<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K/A-1
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities and Exchange Act of 1934
Date of Report: FEBRUARY 19, 1998
---------------------------------------------------------
(Date of earliest event reported)
Commission File Number 1-12486
-------
ASSOCIATED ESTATES REALTY CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
(216) 261-5000
----------------------------------------------------
(Registrant's telephone number, including area code)
<PAGE> 2
ITEM 5: OTHER EVENTS
The Proposed Acquisition of Multi-family Real Estate Properties in Development
- ------------------------------------------------------------------------------
In connection with the merger agreement with MIG Realty Advisors, Inc.
("MIGRA"), as described in the Form 8-K dated February 19, 1998, Associated
Estates Realty Corporation ( the "Company") has elected, subject to the
satisfaction of certain conditions, to acquire the general and certain of the
limited partnership interests in the partnerships that own two multi-family
properties in development known as Windsor Pines Apartments and Windsor at
Kirkman Apartments (collectively the "Developments"). The aggregate purchase
price for the interests in the partnerships that own the Developments is
approximately $56.7 million.
The Developments are further described as follows:
<TABLE>
<CAPTION>
Limited Number of
Property Partnership* Location Suites**
-------- ------------ -------- --------
<S> <C> <C> <C>
Windsor Pines Apartments MIG/Pines Development, Ltd. Pembroke, Florida 368
Windsor at Kirkman Apartments MIG/Orlando Development, Ltd. Orlando, Florida 460
<FN>
* current owner
** number of suites upon completion of construction
</FN>
</TABLE>
The Company has entered into a Contribution and Partnership Interest
Agreement (the "Contribution Agreement") with certain MIGRA stockholders (the
"MIGRA Stockholders"), and certain MIGRA affiliates (the "Non-MIGRA
Stockholders") and MIG Development Company, a Florida corporation ("MIG
Development") pursuant to which the Company was granted the right to indirectly
acquire from the MIGRA Stockholders and the Non-MIGRA Stockholders certain
limited partnership interests in (a) MIG/Pines Development, Ltd., a Florida
limited partnership and (b) MIG/Orlando Development, Ltd., a Florida limited
partnership (collectively referred to as the "Development Partnerships").
The MIGRA Stockholders are (a) general partners in HP Advisors, a
Florida general partnership (the "HP Partnership") and (b) limited partners in
one or more of the Development Partnerships. The Non-MIGRA Stockholders are (a)
limited partners in each of the Development Partnerships and (b) principals of
MIG Development. MIG Development is the general partner of each of the
Development Partnerships.
Pursuant to the terms of the Contribution Agreement, the Company, the
MIGRA Stockholders, the Non-MIGRA Stockholders and MIG Development have agreed
to (a) (i) convert the HP Partnership into a Florida limited partnership having
the name AERC HP Advisors Limited Partnership (the "New HP Partnership"), (ii)
admit the MIGRA Stockholders and certain of the Non-MIGRA Stockholders as
limited partners of the New HP Partnership and (iii) admit the Company as a
general partner of the New HP Partnership and (b) provide for (i) the New HP
Partnership to acquire some or all of the limited partnership interests in the
Development Partnerships and (ii) provide for the Company or its subsidiary to
acquire from MIG Development all of the general partnership interests in one or
more of the Development Partnerships.
In consideration for the contribution or sale of the foregoing
partnership interests (a) MIG Development will receive approximately $111,000 in
cash, (b) the MIGRA Stockholders will receive one or more of five classes of
limited partnership interests in the New HP Partnership and (c) the Non-MIGRA
Stockholders will receive either cash or a certain class of limited partnership
interests in the New HP Partnership. The limited partnership interests may
become exchangeable for either restricted common shares of the Company or cash,
at the Company's election. The limited partners will have rights to cash flow
distributions under the terms of the partnership agreement of the New HP
Partnership.
In determining the price to be paid for the interests in the
partnerships that own the Developments, the Company considered, as applicable,
the expected cash flow from the Developments, the nature of the occupancy trends
and terms of the leases in place, expected operating costs and taxes, the
physical condition of the Developments, the potential to increase their cash
flow and other factors. The Company also considered the capitalization rates at
which it believes apartment properties have recently sold, but determined the
prices it was willing to pay for the Developments primarily based on the factors
discussed above. No independent appraisals were performed in connection with the
acquisitions.
There can be no assurances, however, that the Company will be
successful in its attempts to acquire the interests in the partnerships that own
the Developments currently under contract.
ITEM 7: FINANCIAL STATEMENTS AND EXHIBITS
Financial Statements
- --------------------
This Form 8-K/A is being filed for the purpose of updating certain
historical financial information for the period ended March 31, 1998 (unaudited)
relating to the Company's proposed merger with MIGRA and the acquisition of the
management operations of certain affiliated companies, collectively referred to
as "MIG Companies" and the proposed acquisition of the MIG REIT Properties. The
pro forma financial information, as presented herein has also been updated as of
and for the period ended March 31, 1998 and to reflect additional information
obtained relating to certain pro forma adjustments relating to the year ended
December 31, 1997.
This report includes (i) unaudited consolidated financial statements
for the three months ended March 31, 1998 and 1997 for MIG Residential REIT,
Inc. ("MIG REIT"), (ii) unaudited combined financial statements for the three
months ended March 31, 1998 and 1997 for MIG Companies, presented herein as the
financial statements of the MIGRA Operations, (iii) audited consolidated
financial statements as of December 31, 1997 and 1996 and for each of the three
years in the period ended December 31, 1997 for MIG REIT, and (iv) audited
combined financial statements 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 for the years ended December
31, 1996 and 1995.
The proposed merger with MIGRA and the proposed acquisition of the MIG
REIT Properties were previously reported on the Company's Form 8-K dated
February 19, 1998.
The financials of MIG REIT are presented herein as the financial
statements of the Proposed Acquisition Properties. MIG REIT owns the eight
operating properties being acquired by the Company. 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.
Audited statements of revenue and certain expenses for the year ended
December 31, 1997 for the Development Properties are not presented because the
properties were either under development and/or in the lease-up phase and,
accordingly, the related operating information of the properties would not be
meaningful.
Pro Forma Financial Information (Unaudited)
Unaudited pro forma financial information of the Company, adjusted for
the Proposed Acquisition Properties, the MIGRA Operations and certain other
transactions as described herein is presented as follows:
* Condensed Balance Sheet as of March 31, 1998;
* Condensed Statement of Operations for the three months ended
March 31, 1998;
* Condensed Statement of Operations for the year ended December
31, 1997; and
* Estimated Twelve-Month Pro Forma Statement of Taxable Net
Operating Income and Operating Funds Available.
2
<PAGE> 3
Exhibits
23.01 Consent of Ernst & Young LLP
3
<PAGE> 4
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: /s/ Dennis W. Bikun
- ------------------------------------ -------------------------------------
Dennis W. Bikun
Chief Financial Officer & Treasurer
Chief Accounting Officer
4
<PAGE> 5
ASSOCIATED ESTATES REALTY CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
PROPOSED ACQUISITIONS
MIG RESIDENTIAL REIT, INC.
