SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
________________
Form 10Q
___________
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended
March 31, 2003
Commission file number: 000-29778
Merry Land Properties, Inc.
| State of Incorporation: Georgia |
I.R.S.
Employer Identification Number: 58-2412761
|
________________
P.O. Box 1417
Augusta, Georgia
(Address of Principal Executive Offices)
| 706 722-6756 |
30903
|
| (Registrant’s Telephone |
(Zip
Code)
|
| Number, Including Area Code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months, and (2) has been subject to such filing requirements for the past ninety days: Yes X No____
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2): Yes____ No X
The number of shares of common stock outstanding as of March 14, 2003 was 2,756,763.
Form 10-Q - Merry Land Properties, Inc.
Index
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2003 and December 31, 2002 .........................3
Consolidated Statements of Income -
Three months ended March 31, 2003 and 2002...............................................4
Consolidated Statements of Cash Flows -
Three months ended March 31, 2003 and 2002...............................................5
Notes to Consolidated Financial Statements..................................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...............................................................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................18
Item 4 Controls and Procedures....................................................................19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.........................................................................20
Item 2. Changes in Securities and Use of Proceeds.................................................20
Item 3. Defaults upon Senior Securities...........................................................20
Item 4. Submission of Matters to a Vote of Security Holders.......................................20
Item 5. Other Information.........................................................................20
Item 6. Exhibits and Reports on Form 8-K..........................................................21
SIGNATURES..................................................................................................22
CERTIFICATIONS..............................................................................................23
Form 10-Q - Part I. Financial Information
Item 1-..Financial Statements
Merry Land Properties, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
Unaudited
March 31, 2003 December 31, 2002
-------------------------------------------
ASSETS
Real estate assets, at cost:
Land held for mining, development and sale $ 3,817,368 $ 4,185,624
Apartments 111,214,733 104,284,968
Commercial rental property 3,349,861 3,371,086
Furniture and equipment 2,014,624 2,009,367
Development in progress 2,640,316 8,152,440
-------------------------------------------
Total cost 123,036,902 122,003,485
Accumulated depreciation and depletion (20,241,627) (19,301,776)
-------------------------------------------
102,795,275 102,701,709
INVESTMENT IN JOINT VENTURE 1,492,859 1,539,930
CASH AND CASH EQUIVALENTS 2,256,995 2,984,334
ESCROWED CASH 1,196,708 1,748,261
OTHER ASSETS
Notes receivable 332,014 339,115
Deferred loan costs 1,258,325 1,281,098
Other receivable 411,946 398,795
Deferred tax asset 2,910,202 2,322,511
Other 776,972 275,183
-------------------------------------------
5,689,459 4,616,702
-------------------------------------------
TOTAL ASSETS $ 113,431,296 $113,590,936
===========================================
NOTES PAYABLE
Construction loans $ 27,596,281 $ 26,753,291
Mortgage loans 63,663,970 63,843,303
-------------------------------------------
91,260,251 90,596,594
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accrued interest 564,117 561,959
Accrued property taxes 421,550 414,066
Construction retainage 1,807,386 1,772,821
Payables and accrued liabilities 1,068,644 1,337,153
-------------------------------------------
3,861,697 4,085,999
COMMITMENT AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common stock, at $1 stated value 5,000,000 shares authorized,
2,756,763 and2,740,763 shares issued and outstanding at March
31, 2003 and December 31, 2002, respectively 2,756,763 2,740,763
Capital surplus 10,084,692 9,955,892
Unamortized compensation (1,608,940) (1,613,909)
Cumulative undistributed net earnings 7,215,985 8,186,230
Receivable from ESOP (139,152) (360,633)
-------------------------------------------
18,309,348 18,908,343
-------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'EQUITY $ 113,431,296 $113,590,936
===========================================
The accompanying notes are an integral part of these consolidated balance sheets.
Form 10-Q - Part I. Financial Information
Item 1- Financial Statements
Merry Land Properties, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended March 31,
-------------------------------------
INCOME 2003 2002
-------------------------------------
Rental income $ 3,990,420 $ 3,595,650
Royalty income 168,874 123,420
Interest income 12,203 14,052
Management fees 97,084 108,908
Development fees 114,450 100,000
Sale of condominium 295,000 -
Gain on sale of land 115,208 98,742
Other income 12,091 (7,399)
-------------------------------------
4,805,330 4,033,373
EXPENSES
Rental expense 1,652,751 1,213,870
Cost of condominium sold 360,230 -
Interest expense 1,542,970 1,246,082
Depreciation 964,458 626,253
Amortization 43,048 17,461
General and administrative expense 1,799,807 1,079,185
-------------------------------------
6,363,264 4,182,851
-------------------------------------
LOSS FROM CONTINUING OPERATIONS BEFORE TAXES (1,557,934) (149,478)
Income tax benefit (587,691) (56,756)
-------------------------------------
LOSS FROM CONTINUING OPERATIONS (970,243) (92,721)
DISCONTINUED OPERATIONS:
Gain from sale of apartments, net of $46,902 in income taxes - 76,622
Income from apartments sold, net of an income tax expense of $2,010,217 - 3,238,545
-------------------------------------
INCOME FROM DISCONTINUED OPERATIONS - 3,315,167
NET (LOSS) INCOME $ (970,243) $ 3,222,446
=====================================
WEIGHTED AVERAGE COMMON SHARES
Basic 2,426,262 2,349,806
Diluted 2,426,262 2,349,806
EARNINGS FROM CONTINUING OPERATIONS PER COMMON SHARE
Basic $ (0.40) $ (0.04)
Diluted $ (0.40) $ (0.04)
EARNINGS FROM DISCONTINUED OPERATIONS PER COMMON SHARE
Basic $ - $ 1.41
Diluted $ - $ 1.41
EARNINGS PER COMMON SHARE
Basic $ (0.40) $ 1.37
Diluted $ (0.40) $ 1.37
The accompanying notes are an integral part of these consolidated income statements.
