Back to GetFilings.com
Washington, D.C. 20549
_________________
FORM 10-K
_________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended
DECEMBER 31, 1998
Commission file number: 000-29778
---------------------
MERRY LAND PROPERTIES, INC.
P.O. Box 1417
Augusta, GA 30903
706-722-6756
State of Incorporation: Georgia I.R.S. Employer Identification Number:
58-2412761
Securities registered pursuant to Section 12(b)
of the Act: Name of Each Exchange
Title of Class on Which Registered
-------------- -----------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1 stated value
(Title of Class)
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 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 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 the voting and nonvoting common equity held by
non affiliates of the registrant on March 8, 1999: Common Stock, $1 stated
value-$9,905,441 (all shares other than those owned or controlled by officers,
directors, and 5% shareholders).
The number of shares of common stock outstanding as of March 8, 1999 was
2,595,300.
Documents incorporated by reference: The 1999 definitive proxy statement mailed
to shareholders for the annual meeting scheduled for April 15, 1999, is
incorporated by reference into Part III of this form 10-K.
TABLE OF CONTENTS
PAGE
PART I
Item 1 Business 3
Item 2 Properties 5
Item 3 Legal Proceedings 7
Item 4 Submission of Matters to a Vote of Security Holders 7
PART II
Item 5 Market for the Registrant's Common Stock
and Related Shareholders' Matters 8
Item 6 Selected Financial Data 9
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 8 Financial Statements and Supplementary Data 18
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 30
PART III
Item 10 Directors and Executive Officers of the Registrant 30
Item 11 Executive Compensation 30
Item 12 Security Ownership of Certain Beneficial Owners
and Management 30
Item 13 Certain Relationships and Related Transactions 30
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 31
PART I
Item 1--Business
THE COMPANY
Merry Land Properties, Inc. is a full service real estate company and
at December 31, 1998 had a total market capitalization of $52.7 million.
The Company is headquartered in Augusta, Georgia and maintains offices in
Atlanta and Savannah. Merry Land Properties owns five apartment communities
located in Savannah, Georgia, and Charleston, South Carolina, over 4,000
acres of clay land which produces significant royalties, and a number of
commercial properties, and other tracts of land suitable for sale or
development. The Company also provides third party property management and
development consulting services for others. (See Note 12 to the Financial
Statements in Item 8 for financial information about segments.)
OBJECTIVE
Merry Land's objective is to build shareholder value through active
involvement in the apartment business and other commercial real estate
activities-through the investment, development, rehabilitation and
management of properties for ourselves and for others. The Company expects
to operate primarily in the coastal areas of the Southeastern United States
where it and its predecessor, Merry Land & Investment Company, Inc., have
been active for over eighteen years. The Company believes these areas will
experience economic growth well above national and regional averages as the
baby boom generation approaches retirement age and tends to move in large
numbers, either seasonally or permanently, to resort areas. This in turn
will lead to higher job growth and stronger housing demand, creating
exceptional opportunities for well conceived and well managed real estate
projects.
ORGANIZATION
Merry Land Properties maintains a centralized and functionally organized
management structure, conducting all its corporate level activities (including
accounting, finance, general property management and acquisitions and
development) from its offices in Augusta. The Company also has satellite
offices in Savannah and Atlanta from which it provides property management and
development consulting services to third parties.
Most of the Company's employees are veterans of old Merry Land. The
Chief Executive Officer, Chief Operating Officer, and Chief Financial
Officer all held the same positions at the old company. They and other key
employees bring to the new Merry Land many years of experience in the
apartment business, giving the Company a high level of competence in the
fields of residential development, marketing, management, maintenance and
in other real estate related areas.
Each apartment community functions as an individual business unit
according to well developed policies and procedures. Each community is
operated by an on site Property Manager and staff who are extensively
trained by the Company in sales, management, accounting, maintenance and
other disciplines.
At December 31, 1998, the Company had a total of 140 employees. Of this
number, 125 work at its apartment communities, and 15 are employed at the
corporate offices. A significant portion of the compensation of on site
personnel is tied to achievement of community cash flow targets. All employees
have the opportunity to become shareholders through the Company's Employee
Stock Ownership Plan. Corporate level employees participate in the Company's
restricted stock grant plan, thus further aligning their interests with those
of the Company's shareholders. The Company is a Georgia corporation formed in
1998. It has its principal office at 624 Ellis Street, Augusta, Georgia 30901
and its telephone number is (706) 722-6756.
HISTORY
On October 15, 1998, the shares of Merry Land Properties, Inc., a
newly created subsidiary of Merry Land & Investment Company, Inc. were spun
out as a dividend to that firm's shareholders in conjunction with old Merry
Land's merger into Equity Residential Properties Trust. (See Management's
Discussion and Analysis of Financial Condition and Results of Operations).
The original Merry Land was one of the nation's leading apartment
companies. It owned and operated 135 communities with 35,000 apartment
units which it had acquired or developed throughout the Southeast and
Texas. Its common shares, with a market value in excess of a billion
dollars, were listed on the New York Stock Exchange. Its training,
maintenance, accounting and other operating systems were among the most
progressive in the industry.
FORWARD LOOKING STATEMENTS
This filing includes statements that are "forward looking statements"
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.
ACCOUNTING PREDECESSOR
Merry Land has operated only since October 15, 1998. Accordingly, only
the Consolidated Balance Sheet for December 31, 1998 is an actual financial
statement prepared for a real company. All other statements are those of an
"accounting predecessor" which have been constructed in accordance with the
rules of the Securities and Exchange Commission as described in the Notes
to the Financial Statements.
PART I
Item 2--Properties
APARTMENTS
COMMUNITIES. The Company owns five apartment communities containing
1,004 units in Savannah, Georgia and Charleston, South Carolina. They are
"garden apartments", in wood frame two and three-story buildings without
elevators, with individually metered electric and gas service and
individual heating and cooling systems. The Company's apartments are 32%
one bedroom units, 54% two bedroom units and 14% three bedroom units. The
units average 944 square feet in area, fifteen years of age, and are well
equipped with modern appliances and other conveniences. The communities are
generally heavily landscaped and offer extensive amenities. Most include
swimming pools, tennis courts, club rooms, exercise facilities and hot
tubs. Some of the Company's communities also offer racquetball courts,
saunas, alarm systems and other features.
RESIDENTS. Residents at the Company's apartments typically earn middle
and upper middle levels of incomes. They include young professionals, white
collar workers, medical personnel, teachers, members of the military, single
parents, single adults and young families. These residents are generally
"renters by choice" - who have the means to own homes but choose to live in
apartment communities because of their current employment, family or other
personal circumstances. The Company believes that demand for its apartments is
primarily dependent on the general economic strength of each market's economy
and its level of job creation and household formation, and to a lesser extent
to prevailing interest rate levels for home mortgage loans. There is a steady
turnover of leases at the Company's communities, allowing rents to be adjusted
upward as demand allows. Leases are generally for terms of from six to twelve
months. About two-thirds of the Company's units turn over each year, a rate the
Company believes is typical for higher end apartment communities.
MARKETS. Merry Land's apartment communities are located in the
Southern coastal cities of Savannah, Georgia and Charleston, South
Carolina. The Company believes that these cities will experience economic
growth well above national and regional averages as the baby boom
generation approaches retirement age and tends to move in large numbers,
either seasonally or permanently, to resort areas. Physical occupancy at
the Company's communities has been high over the last five years, averaging
95% or more in each of those years. This strong demand has produced a 3.6%
average annual increase in rental rates at the Company's apartment
communities during this period.
The following table describes the Company's apartment communities at
December 31, 1998.
