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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
or
[ ] 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
(State or other jurisdiction of 36-3857664
incorporation or organization) (I.R.S. Employer Identification No.)
TWO NORTH RIVERSIDE PLAZA, SUITE 800, CHICAGO, ILLINOIS 60606
(Address of principal executive offices) (Zip Code)
(312) 474-1122
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 Par Value The New York Stock Exchange
(Title of Class) (Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes[X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates was
approximately $554.7 million as of February 14, 1997 based upon the closing
price of $23.375 on such date using beneficial ownership of stock rules adopted
pursuant to Section 13 of the Securities Exchange Act of 1934 to exclude voting
stock owned by Directors and Officers, some of whom may not be held to be
affiliates upon judicial determination.
At February 14, 1997, 24,995,278 shares of the Registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III incorporates by reference the Registrant's Proxy Statement relating to
the Annual Meeting of Stockholders to be held May 13, 1997.
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MANUFACTURED HOME COMMUNITIES, INC.
TABLE OF CONTENTS
PART I. Page
----
Item 1. Business..................................................................................3
Item 2. Properties................................................................................7
Item 3. Legal Proceedings........................................................................12
Item 4. Submission of Matters to a Vote of Security Holders......................................13
PART II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................14
Item 6. Selected Financial Data and Operating Information........................................14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....17
Item 8. Financial Statements and Supplementary Data..............................................22
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.....22
PART III.
Item 10. Directors and Executive Officers of the Registrant.......................................22
Item 11. Executive Compensation...................................................................22
Item 12. Security Ownership of Certain Beneficial Owners and Management...........................22
Item 13. Certain Relationships and Related Transactions...........................................22
PART IV.
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K........................23
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PART I
ITEM 1. BUSINESS
THE COMPANY
GENERAL
Manufactured Home Communities, Inc. (together with its consolidated
subsidiaries, the "Company") is a fully integrated company which owns and
operates manufactured home communities. Manufactured home communities are
residential developments designed and improved for the placement of detached,
single-family manufactured homes which are produced off-site and installed
within the community. The owner of each home leases the site on which it is
located. Modern manufactured home communities are similar to typical
residential subdivisions containing centralized entrances, paved streets, curbs
and gutters and parkways. In addition, these communities often provide a
clubhouse for social activities and recreation and other amenities, which may
include swimming pools, shuffleboard courts, tennis courts, laundry facilities
and cable television service. Utilities are provided or arranged for by the
owner of the community. Some communities provide water and sewer service
through public or private utilities, while others provide these services to
residents from on-site facilities.
The Company was formed to continue the property operations, business
objectives and acquisition strategies of an entity that has owned and operated
manufactured home communities since 1969. As of December 31, 1996, the Company
controlled a portfolio of 69 manufactured home communities (the "Properties")
located throughout the United States containing 27,356 residential sites. The
Properties are located in 19 states (with the number of Properties in each
state shown parenthetically) -- Arizona (10), California (6), Colorado (8),
Delaware (3), Florida (20), Illinois (1), Indiana (3), Iowa (1), Kansas (3),
Maryland (1), Minnesota (1), Missouri (3), Montana (1), Nevada (3), New Mexico
(1), Oklahoma (1), Pennsylvania (1), Virginia (1), and West Virginia (1).
The Company has approximately 465 full-time employees dedicated to
carrying out the Company's operating philosophy and strategies of value
enhancement and service to residents. The Company typically utilizes a
two-person management team (who reside at the Properties) for the on-site
management of each of the Properties. Typically, clerical and maintenance
workers are employed to assist these individuals in the management and care of
the Properties. Direct supervision of on-site management is the responsibility
of the Company's four regional vice presidents. These individuals have
significant experience in addressing the needs of residents and in finding or
creating innovative approaches to maximize value and increase cash flow from
property operations. Complementing this field management staff are
approximately 45 corporate employees who assist on-site management in all
property functions.
FORMATION OF THE COMPANY
The Company, through certain of its subsidiaries, became the successor to
the manufactured home community business of Mobile Home Communities, Inc. and
certain affiliated entities (the "Original Owners") that owned 41 manufactured
home communities (the "Original Properties") (collectively, such entities are
referred to as the "Predecessor Business"). In November 1992, the Original
Owners transferred their interests in the Original Properties, net of certain
mortgage indebtedness, to the MHC Operating Limited Partnership (the "Operating
Partnership"). On March 3, 1993, the Company completed an initial public
offering of 10,120,000 shares of common stock, $.01 par value per share (the
"Initial Offering").
The Company is a Maryland corporation, which has elected to be taxed as a
real estate investment trust ("REIT"). The Company generally will not be
subject to Federal income tax to the extent it distributes its REIT taxable
income to its stockholders. REITs are subject to a number of organizational
and operational requirements. If the Company fails to qualify as a REIT, its
income is taxable at regular corporate rates. Even if the Company qualifies for
taxation as a REIT, the Company is subject to certain state and local taxes on
its income and property and Federal income and excise taxes on its
undistributed income.
The operations of the Company are conducted through certain entities which
are owned or controlled by the Company. The Operating Partnership is the
entity through which the Company conducts substantially all of its operations.
Sub-partnerships of the Operating Partnership were created to: (i) facilitate
mortgage financing (the "Financing Partnerships"); (ii) facilitate the
Company's ability to provide financing to the owners of manufactured home
communities ("Lending Partnership"); (iii) own the management operations of the
Company ("Management Partnerships"); and (iv) own the assets and operations of
certain utility companies which service the Properties ("MHC Systems"). The
financial results of the Operating Partnership and sub-partnerships (together
the "Subsidiaries") are consolidated in the Company's consolidated financial
statements.
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In addition, since certain activities, if performed by the Company, may
not be qualifying REIT activities under the Internal Revenue Code of 1986, as
amended (the "Code"), the Company has invested in the non-voting preferred
stock of various corporations which engage in such activities. Realty Systems,
Inc. ("RSI") is engaged in the business of purchasing, selling, leasing and
financing manufactured homes that are located or will be located in properties
managed by the Company. RSI also provides brokerage services to residents at
such properties. Typically residents move from a community but do not relocate
their homes. RSI may provide brokerage services, in competition with other
local brokers, by seeking buyers for the homes. RSI also leases homes to
prospective residents with the expectation that the tenant eventually will
purchase the home. LP Management Corp. leases from the Operating Partnership
certain real property within or adjacent to certain of the Properties
consisting of golf courses, pro shops, restaurants and campgrounds. LP
Management Corp. pays a management fee to an independent contractor who manages
and operates these businesses. The Company believes that RSI's and LP
Management Corp.'s (collectively, "Affiliates") activities benefit the Company
by maintaining and enhancing occupancy at the Properties. The Company accounts
for its investment in and advances to Affiliates using the equity method of
accounting.
BUSINESS OBJECTIVES AND OPERATING STRATEGIES
The Company seeks to maximize both current income and long-term growth in
income. The Company focuses on manufactured home communities that have strong
cash flow growth potential and expects to hold such properties for long-term
investment and capital appreciation. These business objectives and their
implementation are determined by the Company's Board of Directors and may be
changed at any time. The Company's investment and operating approach includes:
- Aggresively managing the Properties to increase operating margins
through rent and/or occupancy increases and expense control;
- Increasing income and property values by continuing the strategic
expansion and, where appropriate, renovation of the Properties;
- Utilizing management information systems to evaluate potential
acquisitions, identify and track competing properties and
monitor tenant satisfaction; and
- Selectively acquiring manufactured home communities that have
potential for long-term cash flow growth.
The Company is committed to enhancing its reputation as the most respected
brand name in the manufactured home community business. Its strategy is to own
and operate the highest quality communities in premier locations across the
United States. The focus is on creating an attractive residential environment
for homeowners by providing a well-maintained, comfortable community with a
variety of organized recreational and social activities and superior amenities.
In addition, the Company regularly surveys rental rates of competing
properties and conducts satisfaction surveys of residents to determine the
factors residents consider most important in choosing a manufactured home
community.
FUTURE ACQUISITIONS
The Company believes that opportunities for property acquisitions are
particularly attractive at this time because of increasing acceptability of and
demand for manufactured homes and continued constraints on development of new
manufactured home communities. The Company believes it has a competitive
advantage in the acquisition of new communities due to its experienced
management, significant presence in major real estate markets and substantial
capital resources. The Company is actively seeking to acquire additional
communities and currently is engaged in various stages of negotiations relating
to the possible acquisition of a number of communities.
The Company anticipates that newly acquired properties will be located in
the United States. The Company utilizes market information systems to identify
and evaluate acquisition opportunities, including a market data base to review
the primary economic indicators of the various locations in which the Company
expects to expand its operations. Acquisitions will be financed from the most
appropriate sources of capital, which may include undistributed funds from
operations, issuance of additional equity securities, sales of investments,
collateralized and uncollateralized borrowings and issuance of debt securities.
In addition, the Company may cause the Operating Partnership to issue OP Units
to finance acquisitions. The Company believes that an ownership structure
which includes the Operating Partnership will permit the Company to acquire
additional manufactured home communities in transactions that may defer all or
a portion of the sellers' tax consequences.
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When evaluating potential acquisitions, the Company will consider such
factors as: (i) the replacement cost of the property; (ii) the geographic area
and type of property; (iii) the location, construction quality, condition and
design of the property; (iv) the current and projected cash flow of the
property and the ability to increase cash flow; (v) the potential for capital
appreciation of the property; (vi) the terms of tenant leases, including the
potential for rent increases; (vii) the potential for economic growth and the
tax and regulatory environment of the community in which the property is
located; (viii) the potential for expansion of the physical layout of the
property and/or the number of sites; (ix) the occupancy and demand by residents
for properties of a similar type in the vicinity and the residents profile; (x)
the prospects for liquidity through sale, financing or refinancing of the
property; and (xi) competition from existing manufactured home communities and
the potential for the construction of new communities in the area. The Company
expects to purchase manufactured home communities with physical and market
characteristics similar to the Properties in its current portfolio.
PROPERTY EXPANSIONS
The Company will seek to increase the income generated from the Properties
and from any additional properties acquired by expanding the number of sites
available to be leased to residents if justified by local market conditions and
permitted by zoning and other applicable laws. Of the 69 Properties, six may
be expanded consistent with existing zoning regulations. In 1997, the Company
expects to complete Phase I of the Bulow Village expansion consisting of 104
sites. In addition, where appropriate, the Company will consider upgrading or
adding facilities and amenities to certain Properties in order to make those
Properties more attractive in their markets. As of December 31, 1996, the
Company had approximately 2,293 expansion sites located in thirteen of the
Properties, of which 163 sites were acquired in 1996. The Company filled 239
of the expansion sites in 1996 and expects to fill an additional 200 sites in
1997.
LEASES
The typical lease entered into between the tenant and one of the Company's
manufactured home communities for the rental of a site requires a security
deposit and is month-to-month or year-to-year, renewable upon the consent of
both parties or, in some instances, as provided by statute. These leases are
cancelable, depending on state law, for non-payment of rent, violation of
community rules and regulations or other specified defaults. Non-cancelable
long-term leases, ranging from one to fifteen years, are in effect at certain
sites within seven of the Properties. In addition, lifetime leases are in
effect at certain sites within five of the Properties. These leases are
subject to rent rate increases based on the Consumer Price Index, in some
instances taking into consideration certain floors and ceilings and allowing
for pass-throughs of certain items such as real estate taxes, utility expenses
and capital expenditures. Generally, market rate adjustments are made on an
annual basis.
REGULATIONS AND INSURANCE
General. Manufactured home communities are subject to various laws,
ordinances and regulations, including regulations relating to recreational
facilities such as swimming pools, clubhouses and other common areas. The
Company believes that each Property has the necessary permits and approvals to
operate.
Americans with Disabilities Act ("ADA"). The Properties and any newly
acquired manufactured home communities must comply with the ADA. The ADA has
separate compliance requirements for "public accommodations" and "commercial
facilities," but generally requires that public facilities such as clubhouses,
pools and recreation areas be made accessible to people with disabilities.
Compliance with the ADA requirements has required removal of access barriers
and other capital improvements at the Properties. Noncompliance could result in
imposition of fines or an award of damages to private litigants. The Company
has taken into account an estimate of funds required to make any changes
required by the ADA in determining the appropriate level of reserves and the
expected level of distributions and believes that such costs can be covered by
funds from the operations of the Properties or established reserves without any
material adverse effect on the Company's financial condition or results of
operations. If ongoing changes involve a greater expenditure than the Company
currently anticipates, or if the changes must be made on a more accelerated
basis than it anticipates, the Company's ability to make expected distributions
could be adversely affected. The Company believes that its competitors face
similar costs to comply with the requirements of the ADA.
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Rent Control Legislation. State and local rent control laws, principally
in California and Florida, limit the Company's ability to increase rents and to
recover increases in operating expenses and the costs of capital improvements.
Enactment of such laws has been considered from time to time in other
jurisdictions. The Company presently expects to continue to maintain
manufactured home communities, and may purchase additional properties, in
markets that are either subject to rent control or in which rent-limiting
legislation exists or may be enacted. For example, Florida has enacted a law
which generally provides that rental increases must be reasonable. Also,
certain jurisdictions in California in which the Company owns Properties limit
rent increases to changes in the Consumer Price Index or some percentage
thereof.
Insurance. Management believes that the Properties are covered by
adequate fire, flood and property insurance provided by reputable companies and
with commercially reasonable deductibles and limits. The Company believes its
insurance coverage is adequate based on the Company's assessment of the risks
to be insured, the probability of loss and the relative cost of available
coverage. The Company has obtained title insurance insuring fee title to the
Properties in an aggregate amount which the Company believes to be adequate.
INDUSTRY
THE MANUFACTURED HOME COMMUNITY INDUSTRY
The Company believes that modern manufactured home communities, like the
Properties, provide an opportunity for increased cash flows and appreciation in
value. These may be achieved through increases in occupancy rates and rents, as
well as expense controls, expansion of existing Properties and opportunistic
acquisitions, for the following industry specific reasons:
- Barriers to Entry: The Company believes that the supply of new
manufactured home communities will be constrained due to barriers to entry
into the industry. The most significant barrier has been the difficulty
in securing zoning from local authorities. This has been the result of (i)
the public's poor perception of the business, and (ii) the fact that
manufactured home communities generate less tax revenue because the homes
are treated as personal property (a benefit to the home owner) rather than
real property. Another factor that creates substantial barriers to entry
is the length of time between investment in the communities' development
and the attainment of stabilized occupancy and the generation of revenues.
The initial development of the infrastructure may take up to two or three
years. Once the community is ready for occupancy, it may be difficult to
attract residents to an empty community. Substantial occupancy levels may
take a number of years to achieve.
- Industry Consolidation: According to an industry analyst's manufactured
home community industry report, 172 of the largest owners and fee managers
of manufactured home communities operating in the United States and Canada
during 1996 operated 2,519 communities. Their communities constituted
approximately 10% of the estimated 24,000 communities that are regarded as
"investment grade". The Company believes that this relatively high degree
of fragmentation in the industry provides the Company, as a national
organization with experienced management and substantial financial
resources, the opportunity to purchase additional manufactured home
communities at favorable prices.
- Stable Tenant Base: The Company believes that manufactured home
communities tend to achieve and maintain a stable rate of occupancy due to
the following factors: (i) residents own their own homes, and (ii) moving
a manufactured home from one community to another involves substantial
cost and effort and often results in the abandonment of on-site
improvements made by the tenant such as decks, garages, carports and
landscaping.
MANUFACTURED HOUSING
Based on the current growth in the number of individuals living in
manufactured homes, the Company believes that manufactured homes are
increasingly viewed by the public as an attractive and economical form of
housing. According to the industry's trade association, nearly one in three
new single family homes sold in the United States today is factory-built.
The Company believes that the growing popularity of manufactured housing
is primarily the result of the following factors:
- Importance of Home Ownership. A 1994 survey by the Federal National
Mortgage Association indicated that most people would make a wide range of
trade-offs in order to own their own home. Security and permanence are thought
to be non-financial reasons to own a home. The commitment to home ownership is
tempered by an awareness of the high cost of owning a home. The affordability
of manufactured housing allows many individuals to achieve this goal without
jeopardizing their financial security.
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- Affordability. For a significant number of persons, manufactured
housing represents the only means of achieving home ownership. In
addition, the total cost of housing in a manufactured home community (home
cost, site rent and related occupancy costs) is competitive with and often
lower than the total cost of alternative housing, such as apartments and
condominiums.