Consolidated Financial Statements
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets as of March 31, 1998 (unaudited)
and December 31, 1997 and 1996 F-3
Consolidated Statements of Income for the periods ended
March 31, 1998 (unaudited) and 1997 (unaudited) and
December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Shareholders' Equity for the
periods ended March 31, 1998 (unaudited) and December 31,
1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the periods ended
March 31, 1998 (unaudited) and 1997 (unaudited) and
December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-8
MIG COMPANIES
Combined Financial Statements
Report of Independent Certified Public Accountants F-14
Combined Balance Sheets as of March 31, 1998 (unaudited),
December 31, 1997 and 1996 (unaudited) F-15
Combined Statements of Operations for the periods
ended March 31, 1998 (unaudited) and 1997 (unaudited) and
December 31, 1997, 1996 (unaudited) and 1995 (unaudited) F-16
Combined Statements of Shareholders' Equity for
the periods ended March 31, 1998 (unaudited)
and December 31, 1997, 1996
(unaudited) and 1995 (unaudited) F-17
Combined Statements of Cash Flows for the periods
ended March 31, 1998 (unaudited) and 1997 (unaudited) and
December 31, 1997, 1996 (unaudited) and 1995 (unaudited) F-18
Notes to Combined Financial Statements F-20
ASSOCIATED ESTATES REALTY CORPORATION
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
Condensed Balance Sheet as of March 31, 1998 F-26
Condensed Statement of Operations for the period
ended March 31, 1998 F-32
Condensed Statement of Operations for the period
ended December 31, 1997 F-36
Estimated Twelve-Month Pro Forma Statement of Taxable
Net Operating Income and Oprating Funds Available F-39
39
</TABLE>
F-1
<PAGE> 6
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
F-2
<PAGE> 7
MIG RESIDENTIAL REIT, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
MARCH 31,
1998 1997 1996
----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Real estate, net................................... $95,408,991 $ 95,442,840 $75,829,988
Cash and cash equivalents.......................... 3,782,492 3,820,352 3,056,332
Restricted cash.................................... 366,804 373,863 345,452
Other assets....................................... 371,879 541,694 191,997
----------- ------------ -----------
Total assets............................. $99,930,166 $100,178,749 $79,423,769
=========== ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses............ $ 623,222 $ 704,791 $ 417,687
Security deposits payable and other
liabilities................................... 678,170 482,313 459,357
Dividends payable................................ 1,250,000 1,600,000 300,000
Note payable under line of credit................ 10,000,000 10,000,000 --
----------- ------------ -----------
12,551,392 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 March 31, 1998 and
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 March 31, 1998 and December
31, 1997 and 1996........................... 25 25 25
Additional paid-in capital......................... 87,378,659 87,391,531 84,564,615
----------- ------------ -----------
87,378,774 87,391,645 84,564,725
Subscriptions receivable, 6,286 shares subscribed,
not issued at December 31, 1996.................. -- -- (6,318,000)
----------- ------------ -----------
87,378,774 87,391,645 78,246,725
----------- ------------ -----------
Total liabilities and shareholders'
equity................................. $99,930,166 $100,178,749 $79,423,769
=========== ============ ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 8
MIG RESIDENTIAL REIT, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE THREE MONTH
PERIOD ENDED MARCH 31 FOR THE YEAR ENDED DECEMBER 31
-------------------------- ---------------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Rental................... $3,634,489 $2,970,872 $13,583,335 $7,573,032 $2,730,693
Interest................. 42,059 37,516 134,388 73,696 164,430
Other.................... 100,174 100,113 412,058 193,896 53,422
---------- ---------- ----------- ---------- ----------
3,776,722 3,108,501 14,129,781 7,840,624 2,948,545
Expenses:
Depreciation............. 595,672 476,013 2,244,944 1,169,248 390,378
Real estate taxes and
insurance............. 387,111 312,481 1,474,995 793,965 318,626
Salaries and employee
benefits.............. 383,781 326,463 1,488,730 727,493 261,135
Management fees, related
parties............... 235,470 226,790 959,293 602,733 212,863
Repairs and
maintenance........... 394,739 185,283 1,095,876 599,986 175,396
Utilities................ 178,742 160,037 722,229 311,708 99,321
Professional fees........ 382,082 53,895 273,196 146,837 49,808
Interest................. 196,231 74,477 712,238 -- --
Other.................... 226,588 206,736 1,013,476 471,827 179,884
---------- ---------- ----------- ---------- ----------
2,980,416 2,022,175 9,984,977 4,823,797 1,687,411
---------- ---------- ----------- ---------- ----------
Net income................. $ 796,306 $1,086,326 $ 4,144,804 $3,016,827 $1,261,134
========== ========== =========== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE> 9
MIG RESIDENTIAL REIT, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------
CLASS A CLASS B ADDITIONAL
--------------- --------------- PAID-IN RETAINED SUBSCRIPTIONS
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS RECEIVABLE TOTAL
------ ------ ------ ------ ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1995................ 32,500 $33 -- $-- $32,499,967 $ (21,376) $(32,500,000) $ (21,376)
Common stock
subscribed........ 47,100 47 -- -- 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............. 196 -- 25,000 25 220,798 -- -- 220,823
Distributions to
shareholders...... -- -- -- -- -- (1,231,624) -- (1,231,624)
------ --- ------ --- ----------- ----------- ------------ -----------
Balance at December
31, 1995............ 79,796 80 25,000 25 79,820,718 8,134 (45,446,000) 34,382,957
Common stock
subscribed........ 4,922 5 -- -- 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............. 542 -- -- -- 552,876 -- -- 552,876
Dividends
declared.......... -- -- -- -- (808,974) (3,024,961) -- (3,833,935)
------ --- ------ --- ----------- ----------- ------------ -----------
Balance at December
31, 1996............ 85,260 85 25,000 25 84,564,615 -- (6,318,000) 78,246,725
Common stock
subscribed........ 3,060 3 -- -- 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............. 1,147 1 -- -- 1,187,115 -- -- 1,187,116
Dividends
declared.......... -- -- -- -- (1,475,196) (4,144,804) -- (5,620,000)
------ --- ------ --- ----------- ----------- ------------ -----------
Balance at December
31, 1997............ 89,467 89 25,000 25 87,391,531 -- -- 87,391,645
Net income
(unaudited)....... -- -- -- -- -- 796,306 -- 796,306
Proceeds from
issuance of common
stock
(unaudited)....... 419 1 -- -- 440,823 -- -- 440,823
Dividends declared
(unaudited)....... -- -- -- -- (453,694) (796,306) -- (1,250,000)
------ --- ------ --- ----------- ----------- ------------ -----------
Balance at March 31,
1998 (Unaudited).... 89,886 $90 25,000 $25 $87,378,659 $ -- $ -- $87,378,774
