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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-11718
MANUFACTURED HOME COMMUNITIES, INC.
(Exact name of registrant as specified in its Charter)
MARYLAND 36-3857664
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
TWO NORTH RIVERSIDE PLAZA, SUITE 800, CHICAGO, ILLINOIS 60606
(Address of principal executive offices) (Zip Code)
(312) 279-1400
(Registrant's telephone number, including area code)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
22,472,731 shares of Common Stock as of November 7, 2003.
MANUFACTURED HOME COMMUNITIES, INC.
TABLE OF CONTENTS
Page
-----
PART I - FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 2003 (unaudited) and December 31, 2002.......... 3
Consolidated Statements of Operations for the quarters and nine months ended
September 30, 2003 and 2002 (unaudited)...................................................... 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2003 and 2002 (unaudited)...................................................... 6
Notes to Consolidated Financial Statements...................................................... 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 17
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk............................... 27
ITEM 4. Controls and Procedures.................................................................. 27
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings........................................................................ 28
ITEM 4. Submission of Matters to a Vote of Security Holders...................................... 28
ITEM 6. Exhibits and Reports on Form 8-K......................................................... 28
2
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30,
2003 DECEMBER 31,
(UNAUDITED) 2002
--------------- -------------
ASSETS
Investment in real estate:
Land.................................................................... $ 279,811 $ 284,219
Land improvements....................................................... 890,641 893,839
Buildings and other depreciable property................................ 120,593 117,949
--------------- -------------
1,291,045 1,296,007
Accumulated depreciation................................................ (262,385) (238,098)
--------------- -------------
Net investment in real estate......................................... 1,028,660 1,057,909
Cash and cash equivalents.................................................. 17,981 7,270
Notes receivable........................................................... 10,772 10,044
Investment in joint ventures............................................... 18,947 19,634
Rents receivable, net...................................................... 2,040 1,735
Deferred financing costs, net.............................................. 7,875 5,030
Inventory.................................................................. 30,687 33,638
Prepaid expenses and other assets.......................................... 36,041 27,590
--------------- -------------
Total assets......................................................... $ 1,153,003 $ 1,162,850
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable.................................................. $ 578,483 $ 575,370
Unsecured term loan..................................................... 100,000 100,000
Unsecured line of credit................................................ 58,500 84,750
Other notes payable..................................................... 113 113
Accounts payable and accrued expenses................................... 40,544 31,010
Accrued interest payable................................................ 4,109 6,415
Rents received in advance and security deposits......................... 7,080 5,966
Distributions payable................................................... 13,773 13,106
--------------- -------------
Total liabilities..................................................... 802,602 816,730
--------------- -------------
Commitments and contingencies
Minority interest - Common OP Units and other.............................. 43,671 43,501
Minority interest - Perpetual Preferred OP Units........................... 125,000 125,000
Stockholders' equity:
Preferred stock, $.01 par value
10,000,000 shares authorized; none issued............................. --- ---
Common stock, $.01 par value
50,000,000 shares authorized; 22,415,161 and 22,093,240
shares issued and outstanding for 2003 and 2002, respectively......... 221 218
Paid-in capital......................................................... 260,743 256,394
Deferred compensation................................................... (1,282) (3,069)
Employee notes.......................................................... --- (2,713)
Distributions in excess of accumulated earnings......................... (74,555) (68,713)
Accumulated other comprehensive income (loss)........................... (3,397) (4,498)
--------------- -------------
Total stockholders' equity............................................ 181,730 177,619
--------------- -------------
Total liabilities and stockholders' equity.............................. $ 1,153,003 $ 1,162,850
=============== =============
The accompanying notes are an integral part of the financial statements.
3
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
QUARTERS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ----------------------------
2003 2002 2003 2002
------------ ----------- ------------ -----------
PROPERTY OPERATIONS:
Community base rental income........................ $ 49,203 $ 48,858 $ 147,675 $ 147,064
Resort base rental income........................... 2,144 1,770 8,076 5,425
Utility and other income............................ 4,904 4,737 15,327 15,150
------------ ----------- ----------- -----------
Property operating revenues..................... 56,251 55,365 171,078 167,639
Property operating and maintenance.................. 16,283 15,860 48,828 47,062
Real estate taxes................................... 4,577 4,321 13,960 13,354
Property management................................. 2,364 2,329 6,992 7,003
------------ ----------- ----------- -----------
Property operating expenses..................... 23,224 22,510 69,780 67,419
------------ ----------- ----------- -----------
Income from property operations................. 33,027 32,855 101,298 100,220
HOME SALES OPERATIONS:
Gross revenues from inventory home sales............ 11,399 9,120 25,058 21,775
Cost of inventory home sales........................ (10,115) (7,404) (21,741) (17,059)
------------ ----------- ----------- -----------
Gross profit from inventory home sales.............. 1,284 1,716 3,317 4,716
Brokered resale revenues, net....................... 491 348 1,321 1,234
Home selling expenses............................... (1,971) (1,934) (5,669) (6,061)
Ancillary services revenues, net.................... (125) (62) 244 604
------------ ----------- ----------- -----------
Income (loss) from home sales and other............. (321) 68 (787) 493
OTHER INCOME AND EXPENSES:
Interest income..................................... 254 239 760 723
Income from unconsolidated joint ventures........... 490 213 1,629 878
General and administrative.......................... (2,027) (1,972) (5,959) (5,915)
Interest and related amortization................... (12,408) (13,119) (37,453) (38,393)
Depreciation on corporate assets.................... (310) (320) (930) (956)
Depreciation on real estate assets and other costs.. (9,446) (8,816) (28,037) (26,632)
------------ ----------- ----------- -----------
Total other income and expenses................. (23,447) (23,775) (69,990) (70,295)
------------ ----------- ----------- -----------
Income before allocation to Minority Interests........... 9,259 9,148 30,521 30,418
MINORITY INTERESTS:
(Income) allocated to Common OP Units............... (1,246) (1,255) (4,369) (4,374)
(Income) allocated to Perpetual Preferred OP Units.. (2,813) (2,813) (8,439) (8,439)
------------ ----------- ----------- -----------
Income from continuing operations............... 5,200 5,080 17,713 17,605
DISCONTINUED OPERATIONS:
Discontinued operations............................. 10 752 913 2,019
Gain on sale of property............................ --- 1,270 10,826 1,270
Minority interest in discontinued operations........ (2) (390) (2,170) (633)
------------ ----------- ----------- -----------
Income from discontinued operations............. 8 1,632 9,569 2,656
------------ ----------- ----------- -----------
NET INCOME AVAILABLE FOR COMMON SHARES................. $ 5,208 $ 6,712 $ 27,282 $ 20,261
============ =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
4
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
QUARTERS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ----------------------------
2003 2002 2003 2002
------------- ------------ ------------ ------------
EARNINGS PER COMMON SHARE - BASIC:
Income from continuing operations ................ $ .24 $ .23 $ .80 $ .82
Income from discontinued operations .............. --- .08 .43 .12
------------- ------------ ------------ ------------
Net income available for Common Shares............. $ .24 $ .31 $ 1.24 $ .94
============= ============ ============ ============
EARNINGS PER COMMON SHARE - FULLY DILUTED:
Income from continuing operations.................. $ .23 $ .23 $ .79 $ .80
Income from discontinued operations................ --- .07 .42 .12
------------- ------------ ------------ ------------
Net income available for Common Shares............. $ .23 $ .30 $ 1.21 $ .91
============= ============ ============ ============
Distributions declared per Common Shares
outstanding.................................... $ .495 $ .475 $ 1.485 $ 1.425
============= ============ ============ ============
Weighted average Common Shares outstanding -
basic.......................................... 22,114 21,676 22,020 21,558
============= ============ ============ ============
Weighted average Common Shares outstanding -
fully diluted.................................. 28,148 27,693 27,952 27,622
============= ============ ============ ============
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
QUARTERS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ---------------------------
2003 2002 2003 2002
------------ ----------- ----------- -----------
Net income available for Common Shares.................. $ 5,208 $ 6,712 $ 27,282 $ 20,261
Net unrealized holding gains (losses) on
derivative instruments......................... 609 (2,551) 1,101 (4,765)
------------ ----------- ----------- -----------
Net other comprehensive income available for
Common Shares.................................. $ 5,817 $ 4,161 $ 28,383 $ 15,496
============ =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
5
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income available for Common Shares................................ $ 27,282 $ 20,261
Adjustments to reconcile net income to
cash provided by operating activities:
Income allocated to Minority Interests............................ 14,978 13,447
Gain on sale of property.......................................... (10,826) (1,270)
Depreciation and amortization expense and other................... 29,636 28,342
Equity in income of unconsolidated joint ventures................. (1,602) (763)
Amortization of deferred compensation and other................... 1,469 3,186
Increase in provision for uncollectible rents receivable.......... (68) --
Changes in assets and liabilities:
Increase in rents receivable...................................... (235) (204)
Decrease in inventory............................................. 2,763 1,288
Increase in prepaid expenses and other assets..................... (1,293) (3,816)
Increase in accounts payable and accrued expenses................. 758 5,407
Increase in rents received in advance and security deposits....... 1,114 2,273
------------- -------------
Net cash provided by operating activities............................. 63,976 68,151
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of rental properties...................................... (97) (49,632)
Proceeds from disposition of assets................................... 27,170 4,647
Distributions from joint ventures..................................... 1,213 502
Purchase of RSI....................................................... --- (675)
Cash received in acquisition of RSI................................... --- 839
Funding of notes receivable........................................... (728) (1,798)
Improvements:
Improvements - corporate.......................................... (72) (324)
Improvements - rental properties.................................. (8,700) (10,058)
Site development costs............................................ (5,517) (7,293)
------------- -------------
Net cash provided by (used in) investing activities................... 13,269 (63,792)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from stock options and employee stock purchase plan...... 6,499 7,469
Distributions to Common Stockholders, Common OP Unitholders and
Perpetual Preferred OP Unitholders................................ (49,094) (46,436)
Collection of principal payments on employee notes.................... 2,713 1,061
Line of credit:
Proceeds.......................................................... 42,000 65,500
Repayments........................................................ (68,250) (7,500)
Refinancings - net proceeds (repayments).............................. 6,899 (3,236)
Principal payments.................................................... (3,786) (9,001)
Debt issuance costs................................................... (3,515) (495)
------------- -------------
Net cash used in financing activities................................. (66,534) 7,362
------------- -------------
Net increase in cash and cash equivalents.................................. 10,711 11,721
Cash and cash equivalents, beginning of period............................. 7,270 1,354
------------- -------------
Cash and cash equivalents, end of period................................... $ 17,981 $ 13,075
============= =============
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest................................... $ 40,156 $ 34,776
============= =============
The accompanying notes are an integral part of the financial statements.