- Lifestyle Choice. As the average age of the United States population
has increased, manufactured housing has become an increasingly popular
housing alternative for retirement and "empty-nest" living. The percentage of
buyers of manufactured homes who are 40 to 49 years old has more than doubled
since 1981 and the percentage of buyers who are 50 to 59 years old increased
40% in the same period. The Company believes that manufactured housing is
especially attractive to such individuals when located within a community that
offers an appealing amenity package, close proximity to local services, social
activities, low maintenance and a secure environment.
- Construction Quality. Since 1976, all manufactured housing has been
required to meet stringent Federal standards, resulting in significant
increases in the quality of the industry's product. The Department of Housing
and Urban Development's standards for manufactured housing construction
quality are the only Federally regulated standards governing housing quality
of any type in the United States. Manufactured homes produced since 1976 have
received a "red and silver" government seal certifying that they were built in
compliance with the Federal code. The code regulates manufactured home design
and construction, strength and durability, fire resistance and energy
efficiency, and the installation and performance of heating, plumbing, air
conditioning, thermal and electrical systems. In newer homes, top grade lumber
and dry wall materials are common. Also, manufacturers are required to follow
the same fire codes as builders of site-built structures.
- Comparability to Site-Built Homes. The manufactured housing industry
has experienced a recent trend towards multi-section homes. Many modern
manufactured homes are longer (up to 80 feet compared to 50 feet in the 1960s)
and wider than earlier models. Many homes have vaulted ceilings, fireplaces
and as many as four bedrooms and closely resemble single family site-built
homes.
ITEM 2. PROPERTIES
The Company believes that the Properties provide attractive amenities and
common facilities that create a comfortable and attractive community for the
residents, with most offering a clubhouse, a swimming pool, laundry facilities
and cable television service. Many also offer additional amenities such as
sauna/whirlpool spas, golf courses, tennis, shuffleboard and basketball courts
and exercise rooms. Since residents own their homes, it is their
responsibility to maintain their homes and the surrounding area. It is
management's role to insure that residents comply with community policies and
to provide maintenance of the common areas, facilities and amenities. The
Company holds periodic meetings of its property management personnel for
training and implementation of the Company's strategies. The Properties
historically have had and the Company believes they will continue to have low
turnover and high occupancy rates due in part to this strategy.
The distribution of the Properties throughout the United States reflects
the Company's belief that geographic diversification helps insulate the
portfolio from regional economic influences. At the same time, the Company has
sought to create clusters of Properties within each of its primary markets in
order to achieve economies of scale in management and operation. The Company
intends to target new acquisitions in or near markets where the Properties are
located and will also consider acquisitions of properties outside such markets.
The Company's five largest markets are South Florida (12 Properties), North
Florida (8 Properties), the Northeast (7), Arizona (10 Properties), and
Colorado (8 Properties). These markets account for 27.2%, 9.9%, 9.8%, 8.7%,
and 11.8%, respectively, of the Company's total revenues for the year ended
December 31, 1996. The Company's largest Property, Bay Indies, located in
Venice, Florida accounted for 5.1% of the Company's total revenues for the year
ended December 31, 1996.
All of the Properties, except Spanish Oaks and Candlelight Village, are
managed by the Management Partnerships. The Lending Partnership owns the
Spanish Oaks and Candlelight Village mortgage notes, which are being treated as
investments in real estate according to generally accepted accounting
principles. The following tables set forth certain information relating to the
Properties by each of the Company's four regions. "Core Portfolio" represents
an analysis of Properties owned during both periods of comparison.
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WESTERN REGION
Monthly Monthly
Number of Sites Occupancy Occupancy Base Rent Base Rent
Location Approximate as of as of as of as of as of
Community (Closest Major City) Acreage 12/31/96 12/31/96 12/31/95 12/31/96 12/31/95
- --------- ------------------- ------------ ---------------- -------- -------- --------- ----------
Palm Shadows Glendale, AZ 33 294 99% 99% $279 $262
(Phoenix)
Brentwood Manor Mesa, AZ 45 275 98% 98% $368 $347
Hacienda De Valencia Mesa, AZ 51 366 93% 95% $299 $285
The Mark Mesa, AZ 61 411 92% 83%(1) $276 $263
Casa del Sol Resort Peoria, AZ 24 246 92% (2) $348 (2)
No. 1 (Phoenix)
Casa del Sol Resort Glendale, AZ 29 239 99% (2) $373 (2)
No. 2 (Phoenix)
Sunrise Heights Phoenix, AZ 28 202 92% 92% $281 $273
Apollo Village Phoenix, AZ 29 238 93% 88%(1) $294 $291
Central Park Phoenix, AZ 40 293 94% 95% $314 $301
The Meadows Tempe, AZ 57 391 96% 95% $347 $332
Concord Cascade Pacheco, CA 31 285 99% 99% $468 $453
(San Francisco)
Contempo Marin San Rafael, CA 61 396 100% 100% $566 $553
(San Francisco)
De Anza Santa Cruz Santa Cruz, CA 30 198 100% 100% $450 $441
Rancho Valley El Cajon, CA 19 140 93% 95% $456 $448
(San Diego)
Lamplighter Spring Valley, CA 32 270 96% 94% $454 $444
(San Diego) ---------------- -------- -------- ------- ------
Total Western Region 4,244 96% 95% $371 $361
---------------- -------- -------- -------- ------
Western Region Core Portfolio 3,759 96% 95% $373 $361
---------------- -------- -------- ------- ------
- -----------------------------
(1) The process of filling expansion sites is ongoing at these properties.
(2) Casa del Sol Resort No. 1 and Casa del Sol Resort No. 2 were acquired on
October 23, 1996.
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ROCKY MOUNTAIN REGION
Number Monthly Monthly
of Sites Occupancy Occupancy Base Rent Base Rent
Location Approximate as of as of as of as of as of
Community (Closest Major City) Acreage 12/31/96 12/31/96 12 /31/95 12/31/96 12/31/95
- --------- ------------------- ---------- -------- --------------- --------- --------- ---------
Date Palm Cathedral City, CA 145 538 91% 92% $560 $558
(San Diego)
Bonanza Las Vegas, NV 43 353 99% 99% $398 $379
Flamingo West Las Vegas, NV 36 205 100% 100% $383 $351
The Cabana Las Vegas, NV 37 263 100% 97% $364 $356
Bonner Springs Bonner Springs, KS 33 209 78% 74% $175 $170
(Kansas City)
Carriage Park Kansas City, KS 24 143 60%(1) 55%(1) $174 $169
Quivira Hills Kansas City, KS 54 142 78% 74% $207 $195
Briarwood Brookline, MO 27 166 94% 98% $159 $139
(Springfield)
Northstar Village Kansas City, MO 61 219 87% 85% $209 $200
Dellwood Manor Warrensburg, MO 46 136 89% 93% $144 $135
(Kansas City)
Hillcrest Aurora, CO (Denver) 73 602 94% 94% $343 $325
Cimarron Broomfield, CO (Denver) 48 327 98% 98% $318 $299
Holiday Village - CO Co. Springs, CO 39 240 98% 99% $324 $302
Holiday Hills Denver, CO 99 740 96% 92% $328 $312
Woodland Hills Denver, CO 57 434 99% 97% $311 $287
Golden Terrace Golden, CO 36 265 99% 97% $349 $326
(Denver)
Golden Terrace West Golden, CO 38 318 98% 99% $343 $318
(Denver)
Pueblo Grande Pueblo, CO 33 252 98% 99% $207 $193
(Denver)
Holiday Village - IA Sioux City, IA 160 519 94% 92% $190 $175
Camelot Acres Burnsville, MN 180 319 94% 88% $314 $301
(Minneapolis) 94%
Candlelight Village Columbus, IN 101 585 93% (2) $157 (2)
Casa Village Billings, MT 65 490 96% 94% $232 $220
Del Rey Albuquerque, NM 59 407 99% 100% $320 $293
Rockwood Tulsa, OK 38 265 99% 99% $182 $169
------ --- ---- ---- ----
Total Rocky Mountain Region 8,137 94% 93% $297 $292
------ --- ---- ---- ----
Rocky Mountain Region Core Portfolio 7,552 95% 93% $308 $292
------ --- ---- ---- ----
- ---------------------------
(1) Carriage Park suffered damage to approximately 85 homes in 1993 due to
flooding; the process of re-leasing the homes on these sites is ongoing.
(2) On May 9, 1996, the Company funded a loan to the owners of Candlelight
Village, which is being accounted for as an investment in real estate.
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EASTERN REGION
Base Rent Base Rent
Number of Sites Occupancy Occupancy Per Site Per Site
Location Approximate as of as of as of as of as of
Community (Closest Major City) Acreage 12/31/96 12/31/96 12/31/95 12/31/96 12/31/95
- --------- ------------------- ---------- ---------- --------- --------- --------- ----------
Nassau Lewes, DE 67 392 99% 100% $232 $227
(Rehoboth Beach)
Mariner's Cove Millsboro, DE 110 375 81% 79%(1) $278 $260
(Rehoboth Beach)
Willow Lake Estates Elgin, IL 110 616 100% 99% $500 $471
(Chicago)
Burns Harbor Chesterton, IN 42 228 98% 99% $253 $246
(Chicago)
Oak Tree Village Portage, IN 76 382 98% 98% $236 $222
(Chicago)
Waterford Wilmington, DE 160 731 85%(1)(2) (2) $324 (2)
Pheasant Ridge Mt. Airy, MD 98 101 100% 98% $344 $316
(Baltimore)
Green Acres Breinigsville, PA 149 595 95% 92%(1) $339 $324
(Allentown)
Meadows of Chantilly Chantilly, VA 82 500 91% 92% $443 $431
(Washington, DC)
Independence Hill Morgantown, WV 55 203 99% 100% $167 $158
(Pittsburgh) ------ --- ---- ---- ----
Total Eastern Region 4,123 93% 95% $335 $321
------ --- ---- ---- ----
Eastern Region Core Portfolio 3,392 95% 95% $337 $321
------ --- ---- ---- ----
- ----------------------
(1) The process of filling expansion sites at these properties is ongoing.
(2) Waterford was acquired on February 28, 1996.
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SOUTHEASTERN REGION
Monthly Monthly
Number of Sites Occupancy Occupancy Base Rent Base Rent
Location Approximate as of as of as of as of as of
Community (Closest Major City) Acreage 12/31/96 12/31/96 12/31/95 12/31/96 12/31/95
- --------- ------------------- ------------ ---------------- -------- -------- -------- --------
Bay Lake Estates Nokomis, FL 35 228 100% 100% $305 $296
(Sarasota)
Bay Indies Venice, FL 211 1,309 100% 100% $284 $279
(Sarasota)
Windmill Village Sarasota, FL 74 471 99% 100% $276 $262
North
Windmill Village Sarasota, FL 61 306 100% 100% $276 $265
South
The Heritage N. Ft. Myers, FL 214 455 60% 52%(1) $264 $258
Windmill Village
Fort Myers N. Ft. Myers, FL 69 491 99% 99% $272 $258
Buccaneer Estates N. Ft. Myers, FL 223 971 100% 100% $270 $255
Lake Fairways N. Ft. Myers, FL 259 896 100% 100% $312 $303
Pine Lakes N. Ft. Myers, FL 298 585 97% 88% $381 $367
Colonies of Margate Margate, FL 125 819 97% 99% $383 $369
Lakewood Village Melbourne, FL 69 349 96% 97% $291 $282
Heritage Village Vero Beach, FL 64 436 98% 100% $261 $242
Lake Haven Dunedin, FL 48 379 98% 98% $324 $308
(Tampa)
Bulow Village Flagler Beach, FL 40 171 100% 98% $182 $172
(Daytona)
Country Place New Port Richey, FL 82 513 65% 59%(1) $195 $185
(Tampa)
East Bay Oaks Largo, FL 41 328 99% 99% $302 $289
(Tampa)
Eldorado Village Largo, FL 25 227 99% 100% $304 $291
(Tampa)
Mid-Florida Lakes Leesburg, FL 290 1,197 94% 93%(1) $280 $269
Oak Bend Ocala, FL 100 262 78% 75%(1) $200 $193
Spanish Oaks Ocala, FL 78 459 99% 99% $245 $231
------ --- --- ---- ----
Total Southeastern Region 10,852 95% 94% $290 $279
------ --- --- ---- ----
Southeastern Region Core Portfolio 10,852 95% 94% $290 $279
------ --- --- ---- ----
Grand Total Company Portfolio 27,356 95%(2) 94%(2) $312 $300
====== === === ==== ====
Grand Total Core Portfolio 25,555 95% 94% $314 $300
====== === === ==== ====
- -----------------------
(1) The process of filling expansion sites at these properties is ongoing.
(2) Changes in total portfolio occupancy includes the impact of acquisitions
and expansion programs and are therefore not comparable. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
11
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ITEM 3. LEGAL PROCEEDINGS
Richard M. Perlman, a former employee of Equity Financial and Management
Co. ("EF&M"), an affiliate of Mr. Samuel Zell, Chairman of the Board of
Directors, filed a legal proceeding against Mr. Zell, EF&M and various
partnerships and corporations controlled by Mr. Zell requesting damages and
injunctive relief over, among other things, the fact that and the manner in
which interests in the Original Properties were contributed to the Operating
Partnership. This proceeding was filed on July 21, 1995 (Richard M. Perlman,
et al v. Samuel Zell, et al.) (United States District Court for the Northern
District of Illinois-Eastern Division, Case No. 95 C4242). Mr. Perlman
voluntarily dismissed the action that he previously filed in the Circuit Court
of Cook County, Illinois, which was known as Richard M. Perlman v. Samuel Zell,
et al, Case No. 92 CH 19915. Mr. Zell believes such claims lack merit and is
vigorously contesting the claims. In addition, the Company has been
indemnified by EF&M and the Original Owners for any losses incurred in
connection with such matter. In light of such indemnity, the Company does not
expect to incur any loss as a result of such action.
On September 17, 1996 Chateau Properties, Inc. ("Chateau") filed suit in
the United States District Court for the District of Maryland against the
Company and the Operating Partnership alleging, among other things, that (i)
the Operating Partnership's tender offer to purchase all outstanding shares of
common stock, which tender offer has since expired, is in violation of the
federal securities laws because it contains untrue statements of material fact
and omits to state material facts and (ii) the Company and the Operating
Partnership have begun a proxy solicitation in opposition to Chateau's proposed
merger with ROC Communities, Inc. ("ROC") and have made material misstatements
of facts and omitted to disclose other material facts as part of that
solicitation effort in violation of applicable federal law. The Company has
filed counterclaims against Chateau and ROC and intends to vigorously defend
itself against Chateau's claims which it believes are frivolous. At this time
it is not possible to predict the outcome of these matters, but the Company
does not anticipate that the impact of this litigation will be material.
In a separate matter, residents of DeAnza Santa Cruz, a Property located
in Santa Cruz, California (the "City") previously brought several actions
opposing certain fees and charges in connection with water service at the
Property, specifically opposing a monthly "readiness to serve" charge. One
group of residents, who have elected to be covered under the City's rent
control ordinance ("Ordinance"), had their case heard before the City's rent
control board. On June 29, 1995, the City's hearing officer found that the
Company may charge only its actual costs. The Company believes its actual costs
exceed the amount of the monthly readiness to serve charge and has appealed
this decision and filed an application with the California Public Utilities
Commission requesting the Commission to set cost based rates for water at this
Property. In connection with the hearing officer's decision, the residents
were awarded costs of approximately $50,000 and the Company has rebated the
readiness to serve charge collected since its acquisition of the Property in
August, 1994. The impact of this decision on the financial condition or results
of operations of the Company is not expected to be material.
The Santa Cruz Homeowners Association, representing approximately fifteen
residents not covered by the Ordinance, separately filed suit in the Superior
Court of the State of California (Case Number 128001) opposing the same fees
and charges in connection with water service and seeking damages, including
punitive damages, arising out of the imposition the readiness to serve charge.
A trial in the matter is set for May 1996 and the Company intends to vigorously
defend itself in the matter.
