<PAGE> 1
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SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
ASSOCIATED ESTATES REALTY CORPORATION
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: Common
Shares, without par value.......................................................
(2) Aggregate number of securities to which transaction applies: ..........
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: ...................... $137,613,000
(4) Proposed maximum aggregate value of transaction: ......................
(5) Total fee paid: .............................................$27,522.60
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ...............................................
(2) Form, Schedule or Registration Statement No.: .........................
(3) Filing Party: .........................................................
(4) Date Filed: ...............................................May 29, 1998
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<PAGE> 2
LOGO
MERGER PROPOSED - YOUR VOTE IS VERY IMPORTANT
May 30, 1998
Dear Shareholder:
You are invited to attend the Annual Meeting of Shareholders of Associated
Estates Realty Corporation (the "Company") to be held on Monday, June 29, 1998,
at 10:00 a.m. (EDT) at The Forum, One Cleveland Center, 1375 East Ninth Street,
Cleveland, Ohio 44114.
In addition to the election of directors, the purpose of the meeting is to
approve our proposed merger of MIG Realty Advisors, Inc. ("MIGRA") into the
Company, the related purchase of eight multifamily properties and two
development properties. Founded in 1982, MIGRA is a manager of apartment
communities across the country and advisor to many institutional real estate
investors. We are very excited about the opportunities we envision as a result
of the proposed acquisition of MIGRA.
In addition to acquiring the property management and investment advisory
businesses of MIGRA, the transaction includes the acquisition of eight
properties in Arizona, California, Georgia, Maryland, North Carolina, Missouri
and Texas containing a total of 1,730 suites and two development properties in
Florida that will contain an aggregate of 828 suites upon completion. We've
already completed the purchase of three other related properties located in
Coconut Creek, Florida; Atlanta, Georgia; and Columbia, Maryland. Upon
completion of the merger, the Company anticipates assuming the management of
approximately 19 multifamily properties for third-party pension funds and other
institutional investors.
This transaction gives us a presence in regions outside the Midwest that
will allow us to grow in selected markets across the country through both
acquisitions and development. Our acquisition and development focus will be on
two distinct types of markets: "continuous markets," which we identify as
markets with a diversified economy, a long trend of growth, and a deep apartment
market; and "opportunistic markets," which we identify as those where we see a
strategic opportunity because of potential growth and good buying opportunities.
In addition, a significant emphasis will be placed on the strategy of
co-investing with institutional clients, providing us access to pension funds
and institutional investors which have been traditional direct owners of real
estate, as they move toward investing with public real estate companies.
In addition to acquiring quality assets, a number of talented employees
will be joining us. Larry E. Wright, currently Chairman of MIGRA, will become
Executive Vice President of the Company. Larry has been directing the day-to-day
operations of MIGRA since 1982 and has more than 24 years' experience in the
real estate business. Louis E. Vogt will join us as Vice President of
Operations. As Senior Vice President and Chief Operating Officer of MIGRA since
1992, Lou has been responsible for property management and acquisitions. James
A. Cote will become President of MIG Realty, Inc., a new subsidiary of the
Company organized to carry on the investment advisory operations of MIGRA, and
will continue to be responsible for developing advisory and co-investing
business and maintaining current relationships with institutional investors.
Experienced key personnel in capital markets, research, strategic planning and
financial reporting will also be joining us from MIGRA.
At the time of our initial public offering in 1993, our portfolio consisted
primarily of properties located in Cleveland, Ohio, developed over 30 years.
Over the past four years, we have made significant strides by expanding our
geographic focus, reducing the age of our portfolio, and developing and
acquiring properties at an average age of six to seven years across several
Midwest markets. We have thus far been able to expand our presence in the
Midwest at a time when no other public company was focused on multifamily
properties in this
<PAGE> 3
region. With the addition of the MIGRA portfolio of managed assets and
properties, we expect internal growth to rise due to the introduction of higher
growth cities in the Southeast and Southwest. At the same time, our steady,
stable assets clustered around Cleveland, Columbus, and Detroit will balance the
potential income volatility that might be expected in some of these markets. We
think this strategic combination of markets provides us the best opportunity for
long-term growth.
OUR BOARD OF DIRECTORS HAS APPROVED THE ACQUISITION PROPOSALS AND
UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE ACQUISITION PROPOSALS.
IN VIEW OF THE SIGNIFICANCE OF THE ACTIONS TO BE TAKEN AT THIS ANNUAL
MEETING OF SHAREHOLDERS, WE URGE YOU TO CAREFULLY REVIEW THE ACCOMPANYING NOTICE
OF ANNUAL MEETING OF SHAREHOLDERS AND THE PROXY STATEMENT, WHICH INCLUDES
ADDITIONAL INFORMATION REGARDING MIG REALTY ADVISORS, INC., THE PROPERTIES TO BE
ACQUIRED AND THE COMPANY. WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING,
PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT AS PROMPTLY AS
POSSIBLE. YOUR VOTE IS VERY IMPORTANT. IF YOU FAIL TO RETURN THE PROXY CARD, THE
EFFECT WILL BE A VOTE AGAINST THE TRANSACTION.
We are excited about the opportunities for our shareholders as a result of
the broadened operating platform available to us through the acquisition of
MIGRA. Our strategy continues to be long-term value creation, and it is with
that perspective that we expect to continue to grow. Thank you for your
continued support.
Sincerely,
/s/ Jeffrey I. Friedman
Jeffrey I. Friedman
Chairman, President and Chief Executive Officer
<PAGE> 4
ASSOCIATED ESTATES REALTY CORPORATION
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
------------------------
Notice is hereby given that the Annual Meeting of Shareholders of
Associated Estates Realty Corporation, an Ohio corporation (the "Company"), will
be held at The Forum, One Cleveland Center, 1375 East Ninth Street, Cleveland,
Ohio 44114, on Monday, June 29, 1998, at 10:00 a.m. (EDT) for the following
purposes:
1. To consider and act upon a proposal to approve the proposed merger
of MIG Realty Advisors, Inc. ("MIGRA") with and into the Company and the
issuance of common shares of the Company in connection therewith (the
"Merger Proposal") pursuant to the terms and conditions set forth in the
Second Amended and Restated Merger Agreement by and among the Company,
MIGRA and the MIGRA Stockholders (the "Merger Agreement"). Approval of the
Merger Proposal includes, among other things, approval for the Company to
continue the property management business carried on by companies owned by
the stockholders of MIGRA (together with MIGRA, the "MIG Companies")
through assignment of the MIG Companies' property management contracts, new
property management agreements or by virtue of the Company having acquired
the property underlying such contracts. The implementation of the Merger
Proposal is contingent upon approval of the MIG REIT Acquisition Proposal
set forth in the following paragraph;
2. To consider and act upon a proposal to approve the proposed
purchase by the Company of certain multifamily apartment properties held by
the direct and indirect subsidiaries of MIG Residential REIT, Inc. ("MIG
REIT") and the issuance of common shares of the Company in connection
therewith (the "MIG REIT Acquisition Proposal"). The implementation of the
MIG REIT Acquisition Approval is contingent upon approval of the Merger
Proposal;
3. To consider and act upon a proposal to approve the acquisition of
two multifamily apartment properties currently in development (the
"Developments") and the issuance of operating partnership units
exchangeable into common shares of the Company in connection therewith (the
"Development Acquisition Proposal") (the MIG REIT Acquisition Proposal, the
Merger Proposal and the Development Acquisition Proposal are collectively
referred to herein as the "Acquisition Proposals"). The implementation of
the Development Acquisition Proposal is contingent upon approval of the
Merger Proposal;
4. To elect six directors, each to serve until the next annual meeting
of shareholders and until his successor has been duly elected and
qualified; and
5. To transact such other business as may properly come before the
meeting.
THE BOARD OF DIRECTORS OF THE COMPANY HAS APPROVED THE ACQUISITION
PROPOSALS AND UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
ACQUISITION PROPOSALS.
Only shareholders of record at the close of business on May 1, 1998 will be
entitled to notice of and to vote at the meeting or any adjournment thereof.
Shareholders are urged to complete, date and sign the enclosed proxy and return
it in the enclosed envelope.
By Order of the Board of Directors,
Martin A. Fishman
Secretary
Dated: May 30, 1998
YOUR VOTE IS IMPORTANT, PLEASE SIGN, DATE AND RETURN YOUR PROXY.
<PAGE> 5
ASSOCIATED ESTATES REALTY CORPORATION
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation of
proxies to be used at the annual meeting of shareholders (the "Annual Meeting")
of Associated Estates Realty Corporation, an Ohio corporation (the "Company"),
to be held at The Forum, One Cleveland Center, 1375 East Ninth Street,
Cleveland, Ohio 44114, on Monday, June 29, 1998, at 10:00 a.m. (EDT) and at any
adjournment thereof. This Proxy Statement and the accompanying notice and proxy
are first being sent to shareholders on or about May 30, 1998. The Company's
Annual Report to Shareholders for the year ended December 31, 1997 was sent to
shareholders on or about March 31, 1998.
If the enclosed proxy is returned, the Common Shares, without par value
("Common Shares"), represented thereby will be voted in accordance with any
specifications made therein by the shareholder. In the absence of any such
specification, they will be voted to elect the directors set forth under the
caption "ELECTION OF DIRECTORS" and in favor of the proposals (collectively, the
"Acquisition Proposals") to approve: (i) the proposed merger of MIG Realty
Advisors, Inc. ("MIGRA") with and into the Company and the issuance of common
shares of the Company in connection therewith (the "Merger Proposal"), which
includes approval for the Company to continue the property management business
carried on by companies owned by the stockholders of MIGRA (together with MIGRA,
the "MIG Companies") through assignment of the MIG Companies' property
management contracts, new property management agreements or by virtue of the
Company having acquired the property underlying the MIG Companies' property
management agreements; (ii) the proposed purchase by the Company of certain
multifamily properties held by the direct and indirect subsidiaries of MIG
Residential REIT, Inc. ("MIG REIT") and the issuance of common shares of the
Company in connection therewith (the "MIG REIT Acquisition Proposal"); and (iii)
the acquisition of two multifamily apartment properties currently in development
(the "Developments") and the issuance of operating partnership units convertible
into common shares of the Company in connection therewith (the "Development
Acquisition Proposal").
Shareholder approval is required for the Acquisition Proposals under the
New York Stock Exchange rules because if each of the foregoing transactions is
consummated the Company will be issuing, in the aggregate, common shares
representing more than 20% of its voting power in a series of related
transactions. However, if the consideration paid in connection with the
transactions contemplated by this Proxy Statement is renegotiated such that the
Company were to issue common shares representing less than 20% of its voting
power, the merger with MIGRA, the acquisition of properties from MIG REIT and/or
the acquisition of the Developments could be accomplished without shareholder
approval. Implementation of the Merger Proposal is contingent upon approval of
the MIG REIT Acquisition Proposal and vice versa. Therefore, a vote against
either of them could have the effect of a vote against the other. Similarly,
implementation of the Development Acquisition Proposal is contingent upon
approval of the Merger Proposal. Therefore, a vote against the Merger Proposal
could have the effect of a vote against the Development Acquisition Proposal.
However, if the merger with MIGRA and the acquisition of the MIG REIT Properties
are not consummated and the parties to the agreements underlying the acquisition
of the Developments agree to waive the contractual condition to consummation of
such transaction that the merger with MIGRA shall have occurred, the acquisition
of the Developments could occur even if shareholder approval for the Development
Acquisition Proposal is not received, since the Company would not be issuing
common shares representing 20% of its voting power in such transaction.
A shareholder's presence alone at the Annual Meeting will not operate to
revoke such shareholder's proxy. The proxy is revocable by a shareholder at any
time insofar as it has not been exercised by giving notice to the Company in
writing or in open meeting.
This solicitation of proxies is made by and on behalf of the Board of
Directors. The cost of the solicitation will be borne by the Company. In
addition to solicitation of proxies by mail, officers and regular employees of
the Company or its affiliates may solicit proxies in person, by telephone or by
facsimile. The Company has also
<PAGE> 6
retained Corporate Investor Communications, Inc., at an estimated cost of $5,000
plus expenses to assist in the solicitation of proxies from brokers, nominees,
institutions and individuals.
The close of business on May 1, 1998 has been fixed as the record date for
the determination of shareholders entitled to notice of and to vote at the
Annual Meeting. On such date, the Company had outstanding 17,074,257 Common
Shares, each of which is entitled to one vote at the Annual Meeting.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Proxy Statement or incorporated herein
by reference which are not statements of historical fact constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (incorporated into Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")). Shareholders
are cautioned that such forward-looking statements are not guaranties of future
performance and involve known and unknown risks, uncertainties, trends and other
factors which may cause the actual results, performance or achievements
expressed or implied by such forward-looking statements to not occur. Such
factors include, among others, the following: general economic and business
conditions which will, among other things, affect demand for apartments owned by
the Company, the availability and creditworthiness of prospective tenants, lease
rents, and the availability of financing and interest rates; adverse changes in
the real estate markets including, among other things, competition with other
companies; risks of real estate development and acquisition; changes in
governmental regulations affecting Government Assisted Properties (as defined in
this Proxy Statement) or affecting the taxation of real estate investment
trusts; expenditures that cannot be anticipated, such as utility rate and usage
increases, unanticipated repairs, additional staffing, insurance increases, and
real estate tax valuation reassessments; the ability to achieve anticipated cost
savings and operating efficiencies in connection with the transactions
contemplated herein; risks generally associated with investments in publicly
traded securities; and other changes and factors referenced in this Proxy
Statement.
SUMMARY
MIGRA AND THE MERGER PROPOSAL
MIGRA, certain of its stockholders (the "MIGRA Stockholders") and the
Company have entered into a merger agreement, pursuant to which MIGRA will be
merged with and into the Company, with the Company to be the surviving
corporation. Pursuant to the Second Amended and Restated Merger Agreement (the
"Merger Agreement"), prior to applying the adjustments known to the Company as
of the date hereof, the purchase price for the merger is stated to be $19.1
million. Giving effect to certain adjustments that are known to the Company as
of the date hereof, the purchase price is currently estimated to be $13.5
million, subject to further adjustments, all as described herein. The purchase
price is payable in common shares which will be issued in three installments. At
the time of the merger, the MIGRA Stockholders will exchange, in the aggregate,
50% of their shares of common stock of MIGRA for approximately 408,318 common
shares of the Company (which, based upon the closing price of Common Shares on
May 22, 1998, would be valued at $7.8 million). The remaining 50% of the common
stock of MIGRA will be exchanged for conversion rights to receive up to an
additional $9.46 million of common shares of the Company to be exercised on the
later of the first and second anniversaries of the merger and satisfaction of
certain conditions.
Subject to certain conditions and adjustments, the conversion rights will
entitle the MIGRA stockholders to receive (a) on the later of the first
anniversary of the closing or the satisfaction of certain conditions,
approximately 29,159 common shares of the Company (which, based upon the closing
price of Common Shares on May 22, 1998, would be valued at approximately
$559,000), plus an amount of common shares of the Company equal to approximately
$2.4 million divided by the average closing prices of Common Shares for the 20
trading days immediately preceding the issuance date, and (b) on the later of
the second anniversary of the closing or the satisfaction of certain conditions,
up to approximately an additional 167,563 common shares of the Company (which,
based upon the closing price of Common Shares on May 22, 1998, would be valued
at approximately $3.2 million), plus an amount of common shares of the Company
equal to approximately
2
<PAGE> 7
$2.4 million divided by the average closing prices of Common Shares for the 20
trading days immediately preceding the issuance date. Giving effect to the
adjustments known to the Company as of the date hereof, the share amounts in (a)
and (b) above would be 0 and 90,495, respectively, in each case plus an amount
of common shares equal to approximately $872,934 divided by the average closing
prices of Common Shares for the 20 days immediately preceding the issuance date.
The obligation of the Company to issue common shares pursuant to the conversion
rights is subject to certain contingencies.
MIGRA currently manages properties and provides asset management services
for ten separate institutional clients and seven commingled funds with 29
institutional clients. Managed properties include 38 multifamily communities.
MIGRA is also active in developing new apartment communities for co-ownership or
sales to third parties and providing loan servicing for a variety of real estate
assets. Pursuant to investment advisory contracts, MIGRA provides investment
advisory services and, through several of its affiliates (together with MIGRA,
the "MIG Companies"), property management services to certain of its clients.
Pursuant to the Merger Agreement, MIG Realty, Inc., a new subsidiary of the
Company, intends to succeed to MIGRA's investment advisory and property
management business. By law, MIGRA's investment advisory contracts are not
transferable in a merger. Therefore, the client must consent to assignment
thereof or enter into a new agreement with the Company. In accordance with the
Merger Agreement, MIGRA has approached its institutional clients to either have
such client consent to the assignment of the investment advisory contracts or
agree to enter into new contracts with the Company. As of May 22, 1998, consents
had been received from MIGRA clients or MIGRA clients had agreed to enter into
new contracts with the Company or the Company has acquired or has entered into a
contract to acquire the underlying property with respect to eight of MIGRA's 12
advisory contracts, representing approximately 67% of the revenue generated by
the advisory business. As of such date, two clients, representing approximately
21% of the revenue generated by MIGRA's advisory business, did not consent to
assignment and have terminated their agreements with MIGRA. The Merger Agreement
provides for an adjustment to be made to the purchase price for any contract
with respect to which a consent is not received within 90 days after
consummation of the Merger. The purchase price adjustment attributable to the
two terminated contracts is $5,580,311. As of the date hereof, two clients have
neither consented to assignment nor terminated their contracts. If those two
clients have not consented to assignment of their contracts or entered into new
contracts within 90 days after the consummation of the Merger, the purchase
price will be further reduced by $8,874,635.
The investment advisory contracts to be assigned to the Company are
terminable upon 30 days' notice. However, because the current MIGRA management,
which has longstanding relationships with the institutional investors under the
advisory contracts, will play an active role in MIG Realty, Inc. and the
maintenance of the advisory business, the Company has no reason to believe that
any client who has consented to assignment or entered into a new agreement with
the Company would terminate the contract in the near future. See "THE
ACQUISITION PROPOSALS -- Investment Advisory and Property Management Services
After the Acquisitions" and "-- Certain Relationships."
Implementation of the Merger Proposal is contingent upon approval of the
MIG REIT Acquisition Proposal. See "THE ACQUISITION PROPOSALS -- Vote Required."
For more information regarding the Merger Proposal and MIGRA, see "THE
ACQUISITION PROPOSALS -- The Merger Proposal" and "INFORMATION WITH RESPECT TO
MIGRA," respectively.
MIG REIT AND THE MIG REIT ACQUISITION PROPOSAL
The Company and subsidiaries of MIG REIT have entered into agreements for
the Company's purchase of eight multifamily apartment properties (the "MIG REIT
Properties") owned by those subsidiaries for an aggregate purchase price of
$108.5 million conditioned on, among other matters, the consummation of the
merger between MIGRA and the Company.
3
<PAGE> 8
In exchange for the MIG REIT Properties, on the closing date, the Company
will (a) pay to MIG REIT a sum equal to 1% of the purchase price, approximately
$1.1 million in cash, and (b) issue to MIG REIT that number of common shares of
the Company determined according to the following formula:
(i) If the average of the closing prices as reported on the New York
Stock Exchange for the 20 trading days prior to the closing is greater than
or equal to $25.31, the number of common shares of the Company to be issued
and delivered will be equal to 99% of the MIG REIT Properties purchase
price (the "Shares Amount"), multiplied by 1.06 and divided by the average
of the closing prices for the aforesaid 20-day period;
(ii) If the average of the closing prices as reported on the New York
Stock Exchange for the 20 trading days prior to the closing is less than or
equal to $23.88, the number of common shares of the Company to be issued
and delivered by the Company will be equal to the Shares Amount, divided by
the average of the closing prices for the aforesaid 20-day period; or
(iii) If the Closing Date Price is greater than $23.88 but less than
$25.31, the number of common shares to be issued and delivered by the
Company will be equal to the Shares Amount, divided by $23.88.
MIG REIT may elect to receive up to an additional $10 million of the
purchase price for the MIG REIT Properties in cash by providing notice to the
Company prior to the date of the closing. The amount of any such cash payment
would be deducted from the Shares Amount for purposes of calculating the number
of common shares to be issued at the closing.
The common shares of the Company issued to MIG REIT in connection with the
purchase of the MIG REIT Properties will be restricted securities within the
meaning of the Securities Act, but the Company and MIG REIT will enter into a
Registration Rights Agreement, pursuant to which the Company will agree to file
a registration statement covering such shares so that those common shares may be
publicly traded to the extent provided for in the Registration Rights Agreement.
MIG REIT is a privately held real estate investment trust which was created
to invest in multifamily assets in multiple markets. At March 31, 1998,
subsidiaries of MIG REIT owned eight multifamily apartment properties containing
1,730 suites. The following table provides certain information concerning each
of the MIG REIT Properties to be acquired by the Company.
<TABLE>
<CAPTION>
NUMBER
YEAR YEAR OF
PROJECT LOCATION BUILT ACQUIRED UNITS
------- -------- ----- -------- ------
<S> <C> <C> <C> <C>
Desert Oasis Apartments Palm Desert, California 1990 1996 320
Fleetwood Apartments Houston, Texas 1993 1995 104
Hampton Point Apartments Silver Spring, Maryland 1986 1997 352
Peachtree Apartments Chesterfield, Missouri 1989 1995 156
The Gardens at Annen Woods Pikesville, Maryland 1987 1995 132
Windsor Falls Apartments Raleigh, North Carolina 1994 1996 276
Morgan Place Apartments Atlanta, Georgia 1989 1995 186
20th & Campbell Apartments Phoenix, Arizona 1989 1996 204
-----
1,730
=====
</TABLE>
Implementation of the MIG REIT Acquisition Proposal is contingent upon
approval of the Merger Proposal. See "THE ACQUISITION PROPOSAL -- Vote
Required."
For more information regarding the MIG REIT Acquisition Proposal and MIG
REIT, see "THE ACQUISITION PROPOSALS -- The MIG REIT Acquisition Proposal" and
"INFORMATION WITH RESPECT TO MIG REIT AND THE MIG REIT PROPERTIES,"
respectively.
4
<PAGE> 9
THE DEVELOPMENT ACQUISITION PROPOSAL
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 the Developments known as Windsor Pines Apartments and
Windsor at Kirkman Apartments. The aggregate purchase price for the interests in
the partnerships that own the Developments is approximately $56.7 million.
Implementation of the Development Acquisition Proposal is contingent upon
approval of the Merger Proposal. See "THE ACQUISITION PROPOSALS -- Vote
Required."
For more information regarding the Development Acquisition Proposal, see
"THE ACQUISITION PROPOSALS -- The Development Acquisition Proposal."
THE MIGRA ORGANIZATION
MIGRA and the MIG Companies are substantially owned by the MIGRA
Stockholders. The MIG Companies include 19 property management companies, each
incorporated in a different state in which a MIGRA client owns real estate. MIG
REIT is a privately held real estate investment trust substantially owned by
institutional investors. MIGRA and certain of the MIG Companies provide
investment advisory and property management services to MIG REIT. The chart
below sets forth the MIGRA organization's structure.
THE MIGRA ORGANIZATION
MIGRA ORGANIZATION CHART
MIGRA Stockholders Institutional
and Kathleen Gutin* Investors
less than 0.1% greater than 99.9%
100% 100%
MIGRA The MIG MIG REIT
Companies
*Kathleen Gutin's interest in MIGRA and the MIG Companies will be purchased by a
MIGRA Stockholder on or prior to the Closing Date
MIGRA was founded in 1982 as a mortgage brokerage company. MIGRA currently
manages properties for ten separate institutional clients and seven commingled
funds with 29 institutional clients. The MIG Companies include 19 separate
management companies, each organized in a different state in which MIGRA's
clients or former clients own real estate. Managed properties include 38
multifamily communities. MIGRA's executive offices are located at 250 Australian
Ave. South, Suite 400, West Palm Beach, Florida 33401. Both MIGRA and the other
MIG Companies are owned by the MIGRA Stockholders and Kathleen Gutin, whose
interest in MIGRA will be sold to Larry E. Wright, a MIGRA Stockholder, prior to
the MIGRA Merger. See "INFORMATION WITH RESPECT TO MIGRA -- Management" for
information regarding the MIGRA Stockholders and Ms. Gutin, all of whom will
continue in management of the Company following consummation of the merger.
MIG REIT is a privately held real estate investment trust that was created
to invest in multifamily assets in multiple markets. At March 31, 1998, MIG REIT
owned eight multifamily apartment properties containing 1,730 suites.
ELECTION OF DIRECTORS
At the Annual Meeting, the shareholders will vote in connection with the
election of the following six nominees, each to serve as a director until the
next annual meeting of shareholders and until his successor is duly elected and
qualified: Jeffrey I. Friedman, Mark L. Milstein, Albert T. Adams, Gerald C.
McDonough,
5
<PAGE> 10
Frank E. Mosier, and Richard T. Schwarz. For more information regarding the
nominees and the election, see "ELECTION OF DIRECTORS."
VOTING
Shareholders may vote in person at the Annual Meeting or by proxy. If the
enclosed proxy is returned, the Common Shares represented thereby will be voted
in accordance with any specifications made therein by the shareholder. In the
absence of any such specification, they will be voted to elect the directors set
forth under the caption "ELECTION OF DIRECTORS" and in favor of the Acquisition
Proposals. A shareholder's presence alone at the Annual Meeting will not operate
to revoke such shareholder's proxy. The proxy is revocable by a shareholder at
any time insofar as it has not been exercised by giving notice to the Company in
writing or in open meeting.
Shareholder approval is required for Acquisition Proposals under the New
York Stock Exchange rules because if each of the foregoing transactions is
consummated the Company will be issuing, in the aggregate, common shares
representing more than 20% of its voting power in a series of related
transactions. However, if the consideration paid in connection with the
transactions contemplated by this Proxy Statement is renegotiated such that the
Company were to issue common shares representing less than 20% of its voting
power, the merger with MIGRA, the acquisition of properties from MIG REIT and/or
the acquisition of the Developments could be undertaken. Implementation of the
Merger Proposal is contingent upon approval of the MIG REIT Acquisition Proposal
and vice versa. Therefore, a vote against either of them could have the effect
of a vote against the other. Implementation of the Development Acquisition
Proposal is contingent upon approval of the Merger Proposal. Therefore, a vote
against the Merger Proposal could have the effect of a vote against the
Development Acquisition Proposal. However, if the merger with MIGRA and the
acquisition of the MIG REIT Properties are not consummated and the parties to
the agreements underlying the acquisition of the Developments agree to waive the
contractual condition to consummation of such transaction that the merger with
MIGRA shall have occurred, the acquisition of the Developments could occur even
if shareholder approval for the Development Acquisition Proposal is not
received, since the Company would not be issuing common shares representing 20%
of its voting power in such transaction.
DISSENTERS' RIGHTS
If the MIG REIT Acquisition Proposal is approved, a shareholder of the
Company objecting to the MIG REIT Acquisition Proposal may be entitled to seek
relief as a dissenting shareholder under Section 1701.85 of the Ohio Revised
Code. To perfect dissenter's rights, a record shareholder must not vote his or
her Common Shares in favor of the MIG REIT Acquisition Proposal at the Annual
Meeting, must deliver a written demand for payment for the cash value of his or
her Common Shares to the Company on or before the tenth day following the Annual
Meeting and must otherwise comply with the statute. Any dissenting shareholder
contemplating exercise of his or her dissenter's rights is urged to read the
summary of Section 1701.85 included herein in "THE ACQUISITION PROPOSALS
-- Rights of Dissenting Shareholders," to carefully review the provisions of
Section 1701.85 attached hereto as Annex B and to consult an attorney, since
failure to follow fully and precisely the procedural requirements of the statute
may result in termination or waiver of such rights.
THE ACQUISITION PROPOSALS
BACKGROUND AND REASON FOR THE ACQUISITIONS
On June 18, 1997, Mr. Greg Golz, financial advisor to MIGRA, met with
representatives of the Company in Cleveland, Ohio. Mr. Golz requested the
meeting for the purpose of apprising the Company of the several options being
considered by MIGRA and ascertaining whether the Company was interested in
discussing further the possibility of a transaction. On June 23, 1997, the
Company executed a Confidentiality Agreement, which permitted the Company to
receive proprietary information regarding MIGRA's business operations and client
relationships, and on July 17, 1997, Larry E. Wright, Chairman of the Board,
President and Chief Executive Officer of MIGRA, executed a Confidentiality
Agreement on behalf of MIGRA, which precluded MIGRA from discussing the fact
that the Company and MIGRA were engaged in negotiations.
6
<PAGE> 11
During June through October 1997, the Company and its legal and financial
advisors evaluated the feasibility and benefits of a proposed merger and
commenced negotiating a draft of the Agreement and Plan of Merger, including
future roles, responsibilities and positions for key management personnel of
MIGRA.
On October 3, 1997, Jeffrey I. Friedman, Chairman of the Board, President
and Chief Executive Officer of the Company, presented the proposed transaction
for preliminary consideration to the Company's Board of Directors. The
presentation included an overview of the possible components of the transaction,
a brief history of MIGRA, projected balance sheet and funds from operations
impact and a proposed post-transaction organizational chart. The Board granted
Mr. Friedman permission to continue negotiating the transaction. The Board
formally approved the merger with MIGRA, the proposed purchase of properties
from MIG REIT, and the acquisition of certain properties in development at a
special meeting held on October 12, 1997.
The Company's Board of Directors has approved the transactions that are the
subject of the Acquisition Proposals (the "Acquisitions") and unanimously
recommends approval of the Acquisitions by the Company's shareholders. In
reaching its decision, the Board of Directors listened to presentations from and
had discussions with employees and outside counsel regarding the business, real
estate assets, and financial, accounting and legal due diligence matters with
respect to MIGRA and the terms and conditions of the documents governing the
Acquisitions, and received information and analyses relating to the financial
performance, condition, business operations and prospects of MIGRA and the MIG
REIT Properties, and current industry, economic and market conditions. The
principal reasons (to which relative weights were not assigned) for the Board's
approval of the Acquisitions and its recommendation to the shareholders are as
follows:
- The Company's strategic objective has been to focus on markets located in
the Midwest. It is anticipated that in the first 12 months after
consummation of the Acquisitions, the Company will target its growth in
Atlanta, Georgia, metropolitan Washington, D.C., and Florida, in addition
to its continued focus on the Midwest and in other markets that may
create portfolio rebalancing and higher growth opportunities. The Company
believes that these are markets that exhibit diversified growing
economies with a substantial quantity of multifamily housing. The
Acquisitions will provide the Company a strong base for continued
expansion.
- Geographic dispersion will reduce the Company's dependence on the Midwest
region. The Company believes that market fluctuations and economic cycles
generally affect different regions at different times. With a significant
number of apartment units in several new markets, the risk that a
regional economic downturn could affect all of the Company's apartment
communities simultaneously may be reduced and may lead to more consistent
operating results.
- MIGRA has significant experience in developing and acquiring high-end
multifamily apartment communities which complements the Company's
existing development capabilities. The Company believes that the MIGRA
Merger provides the Company the platform to expand its development
program into other solid development markets, capitalizing on the best
practices and experiences of the Company and MIGRA.
- The Company believes that there has been a shift in ownership of real
estate by public and private pension funds from direct ownership to
ownership in real estate companies, including real estate investment
trusts. The Company further believes that it will be able to capitalize
on MIGRA's relationships with its pension fund clients to gain a
competitive advantage that will ultimately provide co-investment
opportunities with these pension funds. The Company believes that the
relationships with MIGRA's pension fund clients may afford the Company
the opportunity to negotiate private placements of common shares of the
Company in exchange for properties currently owned by those clients.
- The Acquisitions will increase the Company's total market capitalization
(the outstanding debt of the Company, plus the market value of the
Company's equity securities) from approximately $807 million, based on
$19.19 per share, the closing price of Common Shares on May 22, 1998, to
an estimated $970 million on a pro forma basis. The increased size may
afford several benefits. Companies with larger market capitalizations may
be more attractive to certain institutional investors and, therefore, the
7
<PAGE> 12
Acquisitions may increase the universe of potential investors in the
Company's debt and equity securities.
- The Company is acquiring nine substantially unencumbered assets in the
transaction, increasing to 83 the number of properties contributing
unencumbered cash flow to the Company.
- The Acquisitions will enhance the long-term growth prospects for the
Company.
- A portion of the consideration for the transaction will be in the form of
a private issuance of equity rather than through the use of borrowings or
a public offering of equity or debt securities.
In reaching its decision, the Company's Board of Directors considered
certain negative factors in connection with the Acquisitions, including the
following:
- MIGRA's advisory and property management contracts are generally
terminable upon 30 days' notice by either party. If a client cancels a
management contract prior to or within 90 days after the closing of the
MIGRA Merger, the purchase price to be paid pursuant to the Merger
Agreement will be decreased. However, the revenue stream associated with
the business to be acquired by the Company will be decreased and the
Company would possibly lose the benefit of certain efficiencies in
markets where MIGRA had multiple owned and managed assets. Furthermore,
if a client cancels a management contract more than 90 days after the
closing of the MIGRA Merger, the Company would suffer the same negative
consequences with no purchase price adjustment.
- Any decrease in the price of Common Shares between the time of
consideration by the Board and the closing will result in the Company
issuing more common shares to MIG REIT than anticipated, which will
diminish the anticipated accretive impact or may have a dilutive effect
on the Company's income per share.
- The Company will incur significant costs in connection with the
Acquisitions.
- The anticipated benefits of the Acquisitions may not be realized or the
properties acquired in connection therewith may not perform in accordance
with the Company's expectations.
- In connection with the Acquisitions, the Company will expand into new
geographic areas where the Company's current management does not have
experience operating properties. If the Company is unable to successfully
integrate MIGRA's personnel into the Company's structure, the Company's
inexperience in these markets may result in the owned and managed
properties in these markets not performing as well as expected.
- The high-growth markets into which the Company will expand may experience
increased volatility in the supply and demand for apartment rentals. This
may cause operating results to differ materially from those projected.
- The Company will commit substantial time and effort in connection with
the consummation of the Acquisitions, the integration of the MIGRA
business and the management of a larger and more diverse portfolio, as
well as the difficulties associated with integration. Time spent by
management in connection with the Acquisitions would otherwise be spent
focusing on the Company's day-to-day operations.
- The market for Common Shares and the Company's ability to raise capital
and issue equity in both the public and private markets may be adversely
affected by the Acquisitions, whether or not they are ultimately
consummated.
The Company continuously evaluates its strategic acquisition opportunities
and will continue to do so. The decision to move forward with the Acquisitions
was based on the foregoing considerations and was not made at the exclusion of
any other viable acquisition opportunity. At the inception of the MIGRA
transaction, the Board of Directors was not considering any other potential
transactions.
On November 5, 1997, the Company, MIGRA and MIGRA's shareholders (other
than Kathleen Gutin) (the MIGRA Stockholders) executed an Agreement and Plan of
Merger. Although Ms. Gutin is not participating in the MIGRA Merger and was not
and is not a party to the Merger Agreement, Ms. Gutin has
8
<PAGE> 13
consented to the MIGRA Merger as a shareholder. Ms. Gutin has not exercised her
dissenter's rights under Florida law. Rather, it is a condition to the MIGRA
Merger that the MIGRA Stockholders purchase Ms. Gutin's shares prior to
consummation of the MIGRA Merger. Ms. Gutin and Larry Wright have entered into
an agreement to accomplish such a purchase.
After execution of the Agreement and Plan of Merger, the Company and its
representatives conducted a due diligence investigation of MIGRA as well as the
MIG REIT Properties and the MRT Properties (hereinafter described in "PURCHASE
OF THE MRT PROPERTIES") through January 1998.
The Agreement and Plan of Merger provided that the Company's obligation to
consummate the proposed merger was conditioned upon, among other matters, the
acquisition by the Company of properties managed by MIGRA (through the MIG
Companies) or owned by advisory clients of MIGRA with an aggregate value of $184
million. When it became evident that this condition would not be satisfied, it
was replaced with a provision conditioning the transaction on the acquisition of
the MIG REIT Properties (described in "--The MIG REIT Acquisition Proposal").
However, to the extent certain properties comprising the $184 million worth of
properties were in fact acquired, the purchase price was to be adjusted. On
January 24, 1998, the Company, MIGRA and the MIGRA Stockholders executed the
Amended and Restated Agreement and Plan of Merger for the purpose of reflecting
this change as well as other matters.
The independent trustees of MIG REIT conducted a public bid for offers to
acquire the MIG REIT portfolio. The Company submitted an offer which was
ultimately accepted by the independent trustees. On January 28, 1998, the
Company and MIG REIT executed purchase agreements for the acquisition of the MIG
REIT portfolio.
On January 29, 1998, the Company publicly announced the transaction.
On February 3, 1998, the Company acquired three properties managed by MIGRA
known as the MRT Properties for $59.4 million comprised of cash and the
assumption of mortgage indebtedness. See "PURCHASE OF THE MRT PROPERTIES." These
properties were part of the $184 million worth of properties contemplated by the
original Merger Agreement and the Amended and Restated Merger Agreement.
On March 17, 1998, the Board of Directors ratified the proposed terms of
the contemplated transaction with MIGRA and MIG REIT.
On April 16, 1998, the Company, MIGRA, and the MIGRA Stockholders executed
the Second Amended and Restated Agreement and Plan of Merger. The second
amendment was primarily entered into to make certain changes to the purchase
price adjustment provisions, including calculating the adjustment for the MRT
Properties and the MIG REIT Properties contemplated by the Amended and Restated
Merger Agreement.
On April 23, 1998, the Company entered into agreements to purchase
interests in the partnerships which own the Developments (described in " -- The
Development Acquisition Proposal").
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF THE COMPANY HAS CAREFULLY REVIEWED THE
ACQUISITION PROPOSALS, HAS UNANIMOUSLY APPROVED THE ACQUISITION PROPOSALS AND
UNANIMOUSLY RECOMMENDS A VOTE IN FAVOR OF THE ACQUISITION PROPOSALS.
THE MERGER PROPOSAL
The Merger Agreement
The following is a summary of the material terms of the Merger Agreement.
This summary is qualified by reference to the Merger Agreement, a copy of which
is attached hereto as Annex A and incorporated herein by reference. Shareholders
of the Company are urged to read the Merger Agreement in its entirety.
9
<PAGE> 14
MIGRA, certain of its stockholders and the Company have entered into the
Merger Agreement, pursuant to which MIGRA will be merged with and into the
Company, with the Company to be the surviving corporation (the "MIGRA Merger").
In connection with the MIGRA Merger, the Company will continue the property
management business conducted by affiliates of MIGRA. For further information
regarding MIGRA, see "INFORMATION WITH RESPECT TO MIGRA."
In connection with the MIGRA Merger, the Articles of Incorporation and Code
of Regulations of the Company in effect at the effective time of the MIGRA
Merger will remain the Articles of Incorporation and Code of Regulations of the
Company thereafter.
Purchase Price
The purchase price as set forth in the Merger Agreement is $19.1 million,
subject to certain adjustments, payable as described below (the "Purchase
Price"). The Purchase Price will be paid in common shares of the Company issued
in three installments. Because a portion of the number of shares to be issued in
connection with the MIGRA Merger is fixed based on the average price of the
Company's Common Shares prior to execution of the initial merger agreement, the
actual value of the purchase price cannot be determined until the shares are
issued and the value of those shares is determined. Conversely, because a
portion of the consideration is fixed based on a dollar amount, the number of
shares to be issued cannot be determined until the value of the Company's shares
is determined on the issuance date. The consideration to be paid under the
Merger Agreement is subject to adjustment based upon the occurrence of certain
contingencies and the satisfaction of certain conditions.
A table setting forth the consideration to be received by the MIGRA
Stockholders pursuant to the Merger Agreement, along with references to the
applicable section of the Merger Agreement, is set forth below and is followed
by a narrative description. A table setting forth the consideration with
adjustments known to the Company as of the date hereof is set forth on page 12.
SECOND AMENDED AND RESTATED MERGER AGREEMENT CONSIDERATION*
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------
<CAPTION>
MERGER
AGREEMENT CONSIDERED TO BE PAID
SECTION CLOSING DATE SECOND ISSUANCE THIRD ISSUANCE
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2.1(b) $9,648,573
2.1(c) $ 689,037
2.1(d) $ 3,959,537
2.1(e) $2,408,000
2.1(f) $ 2,408,000
Sub-Total $9,648,573 $3,097,037 $ 6,367,537
Total Consideration $19,113,147
- --------------------------------------------------------------------------
</TABLE>
* Based on a Common Share price of $23.63, the average closing prices of Common
Shares for the 20 trading days immediately preceding November 5, 1997, the
date the original Merger Agreement was executed. Based on the closing price of
Common Shares on May 22, 1998, the maximum total consideration to be paid
under the Merger Agreement would be $16.5 million.
Pursuant to the Merger Agreement, at the closing of the MIGRA Merger, the
MIGRA Stockholders will exchange, in the aggregate, 50% of their shares of
common stock of MIGRA (the "MIGRA Shares") for approximately 408,318 common
shares of the Company (which, based upon the closing price of Common Shares on
May 22, 1998, would be valued at approximately $7.8 million). The remaining 50%
of the MIGRA Shares will be exchanged for conversion rights (the "Conversion
Rights") to receive up to an additional $3.09 million and $6.37 million of
common shares of the Company on the later of the first and second anniversaries,
respectively, of the MIGRA Merger and satisfaction of certain conditions (each
of such subsequent issuance dates being referred to as the "Second Issuance
Date" and the "Third Issuance Date," respectively). The initial distribution of
common shares of the Company and the distribution of Conversion Rights will be
allocated among the MIGRA Stockholders as set forth in the Merger Agreement.
10
<PAGE> 15
Subject to certain conditions and adjustments, the MIGRA Stockholders'
Conversion Rights entitle the MIGRA Stockholders to receive (a) on the Second
Issuance Date, approximately 29,159 common shares of the Company (which, based
on the closing price of Common Shares on May 22, 1998, would be valued at
approximately $600,000), plus an amount of common shares of the Company equal to
approximately $2.4 million divided by the average closing prices for Common
Shares for the 20 Trading Days (as hereinafter defined) immediately preceding
the Second Issuance Date, and (b) on the Third Issuance Date, up to
approximately an additional 167,563 common shares of the Company (which, based
upon the closing price of Common Shares on May 22, 1998, would be valued at
approximately $3.2 million), plus an amount of common shares of the Company
equal to approximately $2.4 million divided by the average closing prices for
Common Shares for the 20 Trading Days immediately preceding the Third Issuance
Date. As used in this Proxy Statement, "Trading Days" means each day that Common
Shares have been traded on the New York Stock Exchange ("NYSE"). The obligation
of the Company to issue common shares on the Second Issuance Date is contingent
upon the issuance of a certificate of occupancy for the so-called Windsor Pines
property and the MIGRA Stockholders' submission to the Company of multifamily
property acquisition opportunities with an aggregate gross asset value of at
least $50 million and an average yield of at least 85% of the pro forma yield of
the properties being acquired by the Company in connection with the Acquisitions
(the "Minimum Yield"). The obligation of the Company to issue common shares on
the Third Issuance Date is contingent upon the issuance of a certificate of
occupancy for the so-called Kirkman property and the MIGRA Stockholders'
submission to the Company of an additional $50 million of multifamily property
acquisition opportunities with the Minimum Yield.
Using the average closing prices for the 20 Trading Days preceding May 26,
1998, 126,670 shares would be issued on each of the Second and Third Issuance
Dates in addition to the 29,159 and 167,563 shares already being issued on those
respective dates.
Purchase Price Adjustments
The number of common shares to be issued by the Company may be further
adjusted as follows:
The number of common shares to be issued by the Company will be adjusted
if, during the 90-day period following consummation of the MIGRA Merger
(the "Adjustment Period") (a) certain named entities which are parties to
various mortgage servicing, advisory and/or asset and property management
agreements with MIGRA or one of its affiliates have not consented to the
assignment of those agreements to or entered into a new agreement with the
Company or one of its affiliates on no less favorable terms or (b) the
Company does not acquire certain listed properties. The formula to decrease
the Purchase Price in the event an adjustment is required is as follows:
(i) An amount equal to the aggregate amount of annualized asset and
property management fees, advisory fees and mortgage servicing fees payable
with respect to each such unassigned contract or property not acquired (the
"Fee Shortfall"), plus
(ii) An amount equal to the product of 2.18 times the excess of the
Fee Shortfall over $1,245,162 (which is 15% of the fees scheduled to be
paid), minus
(iii) (A) One percent of the aggregate purchase price for additional
properties identified by MIGRA acquired by the Company during the
Adjustment Period and (B) one times the annualized fees of any new asset or
property management contracts or mortgage servicing contracts entered into
by the Company during the Adjustment Period and related to additional
properties identified by MIGRA, and (C) the lesser of (1) one-half of one
percent of the aggregate purchase price for any properties acquired by the
Company from the Pennsylvania Public School Employees Retirement System or
(2) 2.18 times the excess of the Fee Shortfall over $1,245,162.
However, in no event will the Purchase Price be increased by the above
formula. Any reduction is first to be applied to the 29,159 common shares
to be issued on the Second Issuance Date, second to the 167,563 common
shares to be issued on the Third Issuance Date and finally to the 408,318
shares to be issued at the closing of the MIGRA Merger (and if there is the
potential for the reduction of shares to be issued at the closing of the
MIGRA Merger, the Company will hold back the issuance of common shares in
an
11
<PAGE> 16
amount equivalent to the amount of the potential reduction until final
determination of the amount of the reduction at the end of the Adjustment
Period). In the event the decrease exceeds $14.3 million, the MIGRA
Stockholders will pay the excess contemporaneously with the Company's
acquisition of the so-called Windsor Pines property.
Furthermore, the aggregate $4.8 million worth of common shares scheduled to
be issued on the Second and Third Issuance Dates may be reduced by the
aggregate value of certain disposition and incentive fees which relate to
properties that are neither purchased by nor the related management
agreements assigned to the Company before the end of the Adjustment Period.
In addition, if the Company acquires certain other properties listed in the
Merger Agreement, the Purchase Price will be increased in accordance with a
formula contained in the Merger Agreement.
Finally, the portion of the Purchase Price payable on the Second Issuance
Date may be further increased or decreased based on the amount of current
assets acquired from MIGRA compared to the amount of liabilities paid on
behalf of MIGRA as of the Second Issuance Date.
As of the date hereof, the Company is aware of certain price adjustments
that will result because certain entities have indicated that they will not
execute consents to assign their asset and property management agreements to the
Company. Thus, the consideration to be paid under the Merger Agreement is
currently as indicated in the table set forth below:
SECOND AMENDED AND RESTATED MERGER AGREEMENT CONSIDERATION,
AS ADJUSTED*
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------
<CAPTION>
MERGER AGREEMENT CONSIDERED TO BE PAID
SECTION CLOSING DATE SECOND ISSUANCE THIRD ISSUANCE
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2.1(b) $9,648,573
2.1(c) $ --
2.1(d) $ 2,138,395
2.1(e) $ 872,934
2.1(f) $ 872,934
Sub-Total $9,648,573 $ 872,934 $ 3,011,329
Total Consideration $13,532,836
- --------------------------------------------------------------------------
</TABLE>
* Based on a Common Share price of $23.63, the average closing prices of Common
Shares for the 20 trading days immediately preceding November 5, 1997, the
date the original Merger Agreement was executed. Based on the closing price of
Common Shares on May 22, 1998, the total consideration to be paid under the
Merger Agreement, as adjusted, would be $11.3 million.
Common Shares
The common shares of the Company to be received by the MIGRA Stockholders
will be restricted securities within the meaning of the Securities Act, and will
not have the benefit of any registration rights. The Company has agreed to use
its reasonable efforts to cause the common shares of the Company issuable to the
MIGRA Stockholders pursuant to the Merger Agreement to be approved for listing
on the NYSE, subject to notice of issuance.
Conditions to Closing
The Merger Agreement contains customary conditions to closing, including
those with respect to the truth or accuracy of the respective representations
and warranties of the Company and MIGRA and the
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<PAGE> 17
performance by the Company and MIGRA of their respective covenants and other
agreements and also includes the following conditions:
The obligations of the Company are, in part, subject to the following:
(a) The Company shall have received a legal opinion from counsel to
MIGRA as to certain specified matters.
(b) At no cost to the Company or Associated Estates Management Company
("AEMC"), the Company shall have acquired the 10% partnership interest in
MIG Ltd. owned by MIG Realty, Inc., an affiliate of MIGRA.
(c) The Company shall have acquired the MIG REIT Properties.
(d) The Company shall have received a letter from each MIGRA
Stockholder relating to his or her investment intent and accredited
investor status (to the extent applicable) and trading restrictions.
(e) AEMC or another affiliate of the Company shall have had its
registration as an investment advisor under the Investment Advisers Act of
1940 approved by the Commission.
(f) The Company shall have received a favorable opinion from Morgan
Stanley & Co. Incorporated as to the fairness of the Acquisitions to the
Company from a financial point of view.