6
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DEFINITION OF TERMS:
Manufactured Home Communities, Inc., together with MHC Operating
Limited Partnership (the "Operating Partnership") and other consolidated
subsidiaries ("Subsidiaries"), are referred to herein as the "Company", "MHC",
"we", "us", and "our". Capitalized terms used but not defined herein are as
defined in the Company's Annual Report on Form 10-K (the "2002 Form 10-K") for
the year ended December 31, 2002.
PRESENTATION:
These unaudited Consolidated Financial Statements of MHC, a Maryland
corporation, have been prepared pursuant to the Securities and Exchange
Commission ("SEC") rules and regulations and should be read in conjunction with
the financial statements and notes thereto included in the 2002 Form 10-K. The
following Notes to Consolidated Financial Statements highlight significant
changes to the Notes included in the 2002 Form 10-K and present interim
disclosures as required by the SEC. The accompanying Consolidated Financial
Statements reflect, in the opinion of management, all adjustments necessary for
a fair presentation of the interim financial statements. All such adjustments
are of a normal and recurring nature. Certain reclassifications have been made
to the prior periods' financial statements in order to conform with current
period presentation.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(a) Basis of Consolidation
The Company consolidates its majority-owned subsidiaries in which it
has the ability to control the operations of the subsidiaries. The Company does
not consolidate entities over which it does not have sole control of the major
decisions. All inter-company transactions have been eliminated in consolidation.
The Company's acquisitions were all accounted for as purchases in accordance
with Accounting Principles Board Opinion No. 16 "Business Combinations" for
those transactions initiated before June 30, 2001 and in accordance with
Statement of Financial Accounting Standards No. 141 "Business Combinations" for
those transactions completed after June 30, 2001.
In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest
Entities. FIN 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The Company will adopt FIN 46 in the fourth
quarter of 2003 and we have determined adoption will not have a material effect
on the financial results of the Company.
(b) Segments
We manage all our operations on a property-by-property basis. Since
each property has similar economic and operational characteristics, the Company
has one reportable segment, which is the operation of manufactured home
communities. The distribution of the Properties throughout the United States
reflects our belief that geographic diversification helps insulate the portfolio
from regional economic influences. We intend to target new acquisitions in or
near markets where the Properties are located and will also consider
acquisitions of properties outside such markets.
7
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(c) Inventory
Inventory consists of new and used manufactured homes, is stated at the
lower of cost or market and is net of a valuation allowance calculated after
consideration of the NADA (National Automobile Dealers Association) Manufactured
Housing Appraisal Guide. Inventory sales revenues and resale revenues are
recognized when the home sale is closed. Resale revenues are stated net of
commissions paid to employees of $251,000 and $686,000, respectively, for the
quarters and nine months ended September 30, 2003.
(d) Notes Receivable
Notes receivable generally are stated at their outstanding unpaid
principal balances net of any deferred fees or costs on originated loans, or
unamortized discounts or premiums net of a valuation allowance. Interest income
is accrued on the unpaid principal balance. Discounts or premiums are amortized
to income using the interest method. In certain cases we finance the sale of
homes to our residents (referred to as "Chattel Loans") which are secured by the
homes. The valuation allowance for the Chattel Loans is calculated based on a
comparison of the outstanding principal balance of each note compared to the
NADA value of the underlying manufactured home collateral.
(e) Real Estate
Real estate is recorded at cost less accumulated depreciation.
Depreciation is computed on the straight-line basis over the estimated useful
lives of the assets. We use a 30-year estimated life for buildings acquired and
structural and land improvements, a ten-to-fifteen-year estimated life for
building upgrades and a three-to-seven-year estimated life for furniture,
fixtures and equipment. Expenditures for ordinary maintenance and repairs are
expensed to operations as incurred and significant renovations and improvements
that improve the asset and extend the useful life of the asset are capitalized
and then expensed over their estimated useful life. Our estimates of useful
lives, salvage value, and depreciation method used are proscribed by various
generally accepted accounting principles ("GAAP") literature. In addition, the
FASB is currently reviewing the methods of depreciation and cost capitalization
for all industries and in June 2001 issued FASB Exposure Draft, "Accounting in
Interim and Annual Financial Statements for Certain Costs and Activities Related
to Property, Plant and Equipment", the implementation of which, if issued, could
also have a material effect on the Company's results of operations.
Certain costs, primarily legal costs, relative to our efforts to
effectively change the use and operations of several Properties subject to rent
control (see Note 9) are currently classified in other assets. These costs, to
the extent these efforts are successful, are capitalized to the extent of the
established value of the revised project and included in the net investment in
real estate for the appropriate Properties. For the nine months ended September
30, 2003, we have capitalized $1.3 million of these costs. To the extent these
efforts are not successful, these costs will be expensed. In addition, we
capitalize certain costs, primarily legal costs, related to entering into lease
agreements which govern the terms under which we may enter into leases with
individual tenants and which are expensed over the term of the lease agreement.
NOTE 2 - EARNINGS PER COMMON SHARE
Earnings per common share are based on the weighted average number of
common shares outstanding during each period. Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS No. 128") defines the calculation
of basic and fully diluted earnings per share. Basic and fully diluted earnings
per share are based on the weighted average shares outstanding during each
period and basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. The conversion of OP Units has been
excluded from the basic earnings per share calculation. The conversion of an OP
Unit to a share of common stock has no material effect on earnings per common
share.