Average Average Average Rent (2)
Date Cost(1) Cost Per Unit Size Per Unit Per Sq. Ft. Average
Name Location Built Units (In Thousands) Unit(1) (Sq.Ft.) 1998 1998 Occupancy
- ---- -------- ----- ----- -------------- -------- -------- -------- ----------- ---------
Greentree Savannah 1983 194 $7,476 $38,534 852 $600 $0.70 94%
Marsh Cove Savannah 1983 188 8,201 43,623 1,053 677 0.64 98
West Wind Savannah 1985 192 7,349 38,277 1,124 708 0.63 98
--- ------ ------- ----- ---- ----- --
574 23,026 40,155 1,009 661 0.66 97
Quarterdeck Charleston 1986 230 9,709 42,093 810 634 0.78 100
Waters Edge Charleston 1985 200 8,030 39,693 911 574 0.63 97
--- ------ ------- ----- ---- ----- ---
430 17,739 41,254 857 606 0.71 99
TOTALS 1,004 $40,765 $40,603 944 $638 $0.67 97%
(1) Represents the total acquisition cost of the property plus the capitalized
cost of the improvements made subsequent to acquisition.
(2) Represents the weighted average of rent charged for occupied units and rent
asked for unoccupied units at December 31, 1998.
(3) Represents average physical occupancy at each month end for 1998.
APARTMENT DEVELOPMENT SITES
The Company owns four land parcels containing a total of 84 acres with
a book value of $3.4 million and zoning to allow the development of
approximately 750 apartment units. The Company intends to commence
construction in 1999 of a 230 unit luxury apartment community on one land
parcel that is adjacent to the Quarterdeck apartment community, which is
owned by the Company. This property is located only minutes from
Charleston's historic downtown. Another parcel is also adjacent to an
existing apartment community owned by the Company, Waters Edge, and lies
along the Ashley River in the Summerville area of Charleston. The Company
is exploring the possibility of subdividing this tract and offering it for
sale as single family lots.
COMMERCIAL PROPERTIES
The Company owns six commercial properties in the Augusta area,
primarily small office buildings, including the Company's headquarters
building. Three buildings are located in the depressed downtown Augusta
rental market and are in varying stages of physical obsolescence. In
conjunction with the formulation of a new business plan for the Company and
the likely disposal of these assets, the Company wrote down the carrying
cost of several of these properties to their estimated value as determined
in the Company's formation and startup in late 1998. This produced a pretax
charge of $1.7 million. These properties, aggregating approximately
170,000 square feet, have a net book value of $2.3 million.
The Company owns six commercial land sites in Augusta, Jacksonville,
Miami, Savannah and Nashville containing 46 acres with a book value of $2.6
million. The Company intends to either sell or develop these properties.
LAND
The Company owns approximately 4,800 acres of unimproved land with a
book value of $1.3 million. Since 1981, brick manufacturer Boral Bricks,
Inc. has had a long term clay mining lease on 2,522 acres of the Company's
land. In 1997, Boral Bricks leased an additional 195 acres for clay
mining. The Company also leases 100 acres to another company for the
mining of sand and gravel, leases other tracts for agriculture and grows
timber on much of the remaining land. The Company expects that some of its
land eventually may be developed or sold for development by others.
PART I
Item 3--Legal Proceedings
None
Item 4--Submission of Matters to a Vote of Security Holders
None
PART II
Item 5--Market for the Registrant's Common Stock and Related Shareholders'
Matters
COMMON STOCK
The Company's shares began trading on the NASDAQ SmallCap Market
System under the symbol "MRYP" on October 16, 1998. For the partial fourth
quarter ended December 31, 1998, the high and low sales prices of the
Company's common shares were $6.00 and $3.44, respectively. On December 31,
1998, the closing sale price for the Common Stock was $3.63 and on March 8,
1999, the closing sale price was $6.50 per share.
At December 31, 1998, there were approximately 2,716 shareholders of
record. In addition, the Company estimates that an additional 11,200
shareholders hold their shares in "street name".
The Company did not pay any dividends to common shareholders in 1998.
At the present time, the Company's intention is to retain earnings to fund
future growth. The Preferred Stock, Senior Debt and Subordinated Debt
agreements contain provisions which could limit the payment of dividends by
the Company; however, these provisions do not currently limit the Company's
ability to pay dividends.
RECENT SALES OF UNREGISTERED SECURITIES. On October 15, 1998, in a
private transaction, the Company issued to Merry Land & Investment Company,
Inc. (the Company's parent corporation at the time) 2,151,315 shares of
common stock, 5,000 shares of Series A Redeemable Cumulative Preferred
Stock ($1,000 liquidation preference per share), $18,317,429 of senior
debt, and $20,000,000 of subordinated debt. The securities were issued in
exchange for five apartment communities, four apartment development sites,
five commercial properties, six commercial sites, 4,816 acres of
undeveloped land, and other assets, all received from Merry Land &
Investment Company, Inc. The securities were issued in a transaction exempt
from registration under Section 4(2) of the Securities Act of 1933.
Following the issuance of securities on October 15, 1998, the common stock
of Merry Land Properties was spun off to the common shareholders of Merry
Land & Investment Company, Inc.
PART II
Item 6--Selected Financial Data
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Company
and should be read in conjunction with the financial statements and notes
thereto incorporated by reference herein. The following amounts are in
thousands, except for information with respect to per share amounts and
apartment units.
Years Ended December 31*
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
OPERATING DATA
Income from operations:
Rental income $ 8,121 $ 7,774 $ 7,523 $ 7,260 $ 6,981
Royalty income 1,693 1,401 369 436 817
Management fees 149 - - - -
Development fees 515 - - - -
Rental expense, property taxes and ins. 3,449 3,022 2,912 2,849 2,765
Depreciation of real estate owned 1,291 1,284 1,213 1,191 1,103
--------- --------- --------- --------- ---------
5,738 4,869 3,767 3,656 3,930
Other income:
Interest income 137 84 70 72 89
--------- --------- --------- --------- ---------
137 84 70 72 89
Expenses:
Interest expense 694 - - - -
Depreciation-other 265 224 145 84 -
General & administrative 655 120 108 90 60
--------- --------- --------- --------- ---------
1,614 344 253 174 60
Income from continuing operations 4,261 4,609 3,584 3,554 3,959
Non recurring cost-impairment charge 1,666 - - - -
--------- --------- --------- --------- ---------
Income before taxes 2,595 4,609 3,584 3,554 3,959
Income tax benefit 462 - - - -
--------- --------- --------- --------- ---------
Net income $ 3,057 $ 4,609 $ 3,584 $ 3,554 $ 3,959
========= ========= ========= ========= =========
Weighted average common shares 2,113 1,923 1,796 1,668 1,322
Weighted average diluted common shares 2,129 1,946 1,834 1,704 1,349
Earnings per common share-basic $ 1.45 $ 2.40 $ 2.00 $ 2.13 $ 2.99
Earnings per common share-diluted $ 1.44 $ 2.37 $ 1.95 $ 2.09 $ 2.93
Common dividends paid $ - $ - $ - $ - $ -
BALANCE SHEET DATA
Real estate and other fixed assets $ 40,982 $ 42,596 $ 41,558 $ 42,508 $ 41,956
Cash and short term investments 3,995 - - - -
Other assets 9,766 1,412 726 751 783
--------- --------- --------- ---------- --------
Total assets $ 54,743 $ 44,008 $ 42,284 $ 43,259 $ 42,739
========= ========= ========= ========== ========
Debt $ 38,317 $ - $ - $ - $ -
Other liabilities 2,209 629 337 394 420
Preferred stock 5,000 - - - -
Investment by Merry Land &
Investment Company, Inc. - 43,379 41,947 42,865 42,739
Common stock and retained earnings 9,217 - - - -
--------- --------- --------- ---------- --------
Total liabilities and stockholders' equity $ 54,743 $ 44,008 $ 42,284 $ 43,259 $ 42,739
========= ========= ========= ========== ========
OTHER DATA
Apartment units owned 1,004 1,004 1,004 1,004 1,004
Apartment units managed 2,712 - - - -
* 1994 operating data, 1995 and 1994 balance sheet data and all other data
unaudited.
