<PAGE>1
C:\8K\1998\698\8KA_630
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities and Exchange Act of 1934
Date of Report: June 30, 1998
Date of earliest event reported)
Commission File Number 1-12486
ASSOCIATED ESTATES REALTY CORPORATION
(Exact name of registrant as specified in its charter)
OHIO 34-1747603
(State or other Jurisdiction of (IRS Employer
Incorporation or organization) Identification
Number)
5025 Swetland Court, Richmond Heights, Ohio 44143-1467
(Address of Principal Executive Offices) (Zip Code)
(216) 261-5000
(Registrant's telephone number, including area code)
<PAGE>2
Item 7: Financial Statements and Exhibits
Financial Statements
This report includes (i) consolidated financial statements
for the period January 1, 1998 to June 29, 1998
(unaudited), the six-month period ended June 30, 1997
(unaudited), and for the years ended December 31, 1997, 1996 and
1995, for MIG Residential REIT, Inc. ("MIG REIT") and (ii)
combined financial statements for the six-month period ended
June 30, 1998 and 1997 (unaudited) and for the year ended December
31, 1997 for MIG Companies, presented herein as the financial
statements of the MIGRA Operations, along with unaudited combined
financial statements of MIG Companies for the years ended December
31, 1996 and 1995.
The related proforma financial information presented
herein adjusts the MIG REIT historical financial statements for
the operations not being acquired, principally those operations
equivalent to a holding company.
The terms of the above transactions and other related
transactions are further discussed in the Company's Form 8-K/A
dated February 19, 1998 and filed June 25, 1998 and Proxy
Statement dated May 30, 1998, which are incorporated by reference
herein.
Pro Forma Financial Information (Unaudited)
Unaudited pro forma financial information of the Company
and the MIG REIT and the MIGRA Operations is presented as
follows:
. Condensed statement of operations for the six month
period ended June 30, 1998;
. Condensed statement of operations for the year ended
December 31, 1997;
. Estimated twelve-month pro forma statement of taxable net
operating income and operating funds available.
<PAGE>3
Exhibits:
23.01 Consent of Ernst & Young LLP
<PAGE>F-1
ASSOCIATED ESTATES REALTY CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Acquisitions
MIG Residential REIT, Inc.
Consolidated Financial Statements for the period January
1, 1998 to June 29, 1998 (unaudited) and the six month
period ended June 30, 1997 (unaudited) and the years
ended December 31, 1997, 1996 and 1995:
Report of Independent Certified Public Accountants F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
MIG Companies
Combined Financial Statements
Report of Independent Certified Public Accountants F-18
Combined Balance Sheets as of June 30, 1998
(unaudited), December 31, 1997 and 1996 (unaudited) F-19
Combined Statements of Operations for the six month
periods ended June 30, 1998 (unaudited) and 1997
(unaudited) and the years ended December 31, 1997, F-20
1996 (unaudited) and 1995 (unaudited)
Combined Statements of Shareholders' Equity for the
six month period ended June 30, 1998 (unaudited) and
the years ended December 31, 1997, 1996 (unaudited)
and 1995 (unaudited) F-21
Combined Statements of Cash Flows for the six month
periods ended June 30, 1998 (unaudited) and 1997
(unaudited) and the years ended December 31, 1997, F-22
1996 (unaudited) and 1995 (unaudited)
Notes to Combined Financial Statements F-24
Associated Estates Realty Corporation
Pro Forma Financial Information (Unaudited)
Pro Forma Condensed Statement of Operations for the
period ended June 30, 1998 F-33
Notes to Pro Forma Condensed Statement of Operations
for the period ended June 30, 1998 F-36
Pro Forma Condensed Statement of Operations for the
period ended December 31, 1997 F-39
Notes to Pro Forma Condensed Statement of Operations
for the period ended December 31, 1997 F-40
Estimated Twelve-Month Pro Forma Statement of
Taxable Net Income and Operating Funds Available F-43
</TABLE>
<PAGE>F-2
Report of Independent Certified Public Accountants
The Board of Directors and Shareholders
MIG Residential REIT, Inc.
We have audited the accompanying consolidated balance sheets
of MIG Residential REIT, Inc. (the Company) as of December 31,
1997 and 1996, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years
in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of MIG Residential REIT, Inc. at December 31,
1997 and 1996, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
West Palm Beach, Florida
January 28, 1998
<PAGE>F-3
MIG RESIDENTIAL REIT, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 29, December 31
1998 1997 1996
(Unaudited)
<S> <C> <C> <C>
Assets
Real estate, net $94,937,424 $ 95,442,840 $75,829,988
Cash and cash equivalents 4,196,808 3,820,352 3,056,332
Restricted cash 348,706 373,863 345,452
Other assets 210,762 541,694 191,997
Total assets $99,693,700 $100,178,749 $79,423,769
Liabilities and shareholders' equity
Liabilities:
Accounts payable and accrued
expenses $ 702,637 $ 704,791 $ 417,687
Security deposits payable and
other liabilities 459,833 482,313 459,357
Dividends payable 1,250,000 1,600,000 300,000
Note payable under line of credit 10,000,000 10,000,000 -
12,412,470 12,787,104 1,177,044
Shareholders' equity:
Common stock:
Class A, par value $.001 per
share-950,000 shares
authorized, 89,886, 89,467 and
85,260 subscribed, 89,886,
89,467 and 78,974 issued and
outstanding at June 29, 1998,
December 31, 1997 and 1996,
respectively 90 89 85
Class B, par value $.001 per
share-50,000 shares authorized,
25,000 shares issued and
outstanding at June 29, 1998,
December 31, 1997 and 1996 25 25 25
Additional paid-in capital 87,281,115 87,391,531 84,564,615
87,281,230 87,391,645 84,564,725
Subscriptions receivable, 6,286
shares subscribed, not issued at
December 31, 1996 - - (6,318,000)
87,281,230 87,391,645 78,246,725
Total liabilities and shareholders'
equity $99,693,700 $100,178,749 $79,423,769 <PAGE>
See accompanying notes.
</TABLE>
<PAGE>F-4
MIG RESIDENTIAL REIT, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the period For the
January 1, 1998 six month
to period ended For the year ended December 31
June 29, 1998 June 30, 1997 1997 1996 1995
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Rental $ 7,238,442 $ 6,426,953 $13,583,335 $7,573,032 $2,730,693
Interest 73,646 67,623 134,388 73,696 164,430
Other 210,156 201,363 412,058 193,896 53,422
7,522,244 6,695,939 14,129,781 7,840,624 2,948,545
Expenses:
Depreciation 1,212,973 1,051,839 2,244,944 1,169,248 390,378
Real estate taxes and insurance 774,372 697,377 1,474,995 793,965 318,626
Salaries and employee benefits 798,535 708,571 1,488,730 727,493 261,135
Management fees, related parties 461,235 463,568 959,293 602,733 212,863
Repairs and maintenance 568,828 497,241 1,095,876 599,986 175,396
Utilities 351,029 336,410 722,229 311,708 99,321
Professional fees 669,145 99,845 273,196 146,837 49,808
Interest 389,231 319,417 712,238 - -
Other 696,746 462,288 1,013,476 471,827 179,884
5,922,094 4,636,556 9,984,977 4,823,797 1,687,411
Net income $ 1,600,150 $ 2,059,383 $ 4,144,804 $3,016,827 $1,261,134
</TABLE>
See accompanying notes.