(g) The Company shall have received the requisite shareholder
approval.
(h) MIGRA and/or the MIGRA Stockholders shall have acquired the
minority partner's interest in MIG Ltd.
(i) The MIGRA Stockholders shall have acquired the interest of
Kathleen Gutin in MIGRA.
(j) MIGRA shall not have received notice from any holder(s) of common
shares of MIGRA that such holder(s) have exercised or intend to exercise
their appraisal rights under the Florida Business Corporation Act.
(k) The MIGRA Stockholders shall have unanimously approved the
execution and delivery of the Merger Agreement.
(l) The MIGRA Stockholders shall have terminated each MIGRA
Stockholder's employment agreement and shall have caused MIGRA to terminate
Ms. Gutin's employment agreement with MIGRA.
(m) The Stockholders Agreement among the MIGRA Stockholders, Ms. Gutin
and MIGRA shall have been terminated.
The obligations of MIGRA are, in part, subject to the following:
(a) The common shares of the Company shall be issued in the MIGRA
Merger and the transactions contemplated in connection therewith shall have
been authorized for listing on the NYSE, subject to official notice of
issuance.
(b) The Company shall have furnished MIGRA with an opinion of counsel
to the Company, substantially similar in form and content to the opinions
provided to underwriters in connection with public offerings of shares of
the Company, to the effect that the Company has qualified and currently
qualifies to be taxed as a real estate investment trust (REIT) pursuant to
Sections 856 through 860 of the Internal Revenue Code.
(c) The Company shall not have entered into a definitive agreement to
merge or consolidate with any entity in a transaction valued in excess of
$200 million, unless such merger or consolidation is for the sole purpose
of acquiring real property and will not result in a change in the senior
management of the Company.
(d) The Company shall have received shareholder approval.
(e) The Company shall have acquired the MIG REIT Properties.
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<PAGE> 18
Any condition to the Acquisitions may be waived by the Company. However,
the Company does not intend to waive any material condition thereto. If the
parties did waive a material condition, the Company would resolicit shareholder
approval only if such approval were still required by the NYSE or state law.
Immediately after the MIGRA Merger, the Company will convey certain assets,
contract rights and properties theretofore owned by MIGRA to a subsidiary of
AEMC, which is an affiliate of the Company.
Indemnification
MIGRA, if the MIGRA Merger is not consummated, and the MIGRA Stockholders,
if the MIGRA Merger is consummated, have agreed to indemnify the Company against
(a) demands, claims, suits, actions or causes of action asserted against the
Company arising from any breach of any of the representations and warranties or
covenants and agreements made by MIGRA or the MIGRA Stockholders in the Merger
Agreement or certain other agreements, and from any liability which was agreed
to be retained by the MIGRA Stockholders, and from certain other specified
matters and (b) losses, liabilities, damages and expenses in connection with the
foregoing. The Company has agreed to indemnify MIGRA and the MIGRA Stockholders
against (a) demands, claims, suits, actions or causes of action asserted against
MIGRA and any MIGRA Stockholder arising from any breach of any of the
representations and warranties or covenants made by the Company in the Merger
Agreement and (b) losses, liabilities, damages and expenses in connection with
the foregoing. Neither the Company nor the MIGRA Stockholders is entitled to be
indemnified until, and only to the extent that, the amount to which it or they
would otherwise be entitled exceeds $500,000. Furthermore, the MIGRA
Stockholders' indemnification liability is capped at the amount of the Purchase
Price under the Merger Agreement less the aggregate value of the decreases in
the number of common shares of the Company issuable to the MIGRA Stockholders in
accordance with the adjustments. However, no MIGRA Stockholder is required to
indemnify the Company in an amount greater than the portion of the Purchase
Price actually received by him.
Larry Wright Employment Agreement
Simultaneously with the completion of the MIGRA Merger, the Company will
enter into an employment agreement with Larry E. Wright (the "Wright Employment
Agreement") for three years at an annual base salary of $225,000, plus an annual
bonus determined by the Compensation Committee of the Company's Board of
Directors (with a minimum bonus of $50,000 for 1998). Under the terms of the
Wright Employment Agreement, Mr. Wright will also be given standard health and
life insurance benefits and be able to participate in all other retirement,
equity incentive and other benefit plans generally available to senior
executives of the Company. In the event Mr. Wright's employment by the Company
is terminated without cause, Mr. Wright will be entitled to severance pay in a
lump sum equal to the greater of (a) the amount of unpaid base salary for the
then unexpired term of his employment agreement, or (b) one year's base salary
at the then effective annual rate of salary, plus in any event certain bonus
amounts, other accrued amounts and full vesting or the cash equivalent of stock
options or other equity awards previously made. The Wright Employment Agreement
also imposes certain confidentiality and noncompetition obligations upon Mr.
Wright during the term of his employment by the Company and for a period of
three years following the date of the termination of such employment.
Other MIGRA Stockholders' Confidentiality and Noncompete Agreements
The MIGRA Stockholders who will become Company employees after the MIGRA
Merger will be entering into Confidentiality and Noncompete Agreements (the
"Noncompete Agreements"). The Noncompete Agreements will impose certain
confidentiality and noncompetition obligations upon such employees during the
term of their employment by the Company and for a period of one year (two years
in the case of James Cote) following the date of the termination of such
employment, if such termination occurs prior to the fifth anniversary of the
date of the Noncompete Agreements. If an employee subject to a Noncompete
Agreement is terminated without cause by the Company, he will be entitled to
receive severance pay equal to 100% of his annual salary plus bonus (if
terminated prior to the first anniversary), 100% of his annual salary (if
terminated on or after the first anniversary but prior to the second
anniversary), and 50% of his annual salary (if terminated on or after the second
anniversary but prior to the fifth anniversary).
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Standstill Agreement
In connection with the Merger Agreement, MIGRA, the MIGRA Stockholders and
the Company also entered into a Standstill Agreement (the "Standstill
Agreement"). The Standstill Agreement provides, among other things, that in the
event the closing of the MIGRA Merger does not occur (other than due to an
intentional material breach of the Merger Agreement by MIGRA or a MIGRA
Stockholder), the Company would not be entitled to purchase certain listed real
properties without the prior written consent of MIGRA, except in response to a
public request for bids. The Company's obligations under the Standstill
Agreement expire one year after termination of the Merger Agreement.
MIG REIT ACQUISITION PROPOSAL
The following is a summary of the material terms of the agreements to
purchase the MIG REIT Properties. The summary is qualified by reference to the
Purchase Agreements for the MIG REIT Properties, copies of which are filed as
exhibits to the Company's Form 8-K which is incorporated herein by reference.
See "DOCUMENTS INCORPORATED BY REFERENCE." Shareholders of the Company are urged
to read the Purchase Agreements in their entirety.
The Purchase
The Company and subsidiaries of MIG REIT have entered into agreements for
the Company's purchase of eight multifamily apartment properties owned by those
subsidiaries (the "MIG REIT Properties") for an aggregate purchase price of
$108.5 million (the "MIG REIT Property Purchase Price") conditioned on, among
other matters, the consummation of the MIGRA Merger. For more information
regarding the MIG REIT Properties, see "INFORMATION WITH RESPECT TO MIG REIT AND
THE MIG REIT PROPERTIES."
In exchange for the MIG REIT Properties, on the date the acquisition of the
MIG REIT Properties is consummated (the "Closing Date"), the Company will (a)
pay to MIG REIT a sum equal to 1% of the MIG REIT Property Purchase Price in
cash and (b) issue to MIG REIT that number of common shares of the Company
determined according to the following formula:
(i) If the Closing Date Price (as defined below) is greater than or
equal to 106% of the Execution Date Price (as defined below), the number of
common shares of the Company to be issued and delivered will be equal to
99% of the MIG REIT Property Purchase Price (the "Shares Amount"),
multiplied by 1.06 and divided by the Closing Date Price;
(ii) If the Closing Date Price is less than or equal to the Execution
Date Price, the number of common shares of the Company to be issued and
delivered by the Company shall be equal to the Shares Amount, divided by
the Closing Date Price; or
(iii) If the Closing Date Price is greater than the Execution Date
Price but less than 106% of the Execution Date Price, the number of common
shares to be issued and delivered by the Company shall be equal to the
Shares Amount, divided by the Execution Date Price.
MIG REIT may elect to receive up to an additional $10 million of the MIG REIT
Property Purchase Price in cash by providing notice to the Company prior to the
Closing Date. The amount of any such cash payment would be deducted from the
Shares Amount for purposes of calculating the number of common shares to be
issued on the Closing Date. For purposes of clauses (i), (ii) and (iii) above:
"Execution Date Price" means $23.88, representing the average of the
closing prices on the NYSE of the common shares of the Company for the
20 Trading Days immediately preceding January 28, 1998, the date of the
purchase agreements between the subsidiaries of MIG REIT and the
Company.
"Closing Date Price" means the average of the closing prices on the NYSE
of the Common Shares of the Company for the 20 Trading Days immediately
preceding the Closing Date.
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Using the average closing prices for the 20 Trading Days preceding May 26, 1998,
the number of shares issued on the Closing Date in connection with the
acquisition of the MIG REIT Properties would be 5,123,619.
Registration Rights
The common shares of the Company issued to MIG REIT in connection with the
purchase of the MIG REIT Properties will be restricted securities within the
meaning of the Securities Act, but the Company and MIG REIT will enter into a
Registration Rights Agreement, pursuant to which the Company will agree to file
a registration statement covering such shares so that those common shares may be
publicly traded to the extent provided in the Registration Rights Agreement.
Initial Registration
No later than 60 days after the Closing Date, the Company is required, at
its sole cost and expense, to prepare and file with the Securities and Exchange
Commission (the "Commission") a registration statement pursuant to Rule 415
promulgated under the Securities Act relating to the common shares to be issued
by the Company to MIG REIT in consideration for the MIG REIT Properties (the
"Registrable Shares"). The Company is required to use all reasonable efforts to
have such registration statement declared effective by the Commission as
promptly as practicable, and to keep such registration statement continuously
effective until the earlier to occur of: (a) the date on which no Registrable
Shares covered by the registration statement are held by a signatory to the
Registration Rights Agreement or its permitted successors and assignees,
including the stockholders of MIG REIT ("Holders"), or (b) the first anniversary
of the date such registration statement becomes effective.
Piggyback Registration
In addition, if, at any time the Registrable Shares are outstanding and the
Company proposes to file another registration statement with respect to an
offering of its common shares which covers sales of common shares by holders of
demand registration rights previously granted by the Company, the Company will
offer the Holders the opportunity to register such amount of Registrable Shares
as Holders may request. Holders must pay their pro rata share of all
registration expenses if their shares are included in such a piggyback
registration.
Rights along with Company Registration
Moreover, if, during the period beginning one year after the date of
issuance of the Registerable Shares and ending two years after such issuance,
the Company proposes to file a registration statement with respect to an
underwritten offering, for its own account, of any class of equity securities or
any options, warrants or other securities convertible into or exchangeable for,
equity securities, to be offered for cash (a "Company Registration"), the
Company must offer the Holders the opportunity to register such number of
Registrable Shares as they may request. The Company will use its best efforts to
cause the managing underwriter or underwriters to permit inclusion of such
Registrable Shares in the offering on the same terms and conditions as the
corresponding securities of the Company. The number of Registrable Shares to be
offered for the account of Holders will be 20% of the number of shares to be
offered by the Company. If the Company receives acceptances from Holders to
register Registrable Shares in excess of 20% of the number of shares to be
offered by the Company, then the number of shares to be offered for the accounts
of the Holders will be reduced pro rata to the extent necessary to reduce the
total number of Registrable Shares to be included in such offering to 20% of the
number of shares to be offered by the Company. The Company is also required to
file any necessary listing applications or amendments with the primary exchange
or quotation system on which the Registrable Shares are then listed or quoted
and to use its reasonable efforts to have the Registrable Shares so listed.
The Company will be obligated to include Registrable Shares in only one
Company Registration as determined by the Company in consultation with the
managing underwriters. The Company will have no obligation to include
Registrable Shares in a "spot" or "rapidly offered common" offering. Upon the
completion of a Company Registration in which notice was provided to Holders and
the Registrable Shares of
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applicable Holders were sold, Holders will have no further right to include
Registrable Shares in a Company Registration.
Any Holder who elects to participate in a Company Registration must sell
its Registrable Shares to the underwriters selected by the Company on the same
terms and conditions as apply to the Company, with such differences as are
appropriate in combined primary and secondary offerings, including with respect
to indemnification and contribution. Holders must pay their pro rata share of
all registration expenses when their shares are included in a Company
Registration.
Securities Act Compliance
Under the Registration Rights Agreement, the Company is required to (a)
notify each Holder of the effectiveness of each registration statement covering
Registrable Shares and to furnish each Holder with the number of copies of the
registration statement, prospectus and any related documents necessary to
facilitate such Holder's sale of Registrable Shares, (b) prepare and file with
the Commission any amendments and supplements to the initial registration
statements and the related prospectus as is necessary to keep the initial
registration statement effective and to comply with the Securities Act, (c)
promptly notify Holders of any request by the Commission for amendments or
supplements to any registration statement or related prospectus, or for
additional information, and (d) promptly notify Holders of any event, the result
of which is that the prospectus, as then in effect, includes an untrue statement
of a material fact or omits to state a material fact which is necessary to make
the statements contained in the prospectus true. The Company will use reasonable
efforts to comply with all applicable rules and regulations of the Commission
and to comply with applicable state securities laws in connection with the
filing of a registration statement in accordance with the Registration Rights
Agreement.
Indemnification by the Company
The Company will indemnify and hold harmless each Holder and its directors,
officers, employees, agents, trustees and partners, and each person who controls
a Holder against losses, claims, damages, actions, liabilities, costs and
expenses (including reasonable attorneys' fees and expenses) arising out of (a)
violations and alleged violations by the Company of any rule or regulation
promulgated under the Securities Act and the Exchange Act or any state
securities law, (b) any untrue statement or alleged untrue statement contained
in the registration statement or any related prospectus or (c) any omission or
alleged omission to state in such registration statement or related prospectus a
material fact required to be stated therein or necessary to make the statements
therein not misleading. The Company will not provide indemnification for claims,
losses, damages, actions, liabilities and costs and expenses which arise out of
or are based on (i) an untrue statement or alleged untrue statement or omission
or alleged omission made with respect to a registration statement or any related
prospectus made in reliance upon and in conformity with information regarding
the Holder or its plan of distribution or ownership interests which was
furnished to the Company by such Holder or its representative for use in
connection with the registration statement or related prospectus or (ii) such
Holder's failure to send or give a copy of the final prospectus furnished to it
by the Company through no failure of the Company at or prior to the time such
action is required by the Securities Act to the person claiming an untrue
statement or omission or alleged omission if such statement or omission was
corrected in such final prospectus.
Indemnification by Holders
Each Holder will agree to indemnify the Company and its officers,
directors, employees, agents, representatives and affiliates, and any other
persons, if any, who are subject to liability because of their connection with
the Company, against losses, claims, damages, actions, liabilities, costs and
expenses which arise out of (a) any untrue statement or alleged untrue statement
of material fact contained in either a registration statement or the related
prospectus, or any omission or alleged omission to state in such registration
statement or related prospectus any material fact required to be stated therein
or necessary to make the statements therein not misleading, but only if and to
the extent such statement or omission occurs from reliance on and in conformity
with information furnished to the Company by such Holder or its representative
regarding such Holder, its plan of distribution or ownership interests, or (b)
the failure to deliver or cause to have delivered the prospectus furnished by
the Company to the Holder to any purchaser of
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such Holder's Registrable Shares through no fault of the Company. Each Holder's
indemnification obligation is limited to the proceeds (net of underwriting
commissions and discounts) received by such Holder from its sale of Registrable
Shares which gave rise to such obligation.
Break-up Fees
MIG REIT's subsidiaries may terminate their agreements with the Company if
MIG REIT receives an offer to purchase the MIG REIT Properties which would
result in the realization of increased value to MIG REIT's shareholders and, as
a result, in the opinion of MIG REIT's counsel, MIG REIT's directors have a
fiduciary duty to accept that offer. If MIG REIT accepts an offer under the
foregoing circumstances, MIG REIT must pay the Company an amount equal to 3% of
the MIG REIT Purchase Price within two days of its delivery of a notice that it
is terminating the Purchase Agreements.
THE DEVELOPMENT ACQUISITION PROPOSAL
The following is a summary of the material terms of the agreements to
purchase the Development Properties. The summary is qualified by reference to
the Contribution and Partnership Interest Purchase Agreement, a copy of which is
filed as an exhibit to the Company's Form 8-K which is incorporated herein by
reference. See "DOCUMENTS INCORPORATED BY REFERENCE." Shareholders of the
Company are urged to read the Contribution and Partnership Interest in its
entirety.
In connection with the Merger Agreement, the Company has entered into a
Contribution and Partnership Interest Purchase Agreement (the "Contribution
Agreement") with the MIGRA Stockholders, and Ed Wayman, James Elwood, Lanny
Kalik and PF Funds, Inc. (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/Orlando
Development, Ltd., a Florida limited partnership (the "Kirkman Partnership"),
(b) MIG/Pines Development, Ltd., a Florida limited partnership (the "Pines
Partnership") and (c) MIG/Hollywood Development, Ltd., a Florida limited
partnership (the "Hollywood Partnership", the Kirkman Partnership, the Pines
Partnership and the Hollywood 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.
The aggregate purchase price for the interests in the partnerships that own
the Developments is approximately $56.7 million. In connection with the
Contribution Agreement, the Company has also entered into three separate
Partnership Interest Purchase Agreements with MIG Development and the MIGRA
Stockholders pursuant to which the Company was granted the right to acquire from
MIG Development a general partnership interest in each of (a) the Pines
Partnership (the "Pines Partnership Interest Purchase Agreement"), (b) the
Kirkman Partnership (the "Kirkman Partnership Interest Purchase Agreement") and
(c) the Hollywood Partnership (the "Hollywood Partnership Interest Purchase
Agreement", the Pines Partnership Interest Purchase Agreement, the Kirkman
Partnership Interest Purchase Agreement and the Hollywood Partnership Interest
Purchase Agreement are collectively referred to as the "Partnership Interest
Purchase Agreements").
The Pines Partnership owns a parcel of real property located in Pembroke
Pines, Florida upon which a 368 unit multi-family apartment complex known as
Windsor Pines Apartments is being constructed (the "Pines Property"). The
Kirkman Partnership owns a parcel of real property located in Orlando, Florida
upon which a 460 unit multi-family apartment complex known as Windsor at Kirkman
Apartments is being constructed (the "Kirkman Property", the Pines Property and
the Kirkman Property sometimes referred to as the "Developments"). The Hollywood
Partnership owns a parcel of real property located in Hollywood, Florida upon
which a 388 unit multi-family apartment complex known as Windsor Hollywood
Apartments has been constructed (the "Hollywood Property").
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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, pursuant to the Partnership Interest Purchase
Agreements, 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.
The Company has completed its inspections of the Developments and the
Hollywood Property and has elected, subject to the satisfaction of certain
conditions (as discussed below) (a) to proceed to the closing of the
transactions contemplated by (i) the Pines Partnership Interest Purchase
Agreement, (ii) the Kirkman Partnership Interest Purchase Agreement and (iii)
the provisions of the Contribution Agreement that relate to the acquisition by
the New HP Partnership of the limited partnership interests in the Pines
Partnership and the Kirkman Partnership. The Company has elected to terminate
the Hollywood Partnership Interest Purchase Agreement and not to acquire any of
the general or limited partnership interests in the Hollywood Partnership.
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 (as hereinafter defined) 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.
The Company's obligation to proceed to the closing of the transactions
contemplated by the Pines Partnership Interest Purchase Agreement and the
provisions of the Contribution Agreement that relate to the acquisition by the
New HP Partnership of the limited partnership interests in the Pines Partnership
are conditioned upon (a) the financial and physical condition of the Pines
Property, with the exception of ongoing construction, shall not have changed in
any material adverse respect from the condition in existence or reflected by
writings produced during the Company's inspection of the Pines Property, (b) MIG
Development shall have arranged without any cost or liability to the Company for
the termination, effective not later than the closing, of any management
contract of any property manager relating to the Pines Property, (c) MIG
Development, at its own cost and expense, shall have substantially completed the
Pines Property in conformity and in accordance with plans and specifications
approved by the Company, (d) the transactions contemplated by the Contribution
Agreement pursuant to which the New HP Partnership shall have acquired the
limited partnership interests in the Pines Partnership shall have occurred, (e)
the Merger of MIGRA into the Company shall have occurred, and (f) MIG
Development shall have leased at least eighty percent (80%) of the units at the
Pines Property in accordance with the leasing requirements approved by the
Company.
The Company's obligation to proceed to the closing of the transactions
contemplated by the Kirkman Partnership Interest Purchase Agreement and the
provisions of the Contribution Agreement that relate to the acquisition by the
New HP Partnership of the limited partnership interests in the Kirkman
Partnership are conditioned (in all material respects) upon (a) the financial
and physical condition of the Kirkman Property, with the exception of ongoing
construction, shall not have changed in any material adverse respect from the
condition in existence or reflected by writings produced during the Company's
inspection of the Kirkman Property, (b) MIG Development shall have arranged
without any cost or liability to the Company for the termination, effective not
later than the closing, of any management contract of any property manager
relating to the Pines Property, (c) the transactions contemplated by the
Contribution Agreement pursuant to which the New HP Partnership shall have
acquired the limited partnership interests in the Kirkman Partnership shall have
occurred, (d) the Merger of MIGRA into the Company shall have occurred, and (e)
Larry Wright shall have either (i) acquired Gutin's partnership interests in the
Kirkman Partnership or (ii) acquired Gutin's consent to the transactions
contemplated by the Contribution Agreement and the Kirkman Partnership Interest
Purchase Agreement.
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INVESTMENT ADVISORY AND PROPERTY MANAGEMENT SERVICES AFTER THE ACQUISITIONS
After consummation of the Acquisitions, MIG Realty, Inc., a wholly owned
subsidiary of AEMC organized to continue the investment advisory services of
MIGRA, will be registered as an investment adviser under the Investment Advisers
Act of 1940. MIG Realty, Inc. will provide investment advisory services and AEMC
or another subsidiary of the Company will provide property management services
to those clients of the MIG Companies that either consent to assignment of their
investment advisory and property management agreements or enter into new
investment advisory and property management agreements with MIG Realty, Inc.
The Company's valuation of MIGRA was based, in part, on the revenue MIGRA
receives as a result of its investment advisory and property management
agreements with its clients. With respect to the advisory services, MIGRA
presents opportunities to acquire multifamily apartment communities to its
clients. When a client accepts an acquisition proposal, MIGRA provides ongoing
investment advice with respect to the property. In its advisory function, MIGRA
is also charged with the responsibility to monitor the property manager. MIGRA
earns a fee for these investment advisory services. With respect to the property
management services, the client agreements generally provide MIGRA with the
ability to either hire a third party property manager, take on the obligation
itself, or hire an affiliate to perform the property management services. For
the majority of its client's assets, the MIG Companies, a group of affiliated
companies, performs the property management services and earns the fees
associated with these services. The contracts are generally terminable upon 30
days written notice.
As a result of the proposed MIGRA Merger, the Company or an affiliate of
the Company will continue the advisory services of MIGRA and the property
management services of the MIG Companies. Although the Company is not acquiring
the various entities that comprise the MIG Companies, the Company will be
carrying on the business currently conducted by the MIG Companies, to the extent
consents are received and new contracts are entered into.
CERTAIN RELATIONSHIPS
It is contemplated that Larry E. Wright will, upon consummation of the
MIGRA Merger, become an Executive Vice President of the Company. In addition,
Mr. Wright will be appointed as a director of the Company following consummation
of the MIGRA Merger. See "ELECTION OF DIRECTORS" and "--Other MIGRA-Related
Transactions with the Company -- Larry Wright Employment Agreement." In
addition, Louis Vogt, Senior Vice President and Chief Operating Officer of
MIGRA, will become Vice President of Operations of the Company, replacing Thomas
Selby who resigned as Vice President of Operations of the Company effective
March 20, 1998. James A. Cote, Senior Vice President-Investor Relations of
MIGRA, will become President of MIG Realty, Inc. Gregory L. Golz, a financial
advisor to MIGRA, and William T. Hughes, Jr., Senior Vice President and Director
of Research of MIGRA, will each become Vice Presidents of the Company with key
roles. All of the foregoing individuals are also stockholders and directors of
MIGRA.
VOTE REQUIRED
A vote of a majority of the voting power of the Common Shares will be
required at the Annual Meeting in order to approve each of the Acquisition
Proposals. Shareholder approval is required for Acquisition Proposals under the
New York Stock Exchange rules because if each of the Acquisitions is consummated
the Company will issue, in the aggregate, common shares representing more than
20% of its voting power in a series of related transactions.
Implementation of the Merger Proposal is contingent upon approval of the
MIG REIT Acquisition Proposal and vice versa. Therefore, a vote against either
of them could have the effect of a vote against the other. If the required vote
is not obtained for either the Merger Proposal or the MIG REIT Acquisition
Proposal, the Company may choose not to go forward with the MIGRA Merger and the
acquisition of the MIG REIT Properties or may attempt to renegotiate the
consideration paid in connection with the Acquisitions and obtain financing
therefor or raise capital in connection therewith, such that common shares
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representing less than 20% of the voting power of the Company will be issued in
connection therewith, in which case, approval of the shareholders would not be
required under state law or NYSE rules.
Implementation of the Development Acquisition Proposal is contingent upon
approval of the Merger Proposal. Therefore, a vote against the Merger Proposal
could have the effect of a vote against the Development Acquisition Proposal. If
the required vote is not obtained for either the Merger Proposal or the
Development Acquisition Proposal, the Company may choose not to go forward with
the acquisition of the Developments or may attempt to renegotiate the
consideration paid in connection with the Acquisitions and obtain financing
therefor or raise capital in connection therewith, such that common shares
representing less than 20% of the voting power of the Company will be issued in
connection with the Acquisition Proposals, in which case, approval of the
shareholders would not be required under state law or NYSE rules. Additionally,
if the MIGRA Merger and the acquisition of the MIG REIT Properties are not
consummated and the parties to the agreements underlying the acquisition of the
Developments agree to waive the contractual condition to consummation of such
transaction that the MIGRA Merger shall have occurred, the acquisition of the
Developments could occur even if shareholder approval for the Development
Acquisition Proposal is not received, since the Company would not be issuing
common shares representing 20% of its voting power in such transaction and
shareholder approval would not be required.
RIGHTS OF DISSENTING SHAREHOLDERS
If the MIG REIT Acquisition Proposal is approved, a shareholder of the
Company objecting to the MIG REIT Acquisition Proposal may be entitled to seek
relief as a dissenting shareholder under Section 1701.85 of the Ohio Revised
Code. The following is a summary of the steps a dissenting shareholder must take
to perfect his or her rights under the Ohio Revised Code. This summary is
qualified by reference to a complete copy of Section 1701.85 of the Ohio Revised
Code, which is attached hereto as Annex B and incorporated by reference herein.
Any dissenting shareholder contemplating exercise of his or her dissenter's
rights is urged to carefully review the provisions of Section 1701.85 and to
consult an attorney, since failure to follow fully and precisely the procedural
requirements of the statute may result in termination or waiver of such rights.
To perfect dissenter's rights, a dissenting shareholder must satisfy each
of the following:
(1) A dissenting shareholder must be a record or beneficial owner of
Common Shares on May 1, the record date for determining entitlement to vote
on the MIG REIT Acquisition Proposal.
(2) A dissenting shareholder must not vote his or her Common Shares in
favor of the MIG REIT Acquisition Proposal at the Annual Meeting. Failing
to vote or abstaining from voting does not waive a dissenting shareholder's
rights. However, a proxy returned to the Company signed, but not marked to
specify voting instructions, will be voted in favor of the MIG REIT
Acquisition Proposal and will be deemed a waiver of dissenter's rights. A
dissenting shareholder may revoke his or her proxy at any time before its
exercise by filing with the Company an instrument revoking it or a duly
executed proxy bearing a later date, or by attending and giving notice of
the revocation of the proxy at the Annual Meeting.
(3) A dissenting shareholder must deliver a written demand for payment
of the fair cash value of his or her Common Shares to the Company on or
before the tenth day following the Annual Meeting and must otherwise comply
with Section 1701.85. Any written demand must specify the shareholder's
name and address, the number and class of shares held by him or her on the
record date, and the amount claimed as the "fair cash value" of said Common
Shares. The Company will not notify shareholders of the expiration of this
ten-day period.
(4) If the Company so requests, a dissenting shareholder must submit
his or her share certificates to the Company within 15 days of such request
for endorsement thereon by the Company that demand for appraisal has been
made. Such a request is not an admission by the Company that a dissenting
shareholder is entitled to relief. The Company will promptly return the
share certificates to the dissenting shareholder. At the option of the
Company, a dissenting shareholder who fails to deliver his or her
certificate upon request from the Company may have his or her dissenter's
rights terminated, unless a court directs otherwise.
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(5) The Company and a dissenting shareholder may come to agreement as
to the fair cash value of the Common Shares. If the Company and any
dissenting shareholder cannot agree upon the "fair cash value" of the
Common Shares, either may, within three months after service of demand by
the dissenting shareholder, file a petition in the Court of Common Pleas of
Cuyahoga County, Ohio, for a determination that the shareholder is entitled
to exercise dissenter's rights and to determine the "fair cash value" of
the Common Shares. The court may appoint one or more appraisers to
recommend a "fair cash value." The fair cash value is to be determined as
of the day prior to the date of the Annual Meeting. The fair cash value is
the amount which a willing seller, under no compulsion to sell, would be
willing to accept, and which a willing buyer, under no compulsion to
purchase, would be willing to pay, but in no event may the fair cash value
exceed the amount specified in the dissenting shareholder's demand. In
determining this value, any appreciation or depreciation in the market
value of the Common Shares resulting from the Acquisitions is excluded. The
Ohio Supreme Court, in Armstrong v. Marathon Oil Company, 32 Ohio St. 3d
397 (1987), stated that fair cash value for publicly traded shares of a
company with significant trading activity will be the market price for such
shares on the date that the transaction is submitted to the shareholders or
directors for final approval, as adjusted to exclude the impact of the
transaction giving rise to the dissenter's rights. Interest on the fair
cash value as well as costs of the proceedings, including reasonable
compensation to any appraisers, are to be assessed or apportioned as the
court considers equitable.
(6) Payment of the fair cash value must be made within 30 days after
the later of (i) the final determination of such value or (ii) the Closing
Date of the Acquisitions. Such payment shall be made only upon simultaneous
surrender to the Company of the share certificates for which such payment
is made.
(7) A dissenting shareholder's rights to receive the fair cash value
of his or her Common Shares will terminate if: (i) the dissenting
shareholder has not complied with Section 1701.85; (ii) the acquisition of
the MIG REIT Properties is abandoned or only common shares of the Company
constituting less than 20% of the voting power of the Company are issued in
connection therewith; (iii) the dissenting shareholder withdraws his demand
and the Board of Directors of the Company consents thereto; or (iv) the
dissenting shareholder and the Company have not agreed on the fair cash
value per share and neither has timely filed a complaint in the Court of
Common Pleas of Cuyahoga County, Ohio.
(8) All rights accruing from the Common Shares, including voting and
dividend and distribution rights, are suspended from the time a dissenting
shareholder makes demand until the termination or satisfaction of the
rights and obligations of the dissenting shareholder and the Company
arising from the demand. During this period of suspension, any dividend or
distribution paid on the Common Shares will be paid to the record owner as
a credit upon the fair cash value thereof. If the shareholder's dissenter's
rights are terminated other than by purchase by the Company of the
dissenting shareholder's Common Shares, then at the time of termination,
all rights will be restored and all distributions which would have been
made, but for suspension, will be made.
Shareholders are not entitled to exercise dissenters' rights with respect
to the Merger Proposal or the Development Acquisition Proposal.
FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITIONS
The parties will use all reasonable efforts to ensure that the MIGRA Merger
is tax-free to the MIGRA Stockholders under Section 368(a) of the Internal
Revenue Code.
Except for shareholders of the Company who exercise their dissenters'
rights, the MIGRA Merger will not have any tax consequences to the Company's
shareholders. Shareholders wishing to exercise their dissenters' rights are
encouraged to speak to their tax advisors regarding the income tax consequences
thereof.
ACCOUNTING TREATMENT
The Acquisitions will be treated as a purchase pursuant to Accounting
Principles Board No. 16. Accordingly, the fair market value of the consideration
being given by the Company in connection with the
22
<PAGE> 27
Acquisitions will be used as the value basis of the combination. The financial
statements of the Company will reflect the combined operations of the Company,
the MIG REIT Properties, MIGRA and the Developments from the date of
consummation of the Acquisitions.
MATERIAL CONTACTS
None of MIGRA, the MIGRA Stockholders or the directors or officers of MIGRA
or MIG REIT had any material contacts with the Company or its directors or
officers prior to discussions and negotiations regarding the Acquisitions.
PURCHASE OF THE MRT PROPERTIES
On February 3, 1998, in anticipation of the MIGRA Merger, the acquisition
of the Developments under the Contribution Documents and the purchase of the MIG
REIT Properties, the Company consummated the acquisition of three properties,
two of which were indirectly owned by MIG Residential Trust ("MRT") and one of
which was indirectly owned by MRT and Stonemark Equity Trust, each a client of
MIGRA (collectively, the "MRT Properties"). The aggregate purchase price for the
MRT Properties was approximately $59.4 million, of which approximately $15.9
million represented assumed liabilities. The cash portion of the purchase price
has been financed primarily through an unsecured 90-day term loan.
The MRT Properties are:
<TABLE>
<CAPTION>
PROPERTY SELLER LOCATION YEAR BUILT NUMBER OF UNITS
-------- ---------------- --------- ---------- ---------------
<S> <C> <C> <C> <C>
The Falls Apartments............... MIG Atlanta Duluth, 1986 520
Falls Corp. Georgia
Reflections Apartments............. MIG/Reflections, Columbia, 1985 184
Inc. Maryland
Cypress Shores Apartments.......... Stonemark Coconut 1991 300
Apartments Creek,
II, Inc. Florida
</TABLE>
The Falls Apartments is a 520-unit multifamily community in Duluth,
Georgia. The 31 apartment buildings comprising this apartment community are two-
and three-story garden style apartments with wood and brick exteriors. The
Reflections Apartments is a 184-unit multifamily community in Columbia,
Maryland. The eleven apartment buildings comprising this apartment community are
two- and three-story garden style apartments with wood exteriors. The Cypress
Shores Apartments is a 300-unit multifamily community in Coconut Creek, Florida.
The thirteen apartment buildings comprising this apartment community are two-
and three-story garden style apartments with wood and stucco exteriors.
In determining the price paid for the MRT Properties, the Company
considered the historical and expected cash flow from the MRT Properties, the
nature of the occupancy trends and terms of the leases in place, current
operating costs and taxes, the physical condition of the MRT Properties, the
potential to increase their cash flow and other factors. The Company also
considered the capitalization rates at which it believes apartment properties in
the concerned geographic areas have recently sold.
COMPARATIVE PER SHARE DATA
The following tabulation reflects (i) the historical income from continuing
operations per share of the Company's Common Shares in comparison with the pro
forma income from continuing operations per share after giving effect to the
acquisition of the Previously Reported Acquisitions, Country Club Apartments and
the MRT Properties, the completion of the offering of 1.75 million common shares
of the Company, the issuance of a $20.0 million medium term note, the proposed
acquisition of the MIG REIT Properties and the proposed merger with MIGRA,
utilizing purchase accounting (1997 presentation), (ii) the historical income
from continuing operations per share of the Company's Common Shares in
comparison with the pro forma income from continuing operations per share after
giving effect to the acquisition of Country Club Apartments
23
<PAGE> 28
and the MRT Properties, the issuance of a $20.0 million medium term note, the
proposed acquisition of the MIG REIT Properties and the proposed merger with
MIGRA, utilizing purchase accounting (1998 presentation), (iii) the historical
income per share of MIG REIT for the period or year indicated, (iv) the actual
cash dividends declared per share for MIG REIT compared with the equivalent of
the cash dividends declared for each share of the Company's Common Shares for
the period or year indicated, together with the cash dividends declared per
share on a combined pro forma basis after giving effect to all of the
transactions as described in (i) or (ii), as the case may be and (v) the
historical book value per share for the Company and MIG REIT, together with the
book value on a combined pro forma basis after giving effect to all of the
transactions as described in (i) or (ii), as the case may be. The information
presented in this tabulation should be read in conjunction with the pro forma
combined financial statements and the separate financial statements of the
Company, the MIG REIT, the MIG Companies, the MRT Properties and Country Club
Apartments, included in or incorporated by reference in this Proxy Statement.
<TABLE>
<CAPTION>
PERIOD ENDED MARCH 31, 1998
-----------------------------------------------
(a) (c)
INCOME FROM CASH
CONTINUING DIVIDENDS BOOK VALUE -
OPERATIONS DECLARED END OF PERIOD
----------- --------- -------------
<S> <C> <C> <C> <C> <C>
The Company -- Historical............................ $ .18 $ .465 $ 10.32
MIG REIT -- Historical............................... 6.94 3.95 761.03
The Company -- Pro forma combined (b)................ .09 (c) .465 (c) 12.53
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------------------
(a) (c)
INCOME FROM CASH
CONTINUING DIVIDENDS BOOK VALUE END
OPERATIONS DECLARED OF PERIOD
----------- --------- --------------
<S> <C> <C> <C> <C> <C>
The Company -- Historical.......................... $ .88 $ 1.86 $ 11.18
MIG REIT -- Historical............................. 37.25 50.51 785.42
The Company -- Pro forma combined (d).............. .62 (c) 1.86 (c) 12.74
</TABLE>
- ---------------
(a) Represents basic and diluted amounts per share.
(b) Represents the Company's historical results adjusted for the acquisition of
the Previously Reported Acquisitions, Country Club Apartments and the MRT
Properties, the completion of the offering of 1.75 million Common Shares of
the Company, the issuance of a $20.0 million medium term note, the proposed
acquisition of the MIG REIT Properties and the proposed merger with MIGRA,
as described in the pro forma presentation included in this Proxy Statement.
(c) Unaudited
(d) Represents the Company's historical results adjusted for the acquisition of
Country Club Apartments and the MRT Properties, which closed in February
1998, the issuance of a $20.0 million medium term note, the proposed
acquisition of the MIG REIT Properties and the proposed merger with MIGRA,
as described in the pro forma presentation included in this Proxy Statement.
(e) MIG REIT pro forma equivalent per share data has been excluded as the
stockholders of MIG REIT will hold MIG REIT shares after the proposed
transaction is consummated and until the planned dissolution is executed.
24
<PAGE> 29
SELECTED PRO FORMA FINANCIAL DATA
(UNAUDITED)
The following table sets forth selected operating financial data of the
Company's results for the period ended March 31, 1998 adjusted for the
acquisition of Country Club Apartments and the MRT Properties (both of which
occurred in February, 1998), the proposed acquisition of the MIG REIT
Properties, the proposed merger with MIGRA and the issuance of a $20.0 million
medium term note, as described in the pro forma presentation included in this
Proxy Statement. The following table also sets forth selected operating
financial data of the Company's historical results for the year ended December
31, 1997 adjusted for the acquisition of the Previously Reported Acquisitions,
Country Club Apartments and the MRT Properties, the completion of the offering
of 1.75 million Common Shares of the Company, the proposed acquisition of the
MIG REIT Properties, the proposed merger with MIGRA and the issuance of a $20.0
medium term note, as described in the pro forma presentation included in this
Proxy Statement. The balance sheet data as of March 31, 1998 reflects the
financial data of the Company as of that date, adjusted for the proposed
acquisition of the MIG REIT Properties, the proposed merger with MIGRA, the
proposed acquisition of the Developments and the issuance of a $20.0 million
medium term note, as described in the pro forma presentation included in this
Proxy Statement.
ASSOCIATED ESTATES REALTY CORPORATION
(amounts in thousands except per share amounts)
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
<S> <C> <C>
OPERATING DATA:
Revenues.................................................. $ 36,825 $145,707
Income from operations.................................... 3,251 17,215
Income before extraordinary items......................... 3,293 19,457
Income before extraordinary items applicable to common
shares................................................. 1,922 13,973
EARNINGS PER COMMON SHARE DATA -- BASIC:
Income before extraordinary items......................... $ 0.09 $ 0.62
Weighted average common shares outstanding................ 22,604 22,609
EARNINGS PER COMMON SHARE DATA -- DILUTED:
Income before extraordinary items......................... $ 0.09 $ 0.62
Weighted average common shares outstanding................ 22,607 22,631
DIVIDENDS DECLARED PER COMMON SHARE......................... $ .465 $ 1.86
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------
<S> <C> <C>
BOOK VALUE PER COMMON SHARE (END OF PERIOD):
Basic..................................................... $ 12.53
Diluted................................................... $ 12.53
BALANCE SHEET DATA:
Total assets.............................................. $812,638
Total debt................................................ $452,055
Minority interest......................................... $ 13,771
Total shareholder's equity................................ $283,268
</TABLE>
The unaudited selected pro forma financial data is not necessarily
indicative of what the actual financial position or results of operations of the
Company would have been assuming the transactions noted above had been completed
nor does it purport to represent the future financial position or results of
operations of the Company.
25
<PAGE> 30
COMPARATIVE MARKET VALUE DATA
No class of the securities of MIGRA or MIG REIT is publicly traded and no
market price data is available with respect thereto. The Company's Common Shares
are listed on the New York Stock Exchange. The high and low sale prices as of
January 28, 1998, the date preceding the public announcement of the proposed
Acquisitions, were, respectively, $24 1/8 and $23 3/4.
INFORMATION WITH RESPECT TO THE COMPANY
The Company is a fully integrated real estate investment trust (REIT) which
was formed in July 1993 to continue the business of the Associated Estates Group
("AEG") of developing, acquiring, rehabilitating, owning, managing, financing
and leasing multifamily residential apartment facilities ("Properties"). At
March 31, 1998, the Company's portfolio consisted of 18,920 suites in 90
Properties.
Of the Company's 18,920 suites, 16,823 suites (approximately 90%) are
contained in conventional high-rise, mid-rise, townhouse or garden apartment
properties and 1,927 suites (approximately 10%) are contained in properties the
rents of which are subsidized by the United States Department of Housing and
Urban Development (the "Government-Assisted Properties"). Of the 1,927 suites
contained in the Government-Assisted Properties, 1,095 suites are tenanted
primarily by lower-income senior citizens or physically impaired individuals and
832 suites are tenanted primarily by lower-income families or individuals. The
remaining 170 suites (approximately 1%) in the Company's portfolio are contained
in apartment communities for elderly persons that provide residents with one
daily meal, housekeeping, laundry and other services and recreational and
educational activities. Approximately 96.2% of the suites in the Properties
owned at March 31, 1998 were leased as of that date.
The Company is a self-administered and self-managed REIT and, accordingly,
does not engage a REIT advisor. The Company manages all of the Properties, and
either AEG or the Company has done so continuously since their acquisition or
development by AEG or the Company. Of the Company's 90 Properties, 41 were
developed or rehabilitated by AEG, two were acquired by AEG prior to the
Company's initial public offering in November 1993, and 47 were acquired (for an
aggregate purchase price of approximately $425 million) by the Company after the
initial public offering. The Company has also acquired the remaining 50%
interest in two of the Properties in the Company's portfolio which were
previously owned by joint ventures. In addition, the Company acquired eight
undeveloped land parcels containing an aggregate of 147.4 acres. The Company
also currently manages 7,052 suites in multifamily properties and eight
commercial properties not owned by the Company. In addition, the Company owns
substantially all of the economic interests in five corporations that provide
management and other services to the Company. Without giving effect to the
Acquisitions, the Company operates Properties in Ohio, Michigan, Pittsburgh,
Pennsylvania and Indianapolis, Indiana. Approximately 50% of the Company's
Properties are located in the Greater Cleveland/Akron, Ohio, area.
The Company's executive offices are located at 5025 Swetland Court,
Richmond Heights, Ohio 44143-1467, and its telephone number is (216) 261-5000.
INFORMATION WITH RESPECT TO MIGRA
MIGRA
Founded in 1982 as a mortgage brokerage company, MIGRA currently manages
properties for ten separate institutional clients and seven commingled funds
with 29 institutional clients. Managed properties include 38 multifamily
communities. MIGRA is also active in the development of new apartment
communities for co-ownership or sales to third parties and providing loan
servicing for a variety of real estate assets. MIGRA's executive offices are
located at 250 Australian Ave. South, Suite 400, West Palm Beach, Florida 33401,
and its telephone number is (561) 820-1300.
26
<PAGE> 31
MIGRA Management
Larry E. Wright has been Chairman, President and Chief Executive Officer of
MIGRA since 1982. Upon consummation of the MIGRA Merger, Mr. Wright will become
Executive Vice President of the Company. In addition, it is anticipated that Mr.
Wright will be appointed to fill a vacancy on the Company's Board of Directors
following consummation of the MIGRA Merger.
James A. Cote has been Senior Vice President -- Investor Relations of MIGRA
since 1992. In that capacity, Mr. Cote is responsible for new business
development and maintaining client relationships with institutional investors.
Following consummation of the MIGRA Merger, Mr. Cote will become President of
MIG Realty, Inc., a new subsidiary of the Company.
Louis E. Vogt has been Senior Vice President, Chief Operating Officer of
MIGRA since 1992. In such capacity, Mr. Vogt directs property and asset
management of the MIG Companies and is responsible for property acquisitions.
Following consummation of the MIGRA Merger, Mr. Vogt will become Vice President
of Operations of the Company.
Gregory L. Golz is the founding principal of Kendal Financial Corporation,
wherein he has served MIGRA as a consultant and reviewed portfolio acquisitions,
engaged in strategic planning and provided investor relations services. Prior to
the inception of Kendal Financial Corporation in 1995, Mr. Golz was a partner in
and Chief Financial Officer of Trammel Crow Residential. Following consummation
of the MIGRA Merger, Mr. Golz will become a Vice President of the Company with a
role in connection with capital markets.
Kathleen L. Gutin has been Senior Vice President, Chief Financial Officer
of MIGRA since 1985. In such position, Ms. Gutin is responsible for accounting
and financial reporting and strategic planning. Following consummation of the
MIGRA Merger, Ms. Gutin will become a Vice President of the Company.
William T. Hughes, Jr., Ph.D. has been Senior Vice President, Director of
Research of MIGRA since 1995. In such capacity, Mr. Hughes oversees MIGRA's
research department and is responsible for identifying target investment
markets, monitoring key economic trends and identifying new investment
opportunities. From 1994 to 1995, Mr. Hughes was Director of the Real Estate
Research Institute at Louisiana State University. From 1990 to 1994, Mr Hughes
was an Assistant Professor in the Finance Department at Louisiana State
University. Following consummation of the MIGRA Merger, Mr. Hughes will become a
Vice President of the Company with a key role in research and strategic
planning.
Market Price of and Dividends on Common Stock
No class of MIGRA's common stock is publicly traded. Market price and
dividend information with respect to MIGRA is not available.
Changes in and Disagreements with Accountants
There have been no changes in or disagreements with MIGRA's accountants.
INFORMATION WITH RESPECT TO MIG REIT AND THE MIG REIT PROPERTIES
MIG REIT
MIG REIT is a privately held real estate investment trust that was created
to invest in multifamily assets in multiple markets. At March 31, 1998,
subsidiaries of MIG REIT owned eight multifamily apartment properties containing
1,730 suites.
27
<PAGE> 32
The MIG REIT Properties
The following table provides certain information concerning each of the MIG
REIT Properties, and is followed by a short description of each of the MIG REIT
Properties.
<TABLE>
<CAPTION>
NUMBER NET BOOK
YEAR YEAR OF VALUE
PROJECT LEGAL OWNER'S NAME LOCATION BUILT ACQUIRED UNITS 12/31/97
------- ------------------ -------- ----- -------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Desert Oasis Apartments MIG Desert Oasis Palm Desert, 1990 1996 320 $13,282,864
Corporation California
Fleetwood Apartments MIG Fleetwood, Ltd. Houston, Texas 1993 1995 104 6,352,652
Hampton Point Apartments MIG Hampton Corporation Silver Spring, 1986 1997 352 20,696,968
Maryland
Peachtree Apartments MIG Peachtree Corporation Chesterfield, 1989 1995 156 8,618,887
Missouri
The Gardens at Annen MIG REIT/Annen Woods, Pikesville, Maryland 1987 1995 132 8,235,534
Woods Inc.
Windsor Falls Apartments MIG REIT Falls, L.L.C. Raleigh, North 1994 1996 276 16,292,184
Carolina
Morgan Place Apartments MIG REIT/Morgan Place, Atlanta, Georgia 1989 1995 186 9,590,710
Inc.