Form 10-Q - Part I. Financial Information
Item 1- Financial Statements
Merry Land Properties, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended March 31,
------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 2003 2002
------------------------------------
Net (loss) income $ (970,243) $ 3,222,446
Adjustments to reconcile net (loss) income to net cash used in operations:
Income from discontinued operations, net of taxes - (3,315,167)
Deferred income tax benefit (587,691) (56,756)
Gain on sale real property and land (115,208) (98,742)
Cost of condominium sold 360,230 -
Depreciation and amortization expense 1,007,506 643,714
Amortization of compensation element of restricted stock grants 95,469 92,423
Decrease in net payables and liabilities (258,867) (403,464)
Increase in other assets and receivables (531,977) (801,353)
------------------------------------
Net cash used in operating activities (1,000,781) (716,900)
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for development (1,106,285) (3,513,323)
Sale of real property and land 183,725 102,600
Capitalized costs, improvements and replacements (321,312) (710,528)
Decrease in receivable from ESOP 221,481 72,721
Distributions from joint ventures 47,071 41,485
Payments received on notes receivable 7,101 10,421
------------------------------------
Net cash used in investing activities (968,219) (3,996,624)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from construction loans 842,990 1,950,754
(Repayment of) net proceeds from mortgage loans (179,333) 893,395
Decrease in escrows 578,004 312,373
------------------------------------
Net cash provided by financing activities 1,241,661 3,156,522
CASH FLOWS FROM DISCONTINUED OPERATIONS - 3,018,974
NET (DECREASE) INCREASE IN CASH (727,339) 1,461,972
CASH AT BEGINNING OF PERIOD $ 2,984,334 $ 3,601,636
====================================
CASH AT END OF PERIOD $ 2,256,995 $ 5,063,608
====================================
Interest paid: $ 1,636,809 $ 2,034,775
Income taxes paid: $ - $ -
Merry Land
Properties, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
1. Organization
Merry Land Properties, Inc. was formed on September 3, 1998, as a corporate subsidiary of Merry Land & Investment Company, Inc. On October 15, 1998, the common stock of Merry Land Properties was spun off to the common shareholders of Merry Land & Investment Company on the basis of one share of Merry Land Properties stock for every twenty shares of Merry Land & Investment Company.
2. Basis of Presentation and Summary of Significant Accounting Policies
The consolidated financial statements were prepared by Merry Land without audit, but in the opinion of management reflect all adjustments necessary (which adjustments are of a normal and recurring nature) for the fair presentation of its financial position as of March 31, 2003 and results of operations for the three month period ended March 31, 2003. Results of operations for the interim 2003 period are not necessarily indicative of results expected for the full year. Certain information and disclosures have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Merry Land believes that the disclosures herein are adequate to make the information presented not misleading.
These financial statements should be read in conjunction with the audited financial statements and notes included in the company’s latest annual report on Form 10-K for the fiscal year ended December 31, 2002.
In December 2002, SFAS 148, Accounting for Stock-Based Compensation – Transition and Disclosure, was issued which amends SFAS No. 123, Accounting for Stock-Based Compensation. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that Statement to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. This standard had no effect of the financial position and results of operations of the company.
3. Discontinued Operations
On March 12, 2002, Merry Land sold both Magnolia Villas and West Wind apartments, located in Savannah, for a total of $16.4 million, recognizing a pretax gain of $5.2 million. In December, 2002, Merry Land also sold Summit Place apartments, located in Charleston. As a result of these sales, the company’s financial statements have been prepared with these three communities’ results of operations, cash flows, and the gain from sale of the two apartments presented and shown as “discontinued operations”. All historical statements have been restated to conform to this presentation in accordance with SFAS No. 144.
