during 1998, the Company terminated its advisory fee arrangements between the Company and WMC, paid WMC $310,000 as partial consideration thereof and, effective November 16, 1998, the Company became self administered. On November 20, 1998, pursuant to the Master Contribution Agreement, the Company, through the OP acquired three commercial properties (the "1998 Acquisition Properties" or the "Commercial Properties") in exchange for issuance from the OP of 2,557,707 limited partnership units ("Units") and the assumption of debt aggregating $17,066,000. The Units are exchangeable, under certain circumstances, on a one-for-one basis for Common Shares in the Company, from and after the one-year anniversary of the date of issuance. AREE is owned in equal thirds by WLPT Funding, LLC, a Delaware limited liability company, ("WLPT Funding") of which Duane Lund owns 90%, Lambert Equities II, LLC, a Delaware limited liability company ("Lambert Equities") of which Paul Lambert owns 92% and Steven B. Hoyt, a Trustee of the Company. As a result of the 1998 acquisitions, 204,904 Units were issued to AREE, 483,412 Units 2 Wellington Properties Trust REIT Status October 22, 1999 were issued to WLPT Funding, 483,412 Units were issued to Lambert Equities and 1,239,248 Units were issued to Mr. Hoyt and his wife. Each of AREE, WLPT Funding, Lambert Equities and Mr. Hoyt have agreed not to transfer any of these Units for a two-year period after the date of issuance. Under the provisions of its trust documents as currently in effect, a six-member Board of Trustees manages Wellington. The Company is publicly owned and its shares are traded on the NASDAQ Small Cap Market. Wellington conducts business in the state of Wisconsin and has filed a Declaration of Trust, as required, to obtain qualification to do business in Wisconsin. Wellington annually files a Wisconsin income tax return. Real estate investment trusts are formally recognized by the state of Wisconsin and are required to pay an income tax on net income after the dividends paid deduction. Wellington has not been required to file an income tax return in the State of Maryland because it has had no business activity in Maryland. However, Wellington has filed an annual report in the State of Maryland and has paid the $25 annual filing fee. Wellington's year-end is December 31 for both financial and tax reporting purposes. Commencing with its tax year ended December 31, 1996, Wellington elected to be taxed as a REIT under the provisions of Sections 856 through 859 of the Internal Revenue Code of 1986 as amended ("IRC"). Our conclusion that Wellington maintained its REIT status for the period between January 1, 1996 through October 20, 1998 is addressed in our 1998 Tax Letter. As with our 1998 Tax Letter, this letter is subject to the resolution of recordkeeping compliance issues that remain unresolved. For the 1997 taxable year, the Company unintentionally failed to demand certain share ownership information of its shareholders as required in order to meet the share ownership tests for REITs ("Demand Letter Issue"). As a consequence of that failure, the IRS could contend that the Company did not qualify as a REIT for 1997, even though the Company did not (but for the failure to send the demand letters) fail the ownership tests. As of the date of this letter, the IRS has given no indication that it intends to challenge the Company's qualification as a REIT for the failure to send such letters. If the IRS were successfully to challenge the Company's REIT status, it could require the Company to pay tax on its income as a regular corporation, and deny the Company's ability to reelect REIT status until possibly as late as 2002. Given that the Company reported a net taxable loss for 1997 and 1998, the requirement to pay tax for those years on income as an ordinary corporation could be of little consequence. However, the Company's inability to reelect REIT status until 2002 could adversely affect its ability to pay scheduled dividends to holders of the Class A Preferred Shares and could adversely affect the value of the common shares into which the Class A Preferred Shares are convertible. Accordingly, our conclusions in this letter continue to be subject to the resolution of the Demand Letter Issue. Moreover, the Company has represented that the demand letters were timely filed for 1998 and will be timely filed for 1999. The Company's declaration of trust provides that it may issue up to 110,000,000 shares of beneficial interest, consisting of 100,000,000 common shares, par value $0.01 per share, and 10,000,000 preferred shares, par value $0.01 per share. For the tax year ended December 31, 1998, the Company had 845,816 common shares outstanding and no issued and outstanding preferred shares. On March 24, 1999, the Company split its outstanding common shares on a 4.75 for 3 basis. In the third quarter of 1999, the Company designated 349,800 of the preferred shares as Class B Junior Cumulative Convertible Preferred Shares (the "Class B Preferred Shares"), $0.01 par value per share, all of which are issued and outstanding. The terms of the Class B preferred shares are identical to those of the Class A Preferred Shares as to rights to dividends, rights to distributions upon liquidation, voting rights, optional conversion and redemption. The Class B Preferred Shares, 3 Wellington Properties Trust REIT Status October 22, 1999 however, rank junior to the Class A Preferred Shares as to dividends and distributions upon liquidation, so that the Company may not pay dividends on the Class B Preferred Shares unless all dividends on the Class A Preferred Shares then accrued have been paid, and the Company can not distribute assets to the holders of Class B Preferred Shares upon liquidation until the full amount of the liquidation preference on the Class A Preferred Shares has been paid in full. The Class B Preferred Shares also differ from the Class A Preferred Shares in that their holders are not entitled to elect a majority of the Company's board of trustees in the event of a dividend arrearage. Holders of Class B shares vote as a separate class only on proposals specifically affecting the relative rights and privileges of the Class B shares. The Company's declaration of trust, subject to certain exceptions, provides that no holder may own, or be deemed to own by virtue of the attribution provisions of the Internal Revenue Code, more than 9.9% of the value of the Company's issued and outstanding shares. The Company amended its declaration of trust as of November 18, 1998 to provide that AREE may not own more than 32% of the Company's issued and outstanding shares. The Company's declaration of trust further provides that any purported transfer of shares that would result in a person owning shares in excess of these percentages or cause the Company to otherwise fail the closely held test constitute excess shares. Such shares are transferred, by operation of law, to an Excess Shares Trust of which the Company serves as trustee for the exclusive benefit of a charitable beneficiary. The Company represents that WMC and AREE transferred 66.531 and 30,000, respectively, of their Class B Preferred Shares to an Excess Shares Trust as of October 13, 1999. In order to perform the necessary testing, the Company provided to us listings of its shareholders as of December 31, 1998 and October 13, 1999. The Company also provided to us a schedule detailing the closely held test as of July 31, 1999. The Company has represented in writing that for the period October 14, 1999 through the date of the Offering, the Company will have more than 100 shareholders and that five or fewer shareholders will not own directly or indirectly more than 50% of Wellington's outstanding shares. Furthermore, Wellington has represented in writing that subsequent to the date of the Offering, Wellington intends to continue to operate in such a manner so as to remain qualified as a REIT. Wellington derives the majority of its revenues from the rental of the properties it owns. Furthermore, the largest percentage of its assets is real estate related. For tax year 1998, Wellington had a net taxable loss, prior to its dividends paid deduction, of ($738,702). Wellington made distributions to its shareholders for 1998 of $533,643. In rendering our conclusion on Wellington's status as a REIT prior to the Offering, we performed the following procedures: (1) reading of Wellington's organizational documents, 8-Ks, 10-Qs, 10-Ks, 14As, Master Contribution Agreement ("MCA"), financial statements; (2) incorporating by reference our 1998 Tax Opinion; (3) reading SEC Registration Statement dated October 14, 1999 ("Registration Statement"); (4) reading Wellington's shareholder listings as of December 31, 1998 and October 13, 1999; (5) calculating the closely held test as of December 31, 1998 and October 13, 1999; (6) reviewing Wellington's calculation of the closely held test as of July 31, 1999; (7) calculating the quarterly asset tests beginning with 12/31/98 and ending with 6/30/99; (8) calculating the annual income tests for 1998; and 4 Wellington Properties Trust REIT Status October 22, 1999 (9) calculation of the annual distribution requirement for 1998. We have not performed any procedures based on information subsequent to June 30, 1999 with the exception of share ownership through October 13, 1999. Transaction Wellington plans to conduct a public offering of 700,000 of Class A Cumulative Convertible Preferred Shares, $0.01 par value per share (the "Class A Preferred Shares"). The underwriters of this Offering will have an option to purchase and sell up to an additional 105,000 Class A Preferred Shares solely to cover overallotments. The Company's common shares are currently listed for quotation on the NASDAQ Small Cap Market(sm) under the symbol "WLPT," but will be listed only on the American Stock Exchange under the symbol "RPP" upon completion of the Offering. The Class A Preferred Shares have been approved for listing on the American Stock Exchange under the symbol "RPP.A" following completion of the Offering. The equity to be outstanding after the Offering will include the following: - - 1,372,152 of the Company's common shares (not including (1) 261,773 shares subject to outstanding warrants and share options, (2) an estimated 1,645,000 shares issuable upon conversion of the Class A Preferred Shares, (3) an estimated 822,030 shares issuable upon conversion of the Company's Class B Junior Cumulative Convertible Preferred Shares, and (4) 1,719,335 shares issuable upon conversion of common units of the OP); - - 700,000 Class A Preferred Shares (not including an additional 105,000 Class A Preferred Shares subject to the underwriters' overallotment option or warrants the Company will issue to its underwriters' representative to purchase up to 35,500 Class A Preferred Shares), as well as 700,000 Class A preferred units of the OP that the Company will receive when it contributes the net proceeds of this offering to the OP (up to 805,000 Class A preferred units if the underwriters' overallotment option is exercised in full); - - 349,800 of the Company's Class B Junior Cumulative Convertible Preferred Shares, as well as 349,800 Class B preferred units the OP has issued to the Company. Each of the Class A Preferred Shares will be entitled, at all meetings of the Company's shareholders, to the number of votes equal to the number of common shares into which they are then convertible. Based on a closing bid price of $3.875 on October 5, 1999, each Class A Preferred Share will initially entitle its holder to approximately 2.35 votes. Holders of the Class A Preferred Shares will generally vote together with holders of common shares and holders of the Class B Junior Cumulative Convertible Preferred Shares as a single class. However, on matters directly affecting the rights and preferences of the Class A Preferred Shares, the holders of the Class A Preferred Shares will vote as a single class. In the event of dissolution or liquidation of the Company, holders of the Class A Preferred Shares will be entitled to receive $10.00 per share, plus any accrued but unpaid dividends on the Class A Preferred Shares, before any distributions to holders of any other existing class of shares are made. 5 Wellington Properties Trust REIT Status October 22, 1999 A dividend on the Class A Preferred Shares equal to $0.475 per share will accrue and be payable every six months, beginning six months after the initial closing date of the Offering. If, at any time, the Company fails to declare or pay a dividend on the Class A Preferred Shares as it accrues, such dividend will be cumulative, without interest, with future dividends. If, at any time, the Company fails to pay a full year's accrued dividends on the Class A Preferred Shares, then the holders of the Class A Preferred Shares will be entitled, voting as a class, to elect a majority of the members of the Company's board of trustees, who will then serve on the board for so long as a full year's dividends remain unpaid. Each of the Class A Preferred Shares will be convertible at any time, at the option of the holder, into a number of the Company's common shares equal to the quotient obtained by dividing (1) $10.00, plus any dividends then accrued but unpaid on the Class A Preferred Shares, by (2) a price equal to 110% of the average closing bid price for the Company's common shares over the 10 trading days preceding the effective date of the registration statement covering the Class A Preferred Shares. The Company will have the option, after 30 days' notice, to redeem the Class A Preferred Shares (in whole or in part) at a per-share price equal to $10.00, plus any dividends then accrued but unpaid. However, the Company will not have the right to redeem the Class A Preferred Shares until two years after the initial closing of the Offering and only if the closing bid price of its common shares equals or exceeds 150% of the then effective conversion price for 20 consecutive trading days before the date of the redemption notice. The Company intends to contribute all of the proceeds from the sale of the Class A Preferred Shares in this offering to the OP, principally to finance acquisitions of additional investment properties or equity securities of other real estate investment entities. A portion of the proceeds may be used for general working capital purposes. CONCLUSIONS: On October 20, 1998, we opined that for the period of January 1, 1996 through October 20, 1998, Wellington was taxable as a REIT under IRC Sections 856 through 859 assuming a favorable resolution of the Demand Letter Issue described therein. Subject to the favorable resolution of the Demand Letter Issue, we conclude that Wellington maintained its REIT status, for the period of October 21, 1998 through June 30, 1999. Based solely on the written representations of Wellington, the Company will continue to qualify as a REIT from July 1, 1999 up to the date immediately after the Offering, again subject to a favorable resolution of the Demand Letter Issue. Our conclusion is based on our understanding of the facts derived from the information provided to us, the written representations of Wellington and the income tax laws, regulations and administrative and judicial interpretations thereof as of the date of this letter. We are not responsible for updating our conclusion for any changes in the facts, management representations or income tax laws, regulations, administrative and judicial interpretations thereof subsequent to the date of this letter. 