====== === ====== === =========== =========== ============ ===========
</TABLE>
See accompanying notes
F-5
<PAGE> 10
MIG RESIDENTIAL REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTH
PERIOD ENDED MARCH 31 FOR THE YEARS ENDED DECEMBER 31
-------------------------- ------------------------------------------
1998 1997 1997 1996 1995
----------- ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income................ $ 796,306 $ 1,086,326 $ 4,144,804 $ 3,016,827 $ 1,261,134
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation............ 595,672 476,013 2,244,944 1,169,248 390,378
Changes in operating
assets and
liabilities:
Restricted cash...... 7,058 (76,926) (28,411) (175,326) (170,126)
Other assets......... 169,814 (183,781) (349,697) (78,662) (102,280)
Accounts payable and
accrued expenses... (81,569) (135,736) 287,104 64,083 353,604
Security deposits
payable and other
liabilities........ 195,857 355,571 22,956 143,868 166,058
----------- ------------ ------------ ------------ ------------
Net cash provided by
operating activities.... 1,683,138 1,521,567 6,321,700 4,140,038 1,898,768
INVESTING ACTIVITIES
Acquisition of operating
real estate............. -- (20,417,364) (20,386,593) (42,752,360) (33,381,756)
Payments for land and
building improvements
and furniture and
equipment............... (561,821) (164,400) (1,471,203) (783,928) (354,570)
----------- ------------ ------------ ------------ ------------
Net cash used in investing
activities.............. (561,821) (20,581,764) (21,857,796) (43,536,288) (33,736,326)
FINANCING ACTIVITIES
Contributions from
subscribing
shareholders............ -- 2,584,000 9,433,000 44,128,000 34,154,000
Proceeds from issuance of
common stock............ 440,823 210,858 1,187,116 552,876 220,823
Dividends paid to
shareholders............ (1,600,000) (775,000) (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) -- --
----------- ------------ ------------ ------------ ------------
Net cash provided by
financing activities.... (1,159,177) 18,869,858 16,300,116 41,146,941 33,143,199
----------- ------------ ------------ ------------ ------------
Increase (decrease) in
cash and cash
equivalents............. (37,860) (190,439) 764,020 1,750,691 1,305,641
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........ $ 3,782,492 $ 2,865,893 $ 3,820,352 $ 3,056,332 $ 1,305,641
=========== ============ ============ ============ ============
</TABLE>
F-6
<PAGE> 11
<TABLE>
<CAPTION>
FOR THE THREE MONTH
PERIOD ENDED MARCH 31 FOR THE YEARS ENDED DECEMBER 31
-------------------------- ------------------------------------------
1998 1997 1997 1996 1995
----------- ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL CASH FLOW
INFORMATION
Cash paid for interest.... $ 184,856 $ 74,477 $ 680,808 $ -- $ --
=========== ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES
Accrued but unpaid
dividends............... $ 1,250,000 $ 795,000 $ 1,600,000 $ 300,000 $ --
=========== ============ ============ ============ ============
</TABLE>
- ---------------
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.
F-7
<PAGE> 12
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.
Unaudited Financial Information
The accompanying unaudited consolidated financial statements as of March
31, 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 three month period ended March 31,
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 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.
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 three 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.
F-8
<PAGE> 13
MIG RESIDENTIAL REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-9
<PAGE> 14
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, residential apartment complex constructed in
Inc. 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 residential August 1995
Corporation 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)
</TABLE>
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>
F-10
<PAGE> 15
MIG RESIDENTIAL REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-11
<PAGE> 16
MIG RESIDENTIAL REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of net income to taxable income for the year ended
December 31 is as follows:
<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.
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.
F-12
<PAGE> 17
MIG RESIDENTIAL REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 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.
F-13
<PAGE> 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
F-14
<PAGE> 19
MIG COMPANIES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------------
1998 1997 1996
----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents.......................... $ 49,713 $ 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............................... 4,691,686 4,359,947 6,394,102
Due from affiliates................................ 2,430,577 2,888,469 1,063,842
Due from shareholders.............................. 719,669
Management and servicing fees receivable........... -- -- --
Other receivables.................................. 1,463,077 1,317,256 1,515,588
Other receivables -- affiliates.................... -- 103,443 --
Investment in unconsolidated entities.............. 3,594 -- 134,836
Property and equipment:
Furniture and equipment.......................... 1,861,507 1,871,321 1,790,459
Leasehold improvements........................... 25,041 27,926 27,926
----------- ----------- -----------
1,886,548 1,899,247 1,818,385
Less accumulated depreciation and amortization... (1,506,053) (1,482,979) (1,318,217)
----------- ----------- -----------
380,495 416,268 500,168
Prepaid expenses and other assets.................. 456,212 437,730 456,271
----------- ----------- -----------
Total assets............................. $10,195,023 $ 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............................. 4,691,552 4,359,646 6,396,919
Lines of credit.................................. 1,111,000 610,000 1,000
Accounts payable and accrued expenses............ 1,901,691 2,167,348 1,883,896
Accrued interest payable......................... -- -- 17,148
Due to affiliates................................ 744,366 263,185 11,665
Due to shareholders.............................. 313,020 -- --
Deficit capital balances of unconsolidated
general partnership interests................. 86,059 82,515 55,738
----------- ----------- -----------
8,847,688 7,482,694 10,646,417
Minority interests................................. (133,066) 168,970 386,634
Shareholders' equity:
Common stock..................................... 19,085 19,085 19,085
Additional paid-in capital....................... 656,094 656,094 656,094
Notes and other amounts due from shareholders.... -- -- (2,561,417)
Retained earnings................................ 805,222 1,433,703 3,570,923
----------- ----------- -----------
1,480,401 2,108,882 1,684,685
----------- ----------- -----------
Total liabilities and shareholders'
equity................................. $10,195,023 $ 9,760,546 $12,717,736
=========== =========== ===========
</TABLE>
See accompanying notes.
