<PAGE> 1
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SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12.
</TABLE>
ASSOCIATED ESTATES REALTY CORPORATION
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: .......
(2) Aggregate number of securities to which transaction applies: ..........
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: ...................................
(4) Proposed maximum aggregate value of transaction: ......................
(5) Total fee paid: .......................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ...............................................
(2) Form, Schedule or Registration Statement No.: .........................
(3) Filing Party: .........................................................
(4) Date Filed: ...........................................................
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<PAGE> 2
ASSOCIATED ESTATES REALTY CORPORATION
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
------------------------
The annual meeting of shareholders of Associated Estates Realty
Corporation, an Ohio corporation (the "Company"), will be held at The Forum, One
Cleveland Center, 1375 E. Ninth St., Cleveland, Ohio 44114, on Wednesday, May
12, 1999, at 10:00 a.m. (EDT) for the following purposes:
1. To fix the number of directors at nine;
2. To elect nine directors, each to serve until the next annual
meeting of shareholders and until his successor has been duly
elected and qualified; and
3. To transact such other business as may properly come before the
meeting.
Only shareholders of record at the close of business on March 22, 1999 will
be entitled to notice of and to vote at the meeting or any adjournment thereof.
Shareholders are urged to complete, date and sign the enclosed proxy and return
it in the enclosed envelope.
By Order of the Board of Directors,
Martin A. Fishman
Secretary
Dated: March 31, 1999
YOUR VOTE IS IMPORTANT. PLEASE SIGN, DATE AND RETURN YOUR PROXY.
<PAGE> 3
ASSOCIATED ESTATES REALTY CORPORATION
PROXY STATEMENT
We are sending you this proxy statement in connection with the solicitation
of proxies to be used at the annual meeting of shareholders of Associated
Estates Realty Corporation (the "Company"), to be held at The Forum, One
Cleveland Center, 1375 E. Ninth St., Cleveland, Ohio 44114, on Wednesday, May
12, 1999, at 10:00 a.m. (EDT) and at any adjournment of that meeting. This proxy
statement and the accompanying notice and proxy are first being sent to
shareholders on or about March 31, 1999. The Company's Annual Report to
Shareholders for the year ended December 31, 1998 is being sent to you together
with this proxy statement.
If you return the enclosed proxy, the common shares represented by your
proxy will be voted as you specify in the proxy. In the absence of any such
specification, they will be voted to fix the number of directors at nine and to
elect the directors set forth under the caption "ELECTION OF DIRECTORS".
Your presence alone at the annual meeting will not be sufficient to revoke
your proxy. You may revoke your proxy at any time before it has been exercised
by filing with the Company a written notice of revocation or a duly executed
proxy bearing a later date or by giving notice of revocation to the Company in
open meeting.
This solicitation of proxies is made by and on behalf of the Board of
Directors. The cost of solicitation will be borne by the Company. In addition to
solicitation of proxies by mail, officers and regular employees of the Company
may solicit proxies in person, by telephone or facsimile.
The record date for determining shareholders entitled to notice of and to
vote at the annual meeting is March 22, 1999. On that date, the Company had
outstanding 22,596,665 common shares. Each common share is entitled to one vote
at the annual meeting.
PROPOSAL ONE: TO FIX THE NUMBER OF DIRECTORS AT NINE
The Company's Code of Regulations provides that the number of directors
shall be fixed by the shareholders at no fewer than three nor more than 15. The
number of directors has been fixed at seven and there are currently seven
directors on the Board. All seven current members of the Board are nominated for
re-election. The Board of Directors is proposing that the number of directors be
increased to nine. The Board believes that James M. Delaney and Louis E. Vogt
could make significant contributions as directors and has nominated them for
election if the proposal to increase the size of the Board is approved.
The affirmative vote of a majority of the issued and outstanding common
shares of the Company is required for approval of this proposal.
The Board of Directors recommends that the shareholders vote FOR this
proposal.
PROPOSAL TWO: ELECTION OF DIRECTORS
If Proposal One is adopted, the number of directors will be fixed at nine.
At the annual meeting, unless you specify otherwise, the common shares
represented by your proxy will be voted to re-elect Messrs. Friedman, Adams,
McDonough, Milstein, Mosier, Schwarz and Wright and, if Proposal One is adopted,
to elect Messrs. Delaney and Vogt. If elected, each nominee will serve as a
director until the next annual meeting of shareholders and until his successor
is duly elected and qualified.
<PAGE> 4
If for any reason any of the nominees is not a candidate (which is not
expected) when the election occurs, the common shares represented by your proxy
will be voted for the election of a substitute nominee designated by the Board
of Directors.
NOMINEES FOR ELECTION AT THE ANNUAL MEETING
<TABLE>
<CAPTION>
DIRECTOR
NAME AND AGE PRINCIPAL OCCUPATION SINCE
------------ ------------------------------------------------------ --------
<S> <C> <C>
Jeffrey I. Friedman, 47 Chairman of the Board of Directors, President and
Chief Executive Officer of the Company 1993
Albert T. Adams, 48 Partner, Baker & Hostetler LLP 1996
James M. Delaney, 64 Retired N/A
Gerald C. McDonough, 70 Retired 1993
Mark L. Milstein, 36 President of Adam Construction Company 1993
Frank E. Mosier, 68 Retired 1993
Richard T. Schwarz, 47 Partner, Sycamore Partners LLC 1994
Louis E. Vogt, 49 Senior Vice President, Operations, of the Company N/A
Larry E. Wright, 51 Executive Vice President of the Company 1998
</TABLE>
Jeffrey I. Friedman has been Chairman of the Board, President and Chief
Executive Officer of the Company since its organization in July 1993. Mr.
