Back to GetFilings.com
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-11718
MANUFACTURED HOME COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 36-3857664
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
TWO NORTH RIVERSIDE PLAZA, SUITE 800, CHICAGO, ILLINOIS 60606
(Address of principal executive offices) (Zip Code)
(312) 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 $597.2 million as of February 22, 1999 based upon the closing
price of $23.9375 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 22, 1999, 26,580,209 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 11, 1999.
2
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....................................................15
PART II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters..............................15
Item 6. Selected Financial Data and Operating Information......................................................15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................18
Item 7A. Quantitative and Qualitative Disclosure About Market Risk..............................................25
Item 8. Financial Statements and Supplementary Data............................................................25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................25
PART III.
Item 10. Directors and Executive Officers of the Registrant.....................................................25
Item 11. Executive Compensation.................................................................................25
Item 12. Security Ownership of Certain Beneficial Owners and Management.........................................25
Item 13. Certain Relationships and Related Transactions.........................................................25
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................................26
2
3
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, 1998, the Company
owned or controlled a portfolio of 154 manufactured home communities and
recreational vehicle ("RV") resorts (the "Properties") located throughout the
United States containing 53,391 residential sites. The Properties are located in
26 states (with the number of Properties in each state shown parenthetically) --
Florida (45), California (25), Arizona (19), Michigan (11), Colorado (10),
Delaware (7), Nevada (5), Indiana (4), Oregon (3), Kansas (3), Missouri (3),
Illinois (2), Iowa (2), New York (2), Utah (2), Pennsylvania (1), Maryland (1),
Minnesota (1), Montana (1), New Mexico (1), Ohio (1), Oklahoma (1), Texas (1),
Virginia (1), West Virginia (1), and Washington (1). As of December 31, 1998,
the Company also owned two commercial buildings located in California.
The Company has approximately 800 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 one or 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 five
regional vice presidents and five regional managers. 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
50 corporate employees who assist on-site management in all property functions.
FORMATION OF THE COMPANY
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
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. MHC Operating Limited Partnership (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.
3
4
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 recreational vehicle areas. 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:
- Aggressively managing the Properties to increase operating margins
by maintaining competitive market rents, increasing occupancy 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 major metropolitan areas and
retirement destinations 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 acquired or gained a controlling interest in eighty-five
properties during 1997 and 1998, more than doubling its portfolio. 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.
4
5
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 units of
limited partnership interests ("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.
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 154 Properties, ten may be
expanded consistent with existing zoning regulations. In 1999, the Company
expects to develop an additional 50 expansion sites within two of these
Properties. 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, 1998, the
Company had more than 1,050 expansion sites available for occupancy in eighteen
of the Properties. The Company filled 207 of the expansion sites in 1998 and
expects to fill an additional 200 to 300 sites in 1999.
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, with remaining terms ranging up to eleven years, are in effect
at certain sites within eight of the Properties. These leases are subject to
rental rate increases based on the Consumer Price Index ("CPI"), 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.
5
6
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 CPI or some percentage thereof.
Insurance. Management believes that the Properties are covered by adequate
fire, flood, property, earthquake and business interruption insurance (where
appropriate) 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 historically 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, there are approximately 50,000
manufactured home communities in the United States and approximately
24,000 of these communities have more than 60 sites. The Company
believes that approximately 20% or 4,800 of the communities with more
than 60 sites would be considered "investment-grade". The six public
companies which own manufactured home communities own approximately 520
or about 10% of the "investment-grade" communities. In addition, based
on a report prepared by one analyst, the top 50 owners of manufactured
home communities own approximately 38% of the "investment-grade" assets.
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, (ii)
manufactured home communities tend to foster a sense of community as a
result of amenities such as club houses, recreational and social
activities and (iii) since moving a manufactured home from one community
to another involves substantial cost and effort, residents often sell
their home in-place (similar to site-built residential housing) with no
interruption of rental payments.
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 four new
single family homes sold in the United States today is factory-built.
6
7
The Company believes that the growing popularity of manufactured housing is
primarily the result of the following factors:
- Importance of Home Ownership. According to the Fannie Mae 1998 National
Housing Survey ("FNMA Survey") renters' desire to own a home is stronger
now than at any time in the 1990's. 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.
- 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. According to the FNMA,
among those people who are nearing retirement (age 40 to 54), approximately
33% plan on moving upon retirement. Approximately 44% of adults age 40 to
54 and 14% of adults age 55 and over are expected to become "empty nesters"
within the next ten years. 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. 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 of Properties owned are Florida (45 Properties), California (25
Properties), Arizona (19 Properties), Michigan (11 Properties) and Colorado (10
Properties). These markets accounted for 34%, 17%, 11%, 4%, and 8%,
respectively, of the Company's total revenues for the year ended December 31,
1998. The Company also has Properties located in the following markets:
Northeast, Northwest, Midwest, and Nevada/Utah/New Mexico. The Company's largest
Property, Bay Indies, located in Venice, Florida accounted for 3% of the
Company's total revenues for the year ended December 31, 1998.
7
8
The following tables set forth certain information relating to the
Properties owned by the Company as of December 31, 1998, categorized by the
Company's major markets. "Core Portfolio" represents an analysis of Properties
owned as of the beginning of both years under comparison. The table excludes the
following RV resort Properties at which rents and occupancy vary based on
seasonality: Sherwood Forest RV (Kissimmee, Florida); Southern Palms (Eustis,
Florida); Mesa Regal (Mesa, Arizona) and Fun & Sun (San Benito, Texas). The
table excludes five Properties in which the Company has a non-controlling joint
venture interest and accounts for using the equity method of accounting.
Number Monthly Monthly
of Sites Occupancy Occupancy Base Rent Base Rent
Location as of as of as of as of as of
Community City, State 12/31/98 12/31/98 12/31/97 12/31/98 12/31/97
- ------------------------- ---------------------- ---------- ------------ ------------ ---------- -----------
FLORIDA
TAMPA/NAPLES CORRIDOR:
Bay Indies Venice FL (b) 1,309 100% 100% $299 $292
Bay Lake Estates Nokomis FL (b) 228 100% 100% $330 $320
Boulevard Estates Clearwater FL 288 97% (a) $263 (a)
Buccaneer Estates N. Ft. Myers FL (b) 971 100% 100% $293 $286
Chalet Village Tampa FL 60 92% (a) $291 (a)
Country Meadows Plant City FL 736 99% (a) $261 (a)
Country Place New PortRichey FL (b) 515 78% (c) 72% (c) $213 $205
Down Yonder Largo FL 361 98% (a) $326 (a)
East Bay Oaks Largo FL (b) 328 99% 99% $328 $314
Eldorado Village Largo FL (b) 227 97% 100% $331 $314
Friendly Village of Kapok Clearwater FL 236 87% (a) $258 (a)
Hillcrest Clearwater FL 279 84% 82% $304 $278
Holiday Ranch Largo FL 150 95% 89% $311 $288
Lake Fairways N. Ft. Myers FL (b) 896 100% 100% $331 $323
Lake Haven Dunedin FL (b) 379 97% 98% $351 $336
Naples Estates Naples FL 484 100% (a) $320 (a)
Pine Lakes N. Ft. Myers FL (b) 585 100% 100% $402 $392
Satellite Park Clearwater FL 87 94% (a) $231 (a)
Sunset Oaks Plant City FL 167 41% (c) (a) $222 (a)
The Heritage N. Ft. Myers FL (b) 455 72% (c) 67% (c) $274 $270
Windmill Manor Bradenton FL 292 95% 98% $340 $334
Windmill Village N. Ft. Myers FL (b) 491 99% 100% $282 $274
Windmill Village North Sarasota FL (b) 471 100% 100% $298 $287
Windmill Village South Sarasota FL (b) 306 100% 100% $301 $288
NORTHERN, CENTRAL AND EASTERN FLORIDA:
Arrowhead Village Lantana FL 602 95% 96% $381 $362
Brittany Estates Tallahassee FL 298 88% (a) $202 (a)
Bulow Village Flagler Beach FL (b) 276 76% (c) 65% (c) $215 $196
Carriage Cove Daytona Beach FL 419 98% 99% $347 $334
Colonies of Margate Margate FL (b) 819 97% 98% $404 $392
Countryside North Vero Beach FL 646 92% (a) $277 (a)
Fernwood Deland FL 92 96% (a) $207 (a)
Heritage Village Vero Beach FL (b) 436 98% 98% $281 $269
Holiday Village Vero Beach FL 128 82% (a) $250 (a)
Indian Oaks Rockledge FL 211 82% (c) 80% (c) $228 $221
Lakewood Village Melbourne FL (b) 349 96% 96% $318 $306
Mid-Florida Lakes Leesburg FL (b) 1,195 96% (c) 95% (c) $296 $288
Oak Bend Ocala FL (b) 262 82% (c) 79% (c) $219 $208
Pickwick Village Port Orange FL 432 95% 94% $283 $277
Sherwood Forest Kissimmee FL 769 84% (a) $299 (a)
Spanish Oaks Ocala FL (b) 459 97% 98% $274 $260
The Landings Port Orange FL 436 88% 91% $277 $274
---------- ------------ ------------ ----------- -----------
Total Florida Market 18,130 94% 95% $303 $301
---------- ------------ ------------ ----------- ----------
Florida Core Portfolio 10,957 95% 95% $309 $300
---------- ------------ ------------ ----------- ----------
8
9
Number Monthly Monthly
of Sites Occupancy Occupancy Base Rent Base Rent
Location as of as of as of as of as of
Community City, State 12/31/98 12/31/98 12/31/97 12/31/98 12/31/97
- ------------------------ ---------------------- ---------- ------------ ------------- ----------- -----------
CALIFORNIA
NORTHERN CALIFORNIA:
California Hawaiian San Jose CA 413 99% 100% $565 $544
Colony Park Ceres CA 186 73% 72% $316 $319
Concord Cascade Pacheco CA (b) 283 100% 99% $476 $473
Contempo Marin San Rafael CA (b) 396 99% 100% $595 $582
Coralwood Modesto CA 194 92% 93% $397 $373
De Anza Santa Cruz Santa Cruz CA (b) 198 100% 100% $473 $460
Four Seasons Fresno CA 242 69% 67% $229 $226
Laguna Lakes San Luis Obispo CA 290 100% (a) $285 (a)
Monte del Lago Castroville CA 314 95% (c) 86% (c) $447 $431
Quail Meadows Riverbank CA 146 95% (a) $319 (a)
Royal Oaks Visalia CA 149 83% 85% $242 $240
Westwinds I-IV (d) San Jose CA 724 99% 100% $534 $501
Sea Oaks Los Osos CA 125 100% 100% $331 $323
Sun Shadow San Jose CA 121 99% 100% $542 $527
SOUTHERN CALIFORNIA:
Date Palm Cathedral City CA (b) 538 90% 90% $589 $573
Lamplighter Spring Valley CA (b) 270 96% 96% $486 $477
Meadowbrook Santee CA 340 93% (a) $554 (a)
Rancho Mesa El Cajon CA 158 92% (a) $492 (a)
Rancho Valley El Cajon CA (b) 140 97% 94% $481 $474
Santiago Estates Sylmar CA 305 93% (a) $549 (a)
---------- ------------ ------------ ----------- -----------
Total California Market 5,532 94% 94% $482 $474
---------- ------------ ------------ ----------- -----------
California Core Portfolio 1,825 96% 96% $536 $523
---------- ------------ ------------ ----------- -----------
ARIZONA
Apollo Village Phoenix AZ (b) 238 93% (c) 93% (c) $334 $316
Brentwood Manor Mesa AZ (b) 275 97% 99% $403 $386
Carefree Manor Phoenix AZ 126 96% 98% $265 $264
Casa del Sol Resort #1 Peoria AZ (b) 246 95% 97% $377 $368
Casa del Sol Resort #2 Glendale AZ (b) 239 98% 100% $408 $393
Casa del Sol Resort #3 Glendale AZ 238 96% (a) $386 (a)
Central Park Phoenix AZ (b) 293 95% 94% $340 $329
Desert Skies Phoenix AZ 164 96% 97% $259 $256
Fairview Manor Tucson AZ 235 96% 99% $279 $274
Hacienda De Valencia Mesa AZ (b) 366 95% 94% $329 $316
Mon Dak Mesa AZ 212 88% (a) $255 (a)
Palm Shadows Glendale AZ (b) 294 97% 98% $311 $297
Sedona Shadows Sedona AZ 200 87% 86% $279 $267
Sunrise Heights Phoenix AZ (b) 200 95% 94% $314 $304
The Mark Mesa AZ (b) 410 99% 99% $316 $295
The Meadows Tempe AZ (b) 391 96% 96% $384 $366
Whispering Palms (d) Phoenix AZ 116 97% 100% $237 $227
---------- ------------ ------------ ----------- -----------
Total Arizona Market 4,243 95% 96% $332 $317
---------- ------------ ------------ ----------- -----------
Arizona Core Portfolio 2,952 96% 96% $351 $336
---------- ------------ ------------ ----------- -----------
9
10
Number Monthly Monthly
of Sites Occupancy Occupancy Base Rent Base Rent
Location as of as of as of as of as of
Community City, State 12/31/98 12/31/98 12/31/97 12/31/98 12/31/97
- ------------------------ --------------------- ---------- ------------ ------------- ----------- -----------
MICHIGAN
Americana Estates Kalamazoo MI 161 98% (a) $254 (a)
Appletree Walker MI 238 94% (a) $292 (a)
Brighton Brighton MI 196 92% (a) $306 (a)
College Heights Auburn Hills MI 161 94% (a) $316 (a)
Creekside Wyoming MI 165 96% 98% $342 $340
Groveland Manor Holly MI 186 95% (a) $293 (a)
Hillcrest Acres Kalamazoo MI 150 98% (a) $258 (a)
Metro Park Romulus MI 227 86% (a) $290 (a)
Riverview Bay City MI 198 87% (a) $210 (a)
Willow Run Ypsilanti MI 185 91% (a) $257 (a)
South Lyon Woods South Lyon MI 211 100% (a) $370 (a)
---------- ------------ ------------ ----------- -----------
---------- ------------ ------------ ----------- -----------
Total Michigan Market 2,078 93% 98% $292 $340
---------- ------------ ------------ ----------- -----------
COLORADO
Bear Creek Sheridan CO 126 98% 99% $357 $354
Cimarron Broomfield CO (b) 327 98% 98% $350 $332
Golden Terrace Golden CO (b) 265 96% 99% $398 $369
Golden Terrace West Golden CO (b) 317 97% 98% $388 $362
Golden Terrace South Golden CO 80 98% 99% $366 $337
Hillcrest Village Aurora CO (b) 603 95% 95% $380 $359
Holiday Hills Denver CO (b) 737 96% 97% $368 $346
Holiday Village - CO Co. Springs CO (b) 240 97% 97% $368 $348
Pueblo Grande Pueblo CO (b) 252 98% 98% $241 $226
Woodland Hills Denver CO (b) 434 98% 99% $353 $336
---------- ------------ ------------ ----------- -----------
Total Colorado Market 3,381 97% 97% $360 $340
---------- ------------ ------------ ----------- -----------
Colorado Core Portfolio 3,175 97% 97% $360 $340
---------- ------------ ------------ ----------- -----------
NORTHEAST
Aspen Meadows Rehoboth DE 199 95% (a) $228 (a)
Camelot Rehoboth DE 302 97% (a) $228 (a)
Mariner's Cove Millsboro DE (b) 375 84% (c) 83% (c) $314 $302
McNicol Rehoboth DE 93 100% (a) $239 (a)
Sweetbriar Rehoboth DE 142 98% (a) $189 (a)
Waterford Wilmington DE (b) 731 92% (c) 89% (c) $350 $337
Whispering Pines (d) Lewes DE (b) 392 94% 97% $246 $241
Pheasant Ridge Mt. Airy MD (b) 101 100% 100% $389 $368
Meadows of Chantilly Chantilly VA (b) 500 82% 86% $466 $457
Independence Hill Morgantown WV (b) 203 89% 98% $187 $178
Green Acres Breinigsville PA (b) 595 98% (c) 98% (c) $369 $357
Brook Gardens Lackawanna NY 426 98% 99% $392 $388
Greenwood Village Manorville NY 477 88% (c) (a) $358 (a)
---------- ------------ ------------ ----------- -----------
Total Northeast Market 4,536 92% 92% $329 $340
---------- ------------ ------------ ----------- -----------
Northeast Core Portfolio 2,897 91% 91% $344 $332
---------- ------------ ------------ ----------- -----------
10
11
Number Monthly Monthly
of Sites Occupancy Occupancy Base Rent Base Rent
Location as of as of as of as of as of
Community City, State 12/31/98 12/31/98 12/31/97 12/31/98 12/31/97
- ------------------------ ---------------------- ---------- ------------ ------------- ----------- -----------
MIDWEST
Five Seasons Cedar Rapids IA 390 83% (c) 91% (c) $238 $228
Holiday Village - IA Sioux City IA (b) 519 93% 95% $216 $204
Camelot Acres Burnsville MN (b) 319 95% 96% $351 $335
Golf Vista Estates Monee IL 319 67% (c) 86% (c) $301 $283
Willow Lake Estates Elgin IL (b) 616 98% 99% $538 $527
Burns Harbor Chesterton IN (b) 228 95% 97% $276 $268
Candlelight Village Columbus IN (b) 585 99% (c) 97% (c) $188 $164
Oak Tree Village Portage IN (b) 380 96% 98% $255 $250
Windsong Indianapolis IN 268 96% (a) $252 (a)
Royal Village Toledo OH 233 96% (a) $234 (a)
Bonner Springs Bonner Springs KS (b) 210 90% 77% $186 $175
Carriage Park Kansas City KS (b) 143 66% (e) 67% (e) $187 $172
Quivira Hills Kansas City KS (b) 142 82% 80% $220 $212
Rockwood Village Tulsa OK (b) 265 100% 99% $204 $191
Briarwood Brookline MO (b) 166 96% 95% $173 $169
Dellwood Manor Warrensburg MO (b) 136 82% 89% $165 $156
Northstar Village Kansas City MO (b) 219 89% 85% $232 $219
---------- ------------ ------------ ----------- -----------
Total Midwest Market 5,138 92% 93% $272 $263
---------- ------------ ------------ ----------- -----------
Midwest Core Portfolio 3,928 94% 93% $277 $266
---------- ------------ ------------ ----------- -----------
NEVADA, UTAH, NEW MEXICO
Del Rey Albuquerque NM (b) 407 89% 95% $351 $337
All Seasons Salt Lake City UT 121 99% 100% $267 $251
Westwood Village Farr West UT 294 100% 100% $206 $204
Bonanza Las Vegas NV (b) 353 95% 99% $439 $415
Boulder Cascade Las Vegas NV 299 98% (a) $428 (a)
Flamingo West Las Vegas NV (b) 205 100% 100% $379 $375
The Cabana Las Vegas NV (b) 263 100% 100% $387 $378
Villa Borega Las Vegas NV 293 99% 98% $413 $403
---------- ------------ ------------ ----------- -----------
Total Nevada, Utah, New Mexico Market 2,235 97% 98% $366 $348
---------- ------------ ------------ ---------- -----------
Nevada, Utah, New Mexico Core Portfolio 1,228 95% 98% $389 $380
---------- ------------ ------------- ----------- -----------
NORTHWEST
Kloshe Illahee Federal Way WA 258 100% 100% $413 $397
Falconwood Eugene OR 183 98% 98% $312 $285
Quail Hollow Fairview OR 137 100% 100% $394 $373
Shadowbrook Clackamas OR 156 100% 100% $390 $384
Casa Village Billings MT (b) 497 93% (c) 97% (c) $257 $240
---------- ------------ ------------ ----------- -----------
Total Northwest Market 1,231 97% 98% $332 $313
---------- ------------ ------------ ----------- -----------
Northwest Core Portfolio 497 93% 97% $257 $240
---------- ------------ ------------ ----------- -----------
Grand Total Company Portfolio 46,504 94% (f) 95% (f) $334 $329
========== ============ ============ =========== ===========
Grand Total Core Portfolio 27,459 95% 95% $337 $325
========== ============ ============ =========== ===========
(a) The Company acquired this Property in 1998.