In connection with certain Properties acquired in 1994, known as the
DeAnza Transaction, the Company funded a $10 million nonrecourse loan to DeAnza
Newport Mobile Estates and Newport Back Bay Realty Company (collectively, the
"Partnerships") secured by a mortgage on the Bayside Village ground lease. The
Bayside Land Company, ground lessor under the ground lease, subsequently filed
a petition under Chapter 11 of the Bankruptcy Code and sought to terminate the
ground lease on various grounds. The Partnerships have informed the Company
that they have filed a joint plan of reorganization with the Bayside Land
Company and certain other creditors, which if approved by the bankruptcy court,
would resolve the outstanding issues and preserve the Partnerships' leasehold
interest in Bayside Village. There can be no assurances that the proposed plan
will be approved by the requisite number of creditors or the court. At this
time it is not possible to predict the impact of the bankruptcy proceedings on
the financial condition or results of operations of the Company, but the
Company does not anticipate that the impact will be material.
12
13
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
On September 29, 1995, the United States Environmental Protection Agency
("USEPA") issued its Findings of Violations and Order for Compliance with
respect to the National Pollution Discharge Elimination System ("NPDES") Permit
governing the operation of the onsite waste water treatment plant at one of the
Properties. On October 6, 1995, the USEPA issued its Findings of Violation and
Order for Compliance with respect to the NPDES Permit governing the operation
of the onsite waste water treatment plant at another of the Properties.
Applicable law provides for fines and penalties of up to $125,000 for these
violations. However, no fines or penalties have been assessed to date, and the
Company believes it has complied with these Orders. The Company spent
approximately $60,000 on upgrades to one of the plants and will spend
approximately $350,000 to connect the other Property to the local municipal
waste water system, which connection will be completed in April, 1997.
The Company is involved in a variety of other legal proceedings arising in
the ordinary course of business. All such proceedings, taken together, are not
expected to have a material adverse impact on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth for the period indicated, the high and low
sales prices for the Company's common stock as reported by the New York Stock
Exchange under the trading symbol MHC.
Distributions Return of Capital
Close High Low Made GAAP Basis (a)
------ ------ ------ ------------- -----------------
1996
1st Quarter $17.75 $19.75 $17.25 $.305 $.065
2nd Quarter 19.25 19.375 17.00 .305 .065
3rd Quarter 19.25 19.625 17.875 .305 .045
4th Quarter 23.25 23.25 19.00 .305 .065
1995
1st Quarter 15.38 19.88 13.75 .295 .145
2nd Quarter 15.38 16.50 14.50 .295 .095
3rd Quarter 17.25 17.38 15.00 .295 .065
4th Quarter 17.50 18.25 15.88 .295 .135
(a) Represents distributions per share in excess of net income per share on a
GAAP basis and is not the same as return of capital on a tax basis.
The number of beneficial holders of the Company's common stock at December 31,
1996 was approximately 5,800.
ITEM 6. SELECTED FINANCIAL AND OPERATING INFORMATION
The following table sets forth selected financial and operating
information on a historical basis for the Company and the Predecessor Business.
The following information should be read in conjunction with all of the
financial statements and notes thereto included elsewhere in this Form 10-K.
The historical operating data for the year ended December 31, 1996 has been
derived from the historical Financial Statements of the Company audited by
Ernst & Young LLP, independent auditors. The historical operating data for the
years ended December 31, 1995, 1994, 1993, and 1992 have been derived from the
historical Financial Statements of the Company and the Predecessor Business
audited by Coopers & Lybrand, L.L.P., independent auditors.
On April 22, 1994, a two-for-one stock split became effective. For
purposes of presenting outstanding shares, distribution per share and units of
limited partnership interest ("OP Units"), the impact of the stock split has
been given retroactive treatment.
13
14
Manufactured Home Communities, Inc. Consolidated
and Combined Historical, Including Predecessor Business
(1) Years ended December 31,
--------------------------------------------------
1996 1995 1994 1993 1992
-------- --------- --------- --------- --------
(Amounts in thousands, except for per share and property data)
OPERATING DATA:
REVENUES
Base rental income $ 93,109 $ 85,242 $ 60,085 $ 36,112 $ 32,032
Utility and other income 8,821 8,481 4,348 2,711 2,341
Equity in income of affiliates 853 885 727 1,195 94
Interest income 2,420 2,296 3,599 1,958 28
-------- --------- --------- --------- --------
Total revenues 105,203 96,904 68,759 41,976 34,495
-------- --------- --------- --------- --------
EXPENSES
Property operating and maintenance 28,399 27,057 19,203 11,350 11,147
Real estate taxes 7,947 7,241 4,214 2,329 2,200
Property management 4,338 4,675 4,099 2,168 1,666
General and administrative 4,062 4,537 3,668 1,383 ---
Depreciation and other costs (2) 15,732 16,122 9,520 5,201 4,273
Interest incurred and amortization (3) 17,782 18,527 11,146 8,588 12,121
-------- --------- --------- --------- --------
Total expenses 78,260 78,159 51,850 31,019 31,387
-------- --------- --------- --------- --------
Income before gain (loss) on sale
of property and allocation to
minority interests 26,943 18,745 16,909 10,957 3,108
Gain (loss) on sale of property --- 1,278 (293) -- 1,019
-------- --------- --------- --------- --------
Income of Predecessor Business $ 4,127
Income before allocation to minority ========
interests (4) 26,943 20,023 16,616 10,957
(Income) allocated to minority interests (4) (2,671) (2,006) (1,568) (522)
-------- --------- --------- ---------
Net income $ 24,272 $ 18,017 $ 15,048 $ 10,435
======== ========= ========= =========
Net income per weighted average share $ .98 $ .74 $ .70 $ .70
======== ========= ========= =========
Dividend per share (5) $ 1.22 $ 1.18 $ 1.14 $ 1.03
Weighted average common shares outstanding, ======== ========= ========= =========
excluding OP Units of 2,715, 2,717, 2,397 and
2,279, respectively 24,693 24,353 21,508 14,918
======== ======== ========= =========
OTHER DATA:
Funds from operations (6) $ 42,187 $ 34,518 $ 26,186 $ 16,094 $ 7,335
Net cash flow:
Operating activities $ 49,660 40,161 24,910 16,724 7,821
Investing activities $(60,954) 4,382 (220,707) (178,059) (2,355)
Financing activities $ 10,858 (45,707) 170,427 188,449 (5,301)
Total Properties (at end of period) (7) 69 65 67 47 40
Total sites (at end of period) 27,356 25,552 25,860 14,474 12,084
Total sites (weighted average) 26,621 25,375 18,164 13,144 12,342
(1) December 31,
---------------------------------------------------
1996 1995 1994 1993 1992
-------- --------- --------- --------- --------
(In thousands)
BALANCE SHEET DATA:
Real estate, before accumulated depreciation (8) $597,650 $543,229 $ 541,775 $197,812 $151,973
Total assets 567,874 523,125 544,106 341,728 127,800
Total debt 254,982 211,966 226,670 103,000 192,416
Minority interests 28,640 29,305 30,507 23,432 ---
Predecessor Business net deficit --- --- --- --- (71,469)
Stockholders' equity 257,952 261,500 270,602 204,426 39
14
15
___________________________________
(1) See the Consolidated Financial Statements of the Company included elsewhere
herein.
(2) Depreciation and other costs include depreciation on corporate assets of
approximately $488,000, $349,000, $243,000, $64,000 and $46,000 for the
years ended December 31, 1996, 1995, 1994, 1993 and 1992, respectively.
(3) The $100.0 million mortgage notes payable (the "Mortgage Debt") bears a
floating interest rate equal to the London Interbank Offered Rate
("LIBOR") plus 1.05% per annum. In October 1996, the Company entered into
an interest rate swap agreement fixing LIBOR on the Mortgage Debt at 5.57%
effective January 10, 1997 through maturity. By fixing the interest rate
on the Mortgage Debt through maturity of the Mortgage Debt, the Company
avoids the general uncertainty relating to the floating interest rate on
the Mortgage Debt through such time.
In July 1995 the Company entered into an interest rate swap agreement (the
"Swap") beginning at the maturity of the Mortgage Debt fixing LIBOR on the
refinancing of the Mortgage Debt at 6.4% for the period 1998 through 2003.
In addition, the Company has a $100 million credit facility bearing
interest at LIBOR plus 1.375% ($57.5 million outstanding at December 31,
1996). With respect to such credit facility, changes in the interest rate
will have an effect on net income and funds from operations ("FFO").
(4) Results of operations prior to the Initial Offering related to the
Predecessor Business. Upon completion of the Initial Offering and related
reorganization transactions, a portion of income/loss was allocated to
minority interests, representing OP Units not owned by the Company.
(5) The Company went public on March 3, 1993. The 1993 first quarter
dividend of $.08 reflected the period from March 3, 1993 to March 31, 1993
and was prorated to $.25.
(6) The Company generally considers FFO to be an appropriate measure of the
performance of an equity REIT. FFO was defined by the National
Association of Real Estate Investment Trusts ("NAREIT") in March 1995 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 significant
non-recurring items, if any. In the first quarter of 1996, the Company
adopted this new definition of FFO which is effective for periods ending
after December 31, 1995. For purposes of presenting FFO, the revised
definition of FFO has been given retroactive treatment. Prior to this
adoption, FFO was defined as income before allocation to minority
interests plus certain non-cash items, primarily depreciation and
amortization. The Company believes that FFO is helpful 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, it provides investors an understanding of the ability of the
Company to incur and service debt and to make capital expenditures. 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 REITs. FFO in
and of itself 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 is not necessarily indicative of cash available
to fund cash needs.
(7) During the year ended December 31, 1993, seven Properties were acquired
which had aggregate net operating income of $1.5 million in 1993, which
included approximately $500,000 of depreciation and amortization expense.
During 1994, 23 Properties were acquired, which had an aggregate net
operating income of $10.3 million in 1994, which included approximately
$3.7 million of depreciation and amortization expense. Also during 1994,
three properties were sold; net operating income attributable to such
properties was approximately $30,500, which included approximately $32,000
of depreciation and amortization expense. During the year ended December
31, 1995, two properties were sold; net operating income attributable to
such properties was approximately $235,000, which included approximately
$83,000 of depreciation and amortization expense. During the year ended
December 31, 1996, four Properties were acquired; net operating income
attributable to such Properties was approximately $1.8 million, which
included approximately $371,000 of depreciation and amortization expense.
(8) The Company believes that the book value of the Properties, which
reflects historical costs of such real estate assets less accumulated
depreciation, is less than the current market value of the Properties.
15
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Financial Data" and the historical Consolidated Financial Statements and Notes
thereto appearing elsewhere in this Annual Report.
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
Since December 31, 1995, the gross investment in rental property has
increased from $543 million to $598 million due to the acquisition of Waterford
on February 28, 1996, the funding of the Candlelight Village loan, which was
accounted for as a purchase, on May 9, 1996, and the acquisition of Casa del
Sol Resort No. 1 and Casa del Sol Resort No. 2 (collectively, the "Casa del Sol
Resorts") on October 23, 1996. The total number of sites increased from 25,552
as of December 31, 1995 to 27,356 as of December 31, 1996.
The following table summarizes certain weighted average occupancy
statistics for the years ended December 31, 1996 and 1995. "Core Portfolio"
represents an analysis of properties owned during both periods of comparison.
Core Portfolio Total Portfolio
-------------- ---------------
1996 1995 1996 1995
---- ---- ---- ----
Total sites 25,554 25,375 26,621 25,375
Occupied sites 24,098 23,787 25,025 23,787
Occupancy % 94.3% 93.7% 94.0% 93.7%
Monthly base rent per site $312 $297 $310 $297
Base rental income ($93.1 million) increased $7.9 million or 9.2%. For
the Core Portfolio, base rental income increased approximately $5.4 million or
6.3%, reflecting a 5.0% increase in base rental rates and a 1.3% increase
related to occupancy. Base rental income at Waterford, Candlelight Village and
the Casa del Sol Resorts (collectively, the "1996 Acquisitions") was
approximately $3.0 million for the year ended December 31, 1996. Partially
offsetting this increase was a $502,000 decrease in base rental income
resulting from the sale of two properties in 1995.
Monthly base rent per site for the total portfolio increased 4.4%
reflecting a 5.0% increase in the Core Portfolio, partially offset by lower
monthly base rents for the 1996 Acquisitions. Average monthly base rent per
site for the 1996 Acquisitions was $270.
Weighted average occupancy increased 0.4% primarily due to increased
occupancy at the expansion communities.
Utility and other income ($8.8 million) increased $340,000 or 4% primarily
due to increased utility income and real estate tax pass-on income.
Interest income ($2.4 million) increased $124,000 or 5%, primarily due to
interest earned on the employee notes granted on January 2, 1996, partially
offset by a decrease in interest earned on short-term investments. Short-term
investments had average balances for the years ended December 31, 1996 and 1995
of approximately $3.4 million and $3.5 million, respectively, which earned
interest income at an effective rate of 5.4% in both years.
Property operating and maintenance expenses ($28.4 million) increased $1.3
million or 5%. The 1996 Acquisitions comprised $826,000 of this increase,
partially offset by a decrease in expense of $171,000 resulting from the sale
of two properties in 1995. The remaining $687,000, or 2.5%, increase was
primarily due to an increase in utility expense of approximately $586,000, an
increase in insurance and other expenses of approximately $275,000, and an
increase in repairs and maintenance of $91,000, partially offset by a decrease
in property payroll of $216,000 and property general and administrative ("G&A)
expense of $49,000. Property operating and maintenance expenses represented
27.0% of total revenues in 1996 and 27.9% in 1995.
16
17
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
(CONTINUED)
Real estate taxes ($7.9 million) increased $706,000 or 10% due to the
expected increase in assessed values at certain Properties in 1996. Real
estate taxes represented 7.6% of total revenues in 1996 and 7.5% in 1995.
Property management expenses ($4.3 million) decreased $337,000 or 7%. The
decrease was primarily due to a decrease in management company payroll as a
result of the staffing reductions in 1995. Property management expenses
represented 4.1% of total revenues in 1996 and 4.8% in 1995.
G&A expenses ($4.0 million) decreased $475,000 or 11%. The Company has
continued to focus on reducing G&A expenses and, as a result these costs have
decreased significantly in 1996. In addition, professional fees decreased
resulting from the write-off in 1995 of legal due diligence and related costs
associated with acquisitions which did not materialize. G&A expenses
represented 3.9% of total revenues in 1996 and 4.7% in 1995.
Interest expense and related amortization ($17.8 million) decreased by
$745,000 or 4%. Interest expense decreased $13,000 due to a decrease in the
interest rate on the Mortgage Debt resulting from the interest rate swap
agreement entered into in December 1995 (see discussion below), partially
offset by an increase in interest on the line of credit resulting from
additional borrowings in 1996. The weighted average outstanding debt balances
for the years ended December 31, 1996 and 1995 were $234.9 million and $228.4
million, respectively. The effective interest rates were 7.2% and 7.6% for the
years ended December 31, 1996 and 1995, respectively. Amortization decreased
$732,000 due to the write-off in 1995 of approximately $385,000 of loan costs
related to the $50 million line of credit with General Electric Credit Corp.
("GECC") which expired in March 1995. In addition, the Company sold a portion
of the interest rate cap on the Mortgage Debt related to 1996 which decreased
amortization in 1996. Interest expense and related amortization represented
16.9% of total revenues in 1996 and 19.1% in 1995.
The Company has an interest rate cap for the term of the Mortgage Debt
which eliminates exposure to increases in LIBOR over 6%, plus 1.05%. In
connection with various swap agreements, discussed below, the Company sold
portions of the interest rate cap related to 1996 and 1997 and recorded a
non-cash write-off of approximately $650,000 in the fourth quarter of 1995 and
$482,000 in the fourth quarter of 1996.
In December 1995, the Company entered into an interest rate swap agreement
fixing the LIBOR rate on the Mortgage Debt at 5.24% effective January 10, 1996
through January 10, 1997. The value of this agreement is impacted by changes
in the market rate of interest. Had the agreement been entered into on
December 31, 1996, the applicable LIBOR swap rate would have been 5.6%. Each
0.01% increase or decrease in the applicable swap rate for this agreement
increases or decreases the value of the agreement entered into by the Company
versus its current value by approximately $850.
In October 1996, the Company entered into an interest rate swap agreement
fixing LIBOR on the Mortgage Debt at 5.57% effective January 10, 1997 through
March 3, 1998. The value of this agreement is impacted by changes in the
market rate of interest. Had the agreement been entered into on December 31,
1996, the applicable LIBOR swap rate would have been 5.8%. Each 0.01% increase
or decrease in the applicable swap rate for this agreement increases or
decreases the value of the agreement entered into by the Company versus its
current value by approximately $2,300.
In July 1995, the Company entered into an interest rate swap agreement
(the "Swap") beginning at the maturity of the Mortgage Debt fixing LIBOR on the
refinancing of the Mortgage Debt at 6.4% for the period 1998 through 2003. The
cost of the Swap consisted only of legal costs which were deemed immaterial.