<PAGE>F-5
MIG RESIDENTIAL REIT, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
Class A Class B
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Balance at January 1, 1995 32,500 $ 33 - $ -
Common stock subscribed 47,100 47 - -
Contributions from
subscribing shareholders - - - -
Net income - - - -
Proceeds from issuance of
common stock 196 - 25,000 25
Distributions to
shareholders - - - -
Balance at December 31, 1995 79,796 80 25,000 25
Common stock subscribed 4,922 5 - -
Contributions from
subscribing shareholders - - - -
Net income - - - -
Proceeds from issuance of
common stock 542 - - -
Dividends declared - - - -
Balance at December 31, 1996 85,260 85 25,000 25
Common stock subscribed 3,060 3 - -
Contributions from
subscribing shareholders - - - -
Net income - - - -
Proceeds from issuance of
common stock 1,147 1 - -
Dividends declared - - - -
Balance at December 31, 1997 89,467 89 25,000 25
Net income (unaudited) - - - -
Proceeds from issuance of
common stock (unaudited) 419 1 - -
Dividends declared
(unaudited) - - - -
Balance at June 29, 1998
(Unaudited) 89,886 $ 90 25,000 $ 25
</TABLE>
MIG RESIDENTIAL REIT, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Paid-In Retained Subscriptions
Capital Earnings Receivable Total
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $32,499,967 $ (21,376)$(32,500,000) $ (21,376)
Common stock subscribed 47,099,953 - (47,100,000) -
Contributions from
subscribing shareholders - - 34,154,000 34,154,000
Net income - 1,261,134 - 1,261,134
Proceeds from issuance of
common stock 220,798 - - 220,823
Distributions to
shareholders - (1,231,624) - (1,231,624)
Balance at December 31, 1995 79,820,718 8,134 (45,446,000) 34,382,957
Common stock subscribed 4,999,995 - (5,000,000) -
Contributions from
subscribing shareholders - - 44,128,000 44,128,000
Net income - 3,016,827 - 3,016,827
Proceeds from issuance of
common stock 552,876 - - 552,876
Dividends declared (808,974) (3,024,961) - (3,833,935)
Balance at December 31, 1996 84,564,615 - (6,318,000) 78,246,725
Common stock subscribed 3,114,997 - (3,115,000) -
Contributions from
subscribing shareholders - - 9,433,000 9,433,000
Net income - 4,144,804 - 4,144,804
Proceeds from issuance of
common stock 1,187,115 - - 1,187,116
Dividends declared (1,475,196) (4,144,804) - (5,620,000)
Balance at December 31, 1997 87,391,531 - - 87,391,645
Net income (unaudited) - 1,600,150 - 1,600,150
Proceeds from issuance of
common stock (unaudited) 789,434 - - 789,435
Dividends declared
(unaudited) (899,850) (1,600,150) - (2,500,000)
Balance at June 29, 1998
(Unaudited) $87,281,115 $ - $ - $ 87,281,230
</TABLE>
See accompanying notes
<PAGE>F-6
MIG RESIDENTIAL REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the
period
January 1, For the
1998 six month
to period ended For the year ended December 31
June 29, 1998 June 30, 1997 1997 1996 1995
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net income $ 1,600,150 $ 2,059,383 $ 4,144,804 $ 3,016,827 $ 1,261,134
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 1,212,973 1,051,839 2,244,944 1,169,248 390,378
Changes in operating assets
and liabilities:
Restricted cash 25,157 (46,628) (28,411) (175,326) (170,126)
Other assets 330,931 (187,646) (349,697) (78,662) (102,280)
Accounts payable and
accrued expenses (2,154) (151,871) 287,104 64,083 353,604
Security deposits payable
and other liabilities (22,480) 373,870 22,956 143,868 166,058
Net cash provided by operating
activities 3,144,577 3,098,947 6,321,700 4,140,038 1,898,768
Investing activities
Acquisition of operating real (33,381,756)
estate - (20,417,365) (20,386,593) (42,752,360)
Payments for land and building
improvements and furniture and
equipment (707,556) (503,446) (1,471,203) (783,928) (354,570)
Net cash used in investing
activities (707,556) (20,920,811) (21,857,796) (43,536,288) (33,736,326)
Financing activities
Contributions from subscribing
shareholders - 9,433,000 9,433,000 44,128,000 34,154,000
Proceeds from issuance of common
stock 789,435 441,471 1,187,116 552,876 220,823
Dividends paid to shareholders (2,850,000) (1,570,000) (4,320,000) (3,533,935) (1,231,524)
Proceeds from line of credit - 16,850,000 16,850,000 - -
Repayments on line of credit - (6,850,000) (6,850,000) - -
Net cash provided (used) by
financing activities (2,060,565) 18,304,471 16,300,116 41,146,941 33,143,199
Increase (decrease) in cash and 1,305,641
cash equivalents 376,456 482,607 764,020 1,750,691
Cash and cash equivalents at
beginning of period 3,820,352 3,056,332 3,056,332 1,305,641 -
Cash and cash equivalents at
end of period $ 4,196,808 $ 3,538,939 $ 3,820,352 $ 3,056,332 $ 1,305,641
Supplemental cash flow
information
Cash paid for interest $ 410,605 $ 318,613 $ 680,808 $ - $ -
Supplemental disclosure of
noncash investing and
financing activities
Accrued but unpaid dividends $ 1,250,000 $ 1,300,000 $ 1,600,000 $ 300,000 $ -
</TABLE>
<PAGE>F-7
The consolidated statement of cash flows for the year ended
December 31, 1995 excludes the effects of certain noncash
investing activities relating to work holdbacks pursuant to
certain purchase agreements, totaling $117,000, which are
included in the cost of real estate acquired and security
deposits payable and other liabilities in the consolidated
balance sheet at December 31, 1995.
See accompanying notes.
<PAGE>F-8
MIG RESIDENTIAL REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Organization
MIG Residential REIT, Inc. (the Company) is a corporation
organized in May 1993 under the laws of the State of Maryland for
the purpose of acquiring and managing a real estate portfolio
consisting principally of operating residential apartment
complexes throughout the United States. The Company has entered
into an agreement with MIG Realty Advisors, Inc. (MIGRA), an
entity affiliated with the Company by means of common management,
which functions as its investment advisor.
Consolidation Policy
The consolidated financial statements include the accounts of
the Company and eight entities which own operating residential
apartment complexes, as discussed in Note 2. The Company has a
100% ownership interest in each of these entities. All
significant transactions and accounts between the Company and the
investee entities have been eliminated in consolidation.
The accompanying unaudited financial statements as of June
29, 1998 and June 30, 1997 have been prepared by the Company's
management in accordance with generally accepted accounting
principles for interim financial information and applicable rules
and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation have been included.
The results of operations for the period from January 1, 1998 to
June 29, 1998 and the six month period ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the
full year. These financial statements should be read in conjunction
with the Company's audited financial statements and notes thereto
included herein for the year ended December 31, 1997.
Real Estate
Real estate is carried at cost.
Costs directly related to the acquisition, renovation or
improvement of real estate are capitalized. Costs incurred in
connection with the pursuit of unsuccessful acquisitions are
expensed at the time the acquisition is abandoned.
<PAGE>F-9
MIG RESIDENTIAL REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Repairs and maintenance are expensed as incurred.
The Company provides for depreciation using the straight-line
method. Buildings and improvements are being depreciated over
their estimated useful lives of 40 years. Land improvements, and
furniture and equipment are depreciated over their estimated
useful lives which range from five to seven years.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents and restricted cash include demand
deposit accounts and other highly liquid investments with
original maturity dates at date of purchase of six months or
less. The Company minimizes its credit risk associated with cash
and cash equivalents and restricted cash by utilizing high credit
quality financial institutions.
Restricted cash consists principally of cash restricted for
the repayment of tenant security deposits.
Leasing Activities
Rental income consists of lease payments earned from tenants
under lease agreements with terms of one year or less. Rental
income is recorded on the accrual method of accounting for
financial reporting and tax purposes.
Costs directly related to the leasing of rental units,
including commissions, are expensed as incurred.
Advertising Costs
The Company expenses advertising costs as incurred.
Advertising costs included in other expenses in the consolidated
statements of income for the year ended December 31, 1997, 1996
and 1995 total approximately $408,000, $127,000 and $40,000,
respectively.
<PAGE>F-10
MIG RESIDENTIAL REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Income Taxes
The Company has elected to be taxed as a real estate
investment trust (REIT) under the Internal Revenue Code (the IRC)
of 1986, as amended. As a REIT, the Company generally is taxed
as a C corporation, the primary differences being that the
Company will be allowed a deduction from taxable income for
dividends paid to shareholders, and an excise tax may be imposed
in the event dividend distributions are insufficient in any
fiscal year. Accordingly, no provision has been made for federal
or state income taxes in the accompanying consolidated financial
statements.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes.
Actual results could differ from those estimates.
Fair Values of Financial Instruments
The carrying amounts of cash and cash equivalents and
restricted cash approximates fair value. The carrying amount of
note payable under the line of credit, which bears interest at a
variable rate (see Note 3), also approximates fair value.<PAGE>
<PAGE>F-11
MIG RESIDENTIAL REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
2. Real Estate
The Company's investments as of December 31, 1997 consist of
the following:
<TABLE>
<CAPTION>
Date Property
Entity Name Nature (Location) of Property Acquired
<S> <C> <C>
MIG REIT/ Morgan Place Apartments, 186-unit March 1995
Morgan Place, Inc. residential apartment complex
constructed in 1989
(Atlanta, Georgia)
MIG REIT/Annen Annen Woods Apartments, 132- unit April 1995
Woods, Inc. residential apartment complex
constructed in 1987
(Pikesville, Maryland)
MIG Peachtree Peachtree Apartments, 156-unit August 1995
Corporation residential apartment complex
constructed in 1989
(Chesterfield, Missouri)
MIG Fleetwood, Ltd. The Fleetwood Apartments, 104-unit September 1995
residential apartment complex
constructed in 1993
(Houston, Texas)
MIG REIT Falls, Windsor Falls Apartments, 276-unit March 1996
L.L.C. residential apartment complex
constructed in 1994
(Raleigh, North Carolina)
MIG 20th & Campbell 20th & Campbell Apartments, 204-unit July 1996
Corporation residential apartment complex
constructed in 1989
(Phoenix, Arizona)
MIG Desert Oasis Desert Oasis Apartments, 320-unit December 1996
Corporation residential apartment complex
constructed in 1990
(Palm Desert, California)
MIG Hampton Hampton Point Apartments, 352-unit February, 1997
Corporation residential apartment complex
constructed in 1986
(Silver Spring, Maryland)<PAGE>
</TABLE>
<PAGE>F-12
MIG RESIDENTIAL REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following summarizes the net capitalized cost of the
Company's investments in operating real estate through the
entities listed above at December 31:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Morgan Place Apartments $ 9,590,710 $ 9,760,659
Annen Woods Apartments 8,235,534 8,288,591
Peachtree Apartments 8,618,887 8,725,625
The Fleetwood Apartments 6,352,652 6,486,269
Windsor Falls Apartments 16,292,184 16,622,844
20th & Campbell Apartments 12,393,041 12,463,876
Desert Oasis Apartments 13,282,864 13,482,124
Hampton Point Apartments 20,676,968 -
$95,442,840 $75,829,988
</TABLE>
Operating real estate held for income production and long-
term appreciation at December 31 consists of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Land $15,758,229 $ 13,409,065
Land improvements 245,645 153,190
Buildings and improvements 81,495,608 63,085,222
Furniture and equipment 1,747,928 742,137
99,247,410 77,389,614
Accumulated depreciation (3,804,570) (1,559,626)
$95,442,840 $ 75,829,988
</TABLE>
3. Note Payable Under Line of Credit
During 1997, the Company entered into a revolving line-of-
credit agreement (the "LOC") with a bank which provides unsecured
maximum aggregate borrowings equal to the lesser of $20,000,000
or 25% of the aggregate value of the Properties, as defined.