(b) Represents a Property which is part of the Core Portfolio.
(c) The process of filling expansion sites at these properties is ongoing.
(d) Westwinds I-IV formerly known as San Jose I-IV; Whispering Palms formerly
known as Em Ja Ha; and Whispering Pines formerly known as Nassau.
(e) Carriage Park suffered damage to approximately 85 homes in 1993 due to
flooding; the process of releasing these sites is ongoing.
(f) Changes in total portfolio occupancy include 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
12
ITEM 3. LEGAL PROCEEDINGS
The residents of DeAnza Santa Cruz Mobile Estates, 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. The
trial of the ongoing utility charge dispute with the residents of this Property
concluded on January 22, 1999. This summary provides the history and reasoning
underlying the Company's defense of the residents' claims and explains the
Company's decision to continue to defend its position, which the Company
believes is fair and accurate.
DeAnza Santa Cruz Mobile Estates is a 198 site community overlooking the
Pacific Ocean. It is subject to the City's rent control ordinance which limits
annual rent increases to 75% of CPI. The Company purchased this Property in
August 1994 from certain unaffiliated DeAnza entities ("DeAnza"). Prior to the
Company's purchase in 1994, DeAnza made the decision to submeter the Property
for both water and sewer in 1993 in the face of the City's rapidly rising
utility costs.
Under California Civil Code Section 798.41, DeAnza was required to reduce
rent by an amount equal to the average cost of usage over the preceding 12
months. This was done. With respect to water, not looking to submit to
jurisdiction of the Public Utility Commission ("PUC"), DeAnza relied on Public
Utilities Code Section 2705.5 ("PUC Section 2705.5") to determine what rates
would be charged for water on an ongoing basis without becoming a public
utility. This statute provides that in a submetered mobilehome park, the
property owner is not subject to regulation and control of the PUC so long as
the users are charged what they would be charged by the utility company if users
received their water directly from the utility company. In Santa Cruz, customers
receiving their water directly from the city's water utility were charged a
certain lifeline rate for the first 400 ccfs of water and a greater rate for
usage over 400 ccfs of water, a readiness to serve charge of $7.80 per month and
tax on the total. In reliance on PUC Section 2705.5, DeAnza implemented its
billings on this schedule notwithstanding that it did not receive the discount
for the first 400 ccfs of water because it was a commercial and not a
residential customer.
A dispute with the residents ensued over the readiness to serve charge and
tax thereon. The residents argued that California Civil Code Section 798.41
required that the park owner could only pass through its actual costs of water
(and that the excess charges over the amount of the rent rollback were an
improper rent increase) and that PUC Section 2705.5 was not applicable. DeAnza
unbundled the utility charges from rent consistent with California Civil Code
Section 798.41 and it has generally been undisputed that the rent rollback was
accurately calculated.
In August 1994, when the Company acquired the Property, the Company
reviewed the respective legal positions of the Santa Cruz Homeowners Association
("HOA") and DeAnza and concurred with DeAnza. Their reliance on PUC Section
2705.5 made both legal and practical sense in that residents paid only what they
would pay if they lived in a residential neighborhood within the city of Santa
Cruz and permitted DeAnza to recoup part of the expenses of operating a
submetered system through the readiness to serve charge.
Over a period of 18 months from 1993 into May of 1995, a series of
complaints were filed by the HOA and Herbert Rossman, a resident, against
DeAnza, and later, the Company. DeAnza and the Company demurred to each of these
complaints on the grounds that the PUC had exclusive jurisdiction over the
setting of water rates and that residents under rent control had to first
exhaust their administrative remedies before proceeding in a civil action. At
one point, the case was dismissed (with leave to amend) on the basis that
jurisdiction was with the PUC and, at another point, Mr. Rossman was dismissed
from the case because he had not exhausted his administrative remedies.
On June 29, 1995, a hearing was held before a Santa Cruz rent control
officer on the submetering of both water and sewer. The Company and DeAnza
prevailed on all issues related to sewer and the rent rollback related to water,
but the hearing officer determined that the Company could only pass through its
actual cost of water, i.e., a prorated readiness to serve charge and tax
thereon. The hearing officer did not deal with the subsidy being given to
residents through the quantity charge and ordered a rebate in a fixed amount per
resident. The Company and DeAnza requested reconsideration on this issue, among
others, which reconsideration was denied by the hearing officer.
The Company then took a writ of mandate (an appeal from an administrative
order) to the Superior Court and, pending this appeal, the residents, the
Company and the City agreed to stay the effect of the hearing officer's decision
until the Court rendered judgment.
12
13
In July 1996, the Superior Court affirmed the hearing officer's decision
without addressing concerns about the failure to take the subsidy on the
quantity charge into account.
The Company requested that the City and the HOA agree to a further stay
pending appeal to the court of appeals, but they refused and the appeals court
denied the Company's request for a stay in late November 1996. Therefore, on
January 1, 1997, the Company reduced its water charges at this Property to
reflect a pass-through of only the readiness to serve charge and tax at the
master meter (approximately $0.73) and to eliminate the subsidy on the water
charges. On their March 1, 1997 rent billings, residents were credited for
amounts previously "overcharged" for readiness to serve charge and tax. The
amount of the rebate given by the Company was $36,400. In calculating the
rebate, the Company and DeAnza took into account the previous subsidy on water
usage although this issue had not yet been decided by the court of appeals. The
Company and DeAnza felt legally safe in so doing based on language in the
hearing officer's decision that actual costs could be passed through.
On March 12, 1997, the Company also filed an application with the PUC to
dedicate the water system at this Property to public use and have the PUC set
cost based rates for water usage. The Company believed it was obligated to take
this action because of its consistent reliance on PUC Section 2705.5 as a safe
harbor from PUC jurisdiction. That is, when the Company could no longer charge
for water as the local serving utility would charge, it was no longer exempt
from the PUC's jurisdiction and control under PUC Section 2705.5.
On March 20, 1997, the court of appeals issued the writ of mandate
requested by the Company on the grounds that the hearing officer had improperly
calculated the amount of the rebate (meaning the Company had correctly
calculated the rent credits), but also ruling that the hearing officer was
correct when he found that the readiness to serve charge and tax thereon as
charged by DeAnza and the Company were an inappropriate rent increase. The court
of appeals further agreed with the Company that the city's hearing officer did
not have the authority under California Civil Code Section 798.41 to establish
rates that could be charged in the future.
Following this decision, the PUC granted the Company its certificate of
convenience and necessity on December 17, 1998 and approved cost based rates and
charges for water that exceed what residents were paying under the Company's
reliance on PUC Section 2705.5. Concurrently, the PUC also issued an Order
Instituting Investigation ("OII") confirming its exclusive jurisdiction over the
issue of water rates in a submetered system and commencing an investigation into
the confusion and turmoil over billings in submetered properties. Specifically,
the OII states: "The Commission has exclusive and primary jurisdiction over the
establishment of rates for water and sewer services provided by private
entities."
Specifically, the PUC ruling regarding the Company's application stated:
"The ultimate question of what fees and charges may or may not be assessed,
beyond external supplier pass-through charges, for in-park facilities when a
mobile home park does not adhere to the provisions of PUC Section 2705.5, must
be decided by the Commission."
After the court of appeals decision, the HOA brought all of its members
back into the underlying civil action for the purpose of determining damages,
including punitive damages, against the Company. The trial was continued from
July 1998 to January 1999 to give the PUC time to act on the Company's
application. Notwithstanding the action taken by the PUC in issuing the OII in
December 1998, the trial court denied the Company's motion to dismiss on
jurisdictional grounds and trial commenced before a jury on January 11, 1999.
Not only did the trial court not consider the Company's motion to dismiss,
the trial court refused to allow evidence of the OII or the Company's PUC
approval to go before the jury. Notwithstanding the Company's strenuous
objections, the judge also allowed evidence of the Company's and DeAnza's
litigation tactics to be used as evidence of bad faith and oppressive actions
(including evidence of the application to the PUC requesting a $22.00 readiness
to serve charge). The Company's motion for a mistrial based upon these
evidentiary rulings was denied. On January 22, 1999, the jury returned a verdict
awarding $6.0 million of punitive damages against the Company and DeAnza. The
Company had previously agreed to indemnify DeAnza on the matter.
The Company is preparing to bond the judgment pending appeal in accordance
with California procedural rules which require a bond equal to 150% of the
amount of the judgment. Post-judgment interest will accrue at the statutory
rate of 10.0% per annum.
13
14
The Company will participate in post trial motions including a case
management conference before March 15, 1999. The post trial motions will include
a motion for judgment notwithstanding the verdict, new trial and remittitur (a
procedure whereby the trial judge could unilaterally reduce the punitive damages
award). To the extent the Company is unable to obtain relief in the form of
reversal or reduction of the award in the trial court pursuant to post trial
motions, relief from the verdict, if any, will have to come on appeal.
Generally, the Company's appeal will focus on two areas: 1) lack of
jurisdiction in the trial court; and 2) trial error. Given that the PUC has
issued an OII confirming its exclusive jurisdiction over the issue of water
rates in a submetered system, that there was generally no dispute with respect
to the rent roll back to achieve relief from rent control, the magnitude of the
verdict in light of reasonable reliance on the PUC's statutory authority, use of
prejudicial evidence against the Company and denial of the Company's rights to
present the PUC decision and related evidence, the Company believes the court of
appeals will reverse or substantially reduce the punitive damage award. However,
there can be no assurances that this will occur.
The Company's view is that the range of possible loss on this matter at
this time based on the opposing legal theories is from 0 (zero) (without
considering the Company's litigation expense which is not expected to be
material) to $6 million (plus costs which the Company expect plaintiffs' counsel
to claim, the Company's litigation expense, cost of the bond and post-judgment
interest). The HOA is also seeking to recover attorneys fees in connection with
the trial, including a multiplier of such fees which may result in an attorneys
fee award in the range of $700,000 to $900,000. This is in addition to the
$100,000 award referred to above. The Company will vigorously oppose such award
of attorney fees.
Under the Company's theory of the case, once appropriate unbundling of the
utility service from rent has occurred, only the PUC has exclusive jurisdiction
regarding rates that may be charged for utility services on a prospective basis.
The Company believes the actions by the PUC in reiterating its exclusive
jurisdiction, agreeing with the Company's interpretation of PUC Section 2705.5,
and in certificating the Company's utility company through the establishment of
cost based rates for the Property validate its previous reliance on PUC Section
2705.5 as a means of recovering a portion of the cost of providing water at the
Property. Based on the PUC's rulings, while legal expense will be incurred in
further defense, it follows that residents did not incur any actual damages (in
the form of "overcharges") and may be liable to return amounts previously repaid
by the Company and DeAnza.
Obviously, plaintiff's theory as described herein has resulted not only in
a refund to residents of amounts "overcharged", but also in the punitive damage
award. To avoid trying this case on the merits, plaintiffs introduced
substantial evidence of legal strategy and objected strenuously (and
successfully) to introduction of evidence supporting the Company on the merits.
Currently, there is little or no settlement potential unless the trial
court indicates to plaintiffs at a scheduled case management conference
(February 24, 1999) that it is seriously considering granting a new trial or
other relief to the Company based on post trial motions. Estimated legal
expense, if this matter is not resolved prior to appeal, during the next 15
months could reach between $300,000 and $500,000.
In a separate matter, 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 on-site waste
water treatment plant at one of the Company's 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 on-site waste water treatment
plant at another of the Company's Properties. The Company and USEPA have reached
a tentative agreement to resolve the matter in which the operation of the
remaining waste water treatment plant would be subject to a consent decree that
would provide for fines and penalties in the event of future violations and the
Company would contribute monies to a supplemental environmental project and pay
a fine. The tentative agreement has not yet been reduced to writing and
therefore remains subject to change. The Company does not believe the impact of
the settlement will be material and the Company believes it has established
adequate reserves for any amounts that may be paid.
In another matter, in connection with the acquisition of the Ellenburg
Communities and pursuant to orders of the California Superior Court,
approximately $30 million of the amounts paid by the Company have been deposited
with the court appointed winding up agents (the "Winding Up Agents"). The
deposited amounts relate to claims (the "Karno Claims") of Norton S. Karno (and
related entities) who at various times has been a creditor, advisor, lawyer and
shareholder of certain of the entities related to the Ellenburg Communities. The
Winding Up Agents have disputed the claims and have filed a complaint against
Mr. Karno (and related entities) requesting that the court determine that the
claims be reduced or eliminated.
14
15
On October 30, 1998, the Company received notice of a lawsuit filed against
the Company and certain Executive Officers of the Company in the Los Angeles
Superior Court alleging, among other causes of action, that the Company breached
certain agreements in connection with the acquisition of the Ellenburg
Communities and claiming damages in excess of $50 million plus punitive damages.
Based upon jurisdictional issues, in February 1999 the claims against the
Executive Officers of the Company were dismissed. The Company believes most of
the claim relates to the disputed Karno Claims discussed above. The Company
believes the claims are without merit, intends to vigorously defend the
defendants in this matter and does not believe the impact of this matter will be
material.
In connection with the acquisition of the Ellenburg Communities, Mr. Karno
and others have appealed various court orders on which the Company has relied.
The court of appeals has recently requested briefing on the issue of whether
certain appeals are moot. Mr. Karno has also sought before both the California
Superior Court and Court of Appeals to take control of ECC, but to date none of
his attempts have been successful.
The Company is involved in various other legal proceedings arising in the
ordinary course of business. All proceedings herein described or referred to,
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)
----- ---- --- ---- -----------------
1998
1st Quarter $25.8750 $27.1250 $24.5625 $.3625 $.05
2nd Quarter 24.1250 27.0000 24.0000 .3625 .08
3rd Quarter 25.4375 27.2500 22.0000 .3625 .10
4th Quarter 25.0625 25.6875 22.8750 .3625 .10
1997
1st Quarter $21.8750 $24.2500 $21.3750 $ .33 $.05
2nd Quarter 23.0625 23.7500 20.1250 .33 .04
3rd Quarter 26.0000 26.4375 23.0625 .33 .02
4th Quarter 27.0000 27.5000 25.6250 .33 .04
(a) Represents distributions per share in excess of net income per share-basic
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,
1998 was approximately 5,600.
ITEM 6. SELECTED FINANCIAL AND OPERATING INFORMATION
The following table sets forth selected financial and operating information
on a historical basis for the Company. 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 years ended
December 31, 1998, 1997 and 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 and 1994 has
been derived from the historical Financial Statements of the Company 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 OP Units, the
impact of the stock split has been given retroactive treatment.