Friedman joined Associated Estates Corporation, the Company's predecessor, in
1974 and was its Chief Executive Officer and President from 1979 to 1993. Mr.
Friedman is the brother-in-law of Mark L. Milstein.
Albert T. Adams has been a partner with the law firm of Baker & Hostetler
LLP in Cleveland, Ohio, since 1984, and has been affiliated with the firm since
1977. Mr. Adams is a director of American Industrial Properties REIT, Boykin
Lodging Company, Captec Net Lease Realty, Inc., Dairy Mart Convenience Stores,
Inc. and Developers Diversified Realty Corporation.
James M. Delaney served as office managing partner of Deloitte & Touche, a
public accounting firm, from 1989 until his retirement in June 1997, having
joined its predecessor firm in 1958.
Gerald C. McDonough served as Chairman and Chief Executive Officer of
Leaseway Transportation Corp., a highway transportation company, from 1982 until
his retirement in July 1988. Mr. McDonough serves as an Independent Trustee of
The Fidelity Funds and is a director of Commercial Intertech Corporation, CUNO,
Inc. and York International Corporation.
Mark L. Milstein has been President of Adam Construction Company, a general
contractor, since 1993 and has been a Senior Project Manager for Adam
Construction Company since 1988. Mr. Milstein is the brother-in-law of Jeffrey
I. Friedman.
Frank E. Mosier served as Vice Chairman of the Advisory Board of BP America
Inc., a producer and refiner of petroleum products, from 1991 to 1993. Mr.
Mosier was Vice Chairman of BP America Inc. from 1988 until his retirement in
1991 and President and Chief Operating Officer of BP America Inc. from 1986 to
1988. Mr. Mosier serves as a director of Boykin Lodging Company.
Richard T. Schwarz is a partner in Sycamore Partners LLC, a private
investment firm focused on investments in specialty chemical companies. Mr.
Schwarz was President and Chairman of Combined Industries from September 1997 to
January 1998 and was President of Laurel Industries, Inc., a subsidiary of
Occidental Petroleum Corporation, from September 1996 to September 1997. Mr.
Schwarz was Executive Vice President and General Manager, Antimony Division,
Laurel Industries, Inc. from 1983 to August 1996.
Louis E. Vogt has been Senior Vice President, Operations, of the Company
since its acquisition of MIG Realty Advisors, Inc. on June 30, 1998. Prior to
that, Mr. Vogt was Senior Vice President and Chief Operating Officer of MIG
Realty Advisors, Inc. since 1992.
2
<PAGE> 5
Larry E. Wright has been Executive Vice President of the Company since its
acquisition of MIG Realty Advisors, Inc. on June 30, 1998. Prior to that, Mr.
Wright was Chairman, President and Chief Executive Officer of MIG Realty
Advisors, Inc. since 1982.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Audit Committee, an Executive Compensation
Committee, an Executive Committee and a Pricing Committee. The Board of
Directors does not have a nominating committee. The Board of Directors held five
meetings in 1998. In 1998, each member of the Board of Directors attended at
least 75% of the meetings of the Board of Directors and of the committees of
which he was a member.
Audit Committee. The Audit Committee consists of Messrs. McDonough
(Chairman), Adams, Mosier and Schwarz. The Audit Committee recommends
independent public accountants, reviews with the independent public accountants
the audit plans and results of the audit, approves professional services
provided by the independent public accountants, reviews the independence of the
independent public accountants, considers the range of audit and non-audit fees
and reviews the adequacy of the Company's internal accounting controls. The
Audit Committee held two meetings in 1998.
Executive Compensation Committee. The Executive Compensation Committee
consists of Messrs. Mosier (Chairman), Adams, McDonough and Schwarz. The
Executive Compensation Committee determines compensation for the Company's
elected officers and administers the Company's equity and incentive plans. The
Executive Compensation Committee held three meetings in 1998.
Executive Committee. The Executive Committee consists of Messrs. Friedman
(Chairman), Milstein and Wright. The Executive Committee possesses the power of
the Board of Directors in the management of the business and affairs of the
Company (other than filling vacancies on the Board or any committees of the
Board) during intervals between meetings of the Board of Directors. The
Executive Committee did not hold any meetings in 1998.
Pricing Committee. The Pricing Committee consists of Messrs. Friedman
(Chairman), Adams and Wright. The Pricing Committee is authorized to approve the
price and terms of offerings of the Company's debt and equity securities of up
to an aggregate amount of $50 million. The Pricing Committee did not hold any
meetings in 1998.
COMPENSATION OF DIRECTORS
The Company pays an annual fee of $16,000, plus a fee of $1,000 for each
Board or committee meeting attended, to its directors who are not employees of
the Company. Directors who are also employees of the Company are not paid any
director fees. Each director is reimbursed for expenses incurred in attending
meetings.
Non-employee directors are permitted to defer all or a portion of their
fees pursuant to the Company's Directors' Deferred Compensation Plan. The plan
is unfunded and participants' contributions are converted to units, the value of
which fluctuates according to the market value of the Company's common shares.
As of December 31, 1998, Messrs. Schwarz and Adams each held 3,166 units
pursuant to the plan.
EXECUTIVE COMPENSATION
REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE
Introduction. The Executive Compensation Committee of the Company's Board
of Directors (the "Committee") is responsible for determining compensation to be
paid to the Company's elected officers. The Committee members are Frank E.