PART II
Item 7--Management's Discussion and Analysis of Financial Condition and
Results of Operations
Merry Land Properties, Inc, was formed on September 3, 1998, as a
corporate subsidiary of Merry Land & Investment Company, Inc. in connection
with a transaction in which Merry Land & Investment Company was merged into
Equity Residential Properties Trust on October 19, 1998. On October 15,
1998, prior to the merger, Merry Land & Investment Company contributed five
apartment communities, four apartment development sites, five commercial
properties, six commercial sites, 4,816 acres of undeveloped land, and
other assets to Merry Land Properties in exchange for 2,131,315 shares of
common stock, $5,000,000 of preferred stock, $18,317,429 of senior debt and
$20,000,000 of subordinated debt. 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. When the
merger transaction was completed Merry Land Properties began operating as
an independent public company and the senior debt, subordinated debt and
preferred stock were acquired by Equity Residential. Also in conjunction
with the merger Equity Residential made an additional capital contribution
of $2,400,000 to Merry Land Properties.
Merry Land has operated only since October 15, 1998. Accordingly,
only the Consolidated Balance Sheet for December 31, 1998 is an actual
financial statement prepared for a real company. All other statements are
those of an "accounting predecessor" which have been constructed in
accordance with the rules of the Securities and Exchange Commission as
described in the Notes to the Financial Statements.
RESULTS OF OPERATIONS
The results of operations for 1998 include the results of Merry Land
Properties, as it operated as an independent company for the period from
October 15, 1998 to December 31, 1998, combined with the constructed
results of the accounting predecessor to Merry Land Properties for the
period from January 1, 1998 to October 15, 1998. The operating results for
the years ended December 31, 1997 and 1996 are entirely those of the
accounting predecessor to Merry Land Properties.
RENTAL OPERATIONS-APARTMENTS. The Company owns five apartment
communities described in the following table:
Occupancy (1) Average Rent (2)
---------------------------------- -------------------------------
Community Units 1998 1997 1996 1998 1997 1996
- --------- ----- ---- ---- ---- ---- ---- ----
Quarterdeck 230 99.8% 99.5% 99.6% $634 $614 $589
Waters Edge 200 96.7 97.3 93.5 574 570 547
--- ---- ---- ---- ---- ---- ----
Total Charleston 430 98.4 98.5 96.8 606 593 569
Greentree 194 93.8 92.0 95.1 600 593 569
Marsh Cove 188 97.8 95.3 95.6 677 658 644
West Wind 192 97.9 98.1 98.3 708 679 660
--- ---- ---- ---- ---- ---- ----
Total Savannah 574 96.5 95.1 96.3 661 643 624
Total 1,004 97.3% 96.6% 96.5% $638 $624 $601
(1) Represents the average physical occupancy at each month end for the
period held.
(2) Represents weighted average monthly rent charged for
occupied units and rents asked for unoccupied units at
December 31.
The operating performance of the Company's apartment
communities is summarized in the following table (dollars in
thousands, except average monthly rent):
% Change from Twelve Months
CHANGE 1997 TO 1998 1998 1997 1996
------ ------------ ---- ---- ----
Rental income 3.9% $283.4 $7,638.7 $7,355.3 $7,145.1
Personnel 2.3 22.7 1,022.4 999.7 862.6
Utilities 1.9 5.3 277.9 272.6 314.4
Operating 39.6 106.6 375.9 269.3 238.3
Maintenance and grounds 33.4 178.4 711.8 533.4 556.7
Taxes and insurance 9.4 63.7 737.7 674.0 685.4
Depreciation and amortization (0.4) (4.6) 1,171.4 1,176.0 1,114.2
----- ----- -------- -------- --------
Subtotal 9.5 372.1 4,297.1 3,925.0 3,771.6
Operating income (2.6)% $(88.7) $3,341.6 $3,373.5
Average occupancy (1) - 0.7% 97.3% 96.6% 96.5%
Average monthly rent (2) 2.2% $ 14 $ 638 $ 624 $ 601
Expense ratio (3) - 2.9% 56.3% 53.4% 52.8%
(1) Represents the average physical occupancy at each month end for the period
held.
(2) Represents weighted average monthly rent charged for occupied units and
rents asked for unoccupied units at December 31.
(3) Represents total operating expenses divided by rental revenues.
For the twelve month period of 1998, rental income rose by $283.4 thousand,
or 3.9%, for the five apartment communities because of 2.2% higher rents and
0.7% higher occupancy over 1997. In the aggregate, the Charleston and Savannah
rental markets were strong in 1998 and 1997 as demand for apartments exceeded
additions to supply. The Company's apartments experienced 97.3% occupancy in
1998, which was 0.7% above 1997. Average rent increased 2.2%, from $624 on
December 31, 1997 to $638 on December 31, 1998. Charleston rents increased to
$606, or 2.2% and Savannah rents increased to $661, or 2.8%, during this
period. The Company believes that physical occupancy should remain satisfactory
despite substantial delivery of new units if general economic activity, job
growth and household formation along the southeastern coast remain strong.
Total expenses were up $372.1 thousand, or 9.5%, in 1998, from the same
period in 1997, due primarily to increases in operating, maintenance and
grounds, taxes and insurance expenses. Operating expenses increased by $106.6
thousand, or 39.6%, while maintenance expenses were up $178.4 thousand, or
33.4%, primarily due to completion of a major maintenance project to repair
deteriorated floor systems at Waters Edge community, which totaled $165.0
thousand. Real estate taxes and insurance were up $63.7 thousand, or 9.4%,
due to an overall increase in millage rates and higher insurance premiums.
In 1997 rental income rose by $210.2 thousand from 1996, or 2.9%,
because of higher rents. Occupancy was essentially flat for the twelve month
period of 1997 versus 1996. Total expenses were up $153.4 thousand, or 4.1%,
in 1997 from the same period in 1996. Personnel expenses were up $137.1
thousand, or 15.9%, due to higher salaries and higher bonuses. Utilities were
down $41.8 thousand, or 13.3%, largely due to the collection of water fees from
the residents. Operating expenses were up $31.0 thousand, or 13.0%, generally
due to increased marketing and advertising expenses.
RENTAL OPERATIONS-COMMERCIAL. The Company owns six commercial properties
in the Augusta area containing a total of 169,915 square feet and including
the office building were the Company's headquarters are located. Three buildings
containing approximately 75,000 square feet are located in the depressed
downtown Augusta rental market and are in varying stages of physical
obsolescence. Consequently, occupancy for all six commercial properties was
52.0% at December 31, 1998. The performance of the six commercial properties is
summarized in the following table (dollars in thousands):
% Change from Twelve Months
Change 1997 to 1998 1998 1997 1996
------ ------------ ---- ---- ----
Rental Income 21.8% $73.7 $411.9 $338.2 $304.1
Utilities 22.4% 17.4 95.1 77.7 76.1
Operating 64.5 2.0 5.1 3.1 5.9
Maintenance and grounds 19.5 13.8 84.7 70.9 60.8
Taxes and insurance 4.2 2.6 63.9 61.3 55.5
Depreciation and amortization (3.0) (9.9) 321.7 331.6 242.5
----- ------ ------ ------ ------
Subtotal 4.8 25.9 570.5 544.6 440.8
Operating income 23.1% $47.8 $(158.6) $(206.4) $(136.7)
In 1998, rental income rose by $73.7 thousand, or 21.8%, for commercial
properties because of increased occupancy. Total expenses were up $25.9
thousand, or 4.8%, in 1998 from the same period in 1997 primarily due to higher
utilities and maintenance expenses resulting from higher occupancy.
In 1997, rental income increased by $34.1 thousand, or 11.2%, for
commercial properties because of increased occupancy. Total expenses were up
$103.8 thousand, or 23.5%, in 1997 from 1996 generally due to higher occupancy
and higher depreciation expense related to capital improvements made in 1997
and 1996.