F-15
<PAGE> 20
MIG COMPANIES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTH
PERIOD ENDED MARCH 31 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........ $ 438,847 $ 612,463 $2,640,721 $3,514,614 $3,508,085
Acquisition, management
and disposition fees... 1,274,110 1,641,098 6,461,682 5,827,709 3,446,588
Servicing and
administrative fees.... 223,723 322,343 1,098,043 1,592,130 2,025,363
Interest.................. 16,461 51,819 42,982 442,708 859,836
Origination fees.......... -- -- -- 142,085 574,398
Other..................... 29,588 65,120 380,245 458,923 619,358
---------- ---------- ---------- ---------- ----------
1,982,729 2,692,843 10,623,673 11,978,169 11,033,628
Expenses:
Salaries, wages and
employee benefits...... 1,491,724 1,546,973 6,775,119 7,352,906 6,793,253
Interest.................. 17,712 244,901 274,329 655,654
Travel, meetings and
seminars............... 96,340 186,327 612,045 905,402 849,453
Occupancy................. 176,029 194,052 744,163 766,953 708,502
Professional fees......... 189,214 224,048 691,517 513,176 546,162
Stationery, postage and
office supplies........ 49,087 71,293 229,599 338,640 335,282
Depreciation and
amortization........... 41,883 42,403 166,382 185,175 341,454
Utilities................. 38,550 49,890 177,466 219,678 183,722
Insurance................. 62,545 57,176 231,257 213,563 173,592
Costs associated with
reorganization plan.... 423,411 -- 1,290,777 -- --
Other..................... 125,105 134,132 687,485 574,257 459,303
---------- ---------- ---------- ---------- ----------
2,711,600 2,505,294 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.............. (728,871) 186,549 (1,227,038) 634,090 (12,749)
Equity in net income of
unconsolidated entities... 6,050 270,361 73,235 49,212 319,732
Minority interests in net
loss (income) of
consolidated
subsidiaries.............. 94,341 24,657 206,145 (102,133) 9,465
---------- ---------- ---------- ---------- ----------
Net (loss) income........... $ (628,480) $ 481,567 $ (947,658) $ 581,169 $ 316,448
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-16
<PAGE> 21
MIG COMPANIES
COMBINED STATEMENT 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 $ -- $(1,144,005) $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)..... -- -- (628,480) -- -- (628,480)
------- -------- ---------- ----------- ----------- ----------
Balance at March 31, 1998
(unaudited)............ $19,085 $656,094 $1,994,784 $(1,189,562) $ -- $1,480,401
======= ======== ========== =========== =========== ==========
</TABLE>
See accompanying notes.
F-17
<PAGE> 22
MIG COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTH
PERIOD ENDED MARCH 31 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.................... $(628,480) $ 481,567 $ (947,658) $ 581,169 $ 316,448
Adjustments to reconcile net loss to net
cash (used in) provided by operating
activities:
Depreciation and amortization........... 41,893 42,403 166,382 185,175 341,454
Net deferred loan fees capitalized...... -- -- -- (23,663) (53,842)
Provision for bad debts -- affiliate.... 8,256 -- 170,280 -- --
Equity in net income of unconsolidated
entities.............................. (6,050) (270,361) (73,235) (49,212) (319,732)
Minority interests in net (loss) income
of consolidated subsidiaries.......... (94,341) (24,657) (206,145) 102,133 (9,465)
Other................................... (24,075) 29,617 (67,769)
Changes in operating assets and
liabilities:
Funds held in escrow.................. (331,739) 923,766 2,034,155 (2,252,437) (2,896,440)
Due from affiliates................... (477,727) (1,367,791) (1,994,907) (433,152) (59,751)
Notes and other amounts due from
shareholders........................ -- -- -- (59,000) 38,000
Other receivables..................... (42,378) (157,820) 80,462 (633,742) (921,935)
Accrued interest receivable........... -- -- 14,425 12,030 52,574
Prepaid expenses and other assets..... (17,600) (45,709) 18,541 (39,379) 149,158
Escrow funds payable.................. 331,906 (920,840) (2,037,273) 2,253,970 2,895,787
Due to affiliates..................... 481,181 805,055 251,520 -- --
Due to shareholder.................... 313,020 -- -- -- --
Accounts payable and accrued
expenses............................ (265,657) (712,809) 283,452 624,530 316,113
Accrued interest payable.............. -- (17,148) (17,148) (14,097) (64,398)
--------- ----------- ----------- ------------ ------------
Net cash (used in) provided by operating
activities............................ (687,716) (1,264,344) (2,281,222) 283,942 (283,798)
INVESTING ACTIVITIES
Purchase of property and equipment...... (7,004) (38,760) (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.............................. 6,000 234,848 234,848 24,272 592,793
Contribution to unconsolidated
entities.............................. -- -- -- -- (5,199)
Principal collected due from
shareholders.......................... -- -- 1,371,855 -- --
--------- ----------- ----------- ------------ ------------
Net cash provided by investing
activities............................ (1,004) 196,088 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........... 501,000 1,665,560 2,911,972 6,783,611 5,608,410
Repayments on lines of credit........... -- (958,857) (2,302,972) (6,786,161) (5,771,527)
Distributions to minority interests..... -- -- (11,520) (17,520) (68,400)
--------- ----------- ----------- ------------ ------------
Net cash provided by (used in) financing
activities............................ 501,000 706,703 597,480 (2,074,884) (7,826,567)
--------- ----------- ----------- ------------ ------------
Decrease in cash and cash equivalents... (187,720) (361,553) (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.................................. $ 49,713 $ 40,277 $ 237,433 $ 401,830 $ 838,923
========= =========== =========== ============ ============
</TABLE>
F-18
<PAGE> 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.
F-19
<PAGE> 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 accompanying unaudited financial statements as of March 31, 1998 and
1997 and December 31, 1996 and 1995 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 three
month period ended March 31, 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 statements
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 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
F-20
<PAGE> 25
MIG COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
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., 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 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 three 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
F-21
<PAGE> 26
MIG COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
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.
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>
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.
F-22
<PAGE> 27
MIG COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
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
======== ======== ========
</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
shareholders' equity on the combined statements of shareholders' equity for the
year ended December 31, 1996 and 1995.
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
F-23
<PAGE> 28
MIG COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
combined statement of operations. In addition, the Company incurred
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:
<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
F-24
<PAGE> 29
MIG COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
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.
F-25
<PAGE> 30
PRO FORMA SELECTED FINANCIAL INFORMATION
ASSOCIATED ESTATES REALTY CORPORATION
PRO FORMA CONDENSED BALANCE SHEET
MARCH 31, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
The following unaudited pro forma condensed balance sheet is presented as
if the following transactions had occurred on March 31, 1998: (i) the proposed
acquisition of 20th and Campbell Apartments, Annen Woods Apartments, Desert
Oasis Apartments, Fleetwood Apartments, Hampton Point Apartments, Morgan Place
Apartments, Peachtree Apartments and Windsor Falls Apartments (collectively, the
MIG REIT Properties), (ii) the proposed merger with MIGRA and the assignment of
the property management operations of its affiliates, (iii) the issuance of a
$20.0 million medium term note on April 9, 1998 and (iv) the proposed
acquisition of the two Developments. The merger with MIGRA was conditioned upon
the acquisition by the Company of properties managed by, or owned by, advisory
clients of MIGRA. The Developments are owned in part, by partnerships whose
partners include the shareholders of MIGRA. The MIG REIT Properties are managed
by, and the owners advised by, MIGRA. Included in the Company's March 31, 1998
balance sheet are four properties acquired in February 1998, namely the MRT
Properties (three properties), which were acquired in contemplation of both the
acquisition of the MIG REIT Properties and the merger with MIGRA, and Country
Club Apartments.