6 Wellington Properties Trust REIT Status October 22, 1999 Our conclusion is also based on the Offering as described in Registration Statement dated October 14, 1999. We are not responsible for updating our conclusion should the actual Offering vary in any manner from the Offering outlined in the Registration Statement. This conclusion is strictly limited to Wellington's status as a REIT from October 21, 1998 through and immediately subsequent to the Offering. We have not been asked nor have we performed sufficient work to render a conclusion on the taxability of the Offering to any parties to the Offering including the shareholders and affiliates of Wellington. STATUTORY OVERVIEW: Sections 856 through 859 of the Internal Revenue Code of 1986, as amended ("IRC") provide special tax provisions that apply to an entity that qualifies as a REIT. In general, a REIT is an organization that specializes in the investment of real estate and real estate mortgages. In order to qualify as a REIT, an entity must satisfy certain organizational requirements, and initial and ongoing tests regarding the nature of the income generated by the REIT and the assets owned by the REIT. In addition, further requirements provide that a REIT distribute substantially all of its taxable income each year and maintain certain records concerning its shareholders. Organizational Requirements In order to qualify as a REIT, an entity must satisfy the following requirements of IRC Section 856(a) during its entire taxable year: 1. the entity must be organized as a corporation, trust, or association; 2. be managed by one or more trustees or directors; 3. have transferable shares or certificates; 4. be taxable as a domestic corporation but for the operation of IRC Sections 856 through 859; and 5. not be a financial institution or insurance company. In addition to the above, a REIT must satisfy minimum and maximum ownership requirements under IRC Section 856(a)(5) and (6). IRC Section 856(a)(5) provides that a REIT must be owned by at least 100 shareholders for 335 days of a 12-month taxable year, or during a proportionate part of a shorter taxable year. The days need not be consecutive. IRC Section 856(a)(6) provides that a REIT must not be closely held. "Closely held" for these purposes is defined in the context of the personal holding company rules. This requirement must be met during the last half of each taxable year. An entity must elect to be taxed as a REIT under IRC Section 856(c)(1). The election is made by filing the entity's income tax return for its first year that it elects REIT status and indicating such status on the return. Once the election is made, it continues until revoked or terminated by the entity's failure to qualify as a REIT for a taxable year. IRC Section 859 provides that in order to elect to be taxed as a REIT, the entity must adopt a calendar year accounting period. IRC Section 856(h)(2) provides that for the first taxable year that an entity elects to be taxed as a REIT, the "100 or more" rule and the "closely held" rule do not apply. Once an entity satisfies the requirements to be taxed as a REIT and elects to be taxed as a REIT, it must demand information from certain shareholders and maintain records on the actual and constructive ownership of its 7 Wellington Properties Trust REIT Status October 22, 1999 outstanding stock. This rule provides the necessary information for the IRS to ensure compliance with the IRC Section 856(a)(5) and (6) requirements. The demands must be made within 30 days of the close of the REIT's taxable year. (See Income Tax Regulations ("regulations") sections 1.857-8(a) and (e)). Asset Tests Under IRC Section 856(c)(4), a REIT must satisfy each of four asset tests as of the close of each quarter as follows: (a) 75% of the value of the total assets must consist of real estate assets, cash and cash items, including receivables, and Government securities; (b) not more than 25% of the value of the total assets may consist of securities, other than those includible under the 75% test; (c) not more than 5% of the value of the total assets may consist of securities of any one issuer, other than those includible under 75% test; and (d) not more than 10% of the outstanding voting securities of any one issuer may be held, other than those includible under the 75% test. IRC Section 856(c)(5) provides that the value of securities for which market quotations are readily available is their quoted market price and the value of any other security or assets is that which is determined by the trustees, in good faith. However, the fair value of securities of other REITs cannot exceed the higher of market value or asset value. Income Tests: Under IRC Section 856(c)(2) and (3), a REIT must satisfy two income tests as follows: (a) 75% of its gross income (excluding gross income from prohibited transactions) must consist of rents from real property, interest on mortgages, gain from the sale of property not held primarily for sale, dividends on and gain from the sale of REIT shares, refunds and abatements of real property taxes, income and gain from foreclosure property, commitment fees, qualified temporary investment income, and gain from the sale of certain other property; and (b) 95% of its gross income (excluding gross income from prohibited transactions) must consist of items that would satisfy the 75% income test, dividends, interest, and gain from the sale or other disposition of stocks and securities. For purposes of applying the asset and income tests, a REIT is treated as owning directly the assets and receiving the income of certain corporate subsidiaries and partnerships. Under IRC Section 856(i), REITs are permitted to have wholly-owned subsidiaries known as "qualified REIT subsidiaries ("QRS"). A QRS is a corporation 100% of whose stock is owned by the REIT. Under IRC Section 856(i), a QRS is not treated as a separate entity for federal income tax purposes. All of a QRS' assets, liabilities, and items of income and loss are treated as if they belong to the REIT. Therefore, in determining qualification under the various asset and income tests, the assets and items of income of a QRS are taken into account directly. 8 Wellington Properties Trust REIT Status October 22, 1999 Similarly, if a REIT is a partner in a partnership, the REIT is deemed to own its proportionate share of the partnership's assets and gross income for purposes of the asset and income tests (regulation 1.856-3(g)). For such purposes, an LLC is treated as a partnership unless it elects to be taxed as a C corporation. Distribution Requirement IRC Section 857 provides a further qualification requirement that the entity must distribute to its shareholders each taxable year at least the sum of: (1) 95% of its REIT taxable income (determined without regard to the dividends paid deduction and by excluding any net capital gain); and (2) 95% of the excess of its net income from foreclosure property over the tax imposed on such income, minus any excess noncash income. Analysis Wellington before the Offering Wellington satisfies the REIT organizational requirements for the period October 21, 1998 through October 13, 1999. The first requirement is satisfied since Wellington was formed under the Maryland real estate investment trust law and is organized as a trust under Maryland law. The second requirement is satisfied due to the fact that for the period between October 21, 1998 through October 13, 1999, a six member Board of Trustees manages Wellington. Upon the closing of the Offering, the Board of Trustees will be increased to seven. Regulation 1.856-1(d)(1) provides that if the REIT is organized as a business trust, the trustees must have continuing exclusive authority over the management of the trust, the conduct of its affairs, and, except as limited by IRC Section 856(d)(2)(C), the management and disposition of trust property. Wellington's Amended and Restated Declaration of Trust provides, in relevant part, that the business and affairs of Wellington be managed under the direction of the Board of Trustees, and that the Board of Trustees has full, exclusive and absolute power, control and authority over the properties and operations of Wellington. Wellington has represented that this is and will continue to be the case. The fact that Wellington retained a relationship with WMC as an advisor in November 1998 which was subsequently terminated in November 1998, should not adversely affect the management by trustees' requirement. Regulation 1.856-1(d)(1) provides that the trustees may delegate some of their authority without violating the "exclusive authority" and "centralization of management" requirements. In Revenue Ruling 72-254, (1972-1 CB 207), the Service approved the trustees' delegation to an advisory company of the authority to make loan commitments and investments within specified limits. Regarding the third organizational requirement (transferable shares); the fourth requirement that the Company must be taxable as a domestic corporation but for the REIT provisions; and the fifth requirement that Wellington is not organized as a financial institution or an insurance company we rely on our 1998 Tax Opinion. Based solely on the written representations of Wellington that the 9 Wellington Properties Trust REIT Status October 22, 1999 facts we relied upon for our 1998 Tax Opinion continue to be true and unchanged, we opine that these requirements are satisfied. In order to satisfy the sixth organizational requirement, Wellington must be owned by 100 or more persons for 335 days of the year. In determining whether the 100 or more persons requirement is satisfied, only actual ownership is taken into account; no deemed ownership or attribution rules apply (see regulation 1.856-1(d)(2)). Pursuant to IRC Section 856(c)(5)(F), any term not specially defined in the REIT provisions has the same meaning as used in the Investment Company Act of 1940 ("ICA"). Under the ICA, "persons" is defined as a natural person or a company and includes pension, profit sharing and stock bonus trusts (see Revenue Ruling 65-3, 1965-1 CB 267). Based upon the listings of shareholders provided to us by Wellington, we concluded that Wellington had more than 100 shareholders from October 20, 1998 to October 13, 1999, and thus satisfied this requirement through October 13, 1999. The seventh organizational requirement prohibits a REIT from being closely held. IRC Section 856(h) provides that the "closely held" determination is made by reference to the personal holding company rules contained in IRC Section 542(a)(2). For these purposes, a REIT is considered closely held if five or fewer individuals own more than 50 percent in value of the REIT's outstanding stock at any time during the last half of its taxable year. Furthermore, IRC Section 856(h) provides that ownership of shares need not be actual ownership; constructive stock ownership rules apply to attribute ownership of shares to persons who might not otherwise be shareholders of record. The attribution rules of IRC Section 544 apply in determining the closely held requirement of a REIT, with certain modifications (stock that is owned by one partner (whether directly or indirectly) cannot be attributed to another partner under IRC Section 856(h)). However, in the third quarter of 1999, Wellington issued 349,800 Class B Preferred shares which remain outstanding. Therefore, in performing the closely held test for October 13, 1999, we considered the number of outstanding common shares and the value of the outstanding Class B Preferred Shares based upon the amount of common shares that would be issued by the conversion of the Class B Preferred Shares. The Company estimated as of October 5, 1999 that each share of Class B Preferred would be convertible into 2.35 common shares. The closely held requirement must be satisfied for the last half of the year, but is waived for a REIT's first taxable year. For the period of January 1, 1996 through October 20, 1998, we incorporate our conclusion in our 1998 Tax Opinion that this requirement was satisfied. For purposes of this letter, we performed the closely held test as of December 31, 1998, using the December 31, 1998 shareholder listing discussed above; and for the period as of July 1, 1999 through October 13, 1999 using the shareholder listing as of October 13, 1999. We also reviewed the closely held calculations performed by the Company as of July 31, 1999 along with the SEC Registration Statement dated October 14, 1999. A limitation to our testing is that shares owned in street name are grouped together under one heading. In order to determine the shareholders that hold shares in street name, Wellington provided a list it refers to as the "NOBO" list (Names and Owners of Beneficial Ownership) as of February 11, 1999 which lists the owners of the shares held in street name. We relied upon this list as an accurate record of the beneficial owners of shares held in street name in performing our closely held test for December 31, 1998 and October 13, 1999. 10 Wellington Properties Trust REIT Status October 22, 1999 Under the attribution rules, common shares owned directly by the wife of Arnold Leas, his children, and trusts for the benefit of such individuals were attributed to Arnold Leas, as were shares owned indirectly by Arnold Leas, his children, and trusts for their respective benefits through WMC's ownership of Wellington shares. Arnold Leas, together with members of his immediate family and trusts for the benefit of such persons, owns approximately 41.8% of the outstanding capital stock of WMC. We determined that as of December 31, 1998 the five largest individual shareholders owned 24.54% of the outstanding common shares of the Company. Therefore, it appears that Wellington does not violate the closely held provision as of December 31, 1998. See Exhibits 1. For the 1999 tax year, Wellington must meet the closely held test during the last half of the taxable year. We reviewed the closely held test performed by the Company at July 31, 1999 and performed the closely held test as of October 13, 1999. For shareholders that own their shares in street name, we assumed that their ownership was the same in February, July and October. We relied upon the listing of shareholders as of October 13, 1999 and the Registration Statement. We converted each outstanding Class B Preferred Share to 2.35 common shares ("Common Share Equivalents"). The Class B Preferred Shares that were transferred to the Excess Shares Trust were not included in shareholder ownership, but were included in determining the total outstanding shares for our analysis at October 13, 1999. (PLR 9621032). Accordingly, based on our calculations, as of October 13, 1999, we determined that the five largest shareholders owned 38.34% of Wellington shares. See Exhibit 2. Therefore, we determined Wellington satisfies the closely held requirement on December 31, 1998 and October 13, 1999, and this provides a reasonable basis to render a conclusion that the test was satisfied for the last half of tax year 1998 and from July 1, 1999 through October 13, 1999. The final organizational requirement is that Wellington elect to be taxed as a REIT. In our 1998 Tax Opinion, we determined that Wellington correctly elected REIT status for its tax year ended December 31, 1996. For that opinion, we contacted the Practitioner Hotline of the Internal Revenue Service ("IRS"). An IRS agent verified that the IRS received a Form 1120 (corporate income tax return) from Wellington for the 1995 tax year and an 1120-REIT (REIT corporate income tax return) for the 1996 tax year. In order to ensure that the minimum and maximum ownership rules are satisfied, Wellington is required to send shareholder demand letters within 30 days after the close of its taxable year. This requirement is waived for Wellington's 1996 tax year since it was the first year as a REIT. Wellington must only satisfy this requirement for 1997 and subsequent years. As previously mentioned, Wellington inadvertently neglected to send its 1997 demand letters timely. Our conclusions are subject to the assumption that IRS will waive the demand letter requirement for 1997. Wellington represents that it has timely filed demand letters for 1998 and will do so for 1999. As a REIT, Wellington is required to comply with the four asset tests on a quarterly basis and with the two income tests on an annual basis. In order to ensure compliance with the asset and income tests, our analysis included a review of the year-end audited financial statements and the income tax returns filed for 1998, as well as a review of quarterly financial statements. We performed a calculation of the asset tests for each quarter in question, and of the income tests at year-end 1998. 