Summarized financial information for the discontinued operations is as follows:
Three months ending
March 31, 2002
-------------------------
Rental income $ 955,420
Operating expenses (401,850)
Depreciation (78,499)
-------------------------
Operating income 475,071
Interest expense (346,144)
Amortization expense (5,402)
-------------------------
Net income before taxes 123,525
Income tax expense (46,902)
-------------------------
Net income after taxes $ 76,622
=========================
4. Earnings Per Share and Share Information
Basic earnings per common share is computed on the basis of the weighted average number of shares outstanding during each period excluding the unvested shares issued to employees under our Management Incentive Plan. Diluted earnings per share is computed giving effect to dilutive stock equivalents resulting from outstanding options and restricted stock using the treasury stock method. Since the company had a loss from continuing operations for the first three months in 2003 and 2002, all stock equivalents were antidilutive during these periods and have been excluded from weighted shares outstanding.
A reconciliation of the average outstanding shares used in the two calculations is as follows:
Three months ended March 31,
------------------------------------
2003 2002
---------------- ----------------
Weighted average shares outstanding-basic 2,426,262 2,349,806
Dilutive potential common shares (1) - -
---------------- ----------------
Weighted average shares outstanding-diluted 2,426,262 2,349,806
(1) Dilutive potential common shares not included because the company's continuing operations were in a loss position for both periods. The total potential common shares outstanding were 2,497,766 and 2,606,468 at March 31, 2002 and 2003, respectively.
5. Segment Information
The company has three reportable segments: Apartment Communities, Commercial Properties and Land, and Third Party Services. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Form 10-K of the year ended December 31, 2002. The following information has been presented in a presentation consistent to the information utilized by the chief decision makers in managing the company. The company measures performance for each segment based on segment income.
Commercial & Third Party
Three months ending March 31, 2003 Apartments Land Services Corporate Consolidated
----------------------------------------------------------------------------------------
Real estate rental revenue $ 3,861,320 $ 129,100 $ - $ - $ 3,990,420
Real estate expense (1,571,533) (81,218) - - (1,652,751)
Depreciation and amortization (877,453) (62,607) - (67,446) (1,007,506)
----------------------------------------------------------------------------------------
Income from real estate 1,412,334 (14,725) - (67,446) 1,330,163
Other income - 333,302 97,084 24,294 454,680
----------------------------------------------------------------------------------------
Segment income 1,412,334 318,577 97,084 (43,152) 1,784,843
Interest expense - - - (1,542,970) (1,542,970)
General and administrative (153,907) (194,881) (131,463) (1,319,556) (1,799,807)
----------------------------------------------------------------------------------------
Income before taxes 1,258,427 123,696 (34,379) (2,905,678) (1,557,934)
Income tax benefit - - - 587,691 587,691
----------------------------------------------------------------------------------------
Net income-continuing operations 1,258,427 123,696 (34,379) (2,317,987) (970,243)
Income-discontinued operations - - - - -
----------------------------------------------------------------------------------------
Net income $ 1,258,427 $ 123,696 $ (34,379) $(2,317,987) $ (970,243)
========================================================================================
Capital investments $ 294,686 $1,127,654 $ - $ 5,257 $ 1,427,597
========================================================================================
Total real estate assets $93,970,029 $8,711,116 $ - $ 114,130 $102,795,275
========================================================================================
Commercial & Third Party
Three months ending March 31, 2002 Apartments Land Services Corporate Consolidated
----------------------------------------------------------------------------------------
Real estate rental revenue $ 3,527,701 $ 67,949 $ - $ - $ 3,595,650
Real estate expense (1,143,738) (70,132) - - (1,213,870)
Depreciation and amortization (535,523) (52,127) - (56,064) (643,714)
----------------------------------------------------------------------------------------
Income from real estate 1,848,440 (54,310) - (56,064) 1,738,066
Other income - 322,162 108,908 6,653 437,723
----------------------------------------------------------------------------------------
Segment income 1,848,440 267,852 108,908 (49,411) 2,175,789
Interest expense - - - (1,246,082) (1,246,082)
General and administrative (286,076) (94,852) (185,580) (512,677) (1,079,185)
----------------------------------------------------------------------------------------
Income before taxes 1,562,364 173,000 (76,672) (1,808,170) (149,478)
Income tax benefit 5,723,833 - - 56,756 56,756
----------------------------------------------------------------------------------------
Net income-continuing operations 1,562,364 173,000 (76,672) (1,751,414) (92,721)
Income-discontinued operations 5,723,833 - - (2,408,665) 3,315,167
----------------------------------------------------------------------------------------
Net income $ 7,286,197 $ 173,000 $ (76,672) $(4,160,079) $ 3,222,446
========================================================================================
Capital investments $ 137,940 $3,291,905 $ - $ 202 $ 3,430,047
========================================================================================
6. Commitments and Contingencies
The company is party to various claims, legal actions, and complaints arising in the ordinary course of business. In the opinion of management, the disposition of these matters will not have a material adverse effect on the financial condition of the company.
The company is subject to the usual obligations associated with entering into contracts for the development and management of the routine conduct of its business.