Such pro forma information is based upon the historical unaudited
consolidated balance sheet of the Company as of March 31, 1998, giving effect to
the transactions described above. This pro forma condensed balance sheet should
be read in conjunction with the pro forma condensed statement of operations of
the Company and the historical financial statements and notes thereto of the
Company included in the Company's Form 10-K for the year ended December 31, 1997
and the Form 10-Q for the quarter ended March 31, 1998 and the MIG REIT and MIG
Companies financial statements included elsewhere in this Form 8-K. This
unaudited pro forma condensed balance sheet is not necessarily indicative of
what the actual financial position of the Company would have been at March 31,
1998 had the transactions described above been consummated on that date, nor
does it purport to represent the future financial position of the Company.
F-26
<PAGE> 31
ASSOCIATED ESTATES REALTY CORPORATION
PRO FORMA CONDENSED BALANCE SHEET (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
(UNAUDITED)
------------------------------------
(a) (b) MERGER AND COMPANY
COMPANY MIG REIT MIG ACQUISITION PRO FORMA
HISTORICAL PROPERTIES COMPANIES ADJUSTMENTS (UNAUDITED)
---------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Real estate and other fixed assets (net)..... $594,172 $ 95,409 $ 380 $ 13,458(a) $766,152
6,000(b)
56,733(c)
Cash and cash equivalents.................... 1,640 3,782 50 (3,782)(a) 1,690
Receivables and other assets................. 26,971 372 5,073 (372)(a) 28,894
(3,150)(b)
Restricted cash.............................. 4,804 367 4,692 (367)(a) 9,496
Intangible assets............................ -- -- -- 6,406(b) 6,406
-------- -------- ------- -------- --------
$627,587 $ 99,930 $10,195 $ 74,926 $812,638
======== ======== ======= ======== ========
LIABILITIES
Secured debt................................. $ 72,514 $ -- $ -- $ -- $ 72,514
Unsecured debt............................... 322,368 10,000 1,111 (10,000)(a) 379,541
11,100(a)
2,000(b)
42,962(c)
20,000(d)
(20,000)(d)
Other liabilities............................ 44,009 2,551 7,651 (2,184)(a) 50,970
(1,057)(b)
Accumulated losses of equity investees in
excess of investment and advances.......... 12,488 -- 86 -- 12,574
-------- -------- ------- -------- --------
451,379 12,551 8,848 42,821 515,599
Minority interests........................... -- -- (133) 133(b) --
13,771(c) 13,771
SHAREHOLDERS' EQUITY
Class A cumulative preferred shares.......... 56,250 -- -- -- 56,250
Common shares................................ 1,707 1 19 (1)(a) 2,260
512(a)
(19)(b)
41(b)
Paid in capital.............................. 171,589 87,378 656 (87,378)(a) 278,096
96,888(a)
(656)(b)
9,619(b)
Retained earnings............................ -- -- 805 (805)(b) --
Accumulated dividends in excess of net
income..................................... (53,338) -- -- -- (53,338)
-------- -------- ------- -------- --------
176,208 87,379 1,480 18,201 283,268
-------- -------- ------- -------- --------
$627,587 $ 99,930 $10,195 $ 74,926 $812,638
======== ======== ======= ======== ========
</TABLE>
F-27
<PAGE> 32
ASSOCIATED ESTATES REALTY CORPORATION
NOTES TO PRO FORMA CONDENSED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(a) MIG REIT PROPERTIES
The Company has entered into a contract to acquire the MIG REIT Properties
for an aggregate purchase price of $108.5 million with up to approximately
$11.1 million payable in cash, the final amount determined at the
discretion of the sellers, and the balance due in common shares of the
Company. The number of common shares of the Company given as consideration
is determined with reference to the average common share price, determined
for the twenty day period prior to the transaction's closing date [see note
(iii) below]. For purposes of this pro forma presentation, it is assumed
$11.1 million is paid in cash [see note (ii) below], and the balance paid
in common shares. The following table represents the purchase price
allocation and the resultant summarized balance sheet at date of purchase.
<TABLE>
<S> <C>
Purchase Price.............................................. $108,500
Elimination of Historical Net Assets (i):
Common shares.......................................... (1)
Paid in capital........................................ (87,378)
Add adjustments for assets not acquired:
Cash and cash equivalents............................ 3,782
Receivables and other assets......................... 372
Restricted cash...................................... 367
Less adjustments for liabilities not assumed:
Unsecured debt....................................... (10,000)
Other liabilities, net............................... (2,184)
--------
Adjustment to historical cost of real estate assets
acquired............................................... $ 13,458
========
Purchase price provided by:
Line of Credit borrowings (ii)............................ $ 11,100
Issuance of 5,171,395 Common Shares (iii):
Common shares.......................................... 517
Paid in capital........................................ 96,883
--------
97,400
--------
$108,500
========
A summarized balance sheet of the MIG REIT Properties, after
purchase price allocation, is as follows:
Real estate assets (iv)................................... $108,867
Liabilities assumed....................................... (367)
--------
Consideration exchanged................................... $108,500
========
</TABLE>
- ---------------
(i) The acquisition represents the purchase of the real estate assets
of the MIG REIT Properties.
(ii) Represents the utilization of the Line of Credit to finance a
portion of the acquisition.
(iii) Represents the issuance of 5,171,395 of the Company's no par value
common shares (stated value of $.10 per share). The MIG REIT
Properties' purchase agreements provide that the number of common
shares issued will be subject to adjustment to the extent the
Closing Date Price, as defined, is less than or greater than the
Execution Date Price, as defined. The number of common shares
assumed to be issued has been determined by reference to an amount
of $18.83 per share, which is the average closing price for the 20
trading days immediately preceding June 23, 1998. The final number
of common shares to be issued will not be known until the date the
transaction is consummated.
(iv) Excludes allocation of purchase price from the MIGRA merger as
described in (b) (iii).
F-28
<PAGE> 33
ASSOCIATED ESTATES REALTY CORPORATION
NOTES TO PRO FORMA CONDENSED BALANCE SHEET --(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(b) MIG COMPANIES
The Company has entered into a merger agreement with MIGRA for total
consideration, including estimated transaction costs, of $11.6 million. The
following table represents the purchase price allocation and the resultant
summarized balance sheet at the date of purchase.
<TABLE>
<S> <C>
Purchase Price, including costs of acquisition.............. $ 11,660
Elimination of Historical Net Assets (i):
Common shares.......................................... (19)
Paid in capital........................................ (656)
Retained earnings...................................... (805)
Add adjustment for assets not acquired:
Receivables and other assets (ii).................... 3,150
Less adjustment for net liabilities not assumed:
Affiliate payables (ii).............................. (1,057)
Minority interests being acquired by the Company..... 133
--------
Excess purchase price over historical book value of net
assets acquired........................................ $ 12,406
========
Allocation of excess purchase price:
Allocation to real estate assets (iii)
MRT Properties (consummated February 3, 1998)........ $ 2,100
MIG REIT Properties.................................. 3,900
Allocation to intangible assets (iv)................... 6,406
--------
$ 12,406
========
Purchase price provided by:
Line of credit (v)........................................ $ 2,000
Issuance of 408,318 common shares Common shares........... 41
Paid in capital........................................ 9,619
--------
9,660
--------
$ 11,660(vi)
========
A summarized balance sheet of the MIG Companies after
purchase price allocation is as follows:
Real estate assets (iii).................................. $ 6,380
Cash and cash equivalents................................. 50
Restricted cash........................................... 4,692
Receivables............................................... 1,923
Intangible assets......................................... 6,406
Liabilities assumed....................................... (7,791)
--------
Consideration exchanged................................... $ 11,660
========
</TABLE>
- ---------------
(i) Represents the elimination of historical equity balances consistent
with the utilization of the purchase method of accounting.
