UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-12486
Associated Estates Realty Corporation
(Exact name of registrant as specified in its charter)
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<S> <C>
Ohio 34-1747603
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5025 Swetland Court, Cleveland, Ohio 44143-1467
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code (216) 261-5000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Common Shares, without par value New York Stock Exchange, Inc.
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<S> <C>
Depositary Shares, each New York Stock Exchange, Inc.
representing 1/10 of a Share of
9-3/4% Class A Cumulative
Redeemable Preferred Shares,
without par value
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ x ]
The aggregate market value of the voting stock held by
nonaffiliates of the Registrant, was $195,016,516 as of March 29,
1999.
The number of Common Shares outstanding as of March 29, 1999 was
22,617,958.
DOCUMENTS INCORPORATED BY REFERENCE
(To The Extent Indicated Herein)
Portions of the Annual Performance Report to Shareholders for the
fiscal year ended December 31, 1998 (in Parts II, III and IV).
Notice of Annual Meeting and Proxy Statement for the Annual
Meeting of Shareholders to be held on May 12, 1999 (in Part III).
<PAGE>
ASSOCIATED ESTATES REALTY CORPORATION
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1998<PAGE>
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Page
Item
PART I
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1. Business 1
Strategy and Philosophy 2
Management and Operations Strategy 2
Acquisitions, development and dispositions 3
Financing 4
Registration statements 6
Competitive Conditions 6
Inflation 7
Main Offices 7
Employees 7
2. Properties 8
Market-rate Properties 8
Government-Assisted Properties 8
Congregate Care Facilities 9
Undeveloped Land 9
Indebtedness Encumbering the Properties 9
Government Programs 9
Rental Assistance Program 9
Mortgage Insurance Programs 11
3. Legal Proceedings 11
4. Submission of Matters to a Vote of Security Holders 11
PART II
5. Market for the Registrant's Common Equity and
Related Stockholder Matters 12
6. Selected Financial and Other Data 12
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
7A. Quantitative and Qualitative Disclosures about
Market Risk 33
8. Financial Statements and Supplementary Data 33
9. Changes and Disagreements with Accountants
on Accounting and Financial Disclosure 33
PART III
10. Directors and Executive Officers of the Registrant 34
11. Executive Compensation 36
12. Security Ownership of Certain Beneficial
Owners and Management 36
13. Certain Relationships and Related Transactions 36
Glossary 37
PART IV
14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 39
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<PAGE>1
See "Glossary" for the definitions of certain capitalized terms
used in this Form 10-K.
PART I
Item 1. Business
Associated Estates Realty Corporation (the "Company"), a
fully integrated real estate company, was formed in July 1993 to
continue the business of the Associated Estates Group ("AEG")
which was developing, acquiring, owning and managing multifamily
residential rental apartment facilities. The Company's portfolio
currently consists of 101 multifamily properties (the
"Properties") including properties owned directly by the Company
or by a subsidiary of the Company or properties in which the
Company was a joint venture partner. The Properties' 21,558
units are located in Arizona, California, Florida, Georgia,
Indiana, Maryland, Michigan, North Carolina, Ohio, Pennsylvania
and Texas.
On June 30, 1998, the Company consummated the merger of MIG
Realty Advisors, Inc. ("MIGRA") into the Company and the related
acquisition of eight multifamily properties from subsidiaries of
MIG Residential REIT, Inc. (the "MIG REIT Properties") and one
development property. The aforementioned June 30, 1998
transactions, together with the Company's purchase of the MRT
properties and a newly developed property are collectively
referred to as the "MIGRA Related Transaction". In connection
with the merger, the Company also acquired the property
management businesses of several of MIGRA's affiliates and the
right to receive certain asset management fees, including
disposition and incentive fees, that would have otherwise been
received by MIGRA upon the sale of certain of the properties
owned by institutions advised by MIGRA. MIGRA is a registered
investment advisor and also functions as a mortgage banker and as
a real estate advisor to pension systems. MIGRA recognizes
revenue primarily from its client's real estate acquisitions and
dispositions, loan origination and consultation, debt servicing,
asset and property management and construction lending
activities. MIGRA earns the majority of its debt servicing fee
revenue from two of its pension fund clients. MIGRA's asset
management, property management, investment advisory and mortgage
servicing operations including those of the prior MIGRA
affiliates are collectively referred to herein as the "MIGRA
Operations".
Of the Company's 21,558 units, 19,461 units are contained in
conventional, market-rate properties (the "Market-rate
Properties") and 1,927 units are contained in properties, the
rents of which are subsidized by the United States Department of
Housing and Urban Development (the "Government-Assisted
Properties"). The remaining 170 units are contained in apartment
communities for elderly persons that provide residents with a
choice of receiving one daily meal, housekeeping, laundry and
other services and recreational and educational activities
("Congregate Care Facilities"). Economic occupancy during 1998
averaged 92.5%. Additionally, the Company owns nine undeveloped
land parcels containing an aggregate of 225 acres.
The Company is a self-administered and self-managed Real
Estate Investment Trust ("REIT") and accordingly, does not engage
or pay for a REIT advisor. The Company manages all of the
Properties, and either AEG or the Company has managed all of the<PAGE>
Properties continuously since their acquisition or development by
AEG or the Company. Of the Company's 101 Properties, 41 were
developed and two were acquired by AEG prior to the IPO and 56
properties were acquired in separate transactions by the Company
or developed after the IPO. Subsequent to the IPO, the Company
also acquired the remaining 50% interest in two of the Properties
included in the Company's Portfolio at the time of the IPO which
were previously owned by joint ventures (together with the 59
Properties referred to above, the "Acquired Properties").
Thirty-two of the Acquired Properties are located in Ohio, 11 are
located in Michigan, three are located in Indiana, three are
located in Maryland, two are located in Florida, two are located
in Georgia, one is located in Arizona, one is located in
California, one is located in North Carolina, one is located in
Pennsylvania, and one is located in Texas. The 59 Acquired
Properties contain 12,974 units, including 220 units that were
added to these Properties after their acquisition.
<PAGE>2
The Company also currently manages 12,426 residential units
and seven commercial properties (containing an aggregate of
approximately 782,000 square feet of gross leasable area), not
owned by the Company. In addition, the Company owns
substantially all of the economic interests in four corporations
which provide management and other services for the Company and
third parties. These corporations are referred to herein as
"Service Companies".
Strategy and Philosophy. The Company, together with
affiliated entities, has assembled, through development,
acquisition and substantial rehabilitation, one of the largest
portfolios of multifamily properties in the Midwest. With the
acquisition of MIGRA, the Company's focus has expanded beyond the
Midwest to a portfolio that targets selected markets throughout
the country. The Company is committed to unequaled resident
service and attentive, "hands-on" management necessary to
maintain and enhance its position as a leading owner, developer
and manager of multifamily properties.
The Company understands the importance of increasing its
cash flow and Funds From Operations (on an aggregate and per
share basis) as well as the value of its portfolio of Properties.
The Company is also committed to continuing growth through the
active management of the Properties, the selective acquisition
and development of additional multifamily properties, and growing
its advisory business through its coinvestment strategy.
Management and Operations Strategy. The Company has employed
a strategy of developing and acquiring a group of multifamily
properties in various locations that has resulted in a
strategically balanced portfolio allowing the Company to respond
to changing lifestyles and demographics. Presently,
approximately 85% of the Company's units are located in Indiana,
Ohio and Michigan. The Company provides a variety of multifamily
rental housing types with monthly rents ranging from $325 to
$1,400 and a portfolio average of $666 per unit at December 31,
1998. During 1998, the Company began the transition from a
centralized to a decentralized management system to facilitate
the Company's multi-regional operations following the acquisition
of MIGRA. Regional and satellite offices are located in Walnut
Creek, California; West Palm Beach, Florida; Detroit, Michigan;
and Columbus, Ohio to further support the Company's regional
operations.
Management of the Properties is supervised by a team of
seven real estate professionals which consist of an executive
officer and six Regional Vice Presidents who together possess
nearly 150 years of experience in the property management
industry. The Company's management approach is to monitor its
marketplace closely and to seek to provide superior services to
its residents through hands on management. The Company believes
this concept simplifies the handling of management tasks and on-
site situations and helps ensure that the site staff provides
quality service to its residents. Consistent with the Company's
decentralization efforts, property managers have been given
additional responsibility and authority for the performance of
their properties, with an emphasis on increasing the information
flow to allow them to manage their property's bottom line growth.
In support of these efforts, the Company is performing a major
hardware upgrade at all properties in 1999, rolling out new
processes to support the decentralized structure, and installing
new property management software.
<PAGE>3
Over the years, the Company has also applied its management
approach to the management of properties for third parties. The
Company believes that third-party property management broadens
the Company's knowledge of a market, creates opportunities for
future acquisitions, enhances purchasing power, provides a
network for new personnel and generates fee income.
The Company intends to maximize all available sources of
capital which may include the selective disposition of certain
Properties and/or undeveloped land. Notwithstanding the
selective dispositions of assets, the Company plans to continue
its annual program of improvements to its Properties and its
ongoing practice of regular maintenance and periodic renovation,
which are intended to yield long-term benefits. The Company
believes that these activities will enhance shareholder value.
The long term goal for the Company is to reduce portfolio
concentration in Ohio with dispositions within the state and
acquisitions in other geographic regions. Although current
conditions, principally restricted access to capital, dictate a
significant reduction in acquisitions for 1999, the Company's
long term plan is to seek economic diversification through
strategic acquisitions.
It is expected that to meet the Company's long term
strategic acquisition goal, individual acquisitions will be
located in the select metro areas of Atlanta, Washington, D.C.,
Orlando, south Florida and Tampa. Management believes that these
markets offer excellent diversification characteristics as well
as operational efficiency. As with all growth markets at this
time, new development is active in these markets. The Company's
market research and operational experience in these areas will
guide site selection and pricing.
One facet of the Company's growth strategy is based on co-
investment with institutional investors. Two programs have been
created for the implementation of the strategy. The first is a
co-investment development program that consists of individual
development partnerships allowing the Company and its
institutional partners to seek the high yields associated with
development. The projects in this program will be built for long
term hold or a forward contracted sale. The second program is a
multifamily pooled fund which is designed to offer a favorable
risk-return relationship for the Company. This fund will acquire<PAGE>
assets at stabilization or through forward contracts. Both
programs will employ moderate project specific debt. The
expected equity division is 25% from the Company and 75% from all
institutional investors. These two programs should allow the
Company to increase operational efficiency in growth markets at a
more rapid pace than direct individual investment because it
requires less capital resources from the Company but allows the
Company to apply its expertise in multifamily apartment
management.
These programs described above are currently being actively
marketed and there can be no assurance that the Company will
attract institutional capital to fund these programs.
Acquisitions, development and dispositions. Should the
Company acquire any multifamily properties in 1999, it would
finance such acquisitions and developments with the most
appropriate sources of capital, which may include the assumption
of mortgage indebtedness, bank and other institutional
borrowings, through the exchange of properties, undistributed
Funds From Operations, or secured debt financings.
<PAGE>4
During 1998, the Company acquired 16 properties containing
4,114 units and two parcels of land consisting of 90 acres,
including 12 properties containing a total of 3,102 units
acquired in connection with the acquisition of MIGRA located in
Arizona, California, Florida, Georgia, Maryland, North Carolina,
and Texas; a 316 unit property located in Toledo, Ohio, a 324
unit property that was constructed in Columbus, Ohio; a 264 unit
property located in Indianapolis, Indiana; and a 108 unit
property that was constructed in Streetsboro, Ohio. The
aggregate purchase price of these acquisitions was $268.3 million
and was financed with the issuance of common stock valued at
$96.4 million, operating partnership units valued at $12.0
million, the assumption of mortgage indebtedness of $31.5 million
and borrowings under the Company's Line of Credit of
approximately $128.4 million. A 156 unit property located in St.
Louis, Missouri, was sold.
The following schedule details construction in progress at
December 31, 1998:
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<CAPTION>
Placed in
(dollars in thousands) Number Costs Service December 31, 1998 Estimated
of Incurred through Land Building Scheduled
Property Units to Date 12/31/98 Cost Cost Completion
<S> <C> <C> <C> <C> <C> <C>
ANN ARBOR, MICHIGAN
Arbor Landings Apts. II 160 $ 9,043 $ 4,268 $ 276 $ 4,499 1999
ATLANTA, GEORGIA
Boggs Road 535 4,046 - 3,955 91 TBD
BATTLE CREEK, MICHIGAN
The Landings at the TBD
Preserve 90 314 - 266 48
GRAND RAPIDS, MICHIGAN
Aspen Lakes II 118 750 - 402 348 TBD
WESTLAKE, OHIO
Westlake 300 704 - 523 181 2000
ORLANDO, FLORIDA
Windsor at Kirkman Apts. 460 35,252 - 3,222 32,030 1999
AVON, OHIO
Village at Avon 312 5,373 - 2,158 3,215 2000
Other - 2,526 - 326 2,200
1,975 $ 58,008 $4,268(1) $11,128 $ 42,612
<FN>
(1) Including land of $368.
</FN>
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Financing. Eighty-two of the Company's 94 wholly owned
properties were unencumbered at December 31, 1998 with earnings
before interest, depreciation and amortization ("EBITDA") of
approximately $59.7 million and an historical cost basis of
approximately $730.3 million. The remaining twelve of the
Company's wholly owned properties have an historical cost basis
of $159.4 million and secured property specific debt of $80.0
million at December 31, 1998. Unsecured debt, which totaled
$423.9 million at December 31, 1998, consisted of $112.5 million
in Medium-Term Notes; Senior Notes of $84.9 million; amounts
drawn on the Company's Line of Credit of $226.0 million; and
amounts drawn on the MIGRA Line of Credit Facilities of
approximately $0.5 million. The Company's proportionate share of
the mortgage debt relating to the seven joint venture properties
was $17.5 million at December 31, 1998. The weighted average
interest rate on the secured, unsecured and the Company's
proportionate share of the joint venture debt was 7.28% at
December 31, 1998.
<PAGE>5
In June 1998, the Company completed a new unsecured $200
million revolving credit facility (the "Line of Credit") which
replaced a $100 million unsecured revolving credit facility.
During the third quarter of 1998, the Line of Credit was
increased from $200 million to $250 million. The new agreement
provides for an extension of the term for an additional year
through June 2001 with the Company having the option to extend
the term through June 2002. The Line of Credit includes certain
restrictive covenants which, among others, requires the Company
to (i) maintain a minimum level of net worth, (ii) limit
dividends to less than 95%, and 90% of Distributable Cash Flow,
as defined in the agreement, for 1999 and 2000, respectively, and
(iii) maintain certain debt coverage ratios. The Company's
borrowings under this Line of Credit bear interest at variable
rates based on the prime rate or LIBOR plus a specified spread,
depending on the Company's long term senior unsecured debt rating
from Standard and Poor's and Moody's Investors Service. Based on
the revised credit ratings that the Company received from Moody's
and Standard and Poor's on March 16, 1999, the spread increased
85 basis points to 225 basis points. The Company believes that
this could have an adverse impact of up to $.05 on earnings per
share in 1999. An annual commitment fee of 15 basis points on
the maximum commitment, as defined in the agreement, payable
annually in advance on each anniversary date. The Line of Credit
is used to finance the acquisition of properties, to provide
working capital and for general corporate purposes. At December
31, 1998, $226.0 million was outstanding under this facility.
The weighted average interest rate on borrowings outstanding
under the Line of Credit was 6.88% and 7.04% at December 31, 1998
and 1997, respectively.
At March 31, 1998, the Company was in violation of certain
financial ratio covenants under the Line of Credit. The Company
received waivers of those violations through June 30, 1998.
Additionally, the Company advised its bank group that it was not
in compliance with one of the financial covenants concerning the
Company's net worth as of September 30, 1998. The net worth
covenant required that the Company maintain a minimum net worth
of $400 million, based on a formula that incorporates the
annualized multiple of the most recent quarter's EBITDA, as
defined in the Agreement. The Company negotiated with its bank
group for a waiver by the banks of the breach of the net worth
covenant, along with an increase in borrowing costs under its
Line of Credit from LIBOR plus 100 basis points to LIBOR plus 140<PAGE>
basis points (based on the then-current credit rating). In
addition, certain of the covenants, including the minimum net
worth covenant, were modified to provide the Company a limited
increase in flexibility. The minimum net worth covenant was
reduced from $400 million to $325 million. The bank group
continued to make advances under the Line of Credit following the
Company's notification that it was not in compliance with the net
worth covenant. A $395,000 default waiver fee was paid in
December 1998 and is reflected in the Consolidated Statements of
Income. The Company's ability to avoid future covenant
violations requires stability in property operating performance
and is dependent upon future LIBOR rate movements. Because of
the volatility of the Company's recent operating performance and
the inability to predict interest rates with certainty, no
assurances can be given that the Company will not have future
covenant violations. If such covenant violations should occur,
the Company believes that it has sufficient financial resources
available to manage any such eventuality.
MIGRA maintains a $500,000 Line of Credit facility ("MIGRA
Line of Credit Facility") which the Company assumed at the time
of the merger. MIGRA's borrowings under this facility bears
interest at prime plus one percent. At December 31, 1998,
$446,565 was outstanding under this facility. The weighted
average interest rate on borrowings outstanding under the MIGRA
Line of Credit Facility was 9.85% at December 31, 1998.
Subsequent to December 31, 1998, the Company paid off the
outstanding balance of $446,565 on this facility. In connection
with the merger, the Company assumed an additional $500,000 Line
of Credit Facility that was paid off at maturity on October 31,
1998.
<PAGE>6
The Company had eleven Medium-Term Notes (the "MTN's")
outstanding having an aggregate balance of $112.5 million and ten
MTN's outstanding with an aggregate balance of $92.5 million at
December 31, 1998 and 1997, respectively. The principal amounts
of these MTN's range from $2.5 million to $20 million and bear
interest from 6.18% to 7.93% over terms ranging from two to 30
years, with a stated weighted average maturity of 9.27 years at
December 31, 1998. The holders of two MTN's with stated terms of
30 years each have a right to repayment of five and seven years
from the issue date of the respective MTN. If these holders
exercised their right to prepayment, the weighted average
maturity would be 4.91 years. The weighted average interest rate
of the 11 MTN's is 6.99% for the year ended December 31, 1998
and 6.97% for the ten MTN's outstanding at December 31, 1997.
One and four of the MTN's in the aggregate amounts of $20.0
million and $50.0 million were issued in 1998 and 1997,
respectively, with the balance issued in 1996.
The Company's current MTN Program provides for the issuance,
from time-to-time, of up to $102.5 million of MTN's due nine
months or more from the date of issue and may be subject to
redemption at the option of the Company or repayment at the
option of the holder prior to the stated maturity date. These
MTN's may bear interest at fixed rates or at floating rates and
can be issued in minimum denominations of $1,000. At December
31, 1998, there are $62.5 million of additional MTN borrowings
available under the program. However, due to the downgrade of
the Company's credit rating to a non-investment grade rating in
March 1999, the Company does not anticipate near to intermediate
issuance of additional MTN's or similar unsecured debt
instruments.
Registration statements. The Company has a shelf
registration statement on file with the Securities and Exchange
Commission relating to the proposed offering of up to $368.8
million of debt securities, preferred shares, depositary shares,
common shares and common share warrants. The total amount of the
shelf filing includes a $102.5 million MTN Program of which MTN's
totaling $40.0 million have been issued leaving $62.5 million
available. The securities may be offered from time to time at
prices and upon terms to be determined at the time of sale.
However, due to the currently depressed price of the Company's
common shares and downgrade of the Company's public debt and
preferred stock in March 1999, it is unlikely that the Company
will be in a position to offer any securities under its shelf
registration statement in the near future.
Competitive Conditions. The following paragraphs contain
forward-looking statements based on current judgments and current
knowledge of management, which are subject to certain risks,
trends and uncertainties that could cause actual results to vary
from those projected. Accordingly, readers are cautioned not to
place undue reliance on forward-looking statements. These
forward-looking statements are intended to be covered by the safe
harbor provisions of the Private Securities Litigation Reform Act
of 1995. Investors are cautioned that the Company's forward-
looking statements involve risks and uncertainty including,
without limitation, changes in economic conditions in the markets
in which the Company owns properties, risks of a lessening of
demand for the apartments owned by the Company, changes in
government regulations affecting the Government-Assisted
Properties, changes in contracts relating to third party
management and advisory business, and expenditures that cannot be
anticipated such as utility rate and usage increases,
unanticipated repairs, additional staffing, insurance increases
and real estate tax valuation reassessments.
<PAGE>7
Given the Midwestern concentration of the Market-rate
portfolio, management's performance expectations are consistent
with the recent past. Management projects that the market-rate
rental growth will be a modest 2% over 1998. This growth rate is
expected to increase, both in magnitude and volatility, as the
recently acquired assets in more dynamic markets enter the
Market-rate portfolio. Management's market expectations for
locations where the Company has significant concentrations are as
follows: Columbus is split between a strengthening northern half
and a flattening southern half, Cleveland continues to exhibit
stability, Michigan will continue to grow but at a slower rate,
Indianapolis is improving from very competitive conditions,
Washington, D.C., Atlanta, and Orlando are in equilibrium with
significant additions to employment and apartment supply, and
south Florida is tightening overall as significant development is
being absorbed.
Inflation. Management's belief is that any effects of small
inflation fluctuations would be negligible on the operational
performance of this portfolio primarily due to the high
correlation between inflation and housing costs combined with the
short term nature, typically one year, of the leases.
The Company expects that building and grounds repair and
maintenance expenditures for the Market-rate Portfolio Properties
will decrease substantially when compared to the prior year as a
result of the reclassification of these costs due to the adoption
of the Company's new capitalization policy effective January 1,<PAGE>
1999. Under the new policy, expenditures for replacements and
individual unit improvements such as carpet, appliances and
kitchen and bath upgrades and renovations that provide benefits
over several accounting periods will be capitalized and
depreciated over their estimated useful lives. Under the
Company's previous policy, these items would have been expensed.
Without giving effect to the new policy, property maintenance
expenditures are expected to increase compared with the prior
year as the Company continues to maintain its properties to
maximize its earnings potential. Utility expenditures will vary
over prior periods as the effect of weather-related usage
variances is factored into the level of utility expense.
The market for the Government-Assisted Properties is unique
in that the residents of these properties receive assistance
under the Rental Assistance Program. See "Item 2. The
Properties-Government Programs." At many of the Government-
Assisted Properties, waiting lists of qualified applicants are
maintained which minimize the need to advertise these units. The
average Economic Occupancy of these Properties consistently
exceeds 98%. However, changes in these government programs could
potentially create decreased rental revenues, additional
vacancies, require more marketing costs and in some cases, these
properties may be converted to Market-rate properties.
Main Offices. The Company's headquarters office is located
at 5025 Swetland Court in Richmond Heights, Ohio. The
headquarters is comprised of one office building of approximately
41,000 square feet and a 3.7 acre parcel of adjacent land for
further development or expansion, all of which are owned by the
Company.
Employees. The Company has approximately 1,090 employees;
approximately 160 of whom are located at the Company's
headquarters.
<PAGE>8
Item 2. The Properties
The Northeast Ohio Properties consist of (i) 48 owned
Properties containing 9,793 units, seven of which are owned by
joint ventures in which the Company owns interests ranging
between 33-1/3% and 50%, (ii) one property that is currently
under construction, the first phase of which will contain 164
units and, when completed, will contain 312 units, and (iii) one
undeveloped land parcel consisting of 39 acres. The joint
ventures consist of five general partnerships and two limited
partnerships in which the Company is a general partner. The
Company has the authority to manage the day-to-day operations of
the Properties owned by the joint ventures. With respect to
seven of these joint ventures, the unanimous consent of the
Company's joint venture partners is required for any sale of the
Property owned by the joint venture or the refinancing of the
indebtedness encumbering such Property.
The Central Ohio Properties consist of (i) 24 Properties
consisting of 4,135 units, and (ii) two undeveloped land parcels
consisting of approximately 20 acres.
The Central Region Properties consist of (i) 18 Properties
consisting of 4,504 units primarily located in Indiana and
Michigan, and (ii) undeveloped land parcels adjacent to three of
the Michigan Properties consisting of approximately 43 acres.<PAGE>
The Eastern Region Properties consist of (i) nine properties
consisting of 2,786 units, located in Florida, Georgia, Maryland,
North Carolina and Pennsylvania, and (ii) two undeveloped land
parcels consisting of approximately 81 acres.
The Western Region Properties consist of three properties
consisting of 628 units located in Arizona, California and Texas.
Market-rate Properties. Eighty-three of the Company's
Properties are market-rate apartment properties in townhome,
garden and high-rise buildings consisting of 19,461 units.
Upon closing of the IPO, the Company acquired a noteholder
interest in one property, in which one of the principals of the
Company has a general partnership interest. Since 1984, the
property has been unable to generate sufficient cash flow to meet
the scheduled interest payments under these notes. The
noteholder is entitled to substantially all cash flows from
operations. Because the cumulative unpaid debt service on the
notes is greater than seven years of aggregate principal
amortization and interest, the Company currently has no
intention to exercise its rights under a security agreement and
foreclose on the property.
Government-Assisted Properties. Sixteen of the Company's
Properties are Government-Assisted Properties consisting of 2,085
units (of which 1,927 are Contract Units and 158 are Market-rate
units). Pursuant to the HUD rental subsidy program, these units
must be held available to persons meeting the criteria for
eligibility (either low-income elderly or family). A portion of
the rent for these units is paid directly to the Company by
eligible residents and the balance is remitted to the Company by
HUD. Increases in rents are established by the provisions of the
applicable HAP Contract. See "Government Programs".
<PAGE>9
Congregate Care Facilities. The Company's two Congregate
Care Facilities were developed to bridge a gap in the housing
market for the elderly between traditional rental housing and
skilled nursing homes. The Congregate Care Facilities are
designed for older persons who do not require on-site medical or
custodial care but have special concerns that are not fulfilled
by traditional apartment housing. Residents of the Company's
Congregate Care Facilities pay market rental rates that are
unregulated and are not subsidized.
Undeveloped Land. The Company also owns nine tracts of
undeveloped land as follows: two 10 acre parcels in the Central
Ohio region and two in the Northern Ohio region-consisting of
approximately 10 and 39 acres,; undeveloped land parcels
adjacent to three of the Michigan Properties consisting of
approximately 18, 4.5, and 20.5 acres, respectively; one
undeveloped land parcel in Georgia consisting of approximately 48
acres; and one land parcel which is under construction in Florida
consisting of approximately 33 acres, all of which are currently
zoned for multifamily property development.
Indebtedness Encumbering the Properties. AEC financed and,
in many cases, refinanced the acquisition, development and
rehabilitation of its Properties with a variety of sources of
mortgage indebtedness, including indebtedness insured by HUD
under programs administered pursuant to Section 221(d)(4) of the
National Housing Act. See "Government Programs". The mortgage
indebtedness currently encumbering nine of the Properties,<PAGE>
including four of the Government-Assisted Properties (one of
which is a joint venture property) and one of the Congregate Care
Facilities, is insured by HUD under this program. Pursuant to
this program, certain aspects of the Company's operation of the
subject Properties are governed by the provisions of separate
Regulatory Agreements. See "Government Programs". Other sources
of financing have included tax-exempt and conventional mortgage
financing.
Government Programs. Twenty of the Company's Properties
(including one of its Congregate Care Facilities) benefit from,
and certain aspects of their operations are governed by
regulation pursuant to, the rental assistance and/or the mortgage
insurance program described below. Eighteen of these Properties
are each owned by a wholly owned subsidiary of the Company, and
the Company is a joint venture partner in two of these Properties
with the Company's interest ranging from 50% to 66-2/3%. The
following summary of the programs is qualified in its entirety by
reference to the applicable Federal statutes and the regulations
promulgated thereunder. There can be no assurance that the terms
of such programs will not change or that any such changes will
not be detrimental to the Company.
Rental Assistance Program. The Company currently
is entitled to receive rental assistance subsidies from
HUD under Section 8 of the United States Housing Act of
1937, as amended (the "Rental Assistance Program"), for
1,927 of the 2,085 rental units in 16 multifamily
properties (the "Government-Assisted Properties").
Approximately 92.4% of the total rental units in the
Government-Assisted Properties (the "Contract Units")
are eligible to receive rental assistance (one
Government-Assisted Property contains 39 Contract Units
and 158 non-subsidized units). The Company is a 50%
joint venture partner in one Government-Assisted
Property consisting of 108 units.
The Rental Assistance Program is a federal rent
subsidy program designed to assist in making housing
available to low and very low income persons and
<PAGE>10
families. Under the Rental Assistance Program, HUD
will make monthly housing assistance payments ("HAP
Payments") to or for the account of the Company with
respect to Contract Units on behalf of persons and
families meeting HUD eligibility requirements
("Eligible Residents"). The amount of each monthly HAP
Payment with respect to each Contract Unit is equal to
the rent (the "Contract Rent") agreed to by HUD
pursuant to the terms of a Housing Assistance Payments
Contract (a "HAP Contract"), less the rent payment
payable by the Eligible Resident for such month. An
Eligible Resident is required to make rent payments
(including a reasonable allowance for the cost of
utilities paid by the resident) not exceeding 30% of
the Eligible Resident's adjusted income. Thus, the
total rental income payable to, or for the account of,
the Company with respect to each Government-Assisted
Property is equal to the rent paid by Eligible
Residents and the HAP Payments actually paid by HUD
pursuant to the applicable HAP Contract.
Below is a table setting forth the final
expiration dates of the HAP Contracts for the Company's<PAGE>
Government-Assisted Properties:
<TABLE>
<CAPTION>
Final
Property Expiration Date
<S> <C>
Shaker Park Gardens II August 2000
Statesman II November 2000
Tallmadge Acres March 2001
Puritas Place September 2011
Jennings Commons November 2001
West High Apartments November 2001
Rainbow Terrace January 2002
Somerset West: 39 units March 2002
Lake Shore Village October 2002
State Road Apartments December 2016
St. James (Riverview) November 2009
Twinsburg Apartments June 2009
Village Towers November 2009
Hillwood I July 2016
Ellet Development December 2017
Sutliff Apartments II November 2019
</TABLE>
Contract Rents are adjusted at least annually in
accordance with one of two adjustment processes, the
annual adjustment factor method or the budget method.
Contract Rents for all but one of the Government-
Assisted Properties are adjusted pursuant to the
"annual adjustment factor" method. Annual adjustment
factors are determined each year by HUD and applied
to then current Contract Rents. The annual
adjustment factors are calculated by HUD for
individual metropolitan areas based on either a local
consumer price index survey or pursuant to a formula
which includes components reflecting changes in
market area rents and utility costs.
Additionally, HUD may permit special additional
adjustments to reflect increases in actual and
necessary expenses of owning and maintaining Contract
Units which result from substantial general increases
in real property taxes, utility rates, insurance or
similar costs, upon demonstration that such general
cost increases are not adequately compensated for by
the annual adjustments.
<PAGE>11
The Contract Rents for one Government-Assisted
Property are determined by the budget method, in
which the Contract Rents are based on the total cost
of operating the Government-Assisted Property, the
amount necessary to fund required reserves and an
amount which provides a reasonable return on the
owner's equity. Contract Rents are revised to
reflect an annual operating budget submitted by the
Company as approved by HUD.
Mortgage Insurance Programs. The mortgage
indebtedness encumbering seven of the Properties
including three of the Government-Assisted Properties
is insured by HUD pursuant to the mortgage insurance
program administered under Section 221(d)(4) of the
National Housing Act.
Owners of projects financed by loans insured by<PAGE>
HUD under the HUD programs previously described are
required to enter into Regulatory Agreements with HUD
which remain in effect so long as the mortgage loan
on the property is insured or held by HUD. Each
wholly owned subsidiary of the Company that benefits
from a government program has entered into a separate
Regulatory Agreement in connection with the Property
owned by it. The Regulatory Agreements contain
certain covenants that restrict the operation of the
subject Properties.
Item 3. Legal Proceedings
Other than routine litigation and administrative proceedings
arising in the ordinary course of business, the Company is not
presently involved in any litigation; nor, to the knowledge of
the Company, is any litigation threatened against the Company or
any of the Properties, which is reasonably likely to have a
material adverse effect on the liquidity or results of operations
of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None
<PAGE>12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The following table shows the high and low closing sale
prices of the Company's common shares on the New York Stock
Exchange (the "NYSE") for each quarter in 1998 and 1997 and the
dividends declared per common share with respect to each such
quarter.
<TABLE>
<CAPTION>
Dividends Declared
Price Range Per Share
1998 1997 1998 1997
High Low High Low
<S> <C> <C> <C> <C> <C> <C>
First Quarter $24-3/16 $20-1/4 $24-5/8 $22-3/8 $ .465 $ .465
Second Quarter $21-3/16 $18-1/2 $23-5/8 $21-3/4 $ .465 $ .465
Third Quarter $19-13/16 $15-15/16 $24 $22 $ .465 $ .465
Fourth Quarter $18-3/16 $11-11/16 $24-3/16 $22-1/2 $ .465 $ .465
$ 1.860 $1.860<PAGE>
</TABLE>
The number of holders of record of the Company's common
shares at December 31, 1998 was 638.
The Company anticipates that dividends will be paid
quarterly using net cash provided by operations. On December 10,
1998, the Company declared a $0.465 per share dividend for
shareholders of record on December 31, 1998, which was paid on
January 15, 1999. The Company's dividend policy is currently
under review.
The Company maintains a dividend reinvestment plan under
which shareholders may elect to reinvest their dividends
automatically in common shares. Under the plan, the Plan Agent
purchases common shares in the open market on behalf of
participating shareholders.
Item 6. Selected Financial and Other Data
The following tables set forth selected financial and other
data for the Company on a consolidated 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 and (ii) Management's
Discussion and Analysis of Financial Condition and Results of
Operations of the Company both included elsewhere herein.<PAGE>
<PAGE>13
<TABLE>
<CAPTION>
Associated Estates Realty Corporation
(Dollars in thousands except per share
amounts and average monthly rental revenue)
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Operating Data:
Revenue:
Rental $132,514 $101,640 $87,975 $70,045 $48,859
Property and asset management, and
disposition fees 6,200 3,752 3,780 4,213 3,931
Painting services 1,606 1,664 1,634 1,067 1,271
Interest 1,164 926 238 486 617
Other 1,524 828 828 1,266 587
Total revenue 143,008 108,810 94,455 77,077 55,265
Expenses:
Property operating and maintenance expenses
(before depreciation and amortization) 58,653 43,230 37,056 29,279 21,084
Painting services 1,617 1,492 1,436 1,001 1,257
Preliminary project costs 298 310 - 46 -
General and administrative 10,217 6,085 5,912 5,471 4,193
Write-off of software development costs 817 - - - -
Depreciation and amortization 24,899 19,266 15,536 12,657 8,122
Charge for unrecoverable funds advanced
to non-owned properties and other 292 1,764 - - -
Default waiver fee 395 - - - -
Interest expense 29,050 19,144 15,516 11,649 6,494
Total expenses 126,238 91,291 75,456 60,103 41,150
Income from operations 16,770 17,519 18,999 16,974 14,115
Equity in net income of joint ventures 445 561 305 297 134
Income before gain on sale of property,
minority interest expense, and
extraordinary item 17,215 18,080 19,304 17,271 14,249
Gain on sale of property 503 1,608 - - -
Minority interest expense (78) - - - -
Income before extraordinary item 17,640 19,688 19,304 17,271 14,249
Extraordinary item (125) 1,024 - (1,097) (727)
Net income $ 17,515 $ 20,712 $19,304 $16,174 $13,522
Net income applicable to common shares $ 12,030 $ 15,228 $13,820 $14,041 $13,522
Earnings per common share data - Basic:
Income before extraordinary item $ .61 $ .88 $ .99 $ 1.09 $ 1.19
Net income $ .61 $ .94 $ .99 $ 1.01 $ 1.13
Weighted average common shares outstanding 19,865 16,198 13,932 13,869 11,942
Earnings per common share-Diluted:
Income before extraordinary item $ .60 $ .88 $ .99 $ 1.09 $ 1.19
Net income $ .60 $ .94 $ .99 $ 1.01 $ 1.13
Weighted average common shares outstanding 20,060 16,216 13,932 13,869 11,942
Dividends declared per common share $ 1.86 $ 1.86 $ 1.80 $ 1.72 $ 1.60
Other data:
Cash flow provided by (used in):
Operating activities $ 41,663 $ 29,936 $ 31,060 $ 28,881 $ 34,481
Investing activities $(151,638)$(131,908)$(75,771)$( 94,151) $(113,567)
Financing activities $ 108,758 $ 102,936 $ 43,149 $ 66,247 $ 49,651
Funds From Operations (a) $ 37,427 $ 34,651 $ 28,915 $ 27,253 $ 22,316
Earnings before interest, depreciation
and amortization (b) $ 72,911 $58,495 $ 52,719 $ 41,270 $ 30,667
Total properties (at end of period) 101 88 84 78 66
Total multifamily units (at end of period) 21,558 17,600 15,838 14,501 12,093
Core Portfolio:
Average monthly rental revenue per
multifamily unit $ 593 $ 587 $ 581 $ 564 $ 529
Economic Occupancy (d) 94.1% 94.0% 95.5% 95.7% 95.2%
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Balance Sheet Data at December 31:
Real estate and other fixed assets
before accumulated depreciation $955,671 $ 646,499 $ 513,966 $ 433,965 $ 312,716
Real estate and other fixed assets
after accumulated depreciation 801,730 515,830 401,864 336,663 227,303
Total assets 840,785 553,910 424,711 355,456 242,761
Total debt (c) 503,905 318,170 217,813 171,234 105,113
Total shareholders' equity 259,188 181,158 158,016 139,170 94,897<PAGE>
</TABLE>
(a) The Company considers Funds From Operations ("FFO"), as
defined by the National Association of Real Estate
Investment Trusts ("NAREIT"), to be one of the measures 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
depreciated property. FFO of unconsolidated partnerships
and joint ventures is determined on a similar basis.
Because the NAREIT definition does not define unusual or
non-recurring items, differences between the Company's
interpretation and other companies' interpretations may
vary which could affect the comparability of the Company's
FFO to that reported by other companies following the
NAREIT definition. Further, 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 NAREIT definition. 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. The following lists the non-recurring
items the Company has considered in its determination of
FFO.
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Non-recurring items:
Write-off of receivable $ 92 $ 1,764
Allowance for receivable 200 -
Local tax accrual 300 -
Severance benefit 267 -
Preliminary project cost write-off 300 310
Write-off of software development costs 817 -
Default waiver fees 395 -
$ 2,371 $ 2,074
</TABLE>
(b) Includes earnings before interest, depreciation and
amortization. Income from joint ventures was calculated
on the same basis ("EBITDA"). Management uses EBITDA as a
measurement tool for the Company since it believes EBITDA
is the most analogous to Net Operating Income; Net
Operating Income is the customary measurement used in
valuing real property, which comprises the majority of the
Company's asset base. 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 financial
performance, cash flow from operating activities or 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.
(c) Amount excludes the Company's share of mortgage
indebtedness relating to the unconsolidated joint ventures<PAGE>
of approximately $17,453, $17,752, $17,969, $18,164 and
$18,342 at December 31, 1998, 1997, 1996, 1995 and 1994,
respectively.
<PAGE>15
(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 units.<PAGE>
<PAGE>16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
Associated Estates Realty Corporation (the "Company") is a
Real Estate Investment Trust ("REIT") which, at December 31,
1998, owned or was a joint venture partner in 101 multifamily
properties containing 21,558 units located in Arizona,
California, Florida, Georgia, Indiana, Maryland, Michigan, North
Carolina, Ohio, Pennsylvania and Texas.
The following Item 7 discussion should be read in
conjunction with the financial statements and notes thereto
appearing elsewhere in this report. Historical results and
percentage relationships set forth in the Consolidated Statements
of Income contained in the financial statements, including trends
which might appear, should not be taken as indicative of future
operations. This Item 7 discussion may also contain forward-
looking statements based on current judgments and current
knowledge of management, which are subject to certain risks,
trends and uncertainties that could cause actual results to vary
from those projected. Accordingly, readers are cautioned not to
place undue reliance on forward-looking statements. These
forward-looking statements are intended to be covered by the safe
harbor provisions of the Private Securities Litigation Reform Act
of 1995. Investors are cautioned that the Company's forward-
looking statements involve risks and uncertainty, including
without limitation, changes in economic conditions in the markets
in which the Company owns properties, risks of a lessening of
demand for the apartments owned by the Company, changes in
government regulations affecting the Government-Assisted
Properties, changes in or termination of contracts relating to
third party management and advisory business, and expenditures
that cannot be anticipated such as utility rate and usage
increases, unanticipated repairs, additional staffing, insurance
increases and real estate tax valuation reassessments.
Liquidity and Capital Resources
The Company has elected to be taxed as a REIT under Sections
856 through 860 of the Internal Revenue Code of 1986, as amended,
commencing with its taxable year ending December 31, 1993. REITs
are subject to a number of organizational and operational
requirements including a requirement that 95% of the income that
would otherwise be considered as taxable income be distributed to
shareholders. Providing the Company continues to qualify as a
REIT, it will generally not be subject to a Federal income tax on
net income.
The Company expects to meet its short-term liquidity
requirements generally through its net cash provided by
operations. The Company believes that its net cash provided by
operations will be sufficient to meet both operating requirements
and the payment of dividends in accordance with REIT
requirements. During 1999 and 2000, approximately $22 million
and $91 million, respectively, of the Company's debt will mature.
Although the Company may no longer be in a position to access
public unsecured debt markets due to revised credit ratings, the
Company believes it has adequate alternatives available to
provide for its liquidity needs including (i) additional
borrowings under the Company's Line of Credit, (ii) new secured
borrowings, and (iii) property sales proceeds.<PAGE>
Financing:
In June 1998, the Company completed a new unsecured $200
million revolving credit facility (the "Line of Credit") which
replaced a $100 million unsecured revolving credit facility.
During the third quarter of 1998, the Line of Credit was
increased from $200 million to $250 million. The new agreement
<PAGE>17
provides for an extension of the term for an additional year
through June 2001 with the Company having the option to extend
the term through June 2002. The Line of Credit includes certain
restrictive covenants which, among others, requires the Company
to (i) maintain a minimum level of net worth, (ii) limit
dividends to less than 95% and 90% of Distributable Cash Flow, as
defined in the agreement, for 1999 and 2000, respectively, and
(iii) maintain certain debt coverage ratios. The Company's
borrowings under this Line of Credit bear interest at variable
rates based on the prime rate or LIBOR plus a specified spread,
depending on the Company's long term senior unsecured debt rating
from Standard and Poor's and Moody's Investors Service. Based on
the revised credit ratings the Company received from Moody's and
Standard and Poor's on March 16, 1999, the spread increased 85
basis points to 225 basis points. The Company believes that this
could have an adverse impact of up to $.05 on earnings per share
in 1999. An annual commitment fee of 15 basis points on the
maximum commitment, as defined in the agreement, payable annually
in advance on each anniversary date. During 1998, the Company
recognized a non-cash extraordinary charge of approximately
$0.125 million ($0.0063 per share), relating to the write-off of
unamortized deferred finance costs associated with the former
revolving credit facility. The Line of Credit is used to finance
the acquisition of properties, to provide working capital and for
general corporate purposes. At December 31, 1998, $226.0 million
was outstanding under this facility.
At March 31, 1998, the Company was in violation of certain
financial ratio covenants under the Line of Credit. The Company
received waivers of those violations through June 30, 1998.
Additionally, the Company advised its bank group that it was not
in compliance with one of the financial covenants concerning the
Company's net worth as of September 30, 1998. The net worth
covenant required that the Company maintain a minimum net worth
of $400 million, based on a formula that incorporates the
annualized multiple of the most recent quarter's earnings before
interest, taxes, depreciation and amortization ("EBITDA"), as
defined in the agreement. The Company negotiated with its bank
group for a waiver by the banks of the breach of the net worth
covenant, along with an increase in borrowing costs under its
Line of Credit from LIBOR plus 100 basis points to LIBOR plus 140
basis points (based on the then-current credit rating). In
addition, certain of the covenants, including the minimum net
worth covenant, were modified to provide the Company a limited
increase in flexibility. The minimum net worth covenant was
reduced from $400 million to $325 million. The bank group
continued to make advances under the Line of Credit following the
Company's notification that it was not in compliance with the net
worth covenant. A $395,000 default waiver fee was paid in
December 1998 and is reflected in the Consolidated Statements of
Income. The Company's ability to avoid future Line of Credit
covenant violations requires stability in property operating
performance and is dependent upon future LIBOR rate movements.
Because of the volatility of the Company's recent operational
performance and the inability to predict interest rates with
certainty, no assurances can be given that the Company will not
have future covenant violations. If such covenant violations<PAGE>
should occur, the Company believes that it has sufficient
financial resources available to manage any such eventuality.
MIGRA maintains a $500,000 Line of Credit facility ("MIGRA
Line of Credit Facility") which the Company assumed at the time
of the merger. At December 31, 1998, $446,565 was outstanding
under this facility. The weighted average interest rate on
borrowings outstanding under the MIGRA Line of Credit Facility was
9.85% at December 31, 1998. Subsequent to December 31, 1998, the
Company paid off the MIGRA Line of Credit Facility of $446,565.
In connection with the merger, the Company assumed an additional
$500,000 Line of Credit Facility that the Company subsequently
paid off at maturity, on October 31, 1998.
<PAGE>18
Eighty-two of the Company's 94 wholly owned properties were
unencumbered at December 31, 1998 with EBITDA of approximately
$59.7 million and a historical cost basis of approximately $730.3
million. The remaining twelve of the Company's wholly owned
properties, have an historical cost basis of $159.4 million and
secured property specific debt of $80.0 million at December 31,
1998. Unsecured debt, which totaled $423.9 million at December
31, 1998, consisted of $112.5 million in Medium-Term Notes,
Senior Notes of $84.9 million, amounts drawn on the Company's
Line of Credit of $226.0 million and amounts drawn on the MIGRA
Line of Credit Facility of approximately $0.5 million. The
Company's proportionate share of the mortgage debt relating to
the seven joint venture properties was $17.5 million at December
31, 1998. The weighted average interest rate on the secured,
unsecured and the Company's proportionate share of the joint
venture debt was 7.28% at December 31, 1998.
On April 9, 1998, the Company issued a 10 year, $20 million
Medium-Term Note (the "MTN") under its $102.5 million MTN
Program. The weighted average interest rate, including the
effect of the settlement of a Treasury Lock agreement, is 7.2%.
The net proceeds to the Company with respect to this issuance
were $19.4 million, which were applied to amounts outstanding
under the Line of Credit. At December 31, 1998 and 1997, the
Company had eleven MTN's outstanding having an aggregate balance
of $112.5 million and ten MTN's outstanding with an aggregate
balance of $92.5 million, respectively.
The Company's current MTN Program provides for the issuance,
from time-to-time, of up to $102.5 million of MTN's due nine
months or more from the date of issue and may be subject to
redemption at the option of the Company or repayment at the
option of the holder prior to the stated maturity date. These
MTN's may bear interest at fixed rates or at floating rates and
can be issued in minimum denominations of $1,000. At December
31, 1998, there are $62.5 million of additional MTN borrowings
available under the program. However, due to the downgrade of the
Company's credit rating to a non-investment grade rating in March
1999, the Company does not anticipate near to intermediate
issuance of additional MTN's or similar unsecured debt
instruments.
Registration statements:
The Company has a shelf registration statement on file with
the Securities and Exchange Commission relating to the proposed
offering of up to $368.8 million of debt securities, preferred
shares, depositary shares, common shares and common share
warrants. The total amount of the shelf filing includes a $102.5
million MTN Program of which MTN's totaling $40.0 million have<PAGE>
been issued leaving $62.5 million available. The securities may
be offered from time to time at prices and upon terms to be
determined at the time of sale. However, due to the currently
depressed price of the Company's common shares and downgrade of
the Company's public debt and preferred stock in March 1999, it
is unlikely that the Company will be in a position to offer any
securities under its shelf registration statement in the near
future.
The MIGRA Transaction:
On June 30, 1998, the Company consummated the merger of MIG
Realty Advisors, Inc. ("MIGRA") into the Company and the related
acquisition of eight multifamily properties from subsidiaries of
MIG Residential REIT, Inc. (the "MIG REIT Properties") and one
development property (structured as a DownREIT partnership). The
aforementioned June 30, 1998 transactions, together with the
Company's purchase of the MRT properties and a newly developed
property, are collectively referred to as the "MIGRA Related
Transaction". In connection with the merger, the Company also
acquired the property management businesses of several of MIGRA's
affiliates and the right to receive certain asset management
fees, including disposition and incentive fees, that would have
otherwise been received by MIGRA upon the sale of certain of the
properties owned by institutions advised by MIGRA.
<PAGE>19
As consideration for their interest in MIGRA and the
affiliated property management businesses, the shareholders of
MIGRA received 408,314 of the Company's common shares. The
number of shares issued was determined based on the average
closing price of the Company's common shares for the 20 trading
days preceding the date of the merger agreement or $23.63 per
share. Subject to the achievement of certain performance
criteria, the former shareholders of MIGRA have the opportunity
to receive additional contingent consideration to be paid in the
form of the Company's common shares. After giving effect to
certain price adjustments, contingent consideration payable on
each of June 30, 1999 and 2000 is approximately $872,000 and $2.9
million, respectively, subject to further adjustment. On or
about December 31, 1998, the conditions precedent to the payment
of the first contingent consideration amount had been satisfied.
The Company recorded approximately $4.2 million in
intangible assets which represent the allocation of the purchase
price to the acquired asset advisory, property management and
loan servicing contracts as well as the client relationships and
MIGRA management team.
The Company also acquired the MIG REIT Properties for $12.2
million in cash, the issuance of 5,139,387 common shares of the
Company and the assumption of approximately $0.7 million in
liabilities. The number of common shares was determined based on
the average closing prices of the Company's common shares for the
20 trading days preceding the purchase of the MIG REIT Properties
or $18.76 per share. The cash portion of the purchase price was
financed using borrowings made available through the Company's
Line of Credit.
In connection with the MIGRA Related Transaction, the
Company also acquired the general and certain limited partnership
interests in a partnership that owns a multifamily property in
development. In exchange for cash of $15.6 million, the Company
received 661,663 operating partnership units ("OP units"),
representing a 59% general partnership interest in AERC HP<PAGE>
Advisors Limited Partnership ("HP Advisors"), an operating
partnership, which owns a parcel of real property located in
Orlando, Florida upon which a 460 unit multifamily apartment
complex, Windsor at Kirkman Apartments, is being constructed.
Certain limited partners of HP Advisors received 459,719 OP
units, representing four classes of limited partnership
interests, in exchange for their interests in Windsor at Kirkman
Apartments. The number of OP units issued was determined with
reference to the Company's common shares and is based on the
average closing prices of the Company's common shares for the 20
trading days preceding the date of the merger agreement or $23.63
per share. Commencing two years from the date of issuance, the
holders of the Class A OP units can present such Class A OP units
for redemption to the operating partnership for cash, subject to
certain conditions. The Company has the option to redeem the OP
units for common shares, exchangeable on a one-for-one basis or
the cash equivalent amount. The Class B and C OP units and Class
E OP units, become exchangeable at the option of the Company into
Class A OP units upon the attainment of certain operating
thresholds, one and two years from the date of the merger
closing, respectively. The cash paid by the Company in exchange
for its OP units in HP Advisors was financed using borrowings
made available through the Company's Line of Credit.
In October 1998, the final MIGRA Related Transaction was
completed by the Company acquiring the general and certain
limited partnership interests in a partnership that owns a
multifamily property located in Pembroke Pines, Florida,
containing 368 units for a purchase price of approximately $34.2
million. In exchange for cash of $16.0 million and the
assumption of mortgage indebtedness of $16.5 million, the Company
received 1,887,345 OP units, representing a general partnership
interest in HP Advisors. Certain limited partners of HP Advisors
received 62,313 Class D OP units in exchange for their interests
in the property. The number of OP units issued was determined
based on the average closing prices of the Company's common
shares for the 20 trading days preceding the targeted closing
date of the acquisition or $17.54 per share. The Class D OP
units are exchangeable into Class A OP units at the option of the
Company, subject to certain conditions, two years from the date
of merger closing and upon the attainment of certain operating
thresholds. The cash paid by the Company in exchange for its OP
units in HP Advisors was financed using borrowings made available
through the Company's Line of Credit.
<PAGE>20
The Company's right to exchange Class B, Class C, Class D
and Class E OP units into Class A OP units is conditioned upon
obtaining certain certificates of occupancy, as set forth in the
agreement, at the Windsor at Kirkman Apartments property.
Acquisitions, development and dispositions:
Should the Company acquire any multifamily properties in
1999, it would finance such acquisitions and development with the
most appropriate sources of capital, which may include the
assumption of mortgage indebtedness, bank and other institutional
borrowings, through the exchange of properties, undistributed
Funds From Operations, or secured debt financings.
During the year ended December 31, 1998, without regard to
the merger of MIGRA and the related acquisition of the eight MIG
REIT Properties and the two properties held in the DownREIT, the
Company acquired five multifamily properties containing 1,584
units and two parcels of land containing 90 acres for an<PAGE>
aggregate purchase price of $99.1 million including $15.6 million
of liabilities assumed; principally mortgage indebtedness of $15.0
million. The acquired properties are located in Coconut Creek,
Florida; Duluth, Georgia; Columbia, Maryland; Indianapolis,
Indiana; and Toledo, Ohio. The land parcels are located in Avon,
Ohio and Atlanta, Georgia. The purchase price of the acquired
properties was financed using borrowings under an unsecured 90
day term loan of $44.5 million and borrowings under the Company's
Line of Credit of approximately $39.0 million. Three of the five
properties were acquired from an entity managed by MIGRA in
anticipation of the consummation of the other MIGRA Related
Transaction. The three properties were owned, in part, by MIG
Residential Trust. The aggregate purchase price of these
properties was $59.5 million of which approximately $15.3 million
represented assumed liabilities.
Bradford at Easton, a newly developed 324 unit property
located in Columbus, Ohio, achieved stabilized occupancy during
the second quarter and was 95.1% physically occupied at December
31, 1998. The Village of Western Reserve, a newly developed 108
unit property located in Streetsboro, Ohio (a city located
southeast of Cleveland) was completed and achieved stabilized
occupancy in July 1998 and was 97.2% physically occupied at
December 31, 1998. The Residence at Barrington, a 288 unit
property located in Aurora, Ohio (also located southeast of
Cleveland) was completed and was 77% physically occupied at
December 31, 1998. The Company considers occupancy at a newly
developed property to have stabilized once the property's
physical occupancy reaches 93%. During 1998, the Company
completed the construction and leasing of 184 additional units at
two of the Company's properties.
The Company is in the process of constructing or planning
the construction of an additional 1,975 units owned by the
Company as follows:
<TABLE>
<CAPTION>
Additional Anticipated
Property Location Units Completion
<S> <C> <C> <C>
Arbor Landings Apts. II Ann Arbor, Michigan 160 2nd Qtr. 1999
Aspen Lakes II Grand Rapids, Michigan 118 TBD
Boggs Road Atlanta, Georgia 535 TBD
The Landings at the
Preserve(a) Battle Creek, Michigan 90 TBD
Village at Avon Avon, Ohio 312 4th Qtr. 2000
Windsor at Kirkman
Apartments Orlando, Florida 460 3rd Qtr. 1999
Westlake Westlake, Ohio 300 TBD
</TABLE>
1,975
(a) A clubhouse will also be added to The Landings at the
Preserve.
TBD - To be determined.
The Company is exploring opportunities to dispose of some of
its joint venture, Government-Assisted and congregate care
multifamily properties. The Company has retained a financial
advisor to evaluate the alternatives relating to the disposition
of its ownership of some of its Government-Assisted properties.
The Company is considering the sale of Desert Oasis, located in
Palm Desert, California and certain older properties located in
northeastern Ohio. The sale of these assets may have either an
accretive or dilutive effect on earnings depending upon the
application of proceeds derived from such sales, which will not
be known until the time of sale.
Management Contract Cancellation:
On January 13, 1999, the Company terminated its management
contract for Longwood Apartments, which will result in a loss of
management fee income in 1999. Approximately $297,008 of
management fees was recognized with respect to this contract in
1998. Moreover, pursuant to the terms of the HUD Settlement
Agreement discussed in Note 11 of the notes to the financial
statements, in the second quarter of 1999, the Company may
terminate its management contract for Park Village Apartments,
which will result in a partial loss of management fee income in
1999. The annual management fees for Park Village Apartments in
1998 were $26,735.
In addition, pursuant to the terms of a separate settlement
agreement with affiliates entered into in conjunction with the
settlement agreement with the Corporation as discussed in Note 8,
the Company has agreed to end its management of certain
commercial properties owned by certain affiliated persons upon 60
days prior written notice from the respective owners of those
properties. Such notice has not been received. The management
fees generated from those commercial properties in 1998 were
$126,451.
The Company further anticipates the loss of management fees
from Euclid Medical & Commercial Arts Building, a non-owned
commercial property, because of the likelihood of foreclosure
proceedings. The annual management fees generated from this
property in 1998 were $92,524.
In addition, if the Company proceeds with the proposed sale
of its interests in the joint venture properties, the Company
would no longer receive the management fees attributable to those
properties and one other property. The annual management fees
generated for these properties in 1998 were $1.1 million.
Certain third party owners of properties currently managed by the
Company have entered into contracts to sell those properties,
subject to certain contingencies. If all those third party owned
properties were sold, the Company would similarly no longer
receive the management fees generated from those properties. The
annual management fees generated for these properties in 1998
were $.5 million.
The impact of the loss of these management fee revenues<PAGE>
would be partially offset by a reduction in operating expenses.
<PAGE>22
Dividends:
On December 10, 1998, the Company declared a dividend of
$0.465 per common share for the quarter ending December 31, 1998
which was paid on January 15, 1999 to shareholders of record on
December 31, 1998. The common share dividend policy is currently
under review by the Board of Directors. On November 23, 1998,
the Company declared a dividend of $0.60938 per Depositary Share
on its Class A Cumulative Preferred Shares (the "Perpetual
Preferred Shares") which was paid on December 15, 1998 to
shareholders of record on December 3, 1998.
Cash flow sources and applications:
Net cash provided by operating activities increased
$11,726,400 from $29,936,400 to $41,662,800 for the year ended
December 31, 1998 when compared with the year ended December 31,
1997. This increase was primarily the result of decreases in
accounts and notes receivable and restricted cash and increases
in depreciation and amortization, offset by decreases in accounts
payable and accrued expenses and funds held for non-owned managed
properties of affiliates and joint ventures.
Net cash flows used for investing activities of $151,638,400
for the year ended December 31, 1998 were primarily used for the
acquisition and development of multifamily real estate properties
and undeveloped land parcels.
Net cash flows provided by financing activities of
$108,758,500 for the year ended December 31, 1998 were primarily
comprised of borrowings on the Line of Credit and the issuance of
MTN's. Funds were also used to pay dividends on the Company's
common and Perpetual Preferred Shares as well as repayments on
the Line of Credit.
During 1999 and 2000, approximately $113 million of the
Company's debt will mature. The Company intends to repay any
such debt as it matures through a combination of (i) additional
fundings under the Company's Line of Credit, (ii) new secured
borrowings, and (iii) property sales proceeds.
RESULTS OF OPERATIONS
Comparison of the year ended December 31, 1998 to the year ended
December 31, 1997
In the following discussion of the comparison of the year
ended December 31, 1998 to the year ended December 31, 1997,
Market-rate Properties refers to the Core and Acquired Property
portfolios. Core Properties represents the 34 wholly owned
multifamily properties acquired by the Company at the time of the
IPO and the 33 properties acquired in separate transactions by
the Company during 1994 through 1996 and the acquisition of the
remaining 50% interest in two properties in which the Company was
a joint venture partner at the time of the IPO. Acquired
Properties refers to the 26 properties acquired between January
1, 1997 and December 31, 1998 as well as the newly constructed
properties.<PAGE>
Overall, total revenue increased $34,197,900 or 31.4% and
total expenses increased $34,947,600 or 38.3% for the year. Net
income applicable to common shares after deduction for the
dividends on the Company's Perpetual Preferred Shares decreased
$3,197,600 or 21.0%.