20th & Campbell MIG 20th & Campbell Phoenix, Arizona 1989 1996 204 12,393,041
Apartments Corporation
----- -----------
1,730 $95,442,840
===== ===========
</TABLE>
The Desert Oasis Apartments is a 320-unit multifamily community in the
Coachella Valley/Palm Springs area of Southern California. The property features
southwestern style architecture and contains 24 one- and two-story residential
buildings. The net rentable area is approximately 280,268 square feet with an
average unit size of 876 square feet. The unit mix features 48 single or studio
units, 32 one-bedroom/one-bath units, 172 two-bedroom/two-bath units and 68
three-bedroom/two-bath units.
The Fleetwood Apartments is a 104-unit luxury apartment community located
in the city of Houston, Texas. The 11 residential buildings are built of
two-story wood frame construction with brick and stucco exteriors. The net
rentable area is approximately 105,076 square feet with an average unit size of
1,020 square feet. The unit mix features 56 one-bedroom/one-bath units, sixteen
one-bedroom/one-bath/loft units, 24 two-bedroom/two-bath units, and eight
two-bedroom/two-bath/loft units.
The Hampton Point Apartments is a 352-unit multifamily community in Silver
Spring, Maryland. The 22 apartment buildings are wood frame construction on
concrete slabs, with two-story and three-story elevations. The net rentable area
is approximately 287,352 square feet with an average unit size of 816 square
feet. The unit mix features 192 one-bedroom/one-bath units, 84
two-bedroom/one-bath units and 76 two-bedroom/two-bath units.
The Peachtree Apartments is a 156-unit luxury apartment community in St.
Louis County, Missouri. The 11 residential buildings are of two-story wood frame
construction with garden level, second floor and townhome units. The net
rentable area is approximately 144,748 square feet, with an average unit size of
928 square feet. The unit mix features 80 one-bedroom/one-bath units, 32
one-bedroom/one and one-half-bath townhomes, 20 two-bedroom/two-bath units, and
24 two-bedroom/two-bath townhomes.
The Gardens at Annen Woods is a 132-unit luxury apartment community in
Baltimore County, Maryland. The 11 three-story buildings have brick veneer over
concrete masonry walls with concrete slabs. The net rentable area is
approximately 167,562 square feet, with an average unit size of 1,269 square
feet. The unit mix features 18 one-bedroom/one-bath units, 72
two-bedroom/two-bath units, 33 two-bedroom/two-bath/den units and nine
three-bedroom/two-bath units.
The Windsor Falls Apartments is a 276-unit apartment community in Raleigh,
North Carolina. The 13 three-story buildings have garden level, second and third
floor units. The net rentable area is approximately 270,384 square feet, with an
average unit size of 980 square feet. The unit mix features 120 one-bedroom/one-
bath units, 120 two-bedroom/two-bath units and 36 three-bedroom/two-bath units.
28
<PAGE> 33
The Morgan Place Apartments is a 186-unit apartment community located in
Dekalb County, Georgia. The five residential buildings are three- and four-story
with wood frame construction and brick and hardboard siding exteriors. The net
rentable area is approximately 145,700 square feet, with an average unit size of
783 square feet. The unit mix features 56 one-bedroom/one-bath units, 74
two-bedroom/one-bath units, 52 two-bedroom/two-bath units and four
three-bedroom/two-bath units.
The 20th and Campbell Apartments is a 204-unit apartment community in
Phoenix, Arizona. The seven three-story residential buildings are of wood frame
construction with stucco exteriors. The net rentable area is approximately
177,453 square feet, with an average unit size of 870 square feet. The unit mix
features 93 one-bedroom/one-bath units, 30 one-bedroom/one-bath/den units and 81
two-bedroom/two-bath units.
Market Price of and Dividends on Common Stock
No class of securities of MIG REIT is publicly traded. Market price
information with respect to MIG REIT is not available. Cash dividends declared
in 1997 were, in the aggregate, $5,620,000. See also "COMPARATIVE PER SHARE
DATA."
Changes in and Disagreements with Accountants
There have been no changes in or disagreements with MIG REIT's accountants.
29
<PAGE> 34
SELECTED FINANCIAL AND OTHER DATA
The following tables set forth selected financial and other data for (i)
the Company on an historical consolidated basis (combined basis prior to
November 19, 1993), (ii) MIG REIT and (iii) the MIG Companies (as defined in the
financial statements of the MIG Companies included in this Proxy Statement) on a
combined basis. The historical financial information contained in the tables has
been derived from and should be read in conjunction with (i) the financial
statements and notes thereto of the Company included in the Company's Form 10-Q
for the period ended March 31, 1998 and the Form 10-K for the year ended
December 31, 1997 as incorporated by reference herein, (ii) the financial
statements and notes thereto of MIG REIT and the MIG Companies included
elsewhere in this Proxy Statement, (iii) Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company included in the
Company's Form 10-Q and Form 10-K for the period ended March 31, 1998 and for
the year ended December 31, 1997 as incorporated by reference herein and (iv)
Management's Discussion and Analysis of Financial Condition and Results of
Operations of MIG REIT and the MIG Companies included elsewhere in this Proxy
Statement.
30
<PAGE> 35
ASSOCIATED ESTATES REALTY CORPORATION
(Amounts in thousands except per share
amounts and average monthly revenue)
<TABLE>
<CAPTION>
FOR THE PERIOD
MARCH 31, MARCH 31, DECEMBER 31, NOVEMBER 19-
----------- ----------- ------------------------------------------- DECEMBER 31,
1998 1997 1997 1996 1995 1994 1993
----------- ----------- --------- -------- -------- --------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
REVENUE:
Rental................... $ 29,105 $ 23,160 $ 101,640 $ 87,975 $ 70,045 $ 48,859 $ 4,256
Property management
fees................... 949 981 3,752 3,780 4,213 3,931 448
Painting services........ 348 508 1,664 1,634 1,067 1,271 247
Interest................. 213 153 926 238 486 617 235
Other.................... 94 76 828 828 1,266 587 28
-------- -------- --------- -------- -------- --------- --------
Total revenue.......... 30,709 24,878 108,810 94,455 77,077 55,265 5,214
EXPENSES:
Property operating and
maintenance expenses
(before depreciation
and amortization)...... 12,302 9,225 43,230 37,056 29,279 21,084 1,623
Painting services........ 338 439 1,492 1,436 1,001 1,257 197
Cost associated with
abandoning
properties............. -- -- 310 -- 46 -- --
General and
administrative......... 1,834 1,511 6,085 5,912 5,471 4,193 425
Depreciation and
amortization........... 5,315 4,329 19,266 15,536 12,657 8,122 639
Charge for unrecoverable
funds advanced to non-
owned properties and
other.................. -- -- 1,764 -- -- -- --
Interest expense......... 6,431 4,107 19,144 15,516 11,649 6,494 644
Nonrecurring property
transfer costs......... -- -- -- -- -- -- 530
-------- -------- --------- -------- -------- --------- --------
Total expenses......... 26,220 19,611 91,291 75,456 60,103 41,150 4,058
-------- -------- --------- -------- -------- --------- --------
Income from operations..... 4,489 5,267 17,519 18,999 16,974 14,115 1,156
Equity in net income (loss)
of joint ventures........ 36 (41) 561 305 297 134 (170)
-------- -------- --------- -------- -------- --------- --------
INCOME BEFORE EXTRAORDINARY
ITEM..................... 4,525 5,226 18,080 19,304 17,271 14,249 986
Gain on sale of land....... -- -- 1,608 -- -- -- --
Extraordinary item......... -- -- 1,024 -- (1,097) (727) (3,876)
-------- -------- --------- -------- -------- --------- --------
NET INCOME (LOSS).......... $ 4,525 $ 5,226 $ 20,712 $ 19,304 $ 16,174 $ 13,522 $ (2,890)
======== ======== ========= ======== ======== ========= ========
NET INCOME (LOSS)
APPLICABLE TO COMMON
SHARES................... $ 3,154 $ 3,855 $ 15,228 $ 13,820 $ 14,041 $ 13,522 $ (2,890)
======== ======== ========= ======== ======== ========= ========
EARNINGS PER COMMON SHARE
DATA -- BASIC (f):
Income before
extraordinary item..... $ .18 $ .25 $ .88 $ .99 $ 1.09 $ 1.19 $ .09
======== ======== ========= ======== ======== ========= ========
Net income (loss)........ $ .18 $ .25 $ .94 $ .99 $ 1.01 $ 1.13 $ (.27)
======== ======== ========= ======== ======== ========= ========
Weighted average common
shares outstanding..... 17,072 15,321 16,200 13,932 13,869 11,942 10,862
======== ======== ========= ======== ======== ========= ========
EARNINGS PER COMMON SHARE--
DILUTED (f):
Income before
extraordinary item..... $ .18 $ .25 $ .88 $ .99 $ 1.09 $ 1.19 $ .09
======== ======== ========= ======== ======== ========= ========
Net income (loss)........ $ .18 $ .25 $ .94 $ .99 $ 1.01 $ 1.13 $ (.27)
======== ======== ========= ======== ======== ========= ========
Weighted average common
shares outstanding..... 17,075 15,351 16,222 13,932 13,869 11,942 10,862
======== ======== ========= ======== ======== ========= ========
<CAPTION>
ASSOCIATED
ESTATES GROUP
("AEG" --
PREDECESSOR)
FOR THE PERIOD
JANUARY 1-
NOVEMBER 18,
1993
--------------
<S> <C>
OPERATING DATA:
REVENUE:
Rental................... $ 32,879
Property management
fees................... 3,192
Painting services........ 1,287
Interest................. 596
Other.................... 378
--------
Total revenue.......... 38,332
EXPENSES:
Property operating and
maintenance expenses
(before depreciation
and amortization)...... 16,365
Painting services........ 1,211
Cost associated with
abandoning
properties............. --
General and
administrative......... 2,780
Depreciation and
amortization........... 4,788
Charge for unrecoverable
funds advanced to non-
owned properties and
other.................. --
Interest expense......... 10,159
Nonrecurring property
transfer costs......... --
--------
Total expenses......... 35,303
--------
Income from operations..... 3,029
Equity in net income (loss)
of joint ventures........ (149)
--------
INCOME BEFORE EXTRAORDINARY
ITEM..................... 2,880
Gain on sale of land....... --
Extraordinary item......... --
--------
NET INCOME (LOSS).......... $ 2,880
========
NET INCOME (LOSS)
APPLICABLE TO COMMON
SHARES................... $ 2,880
========
EARNINGS PER COMMON SHARE
DATA -- BASIC (f):
Income before
extraordinary item.....
Net income (loss)........
Weighted average common
shares outstanding.....
EARNINGS PER COMMON SHARE--
DILUTED (f):
Income before
extraordinary item.....
Net income (loss)........
Weighted average common
shares outstanding.....
</TABLE>
31
<PAGE> 36
<TABLE>
<CAPTION>
FOR THE PERIOD
MARCH 31, MARCH 31, DECEMBER 31, NOVEMBER 19-
----------- ----------- ------------------------------------------- DECEMBER 31,
1998 1997 1997 1996 1995 1994 1993
----------- ----------- --------- -------- -------- --------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
DIVIDENDS DECLARED PER
COMMON SHARE............. $ .465 $ .465 $ 1.86 $ 1.80 $ 1.72 $ 1.60 $ .19
======== ======== ========= ======== ======== ========= ========
OTHER DATA:
Cash flow provided by (used
in):
Operating activities..... $ 13,509 $ 3,301 $ 29,936 $ 31,060 $ 28,881 $ 34,481 $ 139
Investing activities..... $(66,374) $(31,843) $(131,908) $(75,771) $(94,151) $(113,567) $ (2,013)
Financing activities..... $ 52,254 $ 27,820 $ 102,936 $ 43,149 $ 66,247 $ 49,651 $ 30,242
Funds From Operations
(a).................... $ 8,185 $ 8,045 $ 34,651 $ 28,915 $ 27,253 $ 22,316 $ 2,219
Earnings before interest,
depreciation and
amortization (b)....... $ 16,022 $ 14,116 $ 61,488 $ 52,414 $ 41,270 $ 30,667 $ 3,027
Total properties (at end
of period)............. 90 88 88 84 78 66 45
CORE PORTFOLIO:
Total multifamily suites
(at end of period)....... 18,920 16,300 17,600 15,838 14,501 12,093 8,704
Average monthly rental
revenue per Multifamily
suite.................... $ 587 $ 581 $ 587 $ 581 $ 564 $ 529 $ 518
Economic Occupancy (d)... 93.8% 94.8% 94.0% 95.5% 95.7% 95.2% 94.3%
<CAPTION>
ASSOCIATED
ESTATES GROUP
("AEG" --
PREDECESSOR)
FOR THE PERIOD
JANUARY 1-
NOVEMBER 18,
1993
--------------
<S> <C>
DIVIDENDS DECLARED PER
COMMON SHARE.............
OTHER DATA:
Cash flow provided by (used
in):
Operating activities..... $ 10,680
Investing activities..... $ 780
Financing activities..... $ (8,523)
Funds From Operations
(a).................... $ 8,149
Earnings before interest,
depreciation and
amortization (b)....... $ 19,583
Total properties (at end
of period)............. 45
CORE PORTFOLIO:
Total multifamily suites
(at end of period)....... 8,704
Average monthly rental
revenue per Multifamily
suite.................... $ 519
Economic Occupancy (d)... 94.1%
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------- -----------------------------------------------------------
1998 1997 1996 1995 1994 1993
----------- --------- -------- -------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate and other fixed
assets before accumulated
depreciation............. $710,344 $ 646,499 $513,966 $433,965 $ 312,716 $161,838
Real estate and other fixed
assets after accumulated
depreciation............. 594,172 515,830 401,864 336,663 227,303 84,201
Total assets............... 627,587 553,910 424,711 355,456 242,761 129,705
Total debt (c)............. 394,883 318,170 217,813 171,234 105,113 60,389
Total shareholders'
equity................... 176,208 181,158 158,016 139,170 94,897 45,079
</TABLE>
32
<PAGE> 37
MIG RESIDENTIAL REIT, INC. (e)
(Dollars in thousands except average monthly revenue)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, DECEMBER 31,
----------- ----------- -------------------------------
1998 1997 1997 1996 1995
----------- ----------- --------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
REVENUE:
Rental.................................................... $ 3,634 $ 2,971 $ 13,583 $ 7,573 $ 2,731
Interest.................................................. 42 38 135 74 164
Other..................................................... 100 100 412 194 53
-------- -------- --------- -------- --------
Total revenue............................................. 3,776 3,109 14,130 7,841 2,948
EXPENSES:
Property operating and maintenance Expenses (before
depreciation and Amortization).......................... 1,344 984 4,782 2,433 854
Property co-management fees............................... 235 227 959 603 213
General and administrative................................ 609 261 1,287 619 230
Depreciation and amortization............................. 596 476 2,245 1,169 390
Interest expense.......................................... 196 75 712 0 0
-------- -------- --------- -------- --------
Total expenses.......................................... 2,980 2,023 9,985 4,824 1,687
Net income.................................................. $ 796 $ 1,086 $ 4,145 $ 3,017 $ 1,261
======== ======== ========= ======== ========
OTHER DATA:
Cash flow provided by (used in):
Operating activities...................................... $ 1,683 $ 1,521 $ 6,322 $ 4,140 $ 1,899
Investing activities...................................... $ (562) $(20,582) $ (21,858) $(43,536) $(33,736)
Financing activities...................................... $ (1,159) $ 18,870 $ 16,300 $ 41,147 $ 33,143
Funds from operations (a)................................... $ 1,392 $ 1,562 $ 6,390 $ 4,186 $ 1,652
Earnings before interest, Depreciation
and amortization (b)...................................... $ 1,588 $ 1,637 $ 7,102 $ 4,186 $ 1,652
Total properties (at end of period)......................... 8 8 8 7 4
Total multifamily suites (at end of period)................. 1,730 1,730 1,730 1,378 578
Average monthly rental revenue per Multifamily suite........ $ 718 $ 664 $ 692 $ 702 $ 699
Economic occupancy (d)...................................... 91% 88% 91% 92% 93%
BALANCE SHEET DATA:
Real estate before accumulated Depreciation................. $ 99,809 $ 99,247 $ 77,390 $ 33,853
Real estate after accumulated Depreciation.................. 95,409 95,443 75,830 33,463
Total assets................................................ 99,930 100,179 79,424 35,052
Total debt.................................................. 10,000 10,000 -- --
Total shareholders' equity.................................. 87,379 87,392 78,247 34,383
</TABLE>
33
<PAGE> 38
MIG COMPANIES
(Dollars in thousands)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, DECEMBER 31,
----------- ----------- -------------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- ----------- --------- ----------- ----------- ----------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue.............. $ 1,983 $ 2,692 $ 10,264 $ 11,978 $ 11,034 $ 11,633 $ 12,036
Expenses............. 2,712 2,506 11,851 11,344 11,046 11,584 11,951
Net income (loss).... (628) 482 (948) 581 316 410 677
OTHER DATA:
Cash flow provided by
(used in):
Operating
activities....... $ (688) $ (1,264) $ (2,281) $ 284 $ (284) $ 337 $ 263
Investing
activities....... (1) 196 1,519 1,354 6,961 9,121 (576)
Financing
activities....... 501 707 597 (2,075) (7,827) (8,400) 74
BALANCE SHEET DATA:
Total assets......... $ 10,195 $ 9,761 $ 12,718 $ 11,815 $ 18,458 $ 26,721
Total debt........... 1,111 610 2,379 4,338 12,097 20,048
Shareholders'
equity............. 1,480 2,109 1,684 1,709 3,322 2,908
</TABLE>
- ---------------
(a) The Company considers Funds From Operations ("FFO"), as defined by the
National Association of Real Estate Investment Trusts ("NAREIT"), to be an
appropriate measure of the performance of an equity REIT. FFO is defined by
NAREIT as net income (loss) before depreciation and amortization of real
estate assets, determined in accordance with generally accepted accounting
principles ("GAAP"), excluding gains (or losses) from extraordinary items,
unusual or non-recurring items and sales of depreciable property. FFO of
unconsolidated partnerships and joint ventures is determined on a similar
basis. FFO should not be considered as an alternative to net income (as
determined in accordance with GAAP) as an indicator of the Company's
financial performance or to cash flows from operating activities (determined
in accordance with GAAP) as a measure of the Company's liquidity, nor is it
necessarily indicative of sufficient cash flow to fund all of the Company's
needs. FFO presented herein is not necessarily comparable to FFO presented
by other real estate companies due to the fact that not all real estate
companies use the same definition or have the same accounting policies.
(b) Includes earnings before interest, depreciation and amortization. Income
from joint ventures was calculated on the same basis. Income before
interest, depreciation and amortization 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 and should not be considered an alternative to net income as an
indicator of the Company's operating performance or as an alternative to
cash flow as a measure of liquidity.
(c) Amount excludes the Company's share of mortgage indebtedness relating to the
unconsolidated joint ventures of approximately $17,695 at March 31, 1998 and
$17,752, $17,969, $18,164, $18,342 and $19,105 at December 31, 1997, 1996,
1995, 1994 and 1993, respectively.
(d) Economic Occupancy is calculated as the actual rent revenue divided by the
total rent expected to be earned based on the market rental rate for all
suites.
(e) MIG REIT was formed in May 1993 and acquired its first operating property in
March 1995. Accordingly, financial data of MIG REIT is not presented prior
to the acquisition of the first operating property.
(f) Earnings per common share for all periods presented has been computed in
accordance with the provisions of Statement of Financial Accounting
Standards No. 128.
34
<PAGE> 39
MIG COMPANIES AND MIG REIT
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of the combined financial conditions
and results of operations of the MIG Companies and MIG REIT is stated on an
historical basis without giving effect to the MIGRA Merger. This discussion
should be read in conjunction with the combined financial statements and notes
thereto of the MIG Companies (or "MIG") and the financial statements and notes
thereto of MIG REIT. The statements included herein are provided as historical
descriptions and are not intended to suggest the outcome of future performance.
Any estimates or anticipations should be considered forward-looking statements.
All such statements are subject to certain risks and uncertainties which could
cause actual performance to differ materially from that which is projected.
Readers are cautioned not to place undue reliance on these forward-looking
statements which speak only as of the date hereof.
OVERVIEW
MIG includes the accounts of MIG Realty Advisors, Inc. (MIGRA) and its
consolidated invested partnerships and the accounts of MIG Management Services,
a group of 19 corporations, which are affiliated with MIGRA through common
ownership. MIGRA is an investment adviser registered with the SEC pursuant to
the Investment Advisers Act of 1940.
At March 31, 1998, MIG provided property management and/or real estate
advisory and asset management services to 38 multifamily apartment properties
containing approximately 11,333 suites for six separate account clients and four
commingled funds sponsored by MIG. The separate account clients and commingled
funds included 29 institutional investors. MIG provides usual and customary
property management services, asset management services, accounting and
financial reporting services and acquisition and disposition services to its
various clients pursuant to written agreements. In addition to the multifamily
property management and advisory services, MIG serviced 14 mortgage loans and
managed seven commercial properties for three of its institutional clients.
Since 1995, MIG has received commitments from and invested more than $500
million in multifamily apartment properties on behalf of its clients and
presently has commitments for additional investments in multifamily apartment
properties exceeding $200 million. Such commitments are subject to rigorous
standards regarding property type, age, location, demographic growth prospects
and pricing parameters set by institutional separate account investors and as
such the ability to invest such capital commitments is subject to uncertainties.
MIG REIT is a privately held REIT investing in institutional quality
multifamily assets across multiple markets. The institutional investors, which
collectively own more than 99.5% of the outstanding common shares of MIG REIT,
are either public or private retirement systems. Pursuant to these investors'
requirements, investments have been limited to fully constructed and
substantially occupied multifamily apartment properties meeting a narrow set of
guidelines regarding age, location and quality. At March 31, 1998, MIG REIT
owned eight multifamily apartment properties containing 1,730 suites. The
portfolio of properties was compiled from March 1995 to February 1997 with an
acquisition occurring in all but one quarter in between.
The MIG Companies -- Years ended December 31, 1997, 1996 and 1995
Total revenue increased by $944,541, or 8.6%, in 1996 as compared with
1995, but decreased $1,354,493, or 11.3%, in 1997 as compared with 1996. For the
same time periods, total expenses increased $297,702, or 2.7%, and $506,632, or
4.5%, respectively. The decline in revenues over the comparison years was due to
MIG's strategy of remaining focused on its apartment advisory business and
divesting itself of its affordable housing and construction lending activities,
its pursuit of its succession plan and the negotiation of the MIGRA Merger.
Acquisition, management and disposition fees increased between the
comparison years 1996 and 1995 by $2,387,650, or 34.3%, but decreased between
comparison years 1997 and 1996 by $239,920, or 2.6%. The fees
35
<PAGE> 40
increased for the comparison years 1996 and 1995 as MIG's management and
advisory business received steadily increasing investment allocations from
several pension fund investors. Fourteen apartment communities were acquired on
behalf of these investors in 1996 and four apartment communities were acquired
in 1997. Although MIG continued to receive investment allocations during 1997,
these fees decreased between comparison years 1997 and 1996 as the organization
began focusing on other business strategies. The net growth in the number of
multifamily properties advised or managed by MIG (increased by acquisitions and
decreased by transfers to other advisors as well as sell decisions by certain
clients) resulted in managed assets of 30 in 1995 and 42 in 1996 and 1997.
Servicing fees decreased during each of the comparison years since certain
older commercial properties were sold or reassigned to commercial advisors in
accordance with MIG's strategy to remain focused on its apartment advisory
business. Servicing fees decreased for comparison years 1996 and 1995 and 1997
and 1996 by $433,233, or 21.4%, and $494,087, or 31.0%, respectively. The
reduction in the servicing fees was part of MIG's plan to divest itself of this
line of business and remain focused on its apartment advisory business.
Currently, MIG services 14 mortgage loans contributing annual servicing fees of
$518,895.
Interest income and origination fees decreased from 1995 to 1996 by
$849,441, or 59.2%, as MIG wound down its affordable housing and construction
lending divisions in keeping with its strategy to remain focused on its
apartment advisory business. Interest income and origination fees decreased from
1996 to 1997 by $541,811, or 92.7%, as MIG continued to focus on its apartment
advisory business.
Salaries and travel expenses increased by $615,602, or 8.1%, from 1995 and
1996 as the number of staff and their related travel expenses increased to
accommodate the acquisition needs of the company's pension fund clients. These
expenses decreased by $871,144, or 10.5%, between 1997 and 1996 as the
acquisition pace of clients slowed-down.
The increase in the professional fees and other expense category of
$291,569, or 26.8%, to $1,379,002 in 1997 from $1,087,433 in 1996 is the result
of an increase in consulting and legal costs related to the development of a
management succession plan for MIG and the negotiation of the MIGRA Merger.
During 1997, $1,290,777 of expenses were incurred in connection with MIG's
reorganization activities.
Equity in net income of unconsolidated subsidiaries decreased by $270,520,
or 84.6%, from 1995 to 1996 due to the wind down of a joint venture which
managed a contract for the Resolution Trust Corporation.
The MIG Residential REIT -- Years ended December 31, 1997, 1996 and 1995.
The table on page 28 in this Proxy Statement describes the multifamily
properties owned by MIG REIT. An important measure of property performance, in
addition to increasing rental rates and expense control, is physical occupancy.
The portfolio weighted average physical occupancy was 94.4%, 93.8% and 93.9% for
the years 1997, 1996 and 1995, respectively. This occupancy measure has been
stable since inception.
RESULTS OF OPERATIONS
The aforementioned genesis and expansion of the MIG REIT portfolio have a
significant effect on the financial data presented herein. Therefore, in
addition to annual comparisons across the entire portfolio, a same store
comparison is provided from 1996 to 1997. All same store figures refer to four
properties (Morgan Place, Annen Woods, Fleetwood and Peachtree) consisting of
578 units. This same store comparison is not available in 1995 since 1995 is the
year of their initial acquisition.
Revenues. Total revenue increased from $2,948,545 in 1995 to $7,840,624 in
1996, or 166%, due predominantly to the acquisition of three multifamily
properties. A similar comparison between 1996 and 1997 shows an increase of
$6,289,157, or 80%. Most of the increase was the result of the acquisition of
one multifamily property as same store revenue increased $158,756, or 2.5%. This
same store revenue increase was largely the result of a 2.8% increase in rental
rates.
Operating and Maintenance Expenses. These expenses include salaries and
benefits, repairs and maintenance and utilities. From 1995 to 1996, operating
and maintenance (O&M) expenses increased by $1,103,335, or 206%, with repairs
and maintenance representing $424,590, or 38.9%, of this increase. This
36
<PAGE> 41
increase was the result of a 138% expansion in the number of units over this
period. O&M expenses increased by $1,667,648, or 102%, from 1996 to 1997 with
repairs and maintenance representing $495,890, or 29.7%, of this increase. The
lower relative increase in this category is a result of significant capital
improvements conducted over the previous year. Of the O&M expense increase from
1996 to 1997, $59,233 or 3.6%, was due to same store increases.
Real Estate Taxes and Insurance. Taxes and insurance expense increased by
$475,339, or 150%, from 1995 to 1996. These expenses increased at a rate
commensurate with the acquisition of new assets. These expenses grew by
$681,030, or 85.8%, from 1996 to 1997, which was again similar to the growth in
asset base. Same store assets contributed $35,966, or 6.5%, to this total
increase.
Management and Professional Fees. Management and professional fees
increased by 185% between 1995 and 1996 to $749,570. From 1996 to 1997, these
fees increased 61% to $1,232,489.
Depreciation. Depreciation expenses for 1995, 1996 and 1997 were $390,378,
$1,169,247 and $2,244,944, respectively. These amounts exhibit annual rates of
increase of 200% and 92% for 1996 and 1997, respectively. Increases in
depreciation are predominantly attributed to the acquisition of new assets.
Interest. Interest expense of $712,238 was incurred during 1997 because of
the use of a line of credit established to facilitate the acquisition of assets
and deployment of committed capital. There was no such line of credit available
in 1996 or 1995.
LIQUIDITY AND CAPITAL RESOURCES -- THE MIG COMPANIES
MIG's asset management, property management and servicing fee base,
supplemented with acquisition and disposition fees, provide it with adequate
working capital on an annual basis. Corporate strategy and planning allow for an
appropriate matching of expected contract revenues with expenses. Other than
occupancy costs, most expenses are immediately adjustable as the contract fees
change with the sizes of the portfolios under management.
Since fees are typically received quarterly in arrears, short-term cash
requirements are met by the use of lines of credit. At December 31, 1997, there
were three lines of credit of $500,000 each. Borrowings on these lines of credit
are used to meet short-term working capital needs. Each line of credit is
personally guaranteed by MIG's two majority shareholders. Interest is charged at
prime, prime plus 1% and prime plus 1.5% on each of the three lines,
respectively. Commitment fees in the aggregate of $4,300 are charged at the time
of renewal of the lines, whose terms are staggered. At December 31, 1997, the
balance outstanding under these lines of credit totaled $219,000.
A fourth line of credit is used solely to fund advances as necessary to
MIG's development affiliate. Over the past three years the highest balance drawn
on the line at any given time has not exceeded $391,000, since there is a
portion of the line being utilized as collateral for a letter of credit in the
amount of $109,000. Interest is charged at prime. With a weighted average
interest rate of 8.5%, annual commitment fees of $1,250 are charged at the time
of renewal. At December 31, 1997, the balance outstanding on this line of credit
was $391,000.
Net cash provided by operating activities decreased $2,565,164, from
$283,942 to $(2,281,222), for the year ended December 31, 1997 compared with the
year ended December 31, 1996. The decrease was primarily the result of
$1,290,777 of expenses incurred in connection with MIG's reorganization
activities and approximately $2,000,000 advanced to affiliates in connection
with the completion of three development transactions.
Net cash provided by operating activities increased $567,740, from
$(283,798) to $283,942, for the year ended December 31, 1996 compared with the
year ended December 31, 1995. The increase was primarily the result of $581,169
in net income.
Net cash provided by investing activities of $1,519,345 for the year ended
December 31, 1997 was primarily the result of $1,371,855 of principal collected
from shareholders. Net cash provided by investing activities of $1,353,849 for
the year ended December 31, 1996 was primarily the result of $11,974,430 in
37
<PAGE> 42
principal collected on construction loans receivable and $(9,838,236) in
construction loan commitments funds.
Net cash flows provided by financing activities of $597,480 for the year
ended December 31, 1997 was primarily comprised of borrowings on the line of
credit. Net cash flows provided by financing activities of $2,074,884 for the
year ended December 31, 1996 was primarily comprised of proceeds from
construction loan borrowings of $9,919,616 and payments of construction loans
payable of $11,974,430.
Net cash used by financing activities totaled $(597,480), $2,074,884 and
$7,826,567 for the years ended December 31, 1997, 1996 and 1995, respectively.
Net cash provided by investing activities totaled $1,519,345, $1,353,849 and
$6,969,887 for the years ended December 31, 1997, 1996 and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES -- MIG REIT
During 1997, MIG REIT entered into a revolving line-of-credit agreement
(the "LOC") with a bank which provided unsecured maximum aggregate borrowing
availability 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, MIG REIT is required to
maintain compensating balances 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.
Furthermore, MIG REIT has entered into an agreement not to encumber a pool of
real estate assets (the "Asset Pool") whose aggregate Net Asset Value must be
equal to four times the outstanding balance of the LOC. The bank has recorded an
Agreement Not To Encumber against each asset in the Asset Pool, which asset is
to be maintained free and clear of any and all liens. Mature properties in the
Asset Pool are Annen Woods Apartments, Fleetwood Apartments, Morgan Place
Apartments, Peachtree Apartments, Windsor Falls Apartments, 20th & Campbell
Apartments and Desert Oasis Apartments.
Advances under the LOC bear interest at the prime rate minus 1%, LIBOR plus
1.25% or a fixed rate of 8%, as selected by MIG REIT for each Interest Period.
Interest is payable monthly. The effective rate at December 31, 1997 was 7.21%.
MIG REIT 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.
Net cash provided by operating activities increased $2,181,662 from
$4,140,038 for the year ended December 31, 1996 to $6,321,700 for the year ended
December 31, 1997. This increase was primarily the result of an increase in net
income and depreciation of approximately $1,128,000 and $1,076,000,
respectively, attributable to new acquisitions. Net cash provided by operating
activities increased $2,241,270 from $1,898,768 for the year ended December 31,
1995 to $4,140,038 for the year ended December 31, 1996. This increase was
primarily the result of an increase in net income and depreciation of
approximately $1,756,000 and $778,870, respectively, attributable to new
acquisitions.
Net cash flows used for investing activities of $21,857,796 and $43,536,88
for the years ended December 31, 1997 and 1996, respectively, was primarily used
for the acquisition of multifamily real estate.
Net cash flows provided by financing activities of $16,300,116 for the year
ended December 31, 1997 was primarily comprised of $9,433,000 in contributions
from subscribing shareholders, $10,000,000 in net borrowings on the line of
credit, and the payment of $4,320,000 in dividends. Net cash flows provided by
financing activities of $41,146,941 for the year ended December 31, 1996 was
primarily comprised of $44,128,000 of contributions from subscribing
shareholders and the payment of $3,533,935 of dividends.
INFLATION
Substantially all of the market rate leases at the properties allow, at the
time of renewal, for adjustments in the rent payable thereunder, and thus may
enable MIG to seek increases in rents. The substantial majority of these leases
are for one year or less and the remaining leases are for terms up to two years.
The short-term nature of these leases generally serves to reduce the risk to MIG
of the adverse effect of inflation.
38
<PAGE> 43
CONTINGENCY
MIG has assessed its computer system's ability to function properly with
respect to dates in the year 2000 and thereafter. MIG 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.
OVERVIEW -- FIRST QUARTER 1998
The MIG Companies -- For the periods ended March 31, 1998 and 1997
Total revenue decreased by $710,114, or 26.4%, in the first three months of
1998 as compared with the first three months of 1997. For the same time periods,
total expenses increased $205,689, or 8.2%, for the first three months of 1998
as compared with the first three months of 1997. The decline in revenues over
the comparison periods was due to MIG advising clients on fewer investments and,
as a result, there being fewer assets under management as well as MIG divesting
itself of its affordable housing and construction lending activities. The
increase in expenses is primarily due to activities associated with the MIGRA
Merger.
Acquisition, management and disposition fees decreased between comparison
quarters 1998 and 1997 by $540,604, or 24.0%. The decrease is the result of
several clients selling their investments resulting in fewer advised investments
and managed properties as well as there being no acquisitions made on behalf of
clients in the first three months of 1998.
Servicing fees decreased $98,620, or 30.6%, for the three months ended
March 31, 1998, as compared to the three months ended March 31, 1997. This
decrease was the result of several serviced loans being paid off and MIG no
longer pursuing construction lending activities.
Interest income and origination fees decreased between comparison first
quarters 1998 and 1997 by $35,358, or 68.2%, as MIG continued to focus on its
apartment advisory business.
Salaries and travel expenses decreased $145,236, or 8.4%, for the period
ended March 31, 1998, as compared against the period ended March 31, 1997, as
the number of staff and their related travel decreased as a result of there
being no client acquisitions.
The increase in professional fees and the other expense category of
$379,550, or 106%, from March 31, 1998, to March 31, 1997, is the result of an
increase in consulting and legal costs related to the negotiation of the MIGRA
Merger. During the first quarter of 1998, $423,411 of expenses were incurred in
connection with the MIGRA Merger.
Equity in net income of unconsolidated subsidiaries decreased by $264,311,
or 97.8%, for the first three months on 1998 as compared with the first three
months of 1997.
The MIG Residential REIT -- Periods ended March 31, 1998 and 1997
The table on page 28 of this Proxy Statement describes the multifamily
properties owned by MIG REIT. An important measure of property performance, in
addition to increasing rental rates and expense control, is physical occupancy.
The portfolio weighted average physical occupancy was 93.1% and 94.0% for March
31, 1998, and 1997, respectively. This occupancy measure has been stable since
inception.
RESULTS OF OPERATIONS
Revenues. Total revenue increased $668,221, or 21.5%, from $3,108,501 for
the period ended March 31, 1997, to $3,776,722 for the period ended March 31,
1998, or 21.5%, due predominantly to the February 1998 acquisition of a
multifamily property.
Operating and Maintenance Expenses. These expenses include salaries and
benefits, repairs and maintenance and utilities. From March 31, 1997 to March
31, 1998, operating and maintenance expenses increased by $285,479, or 42.5%,
with repairs and maintenance representing $209,456 or 73.4% of this increase.
This increase was the result of an expansion in the number of units over this
period.
39
<PAGE> 44
Real Estate Taxes and Insurance. Taxes and insurance expense increased by
$74,630 or 23.9% between the quarter ended March 31, 1997 and the quarter ended
March 31, 1998. These expenses increased at a rate commensurate with the
acquisition of new assets.
Management and Professional Fees. Management and professional fees
increased by $8,680, or 3.8%, between March 31, 1997 and March 31, 1998.
Depreciation. Depreciation expenses for March 31, 1997 and 1998 were
$476,013, and $595,672, respectively, representing an increase of 25.1%.
Increases in depreciation are predominantly attributed to the acquisition of new
assets.
Interest. Interest expense of $196,231 was incurred during the first
quarter of 1998 because of the use of a line of credit established to facilitate
the acquisition of assets and deployment of committed capital. This represents
an increase of $121,754, or 163.55%, over the same time period of 1997.
LIQUIDITY AND CAPITAL RESOURCES -- THE MIG COMPANIES
MIG's asset management, property management and servicing fee base,
supplemented with acquisition and disposition fees, provide it with adequate
working capital on an annual basis. Corporate strategy and planning allow for an
appropriate matching of expected contract revenues with expense. Other than
occupancy costs, most expenses are immediately adjustable as the contract fees
change with the sizes of the portfolios under management.
Since fees are typically received quarterly in arrears, short-term cash
requirements are met by the use of the lines of credit. At March 31, 1998, there
were three lines of credit of $500,000 each. Borrowings on these lines of credit
are used to meet short-term working capital needs. Each line of credit is
personally guaranteed by MIG's two majority shareholders. Interest is charged at
prime, prime plus 1% and prime plus 1.5% on each of the three lines
respectively. Commitment fees in the aggregate of $4,300 are charged at the time
of renewal of the lines, whose terms are staggered. At March 31, 1998, the
balance outstanding under these lines of credit totaled $720,000.
A fourth line of credit is used solely to fund advances as necessary to
MIG's development affiliate. Over the past three years the highest balance drawn
on the line at any given time has not exceeded $391,000, since there is a
portion of the line being utilized as collateral for a letter of credit in the
amount of $ 109,000. Interest is charged at prime. Annual commitment fees of
$1,250 are charged at the time of renewal. At March 31, 1998, the balance
outstanding on this line of credit was $391,000.
Net cash provided by operating activities increased $576,628 from
$(1,264,344) to $(687,716) for the year quarter ended March 31, 1998 when
compared with the quarter ended March 31, 1997. The increase was primarily the
result of there being fewer expenses incurred in connection with MIG's
reorganization activities.
Net cash used by investing activities of $1,002 for the quarter ended March
31, 1998 was the result of the purchase of property and equipment of $7,002 and
distributions from unconsolidated entities of $6,000. Net cash provided by
investing activities of $196,092 for the quarter ended March 31, 1997 was the
result of the purchase of property and equipment of $38,756 and distributions
from unconsolidated entities of $234,848.
Net cash flows provided by financing activities of $501,000 for the quarter
ended March 31, 1998 was primarily comprised of borrowings on the Line of
Credit. Net cash flows provided by financing activities of $706,703 for the
quarter ended March 31, 1997 was primarily comprised of borrowings and
repayments on the Line of Credit.
LIQUIDITY AND CAPITAL RESOURCES -- MIG REIT
During 1997, MIG REIT entered into a revolving line-of-credit agreement
(the "LOC") with a bank which provided unsecured maximum aggregate borrowing
availability 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, MIG REIT is required to
maintain compensating balances 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.
Furthermore, MIG REIT has entered into an agreement not to encumber a pool of
40
<PAGE> 45
real estate assets (the "Asset Pool") whose aggregate Net Asset Value must be
equal to four times the outstanding balance of the LOC. The bank has recorded an
Agreement Not To Encumber against each asset in the Asset Pool, which asset is
to be maintained free and clear of any and all Liens. Mature Properties in the
Asset Pool are Annen Woods Apartments, Fleetwood Apartments, Morgan Place
Apartments, Peachtree Apartments, Windsor Falls Apartments, 20th & Campbell
Apartments and Desert Oasis Apartments.
Advances under the LOC bear interest at the prime rate minus 1%, LIBOR plus
1.25% or a fixed rate of 8%, as elected by MIG REIT for each Interest Period.
Interest is payable monthly. The effective rate at December 31, 1997 was 7.21%.
MIG REIT 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.
Net cash provided by operating activities increased $161,571 from
$1,521,567 for the quarter ended March 31, 1997 to $ 1,683,138 for the quarter
ended March 31, 1998. This increase was primarily the result of an increase in
depreciation and other assets, offset by decreases in net income and security
deposit payable and other liabilities.
Net cash flows used for investing activities of $561,821 and $20,581,764
for the quarters ended March 31, 1998 and 1997, respectively, were primarily
used for the property improvements and the acquisition of multifamily real
estate.
Net cash flows used by financing activities of $1,159,177 for the quarter
ended March 31, 1998 were primarily comprised of $440,823 in contributions from
subscribing shareholders and $1,600,000 paid in dividends. Net cash flows
provided by financing activities of $18,869,858 for the quarter ended March 31,
1997 were primarily comprised of $2,584,000 of contributions from subscribing
shareholders and $16,850,000 in borrowings on the Line of Credit, in connection
with the February 1997 acquisition of a multifamily property.
41
<PAGE> 46
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 incorporated by reference
into this Proxy Statement and the MIG REIT and MIG Companies financial
statements included elsewhere in this Proxy Statement. 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, nor does it
purport to represent the future financial position of the Company.
42
<PAGE> 47
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>
43
<PAGE> 48
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 5,123,619 Common Shares (iii):
Common shares.......................................... 512
Paid in capital........................................ 96,888
--------
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 5,123,619 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 $19.01 per share, which is the average closing price for the 20
trading days immediately preceding May 26, 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).
44
<PAGE> 49
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.
45
<PAGE> 50
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 May 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 19, 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.
46
<PAGE> 51
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 Development
Properties. 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.
47
<PAGE> 52
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 incorporated by reference into this
Proxy Statement 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 Proxy Statement.
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.
48
<PAGE> 53
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............ -- -- -- 227 540 -- -- 767
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 $ 0.09
======= =======
Weighted average number of
shares -- basic......... 17,072 22,604(l)
======= =======
-- diluted........ 17,075 22,607(l)
======= =======
</TABLE>
49
<PAGE> 54
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,
50
<PAGE> 55
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 5.124 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.
51
<PAGE> 56
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......... 22,609 (o)
========
-- diluted......... 22,631 (o)
========
</TABLE>
52
<PAGE> 57
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>
53
<PAGE> 58
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 5.124 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.
54
<PAGE> 59
ELECTION OF DIRECTORS
At the Annual Meeting, Common Shares represented by proxies, unless
otherwise specified, will be voted for the election of the six nominees
hereinafter named, each to serve as a director until the next annual meeting of
shareholders and until his successor is duly elected and qualified.
If for any reason any of the nominees is not a candidate (which is not
expected) when the election occurs, it is intended that proxies will be voted
for the election of a substitute nominee designated by the Board of Directors.
The following information is furnished with respect to each person nominated for
election as a director.
NOMINEES FOR ELECTION AT THE ANNUAL MEETING
<TABLE>
<CAPTION>
DIRECTOR
NAME AND AGE PRINCIPAL OCCUPATION SINCE
------------ -------------------- --------
<S> <C> <C>
Jeffrey I. Friedman Chairman of the Board of Directors, 1993
46 President and Chief Executive
Officer of the Company
Mark L. Milstein President of Adam Construction 1993
35 Company
Albert T. Adams Partner, Baker & Hostetler LLP 1996
47
Gerald C. McDonough Retired 1993
69
Frank E. Mosier Retired 1993
67
Richard T. Schwarz President and Chief Executive 1994
46 Officer, Monashee Partners Inc.
</TABLE>
Jeffrey I. Friedman has been Chairman of the Board, President and Chief
Executive Officer of the Company since its organization in July 1993. Mr.
Friedman joined AEG, the Company's predecessor, in 1974 and was the Chief
Executive Officer and President of Associated Estates Corporation, an owner and
manager of multifamily residential apartment facilities, from 1979 to 1993.
Mark L. Milstein has been a director of the Company since its organization.
Mr. Milstein has been President of Adam Construction Company since 1993 and has
been a Senior Project Manager for Adam Construction Company, a general
contractor, since 1988, supervising the construction and rehabilitation of
various projects for AEG. Mr. Milstein is the brother-in-law of Jeffrey I.
Friedman.
Albert T. Adams has been a partner with the law firm of Baker & Hostetler
LLP in Cleveland, Ohio, since 1984, and has been affiliated with the firm since
1977. Mr. Adams is a graduate of Harvard College, Harvard Business School and
Harvard Law School. He serves as a member of the Board of Trustees of the
Greater Cleveland Roundtable and of Western Reserve Historical Society and is a
Vice President of the Harvard Business School Club of Northeastern Ohio. Mr.
Adams is a director of Boykin Lodging Company and Developers Diversified Realty
Corporation.
Gerald C. McDonough served as Chairman and Chief Executive Officer of
Leaseway Transportation Corp., a highway transportation company, from 1982 until
his retirement in July 1988. Mr. McDonough serves as an Independent Trustee of
The Fidelity Funds and is a director of Commercial Intertech Corporation, CUNO,
Inc. and York International Corporation.
Frank E. Mosier served as Vice Chairman of the Advisory Board of BP America
Inc., a producer and refiner of petroleum products, from 1991 to 1993. Mr.
Mosier was Vice Chairman of BP America Inc. from
55
<PAGE> 60
1988 until his retirement in 1991 and President and Chief Operating Officer of
BP America Inc. from 1986 to 1988. Mr. Mosier serves as a director of Boykin
Lodging Company.
Richard T. Schwarz is President and Chief Executive Officer of Monashee
Partners Inc., a company in the business of providing commercial real estate
construction loans. Mr. Schwarz was President of Laurel Industries, Inc., a
subsidiary of Occidental Petroleum Corporation, from August 1996 to September
1997. Mr. Schwarz was Vice President and General Manager, Antimony Division,
Laurel Industries, Inc. from 1983 to August 1996.
After the election of directors as provided herein, a vacancy will exist on
the Board of Directors. If the Acquisitions are consummated, the directors
intend to fill that vacancy with Larry E. Wright. Mr. Wright has been Chairman
of the Board, President and Chief Executive Officer of MIGRA since 1982. No
decision has been made with respect to a candidate to fill the vacancy if the
Acquisitions are not consummated.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Audit Committee, an Executive Compensation
Committee and an Executive Committee. The Board of Directors does not have a
nominating committee. The Board of Directors held six meetings in 1997. Each
member of the Board of Directors attended at least 75% of the meetings held in
1997 of the Board of Directors and committees of which he was a member.
Audit Committee. The Audit Committee, which consists of Messrs. McDonough
(Chairman), Adams, Mosier and Schwarz, makes recommendations concerning the
engagement of independent public accountants, reviews with the independent
public accountants the audit plans and results of the audit engagement, approves
professional services provided by the independent public accountants, reviews
the independence of the independent public accountants, considers the range of
audit and non-audit fees and reviews the adequacy of the Company's internal
accounting controls. The Audit Committee held two meetings in 1997.
Executive Compensation Committee. The Executive Compensation Committee,
which consists of Messrs. Mosier (Chairman), Adams, McDonough and Schwarz,
determines compensation for the Company's executive officers and administers the
Company's stock option plan. The Executive Compensation Committee held three
meetings in 1997.
Executive Committee. The Executive Committee, which during 1997 consisted
of Messrs. Friedman (Chairman), Milstein and Jerome Spevack, possesses and may
exercise the power of the Board of Directors in the management of the business
and affairs of the Company (other than filling vacancies on the Board or any
committees thereof) during intervals between meetings of the Board of Directors.
The Executive Committee held four meetings in 1997.
Pricing Committee. The Pricing Committee, which during 1997 consisted of
Messrs. Friedman, Adams and Spevack, is authorized to approve the price and
terms of offerings of up to an aggregate amount of $50 million of the Company's
debt and equity securities. The Pricing Committee was established in August,
1997 and did not hold any meetings in 1997.
COMPENSATION OF DIRECTORS
The Company pays an annual fee of $16,000, plus a fee of $1,000 for each
Board or committee meeting attended, to its directors who are not employees of
the Company. Employees of the Company who are also directors are not paid any
director fees. Each non-employee director is reimbursed for expenses incurred in
attending meetings.
Non-employee directors are permitted to defer all or a portion of their
fees pursuant to the Company's Directors' Deferred Compensation Plan. The plan
is unfunded and participants' contributions are converted to units, the value of
which fluctuates according to the market value of the Common Shares.