8
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - EARNINGS PER COMMON SHARE (CONTINUED)
The following table sets forth the computation of basic and diluted
earnings per share for the quarters and nine months ended September 30, 2003 and
2002 (amounts in thousands):
QUARTERS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2003 2002 2003 2002
------------ ----------- ------------ ------------
NUMERATORS:
INCOME FROM CONTINUING OPERATIONS:
Income from
continuing operations - basic............ $ 5,200 $ 5,080 $ 17,713 $ 17,605
Amounts allocated to dilutive securities..... 1,246 1,255 4,369 4,374
------------ ------------ ------------ ------------
Income from
continuing operations - fully diluted.... $ 6,446 $ 6,335 $ 22,082 $ 21,979
============ ============ ============ ============
INCOME FROM DISCONTINUED OPERATIONS:
Income from
discontinued operations - basic.......... $ 8 $ 1,632 $ 9,569 $ 2,656
Amounts allocated to dilutive securities..... 2 390 2,170 633
------------ ------------ ------------ ------------
Income from
discontinued operations - fully diluted.. $ 10 $ 2,022 $ 11,739 $ 3,289
============ ============ ============ ============
NET INCOME AVAILABLE FOR COMMON SHARES:
Net income available for Common
Shares - basic........................... $ 5,208 $ 6,712 $ 27,282 $ 20,261
Amounts allocated to dilutive securities..... 1,248 1,645 6,539 5,007
------------ ------------ ------------ ------------
Net income available for Common
Shares - fully diluted................... $ 6,456 $ 8,357 $ 33,821 $ 25,268
============ ============ ============ ============
DENOMINATOR:
Weighted average Common Shares
outstanding - basic........................ 22,114 21,676 22,020 21,558
Effect of dilutive securities:
Weighted average Common OP Units................ 5,344 5,400 5,349 5,414
Employee stock options.......................... 690 617 583 650
------------ ------------ ------------ ------------
Weighted average Common Shares
outstanding - fully diluted................ 28,148 27,693 27,952 27,622
============ ============ ============ ============
NOTE 3 - COMMON STOCK AND RELATED TRANSACTIONS
On April 11, 2003, the Company paid a $.495 per share distribution for
the quarter ended March 31, 2003 to stockholders of record on March 28, 2003. On
July 11, 2003, the Company paid a $.495 per share distribution for the quarter
ended June 30, 2003 to stockholders of record on June 27, 2003. On October 10,
2003, the Company paid a $.495 per share distribution for the quarter ended
September 30, 2003 to stockholders of record on September 26, 2003.
9
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - INVESTMENT IN REAL ESTATE
During the nine months ended September 30, 2003 we sold three
properties listed in the table below. Proceeds from the sales were used to repay
amounts on the Company's line of credit. Also during the same period we acquired
a parcel of land adjacent to one of our Properties for approximately $97,000.
TOTAL DISPOSITION GAIN ON
DATE DISPOSED PROPERTY LOCATION SITES PRICE SALE
- ------------- ----------------- ------------------------- ----- ----------- ---------
($ millions) ($ millions)
June 6, 2003 Independence Hill Morgantown, West Virginia 203 $ 3.9 $ 2.8
June 6, 2003 Brook Gardens Hamburg, New York 424 17.8 4.1
June 30, 2003 Pheasant Ridge Mount Airy, Maryland 101 5.4 3.9
--- ----------- ---------
728 $ 27.1 $ 10.8
=== =========== =========
The Company is actively seeking to acquire additional Communities and
Resorts and currently is engaged in negotiations relating to the possible
acquisition of a number of Properties. At any time these negotiations are at
varying stages which may include contracts outstanding to acquire certain
Communities and Resorts which are subject to satisfactory completion of the
Company's due diligence review.
NOTE 5 - NOTES RECEIVABLE
As of September 30, 2003 and December 31, 2002, the Company had
approximately $10.8 million and $10.0 million in notes receivable, respectively.
The Company has approximately $1.6 million in notes which bear interest at a per
annum rate of prime plus 0.5% and mature on December 31, 2011. The notes are
collateralized with a combination of Common OP Units and partnership interests
in certain joint ventures. The Company has approximately $9.1 million in Chattel
Loans receivable, which yield interest at a per annum average rate of
approximately 10.3%, have an average term and amortization of 5 to 15 years,
require monthly principal and interest payments and are collateralized by
manufactured homes at certain Properties.
NOTE 6 - INVESTMENT IN JOINT VENTURES
The Company recorded approximately $1.6 million and $878,000 of net
income from joint ventures in the nine months ended September 30, 2003 and 2002,
respectively, and received approximately $1.2 million and $502,000 in
distributions for the nine months ended September 30, 2003 and 2002,
respectively. Due to the Company's inability to control the joint ventures, the
Company accounts for its investment in the joint ventures using the equity
method of accounting.
The following table summarizes the Company's investments in
unconsolidated joint ventures:
INVESTMENT AS OF
NUMBER OF ECONOMIC SEPTEMBER 30, DECEMBER 31,
PROPERTY LOCATION SITES INTEREST (a) 2003 2002
- ----------------- -------------- --------- ------------ ---------------------------------
(in thousands)
Trails West Tucson, AZ 503 50% $ 1,811 $ 1,917
Plantation Calimesa, CA 385 50% 2,840 2,861
Manatee Bradenton, FL 290 90% 57 631
Home Hallandale, FL 136 90% 1,077 1,092
Villa del Sol Sarasota, FL 207 90% 686 726
Voyager RV Resort Tucson, AZ -- 25% 4,413 4,463
Preferred Interests in
College Heights -- 17% 8,063 7,944
----- ----------- -----------
1,521 $ 18,947 $ 19,634
===== =========== ===========
(a) The percentages shown approximate the Company's economic interest. The
Company's legal interest may differ.
10
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - LONG-TERM BORROWINGS
As of September 30, 2003 and December 31, 2002, the Company had outstanding
mortgage indebtedness of approximately $578.4 million and $575.4 million,
respectively, encumbering 63 and 66 of the Company's Properties, respectively.
As of September 30, 2003 and December 31, 2002, the carrying value of such
Properties was $684 million and $720 million, respectively.
The outstanding mortgage indebtedness consists of:
- - A $265.0 million mortgage note (the "$265 Million Mortgage") collateralized
by 28 Properties beneficially owned by MHC Financing Limited Partnership.
The $265 Million Mortgage has a maturity date of January 2, 2028 and pays
interest at a rate of 7.015% per annum. There is no principal amortization
until February 1, 2008, after which principal and interest are to be paid
from available cash flow and the interest rate will be reset at a rate
equal to the then 10-year U.S. Treasury obligations plus 2.0%. The $265
Million Mortgage is recorded net of a hedge of $3.0 million (net of
accumulated amortization of $329,000) that is being amortized into interest
expense over the life of the loan.
- - A $91.7 million mortgage note (the "DeAnza Mortgage") collateralized by 6
Properties beneficially owned by MHC-DeAnza Financing Limited Partnership.
The DeAnza Mortgage bears interest at a rate of 7.82% per annum, amortizes
beginning August 1, 2000 over 30 years and matures July 1, 2010.
- - A $49 million mortgage note (the "Stagecoach Mortgage") collateralized by 7
Properties beneficially owned by MHC Stagecoach L.L.C. The Stagecoach
Mortgage bears interest at a rate of 6.98% per annum, amortizes beginning
September 1, 2001 over 10 years and matures September 1, 2011.
- - A $44.7 million mortgage note (the "Bay Indies Mortgage") collateralized by
one Property beneficially owned by MHC-Bay Indies Financing Limited
Partnership. On April 17, 2003, we entered into an agreement to refinance
and increase the Bay Indies Mortgage from approximately $21.9 million to
$45 million. Under the new agreement, the Bay Indies Mortgage bears
interest at 5.69% per annum, amortizes over 25 years and matures April 17,
2013.
- - A $15.4 million mortgage note (the "Date Palm Mortgage") collateralized by
one Property beneficially owned by MHC Date Palm, L.L.C. The Date Palm
Mortgage bears interest at a rate of 7.96% per annum, amortizes beginning
August 1, 2000 over 30 years and matures July 1, 2010.
- - Approximately $115.3 million of mortgage debt on 23 other various
Properties, which was recorded at fair market value with the related
discount or premium being amortized over the life of the loan using the
effective interest rate. Scheduled maturities for the outstanding
indebtedness are at various dates through November 30, 2020, and fixed
interest rates range from 6.5% to 9.3% per annum. Included in this debt,
the Company has a $2.4 million loan recorded to account for a direct
financing lease entered into in May 1997.
We have an unsecured line of credit with a group of banks (the "Line of
Credit") with a total facility of $150 million, bearing interest at the London
Interbank Offered Rate ("LIBOR") plus 1.125%. In July 2003, we extended the
maturity to August 9, 2004. We pay a quarterly fee on the average unused amount
of such credit equal to 0.15% of such amount. As of September 30, 2003, $91.5
million was available under the Line of Credit.
We have a $100 million unsecured term loan (the "Term Loan") with a group
of banks with interest only payable monthly at a rate of LIBOR plus 1.375%. The
Term Loan was scheduled to mature on August 9, 2003 with two one-year extension
options with which we may extend the maturity through August 9, 2005. In July
2003, we exercised our extension option through August 9, 2004.