During the year ended December 31, 1998, the Market-rate
Properties generated total revenues of $118,984,000 and property
operating and maintenance expenses of $51,834,800. Of these
amounts, the Acquired and Core Properties contributed total
revenues of $45,650,700 and $73,333,300, respectively, while
incurring property operating and maintenance expenses of
$17,518,800 and $34,316,000, respectively. The Government-
Assisted Properties generated total revenues of $14,169,100 while
incurring property operating and maintenance expenses of
$6,817,700 for the year ended December 31, 1998.
<PAGE>23
Rental Revenues:
Rental revenues increased $30,874,800 or 30.4% for the year.
Rental revenues from the Acquired Properties increased
$29,438,200 for the year. Increases in occupancy and unit rents
at the Core Properties and Government-Assisted Properties
resulted in a $1,547,500 or 2.1% increase and $181,550 or 1.3%
decrease, respectively, in rental revenue from these properties.
The balance of the increase resulted from increased rental
revenues attributable to office space and other miscellaneous
rental revenue items.
Other Revenues:
Other income increased $933,200 or 53.2% for the year. The
increase is due primarily to real estate tax refunds received
and an increase in the amount of interest income earned in the
current year.
The Company recognized property and asset management fee
revenues of $4,704,800 and $1,248,400 for the year ended December
31, 1998 as compared to $3,752,230 and $0, respectively, for the
year ended December 31, 1997. The increase in property and asset
management fee revenues is primarily due to the collection of
these fees by MIGRA relating to their institutional investor
clients. During the year, the Company recognized $247,000 of
disposition fees relating to the sale of three properties owned
by advisory clients.
Property operating and maintenance expenses:
Property operating and maintenance expenses increased
$15,422,600 or 35.7% for the year. Operating and maintenance
expenses at the Acquired Properties increased $12,483,400 for the
year due primarily to the operating and maintenance expenses
incurred at the three properties acquired during 1997, the 14
properties acquired in 1998, and the newly constructed properties
of Bradford at Easton, The Village of Western Reserve and The
Residence at Barrington. Property operating and maintenance
expenses at the Core Properties increased $3,037,600, or 9.7%
when compared to the prior 12 month period primarily due to
increases in personnel, real estate and local taxes and other
operating expenses. Building renovations and unit and common
area refurbishment in the Core Properties that were not<PAGE>
considered to be capital in nature averaged $494 per unit for the
year ended December 31, 1998 as compared to $498 per unit for the
year ended December 31, 1997. Property operating and maintenance
expenses at the Government-Assisted Properties decreased $98,400
or 1.4% for the year due primarily to decreases in utilities and
building and grounds repair and maintenance.
Other expenses:
Depreciation and amortization increased $5,633,100 or 29.2%
for the year primarily due to the increased depreciation expense
recognized on the Acquired Properties as well as the amortization
expense of the intangible assets. The amortization expense
related to the intangible assets is reflected as a charge to the
Management and Service Operations.
Cost associated with abandoned projects of $298,400 and
$309,800 were expensed during 1998 and 1997, respectively. These
costs consist primarily of certain pre-development costs, such as
architectural, legal and accounting fees, that were incurred on
projects that the Company determined it would no longer pursue.
These costs are reflected as a charge to the Management and
Service Operations.
<PAGE>24
General and administrative expenses increased $4,131,600 or
67.9% for the year. This increase is primarily attributable to
payroll and related expenses due to the expense of the MIGRA
advisory operations. General and administrative expenses are
costs related to the Management and Service Operations.
The Management and Service Operations recognized a charge
for unrecoverable funds advanced to non-owned properties and
other costs totaling $291,800 and $1,764,000 which was incurred
during 1998 and 1997, respectively. The 1998 charge primarily
relates to a write-off of $91,800 and a reserve of $200,000
relating to advances to two separate managed but non-owned
properties. The 1997 charge relates to the write-off of two
advances to managed but non-owned properties.
The Company wrote off $817,500 of expenditures which had
been capitalized relating to the Company's LISA(R) system, a
proprietary automated leasing information system. This write-off
relates to the Management and Service Operations and is reflected
as a write-off of software development costs in the Consolidated
Statements of Income.
Interest expense increased $9,906,100 or 51.7% for the year
primarily due to the interest incurred with respect to the
additional borrowings under the Line of Credit used for the
acquisition and construction of properties.
The gain on sale of operating property of $503,500 for 1998
resulted from the sale of an operating property. In 1997, the
Company recognized a gain on sale of land from the sale of a 90
acre parcel zoned for office and industrial use.
Extraordinary items:
In 1998, deferred financing costs of $124,900 were written
off due to the refinancing of the Line of Credit and were<PAGE>
recognized as an extraordinary item in the Consolidated
Statements of Income.
Net income applicable to common shares:
Net income applicable to common shares is equal to net
income less dividends on the Perpetual Preferred Shares of
$5,484,400.
Comparison of the year ended December 31, 1997 to the year ended
December 31, 1996
In the following discussion of the comparison of the year
ended December 31, 1997 to the year ended December 31, 1996,
Market-rate Properties refers to the Core and Acquired Property
portfolios. Core Properties represent the 35 wholly owned
multifamily properties acquired by the Company at the time of the
IPO and the 32 properties acquired during 1994 and 1995 and the
acquisition of the remaining 50% interest in two properties in
which the Company was a joint venture partner at the time of the
IPO. Acquired Properties refers to the 14 properties acquired
between January 1, 1996 and December 31, 1997.
Overall, total revenue increased $14,354,800 or 15.2% and
total expenses increased $15,833,700 or 21.0% for the year. Net
income applicable to common shares after deduction for the
dividends on the Company's Perpetual Preferred Shares increased
$1,408,400 or 10.2%.
During the year ended December 31, 1997, the Market-rate
Properties generated total revenues of $88,058,000 and property
operating and maintenance expenses of $36,314,000. Of these
amounts, the Acquired and Core Properties generated total
revenues of $18,768,700 and $69,289,300, respectively, while
incurring property operating and maintenance expenses of
$7,048,300 and $29,265,700, respectively. The Government-
Assisted Properties generated total revenues of $14,283,000 while
incurring property operating and maintenance expenses of
$6,916,200 for the year ended December 31, 1997.
<PAGE>25
Rental Revenues:
Rental revenues increased $13,664,500 or 15.5% during 1997
when compared to 1996. Rental revenues from the Acquired
Properties increased $12,685,292 for the year. Increases in
occupancy and unit rents at the Core and Government-Assisted
Properties resulted in a $1,020,365 or 1.2% increase and $41,065
or 0.3% decrease, respectively, in rental revenue from these
properties. The balance of the increase resulted from increased
rental revenues attributable to office space and other
miscellaneous rental revenue items.
Other Revenues:
Other income increased $687,600 or 64.5% during 1997 when
compared to 1996. The increase was due primarily to an increase
in the amount of real estate tax refunds received as well as an
increase in the amount of interest income earned in comparison to
the prior year.
Property operating and maintenance expenses:
Property operating and maintenance expenses increased
$6,173,800 or 16.7% during 1997 when compared to 1996. Operating
and maintenance expenses at the Acquired Properties increased
$4,730,300 for the year due primarily to the operating and
maintenance expenses incurred at the eight properties acquired
during 1997 and the recognition of a full year's operating<PAGE>
expenses at the six properties acquired during 1996. Property
operating and maintenance expenses at the Core Properties
increased $811,200 or 2.9% when compared to the prior 12 month
period primarily due to increases in personnel, utilities and
building and grounds repair and maintenance expenses which were
offset by a decrease in advertising expenses. Building
renovations and unit and common area refurbishment in the Core
Properties that were not considered to be capital in nature
averaged $565 per unit for the year ended December 31, 1997 as
compared to $515 per unit for the year ended December 31, 1996.
Property operating and maintenance expenses at the Government-
Assisted Properties increased $632,200 or 10.1% for the year due
primarily to increases in building and grounds repair and
maintenance, personnel and other operating expenses.
Other expenses:
Depreciation and amortization increased $3,730,200 or 24.0%
for the year primarily due to the increased depreciation expense
recognized on the Acquired Properties.
Costs associated with abandoned projects of $309,800 were
expensed during 1997; none in 1996. These costs consist
primarily of certain pre-development costs, such as
architectural, legal and accounting fees, that were incurred on
projects that the Company determined it would no longer pursue.
These costs are reflected as a charge to the Management and
Service Operations.
General and administrative expenses increased $172,500 or
2.9% for the year. This increase is primarily attributable to
payroll and related expenses. General and administrative
expenses are costs related to the Management and Service
Operations.
<PAGE>26
The Management and Service Operations recognized a charge
for unrecoverable funds advanced to non-owned properties and
other costs totaling $1,764,000 during 1997. This charge
primarily relates to the write-off of two advances to managed but
non-owned properties that were deemed to be uncollectible.
Interest expense increased $3,628,300 or 23.4% for the year
primarily due to the interest incurred with respect to the
additional borrowings under the Line of Credit that were used for
the acquisition and construction of properties.
The gain on sale of land resulted from the sale of a 90 acre
parcel zoned for office and industrial use which was one of the
assets acquired by the Company at the time of the Company's
initial public offering.
Extraordinary items:
In 1997, unamortized debt premium was written off upon the
early repayment of mortgage debt of $1,023,700 and was recognized
as an extraordinary item in the Consolidated Statements of
Income.
Net income applicable to common shares:
Net income applicable to common shares is equal to net
income less dividends on the Perpetual Preferred Shares of
$5,484,400.
Equity in net income of joint ventures:
The combined equity in net income of joint ventures<PAGE>
decreased $116,200 or 20.7% for the year ended December 31,
1998, and increased $255,700 or 83.8% for the year ended
December 31, 1997. The decrease from 1997 to 1998 is due
primarily to increased costs of operating the properties
resulting primarily from real estate taxes. The increase from
1996 to 1997 was primarily attributable to increased rents and
occupancies.
The following table presents the historical statements of
operations of the Company's beneficial interest in the operations
of the joint ventures for the years ended December 31, 1998, 1997
and 1996.
<TABLE>
<CAPTION>
For the year ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Beneficial interests in
joint venture operations
Rental revenue $ 6,943,652 $ 6,744,700 $ 6,570,700
Cost of operations 4,388,299 3,943,400 3,968,800
2,555,353 2,801,300 2,601,900
Interest income 21,669 19,700 19,200
Interest expense (1,656,652) (1,763,200) (1,782,700)
Depreciation (426,432) (447,300) (483,600)
Amortization (49,246) (49,600) (49,600)
Net income $ 444,692 $ 560,900 $ 305,200
</TABLE>
Capitalization Policy
Effective January 1, 1999, the Company adopted a new
capitalization policy. The revised policy more closely aligns
the Company's accounting treatment of unit make-ready costs with
those of other multifamily real estate investment trusts (REITs).
Under the new policy, expenditures for replacements and
individual unit improvements such as carpet, appliances, and
kitchen and bath upgrades and renovations that provide benefits
over several accounting periods will be capitalized and
depreciated over their estimated useful lives. These items were
previously expensed by the Company as they were incurred.
<PAGE>27
Outlook
The long term goal for the Company is to reduce portfolio
concentration in Ohio with dispositions within the state and
acquisitions in other geographic regions. Although current
conditions, principally restricted access to capital, dictate a
significant reduction in acquisitions for 1999, the Company's
long term plan is to seek economic diversification through
strategic acquisitions.
It is expected that to meet the Company's long term
strategic acquisition goal, individual acquisitions will be
located in the select metro areas of Atlanta, Washington, D.C.,
Orlando, south Florida and Tampa. Management believes that these
markets offer excellent diversification characteristics as well
as operational efficiency. As with all growth markets at this
time, new development is active in these markets. The Company's
market research and operational experience in these areas will
guide site selection and pricing.
One facet of the Company's growth strategy is based on co-
investment with institutional investors. Two programs have been
created for the implementation of the strategy. The first is a
co-investment development program that consists of individual
development partnerships allowing the Company and its
institutional partners to seek the high yields associated with
development. The projects in this program will be built for long
term hold or a forward contracted sale. The second program is a
multifamily pooled fund which is designed to offer a favorable
risk-return relationship for the Company. This fund will acquire
assets at stabilization or through forward contracts. Both
programs will employ moderate project specific debt. The
expected equity division is 25% from the Company and 75% from all
institutional investors. These two programs should allow the
Company to increase operational efficiency in growth markets at a
more rapid pace than direct individual investment because it
requires less capital resources from the Company but allows the
Company to apply its expertise in multifamily apartment
management.
The programs described above are currently being actively
marketed, and there can be no assurance that the Company will be
able to attract institutional capital to fund these programs.
Given the Midwestern concentration of the Market-rate
portfolio, management's performance expectations are consistent<PAGE>
with the recent past. Management projects that the market-rate
rental growth will be a modest 2% over 1998. This growth rate is
expected to increase, both in magnitude and volatility, as the
recently acquired assets in more dynamic markets enter the
Market-rate portfolio. General market expectations for locations
where the Company has significant concentrations are as follows:
Columbus is split between a strengthening northern half and a
flattening southern half, Cleveland continues to exhibit
stability, Michigan will continue to grow but at a slower rate,
Indianapolis is improving from very competitive conditions,
Washington, D.C., Atlanta, and Orlando are in equilibrium with
significant additions to employment and apartment supply, and
south Florida is tightening overall as significant development is
being absorbed.
Inflation
Management's belief is that any effects of minor inflation
fluctuations would be minimal on the operational performance of
this portfolio primarily due to the high correlation between
inflation and housing costs combined with the short term nature,
typically one year, of the leases.
<PAGE>28
Quantitative and Qualitative Disclosures About Market Risk
The Company's primary market risk exposure is interest rate
risk. At December 31, 1998, the Company had $244.8 million of
variable rate debt. Additionally, the Company has interest rate
risk associated with fixed rate debt at maturity.
Management has and will continue to manage interest rate
risk as follows: (i) maintain a conservative ratio of fixed
rate, long term debt to total debt such that variable rate
exposure is kept at an acceptable level; (ii) hedge certain
longterm variable rate debt through the use of interest rate
swaps or interest rate caps; and (iii) use treasury locks where
appropriate to hedge rates on anticipated debt transactions.
Management uses various financial models and advisors to achieve
those objectives.
The table below provides information about the Company's
financial instruments that are sensitive to changes in interest
rates. For debt obligations, the table presents principal cash
flows and related weighted average interest rates by expected
maturity dates.
<TABLE>
<CAPTION>
Expected Maturity Date
Long term debt 1999 2000 2001 2002
<S> <C> <C> <C> <C>
Fixed:
Fixed rate mortgage debt $ 1,205,649$ 15,830,155 $ 12,163,458$ 1,134,085
Weighted average interest rate 8.23% 8.27% 8.11% 7.80%
MTN's 20,000,000 - 10,000,000 15,000,000
Weighted average interest rate 6.95% 7.12% 7.12% 7.09%
Senior notes - 74,915,903 - 10,000,000
Weighted average interest rate 8.23% 8.23% 7.10% 7.10%
Total fixed rate debt $ 21,205,649$ 90,746,058 $ 22,163,458$ 26,134,085
Variable:
LIBOR based credit facility $ -$ - $ 226,000,000$ -
Prime + 1% Credit Facility 446,565 - - -
Variable rate mortgage debt 55,839 61,687 16,522,997 75,283
Total variable rate debt $ 502,404$ 61,687 $ 242,522,997$ 75,283
Total long term debt $ 21,708,053$ 90,807,745 $ 264,686,455$ 26,209,368
</TABLE>
<TABLE>
<CAPTION>
Expected Maturity Date Fair Market
Long-term debt 2003 Thereafter Total Value
<S> <C> <C> <C> <C>
Fixed:
Fixed rate mortgage debt $ 1,229,704 $ 30,182,912$ 61,745,963 $ 65,945,302
Weighted average interest rate 7.79% 8.10% 8.22% -
MTN's fixed rate 12,500,000 55,000,000 112,500,000 121,587,019
Weighted average interest rate 7.20% 7.23% 6.95% -
Senior notes (fixed rate) - - 84,915,903 89,320,995
Weighted average interest rate 0.00% 0.00% 8.23% -
Total fixed rate debt $ 13,729,704 $ 85,182,912$ 259,161,866 $ 276,853,316
Variable:
LIBOR Based Credit Facility $ - $ -$ 226,000,000 $ 226,000,000
Prime + 1% Credit Facility - - 446,565 446,565
Variable rate mortgage debt 83,165 1,497,733 18,296,704 18,688,738
$ 83,165 $ 1,497,733$ 244,743,269 $ 245,135,303
$ 13,812,869 $ 86,680,645$ 503,905,135 $ 521,988,619<PAGE>
</TABLE>
Sensitivity Analysis
The Company estimates that a 100 basis point decrease in
market interest rates would have changed the fair value of fixed
rate debt to a liability of $287.0 million. The sensitivity to
changes in interest rates of the Company's fixed rate debt was
determined with a valuation model based upon changes that measure
the net present value of such obligation which arise from the
hypothetical estimate as discussed above.
<PAGE>29
Year 2000 Compliance
The year 2000 issue ("Year 2000") is the result of computer
programs being written using two digits rather than four to
define the applicable year. Any of the Company's computer
programs or hardware that have date sensitive software or
embedded chips may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process
transactions, pay vendors or engage in similar normal business
activities.
The Company believes that it has identified all of its
information technology ("IT") and non-IT systems to assess their
Year 2000 readiness. Critical IT systems include, but are not
limited to, operating and data networking and communication
systems, accounts receivable and rent collections, accounts
payable and general ledger, human resources and payroll, cash
management and all IT hardware (such as servers, desktop/laptop
computers and data networking equipment). Critical non-IT
systems include telephone systems, fax machines, copy machines
and property environmental, access and security systems (such as
elevators and alarm systems).
The Company's plan to resolve the Year 2000 issue involves
the following four phases: assessment, remediation, testing and
implementation. The Company has conducted an assessment and/or
survey of its core IT and non-IT systems at both its corporate
offices and properties and believes it is 85% complete on such
assessment which is currently under review by the Company's
technical staff.
Much of the mission critical operating systems, networking
and accounting software that has been purchased over the past few
years has been represented by vendors to already be Year 2000
compliant. The property management software currently being
tested and used at the Company's corporate offices and which is
to be rolled out to the properties during the second and third
quarters of 1999 has been affirmed by the vendor to be tested and
Year 2000 compliant. Hardware upgrades at all of the properties
are expected to be complete by June 1999 to ensure all hardware
is compliant. Testing by the Company of all such critical
systems represented by the vendors to be compliant is expected to
be complete by June 1999.
The estimated costs of these upgrades and conversions should
not exceed $500,000 and have been considered in the Company's
cash flow requirements for 1999.
The Company believes it has identified all non-IT systems at
all properties and expects to have 70% of its remediation and/or
testing complete on these systems by June of 1999. While a
complete technical assessment of all such systems is not final,
the Company does not anticipate expenditures in excess of
$500,000 to remediate non-IT systems at the properties since
findings to date suggest a low incidence of non-compliance on
critical systems. The Company may engage an outside technical
consultant to work with its internal technical staff to assist in
finalizing such assessment, remediation and testing.
In most cases, various third party vendors have been queried
on their Year 2000 readiness. While many responses have been
received to such queries, (especially by banks and other large
financial institutions), many have not yet responded. The
Company will continue to query its significant suppliers and
vendors to determine the extent to which the Company's interface
systems are vulnerable to those third parties' failure to
remediate their own Year 2000 issues. To date, the Company is
not aware of any significant suppliers or vendors with a Year
2000 issue that would materially impact the Company's results of
operations, liquidity or capital resources. However, there can
be no assurances that the systems of other companies, on which
the Company's systems rely, will be timely converted and would
not have an adverse effect on the Company's systems.
<PAGE>30
The Company believes it has an effective program in place
that will resolve the Year 2000 issue in a timely manner. In
addition, the Company has commenced its contingency planning for
critical operational areas that might be affected by the Year
2000 issue if compliance by the Company is delayed. The
Company's contingency plans will involve training and increased
awareness at the property management level, manual workarounds
and adjustment of staffing strategies. The Company intends to
have its contingency planning complete in the third quarter of
1999.
Aside from the catastrophic failure of banks or government
agencies, the Company believes it could continue its normal
business operations if compliance by the Company is delayed. In
the event of such catastrophic failures, the Company would be
unable to deposit rent checks, transfer cash, wire money, pay
vendors by check, or invest excess funds. The Company could be
subject to litigation for its inability to access cash to pay
vendors or failure to properly record business transactions or if
security or access systems fail at properties. However, given
that the Company intends to have contingency planning in place
and that the nature of its day-to-day real estate operations is
not heavily reliant on technology, the Company does not believe
that the Year 2000 issue will materially impact its results of
operations, liquidity or capital resources.
CONTINGENCIES
Environmental
There are no recorded amounts resulting from environmental
liabilities and there are no known contingencies with respect
thereto. Future claims for environmental liabilities are not
measurable given the uncertainties surrounding whether there
exists a basis for any such claims to be asserted and, if so,
whether any claims will, in fact, be asserted. Furthermore, no
condition is known to exist that would give rise to a liability
for site restoration, post closure and monitoring commitments, or
other costs that may be incurred with respect to the sale or
disposal of a property. Phase I environmental audits have been
completed on all of the Company's wholly owned and joint venture
properties. The Company has obtained environmental insurance
covering (i) pre-existing contamination, (ii) on-going third
party contamination, (iii) third party bodily injury and (iv)
remediation. The policy is for a five year term and carries a
limit of liability of $2 million per environmental contamination
discovery (with a $50,000 deductible) and has a $10 million
policy term aggregate. Management has no plans to abandon any of
the properties and is unaware of any other material loss
contingencies.
Rainbow Terrace
On February 9, 1998, the U.S. Department of Housing and
Urban Development ("HUD") notified the Company that Rainbow
Terrace Apartments, Inc. ("RTA"), the Company's subsidiary
corporation that owns Rainbow Terrace Apartments, was in default
under the terms of the Regulatory Agreement and Housing
Assistance Payments Contract ("HAP Contract") pertaining to this
property. Among other matters, HUD alleged that the property was
poorly managed and that RTA had failed to complete certain
physical improvements to the property. Moreover, HUD claimed
that the owner was not in compliance with numerous technical
regulations concerning whether certain expenses were properly
chargeable to the property. As provided in the Regulatory
Agreement and HAP Contract, in the event of a default, HUD has
the right to exercise various remedies including terminating
future payments under the HAP Contract and foreclosing the
government-insured mortgage encumbering the property.
<PAGE>31
This controversy arose out of a Comprehensive Management
Review of the property initiated by HUD in the Spring of 1997,
which included a complete physical inspection of the property.
In a series of written responses to HUD, the Company stated its
belief that it had corrected the management deficiencies cited by
HUD in the Comprehensive Management Review (other than the
completion of certain physical improvements to the property) and
justified the expenditures questioned by HUD as being properly
chargeable to the property in accordance with HUD's regulations.
Moreover, the Company stated its belief that it had repaired any
physical deficiencies noted by HUD in its Comprehensive
Management Review that might pose a threat to the life and safety
of its residents.
In June 1998, HUD notified the Company that all future
Housing Assistance Payments ("HAP") for RTA were abated and
instructed the lender to accelerate the balance due under the
mortgage. Subsequent to the notification of HAP abatements and
the acceleration of the mortgage, the lender advised the Company
that the acceleration notification had been rescinded pursuant to
HUD's instruction. HUD then notified the Company that the HAP
payments would be reinstated and that HUD was reviewing further
information concerning RTA provided by the Company. The Company
has received all monthly HAP payments for RTA during 1998.
In June 1998, the Company filed a lawsuit against HUD
seeking to compel HUD to review certain budget based rent
increases submitted to HUD by the Company in 1995.
Since June 1998, the Company has been involved in ongoing
negotiations with HUD for the purpose of resolving these and
other disputes concerning other properties managed or formerly
managed by the Company or one of the Service Companies, which
were similarly the subject of Comprehensive Management Reviews
initiated by HUD in the Spring of 1997.
On March 12, 1999, the Company, Associated Estates
Management Company ("AEMC"), RTA, PVA Limited Partnership<PAGE>
("PVA"), the owner of Park Village Apartments, and HUD, entered
into a comprehensive settlement agreement (the "Settlement
Agreement") for the purpose of resolving certain disputes
concerning property operations at Rainbow Terrace Apartments,
Park Village Apartments ("Park Village"), Longwood Apartments
("Longwood") and Vanguard Apartments ("Vanguard"). Longwood was
managed by the Company until January 13, 1999. Park Village is
currently managed by the Company. Vanguard was formerly managed
by AEMC until December 1997. All four properties are encumbered
by HUD insured mortgages, governed by HUD imposed regulatory
agreements and subsidized by Section 8 Housing Assistance
Payments.
Under the terms of the Settlement Agreement, HUD has agreed
to pay RTA a retroactive rent increase totaling $1,784,467, which
amount will be sufficient to discharge the outstanding receivable
at December 31, 1998. HUD has further agreed to release the
Company, AEMC, RTA and the owners and principals of PVA, Longwood
and Vanguard from all claims (other than tax or criminal fraud
claims) regarding the ownership or operation of Rainbow Terrace
Apartments, Park Village, Longwood and Vanguard. Moreover, HUD
has agreed not to issue a limited denial of participation,
debarment or suspension, program fraud civil remedy action or
civil money penalty, resulting from the ownership or management
of any of these projects, or to deny eligibility to any of their
owners, management agents or affiliates for participation in any
HUD program on such basis.
<PAGE>32
HUD's obligations under the Settlement Agreement are
conditional upon the performance by the Company, RTA and PVA of
certain obligations, the most significant of which is the
obligation to identify, on or before April 11, 1999, prospective
purchasers for both Rainbow Terrace Apartments and Park Village
who are acceptable to HUD, and upon HUD's approval, convey those
projects to such purchasers. Alternatively, if RTA and PVA are
unable to identify prospective purchasers acceptable to HUD, then
RTA and PVA have agreed to convey both projects to HUD pursuant
to deeds in lieu of foreclosure. In either case (conveyance to a
HUD approved purchaser or deed in lieu of foreclosure), no
remuneration will be received by either RTA or PVA in return,
except for the $1.78 million retroactive rent increase payable to
RTA mentioned above. At December 31, 1998, the Company had
receivables of $1.78 million related to the 1995 retroactive
rental increase requests, which includes additional amounts of
$430,737 relating to 1998 rental increase requests. At December
31, 1998, RTA had net assets of $1.8 million, including the
retroactive rent receivable of $1.78 million due from HUD, and a
remaining amount due under the mortgage of $1.9 million. The
transfer of RTA to a purchaser which is acceptable to HUD or the
direct transfer of RTA to HUD is not expected to have a material
impact on the results of operations or cash flow of the Company.
Affiliate Transactions
In the normal course of business, the Company had followed a
practice of advancing funds on behalf of, or holding funds for
the benefit of, affiliates which own real estate properties
managed by the Company or one of the Service Companies. One of
these affiliates, a corporation (the "Corporation") owned by a
member of the Company's Board of Directors and his siblings
(including the wife of the Company's Chairman and Chief Executive
Officer), which serves as general partner of certain affiliated<PAGE>
entities, had informed the Company that the Corporation had
caused the commencement of a review of expenditures relating to
approximately $2.9 million of capital calls from certain HUD
subsidized affiliated entities, to determine the appropriateness
of such expenditures and whether certain of such expenditures are
properly the responsibility of the Company. The Company
previously stated its belief that all expenditures were
appropriate and that the ultimate outcome of any disagreement
would not have a material adverse effect on the Company's
financial position, results of operations or cash flows.
On March 11, 1999, the Company, the Corporation, certain
shareholders of the Corporation and others entered into a
settlement agreement which resolved all disputes concerning the
aforementioned expenditures and other issues concerning the
management by the Company or one of its Service Companies of
various properties owned by entities in which the Corporation was
a general partner. Pursuant to that settlement agreement, the
Corporation and other affiliates funded all outstanding advances
made by the Company. At December 31, 1998, amounts outstanding
which were subsequently funded pursuant to the settlement
agreement were $4.7 million.
<PAGE>33
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
For a discussion of the Quantitative and Qualitative
Disclosure about Market Risk and the associated interest rate
sensitivity, reference Management's Discussion and Analysis.
Item 8. Financial Statements and Supplementary Data
The response to this item is included in a separate
section at the end of this report.
Item 9. Changes and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
<PAGE>34
PART III
Item 10. Directors and Executive Officers of the Registrant
The information regarding the Company's Directors contained
in the Notice of Annual Meeting and Proxy Statement for the
Annual Meeting of Shareholders will be held on May 12,1999, is
incorporated by reference in this Annual Report on Form 10-K.
The Executive Officers of the Company as of March 1, 1999
are:
<TABLE>
<CAPTION>
Name Age Position with the Company
<S> <C> <C>
Jeffrey I. Friedman 47 Chairman of the Board, President, Chief
Executive Officer and Director
James A. Cote' 52 Vice President and President, MIG
Realty Advisors
Martin A. Fishman 57 Vice President, General Counsel and
Secretary
Kathleen L. Gutin 42 Treasurer, Vice President and Chief
Financial Officer
Louis E. Vogt 49 Senior Vice President, Operations
Larry E. Wright 51 Executive Vice President<PAGE>
</TABLE>
Jeffrey I. Friedman has been Chairman of the Board,
President and Chief Executive Officer of the Company since its
organization. Mr. Friedman joined AEG in 1974 and was the Chief
Executive Officer and President of Associated Estates
Corporation, a company in the AEG group, from 1979 to 1993.
James A. Cote', Vice President and President, MIG Realty
Advisors, joined the Company in 1998 through the acquisition of
MIG Realty Advisors, Inc. Mr. Cote' was with MIG Realty Advisors
from 1992 until the acquisition. He was previously employed by
Grubb and Ellis Realty Advisors and Xerox Corporation. Mr. Cote'
has extensive experience in all aspects of property acquisition,
asset management and dispositions.
Martin A. Fishman has been Vice President - General Counsel
of the Company since its organization. Mr. Fishman joined AEG in
1986 as Vice President - General Counsel of Associated Estates
Corporation, a position he held until the formation of the
Company.
<PAGE>35
Kathleen L. Gutin, Treasurer, Vice President and Chief
Financial Officer, joined the Company in 1998 through the
acquisition of MIG Realty Advisors, Inc. Ms. Gutin joined MIG
Realty Advisors in 1985 and has over 15 years of real estate
related accounting experience. She is a member of the American
Institute of Certified Public Accountants (AICPA) and a Chartered
Financial Analyst (CFA).
Louis E. Vogt, Senior Vice President, Operations, joined the
Company in 1998 through the acquisition of MIG Realty Advisors,
Inc. Mr. Vogt joined MIG Realty Advisors in 1992 and has over 20
years of experience in real estate operations. He is responsible
for acquisitions and asset and property management.
Larry E. Wright, Executive Vice President, joined the
Company in 1998 through the acquisition of MIG Realty Advisors,
Inc. Mr. Wright joined MIG Realty Advisors in 1982 and has over
20 years of real estate experience. He is a member of the
National Multi-Housing Council, Urban Land Institute, National
Association of Real Estate Investment Managers, and Pension Real
Estate Association.
In addition to the executive officers named in the table
above, the following persons have been elected as officers of the
Company by the Board of Directors and hold positions in senior
management with the Company as indicated:
Gregory L. Golz, Vice President, Finance, joined the Company
in 1998. Mr. Golz was previously employed by Kendal Financial
Corporation as a founding Principal from 1994 to 1998. Prior to
Kendal Financial Corporation, Mr. Golz was employed by Trammel
Crow Residential and Bankers Trust Company. He specializes in
mergers, acquisitions, securities and other capital markets
transactions.
Barbara E. Hasenstab joined the Company in 1996 as Director
of Investor Relations and was elected Vice President of Investor
Relations in 1998. Ms. Hasenstab has 20 years of experience in<PAGE>
investor relations and is a member of the National Investor
Relations Institute and is 45 years old.
William T. Hughes, Jr., Ph. D., Vice President-Research,
joined the Company in 1998 through the acquisition of MIG Realty
Advisors, Inc. Dr. Hughes joined MIG Realty Advisors in 1995.
Prior to his employment with MIGRA, Dr. Hughes was employed by
Louisiana State University from 1990 until 1995 in positions of
Director of Real Estate Research Institute and Assistant
Professor of Finance and is widely published in leading real
estate books, journals and periodicals, and a nationally
recognized expert in real estate markets. He is a Chartered
Financial Analyst (CFA).
Nan R. Zieleniec joined AEG in 1990 and was elected Vice
President of Human Resources in 1998, having responsibility for
all areas of human resource planning and administration. Ms.
Zieleniec is a member of the Society of Human Resource Management
and American Compensation Association and she is 40 years old.
The following persons have been appointed as officers of the
Company by the directors and executive officers of the Company:
JoAnn C. Hirsh joined the Company in 1997 as Director of
Government Housing and is currently a Regional Vice President of
Operations. Ms. Hirsh has supervisory responsibility for the
government-subsidized properties and is responsible for
compliance with HUD regulations. Ms. Hirsh has over 20 years of
real estate experience and is a Certified Public Accountant, a
member of the American Institute of Certified Public Accountants
(AICPA), the Ohio Society of CPA's, the National Network of
Commercial Real Estate Women and is 42 years old.
Steven E. Lee joined the Company in 1997 and is currently a
Regional Vice President of Operations. He has been involved in
multifamily property management for 16 years. Mr. Lee has
supervisory responsibility for properties in the Central Ohio
region. Mr. Lee is a Certified Property Manager and is 43 years
old.
<PAGE>36
Richard Q. Mansfield joined the Company in 1995 and is
currently a Regional Vice President of Operations. He has been
involved in multifamily property management for 21 years. Mr.
Mansfield has supervisory responsibility for properties in
northeast Ohio and is 43 years old.
Daniel L. Powers joined the Company in 1998 through the
acquisition of MIG Realty Advisors, Inc. He is currently a
Regional Vice President of Operations for the Central Region,
with supervisory responsibility for properties in Toledo, Ohio;
Indiana, and Michigan. Mr. Powers is a Certified Property
Manager and is 45 years old.
Charles J. Stone joined the Company in 1998 through the
acquisition of MIG Realty Advisors, Inc. He is currently a
Regional Vice President of Operations for the Eastern Region with
supervisory responsibility for properties in Florida, Georgia,
Maryland, North Carolina and Pennsylvania. Mr. Stone is 52 years<PAGE>
old and has over 25 years of real estate experience.
Steven C. Thrower joined the Company in 1998 through the
acquisition of MIG Realty Advisors, Inc. He is currently a
Regional Vice President for the Western Region with supervisory
responsibility for properties in Arizona, California an Texas.
Mr. Thrower is 43 years old and has more than 13 years of real
estate experience.
Item 11. Executive Compensation
The information on Executive Compensation contained in the
Notice of Annual Meeting and Proxy Statement for the Annual
Meeting of Shareholders will be held on May 12, 1999 is
incorporated by reference in this Annual Report on Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information on Security Ownership of Certain Beneficial
Owners and Management contained in the Notice of Annual Meeting
and Proxy Statement for the Annual Meeting of Shareholders will
be held on May 12, 1999 is incorporated by reference in this
Annual Report on Form 10-K.
Item 13. Certain Relationships and Related Transactions
The information on Certain Relationships and Related
Transactions contained in the Notice of Annual Meeting and Proxy
Statement for the Annual Meeting of Shareholders will be held on
May 12, 1999 is incorporated by reference in this Annual Report
on Form 10-K.
<PAGE>37
GLOSSARY
Unless the context otherwise requires, the following
capitalized terms shall have the meanings set forth below for the
purposes of this Form 10-K.
"AEG" means the Associated Estates Group, which includes (i)
various general partnerships, limited partnerships and
corporations which sold interests in 45 multi-family properties
to the Company, (ii) Associated Estates Corporation, (iii) A.E.C.
Management Company, (iv) Estates Mortgage Company, (v) Associated
Health Care Management, Inc., (vi) Merit Management Corporation,
(vii) Merit Painting Services, Inc. and (viii) The Children's
Computer Co.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time.
"Company" means Associated Estates Realty Corporation, an
Ohio corporation, including, where the context requires, its
subsidiaries and the Service Companies.
"Congregate Care Facility" means a residential apartment
community for elderly persons that provides services to its
residents which may include prepared meals, housekeeping and
laundry service and a variety of recreational and educational
activities.
"Contract Rent" means monthly rental amounts, as determined
by HUD, for each Contract Unit payable pursuant to a HAP
Contract.
"Contract Unit" means a unit contained in a
Government-Assisted Property for which the owner of such property
receives rent subsidies from HUD pursuant to a HAP Contract.
"Market-rate Properties" means multifamily Properties which
are operated as conventional multifamily residential apartments,
the operations of which are not subject to regulation by HUD.
"Distributable Cash Flow" means Funds From Operations less
scheduled mortgage debt amortization payments and provisions for
ongoing capitalized improvements to the Properties.
"Economic Occupancy" means the actual rent revenue divided
by the total rent expected to be earned based on the market
rental rate for all units.
"Eligible Resident" means a family or individual whose
income, as determined in accordance with HUD regulations, does
not exceed income limits promulgated by HUD for the housing
market area and which meets certain other conditions specified in
the regulations.
"Funds From Operations" or "FFO" means net income (computed
in accordance with generally accepted accounting principles),
excluding gains (or losses) from sales of property and
extraordinary and nonrecurring items, plus depreciation and
amortization, and after adjustments for unconsolidated<PAGE>
partnerships and joint ventures.
"Government-Assisted Properties" means multifamily
Properties, the rents of which are subsidized and certain aspects
of the operations of which are regulated by HUD pursuant to
Section 8 of the National Housing Act of 1937.
<PAGE>38
"HAP Contract" means the agreement between HUD and the owner
of a Government-Assisted Property which provides for rent
subsidies to be paid by HUD to such owner and obligates such
owner to comply with certain HUD regulations governing certain
aspects of its operations of such Government-Assisted Properties.
"HAP Payment" means a housing assistance payment the owner
of a Government-Assisted Property receives from HUD pursuant to a
HAP Contract.
"HUD" means the United States Department of Housing and
Urban Development.
"IPO" means initial public offering. The Company completed
an initial public offering of 7,250,000 common shares in November
1993, the proceeds of which were used to acquire the various
businesses from AEG.
"National Housing Act" means the National Housing Act, as
amended from time to time.
"Physical Occupancy" means the total number of units less
the number of unoccupied units divided by the total number of
units expressed as a percentage.
"Potential Unit Rent" means the rent at which a unit is
expected to be leased based on its market value.
"Regulatory Agreement" means an agreement between HUD and
the owner of a property, the mortgage indebtedness of which is
insured by HUD, pursuant to which certain aspects of the
operations of such property are regulated.
"Service Companies" means Associated Estates Management
Company, Merit Management Corporation, Merit Painting Services,
Inc., Estates Mortgage Company, Children's Computer Company and
MIG II Realty Advisors, Inc. These are Service Companies in which
Associated Estates Realty Corporation owns substantially all of
the economic interests in order to provide the Company with as
much of the economic benefits of such corporations' operations as
possible while furthering the Company's current intention of
complying with the Code requirements for qualification as a REIT.
"Unit" means an apartment unit in a multifamily Property.
"Total Market Capitalization" means the aggregate market
value of the Company's outstanding Common and Perpetual Preferred
Shares and total long-term debt of the Company.<PAGE>
<PAGE>39
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a) The following documents are filed as part of this Report.
1. Financial Statements: The following documents are
filed as part of this report.
Report of Independent Accountants - Associated
Estates Realty Corporation.
Consolidated Balance Sheets at December 31, 1998
and 1997.
Consolidated Statements of Income for the
three years ended December 31, 1998, 1997
and 1996.
Consolidated Statements of Shareholders'
Equity for the three years ended December
31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for
the three years ended December 31, 1998,
1997, and 1996.
Notes to Financial Statements.
2. Financial Statement Schedules: The following
financial statement schedule of Associated Estates
Realty Corporation is filed as part of this Report
and should be read in conjunction with the
Consolidated Financial Statements of Associated
Estates Realty Corporation.
Schedule Page
III Real Estate and Accumulated Depreciation. F-39
Schedules not listed above have been omitted
because they are not applicable or are not
required or the information required to be
set forth therein is included in the
Consolidated Financial Statements or Notes
thereto.
(b) A Current Report on Form 8-K dated February 3, 1998 was
filed on February 17, 1998 as amended by Form 8-K/A-1 dated
February 3, 1998 and filed on April 8, 1998.
A Current Report on Form 8-K dated February 19, 1998 was
filed on March 31, 1998 as amended by Form 8-K/A-1 dated
February 19, 1998 and filed on June 25, 1998.
A Current Report on Form 8-K dated June 30, 1998 was filed<PAGE>
on July 13, 1998 as amended by Form 8-K/A-1 dated June 30,
1998 and filed on August 31, 1998.
(c) Exhibits: The Exhibits listed on the accompanying Index to
Exhibits immediately following the financial statement
schedules are filed as part of, or incorporated by reference
into, this Report.
<PAGE>40
<TABLE>
<CAPTION>
Filed herewith or
incorporated
herein by
Number Title reference
<S> <C>
2.01 Second Amended and Restated Agreement and Exhibit 2.01 to
Plan of Merger by Form 8-K filed
and among the Company, MIG Realty Advisors, March 31, 1998.
Inc. ("MIGRA")
and the MIGRA stockholders dated as of
March __, 1998.
3.1 Second Amended and Restated Articles of Exhibit 3.1 to
Incorporation of the Company. Form S-11 filed
June 30, 1994
(File No. 33-
80950 as
amended).
3.2 Code of Regulations of the Company Exhibit 3.2 to
Form S-11 filed
June 30, 1994
(File No. 33-
80950 as
amended).
4.1 Specimen Stock Certificate Exhibit 3.1 to
Form S-11 filed
September 2, 1993
(File No. 33-
68276 as
amended).
4.2 Form of Indemnification Agreement Exhibit 4.2 to
Form S-11 filed
September 2, 1993
(File No. 33-
68276 as
amended).
4.3 Promissory Note dated October 23, 1991 from Exhibit 4.3 to
Triangle Properties Limited Partnership, Form S-11 filed
et. al., in favor of PFL Life Insurance September 2, 1993
Company; Open End Mortgage from Triangle (File No. 33-
Properties Limited Partnership I, et. al., 68276 as
in favor of PFL Life Insurance Company (The amended).
Registrant undertakes to provide additional
long-term loan documents upon request).
4.4 Promissory Note dated February 28, 1994 in Exhibit 4.4 to
the amount of $25 million. Open-End Form 10-K filed
Mortgage Deed and Security Agreement from March 31, 1993.
AERC to National City Bank (Westchester
Townhouse); Open-End Mortgage Deed and
Security Agreement from AERC to National
City Bank (Bay Club); Open-End Mortgage
Deed and Security Agreement from Winchester
II Apartments, Inc. to National City Bank
(Winchester II Apartments); and Open-End
Mortgage Deed and Security Agreement from
Portage Towers Apartments, Inc. to
National City Bank (Portage Towers
Apartments).
4.6 Indenture dated as of March 31, 1995 Exhibit 4.6 to
between Associated Estates Realty Form 10-Q filed
Corporation and National City Bank. May 11, 1995.
4.7 $75 Million 8-3/8% Senior Note due April Exhibit 4.7 to
15, 2000 Form 10-Q filed
May 11, 1995.
4.8e Credit Agreement dated June 30, 1998, by Exhibit 4.8e to
and among Associated Estates Realty Form 10-Q filed
Corporation, as Borrower; the banks and August 14, 1998.
lending institutions identified therein as
Banks; National City Bank, as Agent and
Bank of America National Trust and
Savings Association, as Documentation
Agent.<PAGE>
4.8f First Amendment to Credit Agreement by and Exhibit 4.8f to
among Associated Estates Realty Form 10-Q filed
Corporation, as Borrower; National City November 16,
Bank, as Managing Agent for itself and on 1998.
behalf of the Existing Banks and First
Merit Bank, N.A. and Southtrust Bank, N.A.
as the New Banks.
4.8g Second Amendment to Credit Agreement by and Exhibit 4.8g to
among Associated Estates Realty Form 10Q filed
Corporation, as Borrower, National City November 16,
Bank, as Managing Agent for itself and on 1998.
behalf of the Existing Banks and National
City Bank, Bank of America National
Commerzbank Aktiengesellschaft.
4.8h Third Amendment to Credit Agreement by and Exhibit 4.8h
among Associated Estates Realty filed herewith.
Corporation, as Borrower, National City
Bank, as Managing Agent, Bank of America
National Trust & Savings Association, as
Documentation Agent and the banks
identified therein.
4.9 Form of Medium-Term Note-Fixed Rate-Senior Exhibit 4(i) to
Security. Form S- 3 filed
December 7, 1995
(File No.33-80169
as amended).
4.10 Form of Preferred Share Certificate. Exhibit 4.1 to
Form 8-K filed
July 12, 1995.
4.11 Form of Deposit Agreement and Depositary Exhibit 4.2 to
Receipt. Form 8-K filed
July 12, 1995.
4.12 Ten Million Dollar 7.10% Senior Notes Due Exhibit 4.12 to
2002. Form 10-K filed
March 28, 1996.<PAGE>
10 Associated Estates Realty Corporation Exhibit 10 to
Directors Deferred Compensation Plan. Form 10-Q filed
November 14,
1996.
10.1 Registration Rights Agreement among the Exhibit 10.1 to
Company and certain holders of the Form S-11 filed
Company's Common Shares. September 2, 1993
(File No. 33-
68276 as
amended).
10.2 Stock Option Plan Exhibit 10.2 to
Form S-11 filed
September 2, 1993
(File No. 33-
68276 as
amended).
10.3 Amended and Restated Employment Agreement Exhibit 10.1 to
between the Company and Jeffrey I. Form 10-Q filed
Friedman. May 13, 1996.
10.4 Equity-Based Incentive Compensation Plan Exhibit 10.4 to
Form 10-K filed
March 29, 1995.
10.5 Long-Term Incentive Compensation Plan Exhibit 10.5 to
Form 10-K filed
March 29, 1995.
10.6 Lease Agreement dated November 29, 1990 Exhibit 10.6 to
between Royal American Management Form 10-K filed
Corporation and Airport Partners Limited March 29, 1995.
Partnership.
10.7 Sublease dated February 28, 1994 between Exhibit 10.7 to
the Company as Sublessee, and Progressive Form 10-K filed
Casualty Insurance Company, as Sublessor. March 29, 1995.<PAGE>
10.8 Assignment and Assumption Agreement dated Exhibit 10.8 to
May 17, 1994 between the Company, as Form 10-K filed
Assignee, and Airport Partners Limited March 29, 1995.
Partnership, as Assignor.
10.9 Form of Restricted Share Agreement dated Exhibit 10.9 to
December 6, 1995 by and between the Company Form 10-K filed
and William A. Foley, Gerald C. McDonough, March 28, 1996.
Frank E. Mosier and Richard T. Schwarz.
10.10 Pledge Agreement dated May 23, 1997 between Exhibit 10.01 to
Jeffrey I. Friedman and the Company. Form 10-Q filed
August 8, 1997.
10.11 Secured Promissory Note dated May 23, 1997 Exhibit 10.02 to
in the amount of $1,671,000 executed by Form 10-Q filed
Jeffrey I. Friedman in favor of the August 8, 1997.
Company.
10.12 Unsecured Promissory Note dated May 23, Exhibit 10.03 to
1997 in the amount of $1,671,000 executed Form 10-Q filed
by Jeffrey I. Friedman in favor of the August 8, 1997.
Company.
10.14 Share Option Agreement dated November 18, Exhibit 10.14 to
1993 by and between the Company and William Form 10-K filed
A. Foley, Gerald C. McDonough, Frank E. March 30, 1993.
Mosier and Richard T. Schwarz.
21.1 List of Subsidiaries Exhibit 21.1
filed herewith.
23.1 Consent of Independent Accountants Exhibit 23.1
filed herewith.
27 Financial Data Schedule Exhibit 27 filed
herewith.
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 29th day of March, 1999.
ASSOCIATED ESTATES REALTY
CORPORATION
By /s/ Jeffrey I. Friedman
Jeffrey I. Friedman, Chairman of
the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities indicated on
the 29th day of March, 1999.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Jeffrey I. Friedman Chairman of the Board, President, March 29, 1999
Jeffrey I. Friedman Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Kathleen L. Gutin Chief Financial Officer (Principal March 29, 1999
Kathleen L. Gutin Financial Officer and Principal
Accounting Officer)
/s/ Albert T. Adams Director March 29, 1999
Albert T. Adams
/s/ Gerald C. McDonough Director March 29, 1999
Gerald C. McDonough
/s/ Mark L. Milstein Director March 29, 1999
Mark L. Milstein
/s/ Frank E. Mosier Director March 29, 1999
Frank E. Mosier
/s/ Richard T. Schwarz Director March 29, 1999
Richard T. Schwarz
/s/ Larry E. Wright Director March 29, 1999
Larry E. Wright<PAGE>
</TABLE>
<PAGE>F1
INDEX TO FINANCIAL STATEMENTS
ASSOCIATED ESTATES REALTY CORPORATION<PAGE>
<TABLE>
<CAPTION>
Financial Statements: Page
<S> <C>
Report of Independent Accountants F-2
Consolidated Balance Sheets at December 31, 1998
and 1997 F-3
Consolidated Statements of Income for the
three years ended December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Shareholders' Equity
for the three years ended December 31, 1998,
1997 and 1996 F-5
Consolidated Statements of Cash Flows for the three
years ended December 31, 1998, 1997 and 1996 F-6
Notes to Financial Statements F-7
Financial Statement Schedules:
III - Real Estate and Accumulated Depreciation
at December 31, 1998 F-39
</TABLE>
All other schedules are omitted because they are not
applicable or the required information is shown in the financial
statements or notes thereto.
<PAGE>F2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Associated Estates Realty Corporation
In our opinion, the consolidated financial statements listed
in the accompanying index present fairly, in all material
respects, the financial position of Associated Estates Realty
Corporation and its subsidiaries ("the Company") at December 31,
1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial
statement schedule listed in the accompanying index, presents
fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which
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, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Cleveland, Ohio
March 17, 1999
<PAGE>F3
ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1998 1997
ASSETS
<S> <C> <C>
Real estate assets
Land $ 92,675,356 $ 54,906,050
Buildings and improvements 778,450,807 550,156,521
Furniture and fixtures 30,804,870 24,997,001
901,931,033 630,059,572
Less: accumulated depreciation (153,941,702) (130,668,538)
747,989,331 499,391,034
Construction in progress 53,740,292 16,439,393
Real estate, net 801,729,623 515,830,427
Cash and cash equivalents 1,034,655 2,251,819
Restricted cash 6,718,863 10,125,513
Accounts and notes receivable
Rents 2,801,835 2,256,158
Affiliates and joint ventures 13,113,400 14,439,155
Other 2,293,007 2,385,829
Intangible and other assets, net 13,093,972 6,621,404
$ 840,785,355 $553,910,305
LIABILITIES AND SHAREHOLDERS' EQUITY
Secured debt $ 80,042,667 $ 57,817,981
Unsecured debt 423,862,468 260,352,307
Total indebtedness 503,905,135 318,170,288
Accounts payable and accrued expenses 21,525,517 16,197,356
Dividends payable 10,507,586 7,938,692
Resident security deposits 5,960,971 4,867,011
Funds held on behalf of managed properties
Affiliates and joint ventures 5,353,394 7,124,217
Other 4,128,298 2,340,115
Accrued interest 5,501,634 3,776,884
Accumulated losses and distributions of joint
ventures in excess of investment and advances 12,679,793 12,337,664
Total liabilities 569,562,328 372,752,227
Operating partnership minority interest 12,034,880 -
Commitments and contingencies - -
Shareholders' equity
Preferred shares, Class A cumulative, without
par value; 3,000,000 authorized; 225,000
issued and outstanding 56,250,000 56,250,000
Common shares, without par value, $.10 stated
value; 50,000,000 authorized; 22,621,958
and 17,073,773 issued and outstanding
at December 31, 1998 and 1997, respectively 2,262,195 1,707,377
Paid-in capital 277,134,988 171,756,307 <PAGE>
Accumulated dividends in excess of net income (75,991,638) (48,552,106)
Accumulated other comprehensive income (875) (3,500)
Less: Treasury shares, at cost, 25,000 shares
at December 31, 1998 (466,523) -
Total shareholders' equity 259,188,147 181,158,078
$ 840,785,355 $553,910,305
</TABLE>
The accompanying notes are an integral part
of these financial statements.
<PAGE>F4
ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the year ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Revenues
Rental $ 132,514,374 $101,639,584 $ 87,975,036
Property management fees 4,704,837 3,752,230 3,779,676
Asset management fees 1,248,356 - -
Disposition fees 247,000 - -
Painting services 1,605,923 1,663,927 1,633,842
Other 2,687,377 1,754,207 1,066,594
143,007,867 108,809,948 94,455,148
Expenses and charges
Property operating and maintenance 58,652,542 43,229,949 37,056,123
Depreciation and amortization 24,898,978 19,265,827 15,535,587
Painting services 1,616,933 1,491,527 1,436,486
Preliminary project costs 298,360 309,794 -
General and administrative 10,216,222 6,084,654 5,912,197
Write-off of software development costs 817,485 - -
Charge for unrecoverable funds advanced to
non-owned properties and other 291,827 1,764,044 -
Default waiver fee 395,000 - -
Interest expense 29,050,346 19,144,260 15,515,956
Total expenses and charges 126,237,693 91,290,055 75,456,349
Income before gain on sale of property,
equity in net income of joint
ventures, minority interest and
extraordinary items 16,770,174 17,519,893 18,998,799
Gain on sale of property 503,497 1,607,829 -
Equity in net income of joint ventures 444,692 560,934 305,189
Minority interest in operating partnership (78,706) - -
Income before extraordinary items 17,639,657 19,688,656 19,303,988
Extraordinary (loss) or gain-extinguishment
of debt (124,895) 1,023,713 -
Net income $ 17,514,762 $ 20,712,369 $ 19,303,988
Net income applicable to common shares $ 12,030,341 $ 15,227,948 $ 13,819,566
Earnings Per Common Share - Basic:
Net income before extraordinary items $ .61 $ .88 $ .99
Extraordinary items $ - $ .06 $ -
Net income $ .61 $ .94 $ .99
Earnings Per Common Share - Diluted:
Net income before extraordinary items $ .60 $ .88 $ .99
Extraordinary items $ - $ .06 $ -
Net income $ .60 $ .94 $ .99<PAGE>
Dividends paid Per Common Share $ 1.86 $ 1.86 $ 1.80
Weighted average number of common shares
outstanding - Basic 19,865,335 16,198,499 13,931,807
- Diluted 20,059,873 16,215,513 13,931,807
</TABLE>
The accompanying notes are an integral part
of these financial statements.
<PAGE>F5
ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Class A Common Shares
Cumulative (at $.10
Preferred stated
Total Shares value)
<S> <C> <C> <C>
Balance, December 31, 1995 $139,169,679 $ 56,250,000 $ 1,387,238
Comprehensive income:
Net income 19,303,988 - -
Other comprehensive income
Unrealized losses on securities of $18,500, net
of reclassification adjustment for gains
included in net income of $0 (18,500) - -
Total comprehensive income 19,285,488 - -
Issuance of 1,450,000 common shares, net of
underwriters' discounts and offering expenses
of $1,774,222 30,669,528 - 145,000
Common share dividends declared (25,624,075) - -
Preferred share dividends declared (5,484,422) - -
Balance, December 31, 1996 158,016,198 56,250,000 1,532,238
Comprehensive income:
Net income 20,712,369 - -
Other comprehensive income
Unrealized gains on securities of $15,000, net
of reclassification adjustment for gains
included in net income of $0 15,000 - -
Total comprehensive income 20,727,369 - -
Issuance of 1,317 restricted common shares - - 131
Issuance of 1,750,000 common shares, net of
underwriters' discounts and offering expenses
of $2,286,806 38,838,194 - 175,000
Stock options exercised 1,717 - 8
Common share dividends declared (30,940,979) - -
Preferred share dividends declared (5,484,421) - -
Balance, December 31, 1997 181,158,078 56,250,000 1,707,377
Comprehensive income:
Net income 17,514,762 - -
Other comprehensive income
Reclassification adjustment for gains
included in net income of $2,625 2,625 - -
Total comprehensive income 17,517,387 - -
Issuance of 484 restricted common shares - - 48
Issuance of 5,547,701 common shares relating to
the MIGRA merger and the acquisition of the
MIG REIT properties 106,063,359 - 554,770
Additional costs relating to common share offering (129,860) - -<PAGE>
Purchase of treasury shares (466,523) - -
Common share dividends declared (39,469,873) - -
Preferred share dividends declared (5,484,421) - -
Balance, December 31, 1998 $259,188,147 $ 56,250,000 $ 2,262,195
</TABLE>
<TABLE>
<CAPTION>
Accumulated Accumulated
Dividends in Other Treasury
Paid-In Excess of Comprehensive Shares
Capital Net Income Income (at cost)
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $ 102,567,007 $(21,034,566) $ - $ -
Comprehensive Income:
Net income - 19,303,988 - -
Other Comprehensive Income
Unrealized losses on securities of $18,500,
net of reclassification adjustment for
gains included in net income of $0 - - (18,500) -
Total comprehensive income - 19,303,988 (18,500) -
Issuance of 1,450,000 common shares, net of
underwriters' discounts and offering
expenses of $1,774,222 30,524,528 - - -
Common share dividends declared - (25,624,075) - -
Preferred share dividends declared - (5,484,422) - -
Balance, December 31, 1996 133,091,535 (32,839,075) (18,500) -
Comprehensive Income:
Net income - 20,712,369 - -
Other Comprehensive Income
Unrealized gains on securities of $15,000,
net of reclassification adjustment for
gains included in net income of $0 - - 15,000 -
Total comprehensive income - 20,712,369 15,000 -
Issuance of 1,317 restricted common shares (131) - - -
Issuance of 1,750,000 common shares, net
of underwriters' discounts and offering
expenses of $2,286,806 38,663,194 - - -
Stock options exercised 1,709 - - -
Common share dividends declared - (30,940,979) - -
Preferred share dividends declared - (5,484,421) - -
Balance, December 31, 1997 171,756,307 (48,552,106) (3,500) -
Comprehensive Income:
Net income - 17,514,762 - -
Other Comprehensive Income
Reclassification adjustment for gains
included in net income of $2,625 - - 2,625 -
Total comprehensive income - 17,514,762 2,625 -
Issuance of 484 restricted common shares (48) - - -
Issuance of 5,547,701 common shares relating
to the MIGRA merger and the acquisition of
the MIG REIT properties 105,508,589 - - -
Additional costs relating to common share
offering (129,860) - - -
Purchase of treasury shares - - - (466,523)
Common share dividends declared - (39,469,873) - -
Preferred share dividends declared - (5,484,421) - -
Balance, December 31, 1998 $ 277,134,988 $(75,991,638) $ (875) $(466,523)
</TABLE>
The accompanying notes are an integral part
of these financial statements.