(ii) Represents the elimination of the MIG Companies' affiliate
receivables and payables as such amounts will be settled immediately
prior to the merger with the net cash receipt distributed to the MIG
Companies' shareholders prior to the consummation of the merger.
F-29
<PAGE> 34
ASSOCIATED ESTATES REALTY CORPORATION
NOTES TO PRO FORMA CONDENSED BALANCE SHEET --(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(iii) A portion of the purchase price for MIGRA includes amounts associated
with the purchase of the three MRT Properties and the eight MIG REIT
Properties (collectively, the "Properties"). The merger with MIGRA is
contingent upon MIGRA providing a certain minimum amount of suitable
properties for the Company to acquire. MIGRA, in its capacity as
investment advisor to the Properties, presented them to the Company
and had agreed to waive disposition fees otherwise payable to MIGRA
by the property owners, in the event that the owners agreed to sell
the Properties to the Company. Additionally, the purchase
negotiations of the Properties occurred simultaneously with the
negotiations of MIGRA and, in the case of the MIG REIT Properties,
the closing is contingent upon the closing of the merger. MIGRA
provides asset management and property management services to all of
the Properties pursuant to the terms of certain management and
advisory service contracts ("Contracts"). The revenue attributable to
these Contracts had been considered by the Company in determining the
value it is willing to pay for MIGRA. The amount allocated to the
real estate assets acquired, and to be acquired, is based on
estimates of the value of the incremental fees from these Properties
that the Company will not obtain. The amount ultimately allocated to
real estate assets is subject to further review and consummation of
the transaction.
(iv) The allocation to intangible assets is based upon management's
preliminary estimates of the identifiable intangible assets acquired,
including certain key employees and client lists, with the balance
being assigned to goodwill. The preliminary allocation is
approximately $3.2 million relating to identifiable intangible
assets, with the remaining amount of $3.2 million being allocated to
goodwill. The final allocation will be determined once the purchase
price is finalized and upon management's completion of its review and
valuation of the identifiable intangible assets. The ultimate effect
of the aforementioned adjustments, if any, is not expected to be
material to the Company's financial position.
(v) Represents the assumed utilization of the Line of Credit to finance a
portion of the acquisition of MIGRA.
(vi) The merger provides for contingent consideration in a combination of
cash or common shares of the Company of up to $9.5 million, none of
which has been reflected in this pro forma presentation. Based upon
the management contracts that the Company is aware will not be
assigned by MIGRA at closing, the maximum contingent consideration,
without regard to new contracts that may be provided by MIGRA, is
$3.9 million, as of May 22, 1998, assuming a common share price of
$23.63, the average closing price for the 20 trading days immediately
preceding November 5, 1997, the date the original merger agreement
was executed.
(c) DEVELOPMENTS
Represents the purchase of the two Developments, which are under
construction at March 31, 1998. Consideration assumed to be paid totals
$56.7 million and is assumed to be provided by issuance of approximately
$13.8 million in operating partnership units and proceeds of an estimated
$42.9 million funded from a line of credit borrowing, the terms of which
are, as of June 22, 1998, being negotiated. The final purchase price of the
Developments will not be known until consummation of the purchase at which
time the number of operating partnership units issued will also be
determined. The Company is in the process of renegotiating and amending its
line of credit borrowings to increase the available facility from $100
million to $250 million. The Company believes this facility will be in place
by June 29, 1998 and anticipates it to be a three-year commitment with
interest at LIBOR plus 100 basis points. The facility will contain certain
financial covenants. There is no assurance that the Company will be
successful in its negotiations in obtaining this line of credit.
F-30
<PAGE> 35
ASSOCIATED ESTATES REALTY CORPORATION
NOTES TO PRO FORMA CONDENSED BALANCE SHEET --(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table represents the purchase price allocation and resultant
summarized balance sheet at date of acquisition.
<TABLE>
<S> <C>
Purchase price.............................................. $ 56,733
========
Purchase price provided by:
Line of Credit (i)........................................ $ 42,962
Issuance of 604,294 Operating Partnership Units (ii)...... 13,771
--------
$ 56,733
========
A summarized balance sheet of the Developments, after
purchase price allocation, is as follows:
Real estate assets........................................ $ 56,733
Liabilities assumed....................................... -0-
--------
Consideration exchanged................................... $ 56,733
========
</TABLE>
- ---------------
(i) Represents the utilization of the Line of Credit to finance a portion
of the acquisition. The agreement provides that certain Partners'
interests can be purchased for cash. For purposes of this pro forma
presentation, it is assumed that $3.5 million out of a maximum of $5.3
million of total cash consideration payable to the Developments'
partners is paid in cash.
(ii) Represents the issuance of 604,294 operating partnership units in
consideration for the general partnership interests in the
Developments. The Contribution Documents specify that a portion of the
consideration payable in operating partnership units is fixed as to
324,882 units while, the balance of the operating partnership units
assumed to be issued has been determined by reference to an amount of
$19.01 per share, which is the average closing price for the 20
trading days immediately preceding May 26, 1998. The final number of
operating partnership units will not be known until the date the
transaction is consummated. As operating partnership units can be
exchangeable, subject to certain conditions, into common shares of the
Company, they are assumed to be issued at a price related to the
common shares of the Company.
(d) Represents the issuance of the medium term note which occurred on April 9,
1998; the proceeds of which were utilized to repay borrowings under the line
of credit.
F-31
<PAGE> 36
ASSOCIATED ESTATES REALTY CORPORATION
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED MARCH 31, 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 period
ended March 31, 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
proposed acquisition of the MIG REIT Properties and the MIGRA Merger, including
the assignment of the property management operations of its affiliates, as
described herein 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"), (iv) the acquisition or proposed
acquisition, as the case may be, by the Company of Country Club Apartments, the
MRT Properties, the MIG REIT Properties and the MIGRA Merger, including the
assignment of the property management operations of its affiliates, as described
herein, and (v) the issuance of a $20.0 million medium term note on April 9,
1998.
The acquisition of the MRT Properties was made in contemplation of the
acquisition of both the MIG REIT Properties and merger with MIGRA. The merger
with MIGRA is conditioned upon the acquisition by the Company of certain
properties managed by, or owned by, advisory clients of MIGRA. The MRT
Properties and MIG REIT Properties are managed by, and their owners advised by,
MIGRA. The remaining properties were acquired from unrelated third parties.