On February 19, 2003, the company entered into an agreement to merge Merry Land Properties, Inc. into a subsidiary of Cornerstone Realty Income Trust, Inc., a New York Stock Exchange listed real estate investment trust (REIT) headquartered in Richmond, Virginia. Cornerstone will issue new securities to the holders of Merry Land’s common shares. The total value of the common stock to be received by Merry Land shareholders (including common stock receivable upon conversion) as of the date of the merger agreement was approximately $42 million to Merry Land shareholders and Cornerstone will assume approximately $94 million in debt and other liabilities. The transaction will be tax free to our shareholders and is expected to close in the second quarter 2003, subject to the approval of Merry Land’s shareholders and other customary closing conditions. The proposed transaction can be terminated at our option, if the closing price of Cornerstone’s common shares is below $6.50 per share for 10 of any 30 consecutive trading days prior to the consummation of the merger.
Merry Land shareholders will receive 1.818 Cornerstone common shares and 0.220 shares of Cornerstone non-dividend paying Series B Convertible Preferred Stock for each Merry Land share. The preferred stock will be convertible into 0.220 Cornerstone common shares upon the completion and lease up of our Merritt at Whitemarsh project in Savannah and in certain other circumstances.
In order to facilitate the merger transaction, a private company called Merry Land & Investment Company, LLC, has been formed by members of Merry Land’s management to buy the company’s non-apartment assets, which Cornerstone did not desire, and to continue development of apartment projects for Cornerstone.
On February 25, 2003, a plaintiff claiming to be a shareholder of Merry Land filed a purported class action against Merry Land and its directors in the Superior Court of Richmond County, Georgia, alleging that the directors breached their fiduciary duties to the shareholders by approving the proposed merger transaction with Cornerstone Realty Income Trust, Inc. and related transactions, including the sale by Merry Land of the non-apartment assets to Merry Land & Investment Company, LLC. The action seeks, among other things, an injunction barring the transactions and the payment of the plaintiff’s attorneys’ and experts’ fees. Merry Land and its directors believe the action is without merit and will vigorously defend against the action.
Form 10-Q - Part I. Financial Information
Item 2.
Merry Land
Properties, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Recent Events
On February 19, 2003, we entered into an agreement to merge Merry Land Properties, Inc. into a subsidiary of Cornerstone Realty Income Trust, Inc., a New York Stock Exchange listed real estate investment trust (REIT) headquartered in Richmond Virginia. The merger will integrate our portfolio of apartment properties with Cornerstone’s 81 apartment communities containing over 21,000 apartment units throughout the Southeast and Texas. The combined company will have total assets of over $1.1 billion.
For each share of Merry Land common stock, our shareholders will receive 1.818 Cornerstone common shares and 0.220 shares of Cornerstone non-dividend paying Series B Convertible Preferred Stock, which will be convertible into 0.220 Cornerstone common shares upon the completion and lease up of our Merritt at Whitemarsh project in Savannah and in certain other circumstances. The total value of the common stock (including the common stock to be received upon conversion of the preferred stock) as of the date of the merger agreement was approximately $15.00 per Merry Land common share, which represents a 65% premium over our previous forty-five day average share price of $9.17. The transaction will be a tax-free exchange to our shareholders.
To facilitate the merger transaction, a private company called Merry Land & Investment Company, LLC, has been formed by certain members of Merry Land’s management to buy the company’s non-apartment assets, which Cornerstone did not desire, and to continue development of apartment projects for Cornerstone. As a condition of the merger agreement, we have agreed to sell to this new company certain commercial real estate properties, development land and other unimproved real estate, including land subject to clay leases and former landfill sites, for aggregate consideration of $7.4 million, including assumed indebtedness, plus the new entity’s obligation to assume and indemnify us for certain existing and future liabilities (including environmental matters) related to these properties. The new entity’s principals are Tennent Houston, Mike Thompson, Dorrie Green and Fred Bolt.
The transactions were approved and recommended by an independent committee of Merry Land’s board of directors that consisted entirely of directors who will not be owners of the new company. The independent committee was advised by an independent financial advisor.
The proposed transaction can be terminated at our option, if the closing price of Cornerstone’s common shares is below $6.50 per share for 10 of any 30 consecutive trading days prior to the consummation of the merger. Upon completion of the merger, Tennent Houston will be added to Cornerstone’s Board of Directors. The company expects the transactions to close in the second quarter of 2003, subject to the approval of Merry Land’s shareholders and other customary closing conditions.
On February 25, 2003, a plaintiff claiming to be a shareholder of Merry Land filed a purported class action against Merry Land and its directors in the Superior Court of Richmond County, Georgia, alleging that the directors breached their fiduciary duties to the shareholders by approving the proposed merger transaction with Cornerstone and related transactions, including the sale by Merry Land of the non-apartment assets to Merry Land & Investment Company, LLC. The action seeks, among other things, an injunction barring the transactions and the payment of the plaintiff’s attorneys’ and experts’ fees. Merry Land and its directors believe the action is without merit and will vigorously defend against the action.