11 Wellington Properties Trust REIT Status October 22, 1999 For the years in question, Wellington's balance sheet consisted of cash, trade accounts receivable and miscellaneous accounts receivable, prepaid expenses, real and personal property, and miscellaneous other assets. The largest percentage of Wellington's assets consisted of real property that satisfies the definition of real estate assets under IRC Section 856(c)(5)(B). Additionally, we included Wellington's share of the OP's assets along with its share of the assets of recently acquired Highlander. Wellington did not own any Government Securities or other securities or investments of any nature. Based on our analysis, Wellington satisfied the asset tests for 12/31/98, 3/31/99 and 6/30/99. The results of the tests are summarized below and the detailed asset tests can be found at Exhibits 3-5. 75% Asset Test 12/31/98 83.20% 3/31/99 86.33% 6/30/99 91.69% The results of the 25%, 5% and 10% tests were 0% for each quarter since Wellington has not owned securities or other non-real estate investments for the above period. As discussed earlier, Wellington's primary activity, prior to the Offering, has been the ownership and operation of investment real estate. As a result, rental income was the largest component of Wellington's gross income for tax year 1998. In order to be considered qualifying income for purposes of the 75% and 95% income test, Wellington's rental income must satisfy the definition of "rents from real property" under IRC Section 856(d)(1). The term "rents from real property" is defined as rents from interests in real property, charges for services customarily furnished or rendered in connection with the rental of real property, whether or not such charges are separately stated, and rent attributable to incidental personal property. Regulation 1.856-4(a) provides that "rents from real property", in general, includes gross amounts received for the use of, or the right to use, the REIT's real property. IRC Section 856(d)(2) and the regulations thereunder provide that the following rental income is specifically excluded from "rents from real property": (1) rent the determination of which depends, in whole or in part, on any person's income or profit from the property; (2) rent received, directly or indirectly, from a tenant in which the REIT has an ownership interest of at least 10%; and (3) rent from real property if the REIT furnishes or renders certain services to a tenant or manages or operates such property other than through an independent contractor from which the REIT receives no income. For 1998, Wellington's gross income consisted of rental income (net of rent concessions, and vacancy), interest income, and miscellaneous other income. Rental income consisted of rents received for the rental of apartment units, late fee charges, garage rental income, laundry income, pet fee income, and security deposits income. The garage rental income was received in connection with one of the apartment complexes. Each resident of this complex is assigned one parking space with the rental of an apartment unit. If the resident wants more than the assigned one space, the resident 12 Wellington Properties Trust REIT Status October 22, 1999 must pay an additional rental fee. For purposes of the income tests, the garage rental income is "rents from real property;" therefore, the garage rental income is considered qualifying income. The laundry income relates to income received from the use of laundry machines, provided in laundry rooms in the apartment complexes, by tenants. This income is considered "usual and customary" under IRC Section 856(d)(1); therefore, the laundry income is qualifying income (see PLR 9436025). Furthermore, the Service has ruled that tenant payments of late fees, pet fees, interest on unpaid rent, and certain administrative fees are considered "rents from real property" (see PLR 8420012). Based on our analysis, Wellington satisfied the 75% and 95% income tests for 1998. The results of the tests are summarized below and the detailed income tests can be found at Exhibit 6. 1998 95% income test 99.59% 75% income test 99.57% As with 1996 and 1997, the miscellaneous other income for 1998 was an insignificant amount and we did not determine the nature of that income. Rather, we assumed that the miscellaneous income was non-qualifying income. For purposes of the 75% test, our analysis and calculation treated all interest income as non-qualifying because "interest relating to mortgages" was not readily determinable. The final requirement that Wellington had to satisfy in order to qualify as a REIT for 1998 was the annual distribution requirement, as discussed earlier in the letter. The distribution requirement is calculated without regard to the dividends paid deduction and any net capital gain. According to the financial statements and the income tax returns filed, Wellington generated a taxable loss, prior to the dividends paid deduction, for 1996, 1997 and 1998. As a result, Wellington was not required under IRC Section 857(a)(1) to distribute any dividends to its shareholders. Wellington after the Offering Subsequent to the Offering, Wellington must continue to satisfy the same requirements discussed above in order to remain a REIT. Based on written representations of the Company, no part of the Offering will result in its violation of the first six organizational requirements. Understanding that the acquisition of the Class A Preferred Shares by existing shareholders may cause the Company to fail the closely held requirement, the excess shares provisions contained in Article VII of the Amended Declaration of Trust provide protection from violating the closely held test. Management has represented that it will engage in the ownership and operation of rental real estate properties. In addition, management has represented that it will not engage in any business activity or own assets that would cause the Company to violate the asset and income test. Based on the terms of the Offering and the written representations of the Company, the Company will continue to satisfy the asset and income tests. For the tax year ended December 31, 1999, the Company will be required to make an annual distribution of at least 95% of it taxable income (prior to the dividends paid deduction and any net capital gain). The Company has represented that it will continue to make the necessary distributions in order to qualify as a REIT following the Offering and that will timely file demand letters for 1999. 13 Wellington Properties Trust REIT Status October 22, 1999 In our view, each of the tax return positions stated in this letter has a realistic possibility of being sustained on its merits, if challenged. However, we cannot assure that those positions will be sustained. Sincerely, GRANT THORNTON LLP /s/ Mark Stutman Mark Stutman Partner Enclosures EX-10.12 6 SUBSCRIPTION AGREEMENT SUBSCRIPTION AGREEMENT This Agreement is dated June 30, 1999, by and between Wellington Properties Trust (the "Company") and Wellington Management Corporation ("WMC"). WHEREAS, on November 16, 1998, the shareholders of the Company approved a number of real estate acquisitions by the Company or its subsidiaries and related transactions (together, the "Proposed Transactions") pursuant to which, among other things, the Company (i) agreed to acquire the office building housing its executive offices in Brookfield, Wisconsin in exchange for cash, the assumption of debt on the property and the issuance of 745,098 common units (the "Partnership Units") of the operating partnership of the Company, Wellington Properties Investments, L.P., (ii) issued to WMC a warrant to purchase 791,667 common shares of the Company (the "WMC Warrant"), and (iii) agreed to pay $1,600,000 to WMC in consideration of the termination of the parties' existing advisory fee arrangement (the "WMC Management Agreement"). WHEREAS, following shareholder approval of the Proposed Transactions and the issuance of the WMC Warrant to WMC, the parties elected to consummate only a portion of the Proposed Transactions, but not the acquisition of the Brookfield office building, as a result of which the Partnership Units were never issued; WHEREAS, the Company has only paid $650,000 of the $1,600,000 fee for termination of the WMC Management Agreement; and WHEREAS, during the fourth quarter of 1999, the Company intends to make an offering of preferred shares to the public at a price of $10.00 per share and with a preferred dividend equal to $0.95 per annum (the "Preferred Share Offering"); NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Termination of WMC Management Agreement. On August 11, 1999 (the "Effective Date"), the Company will issue to WMC 95,000 preferred shares of a class equal in all respects to the shares offered in the Preferred Share Offering, but ranking junior thereto as to payments of dividends and upon liquidation (the "Junior Preferred Shares"). Upon such issuance, the WMC Management Agreement and all of the Company's obligations thereunder shall terminate. 2. Cancellation of Warrant. On the Effective Date, WMC shall return the WMC Warrant to the Company for cancellation. 3. Discharge of Certain Prior Obligations. The agreements set forth herein are in full satisfaction of the parties' respective obligations to each other in connection with the Proposed Transactions. 4. General Provisions. (a) Successors; Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and each of their respective successors and assigns. Neither party may assign its duties or obligations under this Agreement without the prior written consent of the other party. (b) Entire Agreement; Modifications. This Agreement constitutes the entire agreement between the parties respecting the subject matter hereof, and supersedes all prior negotiations, undertakings, agreements and arrangements with respect thereto, whether written or oral. Except as otherwise explicitly provided herein, this Agreement may not be amended or modified except by written agreement signed by the Company and WMC. (c) Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted by a single arbitration sitting in Minneapolis, Minnesota, in accordance with the rules of the American Arbitration Association (the "AAA") then in effect. The arbitrator shall be selected by the parties from a list of eleven (11) arbitrators provided by the AAA, provided that no arbitrator shall be related to or affiliated with either of the parties. No later than ten (10) days after the list of proposed arbitrators is received by the parties, the parties, or their respective representatives, shall meet at a mutually convenient location in Minneapolis, Minnesota, or telephonically. At that meeting, the party who sought arbitration shall eliminate one (1) proposed arbitrator and then the other party shall eliminate one (1) proposed arbitrator. The parties shall continue to alternatively eliminate names from the list of proposed arbitrators in this manner until each party has eliminated five (5) proposed arbitrators. The remaining arbitrator shall arbitrate the dispute. Each party shall submit, in writing, the specific requested action or decision it wishes to take, or make, with respect to the matter in dispute ("Proposed Solution"), and the arbitrator shall be obligated to choose one (1) party's specific Proposed Solution, without being permitted to effectuate any compromise or "new" position; provided, however, that the arbitrator is authorized to award amounts not in dispute during the pendency of any dispute or controversy arising under or in connection with this Agreement. The party whose Proposed Solution is not selected shall bear the costs of all counsel, experts or other representatives that are retained by both parties, together with all costs of the arbitration proceeding, including, without limitation, the fees, costs and expenses imposed or incurred by the arbitrator. Judgment may be entered on the arbitrator's award in any court having jurisdiction. (d) Waiver. No waiver by either party, at any time, of any breach by the other party of, or compliance with, any condition or provision of this Agreement to be performed by the other party, shall be deemed a waiver of any similar or dissimilar provisions or conditions at the same time or any prior or subsequent time. -2- IN WITNESS WHEREOF, this Agreement has been executed by the undersigned as of the date first written above. WELLINGTON MANAGEMENT CORPORATION /s/ Arnold K. Leas ------------------------------- Arnold K. Leas, President WELLINGTON PROPERTIES TRUST /s/ Duane H. Lund ------------------------------- Duane H. Lund, Chief Executive Officer EX-10.13 7 SUBSCRIPTION AGREEMENT SUBSCRIPTION AGREEMENT This Agreement is dated June 30, 1999, by and between Wellington Properties Trust (the "Company") and American Real Estate Equities, LLC ("AREE"). WHEREAS, during the summer and fall of 1998, AREE advanced the Company an aggregate of $1,392,000 for working capital purposes (together, the "AREE Loan"); WHEREAS, on November 16, 1998, the shareholders of the Company approved a number of real estate acquisitions by the Company or its subsidiaries and related transactions (together, the "Proposed Transactions") pursuant to which, among other things, the Company (i) issued to AREE a warrant to purchase 791,667 common shares of the Company (the "AREE Warrant"), (ii) agreed to issue to AREE 4,933,233 common units (the "Partnership Units") of the operating partnership of the Company, Wellington Properties Investments, L.P., and (iii) agreed, subject to certain contingencies, to reimburse AREE's costs in connection with the Proposed Transactions, which costs totaled $1,356,000 (the "AREE Expenses"); WHEREAS, following shareholder approval of the Proposed Transactions and the issuance of the AREE Warrant to AREE, the parties elected to consummate only a portion of the Proposed Transactions and, as a result, the Company issued only 204,904 Partnership Units to AREE; and WHEREAS, during the fourth quarter of 1999, the Company intends to make an offering of preferred shares to the public at a price of $10.00 per share and with a preferred dividend equal to $0.95 per annum (the "Preferred Share Offering"); NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Partial Repayment of AREE Loan. On August 11, 1999 (the "Effective Date"), the Company shall issue to AREE 119,200 preferred shares of a class equal in all respects to the shares offered in the Preferred Share Offering, but ranking junior thereto as to payments of dividends and upon liquidation (the "Junior Preferred Shares"). By the issuance of such shares, $1,192,000 in principal amount of the AREE Loan shall be discharged. 2. Cancellation of Warrant. On the Effective Date, AREE shall return the AREE Warrant to the Company for cancellation. 