15
16
Manufactured Home Communities, Inc. Consolidated Historical
(1) Years ended December 31,
-------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- -------------- --------------- ------------- ------------
(Amounts in thousands, except for per share and property data)
OPERATING DATA:
REVENUES
Base rental income $ 165,340 $ 108,984 $ 93,109 $ 85,242 $ 60,085
Utility and other income 25,372 11,785 8,821 8,481 4,348
Equity in income of affiliates 1,070 800 853 885 727
Interest income 3,048 1,941 2,420 2,296 3,599
--------- --------- --------- -------- ---------
Total revenues 194,830 123,510 105,203 96,904 68,759
--------- --------- --------- -------- ---------
EXPENSES
Property operating and maintenance 53,064 32,343 28,399 27,057 19,203
Real estate taxes 14,470 8,352 7,947 7,241 4,214
Property management 7,108 5,079 4,338 4,675 4,099
General and administrative 5,411 4,559 4,062 4,537 3,668
Depreciation and other costs (2) 29,421 17,955 15,732 16,122 9,520
Interest and related amortization (3) 49,693 21,753 17,782 18,527 11,146
--------- --------- -------- -------- ---------
Total expenses 159,167 90,041 78,260 78,159 51,850
--------- --------- -------- -------- ---------
Income from operations 35,663 33,469 26,943 18,745 16,909
Gain (loss) on sale of property --- --- --- 1,278 (293)
--------- --------- -------- -------- ---------
Income before allocation to minority
interests and extraordinary item 35,663 33,469 26,943 20,023 16,616
Income allocated to minority interests (6,733) (4,373) (2,671) (2,006) (1,568)
--------- --------- -------- -------- ---------
Income before extraordinary item 28,930 29,096 24,272 18,017 15,048
Extraordinary loss on early extinguishment
of debt (net of income allocated to
minority interests) --- (451) --- --- ---
--------- --------- -------- -------- ---------
Net income $ 28,930 $ 28,645 $ 24,272 $ 18,017 $ 15,048
========= ========= ======== ======== =========
Net income per common share before
extraordinary item - basic $ 1.13 $ 1.18 $ .98 $ .74 $ .70
========= ========= ======== ======== =========
Net income per common share before
extraordinary item - diluted $ 1.12 $ 1.15 $ .98 $ .74 $ .70
========= ========= ======== ======== =========
Net income per common share - basic $ 1.13 $ 1.16 $ .98 $ .74 $ .70
========= ========= ======== ======== =========
Net income per common share - diluted $ 1.12 $ 1.15 $ .98 $ .74 $ .70
========= ========= ======== ======== =========
Dividend per share $ 1.45 $ 1.32 $ 1.22 $ 1.18 $ 1.14
========= ========= ======== ======== =========
Weighted average common shares outstanding -
basic, excluding OP Units of 5,977, 3,749,
2,715, 2,717 and 2,397, respectively 25,626 24,689 24,693 24,353 21,508
========= ========= ======== ======== =========
Weighted average common shares outstanding -
diluted, including OP Units of 5,977,
3,749, 2,715, 2,717 and 2,397, respectively 31,962 28,762 27,546 27,138 23,942
========= ========= ======== ======== =========
OTHER DATA:
Funds from operations (4) $ 64,089 $ 50,834 $ 42,187 $ 34,518 $ 26,186
Net cash flow:
Operating activities $ 71,977 $ 54,581 $ 49,660 $ 40,161 $ 24,910
Investing activities $(262,762) $(239,445) $(60,954) $ 4,382 $(220,707)
Financing activities $ 203,533 $ 185,449 $ 10,858 $(45,707) $ 170,427
Total Properties (at end of period) (5) 154 121 69 65 67
Total sites (at end of period) 53,391 44,108 27,356 25,552 25,860
Total sites (weighted average) 49,932 29,323 26,621 25,375 18,164
16
17
(1) December 31,
-------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- -------------- --------------- ------------- --------------
(In thousands)
BALANCE SHEET DATA:
Real estate, before accumulated $1,237,431 $936,318 $597,650 $543,229 $541,775
depreciation (6)
Total assets 1,176,841 864,365 567,874 523,125 544,106
Total debt 750,849 495,172 254,982 211,966 226,670
Minority interests 70,468 67,453 28,640 29,305 30,507
Stockholders' equity 310,441 280,575 257,952 261,500 270,602
____________
(1) See the Consolidated Financial Statements of the Company included elsewhere
herein.
(2) Depreciation and other costs include depreciation on corporate assets of
approximately $995,000, $590,000, $488,000, $349,000 and $243,000 for the
years ended December 31, 1998, 1997, 1996, 1995 and 1994,
respectively.
(3) The $265 million mortgage note payable (the "Mortgage Debt") bears interest
at 7.015% through February 1, 2008.
The Company has a $175 million credit facility bearing interest at the
London Interbank Offered Rate ("LIBOR") plus 1.125% ($145 million was
outstanding at December 31, 1998).
In July 1995, the Company entered into an interest rate swap agreement (the
"1998 Swap") fixing LIBOR on $100 million of the Company's floating rate
debt at 6.4% for the period, 1998 through 2003. By fixing the rate on $100
million of debt, the Company avoids the general uncertainty relating to the
floating interest rate on the Company's variable rate debt through such
time.
(4) The Company generally considers Funds From Operations ("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 generally accepted
accounting principles ["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.
17
18
(5) 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.
During the year ended December 31, 1997, 39 Properties were acquired; net
operating income attributable to such Properties was approximately $3.8
million, which included approximately $1.7 million of depreciation and
amortization expense. During the year ended December 31, 1998, 41
Properties were acquired; net operating income attributable to such
Properties was approximately $7.6 million, which included approximately
$3.9 million of depreciation and amortization expense.
(6) During 1994, 23 Properties were acquired, which had an aggregate net
The Company believes that the book value of the Properties, which reflectsx
historical costs of such real estate assets less accumulated depreciation,
is less than the current market value of the Properties.
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 Form 10-K. The following discussion may
contain certain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 which reflect management's current
views with respect to future events and financial performance. Such
forward-looking statements are subject to certain risks and uncertainties,
including, but not limited to, the effects of future events on the Company's
financial performance; the adverse impact of external factors such as inflation
and consumer confidence; and the risks associated with real estate ownership.
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31, 1997
Since December 31, 1997, the gross investment in rental property has
increased from $936 million to $1,237 million as of December 31, 1998 due to the
acquisition of the following properties (collectively, the "1998 Acquisition
Properties"): (i) the Ellenburg Communities; (ii) Quail Meadows on January 8,
1998; (iii) Sherwood Forest RV Resort on April 30, 1998; (iv) Casa Del Sol
Resort III on May 14, 1998; (v) a portfolio of eighteen properties (the "College
Heights Communities") on June 4, 1998; and (vi) Sunset Oaks on August 13, 1998.
The total number of sites owned and controlled has increased from 44,108 as of
December 31, 1997 to 53,391 as of December 31, 1998.
The following table summarizes certain weighted average statistics for the
years ended December 31, 1998 and 1997. "Core Portfolio" represents an analysis
of properties owned during both periods of comparison.
Core Portfolio Total Portfolio
----------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- ----------
Total sites 27,455 27,432 43,932 29,323
Occupied sites 26,057 25,983 41,420 27,770
Occupancy % 94.9% 94.7% 94.3% 94.7%
Monthly base rent per site $ 335 $ 321 $ 332 $ 327
Base rental income ($165 million) increased $56.3 million or 51.7%. For the
Core Portfolio, base rental income increased approximately $4.1 million or 4.1%,
reflecting an increase in base rental rates. The remaining $52.2 million
increase in base rental income was attributed to the properties acquired in 1997
and the 1998 Acquisition Properties (collectively, the "1997 and 1998
Acquisition Properties").
18
19
Monthly base rent per site for the total portfolio increased 1.5%, reflecting a
4.4% increase in monthly base rent per site for the Core Portfolio offset by
lower monthly base rents for the 1997 and 1998 Acquisition Properties. Average
monthly base rent per site for the 1997 and 1998 Acquisition Properties was $329
for the year ended December 31, 1998.
Weighted average occupancy decreased 0.4% due to the addition of the 1997
and 1998 Acquisition Properties to the portfolio with lower occupancy
percentages, partially offset by increased occupancy at the Core Portfolio The
0.2% increase at the Core Portfolio reflects a 0.4% decrease attributed to lower
occupancy at four family properties and lower occupancy at two properties where
the Company has implemented a program to upgrade the resident profile and
housing stock. Excluding these communities, occupancy at the Core Portfolio
increased 0.6%.
Utility and other income ($25.4 million) increased $13.6 million or 115.3%,
due to an increase of $13.1 million attributed to the 1997 and 1998 Acquisition
Properties, including $7.2 million of RV income. The remaining $500,000
increase reflected increased utility income, real estate tax pass-ons and other
miscellaneous income at the Core Portfolio.
Interest income ($3.0 million) increased $1.1 million or 57.0%, primarily
due to the issuance of $14.6 million of notes receivable and an increase in
interest earned on short-term investments. Short-term investments had average
balances for the years ended December 31, 1998 and 1997 of approximately $6.9
million and $4.7 million, respectively, which earned interest income at an
effective rate of 5.4% per annum in both years.
Property operating and maintenance expenses ($53.0 million) increased $20.7
million or 64.1%. Of this increase $19.4 million is attributed to the 1997 and
1998 Acquisition Properties. The remaining $1.3 million increase includes
approximately $300,000 of one-time expenses associated with water main breaks,
storm damage and legal costs at the Core Portfolio. The Core Portfolio also
experienced increases in property payroll, property general and administrative
expenses and insurance and other expenses. Property operating and maintenance
expenses represented 27.2% of total revenues in 1998 and 26.2% in 1997.
Real estate taxes ($14.5 million) increased $6.1 million or 73.3% due to
the impact of the 1997 and 1998 Acquisition Properties. Real estate taxes
represented 7.4% of total revenues in 1998 and 6.8% in 1997.
Property management expenses ($7.1 million) increased $2.0 million or
39.9%. The increase was primarily due to an increase in management company
payroll and incremental costs associated with self management of the 1997 and
1998 Acquisition Properties. Property management expenses represented 3.6% of
total revenues in 1998 and 4.1% of total revenues in 1997.
General and Administrative expenses ("G&A") ($5.4 million) increased
$851,000 or 18.7%. The increase was primarily due to increased payroll. G&A
represented 2.8% of total revenues in 1998 and 3.7% in 1997.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
increased $41.6 million or 56.8%. Approximately $37.6 million of the increase
related to the 1997 and 1998 Acquisition Properties. The remaining increase
reflected increased base rental income at the Core Portfolio. EBITDA
represented 58.9% of total revenues in 1998 and 59.2% in 1997.
Interest and related amortization ($49.7 million) increased $27.9 million
or 128.4%. The increase was due to higher weighted average outstanding debt
balances during the period. The weighted average outstanding debt balances for
the years ended December 31, 1998 and 1997 were $696 million and $301.3 million,
respectively. The effective interest rate was 7.2% in 1998 and 7.1% in 1997.
Interest and related amortization represented 25.5% of total revenues in 1998
and 17.6% in 1997.
The Company has a $265.0 million mortgage note (the "Mortgage Debt")
collateralized by 29 properties beneficially owned by MHC Financing Limited
Partnership. The Mortgage Debt has a maturity date of January 2, 2028 and pays
interest only at 7.015%. There is no principal amortization until February 1,
2008 after which principal and interest are paid from available cash flow and
the interest rate is reset at a rate equal to the then 10-year U.S. Treasury
obligations plus 2.0%.
The Company has an unsecured line of credit with a bank (the "Credit
Agreement") bearing interest at the London Interbank Offered Rate ("LIBOR") plus
1.125%. On April 28, 1998, the Company amended the Credit Agreement, increasing
the line of credit from $100 million to $150 million. On December 18, 1998, the
Company further amended the Credit Agreement, increasing the line of credit from
$150 million to $175 million. The Credit Agreement matures on August 17, 2000,
at which time the Company may extend the maturity date to August 17, 2002 and
the Credit Agreement would be converted to a term loan. The Company pays a fee
on the average unused amount of such credit equal to 0.15% of such amount. As of
December 31, 1998, $145 million was outstanding under the Credit Agreement. The
Company paid fees related to the amendments which were immaterial.
19
20
The Company has a term loan (the "Term Loan") with a group of banks with
interest only payable monthly at a rate of LIBOR plus 1.0%. On April 28, 1998,
the Company amended the Term Loan to increase the borrowing from $60 million to
$100 million. The Term Loan matures on April 3, 2000 and may be extended to
April 3, 2002. The Company used the $40 million in proceeds to repay a portion
of the $50 million previously borrowed on April 7, 1998 under the Term Loan. The
Company paid fees related to this amendment which were immaterial.
In July 1995, the Company entered into an interest rate swap agreement (the
"1998 Swap") fixing LIBOR on $100 million of the Company's floating rate debt at
6.4% for the period 1998 through 2003. The cost of the 1998 Swap consisted only
of legal costs which were deemed immaterial. The value of the 1998 Swap is
impacted by changes in the market rate of interest. Had the 1998 Swap been
entered into on December 31, 1998, the applicable LIBOR swap rate would have
been 4.56%. Each 0.01% increase or decrease in the applicable swap rate for the
1998 Swap increases or decreases the value of the 1998 Swap versus its current
value by approximately $39,000. The Company accounts for the 1998 Swap as a
hedge. Payments and receipts under the 1998 Swap are accounted for as an
adjustment to interest expense.
Depreciation on corporate assets ($995,000) increased $405,000 or 68.8%
due to fixed asset additions in 1997 and 1998 associated with the Company's
upgrade of certain computer systems infrastructure and the wide area network.
Depreciation on corporate assets represented 0.5% of total revenues in both 1998
and 1997.
Depreciation on real estate assets and other costs ($28.4 million)
increased $11.1 million or 63.7% as a result of 1997 and 1998 Acquisition
Properties. Depreciation on real estate assets and other costs represented
14.6% of total revenues in 1998 and 14.1% in 1997.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996
Since December 31, 1996, the gross investment in rental property increased
from $598 million to $936 million as of December 31, 1997 due to the acquisition
of the following properties (the "1997 Acquisition Properties"): (i) California
Hawaiian on March 14, 1997; (ii) Golf Vista Estates on March 27, 1997; (iii)
Golden Terrace South on May 30, 1997; (iv) a portfolio of eighteen manufactured
home communities and two commercial properties (collectively, the "MPW
Properties") on August 29, 1997; (v) Arrowhead Village on September 16, 1997,
and (vi) seventeen of the Ellenburg Communities on December 18, 1997. The total
number of sites owned and controlled increased from 27,356 as of December 31,
1996 to 44,108 as of December 31, 1997.
The following table summarizes certain weighted average statistics for the
years ended December 31, 1997 and 1996. "Core Portfolio" represents an analysis
of properties owned during both periods of comparison.
Core Portfolio Total Portfolio
----------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- ----------
Total sites 25,631 25,554 29,323 26,621
Occupied sites 24,319 24,098 27,770 25,025
Occupancy % 94.9% 94.3% 94.7% 94.0%
Monthly base rent per site $ 325 $ 312 $ 327 $ 310
Base rental income ($109 million) increased $15.9 million or 17.0%. For the
Core Portfolio, base rental income increased approximately $4.7 million or
5.2%, reflecting a 4.3% increase in base rental rates and a 0.9% increase
related to occupancy. The remaining $11.2 million increase in base rental
income was attributed to the 1997 Acquisition Properties.
Monthly base rent per site for the total portfolio increased 5.5%,
reflecting a 4.2% increase in monthly base rent per site for the Core Portfolio
and higher monthly base rents for the 1997 Acquisition Properties. Average
monthly base rent per site for the 1997 Acquisition Properties was $343 for the
year ended December 31, 1997.
Weighted average occupancy increased 0.7% due to increased occupancy at the
expansion communities and the addition of the 1997 Acquisition Properties with
higher occupancy percentages to the portfolio.
Utility and other income ($11.8 million) increased $3.0 million or 33.6%,
primarily due to an increase of $1.2 million attributed to the 1997 Acquisition
Properties, the collection of dividend income of $173,000 in the first quarter
of 1997, and increased utility income, real estate tax pass-ons and other
miscellaneous income at the Core Portfolio.
20
21
Interest income ($1.9 million) decreased $479,000 or 19.8%, primarily due
to the repayment of $13 million of notes receivable in August 1997, partially
offset by an increase in interest earned on short-term investments. Short-term
investments had average balances for the years ended December 31, 1997 and 1996
of approximately $4.7 million and $3.4 million, respectively, which earned
interest income at an effective rate of 5.4% per annum in both years.
Property operating and maintenance expenses ($32.3 million) increased $3.9
million or 13.9% due to the impact of the 1997 Acquisition Properties and an
increase in property payroll, property general and administrative expenses and
insurance and other expenses at the Core Portfolio. Partially offsetting these
increases was a decrease in repairs and maintenance expense and utility expense
at the Core Portfolio. Property operating and maintenance expenses represented
26.2% of total revenues in 1997 and 27.0% in 1996.
Real estate taxes ($8.4 million) increased $405,000 or 5.1% due to the
impact of the 1997 Acquisition Properties, partially offset by a decrease in the
Core Portfolio due to lower than expected assessed values at certain of the
properties based on actual bills received. Real estate taxes represented 6.8% of
total revenues in 1997 and 7.6% in 1996.
Property management expenses ($5.1 million) increased $741,000 or 17.1%.
The increase was primarily due to an increase in management company payroll and
incremental costs associated with self management of the 1997 Acquisition
Properties. Property management expenses represented 4.1% of total revenues in
both 1997 and 1996.
G&A ($4.6 million) increased $497,000 or 12.2%. The increase was primarily
due to increased payroll resulting from salary increases. G&A represented 3.7%
of total revenues in 1997 and 3.9% in 1996.