LAND. The Company owns approximately 4,800 acres of unimproved land, of
which 3,144 acres are subject to clay and sand mining leases and 180 acres are
zoned for apartment or commercial uses. The operating performance of the land
is summarized in the following table (dollars in thousands):
% Change from Twelve Months
Change 1997 to 1998 1998 1997 1996
------ ------------ ---- ---- ----
Clay royalties 23.4% $297.0 $1,564.7 $1,267.7 $238.8
Sand royalties (3.7) (5.0) 128.7 133.7 129.8
Rental income (13.4) (10.8) 70.0 80.8 73.8
------ ------- -------- -------- ------
Subtotal 19.0 281.2 1,763.4 1,482.2 442.4
Operating expense 925.0 25.9 28.7 2.8 0.0
Taxes and insurance (20.5) (11.8) 45.9 57.7 56.6
------ ------- -------- -------- ------
Subtotal (23.3) 14.1 74.6 60.5 56.6
Operating income 18.8 $267.1 $1,688.8 $1,421.7 $385.8
Clay royalties increased $297.0 thousand, or 23.4%, for the twelve month
period in 1998 compared to the same period in 1997 due to collections from a
royalty agreement executed in March 1997. For the twelve months in 1997, clay
royalties increased in comparison with 1996 also due to the March 1997 royalty
agreement. Because royalty payments under th agreement end in April 1999,
royalties in future periods are expected to be significantly lower.
MORTGAGE INTEREST INCOME. Interest income from mortgage notes receivable
totaled $106.3 thousand in the twelve month period of 1998, up from $83.8
thousand in the twelve month period of 1997 and $70.3 thousand in the twelve
month period of 1996. The increases were due to an additional note received for
$675.0 thousand from the sale of an apartment community in Augusta during
November 1997.
OTHER INTEREST INCOME. Other interest income was $30.3 thousand, all
earned on cash balances for the period October 15, 1998 to December 31, 1998.
PROPERTY MANAGEMENT AND DEVELOPMENT FEES. In 1998, management fee income
was $149.0 thousand and development fee income was $515.0 thousand, all of
which related to the period October 15, 1998 to December 31, 3998. These fees
were earned under agreements with Equity Residential whereby the Company
provides either property management or development consulting services for
twelve apartment communities. At December 31, 1998, approximately $2.0 million
remains to be earned under the development agreement. The Company has no
expectations of a continuing relationship with Equity Residential that would
produce further fees. The Company intends to seek other third party property
management and development consulting business, but there can be no assurance
that fees approaching current levels will be achieved.
INTEREST EXPENSE. The assets contributed to the Company by Merry Land &
Investment company were not encumbered by mortgage debt at any time during 1996
or 1997 or prior to the spin off in 1998. Therefore, the financial statements
for the accounting predecessor to Merry Land Properties for periods prior to
the spin off assume that there was no debt or related interest expense. In
October 1998 and in connection with the spin off, the Company received its
assets subject to $18.3 million of senior debt, $20.0 million of subordinated
debt, and $5.0 million of preferred stock. Interest expense related to these
obligations totaled $694.5 thousand for 1998, all accrued after the spin off
and included $81.1 thousand of dividends accrued on the Company's preferred
stock. During this period, the average rate on the senior debt was 7.8% and
the rate on the subordinated debt and preferred stock was 8.0%.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
totaled $516.1 thousand for the period of October 15, 1998 to December 31,
1998. For periods prior to October 15, 1998, management has estimated common
and corporate level expenses which might have been incurred on behalf of the
accounting predecessor to Merry Land Properties by Merry Land & Investment
Company in accordance with the rules and regulations of the Securities and
Exchange Commission applicablefor subsidiaries which have been spun off.
Management has allocated such expenses based on its best estimate under these
guidelines of time and effort that would have been expended for the benefit of
the accounting predecessor.
IMPAIRMENT CHARGE. In conjunction with the formulation of a new business
plan for the Company's commercial properties and the likely disposition of
these properties, the Company wrote down the carrying cost of several of these
assets to their estimated value as determined in the Company's formation and
startup. This produced a pretax charge of $1.7 million.
INCOME BEFORE TAXES. Income before taxes decreased to $2.6 million in
1998 from $4.6 million in 1997 and $3.6 million in 1996. As discussed in Note
1 to the financial statements, general and administrative expenses estimated
in the statements were considerably less prior to the spin off than after the
spin off and there was no interest expense assumed prior to the spin off. This
resulting decrease in income before taxes in 1998 primarily related to the
higher general and administrative expense of $490.8 thousand, higher interest
expense of $694.5 thousand, and the $1.7 million impairment charge. These
increases in expenses were somewhat offset by increases in mineral royalties
and fee incme from third party property management and development consulting.
Income increased by $1.3 million in 1997 largely due to an increase in mineral
royalties.
INCOME TAXES. As a REIT, the accounting predecessor to Merry Land
Properties would not have been subject to income taxes. A net income tax
benefit in 1998 related to the period October 15, 1998 to December 31, 1998
totaled $462.6 thousand, and consisted of $123.8 thousand in current income
tax expense and $586.4 thousand in deferred income tax benefit. The deferred
income tax benefit arose primarily from the impairment charge taken against
several of the Augusta commercial properties.
FUNDS FROM OPERATIONS. For the period that the Company operated as an
independent public entity from October 15, 1998 to December 31, 1998 funds
from operations were $680.1 thousand. The following is a reconciliation of
net income to funds from operations. (data in thousands):
October 15, 1998
to
December 31, 1998
-----------------
Net loss available for common $ (648.6)
Add depreciation of real estate owned 248.6
Add impairment charge 1,666.5
Less deferred tax benefit 586.4
----------------
Funds from operations available to common shares $ 680.1
================
Weighted average common shares outstanding--
Basic 2,181.1
Diluted 2,191.6
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 generally accepted accounting principles,
GAAP, and should not be considered as an alternative to net income, or as an
indicator of the Company's operating peformance, 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 costs and net
realized gains, plus depreciation of real property.
LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL STRUCTURE. At December 31, 1998, total debt equaled 73% of both
total capitalization at cost and total capitalization with equity valued at
market. At that date, the Company's financial structure was as follows (dollars
in thousands):
Equity
% of Market % of
Book Total Value Total
---- ----- ------ -----
Senior debt $18,317.4 35% $18,317.4 35%
Subordinated debt 20,000.0 38 20,000.0 38
--------- -- --------- --
Total debt 38,317.4 73 $38,317.4 73
Preferred stock 5,000.0 10 5,000.0 9
Common stock 9,216.7 17 9,416.4 18
--------- -- --------- --
Total capitalization $52,534.1 100% $52,733.8 100%
========= ==== ========= ====
The senior debt, subordinated debt, and preferred stock were issued in
connection with the merger and spin off. Before the spin off non of Merry
Land & Investment Company's debt or preferred stock were attributed to the
predecessor.
Borrowings of up to $25.0 million are available under the senior debt
agreement. The senior debt bears interest, payable quarterly, at the Company's
option either LIBOR plus 250 basis points or at prime plus 200 basis points,
and matures in October 2013. The dividend rate on the preferred stock is also
8.0% until October 2003, payable quarterly, and its mandatory redemption date
is October 2013. Beginning in October 2003, the interest rate on the
subordinated debt and the dividend rate on the preferred stock increase each
year until 2013.
LIQUIDITY. The Company expects to meet its short-term liquidity
requirements with its working capital, cash provided by operating activities,
construction loans, mortgage debt and a line of credit which it intends to
establish with a commercial bank. The Company's primary short-term liquidity
needs are operating expenses, capital improvements, the proposed development
of the Merritt James Island community, and the maturity of the senior debt.
The Company expects to meet its long-term liquidity requirements from a
variety of sources, including operating cash flow, additional borrowings, and
the issuance and sale of debt and equity securities in public and private
markets. The Company's long-term liquidity needs include the maturity of the
subordinated debt, redemption of the preferred stock, and financing
acquisitions and development.
CASH FLOWS. Before the merger and spin off in October 1998, under the
accounting rules for preparing financial statements of a company to be spun
off, all cash flow was assumed to be generated from operating activities and
distributed to the accounting predecessor of Merry Land Properties. Cash and
cash equivalents totaled $4.0 million on December 31, 1998 and were generated
from the merger and spin off, and from operating activities after the spin
off.