Mosier (Chairman), Albert T. Adams, Gerald C. McDonough and Richard T. Schwarz.
The Committee is also responsible for making major policy decisions with respect
to retirement and other benefit plans and administering the Company's Annual
Incentive Plan, Long-Term Incentive Compensation Plan, Share Incentive Plan,
Equity-Based Incentive Compensation Plan and
3
<PAGE> 6
Supplemental Executive Retirement Plan. The Committee carries out its duties
working in conjunction with the Company's human resources officer and executive
compensation consultants, Watson Wyatt Worldwide.
Governing Principles. The Company's Executive Compensation Philosophy
Statement is:
- To support the creation of shareholder value along with the
achievement of other key corporate objectives;
- To attract and retain top organizational contributors to ensure the
Company has the caliber of executives it needs to be successful;
- To focus attention on both current priorities and longer-term
performance of the Company;
- To link an appropriate level of variable compensation to Company and
individual performance based upon position, responsibilities and
ability to influence financial and organizational objectives; and
- To promote and reflect the Company's core values.
Additionally, the Company subscribes to several major tenets in delivering
compensation to its executives:
- Executives should be compensated equitably in light of their
contributions to the Company;
- Compensation should be competitive, in total, given relevant market
practices and performance;
- Compensation should be viewed in the context of a totally integrated
program rather than as individual pay components;
- The administration of the program should be consistent, fair and
fact-based; and
- Stock-based awards should be a significant element of total
compensation.
The key components of the Company's executive compensation program are base
salary, annual incentives, longer-term, stock-based incentives, and retirement
and welfare benefits. Each of these components operates within an integrated
total compensation program. The total compensation mix attributable to the
weighting of each of these components will reflect the competitive market and
may be adjusted from time to time to best support the Company's business
objectives.
The integrated total compensation package is intended to compensate the
Company's officers at the competitive labor market peer group median and provide
the opportunity to earn incentive-based compensation driven by the
accomplishment of performance expectations. The competitive peer group largely
corresponds to the peer group identified on page 10. The Committee believes the
executive compensation program, in total, is reflective of competitive market
practices relative to the peer group.
Base Salary. Base salary serves as the cornerstone for the executive
compensation program and recognizes the relative value that an individual's
contribution brings to the Company. Executives' base salaries are reviewed
annually and adjusted, as appropriate, to reflect changes in the labor market
peer group as well as individual performance, range of responsibilities relative
to the Company's business plan, demonstrated competencies, value, contribution
to the organization, experience and professional growth and development.
Annual Incentives. Annual incentives serve as the primary mechanism to
emphasize pay for performance and provide a key means of communicating annual
objectives and priorities. Through annual incentives, executives are rewarded
for short-term financial performance and achievement of established individual
and corporate objectives. In 1998, the potential for annual incentive
opportunities was directly linked to a funds from operations (FFO) per share
benchmark. Funds from operations is defined by NAREIT as net income applicable
to common shares (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 adjustment for unconsolidated partnerships and joint ventures. Annual
incentive opportunities are set at the beginning of each year for eligible
participants. Incentive opportunities are generally targeted to approximate the
Company's competitive labor market peer group. Award payouts may be made in the
form of cash, restricted shares or common shares at the discretion of the
Committee. Given that
4
<PAGE> 7
the Company did not meet its performance benchmarks in 1998, no participant
earned a payout under the Annual Incentive Plan.
Long-Term Incentives. Long-term incentive compensation is delivered through
the Long-Term Incentive Compensation Plan, Share Incentive Plan and Equity-Based
Incentive Compensation Plan. All elected officers are eligible to participate in
all plans.
The Long-Term Incentive Compensation Plan rewards the achievement of
corporate goals that are in the long-term interests of shareholders. The plan is
strictly performance-based and focuses on actions of management to improve the
Company's business as defined by compounded growth in funds from operations per
share over a three-year period. The Committee establishes the funds from
operations growth benchmarks at the beginning of each three-year plan cycle
based upon the performance expectations of the Company. Awards earned under the
plan may be paid in a combination of cash and restricted shares, at the
discretion of the Committee. A new three-year cycle of the plan was established
in January 1998 following completion of the last performance period in December
1997.
The Equity-Based Incentive Compensation Plan and Share Incentive Plan
provide elected officers and other key employees of the Company the opportunity
to earn common shares or share-based incentives. As part of the total
compensation program, the Committee believes that equity-based awards serve as
an important means of attracting and retaining executives who are in a position
to most directly influence the long-term success of the Company. The Committee
also believes that equity-based awards align executives' interests with those of
shareholders by reinforcing the risk of ownership and the importance of
providing competitive long-term, total returns to shareholders. Awards made
under the plans may be in the form of share options, restricted shares or
deferred shares. Share options are granted at no less than 100% of the current
fair market value of the Company's shares on the date of the grant and will only
be of value to the extent the share price increases over time. Generally, share
options and restricted share awards will vest in installments over no less than
a three-year period and, in most cases, in order to exercise the vested options
or have restrictions lapse, the applicable employee must continue to be employed
by the Company. In determining whether and in what amount to make grants under
the plans, the Committee considers, among other factors, competitive long-term
incentive award levels and the scope of responsibility, the anticipated
performance and the contribution to the Company of the proposed award recipient.
Pursuant to these two plans, in connection with base salary adjustments,
restricted share grants were made to Messrs. Dennis W. Bikun and Martin A.