Under the terms of the LOC, the Company is required to maintain a
compensating balance of not less than an annual average of
$3,000,000 in depository accounts with the bank during the term
of the LOC in support of both outstanding borrowings and the
assurance of future credit availability.
Advances under the LOC bear interest at the prime rate minus
1.00% or LIBOR plus 1.25%, as elected by the Company for each
Interest Period, as defined. Interest is payable monthly. The
effective rate at December 31, 1997 is 7.21%. The Company is
also charged a standby fee of .05% of the average of the maximum
loan amount not drawn in each quarter during the term. Interest
and standby fees paid on the above debt totaled approximately
$693,000 for the year ended December 31, 1997.
<PAGE>F-13
MIG RESIDENTIAL REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Outstanding principal amounts under the LOC are payable in
three equal semiannual payments beginning on the first day of the
16th month following the advance date. The minimum annual
maturity of advances under the LOC as of December 31, 1997 are:
1998-$1,233,000; 1999-$6,666,666; 2000-$2,100,334. Generally,
advances under the LOC may be prepaid at any time prior to
maturity without penalty. On February 19, 2000, all outstanding
advances become due and payable, including interest accrued
thereon.
4. Dividends
The Company's current policy is to declare and pay dividends
to shareholders based upon funds from operations and aggregating
annually at least 95% of its taxable income.
For federal income tax purposes, dividends declared and paid
totaled approximately 133%, 127% and 100% of taxable income for
the years ended December 31, 1997, 1996 and 1995, respectively.
In determining taxable income, costs incurred are capitalized
or expensed in accordance with the treatment appropriate for
federal income tax purposes rather than in accordance with
generally accepted accounting principles (GAAP). The principal
differences between taxable income and net income relate to
methods used to calculate and capitalize acquisition and start-up
costs, the useful lives used to depreciate such costs and the
recognition of revenue and expense for certain items which are
temporarily deferred under GAAP.
The reconciliation of net income to taxable income for the
year ended December 31 is as follows:
<PAGE>F-14
MIG RESIDENTIAL REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net income $4,144,804 $3,016,827 $ 1,261,134
Book over (under) tax
depreciation 104,640 (25,186) (5,138)
Prepaid expenses (36,118) 12,869 (22,213)
Amortization of capitalized
start-up costs (8,574) (6,486) (6,486)
Deferred rental income and
other, net 23,374 22,142 4,327
Taxable income $4,228,126 $3,020,166 $ 1,231,624
</TABLE>
The Company's federal income tax returns are subject to
examination by taxing authorities. Because the application of
tax laws and regulations to many types of transactions is
susceptible to varying interpretations, amounts reported in the
income tax returns could be changed at a later date upon final
determinations by taxing authorities.
5. Shareholders' Equity
Ownership Restrictions
For the Company to continue to qualify as a REIT under the
IRC, as amended, not more than 50% in value of its outstanding
capital shares may be owned by five or fewer individuals at any
time during the last half of the Company's taxable year. For
this purpose, pursuant to the Omnibus Budget Reconciliation Act
of 1993, a pension plan qualifying under IRC Section 401(a) is
not considered an individual shareholder, rather each beneficiary
of the pension plan is considered to own a proportionate amount
of the Company's shares held by the pension plan. The Company's
Articles of Incorporation restrict the beneficial ownership of
the Company's outstanding shares by an individual, or individuals
acting as a group, to 9.9% in value of the Company's outstanding
shares. The purpose of this provision is to assist in protecting
and preserving the Company's REIT status.
Common shares owned by an individual or group of individuals
in excess of these limits are subject to redemption by the
Company. The provision does not apply where a majority of the
Board of Directors, in its sole discretion, waives such
restriction after determining that the eligibility of the Company
to continue qualifying as a REIT for federal income tax purposes
will not be jeopardized or the disqualification of the Company as
a REIT is advantageous to the shareholders.
<PAGE>F-15
MIG RESIDENTIAL REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Capital Calls
During 1997, 1996 and 1995, capital calls aggregating
$9,433,000, $44,128,000 and $34,154,000, respectively, were made
to the subscribing shareholders of the Company, the proceeds of
which have been received.
Redemption
At the discretion of the Board of Directors of the Company,
the Class B common stock may be redeemed in whole by the Company,
at any time, upon at least 15 days prior written notice to the
holders of record and upon paying to the holders of record cash
equal to the net asset value of the shares, as defined, plus all
declared and unpaid dividends.
6. Management Fees
In September 1994, the Company entered into an agreement with
MIGRA, an entity affiliated with the Company by means of common
management, to provide investment advisory services (the Advisor
Agreement), including both strategic and day-to-day
management of the Company.
The Advisor Agreement requires the Company to pay MIGRA a
quarterly asset management fee equal to 7% of cash available for
distribution, as defined. During 1997, 1996 and 1995, the
Company incurred asset management fee expense of approximately
$419,000, $297,000 and $102,000, respectively, and paid asset
management fees of approximately $417,000, $242,000 and $58,000,
respectively, pursuant to the Advisor Agreement. Included in
accounts payable and accrued expenses at December 31, 1997 and
1996 are accrued but unpaid asset management fees of
approximately $101,000 and $99,000, respectively.
The Advisor Agreement also stipulates that MIGRA is entitled
to receive an acquisition fee equal to .75% of the cost of real
estate acquired, as defined, upon the closing of each property
acquired by the Company or its subsidiaries. Acquisition fees
paid to MIGRA and capitalized in the basis of the real estate of
the properties acquired during 1997 and 1996, totaled
approximately $152,000 and $319,000, respectively.
<PAGE> F-16
MIG RESIDENTIAL REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
In addition to the asset management fee and acquisition fees,
the Advisor Agreement also entitles MIGRA to receive an incentive
management fee equal to 10% of the difference between the net
sales proceeds resulting from the disposition of an investment
and the amount necessary at the time of disposition to provide
the Company with an annual 4% real rate of return over the
holding period of the investment, as defined.
The Advisor Agreement shall continue to be effective through
the liquidation and termination of the Company unless earlier
terminated upon the vote of 66-2/3% of the aggregate voting power
of the then outstanding shares of common stock of the Company.
Each of the Company's consolidated entities had property
management agreements with MIG Management Services (MMS), an
entity affiliated by means of common ownership. The agreements
entitle MMS to a monthly fee equal to the lesser of (a)
prevailing market rates, or (b) 4% of gross receipts, as defined,
for performance of property management services. During 1997,
1996 and 1995, the Company incurred property management fee
expense of approximately $540,000, $306,000 and $111,000,
respectively, and paid property management fees of approximately
$569,000, $293,000 and $95,000, respectively.
7. Contingencies
The Company is subject to environmental regulations related
to the ownership, operation and acquisition of real estate. As
part of its due diligence procedures, the Company has conducted
environmental assessments on each property prior to acquisition.
The Company is not aware of any environmental condition on any of
its properties which is likely to have a material adverse effect
on the Company's consolidated financial position or results of
operations.
8. Subsequent Event
On January 28, 1998, the Company entered into agreements to
sell all of its real estate assets to Associated Estates Realty
Corporation (AERC). The aggregate sale price is $108,500,000,
consisting of a combination of cash and AERC common shares.
Among other things, the sale agreements provide for an increase
<PAGE>F-17
MIG RESIDENTIAL REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
of the aggregate sale price up to approximately 6% contingent
upon the trading prices of AERC's common shares, as defined.
Upon consummation of the sale, management of the Company
anticipate that the proceeds will be used to settle any remaining
liabilities of the Company, including its obligation under the
LOC, and the balance will be distributed to its shareholders.
Thereafter, it is anticipated that management will commence the
liquidation and dissolution of the Company.
<PAGE>F-18
Report of Independent Certified Public Accountants
Shareholders
MIG Companies
We have audited the accompanying combined balance sheet of
MIG Companies (the Company) as described in Note 1 as of December
31, 1997, and the related combined statements of operations,
shareholders' equity, and cash flows for the year then ended.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion the financial statements referred to above
present fairly, in all material respects, the combined financial
position of MIG Companies at December 31, 1997, and the combined
results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
West Palm Beach, Florida
February 20, 1998
<PAGE>F-19
MIG COMPANIES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997 1996
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Assets
Cash and cash equivalents $ - $ 237,433 $ 401,830
Construction loans receivable, net of
allowance for loan losses and
unamortized loan fees of $28,951 - - 2,251,099
Funds held in escrow 3,082,319 4,359,947 6,394,102
Due from affiliates 2,054,306 2,888,469 1,063,842
Other receivables 933,000 1,317,256 1,515,588
Other receivables - affiliates - 103,443 -
Investment in unconsolidated entities 1,147 - 134,836
Property and equipment:
Furniture and equipment 1,874,081 1,871,321 1,790,459
Leasehold improvements 27,926 27,926 27,926
1,902,007 1,899,247 1,818,385
Less accumulated depreciation and
amortization (1,563,562) (1,482,979) (1,318,217)
338,445 416,268 500,168
Prepaid expenses and other assets 92,361 437,730 456,271
Total assets $ 6,501,878 $ 9,760,546 $ 12,717,736
Liabilities and shareholders' equity
Liabilities:
Construction loans payable $ - $ - $ 1,207,390
Construction loans payable to
affiliates - - 1,072,661
Escrow funds payable 3,082,319 4,359,646 6,396,919
Lines of credit 946,565 610,000 1,000
Accounts payable and accrued expenses 1,676,575 2,167,348 1,883,896
Accrued interest payable - - 17,148
Due to affiliates 263,185 11,665
Deficit capital balances of unconsoli-
dated general partnership interests 94,299 82,515 55,738
5,799,758 7,482,694 10,646,417
Minority interests (235,957) 168,970 386,634
Shareholders' equity:
Common stock 19,085 19,085 19,085
Additional paid-in capital 1,518,400 656,094 656,094
Notes and other amounts due from
shareholders - - (2,561,417)
Retained earnings (599,408) 1,433,703 3,570,923
938,077 2,108,882 1,684,685
Total liabilities and shareholders' equity $ 6,501,878 $ 9,760,546 $ 12,717,736
</TABLE>
See accompanying notes.