<PAGE>F6
ASSOCIATED ESTATES REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS<PAGE>
<TABLE>
<CAPTION>
For the year ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Cash flow from operating activities:
Net income $ 17,514,762 $ 20,712,369 $ 19,303,988
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 24,898,978 19,265,827 15,535,587
Minority interest in operating partnership 78,706 - -
Write-off of software development costs 817,485 - -
Loss (gain) on extinguishment of debt 124,895 (1,023,713) -
Gain on sale of property (503,497) (1,607,829) -
Charge for unrecoverable funds advanced to
non-owned properties and other 291,827 1,764,044 -
Equity in net income of joint ventures (444,692) (560,936) (305,189)
Earnings distributed from joint ventures 534,474 502,891 423,959
Net change in assets and liabilities
net of effect of the MIGRA merger:
- Accounts and notes receivable 203,650 (2,825,370) (1,052,793)
- Accounts and notes receivable of
affiliates and joint ventures 2,497,659 (4,358,520) (3,387,067)
- Accounts payable and accrued expenses (2,654,278) (37,248) 1,584,630
- Other operating assets and liabilities (257,462) 1,677,352 131,711
- Restricted cash 988,242 (4,500,510) (564,619)
- Funds held for non-owned managed
properties (657,169) 862,992 188,755
- Funds held for non-owned managed
properties of affiliates and joint
ventures (1,770,823) 65,029 (798,481)
Total adjustments 24,147,995 9,224,009 11,756,493
Net cash flow provided by operations 41,662,757 29,936,378 31,060,481
Cash flow from investing activities:
Real estate acquired or developed (net of liabilities
assumed) (160,575,973) (131,446,648) (74,176,202)
Fixed asset additions (1,893,829) (1,994,607) (1,680,625)
Net proceeds received from sale of property 10,664,750 4,892,668 -
Loans receivable - affiliate - (3,342,000) -
Distributions from (contributions to) joint ventures 166,669 (17,378) 86,018
Net cash flow used for investing activities (151,638,383) (131,907,965) (75,770,809)
Cash flow from financing activities:
Principal payments on mortgage notes (9,243,936) (19,306,272) (2,921,236)
Proceeds from mortgage notes - 8,100,000 -
Proceeds from senior and medium-term notes 20,000,000 50,000,000 42,500,000
Proceeds from the issuance of common shares, net
of $2,187,500 and $1,609,500 of underwriting
commissions and $99,306 and $164,722 of
offering expenses paid in 1997 and 1996,
respectively - 38,838,432 30,669,528
Line of credit borrowings 1,284,600,000 370,900,000 170,950,000
Line of credit repayments (1,141,600,000) (309,400,000) (167,050,000)
Deferred financing and offering costs (2,145,679) (815,651) (822,030)
Common share dividends paid (36,900,979) (29,897,358) (24,692,838)
Preferred share dividends paid (5,484,421) (5,484,421) (5,484,422)
Purchase of treasury shares (466,523) - -
Stock options exercised - 1,717 -
Net cash flow provided by financing activities 108,758,462 102,936,447 43,149,002
(Decrease) increase in cash and cash equivalents (1,217,164) 964,860 (1,561,326)
Cash and cash equivalents, beginning of year 2,251,819 1,286,959 2,848,285
Cash and cash equivalents, end of year $ 1,034,655 $ 2,251,819 $ 1,286,959
</TABLE>
The accompanying notes are an integral part
of these financial statements.
<PAGE>F7
ASSOCIATED ESTATES REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Business
Associated Estates Realty Corporation (the "Company") is a
self-administered and self-managed real estate investment trust
("REIT") which specializes in the acquisition, development,
ownership and management of multifamily properties. On June 30,
1998, the Company consummated the merger of MIG Realty Advisors,
Inc. ("MIGRA") into the Company and the related acquisition of
eight multifamily properties from subsidiaries of MIG Residential
REIT, Inc. (the "MIG REIT Properties") and one development
property. The aforementioned June 30, 1998 transactions,
together with the Company's purchase of the MRT properties and a
newly developed property (Note 2), are collectively referred to
as the "MIGRA Related Transaction". In connection with the
merger, the Company also acquired the property management
businesses of several of MIGRA's affiliates and the right to
receive certain asset management fees, including disposition and
incentive fees, that would have otherwise been received by MIGRA
upon the sale of certain of the properties owned by institutions
advised by MIGRA. MIGRA is a registered investment advisor and
also functions as a mortgage banker and as a real estate advisor
to pension systems. MIGRA recognizes revenue primarily from its
client's real estate acquisitions and dispositions, loan
origination and consultation, debt servicing, asset and property
management and construction lending activities. MIGRA earns the
majority of its debt servicing fee revenue from two of its
pension fund clients. MIGRA's asset management, property
management, investment advisory and mortgage servicing operations
including those of the prior MIGRA affiliates are collectively
referred to herein as the "MIGRA Operations".
At December 31, 1998, the Company owned or was a joint
venture partner in 101 multifamily properties containing 21,558
units. Of these properties, 75 were located in Ohio, 11 in
Michigan, two in Florida, two in Georgia, three in Maryland, one
in North Carolina, one in Texas, one in Arizona, three in
Indiana, one in California and one in Pennsylvania.
Additionally, the Company managed 57 non-owned properties, 50 of
which were multifamily properties consisting of 12,426 units (16
of which are owned by various institutional investors consisting
of 5,749 units) and seven of which were commercial properties
containing an aggregate of approximately 782,000 square feet of
gross leasable area. Through special purpose entities,
collectively referred to as the "Service Companies", the Company
provides property and asset management, investment advisory,
painting and computer services as well as mortgage origination
and servicing to both owned and non-owned properties.
Principles of Consolidation
The accompanying consolidated financial statements include
the accounts of the Company, all subsidiaries, the Service
Companies and the operating partnership. The Company holds a
preferred share interest in the Service Companies which entitles
it to receive 95% of the economic benefits from operations and
which is convertible into a majority interest in the voting
common shares. The outstanding voting common shares of these<PAGE>
Service Companies are held by an executive officer of the
Company. The Service Companies are consolidated because, from a
financial reporting perspective, the Company is entitled to
virtually all economic benefits and has operating control. The
preferred share interest is not an impermissible investment for
purposes of the Company's REIT qualification test.
<PAGE>F8
As further described in Note 2, the Company entered into an
operating partnership structured as a DownREIT of which an
aggregate 20% is owned by limited partners. Interests held by
limited partners in real estate partnerships controlled by the
Company are reflected as "Operating partnership minority
interest" in the Consolidated Balance Sheets. Capital
contributions, distributions and profits and losses are allocated
to minority interests in accordance with the terms of the
operating partnership agreement.
One property included in the financial statements is 33-
1/3% owned by third party investors. As this property has an
accumulated deficit, no recognition of the third party interest
is reflected in the financial statements since it is the
Company's policy to recognize minority interest only to the
extent that the third party's investment and accumulated share of
income exceeds distributions and its share of accumulated losses.
Investments in joint ventures, that are 50% or less owned by the
Company, are presented using the equity method of accounting.
Since the Company intends to fulfill its obligations as a partner
in the joint ventures, the Company has recognized its share of
losses and distributions in excess of its investment.
All significant intercompany balances and transactions have
been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in accordance with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting periods.
Actual results could differ from these estimates.
Cash Equivalents
The Company considers highly liquid investments with an
original maturity of three months or less when purchased to be
cash equivalents.
Real Estate and Depreciation
Real estate assets are stated at the lower of cost or fair
value, as appropriate, less accumulated depreciation. Included in
construction in progress are parcels of undeveloped land held for
future development. Depreciation is provided on a straight-line
basis over the estimated useful lives of the assets as follows:
Buildings and improvements 10 - 30 years
Furniture, fixtures and equipment 3 - 10 years
The Company capitalizes interest costs on funds used in
construction, real estate taxes and insurance from the
commencement of development activity through the time the
property is ready for leasing. Expenditures that extend the life
or improve an asset beyond its original condition are
capitalized. Expenditures for maintenance and repairs, and
costs incurred in connection with resident turnover such as unit
cleaning, painting, carpet cleaning or replacement, appliance
repair or replacement and other associated costs are charged to
operations.
<PAGE>F9
Impairment of Long-Lived Assets
Management reviews the carrying value of real estate assets
using estimated future cash flows, including estimated proceeds
from disposition, whenever an event or change in circumstance
indicates that the asset value may not be recoverable.
The Company uses the undiscounted cash flow method to
determine impairment in the carrying value of its long-lived
assets. Measurement of an impairment loss is determined by
reducing the carrying value of the assets to fair value. Assets
that are being held for sale or abandonment are recorded at the
lower of carrying value or fair value less cost to sell.
Deferred Leasing and Financing Costs
Costs incurred in obtaining long-term financing are deferred
and amortized over the life of the associated instrument on a
straight-line basis, which approximates the effective interest
method. Costs incurred with respect to shelf registrations are
capitalized and allocated on a pro rata basis to subsequent
offerings thereunder. External costs incurred in the leasing of
commercial and retail space are amortized on a straight-line
basis over the terms of the related lease agreements.
Intangible Assets
The intangible assets primarily represents the allocated
purchase price from the MIGRA Related Transaction associated with
the acquired advisory, property management and loan servicing
contracts obtained from the MIGRA merger, as well as the client
relationships and the MIGRA management team. The Company will
review its intangible assets for impairment should any of the
following events occur: (i) client terminates a contract that is
not replaced with a new client contract within one year or (ii)
employment services of certain of the six key employees retained
by AERC is terminated. Upon any such occurrence, the Company
will assess the value of the contract or employment relationship
terminated and will write-off the appropriate amount. The
Company is amortizing its intangible assets on a straight-line
basis over a six year period.
Revenue Recognition
The Company's residential property leases are for terms of
generally one year or less. Rental income is recognized on the
straight-line basis. Retroactive revenue increases related to
budget based Government-Assisted Properties are generally
recognized based on applications submitted to the U.S. Department
of Housing and Urban Development ("HUD"). Provision is made for
estimated amounts of revenue increases that may not be granted.
Acquisition, management and disposition fees, interest
income and other fees are recognized when the related services
are performed and the earnings process is complete. Servicing<PAGE>
fee income, related to loans serviced on behalf of the pension
systems, is recognized when earned and is included in other
income in the Consolidated Statements of Income.
Revenues earned by the Service Companies are recognized as
the related services are performed.
<PAGE>F10
Operating Partnership Minority Interest
During 1998, the Company acquired, through a subsidiary
partnership ("DownREIT"), a majority ownership interest in a
development property and a newly developed property. In
conjunction with these acquisitions, the Company issued a total
of 522,032 operating partnership units ("OP units") which consist
of 84,630 Class A OP units, 36,530 Class B OP units, 115,124
Class C OP units, 62,313 Class D OP units, and 223,435 Class E OP
units. These OP units may, under certain circumstances, become
exchangeable into common shares of the Company on a one-for-one
basis. The Class A unitholders are entitled to receive
distributions per OP unit equal to the per share distributions on
the Company's common shares. During 1998, the Company charged
$78,706 to minority interest in operating partnership in the
Consolidated Statements of Income relating to the Class A
unitholders allocated share of net income. For the year ended
December 31, 1998, the Class B, Class C, Class D and Class E
unitholders were not entitled to receive an allocation of net
income and did not receive any cash distributions from the
operating partnership.
Income Taxes
The Company has elected to be taxed as a REIT under the
Internal Revenue Code of 1986 (the "Code"), as amended. As a
REIT, the Company is entitled to a tax deduction for dividends
paid to its shareholders, thereby effectively subjecting the
distributed net income of the Company to taxation at the
shareholder level only, provided it distributes at least 95% of
its taxable income and meets certain other qualifications.
The Service Companies operate as taxable C-corporations
under the Code and have accounted for income taxes in accordance
with the provisions of Statement of Financial Accounting Standard
("SFAS") No. 109, Accounting for Income Taxes. Taxes are
provided for those Service Companies having net profits for both
financial statements and income tax purposes. For those Service
Companies with net operating loss carryforwards, no tax benefits
have been recorded and the related deferred tax assets have been
offset in full through a valuation allowance. The 1998 and 1997
net operating loss carryforwards for the Service Companies, in
the aggregate, are approximately $5,361,000 and $4,387,000 and
expire in the years 2009 to 2018.
At December 31, 1998 and 1997, the Company's net tax basis
of properties exceeds the amount set forth in the Company's
Consolidated Balance Sheets by $54 million and $83 million,
respectively.
Derivative Financial Instruments
The Company may, from time to time, enter into treasury lock
arrangements or interest rate swap contracts as hedges against
increasing interest rates. The Company does not utilize these
arrangements for trading or speculative purposes. These<PAGE>
arrangements, considered qualifying hedges, are not recorded in
the financial statements until the debt transaction is
consummated and the arrangement is settled. The proceeds or
payments resulting from the settlement of the arrangement are
deferred and amortized over the life of the debt as an adjustment
to interest expense. At December 31, 1998, there were no
treasury lock arrangements, interest rate swap contracts or other
derivative instruments outstanding.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 130, Reporting Comprehensive Income.
This statement establishes standards for reporting the components
of comprehensive income and requires that all items that are
required to be recognized under accounting standards as
components of comprehensive income be included in a financial
statement that is displayed with the same prominence as other
financial statements. Comprehensive income includes net income
as well as certain items that are reported directly within a
separate component of stockholders' equity and bypass net income.
The Company adopted the provisions of this statement in 1998.
These disclosure requirements had no impact on financial position
or results of operations.
<PAGE>F11
In June 1997, the FASB issued SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. The
provisions of this statement require disclosure of financial and
descriptive information about an enterprise's operating segments
in annual and interim financial reports issued to shareholders.
The statement defines an operating segment as a component of an
enterprise that engages in business activities that generate
revenue and incur expense, whose operating results are reviewed
by the chief operating decision maker in the determination of
resource allocation and performance, and for which discrete
financial information is available. The Company adopted the
provisions of this statement for its 1998 annual reporting.
These disclosure requirements had no impact on financial position
or results of operations.
In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. The provisions of
this statement require that derivative instruments be carried at
fair value on the balance sheet. The statement continues to
allow derivative instruments to be used to hedge various risks
and sets forth specific criteria to be used to determine when
hedge accounting can be used. The statement also provides for
offsetting changes in fair value or cash flows of both the
derivative and the hedged asset or liability to be recognized in
earnings in the same period; however, any changes in fair value
or cash flow that represent the ineffective portion of a hedge
are required to be recognized in earnings and cannot be deferred.
For derivative instruments not accounted for as hedges, changes
in fair value are required to be recognized in earnings. The
provisions of this statement become effective for quarterly and
annual reporting beginning January 1, 2000. Although the
statement allows for early adoption in any quarterly period after
June 1998, the Company has no plans to adopt the provisions of<PAGE>
SFAS No. 133 prior to the effective date. The impact of adopting
the provisions of this statement on the Company's financial
position, results of operations and cash flow subsequent to the
effective date is not currently estimable and will depend on the
financial position of the Company and the nature and purpose of
the derivative instruments in use by management at that time.
2. DEVELOPMENT, ACQUISITION AND DISPOSITION ACTIVITY
Development Activity
Construction in progress, including the cost of land, for
the development of multifamily properties was $53,740,292 and
$16,439,393 at December 31, 1998 and 1997, respectively. The
Company capitalizes interest costs on funds used in construction,
real estate taxes and insurance from the commencement of
development activity through the time the property is ready for
leasing. Capitalized interest, real estate taxes and insurance
aggregated approximately $2,704,434, $1,880,830 and $1,394,800
during the years ended December 31, 1998, 1997 and 1996,
respectively. During 1998, two projects were completed, The
Residence at Barrington, a 288 unit property located in Aurora,
Ohio (a suburb of Cleveland) at a total cost of construction of
$25.1 million and The Village of Western Reserve, a 108 unit
property located in Streetsboro, Ohio (a city located southeast
of Cleveland) at a total cost of construction of $7.8 million.
During 1998, the construction and leasing of 184 additional
units at two of the Company's properties were completed at a
total cost of $11.9 million. During 1997, one project was
completed, Bradford at Easton, a 324 unit property located in
Columbus, Ohio at a total cost of construction of $18.8 million.
During 1997, the construction and leasing of 175 additional units
at three of the Company's properties were completed at a total
cost of $14.2 million. During 1996, the construction and leasing
of 116 additional units at two of the Company's properties were
completed at a total cost of $6.5 million.
<PAGE>F12
Acquisition Activity
During 1998, without regard to the merger of MIGRA and the
related acquisition of the eight MIG REIT Properties and the two
properties held in the DownREIT, the Company acquired five
multifamily properties containing 1,584 units and two parcels of
land containing 90 acres for an aggregate purchase price of $99.1
million, including $15.6 million of liabilities assumed,
principally mortgage indebtedness of $15.0 million. The acquired
properties are located in Coconut Creek, Florida; Duluth,
Georgia; Columbia, Maryland; Indianapolis, Indiana; and Toledo,
Ohio. The land parcels are located in Avon, Ohio and Atlanta,
Georgia. The purchase price of the acquired properties was
financed using borrowings under an unsecured 90 day term loan of
$44.5 million and borrowings under the Company's Line of Credit
of approximately $39.0 million. Three of the five properties
were acquired from an entity managed by MIGRA in anticipation of
the consummation of the other MIGRA Related Transaction. The
three properties were owned, in part, by MIG Residential Trust.
The aggregate purchase price of these properties was $59.5
million of which approximately $15.3 million represented assumed<PAGE>
liabilities.
On June 30, 1998, the Company consummated the remaining
MIGRA Related Transaction, except for the acquisition of the
newly developed property. As consideration for their interest in
MIGRA and the affiliated property management businesses, the
shareholders of MIGRA received 408,314 of the Company's common
shares. The number of shares issued was determined based on the
average closing price of the Company's common shares for the 20
trading days preceding the date of the merger agreement or $23.63
per share. Subject to the achievement of certain performance
criteria, the former shareholders of MIGRA have the opportunity
to receive additional contingent consideration to be paid in the
form of the Company's common shares. After giving effect to
certain price adjustments, contingent consideration payable on
each of June 30, 1999 and 2000 is approximately $872,000 and $2.9
million, respectively, and is subject to further adjustment. On
or about December 31, 1998, the conditions precedent to the
payment of the first contingent consideration amount of $872,000
had been satisfied.
The Company also acquired the MIG REIT Properties for $12.2
million in cash, the issuance of 5,139,387 common shares of the
Company and the assumption of approximately $0.7 million in
liabilities. The number of common shares was determined based on
the average closing price of the Company's common shares for the
20 trading days preceding the purchase of the MIG REIT Properties
or $18.76 per share. The cash portion of the purchase price was
financed using borrowings made available through the Company's
Line of Credit.
In connection with the MIGRA Related Transaction, the
Company also acquired the general and certain limited partnership
interests in a partnership that owned a multifamily property in
development. In exchange for cash of $15.6 million, the Company
received 661,663 OP units, representing a 59% general partnership
interest in AERC HP Advisors Limited Partnership ("HP Advisors"),
<PAGE>F13
an operating partnership, which owns a parcel of real property
located in Orlando, Florida upon which a 460 unit multifamily
apartment complex, Windsor at Kirkman Apartments, is being
constructed. Certain limited partners of HP Advisors received
459,719 OP units, representing four classes of limited
partnership interests, in exchange for their interests in Windsor
at Kirkman Apartments. The number of OP units issued was
determined with reference to the Company's common shares and is
based on the average closing price of the Company's common shares
for the 20 trading days preceding the date of the merger
agreement or $23.63 per share. Commencing two years from the
date of issuance, the holders of the Class A OP units can present
such Class A OP units for redemption to the operating partnership
for cash, subject to certain conditions. The Company has the
option to redeem the OP units for common shares, exchangeable on
a one-for-one basis, or the cash equivalent amount. The Class B
and C OP units and Class E OP units, become exchangeable at the
option of the Company into Class A OP units upon the attainment
of certain operating thresholds, one and two years from the date
of the merger closing, respectively. The cash paid by the
Company in exchange for its OP units in HP Advisors was financed<PAGE>
using borrowings made available through the Company's Line of
Credit.
In October 1998, the final MIGRA Related Transaction was
completed by the Company acquiring the general and certain
limited partnership interests in a partnership that owns a
multifamily property located in Pembroke Pines, Florida
containing 368 units for a purchase price of approximately $34.2
million. In exchange for cash of $16.0 million and the
assumption of mortgage indebtedness of $16.5 million, the Company
received 1,887,345 OP units, representing a general partnership
interest in HP Advisors. Certain limited partners of HP Advisors
received 62,313 Class D OP units in exchange for their interests
in the property. The number of OP units issued was determined
based on the average closing price of the Company's common shares
for the 20 trading days preceding the targeted closing date of
the acquisition or $17.54 per share. The Class D OP units are
exchangeable into Class A OP units at the option of the Company,
subject to certain conditions, two years from the date of merger
closing and upon the attainment of certain operating thresholds.
The cash paid by the Company in exchange for its OP units in HP
Advisors was financed using borrowings made available through the
Company's Line of Credit.
The Company's right to exchange Class B, Class C, Class D
and Class E OP units into Class A OP units is conditioned upon
obtaining certain certificates of occupancy, as set forth in the
agreement, at the Windsor at Kirkman Apartments property.
In connection with the MIGRA Related Transaction, the
Company recorded the following amounts: (i) accounts receivables
and miscellaneous prepaid expenses of $2.9 million, (ii)
intangible assets of $4.2 million, (iii) real estate assets of
$239.7 million, (iv) accounts payable and accrued expenses of
$4.8 million, (v) accrued real estate taxes of $0.5 million, (vi)
security deposits of $0.8 million, (vii) mortgage indebtedness of
$31.5 million, (viii) borrowings on the MIGRA Line of Credit
Facilities of $1.0 million, (ix) borrowings on the Company's Line
of Credit of $90.1 million, (x) operating partnership units of
$12.0 million and (xi) common stock and additional paid in
capital of $106.1 million.
During 1997, the Company acquired, in separate purchase
transactions, eight multifamily properties containing an
aggregate of 1,762 units and two parcels of land consisting of
14.7 acres for an aggregate purchase price of $105.1 million, of
which $4.5 million represented liabilities assumed. The acquired
properties are located in Clinton Township and Farmington Hills,
Michigan; Indianapolis, Indiana; and Cincinnati, Columbus and
Toledo, Ohio. The purchase price of these acquired properties
has been financed primarily with proceeds from borrowings on the
Company's Line of Credit.
<PAGE>F14
During 1996, the Company acquired, in separate purchase
transactions, six multifamily properties containing an aggregate
of 1,289 units and three parcels of undeveloped land consisting
of 43 acres for an aggregate purchase price of $59.1 million,
which were financed with (i) borrowings under the Company's Line
of Credit of $46.1 million, (ii) net proceeds of $9.9 million
from the issuance of a Medium-Term Note and (iii) the assumption
of mortgage indebtedness of $3.1 million.
Disposition Activity
In December 1998, the Company sold an operating property for
net cash proceeds of $10.7 million, resulting in a gain of
$503,497. The net cash proceeds were used to pay down the
Company's Line of Credit.
In December 1997, the Company sold a 90 acre parcel of land
zoned for office and industrial use. Net cash proceeds from the
sale of $4.9 million, resulting in a gain of $1.6 million, were
placed in a trust which restricted the Company's use of these
funds for the exclusive purchase of other property of like-kind
and qualifying use (Note 3). The like-kind exchange was
consummated in 1998.
3. RESTRICTED CASH
Restricted cash, some of which is required by HUD for
certain government-subsidized properties, includes residents'
security deposits, reserve funds for replacements, other escrows
held for the future payment of real estate taxes and in 1997,
funds held in trust for a pending like-kind exchange (Note 2).
The reserve funds for replacements are intended to provide cash
to defray future costs that may be incurred to maintain the
associated property. In addition, certain escrows are maintained
in connection with mortgage servicing operations.
Restricted cash is comprised of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Like-kind exchange trust $ - $ 4,863,760
Resident security deposits 862,369 805,172
Investor's escrow 2,445,352 -
Escrow and reserve funds for
replacements required by
mortgagees 3,411,142 4,456,581
$ 6,718,863 $ 10,125,513
</TABLE>
Amounts held in the like-kind exchange trust were invested
in money market funds at December 31, 1997. These funds were
used exclusively for the purchase of a multifamily property in a
like-kind exchange (Note 2). Resident security deposits are held
in separate bank accounts in the name of the properties for which
the funds are being held. Investor's escrow 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. These funds are held in short term
investments. Reserve funds for replacements are invested in a
combination of money market funds, U.S. treasury bills with
maturities less than 18 months, and collateralized mortgage
obligations issued by the Federal Home Loan Mortgage Company
("FHLMC") maturing in 2023.
<PAGE>15
Debt securities owned with a maturity at date of purchase of
less than 18 months are classified as "held to maturity" and
securities with a maturity at date of purchase greater than 18
months are classified as "available for sale". Securities
classified as held to maturity are measured at amortized cost.
Securities classified as available for sale are measured at fair
value. Adjustments to fair value of the securities available for
sale, in the form of unrealized holding gains and losses, is
excluded from earnings and reported net of tax, where applicable,
as a separate component of comprehensive income. At December 31,<PAGE>
1998 and 1997, held to maturity securities included: treasury
bills with a cost of $848,917 and $1,873,088 and a fair value of
$876,235 and $1,904,255, respectively, and certificates of
deposits with a cost and estimated fair value of $488,000 at
December 31, 1998. Available for sale investments included FHLMC
securities with a cost of $99,500 and $398,000 at December 31,
1998 and 1997, respectively.
4. INTANGIBLE AND OTHER ASSETS
Intangible assets, deferred charges and prepaid expenses
consist of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Intangible assets $ 4,159,236 $ -
Deferred financing and leasing costs 5,147,550 3,739,789
Less: accumulated amortization (1,547,429) (886,000)
7,759,357 2,853,789
Prepaid expenses 3,914,114 2,325,067
Other assets 1,420,501 1,442,548
$ 13,093,972 $6,621,404
</TABLE>
Amortization expense was $1,325,251, $700,118, and $608,594
for the years ended December 31, 1998, 1997 and 1996,
respectively.
5. EXTRAORDINARY ITEMS AND OTHER CHARGES
In 1998, upon the refinancing of the Line of Credit,
unamortized deferred financing costs were written off. In 1997,
an unamortized debt premium was written off upon the early
repayment of mortgage debt. These transactions have been
reflected as an extraordinary loss of $124,895 and an
extraordinary gain of $1,023,713 in 1998 and 1997, respectively.
During 1998, the Company abandoned its efforts to convert
its proprietary automated leasing information system to a
Windows(c) version. Accordingly, the Company wrote off $817,485
of costs which had been previously capitalized. This write-off
is reflected in the Consolidated Statements of Income.
During 1998 and 1997, the Company wrote off $91,827 and
$1,764,044, respectively, of receivables. The 1998 receivable
write-off was comprised of an advance to a former managed but
non-owned, non-related party property. The 1997 receivable
write-off was principally comprised of two advances to managed
but non-owned, non-related party properties. Additionally, in
1998, the Company reserved $200,000 with respect to a receivable
from an investor in a managed but non-owned property. This
write-off and reserve is reflected as a charge for unrecoverable
funds advanced to non-owned properties and other in the
Consolidated Statements of Income.
<PAGE>F16
6. DEBT
The Company's borrowings are evidenced by both secured and
unsecured debt. Secured debt consists of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Conventional mortgage debt, maturing
at various dates to 2007 $52,176,354 $29,396,477
Federally insured mortgage debt,
maturing at various dates to 2024 27,866,313 28,421,504
$80,042,667 $57,817,981
</TABLE>
Conventional Mortgage Debt
Conventional mortgages payable are comprised of seven and
four loans at December 31, 1998 and 1997, respectively, each of
which is collateralized by the associated real estate and
resident leases. All but one conventional mortgage with a
principal amount of $16.5 million assumed in 1998 are
nonrecourse, fixed rate, project specific loans. The remaining
loan has a variable interest rate. Mortgages payable are
generally due in monthly installments of principal and/or
interest and mature at various dates through March 1, 2007. On
June 30, 1998, the Company paid off a variable rate $8.1 million
mortgage. The weighted average interest rate of the conventional
fixed rate mortgages was 8.75% and 8.52% at December 31, 1998 and
1997, respectively. The weighted average interest rate of the
conventional variable rate mortgages was 6.94% at December 31,
1998.
Federally Insured Mortgage Debt
Federally insured mortgage debt which encumbered seven of
the properties at December 31, 1998 and 1997 (including one
property which is funded through Industrial Development Bonds),
is insured by HUD pursuant to one of the mortgage insurance
programs administered under the National Housing Act of 1934.
These government-insured loans are nonrecourse to the Company.
Payments of principal, interest and HUD mortgage insurance
premiums are made in equal monthly installments and mature at
various dates through March 1, 2024. At December 31, 1998, six
of the seven federally insured mortgages have a fixed rate and
the remaining mortgage ($1,841,854) is variable rate. Interest
rates on the HUD-insured indebtedness range from 7.0% to 10.25%.
The weighted average interest rate of the federally insured
mortgages was 7.63% at December 31, 1998 and 1997.
Under certain of the mortgage agreements, the Company is
required to make escrow deposits for taxes, insurance and
replacement of project assets. The variable rate mortgage is
secured by a letter of credit which is renewed annually.
Real estate assets pledged as collateral for all mortgage
debt had a net book value of $116,367,505 and $50,030,137 at
December 31, 1998 and 1997, respectively.
Unsecured debt consists of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Senior Notes, due 2000 to 2002 with
interest payable quarterly, net of
unamortized discounts of $84,097 and
$147,693 $ 84,915,903 $ 84,852,307
Medium-Term Notes, due 2001 to 2026
with interest payable quarterly 112,500,000 92,500,000
Line of Credit, due 2001 226,446,565 83,000,000
$ 423,862,468 $ 260,352,307<PAGE>
</TABLE>
<PAGE>F17
Senior Notes
The Senior Notes were issued during 1995 in the principal
amounts of $75 million and $10 million and accrue interest at
8.38% and 7.10%, respectively, and mature in 2000 and 2002,
respectively. The balance of the $75 million Senior Note, net of
unamortized discounts, was $74.9 million at December 31, 1998 and
1997.
Medium-Term Notes Program
The Company had 11 Medium-Term Notes (the "MTN's")
outstanding having an aggregate balance of $112.5 million and ten
MTN's outstanding with an aggregate balance of $92.5 million at
December 31, 1998 and 1997, respectively. The principal amounts
of these MTN's range from $2.5 million to $20 million and bear
interest from 6.18% to 7.93% over terms ranging from two to 30
years, with a stated weighted average maturity of 9.27 years at
December 31, 1998. The holders of two MTN's with stated terms of
30 years each have a right to repayment of five and seven years
from the issue date of the respective MTN. If these holders
exercised their right to prepayment, the weighted average
maturity would be 4.91 years. The weighted average interest rate
of the 11 MTN's is 6.99% for the year ended December 31, 1998 and
6.97% for the ten MTN's for the year ended December 31, 1997.
One and four of the MTN's in the aggregate amounts of $20.0
million and $50.0 million were issued in 1998 and 1997,
respectively, with the balance issued in 1996.
The Company's current MTN Program provides for the issuance,
from time to time, of up to $102.5 million of MTN's due nine
months or more from the date of issue and may be subject to
redemption at the option of the Company or repayment at the
option of the holder prior to the stated maturity date. These
MTN's may bear interest at fixed rates or at floating rates and
can be issued in minimum denominations of $1,000. At December
31, 1998, there was $62.5 million of additional MTN borrowings
available under the program.
From time to time, the Company may enter into hedge
agreements to minimize its exposure to interest rate risks.
There are no interest rate protection agreements outstanding as
of December 31, 1998.
Line of Credit
In June 1998, the Company completed a new unsecured $200
million revolving credit facility (the "Line of Credit") which
replaced a $100 million unsecured revolving credit facility.
During the third quarter of 1998, the Line of Credit was
increased from $200 million to $250 million. The new agreement
provides for an extension of the term for an additional year
through June 2001 with the Company having the option to extend
the term through June 2002. The Line of Credit includes certain<PAGE>
restrictive covenants which, among others, requires the Company
to (i) maintain a minimum level of net worth, (ii) limit
dividends to less than 95% and 90% of Distributable Cash Flow, as
defined in the agreement, for 1999 and 2000, respectively, and
(iii) maintain certain debt coverage ratios. The Company's
borrowings under this Line of Credit bear interest at variable
rates based on the prime rate or LIBOR plus a specified spread,
depending on the Company's long term senior unsecured debt rating
from Standard and Poor's and Moody's Investors Service. An
annual commitment fee of 15 basis points on the maximum
commitment, as defined in the agreement, payable annually in
advance on each anniversary date. The Line of Credit is used to
finance the acquisition of properties, to provide working capital
and for general corporate purposes. At December 31, 1998 and
1997, $226.0 million and $83.0 million, respectively, were
outstanding under this facility. The weighted average interest
rate on borrowings outstanding under the Line of Credit was 6.88%
and 7.04% at December 31, 1998 and 1997, respectively.
<PAGE>F18
At March 31, 1998, the Company was in violation of certain
financial ratio covenants under the Line of Credit. The Company
received waivers of those violations through June 30, 1998.
Additionally, the Company advised its bank group that it was not
in compliance with one of the financial covenants concerning the
Company's net worth as of September 30, 1998. The net worth
covenant required that the Company maintain a minimum net worth
of $400 million, based on a formula that incorporates the
annualized multiple of the most recent quarter's earnings before
interest, taxes, depreciation and amortization ("EBITDA"), as
defined in the agreement. The Company negotiated with its bank
group for a waiver by the banks of the breach of the net worth
covenant, along with an increase in borrowing costs under its
Line of Credit from LIBOR plus 100 basis points to LIBOR plus 140
basis points. In addition, certain of the covenants, including
the minimum net worth covenant, were modified to provide the
Company with a limited increase in flexibility. The minimum net
worth covenant was reduced from $400 million to $325 million.
The bank group continued to make advances under the Line of
Credit following the Company's notification that it was not in
compliance with the net worth covenant. A $395,000 default
waiver fee was paid in December 1998 and is reflected in the
Consolidated Statements of Income.
MIGRA maintains a $500,000 Line of Credit facility ("MIGRA
Line of Credit Facility") which the Company assumed at the time
of the merger. MIGRA's borrowings under this facility bears
interest at prime plus one percent. The MIGRA Line of Credit
Facility matures on May 1, 2000. At December 31, 1998, $446,565
was outstanding under this facility. The weighted average
interest rate on borrowings outstanding under the MIGRA Line of
Credit Facility was 9.85% at December 31, 1998. In connection
with the merger, the Company assumed an additional $500,000 Line
of Credit Facility that was paid off at maturity, on October 31,
1998.
As of December 31, 1998, the scheduled maturities of secured
and unsecured indebtedness for each of the next five years and
thereafter, are as follows:
<TABLE>
<S> <C>
1999 $ 21,708,053
2000 90,807,745
2001 264,686,455
2002 26,209,368
2003 13,812,869
Thereafter 86,680,645
$ 503,905,135
</TABLE>
7. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
At December 31, 1998, the Company's interests in the joint
venture partnerships are as follows:
<TABLE>
<CAPTION>
Ownership
<S> <C>
Americana 33-1/3%
Euclid House 33-1/3%
Gates Mills Towers 33-1/3%
Watergate 33-1/3%
College Towers 50%
Highland House 50%
Lakeshore Village 50%
</TABLE>
Summarized financial information for these joint ventures is
as follows:
<TABLE>
<CAPTION>
Balance sheet data
1998 1997
<S> <C> <C>
Real estate, net $12,860,390 $13,812,528
Other assets 4,196,368 4,171,028
$17,056,758 $17,983,556
Amounts payable to the Company $ 159,872 $ 147,349
Mortgages payable 50,374,723 51,132,057
Other liabilities 3,641,143 2,995,699
Accumulated deficit (37,118,980) (36,291,549)
$17,056,758 $17,983,556
</TABLE>
<TABLE>
<CAPTION>
Operating data
1998 1997 1996
<S> <C> <C> <C>
Rental revenues $19,278,712 $18,775,127 $18,254,406
Other revenues 174,774 129,490 127,729
Operating and maintenance expenses 12,316,421 11,020,783 11,093,688
Depreciation and amortization 1,316,451 1,384,453 1,493,727
Interest expense 4,803,070 5,119,462 5,176,499
Net income $ 1,017,544 $ 1,379,919 $ 618,221
Company's proportionate interest in:
Depreciation and amortization $ 475,675 $ 496,983 $ 533,248
Interest expense 1,656,652 1,763,156 1,782,706
Net income of joint ventures 444,692 560,934 305,189<PAGE>
</TABLE>
The Company's proportionate share of net distributions was
$701,143, $485,513 and $509,977 for the years ended December 31,
1998, 1997 and 1996, respectively. Revenues from property
management fees charged to joint ventures aggregated $784,111,
$764,338 and $746,514 for the years ended December 31, 1998, 1997
and 1996, respectively. The corresponding expenses are included
in the operating and maintenance expenses of the joint ventures,
as set forth above.
Lakeshore Village is governed by regulations pursuant to the
property's rent subsidy and mortgage insurance programs under
HUD, which contain provisions governing certain aspects of the
operations of the property (Note 10). Rent subsidies of
$739,278, $785,883 and $802,517 for the years ended December 31,
1998, 1997 and 1996, respectively, were received by the property.
8. TRANSACTIONS WITH AFFILIATES AND JOINT VENTURES
Management and Other Services
The Company provides management and other services to (and
is reimbursed for certain expenses incurred on behalf of) certain
non-owned properties in which the Company's Chief Executive
Officer and/or other related parties have varying ownership
interests. The entities which own these properties, as well as
other related parties, are referred to as "affiliates". The
Company also provides similar services to joint venture
properties.
<PAGE>F20
Summarized affiliate and joint venture transaction activity
follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Property management fee and other
miscellaneous service revenues
- affiliates $ 2,283,066 $ 2,416,850 $ 2,530,165
- joint ventures 939,813 921,701 903,593
Painting service revenues
- affiliates 350,014 460,218 944,769
- joint ventures 322,831 165,956 155,763
Expenses incurred on behalf of and
reimbursed by (1) - affiliates 4,426,066 4,478,437 3,959,548
- joint ventures 2,626,631 2,540,621 2,509,324
Interest income - affiliates 695,367 697,990 201,238
Interest expense - affiliates (344,448) (297,246) (261,071)
- joint ventures (24,324) (24,091) (21,865)
<FN>
(1) Primarily payroll and employee benefits, reimbursed at cost.<PAGE>
</FN>
</TABLE>
Property management fees and other miscellaneous receivables
due from affiliates and joint venture properties aggregated
$6,677,611 and $4,542,798 at December 31, 1998 and 1997,
respectively. Other miscellaneous payables due to affiliates and
joint venture properties aggregated $0 and $329,000 at December
31, 1998 and 1997, respectively.
Advances to Affiliates and Joint Ventures
In the normal course of business, the Company advances funds
on behalf of, or holds funds for the benefit of, affiliates and
joint ventures. Funds advanced to affiliates and joint ventures
aggregated $5,555,732 and $880,057 at December 31, 1998,
respectively, and $9,048,403 and $847,954 at December 31, 1997,
respectively. Except for insignificant amounts, advances to
affiliates bear interest; the weighted average rate charged was
8.3% during 1998 and 1997. The Company held funds for the
benefit of affiliates and joint ventures in the aggregate amount
of $3,174,898 and $2,178,496 at December 31, 1998, respectively,
and $4,989,674 and $1,805,543 at December 31, 1997, respectively.
In February 1998, certain affiliated entities which owed the
Company a substantial amount of the advances described above,
made capital calls to their partners for the purpose of effecting
repayment of such advances. Thereafter, approximately $4.0
million of advances were repaid pursuant to such capital calls.
However, a corporation (the "Corporation") owned by a member of
the Company's Board of Directors, and his siblings (including the
wife of the Company's Chairman and Chief Executive Officer) which
serves as general partner of certain affiliated entities, had
informed the Company that the Corporation has caused the
commencement of a review giving rise to expenditures of
approximately $2.9 million of capital calls relating to certain
HUD subsidized properties. The Company believed that all
expenditures were appropriate and that the ultimate outcome of
any disagreement would not have a material adverse effect on the
Company's financial position, results of operations or cash
flows.
<PAGE>F21
On March 11, 1999, the Company, the Corporation, certain
shareholders of the Corporation and others entered into a
settlement agreement which resolved all disputes concerning the
aforementioned expenditures and other issues concerning the
management by the Company or one of its Service Companies of
various properties owned by entities in which the Corporation was
a general partner. Pursuant to that settlement agreement, the
Corporation and other affiliates funded all outstanding advances
made by the Company. At December 31, 1998, amounts outstanding
which were subsequently funded pursuant to the settlement
agreement were $4.7 million.
Notes receivable
At December 31, 1998 and 1997, two notes of equal amounts
were receivable from the Company's Chief Executive Officer
aggregating $3,342,000 (included in "Accounts and notes
receivables-affiliates and joint ventures"). The notes were
entered into on May 23, 1997 and bear interest, payable quarterly
at the 30-day LIBOR plus the LIBOR margin on the Company's Line
of Credit, with principal due May 1, 2002. The 30-day LIBOR
averaged 5.57% during 1998. One of the notes is collateralized
by 150,000 of the Company's common shares; the other note is
unsecured. The Company recognized interest income of $227,833
and $143,289 for the years ended December 31, 1998 and 1997,
respectively, relating to these notes.
9. NOTEHOLDER INTEREST
The Company has a noteholder interest in one multifamily
property which, since 1984, has been unable to generate
sufficient cash flow, as defined, to meet the scheduled interest
payments under notes payable to the Company. Accordingly, the
Company is entitled to all cash flows from operations. To the
extent that the cumulative unpaid debt service on the notes is
greater than seven years of aggregate principal and interest
amortization (the cumulative amount of debt service), which
occurred in 1995, the Company can exercise its rights under a
security agreement and foreclose on the property. Because, in
substance, the Company will eventually own title to the property,
most likely through foreclosure, the property is presented in the
financial statements as if owned by the Company. Summarized
financial information for this property is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Real estate, net $1,301,603 $1,441,646
Other assets 847,497 803,416
$2,149,100 $2,245,062
Mortgage notes payable $4,125,834 $4,295,287
Other liabilities 360,745 399,677
Accumulated deficit (2,337,479) (2,449,902)
$2,149,100 $2,245,062
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Rental and other revenue $2,309,937 $2,264,592 $2,270,750
Property operating and
maintenance expenses 1,444,442 1,392,571 1,202,178
Depreciation and 151,814 148,224 143,949
amortization
Interest expense 317,244 325,764 335,644
Net income $ 396,437 $ 398,033 $ 588,979
</TABLE>
<PAGE>F22
10. COMMITMENTS AND CONTINGENCIES
Leases
The Company owns one property which derives part of its
rental revenues from commercial tenants with noncancellable
operating leases. Future minimum lease payments to be received,
assuming no new or renegotiated leases, or option extensions, for
each of the next five years and thereafter, are as follows:
<TABLE>
<S> <C>
1999 $ 949,778
2000 643,140
2001 327,036
2002 80,057
2003 70,686
Thereafter 353,433
$ 2,424,130
</TABLE>
The Company leases certain equipment under capital leases.
Such equipment is included in property, plant and equipment with
a cost of $1,599,473 and accumulated depreciation of $702,929 at
December 31, 1998. The Company also leases certain equipment
under operating leases. Future minimum lease payments under all
capital and noncancellable operating leases in which the Company
is the lessee, principally for ground leases, for each of the<PAGE>
next five years and thereafter, are as follows:
<TABLE>
<CAPTION>
Capital Operating
<S> <C> <C>
1999 $ 410,666 $ 129,521
2000 235,321 129,521
2001 140,485 127,166
2002 69,763 101,261
2003 5,302 101,261
Thereafter - 5,175,418
861,537 $5,764,148
Less interest 95,369
$ 766,168
</TABLE>
Certain of the ground lease agreements contain provisions
which, upon expiration of the lease, require reversion of the
land and building to the lessor. Such provisions exist for nine
properties included in the financial statements and expire at
various dates from 2021 to 2086. Rental revenues derived from
such properties were $9,558,571, $9,476,338 and $9,376,871 for
the years ended December 31, 1998, 1997 and 1996, respectively.
Furthermore, at the end of the term of the lease, any remaining
replacement reserves revert to the lessor. Management believes
that the replacement reserves will be utilized for their intended
purpose prior to the end of the lease term. Such cash reserves
included in restricted cash were $1,257,605 and $1,564,010 at
December 31, 1998 and 1997, respectively. With respect to such
leases, the Company incurred ground rent expense of $101,261 for
each of the years ended December 31, 1998, 1997 and 1996.
The Company owns one property which is subject to a warranty
deed reversion provision. This provision requires that the
assignment of fee simple title shall expire in 2037. At December
31, 1998, the net book value of this property was $1,619,006.
<PAGE>F23
Government Programs
Certain of the Company's properties are governed by
regulations pursuant to rent subsidies or mortgage insurance
programs, which contain provisions governing certain aspects of
the operations of the properties. Among other things, such
provisions may include the maintenance of a reserve fund for
replacements, the renting of properties to qualifying residents,
and the requirement to make distributions in accordance with
certain regulations. Certain approvals may be required to
encumber properties having rental subsidies.
The rent subsidy program provides that HUD will make monthly
housing assistance payments to the Company on behalf of persons
who reside in approved properties and who meet the eligibility
criteria. The amount of the total monthly rental and the subsidy
is determined at least annually by HUD. This arrangement is
evidenced by a contract between HUD and the Company. Such
contracts have scheduled expiration dates between August 2000 and
November 2019. HUD may abate subsidy payments if the Company
defaults on any obligations under such contracts and fails to
cure each default after receiving notice thereof. Rent subsidies
of $10,403,845, $11,004,881 and $11,174,488 for the years ended
December 31, 1998, 1997 and 1996, respectively, were recognized
in income by the 15 wholly owned properties eligible for federal
rent subsidies. As discussed in Note 6, certain obligations are
insured by federal mortgage insurance programs. The Company
believes that either the contracts will be renewed, the Company
will enter into another government subsidized or mortgage<PAGE>
restructuring program, or that the properties will be operated as
conventional, market-rate apartments upon expiration of the
contracts.
11. RAINBOW TERRACE APARTMENTS
On February 9, 1998, HUD notified the Company that Rainbow
Terrace Apartments, Inc. ("RTA"), the Company's subsidiary
corporation that owns Rainbow Terrace Apartments, was in default
under the terms of the Regulatory Agreement and Housing
Assistance Payments Contract ("HAP Contract") pertaining to this
property. Among other matters, HUD alleged that the property was
poorly managed and that RTA had failed to complete certain
physical improvements to the property. Moreover, HUD claimed
that the owner was not in compliance with numerous technical
regulations concerning whether certain expenses were properly
chargeable to the property. As provided in the Regulatory
Agreement and HAP Contract, in the event of a default, HUD has
the right to exercise various remedies including terminating
future payments under the HAP Contract and foreclosing the
government-insured mortgage encumbering the property.
This controversy arose out of a Comprehensive Management
Review of the property initiated by HUD in the Spring of 1997,
which included a complete physical inspection of the property.
In a series of written responses to HUD, the Company stated its
belief that it had corrected the management deficiencies cited by
HUD in the Comprehensive Management Review (other than the
completion of certain physical improvements to the property) and
justified the expenditures questioned by HUD as being properly
chargeable to the property in accordance with HUD's regulations.
Moreover, the Company stated its belief that it had repaired any
physical deficiencies noted by HUD in its Comprehensive
Management Review that might pose a threat to the life and safety
of its residents.
In June 1998, HUD notified the Company that all future
Housing Assistance Payments ("HAP") for RTA were abated and
instructed the lender to accelerate the balance due under the
mortgage. Subsequent to the notification of the HAP abatements
and the acceleration of the mortgage, the lender advised the
Company that the acceleration notification had been rescinded
pursuant to HUD's instruction. HUD then notified the Company
that the HAP payments would be reinstated and that HUD was
reviewing further information concerning RTA provided by the
Company. The Company has received the monthly HAP payments for
RTA.
<PAGE>F24
In June 1998, the Company filed a lawsuit against HUD
seeking to compel HUD to review certain budget based rent
increases submitted to HUD by the Company in 1995.
Since June 1998, the Company has been involved in ongoing
negotiations with HUD for the purpose of resolving these and
other disputes concerning other properties managed or formerly
managed by the Company or one of the Service Companies, which
were similarly the subject of Comprehensive Management Reviews
initiated by HUD in the Spring of 1997.
On March 12, 1999, the Company, Associated Estates
Management Company ("AEMC"), RTA, PVA Limited Partnership
("PVA"), the owner of Park Village Apartments, and HUD, entered
into a comprehensive settlement agreement (the "Settlement<PAGE>
Agreement") for the purpose of resolving certain disputes
concerning property operations at Rainbow Terrace Apartments,
Park Village Apartments ("Park Village"), Longwood Apartments
("Longwood") and Vanguard Apartments ("Vanguard"). Longwood was
managed by the Company until January 13, 1999. Park Village is
managed by the Company. Vanguard was managed by AEMC until
December 1997. All four properties are encumbered by HUD insured
mortgages, governed by HUD imposed regulatory agreements and
subsidized by Section 8 Housing Assistance Payments.
Under the terms of the Settlement Agreement, HUD has agreed
to pay RTA a retroactive rent increase totaling $1,784,467, which
represents the outstanding receivable at December 31, 1998. HUD
has further agreed to release the Company, AEMC, RTA and the
owners and principals of PVA, Longwood and Vanguard from all
claims (other than tax or criminal fraud claims) regarding the
ownership or operation of Rainbow Terrace Apartments, Park
Village, Longwood and Vanguard. Moreover, HUD has agreed not to
issue a limited denial of participation, debarment or suspension,
program fraud civil remedy action or civil money penalty,
resulting from the ownership or management of any of these
projects, or to deny eligibility to any of their owners,
management agents or affiliates for participation in any HUD
program on such basis.
HUD's obligations under the Settlement Agreement are
conditional upon the performance by the Company, RTA and PVA of
certain obligations, the most significant of which is the
obligation to identify, on or before April 11, 1999, prospective
purchasers for both Rainbow Terrace Apartments and Park Village
who are acceptable to HUD, and upon HUD's approval, convey those
projects to such purchasers. Alternatively, if RTA and PVA are
unable to identify prospective purchasers acceptable to HUD, then
RTA and PVA have agreed to convey both projects to HUD pursuant
to deeds in lieu of foreclosure. In either case (conveyance to a
HUD approved purchaser or deed in lieu of foreclosure), no
remuneration will be received by either RTA or PVA in return,
except for the $1.78 million retroactive rent increase payable to
RTA mentioned above. At December 31, 1998, the Company had
receivables of $1.78 million related to the 1995 retroactive
rental increase requests, which include additional amounts of
$430,737 relating to 1998 rental increase requests. At December
31, 1998, RTA had net assets of $1.8 million, including the
retroactive rental receivable of $1.78 million due from HUD, and
a remaining amount due under the mortgage of $1.9 million. The
transfer of RTA to a purchaser which is acceptable to HUD or the
direct transfer of RTA to HUD is not expected to have a material
impact on the results of operations or cash flows of the Company.
<PAGE>F25
12. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of estimated fair value were
determined by management using available market information and
appropriate valuation methodologies. Considerable judgment is
necessary to interpret market data and develop estimated fair
values. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize
on disposition of the financial instruments. The use of
different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value amounts.
Rents, accounts and notes receivable, accounts payable,
accrued expenses and other liabilities are carried at amounts<PAGE>
which reasonably approximate corresponding fair values.
Mortgages and notes payable with an aggregate carrying value
of $80,042,667 and $57,817,981 at December 31, 1998 and 1997,
respectively, have an estimated aggregate fair value of
approximately $84,634,040 and $60,958,924, respectively. The
Line of Credit is carried at an amount which approximates fair
market value. Estimated fair value is based on interest rates
currently available to the Company for issuance of debt with
similar terms and remaining maturities.
Senior and Medium-Term Notes with an aggregate carrying
value of $197,415,903 and $177,352,307 at December 31, 1998 and
1997, respectively, have an estimated fair value of $210,908,014
and $185,572,168, respectively.
The Company may, from time to time, enter into interest rate
agreements to manage interest costs and risks associated with
changing rates. The Company does not utilize these agreements
for trading or speculative purposes. These agreements,
considered qualifying hedges, are not recorded in the financial
statements until the debt transaction is consummated and the
agreement is settled. On December 12, 1997, the Company entered
into a treasury lock rate agreement for a notional amount of
$20,000,000 which has since been settled. The carrying value of
the agreement was zero and the fair market value was a liability
of approximately $76,000 at December 31, 1997. There were no
such agreements at December 31, 1998.
Disclosure about the fair value of financial instruments is
based on pertinent information available to management as of
December 31, 1998 and 1997. Although management is not aware of
any factors that would significantly affect the fair value
amounts, such amounts have not been comprehensively revalued for
purposes of these financial statements since these dates and
current estimates of fair value may differ significantly from the
amounts presented herein.
13. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest for the years ended December 31,
1998, 1997 and 1996 was $29,867,753, $19,628,642 and $16,294,050,
respectively, which includes capitalized interest.
<PAGE>F26
The following summarizes the non-cash investing and
financing activities of the Company which are not reflected in
the Consolidated Statements of Cash Flows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <S>
Issuance of common shares in
connection with the acquisition
of MIG REIT Properties and the
MIGRA merger $106,063,359 $ - $ -
Issuance of OP units in connection
with the acquisition of partnership
interests in two properties 11,956,174 - -
Assumption of mortgage debt in
connection with the acquisition
of properties 31,468,622 - 3,036,251
Assumption of liabilities in
connection with the acquisition
of properties 6,225,251 4,448,956 923,691
Dividends declared but not paid 10,507,586 7,938,692 6,895,071
Capital lease obligations 548,867 339,745 319,802
Offering expenses accrued 37,022 37,771 96,785<PAGE>
</TABLE>
14. COMMON, TREASURY AND PREFERRED SHARES
Common Shares
In June and July 1998, the Company issued 408,314 and
5,139,387 common shares relating to the Company's merger of MIGRA
and the related acquisition of eight multifamily properties,
respectively.
On July 2, 1997, the Company completed an offering of
1,750,000 common shares at $23.50 per share. The net proceeds of
approximately $38.8 million were applied to reduce debt.
On December 17, 1996, the Company completed an offering of
1,450,000 common shares at $22.375 per share. The net proceeds
of approximately $30.7 million were applied to reduce debt.
Treasury Shares
On June 29, 1998, the Company's Board of Directors
authorized management to purchase, from time to time, up to
1,000,000 common shares at market prices. The timing of stock
purchases are made at the discretion of management. During the
third quarter of 1998, 25,000 shares were repurchased at an
aggregate cost of $466,523 which was funded primarily from
operating cash flows.
Preferred Shares
At December 31, 1998, 2,250,000 Depositary Shares were
outstanding, each representing 1/10 of a share of the Company's
9.75% Class A Cumulative Redeemable Preferred Shares (the
"Perpetual Preferred Shares"). Dividends on the Perpetual
Preferred Shares are cumulative from the date of issue and are
payable quarterly. Except in certain circumstances relating to
the preservation of the Company's status as a REIT, the Perpetual
Preferred Shares are not redeemable prior to July 25, 2000. On
and after July 25, 2000, the Perpetual Preferred Shares will be
redeemable for cash at the option of the Company.
The Company is authorized to issue 3,000,000 Class B
Cumulative Preferred Shares, without par value, and 3,000,000
Noncumulative Preferred Shares, without par value. There are no
noncumulative preferred shares issued or outstanding at December
31, 1998, 1997 or 1996.
<PAGE>F27
15. EARNINGS AND DIVIDENDS PER SHARE
Earnings Per Share
Earnings per share ("EPS") has been computed pursuant to the
provisions of SFAS No. 128.
The following table provides a reconciliation of both income
before extraordinary items and the number of common shares used
in the computation of basic EPS, which utilizes the weighted
average number of common shares outstanding without regard to
dilutive potential common shares, and diluted EPS, which includes
all such shares.
<TABLE>
<CAPTION>
For the year ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Basic Earnings Per Share:
Income before extraordinary items $17,639,657 $ 19,688,656 $ 19,303,988
Less: Preferred share dividends (5,484,421) (5,484,421) (5,484,422)
Income before extraordinary items
applicable to common shares 12,155,236 14,204,235 13,819,566
Extraordinary items (loss) gain (124,895) 1,023,713 -
Net income applicable to common
shares $12,030,341 $ 15,227,948 $ 13,819,566
Diluted Earnings Per Share:
Income before extraordinary items $17,639,657 $ 19,688,656 $ 19,303,988
Add: Minority interest in
operating partnership 39,353 - -
Less:Preferred share dividends (5,484,421) (5,484,421) (5,484,422)
Amortization expense
relating to contingent
merger consideration (34,816) - -
Income before extraordinary items
applicable to common shares 12,159,773 14,204,235 13,819,566
Extraordinary items gain (loss) (124,895) 1,023,713 -
Net income applicable to common
shares $12,034,878 $ 15,227,948 $ 13,819,566
Number of Shares:
Basic-average shares outstanding 19,865,335 16,198,499 13,931,807
Add: Dilutive effect of stock
options 22,172 17,014 -
Operating partnership units 154,924 - -
Contingent merger
consideration 17,442 - -
Diluted shares 20,059,873 16,215,513 13,931,807
Per Share Amount-Net Income
Before Extraordinary Item:
Basic $ .61 $ .88 $ .99
Diluted $ .60 $ .88 $ .99
Per Share Amount-Net Income:
Basic $ .61 $ .94 $ .99
Diluted $ .60 $ .94 $ .99 <PAGE>
</TABLE>
<PAGE>F28
Options to purchase 1,310,874, 988,674 and 334,474 common
shares were outstanding at December 31, 1998, 1997 and 1996,
respectively (Note 16), a portion of which has been reflected
above using the treasury stock method.
The exchange of operating partnership minority interests
into common shares was not included in the computation of diluted
EPS for certain periods subsequent to their issuance as the
effect of assuming conversion for those periods was antidilutive
(Note 1). As of December 31, 1998, the Company plans to settle
these OP units in cash.
Dividends Per Share
Total dividends declared per common share and the related
components for the years ended December 31, 1998 and 1997, as
reported for income tax purposes, were as follows:
<TABLE>
<CAPTION>
For the year ended December 31, 1998
Non-
Taxable 20% Rate Unrecaptured
Ordinary Return of Capital Section 1250
Date Paid Income Capital Gain Gain Dividends
<S> <C> <C> <C> <C> <C> <C>
1st quarter 5/1/98 $.2253 $ .2213 $.0125 $.0059 $ .465
2nd quarter 8/1/98 .2253 .2213 .0125 .0059 .465
3rd quarter 10/31/98 .2253 .2213 .0125 .0059 .465
4th quarter 1/15/99 .2253 .2213 .0125 .0059 .465
$.9012 $ .8852 $.0500 $.0236 $1.860
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1997
Non-
Taxable 20% Rate Unrecaptured
Ordinary Return of Capital Section 1250
Date Paid Income Capital Gain Gain Dividends
<S> <C> <C> <C> <C> <C> <C>
1st quarter 5/1/97 $.3250 $ .1400 $ .0000 $ .0000 $ .465
2nd quarter 8/1/97 .3250 .1400 .0000 .0000 .465
3rd quarter 10/31/97 .3250 .1400 .0000 .0000 .465
4th quarter 1/15/98 .3250 .1400 .0000 .0000 .465
$1.3000 $ .5600 $ .0000 $ .0000 $1.860
</TABLE>
Preferred dividends of $5,484,421 were paid for the years
ended December 31, 1998 and 1997 of which $276,963 and $0 was
designated as a capital gain dividend for the years ended
December 31, 1998 and 1997, respectively.