Fishman in 1998. Additionally, share option grants were made in connection with
the acquisition of MIG Realty Advisors, Inc. to key employees, including certain
elected officers as identified in the Summary Compensation Table.
Severance Plan. In February 1999, the Committee adopted a policy regarding
elected officers terminated by the Company for other than cause. Upon an
executive's termination, he or she will receive as severance compensation an
amount equal to one year's salary, a pro rated portion of the executive's bonus
under the Annual Incentive Plan, payment of the cost of his or her health
benefits under COBRA for one year and executive outplacement. In exchange for
this severance, the Company would negotiate a standard agreement and release
with the executive.
Supplemental Executive Retirement Plan. The Company's Supplemental
Executive Retirement Plan (the "SERP") was adopted by the Board of Directors on
January 1, 1997 and is administered by the Committee. This non-qualified,
unfunded, defined contribution plan extends to certain named officers of the
Company nominated by the Chief Executive Officer and approved by the Committee.
The SERP provides for the Company to make a contribution to the account of each
of the participating officers at the end of each plan year. The contribution,
which is a percentage of eligible earnings (including base salary and payments
under the Annual Incentive Plan), is set by the Committee at the beginning of
each plan year. The contribution is treated by the Company as an unfunded
liability until the benefits are paid and a deduction is recognized. The account
balances earn interest each year at a rate that is set by the Committee at the
beginning of each plan year.
On January 1, 1998, Messrs. Bikun, Fishman and Friedman were credited with
the second one-fifth of the opening account balances established for them on
January 1, 1997, the SERP's inception date. This balance,
5
<PAGE> 8
payments for which are being spread over a five-year period, gave the
participants credit for prior years of service with the Company. In addition, on
December 31, 1998, Messrs. Bikun, Fishman and Friedman received contributions of
$10,043, $10,947 and $27,509, respectively, under the SERP.
Each participant's SERP account is vested upon his retirement after age 55.
In addition, pursuant to a 1998 amendment to the SERP adopted by the Committee,
the Committee has the discretion to accelerate vesting upon a participant's
separation from the Company prior to age 55. Upon a Change in Control (as
hereinafter defined), all of the SERP accounts will be fully credited with the
initial contribution if they have not already been credited and will be fully
vested in the participants' accounts. Within 30 days of a Change in Control, the
Company must make a cash contribution to an irrevocable "rabbi" trust in an
amount necessary to fund fully the SERP accounts. For purposes of the SERP, a
Change in Control means the first of the following to occur:
(a) any person or group of commonly controlled persons owns or
controls, directly or indirectly, 50% or more of the voting control or
value of the shares of the Company;
(b) any person or group of commonly controlled persons that owned less
than 5% of the voting control or value of the capital shares of the Company
within 30 days following consummation of the initial public offering of the
Company's common shares owns or controls, directly or indirectly, more than
20% of the voting control or value of the shares of the Company; or
(c) the shareholders of the Company approve an agreement to merge or
consolidate with another corporation or other entity resulting (whether
separately or in connection with a series of transactions) in a change in
ownership of 20% or more of the voting control or value of the shares of
the Company, or an agreement to sell or otherwise dispose of all or
substantially all of the assets (including, without limitation, a plan of
liquidation or dissolution), or otherwise approve a fundamental alteration
in the nature of the Company's business.
Section 162(m) Limitations. The Committee has examined the Company's
potential exposure relating to Section 162(m) of the Internal Revenue Code. In
1995, the Company obtained shareholder approval of the Equity-Based Incentive
Compensation Plan and the Long-Term Incentive Compensation Plan so that amounts
paid under these plans would qualify as performance-based compensation and thus
be exempt from the limitations on deductibility imposed by Section 162(m).
Chief Executive Officer Compensation. The base compensation for Jeffrey I.
Friedman was established and is administered pursuant to an employment agreement
entered into between Mr. Friedman and the Company as of January 1, 1996. For
1998, Mr. Friedman earned a base salary of $458,480. The Committee made no base
salary adjustment for 1998 or 1999. The employment agreement provides for a
performance bonus based upon annual performance benchmarks tied to funds from
operations per share, consistent with the Annual Incentive Plan in which the
other elected officers participate. Mr. Friedman did not earn a bonus in 1998
under his annual performance program and did not receive a grant under either of
the Company's share-based plans.
Executive Compensation Committee
<TABLE>
<S> <C>
Frank E. Mosier, Chairman Albert T. Adams
Gerald C. McDonough Richard T. Schwarz
</TABLE>
6
<PAGE> 9
SUMMARY COMPENSATION TABLE
The following table sets forth information with respect to the compensation
earned by or paid to the Company's Chief Executive Officer and the Company's
other four most highly compensated executive officers who served in such
capacities as of December 31, 1998.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------- -----------------------
RESTRICTED
STOCK STOCK ALL OTHER
FISCAL SALARY BONUS AWARDS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($)(1)
- --------------------------- ------ ------ ----- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey I. Friedman....... 1998 458,480 -0- -0- -0- 65,750
Chairman, President and 1997 458,480 -0- -0- 250,000 72,701
Chief Executive Officer 1996 440,000 227,854 -0- -0- N/A
Martin A. Fishman......... 1998 182,450 -0- -0- -0- 33,974
Vice President, General 1997 161,000 -0- 10,015(2) 70,000 32,567
Counsel and Secretary 1996 154,150 52,277 -0- -0- N/A
Dennis W. Bikun (3)....... 1998 167,385 -0- -0- -0- 26,749
Vice President, Chief 1997 150,000 -0- 10,015(4) 70,000 25,669
Financial Officer and 1996 135,713 42,167 -0- -0- N/A
Treasurer
James A. Cote (5)......... 1998 137,500 -0- -0- 50,000 -0-
Vice President
President, MIG Realty,
Inc.