3. Issuance of Additional Junior Preferred Shares. On the Effective Date, the Company shall issue 135,600 additional Junior Preferred Shares to the Company and, effective upon such issuance, AREE hereby relinquishes any claim to reimbursement of the AREE Expenses. In the event that the Company does not have total assets in excess of $105,000,000 or has not achieved annual funds from operations equal to $0.55 per common share (on a fully-diluted basis) on or prior to June 30, 2002, then the Company shall have the right to redeem such 135,600 Junior Preferred Shares for $1.00. 4. Discharge of Certain Prior Obligations. The agreements set forth herein are in full satisfaction of the parties' respective obligations to each other in connection with the Proposed Transactions. 5. General Provisions. (a) Successors; Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and each of their respective successors and assigns. Neither party may assign its duties or obligations under this Agreement without the prior written consent of the other party. (b) Entire Agreement; Modifications. This Agreement constitutes the entire agreement between the parties respecting the subject matter hereof, and supersedes all prior negotiations, undertakings, agreements and arrangements with respect thereto, whether written or oral. Except as otherwise explicitly provided herein, this Agreement may not be amended or modified except by written agreement signed by the Company and AREE. (c) Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted by a single arbitration sitting in Minneapolis, Minnesota, in accordance with the rules of the American Arbitration Association (the "AAA") then in effect. The arbitrator shall be selected by the parties from a list of eleven (11) arbitrators provided by the AAA, provided that no arbitrator shall be related to or affiliated with either of the parties. No later than ten (10) days after the list of proposed arbitrators is received by the parties, the parties, or their respective representatives, shall meet at a mutually convenient location in Minneapolis, Minnesota, or telephonically. At that meeting, the party who sought arbitration shall eliminate one (1) proposed arbitrator and then the other party shall eliminate one (1) proposed arbitrator. The parties shall continue to alternatively eliminate names from the list of proposed arbitrators in this manner until each party has eliminated five (5) proposed arbitrators. The remaining arbitrator shall arbitrate the dispute. Each party shall submit, in writing, the specific requested action or decision it wishes to take, or make, with respect to the matter in dispute ("Proposed Solution"), and the arbitrator shall be obligated to choose one (1) party's specific Proposed Solution, without being permitted to effectuate any compromise or "new" position; provided, however, that the arbitrator is authorized to award amounts not in dispute during the pendency of any dispute or controversy arising under or in connection with this Agreement. The party whose Proposed Solution is not selected shall bear the costs of all counsel, experts or other representatives that are retained by both parties, together with all costs of the arbitration proceeding, including, without limitation, the fees, costs and expenses imposed or incurred by the arbitrator. Judgment may be entered on the arbitrator's award in any court having jurisdiction. (d) Waiver. No waiver by either party, at any time, of any breach by the other party of, or compliance with, any condition or provision of this Agreement to be performed by the other party, shall be deemed a waiver of any similar or dissimilar provisions or conditions at the same time or any prior or subsequent time. -2- IN WITNESS WHEREOF, this Agreement has been executed by the undersigned as of the date first written above. AMERICAN REAL ESTATE EQUITIES, LLC /s/ Duane H. Lund ------------------------------- Duane H. Lund, President WELLINGTON PROPERTIES TRUST /s/ Robert F. Rice ------------------------------- Robert F. Rice, President EX-10.14 8 LUND EMPLOYMENT AGREEMENT DUANE H. LUND EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement"), is made and entered into with effect as of the 1st day of October, 1999 (the "Effective Date"), by and between Wellington Properties Trust, a Maryland real estate investment trust (the "Employer"), and Duane H. Lund (the "Executive"). RECITALS A. The Employer desires to employ the Executive as the Chief Executive Officer of the Employer for a specified term. B. The Executive is willing to accept such employment, upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises and of the covenants and agreements hereinafter contained, it is covenanted and agreed by and between the parties hereto as follows: AGREEMENTS 1. Position and Duties. The Employer hereby employs the Executive as Chief Executive Officer of the Employer, or in such other comparable or other capacity as shall be mutually agreed between the Employer and the Executive. During the period of the Executive's employment hereunder, the Executive shall devote his best efforts and full working time, energy, skills and attention to the business and affairs of the Employer. The Executive's duties and authority shall consist of and include all duties and authority customarily performed and held by persons holding equivalent positions with real estate investment trusts ("REITs") similar in nature and size to the Employer, as such duties and authority are reasonably defined, modified and delegated from time to time by the Board of Trustees of the Employer (the "Board"). The Executive shall have the powers necessary to perform the duties assigned to him, and shall be provided such supporting services, staff, secretarial and other assistance, office space and accoutrements as shall be reasonably necessary and appropriate in light of such assigned duties. 2. Compensation. As compensation for the services to be provided by the Executive hereunder, the Executive shall receive the following compensation and other benefits: (a) Base Salary. The Executive shall receive a "Base Salary" at the rate of Eighty Thousand Dollars ($80,000) per annum, payable in periodic installments in accordance with the regular payroll practices of the Employer. (b) Performance Bonus. Provided that company performance criteria (as described below) are met, in the opinion of the Board or its Compensation Committee, the Executive shall also receive an annual cash performance bonus of one hundred percent (100%) of the Executive's Base Salary for each fiscal year of the Employer, or portion thereof, during the term of this Agreement, payable within thirty (30) days after the end of such fiscal year. The Executive's prorated cash performance bonus of Twenty Thousand Dollars ($20,000) for 1999 shall be earned if the Employer's earnings for the period from October 1, 1999 through December 31, 1999 equal or exceed $0.1375 per common share. The Executive's cash performance bonus of Eighty Thousand Dollars ($80,000) for 2000 shall be earned if the Employer's earnings for 2000 equal or exceed $0.64 per common share. (c) Benefits. The Executive shall be entitled to all perquisites, plans and benefits extended to similarly situated executives, including as such are stated in the Employer's Executive Perquisite Policy (the "Perquisite Policy") promulgated for the Board by its Compensation Committee, and which Perquisite Policy is hereby incorporated by reference, as amended from time to time. In addition, the Executive shall be entitled to participate in all plans and benefits generally, from time to time, accorded to employees of the Employer ("Benefit Plans"), all as determined by the Board or its Compensation Committee from time to time. (d) Withholding. The Employer shall be entitled to withhold, from amounts payable to the Executive hereunder, any federal, state or local withholding or other taxes or charges which, from time to time, it is required to withhold. The Employer shall be entitled to rely upon the advice and counsel of its independent accountants with regard to any question concerning the amount or requirement of any such withholding. 3. Term and Termination. (a) Term. The term of this Agreement and the Executive's employment hereunder shall be extend through December 31, 2000, unless sooner terminated at any time by either party, with or without cause, such termination to be effective as of either (i) one (1) business day after written notice to that effect is delivered by the Employer to the Executive except as and to the extent otherwise required under subparagraphs (e) and (g) of this Section 3; or (ii) thirty (30) days after written notice to that effect is delivered to the Employer by the Executive, whichever is applicable to the termination in question. (b) Voluntary Termination by Executive. In the event that the Executive voluntarily terminates his employment under this Agreement, other than pursuant to Section 3(d) of this Agreement, then the Employer shall only be required to pay the Executive such Base Salary and other benefits as shall have accrued through the effective date of the termination, and the Employer shall not be obligated to pay any performance bonus for the then-current fiscal year, or have any further obligations whatsoever to the Executive (other than payment of amounts remaining unpaid pursuant to declared performance bonuses for prior fiscal years and reimbursement of approved expenses). (c) Premature Termination by Employer. In the event of the termination of the employment of the Executive under this Agreement: (A) by the Employer for any reason other than in accordance with the provisions of subparagraph (e) ("for cause"), subparagraph (f) -2- (death), or subparagraph (g) (disability) of this Section 3, then, notwithstanding any actual or allegedly available alternative employment or other mitigation of damages by (or which may be available to) the Executive, the Executive shall be entitled to a "Lump Sum Payment" equal to the product of: (y) his monthly Base Salary then payable, multiplied by twelve (12). In the event of a termination governed by this subparagraph (c)(i) of Section 3, the Employer shall also: (z) continue for the Executive (provided that such items are not available to him by virtue of other employment secured after termination) the perquisites, plans and benefits provided under the Employer's Perquisite Policy and Benefit Plans as of and after the date of termination, provided such plans or benefits permit such continuation, all items in (z) being collectively referred to as "Post-Termination Perquisites and Benefits," for twelve (12) months following such termination. The payments and benefits provided under (y) and (z) above shall be in addition to such Base Salary as shall have accrued and remain unpaid as well as any expense reimbursements or other payments relating to the period preceding such termination and remaining due and owing to the Executive but shall be in lieu of any performance bonus that the Executive might have otherwise earned for the then-current fiscal year; and shall be in addition to the payment of any theretofore declared performance bonus compensation for any prior fiscal year that remains unpaid as of the date of termination. (d) Constructive Discharge. If, at any time during the term of this Agreement, except in connection with a "for cause" termination pursuant to subparagraph (e) of this Section 3 or the Executive's death or disability termination pursuant to subparagraphs (f) or (g), respectively, of this Section 3, the Executive is Constructively Discharged (as hereinafter defined), then the Executive shall have the right, by written notice to the Employer given within one hundred and twenty (120) days of such Constructive Discharge, to terminate his services hereunder, effective as of thirty (30) days after such notice, and the Executive shall have no further rights or obligations under this Agreement except as specified in Section 5 hereof. The Executive shall in such event be entitled to a Lump Sum Payment of his Base Salary, as well as, all of the Post-Termination Perquisites and Benefits, as if such termination of his employment had been effectuated pursuant to subparagraph (c) of this Section 3 and subject to all of the conditions set forth in subparagraph (c) of this Section 3. For purposes of this Agreement, the Executive shall be deemed to have been "Constructively Discharged" upon the occurrence of any one of the following events: (i) The Executive is removed from the position with the Employer set forth in Section 1 hereof, other than as a result of the Executive's appointment to a position of comparable or superior authority and responsibility, or other than for cause, and provided further, that the Employer shall be permitted to broaden and expand the Executive's responsibilities, whether in the same or different position without such change constituting a "Constructive Discharge" hereunder; (ii) The Executive shall fail to be vested by the Employer with the powers, authority and support services customarily attendant to said office within the REIT industry, other than for cause; -3- (iii) The Employer shall formally notify the Executive in writing, that the employment of the Executive will be terminated (other than for cause) or materially modified (other than for cause) in the future, or that the Executive will be Constructively Discharged in the future; or (iv) The Employer changes the primary employment location of the Executive to a place that is more than one hundred (100) miles from the primary employment location as of the Effective Date of this Agreement; or (v) The Employer commits a material breach of its obligations under this Agreement, which it fails to cure or commence to cure within thirty (30) days after receipt of written notice thereof from the Executive (or if cure is not possible within such thirty (30) days, then the Employer must have failed to either commence to cure within thirty (30) days of have failed to complete to cure within sixty (60) days). (e) Termination for Cause. The employment of the Executive under this Agreement may be terminated by the Employer on a "for cause" basis, as hereinafter defined. If the Executive's employment is terminated by the Employer "for cause" under this subparagraph (e), then the Employer shall only be obligated to pay the Executive such Base Salary as shall have accrued through the effective date of the termination, and the Employer shall not be required to pay the Executive any performance bonus for the current fiscal year, or have any further obligations whatsoever to the Executive (other than payment of amounts remaining unpaid pursuant to declared performance bonuses for prior fiscal years and reimbursement for previously approved expenses). Termination "for cause" shall mean the termination of Executive's employment on the basis of, or as a result of, one or more of the following circumstances: (i) a violation by the Executive of any applicable material law or regulation respecting the business of the Employer; (ii) the Executive being found guilty of, or being publicly associated with, a felony or an act of dishonesty or an act of willful or reckless behavior in connection with the performance of his duties as an officer of the Employer, or otherwise; or (iii) the Executive's course of conduct constituting the willful or negligent failure of the Executive to perform his duties hereunder and which is, or may result in a material detriment to the Company as reasonable determined by the Board. The Executive shall be entitled to thirty (30) days' prior written notice (the "Termination Notice") of the Employer's intention