16. EMPLOYEE BENEFIT PLANS
401(k) Plan
The Company sponsors a defined contribution retirement plan
pursuant to Section 401(k) of the Internal Revenue Code, whereby
eligible employees may elect to contribute between 1% and 12% of
their gross wages. The Company matches such contributions at a
rate of 25% up to a maximum participant contribution of 4%. The
Company made contributions to this plan, of approximately
$76,000, $60,000 and $47,000 for the years ended December 31,
1998, 1997 and 1996, respectively. Effective February 1, 1999,
employees may elect to contribute up to 15% of their gross wages
with a Company matching contribution of 25% up to a maximum
participant contribution of 6%. Additionally, the Company offers
medical, dental and life insurance benefits to employees.
<PAGE>F29
AERC Share Option Plan
The Company provides an incentive and nonqualified stock
option plan (the "AERC Share Option Plan") under which 543,093 of
the Company's common shares are reserved for awards of share
options to eligible key employees. Options may be granted at per
share prices not less than fair market value at the date of
grant, and in the case of incentive options, must be exercisable
within ten years thereof. Option awards granted are vested in
equal annual increments over no fewer than three years, beginning
on the first anniversary of the date of grant. Activity under
the AERC Share Option Plan is summarized as follows:
<TABLE>
<CAPTION>
Granted and
Authorized Outstanding Available Exercisable
<S> <C> <C> <C> <C>
Balance at December 31, 1995 543,093 324,600 218,493 216,400
Granted (at $20.25 per share) - 25,000 (25,000) -
Forfeited (at $22.00 per share) - (4,001) 4,001 -
Exercisable - - - 104,199
Balance at December 31, 1996 543,093 345,599 197,494 320,599
Granted (at $24.06 per share) - 167,494 (167,494) -
Forfeited (at $22.00 per share) - (3,000) 3,000 -
Exercised (at $22.44 to
$23.75 per share) - (75) - (75)
Exercisable - - - 8,333
Balance at December 31, 1997 543,093 510,018 33,000 328,857
Granted (at $12.50 per share) - 72,200 (72,200) -
Forfeited (at $20.25 to $24.06
per share) - (61,800) 61,800 (18,133)
Exercisable - - - 27,499
Balance at December 31, 1998 543,093 520,418 22,600 338,223 <PAGE>
</TABLE>
The weighted average exercise prices of options outstanding
at December 31, 1998, 1997 and 1996 were $22.50, $22.67 and
$21.87 per share, respectively. The weighted average exercise
prices of options exercisable at December 31, 1998, 1997 and 1996
were $22.17, $21.96 and $22.00 per share, respectively.
Long-Term Plan
Participants in the Long-Term Plan, a long-term incentive
compensation plan, will earn incentive compensation over a three
year period (the "Plan Period") based on specific levels of Funds
From Operations per share, as defined, that are established at
the outset of the Plan Period. Initial awards under the Long-
Term Plan were based on the Plan Period beginning January 1, 1995
and ending December 31, 1997. There were no charges to earnings
under this plan in 1997 or 1998. Beginning with the calendar
year 1998, a new three year Plan Period commenced. Payment of
the incentive compensation earned under the Long-Term Plan may be
made in cash, restricted shares of the Company's common shares or
a combination thereof as determined by the Board of Directors.
There were no payments made on the first payment eligibility date
which occurred in 1998. The second payment eligibility date is
in 2001, and it is anticipated that participants will be eligible
for payments each year thereafter until the Long-Term Plan
terminates in 2005.
Omnibus Equity Plan
The Omnibus Equity Plan, an equity-based incentive
compensation plan, provides for the grant to participants of
options to purchase common shares, awards of common shares
subject to restrictions on transfer, awards of common shares
issuable in the future upon satisfaction of certain conditions,
rights to purchase common shares and other awards based on common
<PAGE>F30
shares. The option price with respect to the grant of options to
purchase common shares will be determined at the time of the
grant but will not be less than 100% of the fair market value of
the common shares at the date of the grant or 110% in the case of
a participant who, at the date of grant, owns shares with more
than 10% of the total combined voting power of all classes of
stock of the Company. The rights to purchase common shares will
enable a participant to purchase common shares (i) at the fair
market value of such shares on the date of such grant or (ii) at
85% of such fair market value on such date if the grant is made
in lieu of cash compensation. Under the terms of the Omnibus
Equity Plan, these grants and awards may not aggregate more than
1,400,000 common shares and no participating employee may receive
awards with respect to more than 250,000 common shares during any
calendar year.
Restricted shares and option awards granted are vested in
equal annual increments over three and five years, respectively,
beginning on the first anniversary of the date of grant.
Activity under the Omnibus Equity Plan is summarized as follows:
<TABLE>
<CAPTION>
Granted and
Authorized Outstanding Available Exercisable
<S> <C> <C> <C> <C>
Authorized 1,400,000 - 1,400,000 -
Restricted shares granted
(at $20.40 per share) - 3,000 (3,000) -
Exercisable - - - 1,000
Balance at December 31, 1995 and
1996 1,400,000 3,000 1,397,000 1,000
Restricted shares granted
(at $22.81 per share) - 1,317 (1,317) -
Options granted (at $24.06
per share) - 513,506 (513,506) -
Exercisable - - - 1,000
Balance at December 31, 1997 1,400,000 517,823 882,177 2,000
Restricted shares granted
(at $20.66 per share) - 484 (484) -
Options granted
(at $24.06 per share) - 250,000 (250,000) -
Forfeited (at $22.8125 to
$24.06 per share) - (17,239) 17,239 -
Exercisable - - - 125,795
Balance at December 31, 1998 1,400,000 751,068 648,932 127,795
</TABLE>
The weighted average exercise prices of options outstanding
at December 31, 1998, 1997 and 1996 were $24.04, $22.67 and
$22.00 per share, respectively. The weighted average exercise
prices of options exercisable at December 31, 1998, 1997 and 1996
were $23.97, $21.96 and $22.00 per share, respectively.
Deferred compensation of $34,000, $30,600 and $40,800 at
December 31, 1998, 1997 and 1996, respectively, has been
reflected as a reduction of paid-in capital in the accompanying
financial statements relating to the issuance of 484 restricted
shares in 1998, 1,317 restricted shares in 1997 and 3,000
restricted shares in 1995.
Options Granted to Outside Directors
The Company has granted options to outside directors on a
periodic basis since the initial public offering ("IPO"). The
shares granted are determined by the Company's Executive
Compensation Committee. Option awards granted vest one year from
the date of grant. Activity is summarized as follows:
<PAGE>F31
<TABLE>
<CAPTION>
Granted Exercisable
<S> <C> <C>
Balance at December 31, 1995 25,000 20,000
Granted (at $22.00 per share) 5,000 -
Forfeited (at $22.00 per share) (6,250) (6,250)
Exercisable - 5,000
Balance at December 31, 1996 23,750 18,750
Granted (at $24.06 per share) 20,000 -
Exercisable - 5,000
Balance at December 31, 1997 43,750 23,750
Exercisable - 20,000
Balance at December 31, 1998 43,750 43,750
</TABLE>
The weighted average exercise prices of options outstanding
at December 31, 1998 and 1997 were $22.94 per share, and at
December 31, 1996 were $22.00 per share. The weighted average
exercise prices of options exercisable at December 31, 1998 were
$22.94 per share and at December 31, 1997 and 1996 were $22.00
per share.
Executive Compensation
The Company has an employment agreement with the President
and Chief Executive Officer. This agreement, dated January 1,
1996, 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.
The Company entered into an employment agreement with the
Executive Vice President (former Chairman, President and Chief
Executive Officer of MIGRA) for a period of three years, and non-
compete and severance agreements with certain other executive
officers.
SFAS No. 123
The Company does not recognize compensation cost for stock
options when the option exercise price equals or exceeds the
market value on the date of the grant. Had compensation cost for
the Company's stock-based compensation plans been determined
based on the fair values of the options granted at the grant<PAGE>
dates, consistent with the method of SFAS No. 123, the Company's
net income and earnings per share at December 31 would have been
as follows:
<PAGE>F32
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net income applicable
to common shares
As reported $12,030,341 $15,227,948 $13,819,566
Pro forma $11,760,348 $15,152,835 $13,812,182
Income per common share
As reported - Basic $ .61 $ .94 $ .99
- Diluted $ .60 $ .94 $ .99
Pro forma - Basic $ .59 $ .94 $ .99
- Diluted $ .59 $ .94 $ .99<PAGE>
</TABLE>
The fair value of each option grant was estimated on the
date of grant using the Black-Scholes options pricing model at
December 31 using the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Risk free interest rate or range 4.7%-6.9% 5.8%-6.2% 6.5%-6.9%
Dividend yield or range 7.8%-10.6% 7.8% 7.9%
Expected life or range 7-8 years 7-8 years 7-8 years
Expected volatility or range 16.1%- 16.3% 17.4%-
21.6% 17.6%
Weighted average per share fair
value of an option granted
during the year $.29 $1.85 $1.91
</TABLE>
The pro forma effect on net income as set forth above is not
representative of the pro forma effect on net income in future
years because it does not take into consideration pro forma
compensation expense related to grants made prior to 1996.
<PAGE>F33
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1998
First Second Third Fourth
Quarter Quarter Quarter Quarter
As
Restated(a)
<S> <C> <C> <C> <C>
Revenues $30,708,805 $ 32,846,237 $39,233,362 $40,219,463
Income before extraordinary
item 4,524,746 5,084,498 4,551,430 3,478,983
Net income 4,524,746 4,959,603 4,551,430 3,478,983
Net income applicable
to common shares 3,153,641 3,588,498 3,180,325 2,107,877
Earnings Per Common Share-
Basic:
Income before extraordinary
item per common share $ .18 $ .22 $ .14 $ .09
Net income per common share $ .18 $ .21 $ .14 $ .09
Weighted average number of
shares outstanding
(in thousands) 17,072 17,133 22,598 22,597
Earnings Per Common Share-
Diluted:
Income before extraordinary
item per common share $ .18 $ .22 $ .14 $ .09
Net income per common share $ .18 $ .21 $ .14 $ .09
Weighted average number
of shares outstanding
(in thousands) 17,075 17,133 23,058 22,671
</TABLE>
<TABLE>
<CAPTION>
1997
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Revenues $24,798,341 $26,823,699 $28,127,471 $29,060,437
Income before
extraordinary item 5,225,527 5,356,942 5,776,024 3,330,163
Extraordinary item - (1,043,446) 19,733 -
Net income 5,225,527 6,400,388 5,756,291 3,330,163
Net income applicable
to common shares 3,854,421 5,029,284 4,385,186 1,959,057
Earnings Per Common Share-
Basic:
Income before extraordinary
item per common share $ .25 $ .26 $ .26 $ .11
Net income per common share $ .25 $ .32 $ .26 $ .11
Weighted average number
of shares outstanding
(in thousands) 15,322 15,322 17,053 17,073
Earnings Per Common Share-
Diluted:
Income before extraordinary
item per common share $ .25 $ .26 $ .26 $ .11
Net income per common share $ .25 $ .32 $ .26 $ .11
Weighted average number
of shares outstanding
(in thousands) 15,351 15,335 17,074 17,097
<FN>
(a) The restated amounts reflect adjustments to the
originally reported net income as follows:
</FN>
</TABLE>
<TABLE>
<S> <C>
Real estate tax accrual adjustments $ 356,550
Operating expenses improperly capitalized 240,150
Write-off of stale checks and miscellaneous
accrual errors (136,122)
$ 460,578
</TABLE>
The amounts as originally reported for the third
quarter ended September 30, 1998 were as follows:
Net income $ 5,012,008
Net income applicable to common shares $ 3,640,903
Net income per share - Basic $ .16
- Diluted $ .16
During the fourth quarter ended December 31, 1998, the
Company recorded the following significant adjustments:
Allowance for receivable $ 200,000
Write-off of receivable 91,827
Local tax accrual 330,000
Write-off of software development costs 817,485
Retroactive rental receivable (431,000)
Real estate tax accrual adjustments 630,054
Severance benefit 268,303
$ 1,906,669
18. SEGMENT REPORTING
In 1998, the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. The Company
has three reportable segments: (1) Market-rate multifamily
properties, (2) Government-Assisted multifamily properties, and
(3) Management and Service Operations. The Company has
identified these segments because the discrete information is the
basis upon which management makes decisions regarding resource
allocation and performance assessment. The Market-rate
multifamily properties are conventional multifamily residential
apartments (the operations are not subject to regulation by HUD).
The Government-Assisted properties are multifamily properties for
which the rents are subsidized and certain aspects of the
operations are regulated by HUD pursuant to Section 8 of the
National Housing Act of 1937. The Management and Service
Operations provide management and advisory services to the
Market-rate and Government-Assisted properties which are owned by
the Company, as well as to clients and properties that are not
owned, but managed. All of the Company's properties and
Management and Service Operations are located in the United
States.
The accounting policies of the segments are the same as
those described in the "Basis of Presentation and Significant
Accounting Policies". The Company evaluates the performance of
its segments and allocates resources to them based on EBITDA.
EBITDA should not be considered as an alternative to net income
(determined in accordance with generally accepted accounting
principles - "GAAP"), as an indicator of the Company's financial
performance, cash flow from operating activities (determined in
accordance with GAAP) or 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.
All of the Company's general and administrative costs which
were $10,216,222, $6,084,654 and $5,912,197 for the years ended
December 31, 1998, 1997 and 1996, respectively, are included in
the Management and Service Operations tier as the Company
considers these costs directly attributable to the management<PAGE>
business, regardless of whether these costs relate to the
management of non-owned or owned properties.
<PAGE>F35
Information on the Company's segments for the years ended
December 31, 1998, 1997 and 1996 is as follows:<PAGE>
<TABLE>
<CAPTION>
For the year ended December 31, 1998
Management
Government- and Service Total
Market-Rate Assisted Operations Consolidated
<S> <C> <C> <C> <C>
Total segment revenues $119,178,073 $14,169,113 $17,755,428 $151,102,614
Elimination of intersegment revenues (193,690) - (7,901,057) (8,094,747)
Consolidated revenues $118,984,383 $14,169,113 $ 9,854,371 $143,007,867
Equity in net income of joint
ventures $ 433,303 $ 11,389 $ - $ 444,692
*EBITDA-including the proportionate
share of joint ventures $ 69,830,973 $ 7,872,637 $(4,792,532) $ 72,911,078
Total assets $794,149,514 $17,410,752 $29,225,089 $840,785,355
Capital expenditures, gross $316,976,705 $ 961,402 $ 2,385,132 $320,323,239
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1997
Management
Government- and Service Total
Market-Rate Assisted Operations Consolidated
<S> <C> <C> <C> <C>
Total segment revenues $ 88,248,024 $14,282,950 $14,135,867 $ 116,666,841
Elimination of intersegment revenues (190,050) - (7,666,843) (7,856,893)
Consolidated revenues $ 88,057,974 $14,282,950 $ 6,469,024 $ 108,809,948
Equity in net income of joint
ventures $ 537,828 $ 23,106 $ - $ 560,934
*EBITDA-including the proportionate
share of joint ventures $ 53,256,918 $ 7,503,626 $(2,265,538) $ 58,495,006
Total assets $ 500,957,587 $21,882,821 $31,069,897 $ 553,910,305
Capital expenditures, gross $ 132,707,065 $ 778,597 $ 2,331,667 $ 135,817,329
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1996
Management
Government- and Service Total
Market-Rate Assisted Operations Consolidated
<S> <C> <C> <C> <C>
Total segment revenues $ 74,363,956 $14,268,195 $ 12,408,715 $101,040,866
Elimination of intersegment revenues (190,000) - (6,395,718) (6,585,718)
Consolidated revenues $ 74,173,956 $14,268,195 $ 6,012,997 $ 94,455,148
Equity in net income of joint
ventures $ 290,702 $ 14,487 $ - $ 305,189 <PAGE>
*EBITDA-including the proportionate
share of joint ventures $ 45,978,993 $ 8,123,356 $ (1,383,354)$ 52,718,995
Total assets $381,341,306 $26,299,649 $ 17,070,343 $424,711,298
Capital expenditures, gross $ 77,455,556 $ 680,588 $ 1,996,697 $ 80,132,841 <PAGE>
<FN>
* Intersegment revenues and expenses have been eliminated in the
computation of EBITDA for each of the segments.
</FN>
</TABLE>
<PAGE>F36
A reconciliation of total segment EBITDA to total
consolidated net income for the years ended December 31, 1998,
1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Total EBITDA for reportable segments $ 72,911,078 $ 58,495,006 $52,718,995
EBITDA-proportionate share of joint ventures (2,555,349) (2,801,345) (2,601,877)
Depreciation and amortization (24,898,978) (19,265,827) (15,535,587)
Interest expense (29,050,346) (19,144,260) (15,515,956)
Interest income 1,164,189 925,979 238,413
Income taxes (434,434) (128,726) -
Gain on sale of property 503,497 1,607,829 -
Extraordinary (loss) gain (124,895) 1,023,713 -
Consolidated net income $ 17,514,762 $ 20,712,369 $19,303,988 <PAGE>
</TABLE>
19. PRO FORMA CONDENSED FINANCIAL INFORMATION (UNAUDITED)
As more fully described in Note 2, during the years ended
December 31, 1998 and 1997, the Company completed the acquisition
of 14 and eight multifamily properties (the "Acquired
Properties") with total units of 3,682 and 1,762, during 1998
and 1997, respectively, for an aggregate purchase price of $268.3
million and $104.6 million, respectively. The multifamily
property acquisitions are summarized as follows:
<TABLE>
<CAPTION>
Month
Acquired by
Multifamily Property Location Units the Company
<S> <C> <C> <C>
1998 Acquisitions:
Cypress Shores Apartments Coconut Creek, Florida 300 February
Reflections Apartments Columbia, Maryland 184 February
The Falls Apartments Atlanta, Georgia 520 February
Country Club Apartments Toledo, Ohio 316 February
20th and Campbell Apartments Phoenix, Arizona 204 June
Annen Woods Apartments Pikesville, Maryland 132 June
Desert Oasis Apartments Palm Desert, California 320 June
Fleetwood Apartments Houston, Texas 104 June
Hampton Point Apartments Silver Springs, Maryland 352 June
Morgan Place Apartments Atlanta, Georgia 186 June
Peachtree Apartments St. Louis, Missouri 156 June
Windsor Falls Apartments Raleigh, North Carolina 276 June
Steeplechase at Shiloh Crossing Apts. Indianapolis, Indiana 264 August
Windsor Pines Pembroke Pines, Florida 368 October
3,682
1997 Acquisitions:
The Gables at White River Indianapolis, Indiana 228 February
Remington Place Apartments Cincinnati, Ohio 234 April
Saw Mill Village Apartments Columbus, Ohio 340 April
Hawthorne Hills Apartments Toledo, Ohio 88 May
Oak Bend Commons Columbus, Ohio 102 May
Clinton Place Apartments Clinton Twp., Michigan 202 August
Waterstone Apartments Indianapolis, Indiana 344 August
Spring Valley Detroit, Michigan 224 October
1,762
5,444
</TABLE>
The operating results of the Acquired Properties are included in the
results of operations of the Company from the dates of acquisition.
The following unaudited supplemental pro forma operating data for 1998
is presented to reflect, as of January 1, 1998, the effects of: (i) the 12
property acquisitions completed in 1998, and (ii) the merger of MIGRA. The
following unaudited supplemental pro forma operating data for 1997 is
presented to reflect, as of January 1, 1997, the effects of: (i) the six
property acquisitions completed in 1997, (ii) the 12 property acquisitions
completed in 1998, (iii) the merger of MIGRA, and (iv) the offering of
1,750,000 common shares.
<PAGE>F37
<TABLE>
<CAPTION>
December 31,
(In thousands, except per share amounts) 1998 1997
<S> <C> <C>
Revenues $154,147 $146,195
*Net income 15,278 18,751
Net income applicable to common shares 9,793 13,266
Earnings per common share:
- Basic $ 0.43 $ 0.59
- Diluted $ 0.43 $ 0.58
Weighted average number of common shares
outstanding:
- Basic 22,597 22,597
- Diluted 22,823 22,823
<FN>
*Before extraordinary item
</FN>
</TABLE>
The 1998 and 1997 pro forma financial information does not include the
revenue and expenses for the period January 1 through the date the
properties were acquired by the Company for Oak Bend Apartments and
Waterstone Apartments, properties that were acquired in 1997, nor does it
include Windsor at Kirkman Apartments, Windsor Pines and Steeplechase at
Shiloh Crossing Apartments, properties that were acquired in 1998. The
revenue and expenses of the aforementioned properties were excluded from
the pro forma financial information for 1998 and 1997 as they were under
construction during substantially all of the periods prior to their
acquisition.
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 set
forth, nor does it purport to represent the results of operations of future
periods of the Company.
20. SUBSEQUENT EVENTS
HUD Settlement
As more fully described in Note 11, on March 12, 1999, the Company
entered into a Settlement Agreement with HUD resolving all outstanding
disputes arising out of a Comprehensive Management Review completed by HUD
in 1997. This Settlement Agreement also provides for the payment by HUD
of the Rainbow Terrace Apartments retroactive rental increase receivable as
of December 31, 1998.
Shareholder Rights Plan
Subsequent to December 31, 1998, the Company adopted a Shareholder
Rights Plan in order to protect the interests of the Company and its
shareholders if any hostile takeover activity should occur.
To implement the Plan, the Board of Directors declared a distribution<PAGE>
of one Right for each of the Company's outstanding common shares. Each
Right entitles the holder to purchase from the Company 1/1,000th of a Class
B Series I Cumulative Preferred Share (a "Preferred Share") at a purchase
price of $40 per Right, subject to adjustment. One one-thousandth of a
Preferred Share is intended to be approximately the economic equivalent of
one common share. The Rights will expire on January 6, 2009, unless
redeemed by the Company as described below.
The Rights are not currently exercisable and trade with the Company's
common shares. The Rights will become exercisable if a person or group
becomes the beneficial owner of 15% or more of the then outstanding common
shares of the Company or announces an offer to acquire 15% or more of the
Company's then outstanding common shares.
<PAGE>F38
If a person or group acquires 15% or more of the Company's outstanding
common shares, then each Right not owned by the acquiring person or its
affiliates will entitle its holder to purchase, at the Right's then-current
exercise price, fractional preferred shares that are approximately the
economic equivalent of common shares (or, in certain circumstances, common
shares, cash, property or other securities of the Company) having a market
value equal to twice the then-current exercise price. In addition, if,
after the Rights become exercisable, the Company is acquired in a merger or
other business combination transaction with an acquiring person or its
affiliates or sells 50% or more of its assets or earnings power to an
acquiring person or its affiliates, each Right will entitle its holder to
purchase, at the Right's then-current exercise price, a number of the
acquiring Company's common shares having a market value of twice the
Right's exercise price. The Board of Directors may redeem the Rights, in
whole, but not in part, at a price of $.01 per Right.
The distribution was made on January 29, 1999 to shareholders of
record on that date. The initial distribution of Rights is not taxable to
shareholders.
Management Contract Cancellation
On January 13, 1999, the Company terminated its management contract
for Longwood Apartments, which will result in a loss of management fee
income in 1999. Approximately $297,008 of management fees was recognized
with respect to this contract in 1998. Moreover, pursuant to the terms of
the HUD Settlement Agreement discussed in Note 11, in the second quarter of
1999, the Company may terminate its management contract for Park Village
Apartments, which may result in a partial loss of management fee income in
1999. The annual management fees for Park Village Apartments in 1998 were
$26,735.
In addition, pursuant to the terms of a separate settlement agreement
with affiliates entered into in conjunction with the settlement agreement
with the Corporation as discussed in Note 8, the Company has agreed to end
its management of certain commercial properties owned by certain affiliated
persons upon 60 days prior written notice from the respective owners of
those properties. Such notice has not been received. The management fees
generated from those commercial properties in 1998 were $126,451.
The Company further anticipates the loss of management fees from
Euclid Medical & Commercial Arts Building, a non-owned commercial property,
because of the likelihood of foreclosure proceedings. The annual
management fees generated from this property in 1998 were $92,524.
Payoff of MIGRA Line of Credit Facility
On February 10, 1999, the Company paid off the $446,565 MIGRA Line of
Credit Facility.
Dividends Declared
On February 16, 1999, the Company declared a dividend of $0.60938 per
Depositary Share on its Class A Cumulative Preferred Shares which was paid
on March 15, 1999 to shareholders of record on March 1, 1999.<PAGE>
<PAGE>F39
ASSOCIATED ESTATES REALTY CORPORATION - SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
<TABLE>
<CAPTION>
Initial Cost Historical Cost
---------------------------------- ---------------------
Encumbrances Buildings & Improvements Buildings &
Property (1) Land Improvements (2) Land Improvements
<S> <C> <C> <C> <C> <C> <C>
RESIDENTIAL MULTIFAMILY PROPERTIES
NORTHERN OHIO
Barrington $ - $2,357,168 $ 22,143,462 $ - $ 2,357,168$ 22,143,462
Bay Club - 129,295 3,621,553 47,201 129,295 3,668,754
Colonnade West - 180,264 1,114,901 681,816 277,146 1,699,835
Country Club Apartments - 2,772,168 12,318,828 - 2,772,168 12,318,828
Cultural Gardens - 84,377 1,417,195 127,837 84,377 1,545,032
Edgewater Landing - 417,639 4,518,082 237,363 417,639 4,755,445
Ellet - - 2,174,674 244,808 - 2,419,482
Gates Mills Club - 65,441 3,110,746 323,277 66,845 3,432,619
Gates Mills III 6,619,520 277,898 7,387,584 574,330 277,898 7,961,914
Hawthorne Hills Apartments - 370,282 2,719,463 - 370,282 2,719,463
Hillwood I - - 1,449,483 148,019 - 1,597,502
Holly Park - 497,500 6,947,935 49,608 497,500 6,997,543
Huntington Hills - 360,799 3,181,028 22,299 360,799 3,203,327
Jennings - 205,100 1,665,155 11,893 205,100 1,677,048
KTC Properties (3) - 2,724,005 17,522,183 57,488 2,724,005 17,579,671
Mallard's Crossing 4,092,304 941,070 8,499,249 544,567 941,070 9,043,816
Memphis Manor - 128,948 852,270 100,701 128,948 952,971
Park Place - 145,000 1,447,097 373,854 161,077 1,804,874
Pinecrest - 302,150 2,156,000 - 302,150 2,156,000
Portage Towers - 388,353 5,609,249 2,172,767 524,150 7,646,219
Puritas Place - 194,441 2,697,720 444,407 194,441 3,142,127
Rainbow Terrace 1,935,123 256,000 8,194,477 1,567,187 256,000 9,761,664
Riverview Towers - - 2,300,004 249,958 - 2,549,962
Shaker Park Gardens 2,895,367 276,787 3,012,464 46,744 276,787 3,059,208
The Woodlands of North
Royalton 7,521,883 389,527 9,004,652 5,200 389,527 9,009,852
State Road - - 1,184,542 90,874 - 1,275,416
Statesman II - 222,657 1,632,507 106,041 222,657 1,738,548
Sutliff II - - 3,276,512 222,172 - 3,498,684
Tallmadge Acres - 235,559 4,643,644 789,071 269,869 5,398,405<PAGE>
The Oaks 1,841,854 170,000 2,241,624 25,047 170,000 2,266,671
The Triangle 16,754,148 - 20,578,668 1,344,995 - 21,923,663
Timbers (3) - 400,111 4,056,547 84,978 400,111 4,141,525
Twinsburg - - 2,833,574 310,484 - 3,144,058
Vantage Villa - 565,952 4,598,362 6,531 565,952 4,604,893
Villa Moderne - 96,584 746,332 65,436 102,564 805,788
Village Towers - - 2,442,343 204,763 - 2,647,106
Washington Manor - 289,388 1,489,494 849 289,388 1,490,343
West High - - 2,714,785 322,465 - 3,037,250
West Park Plaza - 127,890 820,402 36,018 127,890 856,420
Westchester Townhouses - 693,300 5,685,526 26,625 693,300 5,712,151
Western Reserve Village - 691,059 6,931,426 - 691,059 6,931,426
Westlake Investment - 35,685 323,834 739,102 35,685 1,062,936
Williamsburg at Greenwood
Village - 843,642 12,929,692 32,604 843,642 12,962,296<PAGE>
</TABLE>
<TABLE>
<CAPTION>
ASSOCIATED ESTATES REALTY CORPORATION SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
Historical Cost
Total Cost,
Net of Depreciable Date of
Accumulated Accumulated Lives Construction/
Property Total Depreciation Depreciation Years Acquisition
<S> <C> <C> <C> <C> <C>
RESIDENTIAL MULTIFAMILY PROPERTIES
NORTHERN OHIO
Barrington $24,500,630$ 628,624 $ 23,872,006 5-30 September, 1995
Bay Club 3,798,049 1,235,766 2,562,283 10-30 December, 1990
Colonnade West 1,976,981 1,306,182 670,799 10-30 July, 1964
Country Club Apartments 15,090,996 345,570 14,745,426 5-30 February, 1998
Cultural Gardens 1,629,409 1,456,596 172,813 10-30 April, 1966
Edgewater Landing 5,173,084 758,962 4,414,122 5-30 April, 1994
Ellet 2,419,482 1,563,944 855,538 30 January, 1978
Gates Mills Club 3,499,464 2,688,789 810,675 5-30 December, 1980
Gates Mills III 8,239,812 6,255,967 1,983,845 6-40 December, 1978
Hawthorne Hills Apartments 3,089,745 151,258 2,938,487 5-30 May, 1997
Hillwood I 1,597,502 1,339,105 258,397 14-30 June, 1976
Holly Park 7,495,043 2,200,364 5,294,679 10-30 September, 1990
Huntington Hills 3,564,126 2,226,964 1,337,162 30 October, 1982
Jennings 1,882,148 956,631 925,517 10-30 November, 1981
KTC Properties (3) 20,303,676 1,936,161 18,367,515 5-30 September, 1995
Mallard's Crossing 9,984,886 1,134,116 8,850,770 5-30 February, 1995
Memphis Manor 1,081,919 898,853 183,066 5-30 December, 1966
Park Place 1,965,951 1,529,464 436,487 5-30 October, 1966
Pinecrest 2,458,150 808,502 1,649,648 7-30 September, 1987
Portage Towers 8,170,369 5,452,394 2,717,975 6-40 May, 1973
Puritas Place 3,336,568 1,717,562 1,619,006 5-30 October, 1981
Rainbow Terrace 10,017,664 8,867,969 1,149,695 3-30 September, 1981
Riverview Towers 2,549,962 1,601,985 947,977 30 October, 1979
Shaker Park Gardens 3,335,995 3,016,408 319,587 15-17 May, 1964
The Woodlands of North
Royalton 9,399,379 5,295,486 4,103,893 5-30 March, 1982
State Road 1,275,416 981,757 293,659 14-30 September, 1977
Statesman II 1,961,205 1,642,906 318,299 13 May, 1987
Sutliff II 3,498,684 2,833,264 665,420 5-30 December, 1979
Tallmadge Acres 5,668,274 3,972,650 1,695,624 6-40 June, 1981
The Oaks 2,436,671 1,022,805 1,413,866 7-30 June, 1985<PAGE>
The Triangle 21,923,663 7,580,085 14,343,578 5-30 March, 1989
Timbers (3) 4,541,636 1,557,350 2,984,286 7-30 September, 1987
Twinsburg 3,144,058 1,974,076 1,169,982 10-30 July, 1979
Vantage Villa 5,170,845 485,198 4,685,647 5-30 October, 1995
Villa Moderne 908,352 762,674 145,678 15-30 October, 1963
Village Towers 2,647,106 1,699,576 947,530 30 October, 1979
Washington Manor 1,779,731 945,801 833,930 10-30 July, 1994
West High 3,037,250 2,747,071 290,179 5-15 December, 1981
West Park Plaza 984,310 838,810 145,500 5-30 April, 1964
Westchester Townhouses 6,405,451 2,444,751 3,960,700 7-30 November, 1989
Western Reserve Village 7,622,485 205,558 7,416,927 10-30 August, 1996
Westlake Investment 1,098,621 931,526 167,095 15-30 October, 1985
Williamsburg at Greenwood
Village 13,805,938 2,106,266 11,699,672 5-30 February, 1994
</TABLE>
<PAGE>F40
ASSOCIATED ESTATES REALTY CORPORATION SCHEDULE III -
REAL ESTATE AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
December 31, 1998
Initial Cost Historical Cost
Encumbrances Buildings & Improvements Buildings &
Property (1) Land Improvements (2) Land Improvements
<S> <C> <C> <C> <C> <C> <C>
Winchester (4) 4,125,835 299,660 5,133,088 1,126,823 344,355 6,215,216
Winchester II - 352,200 8,295,653 399,187 372,877 8,674,163
CENTRAL OHIO
Arrowhead Station - 477,838 4,216,425 82,634 477,838 4,299,059
Bedford Commons - 928,921 5,963,753 3,014 928,921 5,966,767
Bolton Estates - 707,601 5,124,052 14,595 707,601 5,138,647
Bradford at Easton - 2,033,450 16,302,694 19,925 2,033,450 16,322,619
Residence at Christopher
Wren - 1,560,355 13,753,580 16,720 1,560,355 13,770,300
Colony Bay East - 714,150 4,952,909 25,363 714,150 4,978,272
Heathermoor - 1,796,346 9,087,316 3,578 1,796,346 9,090,894
Kensington Grove - 533,117 4,600,057 1,588 533,117 4,601,645
Lake Forest - 840,155 6,134,704 69,053 840,155 6,203,757
Muirwood Village at
Bennell - 789,836 4,656,965 1,726 789,836 4,658,691
Muirwood Village at
London - 205,097 3,728,615 2,710 205,097 3,731,325
Muirwood Village at
Mt. Sterling - 152,812 1,475,391 439 152,812 1,475,830
Muirwood Village at
Zanesville - 368,530 4,820,330 2,830,964 368,530 7,651,294
Oak Bend Commons
Apartments - 732,803 5,030,076 - 732,803 5,030,076
Pendleton Lakes East - 1,313,824 8,026,991 74,503 1,313,824 8,101,494
Perimeter Lakes - 1,268,762 8,778,081 122,843 1,268,762 8,900,924
The Residence at Newark - 323,159 2,807,885 1,331,872 323,159 4,139,757
Saw Mill Village - 2,548,488 17,261,445 - 2,548,488 17,261,445
Sheffield at Sylvan - 347,590 3,102,488 1,774,059 526,332 4,697,805
Sterling Park - 645,538 3,919,325 1,171 645,538 3,920,496
Residence at Turnberry - 868,868 11,567,161 257,305 868,868 11,824,466
Wyndemere - 602,128 2,782,217 1,502,476 602,128 4,284,693<PAGE>
The Residence at
Washington - 289,960 2,579,835 - 289,960 2,579,835
SOUTHERN OHIO
Remington Place - 1,644,583 10,123,827 - 1,644,583 10,123,827
MICHIGAN
Arbor Landings - 1,032,000 10,403,123 1,191,349 1,259,327 11,367,145
Aspen Lakes Apartments 2,926,732 339,596 5,507,707 18,481 339,596 5,526,188
Central Park Place - 1,013,474 7,362,973 37,696 1,013,474 7,400,669
Country Place Apartments(3) - 767,864 4,180,887 12,455 767,864 4,193,342
Clinton Place Apartments - 1,219,248 9,506,062 - 1,219,248 9,506,062
Georgetown Park
Apartments - 1,778,286 12,141,126 11,466,923 2,128,286 23,258,049
Oaks and Woods at Hampton - 3,025,954 27,204,231 38,276 3,025,954 27,242,507
The Landings at the
Preserve - 814,961 7,189,546 7,491 814,961 7,197,037
Spring Brook Apartments - 609,742 5,307,960 - 609,742 5,307,960
Spring Valley Apartments - 1,432,830 13,461,588 - 1,432,830 13,461,588
Summer Ridge - 1,250,919 11,193,520 - 1,250,919 11,193,520<PAGE>
</TABLE>
ASSOCIATED ESTATES REALTY CORPORATION- SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
<TABLE>
<CAPTION>
Historical Cost
Total Cost,
Net of Depreciable Date of
Accumulated Accumulated Lives Construction/
Property Total Depreciation Depreciation Years Acquisition
<S> <C> <C> <C> <C> <C>
Winchester (4) 6,559,571 5,268,114 1,291,457 5-30 March, 1972
Winchester II 9,047,040 6,833,176 2,213,864 6-40 March, 1979
CENTRAL OHIO
Arrowhead Station 4,776,897 554,692 4,222,205 5-30 March, 1995
Bedford Commons 6,895,688 795,709 6,099,979 5-30 December, 1994
Bolton Estates 5,846,248 795,465 5,086,783 5-30 July, 1994
Bradford at Easton 18,356,069 882,012 17,474,057 5-30 October, 1995
Residence at
Christopher Wren 15,330,655 2,201,249 13,129,406 5-30 March, 1994
Colony Bay East 5,692,422 612,283 5,080,139 5-30 February, 1995
Heathermoor 10,887,240 1,324,494 9,562,746 5-30 August, 1994
Kensington Grove 5,134,762 529,849 4,604,913 5-30 July, 1995
Lake Forest 7,043,912 911,860 6,132,052 5-30 July, 1994
Muirwood Village at
Bennell 5,448,527 752,719 4,695,808 5-30 March, 1994
Muirwood Village at
London 3,936,422 600,610 3,335,812 5-30 March, 1994
Muirwood Village at
Mt. Sterling 1,628,642 239,092 1,389,550 5-30 March, 1994
Muirwood Village at
Zanesville 8,019,824 1,109,606 6,910,218 5-30 March, 1994
Oak Bend Commons
Apartments 5,762,879 264,397 5,498,482 5-30 May, 1997
Pendleton Lakes East 9,415,318 1,174,176 8,241,142 5-30 March, 1994
Perimeter Lakes 10,169,686 678,128 9,491,558 5-30 Sept, 1996
The Residence at Newark 4,462,916 647,839 3,815,077 5-30 March, 1994
Saw Mill Village 19,809,933 976,010 18,833,923 5-30 April, 1997
Sheffield at Sylvan 5,224,137 682,241 4,541,896 5-30 March, 1994
Sterling Park 4,566,034 570,107 3,995,927 5-30 August, 1994
Residence at Turnberry 12,693,334 1,867,027 10,826,307 5-30 March, 1994
Wyndemere 4,886,821 564,187 4,322,634 5-30 September, 1994<PAGE>
The Residence at
Washington 2,869,795 252,546 2,617,249 10-30 February, 1996
SOUTHERN OHIO
Remington Place 11,768,410 584,336 11,184,074 5-30 April, 1997
MICHIGAN
Arbor Landings 12,626,472 1,018,033 11,608,439 5-30 January, 1995
Aspen Lakes Apartments 5,865,784 423,887 5,441,897 5-30 September, 1996
Central Park Place 8,414,143 988,655 7,425,488 5-30 December, 1994
Country Place Apartments (3) 4,961,206 495,554 4,465,652 5-30 June, 1995
Clinton Place Apartments 10,725,310 425,692 10,299,618 5-30 August, 1997
Georgetown Park
Apartments 25,386,335 2,005,212 23,381,123 10-30 December, 1994
Oaks and Woods at
Hampton 30,268,461 3,086,692 27,181,769 5-30 August, 1995
The Landings at the
Preserve 8,011,998 785,963 7,226,035 5-30 September, 1995
Spring Brook Apartments 5,917,702 443,725 5,473,977 5-30 June, 1996
Spring Valley Apartments 14,894,418 521,617 14,372,801 5-30 October, 1997
Summer Ridge 12,444,439 1,032,159 11,412,280 5-30 April, 1996
</TABLE>
<PAGE>F41
ASSOCIATED ESTATES REALTY CORPORATION SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
<TABLE>
<CAPTION>
Initial Cost Historical Cost
Encumbrances Buildings & Improvements Buildings &
Property (1) Land Improvements (2) Land Improvements
<S> <C> <C> <C> <C> <C> <C>
FLORIDA
Cypress Shores - 2,768,847 16,570,875 - 2,768,847 16,570,875
Windsor Pines 16,454,851 4,833,541 28,845,451 - 4,833,541 28,845,451
GEORGIA
The Falls 9,379,144 5,403,009 23,772,694 - 5,403,009 23,772,694
Morgan Place - 3,292,205 9,194,451 - 3,292,205 9,194,451
MARYLAND
Reflections 5,500,000 1,807,172 12,509,968 - 1,807,172 12,509,968
Annen Woods - 1,389,231 9,632,734 - 1,389,231 9,632,734
Hampton Pointe - 3,394,350 22,263,146 - 3,394,350 22,263,146
NORTH CAROLINA
Windsor Falls - 1,551,232 16,495,390 - 1,551,232 16,495,390
TEXAS
Fleetwood - 996,810 5,747,188 - 996,810 5,747,188
ARIZONA
20th and Campbell - 3,192,091 10,385,766 - 3,192,091 10,385,766
INDIANA
The Gables at White River - 1,064,131 11,680,107 - 1,064,131 11,680,107
Waterstone Apartments - 1,508,469 22,861,129 - 1,508,469 22,861,129
Steeplechase - 2,260,704 16,312,178 - 2,260,704 16,312,178
CALIFORNIA
Desert Oasis - 1,600,803 14,219,922 - 1,600,803 14,212,922
PENNSYLVANIA
Chestnut Ridge - 2,145,735 19,159,234 - 2,145,735 19,159,234<PAGE>
LAND HELD FOR DEVELOPMENT
NORTHERN OHIO
Barrington - - - - - -
Village at Avon - 2,157,511 - - 2,145,011 -
Westlake Investment - 523,314 - - 523,314 -
Western Reserve Village - - - - - -
CENTRAL OHIO
Muirwood Village at Mt.
Sterling - 125,926 - - 125,926 -
Wyndemere - 200,140 - - 200,140 -<PAGE>
</TABLE>
ASSOCIATED ESTATES REALTY CORPORATION SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
<TABLE>
<CAPTION>
Historical Cost
Total Cost,
Net of Depreciable Date of
Accumulated Accumulated Lives Construction/
Property Total Depreciation Depreciation Years Acquisition
<S> <C> <C> <C> <C> <C>
FLORIDA
Cypress Shores 19,339,722 310,815 19,028,907 5-30 February, 1998
Windsor Pines 33,678,992 181,334 33,497,658 5-30 October, 1998
GEORGIA
The Falls 29,175,703 442,904 28,732,799 5-30 February, 1998
Morgan Place 12,486,656 153,311 12,333,345 5-30 July, 1998
MARYLAND
Reflections 14,317,140 231,754 14,085,386 5-30 February, 1998
Annen Woods 11,021,965 150,369 10,871,596 5-30 July, 1998
Hampton Pointe 25,657,496 363,133 25,294,363 5-30 July, 1998
NORTH CAROLINA
Windsor Falls 18,046,622 274,518 17,772,104 5-30 July, 1998
TEXAS
Fleetwood 6,743,998 95,683 6,648,315 5-30 July, 1998
ARIZONA
20th and Campbell 13,577,857 169,092 13,408,765 5-30 July, 1998
INDIANA
The Gables at White River 12,744,238 740,684 12,003,554 5-30 February, 1997
Waterstone Apartments 24,369,598 1,017,895 23,351,703 5-30 August, 1997
Steeplechase 18,572,882 209,274 18,363,608 5-30 July, 1998
CALIFORNIA
Desert Oasis 15,813,725 236,961 15,576,764 5-30 July, 1998
PENNSYLVANIA
Chestnut Ridge 21,304,969 1,811,199 19,493,770 5-30 March, 1996<PAGE>
LAND HELD FOR DEVELOPMENT
NORTHERN OHIO
Barrington - - - - September, 1995
Village at Avon 2,145,011 - 2,145,011 - June, 1998
Westlake Investment 523,314 - 523,314 - October, 1985
Western Reserve Village - - - - August, 1996
CENTRAL OHIO
Muirwood Village at Mt.
Sterling 125,926 - 125,926 - December, 1996
Wyndemere 200,140 - 200,140 - March, 1997
</TABLE>
<PAGE>F42
ASSOCIATED ESTATES REALTY CORPORATION SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
<TABLE>
<CAPTION>
Initial Cost Historical Cost
Encumbrances Buildings & Improvements Buildings &
Property (1) Land Improvements (2) Land Improvements
<S> <C> <C> <C> <C> <C> <C>
FLORIDA
Kirkman - 3,222,345 - - 3,222,345 -
GEORGIA
Boggs Road - 3,954,771 - - 3,954,771 -
MICHIGAN
Arbor Landings-Phase II - 422,180 - - 422,180 -
Aspen Lakes Apts. - 402,100 - - 402,100 -
Georgetown Park
Apartments - - - - - -
The Landings at the
Preserve - 266,020 - - 266,020 -
$ 80,046,761$101,949,321 $741,522,087 34,874,598 103,048,712 775,284,794
Management Service Companies 3,920,657 754,643 3,166,014
Land, Building & Improvements $ 38,795,255 $ 103,803,355$778,450,808
</TABLE>
ASSOCIATED ESTATES REALTY CORPORATION- SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
<TABLE>
<CAPTION>
Historical Cost
Total Cost,
Net of Depreciable Date of
Accumulated Accumulated Lives Construction/
Property Total Depreciation Depreciation Years Acquisition
<S> <C> <C> <C> <C> <C>
FLORIDA
Kirkman 3,222,345 - 3,222,345 5-30 July, 1998
GEORGIA
Boggs Road 3,954,771 - 3,954,771 -
MICHIGAN
Arbor Landings - Phase II 422,180 - 422,180 - August, 1995
Aspen Lakes Apts. 402,100 - 402,100 - September, 1996
Georgetown Park Apartments - - - - December, 1994
The Landings at the Preserve 266,020 - 266,020 - September, 1995
878,333,506 139,357,785 738,975,721
Management Service Companies 3,920,657 667,212 3,253,445 10-30 November, 1993
Land, Building & Improvements 882,254,163 140,024,997 742,229,166
FURNITURE, FIXTURE & EQUIPMENT 30,804,870 13,916,705 16,888,165
Construction in progress 42,612,292 - 42,612,292
$955,671,325$153,941,702 $ 801,729,623
<FN>
(1) Encumbrances include mortgage debt, deferred liability and other
obligations secured by the real estate assets.
(2) Improvements include the purchase price adjustment for certain
properties in which cash was paid to unrelated third parties to
acquire their interests.
(3) In 1998, properties were combined for operating, marketing
and reporting purposes.
(4) Refer to Note 9 to the December 31, 1998 financial statements
of Associated Estates Realty Corporation.
</FN>
</TABLE>
<PAGE>F43
ASSOCIATED ESTATES REALTY CORPORATION SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
<TABLE>
December 31, 1998
<CAPTION>
Initial Cost Historical Cost
Encumbrances Buildings & Improvements Buildings &
Property (1) Land Improvements (2) Land Improvements
JOINT VENTURE PROPERTIES
INVESTMENTS IN WHICH
AERC HAS A 50% INTEREST
RESIDENTIAL MULTIFAMILY PROPERTIES
NORTHERN OHIO
<S> <C> <C> <C> <C> <C> <C>
College Towers $ - $ 340,000 $ 3,351,247 $ 223,653$ 340,000 $ 3,574,900
Highland House - 54,053 209,903 - 54,053 209,903
Lakeshore Village 4,095,680 482,217 3,861,676 - 482,217 3,861,676
4,095,680 876,270 7,422,826 223,653 876,270 7,646,479
INVESTMENTS IN WHICH
AERC HAS A 33% INTEREST
RESIDENTIAL MULTIFAMILY PROPERTIES
NORTHERN OHIO
Americana 11,823,211 504,207 7,127,922 585,230 504,207 7,713,152
Euclid House 1,608,465 105,000 1,218,156 7,371 105,000 1,225,527
Gates Mills Towers 18,694,683 - 10,358,694 9,458,596 1,351,214 18,466,076
Watergate 14,088,783 499,849 13,538,629 603,761 499,849 14,142,390
46,215,142 1,109,056 32,243,401 10,654,958 2,460,270 41,547,145
Land, Building and
Improvements $ 50,310,822$1,985,326 $ 39,666,227 $ 10,878,611$ 3,336,540 $ 49,193,624<PAGE>
</TABLE>
ASSOCIATED ESTATES REALTY CORPORATION - SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
<TABLE>
<CAPTION>
Historical Cost
Total Cost,
Net of Depreciable Date of
Accumulated Accumulated Lives Construction/
Property Total Depreciation Depreciation Years Acquisition
JOINT VENTURE PROPERTIES
INVESTMENTS IN WHICH
AERC HAS A 50% INTEREST
RESIDENTIAL MULTIFAMILY PROPERTIES
NORTHERN OHIO
<S> <C> <C> <C> <C> <C>
College Towers $ 3,914,900 $ 3,394,653 $ 520,247 7-30 January, 1969
Highland House 263,956 209,903 54,053 5-30 June, 1964
Lakeshore Village 4,343,893 2,091,743 2,252,150 3-30 October, 1982
8,522,749 5,696,299 2,826,450
INVESTMENTS IN WHICH
AERC HAS A 33% INTEREST
RESIDENTIAL MULTIFAMILY PROPERTIES
NORTHERN OHIO
Americana 8,217,359 7,283,864 933,495 5-30 June, 1968
Euclid House 1,330,527 1,201,635 128,892 7-30 August, 1969
Gates Mills Towers 19,817,290 12,543,303 7,273,987 10-30 December, 1969
Watergate 14,642,239 13,050,123 1,592,116 5-30 July, 1971
44,007,415 34,078,925 9,928,490
Land, Building and Improvements 52,530,164 39,775,224 12,754,940
Furniture, Fixtures and Equipment 2,855,770 2,790,767 65,003
Construction in Progress 40,447 - 40,447
$55,426,381 $ 42,565,991 $ 12,860,390
<FN>
(1) Encumbrances include mortgage debt and other obligations secured
by the real estate assets.
(2) Improvements include the purchase price adjustment for certain
properties in which cash was paid to unrelated third parties to
acquire their interests.
</FN>
</TABLE>
<PAGE>F44
SCHEDULE III (continued)
ASSOCIATED ESTATES REALTY CORPORATION
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
The Aggregate Cost for Federal Income Tax purposes was
approximately $800 million and $600 million at December 31, 1998
and 1997, respectively.
The changes in Total Real Estate Assets for the years ended
December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Balance, beginning of period $ 646,498,966 $ 513,966,475
Disposal of fixed assets (11,150,879) (3,284,839)
New acquisition properties 246,384,308 105,681,282
Improvements 73,938,930 30,136,048
Balance, end of period $ 955,671,325 $ 646,498,966
</TABLE>
The changes in Accumulated Depreciation and Amortization for
the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Balance, beginning of period $130,668,538 $112,102,829
Disposal of fixed assets (570,806) -
Depreciation for period 23,843,970 18,565,709
Balance, end of period $153,941,702 $130,668,538
</TABLE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
OF
ASSOCIATED ESTATES REALTY CORPORATION
<TABLE>
<CAPTION>
State of
Subsidiary Incorporation
<S> <C>
AERC of Florida, Inc. Ohio
AERC of Georgia, Inc. Ohio
AERC of Indiana, LLC Indiana
AERC of Michigan, LLC Ohio
AERC of Texas, Inc. Ohio
Aspen Lakes - AERC, Inc. Michigan
Associated Estates Realty Corporation of
Missouri, Inc. Ohio
Associated Estates Realty Corporation of North
Carolina Limited Liability Company Ohio
Associated Estates Realty Corporation
of Pennsylvania, Inc. Ohio
Country Place, Inc. Michigan
Ellet Apartments, Inc. Ohio
FHM Corporation Michigan
Gables Indiana, Inc. Ohio
Gates Mills Club Housing, Inc. Ohio
Hillwood I Apartments, Inc. Ohio
Jennings Commons Apartments, Inc. Ohio
MIG II Realty Advisors, Inc. Ohio
PatCon, Inc. Ohio
Puritas Place Apartments, Inc. Ohio
Rainbow Terrace Apartments, Inc. Ohio
Riverview Towers Apartments, Inc. Ohio
Shaker Park Gardens II, Inc. Ohio
Somerset West Apartments, Inc. Ohio
Spring Valley Apartments LLC Michigan
State Road Apartments, Inc. Ohio
Statesman II Apartments, Inc. Ohio
Sutliff Apartments, Inc. Ohio
Tallmadge Acres Apartments, Inc. Ohio
The Oaks at the Woods Company, Inc. Ohio
Twinsburg Apartments, Inc. Ohio
Village Tower Apartments, Inc. Ohio
West High Apartments, Inc. Ohio
</TABLE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statements on Form S-8 (No. 333-27429 and No. 33-
88430) and in the Prospectuses constituting part of the
Registration Statements on Form S-3 (No. 333-22419 and No. 333-
62627) of Associated Estates Realty Corporation of our report
dated March 17, 1999 appearing on page F-2 of this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Cleveland, Ohio
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,034,655
<SECURITIES> 6,718,863
<RECEIVABLES> 18,208,242
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,093,972
<PP&E> 955,671,325
<DEPRECIATION> (153,941,702)
<TOTAL-ASSETS> 840,785,355
<CURRENT-LIABILITIES> 52,977,400
<BONDS> 0
0
56,250,000
<COMMON> 2,262,195
<OTHER-SE> 200,675,952
<TOTAL-LIABILITY-AND-EQUITY> 840,785,355
<SALES> 132,514,374
<TOTAL-REVENUES> 143,007,867
<CGS> 58,652,542
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 38,534,805
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,050,346
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 124,895
<CHANGES> 0
<NET-INCOME> 17,514,762
<EPS-PRIMARY> .61
<EPS-DILUTED> .60
</TABLE>
_________________________________________________________________
THIRD AMENDMENT TO CREDIT AGREEMENT
BY AND AMONG
ASSOCIATED ESTATES REALTY CORPORATION,
Borrower,
NATIONAL CITY BANK,
as Managing Agent
BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION,
as Documentation Agent
AND
THE BANKS IDENTIFIED ON SCHEDULE 1
Dated: as of December 18, 1998
_________________________________________________________________
THIRD AMENDMENT TO
CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT (this "Amendment")
is made as of December 18, 1998, by and among ASSOCIATED ESTATES
REALTY CORPORATION, an Ohio corporation ("Borrower"), and
NATIONAL CITY BANK, as Managing Agent under the Credit Agreement
defined in the following recitals (in such capacity, the
"Managing Agent"), BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as Documentation Agent under the Credit Agreement
(in such capacity, the "Documentation Agent") and each of the
Banks identified on Schedule 1 attached hereto (the "Banks").
R E C I T A L S
A. Pursuant to that certain credit agreement, dated as of
June 30, 1998, by and among Borrower, the Managing Agent and Bank
of America National Trust and Savings Association, as
Documentation Agent, and the Banks identified on Schedule 1
thereto, such Banks agreed to advance certain Loans and to issue
certain Letters of Credit to Borrower, on the terms and subject
to the conditions set forth therein, and Borrower agreed to repay
the same, with interest thereon, as provided therein.
B. The aforementioned credit agreement has been amended
(1) by a First Amendment to Credit Agreement, dated as of
August 6, 1998; (2) by a Second Amendment to Credit Agreement,
dated as of August 31, 1998. As so amended, such credit
agreement is referred to as the "Credit Agreement".
C. Certain Events of Defaults occurred as of September 30,
1998, in respect of Borrower's compliance with certain covenants
set forth in the Credit Agreement (the "Existing Defaults") which
the Required Banks have not waived and which, immediately prior
to the execution and delivery of this Amendment, remain uncured.
1
D. The Managing Agent, at the direction and with the
express approval of the Required Banks in accordance with the
applicable provisions of the Credit Agreement, has further agreed
with Borrower to amend the Credit Agreement in order to reflect
the parties' understandings regarding certain changes to the
financial covenants set forth in the Credit Agreement, the Banks'
approval of certain changes to Borrower's accounting practices
relevant to particular kinds of capital expenditures and in order
to make other mutually acceptable changes to the Credit
Agreement, upon and subject to the terms and conditions
hereinafter set forth.
NOW, THEREFORE, for Ten Dollars ($10.00) and other valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. Defined Terms. Capitalized terms which are used
in this Amendment without being defined herein shall have the
meanings ascribed to them in the Amended Credit Agreement
(defined below).
2. Amendment of the Credit Agreement. The parties
agree that the Credit Agreement shall be further amended,
effective as of the Effective Date (as hereinafter defined), so
that from and after the Effective Date the Credit Agreement shall
be completely amended and restated as set forth in Annex 1 to
this Amendment. As so amended and restated, the Credit Agreement
is referred to herein as the "Amended Credit Agreement". The
parties acknowledge that certain exhibits and schedules which are
referred to in the Amended Credit Agreement have been omitted
therefrom. Each exhibit and schedule so omitted remains
identical to the corresponding version thereof which was appended
2
to the Credit Agreement; all such exhibits and schedules shall be
deemed to be incorporated in the Amended Credit Agreement by this
reference.
3. Conditions Precedent to this Amendment. On or
prior to the effective date of this Amendment (the "Effective
Date"), each of the following conditions precedent shall have
been satisfied:
(a) Proof of Corporate Authority. The Managing
Agent shall have received from Borrower copies,
certified by a duly authorized officer of Borrower
to be true and complete on and as of the Effective
Date, of records of all corporate action taken by
Borrower to authorize (i) the execution and
delivery of this Amendment; (ii) the making by
Borrower of the borrowings contemplated by the
Amended Credit Agreement, as amended hereby; and
(iii) the performance of its other obligations and
agreements hereunder and under the Amended Credit
Agreement;
(b) Incumbency Certificate. The Managing Agent
shall have received from Borrower an incumbency
certificate, dated as of the Effective Date,
signed by a duly authorized officer of Borrower
and giving the name and bearing a specimen
signature of each individual who shall be
authorized to sign, in the name and on behalf of
Borrower, this Amendment and the Amended Credit
Agreement.
(c) Officers' Certificate. The Managing Agent
shall have received from Borrower a certificate
dated as of the Effective Date, signed by a duly
authorized officer of Borrower and certifying on
terms acceptable to the Managing Agent that each
of the representations and warranties of Borrower
in the Amended Credit Agreement is true and
correct in all material respects on and as of the
Effective Date.
(d) Legality of Transactions. No change in
applicable law shall have occurred as a
consequence of which it shall have become and
continue to be unlawful (i) for the Managing Agent
or any Bank to perform any of its agreements or
obligations under the Amended Credit Agreement or
any other Loan Document on or as of the Effective
Date; or (ii) for Borrower to perform any of its
agreements or obligations under the Amended Credit
Agreement or any Loan Document.
3
(e) Performance, Etc. Except for the Existing
Defaults, Borrower shall have duly and properly
performed, complied with and observed, in all
material respects, each of its covenants,
agreements and obligations contained in each of
the Loan Documents to which Borrower is a party or
by which Borrower is bound. No event shall have
occurred on or prior to the Effective Date, and no
condition shall exist as of the Effective Date,
which constitutes or would (with the delivery of
notice or the passing of time, or both) constitute
a Default or an Event of Default under the Amended
Credit Agreement.
(f) Compliance with Laws. Each of the borrowings
made and each Letter of Credit issued under the
Credit Agreement is, and each borrowing to be made
and each Letter of Credit to be issued under the
Amended Credit Agreement shall be, in compliance
with the requirements of all applicable laws,
regulations, rules and orders, including without
limitation the Environmental Laws and the
requirements imposed by the SEC or by the Board of
Governors of the Federal Reserve System under
Regulations U, G and X.
(g) Payment of Waiver Fee and Certain Expenses.
Borrower shall have (i) paid to the Managing
Agent, for the benefit of the Banks as hereinafter
provided, a Waiver Fee (the "Waiver Fee") in the
amount of Three Hundred Seventy-Five Thousand
Dollars ($375,000); and (ii) reimbursed the
Managing Agent for all reasonable out-of-pocket
costs and expenses, including, without limitation,
all fees and disbursements of legal counsel to the
Managing Agent which shall have been incurred by
the Managing Agent in connection with the
negotiation and preparation of this Amendment and
the documents and instruments described or
referred to herein.