<PAGE>F-20
MIG COMPANIES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the six month
period ended June 30, For the year ended December 31
1998 1997 1997 1996 1995
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Acquisition, management and
disposition fees from affiliates $ 773,342 $ 1,313,141 $ 2,640,721 $ 3,514,614 $ 3,508,085
Acquisition, management and
disposition fees 2,393,287 2,936,451 6,461,682 5,827,709 3,446,588
Servicing and administrative fees 448,208 614,000 1,098,043 1,592,130 2,025,363
Interest 22,883 61,603 42,982 442,708 859,836
Origination fees - - - 142,085 574,398
Other 244,069 168,723 380,245 458,923 619,358
3,881,789 5,093,917 10,623,673 11,978,169 11,033,628
Expenses:
Salaries, wages and employee benefits 3,050,453 2,843,555 6,775,119 7,352,906 6,793,253
Interest 31,336 241,208 244,901 274,329 655,654
Travel, meetings and seminars 254,673 391,762 612,045 905,402 849,453
Occupancy 371,008 370,945 744,163 766,953 708,502
Professional fees 450,605 403,540 691,517 513,176 546,162
Stationery, postage and office supplies 90,570 126,119 229,599 338,640 335,282
Depreciation and amortization 105,305 85,709 166,382 185,175 341,454
Utilities 82,877 86,252 177,466 219,678 183,722
Insurance 254,637 123,425 231,257 213,563 173,592
Costs associated with reorganization
plan 814,460 - 1,290,777 - -
Other 215,841 229,406 687,485 574,257 459,303
5,721,765 4,901,919 11,850,711 11,344,079 11,046,377
(Loss) income before equity in net
income of unconsolidated entities and
minority interests in net loss
(income) of consolidated subsidiaries
and extraordinary item (1,839,976) 191,998 (1,227,038) 634,090 (12,749)
Equity in net income (loss) of
unconsolidated entities (2,237) 260,181 73,235 49,212 319,732
Minority interests in net loss (income)
of consolidated subsidiaries 394,847 33,952 206,145 (102,133) 9,465
Net (loss) income before
extraordinary item $(1,447,366) $ 486,131 $ (947,658)$ 581,169 $ 316,448
Extraordinary item-gain on forgiveness
of debt 328,230 - - - -
Net (loss) income $(1,119,136) $ 486,131 $ (947,658)$ 581,169 $ 316,448
</TABLE>
See accompanying notes.
<PAGE>F-21
MIG COMPANIES
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Notes and
Other
Additional Amounts Total
Common Paid-In Retained Due From Shareholders'
Stock Capital Earnings Distributions Shareholders Equity
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1995 (unaudited) $ 85 $ 648,889 $2,673,306 $ - $(1,444,005) $ 2,178,275
Net income (unaudited) - - 316,448 - - 316,448
Issuance of common
stock (unaudited) 17,000 - - - - 17,000
Accrued preferential
returns (unaudited) - 2,891 - - - 2,891
Additions to notes and
other amounts due from
shareholders (unaudited) - - - - (806,104) (806,104)
Balance at December 31,
1995 (unaudited) 17,085 651,780 2,989,754 - (1,950,109) 1,708,510
Net income (unaudited) - - 581,169 - - 581,169
Issuance of stock
(unaudited) 2,000 - - - - 2,000
Accrued preferential
returns (unaudited) - 4,314 - - - 4,314
Additions to notes and
other amounts due from
shareholders (unaudited) - - - - (611,308) (611,308)
Balance at December 31,
1996 (unaudited) 19,085 656,094 3,570,923 - (2,561,417) 1,684,685
Net loss - - (947,658) - - (947,658)
Distributions - - - (1,189,562) 1,189,562 -
Repayments to notes and
other amounts due from
shareholders - - - - 1,371,855 1,371,855
Balance at December 31,
1997 19,085 656,094 2,623,265 (1,189,562) - 2,108,882
Net loss (unaudited) - - (1,119,136) - - (1,119,136)
Distributions (unaudited) - - - (913,975) - (913,975)
Contributions (unaudited) - 862,306 - - - 862,306
Balance at June 30, 1998
(unaudited) $19,085 $1,518,400 $1,504,129 $ (2,103,537) $ - $ 938,077
</TABLE>
See accompanying notes.
<PAGE>F-22
MIG COMPANIES
COMBINED STATEMENTS OF CASH FLOWS<PAGE>
<TABLE>
<CAPTION>
For the six month
period ended June 30 For the year ended December 31
1998 1997 1997 1996 1995
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net (loss) or income $(1,119,136) $ 486,131 $ (947,658) $ 581,169 $ 316,448
Adjustments to reconcile net loss to
net cash (used in) provided by
operating activities:
Depreciation and amortization 105,305 85,709 166,382 185,175 341,454
Extraordinary gain on forgiveness of (328,230) - - - -
debt
Net deferred loan fees capitalized - - - (23,663) (53,842)
Provision for bad debts - affiliate - - 170,280 - -
Equity in net loss (income) of
unconsolidated entities 2,237 (260,181) (73,235) (49,212) (319,732)
Minority interests in net (loss)
income of consolidated subsidiaries (394,847) (33,952) (206,145) 102,133 (9,465)
Other - - (24,075) 29,617 (67,769)
Changes in operating assets and
liabilities:
Funds held in escrow 1,277,628 1,089,358 2,034,155 (2,252,437) (2,896,440)
Due from affiliates 1,158,360 (912,573) (1,994,907) (433,152) (59,751)
Notes and other amounts due from
shareholders - - - (59,000) 38,000
Other receivables 487,399 (218,090) 80,462 (633,742) (921,935)
Accrued interest receivable - - 14,425 12,030 52,574
Prepaid expenses and other assets 324,678 (39,670) 18,541 (39,379) 149,158
Escrow funds payable (1,277,327) (1,092,861) (2,037,273) 2,253,970 2,895,787
Due to affiliates (263,185) 521,578 251,520 - -
Accounts payable and accrued
expenses (490,771) (1,099,944) 283,452 624,530 316,113
Accrued interest payable - - (17,148) (14,097) (64,398)
Net cash (used in) provided by
operating activities (517,889) (1,395,155) (2,281,222) 283,942 (283,798)
Investing activities
Purchase of property and equipment (2,760) (93,728) (87,358) (188,475) (211,781)
Construction loan commitments funds - - - (9,838,236) (19,420,262)
Principal collected on construction
loans receivable - - - 11,974,430 26,984,006
Loans to shareholders - - - (618,142) (978,670)
Distributions from unconsolidated
entities 8,400 234,842 234,848 24,272 592,793
Contribution to unconsolidated
entities - - - - (5,199)
Principal collected due from
shareholders - 1,371,855 1,371,855 - -
Net cash provided by investing
activities 5,640 1,512,969 1,519,345 1,353,849 6,960,887
Financing activities
Proceeds from construction loan
borrowings - - - 9,919,616 18,757,226
Payments on construction loan
payable - - - (11,974,430) (26,352,276)
Proceeds from lines of credit 2,328,565 2,328,565 2,911,972 6,783,611 5,608,410
Repayments on lines of credit (1,992,000) (2,302,972) (2,302,972) (6,786,161) (5,771,527)
Contribution from shareholders 862,306 - - - -
Distributions to shareholders (913,975) - - - -
Distributions to minority interests (10,080) - (11,520) (17,520) (68,400)
Net cash provided by (used in)
financing activities 274,816 - 597,480 (2,074,884) (7,826,567)
(Decrease) increase in cash and cash
equivalents (237,433) 117,814 (164,397) (437,093) (1,149,478)
Cash and cash equivalents at
beginning of year 237,433 401,830 401,830 838,923 1,988,401
Cash and cash equivalents at end of
year $ - $ 519,644 $ 237,433 $ 401,830 $ 838,923
</TABLE>
<PAGE>F-23
MIG COMPANIES
COMBINED STATEMENTS OF CASH FLOWS (Continued)
Supplemental cash flow information
Interest paid for the year ended December 31, 1997 was
$4,300, $288,426 (unaudited) in 1996 and $720,052 (unaudited) in
1995. Income taxes paid for the year ended 1995 were $11,013
(unaudited).
Supplemental disclosure of noncash investing and financing
activities
During 1997, the Company recorded a noncash distribution of
approximately $1,190,000 with a corresponding reduction in due
from affiliates.
During 1997, the Company transferred the construction loans
receivable and payable to an affiliate totaling approximately
$2,300,000.
In 1995, the Company exchanged a receivable for management
fees of $352,540 (unaudited) for an investment in an
unconsolidated entity of the same amount.
During 1996, the Company recorded a non cash contribution
from a minority interest of approximately $238,000 (unaudited).
In connection therewith, the Company recorded an increase in
minority interest and a corresponding reduction in due to
affiliates.
See accompanying notes.
<PAGE>F-24
MIG COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Organization and Combination Policy
The combined financial statements include the accounts of MIG
Realty Advisors, Inc. ("MIGRA") and its consolidated investee
partnerships and the accounts of MIG Management Services ("MMS"),
a group of 19 corporations, which are affiliated with MIGRA
through common ownership.
The combined financial statements have been prepared as a
result of the pending acquisition of MIGRA and MMS by Associated
Estates Realty Corporation ("AERC").
The financial information for the years ended December 31,
1996 and 1995 is unaudited; however, in the opinion of the
Company, the financial information includes all adjustments
necessary for a fair presentation of the combined financial
position at December 31, 1996 and the combined results of
operations and cash flows for the years ended December 31, 1996
and 1995.