11
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - LONG-TERM BORROWINGS (CONTINUED)
On October 29, 2001, we entered into an interest rate swap agreement (the
"2001 Swap"), effectively fixing the LIBOR rate on $100 million of our floating
rate debt at approximately 3.7% per annum for the period October 2001 through
August 2004. The terms of the 2001 Swap require monthly settlements on the same
dates interest payments are due on the debt. Effective January 1, 2001, the
Company adopted Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS No. 133") and its
amendments, SFAS No. 137 and SFAS No. 138. In accordance with SFAS No. 133, the
interest rate swap will be reflected at market value. We believe the 2001 Swap
is a perfectly effective cash flow hedge, under SFAS No. 133, and there is no
effect on net income as a result of the mark-to-market adjustment. As of
September 30, 2003, the hedge represented a liability of approximately $3.4
million and is recorded in accounts payable and accrued expenses. Mark-to-market
changes in the value of the 2001 Swap are included in other comprehensive
income.
NOTE 8 - STOCK-BASED COMPENSATION
Prior to 2003 we accounted for our stock compensation in accordance with
APB No. 25, "Accounting for Stock Issued to Employees", based upon the intrinsic
value method. This method results in no compensation expense for options issued
with an exercise price equal to or exceeding the market value of the Common
Shares on the date of grant. Effective January 1, 2003, we elected to account
for our stock-based compensation in accordance with SFAS No. 123 and its
amendment (SFAS No. 148), "Accounting for Stock Based Compensation", which will
result in compensation expense being recorded based on the fair value of the
stock option compensation issued. SFAS No. 148 provides three possible
transition methods for changing to the fair value method. We have elected to use
the modified-prospective method. This method requires that we recognize
stock-based employee compensation cost from the beginning of the fiscal year in
which the recognition provisions are first applied as if the fair value method
had been used to account for all employee awards granted, or settled in fiscal
years beginning after December 15, 1994. The following table illustrates the
effect on net income and earnings per share as if the fair value method was
applied to all outstanding and unvested awards in each period presented:
QUARTERS ENDED NINE MONTHS ENDED
------------------------------ -----------------------------
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income available for Common
Shares as reported.................. $ 5,208 $ 6,712 $ 27,282 $ 20,261
Add: Stock-based compensation
expense included in net income as
reported............................ 448 615 1,469 242
Deduct: Stock-based compensation
expense determined under the fair
value based method for all awards... (448) (523) (1,469) (1,352)
------------ ------------ ------------ ------------
Pro forma net income available for
Common Shares....................... $ 5,208 $ 6,804 $ 27,282 $ 19,151
============ ============ ============ ============
Pro forma net income per Common
Share - Basic....................... $ .24 $ .31 $ 1.24 $ .89
============ ============ ============ ============
Pro forma net income per Common
Share - Fully Diluted............... $ .23 $ .31 $ 1.21 $ .87
============ ============ ============ ============
Pursuant to the Stock Option Plan as discussed in Note 14 to the 2002 Form
10-K, certain officers, directors, employees and consultants have been offered
the opportunity to acquire shares of common stock of the Company through stock
options ("Options"). During the nine months ended September 30, 2003, Options
for 207,187 shares of common stock were exercised.
12
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - COMMITMENTS AND CONTINGENCIES
DEANZA SANTA CRUZ MOBILE ESTATES
The residents of DeAnza Santa Cruz Mobile Estates, a property located in
Santa Cruz, California, brought several actions opposing fees and charges in
connection with water service at the property. As a result of one action, the
Company rebated approximately $36,000 to the residents. The DeAnza Santa Cruz
Homeowners Association ("HOA") then proceeded to a jury trial alleging these
"overcharges" entitled them to an award of punitive damages. In January 1999, a
jury awarded the HOA $6.0 million in punitive damages. On December 21, 2001 the
California Court of Appeal for the Sixth District reversed the $6.0 million
punitive damage award, the related award of attorneys' fees, and, as a result,
all post-judgment interest thereon, on the basis that punitive damages are not
available as a remedy for a statutory violation of the California Mobilehome
Residency Law ("MRL"). The decision of the appellate court left the HOA, the
plaintiff in this matter, with the right to seek a new trial in which it must
prove its entitlement to either the statutory penalty and attorneys' fees
available under the MRL or punitive damages based on causes of action for fraud,
misrepresentation or other tort. In order to resolve this matter, the Company
accrued for and agreed to pay $201,000 to the HOA. This payment resolves the
punitive damage claim. The HOA's attorney has made a motion asking for an award
of attorneys' fees and costs in the amount of approximately $1.5 million as a
result of this resolution of the litigation. On April 2, 2003 the court awarded
attorney's fees to the HOA's attorney in the amount of $593,000 and court costs
of approximately $20,000. The Company has appealed this award.
OTHER CALIFORNIA RENT CONTROL LITIGATION
As part of the Company's effort to realize the value of its Properties
subject to rent control, the Company has initiated lawsuits against several
municipalities in California. The Company's goal is to achieve a level of
regulatory fairness in California's rent control jurisdictions, and in
particular those jurisdictions that prohibit increasing rents to market upon
turnover. This regulatory feature, called vacancy control, allows tenants to
sell their homes for a premium representing the value of the future discounted
rent-controlled rents. In the Company's view, such regulation results in a
transfer of the value of the Company's shareholders' land, which would otherwise
be reflected in market rents, to tenants upon the sales of their homes in the
form of an inflated purchase price that cannot be attributed to the value of the
home being sold. As a result, in the Company's view, the Company loses the value
of its asset and the selling tenant leaves the community with a windfall
premium. The Company has discovered through the litigation process that certain
municipalities considered condemning the Company's communities at values well
below the value of the underlying land. In the Company's view, a failure to
articulate market rents for sites governed by restrictive rent control would put
the Company at risk for condemnation or eminent domain proceedings based on
artificially reduced rents. Such a physical taking, should it occur, could
represent substantial lost value to shareholders. The Company is cognizant of
the need for affordable housing in the jurisdictions, but asserts that
restrictive rent regulation with vacancy control does not promote this purpose
because the benefits of such regulation are fully capitalized into the prices of
the homes sold. The Company estimates that the annual rent subsidy to tenants in
these jurisdictions is approximately $15 million. In a more well-balanced
regulatory environment, the Company would receive market rents that would
eliminate the subsidy and homes would trade at or near their intrinsic value.
In connection with such efforts, the Company recently announced it has
entered into a settlement agreement with the City of Santa Cruz, California and
that, pursuant to the settlement agreement, the City amended its rent control
ordinance to exempt the Company's property from rent control as long as the
Company offers a long term lease which gives the Company the ability to increase
rents to market upon turnover and bases annual rent increases on the Consumer
Price Index ("CPI"). The settlement agreement benefits the Company's
shareholders by allowing them to receive the value of their investment in this
community through vacancy decontrol while preserving annual CPI based rent
increases in this age restricted property.
13
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
OTHER CALIFORNIA RENT CONTROL LITIGATION (CONTINUED)
The Company's efforts to achieve a balanced regulatory environment
incentivize tenant groups to file lawsuits against the Company seeking large
damage awards. The homeowners association at Contempo Marin ("CMHOA"), a 396
site property in San Rafael, California, sued the Company in December 2000 over
a prior settlement agreement on a capital pass-through after the Company sued
the City of San Rafael in October 2000 alleging its rent control ordinance is
unconstitutional. In the Contempo Marin case, the CMHOA prevailed on a motion
for summary judgment on an issue that permits the Company to collect only $3.72
out of a pass-through amount of $7.50 that the Company believes had been agreed
to by the CMHOA in a settlement agreement. The Company intends to vigorously
defend this matter, which has been stayed pending a related state court appeal
by the Company of an order dismissing its claims against the City of San Rafael.
The Company believes that such lawsuits will be a consequence of the Company's
efforts to change rent control since tenant groups actively desire to preserve
the premium value of their homes in addition to the discounted rents provided by
rent control. The Company has determined that its efforts to rebalance the
regulatory environment despite the risk of litigation from tenant groups are
necessary not only because of the $15 million annual subsidy to tenants, but
also because of the condemnation risk.
ELLENBURG COMMUNITIES
The Company and certain other parties entered into a settlement agreement
(the "Settlement"), which was approved by the Los Angeles County Superior Court
in April 2000. The Settlement resolved substantially all of the litigation and
appeals involving the Ellenburg Properties, and transactions arising out of the
Settlement closed on May 22, 2000. Only the appeal of one entity remains, the
outcome of which is not expected to materially affect the Company.
In connection with the Ellenburg Acquisition, on September 8, 1999,
Ellenburg Fund 20 ("Fund 20") filed a cross complaint in the Ellenburg
dissolution proceeding against the Company and certain of its affiliates
alleging causes of action for fraud and other claims in connection with the
Ellenburg Acquisition. The Company subsequently successfully had the cross
complaint against the Company and its affiliates dismissed with prejudice by the
California Superior Court. However, Fund 20 appealed. Although this appeal was
one not resolved by the Settlement, the California Court of Appeal dismissed
Fund 20's substantive appeals on March 13, 2003 as moot. Fund 20 petitioned the
California Supreme Court to review this decision which review was denied.