In connection with the proposed merger, Cornerstone filed a registration statement with the Securities and Exchange Commission that contains the prospectus of Cornerstone relating to the securities to be issued as consideration in the merger and the proxy statement of Merry Land relating to the special meeting at which the proposed merger will be considered and voted upon by Merry Land’s shareholders, as well as other relevant documents concerning the proposed merger. Investors and security holders are urged to read the proxy statement/prospectus, along with any other documents filed with the SEC because they contain important information. You can obtain a free copy of the registration statement, including the exhibits filed therewith, at the SEC’s website at www.sec.gov. In addition, you may obtain the proxy statement/prospectus and other documents filed with the SEC free of charge by requesting them from Cornerstone, in writing, at Cornerstone Realty Income Trust, Inc., Attention: Mark M. Murphy, 306 East Main Street, Richmond, Virginia 23219, or by telephone at (804) 643-1761; or from Merry Land, in writing, at Merry Land Properties, Inc., Attention: Dorrie E. Green, 209 Seventh Street, Suite 300, Augusta, Georgia 30901, or by telephone at (706) 722-6756.
Merry Land, its directors and executive officers have been deemed to be participants in the solicitation of proxies from Merry Land shareholders in favor of the proposed merger. A description of any interests that the directors and executive officers of Merry Land have in the transaction are available in the proxy statement/prospectus.
Apartments
At March 31, 2003 Merry Land owned or had an interest in 2,292 apartment units in ten communities. These communities are described in the following table.
Three months ended March 31,
----------------------------
Average Occupancy (1) Average Rental Rate (2)
--------------------- -----------------------
COMMUNITY Units 2003 2002 2003 2002
--------- ----- ---- ---- ---- ----
WHOLLY OWNED COMMUNITIES
------------------------
Quarterdeck 230 94% 97% $ 769 $ 782
Waters Edge 204 90% 98% 648 646
Merritt at James Island (3) 230 80% 39% 1,063 1,046
Windsor Place 224 96% 94% 649 655
--- --- --- ----- -----
Total-Charleston 888 90% 81% 787 750
Greentree 194 88% 96% 681 669
Hammocks at Long Point 308 88% 96% 868 898
Huntington 147 94% 98% 691 676
Marsh Cove 188 93% 96% 758 758
Merritt at Whitemarsh (3) 241 41% N/A 1,037 N/A
--- --- --- ----- -----
Total-Savannah 1,078 80% 96% 829 774
Total-Wholly Owned (4) 1,966 84% 89% $ 810 $ 763
JOINT VENTURE COMMUNITIES
-------------------------
Cypress Cove (5) 326 98% 95% $ 806 $ 789
--- --- --- ------ -----
Total-Joint Venture 326 98% 95% 806 789
Total-all 2,292 86% 90% $ 809 $ 767
(1) Represents the average physical occupancy at each month end for each period owned.
(2) Represents the weighted average monthly rent charged for occupied owned units and
rents asked for unoccupied owned units at March 31.
(3) Development communities under lease up.
(4) All wholly owned communities are "same store" with the exception of the two development communities under lease up.
(5) Merry Land holds a 10% equity interest in this apartment community.
At the end of April 2003 the 230 unit Merritt at James Island in Charleston was 85% occupied and the lease up should be completed this summer. At Merritt at Whitemarsh in Savannah all 241 apartment units have been placed in service, and 113 units, or 57%, have been leased.
In March 2002, the company sold West Wind, a 192 unit apartment community, and Magnolia Villas, a 144 unit apartment community, both located in Savannah. In December 2002, the company sold Summit Place, a 226 unit apartment community located in Charleston.
Results of Operations for the Three Months Ended March 31, 2003 and 2002
Rental Operations-All Apartments. The following table describes the operating performance of the wholly owned apartment communities that the company owned at March 31, 2003. (Dollars in thousands, except average monthly rent)
% Change from Three months ended March 31,
Change 2002 to 2003 2003 2002
---------------------------------------------------------
Rental income 9 % $ 333 $3,861 $3,528
Operating expenses 37 % 428 1,572 1,144
Depreciation 64 % 341 877 536
---------------------------------------------------------
Total expenses 36 % 769 2,449 2,160
Income from apartments (1) (24)% $(436) $1,412 $1,848
Average occupancy (2) N/A (5)% 84% 89%
Average monthly rent (3) 6 % $ 47 $ 810 $ 763
Expense ratio (4) N/A 8 % 41% 32%
(1) Income from apartments is total revenues less operating expenses and depreciation.
(2)
Represents the average physical occupancy at each month end for the period held.
(3)
Represents weighted average monthly rent charged for occupied units and rents asked for unoccupied units at March 31.
(4)
Represents total operating expenses divided by rental revenues.
Income from apartments was down $436 thousand, or 24%, for the first three months in 2003 with a revenue increase of $333 thousand, or 9%, an operating expense increase of $428 thousand, or 37%, and a depreciation expense increase of $341 thousand, or 64%.
Apartment income from Merritt at James Island was $75 thousand and $69 thousand for the first three months in 2003 and 2002, respectively. Rental income increased $293 thousand to $550 thousand in 2003 from $257 thousand in 2002 due to the addition of 118 units. Expenses increased $287 thousand to $475 thousand in 2003 from $189 thousand in 2002.