Larry E. Wright (6)....... 1998 112,500 25,000 -0- 60,000 -0-
Executive Vice President
</TABLE>
- ---------------
(1) Each entry reflects one-fifth of the initial contribution to such officer
under the Supplemental Executive Retirement Plan plus an additional
contribution allocable to that year and interest earned on the account
balances during that year.
(2) Constitutes a grant of 439 common shares on December 3, 1997, which are
subject to restrictions on transfer and forfeiture for a period of three
years from the date of grant. The closing market price of the Company's
common shares on the date of grant was $22.8125.
(3) Mr. Bikun resigned from the Company effective January 8, 1999.
(4) Constitutes a grant of 439 common shares on December 3, 1997, two-thirds of
which were forfeited upon Mr. Bikun's resignation on January 8, 1999. The
closing market price of the Company's common shares on the date of grant was
$22.8125.
(5) Mr. Cote became an employee of the Company on July 1, 1998 in connection
with the Company's merger with MIG Realty Advisors, Inc.
(6) Mr. Wright became an employee of the Company on July 1, 1998 in connection
with the Company's merger with MIG Realty Advisors, Inc.
7
<PAGE> 10
OPTION GRANTS IN 1998
The following table sets forth information with respect to options to
purchase common shares granted by the Company during 1998 to executive officers
named in the Summary Compensation Table:
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS EXERCISE GRANT
UNDERLYING GRANTED TO OF BASE DATE
OPTIONS EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME GRANTED(#) 1998 ($/SH) DATE VALUE($)(1)
---- ---------- ------------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Jeffrey I. Friedman.............. -0- N/A N/A N/A N/A
Martin A. Fishman................ -0- N/A N/A N/A N/A
Dennis W. Bikun.................. -0- N/A N/A N/A N/A
James A. Cote.................... 50,000 20% 24.06 7/1/2009 10,076
Larry E. Wright.................. 60,000 24% 24.06 7/1/2009 12,091
</TABLE>
- ---------------
(1) Based on a Black Scholes pricing model, using a volatility assumption of
16.2% based on the Company's historical weekly stock price history from
November 1993 through the date of the grant. A risk-free rate of return of
5.6%, a dividend yield of 10.6% based on the weighted average annual
dividend yield for 1997 and 1998, and a term of eight years.
AGGREGATED OPTION EXERCISES IN 1998 AND 1998 YEAR-END OPTION VALUES
The following table sets forth information with respect to options to
purchase common shares exercised during 1998 by the executive officers named in
the Summary Compensation Table and the number and value of options held on
December 31, 1998.
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
1998 YEAR- 1998 YEAR-
SHARES VALUE END(#) END($)
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) ($) UNEXERCISABLE UNEXERCISABLE(1)
---- ----------- -------- ------------- ----------------
<S> <C> <C> <C> <C>
Jeffrey I. Friedman.................. -0- N/A 250,000/200,000 -0-/-0-
Martin A. Fishman.................... -0- N/A 34,000/56,000 -0-/-0-
Dennis W. Bikun...................... -0- N/A 34,000/56,000 -0-/-0-
James A. Cote........................ -0- N/A -0-/50,000 -0-/-0-
Larry E. Wright...................... -0- N/A -0-/60,000 -0-/-0-
</TABLE>
- ---------------
(1) Based upon a December 31, 1998 closing price of $11.8125.
EMPLOYMENT AND SEVERANCE AGREEMENTS
The Company has an employment agreement with Jeffrey I. Friedman. 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. Pursuant to this
agreement, Mr. Friedman is required to devote to the Company his entire business
time and may engage in future real estate activities only through the Company.
In addition, Mr. Friedman is prohibited from competing with the Company for a
period of three years following termination of employment. The agreement
provides for the annual base salary set forth under the Summary Compensation
Table, as well as the use of an automobile, membership in a golf club and a
business club, and an allowance of up to $10,000 annually for financial planning
and tax return and preparation service. The agreement provides for an annual
performance bonus of up to 100% of his annual base salary based on the Company
achieving certain funds from operations per share benchmarks. The agreement
contains a provision that upon a change in control (defined identically to the
change in control provision in the SERP), Mr. Friedman is entitled to severance
pay in a lump sum equal to the greater of the amount of unpaid base salary for
the then unexpired term of his employment agreement or
8
<PAGE> 11
one year's base salary at the then effective annual rate of salary, plus in
either case pro rata bonus amounts and accrued benefits.
In connection with the merger with MIG Realty Advisors, Inc. in 1998, the
Company entered into an employment agreement with Larry E. Wright for three
years at an annual base salary of $225,000, plus an annual bonus determined by
the Executive Compensation Committee (with a guaranteed minimum bonus of $50,000
for the first year of employment). Under the terms of the Agreement, Mr. Wright
receives standard health and life insurance benefits and is able to participate
in all other retirement, equity incentive and other benefit plans generally
available for senior executives of the Company. If Mr. Wright's employment is
terminated by the Company without cause, Mr. Wright will be entitled to
severance pay in a lump sum equal to the greater of the amount of unpaid base
salary for the then unexpired term of his employment agreement or one year's
base salary at the then effective annual rate of salary, plus in either case pro
rata bonus amounts and other accrued benefits. The Agreement imposes certain
confidentiality and noncompetition obligations on Mr. Wright during the term of
his employment and for a period of three years following the date of termination
of his employment.