In October 2001, Fund 20 sued the Company and certain of its affiliates
again, this time in Alameda County, California making substantially the same
allegations. The Company obtained an injunction preventing the case from
proceeding until the Fund 20 appeal is decided and other related proceedings in
Arizona (from which the Company has already been dismissed with prejudice) are
concluded. The Company obtained a court order enjoining Fund 20 from proceeding
with its Alameda County action. However, the Company expects Fund 20 to appeal
this order. The Company believes Fund 20's allegations are without merit and
will vigorously defend itself if the Court does not permanently enjoin the
action or cause it to be otherwise dismissed.
14
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
COUNTRYSIDE AT VERO BEACH
The Company has received letters dated June 17, 2002 and August 26, 2002
from Indian River County ("County"), claiming that the Company currently owes
sewer impact fees in the amount of approximately $518,000 with respect to the
Property known as Countryside at Vero Beach, located in Vero Beach, Florida,
purportedly under the terms of an agreement between the County and a prior owner
of the Property. In response, the Company has advised the County that these fees
are no longer due and owing as a result of a 1996 settlement agreement between
the County and the prior owner of the Property, providing for the payment of
$150,000 to the County to discharge any further obligation for the payment of
impact or connection fees for sewer service at the Property. The Company paid
this settlement amount (with interest) to the County in connection with the
Company's acquisition of the Property. Accordingly, the Company believes that
the County's claims are without merit.
DELAWARE DECLARATORY JUDGMENT ACTION
In April 2002, the Company entered into a Stipulation and Consent Order to
Cease and Desist (the "Consent Order") with the State of Delaware (the "State").
The Consent Order resolved various issues raised by the State concerning the
terms of a new lease form used or proposed for use by the Company at certain of
its Properties in Delaware. Among other provisions, the Consent Order
contemplated that the Company would work with the State to develop and implement
a new lease form for use in Delaware. The Consent Order expressly provided that
nothing contained therein would preclude the Company from seeking declaratory
relief from a court as to the legality or enforceability of any provisions which
the Company might wish to incorporate in future leases.
Throughout the summer of 2002, the Company's Delaware legal counsel engaged
in dialogue with representatives of the State concerning various matters,
including the lease provisions to which the State had objected but which the
Company wished to incorporate in future leases. Through this process, it became
apparent that the parties could not reach agreement as to the legality or
enforceability of the proposed lease provisions, and that the Company would need
to seek declaratory relief from a court in order to resolve the matter, as
contemplated by the Consent Order. Accordingly, on August 29, 2002, the Company
filed a Petition for Declaratory Judgment and Other Relief (as amended, the
"Petition") in Sussex County, Delaware Superior Court (the "Court").
In response to the filing of the Petition, on October 1, 2002, the State
filed its Answer to Petition for Declaratory and Other Relief, and Counterclaims
for Civil Enforcement and Contempt (as amended, "Answer and Counterclaim") with
the Court. In the Answer and Counterclaim, the State sought, inter alia,
restitution, statutory penalties, investigative costs and attorneys' fees under
the Delaware Mobile Home Lots and Leases Act, the Consumer Fraud Act, the
Uniform Deceptive Trade Practices Act and the Delaware Consumer Contracts law,
and separately sought a finding of contempt and related contempt penalties for
alleged violations of the Consent Order.
The Company filed a Motion to Dismiss Respondents' Counterclaims with the
Court on October 29, 2002, and the State filed a Motion for Summary Judgment
with the Court on November 15, 2002. On December 30, 2002, the Company filed a
First Amended Petition for Declaratory Judgment and Other Relief with the Court,
and on January 31, 2003, the State filed an Amended Answer and Counterclaim with
the Court.
15
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
DELAWARE DECLARATORY JUDGMENT ACTION (CONTINUED)
On August 29, 2003, the Court issued its decision disposing of all pending
claims in the litigation except one. Specifically, the Court held, inter alia,
that (i) the Company may eliminate the rent cap formula from existing leases at
certain of its Delaware Properties as the leases come up for renewal, (ii)
certain lease provisions proposed by the Company may not be implemented or
enforced under applicable state law, (iii) the change in water supplier at one
of the Properties did not violate the leases at such Property, (iv) the Company
did not violate the Consent Order by filing the Petition, and (v) the Company
did not violate any state statutes as alleged by the State.
The August 29, 2003 decision left open the issue of whether the Company had
violated the Consent Order by continuing to use the disputed lease form (but not
enforce the provisions at issue) at one of its Properties following entry of the
Consent Order (the Company believed that it had no choice but to continue to use
this lease form until the State had approved a new form for use at the Property
as contemplated by the Consent Order). On October 3, 2003, the Court issued its
final order, finding that continued use of the disputed lease form, as to new
tenants but not as to renewal tenants, following entry of the Consent Order
constituted a violation thereof, and assessing a civil penalty in the amount of
$5,000.
On November 3, 2003, the state filed a Notice of Appeal with the Supreme
Court of the State of Delaware, appealing the Court's order denying the State's
Motion for Summary Judgment. The Company intends to vigorously contest such
appeal.
OTHER
The Company is involved in various other legal proceedings arising in the
ordinary course of business. Management believes that all proceedings herein
described or referred to, taken together, are not expected to have a material
adverse impact on the Company.
NOTE 10 - SUBSEQUENT EVENTS
On October 17, 2003, MHC closed 49 mortgage loans collateralized by 51
Properties providing total proceeds of approximately $501 million at a weighted
average interest rate of 5.84% and with a weighted average maturity of
approximately 9 years. Approximately $170 million of the proceeds were used to
repay amounts outstanding on the Company's line of credit and term loan.
16
MANUFACTURED HOME COMMUNITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following is a discussion of the interim results of operations,
financial condition and liquidity and capital resources of the Company for the
quarter and nine months ended September 30, 2003 compared to the corresponding
period in 2002. It should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included herein and the 2002 Form 10-K. The
following discussion may contain certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, which reflect
management's current views with respect to future events and financial
performance. Such forward-looking statements are subject to certain risks and
uncertainties, including, but not limited to, the effects of future events on
the Company's financial performance, the adverse impact of external factors such
as inflation and consumer confidence, and the risks associated with real estate
ownership.
RESULTS OF OPERATIONS
PROPERTY ACQUISITIONS, JOINT VENTURES AND DISPOSITIONS
The following chart lists the Properties acquired or sold since January 1,
2002. The Company defines its core manufactured home community portfolio ("Core
Portfolio") as manufactured home Properties owned throughout both periods of
comparison. Excluded from the Core Portfolio are any Properties acquired or sold
during the period and also any recreational vehicle resorts ("Resorts") which,
together, are referred to as the "Non-Core" Properties.
PROPERTY TRANSACTION DATE SITES
-------- ---------------- -----
TOTAL SITES AS OF JANUARY 1, 2002.................................................. 50,663
ACQUISITIONS:
Mt. Hood Village...................................... March 12, 2002 450
Harbor View........................................... July 10, 2002 471
Countryside........................................... July 31, 2002 560
Golden Sun............................................ July 31, 2002 329
Breezy Hill........................................... July 31, 2002 762
Highland Woods........................................ August 14, 2002 148
Holiday Village....................................... July 31, 2002 301
Tropic Winds.......................................... August 7, 2002 531
Silk Oak Lodge........................................ October 1, 2002 180
Hacienda Village...................................... December 18, 2002 519
Glen Ellen............................................ December 31, 2002 117
EXPANSION SITE DEVELOPMENT AND OTHER:
Sites added or reconfigured in 2002................... 90
Sites added or reconfigured in 2003................... (47)
DISPOSITIONS:
College Heights (17 properties)....................... September 1, 2002 (3,220)
Camelot Acres......................................... November 13, 2002 (319)
Independence Hill..................................... June 6, 2003 (203)
Brook Gardens......................................... June 6, 2003 (424)
Pheasant Ridge........................................ June 30, 2003 (101)
------
TOTAL SITES AS OF SEPTEMBER 30, 2003............................................... 50,807
======
17
MANUFACTURED HOME COMMUNITIES, INC.