to terminate his employment for cause and such Termination Notice shall specify the grounds for such termination; afford the Executive a reasonable opportunity to cure any conduct or act (if curable) alleged as grounds for such termination; and afford the Executive a reasonable opportunity to present to the Board his position regarding any dispute relating to the existence of such cause. Notwithstanding the foregoing procedure, the Employer (through the Board) shall have the unilateral right to make the final substantive determination as to whether the Executive has properly remedied or otherwise addressed those matters described in the Termination Notice as grounds for termination of the Executive's employment; and in the event that the Employer determines (as of the expiration of the above-contemplated 30-day period), that the Executive has not appropriately remedied or otherwise addressed those matters, then the Executive's term of employment shall in all events automatically terminate as of the thirtieth (30th) day after the Employer delivers the Termination Notice, without any -4- responsibility of obligation of the Employer to provide the Executive with any further notice or explanation of the grounds for his termination. (f) Payments Upon Death. This Agreement shall terminate upon the death of the Executive. Upon the Executive's death and the termination of the Agreement the Employer shall only be obligated to pay: (i) such Base Salary as shall have accrued through the date of death; plus (ii) one-twenty-fourth (1/24) of the average of the two (2) most recent annual performance bonuses that the Executive received from the Employer, multiplied by the number of full calendar months the Executive was employed during the then-current fiscal year of the Employer, and the Employer shall not have any further obligations to the Executive (other than payment of amounts remaining unpaid pursuant to declared performance bonuses for prior fiscal years and reimbursement of approved expenses). The amount the Employer shall be obligated to pay upon the Executive's death shall be made to such beneficiary, designee or fiduciary as Executive may have designated in writing or, failing such designation, to the executor or administrator of his estate, in full settlement and satisfaction of all claims and demands on behalf of the Executive. Such payments shall be in addition to any other death benefits of the Employer made available for the benefit of the Executive, and in full settlement and satisfaction of all payments provided for in this Agreement. (g) Disability Determination. The Employer may deliver a Termination Notice and terminate the Executive's employment if the Executive is determined to be "disabled," which term shall mean the Executive's inability, as a result of physical or mental incapacity, substantially to perform his duties hereunder for a period of either six (6) consecutive months, or one hundred and twenty (120) business days within a consecutive twelve (12) month period. In the event of a dispute regarding the Executive's "disability," such dispute shall be resolved through arbitration as provided in subparagraph (d) of Section 9 hereof, except that the arbitrator appointed by the American Arbitration Association shall be a duly licensed medical doctor. The Executive shall be entitled to the compensation and benefits provided under this Agreement during any period of incapacitation occurring during the term of this Agreement prior to the establishment of Executive's "disability" and subsequent termination of his employment. Upon the Executive's termination of employment under this Section 3(g), the Employer shall only be obligated to pay the Executive: (i) such Base Salary as shall have accrued through the effective date of termination; plus (ii) one-twenty-fourth (1/24) of the average of the two (2) most recent annual performance bonuses that the Executive received from the Employer, multiplied by the number of full calendar months the Executive was employed during the then-current fiscal year of the Employer, and the Employer shall not have any further obligations to the Executive (other than payment of amounts remaining unpaid pursuant to declared performance bonuses for prior fiscal years and reimbursement of approved expenses). (h) Termination Upon Change in Control. (i) In the event of a Change in Control (as defined below) of the Employer and the termination of the Executive's employment by Executive or by the Employer under either of subparagraphs (1) or (2) below in connection therewith ("Change in Control -5- Termination"), the Executive shall be entitled to the Severance Amount determined under subparagraph (c) of this Section 3. The following shall constitute Change in Control Termination under this subparagraph (g): (1) The Executive terminates his employment under this Agreement pursuant to a written notice to that effect delivered to the Board within sixty (60) days after the occurrence of an event constituting a Change in Control. (2) Executive's employment is terminated (other than for cause or death or disability), but including Constructive Discharge, by the Employer or its successor, either within one (1) year prior to or following an event constituting a Change in Control. (ii) For purposes of this subparagraph, the term "Change in Control" shall mean the approval by the shareholders of the Employer of: (1) a merger or consolidation of the Employer, if the shareholders of the Employer immediately before such merger or consolidation do not, as a result of such merger or consolidation, own, directly or indirectly, more than fifty percent (50%) of the combined voting power of the then outstanding voting securities of the entity resulting from such merger or consolidation in substantially the same proportion as was represented by their ownership of the combined voting power of the voting securities of the Employer outstanding immediately before such merger or consolidation; (2) a complete or substantial liquidation or dissolution, or an agreement for the sale or other disposition, of all or substantially all of the assets of the Employer; or (3) a complete or substantial liquidation or dissolution or an agreement for the sale or other disposition of its general partnership interests in Wellington Properties Investments, L.P. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because forty percent (40%) or more of the combined voting power of the then-outstanding securities is acquired by: (1) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained for employees of the entity; or (2) any corporation or other entity which, immediately prior to such acquisition, is substantially owned, directly or indirectly, by the stockholders of the Employer in the same proportion as their ownership of stock in the Employer immediately prior to such acquisition. (iii) If it is determined, in the opinion of the Employer's independent accountants, in consultation with the Employer's independent counsel, that any amount payable to the Executive by the Employer under this Agreement, or any other plan or agreement under which the Executive participates or is a party, would constitute an "Excess Parachute Payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), the Employer shall pay to the Executive a "grossing-up" amount equal to the amount of such Excise Tax and all federal and state income or other taxes with respect to the payment of the amount of such Excise Tax, including all such taxes with respect to any such grossing-up amount. If, at a later date, the Internal Revenue Service assesses a deficiency -6- against the Executive for the Excise Tax which is greater than that which was determined at the time such amounts were paid, the Employer shall pay to the Executive the amount of such unreimbursed Excise Tax plus any interest, penalties and professional fees or expenses, incurred by the Executive as a result of such assessment, including all such taxes with respect to any such additional amount. The highest marginal tax rate applicable to individuals at the time of payment of such amounts will be used for purposes of determining the federal and state income and other taxes with respect thereto. The Employer shall withhold from any amounts paid under this Agreement the amount of any Excise Tax or other federal, state or local taxes then required to be withheld. Computations of the amount of any grossing-up supplemental compensation paid under this subparagraph shall be made by the Employer's independent accountants, in consultation with the Employer's independent legal counsel. The Employer shall pay all accountant and legal counsel fees and expenses. 4. Confidentiality and Loyalty. The Executive acknowledges that during the course of his employment, prior to his entry into this Agreement, he has produced, received and had access to, and may hereafter continue to produce, receive and otherwise have access to various materials, records, data, trade secrets and information not generally available to the public (collectively, "Confidential Information") regarding the Employer and its subsidiaries and affiliates. Accordingly, during and subsequent to any termination of this Agreement, on any basis, the Executive shall hold in confidence and shall not, directly or indirectly, disclose, use, copy or make lists of any such Confidential Information, except to the extent that (a) such information is or thereafter becomes a lawfully available from public sources or (b) such disclosure is authorized in writing by the Employer; or (c) such disclosure is required by law or by any competent administrative agency or judicial authority; or (d) such disclosure is otherwise reasonably necessary or appropriate in connection with the performance by the Executive of his duties hereunder. All records, files, documents, computer diskettes, computer programs and other computer-generated material, as well as all other materials or copies thereof relating to the Employer's business, which the Executive shall prepare or use, shall be and remain the sole property of the Employer, shall not be removed from the Employer's premises without its written consent, and shall be promptly returned to the Employer upon termination of the Executive's employment hereunder. The Executive agrees to abide by the Employer's general policies, as in effect from time to time, respecting confidentiality and the avoidance of interests conflicting or appearing to be in conflict with those of the Employer. -7- 5. Non-Competition Covenant. (a) Restrictive Covenant. The Employer and the Executive have jointly reviewed the tenant lists, property submittals, logs, broker lists, and operations of the Employer, and have agreed that, in consideration of this Agreement, and the payment of the amounts described in Sections 2 and 3 hereof, the Executive hereby agrees that, except with the express prior written consent of the Employer, during the term of Executive's employment with the Employer hereunder (the "Restrictive Period"), he will not, directly or indirectly, compete with the business of the Employer, including, but not by way of limitation, by directly or indirectly violating any duty the Executive owes the Employer under applicable state law, owning, managing, operating, controlling, financing, or by directly or indirectly serving as an employee, officer or director of or consultant to, or by soliciting or inducing, or attempting to solicit or induce, any employee or agent of Employer to terminate employment with Employer and become employed by any person, firm, partnership, corporation, trust or other entity which owns or operates a business similar to that of the Employer (the "Restrictive Covenant"). For purposes of this subparagraph (a), a business shall be considered "similar" to that of the Employer if it is engaged in the ownership, acquisition, development, ownership, operation, management or leasing of multi-unit residential, commercial or industrial property (i) in any geographic market or territory in which the Employer owns properties, either as of the date hereof or as of the date of termination of the Executive's employment; or (ii) in any "Target Market" publicly identified by the Employer; or (iii) in any market in which an acquisition is pending at the time of the termination of the Executive's employment. If the Executive violates the Restrictive Covenant and the Employer brings legal action or injunctive or other relief, the Employer shall not, as a result of the time involved in obtaining such relief, be deprived of the benefit of the full period of the Restrictive Covenant. Accordingly, the Restrictive Covenant shall be deemed to have the duration specified in this paragraph (a), computed from the date the relief is granted, but reduced by the time between the period when the Restrictive Period began to run and the date of the first violation of the Restrictive Covenant by the Executive. In the event that a successor of the Employer assumes and agrees to perform this Agreement or otherwise acquires the Employer, this Restrictive Covenant shall continue to apply only to the primary service area of the Employer as it existed immediately before such assumption or acquisition and shall not apply to any of the successor's other offices or markets. The foregoing Restrictive Covenant shall not prohibit the Executive from owning, directly or indirectly, capital stock or similar securities which are listed on a securities exchange or quoted on the National Association of Securities Dealers Automated Quotation System which do not represent more than five percent (5%) of the outstanding capital stock of any corporation. (b) Remedies for Breach of Restrictive Covenant. The Executive acknowledges that the restrictions contained in Sections 4 and 5 of this Agreement are reasonable and necessary for the protection of the legitimate proprietary business interests of the Employer; that any violation of these restrictions would cause substantial injury to the Employer and such interests; that the Employer would not have entered into this Agreement with the Executive without receiving the additional consideration offered by the Executive in binding himself to -8- these restrictions; and that such restrictions were a material inducement to the Employer to enter into this Agreement. In the event of any violation or threatened violation of these restrictions, the Employer shall be relieved of any further obligations under this Agreement, shall be entitled to any rights, remedies or damages available at law, in equity or otherwise under this Agreement, and shall be entitled to preliminary and temporary injunctive relief granted by a court of competent jurisdiction to prevent or restrain any such violation by the Executive and any and all persons directly or indirectly acting for or with him, as the case may be, while awaiting the decision of the arbitrator selected in accordance with paragraph (d) of Section 9 of this Agreement, which decision, if rendered adverse to the Executive, may include permanent injunctive relief to be granted by the court. 6. Intercorporate Transfers. If the Executive shall be transferred by the Employer to an affiliate of the Employer, such transfer shall not be deemed a Constructive Termination or otherwise be deemed to terminate or modify this Agreement, and the employing corporation to which the Executive shall have been transferred shall, for all purposes of this Agreement, be construed as standing in the same place and stead as the Employer as of the date of such transfer. For purposes hereof, an affiliate of the Employer shall mean any corporation or other entity directly or indirectly controlling, controlled by, or under common control with the Employer. For all relevant purposes hereof, the tenure of the Executive shall be deemed to include the aggregate term of his employment by both the Employer and its affiliate. 