YEAR 2000 DISCLOSURE. The Company has evaluated the impact of the "Year
2000" issue on its business, results of operations, and financial condition
and has determined that the cost of any software and hardware upgrades is not
expected to be material. The cost to analyze and prepare for the Year 2000
issue has not been material and the Company does not anticipate the need for
a contingency plan. While there can be no assurances, the Company does not
currently expect the Year 2000 issue will have a material impact on the
Company's business, operations, or financial condition.
INFLATION. Substantially all of the Company's leases are for terms of
one year or less, which should enable the Company to replace existing leases
with new leases at higher rent rates in times of rising prices. The Company
believes 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.
Item 7A--Quantitative and Qualitative Disclosures about Market Risk.
The Company has variable rate debt and thus is exposed to the impact of
interest rate change. The variable rate debt matures in 1999 and bears
interest, payable quarterly, at LIBOR plus 250 basis points or prime plus 200
basis points. Additional borrowings of $6.7 million are available with $18.3
million currently outstanding. The Company intends to eliminate this exposure
to interest rate change by replacing this variable debt with fixed rate debt.
The Company does not enter contracts for trading purposes and does not
use leveraged instruments. None of the Company's notes receivable have variable
interest rates. The following table summarizes the Company's market risk
associated with notes payable and notes receivable as of December 31, 1998.
The table represents principal payments and the related weighted average
interest rates by expected year of maturity. The variable rate represents the
floating interest rate calculated at December 31, 1998.
Expected Fiscal Year of Maturity
---------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total Fair Market
---- ---- ---- ---- ---- ---------- ----- ------------
(In thousands)
Debt:
Fixed Rate $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $20,000.0 $20,000.0 $20,000.0
Avg. Interest Rate - - - - - 9.50% 9.50% 9.50%
Variable Rate $18,317.4 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $18,317.4 $18,317.4
Avg. Interest Rate 7.58% - - - - - 7.58%
Notes Receivable:
Fixed Rate $ 633.5 $51.1 $54.9 $54.1 $42.2 $ 506.5 $ 1,342.3 $ 1,342.3
Avg. Interest Rate 9.8% 7.3% 7.3% 7.1% 6.1% 6.1% 8.0%
Part II
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MERRY LAND PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Accounting
Predecessor
December 31, 1998 December 31, 1997
----------------- -----------------
ASSETS
Real estate assets, at cost:
Land held for mining, development and sale $ 7,255,130 $ 6,391,361
Apartments 40,765,214 40,377,348
Commercial rental property 2,622,024 5,220,096
Furniture and equipment 1,836,144 1,684,030
---------------- ---------------
Total cost 52,478,512 53,672,835
Accumulated depreciation and depletion (11,496,904) (11,076,536)
---------------- ---------------
CASH AND CASH EQUIVALENTS 3,995,365 -
OTHER ASSETS
Notes receivable 1,342,246 1,411,727
Other receivable 1,434,512 -
Deferred tax asset 6,909,857 -
Other 79,620 -
--------------- ---------------
TOTAL ASSETS $ 54,743,208 $ 44,008,026
=============== ===============
NOTES PAYABLE
Senior debt $ 18,317,429 $ -
Subordinated debt 20,000,000 -
--------------- ---------------
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accrued interest 444,553 -
Accrued income taxes 123,846 -
Accrued property taxes 309,936 244,627
Accrued dividends payable 81,111 -
Deferred revenue 771,627 330,696
Other 477,967 53,443
--------------- ---------------
2,209,040 628,766
PREFERRED STOCK 5,000,000 -
STOCKHOLDER'S EQUITY
Investment by Merry Land & Investment Company, Inc. - 43,379,260
Common stock, at $1 stated value, 2,597,633 shares
issued and outstanding 2,597,633 -
Capital surplus 9,121,985 -
Unamortized compensation (1,854,291) -
Cumulative undistributed net earnings (deficit) (648,588) -
--------------- ---------------
9,216,739 43,379,260
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 54,743,208 $ 44.008,026
=============== ===============
The accompanying notes are an integral part of these consolidated
balance sheets. Specific reference is made to Note 1 where the basis
of presentation for these statementsis described and the lack of
comparability between periods is discussed.
MERRY LAND PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31
-----------------------------------------------------
1998 1997 1996
---- ---- ----
INCOME
Rental income $ 8,120,569 $ 7,774,310 $ 7,522,965
Royalty income 1,693,489 1,401,363 368,644
Interest income 136,644 83,816 70,257
Management fees 148,958 - -
Development fees 515,016 - -
----------- ----------- -----------
10,614,676 9,259,489 7,961,866
EXPENSES
Rental expense 3,449,045 3,022,300 2,912,349
Interest expense 694,462 - -
Depreciation 1,556,457 1,507,721 1,356,831
Insurance 42,066 - -
General and administrative expense 611,335 120,480 108,432
Impairment charge 1,666,463 - -
----------- ---------- -----------
8,019,828 4,650,501 4,377,612
INCOME BEFORE TAXES 2,594,848 4,608,988 3,584,254
Income tax benefit 462,597 - -
----------- --------- -----------
NET INCOME $ 3,057,445 $ 4,608,988 $ 3,584,254
=========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
Basic 2,113,393 1,923,000 1,796,000
Diluted 2,129,479 1,946,000 1,834,000
EARNINGS PER COMMON SHARE
Basic $ 1.45 $ 2.40 $ 2.00
Diluted $ 1.44 $ 2.37 $ 1.95
The accompanying notes are an integral part of these consolidated statements.
Specific reference is made to Note 1 where the basis of presentation for these
statements is described and the lack of comparability between periods is
discussed.
MERRY LAND PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Cumulative
Undistributed Total
Investment Common Stock Capital Unamortized Net Earnings Stockholder's
By Parent Shares Amount Surplus Compensation Deficit Equity
--------- ------ ------ ------- ------------ ------------- -------------
BALANCE DECEMBER 31, 1995 $ 42,864,836 - $ - $ - $ - $ - $ 42,864,836
Net income 3,584,254 - - - - - 3,584,254
Net distributions (4,501,631) - - - - - (4,501,631)
------------ -------- --------- -------- ------------ ------------- ------------
BALANCE DECEMBER 31, 1996 $ 41,947,459 - - - - - 41,947,459
Net income 4,608,987 - - - - - 4,608,987
Net distributions (3,177,186) - - - - - (3,177,186)
------------ -------- --------- -------- ------------ ------------- -------------
BALANCE DECEMBER 31, 1997 $ 43,379,260 - - - - - $ 43,379,260
Net income prior to spin off- 3,706,033 - - - - - 3,706,033
Note 1
Net distrinbutions prior to spin off-
Note 1 (3,911,647) - - - - - (3,911,647)
Initial capitalization resulting from
the spin off-Note 1 (43,173,646) 2,151,315 2,151,315 5,152,926 - - (35,869,405)
Capital contribution in connection
with spin off-Note 1 - - - 2,400,000 - - 2,400,000
Issuance of restricted stock grants - 446,318 446,318 1,569,059 (2,015,377) - -
Amortization of stock grants - - - - 161,086 - 161,086
Net income(loss) subsequent to - - - - - (648,588) (648,588)
spin off ------------- --------- --------- --------- ---------- --------- -----------
BALANCE, DECEMBER 31, 1998 $ - 2,597,633 $2,597,633 $9,121,985 $(1,854,291) $(648,588) $ 9,216,739
============= ========= ========== ========== =========== ========= ===========
The accompanying notes are an integral part of these consolidated statements.
Specific reference is made to Note 1 where the basis of presentation for these
statements is described and the lack of comparability between periods is
discussed.