56
<PAGE> 61
EXECUTIVE COMPENSATION
REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE
Introduction. The Executive Compensation Committee of the Company's Board
of Directors (the "Committee") is responsible for determining compensation to be
paid to the Company's executive officers. The Committee members are Frank E.
Mosier (Chairman), Albert T. Adams, Gerald C. McDonough and Richard T. Schwarz.
The Committee is also responsible for making major policy decisions with respect
to health care and other benefit plans and administering the Company's Executive
Incentive Plan, Long-Term Incentive Compensation Plan, Share Incentive Plan, the
Equity-Based Incentive Compensation Plan and the Supplemental Executive
Retirement Plan.
Governing Principles. The Company's executive compensation philosophy is
guided by several principles, as set forth below:
- to provide competitive levels of total compensation in order to attract,
motivate and retain highly capable executives;
- to align the interests of executives and shareholders by linking a
substantial portion of each executive's compensation directly to the
Company's performance;
- to reward performance that contributes to the profitable growth of the
Company, as measured by the creation of sustained shareholder value; and
- to balance short- and longer-term variable, incentive compensation to
achieve desired financial and operating results that tie pay to
performance.
To this end, the Committee determines executive compensation consistent
with a philosophy of compensating executive officers, including the Chief
Executive Officer, based on their responsibilities and the Company's performance
as measured by the achievement of established annual and longer-term goals. The
key components of the program are base salary, annual performance bonuses and
long-term incentive compensation. The Committee does not allocate a fixed
percentage of compensation to each of these three elements, but intends to work
with management to design compensation structures that will best serve the
Company's goals. Each of these components is discussed separately below. The
Company has engaged Watson Wyatt Worldwide to assist in the design and
continuing development of the compensation program.
In establishing base salaries, incentive plan award opportunities and
related financial performance goals, the Committee has considered, among other
things, the size and certain performance criteria of those companies included in
the Peer Group identified in the performance graph on page 62 (excluding Equity
Residential Property Trust and Security Capital Pacific Trust due to their
significantly larger size). The Committee believes the executive compensation
program, in total, appropriately considers the Company's overall performance
relative to the Peer Group as measured primarily by Funds From Operations (FFO)
and that the compensation earned in 1997 by the executive officers is reflective
of such comparable performance.
The Committee has examined the Company's potential exposure relating to
Section 162(m) of the Internal Revenue Code of 1986, as amended. In any event,
and in order to avoid potential problems with deductibility in the future, the
Company has obtained shareholder approval of certain of its compensation plans
so that amounts paid under these plans would qualify as performance-based
compensation and thus be exempt from the limitations on deductibility imposed by
Section 162(m).
Base salary. Base salaries for executive officers are reviewed annually and
reflect economic and competitive trends, role responsibilities, individual
accomplishments and overall achievements of the Company. In adjusting base
salaries for executive officers, the Committee has examined competitive trends
by analyzing salaries paid within the multifamily REIT industry, internal equity
among executives, any planned responsibility changes for the coming year, and
individual accomplishments.
Annual Performance Bonus. All of the Company's executive officers are
eligible to participate in an annual bonus plan which provides for annual
performance bonuses based upon the Company's performance against certain annual
performance benchmarks tied to Funds From Operations (FFO) per share. The Chief
Executive Officer's bonus plan is set forth in his Employment Agreement and the
other officers participate in the Company's Executive Incentive Plan. The
performance measures and goals of these two plans are the same. Funds From
Operations is defined by NAREIT as net income (loss) determined in accordance
with
57
<PAGE> 62
generally accepted accounting principles, excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation and amortization, and
after adjustments for unconsolidated partnerships and joint ventures. Annual
incentive opportunities are set at the beginning of each year and are based upon
the participant's level of responsibility and salary. These incentives are
communicated to participants in the form of minimum and target incentive
opportunities. Award payouts may be made in a combination of cash and restricted
shares, at the discretion of the Committee. Since the Company did not meet
minimum performance benchmarks, no participant earned an annual performance
bonus in 1997.
Long-Term Incentives. Long-term incentive compensation is delivered through
the Long-Term Incentive Compensation Plan, Share Incentive Plan and Equity-Based
Incentive Compensation Plan. All executive officers are eligible to participate
in all plans.
The Long-Term Incentive Compensation Plan rewards the achievement of
corporate goals and performance that are in the long-term interests of
shareholders. The Plan is strictly performance-based and focuses on actions of
management to improve the Company's business as defined by compounded growth in
Funds From Operations per share over a three-year period. The Committee
establishes the Funds From Operations growth benchmarks at the beginning of each
three-year Plan cycle based upon the performance expectations of the Company
given its specific business circumstances. Awards earned under the Plan may be
paid in a combination of cash and restricted shares, at the discretion of the
Committee. Since the Company did not meet minimum performance benchmarks for the
initial three-year cycle of the Plan, no award was earned by any participant at
the end of 1997.
The Equity-Based Incentive Compensation Plan and Share Incentive Plan
provide executive officers and other key employees of the Company the
opportunity to earn common shares or share-based incentives as a means of
strengthening mutual interests between management and shareholders. The
Committee believes that by providing key employees with an opportunity to
increase their ownership of shares in the Company, the interests of shareholders
and executives will be closely aligned. Awards made under the Plans may be in
the form of share options, restricted shares or deferred shares. Share options
are granted at no less that 100% of the current fair market value of the
Company's shares on the date of the grant and will only be of value to the
extent the share price increases over time. Generally, share options and
restricted share awards will vest in installments over no less than a three-year
period and, in most cases, in order to exercise the vested options or have
restrictions lapse, the applicable employee must be employed by the Company at
the time of the event. In determining whether and in what amount to make grants
under the Plans the Committee considers, among other factors, the scope of
responsibility, the anticipated performance, and the contribution to the
Company, of the proposed award recipient.
Pursuant to these two Plans, share options grants were made to certain
employees, including each of the executive officers (other than Mr. Selby who
was first employed by the Company in September 1996), at the time of the
Company's initial public offering in November 1993. A restricted share grant was
made to Mr. Bikun and Mr. Fishman in 1995, and Mr. Selby received a grant of
options at his time of hire. No subsequent share-based awards were made under
these Plans until December 1997, at which time the Committee authorized grants
of share options to executive officers as identified in the Summary Compensation
Table and Options/SAR Grants Table. The Committee also approved grants of
restricted shares to Mr. Bikun, Mr. Fishman, and Mr. Selby in connection with
1998 base salary adjustments.
Supplemental Executive Retirement Plan. The Company's Supplemental
Executive Retirement Plan (the "SERP") was adopted by the Board of Directors on
January 1, 1997. This Plan was implemented to provide competitive retirement
benefits for executive officers and to act as a retention incentive. The SERP is
administered by the Committee. This non-qualified, unfunded, defined
contribution plan extends to certain named officers of the Company nominated by
the Chief Executive Officer and approved by the Committee. The SERP provides for
the Company to make a contribution to the account of each of the participating
officers at the end of each Plan year. The contribution, which is a percentage
of eligible earnings (including base salary and payments under the Executive
Incentive Plan), is set by the Committee at the beginning of each Plan year.
Contributions will not be taxable to the participant (other than social security
and federal unemployment taxes) until distribution. The contribution is treated
by the Company as an unfunded liability until the benefits are paid and a
deduction is recognized. The account balances earn interest each year at a rate
58
<PAGE> 63
that approximates the Company's average cost of capital. The Committee approves
this interest rate at the beginning of each Plan year.
At January 1, 1997, the SERP's inception date, an initial contribution, as
referenced in the Summary Compensation Table found on page 60, was established
to give credit for a specified portion of each participant's prior years of
service. This initial contribution amount is credited to the participants'
accounts, in equal installments, over a five-year period.
Each participant's SERP account is vested upon his retirement at age 55, at
the discretion of the Committee and in accordance with the SERP, upon his
retirement by reason of total disability or upon his death. In the event the
participant retires or otherwise terminates his employment with the Company in a
manner other than listed in the previous sentence, the participant's SERP
account is forfeited.
A participant must elect the manner in which his balance will be
distributed upon retirement. At least one year prior to the intended retirement,
a participant can elect to receive his payment either in a lump sum cash
distribution or in monthly installments over a period not to exceed five years.
Upon a Change in Control (as hereinafter defined), all of the SERP accounts
will be fully credited with the initial contribution if they have not already
been credited and will be fully vested in the participants' accounts. Within 30
days of a Change in Control, the Company must make a cash contribution to an
irrevocable "rabbi" trust in an amount necessary to fund fully the SERP
accounts. For purposes of the SERP, a Change in Control means the first of the
following to occur:
(a) any person or group of commonly controlled persons owns or
controls, directly or indirectly, 50% or more of the voting control or
value of the capital shares of the Company;
(b) any person or group of commonly controlled persons that owned less
than 5% of the voting control or value of the capital shares of the Company
within 30 days following consummation of the initial public offering of the
Company's Common Shares owns or controls, directly or indirectly, more than
20% of the voting control or value of the capital shares of the Company; or
(c) the shareholders of the Company approve an agreement to merge or
consolidate with another corporation or other entity resulting (whether
separately or in connection with a series of transactions) in a change in
ownership of 20% or more of the voting control or value of the capital
shares of the Company, or an agreement to sell or otherwise dispose of all
or substantially all of the assets (including, without limitation, a plan
of liquidation or dissolution), or otherwise approve a fundamental
alteration in the nature of the Company's business.
Shareholder approval of the Acquisitions will trigger a Change in Control
under the SERP. However, all of the Participants have waived their rights with
respect thereto.
Chief Executive Officer Compensation. The base compensation for Jeffrey I.
Friedman was established and has been administered pursuant to an employment
agreement (the "Employment Agreement") which was entered into between Mr.
Friedman and the Company as of November 10, 1993, in connection with the
Company's IPO and was amended and restated as of January 1, 1996. For 1997, Mr.
Friedman earned a base salary of $458,480, which was a 4.2% increase over his
1996 salary level and consistent with general industry practice. The Committee
made no base salary adjustment for 1998.
Prior to 1996, the Employment Agreement provided for an annual cash bonus
for Mr. Friedman based on the growth in the Company's Distributable Cash Flow
(as defined in the agreement). The amended Agreement now provides for a
performance bonus based upon annual performance benchmarks tied to Funds From
Operations per share, consistent with the Executive Incentive Plan in which the
other executive officers participate. Mr. Friedman did not earn a bonus in 1997
under his annual performance program, nor did he receive an award under the
Long-Term Incentive Compensation Plan in which he is a participant. The
Committee approved a grant of 250,000 stock options to Mr. Friedman in December
1997 as an incentive to increase shareholder value through his continued
leadership and management of the Company.
Executive Compensation Committee
<TABLE>
<S> <C>
Frank E. Mosier, Chair Albert T. Adams
Gerald C. McDonough Richard T. Schwarz
</TABLE>
59
<PAGE> 64
SUMMARY COMPENSATION TABLE
The following table sets forth information for the year ended December 31,
1997, with respect to the cash compensation earned and the number of stock
options granted to the Company's Chief Executive Officer and the Company's other
executive officers whose base compensation exceeded $100,000.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------ -----------------------
RESTRICTED
STOCK STOCK ALL OTHER
FISCAL SALARY BONUS AWARDS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($)(1)
- --------------------------- ------ ------ ----- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey I. Friedman 1997 458,480 -0- -0- 250,000 75,191
Chairman, President and 1996 440,000 227,854 -0- -0- N/A
Chief Executive Officer 1995 385,000 101,409 -0- -0- N/A
Jerome Spevack(2) 1997 175,000 -0- -0- -0- N/A
Vice President 1996 175,000 54,374 -0- -0- N/A
1995 175,000 52,500 -0- -0- N/A
Martin A. Fishman 1997 161,000 -0- 10,015(3) 70,000 32,545
Vice President, General 1996 154,150 52,277 -0- -0- N/A
Counsel and Secretary 1995 154,500 46,350 10,250(4) -0- N/A
Thomas G. Selby 1997 150,000 -0- 10,015(3) 70,000 10,131
Vice President, 1996 37,500(6) 10,000 -0- 25,000(7) N/A
Operations(5)
Dennis W. Bikun 1997 150,000 -0- 10,015(3) 70,000 25,659
Chief Financial Officer 1996 135,713 42,167 -0- -0- N/A
and Treasurer 1995 123,375 37,013 10,250(4) -0- N/A
</TABLE>
- ---------------
(1) Reflects one-fifth of the initial contributions under the SERP.
(2) Mr. Spevack tendered his resignation from the Company effective May 1, 1998.
(3) Constitutes a grant of 439 Common Shares on December 3, 1997 which are
subject to restrictions on transfer and forfeiture for a period of three
years from the date of grant. The closing market price of the Company's
Common Shares on the date of grant was $22.8125.
(4) Constitutes a grant of 500 Common Shares on December 6, 1995 which are
subject to restrictions on transfer and forfeiture for a period of three
years from the date of grant. The closing market price of the Company's
Common Shares on the date of grant was $20.50.
(5) Mr. Selby tendered his resignation from the Company effective March 20,
1998.
(6) Mr. Selby was employed by the Company as of September 30, 1996.
(7) In connection with his employment, Mr. Selby was granted 25,000 options to
purchase Common Shares at an exercise price of $20.50. The options have
terminated pursuant to the terms of the Share Incentive Plan.
60
<PAGE> 65
OPTION GRANTS IN 1997
The following table sets forth information with respect to options to
purchase Common Shares granted during 1997 by the Company to executive officers
named in the Summary Compensation Table:
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS EXERCISE GRANT
UNDERLYING GRANTED TO OF BASE DATE
OPTIONS EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME GRANTED(#) 1997 ($/SH) DATE VALUE($)(1)
---- ---------- ------------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Jeffrey I. Friedman 250,000 37% $24.06 10/21/07 $465,725
Jerome Spevack -0- -0- N/A N/A N/A
Martin A. Fishman 70,000 10% $24.06 10/21/07 $130,403
Thomas G. Selby 70,000 10% $24.06 10/21/07 $130,403
Dennis W. Bikun 70,000 10% $24.06 10/21/07 $130,403
</TABLE>
- ---------------
(1) Based on a Black Scholes pricing model, using a volatility assumption of
16.3% based on the Company's historical weekly stock price history from
November 1993 through the date of the grant, a risk-free rate of return of
approximately 6.00%, a dividend yield of 7.8% based on the weighted average
annual dividend yield for 1996 and 1997, and a term of eight years.
AGGREGATED OPTION EXERCISES IN 1997 AND 1997 YEAR-END OPTION VALUES
The following table sets forth information with respect to options to
purchase Common Shares exercised during 1997 by the executive officers named in
the Summary Compensation Table and the number and value of options held on
December 31, 1997.
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
1997 YEAR- 1997 YEAR-
SHARES VALUE END(#) END($)
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) ($) UNEXERCISABLE UNEXERCISABLE(1)
---- ----------- -------- ------------- ----------------
<S> <C> <C> <C> <C>
Jeffrey I. Friedman -0- -0- 200,000/250,000 $ 350,000/-0-
Jerome Spevack -0- -0- 25,000/-0- $ 43,750/-0-
Martin A. Fishman -0- -0- 20,000/70,000 $ 35,000/-0-
Thomas G. Selby(2) -0- -0- 8,333/86,667 $27,082/54,168
Dennis W. Bikun -0- -0- 20,000/70,000 $ 35,000/-0-
</TABLE>
- ---------------
(1) Based upon a December 31, 1997 closing price of $23.75.
(2) Mr. Selby's options have terminated pursuant to the terms of the Share
Incentive Plan.
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with Jeffrey I. Friedman. This
agreement provided for an initial three-year term which commenced November 18,
1993 and is automatically extended for an additional year at the end of each
year of the agreement, subject to the right of either party to terminate by
giving one year's prior written notice. Pursuant to this agreement, Mr. Friedman
is required to devote to the Company his entire business time and may engage in
future real estate activities only through the Company. In addition, Mr.
Friedman is prohibited from competing with the Company for a period of three
years following termination of employment. The agreement provides for the annual
base salary set forth under the Summary Compensation Table, as well as the use
of an automobile, membership in a golf club and a business club, an allowance of
up to $10,000 annually for financial planning, tax return and preparation
service, and certain additional compensation. The agreement was amended in
January 1996 to provide for an annual performance bonus equal to 25% to 100% of
his annual base salary based on the Company achieving certain Funds From
Operations benchmarks. The agreement contains a change-in-control provision
identical to the provision
61
<PAGE> 66
contained in the SERP. See "--Report of the Executive Compensation
Committee--Supplemental Executive Retirement Plan." The change-in-control
provision will be triggered by the Acquisitions, but Mr. Friedman has waived his
rights in connection therewith.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Executive Compensation Committee are Frank E. Mosier
(Chairman), Albert T. Adams, Gerald C. McDonough and Richard T. Schwarz. For a
discussion of the relationship between the Company and Mr. Adams, see "CERTAIN
TRANSACTIONS."
PERFORMANCE GRAPH
Set forth below is a line graph comparing the cumulative total return of a
hypothetical investment in the Common Shares with the cumulative total return of
a hypothetical investment in each of the Standard & Poor's Composite--500 Index
("S&P 500"), and a peer group of multifamily equity REITs identified by the
Company ("Peer Group"). The comparison is based on the respective market prices
of each such investment on the dates shown below, assuming an initial investment
of $100 on November 10, 1993 and the reinvestment of dividends.
COMPARISON OF THE CUMULATIVE TOTAL RETURN
AERC COMMON, S&P COMPOSITE 500 AND PEER GROUP INDICES
<TABLE>
<CAPTION>
ASSOCIATED ASSOCIATED
ESTATES NAREIT ALL ESTATES
MEASUREMENT PERIOD REALTY EQUITY REIT REALTY PEER
(FISCAL YEAR COVERED) CORPORATION S&P 500 INDEX GROUP
<S> <C> <C> <C> <C>
11/10/93 100.00 100.00 100.00 100.00
12/31/93 94.32 100.94 96.15 96.90
06/30/94 104.48 97.52 101.26 98.35
12/31/94 104.05 102.28 98.99 99.35
06/30/95 106.98 122.95 104.86 99.01
12/31/95 115.83 140.71 113.97 111.50
06/30/96 115.63 154.90 122.05 119.53
12/31/96 139.33 172.88 154.68 146.96
6/30/97 140.71 208.50 163.50 156.34
12/31/97 150.80 230.57 186.01 170.23
</TABLE>
(a) The Peer Group is comprised of: The Company, Ambassador Apartments, Inc.,
Amli Residential Properties, Avalon Properties, Inc., BRE Properties, Inc.,
Berkshire Realty Co., Bay Apartment Communities, Camden Property Trust,
Equity Residential Property Trust, Essex Property Trust, Inc., Gables
Residential Trust, Home Properties of New York, Irvine Apartment
Communities, Merry Land & Investment Co., Mid-America Apartment, Oasis
Residential, Inc., Post Properties, Inc., Security Capital Pacific Trust,
Summit Properties, Inc., Charles E. Smith Residential, Town & Country Trust,
United Dominion Realty Trust and Walden Residential Properties. The
Company's Peer Group in 1997 also included Columbus Realty Trust, Evans
Withycombe Residential, and Prime Residential, Inc.
62
<PAGE> 67
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Common Shares of the Company as of April 30, 1998 (except as
otherwise indicated in the footnotes below), by: (a) the Company's Chief
Executive Officer and the Company's other executive officers named in the
Summary Compensation Table; (b) the Company's directors and nominees for
director; (c) each other person who is known by the Company to own beneficially
more than 5% of the outstanding Common Shares (based on filings with the SEC);
and (d) the Company's executive officers and directors as a group. Except as
otherwise described in the notes below, the following beneficial owners have
sole voting power and sole investment power with respect to all Common Shares
set forth opposite their names.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME (AND ADDRESS) OF BENEFICIAL PERCENT
BENEFICIAL OWNER OWNERSHIP(1) OF CLASS
--------------------- ------------ --------
<S> <C> <C>
Albert T. Adams 5,000 *
Dennis W. Bikun 20,939(2)(3) *
Martin A. Fishman 21,514(2)(3) *
Jeffrey I. Friedman 1,158,681(4) 6.7%
5025 Swetland Court
Richmond Heights, Ohio 44143
Gerald C. McDonough 9,750(2) *
Mark L. Milstein, 1,028,453(5) 5.9
4400 Emery Industrial Parkway
Warrensville Heights, Ohio 44128
Frank E. Mosier 10,750(2) *
Richard T. Schwarz 10,001(2)(6) *
Jerome Spevack 87,541 *
Robert Milstein 1,368,324 7.9
7777 Forest Lane Rd., Suite C 618
Dallas, Texas 75230
All executive officers and directors as a group (9
persons) 2,352,629 13.6
</TABLE>
- ---------------
* Less than 1%
(1) Includes Common Shares subject to options currently exercisable or
exercisable within 60 days as follows: Mr. Adams--5,000; Mr. Bikun--20,000;
Mr. Fishman--20,000; Mr. Friedman--200,000; Mr. McDonough--6,250; Mr.
Mosier--6,250; Mr. Schwarz--6,250; and Mr. Spevack--25,000.
(2) Includes 500 Common Shares granted to the individual on December 6, 1995,
which are subject to restrictions on transfer for a three-year period.
(3) Includes 439 Common Shares granted to the individual on December 3, 1997,
which are subject to restrictions on transfer for a three-year period.
(4) Includes 399,865 Common Shares owned of record by Susan M. Friedman, Mr.
Friedman's wife, and 7,346 Common Shares owned of record by Mr. Friedman's
children.
(5) Consists of Common Shares held in a revocable trust of which Mark L.
Milstein is the sole trustee.
(6) Includes 450 Common Shares held by Mr. Schwarz's children.
63
<PAGE> 68
CERTAIN TRANSACTIONS
Baker & Hostetler LLP, a law firm in which Albert T. Adams is a partner,
has been retained by the Company to perform legal services on its behalf, and
the Company expects that Baker & Hostetler LLP will continue to provide such
services during 1998. Mr. Adams is a director of the Company.
In May 1997, the independent directors of the Company approved a loan in
the aggregate amount of $3,342,000 from the Company to Jeffrey I. Friedman. Mr.
Friedman used the proceeds of the loan to purchase 150,000 Common Shares from
Mark Milstein. The loan is evidenced by two promissory notes entered into on May
23, 1997. The notes bear interest, payable quarterly, at an interest rate equal
to the Company's cost of borrowing under its credit facility with the principal
due May 1, 2003. As of May 5, 1998, the interest rate under the notes was
6.6630% per annum. The loan is secured, in part, by 150,000 Common Shares.
In the ordinary course of its management business, the Company advances
funds on behalf of, or holds funds for the benefit of, property owners
(including affiliates) and joint ventures whose properties are managed by the
Company or one of its subsidiaries. On February 19, 1998, the affiliated
entities that owed the advances made capital calls to their partners for the
purpose of repaying certain of these advances outstanding on December 31, 1997.
As of the date hereof, substantially all of the capital calls from the partners
(including Messrs. Mark and Robert Milstein) of all affiliated entities which do
not own Government-Assisted Properties has been paid and used to repay advances
in the aggregate amount of approximately $3,500,000. A corporation substantially
owned by Messrs. Mark and Robert Milstein and Mr. Friedman's wife acts as the
general partner (the "General Partner") of the affiliated entities which own
Government-Assisted Properties (the "Assisted Entities"). Mark and Robert
Milstein have informed the Company that they have retained an expert to review
the expenditures relating to the approximately $2,900,000 of aggregate capital
calls from the General Partner and certain other expenditures, to determine the
appropriateness of such expenditures and whether certain of such expenditures
should be the responsibility of the Company and not the General Partner or the
Assisted Entities. If there is a disagreement concerning the amount or necessity
of, or responsibility for, any of these expenditures then the parties have
agreed to resolve the same through binding arbitration. Mr. Friedman, whose wife
owns approximately 31% of the outstanding capital stock of the General Partner,
has agreed that regardless of the nature or resolution of any dispute, he will
personally pay or cause to be paid to the Company her pro rata share of any
advances not paid by the General Partner. The Company does not believe that the
ultimate outcome of this disagreement will have a material adverse effect on the
Company's financial position, results of operations or cash flows. On March 17,
1998, the independent directors (with the full endorsement of Messrs. Friedman,
Mark Milstein and Spevack) directed the Company's executive officers to take all
necessary steps to modify the Company's existing management relationships as
promptly as practicable to discontinue the practice of advancing funds to
affiliated entities and, until such discontinuance is in effect, to cause any
necessary capital calls from affiliated entities to be made every 30 days.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and beneficial owners of more than 10% of a registered class
of the Company's equity securities ("10% owners"), to file with the Commission
and NYSE initial reports of ownership and reports of changes in ownership of
Common Shares and other equity securities of the Company. Executive officers,
directors and 10% owners are required by Commission regulations to furnish the
Company with copies of all forms they file pursuant to Section 16(a). To the
Company's knowledge, based solely on review of the copies of such reports
furnished to the Company, during the fiscal year ended December 31, 1997, all
Section 16(a) filing requirements applicable to its executive officers,
directors and 10% owners were met.
SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
Price Waterhouse LLP served as independent public accountant to the Company
in 1997 and has been selected to do so in 1998. A representative of Price
Waterhouse LLP is expected to be present at the Annual Meeting and will answer
appropriate questions from shareholders.
64
<PAGE> 69
DOCUMENTS INCORPORATED BY REFERENCE
The documents listed below have been filed by the Company with the
Commission and are incorporated by reference in this Proxy Statement:
(i) The Company's Form 10-Q for the fiscal quarter ended March 31,
1998 filed with the Commission on May 13, 1998;
(ii) The Company's Annual Report to Shareholders sent to shareholders
on or about March 31, 1998;
(iii) The Company's Form 10-K for the fiscal year ended December 31,
1997, filed with the Commission on March 31, 1998;
(iv) The Company's Form 8-K dated May 29, 1998 and filed May 29,
1998;
(v) The Company's Form 8-K dated February 19, 1998 and filed March
31,1998;
(vi) The Company's Form 8-K/A-1 dated February 3, 1998 and filed
April 8, 1998;
(vii) The Company's Form 8-K dated February 3, 1998 and filed
February 17, 1998;
(viii) The Company's Form 8-K dated August 25, 1997 and filed on
December 2, 1997; and
(ix) The Company's Form 8-K/A-1 dated February 6, 1997 and filed on
July 3, 1997.
The information relating to the Company contained in this Proxy Statement
does not purport to be complete and should be read together with the information
contained in the documents incorporated herein by reference.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date hereof and prior to the date of
the Annual Meeting shall be deemed to be incorporated by reference into this
Proxy Statement and shall be deemed a part hereof from the date of filing of
such documents. Any statement contained in a document incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this Proxy
Statement to the extent that a statement contained herein (or in any other
subsequently filed document which is also incorporated by reference herein)
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed to constitute a part of this Proxy Statement, except as so
modified or superseded.
The Company hereby undertakes to provide without charge to each person to
whom this Proxy Statement has been delivered, upon written or oral request of
such person, a copy of any and all documents incorporated by reference in this
Proxy Statement (other than exhibits to such documents unless such exhibits are
specifically incorporated by reference in such documents). Requests for such
copies should be directed to: Associated Estates Realty Corporation, 5025
Swetland Court, Richmond, Heights, Ohio 44143-1467 Attention: Barbara E.
Hasenstab, Director of Investor Relations, (216) 797-8798. In order to ensure
timely delivery of the requested documents prior to the Annual Meeting, any
request should be made prior to June 22, 1998.
65
<PAGE> 70
SHAREHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
Any shareholder proposals intended to be presented at the Company's 1999
Annual Meeting of Shareholders must be received by the Company at 5025 Swetland
Court, Richmond Heights, Ohio 44143, on or before January 30 for inclusion in
the Company's proxy statement and form of proxy relating to the 1999 Annual
Meeting of Shareholders.
OTHER MATTERS
If the enclosed proxy is executed and returned to the Company, the persons
named in it will vote the shares represented by such proxy at the meeting. The
form of proxy permits specification of a vote for the election of directors as
set forth under "ELECTION OF DIRECTORS" or the withholding of authority to vote
in the election of directors. If no specification is made, such shares will be
voted at the meeting to elect directors as set forth under "ELECTION OF
DIRECTORS" above and in favor of each of the Acquisition Proposals. Director
nominees who receive the greatest number of affirmative votes will be elected
directors, thus abstentions and broker non-votes will not affect the results of
the election. The Acquisition Proposals will be approved upon a vote of a
majority of the outstanding Common Shares. If any other matters shall properly
come before the meeting, the persons named in the proxy will vote thereon in
accordance with their judgment. Management does not know of any other matters
that will be presented for action at the meeting.
By order of the Board of Directors,
Martin A. Fishman,
Secretary
Dated: May 30, 1998
66
<PAGE> 71
ASSOCIATED ESTATES REALTY CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
ACQUIRED PROPERTIES
MRT PROPERTIES
Report of Independent Certified Public Accountants........ F-2
Combined Statement of Revenue and Certain Expenses for the
year ended December 31, 1997........................... F-3
Notes to Combined Statement of Revenue and Certain
Expenses............................................... F-4
COUNTRY CLUB APARTMENTS
Report of Independent Accountants......................... F-5
Statement of Revenue and Certain Expenses for the year
ended December 31, 1997................................ F-6
Notes to Statement of Revenue and Certain Expenses........ F-7
PROPOSED ACQUISITIONS
MIG RESIDENTIAL REIT, INC.
Consolidated Financial Statements for the three months
ended March 31, 1998 (unaudited) and 1997 (unaudited)
and the years ended December 31, 1997, 1996 and 1995:
Report of Independent Certified Public Accountants........ F-8
Audited Consolidated Financial Statements
Consolidated Balance Sheets............................ F-9
Consolidated Statements of Income...................... F-10
Consolidated Statements of Shareholders' Equity........ F-11
Consolidated Statements of Cash Flows.................. F-12
Notes to Consolidated Financial Statements............. F-14
MIG COMPANIES
Combined Financial Statements
Report of Independent Certified Public Accountants........ F-20
Combined Balance Sheets as of March 31, 1998 (unaudited),
December 31, 1997 and 1996 (unaudited)................. F-21
Combined Statements of Operations for the three months
ended March 31, 1998 (unaudited) and 1997 (unaudited)
and the years ended December 31, 1997, 1996,
(unaudited) and 1995 (unaudited)....................... F-22
Combined Statements of Shareholders' Equity for the three
months ended March 31, 1998 (unaudited) and the years
ended December 31, 1997, 1996 (unaudited) and 1995
(unaudited)............................................ F-23
Combined Statements of Cash Flows for the three months
ended March 31, 1998 (unaudited) and 1997 (unaudited)
and the years ended December 31, 1997, 1996 (unaudited)
and 1995 (unaudited)................................... F-24
Notes to Combined Financial Statements.................... F-26
</TABLE>
F-1
<PAGE> 72
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
Associated Estates Realty Corporation
We have audited the accompanying combined statement of revenue and certain
expenses for certain multifamily properties (the Statement) for the year ended
December 31, 1997. The Statement is the responsibility of management. Our
responsibility is to express an opinion on the Statement 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 Statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the Statement. An audit also includes assessing
the accounting principles used and the significant estimates made by management,
as well as evaluating the overall Statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
The accompanying Statement was prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange Commission (for
inclusion in the Current Report on Form 8-K of Associated Estates Realty
Corporation) as described in Note 2 to the Statement and is not intended to be a
complete presentation of the combined revenues and expenses of the certain
multifamily properties described in Note 1 to the Statement (the Acquired
Properties).
In our opinion, the Statement referred to above presents fairly, in all
material respects, the combined revenue and certain expenses for the Acquired
Properties for the year ended December 31, 1997 in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
/s/ Ernst & Young LLP
West Palm Beach, Florida
February 2, 1998
F-2
<PAGE> 73
ASSOCIATED ESTATES REALTY CORPORATION
MRT PROPERTIES
COMBINED STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR CERTAIN MULTIFAMILY PROPERTIES
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Revenue
Rental.................................................... $8,085,927
Other..................................................... 309,452
----------
8,395,379
Certain expenses
Personnel................................................. 878,468
Advertising............................................... 139,802
Utilities................................................. 619,541
Building and grounds repair and maintenance............... 689,041
Real estate taxes and insurance........................... 931,824
Other operating........................................... 259,037
----------
3,517,713
----------
Revenue in excess of certain expenses....................... $4,877,666
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 74
ASSOCIATED ESTATES REALTY CORPORATION
MRT PROPERTIES
NOTES TO THE COMBINED STATEMENT
OF REVENUE AND CERTAIN EXPENSES
FOR CERTAIN MULTIFAMILY PROPERTIES
1. OPERATING PROPERTIES
The properties presented herein, referred to as the "MRT Properties," are
summarized as follows:
<TABLE>
<CAPTION>
PROPERTY LOCATION SUITES YEAR BUILT
-------- -------- ------ ----------
<S> <C> <C> <C>
The Falls Apartments................. Duluth, Georgia 520 1986
Reflections Apartments............... Columbia, Maryland 184 1985
Cypress Shores Apartments............ Coconut Creek, Florida 300 1991
</TABLE>
The combined statement of revenue and certain expenses include the
operating results of each of the MRT Properties detailed above for the year
ended December 31, 1997. The MRT Properties were purchased by Associated Estates
Realty Corporation (the "Company") on February 3, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying combined statement of revenue and certain expenses (the
"Statement") has been prepared on the accrual basis of accounting.
The accompanying Statement is not representative of the actual operations
for the period presented because certain expenses which may not be comparable to
the expenses to be incurred by the Company in the future operations of the
properties have been excluded. Expenses excluded consist of depreciation on the
building and improvements and amortization of organization costs and other
intangible assets, interest on debt and other general and administrative
expenses not directly related to the future operations of the MRT Properties.
Income Recognition
Rental income attributable to residential operating leases is recorded when
due from tenants.
Repair and Maintenance
Expenditures for maintenance and repairs are charged to operations as
incurred. Betterments that improve or extend the life of the asset beyond its
original condition are capitalized.
Advertising Expense
The cost of advertising is expensed as incurred.
Use of Estimates
The preparation of the Statement in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect amounts reported in the Statement and accompanying notes. Actual results
could differ from those estimates.
F-4
<PAGE> 75
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Associated Estates Realty Corporation
We have audited the accompanying statement of revenue and certain expenses
of Country Club Apartments for the year ended December 31, 1997. This historical
statement is the responsibility of management. Our responsibility is to express
an opinion on this historical statement based upon 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 historical statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the historical statement, assessing the
accounting principles used and the significant estimates made by management, as
well as evaluating the overall presentation of the historical statement. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying historical statement is prepared on the basis described in
Note 2, for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission (for inclusion in the Current Report on Form
8-K of Associated Estates Realty Corporation) and is not intended to be a
complete presentation of the revenues and expenses of Country Club Apartments.
In our opinion, the historical statement referred to above presents fairly,
in all material respects, the revenue and certain expenses of Country Club
Apartments on the basis described in Note 2 for the year ended December 31,
1997, in conformity with generally accepted accounting principles.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Cleveland, Ohio
January 29, 1998
F-5
<PAGE> 76
ASSOCIATED ESTATES REALTY CORPORATION
COUNTRY CLUB APARTMENTS
STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Revenue
Rental income............................................. $2,162,691
Other income.............................................. 45,184
----------
2,207,875
Certain expenses
Personnel................................................. 214,503
Advertising............................................... 54,431
Utilities................................................. 79,809
Building and grounds repair and maintenance............... 214,676
Real estate taxes and insurance........................... 286,887
Other operating expenses.................................. 51,002
----------
901,308
----------
Revenue in excess of certain expenses....................... $1,306,567
==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-6
<PAGE> 77
ASSOCIATED ESTATES REALTY CORPORATION
COUNTRY CLUB APARTMENTS
NOTES TO THE STATEMENT OF REVENUE AND CERTAIN EXPENSES
1. OPERATING PROPERTY
Country Club Apartments (the "Property") is a multifamily apartment
property containing 316 suites located in Toledo, Ohio. The Property was built
in 1989 and was acquired by Associated Estates Realty Corporation (the
"Company") on February 19, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying statement of revenue and certain expenses has been
prepared on the accrual basis of accounting.
The accompanying financial statement is not representative of the actual
operations for the periods presented, because certain expenses which may not be
comparable to the expenses to be incurred by the Company in the future
operations of the properties have been excluded. Expenses excluded consist of
depreciation on the building and improvements and amortization of organization
costs and other intangible assets, interest expense and other general and
administrative expenses not directly related to the future operations of Country
Club Apartments.
Income Recognition
Rental income attributable to residential operating leases is recorded when
due from tenants.
Repair and Maintenance
Expenditures for maintenance and repairs are charged to operations as
incurred. Betterments that improve or extend the life of the asset beyond its
original condition are capitalized. Costs incurred in connection with resident
turnover are charged to operations.
Use of Estimates
The preparation of the statement of revenue and certain expenses in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect amounts reported in the statement and
accompanying notes. Actual results could differ from those estimates.
F-7
<PAGE> 78
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.
ERNST & YOUNG LLP
/s/ Ernst & Young
West Palm Beach, Florida
January 28, 1998
F-8
<PAGE> 79
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-9
<PAGE> 80
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-10
<PAGE> 81
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-11
<PAGE> 82
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-12
<PAGE> 83
<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.
F-13
<PAGE> 84
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 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-14
<PAGE> 85
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-15
<PAGE> 86
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-16
<PAGE> 87
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-17
<PAGE> 88
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-18
<PAGE> 89
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-19
<PAGE> 90
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.
ERNST & YOUNG LLP
/s/ Ernst & Young LLP
West Palm Beach, Florida
February 20, 1998
F-20
<PAGE> 91
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-21
<PAGE> 92
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.... -- -- 1,290,777 -- --
Other..................... 548,516 134,132 687,485 574,257 459,303
---------- ---------- ---------- ---------- ----------
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-22
<PAGE> 93
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-23
<PAGE> 94
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-24
<PAGE> 95
MIG COMPANIES
COMBINED STATEMENTS OF CASH FLOWS -- CONTINUED
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid for the year ended December 31, 1997 was $4,300, (unaudited)
$288,426 in 1996 and (unaudited) $720,052 in 1995. Income taxes paid for the
year ended 1995 were (unaudited) $11,013.
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
(unaudited) $352,540 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 (unaudited) $238,000. In connection therewith, the
Company recorded an increase in minority interest and a corresponding reduction
in due to affiliates.
See accompanying notes.
F-25
<PAGE> 96
MIG COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Organization and Combination Policy
The combined financial statements include the accounts of MIG Realty
Advisors, Inc. ("MIGRA") and its consolidated investee partnerships and the
accounts of MIG Management Services ("MMS"), a group of 19 corporations, which
are affiliated with MIGRA through common ownership.
The combined financial statements have been prepared as a result of the
pending acquisition of MIGRA and MMS by Associated Estates Realty Corporation
("AERC").
The financial information for the years ended December 31, 1996 and 1995 is
unaudited; however, in the opinion of the Company, the financial information
includes all adjustments necessary for a fair presentation of the combined
financial position at December 31, 1996 and the combined results of operations
and cash flows for the years ended December 31, 1996 and 1995.
The accompanying unaudited financial statements as of 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 for the periods ending 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-26
<PAGE> 97
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-27
<PAGE> 98
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-28
<PAGE> 99
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-29
<PAGE> 100
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-30
<PAGE> 101
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-31
<PAGE> 102
ANNEX A
SECOND AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
ASSOCIATED ESTATES REALTY CORPORATION
("AERC"),
MIG REALTY ADVISORS, INC.
("MIGRA")
AND THE
MIGRA STOCKHOLDERS
<PAGE> 103
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECOND AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER.... 1
PRELIMINARY STATEMENTS...................................... 1
ARTICLE I THE MERGER.................................. 1
1.1 The Merger.......................................... 1
1.2 Effective Time and Closing.......................... 1
1.3 Effects of the Merger............................... 2
1.4 Articles of Incorporation and Bylaws................ 2
1.5 Directors and Officers.............................. 2
1.6 Additional Actions.................................. 2
ARTICLE II CONVERSION OF SECURITIES................... 2
2.1 Conversion of Capital Stock......................... 2
2.2 Shares; Share Prices; Fractional Shares............. 3
2.3 Exchange of Certificates............................ 4
2.4 Purchase Price Adjustment........................... 4
2.5 Disposition Fees.................................... 6
ARTICLE III REPRESENTATIONS AND WARRANTIES OF AERC.... 7
3.1 Organization and Standing........................... 7
3.2 Corporate Power and Authority....................... 7
3.3 Capitalization of AERC.............................. 7
3.4 Conflicts; Consents and Approvals................... 8
3.5 SEC Documents....................................... 8
3.6 Absence of Certain Changes.......................... 9
3.7 Brokerage and Finder's Fees......................... 9
3.8 State Takeover Laws................................. 9
3.9 REIT Status......................................... 9
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF MIGRA.... 9
4.1 Organization and Standing........................... 9
4.2 Subsidiaries and Affiliates......................... 9
4.3 Corporate Power and Authority....................... 11
4.4 Capitalization...................................... 11
4.5 Conflicts; Consents and Approvals................... 12
4.6 Absence of Certain Changes.......................... 12
4.7 Officers, Employees and Compensation................ 13
4.8 Financial Statements................................ 13
4.9 Taxes............................................... 14
4.10 Compliance with Law................................. 15
4.11 Intellectual Property............................... 15
4.12 Title to and Condition of Properties................ 16
4.13 Investment Advisor.................................. 17
4.14 Litigation.......................................... 20
4.15 Brokerage and Finder's Fees; Expenses............... 20
4.16 Employee Benefit Plans.............................. 21
4.17 Contracts........................................... 22
4.18 [INTENTIONALLY OMITTED.]............................ 23
4.19 Labor Matters....................................... 23
4.20 Undisclosed Liabilities............................. 23
</TABLE>
i
<PAGE> 104
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
4.21 Operation of MIGRA's Business; Relationships........ 23
4.22 Environmental Matters............................... 24
4.23 FBCA and State Takeover Laws........................ 24
4.24 Insurance........................................... 24
4.25 Books of Account; Records........................... 24
ARTICLE V COVENANTS OF THE PARTIES.................... 24
5.1 Mutual Covenants.................................... 24
5.2 Covenants of AERC................................... 25
5.3 Covenants of MIGRA.................................. 27
5.4 Covenants of MIGRA Stockholders..................... 30
5.5 Covenants of Mr. Wright............................. 31
ARTICLE VI CONDITIONS................................. 31
6.1 Mutual Conditions................................... 31
6.2 Conditions to Obligations of MIGRA.................. 31
6.3 Conditions to Obligations of AERC................... 32
ARTICLE VII TERMINATION AND AMENDMENT................. 33
7.1 Termination......................................... 33
7.2 Effect of Termination............................... 34
7.3 Amendment........................................... 34
7.4 Extension; Waiver................................... 35
ARTICLE VIII INDEMNIFICATION.......................... 35
8.1 Survival of Representations, Warranties and
Agreements............................................. 35
8.2 Indemnification..................................... 35
8.3 Limitations on Indemnification...................... 36
8.4 Procedure for Indemnification with Respect to Third
Party Claims........................................... 38
8.5 Procedure For Indemnification with Respect to
Non-Third Party Claims................................. 38
8.6 Termination of MIGRA's Warranties................... 39
8.7 Sole Remedies....................................... 39
ARTICLE IX MISCELLANEOUS.............................. 39
9.1 Notices............................................. 39
9.2 Interpretation...................................... 40
9.3 Counterparts........................................ 40
9.4 Entire Agreement.................................... 40
9.5 Third Party Beneficiaries........................... 40
9.6 Governing Law....................................... 40
9.7 Consent to Jurisdiction; Venue...................... 40
9.8 Specific Performance................................ 41
9.9 Assignment.......................................... 41
9.10 Expenses............................................ 41
Exhibit A -- Properties
Exhibit A-1 -- Development Properties
Exhibit B -- Form of Opinion of AERC Counsel
Exhibit C -- Form of Opinion of MIGRA's Counsel
Exhibit D -- Form of Non-Competition Agreement
Exhibit E -- Form of Employment Agreement
Exhibit F -- Description of E Units
</TABLE>
ii
<PAGE> 105
SECOND AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
This Second Amended and Restated Agreement and Plan of Merger (this
"Agreement") is made and entered into as of the 16th day of April, 1998, by and
among Associated Estates Realty Corporation, an Ohio corporation ("AERC"), MIG
Realty Advisors, Inc., a Florida corporation ("MIGRA"), and certain of the
holders of the issued and outstanding shares of MIGRA's capital stock (such
holders herein referred to as the "MIGRA Stockholders"), to amend and restate
the Agreement and Plan of Merger, dated as of November 5, 1997, as amended and
restated as of January 24, 1998 among AERC, MIGRA and the MIGRA Stockholders.
PRELIMINARY STATEMENTS
A. AERC desires to acquire the real estate acquisition, development and
management business and other businesses operated by MIGRA and the interests
owned by MIGRA, the MIGRA Stockholders in other MIGRA Companies (as defined in
Section 4.5) and/or the real property owned thereby through the merger of MIGRA
with and into AERC, with AERC as the surviving corporation (the "Merger"),
pursuant to which each share of MIGRA Common Stock (as defined in Section 4.4)
outstanding at the Effective Time (as defined in Section 1.2) ("MIGRA Conversion
Stock") will be converted into the right to receive AERC Common Shares (as
defined in Section 2.1), as more fully provided herein.
B. Immediately after the Effective Time, the MIGRA Stockholders shall agree
to pay when due all obligations, contingent or otherwise, of MIGRA or any
affiliate arising from or in connection with (i) the purchase of the interest in
MIGRA of Edwin B. Wayman ("Wayman"), (ii) any deferred compensation arrangements
for the benefit of Wayman, (iii) the purchase of the interest of PF Funds, Inc.
in MIG Ltd. (as hereinafter defined); (iv) the liabilities identified on
Schedule A attached hereto, and (v) the purchase price adjustments more fully
described in Section 5.4 (collectively, the "MIGRA Stockholders Fixed
Liabilities").
C. Immediately after the consummation of the Merger, AERC will convey to
(i) Associated Estates Management Company, an Ohio corporation and affiliate of
AERC ("AEMC"), and (ii) MIG Realty, Inc., a newly formed affiliate of AERC
("MRI"), certain of the assets, contract rights and other rights and properties
theretofore owned by MIGRA (the "Spinoff Transfer").
D. MIGRA desires to combine its real estate acquisition, development and
management business and other businesses with the real estate businesses
operated by AERC and for the holders of shares of MIGRA Conversion Stock to have
a continuing equity interest in the combined AERC/MIGRA businesses.
E. The parties intend that the Merger constitute a tax-free
"reorganization" within the meaning of Section 368(a)(1)(A) of the Internal
Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of these premises and the mutual and
dependent promises hereinafter set forth, the parties hereto agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. Upon the terms and subject to the conditions hereof, and
in accordance with the provisions of the Florida Business Corporation Act (the
"FBCA") and Chapter 1701 of the Ohio Revised Code (the "ORC"), MIGRA shall be
merged with and into AERC following the satisfaction or waiver of the conditions
set forth in Article VI, and the separate corporate existence of MIGRA shall
thereupon cease. AERC shall continue its existence under the laws of the State
of Ohio. In its capacity as the corporation surviving the Merger, AERC is
hereinafter sometimes referred to as the "Surviving Corporation."
1.2 Effective Time and Closing. The Merger shall be consummated by (i)
filing with the Secretary of State of the State of Ohio (the "Ohio Secretary of
State") a certificate of merger (the "Certificate of Merger") in such form as is
required by and executed in accordance with Section 1701.81 of the ORC and (ii)
filing with the Department of State of the State of Florida (the "Florida
Department of State") articles of
<PAGE> 106
merger (the "Articles of Merger") in such form as is required by and executed in
accordance with Section 607.1105 of the FBCA. The Merger shall become effective
on the date and at the time when the Certificate of Merger and the Articles of
Merger have been filed with, and accepted by, the Ohio Secretary of State and
the Florida Department of State, respectively, or at such later time as shall be
specified in the Certificate of Merger (the "Effective Time"). Prior to the
filing referred to in this Section 1.2, a closing (the "Closing") shall be held
at the offices of Baker & Hostetler LLP, 3200 National City Center, 1900 East
Ninth Street, Cleveland 44114, or such other place as the parties may agree, on
the fifth business day immediately following the day on which the last of the
conditions set forth in Article VI shall be fulfilled or waived in accordance
with this Agreement or at such other time, date or place as the parties hereto
may agree. The date on which the Closing occurs is hereinafter referred to as
the "Closing Date."
1.3 Effects of the Merger. The Merger shall have the effects of the
applicable provisions of the FBCA and the ORC.
1.4 Articles of Incorporation and Bylaws. The Certificate of Merger and
the Articles of Merger shall provide that at the Effective Time (i) the Articles
of Incorporation of the Surviving Corporation as in effect immediately prior to
the Effective Time shall be the Articles of Incorporation of AERC, and (ii) the
Code of Regulations of AERC in effect immediately prior to the Effective Time
shall be the Code of Regulations of the Surviving Corporation; in each case
until amended in accordance with applicable law.