In the event that the Company does not refinance the Mortgage Debt, the risk
associated with the Swap is that the Company would be obligated to perform its
obligations under the terms of the Swap or would have to pay to terminate the
Swap. In either event, the impact of such transaction would be reflected in
the Company's statement of operations. The value of the Swap is impacted by
changes in the market rate of interest. Had the Swap been entered into on
December 31, 1996, the applicable LIBOR swap rate would have been 6.6%. Each
0.01% increase or decrease in the applicable swap rate for the Swap increases
or decreases the value of the Swap entered into by the Company versus its
current value by approximately $40,000.
17
18
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
(CONTINUED)
On May 7, 1996, the Company amended its credit agreement on the $50.0
million line of credit ("Credit Facility") increasing the Credit Facility to
$100.0 million at LIBOR plus 1.375% and extending the maturity date to August
17, 1998. In addition, the fee on the average unused amount was reduced to
0.15% of such amount from 0.25%. The Company repaid $4.0 million under the
Credit Facility on January 27, 1997.
Depreciation expense and other costs ($15.7 million) increased $390,000 or
2% as a result of the 1996 Acquisitions. In addition, the Company sold a
portion of the interest rate cap on the Mortgage Debt related to 1996 and 1997
and incurred non-cash charges of $482,000 and $650,000 in 1996 and 1995,
respectively. Depreciation expense represented 14.5% of total revenues in 1996
and 15.6% in 1995.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994
The gross investment in rental property remained relatively stable at $543
million as of December 31, 1995 when compared to $542 million as of December
31, 1994. The total number of sites decreased from 25,860 as of December 31,
1994 to 25,552 as of December 31, 1995 due to the sale of two properties in
1995. The acquisition of 23 Properties in 1994 (the "1994 Acquisitions")
increased rental income, property operating and maintenance expenses, real
estate taxes, depreciation, and interest expense for the year ended December
31, 1995 when compared to the year ended December 31, 1994.
The following table summarizes certain weighted average occupancy
statistics for the years ended December 31, 1995 and 1994. "Core Portfolio"
represents an analysis of properties owned during both periods of comparison.
Core Portfolio Total Portfolio
-------------- -----------------------
1995 1994 1995 1994
---- ---- ---- ----
Total sites 14,029 13,947 25,375 19,161
Occupied sites 12,932 12,815 23,786 17,792
Occupancy % 92.2% 91.9% 93.7% 92.9%
Monthly base rent per site $ 270 $ 258 $ 300 $ 277
Base rental income ($85.2 million) increased $25.2 million or 42%. For
the Core Portfolio, base rental income increased approximately $2.3 million or
5.8%, reflecting a 4.8% increase in base rental rates and a 1.0% increase in
occupancy. For the 1994 Acquisitions, base rental income increased
approximately $23.4 million. Partially offsetting this increase was the impact
of an approximate $518,000 decrease in base rental income resulting from the
sale of three properties in 1994 and two properties in 1995.
The 8% increase in monthly base rent per site for the total portfolio was
due to the increase in base rents for the Core Portfolio discussed above, as
well as the full year impact of the 1994 Acquisitions which had higher base
rents than the Core Portfolio. Average monthly rental income for the 1994
Acquisitions was $335 compared to $270 for the Core Portfolio for the year
ended December 31, 1995.
The 0.9% increase in the occupancy percentage for the total portfolio was
due to improved occupancy in the Southeastern Region as a result of increased
occupancy of expansion sites in that region, increased occupancy in the Rocky
Mountain Region at a majority of the Properties in that region, including
Carriage Park which suffered a decrease in occupancy in 1993 as a result of
flooding, and an increase in occupancy in the Western Region as a result of the
sale of Catalina which was 64% occupied. Occupancy in the Eastern Region
remained relatively stable.
Utility and other income ($8.5 million) increased $4.1 million or 95%
primarily due to other income generated by the 1994 Acquisitions and the
one-time collection of water/sewer impact fees at one Property in 1995.
18
19
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994
(CONTINUED)
Interest income ($2.3 million) decreased $1.3 million or 36% primarily due
to a decrease in interest earned on short-term investments, partially offset by
interest earned on the $15.0 million of notes receivable funded by the Company
during 1994 and 1995. Short-term investments had average balances for the
years ended December 31, 1995 and 1994 of approximately $4.7 million and $67.3
million, respectively, which earned interest income at an effective rate of
5.2% and 3.7% per annum, respectively.
Property operating and maintenance expenses ($27.1 million) increased $7.9
million or 41%. The 1994 Acquisitions comprised $8.2 million of this increase.
Partially offsetting this increase was a decrease of approximately $354,000
relating to the properties which were sold in 1994 and 1995 and a slight
decrease at the Core Portfolio. Property operating and maintenance expenses
represented 27.9% of total revenues in both 1995 and 1994.
Real estate taxes ($7.2 million) increased $3.0 million or 72% due to the
1994 Acquisitions which had higher assessed values and higher tax rates than
those Properties in the Core Portfolio causing real estate taxes as a
percentage of revenues to increase. In addition, tax rates increased in 1995
at the Florida and California Properties. Real estate taxes represented 7.5%
of total revenues in 1995 and 6.1% in 1994.
Property management expenses ($4.7 million) increased $576,000 or 14% due
to an increase in management payroll as a result of additions in personnel
directly associated with the 1994 Acquisitions and severance payments for staff
terminated in 1995. Partially offsetting the increase was a decrease in
acquisition related expenses. In the third and fourth quarter of 1994 the
Company expensed legal due diligence and related costs which had been deferred
earlier in 1994 pending the outcome of acquisition reviews, thus increasing
professional fees for that period. Property management expenses represented
4.8% of total revenues in 1995 and 6.0% in 1994.
G&A expenses ($4.5 million) increased $869,000 or 24% primarily due to
increased corporate payroll and related G&A expenses. During 1994, the Company
supplemented its infrastructure in preparation of the absorption of the 1994
Acquisitions and potential additional acquisition opportunities, increasing its
staffing and overall corporate overhead. In addition, professional fees
increased resulting from the write-off in 1995 of legal due diligence and
related costs associated with acquisitions which did not materialize. G&A
represented 4.7% of total revenues in 1995 and 5.3% in 1994.
Interest expense and related amortization ($18.5 million) increased by
$7.4 million or 66%. Interest expense increased $7.1 million due to higher
weighted average outstanding debt balances during the 1995 period, as well as
an increase in the effective interest rate. The weighted average outstanding
debt balances for the years ended December 31, 1995 and 1994 were $221.0
million and $154.8 million, respectively. The effective interest rates were
7.6% and 6.27%, respectively. Amortization increased $273,000 primarily due to
the write-off of loan costs related to the $50 million line of credit with GECC
which expired in March 1995. Interest expense and related amortization
represented 19.1% of total revenues in 1995 and 16.2% in 1994.
Depreciation expense and other costs ($16.1 million) increased $6.6
million or 67% as a result of the 1994 Acquisitions. In addition, the Company
sold a portion of the interest rate cap on the Mortgage Debt related to 1996
and incurred a non-cash charge of $650,000 in 1995. Depreciation expense and
other costs represented 16.6% of total revenues in 1995 and 13.8% in 1994.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities increased $9.5 million from
$40.2 million for the year ended December 31, 1995 to $49.7 million for the
same period in 1996. This increase reflected a $7.7 million increase in FFO,
which reflected increases in rental income and decreases of certain expenses as
discussed in "Results of Operations" above, an increase in accounts payable
accruals of approximately $1.6 million primarily related to acquisition
activities and real estate taxes, and an increase in collection of rents
receivable of $498,000, partially offset by decreased collections of
miscellaneous receivables.
19
20
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Net cash provided by operating activities increased $15.3 million from
$24.9 million for the year ended December 31, 1994 to $40.2 million for the
same period in 1995. This increase reflected an $8.3 million increase in FFO,
as discussed below, and the impact of the following: (i) increased collection
of rents receivable of approximately $922,000; (ii) increased collection of
miscellaneous receivables of $840,000; (iii) increased accounts payable
accruals of approximately $2.0 million primarily related to an increase in real
estate taxes and payroll; and (iv) decreased cash in 1994 of $2.4 million as a
result of acquiring the prepaid rents and security deposits of the 1994
Acquisitions.
FFO was defined by the NAREIT in March 1995 as net income (computed in
accordance with generally accepted accounting principles ["GAAP"]), before
allocation to minority interests, excluding gains (or losses) from sales of
propery, plus real estate depreciation and after adjustments for significant
non-recurring items, if any. In the first quarter of 1996, the Company adopted
this new definition of FFO which was effective for periods ending after
December 31, 1995. Prior to this adoption, FFO was defined as income before
allocation to minority interests plus certain non-cash items, primarily
depreciation and amortization. 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 REITs. Funds available for distribution ("FAD") is defined as FFO less
non-revenue producing capital expenditures. The Company believes that FFO and
FAD are 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, they provide investors an understanding of the
ability of the Company to incur and service debt and to make capital
expenditures. FFO and FAD in and of themselves do 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 and FAD for the years
ended December 31, 1996, 1995 and 1994 (amounts in the thousands):
For the Years Ended
December 31,
-------------------------
Computation of funds from operations: 1996 1995 1994
------- ------- -------
Income before allocation to
minority interests............................ $26,943 $20,023 $16,616
Depreciation on real estate assets........... 14,762 14,738 9,277
Gain on sale of assets and other
non-recurring items......................... 482 (243) 293
------- ------- -------
Funds from operations (a)...................... $42,187 $34,518 $26,186
======= ======= =======
Computation of funds available for distribution:
Funds from operations (a)...................... $42,187 $34,518 $26,186
Non-revenue producing improvements -
rental properties........................... (3,402) (3,286) (3,323)
------- ------- -------
Funds available for distribution................ $38,785 $31,232 $22,863
======= ======= =======
(a) FFO for the years ended December 31, 1995 and 1994 has been restated
pursuant to the new definition of FFO adopted by the Company for periods ending
after December 31, 1995.
Net cash used in investing activities increased $65.4 million from $4.4
million provided by investing activities for the year ended December 31, 1995
to $61.0 million used in investing activities for the year ended December 31,
1996, primarily due to the acquisitions of Waterford and the Casa del Sol
Resorts, the financing of Candlelight Village, the costs incurred in pursuit of
a proposed merger, a decrease in cash from the sale of rental properties in
1996 when compared to 1995 and the purchase of short-term investments, all of
which had maturities of three months or less. Partially offsetting this
increase were increased distributions from Realty Systems, Inc. ("RSI").
20
21
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Net cash used in investing activities decreased $225.1 million from $220.7
million used in investing activities for the year ended December 31, 1994 to
$4.4 million provided by investing activities for the year ended December 31,
1995 due to the following: (i) a decrease in contributions to RSI; (ii) a
decrease in funding of notes receivable; (iii) the payoff of a $1.5 million
note receivable; (iv) an increase in cash from sale of rental properties in
1995 when compared to 1994; and (v) a decrease in cash used for acquisition
activities as no acquisitions took place in 1995. Partially offsetting the
decrease was a decrease in the redemption of short-term investments, all of
which had maturities of three months or less.
During 1996, the Company began a proxy solicitation in opposition to
Chateau Properties, Inc.'s ) "Chateau" proposed merger with ROC Communities,
Inc. ("ROC") and incurred approximately $1.3 million in costs and invested in
certain saleable assets with a book value of approximately $9.9 million. These
expenditures have been included in prepaid expenses and other assets at
December 31, 1996. On February 11, 1997, the Chateau shareholders approved
Chateau's purchase of ROC. Thus, the Company will sell the assets acquired and
write-off the capitalized costs in the first quarter of 1997.
During 1995 and 1996, the Company focused on reducing its investment in
RSI. RSI has reduced its inventory which has allowed for increased
distributions to the Company. In addition, in July 1996, RSI entered into an
agreement with an unaffiliated lender whereby the lender will provide floor
plan financing on the purchase of new inventory. This agreement allowed RSI to
distribute approximately $5.0 million back to the Company.
On February 28, 1996, the Company acquired Waterford, located near
Wilmington, Delaware, for a purchase price of approximately $21 million. The
acquisition was funded with an $18.6 million borrowing under the Company's line
of credit and approximately $2.4 million of existing available cash. Waterford
consists of 621 developed sites and 110 expansion sites; the cost of developing
the expansion sites will be paid by the seller.
On May 9, 1996, the Company funded a recourse real estate loan for
$6,050,000 to the partnership which owns Candlelight Village, located in
Columbus, Indiana. The loan has an interest rate of 9.5%, 9.75% and 10% for
the first, second and third years of the loan, respectively, which interest is
payable monthly. Interest and principal are guaranteed by the general partner
of the partnership which owns Candlelight Village. The loan matures May 8,
1999 at which time the Company has the option to purchase Candlelight Village.
Candlelight Village consists of 512 sites and 73 expansion sites. For
financial accounting purposes, the Company accounts for the loan as an
investment in real estate.
On October 23, 1996, the Company acquired the Casa del Sol Resorts,
located near Phoenix, Arizona, for a purchase price of approximately $17
million. The acquisition was funded with a borrowing under the Company's line
of credit with a bank. The Casa del Sol Resorts consist of 485 sites.
Capital expenditures for improvements were approximately $8.1 million for
the year ended December 31, 1996 compared to $7.8 million for the year ended
December 31, 1995. Of the $8.1 million, approximately $3.4 million represented
improvements to existing sites. The Company anticipates spending approximately
$3.2 million on improvements to existing sites during 1997. The Company
believes these improvements are necessary in order to increase and/or maintain
occupancy levels and maximize rental rates charged to new and renewing
residents. The remaining $4.7 million primarily represented costs to develop
approximately 370 expansion sites at certain of the Properties and costs
associated with the Company's conversion to a new accounting software system
and other corporate headquarter expenditures. The Company is currently
developing an additional 104 sites which should be available for occupancy in
1997.
Net cash provided by financing activities increased $56.6 million from
$45.7 million used in financing activities for the year ended December 31, 1995
to $10.9 million provided by financing activities for the year ended December
31, 1996 primarily due to $52.1 million of borrowings under the line of credit
for the acquisitions of Waterford and the Casa del Sol Resorts and the
financing of Candlelight Village.
Net cash provided by financing activities decreased $216.1 million from
$170.4 million provided by financing activities for the year ended December 31,
1994 to $45.7 million used in financing activities for the year ended December
31, 1995 primarily due to an increase in cash in 1994 resulting from the sale
of common stock in September 1994 and proceeds received from mortgage notes
payable and the line of credit, which cash was used to fund the 1994
Acquisitions.
21
22
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Distributions to common stockholders and minority interests increased $1.1
million for the year ended December 31, 1996 when compared to the same period
in 1995 due to an increase in the distribution per share and number of shares
and OP units outstanding. For the year ended December 31, 1996, the Company
declared and paid quarterly distributions totaling $1.22 per share, which
included the fourth quarter distribution paid on January 10, 1997.
Distributions to common stockholders and minority interests increased by $5.7
million for the year ended December 31, 1995 compared to the same period in
1994 due to an increase in the distribution per share and number of shares and
OP units outstanding. For the year ended December 31, 1995, the Company
declared and paid quarterly distributions totaling $1.18 per share, which
included the fourth quarter distribution paid on January 12, 1996. Return of
capital on a GAAP basis was $0.24 and $0.44 for the years ended December
31,1996 and 1995, respectively.
On January 2, 1996, certain members of management of the Company each
entered into subscription agreements with the Company to acquire a total of
270,000 shares of the Company's common stock at $17.375 per share, the market
price on that date. The Company received from these individuals notes (the
"1996 Employee Notes") in exchange for their shares. The 1996 Employee Notes
accrue interest at 5.91%, mature on January 2, 2005, and are recourse against
the employees in the event the pledged shares are insufficient to repay the
obligations.
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 in rental income as each lease matures. Such types of leases
generally minimize the risk of inflation to the Company.
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 its existing line of credit and the issuance of debt securities or
additional equity securities in the Company, in addition to working capital.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Combined Financial Statements on page F-1 of this
Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company dismissed Coopers & Lybrand L.L.P. as its independent
public accountants effective October 8, 1996 and engaged Ernst & Young
LLP as its new independent public accountants. This event was reported
on Form 8-K dated October 8, 1996, filed October 15, 1996.