RESULTS OF OPERATIONS (CONTINUED)
TRENDS
Occupancy in our Properties as well as our ability to increase rental rates
directly affect revenues. In 2003, occupancy in our Core Portfolio decreased
1.9%. Also during 2003, average monthly base rental rates for the Core Portfolio
increased approximately 5.0%. We project continued growth during the remainder
of 2003 in our Core Portfolio performance. Core Portfolio base rental-rate
growth is expected to be approximately 5 percent. Assuming current economic
conditions continue to impact occupancies, overall revenue growth will be
approximately 3 percent. Core Portfolio operating expenses are expected to grow
in excess of CPI due to continued increases in insurance, real estate taxes and
utility expenses. These projections would result in growth of approximately 2.5
percent in Core Portfolio income from operations (also referred to as net
operating income or "NOI").
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States, which require us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and the related disclosures. We believe that
the following critical accounting policies, among others, affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
We periodically evaluate our long-lived assets, including our investments
in real estate, for impairment indicators. Our judgments regarding the existence
of impairment indicators are based on factors such as operational performance,
market conditions and legal factors. Future events could occur which would cause
us to conclude that impairment indicators exist and an impairment loss is
warranted.
The valuation of financial instruments under Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value of Financial
Instruments" ("SFAS No. 107") and Statement of Financial Accounting Standards
No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging
Activities" requires us to make estimates and judgments that affect the fair
value of the instruments. Where possible, we base the fair values of our
financial instruments, including our derivative instruments, on listed market
prices and third party quotes. Where these are not available, we base our
estimates on other factors relevant to the financial instrument.
Real estate is recorded at cost less accumulated depreciation. Depreciation
is computed on the straight-line basis over the estimated useful lives of the
assets. We use a 30-year estimated life for buildings acquired and structural
and land improvements, a ten-to-fifteen-year estimated life for building
upgrades and a three-to-seven-year estimated life for furniture, fixtures and
equipment. Expenditures for ordinary maintenance and repairs are expensed to
operations as incurred and significant renovations and improvements that improve
the asset and extend the useful life of the asset are capitalized over their
estimated useful life. The determination of useful lives, salvage value, and
depreciation method used are in conformity with GAAP. However, the useful lives,
salvage value, and customary depreciation method used for land improvements and
other significant assets may significantly and materially overstate the
depreciation of the underlying assets and therefore understate the Net Income of
the Company. In addition, the Financial Accounting Standards Board ("FASB") is
currently reviewing the methods of depreciation and cost capitalization for all
industries and in June 2001 issued FASB Exposure Draft, "Accounting in Interim
and Annual Financial Statements for Certain Costs and Activities Related to
Property, Plant and Equipment", the implementation of which, if issued, could
also have a material effect on the Company's results of operations.
18
MANUFACTURED HOME COMMUNITIES, INC.
RESULTS OF OPERATIONS (CONTINUED)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES (CONTINUED)
Certain costs, primarily legal costs, relative to our efforts to
effectively change the use and operations of several Properties subject to rent
control are currently classified in other assets. These costs, to the extent
these efforts are successful, are capitalized to the extent of the established
value of the revised project and included in the net investment in real estate
for the appropriate Properties. To the extent these efforts are not successful,
these costs will be expensed. In addition, we capitalize certain costs,
primarily legal costs, related to entering into lease agreements which govern
the terms under which we may enter into leases with individual tenants and which
are expensed over the term of the lease agreement.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns or both. The Company will
adopt FIN 46 in the fourth quarter of 2003 and we have determined adoption will
not have a material effect on the financial results of the Company.
Prior to 2003 we accounted for our stock compensation in accordance with
APB No. 25, "Accounting for Stock Issued to Employees", based upon the intrinsic
value method. This method results in no compensation expense for options issued
with an exercise price equal to or exceeding the market value of the Common
Shares on the date of grant. Effective January 1, 2003, we elected to account
for our stock-based compensation in accordance with SFAS No. 123 and its
amendment (SFAS No. 148), "Accounting for Stock Based Compensation", which will
result in compensation expense being recorded based on the fair value of the
stock option compensation issued. SFAS 148 provides three possible transition
methods for changing to the fair value method. We have elected to use the
modified-prospective method. This method requires that we recognize stock-based
employee compensation cost from the beginning of the fiscal year in which the
recognition provisions are first applied as if the fair value method had been
used to account for all employee awards granted, or settled in fiscal years
beginning after December 15, 1994. The following table illustrates the effect on
net income and earnings per share as if the fair value method was applied to all
outstanding and unvested awards in each period presented:
QUARTERS ENDED NINE MONTHS ENDED
------------------------------ -----------------------------
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income available for Common
Shares as reported.................... $ 5,208 $ 6,712 $ 27,282 $ 20,261
Add: Stock-based compensation
expense included in net income as
reported.............................. 448 615 1,469 242
Deduct: Stock-based compensation
expense determined under the fair
value based method for all awards..... (448) (523) (1,469) (1,352)
------------ ------------ ------------ ------------
Pro forma net income available for
Common Shares......................... $ 5,208 $ 6,804 $ 27,282 $ 19,151
============ ============ ============ ============
Pro forma net income per Common
Share - Basic......................... $ .24 $ .31 $ 1.24 $ .89
============ ============ ============ ============
Pro forma net income per Common
Share - Fully Diluted................. $ .23 $ .31 $ 1.21 $ .87
============ ============ ============ ============
19
MANUFACTURED HOME COMMUNITIES, INC.
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF THE QUARTER ENDED SEPTEMBER 30, 2003 TO THE QUARTER ENDED
SEPTEMBER 30, 2002
Since December 31, 2001, the gross investment in real estate has increased
from $1,238 million to $1,291 million. The total number of sites owned or
controlled has increased from 50,663 as of December 31, 2001 to 50,807 as of
September 30, 2003.
PROPERTY OPERATIONS:
The following table summarizes certain financial and statistical data for
the Property Operations for the Core Portfolio and the Total Portfolio for the
quarters ended September 30, 2003 and 2002.
CORE PORTFOLIO TOTAL PORTFOLIO
------------------------------------------- ---------------------------------------------
INCREASE / % INCREASE / %
(dollars in thousands) 2003 2002 (DECREASE) CHANGE 2003 2002 (DECREASE) CHANGE
-------- -------- ----------- -------- -------- -------- ---------- ----------
Community base rental income ....... $ 47,888 $ 46,441 $ 1,447 3.1% $ 49,203 $ 48,858 $ 345 0.1%
Resort base rental income .......... 142 144 (2) (1.4%) 2,144 1,770 374 21.1%
Utility and other income ........... 4,688 4,487 201 4.5% 4,904 4,737 167 3.5%
-------- -------- -------- -------- -------- -------- -------- --------
Property operating revenues ... 52,718 51,072 1,646 3.2% 56,251 55,365 886 1.6%
Property operating and
maintenance ................... 14,295 13,699 596 4.4% 16,283 15,860 423 2.7%
Real estate taxes .................. 4,192 3,991 201 5.0% 4,577 4,321 256 5.9%
Property management ................ 2,216 2,136 80 3.7% 2,364 2,329 35 1.5%
-------- -------- -------- -------- -------- -------- -------- --------
Property operating expenses ... 20,703 19,826 877 4.4% 23,224 22,510 714 3.2%
-------- -------- -------- -------- -------- -------- -------- --------
Income from property operations .... $ 32,015 $ 31,246 $ 769 2.5% $ 33,027 $ 32,855 $ 172 0.5%
======== ======== ======== ======== ======== ======== ======== ========
Site and Occupancy Information (1):
Average total sites ................ 41,568 41,587 (19) (0.1%) 43,131 42,259 872 2.1%
Average occupied sites ............. 37,745 38,443 (698) (1.8%) 39,213 39,086 127 0.1%
Occupancy % ........................ 90.8% 92.4% (1.6%) (1.6%) 90.9% 92.5% (1.6%) (1.6%)
Monthly base rent per site ......... $ 422.91 $ 402.69 $ 20.22 5.0% $ 418.25 $ 400.16 $ 18.09 4.5%
Total sites
As of September 30, .......... 41,568 41,586 (18) (0.1%) 43,131 42,358 773 1.8%
Total occupied sites
As of September 30, .......... 37,694 38,392 (698) (1.8%) 39,162 39,122 40 0.1%
(1) Site and occupancy information excludes Resort sites and Properties owned
through joint ventures.
20
MANUFACTURED HOME COMMUNITIES, INC.
RESULTS OF OPERATIONS (CONTINUED)
Property Operating Revenues
The 3.1% increase in Community base rental income for the Core Portfolio
reflects a 5.0% increase in monthly base rent per site coupled with a 1.9%
decrease in average occupied sites.