(h) Changes: None Adverse. From the date of the
most recent balance sheets referred to in
Section 4.5 of the Amended Credit Agreement or
delivered in accordance with the requirements of
the Amended Credit Agreement, in either case
through and including the Effective Date, no
changes shall have occurred in the assets,
liabilities, financial condition, business,
operations or prospects of Borrower or Borrower's
Consolidated Subsidiaries which, individually or
in the aggregate, are material and adverse to
Borrower and its Consolidated Subsidiaries.
(i) Compliance Certificate. The Managing Agent
shall have received a Compliance Certificate, the
required calculations under which shall
demonstrate Borrower's compliance with the
4
covenants set forth in the Amended Credit
Agreement.
(j) Other Approvals. The Managing Agent shall
have received such other approvals, opinions,
certificates, instruments and documents with
respect to the transactions described herein as it
may request.
(k) Representations and Warranties. Each of the
representations and warranties made by or on
behalf of Borrower in the Amended Credit Agreement
or in any other Loan Document shall be true,
correct and complete in all material respects as
of the Effective Date.
4. Acknowledgement of Certain Matters.
(a) The Managing Agent acknowledges its receipt
of the Waiver Fee in the amount referred to in Section 3(g),
above, and further acknowledges that the Facility Fee has been
paid for the period ending as of June 30, 1999.
(b) Borrower, the Managing Agent and each Bank
acknowledges that this Amendment, and the implementation of the
terms of the Amended Credit Agreement resulting from this
Amendment, have been made in contemplation of Borrower's revising
its accounting policies to reflect, in accordance with GAAP, the
accounting treatment of certain suite renovation expenditures in
a manner consistent with the application of the Capital
Expenditure Allocation set forth in the Amended Credit Agreement.
The Managing Agent and each Bank approves such revision to
Borrower's accounting practices, and agrees that the
implementation of such revision shall not constitute inconsistent
application of GAAP for purposes of the Amended Credit Agreement.
(c) The Managing Agent and each Bank agrees that
Borrower may, for the purposes of determining Interest Expense
for Borrower's fiscal quarter and fiscal year ended December 31,
1998, effect a proforma adjustment to the interest payable during
5
such fiscal quarter to reflect the difference between the
interest actually paid in respect of the Obligations during such
fiscal quarter and attributable to the unavailability of LIBOR
Rate Loans under the Credit Agreement by reason of the Existing
Defaults and the interest which would have been paid in respect
of the Obligations during such fiscal quarter if LIBOR Rate Loans
at a LIBOR Margin of One Hundred Forty (140) basis points had
been available to Borrower during the period commencing upon the
occurrence of the Existing Defaults and concluding on the
Effective Date.
5. Ratification. Except as specifically modified and
amended by this Amendment, the Credit Agreement and each other
Loan Document is unchanged and remains in full force and effect.
Borrower hereby ratifies and affirms the Credit Agreement and
every term and condition thereof, as the same are amended and
restated as provided herein, and represents and warrants to the
Managing Agent and each Bank that (a) as of the date hereof and
except for the Existing Defaults, there is no Default or Event of
Default; (b) all of Borrower's representations and warranties
under the Amended Credit Agreement are true and correct in all
material respects as of the Effective Date; and (c) Borrower has
no offsets or claims against the Managing Agent or any Bank
under, in respect of or in any way related to the Amended Credit
Agreement or any Loan Document.
6. Binding Effect. This Amendment shall be binding
upon and shall inure to the benefit of the parties hereto and
their respective successors and permitted assigns.
7. Effective Date. The amendments contemplated by
this Amendment shall be effective, as of the date first set forth
6
above (the "Effective Date"), upon (i) the execution of this
instrument by Borrower, the Managing Agent, the Documentation
Agent and the Banks; and (ii) the satisfaction of each of the
conditions precedent set forth in Section 3 of this Amendment.
8. Regarding Borrower's Debt Ratings. Borrower
warrants and represents that as of the Effective Date, Borrower's
Debt Ratings are as follows:
Moody's: BBB-; and
S&P: Baa3
9. Regarding the Existing Defaults. The Managing
Agent and the Banks agree that provided that all of the
conditions precedent set forth in Section 3, above, shall have
been fulfilled on or before the Effective Date, all of the
Existing Defaults, and all rights and remedies available to the
Banks or the Managing Agent in consequence of the Existing
Defaults, shall be waived.
10. Counterparts. This Amendment may be executed in
multiple counterparts, and signature pages from any counterpart
may be appended to any other counterpart. All such counterparts
shall constitute a single, unified instrument.
IN WITNESS WHEREOF, this Amendment has been duly
executed and delivered by or on behalf of each of the parties as
of the date first set forth above.
7
BORROWER:
ASSOCIATED ESTATES REALTY CORPORATION
By: /s/ Jeffrey I. Friedman
-------------------------------
Print Name: Jeffrey I. Friedman
Title: President
5025 Swetland Court
Cleveland, Ohio 44143
Telephone: (216) 261-5000
Facsimile: (216) 289-9600
Attn: Jeffrey I. Friedman, President
8
MANAGING AGENT:
NATIONAL CITY BANK
By: /s/ Gary L. Wimer
------------------
Gary L. Wimer
Vice President
National City Center
1900 East Ninth Street
Locator No. 2118
Cleveland, Ohio 44114
Telephone: (216) 575-2233
Facsimile: (216) 575-3160
Attn: Gary L. Wimer, Vice President
Investment Real Estate Div.
THE DOCUMENTATION AGENT:
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By: /s/ Richard G. Baer, Jr.
--------------------------------
Print Name: Richard G. Baer, Jr.
Title: Vice President
231 South LaSalle Street, 12-Q
Chicago, Illinois 60697
Telephone: (312) 828-5149
Facsimile: (312) 974-4970
Attn: Richard G. Baer, Jr.,
Vice-President
9
THE BANKS:
NATIONAL CITY BANK
By: /s/ Gary L. Wimer
--------------------
Gary L. Wimer
Vice President
National City Center
1900 East Ninth Street
Locator No. 2118
Cleveland, Ohio 44114
Telephone: (216) 575-2233
Facsimile: (216) 575-3160
Attn: Gary L. Wimer, Vice President
Investment Real Estate Div.
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By: /s/ Richard G. Baer, Jr.
--------------------------------
Print Name: Richard G. Baer, Jr.
Title: Vice President
231 South LaSalle Street, 12-Q
Chicago, Illinois 60697
Telephone: (312) 828-5087
Facsimile: (312) 974-4970
Attn: Richard G. Baer, Jr.,
Vice-President
BANK ONE, N.A.
By: /s/ Douglas D. Lyons
---------------------
Print Name: Douglas D. Lyons
Title: Vice President
30 South Park Place
Painesville, Ohio 44077
Telephone: (440) 352-5580
Facsimile: (440) 352-5971
Attn: Douglas Lyons, Vice-President
10
MANUFACTURERS AND TRADERS TRUST COMPANY
By: /s/ Kevin Quinn
--------------------------------
Print Name: Kevin Quinn
Title: Assistant Vice President
One Fountain Plaza
Buffalo, New York 14203-1495
Telephone: (716) 848-7337
Facsimile: (716) 848-7318
Attn: Kevin B. Quinn,
Assistant Vice President
HARRIS TRUST & SAVINGS BANK
By: /s/ Gregory M. Bins
----------------------------
Print Name: Gregory M. Bins
Title: Vice President
111 West Monroe Street
Chicago, Illinois 60690
Telephone: (312) 461-2203
Facsimile: (312) 461-2968
Attn: Gregory M. Bins,
Vice President
HUNTINGTON BANK - CLEVELAND, N.A.
By: /s/ Gerald A. Buck
---------------------------
Print Name: Gerald A. Buck
Title: Vice President
917 Euclid Avenue
Cleveland, Ohio 44115
Telephone: (216) 515-6882
Facsimile: (216) 515-6369
Attn: Gerald A. Buck,
Vice President
11
CITIZENS BANK OF RHODE ISLAND
By: /s/ John K. Cooper
---------------------------
Print Name: John K. Cooper
Title: Vice President
One Citizens Plaza
Fourth Floor
Providence, Rhode Island 02903
Telephone: (401) 456-7283
Facsimile: (401) 455-5410
Attn: John K. Cooper
Vice President
FIRSTMERIT BANK, N.A.
By: /s/ Peter D. Collins
-----------------------------
Print Name: Peter D. Collins
Title: Vice President
123 West Prospect Avenue
Cleveland, Ohio 44115-1070
Telephone: (216) 694-5638
Facsimile: (216) 621-3201
Attn: Peter D. Collins,
Vice President
SOUTHTRUST BANK, N.A.
By: /s/ Sam Boroughs
--------------------------
Print Name: Sam Boroughs
Title: Asst. Vice President
420 North 20th Street
Birmingham, Alabama 35203
Attn: Sam Boroughs
Telephone: (205) 254-5039
Facsimile: (205) 254-5022
COMMERZBANK AKTIENGESELLSCHAFT
By: /s/ Douglas P. Traynor
------------------------------
Print Name: Douglas P. Traynor
Title: Vice President
Two World Financial Center
New York, New York 10281-1050
Attn: Douglas Traynor, Vice President
Telephone: (212) 266-7569
Facsimile: (212) 266-7565
12
<TABLE>
SCHEDULE 1
to
Third Amendment to
Credit Agreement
<CAPTION>
Participation
Bank Percentage Credit Commitment
----------------------- ------------- -----------------
<S> <C> <C>
National City Bank 14% $ 35,000,000
Bank of America National 14% $ 35,000,000
Trust and Savings
Association
Manufacturers and Traders 8% $ 20,000,000
Trust Company
Harris Trust & Savings Bank 10% $ 25,000,000
Bank One, N.A. 12% $ 30,000,000
Huntington Bank - 10% $ 25,000,000
Cleveland, N.A.
Citizens Bank of 8% $ 20,000,000
Rhode Island
FirstMerit Bank, N.A. 4% $ 10,000,000
SouthTrust Bank, N.A. 10% $ 25,000,000
Commerzbank 10% $ 25,000,000
Aktiengesellschaft
100% $250,000,000
</TABLE>
AMENDED AND RESTATED CREDIT AGREEMENT
THIS AMENDED AND RESTATED CREDIT AGREEMENT, dated as of
December 18, 1998, by and among ASSOCIATED ESTATES REALTY
CORPORATION, an Ohio corporation (hereinafter, "Borrower"), the
banks and lending institutions set forth on Schedule 1 hereto
(the "Banks"), and NATIONAL CITY BANK, a national banking
association ("NCB"), in its capacity as agent for the Banks (in
such capacity, the "Managing Agent"), and BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking
association, in its capacity as Documentation Agent (in such
capacity, the "Documentation Agent").
RECITALS
A. Pursuant to a Credit Agreement, dated as of
June 30, 1998, by and among Borrower, the Managing Agent, the
Documentation Agent and those Banks which were identified on
Schedule A thereto (the "Original Credit Agreement"), such Banks
agreed to make Loans and to issue Letters of Credit to Borrower
upon the terms and subject to the conditions set forth therein.
B. The Original Credit Agreement has been amended by (1)
that certain First Amendment to Credit Agreement dated as of
August 7, 1998, and (2) that certain Second Amendment to Credit
Agreement, dated as of August 31, 1998. As so amended, the
Original Credit Agreement is referred to as the "Amended Credit
Agreement".
C. Borrower, the Managing Agent, the Documentation Agent
and the Banks have agreed to amend and restate the Amended Credit
Agreement in its entirety as hereinafter set forth.
ARTICLE 1.
INTERPRETATION
Section 1.1 General. For the purposes of this
Agreement, the following general rules of interpretation shall
apply to the extent that they are not clearly inconsistent with
the context or the subject-matter of specific provisions hereof:
(a) The expression "this Agreement" shall mean this
Credit Agreement (including all of the Schedules and Exhibits
annexed hereto) as originally executed, or, if supplemented,
amended or restated from time to time, as so supplemented,
amended or restated;
(b) Singular nouns shall include the plural and vice
versa, and all references to dollars shall mean United States
Dollars;
(c) Accounting terms not otherwise defined herein
shall have the meanings assigned to them in accordance with
Generally Accepted Accounting Principles (as hereinafter
defined); and
14
(d) All Schedules and Exhibits to this instrument
shall be deemed to be incorporated herein by reference.
Section 1.2 Definitions. In addition to terms defined
elsewhere in this Agreement, the terms set forth below shall have
the following meanings for the purpose of this Agreement:
"Absolute Interest Period" means, with respect to a
Competitive Bid Loan made at an Absolute Rate, a period not more
than one hundred eighty (180) days after the Draw Date for such
Competitive Bid Loan, as requested by Borrower and offered by a
Bank, but in no event extending beyond the Termination Date. If
an Absolute Interest Period would end on a day which is not a
Business Day, such Absolute Interest Period shall end on the next
succeeding Business Day.
"Absolute Rate" means a fixed rate of interest (rounded
to the nearest 1/100 of 1%) for an Absolute Interest Period with
respect to a Competitive Bid Loan offered by a Bank and accepted
by the Borrower at such rate.
"Absolute Rate Loan" means a Competitive Bid Loan made
at the Absolute Rate.
"Accountants" means Price, Waterhouse & Co., or such
other nationally recognized firm of certified public accountants
as may from time to time be selected by Borrower and acceptable
to the Managing Agent, with the consent of the Required Banks.
"Adjusted Prime Rate" means, at any time, the sum of
the Prime Rate plus the Prime Rate Margin in effect at such time.
"Adjusted Unencumbered Debt Service" means, for any
fiscal period of Borrower and its Wholly-Owned Subsidiaries, an
amount equal to the Debt Service for such period in respect of
all Unencumbered Debt of Borrower and its Wholly-Owned
Subsidiaries, assuming that (a) the rate of interest payable in
respect of all such Unencumbered Debt were the greater of (i)
seven percent (7.0%) per annum, or (ii) two percent (2.0%) per
annum in excess of the prevailing rate, as of the applicable date
of determination, for ten (10) year U.S. Treasury obligations;
and (b) all such Unencumbered Debt were payable in equal monthly
installments of principal and interest over a twenty-five (25)
year mortgage amortization schedule.
"Affiliate" means, in relation to any Person (an
"Affiliated Person"), any Person (other than a Subsidiary) which
(directly or indirectly) controls or is controlled by or is under
common control with such Affiliated Person. For the purposes of
this definition, the term "control" shall mean the possession
(directly or indirectly) of the power to direct or to cause the
direction of the management or the policies of a Person, whether
through the ownership of shares of any class in the capital or
any other voting securities of such Person, by contract or
otherwise.
"Agency Fee" means an annual fee, payable to the
Managing Agent in consideration for its serving as the Managing
15
Agent in respect of the Loan Documents, as and when set forth in
a letter agreement between Borrower and the Managing Agent dated
of even date herewith.
"Aggregate Consolidated Indebtedness" means, at any
time, the sum of (i) the outstanding principal balance at such
time of Consolidated Indebtedness, plus (ii) the amount at such
time of the Consolidated Group Percentage Interest of all
Investment Entity Indebtedness.
"Aggregate Market Value" means, at any time, the sum of
(i) Market Value at such time, plus (ii) the amount at such time
of the Consolidated Group Percentage Interest of Investment
Entity Market Value.
"Apartment Suites" means all multi-family residential
rental units owned by Borrower, its Consolidated Subsidiaries or
any Investment Entity, without regard to whether such units are
subject to any governmental financial support, operating
assistance or regulation. The number of Apartment Suites shall,
for any purpose relevant to this Agreement, mean the aggregate
number of Apartment Suites owned by Borrower, its Consolidated
Subsidiaries or any Investment Entity on the final day of the
fiscal period most recently expired as of the date of such
determination; as to any Investment Entity, the number of
Apartment Suites for the purposes of the determination of the
amount of the Capital Expenditure Allocation shall be equal to
the Consolidated Group Percentage Interest in all of the
Apartment Suites owned by such Investment Entity.
"Applicable Margin" means, as at any date, a percentage
per annum for Prime Rate Loans and Ratable LIBOR Rate Loans,
determined by reference to Borrower's Debt Rating as set forth
below:
16
<TABLE>
<CAPTION>
Debt Rating Ratable LIBOR Prime
-------------------- -------------- ------------
Rate Margin Rate Margin
(expressed in (expressed in
Level S&P Moody's basis points) basis points)
----- --------- --------- ------------- -------------
<S> <C> <C> <C> <C>
1 A- to A+ A3 to A1 100 -0-
2 BBB+ Baa1 110 -0-
3 BBB Baa2 125 -0-
4 BBB- Baa3 140 -0-
5 <BBB- <Baa3 225 25
</TABLE>
The Applicable Margin for each Prime Rate Loan and each Ratable
LIBOR Rate Loan (the "Prime Rate Margin" and the "LIBOR Margin",
respectively) shall be determined by reference to the Debt Rating
in effect as of the Draw Date for such Loan (subject, in the case
of each Prime Rate Loan, to adjustment during the pendency of
such Loan to reflect any changes in Borrower's Debt Rating),
provided that:
(A) if the applicable Debt Ratings established by S&P and
Moody's shall be at differing levels, the Applicable Margin
shall be determined by reference to the lower Debt Rating,
provided, however, that if the difference between the Debt
Ratings shall be more than one level, the Applicable Margin
shall be one (1) level higher than the lower of the two Debt
Ratings;
(B) if only one of S&P and Moody's shall have a Debt Rating
in effect, then: (x) if both S&P and Moody's are engaged in
the business of rating indebtedness, the Applicable Margin
should be the grade that is one level below the available
Debt Rating; or (y) if either S&P or Moody's is no longer
engaged in the business of rating indebtedness, the
Applicable Margin shall be the grade corresponding to the
available Debt Rating; and
(C) if neither S&P nor Moody's shall have a Debt Rating in
effect for Borrower, the Applicable Margin shall be the
grade corresponding to Level 5 shown on the preceding table.
"Assets Under Development" means, as of the date of the
determination thereof, any new real estate project (or the
expansion area of any existing real estate project) owned by
Borrower, any Consolidated Subsidiary or any Investment Entity on
which the construction of one or more new, income-producing
buildings has been commenced and is continuing, provided,
however, that projects (or, in the case of phased projects as to
which discrete portions thereof are constructed and completed at
different times, identifiable phases of such projects) shall
cease being Assets Under Development at such time as a
certificate of occupancy is issued with respect to the
construction performed with respect to such projects or discrete
phases. For the purposes of this Agreement, land and
17
improvements comprised in Assets Under Development shall be
valued, at any time, at (i) the then-current book values thereof
(as determined in accordance with GAAP) for those Assets Under
Development owned by Borrower and its Consolidated Subsidiaries;
and (ii) the applicable Consolidated Group Percentage Interest of
the then-current book value (as determined in accordance with
GAAP) for each Asset Under Development owned by an Investment
Entity.
"Banks" means, collectively, each of the banks or
lending institutions identified on Schedule 1 hereto, as such
Schedule may be amended from time to time pursuant to Section 2.1
hereof, and the respective successors and assigns of such banks
and lending institutions. "Bank" means any of the Banks.
"Business Day" means any day other than a Saturday or
Sunday on which commercial banking institutions are open for
business in Cleveland, Ohio; for all purposes relevant to the
issuance of LIBOR Rate Loans (including, without limitation, the
determination of the LIBOR Rate and of the Draw Date for Ratable
LIBOR Rate Loans and Competitive Bid Loans), "Business Day" shall
mean any day other than a Saturday or Sunday on which commercial
banking institutions are open for business in Cleveland, Ohio,
and in London, England.
"Capital Expenditure Allocation" means, for any party,
an annual amount determined by multiplying the sum of Two Hundred
Dollars ($200.00) by the number of Apartment Suites owned by such
party as of the final day of such fiscal year (or, in the case of
any fiscal quarter, by multiplying the sum of Fifty Dollars
($50.00) by the number of Apartment Suites owned by such party as
of the final day of such fiscal quarter).
"Capitalization Factor" means the annual rate of nine
and one-quarter percent (9.25%).
"Capitalized Income Value" means, as of any date, an
amount equal to the EBITDA of Borrower and its Consolidated
Subsidiaries, including Service EBITDA in an amount not to exceed
$2,500,000 on an annualized basis, divided by the Capitalization
Factor. For the purposes of this provision, the EBITDA of
Borrower and its Consolidated Subsidiaries shall, as appropriate,
be subject to the Pro Forma Adjustment to reflect any acquisition
made by Borrower or any of its Consolidated Subsidiaries during
the applicable fiscal period.
"Closing Date" means the date first set forth in the
preamble of this instrument.
"Code" means the United States Internal Revenue Code of
1986, as amended from time to time, or any successor federal tax
code, and any reference to any statutory provision shall be
deemed to be a reference to any successor provision or
provisions.
"Competitive Bid Fee" means a fee, in the amount of One
Thousand Two Hundred and Fifty Dollars ($1,250), which shall be
earned by, and shall be due and payable to, the Managing Agent
for Managing Agent-administered Competitive Bid Loans as provided
in Section 2.3(c)(vii), below.
"Competitive Bid Borrowing Notice" means the notice, to
be submitted by Borrower to the Managing Agent in accordance with
18
Section 2.3 of this Agreement, reflecting Borrower's acceptance
of Banks' Competitive Bid Quotes submitted as therein provided.
"Competitive Bid LIBOR Rate Loan" means a Competitive
Bid Loan which is a LIBOR Rate Loan.
"Competitive Bid Loan" means each of the Loans made or
to be made to Borrower by one or more Banks in accordance with
Section 2.3 of this Agreement.
"Competitive Bid Note" means, collectively, the
promissory notes of Borrower which are to be dated, executed and
delivered by Borrower to the Banks on the Closing Date, together
with any amendment, modification, supplement or renewal thereof
and with any instruments given in substitution or replacement
therefor.
"Competitive Bid Quote" means an offer by a Bank, in
response to a Competitive Bid Quote Request, which shall be
substantially similar in every material respect to the form
attached hereto as Exhibit A, and shall be delivered by such Bank
to the Managing Agent in accordance with Section 2.3, below.
"Competitive Bid Quote Request" means the request by
the Borrower for the Banks to offer to make Competitive Bid Loans
to Borrower in the amount and for the Interest Periods to be set
forth therein; each Competitive Bid Quote Request shall be
substantially similar in every material respect to the form
attached hereto as Exhibit B.
"Competitive LIBOR Bid Rate" means the annual rate of
interest (expressed as a margin of LIBOR) offered by a Bank to
Borrower in such Bank's Competitive Bid Quote made pursuant to
Section 2.3, below.
"Compliance Certificate" means a certificate,
substantially in the form of Exhibit C, evidencing Borrower's
compliance with the applicable requirements imposed by this
Agreement after giving effect to the making of each Loan.
"Consolidated Subsidiaries" means all of Borrower's
Subsidiaries, and all other Persons, with which Borrower reports
financial results on a consolidated basis in accordance with
GAAP.
"Consolidated Group" means Borrower and all of its
Consolidated Subsidiaries.
"Consolidated Group Percentage Interest" means, with
respect to any Investment Entity at any time, the aggregate
percentage of the total equity interests in such Investment
Entity which is then held by members of the Consolidated Group,
determined by calculating the greater of (i) the percentage of
all issued and outstanding stock or partnership or membership
interests in such Investment Entity which is held by members of
the Consolidated Group, in the aggregate, or (ii) the percentage
of the total book value of such Investment Entity that would be
received by members of the Consolidated Group, in the aggregate,
upon the liquidation of such Investment Entity after repayment in
full of all Indebtedness of such Investment Entity.
"Consolidated Indebtedness" means, collectively, all
Indebtedness of Borrower and its Consolidated Subsidiaries.
19
"Contingent Obligation" means any direct or indirect
liability, contingent or otherwise, with respect to any
Indebtedness, lease, dividend, letter of credit, banker's
acceptance or other obligation of another Person incurred to
provide assurance to the obligee of such obligation that such
obligation will be paid or discharged, that any agreements
relating thereto will be complied with, or that the holders of
such obligation will be protected (in whole or in part) against
loss in respect thereof. Contingent Obligations shall include,
without limitation, (i) the direct or indirect guaranty,
endorsement (otherwise than for collection or deposit in the
ordinary course of business), co-making, discounting with
recourse or sale with recourse by any Person of the obligation of
another Person; (ii) any liability for the obligations of another
Person through any agreement (contingent or otherwise): (A) to
purchase, repurchase or otherwise acquire such obligation or any
security therefor, or to provide funds for the payment or
discharge of such obligation (whether in the form of loans,
advances, stock purchases, capital contributions or otherwise),
(B) to maintain the solvency of any balance sheet item, level of
income or financial condition of another, or (C) to make take-or-
pay, pay-or-play or similar payments if required regardless of
nonperformance by any other party or parties to an agreement, if
in the case of any agreement described under subclauses (A), (B)
or (C) of this sentence the purpose or intent thereof is to
provide the assurance described above. The amount of any
Contingent Obligation shall be equal to the amount of the
obligation so guaranteed or otherwise supported.
"Controlled Partnerships" means (a) MIG/PINES
Development, Ltd., a Florida limited partnership in which
Borrower or a Wholly-Owned Subsidiary of Borrower owns and
controls all of the general partner interest and a controlling
percentage of all of the limited partner interests, and (b)
MIG/Orlando Development, Ltd., a Florida limited partnership in
which Borrower or a Wholly-Owned Subsidiary of Borrower owns and
controls all of the general partner interests and a controlling
percentage of all of the limited partner interests.
"Conventional Apartment Projects" means multi-family,
income-producing properties which are not subject to any
financial support or operating assistance or regulation (other
than landlord/tenant laws and regulations generally applicable to
all apartment projects) imposed by or available from any Federal,
state or local government or governmental instrumentality;
without limiting the generality of the foregoing, projects which
are so-called "congregate care facilities", "assisted living
facilities" or "Section 8 housing projects" shall not be
considered to be Conventional Apartment Projects for the purposes
of this Agreement.
"Corrective Bid" means a supplemental Competitive Bid
Quote submitted by a Bank to the Managing Agent as and when
provided in Section 2.3(c), below, or to the Borrower as and when
provided in Section 2.3(d), below, correcting a manifest error
contained in a Competitive Bid Quote therefore submitted by such
Bank.
"Credit Commitment" means, in relation to any Bank, the
maximum amount to be loaned (or otherwise made available) by such
Bank to Borrower as such Bank's share of Ratable Loans or Letters
of Credit, or in respect of the purchase of portions of, or
interests in, Swingline Loans as provided in Section 2.16, but
20
excluding any Competitive Bid Loans from such Bank to Borrower.
The amount of each Bank's Credit Commitment as of the date hereof
is set forth on Schedule 1.
"Debt Rating" means, as of any date, the rating for
Borrower most recently announced by either S&P or Moody's for any
class of long-term, unsecured public indebtedness issued by
Borrower (without regard to whether such indebtedness has been or
will be issued by Borrower). For the purposes of this Agreement:
(a) if any rating established by S&P or Moody's shall be changed,
such change will be effective as of the date on which the same is
first announced publicly by the Rating Agency making such change;
and (b) if S&P or Moody's shall change the basis on which ratings
are established, each reference to the Debt Rating announced by
such Rating Agency shall refer to the then-equivalent rating by
such Rating Agency.
"Debt Service" means, for any fiscal period of Borrower
and its Consolidated Subsidiaries, all actual interest payments
and principal payments, including capitalized interest but
excluding balloon payments of principal, payable during such
fiscal period, by Borrower and its Consolidated Subsidiaries with
respect to Indebtedness for Borrowed Money on a consolidated
basis.
"Default" means any event or occurrence which, with the
giving of notice or the passage of time, or both, would
constitute an Event of Default.
"Default Interest Rate" means an annual rate of
interest equal to the lesser of (i) two and one-fourth percent
(2-1/4%) above the Prime Rate; or (ii) the maximum rate of
interest which may lawfully be charged in respect of the
Obligations.
"Direct Invitation to Bid" means the Borrower's request
to each of the Banks for the submission of Competitive Bid Quotes
which is issued in accordance with Section 2.3(d) of this
Agreement.
"Distributable Cash Flow" means, with respect to any
fiscal period of Borrower, an amount equal to the Net Income of
Borrower and its Consolidated Subsidiaries for such period,
including any adjustments for Investment Entities, adjusted to
reflect (i) gains or losses from the sale of property, and (ii)
non-recurring and extraordinary items; plus (x) depreciation and
amortization, less the sum of (A) the Capital Expenditure
Allocation applicable to all Apartment Suites owned by Borrower,
its Consolidated Subsidiaries and all Investment Entities, and
(B) loan amortization payments, exclusive of "balloon" principal
payments.
"Distribution" means:
(i) The declaration or payment of any dividends or
other distributions on or in respect of capital stock
(except distributions in such common stock); or
(ii) The redemption, acquisition or other retirement
of Securities, except such redemptions, acquisitions or
other retirements made as a part of the same
transaction from the net proceeds of the sale of such
Securities.
21
"Dividend" means any payment or distribution declared
or made in respect of any common stock, preferred stock, or any
other ownership interest in or in respect of Borrower which,
pursuant to GAAP, would be considered as an equity interest in
Borrower (including, without limitation, distributions in such
capital stock).
"Documentation Agent" means Bank of America National
Trust and Savings Associations and its successors and assigns.
The Documentation Agent shall have no duties or responsibilities
in such capacity under this Agreement without the prior, written
consent of the Documentation Agent and the Managing Agent.
"Draw Date" means, in relation to any Loan, the day on
which such Loan is made or to be made to Borrower pursuant to
this Agreement.
"EBITDA" means, for any fiscal period of Borrower and
its Consolidated Subsidiaries, the sum of (a) Net Income for such
period, plus (b) Interest Expense for such period, plus (c)
depreciation and amortization for such period (but excluding (x)
gains or losses on the sale of Property, (y) non-recurring
charges and extraordinary items, and (z) equity gains or losses
from each Investment Entity included therein), plus (d)
Investment Entity EBITDA.
"Employee Benefit Plan" means an "employee benefit
plan" as defined in Section 3(3) of ERISA.
"Environmental Laws" means all present and future laws,
statutes, ordinances, rules, regulations, orders, and
determinations of any Federal, state or local governmental
authority pertaining to health, protection of the environment,
natural resources, conservation, wildlife, waste management,
regulation of activities involving Hazardous Substances, and
pollution, including, without limitation, the Comprehensive
Environmental Response, Compensation, and Liability Act
("Superfund" or "CERCLA"), 42 U.S.C. SS 9601 et seq., the
Superfund Amendments and Reauthorization Act of 1986 ("SARA"), 42
U.S.C. SS 9601(20)(D), the Resource Conservation and Recovery Act
("RCRA"), 42 U.S.C. SS 6901 et seq., the Federal Water Pollution
Control Act, as amended by the Clean Water Act (the "Clean Water
Act"), 33 U.S.C. SS 1251 et seq., the Clean Air Act ("CAA"), 42
U.S.C. SS 7401 et seq., and the Toxic Substances Control Act, 15
U.S.C. SS 2601 et seq., together with any and all applicable
licenses, permits or governmental approvals pertaining to, or
establishing standards with respect to, any of the foregoing
matters, as any of the foregoing may be amended or supplemented.
"ERISA" means the Employee Retirement Income Security
Act of 1974, and the rules and regulations issued thereunder, as
the same may be amended from time to time, and including any
successor statute.
"ERISA Affiliate" means, in relation to any Person, any
trade or business (whether or not incorporated) which is a member
of a group of which that Person is a member and which is under
common control with such Person within the meaning of the
regulations promulgated under Section 414 of the Code, as
amended.
"ERISA Liabilities" means the aggregate of all unfunded
vested benefits under any plan of Borrower or any ERISA Affiliate
22
of Borrower under any Plan covered by ERISA that is not a Multi-
employer Plan, and all potential withdrawal liabilities of any
thereof under all Multiemployer Plans.
"Event of Default" means any event or condition
described in Section 7.1 of this Agreement.
"Executive Officers" means Jeffrey I. Friedman, Susan
M. Friedman, Larry E. Wright and Louis E. Vogt.
"Extraordinary Disposition" means, with respect to
Borrower, the sale, lease, transfer or other disposition of
assets, other than assets transferred or disposed in the ordinary
course of business, whether by way of the sale of assets or the
sale of stock or other rights in which Borrower has any ownership
interest, and whether in one transaction or a series of related
or unrelated transactions.
"Face Amount" means, as to any Letter of Credit which
is issued or to be issued pursuant to Section 2.14 of this
Agreement, the maximum amount which is available at the time of
such determination to be drawn under such Letter of Credit.
"Facility Fee" means an annual fee, payable in advance
to the Managing Agent for the ratable benefit of the Banks on the
Closing Date and on each anniversary of such date during the
pendency of this Agreement, in an amount determined by
multiplying the Maximum Commitment in effect as of such date by
fifteen one-hundredths of one percent (0.15%).
"Floating Rate Debt" means any Indebtedness for
Borrowed Money which bears interest at a rate or rates which
fluctuate or may fluctuate from time to time (whether by
Borrower's election or by reference to any index) during the
pendency of such Indebtedness, provided, however, that any such
Indebtedness as to which the obligor has procured and maintains
an interest-rate hedging instrument eliminating the risk of
interest-rate fluctuation shall, to the extent and during the
term of such hedging instrument, not be considered to be
"Floating Rate Debt" for the purposes of this Agreement. For
purposes of this definition, "interest-rate hedging instrument"
shall mean an interest-rate hedging instrument with a maturity
date not less than twelve months after the date such instrument
is purchased and with a maximum rate of interest not to exceed
three percentage points in excess of the rate on the Indebtedness
for which the hedging instrument was procured.
"Funded Percentage" means, with respect to each Bank at
any time, such Bank's share of all Obligations outstanding at
such time, expressed as a fraction having as a denominator the
Outstanding Amount at such time and having as a numerator the
aggregate of (x) such Bank's Pro Rata Share of all Ratable Loans
and all Letters of Credit and participation interest in Swingline
Loans then outstanding, and (y) the outstanding principal balance
at such time of all Competitive Bid Loans advanced by such Bank
to Borrower.
"Generally Accepted Accounting Principles" or "GAAP"
means generally accepted accounting principles in effect from
time to time in the United States. Such accounting principles
shall be consistently applied at all times during the pendency of
this Agreement except to the extent that changes in the
23
application thereof are required in order to maintain compliance
with GAAP.
"Guaranteed Pension Plan" means any pension plan
maintained by Borrower or any ERISA Affiliate of Borrower, or to
which Borrower or any ERISA Affiliate contributes, some or all of
the benefits under which are guaranteed by the Pension Benefit
Guaranty Corporation within the U.S. Department of Labor.
"Hazardous Substances" means (i) any hazardous wastes
and/or toxic chemicals, materials, substances or wastes as
defined by or for the purposes of any of the Environmental Laws;
(ii) any "oil", as defined by the Clean Water Act, as amended
from time to time, and regulations promulgated thereunder
(including crude oil or any fraction thereof and any petroleum
products or derivatives thereof); (iii) any substance, the
presence of which is prohibited, regulated or controlled by any
other applicable federal or state or local laws, regulations,
statutes or ordinances now in force or hereafter enacted relating
to waste disposal or environmental protection with respect to the
exposure to, or manufacture, possession, presence, use,
generation, storage, transportation, treatment, release,
emission, discharge, disposal, abatement, cleanup, removal,
remediation or handling of any such substances; (iv) any asbestos
or asbestos-containing materials, polychlorinated biphenyls
("PCBs") in the form of electrical equipment, fluorescent light
fixtures with ballasts, cooling oils or any other form, urea
formaldehyde, atmospheric radon at levels over four picocuries
per cubic liter; (v) any solid, liquid, gaseous or thermal
irritant or contaminant, such as smoke, vapor, soot, fumes,
alkalis, acids, chemicals, pesticides, herbicides, sewage,
industrial sludge or other similar wastes; (iv) industrial,
nuclear or medical by-products; and (vii) any underground storage
tank(s).
"Head Office" means, in relation to the Managing Agent,
the head office of National City Bank, located at 1900 East Ninth
Street, Cleveland, Ohio 44101-0756 or such other office as may
be designated as such by written notice to Borrower and the Banks
by National City Bank or any successor Managing Agent.
"Indebtedness" means, in relation to any Person, at any
time, all of the obligations of such Person which, in accordance
with GAAP, would be classified as indebtedness upon a balance
sheet (including any footnote thereto) of such Person prepared at
such time, and in any event shall include, without limitation:
(i) all indebtedness of such Person arising or
incurred under or in respect of (A) any guaranties
(whether direct or indirect) by such Person of the
indebtedness, obligations or liabilities of any other
Person, or (B) any endorsement by such Person of any of
the indebtedness, obligations or liabilities of any
other Person (otherwise than as an endorser of
negotiable instruments received in the ordinary course
of business and presented to commercial banks for
collection of deposit), or (C) the discount by such
Person, with recourse to such Person, of any of the
indebtedness, obligations or liabilities of any other
Person;
(ii) all indebtedness of such Person arising or
incurred under or in respect of any agreement,
24
contingent or otherwise made by such Person (A) to
purchase any indebtedness of any other Person or to
advance or supply funds for the payment or purchase of
any indebtedness of any other Person or (B) to
purchase, sell or lease (as lessee or lessor) any
property, products, materials or supplies or to
purchase or sell transportation or services, primarily
for the purpose of enabling any other Person to make
payment of any indebtedness of such other Person or to
assure the owner or holder of such other Person's
indebtedness against loss, regardless of the delivery
or non-delivery of the property, products, materials or
supplies or the furnishing or non-furnishing of the
transportation or services, or (C) to make any loan,
advance, capital contribution or other investment in
any other Person for the purpose of assuring a minimum
equity, asset base, working capital or other balance
sheet condition for or as at any date, or to provide
funds for the payment of any liability, dividend or
stock liquidation payment, or otherwise to supply funds
to or in any manner invest in any other Person;
(iii) all indebtedness, obligations and liabilities
secured by or arising under or in respect of any Lien,
upon or in Property owned by such Person, even though
such Person has not assumed or become liable for the
payment of such indebtedness, obligations and
liabilities;
(iv) all indebtedness created or arising under any
conditional sale or other title retention agreement
with respect to Property acquired by such Person, even
though the rights and remedies of the seller or lender
(or lessor) under such agreement in the event of
default are limited to repossession or sale of such
Property;
(v) all indebtedness arising or incurred under or in
respect of any Contingent Obligation; and
(vi) to the extent not included in Interest Expense,
all obligations to make payments under any interest
rate protection agreements, foreign currency exchange
agreements, commodity purchase or option agreement or
other interest, exchange rate or commodity price
hedging agreement.
"Indebtedness for Borrowed Money" means at any time,
all Indebtedness (i) in respect of any money borrowed (including
pursuant to this Agreement); (ii) under or in respect of any
Contingent Obligation (whether direct or indirect) of any money
borrowed; (iii) evidenced by any loan or credit agreement,
promissory note, debenture, bond, guaranty or other similar
written obligation to pay money; or (iv) arising under leases
which, in accordance with GAAP, should be reflected as
indebtedness on a balance sheet.
"Interest Expense" means, for any period, the aggregate
interest payable by Borrower and all of Borrower's Consolidated
Subsidiaries during such period, determined in accordance with
GAAP.
25
"Interest Period" means: (a) For each LIBOR Rate Loan
(including both Ratable LIBOR Rate Loans and all Competitive Bid
Loans), the period commencing on the Draw Date for such Loan and
ending one, two, three, four or six months thereafter; (b) for
each Prime Rate Loan, the period commencing on the Draw Date for
such Loan and ending on the earliest of (i) the date on which
such Loan is repaid; (ii) the date on which such Loan is
converted to a Ratable LIBOR Rate Loan pursuant to this
Agreement, or (iii) the Termination Date; (c) for each Absolute
Rate Loan, the Absolute Interest Period, and (d) for each
Competitive Bid Loan, including but not limited to Absolute Rate
Competitive Bid Loans, the period not to exceed one hundred
eighty (180) days requested by Borrower in a Competitive Bid Loan
Request and confirmed by a Bank in a Competitive Bid Quote which
is accepted by Borrower. No Interest Period in any case may
extend beyond the Termination Date. Any Interest Period which
would otherwise end on a day which is not a Business Day shall
end on the next succeeding Business Day (unless such Business Day
falls in another calendar month, in which case such Interest
Period shall end on the Business Day immediately preceding such
day); each Interest Period in respect of a LIBOR Rate Loan or a
Competitive Bid Loan which begins on the last Business Day of a
calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such
Interest Periods) shall end on the last Business Day of a
calendar month.
"Investment" means any investment in any other Person
by stock purchase, capital contribution, loan, advance, guaranty
of any Indebtedness or creation or assumption of any other
liability in respect of any Indebtedness of such Person
(including, without limitation, any liability of any kind
described in clause (i) or (ii) of the definition of the term
"Indebtedness" set forth in this Section), or the transfer or
sale of Property (otherwise than in the ordinary course of the
business) to any other Person for less than payment in full in
cash of the transfer or sale price or the fair value thereof
(whichever of such price or value is higher).
"Investment Entity" means any Person in which Borrower
or any of its Consolidated Subsidiaries, directly or indirectly,
has an ownership interest, whose financial results are not
consolidated with those of Borrower and its Consolidated
Subsidiaries.
"Investment Entity Capitalized Income Value" means,
with respect to any Investment Entity and as of any date, an
amount equal to its Investment Entity EBITDA on an annualized
basis, divided by the Capitalization Factor. For the purposes of
this provision, Investment Entity EBITDA shall be subject to Pro
Forma Adjustment to reflect any acquisitions made by such
Investment Entity during the applicable fiscal period.
"Investment Entity Debt Service" means, in respect of
any Investment Entity and for any fiscal period, all actual
interest payments and principal payments, including capitalized
interest but excluding balloon payments of principal, payable
during such fiscal period by such Investment Entity.
"Investment Entity EBITDA" means, with respect to any
Investment Entity and for any fiscal period, the sum of (a) such
Investment Entity's Net Income for such period,; plus (b) such
Investment Entity's Investment Entity Interest Expense for such
26
period; plus (c) depreciation and amortization for such period
(but excluding (x) gains or losses from the sale of Property; and
(y) non-recurring charges and extraordinary items).
"Investment Entity Interest Expense" means, for any
Investment Entity and any period, the aggregate interest payable
by such Investment Entity for such period, determined in
accordance with GAAP.
"Investment Entity Market Value" means, with respect to
any Investment Entity and as of any date, the sum of such
entity's Investment Entity Capitalized Market Value, plus (i)
fifty percent (50%) of the book value of such Investment Entity's
Assets Under Development and Raw Land, plus (ii) one hundred
percent (100%) of the value of all unrestricted and non-pledged
cash equivalents owned by such Investment Entity (all as of the
date of determination).
"Investment Entity Secured Debt" means, with respect to
any Investment Entity and as of any date, any Indebtedness for
Borrowed Money of such Investment Entity which is secured by any
Lien upon any property or asset, and any judgment lien in excess
of $250,000 upon any property or asset.
"Investment Grade Debt Rating" shall mean Debt Ratings
from each of Moody's and S&P which are not lower than the Debt
Ratings for such Rating Agencies on Level 4 of the table of
Applicable Margins set forth above.
"Invitation for Bids" means a written notice, given by
the Managing Agent to each Bank following the Managing Agent's
receipt of a proper Competitive Bid Quote Request from Borrower.
"Issuance Date" means, in relation to any Letter of
Credit, the day on which such Letter of Credit is issued or is to
be issued pursuant to this Agreement.
"Issuing Bank", means NCB or its successor as the Bank
responsible for the issuance of Letters of Credit in accordance
with Section 2.14.
"Late Charge" means with respect to any delinquent
payment of principal or interest hereunder a fee that is equal to
the greater of One Hundred and 00/100 Dollars ($100.00) or five
percent (5.0%) of the delinquent payment, charged to Borrower or
added to the unpaid balance of the Notes whenever any payment of
principal or interest is not paid when due.
"Legal Requirements" means all applicable laws, rules,
regulations, ordinances, judgments, orders, decrees, injunctions,
arbitral awards, permits, licenses, authorizations, directions
and requirements of all governments, departments, commissions,
boards, courts, authorities, agencies, and officials and officers
thereof, that are in effect now or at any time in the future.
"Letter of Credit" means any stand-by letter of credit
issued by the Issuing Bank pursuant to this Agreement.
"Letter of Credit Fee" means a fee, payable to the
Issuing Bank, equal to one-eighth of one percent (0.125%) of the
Face Amount of each Letter of Credit, payable in advance for the
issuance of each respective Letter of Credit.
27
"Letter of Credit Commission" means a commission,
payable annually in advance to the Managing Agent for the ratable
benefit of the Banks, in an amount determined by multiplying the
Face Amount of each Letter of Credit issued hereunder by the
LIBOR Margin in effect as at the Issuance Date for such Letter of
Credit. The Letter of Credit Commission shall be paid annually
in respect of each Letter of Credit, with the first year's
payment being due and payable, in advance, on the Issuance Date
therefor and subsequent years' payments (each of which shall be
determined by multiplying the Face Amount of such Letter of
Credit by the LIBOR Margin then in effect) being due and payable
in advance on each anniversary thereof so long as such Letter of
Credit remains outstanding.
"Letter of Credit Usage" means, as at the date on which
the same is determined, the sum of (x) the aggregate of the Face
Amounts of all Letters of Credit then outstanding, plus (y) the
aggregate amount of all drawings under Letters of Credit honored
by the Issuing Bank and not theretofore either reimbursed by
Borrower or converted into Loans as provided in Section 2.14(e).
"Liabilities" means, collectively (x) all indebtedness,
obligations and other liabilities of Borrower and Borrower's
Consolidated Subsidiaries, whether matured or unmatured,
liquidated or unliquidated, direct or indirect, absolute or
contingent, joint or several, secured or unsecured, arising by
contract, operation of law or otherwise, classified as
liabilities in accordance with GAAP on a balance sheet of
Borrower; and (y) the Consolidated Group Percentage Interest of
all Investment Entities' indebtedness, obligations and other
liabilities, whether matured or unmatured, direct or indirect,
liquidated or unliquidated, absolute or contingent, joint or
several, secured or unsecured, arising by contract, operation of
law or otherwise classified as liabilities in accordance with
GAAP on the balance sheet of such Investment Entities.
"LIBOR" means the rate (rounded upward to the next
highest 1/100 of 1%) obtained by dividing (x) the rate of
interest per annum determined by the Managing Agent equal to the
offered rates for deposits in U.S. Dollars of one, two, three,
four or six-month periods (as the case may be) commencing on the
first date of the applicable Interest Period for which such rate
is determined as such rate appears on the Telerate system as of
11:00 a.m. (London, England time) on the date which is two (2)
Business Days preceding the first day of such Interest Period,
for a period comparable to the duration of such Interest Period
and in an amount comparable to the amount of the LIBOR Rate Loan
to be outstanding during such Interest Period, by (y) a
percentage equal to 100% minus the stated maximum rate of all
reserves required to be maintained against "LIBOR Rate
liabilities" as specified in Regulation D (or against any other
category of liabilities which includes deposits by reference to
which the interest rate on LIBOR Rate Loans or loans is
determined or any category of extensions of credit or other
assets which includes loans by a non-United States office of a
bank to United States residents) on such date to any member bank
of the Federal Reserve System.
"LIBOR Break Funding Costs" means an amount sufficient
to reimburse each Bank for any and all loss, cost or expense
actually incurred by such Bank as the result of the occurrence of
any LIBOR Break Funding Event, including, without limitation,
(i) any loss incurred in obtaining, liquidating or reemploying
28
deposits from third parties, but excluding loss of margin for the
period after any such prepayment, and (ii) the excess, if any, of
the amount of interest that otherwise would have accrued on the
principal amount so paid, prepaid or repaid or not borrowed for
the period, beginning with the date of such payment, prepayment
or repayment until the last day of the Interest Period that would
otherwise have been in effect for such LIBOR Rate Loan, at the
applicable rate of interest for such LIBOR Rate Loan over the
amount of interest that otherwise would have accrued on such
principal amount at a rate per annum equal to the interest
component of the amount each Bank would have bid in the London
interbank market for dollar deposits of leading banks in amounts
comparable to such principal amount and with maturities
comparable to such period all as determined as of the date of the
occurrence of the LIBOR Break Funding Event.
"LIBOR Break Funding Event" means any of the events or
occurrences set forth in Sections 2.9(a) or 2.9(b).
"LIBOR Rate" means, for each Interest Period applicable
to each LIBOR Rate Loan, the sum of LIBOR plus the LIBOR Margin
in effect as of the Draw Date for such Loan.
"LIBOR Rate Loan" means a Loan (without regard to
whether the same is a Ratable Loan or a Competitive Bid Loan)
which bears interest at the LIBOR Rate.
"Licenses and Permits" means all licenses, permits,
registrations and recordings thereof and all applications for
such licenses, permits and registrations now owned or hereafter
acquired by Borrower and required or necessary for the business
operations of Borrower.
"Lien" means any lien, mortgage, pledge, security
interest, charge or other encumbrance of any kind, including any
conditional sale or other title retention agreement, any lease in
the nature thereof, and any agreement to give any security
interest.
"Loan Documents" mean this Agreement, the Notes and any
other agreement, instrument, certificate or document now or
hereafter executed in connection with or pursuant to this
Agreement, including without limitation the Letter of Credit
applications submitted to the Managing Agent by the Borrower
pursuant to Section 2.14(a) of this Agreement, as the same may be
modified, amended or supplemented from time to time.
"Loans" mean, collectively, the revolving credit loans,
(each, singly, a "Loan"), including both all Ratable Loans and
all Swingline Loans and Competitive Bid Loans, made or to be made
to Borrower pursuant to this Agreement.
"Managing Agent" means NCB, acting in such capacity for
the Banks under the Loan Documents pursuant to this Agreement,
and includes (where the context so admits) any other Person or
Persons succeeding to such functions in accordance with
Article 8, below.
"Market Value" means, as of any date, an amount equal
to the sum of (i) Borrower's Capitalized Income Value, plus (ii)
fifty percent (50%) of the book value of Borrower's Assets Under
Development and Raw Land, plus (iii) one hundred percent (100%)
of the value of all unrestricted and non-pledged cash equivalents
29
owned by Borrower (all as of the date of determination of Market
Value).
"Maximum Commitment" means the lesser of (i) Two
Hundred Fifty Million Dollars ($250,000,000) or (ii) the sum of
the Credit Commitments.
"Moody's" means Moody's Investors Service, Inc. and its
successors.
"Multiemployer Plan" means a "multiemployer plan" as
defined in Section 4001(a) (3) of ERISA which is maintained for
employees of Borrower or any ERISA Affiliate of Borrower.
"Net Income" means the net income of Borrower and
Borrower's Consolidated Subsidiaries as computed in accordance
with GAAP, as reported in Borrower's most recent report on Forms
10-Q or 10-K, as filed with the SEC.
"Net Worth" means, as of any date, Market Value as of
such date less the aggregate of all then-outstanding Liabilities
of Borrower and its Consolidated Subsidiaries.
"Notes" means, collectively, the promissory notes of
Borrower in the form of Exhibit D (the "Ratable Notes") and
Exhibit D-1 (the "Competitive Bid Notes"), which are to be dated,
executed and delivered to the Banks by Borrower on the date
hereof. "Note" shall mean any one of the Notes, together with
any amendment, modification, supplement or renewal thereof and
with any instruments given in substitution or replacement
thereof.
"Obligations" means, collectively, all of the
indebtedness, obligations and liabilities existing on the date
hereof or arising from time to time hereafter, whether direct,
indirect, absolute, contingent, joint or several, matured or
unmatured, liquidated or unliquidated, secured or unsecured,
arising by contract, operation of law or otherwise, of Borrower
to the Managing Agent or any one or more of the Banks (i) in
respect of the Loans made, or the Letters of Credit issued,
pursuant to this Agreement; or (ii) under or in respect of any
one or more of the Loan Documents. Obligations shall also
include, without limitation, all interest, charges and other fees
payable hereunder (or under any of the Loan Documents) by
Borrower, or due hereunder (or under any of the Loan Documents)
from Borrower to the Managing Agent or any one or more of the
Banks from time to time, together with all costs and expenses
referred to in Section 9.5 herein.
"Outstanding Amount" means, at any time, the aggregate
of (x) the principal balance of all Ratable Loans, Swingline
Loans and Competitive Bid Loans then outstanding hereunder, plus
(y) the Face Amount of all Letters of Credit then outstanding
hereunder, plus (z) the amount of any draw or disbursement made
under any Letter of Credit which Borrower does not convert into a
Loan or otherwise reimburse to the Issuing Bank as and when
required by Section 2.14, below. Notwithstanding the foregoing
to the contrary, the principal balance of any Competitive Bid
Loans which may be outstanding from time to time shall be
excluded from the Outstanding Amount solely for the purpose of
calculating the amount of the Commitment Fee.
30
"Participation Percentage" means, in relation to a
particular Bank, the percentage set forth with respect to such
Bank on Schedule 1.
"Payment Authorization" means the form substantially in
the form of attached Exhibit E, executed by Borrower and
delivered to Managing Agent notifying Managing Agent of any
payment by Borrower hereunder or under the Notes, and if
appropriate, authorizing Managing Agent to debit one or more
designated accounts of Borrower for such payment amount.
"Person" shall include an individual, company,
corporation, association, partnership, joint venture,
unincorporated trade or business enterprise, trust, estate, or
any other legal entity, or a government (Federal, state or
local), court, arbitrator or any agency, instrumentality or
official of the foregoing.
"Preferred Stock" means any form of security which has
a preferential dividend return and ownership priority over the
common stock of Borrower and is classified as shareholders'
equity or capital stock of Borrower in accordance with GAAP.
"Prime Rate" means the rate of interest as in effect
from time to time of the Managing Agent as its prime rate at its
Head Office, without regard to whether the Managing Agent shall
at times lend to other borrowers at lower rates of interest; if
there is no such prime rate, then such other rate as may be
substituted by the Managing Agent for its Prime Rate.
"Prime Rate Loan" means a Loan which bears interest at
the Adjusted Prime Rate.
"Property" means all types of real, personal, tangible,
intangible or mixed property.
"Pro Forma Adjustment" means, with respect to EBITDA or
Investment Entity EBITDA in respect of any fiscal quarter, an
adjustment to such EBITDA to reflect any acquisitions made by
Borrower or such Investment Entity during such fiscal quarter,
assuming (i) the lesser of ninety percent (90%) or actual
occupancy, (ii) that such acquisition occurred on and as of the
initial day of such fiscal quarter, and (iii) that one hundred
percent of the cost of the property so acquired was financed by
Indebtedness unless Borrower shall provide the Managing Agent
with evidence to the contrary.
"Pro Rata Share" means, in relation to any Ratable
Loan, any Letter of Credit or any other item (other than
Swingline Loans and Competitive Bid Loans) arising under this
Agreement, the share of any Bank in such item, which shall be in
the same proportion which the aggregate amount of all of the
Obligations owing to such Bank with respect to such item at such
time shall bear to the aggregate amount of all of the Obligations
then owing to all of the Banks with respect to such item, net of
any and all charges or fees due and payable to the Managing Agent
under the Loan Documents.
"Ratable Loans" means those Loans, other than
Competitive Bid Loans and Swingline Loans, made or to be made to
Borrower under this Agreement. Prime Rate Loans which are
Ratable Loans are sometimes referred to herein as "Ratable Prime
31
Rate Loans"; LIBOR Rate Loans which are Ratable Loans are
sometimes referred to as "Ratable Competitive Bid Loans".
"Rate Option" means the Prime Rate or the LIBOR Rate.
"Rating Agency" means Moody's and/or S&P.
"Raw Land" means all parcels of unimproved and
undeveloped real property owned by Borrower, any Consolidated
Subsidiary or any Investment Entity. For the purposes of this
Agreement, Raw Land shall, at any time, be valued at (i) the
then-current book value thereof (as determined in accordance with
GAAP) for all Raw Land owned by Borrower or any Consolidated
Subsidiary; and (ii) the applicable Consolidated Group Percentage
Interest of the then-current book value of all Raw Land owned by
an Investment Entity.
"Real Estate Project" means any income producing,
multi-family apartment project owned by Borrower, any
Consolidated Subsidiary or any Investment Entity.
"REIT" means a qualified real estate investment trust,
as defined in the Code.
"Request For Advance" means the form, substantially in
the form of attached Exhibit F, to be executed by Borrower and
delivered to the Managing Agent, requesting an advance of Loan
proceeds hereunder, and, among other items, notifying the
Managing Agent of Borrower's intended use of such Loan proceeds.
"Request for Issuance of Letter of Credit" means the
form, substantially similar to that which is attached hereto as
Exhibit G, to be executed by Borrower and delivered to the
Managing Agent, requesting the issuance of a Letter of Credit and
providing the information required in connection therewith by
Section 2.14(a), below.
"Required Banks" means (a) until such time as the
Credit Commitments have been terminated as contemplated by this
Agreement, those Banks having at least sixty-six and two-thirds
percent (66-2/3%) of the aggregate of all Banks' Credit
Commitments; and (b) after the termination of the Credit
Commitments, those Banks having at least sixty-six and two-thirds
percent (66-2/3%) of the aggregate of the Outstanding Amount.
"S&P" means Standard & Poor's Ratings Group, and its
successors.
"SEC" means the Securities and Exchange Commission or
any successor agency.
"Securities" means any stock, shares, voting trust
certificates, bonds, debentures, notes, or other evidences of
indebtedness, secured or unsecured, convertible, subordinated or
otherwise, or in general any instruments commonly known as
"securities" or any certificates of interest, shares or
participation in temporary or interim certificates for the
purchase or acquisition of, or any right to subscribe to,
purchase or acquire, any of the foregoing.
"Secured Debt" means any Indebtedness for Borrowed
Money which is secured by any Lien upon any property or asset,
32
and any judgment lien in excess of $250,000 upon any property or
asset.
"Service EBITDA" means, for any fiscal period of
Borrower, that portion of Borrower's EBITDA which is attributable
(in accordance with GAAP) to payments received by Borrower, or
from any of its Consolidated Subsidiaries, for the performance of
services.
"Subsidiary" means (i) any corporation in which
Borrower (or a Subsidiary of Borrower) owns at least a majority
of the Securities having voting power for the election of
directors; or (ii) any partnership, association, joint venture or
similar business organization in which Borrower (or any
Subsidiary of Borrower) owns at least fifty percent (50%) of the
ownership interest having voting power for the entity so
controlled.
"Swingline Lender" means the Managing Agent, in its
capacity as a Bank.
"Swingline Loans" means loans, the aggregate
outstanding principal balance of which may not exceed Five
Million Dollars ($5,000,000) at any time, made by the Swingline
Lender in accordance with Section 2.16.
"Termination Date" means the earliest of (i)
June 30, 2001, subject to extension in accordance with Section
2.1(b), below; or (ii) the date upon which the entire outstanding
principal balance of the Notes shall become due pursuant to the
provisions hereof (whether as a result of acceleration by the
Managing Agent or the Required Banks or otherwise); (iii) the
date on which the Credit Commitments shall terminate by virtue of
Borrower's exercise of its option under Section 2.15, below; or
(iv) the date upon which the Credit Commitments terminate
pursuant to Section 7.2 hereof.
"Unencumbered Assets Capitalized Income Value" means,
as of any date, an amount equal to Unencumbered EBITDA on an
annualized basis, divided by the Capitalization Factor. For the
purposes of this provision, Borrower's EBITDA shall be subject to
adjustment, in accordance with the Pro Forma Adjustment, to
reflect any acquisitions made during the applicable fiscal
period.
"Unencumbered Debt" means all Indebtedness for Borrowed
Money which is not Secured Debt.
"Unencumbered EBITDA" means, for any fiscal quarter of
Borrower and its Consolidated Subsidiaries, the aggregate of
Service EBITDA for such period (not to exceed $625,000) and that
portion of EBITDA which is attributable, under GAAP, to earnings
derived from Unencumbered Real Estate Assets.