The accompanying unaudited financial statements as of June
30, 1998 and 1997 have been prepared by the Company's management
in accordance with generally accepted accounting principles for
interim financial information and applicable rules and
regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation have been included.
The results of operations for the six month period ended June 30,
1998 and 1997 are not necessarily indicative of the results that
may be expected for the full year. These financial statements should
be read in conjunction with the Company's audited financial state-
ments and notes thereto included herein for the year ended December
31, 1997.
MIGRA is registered with the U.S. Securities and Exchange
Commission as an investment advisor to corporate and municipal
pension systems. The Company has a 75% managing general partner
interest in Mortgage Investors Group, Ltd. (MIG Ltd.), a Florida
limited partnership. In addition to its controlling ownership
interest, MIGRA has control over the operating and financial
<PAGE>F-25
MIG COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued
policies of MIG Ltd. and is, therefore, deemed to have control
over the partnership. Accordingly, the accounts of MIG Ltd.
have been consolidated with MIGRA in the accompanying combined
financial statements and all significant intercompany balances
and transactions have been eliminated in consolidation. MIG Ltd.
is a registered investment advisor and also functions as a
mortgage banker and as a real estate advisor to municipal pension
systems. MIG Ltd. recognizes revenue primarily from real estate
acquisition and disposition, loan origination and consultation,
debt servicing, asset management and construction lending
activities. MIG Ltd. earns the majority of its debt servicing
fee revenue from two of its pension fund clients.
MIGRA also has a 40% interest as a general partner in
Stonemark Investor Services (Stonemark), a general partnership.
The other general partner of Stonemark is an unrelated entity,
MIGRA, under the terms of the partnership arrangement, controls
the operating and financial policies of Stonemark and is,
therefore, deemed to have control over the partnership.
Accordingly, the accounts of Stonemark have been consolidated
with MIGRA in the accompanying combined financial statements and
al significant intercompany balances and transactions have been
eliminated in consolidation.
MIG Realty, Inc., an entity related to MIGRA by means of
common ownership, is a 10% general partner in MIG Ltd. The
limited partner is an unrelated corporation.
MIGRA owns a one percent general partner interest in
Mortgage Investors Fund I Limited Partnership ("MIF I"), Mortgage
Investors Fund II Limited Partnership ("MIF II") and Mortgage
Investors Self Storage I Limited Partnership ("Storage"). In
addition to its ownership interest, MIGRA functions as the real
estate investment advisor to MIF I, MIF II and Storage (the
Partnerships). As a result of MIGRA's noncontrolling ownership
interest as well as the limited partners ability to determine the
operational and financial policies of the Partnerships, MIGRA
accounts for its investment in the Partnerships under the equity
method of accounting.
The corporations which comprise MMS corporations are as
follows: MIG Management Services of Florida Inc., MIG Management
of Georgia Inc., MIG Management Services of Pennsylvania Inc.,
MIG Management Services of Maryland Inc., MIG Management Services
of Virginia Inc., MIG Management Services of North Carolina Inc.,
<PAGE>F-26
MIG COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued
MIG Management Services of Michigan Inc., MIG Management Services
of Texas Inc., MIG Management Services of Illinois Inc., MIG
Management Services of Ohio Inc., MIG Management Services of
Minnesota Inc., MIG Management Services of Oklahoma, Inc., MIG
Management Services of Missouri Inc., MIG Management Services of
California Inc., MIG Management Services of Washington Inc., MIG
Management Services of Arizona Inc., MIG Management Services of
Colorado Inc., MIG Management Services of New Mexico Inc., and
MIG Management Services of Utah Inc. These corporations
primarily provide property management services to owners of
multifamily properties.
MIGRA and its consolidated partnerships and MMS are
collectively referred to hereinafter in these combined financial
statements as MIG Companies or the Company. All significant
intercompany transactions and balances have been eliminated upon
combination.
Property and Equipment
Property and equipment is stated at cost. Depreciation of
furniture and equipment is provided using the straight-line
method over the estimated useful lives of the assets. Asset
lives range from three to five years. Leasehold improvements are
being amortized over the shorter of the estimated useful lives of
the assets or the life of the related leases using the straight-
line method.
Income taxes
MIGRA and MMS operate as subchapter S corporations under the
Internal Revenue Code. MIG Ltd. and Stonemark are each
partnerships. The shareholders of MIGRA and MMS and the partners
of MIG Ltd. and Stonemark include in their own income tax returns
the income or loss of MIGRA, MIG Ltd., Stonemark and MMS,
respectively. Accordingly, none of these entities in the
combined financial statements are subject to income taxes and no
income tax provision has been provided in the accompanying
combined financial statements.
Revenue Recognition
Acquisition, management and disposition fees from affiliates,
interest income and other fees are recognized when the related
services are performed and the earnings process is complete.
Servicing fee income, related to loans serviced on behalf of the
<PAGE>F-27
MIG COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued
municipal pension systems, is recognized when earned.
Cash and Cash Equivalents
For purposes of the combined statement of cash flows, cash
and cash equivalents include demand deposit accounts and
securities purchased from financial institutions under agreements
to resell with original maturity dates of six months or less when
purchased. The Company minimizes the credit risk associated with
cash and cash equivalents by placing its temporary cash
investments with high credit quality financial institutions and
by investing in temporary cash investments which mature in 90
days.
Income and Expense Allocations
The Company's shareholders, through common ownership and/or
management, control several affiliated companies. At the
discretion of management and the shareholders of the Company and
its affiliated companies, certain items of income have been
allocated to affiliates based on their estimates of the value of
the services rendered by the affiliates. In addition, certain
items of expense have been allocated to affiliates based on their
estimates of the expenses incurred by the affiliates.
Accordingly, the accompanying combined financial statements do
not necessarily represent the financial position or results of
operations that would result if the Company operated on an
autonomous basis.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the combined financial statements and accompanying notes.
Actual results could differ from those estimates.
2. Funds Held in Escrow
The majority of escrow funds shown on the combined balance
sheet as funds held in escrow and as escrow funds payable
represent funds held by the Company primarily for the payment of
operating expenses associated with properties managed by the
Company on behalf of its pension fund clients.
<PAGE>F-28
MIG COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued
3. Pension and Profit Sharing Plan and Other
The Company has a 401(k) plan which allows participants to
make tax-deferred contributions to several alternative investment
funds. The Company is also permitted to contribute an amount
determined at the discretion of the Board of Directors to the
401(k) plan. The Company made contributions of $17,000 to this
plan during 1997.
Effective January 1, 1995, the Company terminated its defined
contribution pension plan (the Plan) for eligible employees. In
connection therewith, the Company paid its liability to the Plan
of approximately $108,000 (unaudited) in September 1995.
4. Lines of Credit
Available lines of credit and amounts outstanding at December
31, 1997 are as follows:
<TABLE>
<S> <C>
Unsecured line of credit ($500,000 maximum)
payable to a bank, interest accrues at prime
(8.5% at December 31, 1997), expires on June 30,
1998 $ 219,000
Unsecured line of credit ($500,000 maximum)
payable to a bank, interest accrues at prime
(8.5% at December 31, 1997), expires on June 30,
1998 391,000
Line of credit ($500,000 maximum) payable to a
bank, interest accrues at prime plus 1% (9.5% at
December 31, 1997), expires on October 31, 1998,
secured by life insurance policies on certain
shareholders of MIG Ltd.'s general partners
and all furniture and equipment of MIG Ltd. -
Line of credit ($500,000 maximum) payable to a
bank, interest accrues at prime plus 2%(10.50% at
December 31, 1997), expires on May 31, 2000,
secured by life insurance policies on certain
shareholders of MIG Ltd.'s general partners. -
$ 610,000
</TABLE>
<PAGE>F-29
MIG COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued
5. Leases
The Company occupies certain facilities under long-term
leases. These leases generally are renewable and provide for the
payment of real estate taxes and certain other occupancy
expenses. The lease for one facility provides for escalations
based on changes in the Consumer Price Index. In addition, the
Company leases office equipment from an entity owned by an
existing and a former shareholder of the Company and leases
office space from an entity affiliated with the Company by means
of common management.
Minimum rental commitments under these noncancelable
operating leases at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Facilities Equipment Total
<S> <C> <C> <C>
Year ending December 31, 1998 $ 358,657 $ 50,726 $ 409,383
1999 252,546 30,958 283,504
2000 27,008 25,883 52,891
$ 638,211 $ 107,567 $ 745,778<PAGE>
</TABLE>
Rent expense for the year ended December 31, 1997 was
approximately $575,000 including approximately $27,000 incurred
on the related party leases.
6. Other Related Party Transactions
The Company had approximately $425,000, $2,429,000 (unaudited)
and $1,873,000 (unaudited) in unsecured notes receivable from
shareholders at December 31, 1997, December 31, 1996 and December
31, 1995, respectively. The notes bear interest at the prime
rate (8.5% at December 31, 1997) and are payable on demand.
There was approximately $10,000, $136,000 (unaudited) and $77,000
(unaudited) in accrued interest related to these notes at December
31, 1997, December 31, 1996 and December 31, 1995, respectively.
Interest of $60,000, $126,000 (unaudited) and $103,000 (unaudited)
related to these notes was included in income during 1997, 1996
and 1995, respectively. Based on historical practices, some or
all of the notes receivable and accrued interest due from
shareholders could be distributed to the shareholders at a future
date. Accordingly, these notes and other amounts due from
shareholders are included in shareholder' equity on the combined
statements of shareholders' equity for the year ended December
31, 1996 and 1995.