EBITDA increased $12.7 million or 21%. Approximately $7.6 million of the
increase related to the 1997 Acquisition Properties. The remaining increase
reflected increased base rental income and decreased repairs and maintenance
expense, utility expense and real estate tax expense, partially offset by
increased payroll expense, property general and administrative expense and
insurance and other expenses at the Core Portfolio. In addition, corporate G&A
and property management expenses increased. EBITDA represented 59.2% of total
revenues in 1997 and 57.5% in 1996.
Interest and related amortization ($21.8 million) increased $4.0 million or
22.3%. The increase was due to higher weighted average outstanding debt balances
during the period. The weighted average outstanding debt balances for the years
ended December 31, 1997 and 1996 were $301.3 million and $234.9 million,
respectively. The effective interest rate was 7.1% in 1997 and 7.2% in 1996.
Interest and related amortization represented 17.6% of total revenues in 1997
and 16.9% in 1996.
On December 12, 1997, the Company refinanced the $100.0 million mortgage
note (the "Original Mortgage Debt") with a $265.0 million mortgage note (see
discussion above). In October 1996, the Company entered into an interest rate
swap agreement (the "1997 Swap") fixing LIBOR on the Original Mortgage Debt at
5.57% effective January 10, 1997 through March 3, 1998. The Company sold the
1997 Swap in December 1997 for approximately $26,000 in connection with the
refinancing.
Depreciation on corporate assets ($590,000) increased $102,000 or 20.9% due
to fixed asset additions in 1996 associated with the Company's conversion to a
new accounting software system. Depreciation on corporate assets represented
0.5% of total revenues in both 1997 and 1996.
Depreciation on real estate assets and other costs ($17.4 million)
increased $2.1 million or 13.9% as a result of the 1997 Acquisition Properties.
In addition, the Company recognized a one-time gain of $18,000 representing
gains on the prepayment of notes receivable and the sale of certain assets
related to the Chateau Communities, Inc. merger attempt, partially offset by the
write-off of certain deferred compensation. Depreciation on real estate assets
and other costs represented 14.1% of total revenues in 1997 and 14.5% in 1996.
In the fourth quarter of 1997, the Company recognized an extraordinary item
for early extinguishment of the Original Mortgage Debt of $556,000.
21
22
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities increased $17.4 million from
$54.6 million for the year ended December 31, 1997 to $72.0 million for the same
period in 1998. This increase reflected a $13.3 million increase in FFO, which
reflected increases in rental income as discussed in "Results of Operations"
above, and an increase in accounts payable and real estate tax accruals and
rents received in advance related to the property acquisitions, partially offset
by increased prepaid expenses.
Net cash provided by operating activities increased $4.9 million from $49.7
million for the year ended December 31, 1996 to $54.6 million for the same
period in 1997. This increase reflected an $8.6 million increase in FFO, which
reflected increases in rental income and decreases of certain expenses as
discussed in "Results of Operations" above, and an increase in collection of
rents received in advance and security deposits related to the property
acquisitions, partially offset by an increase in prepaid expenses and rents
receivable and decreased accounts payable accruals.
FFO was defined by 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 was effective for
periods ending after December 31, 1995. 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, 1998, 1997 and 1996 (amounts in thousands):
For the Years Ended
December 31,
------------------------------------------------
Computation of funds from operations: 1998 1997 1996
---------- --------- ----------
Income before allocation to minority interests
and extraordinary item...................... $ 35,663 $ 33,469 $ 26,943
Depreciation on real estate assets and
other costs.......................... 28,426 17,365 15,244
Gain on sale of assets.................... --- --- ---
---------- --------- ----------
Funds from operations......................... $ 64,089 $ 50,834 $ 42,187
========= ========= ==========
Computation of funds available for distribution:
Funds from operations......................... $ 64,089 $ 50,834 $ 42,187
Non-revenue producing improvements -
rental properties...................... (8,005) (4,187) (3,402)
---------- --------- ----------
Funds available for distribution................... $ 56,084 $ 46,647 $ 38,785
========= ========= ==========
Net cash used in investing activities increased $23.3 million from $239.4
million for the year ended December 31, 1997 to $262.8 million for the year
ended December 31, 1998, primarily due to the funding of notes receivable,
improvements made to acquisition properties, and collection of escrow proceeds
related to the acquisition of the Ellenburg Communities, partially offset by the
sale of project related assets in 1997.
22
23
Net cash used in investing activities increased $178.4 million from $61
million for the year ended December 31, 1996 to $239.4 million for the year
ended December 31, 1997, primarily due to increased payments for acquisitions in
1997 and the Company's investment in partnerships, partially offset by the
collection of principal payments on notes receivable, net proceeds from the sale
of project related assets and decreased purchases of short-term investments, all
of which had maturitites of three months or less.
On September 4, 1997, the Company entered into a portfolio purchase
agreement (as amended by a supplemental agreement on December 17, 1997) to
acquire 38 manufactured home communities (the "Ellenburg Communities") from
partnerships having Ellenburg Capital Corporation ("ECC") as the general partner
for a purchase price in excess of $300 million. From December 17, 1997 through
December 31, 1998, the Company closed on the acquisition of thirty-one of the
Ellenburg Communities for an aggregate purchase price of approximately $278
million and gained control of an additional five Ellenburg Communities with
acquisition advances of approximately $57 million to the partnerships which own
such Ellenburg Communities. The Company funded the acquisition advances with
borrowings under the Company's line of credit and term bank facilities. In
addition, the Company assumed debt of approximately $32 million and issued OP
Units of approximately $4.9 million in connection with this transaction.
During 1998, the Company received approximately $14.3 million, including
approximately $365,000 of interest income, which was being held subject to the
completion of due diligence procedures on the Ellenburg Communities. The persons
appointed to windup the affairs of ECC have released the funds and have
presented a status report to the court. The $14.3 million has been recorded as a
liability until certain related issues are finalized at which point the final
liability will be relieved and the purchase price of the Ellenburg Communities
adjusted accordingly.
On January 6, 1998, the Company funded a $12.3 million loan (the "Meadows
Loan") to Meadows Preservation, Inc. The Meadows Loan is collateralized by The
Meadows manufactured home community located in Palm Beach Gardens, Florida,
bears interest at a nominal rate of 9%, subject to adjustment based on cash flow
of the property, and matures on April 30, 1999.
On January 8, 1998, the Company acquired Quail Meadows, located in
Riverbank, California, for a purchase price of approximately $4.7 million. The
acquisition was funded with a borrowing under the Company's line of credit.
Quail Meadows consists of approximately 146 developed sites.
On April 30, 1998, the Company acquired Sherwood Forest RV Resort, located
adjacent to one of the Ellenburg Communities in Kissimmee, Florida, for a
purchase price of approximately $7.0 million. The acquisition was funded with a
borrowing under the Company's line of credit. Sherwood Forest RV Resort consists
of approximately 512 developed sites and a 33 acre expansion parcel.
On May 14, 1998, the Company acquired Casa Del Sol Resort III, located
adjacent to one of the Company's communities in Peoria, Arizona, for a purchase
price of approximately $9.8 million. The acquisition was funded with a
borrowing under the Company's line of credit. Casa Del Sol Resort III consists
of 238 developed sites.
On June 4, 1998, the Company entered into a joint venture agreement with
Wolverine Investors L.L.C. to acquire the College Heights Communities. The
aggregate purchase price for the College Heights Communities was approximately
$89 million. The Company contributed approximately $19 million to the joint
venture, Wolverine Investors L.L.C. contributed approximately $2.0 million to
the joint venture and the remainder of the acquisition was funded with a
borrowing from a financial institution of approximately $68 million. The
Company's $19 million contribution to the joint venture was funded with a
borrowing under the Company's line of credit. Due to the Company's ability to
control the joint venture through its ownership percentage, the joint venture
has been consolidated with the Company for financial reporting purposes.
On August 13, 1998, the Company acquired Sunset Oaks, located in Plant
City, Florida, adjacent to one of the Company's existing properties, for a
purchase price of approximately $3.6 million. The acquisition was funded with a
borrowing under the Company's line of credit. Sunset Oaks consists of 168
developed sites.
23
24
Capital expenditures for improvements were approximately $14.2 million for
the year ended December 31, 1998 compared to $6.4 million for the year ended
December 31, 1997. Of the $14.2 million, approximately $8 million represented
improvements to existing sites including $3.5 million related to newly acquired
properties. The Company anticipates spending approximately $6.7 million on
improvements to existing sites during 1999. The Company believes these
improvements are necessary in order to increase and/or maintain occupancy levels
and maintain competitive market rents for new and renewing residents. The
remaining $6.2 million represented costs to develop expansion sites at certain
of the Company's Properties and other corporate headquarter costs.
Net cash provided by financing activities increased $18.1 million from
$185.4 million for the year ended December 31, 1997 to $203.5 million for the
year ended December 31, 1998 primarily due to the issuance of common stock in
the second quarter of 1998, partially offset by decreased net proceeds from the
line of credit, term loan and mortgage notes payable.
Net cash provided by financing activities increased $174.6 million from
$10.9 million for the year ended December 31, 1996 to $185.4 million for the
year ended December 31, 1997 primarily due to the addition of the New Mortgage
Debt whereby the Company borrowed an additional $165 million, increased
borrowings on the line of credit, and an increase in proceeds from the exercise
of stock options and issuance of common stock under the employee stock purchase
plan, partially offset by the purchase of 330,300 shares of the Company's common
stock under the common stock repurchase plan, increased distributions to common
stockholders and the payment of debt issuance costs related to the Debt
Refinancing.
On April 23, 1998, the Company completed an offering of 1,048,059 shares of
common stock (the "Unit Trust Offering") and sold the shares to Merrill Lynch,
Pierce, Fenner & Smith Incorporated (the "Underwriter"). The offering price per
share was $25.4375, the closing price for shares of the Company's common stock
on April 23, 1998, resulting in gross offering proceeds of approximately $26.7
million. Net of the Underwriter's discount and offering expenses, the Company
received approximately $25 million. The Underwriter deposited the shares of
common stock with the trustee of the Equity Investor Fund Cohen & Steers Realty
Majors Portfolio, a unit investment trust (the "Trust"), in exchange for units
in the Trust.
For the year ended December 31, 1998, the Company declared and paid
quarterly distributions totaling $1.45 per share. For the year ended December
31, 1997, the Company declared and paid quarterly distributions totaling $1.32
per share. Return of capital on a GAAP basis was $0.33, $0.15 and $0.24 for the
years ended December 31, 1998, 1997 and 1996, respectively.
Substantially all of the leases at the Properties allow for monthly or
annual rent increases which provide the Company with the opportunity to achieve
increases, where justified by the market, 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 borrowings under its existing line of credit and the issuance of debt
securities or additional equity securities in the Company, in addition to
working capital.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging
Activities", which is required to be adopted in years beginning after June 15,
1999. SFAS No. 133 permits early adoption as of the beginning of any fiscal
quarter after its issuance. The Company has not yet determined the date at which
it will adopt SFAS No. 133. SFAS No. 133 will require the Company to recognize
all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
Company has not yet determined what the effect of SFAS No. 133 will be on the
earnings and financial position of the Company.
24
25
YEAR 2000
The year 2000 issue ("Year 2000") is the result of computer programs and
embedded processors ("Systems") failing to properly account for the end of 1999
and the rollover to the year 2000. The Year 2000 issue comes from three
date-related problems and practices. First some Systems define the year-portion
of date fields with two digits instead of four. As a result, programs and
equipment that have time-sensitive functions may interpret a date using "00" as
being 1900 rather than 2000. Second, the year 2000 is a leap year. There is a
possibility that some Systems may fail to account for the leap day properly.
Third, in practice, an artificial date of "9/9/99" is sometimes used as a
fictitious date when testing Systems. It is possible that some Systems will
reject the actual date of "September 9, 1999" as fictitious. Problems arising
from one or more of these problems and practices could result in failure of one
or more Systems causing a disruption of operations, including, among other
things, a temporary inability to process transactions, collect rents, or engage
in similar normal business activities.
Utilizing purchasing records, inventory listings, and direct communication
with employees, the Company is in the process of identifying all of its
information technology ("IT") and non-IT systems and assessing them for Year
2000 readiness. Critical systems include, but are not limited to: accounts
receivable, sales and inventory, human resources and payroll, accounts payable
and general ledger, Lotus Notes, Microsoft Office, tax preparation and filing
software, computers, data networking equipment, telephone systems, fax machines
and photocopiers, security and life safety systems (elevators, alarm systems),
process control systems (pool pumps and chlorine systems, sprinkler systems),
cable television systems, lift stations, and drinking water and waste water
treatment plants. The Company has completed the inventory and research phases of
its preparations for the Year 2000. Review of the research material continues in
the first quarter of 1999, as does on-site inspections of the utilities
(drinking water and waste water treatment plants, lift stations, and cable
television systems). The Company has retained consultants to handle assessment
of its drinking water, waste water treatment, lift station and cable television
facilities for which it is responsible. The Company has initiated formal
communications with all of its significant suppliers to determine the extent to
which the Company's interface systems are vulnerable to those third parties'
failure to remediate their own Year 2000 issues. The Company anticipates that
scheduled system upgrades to its accounts receivable system, accounts payable
and general ledger system, and payroll system will remediate current Year 2000
concerns. Remediation steps and development of contingency plans will be
completed in the second quarter of 1999. The Company has set a deadline for Year
2000 readiness of June 30, 1999. There can be no guarantee that the systems of
other companies on which the Company's Systems rely will be timely converted and
will not have an adverse effect on the Company's Systems.
Through December 31, 1998, the Company's costs associated with remediation
efforts have been immaterial. In 1998, the Company retained a full-time contract
employee to perform Year 2000 research and documentation at an annual fee of
approximately $45,000 and has budgeted to retain the employee through 1999. The
cost to retain a consultant to assess the waste water treatment and cable
television facilities has been budgeted at less than $50,000. The Company
expects that replacement of approximately 75 computers will be required with a
capital budget of approximately $200,000. The Company's total Year 2000 project
costs and estimates to complete do not include the estimated costs and time
associated with the impact of third-party Year 2000 issues. The total cost of
the Year 2000 project is estimated to be immaterial assuming third parties
remediate their own Year 2000 issues. This assumption is based on management's
best estimates, which were derived utilizing numerous assumptions of future
events, and there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated.
The Company has commenced its contingency planning for critical operational
areas that might be affected by the Year 2000 issue if compliance is delayed.
Aside from catastrophic failure of banks, governmental agencies, etc., the
Company believes that it could continue operations. For example, rent can be
collected and recorded by manual methods using hardcopy reports from previous
months; payroll can be processed by issuing manual checks relying on existing
payroll registers; bills can be paid as long as banks can process checks; and
basic financial statements can be prepared manually.
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's earnings are affected by changes in interest rates as a
portion of the Company's outstanding indebtedness is at variable rates based on
LIBOR. The Company's $175 million line of credit ($145 million outstanding at
December 31, 1998) bears interest at LIBOR plus 1.125% and the Company's $100
million Term Loan bears interest at LIBOR plus 1.0%. The Company has the 1998
Swap which fixes LIBOR at 6.4% on $100 million of the Company's floating rate
debt for the period 1998 through 2003. If LIBOR increased/decreased by 1.0%
during 1998, interest expense would have increased/decreased by approximately
$1.0 million based on the average balance outstanding under the Company's line
of credit for the year ended December 31, 1998. Information relating to
quantitive and qualitive disclosure about market risk as it relates to the 1998
Swap is set forth in Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, and in Note 9 "Long Term Borrowings" in the
Notes to Consolidated Financial Statements. Such information is incorporated
herein.
25
26
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
None.
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,
1999, and thus this Part has been omitted in accordance with
General Instruction G(3) to Form 10-K.
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(a) Admission Agreement between Equity Financial and Management
Co., Manufactured Home Communities, Inc. and MHC
Operating Partnership
3.1(a) Articles of Incorporation of Manufactured Home
Communities, Inc.
3.2(a) Articles of Amendment and Restatement of Manufactured Home
Communities, Inc.
3.3(a) Bylaws of Manufactured Home Communities, Inc.
4 Not applicable
9 Not applicable
10.1(a) Amended and Restated Agreement of Limited Partnership of
MHC Operating Limited Partnership
10.2(a) Agreement of Limited Partnership of MHC Financing Limited
Partnership
10.3(a) Agreement of Limited Partnership of MHC Management Limited
Partnership
10.4(a) Property Management and Leasing Agreement between MHC
Financing Limited Partnership and MHC Management Limited
Partnership
10.5(a) Property Management and Leasing Agreement between MHC
Operating Limited Partnership and MHC Management Limited
Partnership
10.6(a) Services Agreement between Realty Systems, Inc. and MHC
Management Limited Partnership
10.7(a) Rate Protection Agreement
10.8(a) Revolving Credit Note made by Realty Systems, Inc. to
Equity Financial and Management Co.
10.9(a) Assignment to MHC Operating Limited Partnership of
Revolving Credit Note made by Realty Systems, Inc. to
Equity Financial and Management Co.