1.5 Directors and Officers. Immediately after the Effective Time, the
officers and directors of the Surviving Corporation shall be the officers and
directors identified on Schedule 1.5, until their respective successors are duly
elected and qualified. On the Closing Date, MIGRA shall deliver to AERC evidence
satisfactory to AERC of the resignations of the officers and directors of MIGRA,
such resignations to be effective as of the Effective Time.
1.6 Additional Actions. If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any further deeds,
assignments or assurances in law or any other acts are reasonably necessary or
desirable to (a) vest, perfect or confirm, of record or otherwise, in the
Surviving Corporation its right, title or interest in, to or under any of the
rights, properties or assets of MIGRA, or (b) otherwise carry out the provisions
of this Agreement, MIGRA shall execute and deliver all such deeds, assignments
or assurances in law and shall take all acts necessary, proper or desirable to
vest, perfect or confirm title to and possession of such rights, properties or
assets in the Surviving Corporation and otherwise to carry out the provisions of
this Agreement, and the officers and directors of the Surviving Corporation are
authorized in the name of MIGRA or otherwise to take any and all such action.
ARTICLE II
CONVERSION OF SECURITIES
2.1 Conversion of Capital Stock. By virtue of the Merger and without any
action on the part of AERC or MIGRA, the following securities will be converted
in the manner set forth below:
(a) At the Effective Time, each share of capital stock, without par
value, of AERC issued and outstanding immediately prior to the Effective
Time, but after the conversion described in Section 2.1(b), shall be
converted into one share of common stock, without par value ("AERC Common
Shares"), of the Surviving Corporation.
(b) Subject to the provisions of Section 2.4, at the Effective Time,
the MIGRA Conversion Stock shall be converted into and represent (i) a
number of AERC Common Shares equal to the quotient obtained by dividing (A)
$9,648,573 by (B) the Average Share Price (as hereinafter defined) and (ii)
the right to receive the AERC Common Shares hereinafter described in this
Section 2.1 (the "Conversion Rights"), all as allocated to the MIGRA
Stockholders on Schedule 2.1.
(c) Subject to the provisions of Sections 2.1(h), 2.4 and 5.4, on the
later of the first anniversary date of the Effective Time or the date on
which the conditions set forth in Section 2.1(h) are satisfied (the "Second
Issuance Date"), the holders of the Conversion Rights shall receive a
number of AERC
2
<PAGE> 107
Common Shares equal to the quotient obtained by dividing (A) $689,037 by
(B) the Average Share Price, all as allocated to the MIGRA Stockholders on
Schedule 2.1.
(d) Subject to the provisions of Sections 2.1(i), 2.4 and 5.4, on the
later of the second anniversary date of the Effective Time or the date on
which the conditions set forth in Section 2.1(i) are satisfied (the "Third
Issuance Date"), the holders of the Conversion Rights shall receive a
number of AERC Common Shares equal to the quotient obtained by dividing (A)
$3,959,537 by (B) the Average Share Price.
(e) Subject to the provisions of Sections 2.1(h), 2.4, 2.5 and 5.4, on
the Second Issuance Date, the holders of the Conversion Rights shall
receive a number of AERC Common Shares equal to the quotient obtained by
dividing (A) $2,408,000 by (B) the average closing prices of the AERC
Common Shares for the twenty (20) Trading Days (as defined in Section 2.2)
immediately preceding the Second Issuance Date, all as allocated to the
MIGRA Stockholders on Schedule 2.1.
(f) Subject to the provisions of Sections 2.1(i), 2.4, 2.5 and 5.4, on
the Third Issuance Date, the holders of the Conversion Rights shall receive
a number of AERC Common Shares equal to the quotient obtained by dividing
(A) $2,408,000 by (B) the average closing prices of the AERC Common Shares
for the twenty (20) Trading Days immediately preceding the Third Issuance
Date, all as allocated to the MIGRA Stockholders on Schedule 2.1.
(g) At the Effective Time, each share of capital stock of MIGRA held
in treasury shall be cancelled and retired and no payment shall be made in
respect thereof.
(h) The obligation of AERC to issue AERC Common Shares pursuant to
Sections 2.1(c) and (e) shall be conditioned on the occurrence of both of
the following: (i) the issuance of a final certificate of occupancy for the
so-called Windsor Pines property and (ii) the MIGRA Stockholders'
submission to AERC of multifamily property acquisition opportunities with
an aggregate gross asset value of at least $50,000,000 and an average yield
of at least 85% of the average pro forma yield of the properties to be
acquired by AERC contemporaneously with the Closing to satisfy the
condition set forth in Section 6.3(e)(ii) (the "Initial Properties"). For
purposes of this Agreement "gross asset value" means the most recent
appraisal value, as determined by "CB Commercial Properties," with respect
to the Initial Properties, and with respect to subsequent properties
presented for acquisition, the fair market value thereof as determined by
the agreed upon purchase price or appraised value, as the case may be; and
"yield" means the ratio of (A) the sum of net operating income,
amortization and depreciation to (B) the gross asset value.
(i) The obligation of AERC to issue AERC Common Shares pursuant to
Sections 2.1(d) and (f) shall be conditioned on the occurrence of both of
the following: (i) the issuance of a final certificate of occupancy for the
so-called Kirkman property; and (ii) the MIGRA Stockholders' submission to
AERC of multifamily property acquisition opportunities in addition to those
described in Section 2.1(h)(ii) with an aggregate gross asset value of at
least $50,000,000 and an average yield of at least 85% of the average pro
forma yield of the Initial Properties.
For purposes of Sections 2.1(h) and (i), the average pro forma yield of the
Initial Properties will be agreed upon by and between AERC and the MIGRA
Stockholders and set forth in writing on or before the Closing.
2.2 Shares; Share Prices; Fractional Shares.
(a) For purposes hereof, "Average Share Price" shall mean $23.63 (the
average closing prices of the AERC Common Shares for the twenty (20) Trading
Days immediately preceding November 5, 1997). For purposes of this Agreement,
"Trading Days" shall mean each day that AERC Common Shares have been traded on
the New York Stock Exchange. For purposes of this Agreement, the "Purchase
Price" shall mean $19,113,147, as the same may be adjusted pursuant to Sections
2.4, 2.5 and 5.4.
(b) No certificates for fractional AERC Common Shares shall be issued as a
result of the conversion provided for in Section 2.1. To the extent that an
outstanding share (or fraction thereof) of MIGRA
3
<PAGE> 108
Conversion Stock would otherwise have become a fractional AERC Common Share, the
holder thereof, upon delivery of such fractional interest represented by an
appropriate certificate, shall be entitled to receive a cash payment therefor in
an amount equal to (i) with respect to the Closing, the Average Share Price of
such fractional interest, and (ii) with respect to the Second Issuance Date and
the Third Issuance Date, the relevant closing price of the AERC Common Shares on
the applicable Trading Day relating thereto. Such payment with respect to
fractional shares is merely intended to provide a mechanical rounding off of,
and is not a separately bargained for, consideration. If more than one
certificate representing shares of MIGRA Conversion Stock shall be surrendered
for the account of the same holder, the number of AERC Common Shares for which
certificates have been surrendered shall be computed on the basis of the
aggregate number of shares represented by the certificates so surrendered. In
the event that prior to the Effective Time, the Second Issuance Date or the
Third Issuance Date, as the case may be, AERC shall declare a stock dividend or
other distribution payable in AERC Common Shares or securities convertible into,
or exchangeable for, AERC Common Shares, or effect a stock split,
reclassification, combination or other change with respect to AERC Common
Shares, the calculations set forth in this Section 2.2 shall be correspondingly
adjusted to reflect such dividend, distribution, stock split, reclassification,
combination or other change.
(c) In the event any certificate representing shares of MIGRA Common Stock
shall have been lost, stolen or destroyed, upon receipt of appropriate evidence
(which may consist of an affidavit) as to such loss, theft or destruction and to
the ownership of any such certificate by the person claiming any such
certificate to be lost, stolen or destroyed, and the receipt by AERC of
reasonably appropriate and customary indemnification (which may include the
posting of a bond or similar security), AERC shall cause to be issued in
exchange for any such lost, stolen or destroyed certificate, the applicable
number of AERC Common Shares and the fractional share payment, if any,
deliverable in respect thereof as determined in accordance with Section 2.1 and
this Section 2.2.
2.3 Exchange of Certificates. At the Closing, AERC shall deliver to the
MIGRA Stockholders certificates representing AERC Common Shares issuable
pursuant to Section 2.1(b)(i) plus payment for any fractional shares as provided
in Section 2.2(b), and the MIGRA Stockholders shall deliver to AERC certificates
representing all shares of MIGRA Conversion Stock. On the Second Issuance Date,
AERC shall deliver to the MIGRA Stockholders certificates representing AERC
Common Shares issuable pursuant to Sections 2.1(c) and 2.1(e) plus payment for
any fractional shares as provided in Section 2.2(b). On the Third Issuance Date,
AERC shall deliver to the MIGRA Stockholders certificates representing AERC
Common Shares issuable pursuant to Sections 2.1(d) and 2.1(f) plus payment for
any fractional shares as provided in Section 2.2(b).
2.4 Purchase Price Adjustment
(a) Management and Other Contract Purchase Price Adjustment. If on or
before the 90th day after the Closing Date (the "Adjustment Period") (a) all of
the entities which are parties with a MIGRA Company and/or any affiliate thereof
under a mortgage servicing, advisory and/or asset and property management
agreement ("Relevant Contracts") and scheduled to pay the $8,301,077 of fees on
Schedule 2.4(a) under the Relevant Contracts have not (i) consented in writing
to the assignment to the Surviving Corporation, MRI or AEMC, as the case may be,
of the obligations of the applicable MIGRA Company and/or affiliates thereof
under all Relevant Contracts, as the case may be, on terms no less favorable
than presently existing or (ii) entered into a new contract with the Surviving
Corporation, MRI or AEMC, as the case may be, with respect to the obligations of
the applicable MIGRA Company and/or affiliates thereof, which new contract is on
terms no less favorable than presently existing ("New Relevant Contracts"), or
(b) AERC does not actually acquire all of the properties listed on Exhibit A
(the "Relevant Properties") (as to which (i) no such consent to assignment of
the associated Relevant Contract is obtained or (ii) no New Relevant Contract is
entered into) pursuant to the terms of the applicable purchase agreements
entered into between AERC
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and/or one of its affiliates and the applicable seller (the "Applicable Purchase
Agreement") prior to the end of the Adjustment Period, then the Purchase Price
will be adjusted as follows:
(i) The Purchase Price will be increased by:
(x) One percent of the aggregate purchase price, as reflected in
the Applicable Purchase Agreement and treating any assumed mortgage
indebtedness as part of the purchase price, for other properties
identified by MIGRA which are not listed on Schedule 2.4(c) hereto
(including the properties currently owned by the Pennsylvania Public
School Employees Retirement System listed on Schedule 2.4(b) hereto (the
"PPSERS Properties")) which are actually acquired by AERC pursuant to
the terms of an Applicable Purchase Agreement entered into during the
Adjustment Period; plus,
(y) One times the annualized fees of any new asset or property
management contracts or mortgage servicing contracts related to
properties identified by MIGRA (but which are not listed on Schedule
2.4(a) hereto) which are entered into during the Adjustment Period;
plus,
(z) The lesser of (i) one half of one percent of the aggregate
purchase price, as reflected in the Applicable Purchase Agreements and
treating any assumed mortgage indebtedness as part of the purchase
price, for any of the PPSERS Properties which are actually acquired by
AERC pursuant to the terms of an Applicable Purchase Agreement entered
into during the Adjustment Period, or (ii) 2.18 times the excess of the
Fee Shortfall (as hereinafter defined) over $1,245,162,(which amount is
15% of the total fees scheduled to be paid on Schedule 2.4(a)).
(ii) The Purchase Price will be decreased:
(x) By an amount equal to the aggregate amount of the annualized
asset and property management fees, advisory fees and mortgage servicing
fees payable with respect to each Relevant Contract for which neither
such consent to the assignment nor New Relevant Contract has been
obtained prior to the end of the Adjustment Period or for those Relevant
Contracts for which a consent to assignment has not been obtained or a
New Relevant Contract has not been obtained and which relate to a
Relevant Property, which Relevant Property is not actually acquired by
AERC pursuant to the terms of an Applicable Purchase Contract entered
into prior to the end of the Adjustment Period (the "Fee Shortfall");
plus,
(y) An amount equal to the product of (A) 2.18 times (B) the excess
of the Fee Shortfall over $1,245,162.
(iii) However, in no event shall the amount of the increase described
in clause (i) exceed the amount of the decrease described in clause (ii).
Any decrease in the Purchase Price as a result of any such adjustment will
be reflected as a reduction in the payment to be made pursuant to Section 2.1(c)
and, if necessary, Section 2.1(d) and if further necessary, Section 2.1(b)(i);
provided that if at the Closing Date, there is a potential reduction in the
payment to be made pursuant to Section 2.1(b)(i) by reason of the foregoing, the
amount of such potential reduction shall be held back by AERC until the last day
of the Adjustment Period at which time the amount, if any, of the actual
reduction required under this Section 2.4 shall be determined. If the amount of
the hold back is greater than such actual reduction amount, then the balance of
the amount held back, together with any dividends accrued and paid on the
released AERC Shares from the Closing Date, will be released by AERC. In
addition, in the event that the Purchase Price decrease exceeds the aggregate of
the amounts in Sections 2.1(b), (c) and (d) as adjusted by Section 2.4(b)
hereof, such excess shall be paid in immediately available funds by the MIGRA
Stockholders to AERC contemporaneously with the closing of AERC's direct or
indirect acquisition of the so-called Windsor Pines property; provided however,
that the MIGRA Stockholders, as a group and not on an individual basis, may
elect to reduce the amount of E Units (as defined in Exhibit F) to be received
pursuant to the Windsor Pines closing in lieu of making a cash payment to AERC
with respect to the excess Purchase Price decrease. For the purposes of this
Agreement, the value of an E Unit shall be deemed equal to the Average Share
Price of an AERC Common Share.
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(b) Property Purchase Price Adjustment.
For purposes of this Section 2.4(b), the "Value" of a property shall mean
the appraised value of such property as set forth on Exhibit A.
(i) If on or before July 27, 1998, AERC closes on the acquisition of
properties indicated on Exhibit A (other than the properties previously owned by
subsidiaries of MIG Residential Trust (the "MRT Properties," which include
Cypress Shores, The Falls and Reflections) and the properties owned by
subsidiaries of MIG Residential Trust, Inc. (the "MIG REIT Properties," which
include 20th and Campbell, Annen Woods, Desert Oasis, Hampton Point, Fleetwood,
Morgan Place, Peachtree and Windsor Falls)), the Purchase Price shall be
increased by an amount determined by the following formula, but not to exceed
the sum of (i) $4,777,853 plus (ii) the amount of the decrease, if any, as a
result of Section 2,4(b)(ii):
($32,500,000) multiplied by (1-(the Value of properties acquired
divided by 184,000,000))
Any adjustments pursuant to this subparagraph (i) will be applied as
follows:
(A) 50% of such adjustments will be applied to increase the amount
referred to in Section 2.1(b)(i);
(B) 25% of such increase (x) will be first applied to offset the
decrease, if any, resulting from Section 2.4(b)(ii)(B), and (y) will
then be applied to increase the amounts payable under Section 2.1(c);
and
(C) 25% of such increase (x) will be applied to offset the
decrease,if any, resulting from Section 2.4(b)(ii)(C), and (y) will then
be applied to increase the amounts payable under Section 2.1(d).
(ii) If on or before July 27, 1998, AERC does not close on the acquisition
of any of the MIG REIT Properties, the Purchase Price shall be reduced by an
amount determined by the following formula:
($32,500,000) multiplied by (1-(the Value of properties not acquired
divided by 184,000,000))
Any adjustments pursuant to this subparagraph (ii) will be applied as
follows:
(A) 50% of such adjustment will be applied to reduce the amount
referred to in 2.1(b); (B) 25% first to reduce the amount referred to in
2.1(c), and if necessary 2.1(e); and, (C) 25% first to reduce the amount
referred to in 2.1(d), and if necessary 2.1(f).
(iii) Any closing hereof without all of the MIG REIT Properties shall
require the prior written consent of MIGRA in its sole discretion.
(c) Limitation on Adjustments. Notwithstanding the above, in no event
shall the payment to be made pursuant to Section 2.1(b)(i) be reduced pursuant
to Section 2.4(a) or (b) to an amount less than 50% of the adjusted aggregate
Purchase Price, as decreased pursuant to Section 2.4(a) or as increased or
decreased pursuant to Section 2.4(b), and the parties shall reduce the payment
to be made pursuant to Section 2.1(e) and, if necessary, Section 2.1(f) so as to
provide that the aggregate payments made hereunder will not exceed the Purchase
Price as adjusted hereunder. In no event shall the percentage of the Purchase
Price paid pursuant to Section 2.1(b)(i) be less than 50% of the aggregate
Purchase Price required to be paid hereunder.
2.5 Disposition Fees. The amount of $2,408,000 and $2,408,000 set forth in
each of Sections 2.1(e) and 2.1(f), respectively, shall be reduced by 50% of the
aggregate present value of the disposition and incentive fees described in
Schedule 2.5 which relate to properties which are neither sold to AERC or whose
owners have not consented to assignment to the Surviving Corporation, MRI or
AEMC, as the case may be, of the obligations of the applicable MIGRA Company
and/or affiliate as described in Section 2.4 on or before the end of the
Adjustment Period, such present value to be determined as set forth in Schedule
2.5.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF AERC
In order to induce MIGRA and the MIGRA Stockholders to enter into this
Agreement, AERC hereby represents and warrants to MIGRA and to the MIGRA
Stockholders that the statements contained in this Article III are true, correct
and complete.
3.1 Organization and Standing. AERC is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Ohio with
full power and authority (corporate and other) to own, lease, use and operate
its properties and to conduct its business as and where now owned, leased, used,
operated and conducted. AERC is duly qualified to do business as a foreign
corporation and is in good standing under the laws of any other state of the
United States in which the character of the properties owned or leased by it
therein or in which the transaction of its business makes such qualification
necessary, except where the failure to be so qualified would not have a Material
Adverse Effect (as defined in Section 9.2). AERC is not in default in the
performance, observance or fulfillment of any provision of its Articles of
Incorporation and Code of Regulations, in each case as in effect on the date
hereof (the "AERC Articles" and the "AERC Bylaws," respectively). AERC has
heretofore furnished to MIGRA and the MIGRA Stockholders a complete and correct
copy of the AERC Articles and AERC Bylaws.
3.2 Corporate Power and Authority. AERC has all requisite corporate power
and authority to enter into this Agreement, to perform its obligations hereunder
and to consummate the transactions contemplated hereby. Except for shareholder
approval, the AERC Common Shares issuable pursuant to the Merger and the other
transactions contemplated by this Agreement (the "AERC Shareholder Approval"),
the execution by AERC of this Agreement and the consummation by AERC of the
transactions contemplated hereby (including the issuance of the AERC Common
Shares pursuant to the Merger) have been duly authorized by all requisite
corporate action on the part of AERC, including any approvals required by the
AERC Articles and the AERC Bylaws and the approval by unanimous vote or consent
of the Board of Directors of AERC (the "AERC Board Recommendation"). This
Agreement constitutes, and the other documents and instruments to be delivered
by AERC pursuant hereto when delivered will constitute, the legal, valid and
binding obligations of AERC, enforceable against AERC in accordance with their
respective terms.
3.3 Capitalization of AERC.
(a) As of September 30, 1997, AERC's authorized capital stock consisted
solely of (a) 41,000,000 AERC Common Shares, of which (i) 17,072,436 shares were
issued and outstanding, and (ii) 1,963,083 shares were reserved for issuance
upon the exercise or conversion of options, warrants or convertible securities
granted or issuable by AERC, (b) 3,000,000 Class A Cumulative Preferred Shares,
without par value, of which 225,000 9 3/4% Class A Cumulative Redeemable
Preferred Shares ($250 liquidation preference per share) were issued and
outstanding, (c) 3,000,000 Class B Cumulative Preferred Shares, without par
value, of which none were issued and outstanding, and (d) 3,000,000
Noncumulative Preferred Shares, without par value, of which none were issued and
outstanding. Each outstanding share of AERC capital stock is duly authorized and
validly issued, fully paid and nonassessable, has not been issued in violation
of any preemptive or similar rights and has been issued in compliance with all
federal and state securities laws and the rules of the New York Stock Exchange
(the "NYSE"). The AERC Common Shares to be issued pursuant to this Agreement
have been duly authorized for issuance and when issued and delivered by AERC in
accordance with the provisions of this Agreement will be validly issued, fully
paid and non-assessable and will be issued free and clear of any liens, security
interests or other encumbrances of any kind whatsoever, other than those imposed
by securities laws or which are contemplated by Section 5.4. The AERC Common
Shares issued under this Agreement will not be subject to any preemptive or
similar rights. Assuming that the representations, warranties and covenants of
the MIGRA Stockholders set forth in the letters described in 6.3(j) shall be
true and complete, the AERC Common Shares to be issued pursuant to this
Agreement will be issued in compliance with all federal and state securities
laws and, if AERC is informed by the NYSE that AERC Shareholder Approval shall
have been obtained, the AERC Common Shares to be issued pursuant to this
Agreement will be issued in compliance with the rules of the NYSE.
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3.4 Conflicts; Consents and Approvals. Neither the execution and delivery
by AERC of this Agreement nor the consummation by AERC of the transactions
contemplated by this Agreement will:
(a) conflict with or result in a breach of any provisions of the AERC
Articles or AERC Bylaws;
(b) result in a breach or violation of, a default under, or the
triggering of any payment or other material obligations pursuant to, or
accelerate vesting under, any of AERC's stock option plans, or any grant or
award under any of the foregoing;
(c) except for AERC's Credit Agreement with National City Bank,
violate, or conflict with, or result in a breach of any provision of, or
constitute a default (or an event which, with the giving of notice or lapse
of time or otherwise, would constitute a default) under, or result in the
termination or in a right of termination or cancellation of, or accelerate
the performance required by, or result in the creation of any material
lien, security interest, charge or encumbrance upon, any of the properties
of AERC or any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, deed of trust or any license, franchise, permit,
contract, undertaking, agreement, lease or other instrument, or obligation
to which AERC is a party;
(d) violate any order, writ, injunction, or decree applicable to AERC
or, to the actual knowledge of AERC, any statute, rule or regulation
applicable to AERC; or
(e) require any action, consent, approval or authorization of, review
by, or declaration, filing or registration with, any third party or any
governmental authority, whether federal, state or local (a "Governmental
Authority"), other than (i) actions as may be required by the
Hart-Scott-Rodino Act of 1976, as amended, and the rules and regulations
promulgated thereunder (the "HSR Act"), (ii) action to be taken with
respect to federal and state securities laws, (iii) the filing of the
Certificate of Merger with the Ohio Secretary of State, (iv) the consent of
National City Bank, and (v) AERC Stockholder Approval;
except (i) in the case of clause (c) or (e) for any of the foregoing that are
set forth in Section 3.4 of the AERC Disclosure Schedule, (ii) in the case of
clauses (b) through (e) for any of the foregoing that would not, individually or
in the aggregate, have a Material Adverse Effect on AERC and (iii) in the case
of clause (e), for any of the foregoing which have been or will be obtained
prior to the Closing.
3.5 SEC Documents. AERC has filed all required forms, reports and
documents with the Securities and Exchange Commission ("SEC") required to be
filed by it pursuant to the Securities Act of 1933, as amended (the "Securities
Act"), and the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the rules and regulations promulgated thereunder, all of which have complied
in all material respects with the applicable requirements of the Securities Act
and the Exchange Act, respectively, and such rules and regulations. AERC has
previously furnished to MIGRA for delivery to the MIGRA Stockholders, copies of
all such forms, reports and documents filed by AERC with the SEC since January
1, 1994 (hereafter collectively referred to as the "Reports"). None of the
Reports, including, without limitation, any financial statements or schedules
included therein, at the time filed, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of AERC included in the Reports complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto, were prepared in accordance with
United States generally accepted accounting principles ("GAAP") applied on a
consistent basis (except as otherwise noted in such financial statements) and
present fairly in all material respects the financial position, results of
operations, cash flows and changes in financial position of AERC and its
consolidated subsidiaries as of the dates or the periods indicated, subject, in
the case of unaudited interim consolidated financial statements, to normal
year-end adjustments.
(c) The AERC Common Shares to be issued under this Agreement will be
restricted shares within the meaning of the Securities Act.
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3.6 Absence of Certain Changes. Since June 30, 1997, there has not been:
(a) (i) any change in the business, operations, assets, properties,
customer base, prospects, rights or condition (financial or otherwise) of
AERC, or (ii) any occurrence, circumstance or combination thereof, in each
case which has had a Material Adverse Effect on AERC; or
(b) any material change in AERC's method of doing business or any
change in its accounting principles or practices or its method of
application of such principles or practices.
3.7 Brokerage and Finder's Fees. Neither AERC nor any of its shareholders,
directors, officers or employees has incurred, or will incur, on behalf of AERC,
any brokerage, finder's or similar fee in connection with the transactions
contemplated by this Agreement.
3.8 State Takeover Laws. Prior to the date hereof, the Board of Directors
of AERC has taken all action on the part of AERC, if any, necessary to exempt
under or make not subject to any state takeover law or other state law that
purports to limit or restrict business combinations or the ability to acquire or
vote shares: (i) the Merger and (ii) the other transactions contemplated hereby.
3.9 REIT Status. AERC has qualified to be taxed as a real estate
investment trust pursuant to Section 856 through 860 of the Code for its taxable
years ended December 31, 1993, through December 31, 1996, and AERC expects to so
qualify for the fiscal year ending December 31, 1997.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF MIGRA
In order to induce AERC to enter into this Agreement, MIGRA and each of the
MIGRA Stockholders, jointly and severally, hereby represent and warrant to AERC
and AEMC that the statements contained in this Article IV are true, correct and
complete.
4.1 Organization and Standing. MIGRA is a corporation duly organized,
validly existing and in good standing under the laws of the State of Florida,
with full power and authority (corporate and other) to own, lease, use and
operate its properties and to conduct its business as and where now owned,
leased, used, operated and conducted. MIGRA is duly qualified to do business and
in good standing in each jurisdiction listed in Section 4.1 to the disclosure
schedule delivered by MIGRA to AERC and dated the date hereof (the "MIGRA
Disclosure Schedule"), is not qualified to do business in any other jurisdiction
and neither the nature of the business conducted by it nor the property it owns,
leases or operates requires it to qualify to do business as a foreign
corporation in any other jurisdiction, except where the failure to be so
qualified or in good standing in such jurisdiction would not have a Material
Adverse Effect on MIGRA. MIGRA is not in default in the performance, observance
or fulfillment of any provision of its Articles of Incorporation, as amended and
restated, or its Bylaws, in each case as in effect on the date hereof (the
"MIGRA Articles" and the "MIGRA Bylaws," respectively). MIGRA has heretofore
furnished to AERC a complete and correct copy of the MIGRA Articles and the
MIGRA Bylaws.
4.2 Subsidiaries and Affiliates.
(a) MIGRA owns a 75% general partnership interest in Mortgage Investors
Group, Ltd. ("MIG Ltd."). MIGRA owns its interest in MIG Ltd. free and clear of
any pledge, mortgage, lien, charge or encumbrance of any kind whatsoever (except
any encumbrances contained in the MIG Ltd. Partnership Documents, as defined
below). MIG Ltd. is a limited partnership duly formed, validly existing and in
good standing under the laws of the State of Florida with full power and
authority (partnership and other) to own, lease, use and operate its properties
and to conduct its business as and where now owned, leased, used, operated and
conducted. MIG Ltd. is duly qualified to do business and in good standing in
each jurisdiction listed in Section 4.2 to the MIGRA Disclosure Schedule, is not
qualified to do business in any other jurisdiction and neither the nature of the
business conducted by it nor the property it owns, leases or operates requires
it to qualify to do business as a foreign limited partnership in any other
jurisdiction, except where the failure to be so qualified or in good standing in
such jurisdiction would not have a Material Adverse Effect on MIG Ltd.
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MIGRA is not in default in the performance, observance or fulfillment of any
provision of MIG Ltd's Partnership Agreement or Partnership Certificate (the
"MIG Ltd. Partnership Documents") nor, to its actual knowledge, is any other
partner thereof. MIGRA has heretofore furnished to AERC a complete and correct
copy of each of the MIG Ltd. Partnership Documents.
(b) MIGRA owns a 40% general partnership interest in Stonemark Investor
Services, a general partnership ("Stonemark"). MIGRA owns its interest in
Stonemark free and clear of any pledge, mortgage, lien, charge or encumbrance of
any kind whatsoever (except any encumbrances contained in the Stonemark
Partnership Documents, as defined below). Stonemark is a general partnership
duly formed, validly existing and in good standing under the laws of the State
of Florida with full power and authority (partnership and other) to own, lease,
use and operate its properties and to conduct its business as and where now
owned, leased, used, operated and conducted. Stonemark is duly qualified to do
business and in good standing in each jurisdiction listed in Section 4.2 to the
MIGRA Disclosure Schedule, is not qualified to do business in any other
jurisdiction and neither the nature of the business conducted by it nor the
property it owns, leases or operates requires it to qualify to do business as a
foreign general partnership in any other jurisdiction, except where the failure
to be so qualified or in good standing in such jurisdiction would not have a
Material Adverse Effect on Stonemark. MIGRA is not in default in the
performance, observance or fulfillment of any provision of Stonemark's
Partnership Agreement or Partnership Certificate (the "Stonemark Partnership
Documents") nor, to its actual knowledge, is any other partner thereof. MIGRA
has heretofore furnished to AERC a complete and correct copy of each of the
Stonemark Partnership Documents.
(c) MIGRA owns a 1% general partnership interest in Mortgage Investors Fund
I, a limited partnership ("MIF I"). MIGRA owns its interest in MIF I free and
clear of any pledge, mortgage, lien, charge or encumbrance of any kind
whatsoever (except any encumbrances contained in MIF I Partnership Documents, as
defined below). MIF I is a limited partnership duly formed, validly existing and
in good standing under the laws of the State of Michigan with full power and
authority (partnership and other) to own, lease, use and operate its properties
and to conduct its business as and where now owned, leased, used, operated and
conducted. MIF I is duly qualified to do business and in good standing in each
jurisdiction listed in Section 4.2 to the MIGRA Disclosure Schedule, is not
qualified to do business in any other jurisdiction and neither the nature of the
business conducted by it nor the property it owns, leases or operates requires
it to qualify to do business as a foreign limited partnership in any other
jurisdiction, except where the failure to be so qualified or in good standing in
such jurisdiction would not have a Material Adverse Effect on MIF I. MIGRA is
not in default in the performance, observance or fulfillment of any provision of
MIF I's Partnership Agreement or Partnership Certificate (the "MIF I Partnership
Documents") nor, to its actual knowledge, is any other partner thereof. MIGRA
has heretofore furnished to AERC a complete and correct copy of each of the MIF
I Partnership Documents.
(d) MIGRA owns a 1% general partnership interest in Mortgage Investors Fund
II, a limited partnership ("MIF II"). MIGRA owns its interest in MIF II free
and clear of any pledge, mortgage, lien, charge or encumbrance of any kind
whatsoever (except any encumbrances contained in the MIF II Partnership
Documents, as defined below). MIF II is a limited partnership duly formed,
validly existing and in good standing under the laws of the State of Delaware
with full power and authority (partnership and other) to own, lease, use and
operate its properties and to conduct its business as and where now owned,
leased, used, operated and conducted. MIF II is duly qualified to do business
and in good standing in each jurisdiction listed in Section 4.2 to the MIGRA
Disclosure Schedule, is not qualified to do business in any other jurisdiction
and neither the nature of the business conducted by it nor the property it owns,
leases or operates requires it to qualify to do business as a foreign general
partnership in any other jurisdiction, except where the failure to be so
qualified or in good standing in such jurisdiction would not have a Material
Adverse Effect on MIF II. MIGRA is not in default in the performance, observance
or fulfillment of any provision of MIF II's Partnership Agreement or Partnership
Certificate (the "MIF II Partnership Documents") nor, to its actual knowledge,
is any other partner thereof. MIGRA has heretofore furnished to AERC a complete
and correct copy of each of the MIF II Partnership Documents.
(e) MIGRA owns a 1% general partnership interest in Mortgage Investors Self
Storage I, a limited partnership ("Storage"). MIGRA owns its interest in Storage
free and clear of any pledge, mortgage, lien, charge or encumbrance of any kind
whatsoever (except any encumbrances contained in the Storage
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Partnership Documents. Storage is a general partnership duly formed, validly
existing and in good standing under the laws of the State of Florida with full
power and authority (partnership and other) to own, lease, use and operate its
properties and to conduct its business as and where now owned, leased, used,
operated and conducted. Storage is duly qualified to do business and in good
standing in each jurisdiction listed in Section 4.2 to the MIGRA Disclosure
Schedule, is not qualified to do business in any other jurisdiction and neither
the nature of the business conducted by it nor the property it owns, leases or
operates requires it to qualify to do business as a foreign general partnership
in any other jurisdiction, except where the failure to be so qualified or in
good standing in such jurisdiction would not have a Material Adverse Effect on
Storage. MIGRA is not in default in the performance, observance or fulfillment
of any provision of Storage's Partnership Agreement or Partnership Certificate
(the "Storage Partnership Documents") nor, to its actual knowledge, is any other
partner thereof. MIGRA has heretofore furnished to AERC a complete and correct
copy of each of the Storage Partnership Documents.
(f) Except as set forth in (a) through (e) above or Section 4.2 or Section
4.4 of the MIGRA Disclosure Schedule, (i) neither MIGRA nor MIG Ltd., Stonemark,
MIF I, MIF II or Storage (such entities other than MIGRA sometimes referred to
herein collectively as the "Ventures") owns, directly or indirectly, any equity
or other ownership interest in any corporation, partnership, joint venture or
other entity or enterprise, and neither MIGRA nor any of the Ventures is subject
to any obligation or requirement to provide funds to or make any investment (in
the form of a loan, capital contribution or otherwise) in any entity, except to
the extent MIGRA is so bound with respect to MIG Ltd. as provided in the MIG
Ltd. Partnership Documents, and Stonemark, as provided in the Stonemark
Partnership Documents, and Storage, as provided in the Storage Partnership
Documents.
4.3 Corporate Power and Authority. MIGRA has all requisite corporate power
and authority to enter into this Agreement, to perform its obligations hereunder
and to consummate the transactions contemplated by this Agreement. Except for
approval by the MIGRA Stockholders and Kathleen Gutin ("Gutin") in accordance
with the FBCA and the MIGRA Articles and the MIGRA Bylaws, the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of MIGRA, including unanimous approval by the Board of Directors of MIGRA (the
"MIGRA Board Recommendation"). Notwithstanding the foregoing, MIGRA has all
requisite power and authority to perform its obligations hereunder and to
consummate the Merger. This Agreement has been duly executed and delivered by
MIGRA and constitutes the legal, valid and binding obligation of MIGRA,
enforceable against MIGRA in accordance with its terms.
4.4 Capitalization. As of September 30, 1997, MIGRA's authorized capital
stock consisted solely of 100 shares of common stock, $1.00 par value per share
("MIGRA Common Stock"), of which (a) 85 shares were issued and outstanding and
(b) 15 shares were issued and held in treasury. Each outstanding share of MIGRA
capital stock is duly authorized and validly issued, fully paid and
nonassessable, and has not been issued in violation of any preemptive or similar
rights. Section 4.4 of the MIGRA Disclosure Schedule sets forth the following,
as of the date hereof: (a) the number of shares of MIGRA Common Stock
outstanding and (b) the liquidation preference for such shares, including
accumulated and unpaid dividends. Other than as set forth in Section 4.4 to the
MIGRA Disclosure Schedule, there are no outstanding subscriptions, options,
warrants, puts, calls, agreements, understandings, claims or other commitments
or rights of any type relating to the issuance, sale or transfer of any
securities of MIGRA by MIGRA or, to the actual knowledge of MIGRA and each MIGRA
Stockholder, any other person or entity, nor are there outstanding any
securities which are convertible into or exchangeable for any shares of capital
stock of MIGRA, and MIGRA has no obligation of any kind to issue any additional
securities or to pay for securities of MIGRA or any predecessor. The issuance
and sale of all of the shares of capital stock described in this Section 4.4
have been in compliance with federal and state securities laws. The MIGRA
Disclosure Schedule accurately sets forth the names of, and the number of shares
of, each class of MIGRA capital stock. Except as set forth in Section 4.4 to the
MIGRA Disclosure Schedule, MIGRA has not agreed to register any securities under
the Securities Act or under any state securities law or granted registration
rights to any person or entity. Section 4.4 of the MIGRA Disclosure Schedule
sets forth the equity structure of the Ventures.
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4.5 Conflicts; Consents and Approvals. Neither the execution and delivery
of this Agreement by MIGRA nor the consummation of the transactions contemplated
hereby will:
(a) conflict with, or result in a breach of any provision of, the
MIGRA Articles or the MIGRA Bylaws;
(b) violate, or conflict with, or result in a breach of any provision
of, or constitute a default (or an event which, with the giving of notice,
the passage of time or otherwise, would constitute a default) under, or
entitle any party (with the giving of notice, the passage of time or
otherwise) to terminate, accelerate, modify or call a default under, or
result in the creation of any material lien, security interest, charge or
encumbrance upon any of the properties or assets of MIGRA or the Ventures
(collectively, the "MIGRA Companies") under, any of the terms, conditions
or provisions of any note, bond, mortgage, indenture, deed of trust,
license, contract, undertaking, agreement, lease or other instrument or
obligation to which it is a party;
(c) violate any order, writ, injunction or decree, or, to the actual
knowledge of MIGRA and each MIGRA Stockholder, any statute, rule or
regulations applicable to the MIGRA Companies; or
(d) require any action, consent, approval or authorization of, or
review by, or declaration, registration or filing by any of the MIGRA
Companies with, any third party or any Governmental Authority, other than
actions as may be required by the HSR Act, actions to be taken with respect
to federal and state securities laws, the filing of the Certificate of
Merger with the Ohio Secretary of State and the Articles of Merger with the
Florida Department of State and the approval of the stockholders of MIGRA
(other than the MIGRA Stockholders);
except (i) in the case of clause (b) or (d) for any of the foregoing that are
set forth in Section 4.5 of the MIGRA Disclosure Schedule, (ii) in the case of
clauses (b) through (d) for any of the foregoing that would not, individually or
in the aggregate, have a Material Adverse Effect on the MIGRA Companies taken as
a whole and (iii) in the case of clause (d), for any of the forgoing which have
been or will be obtained prior to the Closing.
4.6 Absence of Certain Changes.
Except as expressly provided for or permitted under Section 5.3(a) of this
Agreement, or as set forth in Section 4.6 to the MIGRA Disclosure Schedule,
since December 31, 1996, there has not been:
(a) (i) Any change in the business, operations, assets, properties,
customer base, prospects, rights or condition (financial or otherwise) of
the MIGRA Companies or (ii) any occurrence, circumstance, or combination
thereof which has had or which reasonably could be expected to result in a
Material Adverse Effect on the MIGRA Companies taken as a whole.
(b) Any declaration, setting aside or payment of any dividend or any
distribution (in cash or in kind) to any stockholder of MIGRA, or any
direct or indirect redemption, purchase or other acquisition by MIGRA of
any of its capital stock or issuance by MIGRA of any options, warrants,
rights or agreements to purchase or acquire such stock;
(c) Any transaction entered into or carried out by a MIGRA Company
involving a payment, individually or in the aggregate, in excess of
$100,000 other than in the ordinary and usual course of business consistent
with past practices;
(d) Any borrowing of, or agreement to borrow, funds by a MIGRA
Company, any incurring by a MIGRA Company of any other liability
(contingent or otherwise), except liabilities incurred in the usual and
ordinary course of its business (consistent with past practices), or any
endorsement, assumption or guarantee of payment or performance of any loan
or obligation of any other person by a MIGRA Company;
(e) Any material change in a MIGRA Company's method of doing business
or any change in its accounting principles or practices or its method of
application of such principles or practices;
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(f) Any mortgage, pledge, lien, security interest, hypothecation,
charge or other encumbrance imposed or agreed to be imposed on or with
respect to the property or assets of a MIGRA Company;
(g) Any sale, lease or other disposition of, or any agreement to sell,
lease or otherwise dispose of, any of the properties or assets of a MIGRA
Company, other than sales in the usual and ordinary course of business for
fair equivalent value to persons other than directors, officers,
stockholders, partners, or other affiliates of a MIGRA Company;
(h) Any purchase of or any agreement to purchase assets (other than
purchases in the ordinary course of business consistent with past
practices) for an amount in excess of $50,000 for any one purchase or
$100,000 for all such purchases made by the MIGRA Companies collectively or
any lease or any agreement to lease, as lessee, any capital assets with
payments over the term thereof to be made by the MIGRA Companies
collectively exceeding an aggregate of $100,000;
(i) Any loan or advance made by a MIGRA Company to any person which
remains unpaid or will be unpaid as of Closing;
(j) Any modification, waiver, change, amendment, release, rescission
or termination of, or accord and satisfaction with respect to, any material
term, condition or provision of any Contract (as defined in Section 4.17)
to which a MIGRA Company is a party, or notice thereof received by a MIGRA
Company, other than any satisfaction by performance in accordance with the
terms thereof in the usual and ordinary course of business; or
(k) Any labor dispute or disturbance materially and adversely
affecting the business operations or condition (financial or otherwise) of
a MIGRA Company, including without limitation the filing of any petition or
charge of unfair labor practice with any governmental or regulatory
authority, efforts to effect a union representation election, actual or
threatened employee strike, work stoppage or slow down.
4.7 Officers, Employees and Compensation. Section 4.7 to the MIGRA
Disclosure Schedule sets forth the names of all directors, officers and
employees of the MIGRA Companies, the total salary, bonus, fringe benefits and
perquisites each received from the MIGRA Companies in the year ended December
31, 1996, and any changes to the foregoing which have occurred subsequent to
December 31, 1996. Except as disclosed in Section 4.7 to the MIGRA Disclosure
Schedule, there are no other forms of compensation paid to any such director,
officer or employee of the MIGRA Companies. Except as disclosed in Section 4.7
to the MIGRA Disclosure Schedule, the amounts accrued on the books and records
of the MIGRA Companies for vacation pay, sick pay, and all commissions and other
fees payable to agents, salesmen and representatives will be adequate to cover
liabilities for all such items. Except as set forth in Section 4.7 to the MIGRA
Disclosure Schedule, no MIGRA Company has become obligated, directly or
indirectly, to any stockholder, director or officer of MIGRA or partner of a
Venture or any person related to such person by blood or marriage, except for
current liability for such compensation. Except as set forth in Section 4.7 to
the MIGRA Disclosure Schedule, to the actual knowledge of MIGRA and each MIGRA
Stockholder, no stockholder, director, officer, agent or employee of the MIGRA
Companies or any person related to such person by blood or marriage holds any
position or office with or has any material financial interest, direct or
indirect, in any supplier, customer or account of, or other outside business
which has material transactions with, the MIGRA Companies. To the actual
knowledge of MIGRA and each MIGRA Stockholder, except as set forth in Schedule
4.7, no MIGRA Company has an agreement or understanding with any stockholder,
director, officer, partner, employee or representative thereof which would
influence any such person not to become associated with AERC from and after the
Closing or from serving the MIGRA Companies after the Closing in a capacity
similar to the capacity presently held.
4.8 Financial Statements.
(a) MIGRA has furnished to AERC the balance sheet of MIGRA and the
consolidated MIGRA Companies (MIG Ltd. and Stonemark) as of December 31, 1996,
and the related statements of income, changes in stockholders' equity, and cash
flows for the fiscal year then ended, including, in each case, the related notes
(collectively, the "Audited Statements"), which are accompanied by the
unqualified audit report of Ernst & Young LLP. The Audited Statements, which
have been initialed for identification by the president
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of MIGRA, have been prepared from and are in accordance with the books and
records of the MIGRA and the consolidated MIGRA Companies, and have been
prepared in conformity with GAAP applied on a consistent basis, and fairly
present in all material respects the financial condition of such companies as of
the date stated and the results of operations for the period then ended in
accordance with such practices.
(b) When delivered in accordance with Section 5.3(d), each balance sheet
for MIGRA and the consolidated MIGRA Companies as of its date and the related
statements of income, changes in stockholders' equity, and cash flows for the
period beginning January 1, 1997 and then ended, including the related notes
(the "Interim Statements"), shall have been prepared from and in accordance with
the books and records of such companies and in accordance with GAAP applied on a
basis consistent with that used in the Audited Statements, and shall fairly
present in all material respects the financial condition of such companies as of
such date and the results of operations for such period in accordance with such
practices, except for normal recurring audit adjustments.
4.9 Taxes.
(a) Each of the MIGRA Companies has duly paid all taxes, assessments, fees
and other governmental charges (hereinafter, "taxes") payable by it. Each MIGRA
Company has duly filed all material federal, state, local and foreign tax
returns and tax reports required to be filed by it and all such returns and
reports are true, correct and complete in all material respects. Except as
disclosed in Section 4.9 to the MIGRA Disclosure Schedule, since December 31,
1988, none of such returns and reports have been amended, and all taxes, arising
under or reflected on such returns and reports have been fully paid or shall be
fully accrued as liabilities in the Interim Statements, when delivered, and
shall be timely paid. No claim has been made by authorities in any jurisdiction
where a MIGRA Company did not file tax returns that it is or may be subject to
taxation therein.
(b) MIGRA has delivered or promptly after the earlier of receipt of a
requisite consent or execution and delivery of this Agreement, will deliver to
AERC copies of all federal, state, local, and foreign income tax returns filed
with respect to it and the MIGRA Companies (and their respective predecessors)
since their respective formation. Section 4.9 of the MIGRA Disclosure Schedule
sets forth the dates and results of any and all audits conducted by taxing
authorities within the last five years or otherwise with respect to any tax year
for which assessment is not barred by any applicable statute of limitations.
Except as disclosed in Section 4.9 to the MIGRA Disclosure Schedule, no waivers
of any applicable statute of limitations for the filing of any tax returns or
payment of any taxes or assessments of any deficient or unpaid taxes are
outstanding; all deficiencies proposed as a result of any audits have been paid
or settled; and there is no pending or, to the best knowledge of MIGRA,
threatened federal, state, local or foreign tax audit or assessment relating to
a MIGRA Company and there is no agreement with any federal, state, local, or
foreign taxing authority that may affect the subsequent tax liabilities of the
MIGRA Companies.
(c) [INTENTIONALLY OMITTED.]
(d) Except as set forth in Section 4.9 of the MIGRA Disclosure Schedule,
there exists no tax-sharing agreement or arrangement pursuant to which any MIGRA
Company is obligated to pay the tax liability of any other person or to
indemnify any other person with respect to any tax.
(e) Section 4.9 of the MIGRA Disclosure Schedule includes a list of all
states, territories and jurisdictions to which any tax is properly payable by
the MIGRA Companies.
(f) MIGRA became an "S corporation," within the meaning of Section
1361(a)(1) of the Code (an "S corporation"), for federal income tax purposes on
January 30, 1987, pursuant to a valid election made by MIGRA, with the consent
of all of its shareholders, and, except as set forth in Section 4.9 of the MIGRA
Disclosure Schedule, effective as of such date, and MIGRA is and from such date
always has been an S corporation. MIGRA will not have, at the Effective Time,
any earnings or profits resulting from any period during which it (including any
predecessor in interest) was subject to taxation under Subchapter C of the Code.
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4.10 Compliance with Law.
(a) Except as set forth in Section 4.10 to the MIGRA Disclosure Schedule
and except for such matters as would not have a Material Adverse Effect on the
MIGRA Companies taken as a whole, the MIGRA Companies are in compliance with all
applicable laws, statutes, orders, rules, regulations, policies or guidelines
promulgated, or judgments, decisions or orders entered by any Governmental
Authority (collectively, "Applicable Laws") to which the MIGRA Companies are
subject (i) including, without limitation, the Securities Act, the Exchange Act,
the Investment Advisors Act of 1940, as amended (the "40 Act"), the Employee
Retirement Income Security Act, as amended ("ERISA"), any state or federal laws
respecting rights of privacy and all rules of professional conduct applicable to
the MIGRA Companies and (ii) excluding for the purposes of this Section 4.10,
all Environmental Laws (as defined in Section 4.22), as to which the sole
representation and warranty is set forth in Section 4.22. The MIGRA Companies
have heretofore made available to AERC copies of all material correspondence
received during the last three years from and to any Governmental Authority and
inspectors alleging a violation of any Applicable Law.