<PAGE>F-30
MIG COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued
The Company had approximately $274,000 in notes payable to a
shareholder at December 31, 1997. The notes bear interest at 10%
and are payable on demand. There was approximately $23,000 in
accrued interest related to these notes at December 31, 1997.
Interest of $23,000 related to these notes was included in
expense during 1997. Amounts are shown net in 1997 and are
included in due from affiliates on the accompanying balance
sheet.
The Company had approximately $2,900,000 and $1,064,000
(unaudited) of advances due from entities affiliated by means of
common ownership or management at December 31, 1997 and 1996,
respectively. These amounts are included in due from affiliates
and officer on the combined balance sheets. The amounts due from
entities affiliated by means of common ownership or management
bear no interest and have no stated repayment terms. The amount
due from an officer of the Company (approximately $324,000
(unaudited) at December 31, 1996 bears interest at the prime rate
(8.25% at December 31, 1996) and is payable on demand. Netted
against due from affiliates and other is approximately $671,000
(unaudited) of amounts due to certain affiliates under common
control at December 31, 1996. These amounts are non-interest
bearing and have no stated repayment terms.
The Company had approximately $260,000 and $12,000 (unaudited)
of amounts due to certain affiliates under common control at
December 31, 1997 and 1996, respectively. These amounts are non-
interest bearing and have no stated repayment terms. In
addition, the Company paid expenses of approximately $170,000 on
behalf of an affiliate for which it received no reimbursement.
The Company received expense reimbursements of $104,000
(unaudited) during 1996 and 1995 from affiliates for expenses
incurred by the Company on behalf of the affiliates. These
reimbursements are included in other revenue on the accompanying
combined statements of operations.
During 1997, a majority shareholder sold his stock in MIGRA,
MMS and other affiliates to an existing shareholder. As part of
the separation, the Company entered into a severance agreement
whereby the former shareholder would receive certain benefits
over a three year period. The total costs of this severance
package is approximately $1,200,000 and is included in salaries,
wages and employee benefits on the accompanying combined
statement of operations. In addition, the Company incurred
<PAGE>F-31
MIG COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued
approximately $400,000 related to severance agreements associated
with other employees which is included in salaries, wages and
employee benefits on the accompanying combined statement of
operations.
The Company had construction loans payable to the shareholder
of a minority interest limited partner in MIG Ltd. of
approximately $1,073,000 (unaudited) and $3,314,000, (unaudited)
and approximately $7,000 (unaudited) in related accrued interest
at December 31, 1996. Interest related to these loans of
approximately $117,000 (unaudited) and $328,000 (unaudited) was
incurred during 1996 and 1995, respectively. These amounts are
included in construction loans payable to affiliates on the
combined balance sheet.
The Company earned approximately $700,000, $881,000 (unaudited)
and $1,197,000 (unaudited) in servicing fee revenue from
affiliates during 1997, 1996 and 1995, respectively.
7. Year 2000 (Unaudited)
The Company has assessed its computer system's ability to
function properly with respect to the dates in the year 2000 and
thereafter. The Company does not believe that the cost of
ensuring its systems are year 2000 compliant will be significant
or that the year 2000 issue will pose significant operational
problems.
8. Costs Associated with Reorganization Plan
During 1997, the Company incurred substantial costs
associated with the planned formation of a real estate investment
trust. Upon completing the necessary research and analyses, the
plan was subsequently abandoned. Also, during 1997, the Company
incurred substantial costs associated with the proposed
acquisition of MIGRA by AERC. The costs associated with these
activities totaling approximately $1,291,000 have been charged to
expense in the accompanying combined statement of operations.
9. Shareholders' Equity
The combined shareholders' equity at December 31, 1997
consists of the following:
<PAGE>F-32
MIG COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued
<TABLE>
<CAPTION>
MIGRA MMS TOTAL
<S> <C> <C> <C>
Common stock $ 85 $ 19,000 $ 19,085
Additional paid-in capital 656,094 - 656,094
Retained earnings 1,323,016 110,687 1,433,703
$ 1,979,195 $ 129,687 $ 2,108,882
</TABLE>
The combined shareholders' equity at December 31, 1996
consists of the following:
<TABLE>
<CAPTION>
MIGRA MMS TOTAL
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Common stock $ 85 $ 19,000 $ 19,085
Additional paid-in
capital 656,094 - 656,094
Notes and other amounts
due from shareholders (2,561,417) - (2,561,417)
Retained earnings 3,460,235 110,688 3,570,923
$ 1,554,997 $ 129,688 $1,684,685
</TABLE>
The common stock of MIGRA and each of the 19 MMS corporations
has a par value of $1 per share. MIGRA has authorized the
issuance of 7,500 shares of its common stock and 85 shares are
issued and outstanding at December 31, 1997. Each of the 19 MMS
corporations have authorized the issuance of 1,000 shares of
their common stock, all of which have been issued and are
outstanding at December 31, 1997 and 1996.
10. Subsequent Event
On January 28, 1998, the shareholders entered into agreements
to sell all the Company to AERC, an unrelated third party in
exchange for cash and common shares.
<PAGE>F-33
ASSOCIATED ESTATES REALTY CORPORATION
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
For the Period ended June 30, 1998 and
For the Year ended December 31,1997
(Unaudited)
(Dollars in Thousands, except per share amounts)
The unaudited pro forma condensed statement of operations for
the six month period ended June 30, 1998 is presented as if the
following transactions had occurred on January 1, 1997 (i) the
acquisition by the Company of Country Club Apartments which occurred
on February 19, 1998, (ii) the acquisition by the Company of the MRT
Properties which occurred on February 3, 1998, (iii) the
acquisition of the MIG REIT Properties and the MIGRA Merger which
occurred on June 30, 1998 and (iv) the issuance of a $20.0
million medium term note on April 9, 1998.
The unaudited pro forma condensed statement of operations for
the year ended December 31, 1997 is presented as if the following
transactions had occurred on January 1, 1997, (i) the acquisition
of the Gables at White River, Remington Place, Saw Mill Village
and Hawthorne Hills Apartments as previously reported on the
Company's Form 8-K/A-1 dated February 6, 1997, (ii) the offering
of 1,750,000 common shares completed on July 2, 1997, (iii) the
acquisition of Clinton Place Apartments and Spring Valley
Apartments as previously reported on the Company's Form 8-K dated
August 25, 1997 (together with the four acquisitions reported on
the Company's Form 8-K/A-1 dated February 6, 1997, the
"Previously Reported Acquisitions") and (iv) the acquisition by
the Company of Country Club Apartments, the MRT Properties, the
MIG REIT Properties and the MIGRA Merger. The acquisition of the
MRT Properties was made in contemplation of the acquisition of
both the MIG REIT Properties and merger with MIGRA. The MRT
Properties and MIG REIT Properties were managed by, and their
owners advised by, MIGRA. The remaining properties were acquired
from an unrelated third party.
This pro forma condensed statement of operations is based
upon the historical results of operations of the Company for the
period ended June 30, 1998 and the year ended December 31, 1997
and should be read in conjunction with the historical financial
statements and notes thereto of the Company included in the
Company's Form 10-Q for the period ended June 30, 1998 and Form
10-K for the year ended December 31, 1997 and the Country Club
Apartments Statement of Revenue and Certain Expenses, the MRT
Properties Combined Statement of Revenue and Certain Expenses,
the MIG REIT and the MIG Companies financial statements included
in this Form 8-K and in the Company's Form 8-K dated February
19, 1998.
The unaudited pro forma condensed statement of operations is
not necessarily indicative of what the actual results of
operations of the Company would have been assuming the
<PAGE>F-34
transactions had been completed as previously set forth, nor does
it purport to represent the results of operations of future
periods of the Company.
<PAGE>F-35
ASSOCIATED ESTATES REALTY CORPORATION
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
For the Period ended June 30, 1998
(Unaudited)
(Dollars in Thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Adjustments (unaudited)
(a) (b) (c)
Country MIG
Company MRT Club REIT
Historical Properties Apartments Properties
<S> <C> <C> <C> <C>
Revenues
Rental $ 59,991 $ 737 $ 290 $ 7,238
Painting services 721 - - -
Acquisition, management and
disposition fees 1,830 - - -
Interest 529 - - 74
Other 484 30 6 210
63,555 767 296 7,522
Expenses
Property operating and maintenance
expenses exclusive of depreciation and
amortization 25,219 328 121 3,190
Management fees, related parties - 74 - 461
Depreciation - real estate assets 10,225 164 40 1,213
- other 416 - - -
Amortization of deferred financing fees 381 - - -
Amortization of intangible assets - - - -
Painting services 732 - - -
General and administrative 3,635 - - 669
Cost associated with reorganization
plan(k) - - - -
Interest expense 13,545 391 134 389
54,153 957 295 5,922
Income (loss) from operations 9,402 (190) 1 1,600
Minority interests in net income of
consolidated subsidiaries - - - -
Equity in net income of joint ventures 207 - - -
Income (loss) before extraordinary items $ 9,609 $ (190) $ 1 $ 1,600
Income before extraordinary items
applicable to common shares $ 6,867
Per share data:
Income before extraordinary items
per share - basic and diluted $ .40
Weighted average number of shares 17,103
- basic
- diluted 17,103
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Adjustments
(unaudited)
(c) (d) Merger
and Company
MIG Medium Acquisition Pro Forma
Companies Term Note Adjustments (unaudited)
<S> <C> <C> <C> <C>
Revenues
Rental $ - $ - $ - $ 68,256
Painting services - - - 721
Acquisition, management and
disposition fees 3,167 - (535)(e) 3,668
(794)(n)
Interest 23 - - 626
Other 692 - - 1,422
3,882 - (1,329) 74,693
Expenses
Property operating and maintenance
expenses exclusive of depreciation and
amortization - - 575 (f) 29,433
Management fees, related parties - - (535)(e) -
Depreciation - real estate assets 105 - 561 (g) 12,308
- other - - - 416
Amortization of deferred financing fees - - - 381
Amortization of intangible assets - - 188 (h) 188
Painting services - - - 732
General and administrative 4,772 - (259)(i) 8,817
Cost associated with reorganization
plan(k) 814 - - 814
Interest expense 31 30 48 (j) 14,568
5,722 30 578 67,657
Income (loss) from operations (1,840) (30) (1,907) 7,036
Minority interests in net income of
consolidated subsidiaries (2) - 2 (l) -
Equity in net income of joint ventures 395 - - 602
Income (loss) before extraordinary items $ (1,447) $ (30) $ (1,905) $ 7,638
Income before extraordinary items
applicable to common shares $ 4,896
Per share data:
Income before extraordinary items
per share - basic and diluted $ .22
Weighted average number of shares 22,620(m)
- basic
- diluted 22,620(m)
<PAGE>F-36
ASSOCIATED ESTATES REALTY CORPORATION
NOTES TO PRO FORMA CONDENSED STATEMENT OF OPERATIONS
For the Period ended June 30, 1998
(In Thousands, except per share amounts)
<FN>
(a) Represents the revenues and expenses of the MRT Properties
for the period ended February 2, 1998. The MRT Properties
were acquired by the Company on February 3, 1998.