MERRY LAND PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
--------------------------------------------------
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,057,445 $ 4,608,987 $ 3,584,254
Adjustments to reconcilde net income to
Net cash provided by operating activities:
Depreciation expense 1,556,457 1,507,721 1,356,831
Impairment charge 1,666,463 - -
Deferred tax benefit (586,443) - -
Increase in property taxes payable 65,309 1,385 12,653
Increase in income taxes payable 123,846 - -
Increase in deferred credits 440,931 330,696 -
Increase in accrued interest 444,553 - -
Other 268,930 (40,000) (70,010)
------------ ------------ ------------
Net cash provided by operating activities 7,037,491 6,408,789 4,883,728
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments received on notes receivable 69,481 (685,416) 25,050
Investment in real estate assets (1,599,960) (2,546,187) (407,147)
------------ ------------ ------------
Net cash used in investing activities (1,530,479) (3,231,603) (382,097)
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions from Merry Land & Investment Co., Inc. 1,554,584 2,546,187 407,147
Other capital contributions 2,400,000 - -
Distributions to Merry Land & Investment Co., Inc. (5,466,231) (5,723,373) (4,908,778)
------------ ------------ ------------
Net cash used in financing activities (1,511,647) (3,177,186) (4,501,631)
NET INCREASE (DECREASE) IN CASH $ 3,995,365 - -
CASH AT BEGINNING OF PERIOD - - -
------------ ------------ ------------
CASH AT END OF PERIOD $ 3,995,365 $ - $ -
============ ============ ============
Interest paid $ 168,798 $ - $ -
Income taxes paid $ - $ - $ -
Non cash transactions:
Deferred tax asset from initial contribution $ 6,323,414 $ - $ -
Issuance of debt in initial capitalization $ 38,317,429 $ - $ -
Issuance of preferred stock in initial
capitalization $ 5,000,000 $ - $ -
The accompanying notes are an integral part of these consolidated statements.
Specific reference is made in Note 1 where the basis of presentation for these
statements is described and the lack of comparability between periods is
discussed.
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. in connection
with a transaction in which Merry Land & Investment Company was merged into
Equity Residential Properties Trust on October 19, 1998. On October 15, 1998,
prior to the merger, Merry Land & Investment Company contributed five
apartment communities, four apartment development sites, five commercial
properties, six commercial sites, 4,816 acres of undeveloped land, and other
assets to Merry Land Properties in exchange for 2,151,315 shares of common
stock, $5,000,000 of preferred stock, $18,317,429 of senior debt and
$20,000,000 of subordinated debt. 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. When the merger
transaction was completed Merry Land Properties began operating as an
independent public company and the senior debt, subordinated debt and
preferred stock were acquired by Equity Residential. Also, in conjunction
with the merger, Equity Residential made an additional capital contribution
of $2,400,00 to Merry Land Properties.
2. BASIS OF PRESENTATION
The financial statements for periods prior to the spin off include only
those assets and liabilities contributed by Merry Land & Investment Company
as described above. These financial statements have been prepared using
Merry Land & Investment Company's historical basis of the assets and
liabilities and the historical results of operations and have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission applicable for subsidiaries which have been spun off. These rules
stipulated that statements shall be prepared as if the entity had existed
prior to the existence of the new company. Such statements are not those of a
real entity, but describe a hypothetical "accounting predecessor" to Merry Land
Properties.
Management has estimated common and corporate level expenses which would
have been incurred on behalf of the accounting predecessor by Merry Land &
Investment Company and has allocated such expenses based on its best estimate
of the time and effort that would have been expended. Property management
costs have been estimated and allocated on a per unit basis. The assets
contributed to Merry Land Properties by Merry Land & Investment Company were
not encumbered by mortgage debt at any time prior to the spin off and the
financial statements for the accounting predecessor for periods prior to the
spin off do not include any debt or related interest expense.
Merry Land & Investment Company was qualified to be taxed as a real
estate investment trust and was not subject to federal income taxation on
distributed income. Accordingly, no provision for income tax is included in
the accompanying financial statements for periods prior to the spin off.
Amounts shown for periods and dates prior to the spin off assume lower
levels of general and administrative expenses than have actually been
incurred after the spin off and exclude any debt, interest expense or income
taxes. Accordingly, comparison of periods subsequent to the spin off with
periods prior to the spin off may be difficult and misleading.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary corporations. Any significant intercompany
transactions and accounts have been eliminated in consolidation.
RECOGNITION OF INCOME
The Company leases its apartment properties generally for terms of one
year or less. Rental income is recognized when earned. Commercial properties
are leased under operating leases. Rental income is recognized on a straight-
line basis over the terms of the respective leases. The Company recognizes
mineral royalty income both as clay and sand is mined and also on a straight-
line basis over the life of the related agreements depending on the terms of
the underlying leases. Property management and development consulting fee
income are recognized when earned.
REAL ESTATE ASSETS AND DEPRECIATION
Real estate assets are carried at depreciated cost except when it is
determined that the asset's carrying value may not be recoverable. Depreciation
of buildings and equipment is computed on the straight-line method for
financial reporting purposes using the following estimated useful lives:
Apartments...........................................40-50 years
Land improvements.......................................15 years
Commercial rental buildings..........................40-50 years
Furniture, fixtures, equipment and carpet............ 5-15 years
Operating equipment....................................3-5 years
Straight-line and accelerated methods are used for income tax reporting
purposes. Expenditures that extend the lives of assets are capitalized; other
repairs and maintenance are expensed.
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of", requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. In October, 1998
in conjunction with formulation of a new business plan for the Company's
commercial properties the Company recorded an impairment charge of
approximately $1.7 million related to the likely disposal of several commercial
properties in Augusta, Georgia. This charge reduces the Company's carrying
value in the properties to the estimated fair value, less selling costs.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, all investments purchased
with an original maturity of three months or less are considered to be cash
equivalents.
INCOME TAXES
In conjunction with the spin off the Company, a taxable "C" corporation,
began accounting for income taxes under SFAS 109 "Accounting for Income
Taxes". Deferred income tax assets and liabilities are determined based upon
differences between financial reporting and tax bases of assets and
liabilities and are measured using the tax rates and regulations that may be
in effect when the differences are expected to reverse.
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 the Company's 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.
For periods prior to the spin off, earnings per share have been computed
giving effect to the distribution ratio of one share of Merry Land Properties
for every twenty common shares of Merry Land & Investment Company. Accordingly,
weighted average common shares outstanding for the accounting predecessor
have been assumed to be 1/20 of the shares outstanding of Merry Land &
Investment Company for the periods prior to the spin off. For the periods
prior to the spin off, dilutive earnings per share are calculated giving
effect to dilutive options of Merry Land & Investment company using the same
ratio.
A reconciliation of the average outstanding shares used in the two
calculations is as follows:
1998 1997 1996
---- ---- ----
Weighted average shares outstanding - basic 2,113,393 1,923,000 1,796,000
Dilutive potential common shares 16,086 23,000 38,000
--------- --------- ---------
Weighted average shares outstanding - diluted 2,129,479 1,946,000 1,834,000
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect both the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.
4. NOTES RECEIVABLE
At December 31, 1998 and 1997, notes receivable consisted of the
following:
Original Note Balances
Note Rate Due Amount 1998 1997
- ---- ---- --- -------- ---- ----
Augusta Partners 10.00% 10/99 $ 695,000 $ 573,566 $ 588,573
Brothersville 6.00% 11/12 675,000 636,512 672,791
Brothersville 10.00% 9/02 327,600 74,717 90,363
New Zion 7.00% 11/12 60,000 57,451 60,000
---------- ---------- ----------
$1,757,600 $1,342,246 $1,411,727
5. DEBT
At December 31, 1998, debt consisted of the following:
Debt Maturity Date Interest Rate Balance
- ---- ------------- ------------- -------
Senior debt (a) October 19, 1999 (a) $18,317,429
Subordinated debt (b) October 19, 2013 (b) 20,000,000
-----------
Total $38,317,429
(a) Senior debt. Borrowing of up to $25,000,000 are available under the
senior debt agreement, therefore, an additional $6,682,571 is available for
future draws. The Senior debt bears interest, payable quarterly, at the
Company's option either LIBOR plus 250 basis points or prime plus 200 basis
points. At December 31, 1998, the interest rate was 7.6%
(b) Subordinated debt. The Subordinated debt has a fifteen-year term,
maturing on October 19, 2013. Interest is payable quarterly and accrues at
the following rates:
Until October, 19, 2003 8.00% Oct. 20, 2008-Oct. 19, 2009 9.75%
Oct. 20, 2003-Oct. 19, 2004 8.25% Oct. 20, 2009-Oct. 19, 2010 10.50%
Oct. 20, 2004-Oct. 19, 2005 8.50% Oct. 20, 2010-Oct. 19, 2011 11.50%
Oct. 20, 2005-Oct. 19, 2006 8.75% Oct. 20, 2011-Oct. 19, 2012 12.75%
Oct. 20, 2006-Oct. 19, 2007 9.00% Oct. 20, 2012-Oct. 19, 2013 14.25%
Oct. 20, 2007-Oct. 19, 2008 9.25%
The senior debt and subordinated debt agreements contain covenants
restricting the amount of debt which can be incurred by the Company.