7. Interest in Assets and Payments. Neither the Executive nor his estate shall acquire any rights in any funds or other assets of the Employer, otherwise than by and through the actual payment of amounts payable hereunder; nor shall the Executive or his estate have any power to transfer, assign, anticipate, pledge, hypothecate or otherwise encumber any of said payments; nor shall any of such payments be subject to seizure for the payment of any debt, judgment, alimony, separate maintenance or be transferable by operation of law in the event or as a result of any bankruptcy, insolvency or other legal proceeding otherwise relating to the Executive. 8. Indemnification. (a) The Employer shall provide the Executive (including his heirs, personal representatives, executors and administrators), during the term of this Agreement and thereafter, throughout all applicable limitations periods, with coverage under the Employer's then-current directors' and officers' liability insurance policy, at the Employer's expense. (b) In addition to the insurance coverage provided for in paragraph (a) of this Section 8, the Employer shall defend, hold harmless and indemnify the Executive (and his heirs, executors and administrators) to the fullest extent permitted under applicable law, and subject to the requirements, limitations and specifications set forth in the Bylaws and other organizational documents of the Employer, against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been an officer of the Employer (whether or not he continues to be an officer at the time of incurring such expenses or liabilities), such expenses -9- and liabilities to include, but not be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements. (c) In the event the Executive becomes a party, or is threatened to be made a party, to any action, suit or proceeding for which the Employer has agreed to provide insurance coverage or indemnification under this Section 8, the Employer shall, to the full extent permitted under applicable law, advance all expenses (including the reasonable attorneys' fees of the attorneys selected by Employer and approved by Executive for the representation of the Executive), judgments, fines and amounts paid in settlement (collectively "Expenses") incurred by the Executive in connection with the investigation, defense, settlement, or appeal of any threatened, pending or completed action, suit or proceeding, subject to receipt by the Employer of a written undertaking from the Executive covenanting: (i) to reimburse the Employer for all Expenses actually paid by the Employer to or on behalf of the Executive in the event it shall be ultimately determined by a court of competent jurisdiction that the Executive is not entitled to indemnification by the Employer for such Expenses; and (ii) to assign to the Employer all rights of the Executive to insurance proceeds, under any policy of directors' and officers' liability insurance or otherwise, to the extent of the amount of Expenses actually paid by the Employer to or on behalf of the Executive. 9. General Provisions. (a) Successors; Assignment. This Agreement shall be binding upon and inure to the benefit of the Executive, the Employer, the Executive's personal representatives, the Employer's successors and assigns, and any successor or assignee of the Employer shall be deemed the successor to all or substantially all of the business and/or assets of the Employer, whether directly or indirectly, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance satisfactory to the Executive expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Employer would be required to perform if no such succession had taken place. The Executive may neither assign his duties or obligations this Agreement, nor sell, assign, pledge, encumber, transfer or hypothecate his entitlement hereunder, and the Employer shall have no obligation to recognize any such purported alienation, or pay any funds to any party claiming the benefit thereof. (b) Entire Agreement; Modifications. This Agreement constitutes the entire agreement between the parties respecting the subject matter hereof, and supersedes all prior negotiations, undertakings, agreements and arrangements with respect thereto, whether written or oral, including, without limitation, that certain Employment Agreement, dated as of November 16, 1998. Except as otherwise explicitly provided herein, this Agreement may not be amended or modified except by written agreement signed by the Executive and the Employer. (c) Enforcement and Governing Law. The provisions of this Agreement shall be regarded as divisible and separate; if any of said provisions should be declared invalid or unenforceable by a court of competent jurisdiction, the validity and enforceability of the -10- remaining provisions shall not be affected thereby. This Agreement shall be construed and the legal relations of the parties hereto shall be determined in accordance with the laws of the State of Minnesota as it constitutes the situs of the corporation and the employment hereunder, without reference to the law regarding conflicts of law. (d) Arbitration. Except as otherwise provided in paragraph (b) of Section 5, any dispute or controversy arising under or in connection with this Agreement or the Executive's employment by the Employer shall be settled exclusively by arbitration, conducted by a single arbitration sitting in Minneapolis, Minnesota, in accordance with the rules of the American Arbitration Association (the "AAA") then in effect. The arbitrator shall be selected by the parties from a list of eleven (11) arbitrators provided by the AAA, provided that no arbitrator shall be related to or affiliated with either of the parties. No later than ten (10) days after the list of proposed arbitrators is received by the parties, the parties, or their respective representatives, shall meet at a mutually convenient location in Minneapolis, Minnesota, or telephonically. At that meeting, the party who sought arbitration shall eliminate one (1) proposed arbitrator and then the other party shall eliminate one (1) proposed arbitrator. The parties shall continue to alternatively eliminate names from the list of proposed arbitrators in this manner until each party has eliminated five (5) proposed arbitrators. The remaining arbitrator shall arbitrate the dispute. Each party shall submit, in writing, the specific requested action or decision it wishes to take, or make, with respect to the matter in dispute ("Proposed Solution"), and the arbitrator shall be obligated to choose one (1) party's specific Proposed Solution, without being permitted to effectuate any compromise or "new" position; provided, however, that the arbitrator is authorized to award amounts not in dispute during the pendency of any dispute or controversy arising under or in connection with this Agreement. The party whose Proposed Solution is not selected shall bear the costs of all counsel, experts or other representatives that are retained by both parties, together with all costs of the arbitration proceeding, including, without limitation, the fees, costs and expenses imposed or incurred by the arbitrator. Judgment may be entered on the arbitrator's award in any court having jurisdiction; including, if applicable, entry of a permanent injunction under paragraph (b) of Section 5. (e) Press Releases and Public Disclosure. Any press release or other public communication by either the Executive or the Employer with any other person concerning the terms, conditions or circumstances of Executive's employment, or the termination of such employment, shall be subject to prior written approval of both the Executive and the Employer, subject to the proviso that the Employer shall be entitled to make requisite and appropriate public disclosure of the terms of this Agreement and any termination hereof, without the Executive's consent or approval, as may be required under applicable statutes, and the rules and regulations of the Securities and Exchange Commission and Nasdaq. The Employer shall be entitled to rely on the advice and counsel of its professional advisors in determining whether any such disclosure is required. -11- (f) Waiver. No waiver by either party, at any time, of any breach by the other party of, or compliance with, any condition or provision of this Agreement to be performed by the other party, shall be deemed a waiver of any similar or dissimilar provisions or conditions at the same time or any prior or subsequent time. (g) Notices. Notices given pursuant to this Agreement shall be in writing, and shall be deemed given when received if personally delivered, or on the first (1st) business day after deposit with a commercial overnight delivery service. Notices to the Employer shall be addressed and delivered to the principal headquarters office of the Employer, Attention: Chairman. Notices to the Executive shall be sent to the address set forth below the Executive's signature on this Agreement, or to such other address as Executive may hereafter designate in a written notice given to the Employer and its counsel. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. WELLINGTON PROPERTIES TRUST, DUANE H. LUND By: /s Robert F. Rice /s/ Duane H. Lund ------------------------------ -------------------------------- Robert F. Rice Address of Executive: President 9169 Larkspur Lane Eden Prairie, MN 55347 EX-10.15 9 RICE EMPLOYMENT AGREEMENT ROBERT F. RICE EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement"), is made and entered into with effect as of the 1st day of October, 1999 (the "Effective Date"), by and between Wellington Properties Trust, a Maryland real estate investment trust (the "Employer"), and Robert F. Rice (the "Executive"). RECITALS A. The Employer desires to employ the Executive as the President of the Employer for a specified term. B. The Executive is willing to accept such employment, upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises and of the covenants and agreements hereinafter contained, it is covenanted and agreed by and between the parties hereto as follows: AGREEMENTS 1. Position and Duties. The Employer hereby employs the Executive as President of the Employer, or in such other comparable or other capacity as shall be mutually agreed between the Employer and the Executive. During the period of the Executive's employment hereunder, the Executive shall devote his best efforts and full working time, energy, skills and attention to the business and affairs of the Employer. The Executive's duties and authority shall consist of and include all duties and authority customarily performed and held by persons holding equivalent positions with real estate investment trusts ("REITs") similar in nature and size to the Employer, as such duties and authority are reasonably defined, modified and delegated from time to time by the Board of Trustees of the Employer (the "Board"). The Executive shall have the powers necessary to perform the duties assigned to him, and shall be provided such supporting services, staff, secretarial and other assistance, office space and accoutrements as shall be reasonably necessary and appropriate in light of such assigned duties. 2. Compensation. As compensation for the services to be provided by the Executive hereunder, the Executive shall receive the following compensation and other benefits: (a) Base Salary. The Executive shall receive a "Base Salary" at the rate of Eighty Thousand Dollars ($80,000) per annum, payable in periodic installments in accordance with the regular payroll practices of the Employer. (b) Performance Bonus. Provided that company performance criteria (as described below) are met, in the opinion of the Board or its Compensation Committee, the Executive shall also receive an annual cash performance bonus of one hundred percent (100%) of the Executive's Base Salary for each fiscal year of the Employer, or portion thereof, during the term of this Agreement, payable within thirty (30) days after the end of such fiscal year. The Executive's prorated cash performance bonus of Twenty Thousand Dollars ($20,000) for 1999 shall be earned if the Employer's earnings for the period from October 1, 1999 through December 31, 1999 equal or exceed $0.1375 per common share. The Executive's cash performance bonus of Eighty Thousand Dollars ($80,000) for 2000 shall be earned if the Employer's earnings for 2000 equal or exceed $0.64 per common share. (c) Benefits. The Executive shall be entitled to all perquisites, plans and benefits extended to similarly situated executives, including as such are stated in the Employer's Executive Perquisite Policy (the "Perquisite Policy") promulgated for the Board by its Compensation Committee, and which Perquisite Policy is hereby incorporated by reference, as amended from time to time. In addition, the Executive shall be entitled to participate in all plans and benefits generally, from time to time, accorded to employees of the Employer ("Benefit Plans"), all as determined by the Board or its Compensation Committee from time to time. (d) Withholding. The Employer shall be entitled to withhold, from amounts payable to the Executive hereunder, any federal, state or local withholding or other taxes or charges which, from time to time, it is required to withhold. The Employer shall be entitled to rely upon the advice and counsel of its independent accountants with regard to any question concerning the amount or requirement of any such withholding. 