(b) Except as specifically set forth in Section 4.10 to the MIGRA
Disclosure Schedule, MIGRA and the MIGRA Companies, and each of them, are (and
as of the Effective Time will be) in full compliance with the provisions of
ERISA and all relevant state pension codes and other laws (as and where
applicable) with respect to the Pension Funds and each of them is, or are, and
at all relevant times have been, in full compliance with the provisions of any
individual or class exemption relieving MIGRA, the other MIGRA Companies, and
the Pension Funds (as applicable) from compliance with relevant provisions of
ERISA, specifically including (without limitation) Prohibited Transaction Class
Exemption ("PTCE") No. 84-14 (March 13, 1984; as amended Oct. 10, 1985)
(relating to transactions by independent qualified professional asset managers,
or "QPAMs").
(c) Except as set forth in Section 4.10 of the MIGRA Disclosure Schedule,
neither MIGRA nor the other MIGRA Companies, or any of them, is party to any
contract, covenant or similar agreement or undertaking, and no MIGRA Stockholder
has actual knowledge of any obligation under Applicable Law, which would prevent
AERC from purchasing or offering to purchase the Managed Properties (as defined
in Section 4.12(c)), or any of them, from the Pension Funds (or any corporation
or trust in which the Pension Funds, individually or collectively, have an
interest) on or after the Effective Time, provided full disclosure of all terms
and affiliations, under terms substantially identical to those set forth in
Schedule 4.10(c) hereto, is thereupon made to the applicable Pension Funds and
all necessary or appropriate independent approvals are provided (including,
where applicable, the receipt of an individual exemption from the relevant
provisions of Part 4, Title I of ERISA).
4.11 Intellectual Property. Set forth in Section 4.11 to the MIGRA
Disclosure Schedule is a true and complete list of (i) all of the MIGRA
Companies' foreign and domestic patents, patent applications, invention
disclosures filed in the patent offices of any countries, trademarks, service
marks or tradenames, copyrights (and any registrations or applications for
registration for any of the foregoing), and (ii) all material agreements to
which a MIGRA Company is a party which concern any Intellectual Property.
"Intellectual Property" shall mean proprietary rights of every kind, including,
without limitation, all domestic or foreign patents, patent applications,
intangible rights in inventions (whether or not patentable), products,
intangible rights in technologies, discoveries, copyrightable and copyrighted
works, apparatus, trade secrets, trademarks and trademark registration
applications and registrations, service marks and service mark registration
applications and registrations, trade names, trade dress, copyrights and
copyright registration applications and registrations, design rights, customer
lists, marketing and customer information, mask works rights, know-how,
licenses, technical information (whether confidential or otherwise), copyright
and trade secret rights in software, databases, methodologies and all
documentation thereof. The Intellectual Property set forth in Section 4.11 of
the MIGRA Disclosure Schedule, together with any other intellectual property
which a MIGRA Company owns or otherwise has the right to use, collectively is
sufficient for the operation of the business of the MIGRA Companies in
substantially the same manner as such business is at present conducted. Except
as set forth in Section 4.11 to the MIGRA Disclosure Schedule, MIGRA or another
MIGRA Company owns, free and clear of any liens, claims or encumbrances, the
Intellectual Property set forth thereon and has the exclusive right to bring
actions for the infringement thereof.
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4.12 Title to and Condition of Properties.
(a) Except as set forth in Section 4.12 to the MIGRA Disclosure Schedule,
each MIGRA Company has good, valid and indefeasible title to all of its material
assets and properties of every kind, nature and description, tangible or
intangible, wherever located, which constitute all of the property now used in
and necessary for the conduct of its business as presently conducted (including
without limitation all material property and assets shown or reflected on the
Audited Statements or the Interim Statements, when delivered, but except for the
real properties owned by the Ventures and the Managed Properties, as defined in
Section 4.12(c)). Except as set forth in Section 4.12 to the MIGRA Disclosure
Schedule and except for such items as do not materially and adversely affect the
use or operation of the properties of each MIGRA Company, all such properties
are owned free and clear of all mortgages, pledges, liens, security interests,
encumbrances and restrictions of any nature whatsoever, including without
limitation (i) rights or claims of parties in possession; (ii) easements or
claims of easements; (iii) encroachments, overlaps, boundary line or water
drainage disputes or any other matters; (iv) any lien or right to a lien for
services, labor or material furnished; (v) special tax or other assessments;
(vi) options to purchase, leases, tenancies, or land contracts; (vii) contracts,
covenants, or reservations which restrict the use of such properties and (viii)
violations of any Applicable Laws (other than Environmental Laws, as to which
the sole representation and warranty is in Section 4.22) applicable to such
properties. To the actual knowledge of MIGRA and each MIGRA Stockholder, all
such properties are usable for their current uses without violating any
Applicable Laws (other than Environmental Laws, as to which the sole
representation and warranty is in Section 4.22), or any applicable private
restriction, and such uses are legal conforming uses in all material respects.
Except as set forth in Section 4.12 to the MIGRA Disclosure Schedule, no
financing statement under the Uniform Commercial Code or similar law naming
MIGRA, or, to the actual knowledge of MIGRA and each MIGRA Stockholder, any
Venture or any of their respective predecessors is on file in any jurisdiction
in which such MIGRA Company owns or manages property or does business, and no
MIGRA Company is a party to or bound under any material agreement or legal
obligation authorizing any party to file any such financing statement. Section
4.12 to the MIGRA Disclosure Schedule contains a complete and accurate list of
the location of all real property which is owned or leased, as lessee, by the
MIGRA Companies and describes the nature of their respective interest in that
real property. With respect to any real property leased, as lessee, by a MIGRA
Company, except as set forth in Section 4.12 of the MIGRA Disclosure Schedule,
such MIGRA Company has an insurable leasehold interest in that real property.
(b) Except as set forth in Section 4.12 to the MIGRA Disclosure Schedule,
all plants and structures and all machinery and equipment and tangible personal
property owned, leased or used by the MIGRA Companies are reasonably suitable
for the purpose or purposes for which they are being used (including compliance
in all material respects with all Applicable Laws, other than Environmental Laws
(as to which the sole representation and warranty is in Section 4.22), and are
in good and reasonable operating condition and repair, ordinary wear and tear
excepted. Section 4.12 to the MIGRA Disclosure Schedule lists, and MIGRA has
furnished or made available to AERC, copies of all engineering, geologic and
environmental reports prepared by or for the MIGRA Companies with respect to the
real property owned by MIGRA or any MIGRA Company.
(c) With respect to each parcel of real property that is owned by MIGRA,
and/or a Venture or is managed by MIGRA or any of its subsidiaries or affiliates
(other than MIG Development Company), all of which are listed on Exhibit A (each
such parcel whether owned and/or managed being hereinafter referred to as a
"Managed Property"):
(i) True, correct and complete copies of all of the following,
together with any modifications or amendments thereof which are currently
in effect, have been or will be made available to AERC promptly after the
execution of this Agreement: (A) all written leases and tenancy agreements
with tenants with respect to all or any portion of each Managed Property
("Tenant Leases") and a current certified rent roll (which shall be updated
and certified by MIGRA as true, correct and complete to a date not earlier
than three days prior to the Closing), (B) all maintenance and service
contracts, supply contracts and other agreements, contracts and contract
rights relating to the ownership or operation of each Managed Property, or
any part thereof ("Project Contracts"), and (C) all leases of equipment,
vehicles and other tangible personal property used by MIGRA in connection
with the management and
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operation of each Managed Property ("Personal Property Leases"). All of the
Tenant Leases, Project Contracts and Personal Property Leases are in full
force and effect. There has not occurred any action or failure to act by
MIGRA or the related owner of the Managed Property ("Owner") with respect
to a Managed Property or, to the actual knowledge of MIGRA and each MIGRA
Stockholder, any other party to any Tenant Lease, Project Contract or
Personal Property Lease which, with the giving of notice or the passage of
time or otherwise, would constitute a default in any material respect or
otherwise entitle either party to damages or a right to terminate, and no
such other party has given written notice with respect to any adverse
condition with respect to any Managed Property or the use or repair of the
same or of any alleged material default by MIGRA or the related Owner under
any such Tenant Lease, Project Contract or Personal Property Lease, which,
individually or in the aggregate, will have a material adverse effect on
MIGRA or the Managed Property. The information contained in the documents,
instruments or other writings to be delivered or made available to AERC by
MIGRA in accordance with the provisions of this Section 4.12(c) was correct
and accurate as of the date of such writings.
(ii) Neither MIGRA nor any MIGRA Stockholder has any actual knowledge
that any federal, state and other taxes, assessments, fees and other
governmental charges with respect to the Managed Property or the business
conducted thereon which are due and payable have not been paid prior to
delinquency.
(iii) Neither MIGRA nor any MIGRA Stockholder has actual knowledge
that any of the Permits (as defined in Section 4.21(b)) are not currently
valid and in full force and effect.
(iv) Neither MIGRA nor any MIGRA Stockholder has actual knowledge that
each Managed Property, as constructed and presently operated, does not
comply with all applicable zoning ordinances and regulations that any
variances or conditional use permits have been issued by any governmental
body which affect any Managed Property.
(v) True and correct copies of all financial statements and records
relating to each Managed Property, or access thereto, will be made
available promptly after the earlier of the execution of a consent or a
Purchase Agreement by the Owner of such Managed Property. Copies of
relevant pages of each related Owner's tax returns for the calendar years
1994, 1995 and 1996 relating to the Managed Property and any other document
or instrument reasonably requested by AERC shall be delivered to AERC
within three (3) days following the execution of this Agreement. There has
been no material adverse financial change with respect to any Managed
Property from that shown in the financial statements, tax returns and
records delivered or made available to AERC by MIGRA for such Managed
Property pursuant to this Agreement and there are no material liabilities
with respect to such Managed Property other than those shown on such
financial statements, tax returns and records.
(vi) There are no brokerage commissions owing by MIGRA or any
affiliate thereof (A) with respect to any of the Tenant Leases or otherwise
relating to each Managed Property which have not been paid and (B) no
ongoing commission or leasing fee obligations with respect to any Managed
Property.
(d) Except as otherwise expressly provided in this Agreement, the
representations and warranties in this Section 4.12 are the sole representations
and warranties by MIGRA and/or the MIGRA Stockholders with respect to the
Managed Properties.
4.13 Investment Advisor.
(a) Investment Contracts, Funds and Clients.
(i) To the actual knowledge of MIGRA and the MIGRA Stockholders, none
of MIGRA, MIG Ltd. or any of their respective subsidiaries currently
serves, or has served at any time during the past two fiscal years, as an
investment adviser (including sub-investment adviser), manager,
administrator, fund accountant, transfer agent and/or distributor to any
investment company, or series or portfolio thereof, as that term is defined
in Section 3 of the Investment Company Act of 1940, as amended (the "ICA").
(ii) Section 4.13(a)(ii) to the MIGRA Disclosure Schedule sets forth:
(A) a list of all funds, trusts or other accounts owned or controlled by
MIGRA or MIGRA Ltd. that would otherwise be deemed to be
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an investment company as defined in the ICA but for the exemption contained
in Section 3(c)(1), the final clause of Section 3(c)(3), Section 3(c)(7),
Section 3(c)(9), Section 3(c)(10) or Section 3(c)(11) of the ICA to which
MIGRA, MIG Ltd. or any of their respective subsidiaries provide investment
advisory, broker-dealer, administrative, transfer agency, accounting,
custody, management and/or distribution services (each a "Fund") including
(1) the assets under management of each Fund, (2) the fee revenues
applicable to each Fund, (3) a description of the fees, including any
formula for the calculation thereof, charged to each Fund, (4) the
annualized revenues for each Fund, and (5) identification of each exception
from the definition of an investment company under the ICA relied upon by
such Fund; (B) a list of all accounts of clients to which MIGRA, MIG Ltd.
or any of their respective subsidiaries provide management, investment
advisory, broker-dealer, transfer agency, accounting, custody,
administrative or distribution services on the date hereof, including any
Funds (each, a "Client"), identifying as to each such account (1) the
Client corresponding to such account, and (2) whether such account is an
institutional advisory account (an "ICG Account") or a private client
advisory account (a "PCG Account")(all ICG and PCG Accounts are hereafter
collectively referred to as "Accounts"); (C) on an Account-by-Account
basis, the aggregate market value of assets under management, a description
of the fees charged and how such fees are calculated, the fee revenues
applicable to each ICG Account and PCG Account, and the annualized revenues
from each of the ICG Accounts and PCG Accounts; (D) a summary of the total
assets under management and total annualized revenues for all Accounts; and
(E) true and correct form of all contracts in effect on the date hereof to
which MIGRA, MIG Ltd. or any of their respective subsidiaries is a party
pursuant to which MIGRA, MIG Ltd. or their respective subsidiaries, as the
case may be, provides to any Client management, investment advisory,
broker-dealer, distribution, transfer agency, accounting, custody, and/or
administrative services (an "Investment Contract"). Each Investment
Contract and any subsequent renewal thereof has been duly authorized,
executed and delivered by MIGRA, MIG Ltd. or their respective subsidiaries,
as the case may be, and, to the extent applicable, is in compliance in all
material respects with Section 205 of the 40 Act and is a valid and binding
agreement of MIGRA, MIG Ltd. or their respective subsidiaries, as the case
may be, enforceable against MIGRA, MIG Ltd. or their respective
subsidiaries, as the case may be, in accordance with its terms, and each of
MIGRA or MIG Ltd., the applicable subsidiary, the Fund and the Client party
thereto is in compliance in all material respects with the terms of each
Investment Contract to which it is a party, and to the best knowledge of
MIGRA and the MIGRA Stockholders, MIG Ltd., no event has occurred or
condition exists that constitutes or with notice or the passage of time
would constitute a default thereunder. Except as set forth on Section
4.13(a)(ii) to the MIGRA Disclosure Schedule, none of the Investment
Contracts, or any other arrangements or understandings relating to
rendering of investment advisory or management services, including without
limitation, all subadvisory services, administration or distribution
services to any Fund, Client or other Person, contains any undertaking by
MIGRA, MIG Ltd. or their respective subsidiaries to cap fees or to
reimburse any or all fees thereunder.
(iii) Each Fund and Account has been, is being and will be operated
and/or managed in all material respects in compliance with (A) its
respective objectives, policies and descriptions, including without
limitation any limitation set forth in the applicable prospectus or other
offering document for a Fund or governing instruments for a Fund or Account
and (B) all Applicable Laws.
(iv) To the best of MIGRA's knowledge, each Fund has timely filed all
tax returns and reports that such Fund is required to file. Each Fund has
timely paid, or reserved for, taxes that such Fund is required to pay.
(b) Regulatory Compliance.
(i) (A) No Fund or Account is or has been required by law to be
registered as an Investment Company under the ICA; (B) the shares of each
Fundare duly and validly issued, fully paid and nonassessable and are
qualified for sale, or an exemption therefrom is in full force and effect,
in each state and territory of the United States and the District of
Columbia to the extent required under Applicable Law; (C) all outstanding
shares of each Fund that were required to be registered under the
Securities Act have been sold pursuant to an effective registration
statement filed thereunder or were sold in
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compliance with an exemption therefrom; (D) no such prospectus or offering
document relating to a Fund contained, as of its effective date, any untrue
statement of a material fact or omitted to state a material fact required
to be stated therein in order to make the statements therein not misleading
or is subject to any stop order or similar order restricting its use; and
(E) each Fund has operated and is currently operating in all material
respects in compliance with all laws applicable to it or its business,
including but not limited to the Securities Act, the ICA and the 40 Act,
and, assuming that each Fund, Account and any other client of MIGRA or MIG
Ltd. consent to the assignment of their Investment Contract as required by
the 40 Act prior to the merger of MIGRA into AERC, consummation of the
transactions contemplated hereby will not result in a violation of any such
laws.
(ii) Each Fund is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization and has
full power, right and authority to own its properties and to carry on its
business as it is now conducted, and is qualified to do business in each
jurisdiction where failure to so qualify would have a material adverse
effect. For purposes of this Section 4.13(b)(ii), a Material Adverse Effect
shall mean a material adverse effect on the condition (financial or other),
business, properties, net worth or results of operations of a Fund.
(iii) The policies of MIGRA and MIG Ltd., as the case may be, with
respect to avoiding conflicts of interest, or the conflicts or interest
that exist, as the case may be, are set forth in the most recent Form ADV
thereof (or incorporated by reference therein), as amended. There have been
no violations or allegations of violations of such policies that have
occurred or been made.
(iv) Neither MIGRA, MIG Ltd., their respective subsidiaries, any Fund,
nor, to the actual knowledge of MIGRA and the MIGRA Stockholders, any
person "associated" (as defined under the 40 Act) with the any of them,
has, for a period of not less than ten years prior to the date hereof been
convicted of any crime or is or has been subject to any disqualification
that would be a basis for denial, suspension or revocation or registration
of an investment adviser under Section 203(e) of the 40 Act or Rule
206(4)-4(b) thereunder or a broker-dealer under Section 15 of the Exchange
Act or for disqualification as an investment adviser for any Investment
Company pursuant to Section 9(a) of the ICA, and there is no basis for, or
proceeding or investigation that is reasonably likely to become the basis
for, any such disqualification, denial, suspension or revocation.
(v) Each current prospectus (which term, as used in this Agreement,
shall include any related statement of additional information and any
private placementmemorandum), as amended or supplemented, relating to each
Fund, and all current supplemental advertising and marketing material
relating to each Fund or used by MIGRA or MIG Ltd. complies in all material
respects with the Securities Act and the rules and regulations thereunder,
the ICA and the rules and regulations thereunder, the 40 Act and the rules
and regulations thereunder, applicable state laws and, where applicable,
the rules and regulations of the National Association of Securities
Dealers, Inc. or any affiliate thereof (NASD). None of such prospectuses,
amendments, supplements or supplemental advertising and marketing
materials, as of their respective dates, includes, included or will include
an untrue statement of a material fact or omits, omitted or will omit to
state a material fact necessary in order to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading.
(vi) Both MIGRA and MIG Ltd. have operated and are currently operating
their investment advisory business in compliance with all Applicable Laws
in all material respects, including, without limitation, the Exchange Act,
the 40 Act and the rules and regulations thereunder.
(vii) MIGRA's and MIG Ltd.'s practices and the practices of their
subsidiaries are, and have been at all times since May 1, 1986 and July 6,
1987, respectively, in all material respects in compliance with the
provisions of the Exchange Act, the 40 Act and similar state laws, and the
rules and regulations under each, relating to the selection of brokers to
execute transactions in Clients' accounts. Neither MIGRA nor MIG Ltd. has
purchased or sold securities for Clients' accounts.
(viii) There exists no "out of balance" or similar condition with
respect to any customer account maintained by MIGRA, MIG Ltd., their
respective subsidiaries, or any Fund.
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(ix) None of MIGRA, MIG Ltd. or any of their respective subsidiaries
has been, or is currently required to be, registered as a broker-dealer
with the SEC under sec. 15 of the Exchange Act or with any state securities
administrator under any applicable state securities laws.
(x) None of MIGRA, MIG Ltd. or any of their respective subsidiaries
has been or currently is registered, or is required to be registered, as a
"commodity pool operator" or a "commodity trading advisor" with the
Commodities Futures Trading Commission.
(c) Investment Adviser Registration. MIGRA and MIG Ltd. each are duly
registered as an investment adviser under the 40 Act and under all applicable
state, federal and foreign investment adviser or related laws. MIGRA and MIG
Ltd. have delivered to AERC a true and complete copy of both MIGRA's and MIG
Ltd.'s currently effective Form ADV, as filed with the SEC and has made
available to AERC all state, federal and foreign registration forms, all prior
Form ADV filings and all reports filed by both MIGRA and MIG Ltd. with the SEC
under the 40 Act and the rules promulgatedthereunder or otherwise and under
similar state, federal and foreign statutes within the last five years, and will
provide to AERC such forms and reports as are filed from and after the date
hereof and prior to the Closing Date. The information contained in such forms
and reports was or will be true and complete as of the time of filing and,
except as indicated on a subsequent form or report filed before the Closing
Date, continues to be true and complete. Each such registration is in full force
and effect, and MIGRA and MIG Ltd. agree to maintain such registration between
the date of this Agreement and the consummation of the Merger.
(d) Status of Accounts. Except as indicated in Section 4.13 of the MIGRA
Disclosure Schedule, no Client has provided any notice in writing to MIGRA or
MIG Ltd. of, and no MIGRA Stockholder has any actual knowledge that any Client
has, any intent to (i) terminate its Investment Contract with such MIGRA
Company, or (ii) reduce the amount of assets under management by such MIGRA
Company. Neither MIGRA or MIG Ltd. nor any MIGRA Stockholder has encouraged any
Client to take any action described in the preceding sentence nor, to the actual
knowledge of MIGRA and each MIGRA Stockholder, is there any existing state of
facts or circumstances, or any state of facts or circumstances arising solely by
virtue of the consummation of the transactions which are the subject of this
Agreement, which would require any Clients under Applicable Laws or by an
applicable Contract to take any action described in the preceding sentence.
4.14 Litigation. Except (i) as set forth in Section 4.14 to the MIGRA
Disclosure Schedule and (ii) suits, claims or actions fully covered (subject to
deductible amounts) by insurance policies issued by an insurer(s) and which has
been accorded a rating by A.M. Best Company, Inc. (or any successor rating
agency) of A-/X (or any replacement rating of equivalent stature) or better, and
as to which such insurer has not disputed coverage, there is no suit, claim,
action, proceeding or formal or informal investigation (an "Action") pending or,
to the actual knowledge of a MIGRA Company (or any MIGRA Stockholder),
threatened against MIGRA or any officer or director of any MIGRA Company which,
individually or in the aggregate, if adversely determined, would have a Material
Adverse Effect on the MIGRA Companies taken as a whole or a Material Adverse
Effect on the ability of the MIGRA to consummate the transactions contemplated
hereby. No MIGRA Company is subject to any outstanding order, writ, injunction
or decree which, individually or in the aggregate, insofar as can be reasonably
foreseen, could have a Material Adverse Effect on the MIGRA Companies taken as a
whole or a Material Adverse Effect on the ability of MIGRA to consummate the
transactions contemplated hereby. Except as set forth in Section 4.14 to the
MIGRA Disclosure Schedule, (i) there has not been any Action which is pending,
or to the actual knowledge of MIGRA and each MIGRA Stockholder, threatened
against a MIGRA Company relating to its method of doing business or its
relationship with past, existing or future users or purchasers of its services,
and (ii) no MIGRA Company has been subject to any outstanding order, writ,
injunction or decree relating to its method of doing business or its
relationship with past, existing or future customers, lessees, users, purchasers
or licensees of any Intellectual Property or services, in any such case within
the three (3) years prior to the date hereof.
4.15 Brokerage and Finder's Fees; Expenses. Neither any MIGRA Company nor
any stockholder, director or officer, partner which is an affiliate of MIGRA or
employeethereof, has incurred or will incur on behalf of a MIGRA Company, any
brokerage, finder's or similar fee in connection with the transactions
contemplated by this Agreement.
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4.16 Employee Benefit Plans.
(a) For purposes of this Section 4.16, the following terms have the
definitions given below:
"Controlled Group Liability" means any and all liabilities under (i)
Title IV of ERISA, (ii) Section 302 of ERISA, (iii) Sections 412 and 4971
of the Code, (iv) the continuation coverage requirements of section 601 et
seq. of ERISA and Section 4980B of the Code, and (v) corresponding or
similar provisions of foreign laws or regulations, in each case other than
pursuant to the Plans.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the regulations thereunder.
"ERISA Affiliate" means, with respect to any entity, trade or
business, any other entity, trade or business that is a member of a group
described in Section 414(b), (c), (m) or (o) of the Code or Section
4001(b)(1) of ERISA that includes the first entity, trade or business, or
that is a member of the same "controlled group" as the first entity, trade
or business pursuant to Section 4001(a)(14) of ERISA.
"Plans" means all written and material non-written employee benefit
plans, programs, policies, practices, and other arrangements providing
benefits to any employee or former employee or beneficiary or dependent
thereof, and whether covering one person or more than one person, sponsored
or maintained by MIGRA Companies or any of its subsidiaries or to which
MIGRA or any of its subsidiaries contributes or is obligated to contribute.
Without limiting the generality of the foregoing, the term "Plans" includes
all employee welfare benefit plans within the meaning of Section 3(1) of
ERISA and all employee pension benefit plans within the meaning of Section
3(2) of ERISA.
"Withdrawal Liability" means liability to a Multiemployer Plan as a
result of a complete or partial withdrawal from such Multiemployer Plan, as
those terms are defined in Part I of Subtitle E of Title IV of ERISA.
(b) Except as set forth in Section 4.16 to the MIGRA Disclosure Schedule:
(i) Section 4.16 to the MIGRA Disclosure Schedule lists all Plans.
With respect to each Plan, MIGRA has made available to AERC a true, correct
and complete copy of: (A) all current plan documents, benefit schedules,
trust agreements, and insurance contracts and other funding vehicles; (B)
the most recent Annual Report (Form 5500 Series) and accompanying schedule,
if any; (C) the current summary plan description, if any; (D) the most
recent annual financialreport, if any; and (E) the most recent
determination letter from the Internal Revenue Service, if any.
(ii) The Internal Revenue Service has issued a favorable determination
letter with respect to each Plan that is intended to be a "qualified plan"
within the meaning of Section 401(a) of the Code (a "Qualified Plan"), and
each Qualified Plan has been operated in material compliance with the Code.
(iii) All contributions required to be made to any Plan by Applicable
Laws or by any plan document or other contractual undertaking, and all
premiums due or payable with respect to insurance policies funding any
Plan, for any period through the date hereof have been timely made or paid
in full and through the Closing Date will be timely made or paid in full
or, to the extent not required to be made or paid on or before the date
hereof or the Closing Date, as applicable, have been or will be fully
reflected in the Audited Statements and the Interim Statements.
(iv) MIGRA and its subsidiaries have complied, and are now in material
compliance with all provisions of ERISA, the Code and all laws and
regulations applicable to the Plans. Each Plan has been operated in
material compliance with its terms. There is not now, and there are no
existing, circumstances that could give rise to, any requirement for the
posting of security with respect to a Plan or the imposition of any lien on
the assets of MIGRA or any of its subsidiaries under ERISA or the Code.
Each Plan includes provisions which reserve the rights of the sponsor of
the Plan to amend or terminate the Plan.
(v) No Plan is subject to Title IV or Section 302 of ERISA or Section
412 or 4971 of the Code. No Plan is a "multiemployer plan" within the
meaning of Section 4001(a)(3) of ERISA (a "Multiemployer Plan") or a plan
that has two or more contributing sponsors at least two of whom are not
under common control, within the meaning of Section 4063 of ERISA (a
"Multiple Employer Plan"), nor has MIGRA
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or any of its subsidiaries or any of their respective ERISA Affiliates, at
any time within five years before the date hereof, contributed to or been
obligated to contribute to any Multiemployer Plan or Multiple Employer
Plan.
(vi) Except for the continuation coverage requirements of Section 601
et seq. of ERISA and Section 4980B of the Code, there does not now exist,
and there are no existing, circumstances that could result in, any
Controlled Group Liability that would be a liability of MIGRA or any of its
subsidiaries following the Closing. Without limiting the generality of the
foregoing, neither MIGRA nor any of its subsidiaries nor any of their
respective ERISA Affiliates has engaged in any transaction described in
Section 4069 or Section 4204 of ERISA.
(vii) Except for health continuation coverage as required by Section
4980B of the Code or Part 6 of Title I of ERISA or as required by
applicablestate insurance laws, neither MIGRA nor any of its subsidiaries
has any liability for life, health, medical or other welfare benefits to
former employees or beneficiaries or dependents thereof.
(viii) Except as set forth in Section 4.16(i) to the MIGRA Disclosure
Schedule, neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will result in, cause
the accelerated vesting or delivery of, or increase the amount or value of,
any payment or benefit to any employee, officer, director or consultant of
MIGRA or any of its subsidiaries and Section 4.16(i) to the MIGRA
Disclosure Schedule specifies the amount of any such payment or benefit.
Without limiting the generality of the foregoing and except as set forth in
Section 4.16(i) to the MIGRA Disclosure Schedule, no amount paid or payable
by MIGRA or any of its subsidiaries in connection with the transactions
contemplated hereby either solely as a result thereof or as a result of
such transactions in conjunction with any other events will be an "excess
parachute payment" within the meaning of Section 280G of the Code.
(ix) There are no pending or, to the knowledge of MIGRA, threatened
claims (other than claims for benefits in the ordinary course), lawsuits or
arbitrations which have been instituted against the Plans, or, to the
knowledge of MIGRA, any fiduciaries thereof with respect to their duties to
the Plans or the assets of any of the trusts under any of the Plans which
could reasonably be expected to result in any material liability of MIGRA
or any of its subsidiaries.
(x) Each of the Plans is, and has always been, operating in material
compliance with all applicable laws, and all persons who participate in the
operation of such Plans and all Plan "fiduciaries" (within the meaning of
Section 3(21) of ERISA) have always acted in material compliance with
applicable laws, the Plan documents and written descriptions of the Plans,
and Part 4 of Title I of ERISA.
(xi) Each Plan that is intended to qualify for favorable tax treatment
under Code Section 125 so qualifies and has been operated in material
compliance with Code Section 125.
(xii) Full payment has been made, or shall be made in accordance with
29 C.F.R. sec. 2510.3-102 (to the extent applicable with regard to employee
contributions), of all amounts which MIGRA or any affiliate thereof is
required to pay under the terms of each of the Plans subject to such
Department of Labor regulation (with regard to employee contributions), and
all such amounts properly accrued through the Effective Time with respect
to the current plan year thereof will be timely paid. Each Plan sponsored
or maintained by MIGRA which is an "employee welfare benefit plan" (within
the meaning of Section 3(1) of ERISA) is, and at all relevant times within
the past three (3) years has been, fully insured by one (1) or more
insurance companies licensed to engage in the business of insurance in the
State of Florida.
4.17 Contracts.
(a) Section 4.17 to the MIGRA Disclosure Schedule lists all written
contracts, agreements, guarantees, leases and executory commitments which are
material, individually or in the aggregate, to the business or financial
condition or results of operations of the MIGRA Companies taken as a whole,
which shall be deemed to include, without limitation, any thereof that require
future payments in excess of $100,000 (each a "Contract") to which a MIGRA
Company is a party. The foregoing dollar amount shall be a measure of
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materiality solely for the purpose of the definition of the term "Contract." The
listing of Contracts separately lists all management agreements or similar
agreements relating to the Managed Properties ("Management Contracts") and all
agreements by and between a MIGRA Company and any Pension Fund or similar entity
to which any MIGRA Company provides investment advice ("Pension Fund
Contracts"). All such Contracts are valid and binding obligations of the MIGRA
Company named therein and, to the actual knowledge of MIGRA and each MIGRA
Stockholder, of each other party thereto. Section 4.17 to the MIGRA Disclosure
Schedule describes each termination or non-renewal that has occurred with
respect to any Contract with any customer or licensee of Intellectual Property
from January 1, 1996 to the date of this Agreement. Neither any MIGRA Company
nor, to the actual knowledge of MIGRA and each MIGRA Stockholder, any other
party thereto is in violation of or in default in respect of, nor has there
occurred an event or condition with respect to a MIGRA Company or to the actual
knowledge of MIGRA and each MIGRA Stockholder, any party thereto, which with the
passage of time or giving of notice (or both) would constitute a default under
or permit the termination of, any Contract.
(b) Except as set forth in Section 4.17 of the MIGRA Disclosure Schedule or
as contemplated by any other provision of this Agreement or the transactions
contemplated hereby, there are no Contracts or other transactions between a
MIGRA Company, on the one hand, and any officer or director of MIGRA or any
partner of a MIGRA Company.
4.18 [INTENTIONALLY OMITTED.]
4.19 Labor Matters. Except as set forth in Section 4.19 to the MIGRA
Disclosure Schedule, no MIGRA Company has any labor contracts, collective
bargaining agreements or employment or consulting agreements with any persons
employed by it or any persons otherwise performing services primarily for it
(the "MIGRA Company Business Personnel"). No MIGRA Company has engaged in any
unfair labor practice with respect to Company Business Personnel, and there is
no unfair labor practice complaint pending or, to the actual knowledge of MIGRA
and each MIGRA Stockholder, threatened, against any MIGRA Company with respect
to MIGRA Company Business Personnel. There is no labor strike, dispute, slowdown
or stoppage pending or, to the knowledge of MIGRA, threatened against any MIGRA
Company.
4.20 Undisclosed Liabilities. Except (i) as and to the extent disclosed or
reserved against on the balance sheet of MIGRA as of August 31, 1997 included in
the Interim Statements, (ii) as incurred after the date thereof in the ordinary
course of business consistent with prior practice and not prohibited by this
Agreement, (iii) as set forth in Section 4.20 to the MIGRA Disclosure Schedule
or (iv) as set forth on Schedule A, no MIGRA Company has any liabilities or
obligations (other than liabilities or obligations for Environmental Laws, as to
whichthe sole representation and warranty is in Section 4.22) of any nature,
whether known or unknown, absolute, accrued, contingent or otherwise and whether
due or to become due, that, individually or in the aggregate, could have a
Material Adverse Effect on the MIGRA Companies taken as a whole.
4.21 Operation of MIGRA's Business; Relationships.
(a) The relationships of the MIGRA Companies with their respective clients
and suppliers (including, without limitation, data suppliers) are satisfactory
and, to the actual knowledge of MIGRA and each MIGRA Stockholder, the execution
of this Agreement, the consummation of the Merger and the other transactions
contemplated hereby will not materially adversely affect the relationships of
the MIGRA Companies with such clients or suppliers, provided that the foregoing
is not a representation and warranty that any such client or supplier will
provide any consent or approval of any such relationship with AERC.
(b) MIGRA is in possession of all material franchises, grants,
authorizations, licenses, permits, easements, variances, exemptions, consents,
certificates, approvals and orders necessary to own, lease, manage and operate
its properties and to the actual knowledge of MIGRA and each MIGRA Stockholder,
each Venture, their respective properties and the owners of the Managed
Properties with respect to the Managed Properties, and MIGRA and each Venture
has all of the foregoing necessary to carry on its business as it is now being
conducted (collectively, the "Permits"), and there is no Action pending or, to
the actual knowledge of MIGRA and each MIGRA Stockholder, threatened regarding
any of the Permits. No MIGRA Company
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or Managed Property is in conflict with, or in default or violation of any of
the Permits, except for any such conflicts, defaults or violations which,
individually or in the aggregate, could not reasonably be expected to have a
Material Adverse Effect on the MIGRA Companies taken as a whole. During the
period commencing on January 1, 1997, and ending on the date hereof, no MIGRA
Company has received any notification alleging a possible conflict, default or
violation by a MIGRA Company of Applicable Laws. The representations and
warranties in this Section 4.21(b) shall not be deemed to be applicable with
respect to Permits under Environmental Laws.
4.22 Environmental Matters.
(a) As used herein, the term "Environmental Laws" means all federal, state,
local or foreign laws relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata), including, without limitation,
laws relating to emissions, discharges, releases or threatened releases of
chemicals, pollutants, contaminants, or industrial, toxic or hazardous
substances or wastes (collectively, "Hazardous Materials") into the environment,
or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of Hazardous Materials, as
well as all authorizations, codes, decrees, demands or demand letters,
injunctions, judgments, licenses, notices or notice letters, orders, permits,
plans or regulations issued, entered, promulgated or approved thereunder.
(b) During the period commencing January 1, 1994, and ending on the
Effective Time, except as set forth in Section 4.22 of the MIGRA Disclosure
Schedule, no MIGRA Company has received any written notification from a
Governmental Authority alleging a possible conflict, default or violation of
Environmental Laws relating to the Managed Properties.
4.23 FBCA and State Takeover Laws. Prior to the date hereof, the Board of
Directors of MIGRA has taken all action on the part of MIGRA, if any, necessary
to exempt under or make not subject to any state takeover law or other state law
that purports to limit or restrict business combinations or the ability to
acquire or vote shares: (i) the Merger and (iii) the other transactions
contemplated hereby.
4.24 Insurance. Except as set forth in Section 4.24 to the MIGRA
Disclosure Schedule, the MIGRA Companies are presently insured, and during each
of the past five calendar years have been insured, against such risks as
companies engaged in a similar business would, in accordance with good business
practice, customarily be insured. Except as set forth in Section 4.24 to the
MIGRA Disclosure Schedule, the policies of fire, theft, liability, professional
practice and other insurance maintained with respect to the assets or businesses
of the MIGRA Companies may be continued by the Surviving Corporation without
modification or premium increase after the Effective Time and for the duration
of their current terms which terms expire as set forth in Section 4.24 to the
MIGRA Disclosure Schedule.
4.25 Books of Account; Records. Each MIGRA Company's general ledgers,
stock record books, minute books and other material records relating to the
assets, properties, contracts and outstanding legal obligations of such MIGRA
Company are, in all material respects, complete and correct, and have been
maintained in accordance with good business practices and the matters contained
therein are appropriate and accurately reflected in the Audited Statements and
the Interim Statements.
ARTICLE V
COVENANTS OF THE PARTIES
The parties hereto agree as follows with respect to the period from and
after the execution of this Agreement.
5.1 Mutual Covenants.
(a) General. Each of the parties shall use its reasonable efforts to take
all action and to do all things necessary, proper or advisable to consummate the
Merger and the transactions contemplated by this Agreement (including, without
limitation, using its reasonable efforts to cause the conditions set forth in
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Article VI for which they are responsible to be satisfied as soon as reasonably
practicable and to prepare, execute and deliver such further instruments and
take or cause to be taken such other and further action as any other party
hereto shall reasonably request).
(b) Other Governmental Matters. Each of the parties shall use its
reasonable efforts to take any additional action that may be necessary, proper
or advisable in connection with any other notices to, registrations or filings
with, and authorizations, consents and approvals of any Governmental Authority
(and, in the case of AERC, the NYSE) that it may be required to give, make or
obtain.
(c) Public Announcements. AERC and MIGRA shall consult with each other
before issuing any press release or otherwise making any public statements with
respect to this Agreement or any transaction contemplated herein and shall not
issue any such press release or make any such public statement without the prior
consent of MIGRA and AERC, respectively, which consent shall not be unreasonably
withheld or delayed; provided, however, that AERC or MIGRA may, without the
prior consent of the other, issue such press release or make such public
statement as may be required by law or the rules of the NYSE if it has used its
reasonable efforts to consult with the other and to obtain consent but has been
unable to do so in a timely manner.
(d) Investment Advisory Contracts. Each of MIGRA and AERC shall use its
reasonable efforts (which shall not include the payment of money) to obtain,
prior to the Closing Date, the consent of the applicable parties to the Relevant
Contracts to the assignment of the Relevant Contracts to AERC or, within 90 days
of the Closing Date to enter into the New Relevant Contracts.
(e) Tax-Free Treatment. Each of MIGRA and AERC shall use all reasonable
efforts to cause the Merger to constitute a tax-free "reorganization" under
Section 368(a) of the Code including, without limitation, reporting the Merger
as a tax-free reorganization and in exercising the election set forth in Section
5.2(l) in a manner that is consistent with such treatment.
(f) Confidentiality. From the date hereof to the Effective Time, MIGRA
will make available for inspection by designated officers, attorneys,
accountants and other representatives of AERC (collectively, "AERC
Representatives"), at all reasonable times during normal business hours, such
financial and other information relating to the business, financial condition
and management of its businesses, including the records and files,
correspondence, audits and properties, as well as all information relating to
commitments, contracts, titles and financial position, or otherwise pertaining
to the business and affairs, of the MIGRA Companies, and the identity of, and,
to the extent not prohibited or otherwise restricted by confidentiality or other
obligations, information pertaining to, the Pension Funds and any other Clients,
as AERC may reasonably request to enable such party to make a reasonably
informed judgment as to whether to consummate the Merger and the transactions
contemplated hereby (all such information is referred to collectively herein as
the "Proprietary Information"). Except as otherwise provided herein, AERC shall
(i) keep confidential all such Proprietary Information, and (ii) not disclose
any of the Proprietary Information to any other person and (iii) not use or make
use of the Proprietary Information for (A) any purpose other than making such
reasonably informed judgment or (B) the furtherance of its own business or that
of any other person or entity or the detriment of the other party's business;
provided, however, the foregoing undertaking will not apply to: (i) disclosures
to which the other partyconsents in writing; (ii) information which is or
becomes known or available publicly other than as a result of a disclosure in
violation of this Agreement; and (iii) disclosures required to be made by law or
by an order, decree, rule, directive or demand of a court of law, an
administrative, regulatory, governmental or quasi-governmental agency or
official, or an arbitrator.
5.2 Covenants of AERC.
(a) Notification of Certain Matters. AERC shall give prompt notice to
MIGRA of (i) the occurrence or non-occurrence of any event known to AERC the
occurrence or non-occurrence of which would cause any AERC representation or
warranty contained in this Agreement to be untrue or inaccurate at or prior to
the Effective Time and (ii) any material failure of AERC to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder; provided, however, that the delivery of any notice
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pursuant to this Section 5.2(a) shall not limit or otherwise affect (A) the
right of MIGRA to terminate this Agreement in accordance with Section 7.1 or (B)
except to the extent set forth in Section 7.2, the other remedies available to
MIGRA hereunder. In addition, AERC shall give prompt notice to MIGRA of any
matter which, pursuant to its due diligence, it determines should be included in
the MIGRA Disclosure Schedule.
(b) NYSE Listing. AERC shall use its reasonable efforts to cause the AERC
Common Shares issuable pursuant to the Merger to be approved for listing on the
NYSE, subject to official notice of issuance, prior to the Effective Time,
including, without limitation, calling for a meeting to obtain through the use
of reasonable efforts the AERC Shareholder Approval.
(c) Exchange Act. For the period ending on the fourth anniversary of the
Closing Date, AERC will file the reports required to be filed by it under the
federal securities laws and the rules and regulations adopted by the SEC
thereunder (or, if AERC is not required to file such reports, it will, upon the
request of any MIGRA Stockholder, make publicly available other information so
long as necessary to permit sales under Rule 144 under the Securities Act or any
successor rule or regulation hereafter adopted by the SEC), to the extent
required from time to time to enable any MIGRA Stockholder who receives AERC
Common Shares in accordance with the terms of this Agreement to sell such AERC
Common Shares without registration under the Securities Act within the
limitations of the exemption provided by (A) Rule 144 under the Securities Act,
as such rule may be amended from time to time, or (B) any successor rule or
regulation hereafter adopted by the SEC.
(d) Tax-Free Treatment. Provided the assets or lines of business of MIGRA
acquired in the Merger are sufficient to meet the requirements described below
in this Section 5.2(d), AERC will either continue to operate a significant line
of business of MIGRA's historic business acquired in the Merger in satisfaction
of the requirements of Reg. sec. 1.368-1(d)(3) or use a significant portion of
MIGRA's historic business assets acquired in the Merger to conduct AERC's
business in satisfaction of the requirements of Reg. sec. 1.368-1(d)(4);
provided that AERC shall not be so required to use any assetsor conduct any
business if, and to the extent, such action would, in the opinion of outside
counsel, cause AERC to breach its covenant set forth in Section 5.2(e).
(e) REIT Status. AERC covenants and agrees that it shall use its best
efforts to continue to be taxed as a real estate investment trust pursuant to
Sections 856 through 860 of the Code unless the Board of Directors of AERC shall
determine that it is in the best interest of the shareholders of AERC to be
taxed otherwise.
(f) Governmental Authorities. AERC and AEMC shall at the expense of MIGRA
cooperate with and assist MIGRA and each other MIGRA Company in connection with
any filings to be made with or consents to be obtained from any Governmental
Authority with jurisdiction over the MIGRA Companies or the Managed Properties.
(g) Lehman Letter. AERC shall use all reasonable efforts to assume at the
Effective Time MIGRA's obligations under the Lehman Letter (as defined in
Section 6.2(h)).
(h) Contact with MIGRA Clients. During the 45 day due diligence period
which period shall expire on February 3, 1998 (the "AERC Due Diligence Period")
and otherwise prior to the Closing, neither AERC nor any of its affiliates or
any of their respective officers, directors and employees ("AERC Contact
Representatives") shall (except as may be contemplated hereby in connection with
the acquisition of any Managed Property, AERC agreeing, however, that if the
Closing does not occur, AERC will not thereafter pursue such acquisitions for a
period of one year after the date of termination of this Agreement) contact,
directly or indirectly, or authorize or instruct any agents, brokers or third
party representatives ("AERC External Representatives"), on behalf of AERC or
any of its affiliates, directly or indirectly, to solicit, initiate discussions
with or make any inquiries of, or make or implement any proposal or offer to,
any client of MIGRA and/or its affiliates identified in Schedule 5.2(h), or
request from any such client any information, with respect to the sale by such
client of any real property and, in the event the Closing does not occur, AERC
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shall, and AERC shall cause its affiliates and the AERC Contact Representatives
and AERC External Representatives to, comply with their obligations under the
Standstill Agreement among the parties dated November 5, 1997 (the "Standstill
Agreement").
AERC and its affiliates and the AERC Contact Representatives shall not be
deemed to give an "authorization" or "instruction" for the purposes of the
foregoing if they request an AERC External Representative to find candidate real
properties in a particular geographic area with specific characteristics which
are general enough not to identify a specific property and do not specifically
identify a client identified in Schedule 5.2(h) as an owner thereof.
(i) Fairness Opinion. AERC shall use all reasonable efforts to obtain on
or prior to the Closing the fairness opinion referred to in Section 6.3(l).
(j) Spinoff Transaction. AERC shall use all reasonable efforts (which
shall not include the payment of money other than filing fees with Governmental
Authorities and legal fees) to consummate the Spinoff Transfer.
(k) Employment Agreement. Concurrently with the Closing, AERC shall
deliver to Mr. Wright an employment agreement in the form of Exhibit E attached
hereto (the "Employment Agreement"), fully executed by AERC.
(l) "A" Contracts. If AERC acquires none of the properties known as Windsor
Hollywood, Kirkman and the Pines on or prior to the Closing Date, $10,000,000
payable in cash or AERC Common Shares as elected by AERC will be paid to the
MIGRA Stockholders in installments of 50%, 18% and 32% on the Closing Date, the
Second Issuance Date and the Third Issuance Date, respectively; provided,
however that AERC shall be deemed to have acquired Kirkman for purposes hereof
even if it does not acquire the interest of PF Funds, Inc. The amount paid under
this Section 5.2(l), if any, shall not constitute an adjustment to the Purchase
Price for purposes of the calculation in Section 8.3(a).
5.3 Covenants of MIGRA.
(a) Conduct of MIGRA's Operations. During the period from the date of this
Agreement to the Effective Time, MIGRA shall and, to the extent within its
control and not in conflict with its fiduciary duty(ies), shall cause each
Venture to, conduct its operations only in the ordinary course, except as
expressly contemplated by this Agreement and the transactions contemplated
hereby, and shall use all reasonable efforts to maintain and preserve its
business organization and its material rights and franchises and to retain the
services of its officers and key employees and maintain its business
relationships with third parties, and to maintain all of its operating assets in
their current condition (normal wear and tear excepted), to the end that their
goodwill and ongoing business shall not be impaired in any material respect.