"Unencumbered Real Estate Assets" means all real estate
projects (including Raw Land, Assets Under Development and
income-producing apartment projects) owned by Borrower or any of
Borrower's Wholly Owned Subsidiaries which are not subject to any
Lien securing an obligation for the payment of money (other than
real property taxes and assessments which are not then due and
payable and Liens in favor of mechanics or material vendors which
are being contested in accordance with the terms of this
Agreement). Real estate projects (including Raw Land, Assets
33
Under Development and income-producing apartment projects) which
are subject to ground leases and as to which Borrower or any of
Borrower's Wholly Owned Subsidiaries acquires the ground
leasehold interest after the date of this Agreement shall not be
considered to be Unencumbered Real Estate Assets.
"Unencumbered Suites" means, for any fiscal period and
for any party, the number of Apartment Suites located in
Unencumbered Real Estate Assets which are income-producing
apartment projects owned by such party as of the final day of
such fiscal period.
"Wholly Owned Subsidiary" of a Person means (i) any
Subsidiary of which such Person (and/or one or more wholly owned
Subsidiary of such Person) shall own or control, directly or
indirectly, all of the outstanding voting securities; or (ii) any
partnership, association or similar business organization of
which such person (and/or one or more Wholly Owned Subsidiaries
of such Person) shall own or control all of the outstanding
voting Securities or ownership interests.
ARTICLE 2.
THE LOANS AND LETTERS OF CREDIT
Section 2.1 Commitments. (a) Each Bank, severally and
not jointly, agrees, upon the terms and subject to the conditions
contained in this Agreement, to make Ratable Loans to Borrower
and to issue, or participate as hereinafter provided in the
issuance of, the Letters of Credit for Borrower, from time to
time prior to the Termination Date. The principal amount of each
Bank's Pro Rata Share of each Ratable Loan shall be equal to such
Bank's Participation Percentage of the aggregate principal amount
of such Loan, and the amount of each Bank's Pro Rata Share in
each Letter of Credit shall be equal to such Bank's Participation
Percentage of the Face Amount of such Letter of Credit.
(b) Provided (i) that there is not then (or on the
commencement of the extension term resulting from Borrower's
exercise of the extension option set forth in this
Section 2.1(b)) any Event of Default hereunder or under any other
Loan Document, and no circumstance which would, with the passing
of time or delivery of notice (or both) constitute such an Event
of Default; and (ii) that Borrower shall then, and upon the
commencement of the extension term resulting from Borrower's
exercise of the extension option set forth in this Section
2.1(b), have Investment Grade Debt Ratings issued by Moody's and
S&P, Borrower may extend the Termination Date for a period of one
(1) year by providing the Managing Agent and each Bank with
written notice of its election to do so not more than one hundred
twenty (120) nor less than sixty (60) days prior to the first
anniversary of the Commencement Date. Thereafter, and provided
that the Termination Date has theretofore been extended as
provided in this Section 2.1(b), Borrower may extend the
Termination Date (as extended as aforesaid) for successive and
consecutive periods of one (1) year each, provided, as to each
instance (x) that Borrower shall exercise such option by
providing the Managing Agent and each Bank with written notice of
its election to do so not earlier than one hundred twenty (120)
days, nor later than sixty (60) days prior to the first (or, if
the Termination Date has theretofore been extended to permit the
same, each successive) anniversary of the Closing Date; and
34
(y) that the Managing Agent and all of the Banks shall elect, in
their discretion, to consent to each such extension of the
Termination Date.
Section 2.2 Making the Ratable Loans. (a) Each Bank
will, subject to the terms and conditions of this Agreement, make
an amount equal to its Participation Percentage in each Ratable
Loan available to the Managing Agent for disbursement to Borrower
at such times and in such amounts as shall be requested by
Borrower in compliance with Section 2.13, below. Borrower may,
subject to the terms and conditions of this Agreement, borrow on
a revolving basis from the Banks from time to time until the
Termination Date sums, the outstanding amount of which shall not,
when added to the Letter of Credit Usage and the outstanding
principal balance of all Swingline Loans and Competitive Bid
Loans, exceed the Maximum Commitment at any time. Each Ratable
Loan shall be in an amount equal to or greater than One Million
Dollars ($1,000,000.00); provided, however, (i) with regard to
each Bank individually, the aggregate sum of each such Bank's Pro
Rata Share of all outstanding Ratable Loans and its Pro Rata
Share of the Letter of Credit Usage shall not exceed such Bank's
Credit Commitment; and (ii) with regard to the Banks
collectively, the aggregate sum of all Loans and the Letter of
Credit Usage shall not exceed the Maximum Commitment. The
Borrower may borrow, repay and reborrow hereunder on and after
the date hereof until the Termination Date, subject to the terms,
provisions and limitations set forth herein.
(b) The absolute and unconditional obligation of
Borrower to repay to each Bank such Bank's respective Pro Rata
Share of the principal of each Ratable Loan and the interest
thereon, as well as Borrower's absolute and unconditional
obligation to repay such Bank's respective Pro Rata Share of the
Face Amount of each Letter of Credit together with any
disbursements made under any Letter of Credit, as and when
required as hereinafter provided, shall be evidenced by a
separate Note for each Bank in the amount of its respective
Credit Commitment. All payments under the Notes shall be made to
the Managing Agent at its Head Office, for the account of the
Banks; the Managing Agent shall allocate all payments received
from Borrower among all Banks in accordance with each Bank's Pro
Rata Share.
Section 2.3 Competitive Bid Loans.
(a) General Provisions.
(i) In addition to Ratable Loans and
Swingline Loans made pursuant to this Agreement, but subject to
the other terms and conditions hereof (including, without
limitation, the requirement that the aggregate Outstanding Amount
-- which for the purposes of this Section 2.3 shall include the
outstanding principal amount of all Competitive Bid Loans and
Swingline Loans -- not exceed the Maximum Commitment at any
time), and provided (x) that there is then no Default or Event of
Default hereunder; and (y) Borrower shall then have Investment
Grade Debt Ratings from Moody's and S&P, Borrower may from time
to time prior to the Termination Date request the Banks to make
offers to make Competitive Bid Loans to Borrower. Each Bank may
(but shall not be obligated to) make such offers in response to
Borrower's written request therefor given in accordance with the
procedures set forth herein. Borrower may (but shall not be
obligated to) accept such offers in the manner provided in this
35
Section 2.3. All of the Competitive Bid Loans shall be evidenced
by the Competitive Bid Notes.
(ii) No Competitive Bid Loan shall affect or
limit the obligation of the Bank making such Competitive Bid Loan
to continue to fund its entire Participation Percentage of all
Ratable Loans and to participate in the issuance of all Letters
of Credit thereafter made or issued hereunder, notwithstanding
that the aggregate of (x) the outstanding principal balance of
all Competitive Bid Loans made by such Bank, and (y) such Bank's
Pro Rata share of all Ratable Loans and all Letters of Credit
made or issued hereunder may exceed such Bank's Credit
Commitment. The aggregate principal balance of all Competitive
Bid Loans which may be outstanding at any time shall not exceed
fifty percent (50%) of the Maximum Commitment. Borrower may not
make more than three (3) requests for Competitive Bid Loans in
any period of thirty (30) consecutive days, or more than one (1)
request for Competitive Bid Loans in any ten (10) day period
(without regard to whether such requests are made by means of
Competitive Bid Quote Requests to the Managing Agent or Direct
Invitations to Bid issued by Borrower to all of the Banks). Each
request made by Borrower for Competitive Bid Loans (whether by
means of its Competitive Bid Quote Requests to the Managing Agent
or Direct Invitations to Bid issued directly to all of the Banks)
may invite offers to bid for as many as three (3) Competitive Bid
Loans; each such request may specify particular amounts and
Interest Periods for the Competitive Bid Loans contemplated
thereby, or, subject to the other requirements of this Section
2.3, may establish desired ranges of principal amounts and
Interest Periods for which Borrower thereby solicits offers from
the Banks. Except as specifically set forth in this
Section 2.3(a)(ii), no Competitive Bid Loan may be continued at
the expiration of its stated Interest Period; all Competitive Bid
Loans shall, if not repaid at the end of the applicable Interest
Period, either be replaced by a Ratable Loan or by another
Competitive Bid Loan made in accordance with and subject to the
terms and conditions of this Agreement. If, at the time of the
expiration of the Interest Period for any Competitive Bid Loan,
any Default or Event of Default shall exist hereunder, and if the
Required Banks shall not elect (notwithstanding such Default or
Event of Default) to make a Ratable Loan to replace such expiring
Competitive Bid Loan, then, provided that at such time (x) the
Credit Commitments have not been terminated in accordance with
Section 7.2(a), below, and (y) the Obligations have not been
accelerated in accordance with Section 7.2(b), below, the Bank
(or Banks) which funded such Competitive Bid Loan shall
automatically be deemed to have elected to replace such expiring
Competitive Bid Loan with another Competitive bid Loan in the
identical principal amount, at an interest rate not to exceed the
Default Interest Rate and having an Interest Period commencing as
of the final day of the Interest Period for such expiring
Competitive Bid Loan and concluding on the date on which the
Default or Event of Default at issue is cured or waived by the
Required Banks and such Competitive Bid Loan is replaced by a
Ratable Loan or by another Competitive Bid Loan made in
accordance with and upon and subject to the terms and conditions
set forth in this Agreement.
(b) Funding the Competitive Bid Loans. Each Bank
making a Competitive Bid Loan shall place at the disposal of the
Managing Agent, at the Managing Agent's Head Office not later
than 2:00 p.m., Cleveland time, on the Draw Date for such
Competitive Bid Loan, the principal amount of such Competitive
36
Bid Loan in immediately available and freely transferrable funds.
If such Bank also has an outstanding Competitive Bid Loan that is
payable on such Draw Date, Borrower agrees that such Bank may
(with prior notice to the Managing Agent) fund only the amount of
any net increase between the principal balance of the outstanding
Competitive Bid Loan and the new Competitive Bid Loan, in which
event the outstanding Competitive Bid Loan shall be deemed to
have been funded to Borrower on the terms of the new Competitive
Bid Loan. Provided that the conditions precedent applicable to
such Loan under Article 3 of this Agreement shall be satisfied as
at such Draw Date, the Managing Agent shall disburse the proceeds
of such Competitive Bid Loan to Borrower at the time and in the
manner provided at Section 2.13 of this Agreement.
(c) Competitive Bid Loans Administered by
the Managing Agent.
(i) If Borrower elects to have the Managing
Agent administer the solicitation and acceptance of offers to
make Competitive Bid Loans, Borrower shall provide the Managing
Agent with written notice of such election, accompanied by
Borrower's completed Competitive Bid Quote Request, by telecopy
for the Managing Agent's receipt not later than (x) 9:00 a.m.,
Cleveland time, at least five (5) Business Days before the
proposed Draw Date for each Competitive Bid LIBOR Rate Loan so
requested; and (y) 9:00 a.m., Cleveland time, at least one (1)
Business Day before the proposed Draw Date for each Absolute Rate
Loan so requested. Each Competitive Bid Quote Request submitted
by Borrower shall specify:
(1) the proposed Draw Date and Interest
Period for each Competitive Bid Loan so requested;
(2) the requested principal amount of
each such Competitive Bid Loan, which shall be in whole
multiples of One Million Dollars ($1,000,000) and shall in
no case be less than Five Million Dollars ($5,000,000); or
the desired range of principal amounts (subject in each case
to the foregoing requirement) and Interest Periods for which
Borrower thereby solicits bids from the Banks; and
(3) whether the Competitive Bid Quotes
so requested are for Competitive Bid LIBOR Rate Loans or for
the Absolute Rate Loans.
The Managing Agent shall reject any Competitive Bid Quote Request
which does not comply in all material respects with the form of
Competitive Bid Quote Request appended as Exhibit B or which is
not given as and when provided above; such rejection shall be
confirmed by written notice from the Managing Agent to Borrower
by telecopy promptly after it occurs.
(ii) Not later than 1:00 p.m., Cleveland
time, on the same Business Day on which it receives a proper
Competitive Bid Quote Request from Borrower, the Managing Agent
shall provide each Bank, by telecopy, with an Invitation for Bids
consistent with the Competitive Bid Quote Request to which it
pertains, reflecting Borrower's request to each Bank for its
submission of a Competitive Bid Quote responsive to such
Competitive Bid Quote Request. Each Bank may, in its discretion
37
(but shall have no obligation to), submit its Competitive Bid
Quote in response to such Invitation in accordance with the
procedure set forth herein. Each Competitive Bid Quote shall be
furnished to the Managing Agent, by telecopy, not later than
1:00 p.m. Cleveland time at least four (4) Business Days before
the proposed Draw Date for each requested Competitive Bid LIBOR
Rate Loan or 10:00 A.M., Cleveland time, on the proposed Draw
Date for each requested Absolute Rate Loan (or such earlier time
as Borrower and the Managing Agent may agree). Notwithstanding
the foregoing to the contrary, as to each Competitive Bid Loan
procedure which is administrated by the Managing Agent and for so
long as NCB shall serve as the Managing Agent hereunder, NCB may,
in its capacity as a Bank, submit Competitive Bid Quotes only by
providing Borrower with written notice of its election to do so,
along with its Competitive Bid Quote, by telecopy, at least one-
half hour before the relevant deadline for submission of
Competitive Bid Quotes by the other Banks. All Competitive Bid
Quotes shall be irrevocable once given, provided, however, that
any Bank which submits a Competitive Bid Quote which contains a
manifest error may supplement such Competitive Bid Quote at any
time prior to the Managing Agent's transmission of its written
notice to Borrower describing the Competitive Bid Quotes received
by the Managing Agent and including such original Competitive Bid
Quote by providing the Managing Agent, by telecopy, with a
corrective Competitive Bid Quote (a "Corrective Quote") otherwise
in accordance with the foregoing criteria, together with express
written notice that such Corrective Quote is submitted for the
purpose of correcting a manifest error in such Bank's original
Competitive Bid Quote.
(iii) Each Competitive Bid Quote shall be
substantially in the form attached hereto as Exhibit A, shall
identify the Bank making such quote, shall constitute an offer by
the Bank submitting such Competitive Bid Quote to make a
Competitive Bid Loan to Borrower in the principal amount, for the
Interest Period or Interest Periods and at the Competitive LIBOR
Bid Rate or the Absolute Rate set forth therein (or in such
lesser principal amount as may result from apportionment by the
Managing Agent as hereinafter provided), and shall specify the
following additional information:
(1) the proposed Draw Date and the
proposed Interest Period for each Competitive Bid Loan
contemplated thereby (which shall in each case
correspond to those requested in the relevant
Invitation for Bids);
(2) the principal amount of the
Competitive Bid Loan for which such offer is being
made, which amount (x) shall be an integral multiple of
One Million Dollars ($1,000,000) and not less than Five
Million Dollars ($5,000,000), and (y) may not exceed
the principal amount of the Competitive Bid Loans
requested in Borrower's Competitive Bid Quote Request;
(3) the minimum amount, if any, of the
Competitive Bid Loan or Loans which may be accepted by
Borrower; and
38
(4) the Competitive LIBOR Bid Rate or
the Absolute Rate, as applicable, for each such
Competitive Bid Loan.
The Managing Agent shall reject Competitive Bid Quotes which are
submitted after the applicable deadline as set forth above, which
fail to include all of the information required above, which
include additional or different terms than those requested in the
applicable Invitation for Bids or which deviate in any fashion
from the form of Competitive Bid Quote (by addition of qualifying
language or otherwise) attached hereto as Exhibit A. The
Managing Agent shall not disclose the contents of any Bank's
Competitive Bid Quote to any other Bank prior to the Managing
Agent's receipt of Borrower's Competitive Bid Borrowing Notice.
(iv) At or before 5:00 p.m., Cleveland time,
at least four (4) Business Days before the proposed Draw Date for
each Competitive Bid LIBOR Rate Loan, or 10:30 a.m., Cleveland
time, on the Draw Date for each Absolute Rate Loan for which the
Managing Agent shall have received timely and proper Competitive
Bid Quotes (or Corrective Quotes) submitted in accordance with
the foregoing procedures, the Managing Agent shall provide
Borrower with written notice thereof, by telecopy. Such notice
shall describe the aggregate principal amount of Competitive Bid
Loans for which offers have been received for each Interest
Period for which Competitive Bid Loans were requested in the
relevant Bid Request and the respective principal amounts and
Competitive LIBOR Bid Rates or Absolute Rates so offered.
(v) Borrower may accept offers to make
Competitive Bid Loans only by providing the Managing Agent with
written notice, by telecopy, of its election to do so not later
than (i) 11:00 a.m., Cleveland time, at least three (3) Business
Days before the proposed Draw Date for any Competitive Bid Loan,
or (ii) 11:00 a.m., Cleveland time, on the Draw Date for any
Absolute Rate Loan. Such notice (a "Competitive Bid Borrowing
Notice") shall specify the aggregate principal amount of the
offers so accepted and the applicable interest rate therefor.
Borrower's failure to provide its Competitive Bid Borrowing
Notice as and when specified in the preceding sentence shall
constitute Borrower's unqualified rejection of all such offers.
Borrower may accept any proper Competitive Bid Quote provided
that:
(1) the aggregate principal amount of
all Competitive Bid Loans to be disbursed on a specified
Draw Date may not exceed the applicable amount set forth in
the related Competitive Bid Quote Request;
(2) acceptance of offers for
Competitive Bid Loans having identical Interest Periods may
only be based upon ascending Competitive LIBOR Bid Rates or
Absolute Rates, as appropriate, for such Loans; and
(3) Borrower may not accept any offer
that fails to comply with the requirements of this
Agreement.
39
(vi) If two or more Banks shall make
Competitive Bid Quotes having identical Competitive LIBOR Bid
Rates or Absolute Rates for Competitive Bid Loans of identical
Interest Periods, the Managing Agent shall apportion the
principal amount of all such Competitive Bid Loans among such
Banks in proportion to the aggregate principal amounts of such
Banks' respective Competitive Bid Quotes (which shall be rounded
upwards to the nearest multiple of $1,000.00). Allocations by
the Managing Agent of the amounts of Competitive Bid Loans shall
be binding and conclusive, absent manifest error. The Managing
Agent shall, not later than 5:00 p.m., Cleveland time, on the
third Business Day before the applicable Draw Date, notify each
Bank of its receipt of a Competitive Bid Borrowing Notice and the
principal amounts of the Competitive Bid Loans allocated to each
participating Bank.
(vii) Borrower shall pay the Managing Agent
an administrative fee (the "Competitive Bid Fee") in the amount
of One Thousand Two Hundred Fifty Dollars ($1,250) for each
Competitive Bid Quote Request transmitted by Borrower to the
Managing Agent pursuant to this Section 2.4(c). Each Competitive
Bid Fee shall be deemed to have been earned by the Managing Agent
with respect to each Managing Agent-administered Competitive Bid
Loan solicitation process (without regard to whether any Bank
shall issue or Borrower shall accept any Competitive Bid Quote in
response thereto, or to whether any Competitive Bid Loan
resulting from such Competitive Bid Request shall be funded).
The Competitive Bid Fee in respect of each such process may be
deducted from the proceeds of any Managing Agent-administered
Competitive Bid Loan; Borrower and each Bank hereby expressly
authorize the Managing Agent to deduct its Competitive Bid Fee
from such proceeds.
(d) Competitive Bid Loans Administered
by Borrower. (i) Borrower may request offers to make Competitive
Bid Loans from all (but not less than all) of the Banks directly
by providing each Bank and the Managing Agent with its Direct
Invitation to Bid not later than (x) 1:00 p.m., Cleveland time,
at least five (5) Business Days before the proposed Draw Date for
the Competitive Bid LIBOR Rate Loans described therein; and (y)
9:00 A.M., Cleveland time, at least one (1) Business Day before
the Draw Date for each Absolute Rate Loan so requested. Each
Direct Invitation to Bid shall specify:
(1) the proposed Draw Date and Interest
Period for each Competitive Bid Loan so requested;
(2) the requested principal amount of
each such Competitive Bid Loan, which shall be in whole
multiples of One Million Dollars ($1,000,000) and shall in
no case be less than Five Million Dollars ($5,000,000); or
the desired range of principal amounts (subject in each case
to the foregoing requirement) and Interest Periods for which
Borrower thereby solicits bids from the Banks; and
(3) whether the Competitive Bid Quotes
so requested are for Competitive Bid LIBOR Rate Loans or for
Absolute Rate Loans.
40
(ii) Each Bank may, in its discretion (but
shall have no obligation to), submit its Competitive Bid Quote in
response to such Direct Invitation in accordance with the
procedure set forth herein. Each Competitive Bid Quote shall be
furnished to Borrower, by telecopy, not later than 1:00 p.m.
Cleveland time at least four (4) Business Days before the
proposed Draw Date for each requested Competitive Bid LIBOR Rate
Loan, or 10:00 A.M., Cleveland time, on the proposed Draw Date
for each requested Absolute Rate Loan (or such earlier time as
Borrower and the Managing Agent may agree). All Competitive Bid
Quotes shall be irrevocable once given, provided, however, that
any Bank which submits a Competitive Bid Quote which contains a
manifest error may supplement such Competitive Bid Quote at any
time prior to the Borrower's acceptance of such original
Competitive Bid Quote by providing Borrower, by telecopy with a
Corrective Bid otherwise in accordance with the foregoing
criteria, together with express written notice that such
Corrective Bid is submitted for the purpose of correcting a
manifest error in such Bank's original Competitive Bid Quote.
Each Competitive Bid Quote shall identify the Bank making such
quote, shall constitute an offer by the Bank submitting such
Competitive Bid Quote to make a Competitive Bid Loan to Borrower
in the principal amount, for the Interest Period or Interest
Periods and at the Competitive LIBOR Bid Rate set forth therein
(or in such lesser principal amounts as may result from
apportionment by the Borrower as hereinafter provided and shall
specify the following additional information:
(1) the proposed Draw Date and the
proposed Interest Period for the Competitive Bid Loan
contemplated thereby (which shall in each case
correspond to those requested in the relevant Direct
Invitation for Bids);
(2) the principal amount of the
Competitive Bid Loan for which such offer is being
made, which amount (x) must be an integral multiple of
One Million Dollars ($1,000,000) and not less than Five
Million Dollars ($5,000,000), and (y) may not exceed
the principal amount of the Competitive Bid Loans
requested in Borrower's Direct Invitation;
(3) the minimum amount, if any, of the
Competitive Bid Loan or Loans which may be accepted by
Borrower; and
(4) the Competitive LIBOR Bid Rate or
the Absolute Rate, as appropriate, for each such
Competitive Bid Loan; and
Borrower shall reject Competitive Bid Quotes which are submitted
after the applicable deadline as set forth above, which fail to
include all of the information required above, which include
additional or different terms than those requested in the
applicable Invitation for Bids or which deviate in any fashion
from the form of Competitive Bid Quote (by addition of qualifying
language or otherwise) attached hereto as Exhibit A. Borrower
shall notify any Bank whose Competitive Bid Quote is so rejected
41
by telecopy promptly after such rejection. Borrower shall not
disclose the contents of any Bank's Competitive Bid Quote to any
other Bank prior to Borrower's acceptance of offers to make
Competitive Bid Loans as provided in the following paragraph.
(iii) Borrower may accept offers to make
Competitive Bid Loans only by providing the Managing Agent and
each Bank with written notice, by telecopy, of its acceptance or
rejection of the offers submitted to it in response to its Direct
Invitation to Bid not later than 11:00 a.m., Cleveland time, at
least three (3) Business Days before the proposed Draw Date for
any Competitive Bid LIBOR Rate Loan or 11:00 a.m., Cleveland
time, on the Draw Date for each Absolute Rate Loan. Borrower's
failure to provide such notice as and when specified in the
preceding sentence shall constitute Borrower's unqualified
rejection of all such offers. Each acceptance notice shall
specify the aggregate principal amount of the offers so accepted
and the applicable interest rate therefor. Borrower may accept
any proper Competitive Bid Quote, provided that:
(1) the aggregate principal amount of
all Competitive Bid Loans to be disbursed on a specified
Draw Date may not exceed the applicable amount set forth in
the related Competitive Bid Quote Request;
(2) acceptance of offers for
Competitive Bid Loans having identical Interest Periods may
only be based upon ascending Competitive LIBOR Bid Rates or
Absolute Rates, as appropriate, for such Loans; and
(3) Borrower may not accept any offer
that fails to comply with the requirements of this
Agreement.
(iv) If two or more Banks shall make
Competitive Bid Quotes having identical Competitive LIBOR Margins
or Absolute Rates for Competitive Bid Loans of identical Interest
Periods, Borrower shall apportion the principal amount of all
such Competitive Bid Loans among such Banks in proportion to the
aggregate principal amounts of such Banks' respective Competitive
Bid Quotes (which shall be rounded upwards to the nearest
multiple of $1,000). Allocations by Borrower of the amounts of
Competitive Bid Loans shall be binding and conclusive, absent
manifest error.
Section 2.4 Interest Payable on the Loans.
(a) Method of Selecting Rate Options and Interest
Periods. Borrower shall select the Rate Option for each Ratable
Loan and shall select the Interest Period applicable to each
Ratable LIBOR Rate Loan from time to time. Borrower shall give
the Managing Agent its irrevocable Request For Advance not later
than 1:00 p.m. Cleveland time at least one (1) Business Day
before the Draw Date of each Ratable Prime Rate Loan and three
(3) Business Days before the Draw Date for each Ratable LIBOR
Rate Loan, specifying:
42
(i) the Draw Date (which shall be a Business Day) for
such Loan;
(ii) the aggregate amount of such Loan;
(iii) the Rate Option selected for such Loan; and
(iv) in the case of each LIBOR Rate Loan, the Interest
Period applicable thereto.
Each LIBOR Rate Loan shall bear interest from and including the
first day of the Interest Period applicable thereto until (but
not including) the last day of such Interest Period at the
interest rate determined as applicable to such LIBOR Rate Loan.
Borrower shall select Interest Periods with respect to LIBOR Rate
Loans so that it is not necessary to pay a LIBOR Rate Loan prior
to the last day of the applicable Interest Period in order to
repay the Loans on the Termination Date. Provided that no
Default or Event of Default shall have occurred and be
continuing, Borrower may elect to continue a Ratable Loan (but
not a Competitive Bid Loan) as a Ratable LIBOR Rate Loan by
giving irrevocable written, telephonic or telegraphic notice
thereof to the Managing Agent not less than three (3) Business
Days prior to the last day of the then-current Interest Period
applicable to such Ratable LIBOR Rate Loan, specifying the
duration of the succeeding Interest Period therefor. The
continuation of any Ratable LIBOR Rate Loan as provided in the
preceding sentence shall constitute the making of a new LIBOR
Rate Loan in the principal amount of the Ratable LIBOR Rate Loan
so continued and for the Interest Period selected as described
above; the Draw Date for such new LIBOR Rate Loan shall be the
first Business Day following the expiration of the Interest
Period of the Loan so continued. If the Managing Agent does not
receive timely notice of such election, Borrower shall be deemed
to have elected to convert such LIBOR Rate Loan to a Prime Rate
Loan at the end of the then-current Interest Period. Provided
that no Default or Event of Default shall have occurred and be
continuing, Borrower may, on any Business Day, convert any
outstanding Prime Rate Loan, or portion thereof, into a LIBOR
Rate Loan in the same aggregate principal amount. If Borrower
desires to convert a Prime Rate Loan, it shall give the Managing
Agent prior written, telephonic or telegraphic notice three (3)
Business Days prior to the requested conversion date, which
notice shall specify the duration of the Interest Period
applicable thereto. The Managing Agent shall notify the Banks of
its receipt of such notice from Borrower not later than
5:00 p.m., Cleveland time, on the Business Day on which the
Managing Agent receives such notice.
(b) Determination of Adjusted Prime Rate. The
Managing Agent shall determine the Adjusted Prime Rate in effect
from time to time. Any change in the Adjusted Prime Rate shall,
for all purposes of this Agreement and the other Loan Documents,
become effective on the effective date of such change in the
Prime Rate as announced by the Managing Agent in accordance with
the Managing Agent's customary practices.
43
(c) Payments.
(i) Borrower shall pay to the Managing Agent, for the
account of the Banks in accordance with their
respective Pro Rata Shares, monthly in arrears on the
last Business Day of each month beginning with the
month following the month in which the Closing Date
occurs, interest on the outstanding principal amount of
the Adjusted Prime Rate Loans at the annual rate equal
to the Adjusted Prime Rate; provided, however, that if
Borrower elects, pursuant to the final paragraph of
Section 2.4(a), to convert a Prime Rate Loan, or any
portion thereof, to a LIBOR Rate Loan, Borrower shall
pay to the Managing Agent, for the account of the Banks
in accordance with their respective Pro Rata Shares,
all accrued but unpaid interest on the Prime Rate Loan,
or such portion thereof, being converted, for the
period commencing on the date of the last payment date
under this paragraph 2.4(c)(i) and concluding on the
day immediately preceding the first day of the Interest
Period for the LIBOR Rate Loan into which the Prime
Rate Loan is converted.
(ii) Borrower shall pay to the Managing Agent, for the
account of the Banks in accordance with their
respective Pro Rata Shares, interest, in arrears, on
the outstanding principal amount of the Ratable LIBOR
Rate Loans at the annual rate equal to the LIBOR Rate.
Such interest shall be due and payable on the last
Business Day of the applicable Interest Period for each
LIBOR Rate Loan having an Interest Period of ninety
(90) days or less; for all other LIBOR Rate Loans,
interest shall be payable, in arrears as aforesaid, on
(x) that Business Day which is ninety (90) days after
the respective Draw Dates for such LIBOR Rate Loans;
and (y) on the final day of the Interest Period
therefor.
(iii) Borrower shall pay to the Managing Agent, for
the account of each Bank having a Competitive Bid Loan
outstanding to Borrower, interest, in arrears, on the
outstanding principal balance of the Competitive Bid
Loans at the annual rate equal to the Competitive LIBOR
Bid Rate or the Absolute Rate applicable to such
Competitive Bid Loans. Such interest shall be due and
payable on the last business day of the applicable
Interest Period for each Competitive Bid Loan having an
Interest Period of ninety (90) days or less; for all
other Competitive Bid Loans, interest shall be payable,
in arrears as aforesaid, on (x) that Business Day which
is ninety (90) days after the respective Draw Dates for
such Competitive Bid Loans; and (y) on the final day of
the Interest Period therefor.
(d) Interest on Overdue Payments; Default Interest
Rate. If any payment of principal or interest, or any drawing or
disbursement made under any Letter of Credit, is not paid when
due, or prior to the expiration of the applicable period of grace
44
(if any) therefor, the Managing Agent shall, upon the request of
the Required Banks, charge and collect from Borrower, or add to
the unpaid balance of the Notes, a Late Charge. The Managing
Agent may charge interest on the Late Charge at the Default
Interest Rate until such time as the required payment of
principal and interest (together with the Late Charge) is paid
hereunder. Any Late Charge charged and collected by the Managing
Agent shall be distributed to the Banks in accordance with their
respective Pro Rata Shares. Any Late Charge charged and collected
by the Managing Agent in respect of any Competitive Bid Loan
shall be distributed to the Banks making such Loan in proportion
to their respective shares in such Competitive Bid Loans. No
failure by the Managing Agent to charge or collect any Late
Charge in respect of any delinquent payment shall be considered
to be a waiver by the Managing Agent or the Banks of any rights
they may have hereunder, including without limitation the right
subsequently to impose a Late Charge for such delinquent payment
or to take such other actions as may then be available to them
hereunder or at law or in equity, including but not limited to
the right to terminate the Credit Commitments or to accelerate
the Obligations pursuant to the terms of Section 7.2 hereof. If
the Notes have been accelerated pursuant to Section 7.2(b), or if
an Event of Default hereunder or under any other Loan Document
shall have occurred and be continuing, the outstanding principal
balance of the indebtedness advanced under this Agreement,
together with all accrued interest thereon and any and all other
Obligations, shall bear interest from the date on which such
amount shall have first become due and payable (or the date on
which any such Event of Default shall have occurred) to the date
on which such amount shall be paid (whether before or after
judgment) at the Default Interest Rate. Interest at the Default
Interest Rate will continue to accrue and will (to the extent
permitted by applicable law) be compounded daily until the
Obligations in respect of such payment are discharged (whether
before or after judgment).
Section 2.5 Repayments and Prepayments of Principal.
(a) Optional Prepayments. Without derogating from the
mandatory prepayment requirements contained in Section 2.5(c)
hereof, Borrower shall have the right to prepay the principal of
the Ratable Loans in full or in part at any time and from time to
time upon payment to Managing Agent of all accrued interest to
the date of payment; provided, however, that (i) all partial
payments of principal shall be in an amount equal to or greater
than One Million Dollars ($1,000,000); (ii) Borrower may not make
any optional prepayment of any LIBOR Rate Loan during the fifteen
(15)-day period commencing on the Draw Date for such LIBOR Rate
Loan; and (iii) all Loans may be prepaid without penalty or
premium. Borrower may not prepay any Competitive Bid Loan
without the prior, written consent of the Bank which made such
Competitive Bid Loan. If Borrower shall prepay any LIBOR Rate
Loan on a day other than the final day of the applicable Interest
Period therefor, such prepayment must include an amount equal to
the aggregate LIBOR Break Funding Costs applicable to or
resulting from such prepayment in accordance with Section 2.9,
below.
45
(b) Mandatory Prepayments.
(i) If at any time the Outstanding Amount exceeds the
Maximum Commitment, Borrower shall immediately prepay
all sums in excess of the Maximum Commitment.
(ii) If (and on each occasion that) a drawing or
disbursement is made under a Letter of Credit and
Borrower shall not reimburse the Issuing Bank therefor
(either by causing the amount of such drawing or
disbursement to be converted into a Loan or by paying
the Issuing Bank the amount of such drawing or
disbursement in immediately available funds), as and
when required by Section 2.14, below, Borrower shall
immediately repay an amount equal to the amount of such
drawing or disbursement, together with interest thereon
at the rate contemplated by Section 2.14, below.
(c) Application of Prepayments. Any prepayment under
the Notes shall be applied by the Managing Agent as set forth in
Section 2.6 hereof. To the extent that any prepayment shall be
applied to a LIBOR Rate Loan, the Managing Agent shall (unless
such prepayment shall result from the acceleration of the Notes
following the occurrence of an Event of Default by Borrower)
retain such amount until the expiration of the Interest Period
applicable to such LIBOR Rate Loan, and shall apply such payment
at such time so as to minimize the LIBOR Break Funding Costs
otherwise applicable to such prepayment, unless specifically
instructed by Borrower to pay, repay or prepay such LIBOR Rate
Loan and nonetheless incur the applicable LIBOR Break Funding
Cost.
(d) Maturity. Subject to the terms and conditions of
this Agreement, Borrower will be entitled to reborrow all or any
part of the principal of the Notes repaid or prepaid prior to the
termination of the Credit Commitments. The Credit Commitments
shall terminate, and all of the indebtedness evidenced by each
Note shall, if not sooner paid, be in any event absolutely and
unconditionally due and payable in full by Borrower on the
Termination Date.
(e) Notice of Prepayments of Principal. Borrower will
provide the Managing Agent at least (1) one Business Day's
advance, written notice of Borrower's intention to make any
voluntary prepayment of principal. Such notice shall be
irrevocable and shall specify the date of prepayment and the
aggregate amount to be paid. The Managing Agent will promptly
notify each Bank of its receipt of such notice.
Section 2.6 Payments and Computations.
(a) Time and Place of Payments. Except as
specifically provided to the contrary in Section 2.14, below,
each payment to be made by Borrower under this Agreement or any
other Loan Document shall be made directly to the Managing Agent
at its Head Office, not later than 12:00 noon Cleveland Time, on
the due date of each such payment, in immediately available and
freely transferrable funds. Any payment received after such time
46
will be deemed to have been received on the next Business Day.
All payments of interest, principal and all other amounts owing
hereunder or under the Notes or any other Loan Document shall be
documented by Borrower's transmitting to the Managing Agent, via
telecopy, a Payment Authorization; the funds representing such
payment shall be transferred to the Managing Agent in accordance
with such Payment Authorization. On the same Business Day that
it receives (or is deemed to receive) payments hereunder the
Managing Agent will distribute (or cause to be distributed) to
each Bank, in immediately available and freely transferrable
funds: (x) such Bank's Pro Rata Share of such payments in
respect of all items other than payments under Competitive Bid
Loans, and (y) such Bank's share of all payments on account of
any Competitive Bid Loans made by such Bank. If the Managing
Agent fails to forward such payment by the close of business on
the same Business Day as such payment is received (or as deemed,
as described above, to have been received) by the Managing Agent,
the Managing Agent shall remit to each Bank its Participation
Percentage of such payment on the immediately following Business
Day, together with interest thereon until payment at the
customary rate set by the Managing Agent for the correction of
errors among banks.
(b) Application of Funds. Notwithstanding anything
herein to the contrary, and notwithstanding anything set forth in
the Payment Authorization, the funds received by the Managing
Agent with respect to the Obligations shall be applied as
follows:
(i) No Default. Provided that the Notes have not been
accelerated pursuant to Section 7.2(b), below, and
provided further that no Event of Default shall have
occurred and be continuing at the time that the
Managing Agent receives such funds, in the following
manner: (a) first, to the payment of all reasonable
costs and expenses incurred in the collection of the
Obligations; (b) second, to the payment of all interest
and principal of all Swingline Loans; (c) third, to the
payment of all accrued but unpaid interest at the time
of such payment; and (d) fourth, to the payment of
principal as allocated by Borrower (with the approval
of the Managing Agent) between Competitive Bid Loans
and Ratable Loans, with principal payments in respect
of the latter to be apportioned among the Banks in
accordance with their respective Pro Rata Shares.
(ii) Default. If the Notes have been accelerated
pursuant to Section 7.2(b), or if an Event of Default
hereunder shall have occurred and be continuing
hereunder at the time the Managing Agent receives such
funds, in the following manner: (a) first to the
payment or reimbursement of the Banks and the Managing
Agent for all costs, expenses, disbursements and losses
which shall have been incurred or sustained by the
Banks or the Managing Agent in or incidental to the
collection of the Obligations owed by Borrower
hereunder or the exercise, protection, or enforcement
by the Banks or the Managing Agent of all or any of the
47
rights, remedies, powers and privileges of the Banks
and the Managing Agent under this Agreement, the Notes,
or any of the other Loan Documents and in and towards
the provision of adequate indemnity to the Managing
Agent and any of the Banks against all taxes or Liens
which by law shall have, or may have priority over the
rights of the Managing Agent or the Banks in and to
such funds; and (b) second to the payment of all of the
Obligations in accordance with Section 2.6(b)(i) above,
provided, however, that in such case the principal of,
and interest in respect of, the Obligations shall be
allocated among the Banks in accordance with their
respective Funded Percentages.
(c) Payments on Business Days. If any sum would (but
for the provisions of this Section 2.6(c)) become due and payable
on any day which is not a Business Day, then such sum shall
become due and payable on the next succeeding Business Day, and
interest payable on such sum shall continue to accrue and shall
be adjusted by the Managing Agent accordingly.
(d) Computation of Interest. All computations of
interest payable under this Agreement, the Notes, or any of the
other Loan Documents shall be computed by the Managing Agent on
the basis of the actual principal amount outstanding on each day
during the payment period, and shall be calculated on the basis
of the actual number of days elapsed during such period on the
basis of a year consisting of three hundred and sixty (360) days.
The daily interest charge shall be one three-hundred-sixtieth
(1/360th) of the annual interest amount. Each determination of
any interest rate by the Managing Agent shall be conclusive and
binding in the absence of manifest error. Absent manifest error,
a certificate or statement signed by an authorized officer of the
Managing Agent shall be conclusive evidence of the amount of the
Obligations due and unpaid as of the date of such certificate or
statement.
Section 2.7 Payments to be Free of Deductions. Each
sum to be paid by Borrower under this Agreement, any Note, or any
of the other Loan Documents shall be made in accordance with
Section 2.6 hereof, without set-off, deduction or counterclaim
whatsoever, and free and clear of taxes, levies, imposts, duties,
charges, fees, deductions, withholdings, compulsory loans,
restrictions or conditions of any nature now or hereafter imposed
or levied by any governmental or taxing authority, unless
Borrower is compelled by law to make any such deduction or
withholding. In the event that any such obligation to deduct or
withhold is imposed upon Borrower with respect to any such
payment: (a) Borrower shall be permitted to make the deduction or
withholding required by law in respect of such payment, and (b)
there shall become and be absolutely due and payable by Borrower
to the Managing Agent or such Bank on the date on which the said
payment shall become due and payable, and Borrower hereby
promises to pay to the Managing Agent or such Bank on such date,
such additional amount as shall be necessary to enable the
Managing Agent or such Bank to receive the same net amount which
the Managing Agent or such Bank would have received on such due
date had no such obligation been imposed by law. Notwithstanding
48
the foregoing to the contrary, this Section 2.7 shall not apply
in the case of any deductions or withholdings made in respect of
taxes charged upon or by reference to the overall net income,
profits or gains of the Managing Agent or any Bank.
Section 2.8 Use of Proceeds.
(a) Permitted Uses of Loan Proceeds. Borrower
represents, warrants and covenants to the Managing Agent and to
each Bank that all proceeds of the Loans shall be used by
Borrower for its general corporate purposes, including without
limitation for working capital, property acquisition and the
construction and expansion of Real Estate Projects.
(b) Permitted Uses of Letters of Credit. Borrower
represents, warrants and covenants to the Managing Agent and to
each Bank that Letters of Credit shall be used solely for the
purpose of providing credit enhancement for Borrower in
connection with financings of Conventional Apartment Projects
acquired or refinanced by Borrower (including but not limited to
the replacement of existing letters of credit), and for no other
purpose or purposes.
(c) Prohibited Uses. Borrower represents, warrants
and covenants to the Managing Agent and to each Bank that the
proceeds of all Loans shall be used only for the uses permitted
as provided above, and that no part of the proceeds of any Loans
will be used (directly or indirectly) so as to result in a
violation of Regulations T, U or X of the Board of Governors of
the Federal Reserve System or for any other purpose violative of
any rule or regulation of such Board.
Section 2.9 LIBOR Break Funding Costs. Borrower shall
pay to the Managing Agent, for the benefit of the Banks entitled
thereto, the LIBOR Break Funding Costs that the Managing Agent
determines are attributable to:
(a) any payment (including, without limitation, the
acceleration of the Loans pursuant to this Agreement or any Loan
Document), repayment, mandatory or optional prepayment, or
conversion of a LIBOR Rate Loan for any reason on a date other
than the last day of the Interest Period for such LIBOR Rate
Loan; or
(b) any failure by Borrower for any reason to borrow a
LIBOR Rate Loan on the date for such borrowing specified in the
relevant notice of borrowing or Request for Advance given
pursuant to this Agreement.
All LIBOR Break Funding Costs attributable to Ratable LIBOR Rate
Loans shall be for the ratable benefit of the Banks. All such
costs in respect of Competitive Bid Loans shall be on account of
those Banks which have funded such Competitive Bid Loans.
Section 2.10 Additional Costs.
(a) Notwithstanding any conflicting provision of this
Agreement to the contrary, if any applicable law or governmental
49
regulation applicable to nationally chartered banking
associations in the United States of America and not in effect as
of the date hereof shall (i) subject the Managing Agent or any
Bank to any tax, levy, impost, duty, charge, fee, deduction or
withholding of any nature with respect to any Loan or Letter of
Credit, this Agreement, any Note, or any of the other Loan
Documents or the payment by Borrower of any amounts payable to
the Managing Agent or any Bank hereunder or thereunder; or
(ii) materially change, in the reasonable opinion of the party so
affected, the basis of taxation of payments to the Managing Agent
or any Bank of the principal of or the interest on any Note or
any other amounts payable to the Managing Agent or any Bank under
this Agreement, or any of the other Loan Documents; or (iii)
impose or increase or render applicable any special or
supplementary special deposit or reserve or similar requirements
(whether or not having the force of law) against assets held by,
or deposits in or for the account of, or any eligible liabilities
of, or loans by any office or branch of, the Managing Agent or
any Bank; or (iv) impose on the Managing Agent or any Bank any
other condition or requirement with respect to this Agreement,
any Note, or any of the other Loan Documents, and if the result
of any of the foregoing is (A) to increase the cost to the
Managing Agent or any Bank of making, funding or maintaining all
or any part of the principal of the Loans or of issuing,
maintaining or making draws or disbursements under the Letters of
Credit, or (B) to reduce the amount of principal, interest or any
other sum payable by Borrower to the Managing Agent or any Bank
under this Agreement, any Note, or any of the other Loan
Documents, or (C) to require the Managing Agent or any Bank to
make any payment or to forego any interest or other sum payable
by Borrower to the Managing Agent or any Bank under this
Agreement, any Note, or any of the other Loan Documents, the
amount of which payment or foregone interest or other sum is
measured by or calculated by reference to the gross amount of any
sum receivable or deemed received by the Managing Agent or any
Bank from Borrower under this Agreement, any Note, or any of the
other Loan Documents, then, and in each such case, Borrower will
pay to the Managing Agent for the Managing Agent or the account
of a Bank, as the case may be, within sixty (60) days of written
notice by the Managing Agent or such Bank, such additional
amounts as will (in the reasonable opinion of the Managing Agent
or such Bank, as the case may be) be sufficient to compensate the
Managing Agent or such Bank for such additional cost, reduction,
payment or foregone interest or other sum actually incurred by
the Managing Agent or any Bank in consequence of such law or
governmental regulation. Anything in this paragraph to the
contrary notwithstanding, the foregoing provisions of this
paragraph shall not apply in the case of any additional cost,
reduction, payment or foregone interest or other sum resulting
solely from or arising solely as a consequence of (x) any taxes
charged upon or by reference to the overall net income, profits
or gains of the Managing Agent or any Bank; or (y) the internal
requirements or policies of the Managing Agent or any Bank.
(b) If any present or future applicable law shall make
it unlawful for Borrower to perform any one or more of its
agreements or obligations under this Agreement, any Note or any
of the other Loan Documents, then the obligations of the Banks
50
under their respective Credit Commitments shall terminate
immediately. If any present or future applicable law shall make
it unlawful for Borrower to perform any one or more of its
agreements or obligations under this Agreement, any Note, or any
of the other Loan Documents, and the Managing Agent or any Bank
shall at any time determine (which reasonable determination shall
be conclusive and binding on Borrower) (i) that, as a consequence
of the effect or operation (whether direct or indirect) of any
such applicable law, any one or more of the rights, remedies,
powers or privileges of the Managing Agent or any Bank under or
in respect of this Agreement, any Note, or any of the other Loan
Documents shall be or become invalid, unenforceable or materially
restricted; and (ii) that all or any one or more of the rights,
remedies, powers and privileges so affected are of material
importance to the Managing Agent or any Bank (as determined by
the party so affected), then the Managing Agent shall, at the
direction of the Required Banks, by giving notice to Borrower,
declare all of the Obligations, including, without limitation,
the entire unpaid principal of the Notes, all of the unpaid
interest accrued thereon and any and all other sums due and
payable by Borrower to the Managing Agent or the Banks under this
Agreement, any Note, and any of the other Loan Documents, to be
immediately due and payable, and, thereupon, such Obligations
shall (if not already due and payable) forthwith become and be
due and payable without further notice or other formalities of
any kind, all of which are hereby expressly waived.
(c) If the Managing Agent or any Bank shall reasonably
determine that any law or governmental regulation applicable to
nationally chartered banking associations in the United States of
America and not in effect as of the date hereof regarding capital
adequacy, or in the event of any change in any existing such law
or governmental regulation or in the interpretation or
administration thereof by any governmental authority, central
bank or comparable agency charged with the interpretation or
administration thereof, or compliance by any Bank with any
request or directive regarding capital adequacy (whether or not
having the force of law) from any such authority, central bank or
comparable agency, has or would have the effect of reducing the
rate of return on such Bank's capital, as a consequence of its
obligations hereunder, to a level below that which such Bank
could have achieved but for such adoption, change or compliance
(taking into consideration such Bank's policies with respect to
capital adequacy) by any amount deemed by such Bank to be
material, then Borrower shall pay to such Bank upon demand such
amount or amounts, in addition to the amounts payable under the
other provisions of this Agreement or any other Loan Document, as
will compensate such Bank for such reduction. Determinations by
any Bank of the additional amount or amounts required to
compensate such Bank in respect of the foregoing shall be
conclusive in the absence of manifest error. In determining such
amount or amounts, each Bank may use any reasonable averaging and
attribution methods of general application.
(d) Borrower acknowledges that any Bank which is not a
nationally chartered banking association in the United States
shall nevertheless be entitled to the benefit of all of the
provisions of Section 2.10 to the same extent and upon the same
51
terms and procedures as would apply if any such Bank were a
nationally chartered banking association in the United States of
America.
Section 2.11 Indemnification for Losses. Without
derogating from any of the other provisions of this Agreement or
any of the other Loan Documents, Borrower hereby absolutely and
unconditionally agrees to indemnify the Managing Agent and each
Bank, upon demand at any time and as often as the occasion
therefor may require, against any and all claims, demands, suits,
actions, damages, losses, costs, expenses and all other
liabilities whatsoever which the Managing Agent or any Bank or
any of their respective directors, officers, employees or agents
may sustain or incur as a consequence of, on account of, in
relation to or in any way in connection with (a) any failure by
Borrower to pay, punctually on the due date thereof, any amount
payable under this Agreement, any Note, or any of the other Loan
Documents beyond the expiration of the period of grace (if any)
applicable thereto, or (b) the acceleration, in accordance with
Section 7.2 hereof, of the maturity of any of the Obligations, or
(c) any failure by Borrower to perform or comply with any of the
terms and provisions of this Agreement, any Note or any of the
other Loan Documents. Such claims, demands, suits, actions,
damages, losses, costs or expenses shall include, without
limitation (i) any costs incurred by the Managing Agent or any
Bank in carrying funds to cover any overdue principal, overdue
interest or any other overdue sums payable by Borrower under this
Agreement, any Note, or any of the other Loan Documents; (ii) any
interest payable by the Managing Agent or any Bank to the lenders
of the funds borrowed by the Managing Agent or any Bank in order
to carry the funds referred to in clause (i) of this Section
2.11; and (iii) any losses (but excluding losses of anticipated
profit) incurred or sustained by the Managing Agent or any Bank
in liquidating or re-employing funds acquired from third parties
to make, fund or maintain all or any part of the Loans or to
issue, maintain or make draws or disbursements under the Letters
of Credit.
Section 2.12 Statements by the Managing Agent or Any
Bank. A statement signed by an officer of the Managing Agent or
any Bank (as the case may be) setting forth any additional amount
required to be paid by Borrower to the Managing Agent or such
Bank under Sections 2.10 and 2.11 hereof shall be submitted by
the Managing Agent or such Bank to Borrower in connection with
each demand made at any time by the Managing Agent (with copies
thereof delivered to each other Bank) or such Bank under either
of such Sections. A claim by the Managing Agent or any Bank for
all or any part of any additional amounts required to be paid by
Borrower under Sections 2.10 and 2.11 hereof may be made before
or after any payment to which such claim relates. Each such
statement shall, in the absence of manifest error, constitute
conclusive evidence of the additional amount required to be paid
to the Managing Agent or such Bank.
Section 2.13 Requests for Advances. (a) All requests
for draws, advances, or disbursements of the proceeds of Ratable
Loans shall be made by Borrower, in writing, on a Request for
Advance. Such Requests for Advance may be transmitted to the
52
Managing Agent at its Head Office via fax, provided that Borrower
immediately notify the Managing Agent by telephone of such
transmission. All such Requests for Advance for Ratable Loans
shall be transmitted to and received by the Managing Agent not
later than 1:00 p.m., Cleveland Time, on the Business Day
determined in accordance with Section 2.4(a). All such Requests
for Advance for such Ratable Loans shall be accompanied by (x) a
written certification, signed by a duly authorized officer of
Borrower (or a properly designated delegate of such an officer),
indicating Borrower's Debt Rating as of the date of such Request
for Advance, and (y) such documents, reports and other materials
as may be necessary to enable the Managing Agent (and each Bank)
to confirm that the conditions precedent to the disbursement of
such requested Loan have been satisfied.
(b) The Managing Agent shall notify the Banks promptly
by telephone of Managing Agent's receipt of Borrower's Request
for Advance, but in no event shall Managing Agent notify the
Banks later than 5:00 p.m. Cleveland Time, on the day on which
the Managing Agent actually receives the applicable Request for
Advance. In addition, the Managing Agent shall provide each Bank
with a copy of each such Request for Advance, together with all
accompanying materials, promptly upon the Managing Agent's
receipt thereof, and shall provide each Bank with a statement
showing the Managing Agent's calculation of its respective
Participation Percentage of each Ratable Loan so requested. Each
Bank will, upon receiving notice from the Managing Agent of
Borrower's Request for Advance, be obligated to place at the
disposal of the Managing Agent, not later than 12:00 noon
Cleveland Time on the Draw Date set forth on such Request for
Advance, an aggregate amount in dollars equal to such Bank's
Participation Percentage of each Ratable Loan requested. The
payment by each such Bank of such aggregate amount shall be made
to the Managing Agent at the Managing Agent's Head Office in
immediately available and freely transferrable funds.
(c) The Managing Agent shall disburse the proceeds of
each Loan to Borrower, in immediately available funds, not later
than 1:30 p.m., Cleveland time, on the Draw Date described
therefor, provided that: (i) Borrower shall have provided the
Managing Agent with a Request for Advance for each Ratable Loan
as and when provided above; (ii) all of the conditions precedent
applicable to such Loan under Article 3, below, shall be
satisfied as at the Closing Date or such later Draw Date as may
be applicable to such Loan; and (z) each Bank shall fund the
amount equal to its Participation Percentage in each Ratable Loan
as provided in Section 2.13(b), above. If after Borrower shall
have provided the Managing Agent with its Request for Advance for
any Ratable Loan, and provided that all of the conditions
precedent for the making of such Ratable Loan shall have been
satisfied, any Bank shall for any reason not fund its
Participation Percentage in such Ratable Loan, the Managing Agent
shall so notify Borrower. If in such event Borrower shall so
request, the Managing Agent shall advance that portion of such
Ratable Loan equal to the aggregate of the funding Banks'
Participation Percentages thereof, without thereby waiving or
releasing any right or claim that the Managing Agent or Borrower
may have as against any Bank which failed to fund its
53
Participation Percentage in such Loan as and when required under
Section 2.13(b).
Section 2.14. The Letters of Credit.
(a) Issuance of Letters of Credit; Conditions and
Limitations. Upon the terms and conditions set forth in this
Agreement, Borrower may request, in accordance with the
provisions of this Section 2.14, that the Issuing Bank issue one
or more Letters of Credit for the account of Borrower from time
to time prior to the Termination Date. If Borrower desires the
issuance of a Letter of Credit, it shall deliver to the Managing
Agent a Request for Issuance of Letter of Credit no later than
1:00 P.M. (Cleveland time) at least five (5) Business Days before
the proposed Issuance Date therefor. The Request for Issuance of
Letter of Credit shall be accompanied by a Letter of Credit
Application, on the Issuing Bank's then-customary form, and shall
contain the following information with respect to each requested
Letter of Credit: (i) its proposed Issuance Date (which shall be
a Business Day), (ii) its proposed Face Amount, (iii) its
proposed expiration date, (iv) the name and address of its
proposed beneficiary, and (v) a summary of its purpose and
contemplated terms. Borrower shall, in addition, furnish (x) a
certificate, signed by a duly authorized officer of Borrower (or
a properly designated delegate of such an officer), indicating
Borrower's Debt Rating as of the date of such Request for
Issuance of a Letter of Credit; and (y) a precise description of
any documents to be presented under, and any other terms of, the
requested Letter of Credit, together with the text of any
certificate to be presented by the beneficiary which, if
presented by the beneficiary prior to the expiration date of the
Letter of Credit, would require the Issuing Bank to make payment
under the Letter of Credit. No Letter of Credit shall require
payment against a conforming draft to be made thereunder on the
same Business Day that such draft is presented if such
presentation is made after 10:00 A.M. (Cleveland time) on such
Business Day. The minimum Face Amount of any Letter of Credit
shall be One Million Dollars ($1,000,000). The issuance of each
Letter of Credit shall be subject to the satisfaction, on the
Issuance Date for each Letter of Credit, of all of the conditions
precedent set forth in Section 3.2, below, and to the following
additional limitations:
(i) Borrower shall not request the
issuance of a Letter of Credit if, after
giving effect to the issuance of such Letter
of Credit, the Letter of Credit Usage would
equal or exceed Twenty-Five Million Dollars
($25,000,000);
(ii) Borrower shall not request the
issuance of a Letter of Credit if, after
giving effect to the issuance of such Letter
of Credit, the Outstanding Amount would
exceed the Maximum Commitment; and
(iii) In no event shall the Issuing
Bank issue any Letter of Credit having an
54
expiration date later than the first to occur
of (x) Termination Date or (y) one (1) year
after its Issuance Date; provided that,
subject to the foregoing clause (x), this
clause (y) shall not prevent the Issuing Bank
from agreeing that a Letter of Credit will
automatically be renewed for a period not to
exceed one (1) year if the Issuing Bank does
not cancel such renewal, provided that at any
such renewal date all of the conditions to
the issuance of a Letter of Credit and set
forth or referred to in this Section 2.14(a)
shall be satisfied.
(b) Issuance of Letters of Credit; Purchase of
Participations Therein. Upon receipt by the Managing Agent of a
Request for Issuance of Letter of Credit from Borrower, the
Managing Agent shall promptly so notify each Bank, and shall
provide each Bank with a copy of such Request for Issuance of
Letter of Credit. Provided that all of the conditions precedent
to the issuance of the requested Letter of Credit have been
satisfied, the Issuing Bank shall cause each Letter of Credit
properly requested hereunder to be issued as requested by
Borrower in accordance with the terms of the respective Request
for Issuance for Letter of Credit therefor. Immediately upon the
issuance of each Letter of Credit, each Bank (other than the
Issuing Bank) shall be deemed to have irrevocably purchased from
the Issuing Bank a participation in such Letter of Credit and any
and all drawings and disbursements thereunder in an amount equal
to such Bank's Pro Rata Share of the Face Amount of such Letter
of Credit, and each Bank hereby covenants and agrees to purchase
and pay for such participation on the terms and subject to the
conditions set forth in this Section 2.14.
(c) Payment in Certain Circumstances. Each Letter of
Credit may provide that the Issuing Bank may (but shall not be
required to) pay the beneficiary thereof upon the occurrence of
an Event of Default and the acceleration of the maturity of the
Loans or, if payment is not then due to the beneficiary, provide
for the deposit of funds in an account to secure payment to the
beneficiary, and that any funds so deposited shall be paid to
such beneficiary provided that all conditions to such payment are
satisfied, or returned to the Issuing Bank for distribution to
the Banks (or, if all Obligations then shall have been
indefeasibly paid in full, to Borrower) if no payment to such
beneficiary has been made and if the final date available for
drawings under the Letter of Credit has passed. Each payment or
deposit of funds by the Issuing Bank as provided in this
paragraph shall be treated for all purposes of this Agreement as
a drawing duly honored by the Issuing Bank under the related
Letter of Credit.
(d) Termination of Credit Commitments. If the Credit
Commitments shall terminate when any Letter of Credit is
outstanding, Borrower shall, on or prior to the date of such
termination: (i) cause each outstanding Letter of Credit to be
cancelled, and an amount equal to all amounts previously drawn
under Letters of Credit and not theretofore reimbursed by
55
Borrower or converted into Loans pursuant to Section 2.14(e) to
be paid immediately to or as directed by the Issuing Bank; or
(ii) deposit, with the Managing Agent, an amount equal to the
Letter of Credit Usage to secure all outstanding Letters of
Credit which are not cancelled as described in the preceding
clause.