10.10(a) Stock Option Plan
10.11A(a) Indenture of Mortgage, Deed of Trust, Security Agreement,
Financing Statement, Fixture Filing and Assignment
of Rents
10.11B(a) Promissory Note
10.11C(a) Assignment of Loan Documents
10.11D(a) Assignment of Leases, Rents and Security Deposits
10.11E(a) Swap Agreement Pledge and Security Agreement
10.11F(a) Cash Collateral Account Security, Pledge and Assignment
Agreement
10.11G(a) Assignment of Property Management and Leasing Agreement
10.11H(a) Trust Agreement
26
27
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K (CONTINUED)
(3) Exhibits (continued):
10.12(a) Form of Noncompetition Agreement
10.13(a) Form of Noncompetition Agreement
10.13A(a) Form of Noncompetition Agreement
10.14(a) General Electric Credit Corporation Commitment
Letter
10.15(a) Administrative Services Agreement between Realty
Systems, Inc. and Equity Group Investments, Inc.
10.16(a) Registration Rights and Lock-Up Agreement with
the Company (the Original Owners, EF&M,
Directors, Officers and Employees)
10.17(a) Administrative Services Agreement between the
Company and Equity Group Investments, Inc.
10.18(a) Form of Subscription Agreement between the Company
and certain officers and other individuals dated
March 3, 1993
10.19(a) Form of Secured Promissory Note payable to the
Company by certain officers dated March 3, 1993
10.20(a) Form of Pledge Agreement between the Company and
certain officers dated March 3, 1993
10.21(a) Loan and Security Agreement between Realty Systems,
Inc. and MHC Operating Limited Partnership
10.22(a) Equity and Registration Rights Agreement with the
Company (the GM Trusts)
10.23(b) Agreement of Limited Partnership of MHC Lending
Limited Partnership
10.23(c) Agreement of Limited Partnership of MHC-Bay Indies
Financing Limited Partnership
10.24(c) Agreement of Limited Partnership of MHC-De Anza
Financing Limited Partnership
10.25(c) Agreement of Limited Partnership of MHC-DAG
Management Limited Partnership
10.26(d) Amendment No. 2 to MHC Operating Limited
Partnership Amended and Restated Partnership
Agreement dated February 15, 1996
10.27(d) Form of Subscription Agreement between the Company
and certain members of management of the
Company dated January 2, 1996
10.28(d) Form of Secured Promissory Note payable to the
Company by certain members of management of the
Company dated January 2, 1996
10.29(d) Form of Pledge Agreement between the Company and
certain members of management of the Company
dated January 2, 1996
10.30(e) Second Amended and Restated MHC Operating Limited
Partnership Agreement of Limited Partnership,
dated as of March 15, 1996
10.31(f) Agreement of Limited Partnership of MHC Financing
Limited Partnership Two
11 Not applicable
12(g) Computation of Ratio of Earnings to Fixed Charges
13 Not applicable
16 Not applicable
18 Not applicable
21(g) Subsidiaries of the registrant
22 Not applicable
23(g) Consent of Independent Auditors
24.1(g) Power of Attorney for John F. Podjasek, Jr. dated
February 22, 1999
24.2(g) Power of Attorney for Michael A. Torres dated
February 19, 1999
24.3(g) Power of Attorney for Thomas E. Dobrowski dated
February 17, 1999
24.4(g) Power of Attorney for Gary Waterman dated
February 18, 1999
24.5(g) Power of Attorney for Donald S. Chisholm dated
February 17, 1999
24.6(g) Power of Attorney for Louis H. Masotti dated
February 19, 1999
27(g) Financial Data Schedule
28 Not applicable
- -------------------
(a) Included as an exhibit to the Company's Form S-11 Registration Statement,
File No. 33-55994, and incorporated herein by reference.
(b) Included as an exhibit to the Company's Report on Form 10-K dated December
31, 1993, and incorporated herein by reference.
27
28
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
(3) Exhibits (continued):
(c) Included as an exhibit to the Company's Report on Form 10-K dated
December 31, 1994, and incorporated herein by reference.
(d) 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.
(e) 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.
(f) Included as an exhibit to the Company's Report on Form 10-K dated
December 31, 1997, and incorporated herein by reference.
(g) Filed herewith.
(b) Reports on Form 8-K:
Form 8-K/A dated December 18, 1997, filed February 24, 1998,
relating to Item 2 - "Acquisition of Assets" and Item 7
"Financial Statements and Exhibits" on the acquisition of the
Ellenburg Communities.
Form 8-K dated June 4, 1998, filed June 18, 1998, relating to
Item 2 - "Acquisition of Assets" and Item 7 "Financial
Statements and Exhibits" on the acquisition of the College
Heights Communities.
Form 8-K/A dated June 4, 1998, filed August 11, 1998, relating
to Item 2 - "Acquisition of Assets" and Item 7 "Financial
Statements and Exhibits" on the acquisition of the College
Heights Communities.
Form 8-K dated January 22, 1999, filed February 4, 1999,
relating to Item 5 - "Other Matters" on certain litigation.
(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.
28
29
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 2, 1999 By: /s/ Howard Walker
------------- -------------------------------------
Howard Walker
President and Chief Executive Officer
Date: March 2, 1999 By: /s/ Thomas P. Heneghan
------------- -------------------------------------
Thomas P. Heneghan
Executive Vice President, Treasurer
and Chief Financial Officer
Date: March 2, 1999 By: /s/ Judy A. Pultorak
------------- -------------------------------------
Judy A. Pultorak
Principal Accounting Officer
29
30
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/ Howard Walker
- ------------------------------- Chief Executive Officer and President March 2, 1999
Howard Walker *Attorney-in-Fact ----------------------
Executive Vice President, Treasurer
/s/ Thomas P. Heneghan and Chief Financial Officer March 2, 1999
- ------------------------------- *Attorney-in-Fact ----------------------
Thomas P. Heneghan
/s/ Samuel Zell Chairman of the Board
- ------------------------------- March 2, 1999
Samuel Zell ----------------------
/s/ Sheli Z. Rosenberg Director
- -------------------------------
Sheli Z. Rosenberg March 2, 1999
----------------------
/s/ David A. Helfand Director
- -------------------------------
David A. Helfand March 2, 1999
----------------------
*Donald S. Chisholm Director
- -------------------------------
Donald S. Chisholm March 2, 1999
----------------------
*Thomas E. Dobrowski Director
- -------------------------------
Thomas E. Dobrowski March 2, 1999
----------------------
*Louis H. Masotti Director
- -------------------------------
Louis H. Masotti March 2, 1999
----------------------
*John F. Podjasek, Jr. Director
- -------------------------------
John F. Podjasek, Jr. March 2, 1999
----------------------
*Michael A. Torres Director
- -------------------------------
Michael A. Torres March 2, 1999
----------------------
*Gary L. Waterman Director
- -------------------------------
Gary L. Waterman March 2, 1999
----------------------
30
31
INDEX TO FINANCIAL STATEMENTS
MANUFACTURED HOME COMMUNITIES, INC.
PAGE
----
Reports of Independent Auditors ........................................F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997............F-3
Consolidated Statements of Operations for the years ended December
31, 1998, 1997 and 1996.............................................F-4
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996........................F-5
Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997 and 1996.............................................F-6
Notes to Consolidated Financial Statements..............................F-7
Schedule II - Valuation and Qualifying Accounts.........................S-1
Schedule III - Real Estate and Accumulated Depreciation.................S-2
Certain schedules have been omitted as they are not applicable to the
Company.
F-1
32
Report of Independent Auditors
To the Board of Directors of
Manufactured Home Communities, Inc.
We have audited the accompanying consolidated balance sheets of
Manufactured Home Communities, Inc. as of December 31, 1998 and 1997, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1998. We have also audited the related financial statement schedules listed in
the accompanying index. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, 1998 and 1997 and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998 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 set forth
therein.
ERNST & YOUNG LLP
Chicago, Illinois
January 28, 1999, except for Note 17
as to which the date is February 18, 1999
F-2
33
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
1998 1997
------------ ------------
ASSETS
Investment in rental property:
Land......................................................... $ 272,225 $ 206,375
Land improvements............................................ 865,720 612,670
Buildings and other depreciable property..................... 95,669 90,870
Advances on rental property acquisitions..................... 3,817 26,403
------------ ------------
1,237,431 936,318
Accumulated depreciation..................................... (118,021) (89,208)
------------ ------------
Net investment in rental property........................ 1,119,410 847,110
Cash and cash equivalents......................................... 13,657 909
Notes receivable.................................................. 15,710 1,147
Investment in and advances to affiliates.......................... 7,797 7,126
Investment in joint ventures...................................... 7,584 ---
Rents receivable ................................................ 671 787
Deferred financing costs, net..................................... 4,634 3,265
Prepaid expenses and other assets................................. 7,325 3,968
Due from affiliates............................................... 53 53
------------ ------------
Total assets................................................. $ 1,176,841 $ 864,365
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable, net.................................. $ 500,573 $ 403,656
Unsecured term loan.......................................... 100,000 60,000
Unsecured line of credit..................................... 145,000 25,000
Other notes payable.......................................... 5,276 6,516
Accounts payable and accrued expenses........................ 33,341 17,197
Accrued interest payable..................................... 4,911 1,536
Rents received in advance and security deposits.............. 6,495 2,299
Distributions payable........................................ 294 55
Due to affiliates............................................ 42 78
------------ ------------
Total liabilities........................................ 795,932 516,337
------------ ------------
Commitments and contingencies
Minority interests................................................ 70,468 67,453
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value
10,000,000 shares authorized; none issued................ --- ---
Common stock, $.01 par value
50,000,000 shares authorized; 26,417,029 and
24,771,180 shares issued and outstanding for 1998
and 1997, respectively................................... 262 248
Paid-in capital.............................................. 364,603 321,915
Deferred compensation........................................ (7,442) (2,885)
Employee notes............................................... (4,654) (4,967)
Distributions in excess of accumulated earnings.............. (42,328) (33,736)
------------ ------------
Total stockholders' equity............................... 310,441 280,575
------------ ------------
Total liabilities and stockholders' equity................... $ 1,176,841 $ 864,365
============ ============
The accompanying notes are an integral part of the financial statements
F-3
34
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
1998 1997 1996
---------- ---------- ----------
REVENUES
Base rental income............................................ $ 165,340 $ 108,984 $ 93,109
Utility and other income...................................... 25,372 11,785 8,821
Equity in income of affiliates................................ 1,070 800 853
Interest income............................................... 3,048 1,941 2,420
---------- ---------- ----------
Total revenues............................................ 194,830 123,510 105,203
---------- ---------- ----------
EXPENSES
Property operating and maintenance............................ 53,064 32,343 28,399
Real estate taxes............................................. 14,470 8,352 7,947
Property management........................................... 7,108 5,079 4,338
General and administrative.................................... 4,668 4,091 3,335
General and administrative - affiliates....................... 743 468 727
Interest and related amortization............................. 49,693 21,753 17,782
Depreciation on corporate assets.............................. 995 590 488
Depreciation on real estate assets and other costs............ 28,426 17,365 15,244
---------- ---------- ----------
Total expenses............................................ 159,167 90,041 78,260
---------- ---------- ----------
Income before allocation to minority interests and
extraordinary loss on early extinguishment of debt........ 35,663 33,469 26,943
Income allocated to minority interests........................ (6,733) (4,373) (2,671)
---------- ---------- ----------
Income before extraordinary loss on early extinguishment
of debt................................................... 28,930 29,096 24,272
Extraordinary loss on early extinguishment of debt (net of
$105 allocated to minority interests)..................... --- (451) ---
---------- ---------- ----------
Net income.................................................... $ 28,930 $ 28,645 $ 24,272
========== ========== ==========
Net income per common share before extraordinary
item - basic.............................................. $ 1.13 $ 1.18 $ .98
========== ========== ==========
Net income per common share before extraordinary
item - diluted............................................ $ 1.12 $ 1.16 $ .98
========== ========== ==========
Net income per common share - basic........................... $ 1.13 $ 1.16 $ .98
========== ========== ==========
Net income per common share - diluted......................... $ 1.12 $ 1.15 $ .98
========== ========== ==========
Weighted average common shares outstanding - basic............ 25,626 24,689 24,693
========== ========== ==========
Weighted average common shares outstanding - diluted (Note 3) 31,962 28,762 27,546
========== ========== ==========
Distributions declared per common share outstanding........... $ 1.45 $ 1.32 $ 1.22
========== ========== ==========
Tax status of distributions:
Ordinary income........................................... $ 1.14 $ 1.12 $ .90
========== ========== ==========
Capital gain.............................................. $ --- $ --- $ ---
========== ========== ==========
Return of capital......................................... $ .31 $ .20 $ .32
========== ========== ==========
The accompanying notes are an integral part of the financial statements
F-4
35
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(AMOUNTS IN THOUSANDS)
1998 1997 1996
---------- ---------- ----------
PREFERRED STOCK, $.01 PAR VALUE................................. $ --- $ --- $ ---
========== ========== ==========
COMMON STOCK, $.01 PAR VALUE
Balance, beginning of year...................................... $ 248 $ 249 $ 244
Issuance of common stock for employee notes................. --- --- 3
Issuance of common stock through restricted
stock awards........................................... 2 1 2
Retirement of treasury stock................................ --- --- (1)
Exercise of options......................................... 1 1 1
Issuance (repurchase) of common stock....................... 11 (3) ---
---------- ---------- ----------
Balance, end of year............................................ $ 262 $ 248 $ 249
========== ========== ==========
PAID - IN CAPITAL
Balance, beginning of year...................................... $ 321,915 $ 296,997 $ 288,613
Issuance of common stock for employee notes................. 129 --- 4,689
Retirement of treasury stock................................ --- --- (1,986)
Conversion of OP Units to common stock...................... 1,100 --- 23
Exercise of options......................................... 2,372 2,070 1,013
Issuance of common stock through restricted
stock awards........................................... 6,118 2,468 4,645
Issuance of common stock through employee stock
purchase plan.......................................... 940 587 ---
Issuance (repurchase) of common stock....................... 24,613 (7,257) ---
Adjustment for minority interests ownership
in operating partnership............................... 7,416 27,050 ---
---------- ---------- ----------
Balance, end of year............................................ $ 364,603 $ 321,915 $ 296,997
========== ========== ==========
DEFERRED COMPENSATION
Balance, beginning of year $ (2,885) $ (3,485) $ (80)
Issuance of common stock through restricted stock awards.... (5,692) (2,074) (4,356)
Recognition of deferred compensation expense................ 1,135 2,674 951
========== ========== ==========
Balance, end of year............................................ $ (7,442) $ (2,885) $ (3,485)
========== ========== ==========
TREASURY STOCK
Balance, beginning of year...................................... $ --- $ --- $ (1,987)
Common stock retired, 109,728 shares........................ --- --- 1,987
---------- ---------- ----------
Balance, end of year............................................ $ --- $ --- $ ---
========== ========== ==========
EMPLOYEE NOTES
Balance, beginning of year...................................... $ (4,967) $ (6,158) $ (1,565)
Notes received for issuance of common stock................. (129) --- (4,692)
Principal payments.......................................... 442 1,191 99
---------- ---------- ----------
Balance, end of year............................................ $ (4,654) $ (4,967) $ (6,158)
========== ========== ==========
DISTRIBUTIONS IN EXCESS OF ACCUMULATED EARNINGS
Balance, beginning of year...................................... $ (33,736) $ (29,651) $ (23,725)
Net income.................................................. 28,930 28,645 24,272
Distributions............................................... (37,522) (32,730) (30,198)
---------- ---------- ----------
Balance, end of year............................................ $ (42,328) $ (33,736) $ (29,651)
========== ========== ==========
The accompanying notes are an integral part of the financial statements
F-5
36
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(AMOUNTS IN THOUSANDS)
1998 1997 1996
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................ $ 28,930 $ 28,645 $ 24,272
Adjustments to reconcile net income to
cash provided by operating activities:
Income allocated to minority interests............................ 6,733 4,268 2,671
Depreciation and amortization expense............................. 29,680 19,018 16,720
Equity in income of Affiliates.................................... (1,070) (800) (853)
Amortization of deferred compensation............................. 1,563 3,068 1,242
Writeoff of a management contract and project costs............... --- (575) ---
Decrease (increase) in rents receivable........................... 116 (64) 212
(Increase) in prepaid expenses and other assets................... (3,359) (2,228) (109)
Increase in accounts payable and accrued expenses................. 5,188 2,847 5,400
Increase in rents received in advance and security deposits....... 4,196 402 105
--------- --------- ---------
Net cash provided by operating activities............................. 71,977 54,581 49,660
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Redemption (purchase) of short-term investments, net.................. --- 1,968 (286)
Sale (purchase) of project related assets............................. --- 11,147 (11,205)
Collection of escrow proceeds on acquisition.......................... 14,295 --- ---
Advances on rental property acquisitions.............................. --- (22,811) ---
Distributions from Affiliates......................................... 399 388 5,004
(Funding) collections on notes receivable............................. (14,563) 16,342 126
Investment in joint ventures.......................................... (7,584) --- ---
Acquisition of rental properties...................................... (241,076) (240,083) (46,531)
Improvements:
Improvements - corporate.......................................... (1,487) (357) (844)
Improvements - rental properties.................................. (8,005) (4,187) (3,402)
Site development costs............................................ (4,741) (1,852) (3,816)
--------- --------- ---------
Net cash used in investing activities................................. (262,762) (239,445) (60,954)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from stock options and employee stock purchase plan ..... 3,313 2,658 1,014
Distributions to common stockholders and minority interests........... (46,491) (46,886) (33,070)
Issuance (repurchase) of common stock................................. 24,623 (7,260) ---
Collection of principal payments on employee notes.................... 442 1,191 99
Proceeds from line of credit, term loan, and mortgage notes payable... 266,847 510,731 52,100
Repayments on mortgage notes payable and line of credit............... (43,298) (272,674) (9,084)
Debt issuance costs................................................... (1,903) (2,311) (201)
--------- --------- ---------
Net cash provided by financing activities............................. 203,533 185,449 10,858
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents....................... 12,748 585 (436)
Cash and cash equivalents, beginning of year............................... 909 324 760
--------- --------- ---------
Cash and cash equivalents, end of year..................................... $ 13,657 $ 909 $ 324
========= ========= =========
SUPPLEMENTAL INFORMATION
Cash paid during the year for interest..................................... $ 45,785 $ 20,667 $ 16,557
========= ========= =========
The accompanying notes are an integral part of the financial statements
F-6
37
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 154 manufactured home communities
(the "Properties") located in 26 states, consisting of 53,391 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, 1998, the Minority Interests represented 5,976,701 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.