6. MANAGEMENT INCENTIVE PLAN
In October, 1998, the shareholders of Merry Land Properties approved the
1998 Management Incentive Plan. In October 1998, fifteen employees, including
the Company's three executive officers, received restricted stock grants for
a total of 446,318 shares of the Company's common stock. The common stock
received under the restricted stock grants vest in fifteen equal annual
installments beginning on the date granted and are forfeitable in the event
the employee terminates service prior to vesting. At December 31, 1998, there
were an additional 53,682 common shares available for grant.
7. EMPLOYEE STOCK OWNERSHIP PLAN
In October, 1998, Merry Land Properties adopted and assumed Merry Land &
Investment Company's Employee Stock Ownership Plan. All costs and expenses
resulting from the assumption of sponsorship of the ESOP by the Company and
certain allocations to accounts of the ESOP participants will be shared by
the Company and Equity Residential Properties Trust based on the ratio of
employees' allocations on October 19, 1998.
Under the plan the Company makes annual contributions to a trust for
the benefit of eligible employees in the form of either cash or common
shares of the Company. The amount of the annual contribution is made at the
discretion of the Board of Directors.
8. PREFERRED STOCK
On October 15, 1998, the Company issued $5,000,000 of Preferred Stock
(5,000 shares with a liquidation preference of $1,000 per share). The
preferred stock agreement contains covenants restricting the amount of debt
which can be incurred by the company. The Preferred Stock must be redeemed
no later than October 19, 2013 and has a dividend rate as follows:
Until Oct. 19, 2003 8.00% Oct. 20, 2008-Oct. 19, 2009 9.75%
Oct. 20, 2003-Oct. 19, 2004 8.25% Oct. 20, 2009-Oct. 19, 2010 10.75%
Oct. 20, 2004-Oct. 19, 2005 8.50% Oct. 20, 2010-Oct. 19, 2011 11.50%
Oct. 20, 2005-Oct. 19, 2006 8.75% Oct. 20, 2011-Oct. 19, 2012 12.75%
Oct. 20, 2006-Oct. 19, 2007 9.00% Oct. 20, 2012-Oct. 19, 2013 14.25%
Oct. 20, 2007-Oct. 19, 2008 9.25%
For the period from October 15, 1998 to December 31, 1998, the Company
accrued preferred stock dividends of $81,111, which were paid in January
1999.
9. COMMON DIVIDENDS
The Company did not pay any dividends to common shareholders in 1998.
10. INCOME TAXES
As discussed in Note 1, the Company is a taxable "C" corporation. It is
assumed that the accounting predecessor distributed sufficient taxable income
to shareholders in the form of dividends to qualify as a REIT, and so no
income taxes were provided for in periods prior to the spin off.
The components of the income tax provision (benefit) are as follows:
Jan. 1, 1998
to
Dec. 31, 1998
-------------
Current federal tax $ 104,271
Current state tax 19,575
Deferred federal tax (493,749)
Deferred state tax (92,694)
-------------
The reconciliation of income tax computed at the U.S. federal statutory
rate to income tax expense for the full year of 1998 is as follows:
% of pretax
$ Amount income
-------- -----------
Income tax expense at statutory rate $ 882,248 34.0%
Increases (reductions) in taxes resulting from:
Benefit from non taxable income under REIT status (1,261,051) (48.6)%
State and local income taxes, net of federal income
tax benefit (48,258) (1.9)%
Royalty income not taxable (64,964) (2.5)%
Dividends not deductible 27,578 1.1%
Other 1,850 0.1%
---------- ------
$ (462,597) (17.8%)
Significant components of the Company's net deferred income taxes are as
follows:
Deferred tax asset: December 31, 1998
- ------------------- -----------------
Excess of tax basis of assets over
Book basis of assets $ 6,956,003
Other (46,146)
-----------------
Total deferred tax asset $ 6,909,857
SFAS 109 requires a valuation allowance be provided to reduce the amount
of the deferred tax assets if, it is more likely than not that some portion
or all of the deferred tax assets will not be realized. Management has
determined that no valuation allowance at December 31, 1998 is required.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
Management estimates that the carrying value of cash and cash equivalents,
notes receivable and notes payable approximate their fair values when compared
to instruments of similar type, maturity and terms.
12. SEGMENT INFORMATION
The Company has four reportable segments: Apartment Communities,
Commercial Properties, Land and Third Party Services. The accounting policies
of the segments are the same as those described in the summary of significant
accounting policies.
Third Party
December 31, 1998 Apartments Commercial Land Services Corporate Consolidated
- ----------------- ---------- ---------- ---- ----------- --------- ------------
Real estate rental revenue $ 7,638,710 $ 411,885 $ 69,973 $ - $ - $ 8,120,568
Real estate expense 3,125,712 248,774 74,559 - - 3,449,045
Depreciation and amortization 1,171,433 321,659 - - 63,365 1,556,457
Impairment charge - 1,666,463 - - - 1,666,463
------------ ----------- ---------- ----------- ---------- ------------
Income from real estate 3,341,565 (1,825,011) (4,586) - (63,365) 1,448,603
Other income - - 1,693,489 663,974 136,644 2,494,107
Segment income 3,341,565 (1,825,011) 1,688,903 663,974 73,279 3,942,710
------------ ----------- ---------- ----------- ----------- ------------
Interest expense - - - - (694,462) (694,462)
Insurance expense - - - - (42,066) (42,066)
General and administrative - - - (194,619) (416,715) (611,334)
Income before taxes 3,341,565 (1,825,011) 1,688,903 469,355 (1,079,964) 2,594,848
============ =========== ========= =========== ========== ============
Income tax benefit - - - - (462,597) (462,597)
Net income $ 3,341,565 $(1,825,011) $1,688,903 $ 469,355 $ (617,367) $ 3,057,445
============ =========== ========== =========== ========== ============
Capital investments $ 387,865 $ 205,175 $ 834,244 $ - $ 172,676 $ 1,599,960
============ =========== ========== =========== ========== ============
Total real estate assets $ 30,664,309 $ 2,319,489 $7,225,605 $ - $ 772,205 $ 40,981,608
============ =========== ========== =========== ========== ============
December 31, 1997
Real estate rental revenue $ 7,355,313 338,209 80,788 - - 7,774,310
Real estate expense 2,749,001 212,883 60,416 - - 3,022,300
Depreciation and amortization 1,176,016 331,705 - - - 1,507,721
Income from real estate 3,430,296 (206,379) 20,372 - - 3,244,289
Other income - - 1,401,363 - 83,816 1,485,179
Segment income 3,430,296 (206,379) 1,421,735 - 83,816 4,729,468
------------ ----------- ---------- ----------- ---------- ------------
General and administrative - - - - (120,480) (120,480)
Net income $ 3,430,296 $ (206,379) $1,421,735 $ - $ (36,664) $ 4,608,988
============ =========== ========== =========== ========== ============
Capital investments $ 750,683 $ 175,417 $1,085,211 $ - $ 534,876 $ 2,546,187
============ =========== ========== =========== ==========
Total real estate assets $ 31,447,876 $ 3,884,674 $6,391,361 $ - $ 872,388 $ 42,596,299
============ =========== ========== =========== ========== ============
December 31, 1996
Real estate rental revenue $ 7,145,051 $ 304,109 $ 73,805 - - 7,522,965
Real estate expense 2,657,449 198,225 56,675 - - 2,912,349
Depreciation and amortization 1,114,207 242,624 - - - 1,356,831
------------ ----------- ---------- ----------- ---------- ------------
Income from real estate 3,373,395 (136,740) 17,130 - - 3,253,785
Other income - - 368,644 - 70,257 438,901
Segment income 3,373,395 (136,740) 385,774 - 70,257 3,692,686
------------ ----------- ---------- ----------- ---------- ------------
General and administrative - - - - (108,432) (108,432)
Net income $ 3,373,395 $ (136,740) $ 385,774 $ - $ (38,175) $ 3,584,254
============ =========== ========== =========== ========== ============
Capital investments $ 408,565 $ 461,808 $ (674,409) $ - $ 211,183 $ 407,147
============ =========== ========== =========== ========== ============
Total real estate assets $ 31,873,208 $ 3,816,834 $5,306,150 $ - $ 561,641 $ 41,557,833
============ =========== ========== =========== ==========
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Merry Land Properties, Inc.:
We have audited the accompanying consolidated balance sheets of Merry
Land Properties, Inc. and subsidiaries as of December 31, 1998 and 1997 and
the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
presently fairly, in all material respects, the financial position of Merry
Land Properties, Inc. and subsidiaries as of December 31, 1998 and 1997 and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
January 27, 1999
Part II
Item 9 --Changes in and Disagreements with Accountants and Financal
Disclosure
None
Part III
Item 10--Directors and Executive Officers of the Registrant
Incorporated by reference to the Company's definitive proxy
statement filed with the Securities and Exchange Commission.