Without limiting the generality of the foregoing, during the period from the
date of this Agreement to the Effective Time, MIGRA shall not and, to the extent
within its control and not in conflict with its fiduciary duty(ies), shall not
permit any of the Ventures to, except as otherwise expressly contemplated by
this Agreement and the transactions contemplated hereby or as set forth in
Section 5.3(a) to the MIGRA Disclosure Schedule, without the prior written
consent of AERC:
(i) do or effect any of the following actions with respect to its
securities: (A) adjust, split, combine or reclassify its capital stock, (B)
except as set forth in Section 5.4(e), make, declare or pay any dividend or
distribution on, or directly or indirectly redeem, purchase or otherwise
acquire, any shares of its capital stock or any securities or obligations
convertible into or exchangeable for any shares of its capital stock, (C)
grant any person any right or option to acquire any shares of its capital
stock, (D) issue, deliver or sell or agree to issue, deliver or sell any
additional shares of its capital stock or any securities or obligations
convertible into or exchangeable or exercisable for any shares of its
capital stock or such securities, or (E) enter into any agreement,
understanding orarrangement with respect to the sale or voting of its
capital stock; provided, however, that MIGRA may make distributions (i) to
MIGRA Stockholders and Gutin, and each Venture may make distributions to
its partners, in an aggregate amount not to exceed the aggregate federal,
state and local liability (exclusive of penalties and interest)
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of a MIGRA Stockholder or Gutin or such partners, respectively, to the
extent that such liability arises from the net income and gain of MIGRA or
the applicable Venture(s) computed using the marginal tax rates of the
MIGRA Stockholder(s) or such partners, respectively, who pay(s) federal,
state and local tax based at the highest such rates of all MIGRA
Stockholders or Gutin or such partners, respectively, after giving effect
to other income and losses of such MIGRA Stockholder(s) or Gutin or such
partners, respectively, and (ii) to partners of the Ventures, to the extent
mandatory under the applicable partnership documents;
(ii) directly or indirectly sell, transfer, lease, pledge, mortgage,
encumber or otherwise dispose of any of its material property or assets
other than in the ordinary course of business;
(iii) make or propose any changes in the MIGRA Articles or the MIGRA
Bylaws;
(iv) merge or consolidate with any other person or acquire a material
amount of assets or capital stock of any other person or, enter into any
confidentiality agreement with any person (other than Pension Funds
relating to this Agreement);
(v) incur, create, assume or otherwise become liable for any
indebtedness for borrowed money in excess of $750,000 or assume, guarantee,
endorse or otherwise as an accommodation become responsible or liable for
the obligations of any other individual, corporation or other entity, other
than in the ordinary course of business consistent with past practice;
(vi) create any subsidiaries;
(vii) enter into or modify any employment, severance, termination or
similar agreements or arrangements with, or grant any bonuses, salary
increases, severance or termination pay to, any officer, director,
consultant or employee or otherwise increase the compensation or benefits
provided to any officer, director, consultant or employee other than salary
increases granted in the ordinary course of business consistent with past
practice and except as may be required by Applicable Law or a binding
written contract in effect on the date of this Agreement;
(viii) enter into, adopt or amend any employee benefit or similar
plan;
(ix) change its method of doing business, or change any method or
principle of accounting in a manner, that is inconsistent in any material
respect with past practice;
(x) settle any Actions, whether now pending or hereafter made or
brought, involving an amount in excess of $50,000;
(xi) write up, write down or write off the book value of any assets,
individually or in the aggregate, in excess of $100,000 except for
depreciation and amortization in accordance with GAAP consistently applied;
(xii) modify, amend or terminate, or waive, release or assign any
material rights or claims with respect to, any Contract set forth in
Section 4.17 to the MIGRA Disclosure Schedule, or any confidentiality
agreement to which MIGRA is a party;
(xiii) incur or commit to any capital expenditures, or obligations or
liabilities in respect thereof, which in the aggregate exceed or would
exceed $50,000;
(xiv) make any material changes or modifications to any pricing policy
or investment policy or enter into any new management agreements or leases
on terms materially different from those in effect in the ordinary and
usual course of business, consistent with past practice;
(xv) take any action to exempt or make not subject to any other state
takeover law or state law that purports to limit or restrict business
combinations or the ability to acquire or vote shares, any person or entity
(other than AERC) or any action taken thereby, which person, entity or
action would have otherwise been subject to the restrictive provisions
thereof and not exempt therefrom;
(xvi) enter into or carry out any other transaction which could
reasonably be expected to have a Material Adverse Effect on the MIGRA
Companies taken as a whole;
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(xvii) permit or cause any MIGRA Company to do any of the foregoing or
agree or commit to do any of the foregoing; or
(xviii) agree in writing or otherwise to take any of the foregoing
actions.
(b) No Solicitation. Unless and until this Agreement is terminated in
accordance with its terms, MIGRA shall not, and shall not authorize, to the
extent within its control and not in conflict with its fiduciary duty(ies), or
permit any Venture or any of its or the Ventures' respective directors,
officers, employees, agents or representatives to, directly or indirectly,
solicit, initiate, encourage or facilitate, or furnish or disclose non-public
information with respect to MIGRA in furtherance of, any inquiries or the making
of any proposal with respect to any recapitalization, merger, consolidation or
other business combination involving MIGRA, or acquisition of any capital stock
or any material portion of the assets of MIGRA, or any combination of the
foregoing (a "Competing Transaction"), or negotiate, explore or otherwise engage
in discussions with any person (other than AERC, AEMC or their respective
directors, officers, employees, agents and representatives) with respect to any
Competing Transaction or enter into any agreement, arrangement or understanding
requiring it to abandon, terminate or fail to consummate the Merger or any other
transactions contemplated by this Agreement. Neither the Board of Directors of
MIGRA nor any committee thereof shall (A) withdraw or modify, or propose
publicly to withdraw or modify, in a manner adverse to AERC, the MIGRA Board
Recommendation, (B) approve or recommend, or propose publicly to approve or
recommend, any Competing Transaction or (C) cause MIGRA or, unless required
pursuant to its fiduciary duty(ies), any other MIGRA Company to enter into any
letter of intent, agreement in principle, acquisition agreement or other similar
agreement (each, an "Acquisition Agreement") related to any Competing
Transaction or proposal for a Competing Transaction. Unless and until there is a
termination of this Agreement in accordance with Section 7.1, from and after the
execution of this Agreement, MIGRA shall immediately advise AERC in writing of
the receipt, directly or indirectly, of any inquiries, discussions,
negotiations, or proposals relating to a Competing Transaction (including the
specific terms thereof and the identity of the other party or parties involved)
and promptly furnish to AERC a copy of any such proposal or inquiry in addition
to any information provided to or by any third party relating thereto.
(c) Compliance with Regulatory Requirements. MIGRA shall, and, to the
extent within its control, and not in conflict with its fiduciary duty(ies),
cause each Venture, at the expense of AERC, to cooperate with and assist AERC,
AEMC and MRI in connection with any filings to be made with or consents to
obtained from any Governmental Authority with jurisdiction over any of the MIGRA
Companies or the Managed Properties.
(d) Financial Statements. MIGRA shall deliver to AERC Interim Statements
within 20 days following the end of each calendar month after the date hereof.
(e) Notification of Certain Matters. MIGRA shall give prompt notice to
AERC of (i) the occurrence or non-occurrence of any event known to MIGRA the
occurrence or non-occurrence of which would cause any MIGRA or MIGRA Stockholder
representation or warranty contained in this Agreement to be materially untrue
or inaccurate at or prior to the Effective Time and (ii) any material failure of
MIGRA or any MIGRA Stockholder to comply with or satisfy any covenant, condition
or agreement to be complied with or satisfied by it hereunder; provided,
however, that the delivery of any notice pursuant to this Section 5.3(e) shall
not limit or otherwise affect (A) the right of AERC to terminate this Agreement
in accordance with Section 7.1 or (B) except to the extent set forth in Section
7.2, the other remedies available to AERC hereunder.
(f) MIG Ltd. Purchase. MIGRA and the MIGRA Stockholders will use
reasonable efforts to have MIGRA and/or the MIGRA Stockholders enter into a
definitive purchase agreement with PF Funds, Inc. to acquire its interest in MIG
Ltd. at or before the Effective Time. The parties acknowledge that the MIGRA
Stockholders may transfer AERC Common Shares to PF Funds, Inc. as some or all of
the consideration for that purchase; provided, however, that PF Funds shall
agree to execute a letter relating to investment intent and accredited investor
status (to the extent applicable) and trading restrictions which will be solely
the trading restrictions imposed by Rule 144 under the Securities Act in a form
substantially identical to that delivered by the MIGRA Stockholders pursuant to
Section 6.3(j).
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(g) Development Properties. True and correct copies of all financial
statements and records relating to each of the properties known as the Windsor
Pines, Hollywood Pines and Kirkman properties, which properties are more fully
described on Exhibit A-1 hereto (the "Development Properties"), or access
thereto will be made available to AERC promptly after the execution of this
Agreement.
(h) Rights to Disposition Fees. MIGRA shall obtain from NYNEX a letter to
clarify that pursuant to the NYNEX Real Estate Investment Management Contract
dated February 7, 1995 disposition fees are payable upon termination of such
contract. If MIGRA does not obtain a letter from NYNEX prior to the Closing
Date, that portion of the AERC Common Shares (payable ratably over the Second
and Third Issuance Dates pursuant Sections 2.1(e) and 2.1(f), as applicable)
representing $194,365 will be held in escrow to be delivered as follows: (i) to
the MIGRA Stockholders on the earlier to occur of (a) the date such letter is
received by AERC, and (b) the date all such disposition fees are paid to AERC,
or (ii) to AERC if on or before February 1, 2005 such letter has not been
received and such fees have not been paid. The value of such AERC Common Shares
shall be determined in accordance with Section 2.1(e) and 2.1(f) (as the case
may be).
5.4 Covenants of MIGRA Stockholders.
(a) Purchase Price Adjustment.
(i) At least three Business Days prior to the Closing Date, the MIGRA
Stockholders shall cause to be delivered to AERC a statement of MIGRA, MIG
Ltd. and Stonemark as of the Closing Date, which statement shall set forth
MIGRA's good faith estimate of the current assets, including, without
limitation, advances made to MIG Development Company and other affiliates
of MIGRA (the "Current Assets") and all liabilities (the "Liabilities") of
MIGRA, and prorata based on its ownership interest therein, of MIG Ltd. and
Stonemark, as of the Closing Date as defined and determined in accordance
with GAAP and in a manner consistent with the preparation of the Audited
Financial Statements.
(ii) If on the Second Issuance Date, the actual amount of Current
Assets collected by AERC on or before the Second Issuance Date exceeds the
actual amount of Liabilities paid by AERC on or before the Second Issuance
Date, then AERC shall pay on the Second Issuance Date to the MIGRA
Stockholders either an amount of cash or AERC Common Shares, as elected by
each MIGRA Stockholder, equal in amount or value (as determined in
accordance with Section 2.1(c)), respectively, to such excess. If on the
Second Issuance Date, the actual amount of such Liabilities exceeds the
actual amount of such Current Assets, then the MIGRA Stockholders shall
either (i) pay on the Second Issuance Date to AERC an amount equal to such
excess or (ii) notify AERC that the number of AERC Common Shares to be
received pursuant to Section 2.1(c) or 2.1(e) shall be reduced by a number
of the AERC Common Shares equal in value to such excess, such value to be
determined pursuant to Section 2.1(c) or 2.1(e), respectively.
(b) Responsibility for Certain Obligations. The MIGRA Stockholders shall
jointly and severally pay when due the MIGRA Stockholders Fixed Liabilities. If
any MIGRA Stockholders Fixed Liability is not paid when due, AERC shall have the
right to pay the amount of such MIGRA Stockholder Fixed Liability that is due
and payable and is not so paid and to reduce the amount of AERC Common Shares to
be received by the MIGRA Stockholders pursuant to Section 2.1 by the number of
AERC Common Shares equal in value to the amount of such MIGRA Stockholder Fixed
Liability that is so paid, such value to be determined as set forth in Section
2.1. Such reduction shall apply to the installments of AERC Common Shares to be
next received.
(c) Non-Competition Agreements. Concurrently with the Closing, each MIGRA
Stockholder shall deliver to AERC a non-competition agreement in the form of
Exhibit D attached hereto (collectively, the "Non-Competition Agreements"),
fully executed by such MIGRA Stockholder.
(d) Resignations. Concurrently with the Closing, each MIGRA Stockholder
who is an officer and/or a director of MIGRA shall resign as an officer and/or
director of MIGRA and, prior to or concurrently with the Closing, MIGRA shall
cause Gutin to resign as an officer and/or director of MIGRA and to otherwise
terminate her employment therewith, effective as of the Effective Time.
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(e) MIGRA Distributions. The MIGRA Stockholders shall, prior to the
Effective Time, cause MIGRA to make a distribution to the MIGRA Stockholders and
Gutin in an amount necessary to establish to the reasonable satisfaction of AERC
that MIGRA does not have any accumulated earnings and profits from any period
that MIGRA or any of its predecessors were taxable as C corporations for federal
income tax purposes.
(f) Encumbrances on Conversion Rights. No MIGRA Stockholder shall create,
incur, assume or suffer to exist any pledge, lien, security interest or other
charge or encumbrances of any nature upon or with respect to the Conversion
Rights, except as may be contemplated by that certain Pledge Agreement dated
June 9, 1997, between Wayman and Mr. Wright and the related Escrow Agreement
dated as of August 1, 1997 and except for a transfer to PF Funds as contemplated
by and in accordance with Section 5.3(f) of this Agreement.
(g) On or before the Closing, the MIGRA Stockholders shall (i) use
reasonable efforts to acquire the entire right, title and interest of Gutin in
and to the MIGRA Companies and (ii) approve by unanimous vote or consent in
accordance with the FBCA the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby.
(h) On or before the Closing, the MIGRA Stockholders shall (i) terminate
each such person's employment agreement with MIGRA, (ii) cause MIGRA to
terminate Gutin's employment agreement with MIGRA, and (iii) terminate the
Stockholder Agreement by and among the MIGRA Stockholders, Gutin and MIGRA.
5.5 Covenants of Mr. Wright.
(a) Employment Agreement. Concurrently with the Closing, Larry Wright
shall deliver to AERC the Employment Agreement, fully executed by Mr. Wright.
ARTICLE VI
CONDITIONS
6.1 Mutual Conditions. The obligations of the parties hereto to consummate
the Merger shall be subject to fulfillment of the following conditions:
(a) No temporary restraining order, preliminary or permanent
injunction or other order or decree which prevents the consummation of the
Merger shall have been issued and remain in effect, and no statute, rule or
regulation shall have been enacted by any Governmental Authority which
prevents the consummation of the Merger.
(b) On the Closing Date and at the Effective Time, no stop order or
similar restraining order shall have been threatened by the SEC or any
state securities administrator prohibiting the Merger or the issuance of
the AERC Common Shares or the Conversion Rights.
(c) No Action shall be instituted by any Governmental Authority which
seeks to prevent consummation of the Merger or the issuance of the AERC
Common Shares or the Conversion Rights or seeking material damages in
connection with the transactions contemplated hereby which continues to be
outstanding.
6.2 Conditions to Obligations of MIGRA. The obligations of MIGRA to
consummate the Merger and the transactions contemplated hereby shall be subject
to the fulfillment of the following conditions unless waived by MIGRA:
(a) The representations and warranties of AERC set forth in Article
III shall be true and correct in all material respects on the date hereof
and on and as of the Closing Date as though made on and as of the Closing
Date (except for representations and warranties made as of a specified
date, which need be true and correct only as of the specified date).
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(b) AERC shall have performed in all material respects each obligation
and agreement and shall have complied in all material respects with each
covenant to be performed and complied with by it hereunder at or prior to
the Closing.
(c) AERC shall have furnished MIGRA with a certificate dated the
Closing Date signed on behalf of it by the Chairman, President or any Vice
President to the effect that the conditions set forth in Sections 6.2(a)
and (b) have been satisfied.
(d) MIGRA shall have received the favorable legal opinion, dated the
Closing Date, of Baker & Hostetler LLP as to the matters referred to in
Exhibit B.
(e) The AERC Common Shares to be issued in the Merger and the
transactions contemplated hereby shall have been authorized for inclusion
on the NYSE, subject to official notice of issuance.
(f) AERC shall have furnished MIGRA with an opinion of Baker &
Hostetler LLP, substantially similar in form and content to the opinions
provided to underwriters in connection with public offerings of AERC Common
Shares, to the effect that AERC has qualified, and currently qualifies, to
be taxed as a REIT pursuant to Sections 856 through 860 of the Code.
(g) AERC shall not have entered into a definitive agreement to merge
or consolidate with any entity in a transaction valued in excess of
$200,000,000, unless such merger or consolidation shall be for the sole
purpose of acquiring real property and shall not result in a change in the
senior management of AERC.
(h) AERC shall have assumed the obligations of MIGRA under that
certain letter agreement dated May 1, 1997, between MIGRA and Lehman
Brothers, as amended on September 10, 1997 (the "Lehman Letter").
(i) AERC shall have received the AERC Shareholder Approval.
(j) AERC shall have acquired all of the MIG REIT Properties.
(k) AERC shall have received all material Governmental Authority
consent(s) and approval(s) required because of this Agreement.
6.3 Conditions to Obligations of AERC. The obligation of AERC to
consummate the Merger and the other transactions contemplated hereby shall be
subject to the fulfillment of the following conditions unless waived by AERC:
(a) The representations and warranties of MIGRA set forth in Article
IV shall be true and correct in all material respects on the date hereof
and on and as of the Closing Date as though made on and as of the Closing
Date (except for representations and warranties made as of a specified
date, which need be true and correct only as of the specified date).
(b) MIGRA shall have performed in all material respects each
obligation and agreement and shall have complied in all material respects
with each covenant to be performed and complied with by it hereunder at or
prior to the Effective Time.
(c) MIGRA shall have furnished AERC with a certificate dated the
Closing Date signed on its behalf by its Chairman, President or any Vice
President to the effect that the conditions set forth in Sections 6.3(a)
and (b) have been satisfied.
(d) AERC shall have received the favorable legal opinion, dated the
Closing Date, of (i) Mayer, Brown & Platt or other counsel acceptable to
AERC, as to the matters referred to in Exhibit C, and (ii) Holland &
Knight, as to matters referred to in Section 4.13.
(e) (i) at no cost to AERC or AEMC, AERC shall have acquired the 10%
partnership interest in MIG Ltd. owned by MIG Realty, Inc., an affiliate of
MIGRA, and (ii) AERC shall have acquired all of the MIG REIT Properties.
(f) [INTENTIONALLY OMITTED].
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(g) MIGRA and AERC shall have received all material customer, vendor,
lessee, licensee, licensor, Governmental Authority and other third party
consents and approvals required because of this Agreement or the
transactions contemplated by this Agreement, excluding consents from
clients of the MIGRA Companies and their affiliates regarding the Relevant
Contracts, as to which the provisions of Section 2.4(a) shall be the sole
consequence to the MIGRA Stockholders with respect to not obtaining such
consents.
(h) MIGRA shall not have received notice from any holder or holders of
the MIGRA Common Stock issued and outstanding on the record date for the
determination of MIGRA Stockholders entitled to vote on the Merger that
such holder or holders have exercised or intend to exercise their appraisal
rights under the FBCA.
(i) The Employment Agreement and the Noncompetition Agreements shall
have been entered into and shall remain in full force and effect according
to their respective terms as of the Closing.
(j) AERC shall have received letters addressed to it from each of the
MIGRA Stockholders relating to investment intent and accredited investor
status (to the extent applicable) and trading restrictions which will be
solely the trading restrictions imposed by Rule 144 under the Securities
Act relating to the AERC Common Shares in a form reasonably required by
AERC and reasonably acceptable to the MIGRA Stockholders.
(k) AEMC or another affiliate of AERC shall have had its Form ADV
approved by the SEC.
(l) AERC shall have received a favorable opinion from Morgan Stanley
Dean Witter as to the fairness of the Merger.
(m) AERC shall have received the AERC Shareholder Approval.
(n) MIGRA and/or the MIGRA Stockholders shall have acquired the
interest in MIG Ltd. of PF Funds, Inc.
(o) On or before the Closing, the MIGRA Stockholders shall have (i)
acquired the entire right, title and interest of Gutin in and to the MIGRA
Companies, and (ii) approved by unanimous vote or consent in accordance
with the FBCA the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby.
(p) On or before the Closing, the MIGRA Stockholders shall have (i)
terminated each such person's employment agreement with MIGRA and (ii)
terminated the Stockholders Agreement by and among the MIGRA Stockholders,
Gutin and MIGRA.
(q) AERC shall have received all material Governmental Authority and
National City Bank consent(s) and approval(s) required because of this
Agreement.
(r) AERC shall have received the opinion, dated the Closing Date, of
Ernst & Young LLP, that MIGRA has no earnings or profits as of the Closing
Date.
ARTICLE VII
TERMINATION AND AMENDMENT
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time:
(a) by mutual consent of AERC and MIGRA;
(b) by either AERC or MIGRA if any permanent injunction or other order
of a court or other competent Governmental Authority preventing the
consummation of the Merger shall have become final and nonappealable;
(c) by either AERC or MIGRA if the Merger shall not have been
consummated on or before June 2, 1998 if AERC's Proxy Statement is not
reviewed by the SEC and on or before June 30, 1998 if AERC's Proxy
Statement is reviewed by the SEC, unless extended by the Boards of
Directors of both
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AERC and MIGRA (provided that the right to terminate this Agreement under
this Section 7.1(c) shall not be available to any party whose failure or
whose affiliate's failure to perform any material covenant or obligation
under this Agreement has been the cause of or resulted in the failure of
the Merger to occur on or before such date);
(d) by AERC if MIGRA or any MIGRA Stockholder has materially breached
any covenant or agreement contained in this Agreement and such breach is
either not capable of being cured prior to the Closing or, if such breach
is capable of being cured, is not so cured within a reasonable amount of
time;
(e) by MIGRA if AERC has materially breached any covenant or agreement
contained in this Agreement and such breach is either not capable of being
cured prior to the Closing or, if such breach is capable of being cured, is
not so cured within a reasonable amount of time;
(f) by AERC if at any time the representations and warranties of MIGRA
or the MIGRA Stockholders set forth in Article IV shall not be true and
correct in all material respects (it being understood and agreed that
representations and warranties made as of a specified date, need be true
only as of such specified date);
(g) by MIGRA or the MIGRA Stockholders if at any time the
representations and warranties of AERC set forth in Article III shall not
be true and correct in all material respects (it being understood and
agreed that representation and warranties made as of a specified date, need
be true only as of such specified date); or
(h) by either AERC or MIGRA if the MIG REIT Properties are acquired by
any one other than AERC.
7.2 Effect of Termination. In the event of the termination of this
Agreement pursuant to Section 7.1, this Agreement, except for the provisions of
this Section 7.2, Article VIII and Sections 9.8 and 9.10, shall become void and
have no further effect, without any liability on the part of any party or its
directors, officers or stockholders. Notwithstanding the foregoing, nothing in
this Section 7.2 shall relieve any party to this Agreement of liability for a
material breach of any representation and warranty of, or covenant or agreement
by, such party in this Agreement, which liability may be recoverable pursuant to
Article VIII, and provided, further, that if it shall be determined pursuant to
Section 8.5 that termination of this Agreement resulted from an intentional
breach of this Agreement, then, in addition to other remedies under this Section
7.2, Article VIII and Section 9.8 for breach of this Agreement, the party so
found to have intentionally breached this Agreement shall indemnify and hold
harmless the other parties for their respective reasonable costs, fees and
expenses, including, without limitation, the fees and expenses of their counsel
and accountants, as well as fees and expenses incident to negotiation,
preparation and execution of this Agreement and related documentation ("Costs").
Notwithstanding any provision of this Agreement to the contrary, in the event of
the termination of this Agreement, (i) by reason of a breach by MIGRA or any
MIGRA Stockholder under this Agreement, the limitation of liability referred to
in Section 8.3 shall be inapplicable, but in no event shall the maximum
aggregate liability of MIGRA and/or the MIGRA Stockholders under this Agreement,
which liability, with respect to the MIGRA Stockholders, shall be solely with
respect to a breach of any covenant or agreement of MIGRA and/or the MIGRA
Stockholders in this Agreement or the Additional Documents (as defined in
Section 8.1(a)), exceed the Purchase Price, as adjusted hereunder (the "Adjusted
Purchase Price") and (ii) by reason of a breach by AERC under this Agreement,
the maximum aggregate liability of AERC under this Agreement shall not exceed
the Adjusted Purchase Price. In the event of termination of this Agreement
pursuant to Section 7.1, MIGRA shall not be liable to AERC under the indemnity
agreement in Section 8.2(a)(i)(A) in respect of a breach of a representation or
warranty made by MIGRA or any MIGRA Stockholder contained in this Agreement on
the Closing Date to the extent, but only to the extent, that (w) such
representation or warranty was true and correct when made, (x) MIGRA has
notified AERC of such breach in accordance with the Agreement and (y) such
breach is the result solely of the occurrence of a circumstance or an event
subsequent to the date hereof.
7.3 Amendment. This Agreement may be amended by the parties hereto, by
action taken or authorized by their respective Boards of Directors, at any time
before or after adoption of this Agreement by MIGRA Stockholders or by AERC
shareholders, as the case may be, but after any such approval, no amendment
shall
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be made which by law requires further approval or authorization by the MIGRA
Stockholders or the AERC shareholders without such further approval or
authorization. Notwithstanding the foregoing, this Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto.
7.4 Extension; Waiver. At any time prior to the Effective Time, AERC (with
respect to MIGRA and the MIGRA Stockholders) and MIGRA (with respect to AERC and
AEMC) by action taken or authorized by their respective Boards of Directors,
may, to the extent legally allowed, (a) extend the time for the performance of
any of the obligations or other acts of such party, (b) waive any inaccuracies
in the representations and warranties contained herein or in any document
delivered pursuant hereto and (c) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of such party.
ARTICLE VIII
INDEMNIFICATION
8.1 Survival of Representations, Warranties and Agreements.
(a) Subject to the limitations set forth in Section 8.3 and 8.6, below, and
notwithstanding any investigation conducted at any time with regard thereto by
or on behalf of AERC or MIGRA or the MIGRA Stockholders, all representations,
warranties, covenants and agreements of MIGRA, the MIGRA Stockholders and AERC
in this Agreement and in any other documents executed or delivered by MIGRA, the
MIGRA Stockholders or AERC pursuant to this Agreement or in connection with the
transactions contemplated by this Agreement (other than the Standstill
Agreement, Contribution and Partnership Interests Purchase Agreement and
documentation executed and delivered in connection therewith, and documents
delivered in connection with the acquisition of the real properties listed on
Exhibit A, which, in each case, shall survive in accordance with their
respective terms) (the "Additional Documents") shall survive the execution,
delivery and performance of this Agreement and the Additional Documents. All
representations and warranties of MIGRA, the MIGRA Stockholders or AERC set
forth in this Agreement and in the Additional Documents shall be deemed to have
been made again by MIGRA, the MIGRA Stockholders or AERC, as the case may be, at
and as of the Effective Time (except for representations and warranties made as
of a specified date,which need be true and correct only as of the specified
date). This Section 8.1 shall not limit any covenant or agreement of the parties
hereto, which by its terms contemplates performance after the Effective Time or
after the termination of this Agreement.
(b) As used in this Article VIII, any reference to a representation,
warranty or covenant contained in any section of this Agreement shall include
the Schedule and any Exhibit relating to such section.
8.2 Indemnification.
(a) Subject to the limitations set forth in Sections 8.3 and 8.6, by virtue
of the approval and adoption of this Agreement and the Merger by MIGRA and the
MIGRA Stockholders, MIGRA (prior to the Closing) and the MIGRA Stockholders
(prior to Closing, for each MIGRA Stockholder solely with respect to
Indemnifiable Claims described in clause (i) (B) below as a result of any breach
by such MIGRA Stockholder, and subsequent to the Closing, with respect to all
Indemnifiable Claims), shall jointly and severally indemnify and hold harmless
AERC from and against any and all (i) demands, claims, suits, actions, or causes
of action ("Claims") asserted against, resulting to, imposed upon, or incurred,
sustained by, asserted by or suffered by AERC, directly or indirectly, as a
result of or arising from (A) any inaccuracy in or breach of any of the
representations and warranties made by MIGRA and/or the MIGRA Stockholders in
this Agreement or the Additional Documents, (B) the breach of any covenant or
agreement of MIGRA and/or the MIGRA Stockholders contained in this Agreement or
the Additional Documents, (C) any Claims relating to the MIGRA Stockholders
Fixed Liabilities and (D) any Claims relating to any liability or obligation of
any nature of the MIGRA Companies or any MIGRA Company, matured or unmatured,
liquidated or unliquidated, fixed or contingent, or known or unknown, arising
out of matters prior to or at the Effective Time, other than (w) any Claim with
respect to any of the Managed Properties, as to which the sole
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indemnification obligation of MIGRA Stockholders is in Section 8.2(a)(i)(A), (x)
any Claim arising out of the failure to obtain any consent or approval necessary
to effect the Merger and the other transactions contemplated by this Agreement
(provided that MIGRA and/or the MIGRA Stockholders, as applicable, have all
complied with their respective obligations under the relevant provisions of
Sections 5.1, 5.3 and 5.4 with respect to obtaining the consent or approval at
issue and AERC has complied with its obligations under the relevant provisions
of Section 5.2 with respect to obtaining such consent or approval), (y) any
Claim with respect to any increase in insurance premiums with respect to
insurance covered in Section 4.24 and (z) as otherwise expressly provided in
this Agreement, and (ii) losses, liabilities, damages and expenses, including
without limitation interest, penalties, reasonable attorneys' fees, any and all
expenses actually incurred, in investigating, preparing or defending against any
such Claim, commenced or threatened, and any and all amounts paid in settlement
of any such Claim (collectively, "Damages") (collectively, "Indemnifiable
Claims" when used in the context of AERC as the Indemnified Party (as defined in
Section 8.3(c)).
(b) Subject to the limitations set forth in Section 8.3 and 8.6, by virtue
of the approval and adoption of this Agreement by AERC, AERC hereby covenants
and agrees to indemnify and hold harmless MIGRA (prior to the Closing) and the
MIGRA Stockholders, both prior and subsequent to the Closing, from and against
any and all (i) Claims asserted against, resulting to, imposed upon, or
incurred, sustained by, asserted by or suffered by MIGRA or any or all of the
MIGRA Stockholders, directly or indirectly, as a result of or arising from (A)
any inaccuracy in or breach of any of the representations and warranties made by
AERC in this Agreement or (B) the breach of any covenant of AERC contained in
this Agreement and(ii) all related Damages (collectively, "Indemnifiable Claims"
when used in the context of MIGRA or the MIGRA Stockholders as the Indemnified
Party.
(c) For purposes of this Article VIII, all Damages shall be computed net of
any insurance coverage or tax benefit which reduces the Damages that would
otherwise be sustained; provided that in all cases the timing of the receipt or
realization of insurance proceeds shall be taken into account in determining the
amount of reduction of Damages.
(d) AERC shall be deemed to have suffered Damages arising out of or
resulting from the matters referred to in Section 8.2(a) if the same shall be
suffered by any subsidiary or affiliate of AERC, including without limitation,
MIGRA after the Effective Time.
8.3 Limitations on Indemnification. Rights to indemnification under this
Article VIII are subject to the following limitations:
(a) AERC shall not be entitled to indemnification hereunder with
respect to an Indemnifiable Claim arising out of a breach of a
representation, warranty, covenant or agreement (or, if more than one such
Indemnifiable Claim is asserted, with respect to all such Indemnifiable
Claims), unless the aggregate amount of Damages with respect to such
Indemnifiable Claim or Claims exceeds $500,000 (the "Basket"), in which
event AERC shall be entitled to indemnification hereunder for Damages with
respect to all Indemnifiable Claims in excess of the Basket; provided,
however, that in no event shall AERC be entitled to indemnification
hereunder, including without limitation Section 8.2(a)(i)(D), for Damages
in an amount in excess of the difference between (i) the Adjusted Purchase
Price and (ii) the aggregate value of the decreases to the number of AERC
Common Shares receivable by the MIGRA Stockholders made pursuant to
Sections 2.4, 2.5 and 5.4, such difference herein referred to as the "MIGRA
Cap"; and further, provided, however, that notwithstanding the joint and
several indemnification obligation of the MIGRA Stockholders, no MIGRA
Stockholder at any time shall have to pay Damages in excess of the amount
of the Purchase Price actually received by such MIGRA Stockholder at such
time, it being understood that such excess shall become immediately due and
payable on the immediately succeeding date when an installment of AERC
Common Shares becomes payable pursuant to Section 2.1 (to the extent of the
value of the AERC Common Shares receivable on such date), and any remaining
excess and any additional subsequent Damages also shall become so
immediately due and payable on the immediately succeeding date when such an
installment becomes so payable (to the extent of the value of the AERC
Common Shares receivable on such date); and further, provided, however,
that no MIGRA Stockholder shall be liable for Damages in an amount in
excess of his or her pro rata share, as determined by referenceto the
relative number of shares of MIGRA Conversion Stock held thereby, of
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the MIGRA Cap; and provided further, in the event that AERC has actual
knowledge of a breach of this Agreement which entitles it to terminate this
Agreement pursuant to Section 7.1(d) or 7.1(f) (whether or not it also has
the right to terminate under Section 7.1(h)) and elects not to exercise any
such right of termination and to waive all (but not less than all) of such
breaches (and the right to terminate under Section 7.1(h)) solely for the
purpose of effecting the Closing pursuant to Section 7.4, no MIGRA
Stockholder shall be liable for Damages caused by the representations and
warranties which are known to be not true and correct and (subject to the
last sentence of this Section 8.3(a)) Claims under Section 8.2(a)(i)(D)
relating to liabilities and potential liabilities, which to the actual
knowledge of MIGRA or any MIGRA Stockholder or AERC, were in existence, at
the Effective Time in excess of his or her pro rata share, determined as
aforesaid, of either (i) if the price adjustment referred to in Section
5.2(l) shall occur, 10% of the sum of $10,000,000 plus the Adjusted
Purchase Price, or (ii) if the price adjustment referred to in Section
5.2(l) shall not occur, 10% of the Adjusted Purchase Price. In the event
the MIGRA Stockholders become liable for Damages pursuant to this Section,
each MIGRA Stockholder shall have the right to elect, by written notice to
AERC, to pay the amount of Damages in cash or by a reduction of the number
of AERC Common Shares otherwise receivable thereby equal in value to the
amount of Damages; provided, that in the event a MIGRA Stockholder
exercises his or her rights pursuant to Section 8.5 as to the Indemnifiable
Claim or Claims in question, such number of AERC Common Shares shall be
placed in escrow pursuant to an escrow agreement, and with an escrow agent,
mutually agreed upon by AERC and the applicable MIGRA Stockholder(s). For
purposes of the preceding sentence, the value of the AERC Common Shares
shall be determined in the following order of priority: (i) at the
Effective Time, pursuant to Section 2.1(b); (ii) on the Second Issuance
Date, (A) first, pursuant to Section 2.1(c) and (B) second, pursuant to
Section 2.1(e) and (iii) on the Third Issuance Date, (A) first, pursuant to
Section 2.1(d) and (B) second, pursuant to Section 2.1(f). The limits on
indemnification contained in this subsection shall not apply in the event
of a breach of the representations and warranties contained in Section
4.9(f) and the Basket shall not be applicable to any failure to pay any
Claims relating to the MIGRA Stockholders Fixed Liabilities, or any
Claims(s) under Section 8.2(a)(i)(D) relating to liabilities and potential
liabilities of the MIGRA Companies or a MIGRA Company which, to the actual
knowledge of MIGRA or any MIGRA Stockholder, were in existence at the
Effective Time (whether or not the amount of such liability or potential
liability was quantified or quantifiable at the Effective Time), including,
without limitation, any such liabilities and obligations listed on the
MIGRA Disclosure Schedule.
(b) Neither MIGRA nor the MIGRA Stockholders shall be entitled to
indemnification hereunder with respect to an Indemnifiable Claim arising
out of a breach of a representation, warranty, covenant or agreement (or,
if more than one such Indemnifiable Claim is asserted, with respect to all
such Indemnifiable Claims) unless the aggregate amount of Damages with
respect to such Indemnifiable Claim or Claims exceeds the Basket, in which
event MIGRA or the MIGRA Stockholders shall be entitled to indemnification
hereunder for Damages with respect to all Indemnifiable Claims in excess of
the Basket; provided, however, that in no event shall MIGRA and the MIGRA
Stockholders be entitled to such indemnification for such Damages in an
amount in excess of the Adjusted Purchase Price.
(c) The obligation of indemnity (i) with respect to the
representations and warranties set forth in Article III shall terminate two
years after the Closing and (ii) with respect to any representations and
warranties relating to the Managed Properties shall terminate two years
after the Closing unless, in either case, an Indemnifiable Claim has been
brought with respect thereto prior to such termination; provided that with
respect to the representations and warranties set forth in Sections 3.1
through 3.3, 4.1 through 4.4, and 4.9 and with respect to the MIGRA
Stockholders Liabilities, the obligation of indemnity shall extend to the
expiration of the applicable statute of limitations, if later; and provided
further, that nothing contained in the preceding portion of this Section
8.3(c) shall be construed to limit the survival of the representations and
warranties in Article IV (other than those covered by the preceding portion
of this Section 8.3(c) or the obligation of indemnity contained in Section
8.2(a)(i)(D), which representations and warranties and obligation shall
survive the Closing and shall extend to the expiration of the applicable
statute of limitations).
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(d) The foregoing provisions of this Section 8.3 notwithstanding, if,
prior to the termination of any obligation to indemnify, written notice of
a claimed breach or other occurrence or matter giving rise to a claim of
indemnification is given by the party seeking indemnification (the
"Indemnified Party") to the party from whom indemnification is sought (the
"Indemnifying Party"), or an Indemnifiable Claim is commenced against the
Indemnified Party, the Indemnified Party shall not be precluded from
seeking indemnification for such claimed breach, occurrence, other matter,
or an Indemnified Claim from the Indemnifying Party in accordance with
Section 8.4 or 8.5, as applicable.
8.4 Procedure for Indemnification with Respect to Third Party Claims.
(a) If the Indemnified Party determines to seek indemnification under this
Article VIII with respect to Indemnifiable Claims resulting from the assertion
of liability by third parties, it shall give prompt notice to the Indemnifying
Party after it becomes aware of any such Indemnifiable Claim (such notice to be
given in any event within the shorter of 15 days or the number of days necessary
to respond to the Indemnifiable Claim), which notice shall set forth such
material information with respect to such Indemnifiable Claim as is then
reasonably available to the Indemnified Party. If any such liability is asserted
against the Indemnified Party and the Indemnified Party notifies the
Indemnifying Party of such liability, the Indemnifying Party shall be entitled,
if it so elects by written notice delivered to the Indemnified Party within 10
days after receiving the Indemnified Party's notice, to assume the defense of
such asserted liability with counsel reasonably satisfactory to the Indemnified
Party. Notwithstanding the foregoing: (i) the Indemnified Party shall have the
right to employ its own counsel in any such case, but the fees and expenses of
such counsel shall be payable by the Indemnified Party; (ii) the Indemnified
Party shall not have any obligation to give any notice of any assertion of
liability by a third party unless such assertion is in writing; and (iii) the
rights of the Indemnified Party to be indemnified in respect of Indemnifiable
Claims resulting from the assertion of liability by third parties shall not be
adversely affected by its failure to give notice pursuant to the foregoing
provisions unless, and, if so, only to the extent that, the Indemnifying Party
is materially prejudiced by such failure. With respect to any assertion of
liability by a third party that results in an Indemnifiable Claim, the Parties
shall make available to each other all relevant information in their possession
which is material to any such assertion.
(b) In the event that the Indemnifying Party fails to assume the defense of
the Indemnified Party against any such Indemnifiable Claim, within 15 days after
receipt of the Indemnified Party's notice of such Indemnifiable Claim, the
Indemnified Party shall have the right to defend, compromise or settle such
Indemnifiable Claim on behalf, for the account, and at the risk of the
Indemnifying Party.
(c) Notwithstanding anything in this Section 8.4 to the contrary, (i) if
there is a reasonable likelihood that an Indemnifiable Claim may materially and
adversely affect the Indemnified Party, its corporate parent, if any, its
subsidiaries or affiliates, including without limitation MIGRA after the
Effective Time if AERC is the Indemnified Party, other than as a result of money
damages or other money payments (each, a "Non-monetary Indemnifiable Claim"),
then the Indemnified Party shall provide written notice to the Indemnifying
Party to such effect explaining the reasons therefor and, if the Indemnifying
Party consents thereto (which consent shall not be unreasonably withhold or
delayed), the Indemnifying Party shall have the right, at the cost and expense
of the Indemnifying Party, to defend such Indemnifiable Claim; and (ii) neither
the Indemnifying Party nor the Indemnified Party shall, without the other's
prior written consent (which consent shall not be unreasonably withheld or
delayed), settle or compromise (i) any Indemnifiable Claim or consent to entry
of any judgment in respect of any Indemnifiable Claim, in each case involving
money damages or other money payments, unless such settlement, compromise or
consent includes as an unconditional term the giving by the claimant or the
plaintiff to the Indemnified Party (and its corporate parent, if any, its
subsidiaries and affiliates including without limitation MIGRA after the
Effective Time if AERC is the Indemnified Party) a release from all liability in
respect of such Indemnifiable Claim or (ii) any Non-monetary Indemnifiable
Claim.
8.5 Procedure For Indemnification with Respect to Non-Third Party
Claims. In the event that the Indemnified Party asserts the existence of an
Indemnifiable Claim giving rise to Damages (but excluding Indemnifiable Claims
resulting from the assertion of liability by third parties), it shall give
written notice to the Indemnifying Party specifying the nature and amount of the
Indemnifiable Claim asserted. If the Indemnifying Party, within 15 business days
after receipt of such notice by the Indemnified Party, has not
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given written notice to the Indemnified Party announcing its intent to contest
such assertion by the Indemnified Party, such assertion shall be deemed accepted
and the amount of Indemnifiable Claim shall be deemed a valid Indemnifiable
Claim. In the event, however, that the Indemnifying Party contests the assertion
of an Indemnifiable Claim by giving such written notice to the Indemnified Party
within such 15 business day period, then if the parties, acting in good faith,
cannot reach agreement with respect to such Indemnifiable Claim within 20 days
after such notice, the contested assertion of the claim shall be referred to
arbitration in Cleveland, Ohio, in accordance with the then-current rules of the
American Arbitration Association. The parties shall select an arbitrator who
resides other than in Greater Cleveland or south Florida. The determination made
in accordance with such rules shall be delivered in writing to the parties and
shall be final and binding and conclusive on the parties and the amount of the
Indemnifiable Claim, if any, determined to exist shall be a valid Indemnifiable
Claim. Each Party shall pay its own legal, accounting and other fees in
connection with such a contest; provided that if the contested Claim is referred
to and ultimately determined by arbitration and the position of the
nonprevailing party is not upheld in any material respect by the arbitrators,
the legal, auditing and other fees of the prevailing party and the fees and
expenses of any arbitrator shall be borne by the nonprevailing Party.
8.6 Termination of MIGRA's Warranties. Notwithstanding any provisions of
this Agreement to the contrary: (a) all representations, warranties and
covenants made by MIGRA in this Agreement or the Additional Documents shall
terminate as to MIGRA (but only as to MIGRA, but not as to the MIGRA
Stockholders, if, and to the extent made by them) as of the Effective Time; and
(b) after the Effective Time, MIGRA shall not have any obligation or liability
to any MIGRA Stockholder as a direct or indirect result of any breach of
representation, warranty or covenant for which the MIGRA Stockholders have or
may have liability to AERC pursuant to the terms of this Agreement.
8.7 Sole Remedies. Except as provided in Section 7.2 or Section 9.8, the
remedies provided in this Article VIII shall be the sole and exclusive remedies
of the parties hereto and shall preclude the assertion by any party hereto of
any other rights or the seeking of any other remedies against the other parties
hereto.
ARTICLE IX
MISCELLANEOUS
9.1 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (which is
confirmed) or dispatched by a nationally recognized overnight courier service to
the parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
IF TO MIGRA OR THE MIGRA STOCKHOLDERS:
MIG REALTY ADVISORS, INC.
Attn: Larry Wright
250 Australian Avenue, South, Suite 400
West Palm Beach, Florida 33401
Phone (561) 820-1300
Fax (561) 832-1622
WITH A COPY TO:
MAYER, BROWN & PLATT
Attn: Stuart P. Pergament, Esq.
2000 Pennsylvania Avenue, N.W.
Washington, D.C. 20006
Phone (202) 778-0600
Fax (202) 861-0473
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IF TO AERC:
ASSOCIATED ESTATES REALTY CORPORATION
Attn: Mr. Jeffrey Friedman
5025 Swetland Court
Richmond Heights, Ohio 44143-1467
Phone (216) 473-8700
Fax (216) 473-8105
WITH A COPY TO:
BAKER & HOSTETLER LLP
Attn: Albert T. Adams, Esq.
3200 National City Center
1900 East Ninth Street
Cleveland, Ohio 44114-3485
Phone (216) 861-7499
Fax (216) 696-0740
9.2 Interpretation. When a reference is made in this Agreement to an
Article or Section, such reference shall be to an Article or Section of this
Agreement unless otherwise indicated. The headings and the table of contents
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. For the purposes of
any provision of this Agreement, a "Material Adverse Effect" with respect to any
party shall mean a material adverse effect on the assets, liabilities, results
of operations or financial condition of such party and its subsidiaries taken as
a whole. For purposes of this Agreement, unless otherwise provided expressly, a
"subsidiary" of any person means another person, an amount of the voting
securities or other voting ownership or voting partnership interests of which is
sufficient to elect at least a majority of its Board of Directors or other
governing body (or, if there are no such voting securities or interests, 50% or
more of the equity interests of which) is owned directly or indirectly by such
first person.
9.3 Counterparts. This Agreement may be executed in counterparts, which
together shall constitute one and the same Agreement. The parties may execute
more than one copy of the Agreement, each of which shall constitute an original.
9.4 Entire Agreement. This Agreement (including the documents and the
instruments referred to herein) constitutes the entire agreement among the
parties and supersede all prior agreements and understandings, agreements or
representations by or among the parties, written and oral, with respect to the
subject matter hereof and thereof; provided, however, that the existing
confidentiality agreements between AERC and MIGRA shall continue to be in full
force and effect.
9.5 Third Party Beneficiaries. Except as set forth in the next sentence,
nothing in this Agreement, express or implied, is intended or shall be construed
to create any third party beneficiaries. AEMC, as the successor to the business
conveyed in the Spinoff Transfer, is an intended third party beneficiary of
Article IV, and the obligations of MIGRA and the MIGRA Stockholders in Articles
V and VIII of this Agreement.
9.6 Governing Law. Except to the extent that the laws of the jurisdiction
of organization of any party hereto, or any other jurisdiction, are mandatorily
applicable to the Merger or to matters arising under or in connection with this
Agreement, this Agreement shall be governed by the laws of the State of Ohio.
Except as provided otherwise in Section 8.5, all actions and proceedings arising
out of or relating to this Agreement shall be heard and determined in any Ohio
state or federal court sitting in Cleveland, Ohio.
9.7 Consent to Jurisdiction; Venue. Except with respect to any claim or
proceeding arising out of Section 8.5:
(a) Each of the parties hereto irrevocably submits to the exclusive
jurisdiction of the state courts of Ohio and to the jurisdiction of the
United States District Court for the Northern District of Ohio, for the
40
<PAGE> 145
purpose of any action or proceeding arising out of or relating to this
Agreement and each of the parties hereto irrevocably agrees that all claims
in respect to such action or proceeding may be heard and determined
exclusively in any Ohio state or federal court sitting in the City of
Cleveland. Each of the parties hereto agrees that a final judgment in any
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by
law.
(b) Each of the parties hereto irrevocably consents to the service of
any summons and complaint and any other process in any other action or
proceeding relating to the Merger, on behalf of itself or its property, by
the personal delivery of copies of such process to such party. Nothing in
this Section 9.7 shall affect the right of any party hereto to serve legal
process in any other manner permitted by law.
9.8 Specific Performance; Other Equitable Relief.
(a) The transactions contemplated by this Agreement are unique.
Accordingly, each of the parties acknowledges and agrees that, in addition to
all other remedies to which it may be entitled hereunder, each of the parties
hereto is entitled to a decree of specific performance, provided such party is
not in material default hereunder and may be entitled to pursue the judicial
determination referred to in the second sentence of Section 7.2.
(b) AERC acknowledges and agrees that, in the event of a breach of Section
5.1(f) and Section 5.2(h) of this Agreement, MIGRA may not have an adequate
remedy at law and would be entitled to equitable relief. AERC hereby consents to
the entry of an injunctive or otherwise order by a court of competent
jurisdiction intended to enforce the terms and intent of Section 5.2(h) of this
Agreement.
9.9 Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto (whether by
operation of law or otherwise) without the prior written consent of the other
parties. Subject to the preceding sentence, this Agreement shall be binding
upon, inure to the benefit of and be enforceable by the parties and their
respective successors and assigns.
9.10 Expenses. Subject to the provisions of Section 7.2, all costs and
expenses incurred by AERC in connection with this Agreement and the transactions
contemplated hereby shall be paid by it, and all such costs and expenses
incurred by MIGRA and the MIGRA Stockholders shall be paid by MIGRA.
Notwithstanding any provision of this Agreement or any other Agreement executed
or delivered by or on behalf of MIGRA to the contrary, MIGRA shall be solely
responsible for payment of up to $40,000 owed to Stonemark Apartments II, Inc.
("Stonemark"), if any, upon the closing of the transactions contemplated by that
certain purchase agreement between AERC and Stonemark.
41
<PAGE> 146
IN WITNESS WHEREOF, AERC and MIGRA have signed this Agreement as of the
date first written above.
ASSOCIATED ESTATES REALTY
CORPORATION
By: /s/ Jeffrey I. Friedman
------------------------------------
Name: Jeffrey I. Friedman
Title: Chairman, President and Chief
MIG REALTY ADVISORS, INC.