3. Term and Termination. (a) Term. The term of this Agreement and the Executive's employment hereunder shall be extend through December 31, 2000, unless sooner terminated at any time by either party, with or without cause, such termination to be effective as of either (i) one (1) business day after written notice to that effect is delivered by the Employer to the Executive except as and to the extent otherwise required under subparagraphs (e) and (g) of this Section 3; or (ii) thirty (30) days after written notice to that effect is delivered to the Employer by the Executive, whichever is applicable to the termination in question. (b) Voluntary Termination by Executive. In the event that the Executive voluntarily terminates his employment under this Agreement, other than pursuant to Section 3(d) of this Agreement, then the Employer shall only be required to pay the Executive such Base Salary and other benefits as shall have accrued through the effective date of the termination, and the Employer shall not be obligated to pay any performance bonus for the then-current fiscal year, or have any further obligations whatsoever to the Executive (other than payment of amounts remaining unpaid pursuant to declared performance bonuses for prior fiscal years and reimbursement of approved expenses). (c) Premature Termination by Employer. In the event of the termination of the employment of the Executive under this Agreement: (A) by the Employer for any reason other than in accordance with the provisions of subparagraph (e) ("for cause"), subparagraph (f) (death), or subparagraph (g) (disability) of this Section 3, then, notwithstanding any actual or -2- allegedly available alternative employment or other mitigation of damages by (or which may be available to) the Executive, the Executive shall be entitled to a "Lump Sum Payment" equal to the product of: (y) his monthly Base Salary then payable, multiplied by twelve (12). In the event of a termination governed by this subparagraph (c)(i) of Section 3, the Employer shall also: (z) continue for the Executive (provided that such items are not available to him by virtue of other employment secured after termination) the perquisites, plans and benefits provided under the Employer's Perquisite Policy and Benefit Plans as of and after the date of termination, provided such plans or benefits permit such continuation, all items in (z) being collectively referred to as "Post-Termination Perquisites and Benefits," for twelve (12) months following such termination. The payments and benefits provided under (y) and (z) above shall be in addition to such Base Salary as shall have accrued and remain unpaid as well as any expense reimbursements or other payments relating to the period preceding such termination and remaining due and owing to the Executive but shall be in lieu of any performance bonus that the Executive might have otherwise earned for the then-current fiscal year; and shall be in addition to the payment of any theretofore declared performance bonus compensation for any prior fiscal year that remains unpaid as of the date of termination. (d) Constructive Discharge. If, at any time during the term of this Agreement, except in connection with a "for cause" termination pursuant to subparagraph (e) of this Section 3 or the Executive's death or disability termination pursuant to subparagraphs (f) or (g), respectively, of this Section 3, the Executive is Constructively Discharged (as hereinafter defined), then the Executive shall have the right, by written notice to the Employer given within one hundred and twenty (120) days of such Constructive Discharge, to terminate his services hereunder, effective as of thirty (30) days after such notice, and the Executive shall have no further rights or obligations under this Agreement except as specified in Section 5 hereof. The Executive shall in such event be entitled to a Lump Sum Payment of his Base Salary, as well as, all of the Post-Termination Perquisites and Benefits, as if such termination of his employment had been effectuated pursuant to subparagraph (c) of this Section 3 and subject to all of the conditions set forth in subparagraph (c) of this Section 3. For purposes of this Agreement, the Executive shall be deemed to have been "Constructively Discharged" upon the occurrence of any one of the following events: (i) The Executive is removed from the position with the Employer set forth in Section 1 hereof, other than as a result of the Executive's appointment to a position of comparable or superior authority and responsibility, or other than for cause, and provided further, that the Employer shall be permitted to broaden and expand the Executive's responsibilities, whether in the same or different position without such change constituting a "Constructive Discharge" hereunder; (ii) The Executive shall fail to be vested by the Employer with the powers, authority and support services customarily attendant to said office within the REIT industry, other than for cause; -3- (iii) The Employer shall formally notify the Executive in writing, that the employment of the Executive will be terminated (other than for cause) or materially modified (other than for cause) in the future, or that the Executive will be Constructively Discharged in the future; or (iv) The Employer changes the primary employment location of the Executive to a place that is more than one hundred (100) miles from the primary employment location as of the Effective Date of this Agreement; or (v) The Employer commits a material breach of its obligations under this Agreement, which it fails to cure or commence to cure within thirty (30) days after receipt of written notice thereof from the Executive (or if cure is not possible within such thirty (30) days, then the Employer must have failed to either commence to cure within thirty (30) days of have failed to complete to cure within sixty (60) days). (e) Termination for Cause. The employment of the Executive under this Agreement may be terminated by the Employer on a "for cause" basis, as hereinafter defined. If the Executive's employment is terminated by the Employer "for cause" under this subparagraph (e), then the Employer shall only be obligated to pay the Executive such Base Salary as shall have accrued through the effective date of the termination, and the Employer shall not be required to pay the Executive any performance bonus for the current fiscal year, or have any further obligations whatsoever to the Executive (other than payment of amounts remaining unpaid pursuant to declared performance bonuses for prior fiscal years and reimbursement for previously approved expenses). Termination "for cause" shall mean the termination of Executive's employment on the basis of, or as a result of, one or more of the following circumstances: (i) a violation by the Executive of any applicable material law or regulation respecting the business of the Employer; (ii) the Executive being found guilty of, or being publicly associated with, a felony or an act of dishonesty or an act of willful or reckless behavior in connection with the performance of his duties as an officer of the Employer, or otherwise; or (iii) the Executive's course of conduct constituting the willful or negligent failure of the Executive to perform his duties hereunder and which is, or may result in a material detriment to the Company as reasonable determined by the Board. The Executive shall be entitled to thirty (30) days' prior written notice (the "Termination Notice") of the Employer's intention to terminate his employment for cause and such Termination Notice shall specify the grounds for such termination; afford the Executive a reasonable opportunity to cure any conduct or act (if curable) alleged as grounds for such termination; and afford the Executive a reasonable opportunity to present to the Board his position regarding any dispute relating to the existence of such cause. Notwithstanding the foregoing procedure, the Employer (through the Board) shall have the unilateral right to make the final substantive determination as to whether the Executive has properly remedied or otherwise addressed those matters described in the Termination Notice as grounds for termination of the Executive's employment; and in the event that the Employer determines (as of the expiration of the above-contemplated 30-day period), that the Executive has not appropriately remedied or otherwise addressed those matters, then the Executive's term of employment shall in all events automatically terminate as of the thirtieth (30th) day after the Employer delivers the Termination Notice, without any -4- responsibility of obligation of the Employer to provide the Executive with any further notice or explanation of the grounds for his termination. (f) Payments Upon Death. This Agreement shall terminate upon the death of the Executive. Upon the Executive's death and the termination of the Agreement the Employer shall only be obligated to pay: (i) such Base Salary as shall have accrued through the date of death; plus (ii) one-twenty-fourth (1/24) of the average of the two (2) most recent annual performance bonuses that the Executive received from the Employer, multiplied by the number of full calendar months the Executive was employed during the then-current fiscal year of the Employer, and the Employer shall not have any further obligations to the Executive (other than payment of amounts remaining unpaid pursuant to declared performance bonuses for prior fiscal years and reimbursement of approved expenses). The amount the Employer shall be obligated to pay upon the Executive's death shall be made to such beneficiary, designee or fiduciary as Executive may have designated in writing or, failing such designation, to the executor or administrator of his estate, in full settlement and satisfaction of all claims and demands on behalf of the Executive. Such payments shall be in addition to any other death benefits of the Employer made available for the benefit of the Executive, and in full settlement and satisfaction of all payments provided for in this Agreement. (g) Disability Determination. The Employer may deliver a Termination Notice and terminate the Executive's employment if the Executive is determined to be "disabled," which term shall mean the Executive's inability, as a result of physical or mental incapacity, substantially to perform his duties hereunder for a period of either six (6) consecutive months, or one hundred and twenty (120) business days within a consecutive twelve (12) month period. In the event of a dispute regarding the Executive's "disability," such dispute shall be resolved through arbitration as provided in subparagraph (d) of Section 9 hereof, except that the arbitrator appointed by the American Arbitration Association shall be a duly licensed medical doctor. The Executive shall be entitled to the compensation and benefits provided under this Agreement during any period of incapacitation occurring during the term of this Agreement prior to the establishment of Executive's "disability" and subsequent termination of his employment. Upon the Executive's termination of employment under this Section 3(g), the Employer shall only be obligated to pay the Executive: (i) such Base Salary as shall have accrued through the effective date of termination; plus (ii) one-twenty-fourth (1/24) of the average of the two (2) most recent annual performance bonuses that the Executive received from the Employer, multiplied by the number of full calendar months the Executive was employed during the then-current fiscal year of the Employer, and the Employer shall not have any further obligations to the Executive (other than payment of amounts remaining unpaid pursuant to declared performance bonuses for prior fiscal years and reimbursement of approved expenses). (h) Termination Upon Change in Control. (i) In the event of a Change in Control (as defined below) of the Employer and the termination of the Executive's employment by Executive or by the Employer under either of subparagraphs (1) or (2) below in connection therewith ("Change in Control -5- Termination"), the Executive shall be entitled to the Severance Amount determined under subparagraph (c) of this Section 3. The following shall constitute Change in Control Termination under this subparagraph (g): (1) The Executive terminates his employment under this Agreement pursuant to a written notice to that effect delivered to the Board within sixty (60) days after the occurrence of an event constituting a Change in Control. (2) Executive's employment is terminated (other than for cause or death or disability), but including Constructive Discharge, by the Employer or its successor, either within one (1) year prior to or following an event constituting a Change in Control. (ii) For purposes of this subparagraph, the term "Change in Control" shall mean the approval by the shareholders of the Employer of: (1) a merger or consolidation of the Employer, if the shareholders of the Employer immediately before such merger or consolidation do not, as a result of such merger or consolidation, own, directly or indirectly, more than fifty percent (50%) of the combined voting power of the then outstanding voting securities of the entity resulting from such merger or consolidation in substantially the same proportion as was represented by their ownership of the combined voting power of the voting securities of the Employer outstanding immediately before such merger or consolidation; (2) a complete or substantial liquidation or dissolution, or an agreement for the sale or other disposition, of all or substantially all of the assets of the Employer; or (3) a complete or substantial liquidation or dissolution or an agreement for the sale or other disposition of its general partnership interests in Wellington Properties Investments, L.P. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because forty percent (40%) or more of the combined voting power of the then-outstanding securities is acquired by: (1) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained for employees of the entity; or (2) any corporation or other entity which, immediately prior to such acquisition, is substantially owned, directly or indirectly, by the stockholders of the Employer in the same proportion as their ownership of stock in the Employer immediately prior to such acquisition. (iii) If it is determined, in the opinion of the Employer's independent accountants, in consultation with the Employer's independent counsel, that any amount payable to the Executive by the Employer under this Agreement, or any other plan or agreement under which the Executive participates or is a party, would constitute an "Excess Parachute Payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), the Employer shall pay to the Executive a "grossing-up" amount equal to the amount of such Excise Tax and all federal and state income or other taxes with respect to the payment of the amount of such Excise Tax, including all such taxes with respect to any such grossing-up amount. If, at a later date, the Internal Revenue Service assesses a deficiency -6- against the Executive for the Excise Tax which is greater than that which was determined at the time such amounts were paid, the Employer shall pay to the Executive the amount of such unreimbursed Excise Tax plus any interest, penalties and professional fees or expenses, incurred by the Executive as a result of such assessment, including all such taxes with respect to any such additional amount. The highest marginal tax rate applicable to individuals at the time of payment of such amounts will be used for purposes of determining the federal and state income and other taxes with respect thereto. The Employer shall withhold from any amounts paid under this Agreement the amount of any Excise Tax or other federal, state or local taxes then required to be withheld. Computations of the amount of any grossing-up supplemental compensation paid under this subparagraph shall be made by the Employer's independent accountants, in consultation with the Employer's independent legal counsel. The Employer shall pay all accountant and legal counsel fees and expenses. 