The loss from apartments from the Merritt at Whitemarsh, which was completed in the first quarter 2003, was $89 thousand for the first three months in 2003. In 2003, rental income and expenses were $256 thousand and $346 thousand, respectively. In 2002, Whitemarsh’s income from apartments was $15 thousand on rental income of $29 thousand and expenses of $14 thousand.
Rental Operations-Same Store Apartments. The following table compares the performance of the 1,491 units of our seven wholly owned residential communities which we owned for the first quarters of both 2003 and 2002. (“same store” results) (Dollars in thousands, except average monthly rent)
Three months ended March 31,
% Change from ----------------------------
Change 2002 to 2003 2003 2002
-------------------------------------------------------
Rental income (6)% $ (187) $3,055 $3,242
Personnel 14 % 42 335 293
Utilities 27 % 20 95 75
Operating 10 % 12 137 125
Maintenance and grounds 28 % 45 206 161
Taxes and insurance 6 % 22 385 363
Depreciation 2 % 10 470 460
-------------------------------------------------------
Total expenses 10 % 151 1,628 1,477
Income from apartments (1) (19)% $ (338) $1,427 $1,765
Average occupancy (2) N/A (4)% 92% 96%
Average monthly rent (3) (1)% $ (6) $ 734 $ 740
Expense ratio (4) N/A 7 % 38% 31%
(1)
Income from apartments is total revenues less operating expenses and depreciation.
(2)
Represents the average physical occupancy at each month end for the period held.
(3)
Represents weighted average monthly rent charged for occupied units and rents asked for unoccupied units at March 31.
(4)
Represents total operating expenses divided by rental revenues.
Same store income from apartments for the first quarter in 2003 was down 19% on a revenue decrease of 6% and an increase in expenses of 10%. Non depreciation expenses increased 14%. Overall occupancy at March 31, 2003 was 90.6%, down from 95.8% a year ago.
Income from apartments for the first quarter in 2003 in Charleston was down 22% on a revenue decrease of 4% and an increase in expenses of 16%. The decrease in revenue was primarily due to a 3% decrease in average occupancy and the increase in expenses was due to an increase in maintenance employees and maintenance costs.
Income from apartments for the first quarter in 2003 in Savannah was down 17% on a revenue decrease of 7% and an increase in expenses by 6%. The decrease in revenue was primarily due to a 5% decrease in average occupancy.
Like most of the country, our markets in Savannah and Charleston are suffering weak apartment demand as the struggling economy has slowed job growth and low interest rates have encouraged home ownership at the expense of apartment rentals. However, rental activity has picked up in recent weeks and we hope that this will continue as the economy begins to expand and as mortgage rates move up.
Rental Operations-Commercial. The company owns three commercial properties in the Augusta area. In 2002, we relocated our corporate offices from the Ellis Street office building to the newly renovated space in our Leonard building, also in downtown Augusta.
Rental revenue increased to $124 thousand in 2003 from $64 thousand in 2002 primarily due to the new lease on our Ellis Street building.
Land. We own 4,131 acres of unimproved land, of which 2,948 acres are subject to clay and sand mining leases. Land income, for the most part mineral royalties and mitigation credits, was $177 thousand and $113 thousand for the first three months in 2003 and 2002, respectively.
Property Management Fees. Management fee income decreased $12 thousand in the first three months of 2003 to $97 thousand from $109 thousand the same period in 2002. The total units managed were 1,254 at the end of the first quarter 2003, down 204 units from 1,458 units in 2002.
Development Fees. Development fee income was $114 thousand for the first quarter 2003, up from $100 thousand in 2002. All of the fee income in 2002 and $54 thousand of fee income in 2003 was from the Preserve at Godley Station Phase II, a third party development community, and $60 thousand of the fee income in 2003 was from the Merritt at Godley Station Phase I, a joint venture development community in which Merry Land has a 35% ownership interest. Merry Land also received $33 thousand in distributions in 2003 from the Merritt at Godley Station Phase I joint venture. Both of these developments are located in Savannah.
Sale of Land. In March 2003, we sold a 74 acre tract of land located in Lexington, South Carolina for $165 thousand, recognizing a pretax gain of $122 thousand. In January 2002, we sold a 5.7 acre tract of land from the Brickyard Tract in Augusta for $103 thousand, recognizing a pretax gain of $99 thousand.
Sale of Condominium. We have sold all of the seven condominium units at 214 Calhoun Street in Charleston; four units in 2001 and two units in 2002 and the final unit in March 2003. Total sales proceeds have been $3.0 million, and we have recognized cumulative pretax gains of $218 thousand. During the first quarter of 2003, we sold the remaining unit for $295 thousand, recognizing a pretax loss of $65 thousand.