PART III
ITEMS 10, 11, 12, 13.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, EXECUTIVE
COMPENSATION, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 10, Item 11, Item 12, and
Item 13 will be contained in a definitive proxy statement
which the Registrant anticipates will be filed no later than
April 28, 1997, and thus this part has been omitted in
accordance with General Instruction G(3) to Form 10-K.
22
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)
(1&2) See Index to Financial Statements and Schedules on page F-1 of this
Form 10-K.
(3) Exhibits:
2* Admission Agreement between Equity Financial and Management Co.,
Manufactured Home Communities, Inc. and MHC Operating Partnership
3.1* Articles of Incorporation of Manufactured Home Communities, Inc.
3.2* Articles of Amendment and Restatement of Manufactured Home
Communities, Inc.
3.3* Bylaws of Manufactured Home Communities, Inc.
4 Not applicable
9 Not applicable
10.1* Amended and Restated Agreement of Limited Partnership of MHC
Operating Limited Partnership
10.2* Agreement of Limited Partnership of MHC Financing Limited Partnership
10.3* Agreement of Limited Partnership of MHC Management Limited Partnership
10.4* Property Management and Leasing Agreement between MHC Financing
Limited Partnership and MHC Management Limited Partnership
10.5* Property Management and Leasing Agreement between MHC Operating
Limited Partnership and MHC Management Limited Partnership
10.6* Services Agreement between Realty Systems, Inc. and MHC Management
Limited Partnership
10.7* Rate Protection Agreement
10.8* Revolving Credit Note made by Realty Systems, Inc. to Equity
Financial and Management Co.
10.9* Assignment to MHC Operating Limited Partnership of Revolving Credit
Note made by Realty Systems, Inc. to Equity Financial and
Management Co.
10.10* Stock Option Plan
10.11A* Indenture of Mortgage, Deed of Trust, Security Agreement,
Financing Statement, Fixture Filing and Assignment of Rents
10.11B* Promissory Note
10.11C* Assignment of Loan Documents
10.11D* Assignment of Leases, Rents and Security Deposits
10.11E* Swap Agreement Pledge and Security Agreement
10.11F* Cash Collateral Account Security, Pledge and Assignment Agreement
10.11G* Assignment of Property Management and Leasing Agreement
10.11H* Trust Agreement
10.12* Form of Noncompetition Agreement
10.13* Form of Noncompetition Agreement
10.13A* Form of Noncompetition Agreement
10.14* General Electric Credit Corporation Commitment Letter
10.15* Administrative Services Agreement between Realty Systems, Inc. and
Equity Group Investments, Inc.
10.16* Registration Rights and Lock-Up Agreement with the Company (the
Original Owners, EF&M, Directors, Officers and Employees)
10.17* Administrative Services Agreement between Manufactured Home
Communities, Inc. and Equity Group Investments, Inc.
10.18* Form of Subscription Agreement between the Company and certain
officers and other individuals dated March 3, 1993
10.19* Form of Secured Promissory Note payable to the Company by certain
officers dated March 3, 1993
10.20* Form of Pledge Agreement between the Company and certain officers
dated March 3, 1993
10.21* Loan and Security Agreement between Realty Systems, Inc. and MHC
Operating Limited Partnership
10.22* Equity and Registration Rights Agreement with the Company (the GM
Trusts)
10.23*** Agreement of Limited Partnership of MHC Lending Limited Partnership
10.23**** Agreement of Limited Partnership of MHC-Bay Indies Financing Limited
Partnership
10.24**** Agreement of Limited Partnership of MHC-De Anza Financing Limited
Partnership
10.25**** Agreement of Limited Partnership of MHC-DAG Management Limited
Partnership
23
24
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(3) Exhibits (continued):
10.26***** Amendment No. 2 to MHC Operating Limited Partnership Amended
and Restated Partnership Agreement dated February 15, 1996
10.27***** Form of Subscription Agreement between the Company and certain
members of management of the Company dated January 2, 1996
10.28***** Form of Secured Promissory Note payable to the Company by certain
members of management of the Company dated January 2, 1996
10.29***** Form of Pledge Agreement between the Company and certain members of
management of the Company dated January 2, 1996
10.30****** Second Amended and Restated MHC Operating Limited Partnership
Agreement of Limited Partnership, dated as of March 15, 1996
11 Not applicable
12******* Computation of Ratio of Earnings to Fixed Charges
13 Not applicable
16 Not applicable
18 Not applicable
21******* Subsidiaries of the registrant
22 Not applicable
23******* Consent of Independent Auditors
23.1******* Consent of Independent Auditors
24.1******* Power of Attorney for John F. Podjasek, Jr. dated March 5, 1997
24.2******* Power of Attorney for Michael A. Torres dated January 29, 1997
24.3******* Power of Attorney for Thomas E. Dobrowski dated February 27, 1997
24.4******* Power of Attorney for Gary Waterman dated February 26, 1997
24.5******* Power of Attorney for Donald S. Chisholm dated February 25, 1997
24.6******* Power of Attorney for Louis H. Masotti dated March 4, 1997
27******* Financial Data Schedule
28 Not applicable
________________________
* Included as an exhibit to the Company's Form S-11 Registration
Statement, File No. 33-55994, and incorporated herein by reference.
** Included as an exhibit to the Company's Form S-11 Registration
Statement, File No. 33-67750, and incorporated herein by reference.
*** Included as an exhibit to the Company's Report on Form 10-K dated
December 31, 1993, and incorporated herein by reference.
**** Included as an exhibit to the Company's Report on Form 10-K dated
December 31, 1994, and incorporated herein by reference.
***** Included as an exhibit to the Company's Report on Form 10-Q for the
quarter ended March 31, 1996, and incorporated herein by reference.
****** Included as an exhibit to the Company's Report on Form 10-Q for the
quarter ended June 30, 1996, and incorporated herein by reference.
******* Filed herewith.
24
25
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
(b) Reports on Form 8-K:
Form 8-K dated October 8, 1996, filed October 15, 1996,
relating to Item 4 - "Changes in Registrant's Certifying Accountants"
and Item 7 - "Financial Statements and Exhibits".
(c) Exhibits:
See Item 14 (a)(3) above.
(d) Financial Statement Schedules:
See Index to Financial Statements attached hereto on page F-1
of this Form 10-K.
25
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MANUFACTURED HOME COMMUNITIES, INC.,
a Maryland corporation
Date: March 7, 1997 By: /s/ David A. Helfand
------------- -------------------------------------
David A. Helfand
President and Chief Executive Officer
Date: March 7, 1997 By: /s/ Thomas P. Heneghan
------------- -------------------------------------
Thomas P. Heneghan
Executive Vice President, Treasurer
and Chief Financial Officer
Date: March 7, 1997 By: /s/ Judy A. Pultorak
------------- -------------------------------------
Judy A. Pultorak
Principal Accounting Officer
26
27
MANUFACTURED HOME COMMUNITIES, INC. - SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf
of the Registrant and in capacities and on the dates indicated.
Name Title Date
- ----------------------- ------------------------------------- -------------
/s/ David A. Helfand Chief Executive Officer and President
- -------------------- *Attorney-in-Fact March 7, 1997
David A. Helfand -------------
/s/ Thomas P. Heneghan Executive Vice President, Treasurer
- ----------------------- and Chief Financial Officer
Thomas P. Heneghan *Attorney-in-Fact March 7, 1997
-------------
/s/ Samuel Zell Chairman of the Board
- ---------------
Samuel Zell March 7, 1997
-------------
/s/ Sheli Z. Rosenberg Director
- ----------------------
Sheli Z. Rosenberg March 7, 1997
-------------
/s/ Timothy H. Callahan Director
- -----------------------
Timothy H. Callahan March 7, 1997
-------------
*Donald S. Chisholm Director
- -------------------
Donald S. Chisholm March 7, 1997
-------------
*Thomas E. Dobrowski Director
- --------------------
Thomas E. Dobrowski March 7, 1997
-------------
*Louis H. Masotti Director
- -------------------
Louis H. Masotti March 7, 1997
-------------
*John F. Podjasek, Jr. Director
- ----------------------
John F. Podjasek, Jr. March 7, 1997
-------------
*Michael A. Torres Director
- ------------------
Michael A. Torres March 7, 1997
-------------
*Gary L. Waterman Director
- -----------------
Gary L. Waterman March 7, 1997
-------------
27
28
INDEX TO FINANCIAL STATEMENTS
MANUFACTURED HOME COMMUNITIES, INC.
Page
----
Reports of Independent Auditors............................. F-2 and F-3
Consolidated Balance Sheets as of
December 31, 1996 and 1995................................ F-4
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994........................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994........................... F-6
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1996, 1995 and 1994....... F-7
Notes to Consolidated Financial Statements................... F-8
Schedule II - Valuation and Qualifying Accounts.............. S-1
Schedule III - Real Estate and Accumulated Depreciation...... S-2
F-1
29
Report of Independent Auditors
To the Board of Directors of
Manufactured Home Communities, Inc.
We have audited the accompanying consolidated balance sheet of
Manufactured Home Communities, Inc. as of December 31, 1996, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended. We have also audited the related financial
statement schedules listed in the accompanying index for the year ended
December 31, 1996. These financial statements and schedules are the
responsibility of the management of Manufactured Home Communities, Inc. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects the consolidated financial position of Manufactured
Home Communities, Inc. as of December 31, 1996 and the consolidated results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects the information required to be included therein.
ERNST & YOUNG LLP
Chicago, Illinois
January 27, 1997, except for Note 15, as
to which the date is February 11, 1997
F-2
30
Report of Independent Auditors
To the Board of Directors of
Manufactured Home Communities, Inc.
We have audited the accompanying consolidated balance sheet of
Manufactured Home Communities, Inc. as of December 31, 1995, and the related
consolidated statements of operations, changes in stockholders' and cash flows
for each of the years ended December 31, 1995 and 1994. We have also audited
the related schedules listed in the accompanying index for the years ended
December 31, 1995 and 1994. These financial statements are the responsibility
of the management of Manufactured Home Communities, Inc. Our responsibility is
to express an opinion on these financial statements and schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects the consolidated financial position of Manufactured
Home Communities, Inc. as of December 31, 1995 and the consolidated results of
their operations and cash flows for the years ended December 31, 1995 and 1994
in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
February 16, 1996
F-3
31
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
1996 1995
-------- --------
ASSETS
Investment in rental property:
Land........................................................ $138,514 $127,229
Land improvements........................................... 370,440 328,667
Buildings and other depreciable property.................... 88,696 87,333
-------- --------
597,650 543,229
Accumulated depreciation.................................... (71,481) (56,403)
-------- --------
Net investment in rental property......................... 526,169 486,826
Cash and cash equivalents..................................... 324 760
Short-term investments (at cost, which approximates market)... 1,968 1,682
Notes receivable.............................................. 15,427 15,010
Investment in and advances to affiliates...................... 6,836 10,987
Rents receivable.............................................. 723 935
Deferred financing costs, net................................. 1,999 3,268
Prepaid expenses and other assets............................. 14,279 3,156
Due from affiliates........................................... 149 501
-------- --------
Total assets................................................ $567,874 $523,125
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable...................................... $197,482 $199,066
Line of credit.............................................. 57,500 12,900
Accounts payable and accrued expenses....................... 14,364 8,759
Accrued interest payable.................................... 1,495 1,258
Rents received in advance and security deposits............. 1,897 1,792
Distributions payable....................................... 8,439 7,998
Due to affiliates........................................... 105 547
-------- --------
Total liabilities......................................... 281,282 232,320
-------- --------
Commitments and contingencies
Minority interests............................................ 28,640 29,305
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value
10,000,000 shares authorized; none issued................. --- ---
Common stock, $.01 par value
50,000,000 shares authorized; 24,951,948 and
24,502,877 shares issued and 24,951,948 and 24,393,149 shares
outstanding for 1996 and 1995, respectively............. 249 244
Paid-in capital............................................. 293,512 288,533
Treasury stock, 109,728 shares of common stock.............. --- (1,987)
Employee notes.............................................. (6,158) (1,565)
Distributions in excess of accumulated earnings............. (29,651) (23,725)
-------- --------
Total stockholders' equity................................ 257,952 261,500
-------- --------
Total liabilities and stockholders' equity.................. $567,874 $523,125
======== ========
The accompanying notes are an integral part of the financial statements
F-4
32
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
1996 1995 1994
------- ------- -------
REVENUES
Base rental income.................................... $93,109 $85,242 $60,085
Utility and other income.............................. 8,821 8,481 4,348
Equity in income of affiliates........................ 853 885 727
Interest income....................................... 2,420 2,296 3,599
------- ------- -------
Total revenues...................................... 105,203 96,904 68,759
------- ------- -------
EXPENSES
Property operating and maintenance.................... 28,399 27,057 19,203
Real estate taxes..................................... 7,947 7,241 4,214
Property management................................... 4,338 4,675 4,099
General and administrative............................ 3,335 3,151 2,618
General and administrative - affiliates............... 727 1,386 1,050
Interest and related amortization..................... 17,782 18,527 11,146
Depreciation on corporate assets...................... 488 349 243
Depreciation on real estate assets and other costs.... 15,244 15,773 9,277
------- ------- -------
Total expenses...................................... 78,260 78,159 51,850
------- ------- -------
Income from operations................................ 26,943 18,745 16,909
Gain (loss) on sale of rental properties.............. --- 1,278 (293)
------- ------- -------
Income before allocation to minority
interests........................................... 26,943 20,023 16,616
(Income) allocated to minority
interests........................................... (2,671) (2,006) (1,568)
------- ------- -------
Net income............................................ $24,272 $18,017 $15,048
======= ======= =======
Net income per weighted average common share
outstanding......................................... $ .98 $ .74 $ .70
======= ======= =======
Distributions declared
per common share outstanding........................ $ 1.22 $ 1.18 $ 1.14
======= ======= =======
Weighted average common shares outstanding............ 24,693 24,353 21,508
======= ======= =======
Tax status of distributions
Ordinary income..................................... $ .90 $ .68 $ .63
======= ======= =======
Capital gain........................................ $ --- $ .02 $ ---
======= ======= =======
Return of capital................................... $ .32 $ .48 $ .51
======= ======= =======
The accompanying notes are an integral part of the financial statements
F-5
33
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS)
1996 1995 1994
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................. $24,272 $18,017 $15,048
Adjustments to reconcile net income to
cash provided by operating activities:
Income allocated to minority interests................... 2,671 2,006 1,568
Depreciation and amortization expense.................... 16,720 17,842 10,967
(Gain) loss on sale of rental properties................. --- (1,278) 293
Equity in income of Affiliates........................... (853) (885) (727)
Amortization of deferred compensation and other.......... 1,242 377 ---
Decrease (increase) in rents receivable.................. 212 710 (212)
(Increase) in prepaid expenses and other assets.......... (109) (664) (1,504)
Increase in accounts payable and accrued expenses........ 5,400 3,833 1,880
Increase (decrease) in rents received in advance
and security deposits.................................. 105 203 (2,403)
------- ------- -------
Net cash provided by operating activities.................. 49,660 40,161 24,910
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
(Purchase) redemption of short-term investments, net....... (286) 4,799 125,738
Proposed merger costs...................................... (11,205) --- ---
Distributions from (contributions to) Affiliates........... 5,004 1,399 (1,483)
Funding of notes receivable................................ --- --- (12,000)
Collection of principal payments on notes receivable....... 126 1,832 78
Net proceeds from sale of rental property.................. --- 4,762 1,005
Acquisition of rental properties........................... (46,531) (600) (326,679)
Improvements:
Improvements - corporate................................. (844) (808) (1,497)
Improvements - rental properties......................... (3,402) (3,286) (3,323)
Site development costs................................... (3,816) (3,716) (2,546)
------- ------- -------
Net cash (used in) provided by investing activities........ (60,954) 4,382 (220,707)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of common stock
and exercise of stock options............................ 1,014 752 76,500
Distributions to common stockholders and minority interests (33,070) (31,963) (26,268)
Treasury stock acquired.................................... --- (1,987) ---
Collection of principal payments on employee notes......... 99 2,485 70
Proceeds from mortgage notes payable and line of credit.... 52,100 --- 178,650
Repayments on mortgage notes payable and line of credit.... (9,084) (14,704) (56,496)
Debt issuance costs and other.............................. (201) (290) (2,029)
------- ------- -------
Net cash provided by (used in) financing activities........ 10,858 (45,707) 170,427
------- ------- -------
Net (decrease) in cash and cash equivalents.................. (436) (1,164) (25,370)
Cash and cash equivalents, beginning of year................. 760 1,924 27,294
------- ------- -------
Cash and cash equivalents, end of year....................... $ 324 $ 760 $ 1,924
======= ======= =======
SUPPLEMENTAL INFORMATION
Cash paid during the year for interest....................... $16,557 $16,156 $ 9,382
======= ======= =======
The accompanying notes are an integral part of the financial statements
F-6
34
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS)
1996 1995 1994
-------- -------- --------
PREFERRED STOCK, $.01 PAR VALUE.................. $ --- $ --- $ ---
======== ======== ========
COMMON STOCK, $.01 PAR VALUE
Balance, beginning of year....................... $ 244 $ 244 $ 204
Issuance of common stock for employee notes.... 3 --- ---
Issuance of common stock through restricted
stock awards................................. 2 --- ---
Retirement of treasury stock................... (1) --- ---
Exercise of options............................ 1 --- ---
Net proceeds from shelf offering............... --- --- 40
-------- -------- --------
Balance, end of year............................. $ 249 $ 244 $ 244
======== ======== ========
PAID - IN CAPITAL
Balance, beginning of year....................... $288,533 $287,397 $210,884
Issuance of common stock for employee notes.... 4,689 --- ---
Retirement of treasury stock................... (1,986) --- ---
Conversion of OP Units to common stock......... 23 --- ---
Recognition of deferred compensation expense... 951 86 ---
Exercise of options............................ 1,013 752 607
Issuance of common stock through restricted
stock awards................................. 289 291 ---
Net proceeds from shelf offering............... --- --- 75,790
Adjustment for minority interests ownership
in operating partnership..................... --- 7 116
-------- -------- --------
Balance, end of year............................. $293,512 $288,533 $287,397
======== ======== ========
TREASURY STOCK
Balance, beginning of year....................... $ (1,987) $ --- $ ---
Common stock retired (acquired), 109,728 shares 1,987 (1,987) ---
-------- -------- --------
Balance, end of year............................. $ --- $ (1,987) $ ---
======== ======== ========
EMPLOYEE NOTES
Balance, beginning of year....................... $ (1,565) $ (4,050) $ (4,120)
Notes received for issuance of common stock.... (4,692) --- ---
Principal payments............................. 99 2,485 70
-------- -------- --------
Balance, end of year............................. $ (6,158) $(1,565) $(4,050)
======== ======== ========
DISTRIBUTIONS IN EXCESS OF ACCUMULATED EARNINGS
Balance, beginning of year....................... $(23,725) $(12,989) $(2,542)
Net income..................................... 24,272 18,017 15,048
Distributions.................................. (30,198) (28,753) (25,495)
-------- -------- --------
Balance, end of year............................. $(29,651) $(23,725) $(12,989)
======== ======== ========
The accompanying notes are an integral part of the financial statements
F-7
35
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION OF THE COMPANY AND BASIS OF PRESENTATION
Manufactured Home Communities, Inc. (together with its consolidated
subsidiaries, the "Company"), formed in March 1993, is a Maryland corporation
which has elected to be taxed as a real estate investment trust ("REIT"). The
Company owns or has a controlling interest in 69 manufactured home communities
located in 19 states, consisting of 27,356 sites. The Company generally will
not be subject to Federal income tax to the extent it distributes its REIT
taxable income to its stockholders.