4. Confidentiality and Loyalty. The Executive acknowledges that during the course of his employment, prior to his entry into this Agreement, he has produced, received and had access to, and may hereafter continue to produce, receive and otherwise have access to various materials, records, data, trade secrets and information not generally available to the public (collectively, "Confidential Information") regarding the Employer and its subsidiaries and affiliates. Accordingly, during and subsequent to any termination of this Agreement, on any basis, the Executive shall hold in confidence and shall not, directly or indirectly, disclose, use, copy or make lists of any such Confidential Information, except to the extent that (a) such information is or thereafter becomes a lawfully available from public sources or (b) such disclosure is authorized in writing by the Employer; or (c) such disclosure is required by law or by any competent administrative agency or judicial authority; or (d) such disclosure is otherwise reasonably necessary or appropriate in connection with the performance by the Executive of his duties hereunder. All records, files, documents, computer diskettes, computer programs and other computer-generated material, as well as all other materials or copies thereof relating to the Employer's business, which the Executive shall prepare or use, shall be and remain the sole property of the Employer, shall not be removed from the Employer's premises without its written consent, and shall be promptly returned to the Employer upon termination of the Executive's employment hereunder. The Executive agrees to abide by the Employer's general policies, as in effect from time to time, respecting confidentiality and the avoidance of interests conflicting or appearing to be in conflict with those of the Employer. -7- 5. Non-Competition Covenant. (a) Restrictive Covenant. The Employer and the Executive have jointly reviewed the tenant lists, property submittals, logs, broker lists, and operations of the Employer, and have agreed that, in consideration of this Agreement, and the payment of the amounts described in Sections 2 and 3 hereof, the Executive hereby agrees that, except with the express prior written consent of the Employer, during the term of Executive's employment with the Employer hereunder (the "Restrictive Period"), he will not, directly or indirectly, compete with the business of the Employer, including, but not by way of limitation, by directly or indirectly violating any duty the Executive owes the Employer under applicable state law, owning, managing, operating, controlling, financing, or by directly or indirectly serving as an employee, officer or director of or consultant to, or by soliciting or inducing, or attempting to solicit or induce, any employee or agent of Employer to terminate employment with Employer and become employed by any person, firm, partnership, corporation, trust or other entity which owns or operates a business similar to that of the Employer (the "Restrictive Covenant"). For purposes of this subparagraph (a), a business shall be considered "similar" to that of the Employer if it is engaged in the ownership, acquisition, development, ownership, operation, management or leasing of multi-unit residential, commercial or industrial property (i) in any geographic market or territory in which the Employer owns properties, either as of the date hereof or as of the date of termination of the Executive's employment; or (ii) in any "Target Market" publicly identified by the Employer; or (iii) in any market in which an acquisition is pending at the time of the termination of the Executive's employment. If the Executive violates the Restrictive Covenant and the Employer brings legal action or injunctive or other relief, the Employer shall not, as a result of the time involved in obtaining such relief, be deprived of the benefit of the full period of the Restrictive Covenant. Accordingly, the Restrictive Covenant shall be deemed to have the duration specified in this paragraph (a), computed from the date the relief is granted, but reduced by the time between the period when the Restrictive Period began to run and the date of the first violation of the Restrictive Covenant by the Executive. In the event that a successor of the Employer assumes and agrees to perform this Agreement or otherwise acquires the Employer, this Restrictive Covenant shall continue to apply only to the primary service area of the Employer as it existed immediately before such assumption or acquisition and shall not apply to any of the successor's other offices or markets. The foregoing Restrictive Covenant shall not prohibit the Executive from owning, directly or indirectly, capital stock or similar securities which are listed on a securities exchange or quoted on the National Association of Securities Dealers Automated Quotation System which do not represent more than five percent (5%) of the outstanding capital stock of any corporation. (b) Remedies for Breach of Restrictive Covenant. The Executive acknowledges that the restrictions contained in Sections 4 and 5 of this Agreement are reasonable and necessary for the protection of the legitimate proprietary business interests of the Employer; that any violation of these restrictions would cause substantial injury to the Employer and such interests; that the Employer would not have entered into this Agreement with the Executive without receiving the additional consideration offered by the Executive in binding himself to -8- these restrictions; and that such restrictions were a material inducement to the Employer to enter into this Agreement. In the event of any violation or threatened violation of these restrictions, the Employer shall be relieved of any further obligations under this Agreement, shall be entitled to any rights, remedies or damages available at law, in equity or otherwise under this Agreement, and shall be entitled to preliminary and temporary injunctive relief granted by a court of competent jurisdiction to prevent or restrain any such violation by the Executive and any and all persons directly or indirectly acting for or with him, as the case may be, while awaiting the decision of the arbitrator selected in accordance with paragraph (d) of Section 9 of this Agreement, which decision, if rendered adverse to the Executive, may include permanent injunctive relief to be granted by the court. 6. Intercorporate Transfers. If the Executive shall be transferred by the Employer to an affiliate of the Employer, such transfer shall not be deemed a Constructive Termination or otherwise be deemed to terminate or modify this Agreement, and the employing corporation to which the Executive shall have been transferred shall, for all purposes of this Agreement, be construed as standing in the same place and stead as the Employer as of the date of such transfer. For purposes hereof, an affiliate of the Employer shall mean any corporation or other entity directly or indirectly controlling, controlled by, or under common control with the Employer. For all relevant purposes hereof, the tenure of the Executive shall be deemed to include the aggregate term of his employment by both the Employer and its affiliate. 7. Interest in Assets and Payments. Neither the Executive nor his estate shall acquire any rights in any funds or other assets of the Employer, otherwise than by and through the actual payment of amounts payable hereunder; nor shall the Executive or his estate have any power to transfer, assign, anticipate, pledge, hypothecate or otherwise encumber any of said payments; nor shall any of such payments be subject to seizure for the payment of any debt, judgment, alimony, separate maintenance or be transferable by operation of law in the event or as a result of any bankruptcy, insolvency or other legal proceeding otherwise relating to the Executive. 8. Indemnification. (a) The Employer shall provide the Executive (including his heirs, personal representatives, executors and administrators), during the term of this Agreement and thereafter, throughout all applicable limitations periods, with coverage under the Employer's then-current directors' and officers' liability insurance policy, at the Employer's expense. (b) In addition to the insurance coverage provided for in paragraph (a) of this Section 8, the Employer shall defend, hold harmless and indemnify the Executive (and his heirs, executors and administrators) to the fullest extent permitted under applicable law, and subject to the requirements, limitations and specifications set forth in the Bylaws and other organizational documents of the Employer, against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been an officer of the Employer (whether or not he continues to be an officer at the time of incurring such expenses or liabilities), such expenses -9- and liabilities to include, but not be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements. (c) In the event the Executive becomes a party, or is threatened to be made a party, to any action, suit or proceeding for which the Employer has agreed to provide insurance coverage or indemnification under this Section 8, the Employer shall, to the full extent permitted under applicable law, advance all expenses (including the reasonable attorneys' fees of the attorneys selected by Employer and approved by Executive for the representation of the Executive), judgments, fines and amounts paid in settlement (collectively "Expenses") incurred by the Executive in connection with the investigation, defense, settlement, or appeal of any threatened, pending or completed action, suit or proceeding, subject to receipt by the Employer of a written undertaking from the Executive covenanting: (i) to reimburse the Employer for all Expenses actually paid by the Employer to or on behalf of the Executive in the event it shall be ultimately determined by a court of competent jurisdiction that the Executive is not entitled to indemnification by the Employer for such Expenses; and (ii) to assign to the Employer all rights of the Executive to insurance proceeds, under any policy of directors' and officers' liability insurance or otherwise, to the extent of the amount of Expenses actually paid by the Employer to or on behalf of the Executive. 9. General Provisions. (a) Successors; Assignment. This Agreement shall be binding upon and inure to the benefit of the Executive, the Employer, the Executive's personal representatives, the Employer's successors and assigns, and any successor or assignee of the Employer shall be deemed the successor to all or substantially all of the business and/or assets of the Employer, whether directly or indirectly, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance satisfactory to the Executive expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Employer would be required to perform if no such succession had taken place. The Executive may neither assign his duties or obligations this Agreement, nor sell, assign, pledge, encumber, transfer or hypothecate his entitlement hereunder, and the Employer shall have no obligation to recognize any such purported alienation, or pay any funds to any party claiming the benefit thereof. (b) Entire Agreement; Modifications. This Agreement constitutes the entire agreement between the parties respecting the subject matter hereof, and supersedes all prior negotiations, undertakings, agreements and arrangements with respect thereto, whether written or oral, including, without limitation, that certain Employment Agreement, dated as of November 16, 1998. Except as otherwise explicitly provided herein, this Agreement may not be amended or modified except by written agreement signed by the Executive and the Employer. (c) Enforcement and Governing Law. The provisions of this Agreement shall be regarded as divisible and separate; if any of said provisions should be declared invalid or unenforceable by a court of competent jurisdiction, the validity and enforceability of the -10- remaining provisions shall not be affected thereby. This Agreement shall be construed and the legal relations of the parties hereto shall be determined in accordance with the laws of the State of Minnesota as it constitutes the situs of the corporation and the employment hereunder, without reference to the law regarding conflicts of law. (d) Arbitration. Except as otherwise provided in paragraph (b) of Section 5, any dispute or controversy arising under or in connection with this Agreement or the Executive's employment by the Employer shall be settled exclusively by arbitration, conducted by a single arbitration sitting in Minneapolis, Minnesota, in accordance with the rules of the American Arbitration Association (the "AAA") then in effect. The arbitrator shall be selected by the parties from a list of eleven (11) arbitrators provided by the AAA, provided that no arbitrator shall be related to or affiliated with either of the parties. No later than ten (10) days after the list of proposed arbitrators is received by the parties, the parties, or their respective representatives, shall meet at a mutually convenient location in Minneapolis, Minnesota, or telephonically. At that meeting, the party who sought arbitration shall eliminate one (1) proposed arbitrator and then the other party shall eliminate one (1) proposed arbitrator. The parties shall continue to alternatively eliminate names from the list of proposed arbitrators in this manner until each party has eliminated five (5) proposed arbitrators. The remaining arbitrator shall arbitrate the dispute. Each party shall submit, in writing, the specific requested action or decision it wishes to take, or make, with respect to the matter in dispute ("Proposed Solution"), and the arbitrator shall be obligated to choose one (1) party's specific Proposed Solution, without being permitted to effectuate any compromise or "new" position; provided, however, that the arbitrator is authorized to award amounts not in dispute during the pendency of any dispute or controversy arising under or in connection with this Agreement. The party whose Proposed Solution is not selected shall bear the costs of all counsel, experts or other representatives that are retained by both parties, together with all costs of the arbitration proceeding, including, without limitation, the fees, costs and expenses imposed or incurred by the arbitrator. Judgment may be entered on the arbitrator's award in any court having jurisdiction; including, if applicable, entry of a permanent injunction under paragraph (b) of Section 5. (e) Press Releases and Public Disclosure. Any press release or other public communication by either the Executive or the Employer with any other person concerning the terms, conditions or circumstances of Executive's employment, or the termination of such employment, shall be subject to prior written approval of both the Executive and the Employer, subject to the proviso that the Employer shall be entitled to make requisite and appropriate public disclosure of the terms of this Agreement and any termination hereof, without the Executive's consent or approval, as may be required under applicable statutes, and the rules and regulations of the Securities and Exchange Commission and Nasdaq. The Employer shall be entitled to rely on the advice and counsel of its professional advisors in determining whether any such disclosure is required. -11- (f) Waiver. No waiver by either party, at any time, of any breach by the other party of, or compliance with, any condition or provision of this Agreement to be performed by the other party, shall be deemed a waiver of any similar or dissimilar provisions or conditions at the same time or any prior or subsequent time. (g) Notices. Notices given pursuant to this Agreement shall be in writing, and shall be deemed given when received if personally delivered, or on the first (1st) business day after deposit with a commercial overnight delivery service. Notices to the Employer shall be addressed and delivered to the principal headquarters office of the Employer, Attention: Chairman. Notices to the Executive shall be sent to the address set forth below the Executive's signature on this Agreement, or to such other address as Executive may hereafter designate in a written notice given to the Employer and its counsel. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. WELLINGTON PROPERTIES TRUST, ROBERT F. RICE By: /s/ Duane H. Lund /s/ Robert F. Rice ----------------------------- ------------------------------ Duane H. Lund Address of Executive: Chief Executive Officer N77 W22052 Wooded Hills Drive Sussex, WI 53092 EX-21 10 LIST OF SUBSIDIARIES EXHIBIT 21 Maple Grove Apartment Homes, Inc., a Wisconsin corporation and wholly-owned subsidiary of the Company Lake Pointe Apartment Homes, Inc., a Wisconsin corporation and wholly-owned subsidiary of the Company Wellington Properties Investments, L.P., a Delaware limited partnership (the Company is the sole general partner) WLPT CliffSix LLC, a Delaware limited liability company and wholly-owned subsidiary of Wellington Properties Investments, L.P. CSC of Minnesota, LLC, a Delaware limited liability company and wholly-owned subsidiary of Wellington Properties Investments, L.P. -----END PRIVACY-ENHANCED MESSAGE-----