Interest expense assumes interest at market rates with
respect to mortgages assumed or at the rate of the Company's
unsecured bridge loan, as applicable, for the period ended
February 2, 1998.
Depreciation expense reflects the pro forma depreciation
charge utilizing the properties' respective purchase prices
and an estimated useful life of 30 years for buildings for
the period ended February 2, 1998.
(b) Represents the revenues and expenses of Country Club
Apartments for the period ended February 18, 1998. Country
Club Apartments was acquired by the Company on February 19,
1998.
Interest expense assumes interest at the weighted average
rate of the Company's line of credit for the period ended
February 18, 1998.
Depreciation expense reflects the pro forma depreciation
charge utilizing the property's purchase price and an
estimated useful life of 30 years for buildings for the
period ended February 18, 1998.
(c) Represents the respective historical statement of operations
of the MIG REIT Properties and the MIG Companies for the
period ended June 29, 1998.
(d) Reflects the increase in interest expense associated with
the issuance of a medium term note which occurred on April
9, 1998 and was utilized to repay borrowings under the line
of credit agreement. Interest expense is calculated at the
stated rate, adjusted for offering costs, of the medium term
note, reduced by the interest savings under the line of
credit.
(e) Decrease results from the elimination of management and
advisory fees earned by the MIG Companies from the MRT and
MIG REIT Properties as follows:
MRT Properties $ 74
MIG REIT Properties 461
$ 535
<PAGE>F-37
(f) Charge for maintenance and repairs to conform the accounting
policies of the acquired properties to those of the Company.
(g) Represents the net increase in depreciation for real estate
acquired as a result of recording the MIG REIT Properties at
their respective purchase prices (which exceeds historical
cost). Depreciation is computed on a straight-line basis
over the estimated useful lives of the related assets of
approximately 30 years.
Calculation of the pro forma adjustment of depreciation of
real estate property for the period ended June 30, 1998:
Depreciation expense based upon an estimated $ 1,774
useful life of approximately 30 years
Less: Historic MIG REIT Properties
depreciation of real estate property 1,212
$ 561
Notes (a) and (b) describe depreciation of the other real
estate acquisitions reflected in this pro forma
presentation.
(h) Reflects the amortization of the intangible assets,
including goodwill, recognized from the MIGRA Merger.
Intangible assets, including key employees and client lists
are being amortized over seven years while the goodwill is
being amortized over 13 years. The amounts allocated among
the aforementioned intangible assets are based upon certain
estimates. However, management believes that the impact of
such adjustments, if any, will not be material.
(i) Decrease results from the duplication of certain professional
fees which will be eliminated or reduced upon the purchase of
the MIG REIT Properties.
(j) Represents the net increase in interest expense incurred on
funds borrowed under the Company's Line of Credit to finance
the acquisition of the MIG REIT properties and MIGRA Merger.
Interest expense assumes interest at the weighted average
rate of the Company's line of credit.
(k) Represents costs incurred by the MIG Companies associated
with an abandoned financing and reorganization plan. Such
costs are non-recurring.
(l) To eliminate the minority interests in the net loss of
consolidated subsidiaries, which interests are being
acquired by the Company.
<PAGE>F-38
(m) Assumes shares issued in connection with the MIGRA Merger
and the acquisition of the MIG REIT Properties occurred as
of January 1, 1997. Common shares issued in connection
with the MIGRA Merger exclude the common shares whose
issuance is contingent upon the satisfaction of certain
conditions. Common shares issued for the merger are
408,318. Common shares issued for the MIG REIT Properties
are 5,139,387. Also excludes operating partnership units
issued in connection with the assumed purchase of the
Development Property which are, in certain circumstances and,
at the option of the Company, convertible on a one-for-one
basis into common shares of the Company. Such potential
common shares are excluded from the per share presentation
since the Development Property was acquired on June 30,
1998, and prior to that time, had limited or no operating
history.
(n) The adjustment represents the revenue earned by MIGRA or its
affiliates from the management contracts not available for
assignment to the Company at the closing of the MIGRA Merger.
No adjustment to the expenses was made since costs are not
specifically identifiable to the contracts.
</FN>
</TABLE>
<PAGE>F-39
ASSOCIATED ESTATES REALTY CORPORATION
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
(Unaudited)
(Dollars in Thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Adjustments
(unaudited)
(a) (b) (c) (d)
Previously Country
Company Reported Follow-on MRT Club
Historical Acquisitions Offering Properties Apartments
<S> <C> <C> <C> <C> <C>
Revenues
Rental $ 101,640 $ 4,525$ - $ 8,086 $ 2,163
Painting services 1,664 - - - -
Acquisition, management and
disposition fees 3,752 - - - -
Interest 926 - - - -
Other 828 61 - 309 45
108,810 4,586 - 8,395 2,208
Expenses
Property operating and mainten-
ance expenses exclusive of
depreciation and amortization 43,230 1,694 - 3,518 901
Management fees, related parties - - - 334 -
Depreciation - real estate assets 17,926 945 - 1,808 482
- other 640 - - - -
Amortization of deferred
financing fees 700 - - - -
Amortization of goodwill - - - - -
Painting services 1,491 - - - -
Cost associated with abandoned
projects 310 - - - -
General and administrative 6,085 - - - -
Charge for unrecoverable funds
advanced to non-owned
properties and other 1,764 - - - -
Costs associated with
reorganization plan (k) - - - - -
Interest expense 19,144 1,355 (1,883) 4,068 1,024
91,290 3,994 (1,883) 9,728 2,407
Income from operations 17,520 592 1,883 (1,333) (199)
Minority interests in net loss of
consolidated subsidiaries - - - - -
Gain on sale of land 1,608 - - - - <PAGE>
Equity in net income of joint
ventures 561 - - - -
Income (loss) before
extraordinary items $ 19,689 $ 592$ 1,883 $ (1,333) $ (199)
Net income before extraordinary
items applicable to common shares $ 14,205
Per share data:
Net income before extraordinary
items per share - basic and
diluted $ .88
Weighted average number of shares
- basic 16,200
- diluted 16,222
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Adjustments
(unaudited)
(e) (e) Merger
MIG and Company
REIT MIG Acquisition ProForma
Properties Companies Adjustments (unaudited)
<S> <C> <C> <C> <C>
Revenues
Rental $ 13,584 $ - $ - $129,998
Painting services - - - 1,664
Acquisition, management and
disposition fees - 9,103(n) (1,293)(f) 9,809
(1,753)(n)
Interest 134 43 - 1,103
Other 412 1,478 - 3,133
14,130 10,624 (3,046) 145,707
Expenses
Property operating and mainten-
ance expenses exclusive of
depreciation and amortization 5,796 - 372 (g) 55,511
Management fees, related parties 959 - (1,293)(f) -
Depreciation - real estate assets 2,245 - 1,333 (h) 24,739
- other - 166 - 806
Amortization of deferred
financing fees - - - 700
Amortization of goodwill - - 377 (i) 377
Painting services - - - 1,491
Cost associated with abandoned
projects - - - 310
General and administrative 273 10,149 (175)(j) 16,332
Charge for unrecoverable funds
advanced to non-owned
properties and other - - - 1,764
Costs associated with
reorganization plan (k) - 1,291(k) - 1,291
Interest expense 712 245 12(l) 24,677
9,985 11,851 626 127,998
Income from operations 4,145 (1,227) (3,672) 17,709
Minority interests in net loss of
consolidated subsidiaries - 206 (206)(m) -
Gain on sale of land - - - 1,608
Equity in net income of joint
ventures - 73 - 634
Income (loss) before
extraordinary items $ 4,145 $ (948) $ (3,878) $ 19,951
Income before extraordinary
items applicable to common shares $ 14,467
Per share data:
Income before extraordinary
items per share - basic and
diluted $ .64
Weighted average number of shares
- basic 22,620(o)
- diluted 22,642(o)
<PAGE>F-40
ASSOCIATED ESTATES REALTY CORPORATION
Notes to Pro Forma Condensed Statement of Operations
For the Year ended December 31, 1997
(In Thousands, except per share amounts)
<FN>
(a) Reflects the revenues and expenses of the Previously
Reported Acquisitions for the period January 1, 1997 through
the date of acquisition.
Interest expense assumes interest at market rates with
respect to mortgages assumed or at the rate of the Company's
line of credit or Medium Term Notes, as applicable.
Depreciation expense reflects the pro forma depreciation
charge utilizing the properties' respective purchase prices
and an estimated useful life of 30 years for buildings.