Interest Expense. Total interest expense decreased $49 thousand to $1.5 million for the first three months in 2003, from $1.6 million in 2002. The $346 thousand decrease in mortgage interest expense resulting from the purchaser’s assumption of the West Wind, Magnolia Villas and Summit Place apartments’ mortgages in 2002 was mostly offset by the decrease in interest capitalized to development. (Dollars in thousands for the following table)
Three months ended March 31,
Change from ---------------------------------
2002 to 2003 2003 2002
---------------- -------------- --------------
Construction loans $ 55 $ 398 $ 343
Mortgage loans (11) 1,241 1,252
---------------- -------------- --------------
Total interest cost 44 1,639 1,595
Capitalized for development 253 (96) (349)
---------------- -------------- --------------
Interest expense-continuing operations 297 1,543 1,246
Mortgage loans-discontinued operations (346) - 346
---------------- -------------- --------------
Total interest expense $ (49) $ 1,543 $ 1,592
In 2002, the purchasers of West Wind, Magnolia Villa and Summit Place apartment communities assumed $20.6 million in mortgage debt.
Capitalized interest related to development decreased due to the completion of the Merritt at James Island and the Merritt at Whitemarsh communities.
General and Administrative Expenses. General and administrative expenses increased $721 thousand, or 67%, to $1.8 million for the first quarter 2003 due to the $662 thousand increase in the proposed merger costs and due to the increase in legal and audit fees.
Loss From Continuing Operations Before Taxes. The loss from continuing operations before taxes increased $1.4 million to a $1.6 million loss for the three month period in 2003 from a $150 thousand loss for 2002. The increase in loss was primarily due to the $721 thousand increase in general and administrative expense, the decrease in apartment income (net of rental, depreciation and interest expenses) from the “same store” communities and from the $406 thousand decrease in apartment income from both the Merritt at James Island and the Merritt at Whitemarsh development communities.
Income From Discontinued Operations. On March 12, 2002, Merry Land sold both Magnolia Villas and West Wind apartments, located in Savannah, for a total of $16.4 million, recognizing a pretax gain of $5.2 million. Their total cost was $13.1 million and they had a net book value of $10.9 million. In addition, the company sold Summit Place apartments in December 2002. The total net income after interest and income taxes for these three apartment communities was $77 thousand for the first three months in 2002.
Funds From Operations. For the first quarter of 2003 the (deficit) funds from operations totaled $(27) thousand down from $638 thousand in 2002. The reduction in FFO was due primarily to the sale of Magnolia Villas, West Wind and Summit Place apartments in 2002 and the increase in expenses related to the merger. (Dollars in thousands)
Three months ended March 31,
---------------------------------
2003 2002
------------- ------------
Loss from continuing operations $ (970) $ (93)
Add: depreciation of real estate owned 962 585
Add: tax benefit resulting from permanent difference in book and tax basis 52 52
Less: gain on sale of land, net of tax effect (71) (61)
------------- ------------
Funds from continuing operations (27) 483
Income from discontinued operations - 3,315
Add: depreciation of real estate owned - 79
Less: gain on sale of apartments, net of tax effect - (3,239)
------------- ------------
Funds from discontinued operations - 155
------------- ------------
Total funds from operations $ (27) $ 638
Weighted average common shares outstanding-
Basic 2,426 2,350
Diluted 2,426 2,350
The company believes that funds from operations are an important measure of its operating performance. Funds from operations do not represent cash flows from operations as defined by accounting principles generally accepted in the United States, GAAP, and should not be considered as an alternative to net income, or as an indicator of the company’s operating performance, or as a measure of the company’s liquidity. The company defines funds from operations as net income computed in accordance with GAAP, excluding non-recurring items and net realized gains (losses), plus depreciation of operating real estate.
Financial Structure. We use debt to finance most of our acquisitions and development activities and, as a result, are a highly leveraged company. At March 31, 2003 total debt equaled 83% of total capitalization at cost and 72% of total capitalization with equity valued at market. (2,756,763 shares outstanding at the March 31, 2003 closing price of $13.08 per share). (Dollars in thousands)
Equity at Equity at
Book % of Market % of
Value Total Value Total
-------------- ----------- --------------- ------------
Construction loan $ 63,664 59% $ 63,664 50%
Mortgage loans 27,596 25% 27,596 22%
-------------- ----------- --------------- ------------
Total debt 91,260 83% 91,260 72%
Common stock 18,720 17% 36,058 28%
-------------- ----------- --------------- ------------
Total capitalization $ 109,980 100% $ 127,318 100%
============== =========== =============== ============
Liquidity. We expect to meet our short-term liquidity requirements with working capital, cash provided by operating activities, lines of credit, construction loans, and the possible sale of land or other assets. Our primary short-term liquidity needs include operating expenses, capital improvements, purchase of land, the completion of the Merritt at Whitemarsh and the Merritt at James Island development communities, and the development of the Merritt at Central Park and Merritt at Godley Station apartment communities and the development of the First Ward property. Possible additional construction costs and a slower than projected lease up of the two development communities could have a negative impact on our short term cash requirements. In addition, a weak national economy might continue to affect cash generated by our stabilized communities.