The operations of the Company are conducted through certain entities which
are owned or controlled by the Company. MHC Operating Limited Partnership (the
"Operating Partnership") is the entity through which the Company conducts
substantially all of its operations. The Company contributed the proceeds from
its initial public offering to the Operating Partnership for a general
partnership interest. The limited partners of the Operating Partnership (the
"Minority Interests") receive an allocation of net income which is based on
their respective ownership percentage of the Operating Partnership which is
shown on the Consolidated Financial Statements as Minority Interests. As of
December 31, 1996, the Minority Interests represented 2,714,889 units of
limited partnership interest ("OP Units") which are convertible into an
equivalent number of shares of the Company's stock. The issuance of additional
shares of common stock or OP Units changes the respective ownership of the
Operating Partnership for both the Minority Interests and the Company.
Sub-partnerships of the Operating Partnership were created to (i)
facilitate mortgage financing (the "Financing Partnerships"); (ii) facilitate
the Company's ability to provide financing to manufactured home communities
("Lending Partnership"); (iii) own the management operations of the Company
("Management Partnerships"); and (iv) own the assets and operations of certain
utility companies which service the Company's properties ("MHC Systems").
The accompanying financial statements represent the consolidated financial
information of the Company and its subsidiaries. Due to the Company's ability
as general partner to control either through ownership or by contract the
Operating Partnership, the Financing Partnerships, the Lending Partnerships,
the Management Partnerships and MHC Systems, each such subsidiary has been
consolidated with the Company for financial reporting purposes.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the 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.
(b) Rental Property
Rental property is recorded at cost less accumulated depreciation. Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and For Long-Lived Assets To Be Disposed Of" ("SFAS No.
121") was effective for fiscal years beginning after December 15, 1995. The
Company evaluates rental properties for impairment when conditions exist
which may indicate that it is probable that the sum of expected future cash
flows (undiscounted) from a rental property is less than its carrying value.
Upon determination that a permanent impairment has occurred, rental
properties are reduced to fair value. For the year ended December 31, 1996,
permanent impairment conditions did not exist at any of the Company's
properties.
Depreciation is computed on the straight-line basis over the estimated useful
lives of the assets. The Company uses 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 which improve the asset and/or extend the useful
life of the asset are capitalized over their estimated useful life. Initial
direct leasing costs are expensed as incurred.
F-8
36
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(b) Rental Property(continued)
The distribution of the Properties throughout the United States reflects
the Company's belief that geographic diversification helps insulate the
portfolio from regional economic influences. At the same time, the
Company has sought to create clusters of Properties within each of its
primary markets in order to achieve economies of scale in management and
operation. The Company's five largest markets are South Florida, North
Florida, the Northeast, Arizona, and Colorado. These markets account for
27.2%, 9.9%, 9.8%, 8.7%, and 11.8%, respectively, of the Company's total
revenues for the year ended December 31, 1996.
(c) Cash and Cash Equivalents
The Company considers all demand and money market accounts and certificates
of deposit with an original maturity when purchased of three months or
less, to be cash equivalents.
(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. Interest income is accrued on the unpaid principal
balance. Discounts are amortized to income using the interest method.
(e) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" requires disclosures about the fair
value of financial instruments whether or not such instruments are
recognized in the balance sheet. The Company's financial instruments
include short-term investments, notes receivable, accounts receivable,
accounts payable, other accrued expenses, mortgage notes payable and
interest rate hedge arrangements. The fair value of all financial
instruments, including notes receivable, were not materially different
from their carrying values at December 31, 1996 and 1995, except the fair
market value of certain derivatives related to the Mortgage Debt (see
Note 8).
(f) Deferred Financing Costs
Deferred financing costs include fees and costs incurred to obtain
long-term financing and costs to obtain the interest rate cap for the
Mortgage Debt. The costs are being amortized over the terms of the
respective loans on a level yield basis. Unamortized deferred financing
fees are written-off when debt is retired before the maturity date.
Accumulated amortization for such costs was $6,211,736 and $4,747,978 at
December 31, 1996 and 1995, respectively.
(g) Revenue Recognition
Rental income attributable to leases is recorded when earned from tenants.
(h) Earnings Per Common Share
Earnings per common share are based on the weighted average number of
common shares outstanding during each year. The conversion of an OP Unit
to common stock will have no effect on earnings per common share since
the allocation of earnings to an OP Unit is equivalent to earnings
allocated to a share of common stock. The outstanding common stock
options have less than a 1% dilutive effect on earnings per share.
F-9
37
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(i) Minority Interests
Net income is allocated to Minority Interests based on their respective
ownership percentage of the Operating Partnership. An ownership percentage
is represented by dividing the number of OP Units held by the Minority
Interests (2,714,889 at December 31, 1996) by total OP Units and common
stock outstanding. Issuance of additional shares of common stock or OP
Units changes the percentage ownership of both the Minority Interests and
the Company. Due in part to the exchange rights, such transactions and the
proceeds therefrom are treated as capital transactions and result in an
allocation between stockholders' equity and Minority Interests to account
for the change in respective percentage ownership of the underlying
equity of the Operating Partnership.
(j) Income Taxes
Due to the structure of the Company as a REIT, the results of operations
contain no provision for Federal income taxes. However, the Company may be
subject to certain state and local income, excise or franchise taxes. The
Company paid state and local taxes of $73,000 and $183,000 during the years
ended December 31, 1996 and 1995. As of December 31, 1996, net investment
in rental property and notes receivable had a federal tax basis of
approximately $442.8 million and $35.0 million, respectively.
(k) Reclassifications
Certain 1995 and 1994 amounts have been reclassified to conform to the 1996
financial presentation. Such reclassifications have no effect on the
operations as originally presented.
NOTE 3 - COMMON STOCK AND OTHER EQUITY RELATED TRANSACTIONS
The following table presents the changes in the Company's outstanding common
stock for the years ended December 31, 1996, 1995 and 1994 (excluding OP Units
of 2,714,889, 2,717,048 and 2,717,048 outstanding at December 31, 1996, 1995
and 1994, respectively):
1996 1995 1994
---------- ---------- ----------
Shares outstanding at January 1,...................... 24,393,149 24,426,887 20,370,998
Common stock purchased by key employees of
the Company.................................... 270,000 --- ---
Common stock issued through Shelf Offering...... --- --- 4,000,000
Common stock issued through conversion of
OP Units....................................... 2,159 --- ---
Common stock issued through exercise of Options. 75,497 58,500 47,166
Common stock issued through stock awards........ 211,143 17,490 8,723
Common stock purchased in 1995 and retired
in 1996........................................ --- (109,728) --
---------- ---------- ----------
Shares outstanding at December 31,.................... 24,951,948 24,393,149 24,426,887
========== ========== ==========
On August 26, 1994, the Company was declared effective on its Registration
Statement offering of up to 5,000,000 shares of common stock. During September
1994, the Company sold 4,000,000 shares in separate privately negotiated
transactions (the "Shelf Offering"). The average price per share was $19.135,
resulting in gross offering proceeds of approximately $76.5 million. Net of
offering expenses, the Company received approximately $75.8 million. The
Company contributed the net proceeds from the Shelf Offering to the Operating
Partnership.
During 1994, the Company, as general partner of the Operating Partnership,
approved the addition of new limited partners (the "1994 Limited Partners") to
the Operating Partnership in connection with the acquisition of certain
properties. The interests of the 1994 Limited Partners are represented by
437,236 OP Units. An OP Unit is exchangeable on a one-for-one basis for a share
of the Company's common stock. OP Units receive the same amount in
distributions as holders of common stock.
F-10
38
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - COMMON STOCK AND OTHER EQUITY RELATED TRANSACTIONS (CONTINUED)
As of December 31, 1996, the Company's percentage ownership of the
Operating Partnership was 90.19%. The remaining 9.81% is owned by the Minority
Interests.
The Company paid a $.305 per share distribution on April 12, 1996, July
12, 1996, October 11, 1996 and January 10, 1997 for the quarters ended March
31, June 30, September 30, and December 31, 1996, respectively, to stockholders
of record on March 29, June 28, September 27, and December 27, 1996,
respectively.
In September 1996, the Company retired 109,728 shares of common stock
which were held in treasury.
NOTE 4 - RENTAL PROPERTY
Land improvements consist primarily of improvements made to land such as
landscaping and infrastructure. Depreciable property consists of permanent
buildings in the communities such as clubhouses, laundry facilities,
maintenance storage facilities, and furniture, fixtures and equipment.
During the year ended December 31, 1994, the Company acquired 23
communities consisting of 11,476 sites for an aggregate purchase price of
approximately $348.4 million. The acquisitions were funded with approximately
$145.9 million in borrowings, $8.3 million in OP units, and the remainder in
working capital.
On April 24, 1995, Catalina Village located in Phoenix, Arizona, was sold
for cash of approximately $1.5 million and a purchase money note receivable of
$1.45 million, net of a fair value discount of $450,000. The Company recorded
a gain of approximately $408,000 in the second quarter of 1995. On September
29, 1995, Elmwood located in Canby, Oregon, was sold for cash of approximately
$3.5 million. The Company recorded a gain of approximately $810,000 in the
third quarter of 1995.
On February 28, 1996, the Company acquired Waterford, located near
Wilmington, Delaware, for a purchase price of approximately $21 million. The
acquisition was funded with an $18.6 million borrowing under the Company's line
of credit with a bank and approximately $2.4 million of existing available
cash. Waterford consists of 621 developed sites and 110 expansion sites; the
cost of completing the expansion sites will be paid by the seller.
On May 9, 1996, the Company funded a recourse first mortgage real estate
loan for $6,050,000 to the partnership which owns Candlelight Village, located
in Columbus, Indiana. The loan has an interest rate of 9.5%, 9.75% and 10% for
the first, second and third years of the loan, respectively, which interest is
payable monthly. Interest and principal are guaranteed by the general partner
of the partnership which owns Candlelight Village. The loan matures May 8,
1999 at which time the Company has the option to purchase Candlelight Village.
Candlelight Village consists of 512 sites and 73 expansion sites. For
financial accounting purposes, the Company accounts for the loan as an
investment in real estate.
On October 23, 1996, the Company acquired two properties, Casa del Sol
Resort No. 1 and Casa del Sol Resort No. 2 (collectively, the "Casa del Sol
Resorts"), located near Phoenix, Arizona, for a purchase price of approximately
$17 million. The acquisition was funded with a borrowing under the Company's
line of credit with a bank. The Casa del Sol Resorts consist of 485 sites.
The acquisitions have been accounted for utilizing the purchase method of
accounting and, accordingly, the results of operations of acquired assets are
included in the statement of operations from the dates of acquisitions. The
Company acquired all of the communities from unaffiliated third parties.
The Company is actively seeking to acquire additional communities and
currently is engaged in negotiations relating to the possible acquisition of a
number of communities. At any time these negotiations are at varying stages
which may include contracts outstanding to acquire certain manufactured home
communities which are subject to satisfactory completion of the Company's due
diligence review.
F-11
39
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INVESTMENT IN AND ADVANCES TO AFFILIATES
Investment in and advances to affiliates consists principally of preferred
stock of Realty Systems, Inc. ("RSI") and LP Management Corp. (collectively
"Affiliates") and advances under a line of credit between the Company and RSI.
The Company accounts for the investment in and advances to Affiliates using the
equity method of accounting.
Following is unaudited financial information for the Affiliates for the
year ended December 31, 1996 and 1995 (amounts in thousands):
1996 1995
-------- --------
Assets $12,772 $14,739
Liabilities, net of amounts due
to the Company (5,936) (3,752)
-------- --------
Net investment in Affiliates $ 6,836 $10,987
======== ========
Gross sales $20,645 $18,409
Cost of sales (17,539) (15,599)
Other revenues and expenses (2,253) (1,925)
-------- --------
Equity in income of Affiliates $ 853 $ 885
======== ========
NOTE 6 - NOTES RECEIVABLE
At December 31, 1996 and 1995, notes receivable consisted of the following
(amounts in thousands):
1996 1995
------- -------
$2.0 million note receivable with monthly principal and
interest payments at 9.0%, maturing on 6/10/2003............. $ 1,596 $ 1,768
$1.2 million purchase money notes with monthly principal and
interest payments at 7%, maturing on 7/31/2001............... 1,160 1,174
$10 million leasehold mortgage loan with interest accruing at
a stated rate of 12.5% with a pay rate of 8.75%, maturing on
9/1/2013 (a)................................................. 11,071 10,558
$1.9 million note receivable with monthly interest
payments at prime plus 1.6%, maturing on 4/15/2000 (b)....... 1,600 1,510
------- -------
Total notes receivable....................................... $15,427 $15,010
======= =======
(a) The $10 million mortgage loan (the "Bayside Loan") is collateralized by a
leasehold interest held by the borrower. The maturity of the Bayside Loan is
co-terminus with the maturity of the ground lease. The pay rate increases 25
basis points per year until 2001 when it will be fixed through maturity. The
excess of the stated rate over the pay rate is added to the principal balance
and will also accrue at the stated rate (the "Deferred Interest"). The Deferred
Interest and interest accrued thereon shall be payable out of a participating
percentage of cash flow.
(b) The pay rate is capped at 12%. The excess of the stated rate over the pay
rate is added to the principal balance and will also accrue interest at the
stated rate. The note was recorded net of a $450,000 fair value discount. As
of December 31, 1996 and 1995, the unamortized discount was $300,000 and
$390,000, respectively.