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131") which was effective for fiscal years beginning after December
15, 1997. SFAS No. 131 supersed Statement of Financial Accounting Standards No.
14, "Financial Reporting for Segments of a Business Enterprise". SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The adoption of SFAS No. 131 did not affect results of operations or financial
position of the Company. The Company has one reportable segment which is the
operation of manufactured home communities. The Company has concentrations of
Properties within the following states: Florida (45 Properties), California (25
Properties), Arizona (19 Properties), Michigan (11 Properties) and Colorado (10
Properties). These concentrations of Properties accounted for 34%, 17%, 11%, 4%,
and 8%, respectively, of the Company's total revenues for the year ended
December 31, 1998. The Company also has Properties located in the following
areas of the United States: Northeast, Northwest, Midwest, and Nevada/Utah/New
Mexico. The Company's largest Property, Bay Indies, located in Venice, Florida,
accounted for 3% of the Company's total revenues for the year ended December 31,
1998. 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. 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.
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.
F-7
38
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(b)Rental Property
Rental property is recorded at cost less accumulated depreciation. 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, 1998
and 1997, 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 extend
the useful life of the asset are capitalized over their estimated useful
life. Initial direct leasing costs are expensed as incurred. Total
depreciation expense was $29.1 million, $18.0 million, and $15.3 million
for the years ended December 31, 1998, 1997 and 1996, respectively.
(c)Cash and Cash Equivalents
The Company considers all demand and money market accounts and certificates
of deposit with a 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, 1998 and 1997, except the fair market
value of certain derivatives related to mortgage debt (see Note 10).
(f)Deferred Financing Costs
Deferred financing costs include fees and costs incurred to obtain
long-term financing. 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 $1,199,221 and $717,112 at
December 31, 1998 and 1997, respectively.
(g) Revenue Recognition
Rental income attributable to leases is recorded when earned from tenants.
F-8
39
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(h)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 (5,976,701 and 5,733,815 at December 31, 1998 and 1997,
respectively) by 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
the respective percentage ownership of the underlying equity of the
Operating Partnership.
(i)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 approximately $78,000 and $40,000
during the years ended December 31, 1998 and 1997. As of December 31, 1998,
net investment in rental property and notes receivable had a federal tax
basis of approximately $747 million and $70 million, respectively.
(j)Reclassifications
Certain 1997 and 1996 amounts have been reclassified to conform to the 1998
financial presentation. Such reclassifications have no effect on the
operations or equity as originally presented.
NOTE 3 - EARNINGS PER COMMON SHARE
Earnings per common share are based on the weighted average number of common
shares outstanding during each year. In 1997, the Financial Accounting Standards
Board issued Statement No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No.
128 replaces the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to the SFAS No. 128 requirements. The conversion of OP Units has been
excluded from the basic earnings per share calculation. The conversion of an OP
Unit to common stock will have no material 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 following table sets forth the computation of basic and diluted
earnings per share (amounts in thousands):
1998 1997 1996
--------- --------- --------
Numerator:
Net income.................................... $ 28,930 $ 28,645 $ 24,272
Income allocated to minority interests........ 6,733 4,373 2,671
--------- --------- --------
Numerator for diluted earnings per share-
income available to common shareholders
after assumed conversions.................. $ 35,663 $ 33,018 $ 26,943
========= ========= ========
Denominator:
Weighted average shares outstanding........... 25,626 24,689 24,693
Weighted average shares outstanding
assuming conversion of OP Units............ 5,955 3,749 2,715
Employee stock options........................ 381 324 138
--------- --------- --------
Denominator for diluted earnings per share-
adjusted weighted average shares and
assumed conversions........................ 31,962 28,762 27,546
========= ========= ========
F-9
40
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - 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, 1998, 1997 and 1996 (excluding OP
Units of 5,976,701, 5,733,815 and 2,714,889 outstanding at December 31, 1998,
1997 and 1996, respectively):
1998 1997 1996
---------- ---------- ----------
Shares outstanding at January 1,................................... 24,771,180 24,951,948 24,393,149
Common stock purchased by key employees of the Company........ 5,000 --- 270,000
Common stock issued through conversion of OP Units............ 99,552 --- 2,159
Common stock issued through exercise of Options............... 141,403 107,147 75,497
Common stock issued through stock awards...................... 328,831 14,777 211,143
Common stock issued through ESPP.............................. 44,804 27,608 ---
Common stock issued through Unit Trust Offering .............. 1,048,059 --- ---
Common stock repurchased and retired.......................... (21,800) (330,300) ---
---------- ---------- ----------
Shares outstanding at December 31,................................. 26,417,029 24,771,180 24,951,948
========== ========== ==========
As of December 31, 1998, the Company's percentage ownership of the
Operating Partnership was 81%. The remaining 19% is owned by the Minority
Interests.
The Company paid a $.3625 per share distribution on April 10, 1998, July
10, 1998, October 9, 1998 and December 30, 1998, for the quarters ended March
31, 1998, June 30, 1998, September 30, 1998 and December 31, 1998, respectively,
to stockholders of record on March 27, 1998, June 26, 1998, September 25, 1998
and December 16, 1998, respectively.
In March 1997, the Company's Board of Directors approved a common stock
repurchase plan whereby the Company is authorized to repurchase and retire up to
1,000,000 shares of its common stock. Shares of common stock repurchased and
retired under the plan for the years ended December 31, 1998 and 1997 were
21,800 and 330,300 respectively.
The Company adopted, effective July 1, 1997, the 1997 Non Qualified
Employee Stock Purchase Plan ("ESPP"). Pursuant to the ESPP, certain employees
and directors of the Company may each annually acquire up to $100,000 of common
stock of the Company. The aggregate number of shares of common stock available
under the ESPP shall not exceed 1,000,000, subject to adjustment by the Board of
Directors. The common stock may be purchased quarterly at a price equal to 85%
of the lesser of: (a) the closing price for a share on the last day of such
quarter; and (b) the greater of: (i) the closing price for a share on the first
day of such quarter, and (ii) the average closing price for a share for all the
business days in the quarter. Shares of common stock issued through the ESPP for
the years ended December 31, 1998 and 1997 were 44,804 and 27,608 respectively.
On August 29, 1997, the Company, as general partner of the Operating
Partnership, approved the addition of new limited partners (the "MPW Limited
Partners") to the Operating Partnership in connection with the acquisition of
properties from limited partners and joint ventures affiliated with Mobileparks
West, a California limited partnership. The MPW Limited Partners received
3,018,926 OP Units which are exchangeable on a one-for-one basis for shares of
the Company's common stock.
During 1998, the Company, as general partner of the Operating Partnership,
approved the admission of new limited partners (the "1998 Acquisition Partners")
to the Operating Partnership in connection with certain acquisitions of rental
property and investments in joint ventures (see Notes 5 and 6). The 1998
Acquisition Partners received 342,438 OP Units which are exchangeable on a
one-for-one basis for shares of the Company's common stock.
On April 23, 1998, the Company completed an offering of 1,048,059 shares of
common stock (the "Unit Trust Offering") and sold the shares to Merrill Lynch,
Pierce, Fenner & Smith Incorporated (the "Underwriter"). The offering price per
share was $25.4375, the closing price for shares of the Company's common stock
on April 23, 1998, resulting in gross offering proceeds of approximately $26.7
million. Net of the Underwriter's discount and offering expenses, the Company
received approximately $25 million. The Underwriter deposited the shares of
common stock with the trustee of the Equity Investor Fund Cohen & Steers Realty
Majors Portfolio, a unit investment trust (the "Trust"), in exchange for units
in the Trust.
F-10
41
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - 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, 1996, the Company acquired three
communities for an aggregate purchase price of approximately $38 million and
funded a recourse first mortgage real estate loan for approximately $6 million
to the partnership which owned one community. For financial accounting purposes,
the Company accounts for the loan as an investment in real estate. These four
communities consist of 1,618 sites and 183 expansion sites. The acquisitions and
loan funding were funded with approximately $41.6 million in borrowings under
the Company's line of credit and $2.4 million in existing available cash.
During the year ended December 31, 1997, the Company acquired twenty-two
communities for an aggregate purchase price of approximately $156.4 million.
These acquisitions were funded with approximately $60.6 million in borrowings
under the Company's line of credit, issuance of approximately $64 million of OP
Units, assumption of approximately $13 million in debt, approximately $7.4
million of existing available cash, issuance of installment notes totaling
approximately $6 million and entry into a lease, accounted for as a capital
lease, valued at approximately $2.4 million. In connection with the acquisition
of one of the communities the Company issued an additional $1.1 million of OP
units in 1998.
On September 4, 1997, the Company entered into a portfolio purchase
agreement (as amended by a supplemental agreement on December 17, 1997) to
acquire 38 manufactured home communities (the "Ellenburg Communities") from
partnerships having Ellenburg Capital Corporation ("ECC") as the general partner
for a purchase price in excess of $300 million. During 1997 and 1998, the
Company closed on the acquisition of thirty-one of the Ellenburg Communities for
an aggregate purchase price of approximately $278 million and gained control of
an additional five Ellenburg Communities with acquisition advances of
approximately $57 million to the partnerships which own such Ellenburg
Communities. The Company funded the acquisition advances with borrowings under
the Company's line of credit and term bank facilities. In addition, the Company
assumed debt of approximately $32 million and issued OP Units of approximately
$4.9 million in connection with this transaction.
In connection with the supplemental agreement entered into in December
1997, on February 12, 1998, the Company exercised its right of first refusal to
purchase five of the Ellenburg Communities. A third party, backed by one of the
Company's competitors upon denial of a stay of the sale, has appealed certain
orders of the Superior Court for the State of California, County of Los Angeles
related to the Company's acquisition of the Ellenburg Communities, including the
order approving the supplemental agreement. The Company does not expect the
appeals to be successful, or if successful, to have a material impact on the
Company's acquisition of the Ellenburg Communities.
During 1998, the Company received approximately $14.3 million, including
approximately $365,000 of interest income, which was being held subject to the
completion of due diligence procedures on the Ellenburg Communities. The persons
appointed to windup the affairs of ECC have released the funds and have
presented a status report to the court. The $14.3 million has been recorded as a
liability until certain related issues are finalized at which point the final
liability will be relieved and the purchase price of the Ellenburg Communities
adjusted accordingly.
On January 8, 1998, the Company acquired Quail Meadows, located in
Riverbank, California, for a purchase price of approximately $4.7 million. The
acquisition was funded with a borrowing under the Company's line of credit.
Quail Meadows consists of approximately 146 developed sites.
On April 30, 1998, the Company acquired Sherwood Forest RV Resort, located
adjacent to one of the Ellenburg Communities in Kissimmee, Florida, for a
purchase price of approximately $7.0 million. The acquisition was funded with a
borrowing under the Company's line of credit. Sherwood Forest RV Resort consists
of approximately 512 developed sites and a 33 acre expansion parcel.
F-11
42
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - RENTAL PROPERTY (CONTINUED)
On May 14, 1998, the Company acquired Casa Del Sol Resort III, located
adjacent to one of the Company's communities in Peoria, Arizona, for a purchase
price of approximately $9.8 million. The acquisition was funded with a borrowing
under the Company's line of credit. Casa Del Sol Resort III consists of 238
developed sites.
On June 4, 1998, the Company entered into a joint venture agreement with
Wolverine Investors L.L.C. to acquire eighteen manufactured home communities
(the "College Heights Communities"). The aggregate purchase price for the
College Heights Communities was approximately $89 million. The Company
contributed approximately $19 million to the joint venture, Wolverine Investors
L.L.C. contributed approximately $2.0 million to the joint venture and the
remainder of the acquisition was funded with a borrowing from a financial
institution of approximately $68 million. The Company's $19 million contribution
to the joint venture was funded with a borrowing under the Company's line of
credit. Due to the Company's ability to control the joint venture through its
approximate 95% interest, the joint venture properties and related operations
have been consolidated for financial reporting purposes.
On August 13, 1998, the Company acquired Sunset Oaks, located in Plant
City, Florida, adjacent to one of the Company's existing properties, for a
purchase price of approximately $3.6 million. The acquisition was funded with a
borrowing under the Company's line of credit. Sunset Oaks consists of 168
developed 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.
The following unaudited summarized pro forma financial information presents
the effect of all material transactions which transpired from January 1, 1997 to
December 31, 1998. In management's opinion, the summarized pro forma financial
information does not purport to present what actual results would have been had
the above transactions occurred on January 1, 1997, or to project results for
any future period. The amounts presented in the following table are in
thousands, except for per share amounts:
For the Years Ended
1998 1997
---------- ----------
Total revenues $ 205,358 $ 196,996
Pro Forma net income $ 35,450 $ 23,024
Pro Forma net income per share - basic $ 1.12 $ .89
Pro Forma net income per share - fully diluted $ 1.11 $ .88
NOTE 6 - INVESTMENT IN JOINT VENTURE
On March 18, 1998, the Company joined Plantation Company, LLC and Trails
Associates, LLC, two 49% joint venture investments with Meadows Management
Company to own two manufactured home communities known as "Plantation on the
Lake" and "Trails West", for approximately $6.5 million. Plantation on the Lake
is located in Riverside, California and consists of 385 developed sites and 122
expansion sites. Trails West is located in Tucson, Arizona and consists of 488
developed sites and 294 expansion sites. The Company's investments were funded
with a $3.9 million borrowing under the Company's line of credit and with the
issuance of approximately $2.6 million in OP Units. Due to the Company's
inability to control over the joint ventures, the Company accounts for its
investment in the joint ventures on the equity method.
F-12
43
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - 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, 1998 and 1997 (amounts in thousands):
1998 1997
------------ ------------
Assets $ 16,906 $ 14,466
Liabilities, net of amounts due
to the Company (9,109) (7,340)
------------ ------------
Net investment in Affiliates $ 7,797 $ 7,126
============ ============
Home sales $ 24,662 $ 20,994
Cost of sales (18,999) (17,352)
Other revenues and expenses, net (4,593) (2,842)
------------ ------------
Equity in income of Affiliates $ 1,070 $ 800
============ ============
NOTE 8 - NOTES RECEIVABLE
At December 31, 1998 and 1997, the Company had approximately $15.7 million
and $1.1 million in notes receivable, respectively. The Company has $1.1 million
in purchase money notes with monthly principal and interest payments at 7.0%,
maturing on July 31, 2001. On January 6, 1998, the Company funded a $12.3
million loan (the "Meadows Loan") to Meadows Preservation, Inc. The Meadows Loan
is collateralized by The Meadows manufactured home community located in Palm
Beach Gardens, Florida, bears interest at the lesser of 9% or the cash flow of
the property which for the year ended December 31, 1998 approximated 7%, and
matures on April 30, 1999, as amended. On May 12, 1998, the Company entered into
an agreement to loan $5.9 million to Trails Associates, LLC (the "Trails West
Loan") for development of the property known as Trails West. On May 12, 1998,
the Company funded $1,750,000 under the Trails West Loan. This $1,750,000
portion of the Trails West Loan is collateralized by the property known as
Trails West, bears interest at the rate of 8.5% and matures on June 1, 2003. The
Meadows Loan and Trails West Loan were funded with a borrowing under the
Company's line of credit.
NOTE 9 - 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. The Company received from
these individuals notes (the "1993 Employee Notes") in exchange for their
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.
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.
In December 1997, the then Chief Executive Officer of the Company resigned
and paid off his 1993 Employee Note and 1996 Employee Note in the aggregate
amount of approximately $1 million.
F-13
44
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - EMPLOYEE NOTES RECEIVABLE (CONTINUED)
On March 23, 1998, a member of management of the Company entered into a
subscription agreement with the Company to acquire a total of 5,000 shares of
the Company's common stock at $25.75 per share, the market price on that date.
The Company received from this individual a note in exchange for his shares. The
note accrues interest at 5.97%, matures on March 23, 2008, and is recourse
against the employee in the event the pledged shares are insufficient to repay
the obligation.
In June 1998, a member of management of the Company resigned and paid off
his 1993 Employee Note and 1996 Employee Note in the aggregate amount of
approximately $310,000.
NOTE 10 - LONG-TERM BORROWINGS
As of December 31, 1998 and 1997, the Company had outstanding mortgage
indebtedness of approximately $500.6 million and $403.7 million, respectively,
encumbering 72 and 43 of the Company's properties, respectively. As of December
31, 1998 and 1997, the carrying value of such properties was approximately $634
million and $493 million, respectively.