Property Operating Expenses
The increase in property operating and maintenance expense for the Core
Portfolio is due primarily to increases in property payroll, utility expense,
repair and maintenance and administrative expenses. The increase in Core
Portfolio real estate taxes is generally due to higher property assessments on
certain Properties. Property management expense for the Core Portfolio, which
reflects costs of managing the Properties and is estimated based on a percentage
of Property revenues, increased by 3.7%.
HOME SALES OPERATIONS:
The following table summarizes certain financial and statistical data for
the Home Sales Operations for the quarters ended September 30, 2003 and 2002.
HOME SALES OPERATIONS
---------------------------------------------
INCREASE /
(dollars in thousands) 2003 2002 (DECREASE) % CHANGE
--------- --------- ---------- ----------
Gross revenues from new home sales ................ $ 10,394 $ 8,328 $ 2,066 24.8%
Cost of new home sales ............................ (9,136) (6,584) 2,552 38.8%
--------- --------- --------- ---------
Gross profit from new home sales .................. 1,258 1,744 (486) (27.9%)
Gross revenues from used home sales ............... 1,005 792 213 26.9%
Cost of used home sales ........................... (979) (820) 159 19.4%
--------- --------- --------- ---------
Gross profit from used home sales ................. 26 (28) 54 192.9%
Brokered resale revenues, net ..................... 491 348 143 41.1%
Home selling expenses ............................. (1,971) (1,934) 37 1.9%
Ancillary services revenues, net .................. (125) (62) 63 101.6%
--------- --------- --------- ---------
(Loss) income from home sales and other ........... $ (321) $ 68 $ (389) (572.0%)
========= ========= ========= =========
HOME SALES VOLUMES:
New home sales .................................. 137 112 25 22.3%
Used home sales ................................. 53 48 5 10.4%
Brokered home resales ........................... 287 216 71 32.9%
New home sales gross profit reflects a 22.3% increase in sales volume
coupled with an 8.8% decrease in average profit margins. The average selling
price of new homes increased approximately $1,511 or 2.0% compared to 2002. Used
home sales gross profit reflects an increase in gross margin on used home sales,
and increased sales volume. Brokered resale revenues increased 41.1% compared to
the prior year due to higher volume.
21
MANUFACTURED HOME COMMUNITIES, INC.
RESULTS OF OPERATIONS (CONTINUED)
OTHER INCOME AND EXPENSES:
The decrease in other income and expenses reflects increased income from
joint ventures and interest income and a decrease in interest expense. Interest
expense decreased due to a decrease in the weighted average interest rate for
outstanding debt.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2003 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2002
The following table summarizes certain financial and statistical data for the
Property Operations for the Core Portfolio and the Total Portfolio for the nine
months ended September 30, 2003 and 2002.
CORE PORTFOLIO TOTAL PORTFOLIO
-------------------------------------------- -----------------------------------------------
INCREASE / % INCREASE / %
(dollars in thousands) 2003 2002 (DECREASE) CHANGE 2003 2002 (DECREASE) CHANGE
-------- -------- ----------- -------- -------- -------- ---------- ----------
Community base rental income ....... $143,726 $139,101 4,625 3.3% $147,675 $147,064 $ 611 0.1%
Resort base rental income .......... 443 390 53 13.6% 8,076 5,425 2,651 48.8%
Utility and other income ........... 14,295 14,115 180 1.3% 15,327 15,150 177 1.2%
-------- -------- -------- -------- -------- -------- -------- --------
Property operating revenues ... 158,464 153,606 4,858 3.2% 171,078 167,639 3,439 2.1%
Property operating and
maintenance ................... 42,483 40,749 1,734 4.3% 48,828 47,062 1,766 3.8%
Real estate taxes .................. 12,778 12,186 592 4.9% 13,960 13,354 606 4.5%
Property management ................ 6,386 6,451 (65) (1.0%) 6,992 7,003 (11) (0.1%)
-------- -------- -------- -------- -------- -------- -------- --------
Property operating expenses ... 61,647 59,386 2,261 3.8% 69,780 67,419 2,361 3.5%
-------- -------- -------- -------- -------- -------- -------- --------
Income from property operations .... $ 96,817 $ 94,220 $ 2,597 2.8% $101,298 $100,220 $ 1,078 1.1%
======== ======== ======== ======== ======== ======== ======== ========
Site and Occupancy Information (1):
Average total sites ................ 41,567 41,575 (8) (0.1%) 43,131 43,919 (788) (1.8%)
Average occupied sites ............. 38,008 38,674 (666) (1.7%) 39,478 40,817 (1,339) (3.3%)
Occupancy % ........................ 91.4% 93.0% (1.6%) (1.6%) 91.5% 92.9% (1.4%) (1.4%)
Monthly base rent per site ......... $ 420.17 $ 399.64 $ 20.53 5.1% $ 415.63 $ 395.06 $ 20.57 5.2%
(1) Site and occupancy information excludes Resort sites and Properties owned
through joint ventures.
Property Operating Revenues
The 3.3% increase in base rental income for the Core Portfolio reflects a
5.1% increase in monthly base rent per site coupled with a 1.8% decrease in
average occupied sites.
22
MANUFACTURED HOME COMMUNITIES, INC.
RESULTS OF OPERATIONS (CONTINUED)
Property Operating Expenses
The increase in property operating and maintenance expense for the Core
Portfolio is due primarily to increases in property payroll, insurance and other
expenses, utility expense, repair and maintenance expenses and administrative
expense. The increase in Core Portfolio real estate taxes is generally due to
higher property assessments on certain Properties. Property management expense
for the Core Portfolio, which reflects costs of managing the Properties and is
estimated based on a percentage of Property revenues, remained relatively
stable.
HOME SALES OPERATIONS:
The following table summarizes certain financial and statistical data
for the Home Sales Operations for the nine months ended September 30, 2003 and
2002.
HOME SALES OPERATIONS
-------------------------------------------------------------
INCREASE/
(dollars in thousands) 2003 2002 (DECREASE) % CHANGE
--------- --------- ---------- --------
Gross revenues from new home sales ...................... $ 22,654 $ 20,057 2,597 12.9%
Cost of new home sales .................................. (19,413) (15,673) 3,740 23.9%
-------- -------- ------ ------
Gross profit from new home sales ........................ 3,241 4,384 (1,143) (26.1%)
Gross revenues from used home sales ..................... 2,404 1,718 686 39.9%
Cost of used home sales ................................. (2,328) (1,386) 942 68.0%
-------- -------- ------ ------
Gross profit from used home sales ....................... 76 332 (256) (77.1%)
Brokered resale revenues, net ........................... 1,321 1,234 87 7.1%
Home selling expenses ................................... (5,669) (6,061) (392) (6.5%)
Ancillary services revenues, net ........................ 244 604 (360) (59.6%)
-------- -------- ------ ------
(Loss) income from home sales and other ................. $ (787) $ 493 (1,280) (259.6%)
======== ======== ====== ======
HOME SALES VOLUMES:
New home sales ........................................ 307 273 34 12.5%
Used home sales ....................................... 142 126 16 12.7%
Brokered home resales ................................. 829 759 70 9.2%
New home sales gross profit reflects a 12.5% increase in sales volume
coupled with a 7.6% decrease in average profit margins. Used home sales gross
profit reflects a decrease in gross margin on used home sales, partially offset
by increased sales volume. Brokered resale revenues increased 7.1% compared to
the prior year due to higher volume. The 6.4% decrease in home selling expenses
primarily reflects reductions in payroll and advertising expenses.
23
MANUFACTURED HOME COMMUNITIES, INC.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
As of September 30, 2003, the Company had $18.0 million in cash and
cash equivalents and $91.5 million available on its line of credit. The Company
expects to meet its short-term liquidity requirements, including its
distributions, generally through its working capital, net cash provided by
operating activities and availability under the existing line of credit. The
Company expects to meet certain long-term liquidity requirements such as
scheduled debt maturities, property acquisitions and capital improvements by
long-term collateralized and uncollateralized borrowings including borrowings
under its existing line of credit and the issuance of debt securities or
additional equity securities in the Company, in addition to working capital.
INFLATION
Substantially all of the leases at the Properties allow for monthly or
annual rent increases which provide the Company with the opportunity to achieve
increases, where justified by the market, as each lease matures. Such types of
leases generally minimize the risk of inflation to the Company.
ACQUISITIONS AND DISPOSITIONS
During the nine months ended September 30, 2003 we sold three
properties listed in the table below. Proceeds from the sales were used to repay
amounts on the Company's line of credit. Also during the same period we acquired
a parcel of land adjacent to one of our Properties for approximately $97,000.