F-12
40
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - EMPLOYEE NOTES RECEIVABLE
In December 1992, certain directors, officers and other individuals each
entered into subscription agreements with the Company to acquire 440,000 shares
of the Company's common stock at $7.25 per share. In addition, in 1993, the
then Chief Executive Officer, subscribed for an additional 100,000 shares at
the Initial Offering price of $12.875. Cash of $39,150 was paid to acquire
5,400 of the shares and subscription agreements were entered into for the
remaining shares. Upon successful completion of a public stock offering, the
subscription agreements allowed the individuals who were employees to tender
notes (the "1993 Employee Notes") to the Company in exchange for their
remaining shares. The 1993 Employee Notes accrue interest at 6.77%, mature on
March 2, 2003, and are recourse against the employees in the event the pledged
shares are insufficient to repay the obligations. In January 1995, effective
March 31, 1995, the then Chief Executive Officer of the Company resigned and in
accordance with the terms of the 1993 Employee Notes, was required to repay his
1993 Employee Note. The Company acquired 109,600 shares of common stock and
cash based upon an $18.125 per share common stock price as payment for such
1993 Employee Note. The 109,600 shares were being held in Treasury and in 1996
were retired.
On January 2, 1996, certain members of management of the Company each
entered into subscription agreements with the Company to acquire a total of
270,000 shares of the Company's common stock at $17.375 per share, the market
price on that date. The Company received from these individuals notes (the
"1996 Employee Notes") in exchange for their shares. The 1996 Employee Notes
accrue interest at 5.91%, mature on January 2, 2005, and are recourse against
the employees in the event the pledged shares are insufficient to repay the
obligations.
NOTE 8 - LONG-TERM BORROWINGS
At December 31, 1996 and 1995, long-term borrowings consisted of the
following (amounts in thousands):
1996 1995
-------- --------
$100.0 million mortgage notes payable with monthly interest only
payments at LIBOR plus 1.05%, maturing 3/3/98 (a).................. $100,000 $100,000
First mortgage loan with monthly principal and interest payments
at 7.40%, maturing on 3/1/2004 (b)................................. 8,620 8,767
Purchase money note with structured principal and interest payments
at an imputed rate of 7.38%, maturing on 7/11/2004................. 1,334 1,516
First mortgage loan with monthly principal and interest payments
at a rate of 7.48%, maturing on 8/1/2004 (c)....................... 24,544 24,859
$65.0 million first mortgage loan with monthly principal and
interest payments at 8%, maturing on 9/1/2001 (d).................. 62,984 63,924
-------- --------
Total collateralized borrowings.................................... 197,482 199,066
$100.0 million line of credit at LIBOR plus 1.375% (e)............. 57,500 12,900
-------- --------
Total long-term borrowings......................................... $254,982 $211,966
======== ========
(a) The $100.0 million mortgage notes payable (the "Mortgage Debt") are
collateralized by 32 of the Original Properties beneficially owned by MHC
Financing. The Company has an interest rate cap for the term of the Mortgage
Debt which eliminates exposure to increases in LIBOR over 6%, plus 1.05%. In
connection with the various swap agreements, discussed below, the Company sold
portions of the interest rate cap related to 1996 and 1997 and recorded a
non-cash write-off of approximately $650,000 in the fourth quarter of 1995 and
$482,000 in the fourth quarter of 1996.
F-13
41
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - LONG-TERM BORROWINGS (CONTINUED)
In December 1995, the Company entered into an interest rate swap agreement
fixing the London Interbank Offered Rate ("LIBOR") on the Mortgage Debt at
5.24% effective January 10, 1996 through January 10, 1997. The value of this
agreement is impacted by changes in the market rate of interest. Had the
agreement been entered into on December 31, 1996, the applicable LIBOR swap
rate would have been 5.6%. Each 0.01% increase or decrease in the applicable
swap rate for this agreement increases or decreases the value of the agreement
entered into by the Company versus its current value by approximately $850.
In October 1996, the Company entered into an interest rate swap agreement
fixing LIBOR on the Mortgage Debt at 5.57% effective January 10, 1997 through
March 3, 1998. The value of this agreement is impacted by changes in the
market rate of interest. Had the agreement been entered into on December 31,
1996, the applicable LIBOR swap rate would have been 5.8%. Each 0.01% increase
or decrease in the applicable swap rate for this agreement increases or
decreases the value of the agreement entered into by the Company versus its
current value by approximately $2,300.
In July 1995, the Company entered into an interest rate swap agreement
(the "Swap") beginning at the maturity of the Mortgage Debt fixing LIBOR on the
refinancing of the Mortgage Debt at 6.4% for the period 1998 through 2003. The
cost of the Swap consisted only of legal costs which were deemed immaterial.
In the event that the Company does not refinance the Mortgage Debt, the risk
associated with the Swap is that the Company would be obligated to perform its
obligations under the terms of the Swap or would have to pay to terminate the
Swap. In either event, the impact of such transaction would be reflected in
the Company's statement of operations. The value of the Swap is impacted by
changes in the market rate of interest. Had the Swap been entered into on
December 31, 1996, the applicable LIBOR swap rate would have been 6.6%. Each
0.01% increase or decrease in the applicable swap rate for the Swap increases
or decreases the value of the Swap entered into by the Company versus its
current value by approximately $40,000.
(b) The non-recourse loan is collateralized by the Brentwood Manor and Palm
Shadows properties.
(c) The non-recourse loan is collateralized by the Bay Indies property.
(d) The non-recourse loan is collateralized by seven properties acquired in
1994.
(e) On May 7, 1996, the Company amended the credit agreement increasing the
$50.0 million line of credit to $100.0 million at LIBOR plus 1.375% and
extending the maturity date to August 17, 1998. In addition, the fee on the
average unused amount was reduced to .15% of such amount from .25%. The
Company paid a $201,000 loan fee which is being amortized over the remaining
period of the amended agreement.
As of December 31, 1996, the carrying value of the property
collateralizing the long-term borrowings was approximately $331 million.
Aggregate payments of principal on long-term borrowings for each of the
next five years and thereafter are as follows (amounts in thousands):
Year Amount
---------- --------
1997 $1,520
1998 159,257
1999 1,776
2000 1,915
2001 59,162
Thereafter 31,352
--------
Total $254,982
========
F-14
42
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - LEASE AGREEMENTS
The leases entered into between the tenant and the Company for the rental
of a site are month-to-month or for a period of one to ten years, renewable
upon the consent of the parties or, in some instances as provided by statute.
Non-cancelable long-term leases, ranging from one to fifteen years, are in
effect at certain sites within six of the properties. Rental rate increases at
these properties are primarily a function of increases in the Consumer Price
Index taking into consideration certain floors and ceilings. Additionally,
periodic market rate adjustments are made as deemed necessary. Future minimum
rents scheduled to be received under noncancelable tenant leases at December
31, 1996 are as follows (amounts in thousands):
Year Amount
---------- -------
1997 $13,917
1998 9,312
1999 5,523
2000 5,685
2001 5,854
Thereafter 29,161
-------
Total $69,452
=======
NOTE 10 - TRANSACTIONS WITH RELATED PARTIES
Equity Group Investments, Inc. ("EGI"), an entity controlled by Mr. Samuel
Zell, Chairman of the Board of Directors, and certain of its affiliates have
provided services such as administrative support, investor relations, corporate
secretarial, real estate tax evaluation services, market consulting and
research services, and computer and support services, as well as, providing
office space to the Company. Fees paid to EGI and its affiliates amounted to
approximately $708,000, $1,047,000 and $1,125,000 for the years ended December
31, 1996, 1995 and 1994, respectively. Amounts due to these affiliates were
approximately $31,000 and $276,000 as of December 31, 1996 and 1995,
respectively.
Certain related entities, owned by persons affiliated with Mr. Zell, have
provided services to the Company. These entities include, but are not limited
to, Rosenberg & Liebentritt, P.C. which provided legal services; The Riverside
Agency, Inc. which provided insurance brokerage services; Greenberg and
Pociask, Ltd. which provided tax and accounting services; Computech Systems,
Inc. which provided computer services; and Equity Properties & Development, LP
which provided accounting services. Fees paid to these entities amounted to
approximately $527,000, $250,000 and $721,000 for the years ended December 31,
1996, 1995 and 1994, respectively. Amounts due to these affiliates were
approximately $74,000 and $270,000 as of December 31, 1996 and 1995,
respectively. Of the amounts due to these affiliates as of December 31, 1996,
approximately $67,000 was capitalized as part of the proposed merger costs.
Related party agreements or fee arrangements are generally for a term of
one year and approved by independent members of the Board of Directors.
NOTE 11 - PREFERRED STOCK
The Company's Board of Directors is authorized under the Company's
charter, without further stockholder approval, to issue, from time to time, in
one or more series, 10,000,000 shares of $.01 par value preferred stock (the
"Preferred Stock"), with specific rights, preferences and other attributes as
the Board may determine, which may include preferences, powers and rights that
are senior to the rights of holders of the Company's common stock. However,
under certain circumstances, the issuance of preferred stock may require
stockholder approval pursuant to the rules and regulations of the New York
Stock Exchange.
F-15
43
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - SAVINGS PLAN
The Company has a qualified retirement plan, with a salary deferral
feature designed to qualify under Section 401 of the Code (the "401(k) Plan"),
to cover its employees and those of its Subsidiaries, if any. The 401(k) Plan
permits eligible employees of the Company and those of any Subsidiary to defer
a portion of their compensation up to 16% of their eligible compensation on a
pre-tax basis subject to certain maximum amounts. In addition, the Company will
match dollar-for-dollar the participant's contribution up to 4% of the
participant's eligible compensation.
In addition, amounts contributed by the Company will vest, on a prorated
basis, according to the participant's vesting schedule. After five years of
employment with the Company, the participants will be 100% vested for all
amounts contributed by the Company. Additionally, a discretionary profit
sharing component of the 401(k) Plan provides for a contribution to be made
annually for each participant in an amount, if any, as determined by the
Company. All employee contributions are 100% vested. The Company's contribution
to the 401(k) Plan was approximately $201,000, $171,000 and $157,000 for the
years ended December 31, 1996, 1995 and 1994, respectively. The Company's
anticipated plan contribution for profit sharing was approximately $176,000 for
the year ended December 31, 1996.
NOTE 13 - STOCK OPTION PLAN
A Stock Option Plan (the "Plan") was adopted by the Company in December
1992. Pursuant to the Plan, certain officers, directors, key employees and
consultants of the Company may be offered the opportunity to acquire shares of
common stock (the "shares") through the grant of stock options ("Options"),
including non-qualified stock options and, for key employees, incentive stock
options within the meaning of Section 422 of the Code. The Compensation
Committee will determine the vesting schedule, if any, of each Option and the
term, which term shall not exceed ten years from the date of grant. As to the
Options that have been granted through December 31, 1996, generally, one-third
are exercisable one year after the initial grant, one-third are exercisable two
years following the date such Options were granted and the remaining one-third
are exercisable three years following the date such Options were granted. The
Plan allows for 10,000 Options to be granted annually to each director. The
common stock with respect to which the Options may be granted during any
calendar year to any grantee shall not exceed 250,000 shares. In addition, the
Plan provides for the granting of stock appreciation rights ("SARs") and
restricted stock awards ("Stock Awards"). A maximum of 2,000,000 shares of
common stock were available for grant under the Plan.
In 1996, 1995 and 1994, the Company issued 13,144, 17,490 and 8,723 shares
related to Stock Awards, respectively. The shares related to the Stock Awards
shall be restricted for a period of two years from the date of grant. The fair
market value of these Stock Awards of approximately $289,000, $291,000 and
$170,000 at the date of grant was recorded by the Company in 1996, 1995 and
1994.
In December 1996, the Company awarded 198,000 Stock Awards to certain
members of senior management of the Company. These Stock Awards vest over five
years, but may be restricted for a period of up to fifteen years depending upon
certain performance benchmarks being met. The fair market value of these Stock
Awards of approximately $4.4 million as of the date of grant was recorded in
1996 as deferred compensation. For 1996, the Company amortized approximately
$871,000 related to these Stock Awards.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its Options and Stock Awards because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123")
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of
the Company's Options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized. Additionally, the amount
recognized as expense for the Stock Awards during any given year of the
performance period is dependent on certain performance benchmarks being met.
F-16
44
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - STOCK OPTION PLAN (CONTINUED)
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its Options and Restricted Stock Awards under the fair value
method of that Statement. The fair value for the Options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1996 and 1995, respectively: risk-free
interest rates of 6.5% and 6.5%; dividend yields of 6.4% and 7.2%; volatility
factors of the expected market price of the Company's common stock of .27 and
.27; and a weighted-average expected life of the options of 5 years. The fair
value of the Stock Awards granted in December 1996 has been estimated as
approximately 30% below the fair market value on the date of grant because
these Stock Awards may remain restricted even after they become fully vested.
Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1997.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's Options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its Options.
For purposes of pro forma disclosures, the estimated fair value of the
Options is amortized to expense over the Options' vesting period and the
estimated fair value of the Restricted Awards is amortized to expense over the
same period as expense was recognized by the Company in the current year. The
pro forma effect of SFAS No. 123 on the Company's net income for the years
ended December 31, 1996 and 1995 was immaterial.
A summary of the Company's stock option activity, and related information
for the years ended December 31, 1996, 1995 and 1994 follows:
Weighted Average
Shares Subject Exercise Price Per
to Option Share
-------------- --------------------
Balance at December 31, 1993 733,500 $15.99
Options granted 405,750 20.52
Options exercised (47,166) 12.88
-------------- --------------------
Balance at December 31, 1994 1,092,084 17.81
Options granted 437,250 16.92
Options exercised (58,500) 12.88
Options canceled (130,200) 18.96
-------------- --------------------
Balance at December 31, 1995 1,340,634 17.62
Options granted 307,350 21.01
Options exercised (75,497) 14.14
Options canceled (121,835) 20.19
-------------- --------------------
Balance at December 31, 1996 1,450,652 $18.31
============== ====================
As of December 31, 1996, 1995 and 1994, 116,957 shares, 513,615 shares
and 846,750 shares remained available for grant, respectively, and 874,353
shares, 759,193 shares and 479,809 shares were exercisable, respectively.
Exercise prices for Options outstanding as of December 31, 1996 ranged from
$12.875 to $22.375, with the substantial majority of the exercise prices
exceeding $17.25. The remaining weighted-average contractual life of those
Options was 8.1 years.
F-17
45
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - COMMITMENTS AND CONTINGENCIES
On September 17, 1996 Chateau Properties, Inc. ("Chateau") filed suit in
the United States District Court for the District of Maryland against the
Company and the Operating Partnership alleging, among other things, that (i)
the Operating Partnership's tender offer to purchase all outstanding shares of
common stock, which tender offer has since expired, is in violation of the
federal securities laws because it contains untrue statements of material fact
and omits to state material facts and (ii) the Company and the Operating
Partnership have begun a proxy solicitation in opposition to Chateau's proposed
merger with ROC Communities, Inc. ("ROC") and have made material misstatements
of facts and omitted to disclose other material facts as part of that
solicitation effort in violation of applicable federal law. The Company has
filed counterclaims against Chateau and ROC and intends to vigorously defend
itself against Chateau's claims which it believes are frivolous. At this time
it is not possible to predict the outcome of these matters, but the Company
does not anticipate that the impact of this litigation will be material.
The Company is involved in a variety of legal proceedings arising in the
ordinary course of business. All such proceedings, taken together, are not
expected to have a material adverse impact on the financial position, results
of operations or cash flows of Company.
NOTE 15 - PROPOSED MERGER
During 1996, the Company began a proxy solicitation in opposition to
Chateau Properties, Inc.'s ("Chateau") proposed merger with ROC Communities,
Inc. ("ROC") and incurred approximately $1.3 million in costs and invested in
certain saleable assets with a book value of approximately $9.9 million. These
expenditures have been included in prepaid expenses and other assets at
December 31, 1996. On February 11, 1997, the Chateau shareholders approved
Chateau's purchase of ROC. Thus, the Company will sell the assets acquired and
write-off the capitalized costs in the first quarter of 1997.