This pro forma condensed statement of operations is based upon the
historical results of operations of the Company for the period ended March
31,1998 and the year ended December 31, 1997 and should be read in conjunction
with the pro forma condensed balance sheet of the Company set forth elsewhere
herein and the historical financial statements and notes thereto of the Company
included in the Company's Form 10-Q for the period ended March 31, 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 elsewhere in this Form 8-K or 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 transactions had been completed as previously set
forth, nor does it purport to represent the results of operations of future
periods of the Company.
F-32
<PAGE> 37
ASSOCIATED ESTATES REALTY CORPORATION
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED MARCH 31, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS (UNAUDITED)
-----------------------------------------------------------------------
(a) (b) (c) (c) (d) MERGER
COUNTRY MIG MEDIUM AND COMPANY
COMPANY MRT CLUB REIT MIG TERM ACQUISITION PRO FORMA
HISTORICAL PROPERTIES APARTMENTS PROPERTIES COMPANIES NOTE ADJUSTMENTS (UNAUDITED)
---------- ---------- ---------- ---------- --------- ------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Rental.................... $29,105 $ 737 $290 $3,634 $ -- $ -- $ -- $33,766
Painting services......... 349 -- -- -- -- -- 349
Acquisition, management
and disposition fees.... 949 -- -- -- 1,937 -- (309)(e) 2,180
(397)(m)
Interest.................. 213 -- -- 42 16 -- 271
Other..................... 93 30 6 100 30 -- -- 259
------- ----- ---- ------ ------ ---- ------- -------
30,709 767 296 3,776 1,983 -- (706) 36,825
Expenses
Property operating and
maintenance expenses
exclusive of
depreciation and
amortization............ 12,302 328 121 1,344 1,769 -- 267(f) 16,131
Management fees, related
parties................. -- 74 -- 235 -- -- (309)(e) --
Depreciation -- real
estate assets........... 4,925 184 66 596 -- -- 319(g) 6,090
-- other....... 192 -- -- -- -- -- -- 192
Amortization of deferred
financing fees.......... 197 -- -- -- 42 -- -- 239
Amortization of intangible
assets.................. -- -- -- -- -- -- 160(h) 160
Painting services......... 338 -- -- -- -- -- -- 338
General and
administrative.......... 1,834 -- -- 382 342 -- (96)(i) 2,462
Other expenses............ -- -- -- 227 117 -- -- 344
Costs associated with
reorganization plan..... -- -- -- -- 423 -- -- 423
Interest expense.......... 6,432 391 134 196 18 15 9(j) 7,195
------- ----- ---- ------ ------ ---- ------- -------
26,220 977 321 2,980 2,711 15 350 33,574
Income (loss) from
operations............ 4,489 (210) (25) 796 (728) (15) (1,056) 3,251
Minority interests in net
loss of consolidated
subsidiaries.............. -- -- -- -- 94 -- (94)(k) --
Equity in net income of
joint ventures............ 36 -- -- -- 6 -- -- 42
------- ----- ---- ------ ------ ---- ------- -------
Income (loss) before
extraordinary............. $ 4,525 $(210) $(25) $ 796 $ (628) $(15) $(1,150) $ 3,293
======= ===== ==== ====== ====== ==== ======= =======
Income before extraordinary
items applicable to common
shares.................... 3,154 $ 1,922
======= =======
Per share data:
Income before
extraordinary items per
share -- basic and
diluted................. $ .18 $ 0.08
======= =======
Weighted average number of
shares -- basic......... 17,072 22,652(l)
======= =======
-- diluted........ 17,075 22,655(l)
======= =======
</TABLE>
F-33
<PAGE> 38
ASSOCIATED ESTATES REALTY CORPORATION
NOTES TO PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(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 (proposed purchase transactions) for
the period ended March 31, 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:
<TABLE>
<S> <C>
MRT Properties...................................... $ 74
MIG REIT Properties................................. 235
----
$309
====
</TABLE>
(f) Charge for maintenance and repairs to conform the accounting policies of
the acquired and proposed acquisition properties to those of the Company.
(g) 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 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 March 31, 1998:
<TABLE>
<S> <C>
Depreciation expense based upon an estimated useful
life of approximately 30 years.................... $915
Less: Historic MIG REIT Properties depreciation of
real estate property.............................. 596
----
$319
====
</TABLE>
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,
F-34
<PAGE> 39
ASSOCIATED ESTATES REALTY CORPORATION
NOTES TO PRO FORMA CONDENSED STATEMENT OF OPERATIONS -- (CONTINUED)
while the goodwill is being amortized over 13 years. The amounts allocated
among the aforementioned intangible assets are based upon a preliminary
purchase price and 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 audit fees which will be
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 the MIGRA Merger. Interest expense assumes interest at
the weighted average rate of the Company's Line of Credit.
(k) To eliminate the minority interests in the net loss of consolidated
subsidiaries, which interests are being acquired by the Company.
(l) 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 assumed to be issued in connection with the MIGRA Merger
exclude the common shares whose issuance is contingent upon the
satisfaction of certain conditions. Common shares assumed to be issued for
the merger are 408,318. In addition, the 5.171 million common shares
assumed to be issued for the acquisition of the MIG REIT Properties is
subject to potential adjustment. [See note (a) (iii) of the pro forma
balance sheet.] Also excludes operating partnership units issued in
connection with the assumed purchase of the Developments which are, in
certain circumstances and, at the option of the Company, exchangeable 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 Developments
are assumed to be acquired on March 31, 1998, and prior to that time, had
limited or no operating history.
(m) The adjustment represents the revenue earned by MIGRA or its affiliates from
the management contracts which the Company has been informed will not be
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. There can be no assurance that the remaining
contracts will be assigned to the Company at the closing of the MIGRA
Merger.