(b) Represents the reduction of interest expense associated with
the repayment of debt utilizing the proceeds of the 1.75
million Common Share offering completed on July 2, 1997 and
the issuance of a $20 million medium term note issued on
April 8, 1998.
(c) Represents the revenues and expenses of the MRT Properties
for the year ended December 31, 1997. The MRT Properties
were acquired by the Company on February 3, 1998.
Interest expense assumes interest at market rates with
respect to mortgages assumed or at the rate of the Company's
line of credit or unsecured term loan, as applicable.
Depreciation expense reflects the pro forma depreciation
charge utilizing the properties' respective purchase prices
and an estimated useful life of 30 years for buildings.
(d) Reflects the revenues and expenses of Country Club
Apartments for the year ended December 31, 1997. Country
Club Apartments was acquired by the Company on February 19,
1998.
Interest expense assumes interest at the weighted average
rate of the Company's line of credit.
Depreciation expense reflects the pro forma depreciation
charge utilizing the property's purchase price and an
estimated useful life of 30 years for buildings.
(e) Represents the respective historical statement of operations
of the MIG REIT Properties and the MIG Companies for the
year ended December 31, 1997.
<PAGE>F-41
(f) Decrease results from the elimination of management and
advisory fees earned by the MIG Companies from the MRT and
MIG REIT Properties as follows:
MRT Properties $ 334
MIG REIT Properties 959
$ 1,293
(g) Charge for maintenance and repairs to conform the accounting
policies of the acquired properties to those of the Company.<PAGE>
(h) Represents the net increase in depreciation for real estate
to be acquired as a result of recording the MIG REIT
Properties at their respective purchase prices (which
exceeds historical costs). Depreciation is computed on a
straight-line basis over the estimated useful lives of the
related assets of approximately 30 years.
Calculation of the pro forma adjustment of depreciation of
real estate property for the year ended December 31, 1997:
Depreciation expense based upon
an estimated useful life of
approximately 30 years $ 3,578
Less: Historic MIG REIT Properties
depreciation of real estate
property 2,245
$ 1,333
Notes (a), (c) and (d) describe depreciation of all other
real estate acquisitions reflected in this pro forma
presentation.
(i) Reflects the amortization of the intangible assets,
including goodwill, recognized from the MIGRA Merger.
Intangible assets, including key employees and client lists
are being amortized over seven years while the goodwill is
being amortized over 13 years. The amounts allocated among
the aforementioned intangible assets are based upon certain
estimates. However, management believes that the impact of
such adjustments, if any, will not be material.
(j) Decrease results from the duplication of certain professional
fees which will be eliminated or reduced upon the purchase of
the MIG REIT Properties.
(k) Represents costs incurred by the MIG Companies associated
with an abandoned financing and reorganization plan. Such
costs are non-recurring.
<PAGE>F-42
(l) Represents the net decrease in interest expense incurred on
funds borrowed under the Company's Line of Credit to finance
the acquisition of the MIG REIT Properties and the MIGRA
Merger.
(m) To eliminate the minority interests in the net loss of
consolidated subsidiaries, which interests are being
acquired by the Company.
(n) The adjustment represents the revenue earned by MIGRA or its
affiliates from the management contracts not available for
assignment to the Company at the closing of the MIGRA Merger.
No adjustment to the expenses was made since costs are not
specifically identifiable to the contracts.
(o) Assumes 1.75 million shares issued in connection with the
Common Share offering on July 2, 1997 and shares issued in
connection with the MIGRA Merger and the acquisition of the
MIG REIT Properties occurred as of January 1, 1997. Common
shares issued in connection with the MIGRA Merger exclude
the common shares whose issuance is contingent upon the
satisfaction of certain conditions. Common shares issued
for the merger are 408,318. Common shares issued for the
MIG REIT Properties are 5,139,387. Also excludes
operating partnership units issued in connection with the
purchase of the Development Property which are, in certain
circumstances and, at the option of the Company, convertible
on a one-for-one basis into common shares of the Company.
Such potential common shares are excluded from the per share
presentation since the Development Property was acquired on
June 30, 1998, and prior to that time, had limited or no
operating history.
</FN>
</TABLE>
<PAGE>F-43
ASSOCIATED ESTATES REALTY CORPORATION
ESTIMATED TWELVE-MONTH PRO FORMA STATEMENT OF
TAXABLE NET OPERATING INCOME AND OPERATING FUNDS AVAILABLE
(Unaudited)
The following unaudited statement is a pro forma estimate
for a twelve-month period of taxable income and funds available
from operations of the Company. The unaudited pro forma
statement is based on the Company's historical operating results
for the year ended December 31, 1997 adjusted as if the following
transactions had occurred on January 1, 1997: (i) the acquisition
of the Gables at White River, Remington Place, Saw Mill Village
and Hawthorne Hills Apartments as previously reported on the
Company's Form 8-K/A-1 dated February 6, 1997, (ii) the offering
of 1,750,000 common shares completed on July 2, 1997, (iii) the
acquisition of Clinton Place Apartments and Spring Valley
Apartments as previously reported on the Company's Form 8-K dated
August 25, 1997 (together with the four acquisitions reported on
the Company's Form 8-K/A-1 dated February 6, 1997, the
"Previously Reported Acquisitions") and (iv) the acquisition by
the Company of Country Club Apartments, the MRT Properties
reported on the Company's Form 8-K/A dated February 19, 1998 and
Proxy Statement dated May 30, 1998 and the MIG Residential REIT
Properties and the merger with MIG Realty Advisors, Inc. as
reported herein.
This estimated twelve-month pro forma statement of taxable
net operating income and operating funds available is based upon
the historical results of operations of the Company for the year
ended December 31, 1997 and should be read in conjunction with
the proforma condensed balance sheet and the pro forma condensed
statement of operations of the Company set forth elsewhere herein
and the historical financial statements and notes thereto of the
Company included in the Associated Estates Realty Corporation
Form 10-K for the year ended December 31, 1997 and the Country
Club Apartments Statement of Revenue and Certain Expenses, the
MRT Properties Combined Statement of Revenue and Certain Expenses
included in the Company's Form 8-K/A dated February 19, 1998 and
Proxy Statement dated May 30, 1998 and the MIG Residential REIT,
Inc. and the MIG Companies financial statements for the year
ending December 31, 1997 as presented elsewhere in this report.
<TABLE>
<CAPTION>
ESTIMATE OF TAXABLE NET OPERATING INCOME (IN THOUSANDS):
<S> <C>
Historical earnings from operations, exclusive of
depreciation and amortization (Note 1) $ 34,494
Historical earnings (loss) from operations,
exclusive of depreciation and amortization (Note 2)
Previously reported acquisitions 1,537
MRT Properties 475
Country Club Apartments 283
MIG Residential REIT Properties 6,390
MIG Companies (782)
42,397
Estimated tax basis depreciation and amortization (Note 3)
AERC (12,492)
Previously Reported Acquisitions (1,660)
MRT Properties (1,322)
Country Club Apartments (320)
MIG Residential REIT Properties (2,549)
MIG Companies (166)
Pro Forma taxable operating income before dividends deduction 23,888
Estimated dividends deduction (Note 4) 42,073
$(18,185)
Pro Forma taxable operating income $ -
ESTIMATE OF PRO FORMA OPERATING FUNDS AVAILABLE (NOTE 5)
IN THOUSANDS):
Pro Forma taxable operating income before dividends deduction $ 23,888
Add pro forma tax basis depreciation and amortization 18,509
Estimate of pro forma operating funds available $ 42,397 <PAGE>
<PAGE>F-44
_________
<FN>
Note 1 - The historical earnings from operations represents the
Company's net income applicable to common shares as adjusted for
depreciation and amortization for the year ended December 31,
1997 as reflected in the historical financial statements.
Note 2 - The historical earnings from operations represents the
pro forma results of the Previously Reported Acquisitions, MRT
Properties, Country Club Apartments, the MIG Residential REIT
Properties and MIG Companies as referred to in the pro forma
condensed consolidated statement of operations for the year ended
December 31, 1997 included elsewhere in this report.
Note 3 - The tax basis depreciation of the Company is based upon
the original purchase price allocated to the buildings, equipment
and personal property, depreciated on a straight-line basis
over a 40-, 12-, and 10-year life, respectively.
Note 4 - Estimated dividends deduction is based on the estimated
dividend rate of $1.86 per share. Shares outstanding, on a pro
forma basis are 22,620.
Note 5 - Operating funds available does not represent cash
generated from operating activities in accordance with generally
accepted accounting principles and is not necessarily indicative
of cash available to fund cash needs.
</FN>
</TABLE>
<PAGE>F-45
SIGNATURES
Pursuant to the requirements of the Securities and Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned hereto duly authorized.
Associated Estates Realty Corporation
Date: August 31, 1998 /s/ Dennis W. Bikun
Dennis W. Bikun
Chief Financial Officer & Treasurer
Chief Accounting Officer<PAGE>
EXHIBIT 23.01
Consent of Independent Certified Public Accountants
We consent to the use of (a) our report dated January 28,
1998, with respect to the consolidated financial statements of
MIG Residential REIT, Inc. for each of the three years in the
period ended December 31, 1997 and (b) our report dated February
20, 1998, with respect to the combined financial statements of
MIG Companies for the year ended December 31, 1997, included in
Associated Estates Realty Corporations's ("AERC") Current Report
on Form 8-K/A-1 dated June 30, 1998, incorporated by reference in
Registration Statements (Form S-3 No. 333-22419 and Forms S-8 No.
333-27429 and No. 33-88430) of AERC filed with the Securities and
Exchange Commission.
/s/ Ernst & Young, LLP
West Palm Beach, Florida
August 27, 1998