F-18
46
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is unaudited quarterly data for 1996 and 1995 (amounts in
thousands, except for per share amounts):
First Second Third Fourth
Quarter Quarter Quarter Quarter
3/31 6/30 9/30 12/31
------- ------- ------- -------
1996
- -------------------------------------------
Total revenues ............................ $25,469 $26,128 $26,408 $27,198
======= ======= ======= =======
Income before allocation
to minority interests .................... $ 6,557 $ 6,666 $ 7,145 $ 6,575
======= ======= ======= =======
Net income ................................ $ 5,907 $ 6,005 $ 6,437 $ 5,923
======= ======= ======= =======
Weighted average common
shares outstanding (excluding OP Units) .. 24,664 24,687 24,697 24,714
======= ======= ======= =======
Weighted average OP Units ................. 2,715 2,715 2,715 2,715
======= ======= ======= =======
Net income per common share outstanding ... $ .24 $ .24 $ .26 $ .24
======= ======= ======= =======
1995
- -------------------------------------------
Total revenues ............................ $24,128 $24,169 $24,567 $24,040
======= ======= ======= =======
Income before allocation
to minority interests .................... $ 3,998 $ 5,364 $ 6,324 $ 4,337
======= ======= ======= =======
Net income ................................ $ 3,598 $ 4,828 $ 5,691 $ 3,900
======= ======= ======= =======
Weighted average common
shares outstanding (excluding OP Units) .. 24,311 24,332 24,372 24,377
======= ======= ======= =======
Weighted average OP Units ................. 2,717 2,717 2,717 2,717
======= ======= ======= =======
Net income per common share outstanding ... $ .15 $ .20 $ .23 $ .16
======= ======= ======= =======
F-19
47
SCHEDULE II
MANUFACTURED HOME COMMUNITIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1996
ADDITIONS
----------------------
BALANCE AT CHARGED CHARGED BALANCE
BEGINNING TO TO OTHER AT END OF
OF PERIOD INCOME ACCOUNTS DEDUCTIONS(1) PERIOD
--------- ------ -------- ------------- ------
For the year ended December 31, 1994:
Allowance for doubtful accounts...... $100,000 $235,574 $--- ($175,574) $160,000
For the year ended December 31, 1995:
Allowance for doubtful accounts...... $160,000 $380,854 $--- ($340,854) $200,000
For the year ended December 31, 1996:
Allowance for doubtful accounts...... $200,000 $198,797 $--- ($148,797) $250,000
(1) Deductions represent tenant receivables deemed uncollectible.
S-1
48
SCHEDULE III
MANUFACTURED HOME COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(IN THOUSANDS)
Subsequent to
Initial cost to Acquisition
Company (Improvements)
----------------------------- -------------------------
MANUFACTURED Depreciable Depreciable
HOUSING COMMUNITIES LOCATION Encumbrances Land Property Land Property
- --------------------------------------------------------------------------------------------------------------------------------
NASSAU PARK Lewes, DE --- $ 1,536 $ 4,609 $ 0 $ 307
MARINER'S COVE Millsboro, DE --- 990 2,971 0 2,524
WATERFORD Wilmington, DE --- 5,250 16,202 ---- 47
LAKE HAVEN Dunedin, FL $ 4,286 1,135 4,047 0 297
BULOW VILLAGE Flagler Beach, FL 1,334 3,633 949 4 1,738
BUCCANEER ESTATES N. Ft. Myers, FL 7,831 4,207 14,410 0 246
FFEC-SIX N. Ft. Myers, FL --- 401 3,608 0 36
THE HERITAGE N. Ft. Myers, FL --- 1,438 4,371 0 950
LAKE FAIRWAYS N. Ft. Myers, FL --- 6,075 18,134 0 176
PINE LAKES N. Ft. Myers, FL --- 6,306 14,579 0 3,536
WINDMILL VILLAGE N. Ft. Myers, FL 4,930 1,417 5,440 0 334
EAST BAY OAKS Largo, FL 3,477 1,240 3,322 0 221
ELDORADO VILLAGE Largo, FL 2,323 778 2,341 0 205
MID-FLORIDA LAKES Leesburg, FL 13,018 5,997 20,635 0 513
COLONIES OF MARGATE Margate, FL 12,911 5,890 20,211 0 257
LAKEWOOD VILLAGE Melbourne, FL --- 1,863 5,627 0 80
COUNTRY PLACE VILLAGE New Port Richey, FL 555 663 0 18 5,134
BAY LAKE ESTATES Nokomis, FL 2,150 990 3,390 0 144
OAK BEND Ocala, FL --- 850 2,572 0 186
SPANISH OAKS Ocala, FL --- 2,250 6,922 0 68
WINDMILL VILLAGE NORTH Sarasota, FL 4,273 1,523 5,063 0 258
WINDMILL VILLAGE SOUTH Sarasota, FL 2,630 1,106 3,162 0 225
BAY INDIES Venice, FL 24,544 10,483 31,559 0 234
CANDLELIGHT VILLAGE Columbus, IN --- 1,513 4,538 0 24
HERITAGE VILLAGE Vero Beach, FL --- 2,403 7,259 0 91
BURNS HARBOR ESTATES Chesterton, IN --- 916 2,909 0 262
OAKTREE VILLAGE Portage, IN 3,419 0 0 569 2,799
PHEASANT RIDGE Mount Airy, MD 1,113 376 1,779 0 94
GREEN ACRES PARK Breinigsville, PA 6,802 2,407 7,479 0 627
GREEN ACRES LAND Breinigsville, PA --- 273 0 0 916
MEADOWS OF CHANTILLY Chantilly, VA --- 5,430 16,440 0 634
INDEPENDENCE HILL Morgantown, WV 810 299 898 0 120
BONNER SPRINGS Bonner Springs, KS --- 343 1,041 0 86
CARRIAGE PARK Kansas City, KS --- 309 938 0 339
QUIVIRA HILLS Kansas City, KS 1,115 376 1,139 0 89
NORTH STAR VILLAGE Kansas City, MO 1,299 451 1,365 0 147
BRIARWOOD Brookline, MO 492 423 1,282 0 129
DELLWOOD ESTATES Warrensburg, MO 524 300 912 0 63
HILLCREST VILLAGE Aurora, CO 6,414 1,912 5,202 289 1,181
CIMARRON Broomfield, CO 3,275 863 2,790 0 261
Gross Amount Carried
at Close of
Period 12/31/96
-----------------------------------
MANUFACTURED Depreciable Accumulated Date of
HOUSING COMMUNITIES Land Property Total Depreciation Acquisition
- ------------------------------------------------------------------------------------------------------
NASSAU PARK $ 1,536 $ 4,916 $ 6,452 $1,370 1988
MARINER'S COVE 990 5,495 6,485 1,069 1987
WATERFORD 5,250 16,249 21,499 249 1996
LAKE HAVEN 1,135 4,344 5,479 1,875 1983
BULOW VILLAGE 3,637 2,687 6,323 134 1994
BUCCANEER ESTATES 4,207 14,656 18,862 1,149 1994
FFEC-SIX 401 3,644 4,045 264 1994
THE HERITAGE 1,438 5,321 6,760 533 1993
LAKE FAIRWAYS 6,075 18,310 24,385 1,322 1994
PINE LAKES 6,306 18,115 24,421 1,160 1994
WINDMILL VILLAGE 1,417 5,774 7,191 2,519 1983
EAST BAY OAKS 1,240 3,543 4,783 1,562 1983
ELDORADO VILLAGE 778 2,546 3,324 1,105 1983
MID-FLORIDA LAKES 5,997 21,148 27,145 1,647 1994
COLONIES OF MARGATE 5,890 20,468 26,358 1,600 1994
LAKEWOOD VILLAGE 1,863 5,707 7,569 490 1994
COUNTRY PLACE VILLAGE 681 5,134 5,815 1,035 1986
BAY LAKE ESTATES 990 3,534 4,524 282 1994
OAK BEND 850 2,758 3,609 297 1993
SPANISH OAKS 2,250 6,990 9,240 738 1993
WINDMILL VILLAGE NORTH 1,523 5,321 6,844 2,336 1983
WINDMILL VILLAGE SOUTH 1,106 3,387 4,493 1,481 1983
BAY INDIES 10,483 31,793 42,275 3,105 1994
CANDLELIGHT VILLAGE 1,513 4,562 6,074 68 1996
HERITAGE VILLAGE 2,403 7,350 9,754 632 1994
BURNS HARBOR ESTATES 916 3,171 4,087 430 1993
OAKTREE VILLAGE 569 2,799 3,368 506 1987
PHEASANT RIDGE 376 1,873 2,249 972 1988
GREEN ACRES PARK 2,407 8,106 10,512 2,390 1988
GREEN ACRES LAND 273 916 1,189 0 1994
MEADOWS OF CHANTILLY 5,430 17,074 22,504 1,482 1994
INDEPENDENCE HILL 299 1,018 1,317 236 1990
BONNER SPRINGS 343 1,127 1,471 278 1989
CARRIAGE PARK 309 1,277 1,586 283 1989
QUIVIRA HILLS 376 1,228 1,604 297 1989
NORTH STAR VILLAGE 451 1,512 1,963 366 1989
BRIARWOOD 423 1,411 1,835 332 1989
DELLWOOD ESTATES 300 975 1,275 239 1989
HILLCREST VILLAGE 2,201 6,383 8,585 2,530 1983
CIMARRON 863 3,051 3,914 1,319 1983
S-2
49
SCHEDULE III
MANUFACTURED HOME COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
DECEMBER 31, 1996
(IN THOUSANDS)
Costs Capitalized
Subsequent to
Initial Cost to Acquisition
Company (Improvements)
--------------------------- --------------------------
MANUFACTURED Depreciable Depreciable
HOUSING COMMUNITIES LOCATION Encumbrances Land Property Land Property
- --------------------------------------------------------------------------------------------------------------------------
HOLIDAY VILLAGE, CO Colorado Springs, CO 2,708 567 1,759 0 302
HOLIDAY HILLS VILLAGE Denver, CO 7,123 2,159 7,780 0 1,271
GOLDEN TERRACE VILLAGE Golden, CO 3,112 826 2,415 0 322
GOLDEN TERRACE WEST Golden, CO 3,317 1,694 5,065 0 466
PUEBLO GRANDE VILLAGE Pueblo, CO 928 241 1,069 0 247
WOODLAND HILLS Thornton, CO --- 1,928 5,779 0 378
HOLIDAY VILLAGE, IA Sioux City, IA 1,931 313 3,744 0 340
CAMELOT ACRES Burnsville, MN 3,108 527 2,058 0 274
CASA VILLAGE Billings, MT 2,611 1,011 3,109 181 1,003
APOLLO VILLAGE Apollo, AZ --- 932 3,219 0 233
BRENTWOOD MANOR Mesa, AZ 5,124 1,998 6,024 0 136
HACIENDA DE VALENCIA Mesa, AZ 3,968 833 2,701 0 481
THE MARK Mesa, AZ --- 1,354 4,660 5 149
PALM SHADOWS Glendale, AZ 3,496 1,400 4,218 0 128
CASA DEL SOL RESORT NO. 1 Phoenix, AZ --- 2,315 6,467 0 33
CASA DEL SOL RESORT NO. 2 Phoenix, AX --- 2,204 6,283 0 20
CENTRAL PARK Phoenix, AZ 3,405 1,612 3,784 0 200
SUNRISE HEIGHTS Phoenix, AZ --- 999 3,016 0 110
THE MEADOWS Tempe, AZ --- 2,614 7,887 0 164
RANCHO VALLEY El Cajon, CA 2,671 685 1,902 0 199
CONCORD CASCADE Pacheco, CA 6,077 985 3,016 0 338
DATE PALM Cathedral City, CA 9,957 4,138 14,064 (23) 443
CONTEMPO MARIN San Rafael, CA --- 4,779 16,379 9 705
DE ANZA SANTA CRUZ
ESTATES Santa Cruz, CA 4,549 2,103 7,204 0 70
LAMPLIGHTER VILLAGE Spring Valley, CA 5,350 633 2,201 0 400
BONANZA VILLAGE Las Vegas, NV 4,821 908 2,643 0 214
CABANA Las Vegas, NV --- 2,648 7,989 0 39
FLAMINGO WEST Las Vegas, NV --- 1,732 5,266 0 90
ROCKWOOD VILLAGE Tulsa, OK 1,132 645 1,622 0 180
DEL REY Albuquerque, NM --- 1,926 5,800 0 306
WILLOW LAKE ESTATES Elgin, IL 12,569 6,136 21,033 2 259
MANAGEMENT BUSINESS Chicago, IL --- 0 436 0 3,371
-------- -------- -------- ------ -------
$197,482 $137,460 $420,687 $1,054 $38,449
======== ======== ======== ====== =======
Gross Amount Carried
at Close of
Period 12/31/96
----------------------------------------
MANUFACTURED Depreciable Accumulated Date of
HOUSING COMMUNITIES Land Property Total Depreciation Acquisition
- ------------------------------------------------------------------------------------------------------------------
HOLIDAY VILLAGE, CO 567 2,061 2,628 859 1983
HOLIDAY HILLS VILLAGE 2,159 9,051 11,210 3,734 1983
GOLDEN TERRACE VILLAGE 826 2,737 3,563 1,152 1983
GOLDEN TERRACE WEST 1,694 5,531 7,225 1,785 1986
PUEBLO GRANDE VILLAGE 241 1,316 1,556 564 1983
WOODLAND HILLS 1,928 6,157 8,085 582 1994
HOLIDAY VILLAGE, IA 313 4,084 4,397 1,505 1986
CAMELOT ACRES 527 2,332 2,859 1,009 1983
CASA VILLAGE 1,192 4,112 5,303 1,519 1983
APOLLO VILLAGE 932 3,452 4,384 257 1994
BRENTWOOD MANOR 1,998 6,160 8,158 761 1993
HACIENDA DE VALENCIA 833 3,182 4,016 1,326 1984
THE MARK 1,359 4,809 6,168 373 1994
PALM SHADOWS 1,400 4,346 5,746 543 1993
CASA DEL SOL RESORT NO. 1 2,315 6,500 8,815 28 1996
CASA DEL SOL RESORT NO. 2 2,204 6,303 8,507 26 1996
CENTRAL PARK 1,612 3,984 5,596 1,737 1983
SUNRISE HEIGHTS 999 3,126 4,126 297 1994
THE MEADOWS 2,614 8,051 10,664 783 1994
RANCHO VALLEY 685 2,101 2,786 910 1983
CONCORD CASCADE 985 3,354 4,340 1,428 1983
DATE PALM 4,115 14,507 18,622 1,125 1994
CONTEMPO MARIN 4,788 17,084 21,872 1,294 1994
DE ANZA SANTA CRUZ
ESTATES 2,103 7,274 9,377 569 1994
LAMPLIGHTER VILLAGE 633 2,601 3,234 1,079 1983
BONANZA VILLAGE 908 2,857 3,764 1,209 1983
CABANA 2,648 8,028 10,676 680 1994
FLAMINGO WEST 1,732 5,356 7,086 443 1994
ROCKWOOD VILLAGE 645 1,802 2,446 779 1983
DEL REY 1,926 6,106 8,032 748 1993
WILLOW LAKE ESTATES 6,138 21,292 27,430 1,654 1994
MANAGEMENT BUSINESS 0 3,807 3,807 1,041
-------- -------- -------- -------
$138,514 $459,136 $597,650 $71,481
======== ======== ======== =======
NOTES:
(1) For depreciable property, the Company uses 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 and fixtures.
(2) The balance of furniture and fixtures included in the total amounts was
approximately $6.8 million as of December 31, 1996.
(3) The aggregate cost of land and depreciable property for Federal income tax
purposes was approximately $587.6 million, as of December 31, 1996.
(4) All properties were acquired, except for Country Place Village which was
constructed.
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SCHEDULE III
MANUFACTURED HOME COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
DECEMBER 31, 1996
(IN THOUSANDS)
The changes in total real estate for the years ended December 31, 1996, 1995
and 1994 were as follows:
1996 1995 1994
-------- -------- --------
Balance, beginning of year $543,229 $541,775 $197,812
Acquisitions............ 46,531 600 339,739
Improvements............ 8,062 7,810 7,366
Dispositions and other.. (172) (6,956) (3,142)
-------- -------- --------
Balance, end of year...... $597,650 $543,229 $541,775
======== ======== ========
The changes in accumulated depreciation for the years ended December 31, 1996,
1995 and 1994 were as follows:
1996 1995 1994
------- ------- -------
Balance, beginning of year $56,403 $43,377 $34,512
Depreciation expense.... 15,250 15,087 9,520
Dispositions and other.. (172) (2,061) (655)
------- ------- -------
Balance, end of year...... $71,481 $56,403 $43,377
======= ======= =======
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