Item 11--Executive Compensation
Incorporated by reference to the Company's definitive proxy
statement filed with the Securities and Exchange Commission.
Item 12--Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference to the Company's definitive proxy
statement filed with the Securities and Exchange Commission.
Item 13--Certain Relationships and Related Transactions
Incorporated by reference to the Company's definitive proxy
statement filed with the Securities and Exchange Commission.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS. The following financial statements are filed as
part of this report:
Report of Independent Public Accountants
Balance Sheets
Statements of Income
Statements of Changes in Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
2. FINANCIAL STATEMENT SCHEDULES. The following financial statement schedules
are required to be filed by Item 8 and Item 14(d) of Form 10-K:
Report of Independent Public Accountants on Schedules
Real Estate and Accumulated Depreciation
3. EXHIBITS.
(3.i) - Articles of Incorporation, as amended by Articles of Amendment to
Articles of Incorporation re Series A Redeemable Cumulative Preferred
Stock
(3.ii) - Bylaws, as amended on January 28, 1999.
(4) Instruments Defining Rights of Security Holders, Including
Indentures:
(4.1) - The Company's $20,000,000 Senior Subordinated Term Loan Agreement
with Merry Land & Investment Company, Inc., dated October 15, 1998.
(10) MATERIAL CONTRACTS.
(10.1) The Company's Development Agreement with ERP Operating Limited
Partnership dated October 19, 1998.
(10.2) The Company's $25,000,000 Senior Term Loan Agreeemnt with Merry
Land & Investment Company, Inc., dated October 15, 1998.
(10.3) The Company's Employee Stock Ownership Plan.
(10.4) The Company's 1998 Management Incentive Plan (incorporated herein
by reference to Appendix F to Exhibit 10.1 of the Company's
Registration Statement on Form 10 filed September 4, 1998)
(10.5) Asset Exchange Agreement with Merry Land & Investment Company, Inc.
dated October 15, 1998.
(10.6) The Company's Preferred Stock Purchase Agreement with Merry Land &
Investment Company, Inc. dated October 15, 1998.
(21) -- Subsidiaries of Merry Land Properties, Inc.
(27) -- Financial Data Schedule.
(b) -- Reports on Form 8-K. The registrant filed no reports on Form 8-K
during the last quarter of 1998.
To Merry Land Properties, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in this Form 10-K, and have issued
our report thereon dated January 27, 1999. Our audit was made for the purpose
of forming an opinion on those statements taken as a whole. The schedule
listed in Item 14 is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
- ------------------------------
Arthur Andersen LLP
Atlanta, Georgia
January 27, 1999
PART IV
Item 14 --Schedule XI--Real Estate and Accumulated Depreciation for the Year
Ending December 31, 1998:
Cost Capitalized Gross Amount at Which
Initial Cost to Company Subsequent to Acquisition Carried at Dec. 31, 1998 Accumulated Date of Deprec
Buildings & Carrying Buildings & Total Depreciation Construc- Date iable
Residential Land Improvements Improvements Cost Land Improvements (a) (a) tion Acq. Life
- ----------- ---- ------------ ------------ -------- ---- ------------ ------ ------------ --------- ---- ------
Residential
- -----------
Greentree $325,000 $ 6,001,731 $ 1,148,959 $ 325,806 $ 7,149,884 $ 7,475,690 $ 2,293,979 1983 1986 5-50 yr.
Marsh Cove 329,786 6,649,280 1,222,098 345,467 7,855,697 8,201,164 2,423,086 1986 1989 5-50 yr.
Quarterdeck 580,000 8,216,250 912,636 600,402 9,108,484 9,708,886 2,178,557 1986 1989 5-50 yr.
Waters Edge 448,000 6,490,069 1,092,185 450,864 7,579,390 8,030,254 2,017,841 1985 1988 5-50 yr.
West Wind 960,000 5,597,500 791,720 960,000 6,389,220 7,349,220 1,187,441 1985 1993 5-50 yr.
Landing -------- ----------- ----------- --------- ----------- ----------- -----------
Total 2,642,786 32,954,830 5,167,598 - 2,682,539 38,082,675 40,765,214 10,100,904
Apartments
Commercial 356,000 1,612,486 653,538 - 370,920 2,251,104 2,622,024 302,535 var. var. 5-50 yr.
- ----------
Land 5,716,070 - 1,539,060 - 7,255,130 - 7,255,130 29,526 various -
- ---- ---------- ----------- ----------- ---- ---------- ----------- ----------- -----------
Total $8,714,856 $34,567,316 $ 7,360,196 $ - $10,308,589 $40,333,779 $50,642,368 $10,432,965
========== =========== =========== ==== =========== =========== =========== ===========
Notes:
(a) Reconciliations of total real estate carrying value and accumulated
depreciation for the years ending December 31, 1998, 1997 and 1996 are
as follows:
Real Estate Cost Accumulated Depreciation
------------------------------------------- -------------------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Balance at beginning
of period $50,603,514 $49,677,413 $48,248,064 $10,264,894 $ 8,981,301 $ 7,721,600
Additions - acquisitions
and improvements 2,842,102 926,101 1,429,349 1,304,855 1,283,593 1,259,701
Deductions -
impairment charge 2,803,247 - - 1,136,784 - -
----------- ----------- ----------- ----------- ----------- -----------
Balance at end of period $50,642,369 $50,603,514 $49,677,413 $10,432,965 $10,264,894 $ 8,981,301
=========== =========== =========== =========== =========== ===========
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned,
MERRY LAND PROPERTIES, INC.
(Registrant)
/s/ W. TENNENT HOUSTON
- ---------------------------
W. Tennent Houston
Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ DAVID W. COBB Director March 31, 1999
- -----------------
David W. Cobb
/s/ DORRIE E. GREEN Vice President, Chief March 31, 1999
- ------------------- Financial Officer,
Dorrie E. Green Secretary and Treasurer
/s/ W. TENNENT HOUSTON Chairman of the Board and March 31, 1999
- ---------------------- Chief Executive Officer
W. Tennent Houston
/s/ BOONE A. KNOX Director March 31, 1999
- ------------------
Boone A. Knox
/s/ STEWART R. SPEED Director March 31, 1999
- --------------------
Stewart R. Speed
/s/ MICHAEL N. THOMPSON President, Chief Operating March 31, 1999
- ----------------------- Officer and Director
Michael N. Thompson