The outstanding mortgage indebtedness consists in part of a $265.0 million
mortgage note (the "Mortgage Debt") collateralized by 29 properties beneficially
owned by MHC Financing Limited Partnership. The Mortgage Debt has a maturity
date of January 2, 2028 and pays interest at 7.015%. There is no principal
amortization until February 1, 2008, after which principal and interest are paid
from available cash flow and the interest rate is reset at a rate equal to the
then 10-year U.S. Treasury obligations plus 2.0%. In connection with the
acquisition of the College Heights Communities, the joint venture formed by the
Company and Wolverine Investors L.L.C. borrowed approximately $68 million (the
"College Heights Debt") at an interest rate of 7.19%, maturing July 1, 2008. The
Company also has outstanding debt on 23 properties in the aggregate amount of
approximately $169 million, which was recorded at fair market value with the
related discount or premium being amortized over the life of the loan using the
effective interest rate. In addition, the Company recorded a $2.4 million loan
in connection with a direct financing lease entered into in May 1997. Scheduled
maturities for the outstanding indebtedness, excluding the Mortgage Debt and
College Heights Debt, are at various dates through November 30, 2020, and fixed
interest rates range from 7.25% to 9.05%.
The Company has an unsecured line of credit with a bank (the "Credit
Agreement") bearing interest at the London Interbank Offered Rate ("LIBOR") plus
1.125%. On April 28, 1998, the Company amended the Credit Agreement, increasing
the line of credit from $100 million to $150 million. On December 18, 1998, the
Company amended the Credit Agreement, increasing the line of credit from $150
million to $175 million. The Credit Agreement matures on August 17, 2000, at
which time the Company may extend the maturity date to August 17, 2002 and the
Credit Agreement would be converted to a term loan. The Company pays a fee on
the average unused amount of such credit equal to 0.15% of such amount. As of
December 31, 1998, $145 million was outstanding under the Credit Agreement. The
Company paid fees related to the amendments which were immaterial.
The Company has a term loan (the "Term Loan") with a group of banks with
interest only payable monthly at a rate of LIBOR plus 1.0%. On April 28, 1998,
the Company amended the Term Loan to increase the borrowing from $60 million to
$100 million. The Term Loan matures on April 3, 2000 and may be extended to
April 3, 2002. The Company used the $40 million in proceeds to repay a portion
of the $50 million previously borrowed on April 7, 1998 under the Term Loan. The
Company paid fees related to this amendment which were immaterial.
The Company has approximately $5.3 million of installment notes payable,
secured by a letter of credit with interest rates of 7.5%, maturing September 1,
2002. Approximately $4 million of the notes pay principal annually and interest
quarterly and the remaining $1.3 million of the notes pay interest quarterly.
In July 1995, the Company entered into an interest rate swap agreement (the
"1998 Swap") fixing LIBOR on $100 million of the Company's floating rate debt at
6.4% for the period 1998 through 2003. The cost of the 1998 Swap consisted only
of legal costs which were deemed immaterial. The value of the 1998 Swap is
impacted by changes in the market rate of interest. Had the 1998 Swap been
entered into on December 31, 1998, the applicable LIBOR swap rate would have
been 4.56%. Each 0.01% increase or decrease in the applicable swap rate for the
1998 Swap increases or decreases the value of the 1998 Swap versus its current
value by approximately $39,000. The Company accounts for the 1998 Swap as a
hedge. Payments and receipts under the 1998 Swap are accounted for as an
adjustment to interest expense.
F-14
45
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - LONG-TERM BORROWINGS (CONTINUED)
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
---------- -----------
1999 $ 11,103
2000 4,074
2001 81,501
2002 252,813
2003 20,051
Thereafter 381,307
-----------
Total $ 750,849
===========
NOTE 11 - 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, with remaining terms up to eleven years, are in
effect at certain sites within eight 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,
1998 are as follows (amounts in thousands):
Year Amount
---------- ------------
1999 $ 16,211
2000 6,122
2001 6,245
2002 6,369
2003 6,497
Thereafter 17,863
-----------
Total $ 59,307
===========
NOTE 12 - GROUND LEASES
The Company leases land under noncancellable operating leases at certain
of the properties expiring in various years from 2022 to 2031 with terms which
require twelve equal payments per year plus additional rents calculated as a
percent of gross revenues. For the year ended December 31, 1998, ground lease
rent was $1.6 million. Minimum future rental payments under the ground lease are
$1.6 million for each of the next five years and $32.7 million thereafter.
NOTE 13 - 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. Fees paid to EGI and its affiliates
amounted to approximately $104,000, $140,000 and $708,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. Amounts due to these affiliates
were approximately $7,000, $15,000 and $31,000 as of December 31, 1998, 1997 and
1996, respectively.
F-15
46
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
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, including
property acquisition services; The Riverside Agency, Inc. which provided
insurance brokerage services; Equity Office Properties Trust which provided
office space to the Company; and Equity Properties & Development, LP which
provided accounting services. Fees paid to these entities amounted to
approximately $850,000, $459,000 and $527,000 for the years ended December 31,
1998, 1997 and 1996, respectively. Amounts due to these affiliates were
approximately $35,000, $63,000 and $74,000 as of December 31, 1998, 1997 and
1996, respectively. Of the amounts due to these affiliates as of December 31,
1998, 1997 and 1996, approximately $175,000, $105,000 and $67,000, respectively,
were capitalized.
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 14 - STOCK OPTION PLAN
A Stock Option Plan (the "Plan") was adopted by the Company in December
1992. Pursuant to the Plan, certain officers, directors, employees and
consultants of the Company may be offered the opportunity to acquire shares of
common stock 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, 1998, 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 4,000,000 shares of common stock were available for grant
under the Plan as of December 31, 1998.
In 1998, 1997 and 1996, the Company issued 18,238, 14,777 and 13,144 shares
related to Stock Awards, respectively, which represented a portion of certain
employees bonuses. 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 $445,000 $394,361 and $289,000 at the date of
grant was recorded as compensation expense by the Company in 1998, 1997 and
1996, respectively.
In 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 tied to increases in funds from operations being met. The
fair market value of these Stock Awards of approximately $4.4 million as of the
date of grant was treated in 1996 as deferred compensation. The Company
amortized approximately $616,000, $1.6 million and $871,000 related to these
Stock Awards in 1998, 1997 and 1996, respectively.
In 1997, the Company awarded 77,750 Stock Awards to certain members of
senior management of the Company. These Stock Awards vest over three years and
are dependent upon certain performance benchmarks tied to total returns to
shareholders being met. The fair market value of these Stock Awards of
approximately $2.1 million as of the date of grant was treated in 1997 as
deferred compensation. The Company amortized approximately $519,000 and $1.0
million related to these performance units in 1998 and 1997 respectively.
In 1998, the Company awarded 233,500 Stock Awards to certain members of
senior management of the Company. These Stock Awards vest over five years and
are dependent upon certain performance benchmarks tied to total returns to
shareholders being met. The fair market value of these Stock Awards of
approximately $5.7 million as of the date of grant was treated in 1998 as
deferred compensation.
F-16
47
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - STOCK OPTION PLAN (CONTINUED)
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.
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 1998, 1997 and 1996, respectively: risk-free
interest rates of 5.7%, 6.3% and 6.6%; dividend yields of 5.8%, 5.5% and 6.4%;
volatility factors of the expected market price of the Company's common stock of
.23, .24 and .27; and a weighted-average expected life of the Options of 5
years. The fair value of the Stock Awards granted in 1996, 1997 and 1998 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.
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 Stock Awards is amortized to expense over
the same period. The pro forma effect of SFAS No. 123 on the Company's net
income for the years ended December 31, 1998, 1997 and 1996 was $225,000 ($0.01
per share), $0 ($0 per share), and $66,000 ($0 per share), respectively.
A summary of the Company's stock option activity, and related information
for the years ended December 31, 1998, 1997 and 1996 follows:
Weighted Average
Shares Subject Exercise Price Per
to Option Share
-------------- ------------------
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
Options granted 404,450 25.37
Options exercised (107,147) 18.82
Options canceled (57,462) 19.75
--------- -----------
Balance at December 31, 1997 1,690,493 19.91
Options granted 378,986 22.04
Options exercised (141,403) 18.07
Options canceled (28,697) 24.09
--------- -----------
Balance at December 31, 1998 1,899,379 $ 21.08
========= ===========
F-17
48
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - STOCK OPTION PLAN (CONTINUED)
As of December 31, 1998, 1997 and 1996, 1,075,091 shares, 1,755,532 shares
and 116,957 shares remained available for grant, respectively, and 1,269,982
shares 1,071,890 shares and 874,353 shares were exercisable, respectively.
Exercise prices for Options outstanding as of December 31, 1998 ranged from
$12.875 to $26.750, with the substantial majority of the exercise prices
exceeding $17.25. The remaining weighted-average contractual life of those
Options was 7.4 years.
NOTE 15 - 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. As of
December 31, 1998 and 1997, no Preferred Stock was issued by the Company.
NOTE 16 - 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 $256,000, $262,000, and $201,000 and for the years ended
December 31, 1998, 1997 and 1996, respectively. The Company's anticipated plan
contribution for the profit sharing component of the 401(k) Plan was
approximately $204,000 for the year ended December 31, 1998.
NOTE 17 - COMMITMENTS AND CONTINGENCIES
The 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 and tax thereon. 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. In connection with the hearing officer's decision,
in 1997 the residents were awarded costs of approximately $100,000 and the
Company rebated amounts overcharged since its acquisition of the Property in
August, 1994 of approximately $36,400. The Company believed its actual costs
exceeded the amount of the monthly readiness to serve charge and appealed the
hearing officer's decision. Also, in March 1997 the Company filed an application
with the California Public Utilities Commission ("PUC") requesting the PUC to
set cost based rates for water at this Property. In March 1997, the court of
appeals issued a writ of mandate requested by the Company ruling that the
hearing officer had improperly calculated the amount of the rebate, but was
correct when he found that the readiness to serve charge and tax thereon were an
inappropriate rent increase. The court of appeals further agreed with the
Company that the hearing officer did not have the authority to establish rates
that could be charged in the future. In December 1998, the PUC granted the
Company its certificate of convenience and necessity and approved cost based
rates and charges for water that exceed what residents were paying. The PUC also
issued an Order Instituting Investigation confirming its exclusive jurisdiction
over the issue of water rates in a submetered system and commencing an
investigation into the confusion and turmoil over billings in submetered
properties.
F-18
49
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Santa Cruz Homeowners Association ("HOA"), 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 of the readiness to serve
charge. After the court of appeals decision discussed above, the HOA brought all
of its members back into the underlying civil action for the purpose of
determining damages, including punitive damages, against the Company. A trial
was held before a jury in the Santa Cruz Superior Court commencing on January
11, 1999. On January 22, 1999, the jury returned a verdict awarding $6 million
of punitive damages against the Company. The Company is preparing to bond the
judgment pending appeal in accordance with California procedural rules which
require a bond equal to 150% of the amount of the judgment which will accrue
interest at the statutory rate of 10.0% per annum. The Company will appeal this
decision and due to the uncertainty of the ultimate outcome because of the
competing legal theories, the Company is unable to estimate the amount of loss,
if any, and therefore no adjustments have been made to the accompanying
financial statements. The HOA is also seeking to recover attorneys fees in
connection with the trial, including a multiplier of such fees which may result
in an attorneys fee award in the range of $700,000 to $900,000. This is in
addition to the $100,000 award referred to above. The Company will vigorously
oppose such award of attorney fees. The Company expects to incur $300,000 to
$500,000 in costs and expenses over the next 15 months in connection with this
appeal.
In a separate matter, 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 on-site waste
water treatment plant at one of the Company's 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 on-site waste water treatment
plant at another of the Company's properties. The Company and USEPA have reached
a tentative agreement to resolve the matter in which the operation of the
remaining waste water treatment plant would be subject to a consent decree that
would provide for fines and penalties in the event of future violations and the
Company would contribute monies to a supplemental environmental project and pay
a fine. The tentative agreement has not yet been reduced to writing and
therefore remains subject to change. The Company does not believe the impact of
the settlement will be material and the Company believes it has established
adequate reserves for any amounts that may be paid.
In another matter, in connection with the acquisition of the Ellenburg
Communities and pursuant to orders of the California Superior Court,
approximately $30 million of the amounts paid by the Company have been deposited
with the court appointed winding up agents (the "Winding Up Agents"). The
deposited amounts relate to claims (the "Karno Claims") of Norton S. Karno (and
related entities) who at various times has been a creditor, advisor, lawyer and
shareholder of certain of the entities related to the Ellenburg Communities. The
Winding Up Agents have disputed the claims and have filed a complaint against
Mr. Karno (and related entities) requesting that the court determine that the
claims be reduced or eliminated.
On October 30, 1998, the Company received notice of a lawsuit filed against
the Company and certain Executive Officers of the Company in the Los Angeles
Superior Court alleging, among other causes of action, that the Company breached
certain agreements in connection with the acquisition of the Ellenburg
Communities and claiming damages in excess of $50 million plus punitive damages.
Based upon jurisdictional issues, in February 1999 the claims against the
Executive Officers of the Company were dismissed. The Company believes most of
the claim relates to the disputed Karno Claims discussed above. The Company
believes the claims are without merit, intends to vigorously defend the
defendants in this matter and does not believe the impact of this matter will be
material.
In connection with the acquisition of the Ellenburg Communities, Mr. Karno
and others have appealed various court orders on which the Comany has relied.
The court of appeals has recently requested briefing on the issue of whether
certain appeals are moot. Mr. Karno has also sought before both the California
Superior Court and Court of Appeals to take control of ECC, but to date none of
his attempts have been successful.
The Company is involved in various other legal proceedings arising in the
ordinary course of business. All proceedings herein described or referred to,
taken together, are not expected to have a material adverse impact on the
Company.
F-19
50
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is unaudited quarterly data for 1998 and 1997 (amounts in
thousands, except for per share amounts):
First Second Third Fourth
Quarter Quarter Quarter Quarter
3/31 6/30 9/30 12/31
----------- ----------- ----------- -----------
1998
- --------------------------------------------
Total revenues.............................. $ 44,872 $ 47,894 $ 50,809 $ 51,254
=========== ============ =========== ===========
Income before allocation
to minority interests..................... $ 9,586 $ 9,066 $ 8,440 $ 8,570
=========== ============ =========== ===========
Net income.................................. $ 7,765 $ 7,343 $ 6,837 $ 6,984
=========== ============ =========== ===========
Weighted average common shares
outstanding-basic (excluding OP Units).... 24,805 25,659 25,988 26,033
=========== ============ =========== ===========
Weighted average common shares
outstanding - diluted
(including OP Units)................... 31,095 32,095 32,339 32,382
=========== ============ =========== ===========
Weighted average OP Units................... 5,886 6,020 5,985 5,981
=========== ============ =========== ===========
Net income per common share
outstanding - basic....................... $ .31 $ .29 $ .26 $ .27
=========== ============ =========== ===========
Net income per common share
outstanding - diluted..................... $ .31 $ .28 $ .26 $ .26
=========== ============ =========== ===========
1997
- --------------------------------------------
Total revenues.............................. $ 28,529 $ 29,385 $ 31,153 $ 34,443
=========== ============ =========== ===========
Income before allocation
to minority interests..................... $ 7,711 $ 8,051 $ 8,783 $ 8,368
=========== ============ =========== ===========
Net income.................................. $ 6,955 $ 7,253 $ 7,642 $ 6,795
=========== ============ =========== ===========
Weighted average common shares
outstanding-basic (excluding OP Units).... 24,840 24,715 24,575 24,628
=========== ============ =========== ===========
Weighted average common shares
outstanding - diluted
(including OP Units)................... 27,840 27,660 28,735 30,781
=========== ============ =========== ===========
Weighted average OP Units................... 2,715 2,715 3,798 5,734
=========== ============ =========== ===========
Net income per common share
outstanding - basic....................... $ .28 $ .29 $ .31 $ .28
=========== ============ =========== ===========
Net income per common share
outstanding - diluted..................... $ .28 $ .29 $ .31 $ .27
=========== ============ =========== ===========
51
SCHEDULE II
MANUFACTURED HOME COMMUNITIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1998
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING INCOME OTHER END OF
OF PERIOD ACCOUNTS DEDUCTIONS(1) PERIOD
----------- ----------- ---------- --------------- ------------
For the year ended December 31, 1996:
Allowance for doubtful accounts......... $200,000 $198,797 $ --- ($148,797) $250,000
For the year ended December 31, 1997:
Allowance for doubtful accounts......... $250,000 $150,985 $ --- ($150,985) $250,000
For the year ended December 31, 1998:
Allowance for doubtful accounts......... $250,000 $167,774 $ --- ($167,774) $250,000
(1) Deductions represent tenant receivables deemed uncollectible.