(e) Payment of Amounts Drawn Under Letters of Credit.
Upon receipt by the Issuing Bank of any request for drawing under
its Letter of Credit by the beneficiary thereof, the Issuing Bank
shall notify Borrower and the Managing Agent promptly after its
receipt of notice of any such request, and in any event at least
two (2) Business Days prior to the date on which the Issuing Bank
intends to honor such drawing (unless under the terms of the
Letter of Credit the Issuing Bank is required to honor a drawing
prior to the second Business Day after presentation of a request
for drawing, in which case the Issuing Bank shall provide
Borrower and the Managing Agent with such notice of such request
as may be practicable under the circumstances). The Managing
Agent shall provide each Bank with a true and complete copy of
such notice within one (1) Business Day of the Managing Agent's
receipt of the same. Borrower shall, and hereby covenants and
agrees to, reimburse the Issuing Bank on the day on which such
drawing is honored in an amount, in immediately available funds,
equal to the amount of such drawing; provided that (i) unless
Borrower shall have notified the Managing Agent prior to
11:00 A.M. (Cleveland time) on the Business Day immediately prior
to the date of such drawing that Borrower intends to reimburse
the Issuing Bank for the amount of such drawing with funds other
than the proceeds of Loans, Borrower shall be deemed to have
given a Request for Advance to the Managing Agent requesting a
Prime Rate Loan on the date on which such drawing is honored, in
the amount of such drawing; and (ii) the Banks shall, on the date
of such drawing, make Loans in the amount of such drawing, the
proceeds of which shall be applied directly by the Managing Agent
to reimburse the Issuing Bank for the amount of such drawing; and
provided further, that if for any reason proceeds of such Loans
are not received by the Issuing Bank on such date in an amount
equal to the amount of such drawing, Borrower shall reimburse the
Issuing Bank, on the next Business Day, in an amount equal to the
excess of the amount of such drawing over the amount of such
Loans which are actually received, plus accrued interest on such
amount at the Default Interest Rate.
(f) Payment by Banks. If Borrower shall fail to
reimburse the Issuing Bank as and when required above for the
amount of any drawing honored by the Issuing Bank under a Letter
of Credit issued by it, the Issuing Bank shall promptly notify
each Bank of the unreimbursed amount of such drawing and of such
Bank's respective Pro Rata Share thereof. Each Bank shall make
available to the Issuing Bank an amount equal to its respective
Pro Rata Share of such unreimbursed drawing, in immediately
available funds, at the office of the Issuing Bank specified in
such notice, not later than 12:00 P.M. (Cleveland time) on the
first Business Day after such Bank's receipt of such notice from
the Issuing Bank. If any Bank fails so to make available to the
Issuing Bank the amount of such Bank's Pro Rata Share of such
Letter of Credit, the Issuing Bank shall be entitled to recover
56
such amount on demand from such Bank, together with interest at
the customary rate set by the Issuing Bank for the correction of
errors among banks. Nothing in this provision shall prejudice
the right of any Bank to recover from the Issuing Bank any
amounts made available by such Bank to the Issuing Bank pursuant
to this provision in the event that it is determined by a court
of competent jurisdiction that the payment with respect to a
Letter of Credit by the Issuing Bank in respect of which payment
was made by the Issuing Bank constituted gross negligence or
willful misconduct on the part of the Issuing Bank. The Issuing
Bank shall, or shall cause the Managing Agent to, distribute to
each other Bank which has paid all amounts payable by it under
this Section 2.14(f) with respect to any Letter of Credit issued
by the Issuing Bank such other Bank's Pro Rata Share of all
payments received by the Issuing Bank from Borrower in
reimbursement of drawings honored by the Issuing Bank under such
Letter of Credit when such payments are received.
(g) Compensation. Borrower agrees to pay the
following amounts with respect to each Letter of Credit issued
pursuant to this Agreement:
(i) a Letter of Credit Fee equal to 1/8
of 1% of the Face Amount of such Letter of
Credit, payable in advance to the Issuing
Bank on the Issuance Date of such Letter of
Credit; and
(ii) a Letter of Credit Commission in
an amount equal to the LIBOR Margin in effect
as of the Issuance Date of such Letter of
Credit, multiplied by the Face Amount of such
Letter of Credit, payable, in advance, to the
Managing Agent for the ratable benefit of the
Banks, on the Issuance Date of such Letter of
Credit (and, solely in the case of Letters of
Credit which are renewed after the expiration
of the initial period thereof, on each
renewal date for so long as such Letters of
Credit remain outstanding); and
(iii) with respect to the issuance, amendment or
transfer of each Letter of Credit and each drawing made
thereunder, documentary and processing charges in
accordance with the Issuing Bank's standard schedule
for such charges in effect at the time of such
issuance, amendment, transfer or drawing, as the case
may be.
Promptly upon receipt by the Managing Agent of the Letter of
Credit Commission, the Managing Agent shall distribute to each
Bank its Pro Rata Share of such amount.
(h) Obligations Absolute. The obligation of Borrower
to reimburse the Issuing Bank for drawings made under the Letters
of Credit and the obligations of the Banks under Section 2.14(f)
shall be unconditional and irrevocable, and shall be paid
57
strictly in accordance with the terms of this Agreement under all
circumstances including, without limitation, the following:
(i) any lack of validity or
enforceability of any Letter of Credit;
(ii) the existence of any claim, set-
off, defense or other right which Borrower
may have at any time against a beneficiary or
any transferee of any Letter of Credit (or
any persons or entities for whom any such
transferee may be acting), the Issuing Bank,
the Managing Agent, any Bank or any other
Person, whether in connection with this
Agreement, the transactions contemplated
herein or any unrelated transaction
(including any underlying transaction between
Borrower and the beneficiary for which the
Letter of Credit was procured);
(iii) any draft, demand, certificate or
any other document presented under any Letter
of Credit proving to be forged, fraudulent,
invalid or insufficient in any respect or any
statement therein being untrue or inaccurate
in any respect;
(iv) payment by the Issuing Bank under
any Letter of Credit against presentation of
a demand, draft or certificate or other
document which does not comply with the terms
of such Letter of Credit, provided that such
payment does not constitute gross negligence
or willful misconduct of the Issuing Bank;
(v) any other circumstance or
occurrence whatsoever, which is similar to
any of the foregoing; or
(vi) the fact that a default or an
Event of Default shall have occurred and be
continuing.
(i) Indemnification; Nature of the Issuing Bank's
Duties. In addition to amounts payable as elsewhere provided in
this Section 2.14, and without limiting any other indemnification
provided for in this Agreement, Borrower agrees to protect,
indemnify, pay and save the Issuing Bank harmless from and
against any and all claims, demands, liabilities, damages,
losses, costs, charges and expenses (including reasonable
attorneys' fees) which the Issuing Bank may incur or be subject
to as a consequence, direct or indirect, of (i) the issuance of
the Letters of Credit, other than as a result of the gross
negligence or willful misconduct of the Issuing Bank as
determined by a court of competent jurisdiction, or (ii) the
failure of the Issuing Bank to honor a drawing under any Letter
of Credit as a result of any act or omission, whether rightful or
wrongful, of any present or future de jure or de facto government
58
or governmental authority. Borrower assumes all risks of the
acts and omissions of, or misuse of the Letters of Credit issued
by the Issuing Bank by, the respective beneficiaries of such
Letters of Credit. In furtherance and not in limitation of the
foregoing, the Issuing Bank shall not be responsible for:
(i) the form, validity, sufficiency, accuracy, genuineness or
legal effect of any document submitted by any party in connection
with the application for and issuance of Letters of Credit, even
if any of the foregoing should in fact prove to be invalid,
insufficient, inaccurate, fraudulent or forged in any respect;
(ii) the validity or insufficiency of any instrument transferring
or assigning or purporting to transfer or assign any Letter of
Credit or the rights or benefits thereunder or proceeds thereof,
in whole or in part, which may prove to be invalid or ineffective
for any reason; (iii) the failure of the beneficiary of any
Letter of Credit to comply fully with conditions required in
order to draw upon such Letter of Credit; (iv) the errors,
omissions, interruptions or delays in transmission or delivery of
any messages, by mail, cable, telegraph, telecopy, telex or
otherwise, whether or not they be in cipher; (v) the errors in
interpretation of technical terms; (vi) any loss or delay in the
transmission or otherwise of any document required in order to
make a drawing under any Letter of Credit or any proceeds
thereof; (vii) the misapplication by the beneficiary of any
Letter of Credit of the proceeds of any drawing under such Letter
of Credit; and (viii) for any consequences arising from causes
beyond the control of the Issuing Bank. None of the above shall
affect, impair, or prevent the vesting of any of the Issuing
Bank's rights or powers hereunder. In determining whether to pay
under any Letter of Credit, the Issuing Bank shall be responsible
only to determine that the documents and certificates required to
be delivered under that Letter of Credit have been delivered and
that the same comply on their face with the requirements of that
Letter of Credit. Borrower shall have no obligation to indemnify
the Issuing Bank in respect of any liability incurred by the
Issuing Bank arising solely out of the gross negligence or
willful misconduct of the Issuing Bank, as determined by a court
of competent jurisdiction, or out of the wrongful dishonor by the
Issuing Bank of a proper demand for payment made under the
Letters of Credit issued by it.
(j) Amendments. Borrower may request that the Issuing
Bank amend any Letter of Credit by delivering to the Managing
Agent and the Issuing Bank a notice specifying the nature, terms
and proposed date of the requested amendment. The Issuing Bank
may amend Letters of Credit, provided that any amendment
extending the expiry date or increasing the face amount of any
Letter of Credit shall be permitted only if the Issuing Bank
would, at the time of the proposed be permitted to issue a new
Letter of Credit having such an expiry date or face amount under
this Section 2.14 on the date of the amendment.
Section 2.15 Voluntary Termination of the Credit
Commitments. Borrower may cause the Banks to terminate this
Agreement and to terminate the Credit Commitments upon the
following conditions and requirements: (a) Borrower shall
provide the Managing Agent and each Bank with not less than
thirty (30) days prior, written notice of its election to do so,
59
which notice shall specify the date on which Borrower would
propose to effect such termination (which date may be extended
for a period not to exceed thirty (30) days, by written notice
from Borrower to the Managing Agent and the Banks prior to the
date first specified for such termination); (b) Borrower shall,
on or before such effective date, prepay all Loans in full in
accordance with Section 2.5(b) of this Agreement; (c) there shall
be no Letters of Credit outstanding as of the effective date of
such termination; (d) Borrower shall pay all fees which, but for
such termination, would have been payable to the Managing Agent
and the Banks as contemplated by this Agreement for the unexpired
balance of the term of this Agreement; and (e) Borrower shall
pay, or shall reimburse the Managing Agent and each Bank for, all
out-of-pocket costs and expenses (including reasonable attorneys'
fees) incurred by them in connection with or as the result of
Borrower's election to cause the Credit Commitments to be
terminated as provided in this Section 2.15. From and after the
effective date of any termination affected in accordance with
this Section 2.15, and provided that Borrower shall have complied
with the requirements set forth above, none of the parties to
this Agreement shall have any further duties or obligations
hereunder.
Section 2.16 Swingline Loans.
(a) In addition to Ratable Loans and Competitive Bid
Loans available hereunder, Borrower may, on and subject to the
terms and conditions set forth in this Section 2.16, obtain
Swingline Loans from the Swingline Lender in the aggregate
principal amount not to exceed Five Million Dollars ($5,000,000).
Swingline Loans will be made available to Borrower for same-day
borrowings, provided that Borrower shall provide the Managing
Agent with a Request for Advance for each Swingline Loan not
later than 1:00 p.m. Cleveland time on the proposed Draw Date for
each Swingline Loan and otherwise in accordance with Section
2.13. Provided that there shall then be no uncured Event of
Default, and provided further that the making of the requested
Swingline Loans shall not cause the Outstanding Amount to exceed
the Maximum Commitment, the Swingline Lender will make the
proceeds of each requested Swingline Loan available to Borrower
not later than 4:00 p.m., Cleveland time, on the requested Draw
Date therefor.
(b) Each Swingline Loan shall be in a principal amount
not less than One Million Dollars ($1,000,000). All Swingline
Loans shall bear interest at the Adjusted Prime Rate. No
Swingline Loan shall be outstanding for more than five (5) days,
and Swingline Loans shall not be outstanding for more than ten
(10) days in any calendar month.
(c) Each Bank unconditionally agrees that it will,
upon the written request of the Swingline Lender, purchase an
amount equal to its Participation Percentage of any Swingline
Loan regardless of whether the conditions precedent for making
any Loan otherwise provided in this Agreement are satisfied at
the time of such request (and regardless of whether a Default or
Event of Default shall then exist). Such purchase shall take
place on the Business Day immediately after the date of the
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Swingline Lender's written request therefor. From and after the
date on which the Banks purchase their respective Participation
Percentages of such Swingline Loan (and to the extent of such
purchases), such Swingline Loan shall: (i) be treated, for all
purposes relevant to this Agreement, as a Ratable Loan made by
the purchasing Banks, and not as a Swingline Loan made by the
Swingline Lender (and each Bank's payment of the purchase price
shall constitute its funding of a Ratable Loan in the amount of
the purchase price paid by it); and (ii) shall no longer
constitute a Swingline Loan, except that all interest accruing on
or attributable to such Swingline Loan for the period prior to
the date of such purchase shall be paid when due by Borrower to
the Managing Agent for the benefit of the Swingline Lender and
all amounts accruing on or attributable to such Loan for the
period from and after the date of such purchase shall be paid
when due by Borrower to the Managing Agent for the benefit of the
purchasing Banks. If prior to purchasing its Participation
Percentage of a Swingline Loan an Event of Default of the nature
described in Section 7.1(h) or (i) of this Agreement shall have
occurred and such event prevents the consummation of such
purchase, each Bank will purchase an undivided participating
interest in such Swingline Loan. From and after the date of each
Bank's purchase of its participating interest in a Swingline
Loan, if the Swingline Lender receives any payment on account
thereof, the Swingline Lender will distribute to such Bank its
participating interest in such amount (appropriately adjusted, in
the case of interest payments; to reflect the period during which
such Bank's participating interest was outstanding and funded);
provided, however, that if such payment was received by the
Swingline Lender and is required to be returned to Borrower, each
Bank will return to the Swingline Lender any portion thereof
previously distributed to it by the Swingline Lender. If any
Bank shall fail to purchase its Participation Percentage of a
Swingline Loan upon the Swingline Lender's written request
therefor (or to purchase a participating interest in a Swingline
Loan under the circumstances described above), the Swingline
Lender shall be entitled to recover the amount of such Bank's
Participation Percentage in such Swingline Loan from such Bank on
demand, together with interest thereon at the customary rate
established by the Swingline Lender for the correction of errors
among banks.
ARTICLE 3.
CONDITIONS PRECEDENT TO DISBURSEMENTS
Section 3.1 Conditions Precedent to the Initial
Closing. On or prior to the Closing Date, each of the following
conditions precedent shall have been satisfied:
(a) Certified Copies of Charter Documents and Bylaws.
The Managing Agent shall have received from Borrower (i) a copy,
certified by a duly authorized officer of Borrower to be true and
complete on and as of the Closing Date, of Borrower's Articles of
Incorporation, and by-laws or code of regulations as in effect on
the Closing Date (together with any an all amendments thereto);
(ii) the charter or other organizational documents of Borrower,
61
certified by the Ohio Secretary of State; and (iii) a Certificate
of Good Standing and Certificate of Continued Existence for
Borrower, each issued by the Ohio Secretary of State as of a date
not more than five (5) days before the Closing Date.
(b) Proof of Corporate Authority. The Managing Agent
shall have received from Borrower copies, certified by a duly
authorized officer of Borrower to be true and complete on and as
of the Closing Date, of records of all corporate action taken by
Borrower to authorize (i) the execution and delivery of this
Agreement and the other Loan Documents and to which it is or is
to become a party as contemplated or required by this Agreement;
(ii) its performance of all of its obligations under each of such
documents; and (iii) the making by Borrower of the borrowings
contemplated hereby.
(c) Incumbency Certificate. The Managing Agent shall
have received from Borrower an incumbency certificate, dated as
of the Closing Date, signed by a duly authorized officer and
giving the name and bearing a specimen signature of each
individual who shall be authorized (i) to sign, in the name and
on behalf of Borrower, each of the Loan Documents to which
Borrower is or is to become a party on the Closing Date; and (ii)
to give notices and to take other action on behalf of Borrower
under the Loan Documents.
(d) Officers' Certificates. The Managing Agent shall
have received from Borrower a certificate dated as of the Closing
Date signed by a duly authorized officer of Borrower and
certifying, on terms acceptable to the Managing Agent, that each
of the representations and warranties of Borrower in this
Agreement and in the other Loan Documents was true and correct
when made, and is true and correct on and as of the Closing Date.
(e) Loan Documents. (i) Each of the Loan Documents
shall have been duly and properly authorized, executed and
delivered by Borrower, and all such documents shall be in full
force and effect on and as of the Closing Date; and (ii) executed
originals of each of the Notes shall have been delivered to the
Banks in accordance with their respective Credit Commitments.
Executed originals or (as the case may be) executed counterparts
of each of the other Loan Documents shall have been delivered to
the Managing Agent and each Bank.
(f) Legality of Transactions. No change in applicable
law shall have occurred as a consequence of which it shall have
become and continue to be unlawful (i) for the Managing Agent or
any Bank to perform any of its agreements or obligations under
any of the Loan Documents to which it is a party on the Closing
Date; or (ii) for Borrower to perform any of its agreements or
obligations under any of the Loan Documents to which it is a
party on the Closing Date.
(g) Performance, Etc. Borrower shall have duly and
properly performed, complied with and observed, in all material
respects, each of its covenants, agreements and obligations
contained in each of the Loan Documents to which Borrower is a
party or by which Borrower is bound on the Closing Date. No
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event shall have occurred on or prior to the Closing Date, and no
condition shall exist on the Closing Date, which constitutes or
would constitute a Default or an Event of Default.
(h) Compliance with Laws. The borrowings made, and
other financial accommodations provided, under this Agreement are
and shall be in compliance with the requirements of all
applicable laws, regulations, rules and orders, including without
limitation the Environmental Laws and the requirements imposed by
the SEC or by the Board of Governors of the Federal Reserve
System under Regulations U, G and X.
(i) Legal Opinion. The Managing Agent and each Bank
shall have received a written legal opinion, addressed to the
Managing Agent and each Bank and dated as of the Closing Date,
from legal counsel for Borrower, which shall be substantially in
the form of attached Exhibit I and shall otherwise be acceptable
to the Managing Agent and each Bank.
(j) Expenses. Borrower shall have reimbursed the
Managing Agent for all reasonable out-of-pocket costs and
expenses, including without limitation all fees and disbursements
of legal counsel to the Managing Agent which shall have been
incurred by Managing Agent. Each Bank agrees that it shall be
responsible for any legal fees incurred by it in connection with
the negotiation, review, execution and delivery of the Loan
Documents.
(k) Payment of Certain Fees. Borrower shall have paid
the Agency Fee, and shall have paid the Closing Fee and the
initial annual installment of the Facility Fee on the Closing
Date in accordance with Section 5.10.
(l) Purpose Certificate. The Managing Agent shall
have received from Borrower on the Closing Date a certificate, in
form and substance satisfactory to the Managing Agent and each
Bank and signed by an officer of Borrower, stating the purpose to
which the proceeds of the Loan or Loans to be made on the Closing
Date are to be applied, certifying that such purpose is permitted
under Section 2.8 of this Agreement and providing such other
information with respect to the use of such proceeds as the
Managing Agent may reasonably request.
(m) Changes: None Adverse. From the date of the most
recent balance sheets referred to in Section 4.5 of this
Agreement to the Closing Date, no changes shall have occurred in
the assets, liabilities, financial condition, business,
operations or prospects of Borrower or Borrower's Consolidated
Subsidiaries which, individually or in the aggregate, are
materially adverse to Borrower and its Consolidated Subsidiaries.
(n) Compliance Certificate. The Managing Agent shall
have received a Compliance Certificate, the required calculations
under which shall be modified so as to demonstrate the compliance
by Borrower with the covenants of this Agreement required to be
measured in such Certificate, giving effect for the purpose of
such calculations the disbursement to Borrower of the Loan (or
Loans) on the Closing Date.
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(o) Financial Statements. The Managing Agent and each
Bank shall have received the financial statements referred to in
Section 4.5, certified by an officer of Borrower, and the
Managing Agent and each Bank shall have been satisfied that such
financial statements accurately reflect the financial status and
condition of Borrower and its Consolidated Subsidiaries.
(p) Americans with Disabilities Act ("ADA")
Requirements. Borrower shall adopt and take commercially
reasonable efforts to implement a compliance program in order to
cause each real estate project owned by Borrower or any of its
Consolidated Subsidiaries which is not in compliance with Title
III of the Americans with Disabilities Act, as such act may be
amended, modified or replaced from time to time hereafter (the
"ADA") to be brought into such compliance, to the extent that
such action is required by law, at Borrower's sole cost and
expense, and shall not cause or permit any future improvements to
all or any part of any such property to be made which are not in
compliance with the ADA.
(q) Representations and Warranties. Each of the
representations and warranties made by or on behalf of Borrower
in this Agreement or in any other Loan Document shall be true,
correct and complete in all material respects.
(r) Evidence of Insurance. Borrower shall have
provided the Managing Agent with original counterparts of
Borrower's insurance policies required by the terms of this
Agreement; such policies shall comply with the requirements
therefor set forth herein.
(s) Other Approvals. The Managing Agent shall have
received such other approvals, opinions, certificates,
instruments and documents with respect to the transactions
described herein as it may reasonably request.
Section 3.2 Conditions Precedent to Subsequent Loans
and Letters of Credit. The obligation of the Banks to make or
disburse any one or more Loans and to issue any Letters of Credit
from time to time after the Closing Date shall be subject to the
satisfaction, prior thereto or concurrently therewith, of each of
the following conditions precedent:
(a) Legality of Transactions. It shall not be
unlawful (a) for any Bank or the Managing Agent to perform any of
its agreements or obligations under any of the Loan Documents to
which such Person is a party on the Draw Date of such Loan or the
Issuance Date of such Letter of Credit; or (b) for Borrower to
perform any of its agreements or obligations under any of the
Loan Documents.
(b) Representations and Warranties. Each of the
representations and warranties made by or on behalf of Borrower
to the Banks or the Managing Agent in this Agreement or any other
Loan Document (a) shall be true and correct when made and (b)
shall, for all purposes of this Agreement, be deemed to be
repeated on and as of the date of the Borrower's Request for
Advance for such Loan or Request for Issuance of Letter of
64
Credit, and shall be true and correct in all material respects as
of each such date.
(c) Performance, etc. Borrower shall have duly and
properly performed, complied with and observed, in all material
respects, each of its covenants, agreements and obligations
contained in this Agreement and/or in all of the other Loan
Documents.
(d) No Default. No event shall have occurred on or
prior to such date and be continuing on such date, and no
condition shall exist on such date which constitutes a Default or
Event of Default, and the making of such Loan or the issuance of
such Letter of Credit shall not result in a Default or an Event
of Default.
(e) Proceedings and Documents. All corporate,
governmental and other proceedings in connection with the
transactions contemplated hereby and by the other Loan Documents,
and all instruments and documents incidental thereto shall be
completed and in place (and, to the extent required by the
Managing Agent, duly recorded) in form and substance satisfactory
to the Managing Agent, and the Managing Agent shall have received
all such counterpart originals or certified or other copies of
all such instruments and documents as the Managing Agent shall
have reasonably requested.
(f) Borrowing Purpose. Borrower shall have provided
the Managing Agent with a report describing in detail reasonably
acceptable to the Managing Agent the proposed use of the proceeds
of such Loan, and providing such other information as the
Managing Agent may reasonably request.
(g) Maximum Credit. The making of such Loan or the
issuance of such Letter of Credit shall not result in the
Outstanding Amount exceeding the Maximum Commitment.
(h) Other Approvals. The Managing Agent shall have
received such other approvals, opinions, certificates,
instruments and documents as it may reasonably request.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to the Managing Agent
and to each Bank as follows:
Section 4.1 Corporate Existence and Authority.
(a) Borrower: (i) is duly organized, validly existing
and in good standing as a corporation under the laws of the State
of Ohio; (ii) has full corporate power and authority and full
legal right to own or to hold under lease its Property and to
conduct its businesses as they are presently conducted; and (iii)
has timely filed all tax returns and duly made all elections
necessary or appropriate for Borrower to be taxed as a REIT under
Sections 856 through 860 of the Code for each fiscal year of
65
Borrower since 1994, and is a self-administered REIT. Borrower
is qualified and licensed, admitted or approved to do business in
each jurisdiction wherein the character of its Property or the
nature of its business make such qualification necessary or
advisable and where the failure to so qualify would have a
materially adverse effect on Borrower.
(b) Borrower has appropriate corporate power and
authority, and full legal right, to enter into this Agreement and
each of the other Loan Documents, and to perform, observe and
comply with all of its agreements and obligations under each and
all of such documents.
(c) Except as set forth on Schedule 4.1(c), Borrower
does not own or hold of record (whether directly or indirectly)
any shares of any class in the capital of any corporation, nor
does Borrower own or hold (whether directly or indirectly) any
legal and/or beneficial equity interest in any partnership,
business trust or joint venture or in any other unincorporated
trade or business enterprise.
Section 4.2 Due Authorization.
(a) The execution and delivery by Borrower of this
Agreement and each of the other Loan Documents, the performance
by Borrower of all of its agreements and obligations under such
documents, and the making by Borrower of the borrowings
contemplated by this Agreement have been duly authorized by all
necessary corporate action on the part of Borrower and do not and
will not (i) contravene any provision of its charter documents or
by-laws or code of regulations (each as in effect from time to
time); (ii) conflict with, or result in a breach of the terms,
conditions or provisions of, or constitute a default under, or
(except as expressly contemplated by the terms of this Agreement)
result in the creation of any Lien upon any of the Property of
Borrower under any agreement, trust deed, indenture, mortgage or
other instrument to which Borrower is a party or by which
Borrower or any Property of Borrower is bound or affected; (iii)
violate or contravene any provision of any law, rule or
regulation (including, without limitation, Regulations G, T, U or
X of the Board of Governors of the Federal Reserve System) or any
order, ruling or interpretation thereunder or any decree, order
or judgment of any court or governmental or regulatory authority,
bureau, agency or official (all as from time to time in effect
and applicable to Borrower); or (iv) require any waivers,
consents or approvals by any of the creditors or trustees for
creditors of Borrower or any other Person.
(b) Except as to matters which Borrower has procured,
obtained or performed prior to or concurrently with its execution
and delivery of this Agreement, no approval, consent, order,
authorization or license by, or giving notice to, or taking any
other action with respect to, any governmental or regulatory
authority or agency is required under any provision of any
applicable law:
(i) for the execution and delivery by Borrower of this
Agreement, each Note, and the other Loan Documents, for
66
the performance by Borrower of any of the agreements
and obligations hereunder or thereunder or for the
making by Borrower of the borrowing contemplated by
this Agreement, or for the conduct by Borrower of its
business; or
(ii) to ensure the continuing legality, validity,
binding effect, enforceability or admissibility in
evidence of this Agreement, the Notes and the other
Loan Documents.
Section 4.3 Enforceability of Documents.
(a) On or before the Closing Date, Borrower will have
duly executed and delivered each of the Loan Documents required
of it by this Agreement, and each such Loan Document will be in
full force and effect. Each Loan Document shall constitute the
legal, valid and binding obligation of Borrower, enforceable
against Borrower in accordance with its respective terms.
(b) The representations and warranties made by
Borrower in this Section 4.3 are subject to the following
qualifications:
(i) the enforceability of any rights and remedies
provided in any of the Loan Documents or against any
particular party thereto is subject to applicable
bankruptcy, reorganization, moratorium or other similar
laws affecting generally the enforcement of creditors'
rights; and
(ii) the availability of equitable remedies for the
enforcement of any provision of any of the Loan
Documents may be subject to the discretion of the court
before which any proceeding for the enforcement of any
provision may be brought.
Section 4.4 No Default.
(a) No event has occurred and is continuing, and no
condition exists, which constitutes a Default or an Event of
Default.
(b) No default by Borrower and no accrued right of
rescission, cancellation or termination on the part of Borrower,
exists under this Agreement or any of the other Loan Documents.
Section 4.5 Financial Statements. Borrower has
furnished the Managing Agent with copies of its annual financial
statements dated December 31, 1997, as audited by Borrower's
Accountants and certified by Borrowers' chief financial officer,
together with Borrower's unaudited quarterly financial statements
for the quarter ended as of September 30, 1998, certified by
Borrower's chief financial officer, all of which have been
prepared in accordance with GAAP. Such balance sheets and other
financial statements present fairly the financial condition of
Borrower and its Consolidated Subsidiaries as of the respective
dates thereof. Such statements of income present fairly the
67
results of operations of Borrower and its Consolidated
Subsidiaries for the fiscal period then ended. There are no
material liabilities or obligations, secured or unsecured
(whether accrued, absolute or actual, contingent or otherwise),
which were not reflected in the balance sheets of Borrower as at
such date or in the footnotes thereto, and which should, in
accordance with GAAP, have been reflected in such balance sheets.
Section 4.6 No Adverse Changes. No changes have
occurred in the assets, liabilities or financial condition of
Borrower or its Consolidated Subsidiaries from those reflected in
the most recent balance sheets referred to in Section 4.5 hereof
which, individually or in the aggregate, have been materially
adverse. Since the date of the most recent balance sheet, there
has been no materially adverse development in the business or in
the operations or prospects of Borrower.
Section 4.7 Title to Assets. Except as set forth in
Schedule 4.7, Borrower or a Consolidated Subsidiary has good,
sufficient and legal title to, or leasehold interest in, all the
Property and assets reflected in the most recent balance sheet
referred to in Section 4.5, other than assets disposed of since
the date of such balance sheet in the ordinary course of business
or pursuant to a plan of disposition of assets disclosed to and
approved by the Required Banks.
Section 4.8 Indebtedness for Borrowed Money. Except
as permitted under Section 6.7, no Indebtedness of Borrower is
secured by or otherwise benefits from any Lien on or with respect
to the whole or any part of Borrower's properties or assets,
present or future. There exists no default or event or condition
which, with the giving of notice or passage of time, or both,
would constitute a default under the provisions of any instrument
evidencing or securing any Indebtedness of Borrower or of any
agreement relating thereto.
Section 4.9 Litigation. Except as disclosed in
Schedule 4.9 or pursuant to Section 5.5, there is no pending
action, suit, proceeding or investigation pending, or, to
Borrower's knowledge, threatened, before any court, governmental
or regulatory authority, agency, commission or official, board of
arbitration or arbitrator against Borrower or in which Borrower
is a participant which, if determined adversely to Borrower,
could reasonably be expected to affect, in any material and
adverse way, the financial position, assets, business, operations
or prospects of Borrower. There are no proceedings pending or
threatened against Borrower which call into question the validity
or enforceability of any of the Loan Documents.
Section 4.10 No Materially Adverse Contracts.
Borrower is not a party to or bound by any contracts, agreements
or instruments (whether written or oral) which, either
individually or in the aggregate, materially adversely affect the
financial position, business, operations or prospects of
Borrower.
Section 4.11 Tax Returns. Borrower has filed all
federal, state and other tax returns required to be filed by it
68
and has made reasonable provisions, in accordance with GAAP, for
the payment of all taxes (if any) which have or may become due
and payable pursuant to any of the said returns or pursuant to
any matters raised by audits or for other reasons. In addition,
Borrower has paid or caused to be paid all real and personal
property taxes and assessments and other governmental charges
lawfully levied or imposed on or against it or its Property,
other than those presently payable without payment of interest or
penalty and those which are subject to contests initiated by
Borrower in good faith and diligently prosecuted, in each case as
permitted by and subject to the requirements of Section 5.8,
below.
Section 4.12 Contracts with Affiliates or
Subsidiaries. (a) Except as permitted by Section 6.9 hereof and
as otherwise set forth on Schedule 4.1(c) hereto, Borrower is not
a party to or otherwise bound by any material agreements,
instruments or contracts (whether written or oral) with any
Affiliate or Subsidiary.
(b) Except as permitted by Section 6.9 and as
otherwise set forth on Schedule 4.1(c) hereto, there is no
Indebtedness for Borrowed Money owing by Borrower to any
Affiliate nor is there Indebtedness for Borrowed Money owing by
any Affiliate to Borrower.
Section 4.13 Employee Benefit Plans. Borrower does
not maintain any Employee Benefit Plans or Guaranteed Pension
Plans, except for those which are described on Schedule 4.13,
attached hereto and made a part hereof by this reference.
Section 4.14 Governmental Regulation. Borrower is not
a "public utility company", a "holding company" or a "subsidiary"
or an "affiliate" of a "holding company," as such terms are
defined in the federal Public Utility Holding Company Act of
1935, as amended. Borrower is not an "investment company" or a
company "controlled" by an "investment company," as such terms
are defined in the federal Investment Company Act of 1940, as
amended. Borrower is not subject to regulation under the Public
Utility Holding Company Act of 1935, the Federal Power Act, the
Interstate Commerce Act or the Investment Company Act of 1940 or
under any federal or state statute or regulation limiting its
ability to incur Indebtedness for Borrowed Money.
Section 4.15 Securities Activities. Borrower is not
engaged in the business of extending credit for the purpose of
purchasing or carrying any "margin security" or "margin stock" as
such terms are used in Regulation U and X of the Board of
Governors of the Federal Reserve System, 12 C.F.R. Parts 221 and
224.
Section 4.16 Disclosure. Neither this Agreement nor
any other Loan Document, or any other document, certificate or
written statement furnished to the Managing Agent or any Bank by
or on behalf of Borrower for use in connection with the
transactions contemplated by this Agreement contains any untrue
statement of a material fact or omits to state a material fact
necessary in order to make the statements contained therein not
69
misleading as of the date of such document, certificate or other
statement.
Section 4.17 No Material Default. Borrower is not in
default under any order, writ, judgment, injunction, decree,
statute or governmental rule, indenture, agreement, contract,
lease or other instrument or contract applicable to it, which
default would have a material adverse effect on the business,
assets, Properties or condition, financial or otherwise, of
Borrower or in the performance of any covenants or conditions
respecting any of its Indebtedness; no holder of any Indebtedness
of Borrower has given notice of any asserted default thereunder,
and no liquidation or dissolution of Borrower and no
receivership, insolvency, bankruptcy, reorganization or other
similar proceedings relative to Borrower or its Property is
pending or (to Borrower's knowledge) threatened.
Section 4.18 Environmental Conditions. (a) Borrower
has obtained all necessary permits, licenses, variances,
satisfactory clearances and all other necessary approvals
(collectively the "EPA Permits") for the operation and conduct of
its business from all applicable federal, state, and local
governmental authorities, utility companies or
development-related entities including, but not limited to, any
and all appropriate Federal or State environmental protection
agencies and other County or City departments, public water works
and public utilities. All EPA Permits are in full force and
effect; no such EPA Permit has expired or been suspended, denied
or revoked, or is under challenge by any Person. Borrower is in
compliance with each EPA Permit, and Borrower has no knowledge or
information concerning any condition or fact which might or could
cause a suspension, denial or revocation of any of Borrower's EPA
Permits.
(b) Neither Borrower nor any Property owned by
Borrower is (i) subject to any material private or governmental
litigation, threatened litigation, Lien or judicial or
administrative notice, order or action relating to Hazardous
Substances or environmental problems, impairments or liabilities;
or (ii) with any applicable notice or lapse of time (or both),
and/or failure to take certain curative or remedial actions, in
direct or indirect violation of any Environmental Laws.
(c) To the best of Borrower's knowledge, there has
been no Release (as defined in CERCLA) into, on or from any
Property and no Hazardous Substances (except for (x) "Household
Waste" as that term is defined at 40 C.F.R. 261.4(b)(l) (1990),
and (y) de minimis amounts of Hazardous Substances which neither
violate any Environmental Laws nor require any affirmative
remediation or corrective action) are located on or have been
treated, stored, processed, disposed of, handled, transported to
or from, disposed of upon the or into, upon or from any of
Borrower's Property. Borrower shall not allow any Hazardous
Substance to exist or be treated, stored, disposed, Released,
located, discharged, possessed, managed, processed, or otherwise
handled on any Property or in the operation or conduct of its
business in violation of Environmental Laws, and shall comply
with all Environmental Laws affecting Borrower's Property.
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(d) Borrower and its Affiliates do not and shall not
transport or engage in the business of transporting, in any
manner, any Hazardous Substances.
(e) Borrower is not aware of any circumstances which
would result in any material obligation under any Environmental
Law to remediate any Hazardous Substances in, on or under any of
Borrower's Property.
Section 4.19 Licenses and Permits. Borrower owns or
possesses all material Licenses and Permits and rights with
respect thereto necessary for the lawful and proper conduct of
its business as presently conducted and proposed to be conducted,
without any known conflict with the rights of others, free of any
Lien not permitted by Section 6.7 of this Agreement. All such
Licenses and Permits are in full force and effect, and Borrower
is in compliance with the requirements imposed by, or in respect
of, all such Licenses and Permits without any known conflict with
the valid rights of others which could affect or impair in any
material manner the business, assets or condition, financial or
otherwise, of Borrower. No event has occurred and is continuing
which permits, or after notice or lapse of time or both would
permit, the revocation or termination of any such License or
Permit, or affect the rights of Borrower thereunder. There is no
litigation or other proceeding or dispute with respect to any
such Licenses and Permits which has, or is reasonably likely to
have, any material adverse effect on the validity or continued
availability of any such Licenses and Permits.
Section 4.20 Solvency. (a) Immediately after the date
hereof and immediately following the making of each Loan and
after giving effect to the application of the proceeds of such
Loans: (i) the fair value of the assets of Borrower and its
Consolidated Subsidiaries, at a fair valuation, exceeds and will
exceed the debts and liabilities, subordinated, contingent or
otherwise, of Borrower and its Consolidated Subsidiaries; (ii)
the present fair saleable value of the Property of Borrower and
its Consolidated Subsidiaries will be greater than the amount
that would be required to pay the probable liability of Borrower
and its Consolidated Subsidiaries on their debts and other
liabilities, subordinated, contingent or otherwise, as such debts
and other liabilities become absolute and matured; (iii) Borrower
and its Consolidated Subsidiaries will be able to pay their debts
and liabilities, subordinated, contingent or otherwise, as such
debts and liabilities become absolute and matured; and (iv)
Borrower and its Consolidated Subsidiaries will not have
unreasonably small capital with which to conduct the businesses
in which they are engaged as such businesses are now conducted
and are proposed to be conducted after the date hereof.
(b) Borrower does not intend to, or to permit any of
its Consolidated Subsidiaries to, and does not believe that it or
any of its Consolidated Subsidiaries will, incur debts beyond its
ability to pay such debts as they mature, taking into account the
timing of and amounts of cash to be received by it or any such
Consolidated Subsidiary and the timing of the amounts to be
payable in respect of Borrower's Consolidated Indebtedness.
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Section 4.21 Insurance. Borrower and its Subsidiaries
carry insurance on their Real Estate Projects with Qualified
Insurers (as defined below), in such amounts, with such
deductibles and covering such risks as are customarily carried by
companies engaged in similar businesses and owning similar Real
Estate Projects in localities where Borrower and its Subsidiaries
operate, including, without limitation:
(a) Property and casualty insurance (including
coverage for flood and other water damage for any Real Estate
Project located within a 100-year flood plain) in the amount of
the replacement cost of the improvements at the Project;
(b) Builder's risk insurance for any Real Estate
Project under construction in the amount of the construction cost
of such Real Estate Project;
(c) Loss of rental income insurance in the amount not
less than one year's gross revenues from the Real Estate
Projects; and
(d) Comprehensive general liability insurance in the
amount of $20,000,000 per occurrence.
Section 4.22 REIT Status. Borrower is in good
standing on the New York Stock Exchange and is qualified and
currently is in compliance in all material respects with all
provisions of the Code applicable to the qualification of
Borrower as a REIT.
Section 4.23 "Year 2000" Compliance. Borrower has
conducted a comprehensive review and assessment of its computer
applications and has made inquiry of its key suppliers, vendors
and customers with respect to the "year 2000 problem" (that is,
the risk that computer applications may not be able properly to
perform date-sensitive functions after December 31, 1999) and,
based on that review and inquiry, Borrower does not believe the
year 2000 problem will result in a material adverse change in
Borrower's business, financial condition or ability to repay the
Obligations as and when required by this Agreement.
ARTICLE 5.
AFFIRMATIVE COVENANTS OF BORROWER
Borrower covenants with and warrants to the Managing
Agent and to each Bank that from and after the Closing Date and
until all of the Obligations are paid and satisfied in full,
Borrower shall comply with, observe, perform or fulfill all of
the covenants set forth in this Article 5.
Section 5.1 Reports and Other Information.
(a) Borrower shall provide to the Managing Agent as soon as
available, and in any event within forty-five (45) days after the
close of each of the first three quarters of each fiscal year of
Borrower, balance sheets of Borrower as of the end of such
quarter and statements of income and statements of cash flow of
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Borrower and its Consolidated Subsidiaries for the period
commencing at the end of the previous fiscal year and ending with
the end of such quarter, certified by the chief financial
officer, principal accounting officer or chief executive officer
of Borrower, together with a certificate of such officer stating
that of the date of such certificate and to the best of his
knowledge, after reasonable inquiry, no event has occurred which
constitutes an Event of Default or would constitute an Event of
Default with the giving of notice or the lapse of time or both,
or, if an Event of Default or such an event has occurred and is
continuing, a statement as to the nature thereof and the action
which Borrower has taken or proposes to take with respect
thereto, and further setting out in such detail as is reasonably
required by the Banks (i) Borrower's compliance with the
requirements of Sections 5.19, 6.7 and 6.8 hereof, (ii) a
borrowing report, certified by a duly authorized officer of
Borrower, on behalf of Borrower, and (iii) such other information
as may reasonably be requested by the Banks with respect to
Borrower or Borrower's business or Property.
(b) Borrower shall provide to the Managing Agent as
soon as available, and in any event within ninety (90) days after
the end of each fiscal year of Borrower a copy of the annual
financial statements of Borrower and its Consolidated
Subsidiaries for such year, including therein a copy of the
balance sheets of Borrower and its Consolidated Subsidiaries as
of the end of such fiscal year and statements of income and
statements of cash flow and statements of Shareholders' Equity of
Borrower and its Consolidated Subsidiaries, certified without
qualification by Borrower's Accountants, together with a
certificate of the chief financial officer, principal accounting
officer or chief executive officer of Borrower stating that, as
of the date of such certificate, to the best of his knowledge and
after reasonable inquiry, no event has occurred which constitutes
an Event of Default or would constitute an Event of Default with
the giving of notice or the lapse of time or both, or, if an
Event of Default or such an event has occurred and is continuing,
a statement as to the nature thereof and the action which
Borrower has taken or proposes to take with respect thereto and
further setting out in such detail as is reasonably required by
the Banks (i) Borrower's compliance with the requirements of
Sections 5.19, 6.7 and 6.8 hereof, (ii) a borrowing report,
certified by a duly authorized officer of Borrower, and (iii)
such other information as may be reasonably requested by the
Banks with respect to Borrower or Borrower's business or
Property.
(c) Borrower shall provide to the Managing Agent,
promptly after sending or filing thereof, copies of all reports
which Borrower sends to its shareholders, and copies of all
reports and registration statements which Borrower files with the
Securities and Exchange Commission.
(d) Borrower shall provide to the Managing Agent as
soon as possible, and in any event within five (5) days after the
occurrence thereof, any information as to the occurrence of an
Event of Default, or an event which with notice or lapse of time
or both would constitute an Event of Default, continuing on the
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date of such statement, together with a statement of the chief
financial officer or treasurer of Borrower setting forth the
details of such Event of Default or event, and the action which
Borrower proposes to take with respect thereto.
(e) Borrower shall provide to the Managing Agent,
immediately upon Borrower's receipt thereof, copies of all
notices and other written communications received by Borrower
from Moody's or S&P relating to any change, or proposed change,
in Borrower's Debt Rating (including, without limitation, any
notice that either Moody's or S&P has changed, or is changing,
the basis on which its ratings are established or reported).
(f) Borrower shall provide the Managing Agent with
such other information relating to Borrower (including, without
limitation, any business plan of Borrower) as the Managing Agent
may from time to time reasonably request.
Section 5.2 Maintenance of Property; Insurance.
(a) Borrower covenants and agrees to keep and maintain all of its
Property in good repair, working order and condition, reasonable
wear and tear excepted, and from time to time to make, or use all
reasonable legal remedies to cause to be made, all proper
repairs, renewals or replacements, betterments and improvements
thereto so that the business carried on in connection therewith
may be properly and advantageously conducted at all times.
(b) Borrower covenants and agrees to keep all of its
Properties insured against loss or damage by theft, fire, smoke,
sprinklers, riot and explosion, such insurance (the "Insurance")
to be in such form, in such amounts and against such other risks
and hazards as are customarily maintained by other Persons
operating similar businesses and having similar properties in the
same general areas, including but not limited to liability
coverage, with an insurer which is financially sound and
reputable 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 (a "Qualified
Insurer"). In the event that an insurer ceases to be a Qualified
Insurer during the term of any Insurance policy, Borrower shall
replace such coverage, at the end of the then-current policy
term, by a policy issued by a Qualified Insurer. Borrower
further shall, in addition, require that the insurer with respect
to each such Insurance policy provide for at least thirty (30)
days' advance written notice to Borrower of any cancellation or
termination of, or other change of any nature whatsoever in, the
coverage provided under any such policy.
Section 5.3 REIT Status; Corporate Existence; Listing.
(a) Borrower shall make all filings under the Code necessary to
preserve and maintain (i) its qualifications as a REIT under the
Code and (ii) the applicability to Borrower and its shareholders
of the method of taxation provided for in Section 857(b) of the
Code (and any successor provision thereto).
(b) Borrower shall preserve and maintain its existence
and all of its rights, franchises and privileges as an Ohio
corporation.
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(c) Borrower shall preserve and maintain the listing
of its common stock on the New York Stock Exchange.
Section 5.4 Compliance with Laws. (a) Borrower shall,
and hereby covenants and agrees to, comply with all acts, rules,
regulations, orders, directions and ordinances of any
legislative, administrative or judicial body or official,
applicable to the operation of Borrower's business.
(b) Borrower will promptly notify the Managing Agent
in the event that Borrower receives any notice, claim or demand
from any governmental agency which alleges that Borrower is in
material violation of any of the terms of, or has failed to
comply with any applicable order issued pursuant to any Federal,
state or local statute regulating its operation and business,
including, but not limited to, the Occupational Safety and Health
Act, the ADA and all Environmental Laws.
Section 5.5 Notice of Litigation; Judgments. Borrower
shall furnish or cause to be furnished to the Managing Agent,
promptly (and, in any event, within five (5) Business Days) after
Borrower shall have first become aware of the same, a written
notice setting forth full particulars of and what action Borrower
is taking or proposes to take with respect to (a) any final
judgment in an amount exceeding Five Hundred Thousand Dollars
($500,000.00) rendered against Borrower or any Affiliate of
Borrower; (b) the commencement or institution of any legal or
administrative action, suit, proceeding or investigation by or
against Borrower in or before any court, governmental or
regulatory body, agency, commission or official, board of
arbitration or arbitrator, the outcome of which could materially
and adversely affect Borrower's current or future financial
position, assets, business, operations or prospects, or could
prevent or impede the implementation or completion, observance or
performance of any of the arrangements or transactions
contemplated by any of the Loan Documents; or (c) the occurrence
of any adverse development, not previously disclosed by Borrower
to the Managing Agent in writing, in any such action, suit,
proceeding or investigation.
Section 5.6 Notice of Other Events. (a) If (and on
each occasion that) any event shall occur or any condition shall
develop which constitutes a Default or an Event of Default, then,
promptly (and, in any event, within five (5) Business Days) after
Borrower shall have first become aware of the same, Borrower will
furnish or cause to be furnished to the Managing Agent a written
notice specifying the nature and the date of the occurrence of
such event or (as the case may be), the nature and the period of
existence of such condition and what action Borrower is taking or
proposes to take with respect thereto.
(b) Immediately upon Borrower's first becoming aware
of any of the following occurrences, Borrower will furnish or
cause to be furnished to the Managing Agent (for further
distribution to Banks) written notice with full particulars of:
(i) the business failure, insolvency or bankruptcy of Borrower;
(ii) the rescission, cancellation or termination, or the creation
or adoption, of any material agreement or contract to which
75
Borrower is a party; (iii) any material labor dispute, any
attempt by any labor union or organization representatives to
organize or represent employees of Borrower, or any unfair labor
practices or proceedings of the National Labor Relations Board
with respect to Borrower; or any defaults or events of default
under any material agreement of Borrower or any material
violations of any laws, regulations, rules or ordinances of any
governmental or regulatory body by Borrower or with respect to
any of Borrower's Property.
Section 5.7 Inspections. Borrower shall permit any
officer, employee, consultant or other representative or agent of
the Managing Agent or of any Bank to visit and inspect, from time
to time and at any reasonable time, after prior notice to
Borrower, any of the assets or Property owned or held under lease
by Borrower, to examine the books of account, records, reports
and the papers (and to make copies thereof and to take extracts
therefrom) of Borrower and to discuss the affairs, finances and
accounts of Borrower with the directors and executive officers,
as the case may be, of Borrower. All of such activities shall be
coordinated by and through the Managing Agent.
Section 5.8 Payment of Taxes and Other Claims.
Borrower shall pay and discharge promptly all taxes, assessments
and other governmental charges or levies at any time imposed upon
it or upon its income, revenues or Property, as well as all
claims of any kind (including claims for labor, material or
supplies) which, if unpaid, might by law become a Lien or charge
upon all or any part of its income, revenues or Property.
Notwithstanding the foregoing to the contrary, Borrower may,
provided that there is not then an Event of Default hereunder,
contest the propriety or amount of any such taxes, assessments or
governmental charges, or of any such claims, if (a) such contest
is instituted in good faith and prosecuted with reasonable
diligence; (b) such contest shall preclude the sale or forfeiture
of the affected Property (or Borrower shall provide the Managing
Agent with such reasonable security or other assurances as may be
requested by the Managing Agent in connection with such contest);
and (c) Borrower shall indemnify the Managing Agent and all of
the Banks of and from any and all liability, loss, cost or
expense incurred by or asserted against any such party in
connection with, or in consequence of, any such contest.
Section 5.9 Payment of Indebtedness. Borrower will
duly and punctually pay or cause to be paid the principal and
interest on the Loans, all draws and disbursements under the
Letters of Credit and all fees and other amounts payable
hereunder or under the Loan Documents, as and when required by
this Agreement and/or the other Loan Documents. Borrower shall
pay all other Indebtedness (whether existing on the date hereof
or arising at any time thereafter) as and when the same is due
and payable.
Section 5.10 Payment of Fees. Borrower shall, and
hereby covenants and agrees to, pay the following fees as and
when described below:
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(a) The Facility Fee, payable to the Managing Agent
for the ratable benefit of the Banks annually in advance, on the
Closing Date and on each anniversary of such date during the
pendency of this Agreement in an amount equal to fifteen
hundredths of one percent (0.15%) of the Maximum Commitment;
(b) The Agency Fee in accordance with the letter
agreement described above;
(c) The Letter of Credit Fee in accordance with
Section 2.14;
(d) The Letter of Credit Commission in accordance with
Section 2.14; and
(e) The Competitive Bid Fee in accordance with
Section 2.3.
Section 5.11 Performance of Obligations Under the Loan
Documents. Borrower will duly and properly perform, observe and
comply with all of its agreements, covenants and obligations
under this Agreement and each of the other Loan Documents.
Section 5.12 Governmental Consents and Approvals.
(a) Borrower will obtain or cause to be obtained all such
approvals, consents, orders, authorizations and licenses from,
give all such notices promptly to, register, enroll or file all
such agreements, instruments or documents promptly with, and
promptly take all such other action with respect to, any
governmental or regulatory authority, agency or official, or any
central bank or other fiscal or monetary authority, agency or
official, as may be required from time to time under any
provision of any applicable law:
(i) for the performance by Borrower of any of its
agreements or obligations under the Notes, this
Agreement or any of the other Loan Documents or for the
payment by Borrower to the Managing Agent at its Head
Office of any sums which shall become due and payable
by Borrower to the Managing Agent or any Bank
thereunder;
(ii) to ensure the continuing legality, validity,
binding effect or enforceability of the Notes or any of
the other Loan Documents or of any of the agreements or
obligations thereunder of Borrower; or
(iii) to continue the proper operation of the business
and operations of Borrower.
(b) Borrower shall duly perform and comply with the
terms and conditions of all such approvals, consents, orders,
authorizations and Licenses and Permits from time to time granted
to or made upon Borrower.
Section 5.13 Notice as to Certain Documents. If (and
on each occasion that) any of the following events shall occur:
77
(i) the charter or other organizational documents of
Borrower shall at any time be modified or amended in
any respect whatever; or
(ii) the by-laws or code of regulations of Borrower
shall at any time be modified or amended in any respect
whatever;
then promptly (and, in any event, within one (1) Business Day)
after the occurrence of any such event, Borrower shall furnish
the Managing Agent with a true and complete copy of each such
modification, amendment or supplement.
Section 5.14 Notice of Termination of Certain
Documents. (a) If (and on each occasion that) any of the
following events shall occur:
(i) any Loan Document shall at any time be terminated,
cancelled or rescinded for any reason whatever; or
(ii) any action at law, suit in equity or other legal
proceeding shall at any time be commenced or threatened
in writing by any person (A) to terminate, cancel or
rescind any Loan Document, or (B) to enforce any other
Person's performance or observance of or compliance
with any covenants, agreements or obligations under any
Loan Document; or
(iii) any Person which is a party to or otherwise
bound by any Loan Document shall fail or refuse to
perform, comply with or observe or shall otherwise
breach any one or more of its covenants, agreements or
obligations under such Loan Document;
then Borrower will promptly (and, in any event, within one (1)
Business Day) after Borrower shall have first become aware of the
occurrence of any such event, furnish to the Managing Agent
written notice setting forth the particulars thereof.
(b) Borrower will take or cause to be taken, promptly
and without any expense to the Managing Agent or any Bank, all
such action as may be required to prevent, and will refrain from
taking any action that might cause, the termination,
cancellation, amendment or rescission of this Agreement or any of
the other Loan Documents.
Section 5.15 Employee Benefit Plans and Guaranteed
Pension Plans. (a) Borrower will not establish any Guaranteed
Pension Plans or Employee Benefit Plans without the Managing
Agent's prior written consent (which will not be unreasonably
withheld or delayed), (b) Borrower will make full payment when
due of all amounts which, under the provisions of Employee
Benefit Plans or under applicable law, are required to be paid as
contributions thereto, (c) Borrower will not permit to exist any
accumulated funding deficiency, whether or not waived, (d)
Borrower will file on a timely basis all reports, notices and
other filings required by any governmental agency with respect to
any of its Employee Benefit Plans, (e) Borrower will make any
78
payments to Multiemployer Plans required to be made under any
agreement relating to such Multiemployer Plans, or under any law
pertaining thereto, (f) Borrower will cause the actuarial present
value of all benefit commitments under each Guaranteed Pension
Plan to be less than the current value of the assets of such
Guaranteed Pension Plan allocable to such benefit commitments,
(g) Borrower will furnish to all participants, beneficiaries and
employees under any of the Employee Benefit Plans, within the
periods prescribed by law, all reports, notices and other
information to which they are entitled under applicable law, and
(h) Borrower will take no action which would cause any of the
Employee Benefit Plans to fail to meet any qualification
requirement imposed by the Code, as amended. As used herein, the
term "accumulated funding deficiency" has the meaning specified
in Section 302 of ERISA and Section 412 of the Code, and the
terms "actuarial present value", "benefit commitments" and
"current value" have the meaning specified in Section 4001 of
ERISA.
Section 5.16 Further Assurances. Borrower will
execute, acknowledge and deliver, or cause to be executed,
acknowledged and delivered, any and all such further assurances
and other agreements or instruments, and take or cause to be
taken all such other action, as shall be reasonably requested by
the Managing Agent from time to time in order to give full effect
to any of the Loan Documents.
Section 5.17 Deliberately Omitted.
Section 5.18 Use of Proceeds. Borrower shall use all
Loan proceeds for the purposes permitted by Section 2.8 of this
Agreement.
Section 5.19 Financial Covenants.
(a) Consolidated Indebtedness to Market Value Ratio.
Aggregate Consolidated Indebtedness shall not, at any time
through and including December 31, 2000, exceed fifty-five
percent (55%) of Aggregate Market Value. After December 31,
2000, Aggregate Consolidated Indebtedness shall not, at any time,
exceed fifty percent (50%) of Aggregate Market Value. For the
purposes of this Section 5.19(a), the Consolidated Group
Percentage Share of Investment Entity Market Value shall not
exceed fifteen percent (15%) of Market Value.
(b) Secured Debt to Market Value. The sum of (i) the
aggregate outstanding principal balance of all Secured Debt of
Borrower and its Consolidated Subsidiaries, plus (ii) the
Consolidated Group Percentage Interest of Investment Entity
Secured Debt shall not, at any time, exceed twenty percent (20%)
of Aggregate Market Value.
(c) Floating Rate Debt. The aggregate outstanding
principal balance of (i) all Floating Rate Debt of Borrower and
its Consolidated Subsidiaries and (ii) the Consolidated Group
Percentage Interest of all Floating Rate Debt of the Investment
Entities shall not exceed fifty percent (50%) of the aggregate of
the outstanding principal balance of (x) all Indebtedness for
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Borrowed Money of Borrower and its Consolidated Subsidiaries; and
(y) the Consolidated Group Percentage Interest of all
Indebtedness for Borrowed Money of the Investment Entities.
(d) Debt Service Coverage Ratio. The sum of EBITDA
and the Consolidated Group Percentage Interest of all Investment
Entity EBITDA, each on an annualized basis (determined by
multiplying the quarterly EBITDA by a factor of four, and subject
to the adjustments described in the following sentence), shall at
all times exceed the sum of all required payments of Debt Service
and the Consolidated Group Percentage Interest of Investment
Entity Debt Service by a ratio of not less than two (2.00) to one
(1). For the purposes of this provision, Borrower's EBITDA and
Investment Entity EBITDA shall, as appropriate, be subject to Pro
Forma Adjustment to reflect any acquisitions made by Borrower or
any Investment Entity, respectively, during the applicable fiscal
period.
(e) Unencumbered Debt Service Coverage Ratio.
Borrower and its Wholly-Owned Subsidiaries (which, for all
purposes of this Section 5.19(e) shall include the Controlled
Partnerships) shall at all times maintain a ratio of Unencumbered
EBITDA to all required payments of Debt Service as described in
this Section 5.19(e) on all the Unencumbered Debt of Borrower and
such Subsidiaries, on an annualized basis (determined by
multiplying the quarterly Unencumbered EBITDA by a factor of
four, and subject to the adjustments described in this Section
5.19(e)) of not less than two (2.0) to one (1). For the purposes
of this provision: (i) Unencumbered EBITDA shall be subject to
Pro Forma Adjustment to reflect any acquisition of an
Unencumbered Real Estate Asset (other than Raw Land or Assets
Under Development) made during the applicable period; and (ii)
Unencumbered EBITDA for each fiscal period of Borrower and its
Wholly-Owned Subsidiaries shall be adjusted to deduct the Capital
Expenditure Allocation attributable to such parties' Unencumbered
Suites.