We expect to meet our long-term liquidity requirements from a variety of sources including operating cash flow, additional mortgage loans and other borrowings, the possible sale of apartment communities and other assets and the issuance and sale of debt and equity securities in public and private markets. Our long term liquidity needs include the maturity of the mortgage and term loan debt and the financing of acquisitions and development.
Cash Flows. Cash and cash equivalents totaled $2.3 million at March 31, 2003, down $727 thousand from $3.0 million at December 31, 2002. Net cash used by continuing operations was $1.1 million and the company used an additional $321 thousand for capital improvements on existing properties and for renovating our new corporate office and used $263 thousand net of construction loans on the existing developments. We also received $275 thousand from the repayment various receivables and investments, $184 thousand from the sale of land and a net $399 from mortgage loans and escrow repayments.
Critical Accounting Policies
A critical accounting policy is one which is both important to the portrayal of a company’s financial condition and results and requires significant judgment or complex estimation processes. As Merry Land is in the business of developing, owning and managing apartment properties, our critical accounting policies relate to cost capitalization, depreciation and amortization, and impairment of long-lived assets.
We expense pre-development costs incurred on a potential project until it becomes probable that the project will go forward. After a project becomes probable, all subsequently incurred predevelopment costs are capitalized. If the decision is made to not commence development of a project that had been deemed probable, all previously capitalized predevelopment costs are expensed. Once development of the project commences, Merry Land capitalizes interest, real estate taxes, and certain internal personnel and associated costs directly related to the project under development and construction based on the portion of the project which remains under construction.
When a project is completed and placed in service, it is depreciated on a straight-line basis over its estimated useful life. Projects are depreciated over 5 to 50 years. As required by generally accepted accounting principles, Merry Land periodically evaluates its real estate assets to determine if there has been any impairment in their carrying values and records impairment losses if the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts or there are other indicators of impairment. Merry Land did not own any real estate assets that required an impairment charge in 2003.
Inflation. Substantially all of our leases are for terms of one year or less, which should enable us to replace existing leases with new leases at higher rental rates in times of rising prices. We believe that this would offset the effect of cost increases stemming from inflation.
Forward Looking Statements. This filing includes statements that are “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 regarding expectations with respect to market conditions, development projects, acquisitions, occupancy rates, capital requirements, sources of funds, expense levels, operating performance, and other matters. These assumptions and statements are subject to various factors, unknown risks and uncertainties, including general economic conditions, local market factors, delays and cost overruns in construction, completion and rent up of development communities, performance of consultants or other third parties, environmental concerns, and interest rates, any of which may cause actual results to differ from the company’s current expectations.
Form 10-Q - Part I. Financial Information
Item 3.
Merry Land Properties, Inc.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes to the company’s reported market risk since December 31, 2002.
Form 10-Q - Part I. Financial Information
Merry Land Properties, Inc.
Controls and Procedures
Within the 90 days prior to the filing of this report, the Company carried out an evaluation, under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer and with the participation of the Company’s management, including the of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company’s periodic Securities and Exchange Commission filings. No significant changes were made in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
Form 10-Q - Merry Land Properties, Inc.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On February 25, 2003, a plaintiff claiming to be a shareholder of Merry Land filed a purported class action against Merry Land and its directors in the Superior Court of Richmond County, Georgia, alleging that the directors breached their fiduciary duties to the shareholders by approving the proposed merger transaction with Cornerstone Realty Income Trust, Inc. and related transactions, including the sale by Merry Land of certain non-apartment assets to an entity formed by certain members of Merry Land’s management. The action seeks, among other things, an injunction barring the transactions and the payment of the plaintiff’s attorneys’ and experts’ fees. Merry Land and its directors believe the action is without merit and is vigorously defending against the action.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
(99.1) Certification of Periodic Financial Report
b.
Reports on Form 8-K. The registrant filed one report on Form 8-K during the first quarter of 2003, which was filed on
February 26, 2003 in regard to the proposed merger between Cornerstone Realty Income Trust and Merry Land
Properties, Inc.
Form 10-Q - Merry Land Properties, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MERRY LAND PROPERTIES, INC.
/s/ Dorrie E. Green
Dorrie E. Green
Senior Vice President and
Chief Financial Officer
May 14, 2003
Certifications
I, W. Tennent Houston, certify that:
- I have reviewed this quarterly report on Form 10-Q of Merry Land Properties, Inc.;
- Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
- Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, the results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
- The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a -- 14 and 15d -- 14) for the registrant and we have:
- designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
- evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
- presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
- The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors:
- all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
- any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
- The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| By: /s/ W. Tennent Houston | Date: May 14, 2003 |
| W.
Tennent Houston Chief Executive Officer |
I, Dorrie E. Green, certify that:
- I have reviewed this quarterly report on Form 10-Q of Merry Land Properties, Inc.;
- Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
- Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, the results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
- The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a -- 14 and 15d -- 14) for the registrant and we have:
- designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
- evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
- presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
- The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors:
- all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
- any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
- The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| By: /s/ Dorrie E. Green | Date: May 14, 2003 |
| Dorrie
E. Green Chief Financial Officer |