S-1
52
SCHEDULE III
MANUFACTURED HOME COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
(IN THOUSANDS)
Initial Cost to
Company
---------------------
Manufactured Home Depreciable
Communities Location Encumbrances Land Property
- ----------------------------------------------------------------------------------------
APOLLO VILLAGE Apollo AZ 0 932 3,219
BRENTWOOD MANOR Mesa AZ 4,928 1,998 6,024
CASA DEL SOL NO. 3 Glendale AZ 0 2,450 7,452
CASA DEL SOL RESORT NO. 1 Phoenix AZ 6,778 2,215 6,467
CASA DEL SOL RESORT NO. 2 Phoenix AZ 6,911 2,104 6,283
CENTRAL PARK Phoenix AZ 7,175 1,612 3,784
HACIENDA DE VALENCIA Mesa AZ 8,410 833 2,701
PALM SHADOWS Glendale AZ 3,362 1,400 4,218
SEDONA SHADOWS Sedona AZ 1,542 1,096 3,431
SUNRISE HEIGHTS Phoenix AZ 0 999 3,016
THE MARK Mesa AZ 0 1,354 4,660
THE MEADOWS Tempe AZ 9,394 2,614 7,887
CALIFORNIA HAWAIIAN San Jose CA 17,953 5,825 17,755
CONCORD CASCADE Pacheco CA 10,369 985 3,016
CONTEMPO MARIN San Rafael CA 16,128 4,779 16,379
CORALWOOD Modesto CA 0 0 5,047
DATE PALM Cathedral City CA 9,621 4,138 14,064
DE ANZA SANTA CRUZ ESTATES Santa Cruz CA 4,396 2,103 7,204
FOUR SEASONS Fresno CA 0 756 2,348
GARDEN WEST OFFICE PLAZA Monterey CA 0 535 1,702
LAMPLIGHTER VILLAGE Spring Valley CA 9,382 633 2,201
MONTE DEL LAGO Castroville CA 2,626 3,150 9,469
NICHOLSON PLAZA San Jose CA 0 0 4,512
QUAIL MEADOWS Riverbank CA 0 1,155 3,469
RANCHO VALLEY El Cajon CA 4,640 685 1,902
ROYAL OAKS Visalia CA 0 602 1,921
SAN JOSE I, II, III AND IV San Jose CA 0 0 17,616
SEA OAKS Los Osos CA 0 871 2,703
SUNSHADOW San Jose CA 0 0 5,707
CIMARRON Broomfield CO 8,077 863 2,790
GOLDEN TERRACE SOUTH Golden CO 2,400 750 2,265
GOLDEN TERRACE VILLAGE Golden CO 8,031 826 2,415
GOLDEN TERRACE WEST Golden CO 9,724 1,694 5,065
HILLCREST VILLAGE Aurora CO 15,458 1,912 5,202
HOLIDAY HILLS VILLAGE Denver CO 19,412 2,159 7,780
HOLIDAY VILLAGE, CO Colorado CO 6,256 567 1,759
Springs
PUEBLO GRANDE VILLAGE Pueblo CO 3,471 241 1,069
WOODLAND HILLS Thornton CO 0 1,928 4,408
MARINER'S COVE Millsboro DE 0 990 2,971
NASSAU PARK Lewes DE 0 1,536 4,609
WATERFORD Wilmington DE 0 5,250 16,202
ARROWHEAD VILLAGE Lantana FL 0 5,325 15,420
BAY INDIES Venice FL 23,830 10,483 31,559
BAY LAKE ESTATES Nokomis FL 2,078 990 3,390
Costs Capitalized
Subsequent to Gross Amount Carried
Acquisition at Close of
(Improvements) Period 12/31/98
--------------------- -------------------------------
Manufactured Home Depreciable Depreciable Accumulated Date of
Communities Land Property Land Property Total Depreciation Acquisition
- -----------------------------------------------------------------------------------------------------------------
APOLLO VILLAGE 0 268 932 3,487 4,419 500 1994
BRENTWOOD MANOR 0 172 1,998 6,196 8,194 1,192 1993
CASA DEL SOL NO. 3 0 0 2,450 7,452 9,902 124 1998
CASA DEL SOL RESORT NO. 1 0 85 2,215 6,552 8,767 378 1996
CASA DEL SOL RESORT NO. 2 0 72 2,104 6,355 8,459 355 1996
CENTRAL PARK 0 329 1,612 4,113 5,725 2,023 1983
HACIENDA DE VALENCIA 0 733 833 3,434 4,267 1,579 1984
PALM SHADOWS 0 203 1,400 4,421 5,821 847 1993
SEDONA SHADOWS 0 267 1,096 3,698 4,794 156 1997
SUNRISE HEIGHTS 0 147 999 3,163 4,162 517 1994
THE MARK 5 277 1,359 4,937 6,296 716 1994
THE MEADOWS 0 257 2,614 8,144 10,758 1,337 1994
CALIFORNIA HAWAIIAN 0 63 5,825 17,818 23,643 1,042 1997
CONCORD CASCADE 0 538 985 3,554 4,539 1,663 1983
CONTEMPO MARIN 8 801 4,787 17,180 21,967 2,453 1994
CORALWOOD 0 49 0 5,096 5,096 226 1997
DATE PALM -23 628 4,115 14,692 18,807 2,144 1994
DE ANZA SANTA CRUZ ESTATES 0 116 2,103 7,320 9,423 1,066 1994
FOUR SEASONS 0 27 756 2,375 3,131 106 1997
GARDEN WEST OFFICE PLAZA 0 5 535 1,707 2,242 75 1997
LAMPLIGHTER VILLAGE 0 479 633 2,680 3,313 1,274 1983
MONTE DEL LAGO 0 123 3,150 9,592 12,742 429 1997
NICHOLSON PLAZA 0 1 0 4,513 4,513 200 1997
QUAIL MEADOWS 0 0 1,155 3,469 4,624 88 1998
RANCHO VALLEY 0 308 685 2,210 2,895 1,064 1983
ROYAL OAKS 0 14 602 1,935 2,537 87 1997
SAN JOSE I, II, III AND IV 0 2229 0 19,845 19,845 842 1997
SEA OAKS 0 14 871 2,717 3,588 122 1997
SUNSHADOW 0 31 0 5,738 5,738 255 1997
CIMARRON 0 340 863 3,130 3,993 1,535 1983
GOLDEN TERRACE SOUTH 0 175 750 2,440 3,190 119 1997
GOLDEN TERRACE VILLAGE 0 163 826 2,578 3,404 1,221 1983
GOLDEN TERRACE WEST 0 571 1,694 5,636 7,330 2,172 1986
HILLCREST VILLAGE 289 1,494 2,201 6,696 8,897 3,035 1983
HOLIDAY HILLS VILLAGE 0 1,847 2,159 9,627 11,786 4,422 1983
HOLIDAY VILLAGE, CO 0 365 567 2,124 2,691 1,011 1983
PUEBLO GRANDE VILLAGE 0 293 241 1,362 1,603 668 1983
WOODLAND HILLS 0 1,863 1,928 6,271 8,199 1,034 1994
MARINER'S COVE 0 2,326 990 5,297 6,287 1,378 1987
NASSAU PARK 0 525 1,536 5,134 6,670 1,720 1988
WATERFORD 0 188 5,250 16,390 21,640 921 1996
ARROWHEAD VILLAGE 0 63 5,325 15,483 20,808 645 1997
BAY INDIES 0 403 10,483 31,962 42,445 5,277 1994
BAY LAKE ESTATES 0 205 990 3,595 4,585 543 1994
S-2
53
SCHEDULE III
MANUFACTURED HOME COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
DECEMBER 31, 1998
(IN THOUSANDS)
Initial Cost to
Company
----------------------
Manufactured Home Depreciable
Communities Location Encumbrances Land Property
- ----------------------------------------------------------------------------------------
BUCCANEER ESTATES N. Ft. Myers FL 7,567 4,207 14,410
BULOW VILLAGE Flagler Beach FL 1,220 3,633 949
COLONIES OF MARGATE Margate FL 12,476 5,890 20,211
COUNTRY PLACE VILLAGE New Port FL 4,002 663 0
Richey
EAST BAY OAKS Largo FL 6,666 1,240 3,322
ELDORADO VILLAGE Largo FL 4,570 778 2,341
FFEC-SIX N. Ft. Myers FL 0 401 3,608
HERITAGE VILLAGE Vero Beach FL 0 2,403 7,259
LAKE FAIRWAYS N. Ft. Myers FL 0 6,075 18,134
LAKE HAVEN Dunedin FL 8,062 1,135 4,047
LAKEWOOD VILLAGE Melbourne FL 0 1,863 5,627
MID-FLORIDA LAKES Leesburg FL 12,580 5,997 20,635
OAK BEND Ocala FL 0 850 2,572
PINE LAKES N. Ft. Myers FL 0 6,306 14,579
SHERWOOD FOREST RV Kissimmee FL 0 3,437 3,621
SPANISH OAKS Ocala FL 0 2,250 6,922
SUNSET OAKS Plant City FL 0 1,111 2,513
THE HERITAGE N. Ft. Myers FL 0 1,438 4,371
WINDMILL VILLAGE N. Ft. Myers FL 9,057 1,417 5,440
WINDMILL VILLAGE NORTH Sarasota FL 9,248 1,523 5,063
WINDMILL VILLAGE SOUTH Sarasota FL 5,556 1,106 3,162
HOLIDAY VILLAGE, IA Sioux City IA 0 313 3,744
GOLF VISTA ESTATES Monee IL 0 2,843 4,719
WILLOW LAKE ESTATES Elgin IL 12,146 6,136 21,033
BURNS HARBOR ESTATES Chesterton IN 0 916 2,909
CANDLELIGHT VILLAGE Columbus IN 0 1,513 4,538
OAKTREE VILLAGE Portage IN 6,084 0 0
BONNER SPRINGS Bonner Springs KS 0 343 1,041
CARRIAGE PARK Kansas City KS 0 309 938
QUIVIRA HILLS Kansas City KS 0 376 1,139
PHEASANT RIDGE Mount Airy MD 0 376 1,779
CAMELOT ACRES Burnsville MN 6,994 527 2,058
BRIARWOOD Brookline MO 0 423 1,282
DELLWOOD ESTATES Warrensburg MO 0 300 912
NORTH STAR VILLAGE Kansas City MO 0 451 1,365
CASA VILLAGE Billings MT 8,029 1,011 3,109
DEL REY Albuquerque NM 0 1,926 5,800
BONANZA VILLAGE Las Vegas NV 9,975 908 2,643
CABANA Las Vegas NV 0 2,648 7,989
FLAMINGO WEST Las Vegas NV 0 1,732 5,266
VILLA BOREGA Las Vegas NV 2,401 2,896 8,774
ROCKWOOD VILLAGE Tulsa OK 12 645 1,622
FALCON WOOD Eugene OR 0 1,112 3,426
QUAIL HOLLOW Fairview OR 0 0 3,249
SHADOWBROOK Clackamas OR 0 1,197 3,693
Costs Capitalized
Subsequent to Gross Amount Carried
Acquisition at Close of
(Improvements) Period 12/31/98
--------------------- -------------------------------
Manufactured Home Depreciable Depreciable Accumulated Date of
Communities Land Property Land Property Total Depreciation Acquisition
- -----------------------------------------------------------------------------------------------------------------
BUCCANEER ESTATES 0 423 4,207 14,833 19,040 2,164 1994
BULOW VILLAGE 4 2,264 3,637 3,213 6,850 311 1994
COLONIES OF MARGATE 0 397 5,890 20,608 26,498 3,003 1994
COUNTRY PLACE VILLAGE 18 5,496 681 5,496 6,177 1,411 1986
EAST BAY OAKS 0 312 1,240 3,634 4,874 1,812 1983
ELDORADO VILLAGE 0 255 778 2,596 3,374 1,285 1983
FFEC-SIX 0 111 401 3,719 4,120 509 1994
HERITAGE VILLAGE 0 139 2,403 7,398 9,801 1,150 1994
LAKE FAIRWAYS 0 322 6,075 18,456 24,531 2,575 1994
LAKE HAVEN 0 402 1,135 4,449 5,584 2,185 1983
LAKEWOOD VILLAGE 0 176 1,863 5,803 7,666 897 1994
MID-FLORIDA LAKES 0 914 5,997 21,549 27,546 3,117 1994
OAK BEND 0 303 850 2,875 3,725 505 1993
PINE LAKES 0 4,447 6,306 19,026 25,332 2,482 1994
SHERWOOD FOREST RV 0 0 3,437 3,621 7,058 71 1998
SPANISH OAKS 0 168 2,250 7,090 9,340 1,223 1993
SUNSET OAKS 0 0 1,111 2,513 3,624 21 1998
THE HERITAGE 0 1,470 1,438 5,841 7,279 949 1993
WINDMILL VILLAGE 0 684 1,417 6,124 7,541 2,926 1983
WINDMILL VILLAGE NORTH 0 444 1,523 5,507 7,030 2,707 1983
WINDMILL VILLAGE SOUTH 0 277 1,106 3,439 4,545 1,721 1983
HOLIDAY VILLAGE, IA 0 421 313 4,165 4,478 1,797 1986
GOLF VISTA ESTATES 0 1,132 2,843 5,851 8,694 321 1997
WILLOW LAKE ESTATES 2 457 6,138 21,490 27,628 3,107 1994
BURNS HARBOR ESTATES 0 788 916 3,697 4,613 684 1993
CANDLELIGHT VILLAGE 250 1,776 1,763 6,314 8,077 331 1996
OAKTREE VILLAGE 569 3,315 569 3,315 3,884 761 1987
BONNER SPRINGS 0 165 343 1,206 1,549 357 1989
CARRIAGE PARK 0 364 309 1,302 1,611 391 1989
QUIVIRA HILLS 0 110 376 1,249 1,625 386 1989
PHEASANT RIDGE 0 113 376 1,892 2,268 1,061 1988
CAMELOT ACRES 0 366 527 2,424 2,951 1,186 1983
BRIARWOOD 0 147 423 1,429 1,852 439 1989
DELLWOOD ESTATES 0 77 300 989 1,289 307 1989
NORTH STAR VILLAGE 0 191 451 1,556 2,007 480 1989
CASA VILLAGE 181 1,210 1,192 4,319 5,511 1,827 1983
DEL REY 0 429 1,926 6,229 8,155 1,191 1993
BONANZA VILLAGE 0 430 908 3,073 3,981 1,434 1983
CABANA 0 79 2,648 8,068 10,716 1,232 1994
FLAMINGO WEST 0 109 1,732 5,375 7,107 823 1994
VILLA BOREGA 0 77 2,896 8,851 11,747 395 1997
ROCKWOOD VILLAGE 0 237 645 1,859 2,504 909 1983
FALCON WOOD 0 10 1,112 3,436 4,548 154 1997
QUAIL HOLLOW 0 27 0 3,276 3,276 146 1997
SHADOWBROOK 0 95 1,197 3,788 4,985 167 1997
S-3
54
SCHEDULE III
MANUFACTURED HOME COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
DECEMBER 31, 1998
(IN THOUSANDS)
Initial Cost to
Company
---------------------
Manufactured Home Depreciable
Communities Location Encumbrances Land Property
- -----------------------------------------------------------------------------------------
GREEN ACRES LAND Breinigsville PA 0 273 0
GREEN ACRES PARK Breinigsville PA 15,994 2,407 7,479
ALL SEASONS Salt Lake City UT 0 510 1,623
WESTWOOD Farr West UT 0 1,346 4,179
MEADOWS OF CHANTILLY Chantilly VA 0 5,430 16,440
KLOSHE ILLAHEE Federal Way WA 3,293 2,408 7,286
INDEPENDENCE HILL Morgantown WV 0 299 898
ELLENBURG COMMUNITIES Various 64,649 73,150 278,306
COLLEGE HEIGHTS Various 67,640 21,137 64,753
MANAGEMENT BUSINESS Chicago IL 0 0 436
-----------------------------------------
$500,573 $270,922 $906,275
=========================================
Costs Capitalized
Subsequent to Gross Amount Carried
Acquisition at Close of
(Improvements) Period 12/31/98
-------------------- -------------------------------
Manufactured Home Depreciable Depreciable Accumulated Date of
Communities Land Property Land Property Total Depreciation Acquisition
- ----------------------------------------------------------------------------------------------------------------
GREEN ACRES LAND 0 947 273 947 1,220 90 1994
GREEN ACRES PARK 0 906 2,407 8,385 10,792 2,938 1988
ALL SEASONS 0 57 510 1,680 2,190 76 1997
WESTWOOD 0 396 1,346 4,575 5,921 201 1997
MEADOWS OF CHANTILLY 0 1,008 5,430 17,448 22,878 2,733 1994
KLOSHE ILLAHEE 0 33 2,408 7,319 9,727 326 1997
INDEPENDENCE HILL 0 153 299 1,051 1,350 317 1990
ELLENBURG COMMUNITIES 0 0 73,150 278,306 351,456 6,585 1998
COLLEGE HEIGHTS 0 0 21,137 64,753 85,890 893 1998
MANAGEMENT BUSINESS 0 5,245 0 5,681 5,681 2,391
--------------------------------------------------------------------------------
$1,303 $58,931 $272,225 $965,206 $1,237,431 $118,021
======================================================================
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 $9.9 million as of December 31, 1998.
(3) The aggregate cost of land and depreciable property for Federal income
tax purposes was approximately $1.1 billion, as of December 31, 1998.
(4) All properties were acquired, except for Country Place Village which
was constructed.
S-4
55
SCHEDULE III
MANUFACTURED HOME COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
DECEMBER 31, 1998
(IN THOUSANDS)
The changes in total real estate for the years ended December 31, 1998, 1997 and
1996 were as follows:
1998 1997 1996
---- ---- ----
Balance, beginning of year.... $ 936,318 $597,650 $543,229
Acquisitions.............. 286,880 332,272 46,531
Improvements.............. 14,566 6,643 8,062
Dispositions and other.... (333) (247) (172)
---------- -------- --------
Balance, end of year.......... $1,237,431 $936,318 $597,650
========== ======== ========
The changes in accumulated depreciation for the years ended December 31, 1998,
1997 and 1996 were as follows:
1998 1997 1996
---- ---- ----
Balance, beginning of year.... $ 89,208 $ 71,481 $ 56,403
Depreciation expense...... 29,146 17,974 15,250
Dispositions and other.... (333) (247) (172)
---------- -------- --------
Balance, end of year.......... $ 118,021 $ 89,208 $ 71,481
========== ======== ========
S-5