F-35
<PAGE> 40
ASSOCIATED ESTATES REALTY CORPORATION
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
(UNAUDITED)
---------------------------------------------------------------
(a) (b) (c) (d) (e)
PREVIOUSLY COUNTRY MIG
COMPANY REPORTED FOLLOW-ON MRT CLUB REIT
HISTORICAL ACQUISITIONS OFFERING PROPERTIES APARTMENTS PROPERTIES
-------- ------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Rental.............................. $101,640 $4,525 $ -- $ 8,086 $2,163 $13,584
Painting services................... 1,664 -- -- -- -- --
Acquisition, management and
disposition fees.................. 3,752 -- -- -- -- --
Interest............................ 926 -- -- -- -- 134
Other............................... 828 61 -- 309 45 412
-------- ------ ------- ------- ------ -------
108,810 4,586 -- 8,395 2,208 14,130
Expenses
Property operating and maintenance
expenses exclusive of depreciation
and amortization.................. 43,230 1,694 -- 3,518 901 5,796
Management fees, related parties.... -- -- -- 334 -- 959
Depreciation -- real estate
assets............................ 17,926 945 -- 2,003 482 2,245
-- other................. 640 -- -- -- -- --
Amortization of deferred financing
fees.............................. 700 -- -- -- -- --
Amortization of intangible assets... -- -- -- -- -- --
Painting services................... 1,491 -- -- -- -- --
Cost associated with abandoned
projects.......................... 310 -- -- -- -- --
General and administrative.......... 6,085 -- -- -- -- 273
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 1,024 712
-------- ------ ------- ------- ------ -------
91,290 3,994 (1,883) 9,923 2,407 9,985
-------- ------ ------- ------- ------ -------
Income from operations............ 17,520 592 1,883 (1,528) (199) 4,145
Minority interests in net loss of
consolidated subsidiaries........... -- -- -- -- -- --
Gain on sale of land.................. 1,608 -- -- -- -- --
Equity in net income of joint
ventures............................ 561 -- -- -- -- --
-------- ------ ------- ------- ------ -------
Income (loss) before extraordinary
items............................... $ 19,689 $ 592 $ 1,883 $(1,528) $ (199) $ 4,145
======== ====== ======= ======= ====== =======
Income before extraordinary items
applicable to common shares......... $ 14,205
========
Per share data:
Income before extraordinary items
per share -- basic and diluted.... $ .88
========
Weighted average
number of shares -- basic......... 16,200
========
-- diluted......... 16,222
========
<CAPTION>
PRO FORMA ADJUSTMENTS
(UNAUDITED)
---------------------------
(e) MERGER
AND COMPANY
MIG ACQUISITION PRO FORMA
COMPANIES ADJUSTMENTS (unaudited)
------- ------- --------
<S> <C> <C> <C> <C> <C>
Revenues
Rental.............................. $ -- $ -- $129,998
Painting services................... -- -- 1,664
Acquisition, management and
disposition fees.................. 9,103 (1,293) (f) 9,809
(1,753) (n)
Interest............................ 43 -- 1,103
Other............................... 1,478 -- 3,133
------- ------- --------
10,624 (3,046) 145,707
Expenses
Property operating and maintenance
expenses exclusive of depreciation
and amortization.................. -- 372 (g) 55,511
Management fees, related parties.... -- (1,293) (f) --
Depreciation -- real estate
assets............................ -- 1,415 (h) 25,016
-- other................. 166 -- 806
Amortization of deferred financing
fees.............................. -- -- -- 700
Amortization of intangible assets... -- 641 (i) 641
Painting services................... -- -- -- 1,491
Cost associated with abandoned
projects.......................... -- -- 310
General and administrative.......... 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 -- 1,291
Interest expense.................... 245 (35) (l) 24,630
------- ------- --------
11,851 925 128,492
------- ------- --------
Income from operations............ (1,227) (3,971) 17,215
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............................... $ (948) $(4,177) $ 19,457
======= ======= ========
Income before extraordinary items
applicable to common shares......... $ 13,973
========
Per share data:
Income before extraordinary items
per share -- basic and diluted.... $ .62
========
Weighted average
number of shares -- basic......... 22,652 (o)
========
-- diluted......... 22,655 (o)
========
</TABLE>
F-36
<PAGE> 41
ASSOCIATED ESTATES REALTY CORPORATION
NOTES TO PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(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 (proposed purchase transactions) for
the year ended December 31, 1997.
(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:
<TABLE>
<S> <C>
MRT Properties.................................... $ 334
MIG REIT Properties............................... 959
------
$1,293
======
</TABLE>
(g) Charge for maintenance and repairs to conform the accounting policies of
the acquired and proposed acquisition properties to those of the Company.
(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:
<TABLE>
<S> <C>
Depreciation expense based upon an estimated
useful life of approximately 30 years........... $3,660
Less: Historic MIG REIT Properties depreciation of
real estate property............................ 2,245
------
$1,415
======
</TABLE>
F-37
<PAGE> 42
ASSOCIATED ESTATES REALTY CORPORATION
NOTES TO PRO FORMA CONDENSED STATEMENT OF OPERATIONS -- (CONTINUED)
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 goodwill is
being amortized over 13 years. The amounts allocated among the
aforementioned intangible assets are based upon a preliminary purchase
price and certain estimates. However, management believes that the impact
of such adjustments, if any, will not be material.
(j) Decrease results from the duplication of directors' fees, directors and
officers' insurance costs and certain audit 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.
(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. Interest expense assumes interest at
the weighted average rate of the Company's line of credit.
(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 which the Company has been informed will not
be 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. There can be no assurance that
the remaining contracts will be assigned to the Company at the closing of
the MIGRA Merger.
(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 assumed to be issued in connection with the
MIGRA Merger exclude the common shares whose issuance is contingent upon
the satisfaction of certain conditions. Common shares assumed to be issued
for the merger are 408,318. In addition, the 5.171 million common shares
assumed to be issued for the acquisition of the MIG REIT Properties is
subject to potential adjustment. [See note (a.iii) of the pro forma balance
sheet.] Also excludes operating partnership units issued in connection with
the assumed purchase of the Developments which are, in certain
circumstances and, at the option of the Company, exchangeable 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 Developments
are assumed to be acquired on March 31, 1998, and prior to that time, had
limited or no operating history.
F-38
<PAGE> 43
ASSOCIATED ESTIMATES 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"), (iv) the acquisition or proposed acquisition, as the case may
be, by the Company of Country Club Apartments, the MRT Properties, the MIG REIT
Properties and the MIGRA Merger, including the assignment of the property
management operations of its affiliates, and (v) the issuance of a $20.0 million
medium term note on April 9, 1998.
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 pro forma condensed balance sheet and the pro forma
condensed statements 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 and the MRT Properties Combined Statement of Revenue and
Certain Expenses included in the Company's Form 8-K dated February 19, 1998 and
the MIG Residential REIT, Inc. and the MIG Companies financial statements for
the year ending December 31, 1997 included elsewhere in this report.
ESTIMATE OF TAXABLE NET OPERATING INCOME (IN THOUSANDS):
<TABLE>
<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 REIT 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 (1,482)
Country Club Apartments (320)
MIG REIT (2,711)
MIG Companies (166)
--------
Pro Forma taxable operating income before dividends deduction 23,566
Estimated dividends deduction (Note 4) 42,138
--------
$(18,572)
========
Pro Forma taxable operating income $ --
========
ESTIMATE OF PRO FORMA OPERATING FUNDS AVAILABLE (NOTE 5)
(IN THOUSANDS):
Pro Forma taxable operating income before dividends deduction $ 23,566
Add pro forma tax basis depreciation and amortization 18,831
--------
Estimate of pro forma operating funds available $ 42,397
========
</TABLE>
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 REIT 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 22,655.
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.
F-39
<PAGE> 1
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
this Current Report on Form 8-K/A-1 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
- -----------------------
Ernst & Young, LLP
West Palm Beach, Florida
June 24, 1998