Dennis W. Bikun resigned from the Company effective January 8, 1999.
Pursuant to a Confidential Separation Agreement and Release dated December 30,
1998, Mr. Bikun received cash severance of $175,000, outplacement services, 18
months of Company paid health benefits under COBRA, and accelerated vesting of
the balance in his SERP account (including the remaining two-fifths of the
initial contribution which had not previously been paid). In consideration of
the foregoing, Mr. Bikun agreed to keep information about the Company
confidential, agreed not to solicit any Company employees for two years, and
executed a release for the benefit of the Company and its affiliates.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Executive Compensation Committee are Frank E. Mosier
(Chairman), Albert T. Adams, Gerald C. McDonough and Richard T. Schwarz. For a
discussion of the relationship between the Company and Mr. Adams, see "CERTAIN
TRANSACTIONS."
9
<PAGE> 12
PERFORMANCE GRAPH
A line graph comparing the cumulative total return of a hypothetical
investment in the Company's common shares with the cumulative total return of a
hypothetical investment in each of the Standard & Poor's Composite - 500 Index,
the NAREIT All Equity REIT Index and a peer group of multifamily equity REITs
identified by the Company. The comparison is based on the respective market
prices of each such investment on the dates shown below, assuming an initial
investment of $100 on January 1, 1994 and the reinvestment of dividends.
COMPARISON OF THE CUMULATIVE TOTAL RETURN
AERC COMMON SHARES AND S&P COMPOSITE 500,
NAREIT ALL EQUITY REIT AND PEER GROUP INDICES
<TABLE>
<CAPTION>
ASSOCIATED ESTATES NAREIT ALL EQUITY ASSOCIATED ESTATES
REALTY CORPORATION S&P 500 REIT INDEX REALTY PEER GROUP
------------------ ------- ----------------- ------------------
<S> <C> <C> <C> <C>
01/01/94 100.00 100.00 100.00 100.00
12/31/94 110.32 101.32 103.70 100.03
12/31/95 122.81 139.39 119.48 113.19
12/31/96 147.72 171.26 164.04 152.43
12/31/97 159.89 228.42 198.75 177.64
12/31/98 89.64 293.69 165.71 160.59
</TABLE>
(a) The peer group is comprised of: the Company, AMLI Residential Properties,
Archstone Communities Trust, AvalonBay Communities, Inc., BRE Properties,
Inc., Berkshire Realty Co., Camden Property Trust, Equity Residential
Property Trust, Essex Property Trust, Inc., Gables Residential Trust, Home
Properties of New York, Irvine Apartment Communities, Mid-America Apartment,
Post Properties, Inc., Summit Properties, Inc., Charles E. Smith
Residential, Town & Country Trust, United Dominion Realty Trust and Walden
Residential Properties. The Company's peer group in 1998 also included
Ambassador Apartments, Inc., Bay Apartment Communities, Merry Land &
Investment Co., Oasis Residential, Inc., and Security Capital Pacific Trust.
Changes in the peer group are the result of name changes and consolidation
in the industry.
10
<PAGE> 13
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of common shares of the Company as of February 26, 1999 (except as
otherwise indicated in the footnotes below), by: (a) the Company's Chief
Executive Officer and the other executive officers named in the Summary
Compensation Table; (b) the Company's directors and nominees for director; (c)
each other person who is known by the Company to own beneficially more than 5%
of the outstanding common shares (based on filings with the SEC); and (d) the
Company's executive officers and directors as a group. Except as otherwise
described in the notes below, the following beneficial owners have sole voting
power and sole investment power with respect to all common shares set forth
opposite their names.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF COMMON
COMMON SHARES SUBJECT TO OPTIONS PERCENT
SHARES BENEFICIALLY CURRENTLY EXERCISABLE OR OF
NAME OF BENEFICIAL OWNER OWNED EXERCISABLE WITHIN 60 DAYS TOTAL CLASS
------------------------ ------------------- -------------------------- --------- -------
<S> <C> <C> <C> <C>
Albert T. Adams.................. 2,000 10,000 12,000 *
Dennis W. Bikun.................. 646 34,000 34,646 *
James A. Cote.................... 70,724 -0- 70,724 *
James M. Delaney................. -0- -0- -0- *
Martin A. Fishman (1)............ 2,642 34,000 36,642 *
Jeffrey I. Friedman (2).......... 965,377 250,000 1,215,377 5.32
Gerald C. McDonough.............. 3,500 11,250 14,750 *
Mark L. Milstein (3)............. 1,030,953 -0- 1,030,953 4.56
Frank E. Mosier.................. 4,500 11,250 15,750 *
Richard T. Schwarz (4)........... 43,751 11,250 55,001 *
Louis E. Vogt.................... 37,976 -0- 37,976 *
Larry E. Wright.................. 172,287 -0- 172,287 *
Robert Milstein (5).............. 1,368,324 N/A 1,368,324 6.06
All Executive Officers and
Directors as a Group (13
persons)....................... 2,334,356 361,750 2,696,106 11.74
</TABLE>
- ---------------
* Less than 1%.
(1) Includes 439 common shares granted to the individual on December 3, 1997,
which are subject to restrictions on transfer for a three-year period.
(2) Includes 399,865 common shares owned of record by Susan M. Friedman, Mr.
Friedman's wife, and 13,650 common shares owned beneficially or of record by
Mr. Friedman's children. Mr. Friedman's address is 5025 Swetland Court,
Richmond Heights, Ohio 44143.