By: /s/ Larry E. Wright
------------------------------------
Name: Larry E. Wright
Title: President and Chief Executive
Officer
MIGRA STOCKHOLDERS
/s/ Larry E. Wright
- -----------------------------------------------------
Name: Larry E. Wright
/s/ Louis E. Vogt
- -----------------------------------------------------
Name: Louis E. Vogt
/s/ James Cote
- -----------------------------------------------------
Name: James Cote
/s/ William Hughes
- -----------------------------------------------------
Name: William Hughes
/s/ Gregory Golz
- -----------------------------------------------------
Name: Gregory Golz
42
<PAGE> 147
EXHIBIT A
PROPERTIES
<TABLE>
<CAPTION>
PROPERTY NAME OWNER APPRAISED VALUE
------------- ----- ---------------
<S> <C> <C>
Morgan Place................................................ REIT $11,600,000
The Falls................................................... MRT $25,000,000
Fleetwood................................................... REIT $ 6,750,000
Desert Oasis................................................ REIT $13,000,000
20th and Campbell........................................... REIT $13,000,000
Windsor Falls............................................... REIT $17,600,000
Summerbreeze................................................ MIG III $ 6,000,000
Vintage View................................................ MIG III $10,000,000
Mission Ridge............................................... MRT $11,750,000
Cypress Shores.............................................. SET $18,900,000
Peachtree................................................... REIT $ 9,700,000
Annen Woods................................................. REIT $ 9,100,000
Hamption Point.............................................. REIT $20,900,000
Reflections................................................. MRT $11,400,000
Camden at Bloomingdale...................................... CALSTRS $27,100,000
Stratford Place............................................. CALSTRS $25,700,000
Kensington Square........................................... CALSTRS $16,100,000
Park Place.................................................. SWIB $56,000,000
Briar Meadows............................................... CALSTRS $11,900,000
Willow Creek................................................ CDP&F $ 9,700,000
Waterford................................................... CALSTRS $17,500,000
Washington Plaza............................................ CDP&F $21,100,000
Isles at Sawgrass........................................... CALSTRS $23,600,000
Camino Real................................................. NYCF $14,500,000
Aylesbury Farms............................................. NYCF $33,900,000
Bristol Park................................................ NYNEX $32,700,000
Steeplechase................................................ NYCF $19,000,000
Northern Crossing........................................... NYNEX $30,300,000
Bentley Wynde............................................... NYCF $25,300,000
Alpine Meadows.............................................. NYCF $16,500,000
Park at Sawgrass............................................ NYNEX $32,300,000
Abbott's Mill............................................... NYSTRS $18,826,000
Remington West.............................................. NYSTRS $21,013,000
Deerwood.................................................... SJP&F $14,414,000
Sonterra Paradise Valley.................................... NYSTRS $17,490,000
</TABLE>
EXHIBIT A-1
DEVELOPMENT PROPERTIES
Windsor Hollywood Apartments
Windsor Pines Apartments
Windsor at Kirkman Apartments
A-1
<PAGE> 148
EXHIBIT B
OPINION OF AERC'S COUNSEL
1. AERC is a corporation duly organized, validly existing and in good
standing under the laws of the State of Ohio with all requisite corporate power
and authority to own and operate its properties and to conduct its businesses as
now conducted.
2. AERC has all requisite corporate power and authority to execute and
deliver the Agreement and to perform its obligations thereunder.
3. The execution and delivery of the Agreement by AERC, and the
consummation by AERC of the transactions contemplated thereby have been duly
authorized by all requisite corporate action on the part of AERC. The Agreement
has been duly executed and delivered by AERC, and the Agreement constitutes the
legal, valid and binding obligation of AERC, enforceable in accordance with its
terms, except as may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by general principles of equity and public
policy.
4. Neither the execution and delivery of the Agreement by AERC nor the
consummation of the transactions contemplated thereby will conflict with, or
result in a breach of, any provision of the AERC Articles or the AERC Code of
Regulations.
5. All AERC Common Shares to be issued in the Merger will be duly
authorized and validly issued, fully paid and nonassessable and will not be
issued in violation of any preemptive or similar rights.
6. All actions on the part of AERC have been taken necessary to exempt
under or make not subject to any state takeover law or other state law that
purports to limit or restrict business combinations or the ability to acquire or
vote shares: (i) the execution of the Agreement, (ii) the Merger and (iii) the
transactions contemplated by the Agreement.
7. Upon the filing of the Certificate of Merger with the Ohio Secretary of
State, the Merger will be effective under the Ohio Revised Code in accordance
with the terms of the Agreement and the Certificate of Merger.
We express no opinion as to any violation of law that might result, in
whole or in part, from any competitive effect, actual or potential, of the
transactions contemplated by the Agreement.
The foregoing opinions are limited to the laws of the State of Ohio and
applicable federal law of the United States of America and we express no opinion
as to the law of any other jurisdiction. To the extent that any matter with
respect to which we give any opinion herein is governed by the laws of any other
jurisdiction, we have assumed, with your permission and without investigation,
that such laws are the same as the internal substantive laws of the State of
Ohio. We assume no obligation to update such opinions to reflect any facts or
circumstances that hereafter may come to our attention or any changes in the
laws that hereafter may occur. The opinions contained herein are provided to you
for your exclusive use solely in connection with the transactions contemplated
by the Agreement and may not be otherwise used or relied upon by you or any
other person for any purpose whatsoever, without in each instance our prior
written consent.
Very truly yours,
B-1
<PAGE> 149
EXHIBIT C
OPINION OF MIGRA'S COUNSEL
[TO BE REVISED TO REFLECT STRUCTURE
AND INVESTMENT COMPANY MATTERS]
1. MIGRA is a corporation organized, validly existing and in good standing
under the laws of the State of Florida with full corporate power and authority
to own, and operate its properties and to conduct its business as now conducted.
2. MIGRA has all requisite corporate power and authority to execute and
deliver the Agreement, and to perform its obligations thereunder.
3. The execution and delivery by MIGRA of the Agreement and the
consummation by MIGRA of the transactions contemplated by the Agreement have
been duly authorized by all necessary corporate action on the part of MIGRA. The
Agreement has been duly executed and delivered by MIGRA, and constitutes the
legal, valid and binding obligation of MIGRA, enforceable in accordance with its
terms, except as may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by general principles of equity and public
policy.
4. Neither the execution and delivery of the Agreement by MIGRA nor the
consummation of the transactions contemplated thereby will conflict with, or
result in a breach of, any provision of the Articles of Incorporation, as
amended, or the Bylaws, as amended, of MIGRA.
5. All actions on the part of MIGRA have been taken necessary to exempt
under or make not subject to any state takeover law or other state law that
purports to limit or restrict business combinations or the ability to acquire or
vote shares: (i) the execution of the Agreement, (ii) the Merger and (iii) the
transactions contemplated by the Agreement.
6. Upon the filing of the Certificate of Merger with the Florida Secretary
of State, the Merger will be effective under the FBCA in accordance with the
terms of the Agreement and the Certificate of Merger.
We express no opinion as to any violation of law that might result, in
whole or in part, from any anticompetitive effect, actual or potential, of the
transactions contemplated by the Agreement.
The foregoing opinions are limited to the laws of the State of Florida and
applicable federal law of the United States of America. We express no opinion as
to the law of any other jurisdiction. To the extent that any matter with respect
to which we give any opinion herein is governed by the laws of any other
jurisdiction, we have assumed, with your permission and without investigation,
that such laws are the same as the internal substantive laws of the State of
Florida. We assume no obligation to update such opinions to reflect any facts or
circumstances that hereafter may come to our attention or any changes in the
laws that hereafter may occur. The opinions contained herein are provided to you
for your exclusive use solely in connection with the transactions contemplated
by the Agreement and may not be otherwise used or relied upon by you or any
other person for any purpose whatsoever, without in each instance our prior
written consent.
Very truly yours,
C-1
<PAGE> 150
EXHIBIT D
ASSOCIATED ESTATES REALTY CORPORATION
CONFIDENTIALITY AND NONCOMPETE AGREEMENT
This Confidentiality and Noncompete Agreement (this "Agreement") is entered
into as of the day of , 1998, between Associated Estates Realty
Corporation, an Ohio corporation (the "Company"), and , an employee
and shareholder of the Company (the "Employee").
RECITALS
WHEREAS, in connection with the transactions contemplated by the Second
Amended and Restated Agreement and Plan of Merger by and between the Company and
MIG Realty Advisors, Inc., dated April 16, 1998, (the "Merger Agreement"), the
Company desires to employ the Employee, and the Employee desires to be employed
by the Company;
WHEREAS, it is a condition precedent to the Company's obligations under the
Merger Agreement that Employee agree to the terms and conditions of and,
immediately prior to the closing under the Merger Agreement, enters into this
Agreement;
WHEREAS, Employee's position with the Company will provide Employee with,
access to and familiarity with, all or some of the know-how, trade secrets,
business methods, and other confidential information of the Company;
NOW, THEREFORE, in consideration of Employee's employment with the Company,
the Company's provision to Employee of certain employee benefits including the
severance benefits conferred herein, Employee and the Company hereby agree
follows:
AGREEMENTS
A. CONFIDENTIALITY AND NONCOMPETE.
1. The Employee acknowledges the Company's reliance and expectation of the
Employee's commitment to performance of his duties and responsibilities during
the term of his employment. In light of such reliance and expectation on the
part of the Company, during the term of employment and for a period of one (1)
year [two (2) years, in the case of Jim Cote] following the termination of the
Employee's employment, if such termination occurs prior to the fifth anniversary
of this Agreement, the Employee will not, directly or indirectly, do any of the
following:
(a) Own, manage, control or participate in the ownership, management,
or control of, or be employed or engaged by or otherwise affiliated or
associated as a consultant, independent contractor or otherwise with, any
other corporation, partnership, proprietorship, firm, association or other
business entity primarily engaged in the business of, or otherwise directly
engage in the business of, acquiring, owning, developing or managing
multifamily properties in competition with the Company in any geographic
region in which the Company, at the time of Employee's termination,
operates its business; provided, however, that the ownership of not more
than one percent (1%) of any class of publicly traded securities of any
entity will not be deemed a violation of this covenant; or
(b) Disclose, divulge, discuss, copy or otherwise use or suffer to be
used in any manner, in competition with, or contrary to the interests of,
the Company, any confidential information relating to the Company's
operations, properties or otherwise to its particular business or other
trade secrets of the Company, it being acknowledged by the Employee that
all such information regarding the business of the Company compiled or
obtained by, or furnished to, the Employee while the Employee shall have
been employed by the Company is confidential information and the Company's
exclusive property; provided, however, that the foregoing restrictions will
not apply to the extent that such information (i) is in the public domain
or becomes obtainable in the public domain, except by reason of the breach
by the
D-1
<PAGE> 151
Employee of the terms hereof, (ii) was not acquired by the Employee in
connection with his employment with the Company, (iii) was not acquired by
the Employee from the Company or its representatives, or (iv) is required
to be disclosed by rule of law or by order of a court or governmental body
or agency.
2. The Employee agrees and understands that the remedy at law for any
breach by him of this Agreement may be inadequate and that the damages flowing
from such breach may not be readily susceptible to being measured in monetary
terms. Accordingly, it is acknowledged that, upon adequate proof of the
Employee's material violation of any legally enforceable provision of this
Agreement, the Company will be entitled to immediate injunctive relief and may
obtain a temporary order restraining any threatened or further breach. Nothing
in this Agreement will be deemed to limit the Company's remedies at law or in
equity for any breach by the Employee of any of the provisions of this Agreement
which may be pursued or availed of by the Company.
3. The Employee has carefully considered the nature and extent of the
restrictions upon him and the rights and remedies conferred upon the Company
pursuant to this Agreement, and hereby acknowledges and agrees that the same are
reasonable in time and territory, and, in the judgement of the Company, are
fully required to protect the legitimate interests of the Company.
B. SEVERANCE.
1. Employee acknowledges that his employment is at will, and the Company
may terminate the Employee's employment with the Company with at any time or
without cause. If the termination of Employee's employment with the Company is:
(i) as a result of the death or permanent disability of the Employee; or (ii)
for "cause" at any time by action of the Chief Executive Officer or board of
directors of the Company, then Employee's compensation and benefits will
terminate on the effective date of termination.
2. If Employee is terminated "without cause," then the Company will
continue to pay Employee, as severance pay, an amount based on the Employee's
annual salary in effect as of the date of termination as follows:
<TABLE>
<CAPTION>
DATE OF TERMINATION AMOUNT OF SEVERANCE
------------------- -------------------
<S> <C>
Prior to the first 100% of annual salary plus the bonus amount set forth in the
anniversary of this Employee's offer letter from the Company
Agreement
On or after the first 100% of annual salary
anniversary but prior to
the second anniversary of
this Agreement
On or after the second 50% of annual salary
anniversary but prior to
the fifth anniversary of
this Agreement
</TABLE>
The amount of severance shall be payable in respect of a period of twelve
months after the effective date of termination.
If Employee is terminated without cause, Employee shall have no duty of
mitigation and any compensation paid to Employee during a period for which the
Company is required to make payment to Employee hereunder, shall not relieve the
Company from its payment obligation hereunder.
For purposes hereof, the term "cause" shall mean:
(a) The Employee's fraud, commission of a felony or, as determined by
the reasonable judgment of the board of directors, a commission of an act
or series of acts which result in material injury to the business
reputation of the Company, commission of an act or series of repeated acts
of dishonesty with respect to the Company which are materially adverse to
the best interests of the Company, or the
D-2
<PAGE> 152
Employee's willful and repeated failure to perform his duties, which
failure has not been cured within fifteen (15) days after the Company gives
notice thereof to the Employee; or
(b) The Employee's material breach of any provision of this Agreement.
C. MISCELLANEOUS.
1. All of the rights and obligations of the Company under this Agreement
are fully assignable, transferable and delegable, in whole or in part, by the
Company to any successor to all or substantially all of its assets or its
business. Employee may not assign any of his rights or obligations under this
Agreement. This Agreement shall be binding upon the parties to this Agreement
and their respective legal representatives, heirs, devisees, legatees or other
successors and assigns, and shall inure to the benefit of the parties to this
Agreement and their respective permitted legal representatives, heirs, devisees,
legatees or other permitted successors and assigns.
2. This Agreement contains the entire agreement between the parties hereto
regarding the subject matter hereof and supersedes all prior and contemporaneous
agreements, understandings, negotiations and discussions, whether oral or
written.
3. This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Ohio.
4. The recitals hereto are an integral part of this Agreement and are
incorporated herein by reference.
5. Titles and captions of or in this Agreement are inserted only as a
matter of convenience and reference and in no way are intended to effect the
intent or scope of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Confidentiality and
Noncompete Agreement in Cleveland, Ohio on the day and year first set forth
above.
ASSOCIATED ESTATES REALTY CORPORATION,
an Ohio corporation
By:
-------------------------------------------
Title:
------------------------------------------
EMPLOYEE
----------------------------------------------
[name]
D-3
<PAGE> 153
EXHIBIT E
EMPLOYMENT AGREEMENT
BETWEEN
ASSOCIATED ESTATES REALTY CORPORATION
AND
LARRY WRIGHT
E-1
<PAGE> 154
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into as of the day of
, 1998, between ASSOCIATED ESTATES REALTY CORPORATION, an Ohio corporation
(the "Company"), and LARRY WRIGHT (the "Executive").
W I T N E S S E T H:
WHEREAS, in connection with the transactions contemplated by the Second
Amended and Restated Agreement and Plan of Merger by and between the Company and
MIG Realty Advisors, Inc. dated April 16, 1998 (the "Merger Agreement"), the
Company desires to employ the Executive, and the Executive desires to be
employed by the Company, on the terms and subject to the conditions set forth
herein;
WHEREAS, it is a condition precedent to the Company's obligations under the
Merger Agreement that Executive agrees to the terms and conditions of, and,
immediately prior to the closing under the Merger Agreement, enters into, this
Agreement;
NOW, THEREFORE, in consideration of the mutual promises herein contained,
the parties agree as follows:
1. EMPLOYMENT.
(a) The Company hereby employs the Executive as its Executive Vice
President and the Executive hereby accepts such employment, on the terms and
subject to the conditions hereinafter set forth.
(b) During the term of this Employment Agreement, Executive shall be and
have the title of Executive Vice President and shall devote his entire business
time and all reasonable efforts to his employment and perform diligently such
duties as are customarily performed by vice presidents of companies similar in
size to the Company, together with such other duties as may be reasonably
requested from time to time by the Chief Executive Officer or the Board of
Directors of the Company (the "Board"), which duties shall be consistent with
his title and position as set forth above and as provided in Paragraph 2.
2. TERM AND POSITIONS.
(a) Subject to the provisions for termination hereinafter stated, the term
of this Employment Agreement shall begin on the date hereof and shall continue
through the third anniversary of the date hereof.
(b) The Executive shall be entitled to serve as the Executive Vice
President of the Company. For service as a director, officer and employee of the
Company, the Executive shall be entitled to the full protection of the
applicable indemnification provisions of the Amended and Restated Articles of
Incorporation and Code of Regulations of the Company, as the same may be amended
from time to time.
(c) If:
(i) the Company materially changes the Executive's duties and
responsibilities as set forth in Paragraphs 1(b) and 2(b) without his
consent;
(ii) the Executive's place of employment is located more than
fifty (50) miles from the geographical center of West Palm Beach,
Florida;
(iii) there occurs a material breach by the Company of any of
its obligations under this Employment Agreement, which breach has not
been cured in all material respects within ten (10) days after the
Executive gives notice thereof to the Company; or
(iv) there occurs a "change in control" (as hereinafter
defined) of the Company;
then in any such event the Executive shall have the right to terminate his
employment with the Company, but such termination shall not be considered a
voluntary resignation or termination of such employment or of this Employment
Agreement by the Executive but rather a discharge of the Executive by the
Company "without cause" (as defined in Paragraph 5(a)(iii)).
E-2
<PAGE> 155
(d) The Executive shall be deemed not to have consented to any written
proposal calling for a material change in his duties and responsibilities unless
he shall give written notice of his consent thereto to the Board within fifteen
(15) days after receipt of such written proposal. If the Executive shall not
have given such consent, the Company shall have the opportunity to withdraw such
proposed material change by written notice to the Executive given within ten
(10) days after the end of said fifteen (15) day period.
(e) The term "change in control" means the first to occur of the following
events:
(i) any person or group of commonly controlled persons owns or
controls, directly or indirectly, fifty percent (50%) or more of the voting
control or value of the capital stock of the Company;
(ii) any person or group of commonly controlled persons owning less
than five percent (5%) of the voting control or value of the capital stock
of the Company as of the date hereof owns or controls, directly or
indirectly, more than twenty percent (20%) of the voting control or value
of the capital stock of the Company; or
(iii) the shareholders of the Company approve an agreement to merge or
consolidate with another corporation or other entity resulting (whether
separately or in connection with a series of transactions) in a change in
ownership of twenty percent (20%) or more of the voting control or value of
the capital stock of the Company, or an agreement to sell or otherwise
dispose of all or substantially all of the Company's assets (including,
without limitation, a plan of liquidation or dissolution), or otherwise
approve of a fundamental alteration in the nature of the Company's
business.
Notwithstanding the foregoing provisions of this Paragraph 2, neither the
transactions contemplated by the Merger Agreement nor the ownership of capital
stock by the Executive, Jeffrey Friedman, Jerome Spevack, Martin A. Fishman,
Dennis W. Bikun, Susan Friedman, Mark L. Milstein, Robert Milstein or any
shareholder receiving equity securities of the Company in connection with the
transactions contemplated by the Merger Agreement and/or their respective
affiliates shall be deemed to result in a "change in control" of the Company.
3. COMPENSATION.
During the term of this Employment Agreement the Company shall pay or
provide, as the case may be, to the Executive the compensation and other
benefits and rights set forth in this paragraph 3.
(a) The Company shall pay to the Executive a base salary payable in
accordance with the Company's usual pay practices (and in any event no less
frequently than monthly) of $225,000 per annum, to be increased (but not
decreased) from time to time (based upon the performance of the Company and the
Executive) as approved by the Compensation Committee of the Board.
(b) The Company shall pay to the Executive bonus compensation for each
calendar year not later than 60 days following the end of each calendar year or
the termination of the Executive's employment, as the case may be, prorated on a
per diem basis for partial calendar years, as determined by the Compensation
Committee of the Board.
(c) The Company shall provide to the Executive such life, medical,
hospitalization and dental insurance for himself, his spouse and eligible family
members as may be available to other executive officers of the Company or as may
be determined by the Board or the Company's Executive Compensation Committee
from time to time.
(d) The Executive shall participate in all retirement and other benefit
plans of the Company generally available from time to time to employees of the
Company and for which the Executive qualifies under the terms thereof (and
nothing in this Agreement shall or shall be deemed to in any way effect the
Executive's right and benefits thereunder except as expressly provided herein)
or as may be determined by the Board or the Company's Executive Compensation
Committee from time to time.
(e) The Executive shall be entitled to such periods of vacation and sick
leave allowance each year as are determined by him in his sole discretion
consistent with the performance of his duties under this Agreement.
E-3
<PAGE> 156
(f) The Executive shall be entitled to participate in any equity or other
employee benefit plan that is generally available to senior executive officers,
as distinguished from general management, of the Company. The Executive's
participation in and benefits under any such plan shall be on the terms and
subject to the conditions specified in the governing document of the particular
plan.
(g) The Company shall reimburse the Executive or provide him with an
expense allowance during the term of this Employment Agreement for travel,
entertainment and other expenses reasonably and necessarily incurred by the
Executive in connection with the Company's business. The Executive shall furnish
such documentation with respect to reimbursement to be paid hereunder as the
Company shall reasonably request.
4. PAYMENT IN THE EVENT OF DEATH OR PERMANENT DISABILITY.
(a) In the event of the Executive's death or "permanent disability" (as
hereinafter defined) during the term of this Employment Agreement, the Company
shall pay to the Executive (or his successors and assigns in the event of his
death) an amount equal to one (1) times the Executive's then effective per annum
rate of salary, as determined under Paragraph 3(a), plus a pro rata portion of
the bonus applicable to the calendar year in which such death or permanent
disability occurs, as such bonus is determined under Paragraph 3(b).
(b) The pro rata portion of the bonus described in Paragraph 4(a) shall be
paid when and as provided in Paragraph 3(b). The remainder of the benefit to be
paid pursuant to Paragraph 4(a) shall be paid within ninety (90) days after the
date of death or permanent disability, as the case may be.
(c) Except as otherwise provided in Paragraphs 3(d) and 4(a), in the event
of the Executive's death or permanent disability the Executive's employment
hereunder shall terminate and the Executive shall be entitled to no further
compensation or other benefits under this Employment Agreement, except as to
that portion of any unpaid salary and other benefits accrued and earned by him
hereunder up to and including the date of such death or permanent disability, as
the case may be.
(d) For purposes of this Employment Agreement, the Executive's "permanent
disability" shall be deemed to have occurred after one hundred twenty (120) days
in the aggregate during any consecutive twelve (12) month period, or after
ninety (90) consecutive days, during which one hundred twenty (120) or ninety
(90) days, as the case may be, the Executive, by reason of his physical or
mental disability or illness, shall have been unable to discharge his duties
under this Employment Agreement. The date of permanent disability shall be such
one hundred twentieth (120th) or ninetieth (90th) day, as the case may be. In
the event either the Company or the Executive, after receipt of notice of the
Executive's permanent disability from the other, disputes that the Executive's
permanent disability shall have occurred, the Executive shall promptly submitto
a physical examination by the chief of medicine of any major accredited hospital
in the West Palm Beach, Florida area and, unless such physician shall issue his
written statement to the effect that in his opinion, based on his diagnosis, the
Executive is capable of resuming his employment and devoting his full time and
energy to discharging his duties within thirty (30) days after the date of such
statement, such permanent disability shall be deemed to have occurred.
5. TERMINATION.
(a) The employment of the Executive under this Employment Agreement, and
the term hereof, may be terminated by the Company:
(i) on the death or permanent disability (as defined above) of the
Executive;
(ii) for "cause" at any time by action of the Board; or
(iii) "without cause" at any time by action of the Board.
For purposes hereof, the term "cause" shall mean:
(A) The Executive's fraud, commission of a felony or of an act or
series of acts which result in material injury to the business
reputation of the Company, commission of an act or series of repeated
acts of dishonesty which are materially inimical to the best interests
of the Company, or the Executive's willful and repeated failure to
perform his duties under this Employment Agreement,
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which failure has not been cured within fifteen (15) days after the
Company gives notice thereof to the Executive; or
(B) The Executive's material breach of any material provision of
this Employment Agreement, which breach has not been cured in all
substantial respects within ten (10) days after the Company gives notice
thereof to the Executive.
For purposes hereof, the term "without cause" shall mean any reason
other than those set forth in subparagraphs (a)(i) and (a)(ii) of this
Paragraph 5.
Upon any termination of this Employment Agreement, the Executive shall be
deemed to have resigned from all offices and directorships held by the Executive
in the Company.
(b) In the event of a termination claimed by the Company to be for "cause"
pursuant to Paragraph 5(a)(ii), the Executive shall have the right to have the
justification for said termination determined by arbitration in Cleveland, Ohio.
In order to exercise such right, the Executive shall serve on the Company within
thirty (30) days after termination a written request for arbitration. The
Company immediately shall request the appointment of a single arbitrator by the
American Arbitration Association and thereafter the question of "cause" shall be
determined under the rules of the American Arbitration Association, and the
decision of the arbitrator shall be final andbinding on both parties. The
parties shall use all reasonable efforts to facilitate and expedite the
arbitration and shall act to cause the arbitration to be completed as promptly
as possible. During the pendency of the arbitration, the Executive shall
continue to receive all compensation and benefits to which he is entitled
hereunder, and if at any time during the pendency of such arbitration the
Company fails to pay and provide all compensation and benefits to the Executive
in a timely manner the Company shall be deemed to have automatically waived
whatever rights it then may have had to terminate the Executive's employment for
cause. Expenses of the arbitration shall be borne equally by the parties.
(c) In the event of termination pursuant to subparagraph (a)(i) or (a)(ii)
of this Paragraph 5, except as otherwise provided in Paragraphs 3(d) and 4(a),
the Executive shall be entitled to no further compensation or other benefits
under this Employment Agreement, except as to that portion of any unpaid salary
and other benefits accrued and earned by him hereunder up to and including the
effective date of such termination.
(d) In the event of termination pursuant to subparagraph (a)(iii) of this
Paragraph 5, the Executive shall be entitled to (i) severance pay in a lump sum
equal to the greater of (A) the total amount of unpaid base salary for the then
unexpired portion of the term of this Agreement, at the then effective per annum
rate of salary, as determined under Paragraph 3(a), and (B) the amount of one
year's base salary at the then effective annual rate of salary, (ii) a pro rata
portion of the bonus described in Paragraph 4(a) applicable to the calendar year
in which such termination occurs, as such bonus is determined under Paragraph
3(b), and (iii) other benefits accrued and earned by him hereunder up to and
including the effective date of such termination.
6. COVENANTS AND CONFIDENTIAL INFORMATION.
(a) The Executive acknowledges the Company's reliance and expectation of
the Executive's commitment to performance of his duties and responsibilities
during the term of this Employment Agreement. In light of such reliance and
expectation on the part of the Company, during the term of this Employment
Agreement and for a period of three (3) years thereafter (and, as to clause (ii)
of this subparagraph (a), at any time during and after the term of this
Employment Agreement), the Executive shall not, directly or indirectly, do
either of the following:
(i) Own, manage, control or participate in the ownership, management,
or control of, or be employed or engaged by or otherwise affiliated or
associated as a consultant, independent contractor or otherwise with, any
other corporation, partnership, proprietorship, firm, association or other
business entity engaged in the business of, or otherwise engage in the
business of, acquiring, owning, developing or managing multifamily
properties in any geographic region in which the Company, at the time of
Executive's termination, operates its business; provided, however, that the
ownership of (A) not more than one percent (1%) of any class of publicly
traded securities of any entity[ or (B) any interest
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disclosed in the Company's Registration Statement on Form S- shall not be
deemed a violation of this covenant]; or
(ii) Disclose, divulge, discuss, copy or otherwise use or suffer to be
used in any manner, in competition with, or contrary to the interests of,
the Company, any confidential information relating to the Company's
operations, properties orotherwise to its particular business or other
trade secrets of the Company, it being acknowledged by the Executive that
all such information regarding the business of the Company compiled or
obtained by, or furnished to, the Executive while the Executive shall have
been employed by or associated with the Company is confidential information
and the Company's exclusive property; provided, however, that the foregoing
restrictions shall not apply to the extent that such information (A) is
clearly obtainable in the public domain, (B) becomes obtainable in the
public domain, except by reason of the breach by the Executive of the terms
hereof, (C) was not acquired by the Executive in connection with his
employment or affiliation with the Company, (D) was not acquired by the
Executive from the Company or its representatives, or (E) is required to be
disclosed by rule of law or by order of a court or governmental body or
agency.
(b) The Executive agrees and understands that the remedy at law for any
breach by him of this Paragraph 6 will be inadequate and that the damages
flowing from such breach are not readily susceptible to being measured in
monetary terms. Accordingly, it is acknowledged that, upon adequate proof of the
Executive's violation of any legally enforceable provision of this Paragraph 6,
the Company shall be entitled to immediate injunctive relief and may obtain a
temporary order restraining any threatened or further breach. Nothing in this
Paragraph 6 shall be deemed to limit the Company's remedies at law or in equity
for any breach by the Executive of any of the provisions of this Paragraph 6
which may be pursued or availed of by the Company.
(c) The Executive has carefully considered the nature and extent of the
restrictions upon him and the rights and remedies conferred upon the Company
under this Paragraph 6, and hereby acknowledges and agrees that the same are
reasonable in time and territory, are designed to eliminate competition which
otherwise would be unfair to the Company, do not stifle the inherent skill and
experience of the Executive, would not operate as a bar to the Executive's sole
means of support, are fully required to protect the legitimate interests of the
Company and do not confer a benefit upon the Company disproportionate to the
detriment to the Executive.
7. TAX ADJUSTMENT PAYMENTS. If all or any portion of the amounts payable
to the Executive under this Employment Agreement (together with all other
payments of cash or property, whether pursuant to this Employment Agreement or
otherwise, including, without limitation, the issuance of common stock of the
Company, or the granting, exercise or termination of options therefor)
constitutes "excess parachute payments" within the meaning of Section 280G of
the Code that are subject to the excise tax imposed by Section 4999 of the Code
(or any similar tax or assessment), the amounts payable hereunder shall be
increased to the extent necessary to place the Executive in the same after-tax
position as he would have been in had no such tax assessment been imposed on any
such payment paid or payable to the Executive under this Employment Agreement or
any other payment that the Executive may receive in connection therewith. The
determination of the amount of any such tax or assessment and the incremental
payment required hereby in connection therewith shall be made by the accounting
firm employed by the Executive within thirty (30) calendar days after such
payment and said incremental payment shall be made within five (5) calendar days
after determination has been made. If, after the date upon which the payment
required by this Paragraph 7 has been made, it is determined (pursuant to final
regulations or published rulings of the Internal Revenue Service, final judgment
of a court of competent jurisdiction, Internal Revenue Service audit assessment,
or otherwise) that the amount of excise or other similar taxes or assessments
payable by the Executive is greater than the amount initially so determined,
then the Company shall pay the Executive an amount equal to the sum of: (i) such
additional excise or other taxes, plus (ii) any interest, fines and penalties
resulting from such underpayment, plus (iii) an amount necessary to reimburse
the Executive for any income, excise or other tax assessment payable by the
Executive with respect to the amounts specified in (i) and (ii) above, and the
reimbursement provided by this clause (iii), in the manner described above in
this Paragraph 7. Payment
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thereof shall be made within five (5) calendar days after the date upon which
such subsequent determination is made.
8. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
(a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Ohio and has all requisite
corporate power and authority to enter into, execute and deliver this
Employment Agreement, fulfill its obligations hereunder and consummate the
transactions contemplated hereby.
(b) The execution and delivery of, performance of obligations under,
and consummation of the transactions contemplated by, this Employment
Agreement have been duly authorized and approved by all requisite corporate
action by or in respect of the Company, and this Employment Agreement
constitutes the legally valid and binding obligation of the Company,
enforceable by the Executive in accordance with its terms.
(c) No provision of the Company's governing documents or any agreement
to which its is a party or by which it is bound or of any material law or
regulation of the kind usually applicable and binding upon the Company
prohibits or limits its ability to enter into, execute and deliver this
Employment Agreement, fulfill its respective obligations hereunder and
consummate the transactions contemplated hereby.
9. MISCELLANEOUS.
(a) The Executive represents and warrants that he is not a party to
any agreement, contract or understanding, whether employment or otherwise,
which would restrict or prohibit him from undertaking or performing
employment in accordance with the terms and conditions of this Employment
Agreement.
(b) The provisions of this Employment Agreement are severable and if
any one or more provisions may be determined to be illegal or otherwise
unenforceable, in whole or in part, the remaining provisions and any
partially unenforceable provision to the extent enforceable in any
jurisdiction nevertheless shall be binding and enforceable.
(c) The rights and obligations of the Company under this Employment
Agreement shall inure to the benefit of, and shall be binding on, the
Company and its successors and assigns, and the rights and obligations
(other than obligations to perform services) of the Executive under this
Employment Agreement shall inure to the benefit of, and shall be binding
upon, the Executive and his heirs, personal representatives and assigns.
(d) Any controversy or claim arising out of or relating to this
Employment Agreement, or the breach thereof, shall be settled by
arbitration in accordance with the Rules of the American Arbitration
Association then pertaining in Cleveland, Ohio, and judgment upon the award
rendered by the arbitrator or arbitrators may be entered in any court
having jurisdiction thereof. The arbitrator or arbitrators shall be deemed
to possess the powers to issue mandatory orders and restraining orders in
connection with such arbitration; provided, however, that nothing in this
Paragraph 9(d) shall be construed so as to deny the Company the right and
power to seek and obtain injunctive relief in a court of equity for any
breach or threatened breach by the Executive of any of his covenants
contained in Paragraph 9 hereof.
(e) Any notice to be given under this Employment Agreement shall be
personally delivered in writing or shall have been deemed duly given when
received after it is posted in the United States mail, postage prepaid,
registered or certified, return receipt requested, and if mailed to the
Company, shall be addressed to its principal place of business, attention:
General Counsel, and if mailed to the Executive, shall be addressed to him
at his home address last known on the records of the Company, or at such
other address or addresses as either the Company or the Executive may
hereafter designate in writing to the other.
(f) The failure of either party to enforce any provision or provisions
of this Employment Agreement shall not in any way be construed as a waiver
of any such provision or provisions as to any future violations thereof,
nor prevent that party thereafter from enforcing each and every other
provision of this Employment Agreement. The rights granted the parties
herein are cumulative and the waiver of any
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single remedy shall not constitute a waiver of such party's right to assert
all other legal remedies available to it under the circumstances.
(g) This Employment Agreement supersedes all prior agreements and
understandings between the parties and may not be modified or terminated
orally. No modification, termination or attempted waiver shall be valid
unless in writing and signed by the party against whom the same is sought
to be enforced.
(h) This Employment Agreement shall be governed by and construed
according to the laws of the State of Ohio.
(i) Captions and paragraph headings used herein are for convenience
and are not a part of this Employment Agreement and shall not be used in
construing it.
(j) Where necessary or appropriate to the meaning hereof, the singular
and plural shall be deemed to include each other, and the masculine,
feminine and neuter shall be deemed to include each other.
IN WITNESS WHEREOF, the parties have executed this Employment Agreement on
the day and year first set forth above.
ASSOCIATED ESTATES REALTY CORPORATION,
an Ohio corporation
By:
-------------------------------------------
Authorized Officer
----------------------------------------------
Larry Wright
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EXHIBIT F
"E Units" or "E Unit" shall mean a special class of limited partnership
units in AERC HP Advisors LP, a to be formed Florida limited partnership (the
"Downreit Partnership"). The Downreit Partnership will be formed in connection
with the acquisition of the Development Properties (as that term is defined that
certain Agreement and Plan of Merger by and between Associated Estates Realty
Corporation and MIG Realty Advisors, Inc. of which this Exhibit F is a part (the
"Merger Agreement")). The E Units will be issued to some of the limited partners
of MIG/Pines Development, Ltd., a Florida limited partnership (the "Pines
Partnership") in exchange for the contribution to the Downreit Partnership of
those limited partner's respective limited partnership interests in the Pines
Partnership. Each E Unit will be equal to a common share, without par value, of
Associated Estates Realty Corporation stock ("Common Share"). Each Common Share
will have a value equal to the "Average Share Price" of a Common Share. Average
Share Price shall have the meaning set forth in Section 2.2 of the Merger
Agreement. The express terms pursuant to which the E Units will be issued are
(or will be) set forth in that certain Contribution and Partnership Interest
Purchase Agreement by and among Associated Estates Realty corporation, an Ohio
corporation, Ed Wayman, Larry Wright, James A. Cote', James Elwood, Lanny Kalik,
MIG Development Company, a Florida corporation, Louis E. Vogt, Kathleen L.
Gutin, William T. Hughes, Jr., and Greg L. Golz. The rights that an owner of an
E Unit will have in the proposed Downreit Partnership are (or will be) set forth
in that certain Amended and Restated Limited Partnership Agreement of AERC HP
Advisors LP (the "Downreit Partnership Agreement"). Without limiting the
generality of the foregoing, the Downreit Partnership Agreement will provide,
inter alia, that for a period of two (2) years following the closing of the
transactions contemplated by the Merger Agreement, the right of an owner of an E
Unit to receive quarterly distributions of cash flow generated by the Downreit
Partnership will be subject and subordinate to the rights of certain other
owners of different classes of general or limited partnership units in the
Downreit Partnership to receive quarterly distributions of cash flow generated
by the Downreit Partnership.
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ANNEX B
1701.85 DISSENTING SHAREHOLDER'S DEMAND FOR FAIR CASH VALUE OF SHARES.
(A)(1) A shareholder of a domestic corporation is entitled to relief as a
dissenting shareholder in respect of the proposals described in sections
1701.74, 1701.76, and 1701.84 of the Revised Code, only in compliance with this
section.
(2) If the proposal must be submitted to the shareholders of the
corporation involved, the dissenting shareholder shall be a record holder of the
shares of the corporation as to which he seeks relief as of the date fixed for
the determination of shareholders entitled to notice of a meeting of the
shareholders at which the proposal is to be submitted, and such shares shall not
have been voted in favor of the proposal. Not later than ten days after the date
on which the vote on the proposal was taken at the meeting of the shareholders,
the dissenting shareholder shall deliver to the corporation a written demand for
payment to him of the fair cash value of the shares as to which he seeks relief,
which demand shall state his address, the number and class of such shares, and
the amount claimed by him as the fair cash value of the shares.
(3) The dissenting shareholder entitled to relief under division (C) of
section 1701.84 of the Revised Code in the case of a merger pursuant to section
1701.80 of the Revised Code and a dissenting shareholder entitled to relief
under division (E) of section 1701.84 of the Revised Code in the case of a
merger pursuant to section 1701.801 [1701.80.1] of the Revised Code shall be a
record holder of the shares of the corporation as to which he seeks relief as of
the date on which the agreement of merger was adopted by the directors of that
corporation. Within twenty days after he has been sent the notice provided in
section 1701.80 or 1701.801 [1701.80.1] of the Revised Code, the dissenting
shareholder shall deliver to the corporation a written demand for payment with
the same information as that provided for in division (A)(2) of this section.
(4) In the case of a merger or consolidation, a demand served on the
constituent corporation involved constitutes service on the surviving or the new
entity, whether the demand is served before, on, or after the effective date of
the merger or consolidation.
(5) If the corporation sends to the dissenting shareholder, at the address
specified in his demand, a request for the certificates representing the shares
as to which he seeks relief, the dissenting shareholder, within fifteen days
from the date of the sending of such request, shall deliver to the corporation
the certificates requested so that the corporation may forthwith endorse on them
a legend to the effect that demand for the fair cash value of such shares has
been made. The corporation promptly shall return such endorsed certificates to
the dissenting shareholder. A dissenting shareholder's failure to deliver such
certificates terminates his rights as a dissenting shareholder, at the option of
the corporation, exercised by written notice sent to the dissenting shareholder
within twenty days after the lapse of the fifteen-day period, unless a court for
good cause shown otherwise directs. If shares represented by a certificate on
which such a legend has been endorsed are transferred, each new certificate
issued for them shall bear a similar legend, together with the name of the
original dissenting holder of such shares. Upon receiving a demand for payment
from a dissenting shareholder who is the record holder of uncertificated
securities, the corporation shall make an appropriate notation of the demand for
payment in its shareholder records. If uncertificated shares for which payment
has been demanded are to be transferred, any new certificate issued for the
shares shall bear the legend required for certificated securities as provided in
this paragraph. A transferee of the shares so endorsed, or of uncertificated
securities where such notation has been made, acquires only such rights in the
corporation as the original dissenting holder of such shares had immediately
after the service of a demand for payment of the fair cash value of the shares.
A request under this paragraph by the corporation is not an admission by the
corporation that the shareholder is entitled to relief under this section.
(B) Unless the corporation and the dissenting shareholder have come to an
agreement on the fair cash value per share of the shares as to which the
dissenting shareholder seeks relief, the dissenting shareholder or the
corporation, which in case of a merger or consolidation may be the surviving or
new entity, within three months after the service of the demand by the
dissenting shareholder, may file a complaint in the court of common pleas of the
county in which the principal office of the corporation that issued the shares
is located or was located when the proposal was adopted by the shareholders of
the corporation, or, if the proposal was not required to be submitted to the
shareholders, was approved by the directors. Other dissenting shareholders,
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within that three-month period, may join as plaintiffs or may be joined as
defendants in any such proceeding, and any two or more such proceedings may be
consolidated. The complaint shall contain a brief statement of the facts,
including the vote and the facts entitling the dissenting shareholder to the
relief demanded. No answer to such a complaint is required. Upon the filing of
such a complaint, the court, on motion of the petitioner, shall enter an order
fixing a date for a hearing on the complaint and requiring that a copy of the
complaint and a notice of the filing and of the date for hearing be given to the
respondent or defendant in the manner in which summons is required to be served
or substituted service is required to be made in other cases. On the day fixed
for the hearing on the complaint or any adjournment of it, the court shall
determine from the complaint and from such evidence as is submitted by either
party whether the dissenting shareholder is entitled to be paid the fair cash
value of any shares and, if so, the number and class of such shares. If the
court finds that the dissenting shareholder is so entitled, the court may
appoint one or more persons as appraisers to receive evidence and to recommend a
decision on the amount of the fair cash value. The appraisers have such power
and authority as is specified in the order of their appointment. The court
thereupon shall make a finding as to the fair cash value of a share and shall
render judgment against the corporation for the payment of it, with interest at
such rate and from such date as the court considers equitable. The costs of the
proceeding, including reasonable compensation to the appraisers to be fixed by
the court, shall be assessed or apportioned as the court considers equitable.
The proceeding is a special proceeding and final orders in it may be vacated,
modified, or reversed on appeal pursuant to the Rules of Appellate Procedure
and, to the extent not in conflict with those rules, Chapter 2505. of the
Revised Code. If, during the pendency of any proceeding instituted under this
section, a suit or proceeding is or has been instituted to enjoin or otherwise
to prevent the carrying out of the action as to which the shareholder has
dissented, the proceeding instituted under this section shall be stayed until
the final determination of the other suit or proceeding. Unless any provision in
division (D) of this section is applicable, the fair cash value of the shares
that is agreed upon by the parties or fixed under this section shall be paid
within thirty days after the date of final determination of such value under
this division, the effective date of the amendment to the articles, or the
consummation of the other action involved, whichever occurs last. Upon the
occurrence of the last such event, payment shall be made immediately to a holder
of uncertificated securities entitled to such payment. In the case of holders of
shares represented by certificates, payment shall be made only upon and
simultaneously with the surrender to the corporation of the certificates
representing the shares for which the payment is made.
(C) If the proposal was required to be submitted to the shareholders of the
corporation, fair cash value as to those shareholders shall be determined as of
the day prior to the day on which the vote by the shareholders was taken and, in
the case of a merger pursuant to section 1701.80 or 1701.801 [1701.80.1] of the
Revised Code, fair cash value as to shareholders of a constituent subsidiary
corporation shall be determined as of the day before the adoption of the
agreement of merger by the directors of the particular subsidiary corporation.
The fair cash value of a share for the purposes of this section is the amount
that a willing seller who is under no compulsion to sell would be willing to
accept and that a willing buyer who is under no compulsion to purchase would be
willing to pay, but in no event shall the fair cash value of a share exceed the
amount specified in the demand of the particular shareholder. In computing such
fair cash value, any appreciation or depreciation in market value resulting from
the proposal submitted to the directors or to the shareholders shall be
excluded.
(D)(1) The right and obligation of a dissenting shareholder to receive such
fair cash value and to sell such shares as to which he seeks relief, and the
right and obligation of the corporation to purchase such shares and to pay the
fair cash value of them terminates if any of the following applies:
(a) The dissenting shareholder has not complied with this section,
unless the corporation by its directors waives such failure;
(b) The corporation abandons the action involved or is finally
enjoined or prevented from carrying it out, or the shareholders rescind
their adoption of the action involved;
(c) The dissenting shareholder withdraws his demand, with the consent
of the corporation by its directors;
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(d) The corporation and the dissenting shareholder have not come to an
agreement as to the fair cash value per share, and neither the shareholder
nor the corporation has filed or joined in a complaint under division (B)
of this section within the period provided in that division.
(2) For purposes of division (D)(1) of this section, if the merger or
consolidation has become effective and the surviving or new entity is not a
corporation, action required to be taken by the directors of the corporation
shall be taken by the general partners of a surviving or new partnership or the
comparable representatives of any other surviving or new entity.
(E) From the time of the dissenting shareholder's giving of the demand
until either the termination of the rights and obligations arising from it or
the purchase of the shares by the corporation, all other rights accruing from
such shares, including voting and dividend or distribution rights, are
suspended. If during the suspension, any dividend or distribution is paid in
money upon shares of such class or any dividend, distribution, or interest is
paid in money upon any securities issued in extinguishment of or in substitution
for such shares, an amount equal to the dividend, distribution, or interest
which, except for the suspension, would have been payable upon such shares or
securities, shall be paid to the holder of record as a credit upon the fair cash
value of the shares. If the right to receive fair cash value is terminated other
than by the purchase of the shares by the corporation, all rights of the holder
shall be restored and all distributions which, except for the suspension, would
have been made shall be made to the holder of record of the shares at the time
of termination.
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ASSOCIATED ESTATES REALTY CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Jeffrey I. Friedman, Martin A. Fishman
and Dennis W. Bikun, and each of them, the attorneys and proxies of the
undersigned with full power of substitution to vote as indicated herein,
all the Common Shares of Associated Estates Realty Corporation held of
record by the undersigned on May 1, 1998, at the Annual Meeting of
Shareholders to be held on June 29, 1998, or any adjournment thereof,
with all the powers the undersigned would possess if then and there
personally present.
1. [ ] FOR or [ ] WITHHOLD AUTHORITY to vote for the Merger Proposal to
merge MIG Realty Advisors, Inc. with and into the Company and to issue
common shares in connection therewith.
2. [ ] FOR or [ ] WITHHOLD AUTHORITY to vote for the MIG REIT
Acquisition Proposal to purchase certain multifamily properties held by
direct and indirect subsidiaries of MIG Residential REIT, Inc. and to
issue common shares in connection therewith.
3. [ ] FOR or [ ] WITHHOLD AUTHORITY to vote for the Development
Acquisition Proposal to acquire two multifamily apartment properties
currently in development and to issue operating units convertible into
common shares in connection therewith.
4. [ ] FOR or [ ] WITHHOLD AUTHORITY to vote (except as marked to the
contrary below) for the election of each of the nominees for Director
listed below:
Jeffrey I. Friedman, Mark L. Milstein, Albert T. Adams,
Gerald C. McDonough, Frank E. Mosier and Richard T. Schwarz
(INSTRUCTION: To withhold authority to vote for any individual nominee,
write that nominee's name in the space provided below)
(Continued on reverse side)
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(Continued from other side)
5. In their discretion, to vote upon such other business as may properly
come before the meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS SPECIFIED BY THE
SHAREHOLDER. IF NO SPECIFICATIONS ARE MADE, THE PROXY WILL BE VOTED FOR
EACH OF PROPOSALS 1, 2 AND 3 ABOVE AND TO ELECT THE NOMINEES DESCRIBED
IN PROPOSAL 4 ABOVE.
Receipt of Notice of Annual Meeting of Shareholders and the related
Proxy Statement dated May 30, 1998, is hereby acknowledged.
Date , 1998
---------------------
--------------------------------
--------------------------------
--------------------------------
Signature(s) of Shareholder(s)
PLEASE SIGN AS YOUR NAME
APPEARS HEREON. IF SHARES ARE
HELD JOINTLY, ALL HOLDERS MUST
SIGN. WHEN SIGNING AS ATTORNEY,
EXECUTOR, ADMINISTRATOR,
TRUSTEE OR GUARDIAN, PLEASE
GIVE YOUR FULL TITLE. IF A
CORPORATION, PLEASE SIGN IN
FULL CORPORATE NAME BY
PRESIDENT OR OTHER AUTHORIZED
OFFICER. IF A PARTNERSHIP,
PLEASE SIGN IN PARTNERSHIP NAME
BY AUTHORIZED PERSON.
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Proxy Card