(f) Unencumbered Real Estate Assets to Unencumbered
Debt Ratio. The ratio of the aggregate value of the Unencumbered
Real Estate Assets of Borrower and its Wholly-Owned Subsidiaries
(which, for all purposes of this Section 5.19(f), shall include
the Controlled Partnerships) to the aggregate outstanding
principal balance of Unencumbered Debt of Borrower and its
Wholly-Owned Subsidiaries shall at all times through and
including December 31, 2000, equal or exceed one and three-
quarters (1.75) to one (1); thereafter, such ratio shall at all
times exceed two (2) to one (1). The value of Unencumbered Real
Estate Assets for the purposes of this Section 5.19(f) shall be
the sum of (A) all Unencumbered Assets Capitalized Income Value
for Borrower and its Wholly-Owned Subsidiaries (which, solely for
the purposes of this Section 5.19(f), shall be determined by
Unencumbered EBITDA for Borrower and its Wholly-Owned
Subsidiaries for each fiscal period, as adjusted to deduct an
amount equal to the Capital Expenditure Allocation attributable
to such parties' Unencumbered Suites) plus (B) fifty percent
(50%) of the book value of all Assets Under Development which are
Unencumbered Real Estate Assets, plus (C) fifty percent (50%) of
the book value of all Raw Land which is Unencumbered Real Estate
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Assets. For the purposes of this Section 5.19(f): (1) the
aggregate of the value (determined as provided in this Section
5.19(f) of Assets Under Development and Raw Land included in
Unencumbered Real Estate Assets shall not exceed ten percent
(10%) of Unencumbered Assets Capitalized Income Value; and (2)
the value (determined as provided in this Section 5.19(f) of Raw
Land included in Unencumbered Real Estate Assets shall not exceed
five percent (5%) of Unencumbered Assets Capitalized Income
Value.
(g) Dividend Ratio. Borrower shall not pay any
Dividends during the fiscal year ending December 31, 1998, in
excess of those Dividends which have been paid as of the date
hereof. The amount of all Dividends paid by Borrower during its
fiscal year ending December 31, 1999, shall not exceed ninety-
five percent (95%) of Borrower's Distributable Cash Flow for such
fiscal year; this ratio shall be tested on a year-to-date basis
for the purposes of this Section 6.19(g) as of June 30, 1999, and
as of the end of each subsequent fiscal quarter of Borrower
thereafter on a cumulative quarterly basis for the balance of
such fiscal year. The amount of all Dividends paid by Borrower
during any fiscal year ending after December 31, 1999, shall not
exceed ninety percent (90%) of Borrower's Distributable Cash Flow
for any such fiscal year. This ratio shall be tested in respect
of the fiscal year ending December 31, 2000, on a year-to-date
basis for the purposes of this Section 5.19(g) as of June 30,
2000, and thereafter on a cumulative quarterly basis for the
balance of such fiscal year. For each fiscal year of Borrower
after December 31, 2000, this ratio shall be tested on a
cumulative quarterly basis.
(h) Assets Under Development and Raw Land. The
aggregate value of the Assets Under Development and Raw Land
shall not, at any time, exceed twenty percent (20%) of the
Aggregate Market Value at such time.
(i) Fixed Charge Coverage Ratio. Borrower shall at
all times maintain the ratio of EBITDA to the sum of (i) all
required payments of Debt Service of Borrower and its
Consolidated Subsidiaries on an annualized basis (determined by
multiplying the quarterly EBITDA by a factor of four); (ii) all
required payments of Investment Entity Debt Service of all
Investment Entities on an annualized basis, and (iii) all
dividend payments regarding Preferred Stock, of not less than one
and three-quarters (1.75) to one (1). For the purposes of this
Section 5.19(i), EBITDA and Investment Entity EBITDA for each
fiscal year shall be reduced by an amount equal to the Capital
Expenditure Allocation for such fiscal year.
(j) Minimum Net Worth. The Net Worth of Borrower and
its Consolidated Subsidiaries which are Wholly Owned Subsidiaries
(which, for the purposes of this Section 5.19 (j), shall include
the Controlled Partnerships) shall, at all times equal or exceed
Three Hundred Twenty-Five Million Dollars ($325,000,000). If
Borrower shall make any equity offerings (including, without
limitation, any public offering, however characterized, which
would be treated as an equity offering for the purposes of GAAP)
during the pendency of this Agreement, the minimum Net Worth
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required to be maintained hereunder shall be not less than the
sum of Three Hundred Twenty-Five Million Dollars ($325,000,000)
plus ninety percent (90%) of the net proceeds to Borrower of such
offering.
(k) Concentration of Stock. The Executive Officers of
Borrower shall, individually or in the aggregate, at all times
own, beneficially and of record, an aggregate of not less than
five hundred thousand shares of Borrower's capital stock on an
undiluted basis.
(l) Conventional Apartments Ratio. The number of
Conventional Apartment units owned by Borrower and its
Consolidated Subsidiaries shall, at all times, exceed eighty
percent (80%) of the number of all Apartment Suites owned by
Borrower and its Consolidated Subsidiaries.
(m) Adjusted Unencumbered Debt Service Coverage Ratio.
Borrower and its Wholly-Owned Subsidiaries (which, for the
purposes of this Section 5.19(m), shall include the Controlled
Partnerships) shall at all times maintain a ratio of Unencumbered
EBITDA to Adjusted Unencumbered Debt Service greater than one and
one-half (1.50) to one (1.0). For the purpose of this Section
5.19(m), Unencumbered EBITDA for any fiscal period shall be
reduced by an amount equal to the Capital Expenditure Allocation
for such fiscal period.
ARTICLE 6.
NEGATIVE COVENANTS OF BORROWER
Borrower covenants with and represents and warrants to
the Managing Agent and to each Bank that from and after the
Closing Date and until all of the Obligations are paid and
satisfied in full:
Section 6.1 Limitation on Nature of Business.
Borrower will not at any time make any material alterations in
the nature or character of its business as carried on at the date
hereof, or undertake, conduct or transact any business in a
manner prohibited by applicable law.
Section 6.2 Limitation on Consolidation and Merger.
Borrower shall not at any time consolidate with or merge into or
with any Person or Persons or enter into or undertake any plan or
agreement of consolidation or merger with any Person. This
Section 6.2 shall not prohibit Borrower from merging any one or
more of Borrower's Subsidiaries with or into Borrower.
Section 6.3 Limitation on Distributions, Dividends and
Return of Capital. (a) Borrower shall not, if any Event of
Default shall exist at the time: (i) declare or pay any
Distribution or cash dividends of any kind on any shares of any
class in its capital; (ii) make any payments on account of the
purchase or other acquisition or redemption or other retirement
of any shares of any class in its capital, or any warrants or
options to purchase any such shares; or (iii) make any other
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Distributions of any kind in respect of any shares of any class
in its capital.
(b) Borrower shall make such Distributions as may be
necessary to permit Borrower to preserve its status as a REIT,
provided, however, that the making of any Distribution for such
purpose which would be prohibited or would, if made, constitute a
Default or Event of Default under any provision of this Agreement
shall nevertheless be prohibited, or shall constitute a Default
or an Event of Default, as the case may be.
(c) Borrower shall not at any time make (whether
directly or indirectly) any payment of any kind on any
Indebtedness (other than the Obligations) to any other Person
while any Default or Event of Default exists hereunder.
(d) Borrower shall not at any time make (whether
directly or indirectly) any payments or other distributions of
any kind to any Affiliate or transfer or assign (whether directly
or indirectly) any Property or assets of any kind to any
Affiliate; excluding, however, from the operation of the
foregoing provisions of this paragraph:
(i) payments on transactions or contracts which are
permissible under Section 6.9;
(ii) remuneration payable by Borrower to its
employees, directors, or officers in amounts approved
by its board of directors or officers;
(iii) reimbursements by Borrower of the business
expenses of employees, directors and officers incurred
in the ordinary course of business; and
(iv) payments, distributions or transfers which are
consolidated on Borrower's financial statements.
Notwithstanding any provision of this Section 6.3 to the
contrary, Borrower shall not be permitted to make any
Distribution which would vitiate or jeopardize in any material
way Borrower's status or qualification as a REIT or would violate
any other provision of this Agreement.
Section 6.4 Limitation on Disposition of Assets.
During the term of this Agreement, Borrower shall not at any time
engage in any sale, lease (as lessor), liquidation or other
transfer, distribution or disposition of all or any material part
of its Property or assets (either by or through a single
transaction or by or through a series of separate but related
transactions).
Section 6.5 Limitation on Investments. Borrower shall
not make any Investments of any kind whatever in any Person or
Persons, except for:
(a) Investments in property to be used in the ordinary
course of business of Borrower as multi-family apartment
projects;
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(b) Investments in undeveloped land for the
development of multi-family apartment projects;
(c) Investments arising from the sale of goods and
services in the ordinary course of business of Borrower;
(d) Investments in a Subsidiary or Affiliate permitted
pursuant to Section 6.3(d)(iv), and Investments in joint ventures
and partnerships engaged solely in the business of purchasing,
developing, owning, operating, managing and leasing Real Estate
Projects;
(e) Investments in direct obligations of the United
States of America, or any agency thereof or obligations
guaranteed by the United States of America, provided that such
obligations mature within two (2) years from the date of
acquisition thereof;
(f) Investments in certificates of deposit maturing
within two (2) years from the date of acquisition issued by any
bank or trust company organized under the laws of the United
States or any state thereof having capital surplus and undivided
profits aggregating at least One Hundred Million and 00/100
Dollars ($100,000,000.00); or
(g) Investments in commercial paper given the highest
rating by a national credit rating agency and maturing not more
than two (2) years from the date of creation thereof.
Notwithstanding any restriction set forth in this Section 6.5 to
the contrary, Borrower shall be permitted to make such
Investments in the ordinary course of Borrower's business as
shall not vitiate or jeopardize in any material way Borrower's
status or qualification as a REIT and shall not, singly or
cumulatively, violate any other provisions of this Agreement.
Section 6.6 Acquisition of Margin Securities.
Borrower shall not own, purchase or acquire (or enter into any
contract to purchase or acquire) any "margin security" as defined
by any regulation of the Federal Reserve Board as now in effect
or as the same may hereafter be in effect unless, prior to any
such purchase or acquisition or entering into any such contract,
the Managing Agent, for its benefit and that of each Bank, shall
have received an opinion of counsel satisfactory to the Managing
Agent and each Bank to the effect that such purchase or
acquisition will not cause this Agreement or the Notes to be in
violation of Regulation G, T, U, X or any other regulation of the
Federal Reserve Board then in effect.
Section 6.7 Limitation on Mortgages, Liens and
Encumbrances. Borrower shall not at any time create, assume or
incur any mortgage, Lien or other encumbrance in respect of any
of its Property, assets, income or revenues of any character if
as a result of doing so Borrower shall (x) breach any of
Borrower's warranties or representations under this Agreement, or
(y) violate any covenant contained in this Agreement.
Notwithstanding the foregoing, Borrower will not create, assume,
incur or permit to exist any involuntary Lien on any of its
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Property, assets, income or revenues other than: (i) Liens for
taxes, assessments or governmental charges or claims the payment
of which is not at the time required by any provision of this
Agreement; (ii) statutory Liens of landlords and Liens of
carriers, warehousemen, mechanics, materialmen and other Liens
imposed by law incurred in the ordinary course of business for
sums not yet delinquent or being contested in good faith, if such
reserve or other appropriate provision, if any, as shall be
required by GAAP, shall have been made in respect thereof; and
(iii) Liens (other than any Lien imposed by ERISA) incurred or
deposits made in the ordinary course of business in connection
with workers' compensation, unemployment insurance and other
types of social security, or to secure the performance of
tenders, statutory obligations, surety and appeal bonds, bids,
leases, government contracts, performance and return-of-money
bonds and other similar obligations (exclusive of Indebtedness
for Borrowed Money).
Section 6.8 Limitation on Sales and Leasebacks.
Borrower shall not at any time, directly or indirectly, sell and
thereafter lease back any of its assets or Property.
Section 6.9 Transactions with Affiliates. Except as
set forth on Schedule 4.1(c), Borrower shall not at any time
enter into or participate in any agreements or transactions of
any kind with any Affiliates of Borrower, except (i) agreements
or transactions that individually produce annual payments of less
than One Hundred Thousand Dollars ($100,000.00) and are otherwise
not prohibited by the terms of this Agreement; (ii) agreements or
transactions entered into in the ordinary course of business on
an arms-length basis and on terms generally available between
unrelated Persons; or (iii) agreements permitted pursuant to
Section 6.3(d)(iv).
Section 6.10 Limitation on Certain Transactions.
Borrower shall not acquire or purchase any equity interest in any
other entity, or acquire or purchase any assets or obligation of
any other entity or incur any Indebtedness for Borrowed Money if
any such acquisition, purchase or financing (whether in any
specific transaction or in a series of transactions or
undertakings) would result in a violation of any one or more (or
all) of the covenants set forth in Section 5.19 above.
ARTICLE 7.
EVENTS OF DEFAULT; REMEDIES
Section 7.1 Events of Default. The occurrence of any
one or more of the following events shall constitute an "Event of
Default":
(a) Principal and Interest. Any principal, interest or
any other sum payable under this Agreement or the Notes (or any
Note) shall not be paid within five (5) days of the date on which
the same first became due and payable hereunder, or Borrower
shall fail to reimburse the Issuing Bank for any draws or
disbursements made under any Letters of Credit as and when
required by the terms of Section 2.14, above;
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(b) Representations and Warranties. Any representation
or warranty at any time made by or on behalf of Borrower in this
Agreement, any Loan Document or in any certificate, written
report or statement furnished to the Managing Agent or to any
Bank in connection therewith shall prove to have been untrue,
incorrect or breached in any material respect on or as of the
date on which the same was made or was deemed to have been made
or repeated;
(c) Certain Covenants. Borrower shall fail to comply
with the covenants set forth in Sections 5.2(b), 5.5(a), 5.19 or
Article 6;
(d) Other Covenants. Borrower shall fail to perform,
comply with or observe any other covenant or agreement contained
in this Agreement and such failure or breach shall continue for
more than twenty (20) days after the earlier of the date on which
Borrower shall have first become aware of such failure or breach
or the date on which the Managing Agent or any Bank shall have
first notified Borrower of such failure or breach (provided,
however, that solely with respect to defaults of the nature
described in this Section 7.1(d) which cannot be cured by the
payment of money and cannot using appropriate diligence be cured
within such 20-day period, Borrower shall not be deemed to have
defaulted hereunder provided that Borrower shall commence
reasonable curative action with respect to such matter within
such 20-day period and shall thereafter diligently and
continuously prosecute the same to a timely completion);
(e) Loan Documents. Borrower shall fail to observe or
perform in any material fashion any of its obligations or
undertakings under any Loan Document other than this Agreement,
and such failure shall continue beyond the applicable period of
grace (if any) provided therein, or any Loan Document shall cease
to be legal, valid, binding or enforceable in accordance with its
terms;
(f) Litigation. Any action at law, suit in equity or
other legal or administrative proceeding to amend, cancel, revoke
or rescind any Loan Document shall be commenced by or on behalf
of Borrower or by any court or any other governmental authority
or any court or any other governmental authority shall make a
determination, or issue a judgment, order, decree or ruling to
the effect that, any one or more of the covenants, agreements or
obligations of Borrower hereunder or under any one or more of the
other Loan Documents are illegal, invalid or unenforceable in
accordance with the terms thereof;
(g) Acceleration of Other Agreements. Borrower shall
default under any agreement, instrument or contract to which
Borrower is a party or by which any of its assets or Property is
bound, and such default shall result in all or any material part
of the Indebtedness of Borrower becoming or being declared due
and payable prior to the date on which such Indebtedness or any
part thereof would otherwise have become due and payable;
(h) Insolvency-Voluntary. If Borrower shall:
(1) take any action for the termination, winding up, liquidation
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or dissolution of Borrower; (2) make a general assignment for the
benefit of creditors, become insolvent or be unable to pay its
debts as they mature; (3) file a petition in voluntary
liquidation or bankruptcy; (4) file a petition or answer or
consent seeking the reorganization of Borrower, or the
readjustment of any of the Indebtedness of Borrower; (5) commence
any case or proceeding under applicable insolvency or bankruptcy
laws now or hereafter existing; (6) consent to the appointment of
any receiver, administrator, custodian, liquidator or trustee of
all or any part of its assets or property; (7) take any corporate
action for the purpose of effecting any of the foregoing; or
(8) be adjudicated as bankrupt or insolvent;
(i) Insolvency-Involuntary. If any petition for any
proceedings in bankruptcy or liquidation or for the
reorganization or readjustment of Indebtedness of Borrower shall
be filed, or any case or proceeding shall be commenced, under any
applicable bankruptcy or insolvency laws now or hereafter
existing, against Borrower, or any receiver, administrator,
custodian, liquidator or trustee shall be appointed for Borrower
or for all or any part of Borrower's assets or Property, or any
order for relief shall be entered in a proceeding with respect to
the Borrower under the provisions of the United States Bankruptcy
Code, as amended and such proceeding or such appointment shall
not be dismissed or discharged, as the case may be, within
forty-five (45) days after the filing or appointment thereof;
(j) Judgment. Any final and non-appealable judgment,
order or decree for the payment of money in excess of Five
Hundred Thousand and 00/100 Dollars ($500,000.00) shall be
rendered against Borrower, and shall not be discharged within
thirty (30) days after the date of the entry thereof;
(k) ERISA. Any Termination Event shall occur and, as
of the date thereof or any subsequent date, the sum of the
various liabilities of Borrower and its ERISA Affiliates
including, without limitation, any liability to the Pension
Benefit Guaranty Corporation or its successor or to any other
party under Sections 4062, 4063, or 4064 of ERISA or any other
provision of law resulting from or otherwise associated with such
event exceeds One Hundred Thousand Dollars ($100,000.00); or
Borrower or any of its ERISA Affiliates as an employer under any
Multiemployer Plan shall have made a complete or partial
withdrawal from such Multiemployer Plans and the plan sponsors of
such Multiemployer Plans shall have notified such withdrawing
employer that such employer has incurred a withdrawal liability
requiring a payment in an amount exceeding One Hundred Thousand
Dollars ($100,000.00);
(l) Material Adverse Change. Any material adverse
change shall occur in Borrower's operations, financial condition
or ability to pay the Obligations as and when they become due and
payable; or
(m) Loss of Licenses or Permits. Any of the Licenses
and Permits now held or hereafter acquired by Borrower, shall be
revoked or terminated and not renewed and the absence of any such
Licenses and Permits would have a material adverse impact on the
87
business, Property, prospects, profits or condition (financial or
otherwise) of Borrower.
Section 7.2 Termination of Commitments and
Acceleration of Obligations. If any one or more of the Events of
Default shall at any time occur and be continuing:
(a) Upon the request of the Required Banks, the
Managing Agent shall, by giving notice to Borrower, immediately
terminate the Credit Commitments of all of the Banks in full, and
each Bank shall thereupon be relieved of all of its obligations
to make any Loans and to issue (or participate as hereinabove
provided in the issuance of) any Letters of Credit hereunder;
except that if there shall be a Default under Section 7.1(h) or
(i) hereof, the Credit Commitments of all of the Banks shall
automatically terminate in full concurrently with the occurrence
of such Default, and each Bank shall thereupon be relieved of all
of its obligations to make any Loans hereunder.
(b) The Managing Agent, upon the request of the
Required Banks, shall, by giving notice to Borrower (a "Notice of
Acceleration"), declare all of the Obligations, including the
entire unpaid principal of the Notes, all of the unpaid interest
accrued thereon, and any and all other sums payable by Borrower
under this Agreement, the Notes, or any of the other Loan
Documents to be immediately due and payable; except that if there
shall be an Event of Default under Section 7.1(h) or (i), all of
the Obligations, including the entire unpaid balance of all of
the Notes, all of the unpaid interest accrued thereon and all (if
any) other sums payable by Borrower under this Agreement, the
Notes or any of the other Loan Documents shall automatically and
immediately be due and payable without notice to Borrower; and
except further that if there shall be an Event of Default under
Section 7.1(h) or (i), and if the Managing Agent, in accordance
with the terms of this Agreement, shall give a Notice of
Acceleration to Borrower, Borrower shall not be required to pay
any prepayment penalties in connection with the acceleration of
any of the Obligations of Borrower. Thereupon, all of such
Obligations which are not already due and payable shall forthwith
become and be absolutely and unconditionally due and payable,
without presentment, demand, protest or any further notice or any
other formalities of any kind, all of which are hereby expressly
and irrevocably waived.
(c) Subject always to the provisions of Section 8.8
hereof, the Managing Agent may proceed to protect and enforce all
or any of its or the Banks' rights, remedies, powers and
privileges under this Agreement, the Notes or any of the other
Loan Documents by action at law, suit in equity or other
appropriate proceedings, whether for specific performance of any
covenant contained in this Agreement, any Note or any of the
other Loan Documents, or in aid of the exercise of any power
granted to the Managing Agent herein or therein.
Section 7.3 No Implied Waiver; Rights Cumulative. No
delay on the part of the Managing Agent or any Bank in exercising
any right, remedy, power or privilege hereunder or under any of
the other Loan Documents or provided by statute or at law or in
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equity or otherwise shall impair, prejudice or constitute a
waiver of any such right, remedy, power or privilege or be
construed as a waiver of any Default or Event of Default or as an
acquiescence therein. No right, remedy, power or privilege
conferred on or reserved to the Managing Agent or any Bank under
any of the Loan Documents or otherwise is intended to be
exclusive of any other right, remedy, power or privilege. Each
and every right, remedy, power and privilege conferred on or
reserved to the Managing Agent or any Bank under any of the Loan
Documents or otherwise shall be cumulative and in addition to
each and every other right, remedy, power or privilege so
conferred on or reserved to Managing Agent or any such Bank, and
may be exercised at such time or times and in such order and
manner as the Managing Agent or any such Bank shall (in its sole
and complete discretion) deem expedient.
ARTICLE 8.
CONCERNING THE MANAGING AGENT AND THE BANKS
Section 8.1 Appointment of the Managing Agent. Each
of the Banks hereby appoints NCB to serve as its Managing Agent
under this Agreement and the other Loan Documents, and in such
capacity to administer this Agreement and the other Loan
Documents.
Section 8.2 Authority. Each of the Banks hereby
irrevocably authorizes the Managing Agent (i) to take such action
on its behalf under this Agreement and the other Loan Documents
and to exercise such powers and perform such duties hereunder and
thereunder as are delegated to or required of the Managing Agent
by the terms hereof or thereof, together with such powers as are
reasonably incidental thereto; and (ii) to take such action on
such Bank's behalf as the Managing Agent shall consider
reasonably necessary or advisable for the protection, collection
or enforcement of any of the Obligations.
Section 8.3 Acceptance of Appointment. The Managing
Agent hereby accepts its appointment as Managing Agent for each
of the Banks under this Agreement and the other Loan Documents,
on the terms set forth in this Agreement, including the
following:
(a) The Managing Agent makes no representation as to
the value, validity or enforceability of this Agreement or of any
of the other Loan Documents or as to the correctness of any
statement contained in this Agreement or in any of the other Loan
Documents (other than statements made by the Managing Agent
herein or therein);
(b) The Managing Agent may exercise its powers and
perform its duties under this Agreement and the other Loan
Documents either directly or through its agents or attorneys;
(c) The Managing Agent shall be entitled to obtain
from counsel selected by it advice with respect to legal matters
pertaining to this Agreement or any of the other Loan Documents,
89
and shall not be liable for any action taken, omitted to be taken
or suffered in good faith in accordance with the advice of such
counsel, except for losses due to the Managing Agent's gross
negligence or willful misconduct;
(d) The Managing Agent shall not be required to use
its own funds in the performance of any of its duties or in the
exercise of any of its rights or powers, and shall not be
obligated to take any action which, in its reasonable judgment,
would involve it in any expense or liability unless it shall have
been furnished security or indemnity in an amount and in form and
substance satisfactory to it;
(e) The Managing Agent, in performing its duties and
functions under this Agreement and the other Loan Documents on
behalf of the Banks, will exercise the same care which it
normally exercises in making and handling loans in which it alone
is interested, but the Managing Agent does not assume further
responsibility; and
(f) The Managing Agent shall not be removed, replaced
or succeeded without its consent except (i) for its gross
negligence or willful misconduct; and (ii) the Required Banks
may, with the prior, written consent of Borrower, direct the
Managing Agent to resign as such by providing the Managing Agent
with not less than thirty (30) days' prior, written notice of
their election to do so, in which event the provisions of Section
8.16, below, shall govern the replacement of the resigning
Management Agent.
Section 8.4 Application of Moneys. All moneys
realized by the Managing Agent under the Loan Documents shall be
held by the Managing Agent for application in accordance with
Section 2.6(b) hereof.
Section 8.5 Reliance by the Managing Agent and Banks.
The Managing Agent and each Bank shall be entitled to rely on any
notice, consent, certificate, affidavit, letter, telegram,
telecopy, facsimile or teletype message, statement, order,
instrument or other document believed by it to be genuine and
correct and to have been signed or sent by the proper person or
persons. The Managing Agent shall deem and treat the payee of
any Note as the absolute owner thereof for all purposes hereof
until such time as it receives written notice of an assignment
permitted hereunder of such payee's interest, together with the
written agreement of the assignee in form and substance
reasonably satisfactory to Managing Agent that such assignee is
bound by this Agreement as a "Bank" hereunder.
Section 8.6 Exculpatory Provisions. (a) Neither the
Managing Agent nor any of its shareholders, directors, officers,
employees or agents shall be liable in any manner to any Bank for
any action taken, omitted to be taken or suffered in good faith
by it or them under any of the Loan Documents or in connection
therewith, or be responsible for the consequences of any
oversight or error of judgment, except for losses due to gross
negligence or willful misconduct of the Managing Agent or any
such shareholder, director, officer, employee or agent. Without
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limiting the generality of the foregoing, under no circumstances
shall the Managing Agent be subject to any liability to any Bank
on account of any action taken or omitted to be taken by the
Managing Agent in compliance with the direction of the Required
Banks or all Banks, as the case may be as provided for hereunder.
(b) The Managing Agent shall not be responsible in any
manner to any Bank for the due execution, effectiveness,
genuineness, validity, enforceability, perfection or recording of
this Agreement, any of the Notes, any of the other Loan Documents
or for any certificate, report or other document used under or in
connection with this Agreement or any of the other Loan
Documents, or for the truth or accuracy of any recitals,
statements, warranties or representations contained herein or in
any certificate, report or other document at any time hereafter
furnished or purporting to have been furnished to it by or on
behalf of Borrower, or any other Person, or be under any
obligation to any Bank to ascertain or inquire as to the
performance or observance of any of the covenants, agreements or
conditions set forth in this Agreement, the Notes or any of the
other Loan Documents or as to the use of any moneys lent
hereunder or thereunder, except for losses due to the Managing
Agent's gross negligence or willful misconduct.
(c) The Managing Agent shall not be obligated to take
any action or refrain from taking any action hereunder or under
any Loan Document that might, in its judgment, involve it in any
expense or liability until it shall have been indemnified to its
satisfaction by, or received an agreement to indemnify from, each
Bank. If a court of competent jurisdiction shall determine that
any amount received and distributed by the Managing Agent is to
be repaid, each Person to whom any such distribution shall have
been made shall either repay to the Managing Agent such Person's
proportionate share of the amount so determined to be repaid or
shall pay over the same in such manner and to such Persons as
shall be determined by such court.
Section 8.7 Action by the Managing Agent. Except as
otherwise expressly provided in this Agreement or in any other
Loan Document, the Managing Agent will take such action, assert
such rights and pursue such remedies under this Agreement and the
other Loan Documents as the Required Banks or all of the Banks,
as the case may be as provided for hereunder, shall direct.
Except as otherwise expressly provided in any of the Loan
Documents, the Managing Agent will not (and will not be obligated
to) take any action, assert any rights or pursue any remedies
under this Agreement or any of the other Loan Documents in
violation or contravention of any express direction or
instruction of the Required Banks or all of the Banks, as the
case may be as provided for hereunder. As to any matter
pertaining to the enforcement of this Agreement or any other Loan
Document, or in any instance in which the consent of the Required
Banks or all of the Banks is required by the terms of this
Agreement, the Managing Agent may refuse (and will not be
obligated) to take any action, assert any rights or pursue any
remedies under this Agreement or any of the other Loan Documents
without the express written direction and instruction of the
Required Banks or all of the Banks, as the case may be as
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provided for hereunder. If the Managing Agent fails, within a
commercially reasonable time, to take such action as may properly
be directed by the Required Banks or all of the Banks, as the
case may be as provided for hereunder, such parties may, acting
collectively and pursuant to the written consent of the Required
Banks or all of the Banks, as appropriate, take such action in
the Managing Agent's place and stead, on behalf of all Banks.
All notices, Loan Documents, supporting documentation and other
material information required to be delivered by Borrower to the
Managing Agent hereunder shall be delivered to each Bank within a
reasonable time after the Managing Agent's receipt of same by the
Managing Agent. Without limiting the generality of the
foregoing, the Managing Agent shall, within fifteen (15) Business
Days of its receipt of any financial statements or other
financial reporting information, certificates, or notices
hereunder (including, without limitation, the evidence of
insurance required by Section 3.1(r), above), received by the
Managing Agent in connection with this Agreement, forward the
same to the Banks, unless a shorter period for the transmittal of
any such item is required by other provisions of this Agreement.
Additionally, the Managing Agent shall promptly provide the Banks
with copies of all notices which the Managing Agent sends to
Borrower pursuant to this Agreement. Additionally, the Managing
Agent shall, if any Bank shall request other documents furnished
to the Managing Agent by the Borrower in connection with this
Agreement or the transactions contemplated hereby, furnish the
same to the requesting Bank within fifteen (15) Business Days
after its request therefor. No Bank (specifically including any
Bank which is the holder of a Competitive Bid Note which
evidences an outstanding Competitive Bid Loan made by such Bank
but excluding the Managing Agent, acting in its capacity as the
Managing Agent) shall be entitled to take any enforcement action
of any kind under any of the Loan Documents, except as expressly
provided in this Agreement. Without limiting the generality of
the foregoing, no Bank which is the holder of a Competitive Bid
Note evidencing an outstanding Competitive Bid Loan made by such
Bank may initiate or prosecute any remedial or enforcement action
in consequence of Borrower's failure to pay any principal or
interest in respect of such Competitive Bid Loan except through
the Managing Agent and at the direction of the Required Banks,
and otherwise upon and subject to the procedures applicable to
Events of Default under this Agreement. Action that may be taken
by Required Banks or all of the Banks, as the case may be as
provided for hereunder, may be taken pursuant to a vote at a
meeting (which may be held by telephone conference call) of all
Banks, or pursuant to the written consent or direction of such
Banks. Each Bank shall be entitled to request such reasonable
information about Borrower from the Managing Agent as such Bank
may determine to be appropriate.
Section 8.8 Defaults. The Managing Agent will
promptly notify each Bank of any Default or Event of Default or
any failure by Borrower to make any payment in respect of any of
the Notes, provided, however, that the Managing Agent shall not
be deemed to have knowledge of any item until such time as the
Managing Agent's officers responsible for administration of the
Loans shall receive written notice thereof or have actual
knowledge of such event. If any Bank (including without
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limitation any Bank which is the holder of a Competitive Bid Note
evidencing an outstanding Competitive Bid Loan made by such Bank)
shall become aware of any Default or Event of Default, it shall
promptly notify the Managing Agent and each other Bank thereof,
provided, however, that no Bank shall be deemed to have knowledge
of any Default or Event of Default until such time as its
officers responsible for administration of the Loans shall
receive written notice thereof or shall have actual knowledge of
such event.
Section 8.9 Amendments, Waivers and Consents. Any
provision of this Agreement, the Notes or the other Loan
Documents may be amended or waived upon the consent of the
Required Banks; and after such consent the Managing Agent, on
behalf of all Banks, may execute and deliver to Borrower a
written instrument waiving or amending such provision; provided,
however, that the written consent of the Managing Agent and all
of the Banks will be necessary for any amendment or waiver which
would result in (i) a change in the Maximum Commitment which
would increase the same to an amount greater than Two Hundred
Fifty Million Dollars ($250,000,000); (ii) a reduction in the
interest rates payable by Borrower hereunder or thereunder or in
the amount of the Facility Fee, Letter of Credit Fee, or Letter
of Credit Commission; (iii) a change in the payment schedule;
(iv) a change in this paragraph or of the definition of "Required
Banks" or any provision of this Agreement which requires consent
or action of all Banks for action thereunder; or (v) a release of
any collateral or guaranty.
Section 8.10 Indemnification. Each Bank agrees to
indemnify the Managing Agent (in its capacity as the Managing
Agent hereunder and not in its capacity as a Bank, and to the
extent that the Managing Agent is not promptly reimbursed by
Borrower), in accordance with (and limited to) such Bank's
respective Participation Percentage, from and against any and all
liabilities, obligations, losses, damages, penalties, interests,
actions, judgments and suits of any kind or nature whatsoever
which may be imposed on, incurred by or asserted against the
Managing Agent (solely in its capacity as Managing Agent
hereunder) relating to or arising out of this Agreement or any of
the other Loan Documents or relating to any action taken or
omitted by the Managing Agent under this Agreement or any of the
other Loan Documents, provided that no Bank shall be liable under
this Section 8.11 for any portion of such liabilities,
obligations, losses, damages, penalties, interest, actions,
judgments or suits resulting from the Managing Agent's gross
negligence or willful misconduct.
Section 8.11 Reimbursement of the Managing Agent.
Upon the occurrence of an Event of Default which Borrower has not
cured within a reasonable period of time and subject to the
consent of the Required Banks (or all Banks, as appropriate) to
the taking by the Managing Agent of any action under the Loan
Documents, each Bank further agrees to reimburse the Managing
Agent, in accordance with (and limited to) such Bank's respective
Participation Percentage, for all out-of-pocket costs or expenses
reasonably incurred by the Managing Agent in connection with its
duties under this Agreement, but only to the extent such fees,
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disbursements, expenses and compensation have not been promptly
reimbursed to the Managing Agent by Borrower. If any such sums
are reimbursed to the Managing Agent by Borrower after one or
more Banks have reimbursed the Managing Agent for such sums, the
Managing Agent will refund such sums ratably to the Banks which
contributed such sums.
Section 8.12 Dealing with the Banks. The Managing
Agent may at all times deal solely with the several Banks for all
purposes of this Agreement and the protection, enforcement and
collection of the Notes, including without limitation the
acceptance and reliance upon any certificate, consent or other
document executed on behalf of one or more of the Banks and the
division of payments pursuant to Sections 2.4, 2.5, 2.6 or 8.5
hereof. The Managing Agent shall not have a fiduciary
relationship in respect of any Bank by reason of this Agreement.
The Managing Agent shall have no implied duties to the Banks, or
any obligation to the Banks to take any action hereunder except
for those actions which are specifically provided by this
Agreement to be taken by the Managing Agent. No Bank shall have
a fiduciary relationship in respect of the Managing Agent by
reason of this Agreement. No Bank shall have any implied duties
to the Managing Agent, or any obligation to the Managing Agent to
take any action hereunder except any action specifically provided
by this Agreement to be taken by the Banks.
Section 8.13 The Managing Agent as Bank. NCB shall,
in its capacity as a Bank under the Loan Documents, have the same
obligations, rights, remedies, powers and privileges under the
Loan Documents as it would have were it not also the Managing
Agent.
Section 8.14 Duties Not to be Increased. The duties
and liabilities of the Managing Agent under this Agreement and
the other Loan Documents shall not be increased or otherwise
changed without its express prior written consent. The Managing
Agent shall have no duty to provide information to the Banks
except as expressly set forth herein.
Section 8.15 Bank Credit Decisions. Each Bank
acknowledges that it has, independently of and without reliance
upon the Managing Agent or any of the other Banks, made its own
credit analysis and decision to enter into this Agreement and the
other Loan Documents to which it is a party. Each Bank also
acknowledges that it will, independently of and without reliance
upon the Managing Agent or any of the other Banks, continue to
make its own credit decisions in taking or not taking action
under this Agreement or any of the other Loan Documents and in
determining the compliance or lack thereof by Borrower and any
other Person with any provision of any Loan Document or other
document or agreement.
Section 8.16 Resignation of the Managing Agent. NCB
and any successor Managing Agent may resign as such at any time
by giving at least ninety (90) days' prior written notice of
resignation to each Bank and to Borrower. Such resignation will
be effective on the date which is specified in such notice. Upon
any such resignation by NCB as Managing Agent, or in the event
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the office of Managing Agent shall thereafter become vacant for
any other reason, the Required Banks shall appoint a successor
Managing Agent, by an instrument in writing signed by the
Required Banks and delivered to such successor Managing Agent
and Borrower, whereupon such successor Managing Agent shall
succeed to all of the rights and obligations of the resigning
Managing Agent as if originally named. The resigning Managing
Agent shall duly assign, transfer and deliver to such successor
Managing Agent all moneys at the time held by it hereunder, after
deducting therefrom its expenses for which it is entitled to be
reimbursed. Upon such succession of any such successor Managing
Agent, the prior Managing Agent shall thereafter be discharged
from its duties and obligations hereunder. After the resignation
of an Managing Agent, the provisions of this Section shall
continue in effect for its benefit in respect of any actions
taken or omitted to be taken by it while it was acting as
Managing Agent.
Section 8.17 Assignment of Notes: Participation.
(a) Each Bank may assign to one or more banks or other financial
institutions all or a portion of its rights and obligations under
this Agreement, the Ratable Notes, the Competitive Bid Notes and
the other Loan Documents; provided that (i) for each such
assignment, the parties thereto shall execute and deliver an
assignment and assumption agreement, in form and substance
acceptable to the Managing Agent, together with any Notes subject
to such assignment, and (ii) no such assignment shall be for less
than Five Million and 00/100 Dollars ($5,000,000.00) of the
aggregate of the assigning Bank's Credit Commitment, unless such
assignment is to a then-current holder of a Note. Any Bank
proposing to effect an assignment hereunder shall provide prior,
written notice of its intention to do so to Borrower and the
Managing Agent; such notice shall identify the proposed assignee
and the amount and terms of such proposed assignment. Borrower
and the Managing Agent shall each have the right to approve the
proposed assignee (and each hereby agrees not unreasonably to
withhold its approval), provided, however, that Borrower shall
have no right to approve (or to refrain from approving) if, at
the time of its receipt of any notice proposing an assignment,
any Default or Event or Default shall exist. In addition, in the
event of the occurrence of an Event of Default which remains
uncured for a period of ninety (90) days or more from the date on
which it occurred, the Managing Agent shall not, from and after
the expiration of such ninety (90) day period have the right to
approve (or disapprove) any assignment which otherwise complies
with the requirements set forth in this Section 8.17(a). Subject
to the foregoing, upon the delivery of an executed assignment and
assumption agreement as described in the preceding sentence to
the Managing Agent, from and after the date specified as the
effective date therein (the "Acceptance Date"), (x) the assignee
thereunder shall be a party hereto, and, to the extent that
rights and obligations hereunder have been assigned to it
pursuant to such agreement, such assignee shall have the rights
and obligations of a Bank hereunder; and (y) the assignor
thereunder shall, to the extent that rights and obligations
hereunder have been assigned by it pursuant to such agreement,
relinquish its rights (other than any rights it may have pursuant
to Section 9.5 which will survive) and be released from its
95
obligations under this Agreement (and, in the case of an
assignment covering all or the remaining portion of an assigning
Bank's rights and obligations under this Agreement, such Bank
shall cease to be a party hereto).
(b) Each Bank may sell participations of up to fifty
percent (50%) of its rights and obligations under the Loan
Documents, excluding Competitive Bid Loans, to one or more
Persons; provided, however, that (i) any selling Banks'
obligations under the Loan Documents shall remain unchanged by
any such participation, (ii) such Bank shall remain solely
responsible to the other parties hereto for the performance of
such obligations, (iii) such Bank shall remain the holder of its
Note for all purposes of the Loan Documents, (iv) the
participating banks or other entities shall be entitled to the
cost protection provisions of Sections 2.10 and 9.5 hereof, but a
participant shall not be entitled to receive pursuant to such
provisions an amount larger than its share of the amount to which
the Bank granting such participation would have been entitled,
(v) Borrower, the Managing Agent and the other Banks shall
continue to deal solely and directly with the selling Bank in
connection with such Bank's rights and obligations under the Loan
Documents, and (vi) no such transfer shall include the transfer
of any of such Bank's rights to grant consents or approve
amendments or modifications to the Loan Documents except with
respect to those items requiring the action of or consent by all
Banks or affecting the rights and obligations of Managing Agent.
Each Bank may share any and all information received by it from
or on behalf of the Borrower pursuant to this Agreement or any of
the other Loan Documents with any participant or prospective
participant of such Bank.
(c) Notwithstanding any other provision of this
Agreement to the contrary, National City Bank agrees that so long
as it shall be the Managing Agent its Credit Commitment shall
equal or exceed the Credit Commitment of any other Bank.
ARTICLE 9.
PROVISIONS OF GENERAL APPLICATION
Section 9.1 Duration. This Agreement shall continue
in full force and effect and the duties, covenants, and
liabilities of Borrower hereunder and all the terms, conditions,
and provisions hereof relating thereto shall continue to be fully
operative until all Obligations to the Managing Agent and each
Bank have been satisfied in full, provided, however that
notwithstanding the provisions of this Section 9.1 the
Commitments shall expire and all Obligations shall be due and
payable on the Termination Date.
Section 9.2 Notices. (a) All notices and other
communications pursuant to this Agreement shall be in writing,
either delivered in hand or sent by recognized overnight courier
service, by certified mail, postage prepaid and return receipt
requested, or by telex, telecopier, facsimile transmission or
telegraph, addressed as follows:
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(i) If to Borrower, to:
Associated Estates Realty Corporation
5025 Swetland Court
Cleveland, Ohio 44143
Telecopier: (216) 289-9600
Attn: Jeffrey I. Friedman, President
with a copy to:
Associates Estates Realty Corporation
5025 Swetland Court
Cleveland, Ohio 44143
Telecopier: (216) 289-9600
Attn: Martin A. Fishman, Esq.,
General Counsel
(ii) If to the Managing Agent, to:
National City Bank
1900 East Ninth Street
Cleveland, Ohio 44101
Telecopier: (216) 575-3160
Attn: Gary L. Wimer, Vice President
with a copy to:
Taft, Stettinius & Hollister
Bond Court Building, Suite 600
1300 East Ninth Street
Cleveland, Ohio 44114
Telecopier: (216) 241-2837
Attn: William K. Smith, Esq.
(iii) If to a Bank, to such Bank's address set forth
on Schedule 1;
or to such other addresses or by way of such telex and other
numbers as any party hereto shall have designated in a written
notice to the other parties hereto.
(b) Except as otherwise expressly provided herein, any
notice or other communication given under this Agreement or any
other Loan Document shall be deemed to have been duly given or
made and to have become effective when delivered in hand to the
party to which it is directed, or, if sent by certified mail, or
by telex, telecopier, facsimile transmission or telegraph, and
properly addressed in accordance with Section 9.2(a): (i) when
received by the addressee; or (ii) if sent by certified mail, on
the date noted on Borrower's return receipt. Any notice sent by
telex, telecopier or facsimile transmission or telegraph shall be
confirmed by a counterpart thereof sent by overnight courier or
hand-delivery.
Section 9.3 Survival of Representations. All
representations and warranties made by or on behalf of Borrower
in this Agreement or any of the other Loan Documents shall be
97
deemed to have been relied upon by the Managing Agent and each
Bank notwithstanding any investigation made by Managing Agent or
any Bank. All such representations and warranties shall survive
the making of each of the Loans and the issuance of the Letters
of Credit until all of the Obligations shall have been paid in
full.
Section 9.4 Amendments. Each of the Loan Documents
may be modified, amended or supplemented in any respect whatever,
only by a written instrument signed by Borrower and the Managing
Agent with the prior written consent or approval of the Required
Banks or all of the Banks (as the case may be), all in accordance
with the terms of Section 8.9 hereof.
Section 9.5 Costs, Expenses, Taxes and
Indemnification. (a) Borrower absolutely and unconditionally
agrees to pay to the Managing Agent, and to reimburse the
Managing Agent for, all reasonable out-of-pocket costs and
expenses (including legal fees and expenses) which shall at any
time be incurred or sustained by the Managing Agent or any of its
directors, officers, employees or agents as a consequence of or
any way in connection with: (a) the preparation, negotiation,
execution and delivery of the Loan Documents; (b) the perfection
and continuation of the rights of the Banks and the Managing
Agent in connection with the Loans; (c) preparation, negotiation,
execution, or delivery of any amendment or modification of any of
the Loan Documents; or (d) in the granting by the Managing Agent
or any Bank of any consents, approvals or waivers under any of
the Loan Documents.
(b) Borrower absolutely and unconditionally agrees to
pay to the Managing Agent, for the account of Managing Agent and
each Bank and upon demand by the Managing Agent or any Bank at
any time and as often as the occasion therefor may require, all
reasonable out-of-pocket costs and expenses which shall be
incurred or sustained by the Managing Agent, any Bank or their
respective directors, officers, employees or agents as a
consequence of, on account of, in relation to or any way in
connection with the exercise, protection or enforcement any of
its rights, remedies, powers or privileges hereunder or under any
of the Loan Documents or in connection with any litigation,
proceeding or dispute arising from or related to any of the Loan
Documents (including, but not limited to, all of the reasonable
fees and disbursements of consultants, legal advisers,
accountants, experts and agents for the Managing Agent or any
Bank, the reasonable travel and living expenses away from home of
employees, consultants, experts or agents of the Managing Agent
or any Bank, and the reasonable fees of agents, consultants and
experts of the Managing Agent or any Bank for services rendered
on its behalf).
(c) Borrower shall absolutely and unconditionally
indemnify and hold harmless the Managing Agent and each Bank
against any and all claims, demands, suits, actions, causes of
action, damages, losses, settlement payments, obligations, costs,
expenses and all other liabilities whatsoever which shall at any
time or times be incurred or sustained by the Managing Agent or
any Bank or by any of their respective shareholders, directors,
98
officers, employees, subsidiaries, Affiliates or agents on
account of, or in relation to, or in any way in connection with,
any of the arrangements or transactions contemplated by,
associated with or ancillary to this Agreement or any of the
other Loan Documents, without regard to whether all or any of the
transactions contemplated by, associated with or ancillary to
this Agreement, or any of such Loan Documents shall ultimately be
consummated.
(d) Borrower hereby covenants and agrees that any sums
expended by the Managing Agent or any Bank for which Managing
Agent or any Bank is entitled to reimbursement under this Section
9.5 shall be immediately due and payable upon demand by the
Managing Agent or any Bank, and shall bear interest at the
Default Interest Rate from the date on which the Managing Agent
or such Bank incurred such expense until the date such payment is
made in full.
(e) Borrower's indemnity obligations under this
Section 9.5 shall not extend to any losses, costs, expenses or
damages proximately caused by the gross negligence or willful
misconduct of any party which, absent this Section 9.5(e), would
be entitled to indemnification hereunder.
Section 9.6 Set-Off; Sharing of Set-Off Proceeds. (a)
Borrower hereby confirms to the Managing Agent and to each Bank
the continuing and immediate rights of set-off of the Managing
Agent and each Bank with respect to all deposits, balances and
other sums credited by or due from Managing Agent or such Bank or
any of their respective offices or branches to Borrower, which
rights are in addition to any other rights which the Managing
Agent or such Bank may have under applicable law. If any
principal, interest or other sum payable by Borrower to the
Managing Agent or any Bank under the Notes or any of the Loan
Documents is not paid punctually as and when the same shall first
become due and payable, or if any Event of Default shall at any
time occur and be continuing, any deposits, balances or other
sums credited by or due from Managing Agent or such Bank or any
of their respective offices or branches to Borrower, may, without
any prior notice of any kind to Borrower, and without any other
conditions precedent now or hereafter imposed by statute, rule or
law or otherwise (all of which are hereby expressly and
irrevocably waived by Borrower), be immediately set off,
appropriated and applied by the Managing Agent or such Bank
toward the payment and satisfaction of the Obligations in
accordance with the provisions of paragraph (b) below.
(b) Each Bank and the Managing Agent agrees that if it
shall receive (whether by payment received otherwise than in
accordance with the terms of the Loan Documents, exercise of the
right of set-off, counterclaim, cross-claim, enforcement of any
claim, or proceedings against Borrower or any other Person or
Persons, proof of claim in bankruptcy, reorganization,
liquidation, receivership or other similar proceedings, or
otherwise), and shall retain and apply to the payment of any of
the Obligations owing to it any amount in excess of its Funded
Percentage of the aggregate of all payments received by all of
the Banks and the Managing Agent in respect of all of the
99
Obligations, such Bank will promptly make such dispositions and
arrangements with the other Banks and the Managing Agent with
respect to such excess, either by way of distribution, pro tanto
assignment of claim, subrogation or otherwise, as shall result in
each of the Banks receiving its Funded Percentage of such
payments.
Section 9.7 Binding Effect; Assignment. This
Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted
assigns; provided, however, that (i) Borrower may not assign or
delegate any of its rights or obligations hereunder without the
express prior written consent of the Managing Agent and all
Banks; and (ii) no Bank may assign or delegate its rights or
obligations hereunder except in accordance with Section 8.18
hereof.
Section 9.8 Governing Law; Jurisdiction and Venue.
(a) This instrument and the rights and obligations of all parties
hereunder shall be governed by and construed under the
substantive laws of the State of Ohio, without reference to the
conflict of laws principles of such state.
(b) The Managing Agent, each Bank and Borrower hereby
designate all state and federal courts of record sitting in
Cleveland, Ohio as forums where any action, suit or proceeding in
respect of or arising out of this Agreement, the Notes, Loan
Documents, or the transactions contemplated by this Agreement may
be prosecuted as to all parties, their successors and assigns,
and each hereby consents to the jurisdiction and venue of such
courts. Borrower waives any and all personal rights under the
laws of any other state to object to jurisdiction within the
State of Ohio for the purposes of litigation to enforce the
Obligations of Borrower. In the event any such litigation shall
be commenced, Borrower agrees that service of process may be
made, and personal jurisdiction over Borrower obtained, by
service of a copy of the summons, complaint and other pleadings
required to commence such litigation upon Borrower's appointed
Managing Agent for Service of Process in the State of Ohio, which
the undersigned hereof designates to be: Martin A. Fishman,
Esq., 5025 Swetland Court, Cleveland, Ohio 44143. Borrower
recognizes and agrees that such designation agency has been
created for the benefit of the Borrower, and the parties agree
that this designation shall not be revoked, withdrawn, or
modified without the prior written consent of the Managing Agent.
Section 9.9 WAIVER OF JURY TRIAL. AS A MATERIAL
INDUCEMENT FOR THE BANKS TO EXTEND CREDIT TO BORROWER, AND AFTER
HAVING THE OPPORTUNITY TO CONSULT COUNSEL, BORROWER HEREBY
EXPRESSLY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY LAWSUIT OR
PROCEEDING RELATING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN
DOCUMENTS OR ARISING IN ANY WAY FROM THE OBLIGATIONS.
Section 9.10 Waivers. Borrower waives notice of
nonpayment, demand, notice of demand, presentment, protest and
notice of protest with respect to the Obligations, or notice of
acceptance hereof, notice of the Loans made, credit extended, or
any other action taken in reliance hereon, and all other demands
100
and notices of any description, except for those notices which
are expressly provided for herein.
Section 9.11 Integration of Schedules and Exhibits.
The Exhibits and Schedules annexed to this Agreement are part of
this Agreement and are incorporated herein by reference.
Section 9.12 Headings. The table of contents,
headings of the Articles, Sections and paragraphs of this
Agreement have been inserted for convenience of reference only
and shall not be deemed to alter, limit or affect the scope,
meaning or interpretation of any provision of this Agreement.
Section 9.13 Counterparts. This Agreement may be
executed in any number of counterparts, and signature pages but
all of such counterparts shall together constitute a single
agreement. In making proof of this Agreement, it shall not be
necessary to produce or account for more than one counterpart
hereof signed by each of the parties hereto.
Section 9.14 Severability. If any provision of this
Agreement, or the application thereof to any person or
circumstance shall be invalid or unenforceable to any extent, the
balance of this Agreement and the application of all provisions
of this Agreement to all other persons and circumstances shall
not be affected thereby; each provision of this Agreement shall
remain valid and enforceable to the fullest extent permitted by
law.
Section 9.15 Miscellaneous. All of the rights of the
Managing Agent and each Bank contained in this Agreement shall
likewise apply insofar as applicable to any modification of or
supplement to this Agreement. No officers, directors,
shareholders or employees of Borrower shall have any personal
liability for any obligations under this Agreement or as a result
of any documents or certificates delivered pursuant to this
Agreement, except in cases of actual fraud or willful misconduct;
provided, however, that nothing in this sentence shall be deemed
in any way to limit the absolute and unconditional liability of
Borrower for the full and timely payment, observance and
performance of all of its obligations hereunder.
Section 9.16 Confidentiality. (a) Borrower
acknowledges that from time to time financial advisory,
investment banking and other services may be offered or provided
to Borrower or one or more of its Affiliates by the Managing
Agent or any Bank, or by their respective Affiliates, and
Borrower hereby authorizes the Managing Agent and each Bank to
share any information delivered to it by Borrower or its
Affiliates pursuant to this Agreement, or in connection with
their respective decisions to enter into this Agreement, with any
such Affiliate, it being understood that any such Affiliate
receiving such information shall be bound by the provisions of
clause (b) below as if it were a Bank hereunder.
(b) Each Bank and the Managing Agent agrees to keep
confidential, in accordance with their customary procedures for
handling confidential information, any non-public information
101
supplied to it by Borrower pursuant to this Agreement which is
identified by Borrower as being confidential at the time the same
is delivered to Managing Agent or any Bank. Notwithstanding the
foregoing to the contrary, the Managing Agent and any Bank may
disclose any such information: (i) to the extent required by
statute, rule, regulation or judicial process, (ii) to its
counsel, (iii) to regulatory personnel, auditors or accountants,
(iv) to the Managing Agent or any other Bank, (v) in connection
with any litigation to which any one or more of the Banks or the
Managing Agent is a party, (vi) to an Affiliate of Managing Agent
or any Bank as provided in clause (a) above, or (vii) to any
assignee or participant (or prospective assignee or participant)
so long as such assignee or participant (or prospective assignee
or participant) agrees to be bound by the provisions hereof.
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IN WITNESS WHEREOF, the parties have caused this Credit
Agreement to be signed by their respective officers as of the day
first above written.
BORROWER:
ASSOCIATED ESTATES REALTY CORPORATION
By: /s/ Jeffrey I. Friedman
------------------------------
Print Name:Jeffrey I. Friedman
Title: President
5025 Swetland Court
Cleveland, Ohio 44143
Telephone: (216) 261-5000
Facsimile: (216) 289-9600
Attn: Jeffrey I. Friedman, President
MANAGING AGENT:
NATIONAL CITY BANK
By: /s/ Gary L. Wimer
------------------------------
Gary L. Wimer
Vice President
National City Center
1900 East Ninth Street
Locator No. 2118
Cleveland, Ohio 44114
Telephone: (216) 575-2233
Facsimile: (216) 575-3160
Attn: Gary L. Wimer, Vice President
Investment Real Estate Div.
THE DOCUMENTATION AGENT:
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By: /s/ Richard G. Baer, Jr.
-------------------------------
Print Name: Richard G. Baer
Title: Vice President
231 South LaSalle Street, 12-Q
Chicago, Illinois 60697
Telephone: (312) 828-5149
Facsimile: (312) 974-4970
Attn: Richard G. Baer, Jr.,
Vice-President
THE BANKS:
NATIONAL CITY BANK
By: /s/ Gary L. Wimer
------------------------------
Gary L. Wimer
Vice President
National City Center
1900 East Ninth Street
Locator No. 2118
Cleveland, Ohio 44114
Telephone: (216) 575-2233
Facsimile: (216) 575-3160
Attn: Gary L. Wimer, Vice President
Investment Real Estate Div.
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By: /s/ Richard G. Baer, Jr.
--------------------------------
Print Name: Richard G. Baer, Jr.
Title: Vice President
231 South LaSalle Street, 12-Q
Chicago, Illinois 60697
Telephone: (312) 828-5087
Facsimile: (312) 974-4970
Attn: Richard G. Baer, Jr.,
Vice-President
BANK ONE, N.A.
By: /s/ Douglas D. Lyons
---------------------------------
Print Name:Douglas D. Lyons
Title: Vice President
30 South Park Place
Painesville, Ohio 44077
Telephone: (440) 352-5580
Facsimile: (440) 352-5971
Attn: Douglas Lyons, Vice-President
MANUFACTURERS AND TRADERS TRUST COMPANY
By: /s/ Kevin B. Quinn
--------------------------------
Print Name: Kevin B. Quinn
Title: Assistant Vice President
One Fountain Plaza
Buffalo, New York 14203-1495
Telephone: (716) 848-7337
Facsimile: (716) 848-7318
Attn: Kevin B. Quinn,
Assistant Vice President
HARRIS TRUST & SAVINGS BANK
By: /s/ Gregory M. Bins
---------------------------------
Print Name: Gregory M. Bins
Title: Vice President
111 West Monroe Street
Chicago, Illinois 60690
Telephone: (312) 461-2203
Facsimile: (312) 461-2968
Attn: Gregory M. Bins,
Vice President
HUNTINGTON BANK - CLEVELAND, N.A.
By: /s/ Gerald A. Buck
---------------------------------
Print Name: Gerald A. Buck
Title: Vice President
917 Euclid Avenue
Cleveland, Ohio 44115
Telephone: (216) 515-6882
Facsimile: (216) 515-6369
Attn: Gerald A. Buck,
Vice President
CITIZENS BANK OF RHODE ISLAND
By: /s/ John K. Cooper
----------------------------
Print Name: John K. Cooper
Title: Vice President
One Citizens Plaza
Fourth Floor
Providence, Rhode Island 02903
Telephone: (401) 456-7283
Facsimile: (401) 455-5410
Attn: John K. Cooper
Vice President
FIRSTMERIT BANK, N.A.
By: /s/ Peter D. Collins
---------------------------------
Print Name: Peter D. Collins
Title: Vice President
123 West Prospect Avenue
Cleveland, Ohio 44115-1070
Telephone: (216) 694-5638
Facsimile: (216) 621-3201
Attn: Peter D. Collins,
Vice President
SOUTHTRUST BANK, N.A.
By: /s/ Sam Boroughs
--------------------------------
Print Name: Sam Boroughs
Title: Assistant Vice President
420 North 20th Street
Birmingham, Alabama 35203
Attn: Sam Boroughs
Telephone: (205) 254-5039
Facsimile: (205) 254-5022
COMMERZBANK AKTIENGESELLSCHAFT
By: /s/ Douglas P. Traynor
---------------------------------
Print Name: Douglas P. Traynor
Title: Vice President
By: /s/ James J. Henry
---------------------------------
Print Name: James J. Henry
Title: Senior Vice President
Two World Financial Center
New York, New York 10281-1050
Attn: Douglas Traynor, Vice President
Telephone: (212) 266-7569
Facsimile: (212) 266-7565
107
SCHEDULE 1
to
First Amendment to
Credit Agreement
<TABLE>
<CAPTION>
Participation
Bank Percentage Credit Commitment
------------------ ------------- -----------------
<S> <C> <C>
National City Bank 14% $ 35,000,000
Bank of America National 14% $ 35,000,000
Trust and Savings
Association
Manufacturers and Traders 8% $ 20,000,000
Trust Company
Harris Trust & Savings Bank 10% $ 25,000,000
Bank One, N.A. 12% $ 30,000,000
Huntington Bank - 10% $ 25,000,000
Cleveland, N.A.
Citizens Bank of 8% $ 20,000,000
Rhode Island
FirstMerit Bank, N.A. 4% $ 10,000,000
SouthTrust Bank, N.A. 10% $ 25,000,000
Commerzbank 10% $ 25,000,000
Aktiengesellschaft
--- ------------
100% $250,000,000
</TABLE>