(3) Consists of common shares held in a revocable trust of which Mark L.
Milstein is the sole trustee.
(4) Includes 450 common shares held by Mr. Schwarz's children.
(5) Mr. Milstein's address is 7777 Forest Lane Rd., Suite C618, Dallas, Texas
75230.
CERTAIN TRANSACTIONS
Albert T. Adams, a director of the Company, is a partner in Baker &
Hostetler LLP. Baker & Hostetler LLP has been retained by the Company to perform
legal services on its behalf, and the Company expects that Baker & Hostetler LLP
will continue to provide such services during 1999.
In May 1997, the independent directors of the Company approved a loan in
the aggregate amount of $3,342,000 from the Company to Jeffrey I. Friedman. Mr.
Friedman used the proceeds of the loan to purchase 150,000 common shares of the
Company from Mark Milstein. The loan is evidenced by two promissory notes
entered into on May 23, 1997. The notes bear interest, payable quarterly, at an
interest rate equal to the Company's cost of borrowing under its credit facility
with the principal due May 1, 2003. As of March 1, 1999, the interest rate under
the notes was 6.34% per annum. The loan is partially secured by 150,000 common
shares.
11
<PAGE> 14
In the normal course of its management business, the Company previously
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 its subsidiaries. On March 17, 1998, the independent directors
directed the Company's executive officers to take all necessary steps to modify
the Company's existing management relationships as promptly as practicable to
discontinue the practice of advancing funds to affiliated entities and to cause
any necessary capital calls from affiliated entities to be made. In response,
one of these affiliates, a corporation owned by Mark Milstein and his siblings
(including Jeffrey Friedman's wife) (the "Milstein Affiliate") which serves as
general partner of some of the affiliated entities, informed the Company that it
was causing a review of expenditures relating to approximately $2.9 million of
capital calls from certain of the affiliated entities subsidized by the U.S.
Department of Housing and Urban Development to determine the appropriateness of
such expenditures and whether some of the expenditures should properly be the
responsibility of the Company. On March 11, 1999, the Company, the Milstein
Affiliate, Mark Milstein and Robert Milstein entered into settlement agreements
which resolved all disputes concerning the aforementioned expenditures and other
issues concerning the management by the Company or one of its subsidiaries of
various properties owned by entities in which the Milstein Affiliate is a
general partner. Pursuant to the settlement agreements, all of the outstanding
advances made by the Company to affiliates were repaid. At December 31, 1998,
amounts outstanding, which were subsequently funded pursuant to the settlement,
were $4.7 million. In exchange, among other matters, the Company agreed to
obtain approval from Messrs. Milstein and the property owners prior to incurring
certain expenditures relating to the properties and to indemnify and hold
Messrs. Milstein, the Milstein Affiliate, the property owners and other
affiliates harmless from any loss arising out the Company's failure to abide by
the approval requirement. The Company also agreed to indemnify and hold Messrs.
Milstein, the Milstein Affiliate, the property owners and other affiliates
harmless from losses in connection with housing code violations and criminal
enforcement proceedings pending before the Cleveland Housing Court as they
relate to Longwood Apartments and certain other expenditures incurred at
Longwood Apartments and except for the foregoing, each party to the agreement
released the other from any claims arising in connection with the Longwood
Apartments. Moreover, the Company agreed to defend housing code violations and
criminal enforcement proceedings currently pending in the Cleveland Housing
Court as they relate to Park Village Apartments. In addition, in connection with
the settlement, the Company agreed to end its management of commercial
properties owned by certain affiliated persons upon 60 days prior written notice
from the respective owners of those properties. Such notices have not been
received as of March 30, 1999. The management fees generated from those
commercial properties in 1998 were $126,451.
On June 30, 1998, the Company consummated a merger with MIG Realty
Advisors, Inc. and the related acquisition of eight multifamily properties and
one development property. In connection with the merger, the Company also
acquired the property management businesses of several of MIG Realty Advisors'
affiliates and the right to receive asset management fees, including disposition
and incentive fees, payable to MIG Realty Advisors upon the sale of certain
properties owned by advisees of MIG Realty Advisors. Related to the transaction
was the Company's purchase of a newly developed property and the Company's
purchase of three properties from MIG Residential Trust and Stonemark Equity
Trust, each a client of MIG Realty Advisors. As consideration for their interest
in MIG Realty Advisors and the affiliated property management businesses, the
stockholders of MIG Realty Advisors received, in the aggregate, 408,314 of the
Company's common shares. Of that, Messrs. Wright, Vogt, and Cote, as former
stockholders of MIG Realty Advisors, received 172,287, 37,976 and 70,724 shares
in the Company, respectively. Subject to achieving certain performance criteria,
the former stockholders of MIG Realty Advisors (including Messrs. Wright, Vogt,
Cote and two other officers of the Company) have the opportunity to receive
additional contingent consideration to be paid in the form of common shares of
the Company. After giving effect to known price adjustments, contingent
consideration potentially payable to the former stockholders of MIG Realty
Advisors, in the aggregate, on June 30, 1999 and June 30, 2000 is approximately
$872,000 and $2.9 million, respectively, subject to further adjustment. As of
December 31, 1998, the conditions precedent to the payment of the first
contingent consideration amount had been satisfied.
12
<PAGE> 15
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, executive officers and beneficial owners of more than 10% of a
registered class of the Company's equity securities to file with the SEC and New
York Stock Exchange initial reports of ownership and reports of changes in
ownership of common shares and other equity securities of the Company.