TOTAL DISPOSITION GAIN ON
DATE DISPOSED PROPERTY LOCATION SITES PRICE SALE
- ------------- ----------------- ------------------------- ----- ------------ ------------
($ millions) ($ millions)
June 6, 2003 Independence Hill Morgantown, West Virginia 203 $ 3.9 $ 2.8
June 6, 2003 Brook Gardens Hamburg, New York 424 17.8 4.1
June 30, 2003 Pheasant Ridge Mount Airy, Maryland 101 5.4 3.9
--- ------- --------
728 $ 27.1 $ 10.8
=== ======= ========
INVESTMENTS IN JOINT VENTURES
During the nine months ended September 30, 2003, the Company recorded
approximately $1.6 million of net income from joint ventures and received
approximately $1.2 million in distributions.
CAPITAL IMPROVEMENTS
Capital expenditures for improvements are identified by the Company as
recurring capital expenditures ("Recurring CapEx"), site development costs and
corporate headquarters costs. Recurring CapEx was approximately $8.7 million for
the nine months ended September 30, 2003. Site development costs were
approximately $5.5 million for the nine months ended September 30, 2003, and
represent costs to develop expansion sites at certain of the Company's
Properties and costs for improvements to sites when a smaller used home is
replaced with a larger new home.
24
MANUFACTURED HOME COMMUNITIES, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
EQUITY TRANSACTIONS
In order to qualify as a REIT for federal income tax purposes, the
Company must distribute 90% or more of its taxable income (excluding capital
gains). The following distributions have been declared and/or paid to common
stockholders and minority interests since January 1, 2003.
DISTRIBUTION
AMOUNT PER FOR THE QUARTER SHAREHOLDER
SHARE ENDING DATE PAYMENT DATE
- ---------------- ------------------ ------------------- ----------------
$0.4750 December 31, 2002 December 27, 2002 January 10, 2003
$0.4950 March 31, 2003 March 28, 2003 April 14, 2003
$0.4950 June 30, 2003 June 27, 2003 July 14, 2003
$0.4950 September 30, 2003 September 26, 2003 October 10, 2003
The Operating Partnership paid distributions of 9.0% per annum on the
$125 million of Series D Cumulative Redeemable Perpetual Preferred Units
("Preferred Units"). Distributions on the Preferred Units of $ 2.8 million were
paid on March 31, 2003, June 30, 2003 and September 30, 2003.
MORTGAGES AND CREDIT FACILITIES
On April 17, 2003, we entered into an agreement to refinance and
increase the Bay Indies Mortgage from approximately $21.9 million to $45
million. Under the new agreement, the Bay Indies Mortgage bears interest at
5.69% per annum, amortizes over 25 years and matures April 17, 2013. The net
proceeds were used to pay down the Company's line of credit. Also during the
nine months ended September 30, 2003, mortgage notes payable on two other
properties were repaid totaling approximately $16.2 million using proceeds from
borrowings on the Company's line of credit.
Throughout the nine months ended September 30, 2003, the Company
borrowed $42.0 million on its line of credit and repaid $68.3 million on the
line of credit. The line of credit bears interest at a rate of LIBOR plus
1.125%.
Certain of the Company's mortgage and credit agreements contain
covenants and restrictions including restrictions as to the ratio of secured or
unsecured debt versus encumbered or unencumbered assets, the ratio of fixed
charges-to-earnings before interest, taxes, depreciation and amortization
("EBITDA"), limitations on certain holdings and other restrictions.
25
MANUFACTURED HOME COMMUNITIES, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
FUNDS FROM OPERATIONS
Funds From Operations ("FFO"), a non-GAAP financial performance
measure, was redefined by the National Association of Real Estate Investment
Trusts ("NAREIT") in April 2002, as net income (computed in accordance with
GAAP), before allocation to minority interests, excluding gains (or losses) from
sales of property, plus real estate depreciation and after adjustments for
unconsolidated partnerships and joint ventures. The Company computes FFO in
accordance with the NAREIT definition, which may differ from the methodology for
calculating FFO utilized by other equity REITs and, accordingly, may not be
comparable to such other REIT's computations. The Company believes that FFO is
useful to investors as a measure of the performance of an equity REIT because,
along with cash flows from operating activities, financing activities and
investing activities, FFO provides investors an understanding of the ability of
the Company to incur and service debt and to make capital expenditures. FFO does
not represent cash generated from operating activities in accordance with GAAP
and therefore should not be considered an alternative to net income as an
indication of the Company's performance or to net cash flows from operating
activities as determined by GAAP as a measure of liquidity and are not
necessarily indicative of cash available to fund cash needs.
The following table presents a calculation of FFO for the quarters and
nine months ended September 30, 2003 and 2002 (amounts in thousands):
QUARTERS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- --------------------------------
2003 2002 2003 2002
-------------- --------------- --------------- --------------
COMPUTATION OF FUNDS FROM OPERATIONS:
Net income available for Common Shares.................. $ 5,208 $ 6,712 $ 27,282 $ 20,261
Income allocated to common OP Units..................... 1,248 1,645 6,539 5,007
Depreciation on real estate assets...................... 9,446 8,816 28,037 26,631
Depreciation on real estate assets held-for-sale........ --- 121 129 362
Gain on the sale of Properties and other................ --- (1,270) (10,826) (1,270)
------------- ------------- ------------- -------------
Funds from operations................................. $ 15,902 $ 16,024 $ 51,161 $ 50,991
============= ============= ============= =============
Weighted average Common Stock outstanding - diluted 28,148 27,693 27,952 27,622
============= ============= ============= =============
26
MANUFACTURED HOME COMMUNITIES, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our earnings are affected by changes in interest rates, since a portion
of our outstanding indebtedness is at variable rates based on LIBOR. Our Line of
Credit ($58.5 million outstanding at September 30, 2003) bears interest at LIBOR
plus 1.125%, per annum and our $100 million Term Loan bears interest at LIBOR
plus 1.375%. If LIBOR increased/decreased by 1.0% during the nine months ended
September 30, 2003, interest expense would have increased/decreased by
approximately $1.3 million based on the combined average balance outstanding
under the Company's Line of Credit and Term Loan during the period.
On October 29, 2001, we entered into an interest rate swap agreement
(the "2001 Swap"), effectively fixing the LIBOR rate on $100 million of our
floating rate debt at approximately 3.7% per annum for the period October 2001
through August 2004. The terms of the 2001 Swap require monthly settlements on
the same dates interest payments are due on the debt. Effective January 1, 2001,
the Company adopted Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133")
and its amendments, SFAS No. 137 and SFAS No. 138. In accordance with SFAS No.
133, the interest rate swap will be reflected at market value. We believe the
2001 Swap is a perfectly effective cash flow hedge, under SFAS No. 133, and
there will be no effect on net income as a result of the mark-to-market
adjustment. As of September 30, 2003, the hedge represented a liability of
approximately $3.4 million and is recorded in accounts payable and accrued
expenses. Mark-to-market changes in the value of the 2001 Swap are included in
other comprehensive income.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the reporting period, an evaluation was performed
under the supervision and with the participation of the Company's management,
including the CEO and CFO, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures. Based on that evaluation, the
Company's management, including the CEO and CFO, concluded that the Company's
disclosure controls and procedures were effective in timely alerting them to
material information.
CHANGES IN INTERNAL CONTROLS
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
during the quarter ended September 30, 2003.
27
MANUFACTURED HOME COMMUNITIES, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(see Note 9 of the Consolidated Financial Statements contained herein)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
31.1 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
Form 8-K dated and filed July 22, 2003, relating to
Item 7 - "Financial Statements and Exhibits" and Item 12 -
"Disclosure of Results of Operations and Financial
Condition" regarding release of 2nd Quarter 2003 results of
operations and financial condition.
Form 8-K dated and filed September 3, 2003, relating to Item
5 - "Other Events and Regulation FD Disclosure" regarding
the Company's initiation of a process to obtain $500
million in loan commitments from an institutional lender.
Form 8-K dated and filed September 8, 2003, relating to Item
5 - "Other Events and Regulation FD Disclosure" regarding a
settlement agreement the Company entered into with the City
of Santa Cruz.
Form 8-K dated and filed September 15, 2003, relating to Item 5
- "Other Events and Regulation FD Disclosure" regarding the
appointment of Michael Berman as the Company's Chief
Financial Officer.
28
SIGNATURES
Pursuant to the requirements 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.
MANUFACTURED HOME COMMUNITIES, INC.
BY: /s/ MICHAEL B. BERMAN
______________________________________
Michael B. Berman
Vice President, Treasurer and
Chief Financial Officer
BY: /s/ MARK HOWELL
_______________________________________
Mark Howell
Principal Accounting Officer and
Assistant Treasurer
DATE: November 10, 2003
29