Directors, executive officers and 10% owners are required by SEC regulations to
furnish the Company with copies of all forms they file pursuant to Section
16(a). To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company, during the fiscal year ended December 31,
1998, all Section 16(a) filing requirements applicable to its executive
officers, directors and 10% owners were met.
SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
PriceWaterhouseCoopers LLP served as independent public accountant to the
Company in 1998 and has been selected to do so in 1999. A representative of
PriceWaterhouseCoopers LLP is expected to be present at the annual meeting and
will answer appropriate questions from shareholders.
SHAREHOLDER PROPOSALS FOR 2000 ANNUAL MEETING
Any shareholder proposal intended to be presented at the Company's 2000
annual meeting of shareholders must be received by the Company at 5025 Swetland
Court, Richmond Heights, Ohio 44143, on or before December 1, 1999 if it is to
be included in the Company's proxy statement and form of proxy. A shareholder
proposal other than pursuant to SEC Rule 14a-8 will be considered untimely if it
is received less than 45 days prior to the Company's 2000 annual shareholders
meeting and the Company will not be required to present the proposal at the 2000
meeting. If the Board of Directors chooses to present a shareholder proposal
despite its untimeliness, the persons named in the proxies solicited by the
Board of Directors for the 2000 annual meeting will have the right to exercise
discretionary authority with respect to that proposal.
OTHER MATTERS
The presence at the meeting, in person or by proxy, of the holders of a
number of shares representing a majority of the outstanding voting power on the
record date will represent a quorum. Proxies received by the Company marked as
abstentions or broker non-votes will be included in the calculation of the
number of shares considered to be present at the meeting. The New York Stock
Exchange has advised the Company that, in accordance with its rules, brokers
have discretionary authority to vote shares held by them on behalf of others
with respect to the proposals described in this proxy statement.
If the enclosed proxy is executed and returned to the Company, the persons
named in it will vote the shares represented by such proxy at the meeting. The
form of proxy permits you to specify how the persons names in the proxy will
vote your shares in Proposal One and in the election of directors or permits you
to withhold authority to vote in Proposal One and/or the election of directors.
If you do not specify how your shares should be voted, your shares will be voted
for Proposal One and to elect the directors as set forth under "ELECTION OF
DIRECTORS." Proposal One requires approval of a majority of the outstanding
shares; abstentions and broker non-votes, which are included in the number of
shares outstanding but not as affirmative votes, will therefore have the same
effect as votes against the Proposal. Director nominees who receive the greatest
number of affirmative votes will be elected directors. Abstentions and broker
non-votes will therefore not affect the results of the election.
If any other matters properly come before the meeting, the persons named in
the proxy will vote on those matters in accordance with their judgment.
Management does not know of any other matters that will be presented for action
at the meeting.
By order of the Board of Directors,
Martin A. Fishman, Secretary
DATED: MARCH 31, 1999
13
<PAGE> 16
------------------------------------------------------------------------
ASSOCIATED ESTATES REALTY CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Jeffrey I. Friedman and Martin A.
Fishman and each of them, the attorneys and proxies of the undersigned
with full power of substitution to vote as indicated herein, all the
Common Shares of Associated Estates Realty Corporation held of record by
the undersigned on March 22, 1999, at the Annual Meeting of Shareholders
to be held on May 12, 1999, or any adjournment thereof, with all the
powers the undersigned would possess if then and there personally
present.
1. [ ] FOR or [ ] WITHHOLD AUTHORITY to fix the number of directors at
nine.
2. [ ] FOR or [ ] WITHHOLD AUTHORITY to vote (except as marked to the
contrary below) for the election of each of the nominees for Director
listed below:
Jeffrey I. Friedman, Mark L. Milstein, Albert T. Adams,
Gerald C. McDonough, Frank E. Mosier, Richard T. Schwarz,
James M. Delaney and Louis E. Vogt
(the election of Messrs. Delaney and Vogt is contingent on the approval
of item 1 above)
(INSTRUCTION: To withhold authority to vote for any individual nominee,
write that nominee's name in the space provided below)
(Continued on reverse side)
------------------------------------------------------------------------
------------------------------------------------------------------------
(Continued from other side)
3. In their discretion, to vote upon such other business as may properly
come before the meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS SPECIFIED BY THE
SHAREHOLDER. IF NO SPECIFICATIONS ARE MADE, THE PROXY WILL BE VOTED FOR
THE PROPOSAL TO FIX THE NUMBER OF DIRECTORS IN ITEM 1 ABOVE AND TO ELECT
THE NOMINEES DESCRIBED IN ITEM 2 ABOVE.
Receipt of Notice of Annual Meeting of Shareholders and the related
Proxy Statement dated March 30, 1999, is hereby acknowledged.
Dated , 1999
---------------
---------------------------
---------------------------
---------------------------
Signature(s) of
Shareholder(s)
PLEASE SIGN AS YOUR NAME
APPEARS HEREON. IF SHARES
ARE HELD JOINTLY, ALL
HOLDERS MUST SIGN. WHEN
SIGNING AS ATTORNEY,
EXECUTOR, ADMINISTRATOR,
TRUSTEE OR GUARDIAN, PLEASE
GIVE YOUR FULL TITLE. IF A
CORPORATION, PLEASE SIGN IN
FULL CORPORATE NAME BY
PRESIDENT OR OTHER
AUTHORIZED OFFICER. IF A
PARTNERSHIP, PLEASE SIGN IN
PARTNERSHIP NAME BY
AUTHORIZED PERSON.
------------------------------------------------------------------------
Proxy Card
