<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-11718
MANUFACTURED HOME COMMUNITIES, INC.
(Exact name of registrant as specified in its Charter)
MARYLAND 36-3857664
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
TWO NORTH RIVERSIDE PLAZA, SUITE 800, CHICAGO, ILLINOIS 60606
(Address of principal executive offices) (Zip Code)
(312) 474-1122
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
26,111,223 shares of Common Stock as of October 30, 1998.
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MANUFACTURED HOME COMMUNITIES, INC.
TABLE OF CONTENTS
PART I - FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997........................................... 3
Consolidated Statements of Operations for the nine months
and quarters ended September 30, 1998 and 1997.................. 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 and 1997..................................... 5
Notes to Consolidated Financial Statements........................ 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 11
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings......................................... 20
ITEM 6. Exhibits and Reports on Form 8-K.......................... 20
</TABLE>
2
<PAGE> 3
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------- -------------
<S> <C> <C>
ASSETS
Investment in rental property:
Land................................................................ $ 271,956 $ 206,375
Land improvements................................................... 860,995 612,670
Buildings and other depreciable property............................ 94,967 90,870
Advances on rental property acquisitions............................ 2,866 26,403
---------- ---------
1,230,784 936,318
Accumulated depreciation............................................ (109,455) (89,208)
---------- ---------
Net investment in rental property................................. 1,121,329 847,110
Cash and cash equivalents............................................. 4,089 909
Short-term investments (at cost, which approximates market)........... 2,366 ---
Notes receivable...................................................... 15,639 1,147
Investment in and advances to affiliates.............................. 5,950 7,126
Investment in joint ventures.......................................... 7,527 ---
Rents receivable...................................................... 1,133 787
Deferred financing costs, net......................................... 4,463 3,265
Prepaid expenses and other assets..................................... 7,279 4,021
---------- ---------
Total assets........................................................ $1,169,775 $ 864,365
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable.............................................. $ 501,352 $ 403,656
Unsecured term loan................................................. 100,000 60,000
Unsecured line of credit............................................ 121,500 25,000
Other notes payable................................................. 5,167 6,516
Accounts payable and accrued expenses............................... 35,646 17,197
Accrued interest payable............................................ 4,963 1,536
Rents received in advance and security deposits..................... 6,900 2,299
Distributions payable............................................... 11,757 55
Due to affiliates................................................... 153 78
---------- ---------
Total liabilities.................................................. 787,438 516,337
Commitments and contingencies.........................................
Minority interests.................................................... 68,758 67,453
Stockholders' equity:
Preferred stock, $.01 par value; 10,000 shares authorized; none issued --- ---
Common stock, $.01 par value
50,000,000 shares authorized; 26,111,223 and 24,771,180
shares issued and outstanding for 1998 and 1997, respectively...... 260 248
Paid-in capital..................................................... 357,755 319,030
Employee notes...................................................... (4,695) (4,967)
Distributions in excess of accumulated earnings..................... (39,741) (33,736)
---------- ---------
Total stockholders' equity........................................ 313,579 280,575
---------- ---------
Total liabilities and stockholders' equity.......................... $1,169,775 $ 864,365
========== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 4
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS AND QUARTERS ENDED SEPTEMBER 30, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended For the Quarters Ended
September 30, September 30,
--------------------------- ------------------------
1998 1997 1998 1997
----------- --------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES
Base rental income................................$ 121,625 $ 78,439 $ 43,466 $ 27,461
Utility and other income.......................... 18,567 8,447 5,902 2,964
Equity in income of affiliates.................... 650 511 326 304
Interest income................................... 2,734 1,670 1,115 424
-------- --------- --------- ---------
Total revenues................................. 143,576 89,067 50,809 31,153
-------- --------- --------- ---------
EXPENSES
Property operating and maintenance................ 39,145 23,520 13,894 8,246
Real estate taxes................................. 10,863 5,966 3,761 2,052
Property management............................... 5,293 3,649 1,828 1,237
General and administrative........................ 4,240 3,241 1,302 1,029
Interest and related amortization................. 36,178 15,573 13,659 5,556
Depreciation on corporate assets.................. 695 437 235 148
Depreciation on real estate assets and other costs 20,072 12,136 7,690 4,102
-------- --------- --------- ---------
Total expenses................................. 116,486 64,522 42,369 22,370
-------- --------- --------- ---------
Income before allocation to minority interests.... 27,090 24,545 8,440 8,783
(Income) allocated to minority interests.......... (5,147) (2,695) (1,603) (1,141)
-------- --------- --------- ---------
Net income........................................ $ 21,943 $ 21,850 $ 6,837 $ 7,642
======== ========= ========= =========
Net income per common share - basic............... $ .86 $ .88 $ .26 $ .31
======== ========= ========= =========
Net income per common share - diluted............. $ .85 $ .88 $ .26 $ .31
======== ========= ========= =========
Distributions declared per common share
outstanding.................................... $ 1.0875 $ .99 $ .3625 $ .33
======== ========= ========= =========
Weighted average common shares
outstanding - basic............................ 25,488 24,709 25,988 24,575
======== ========= ========= =========
Weighted average common shares
outstanding - diluted (Note 1)................. 31,801 28,078 32,339 28,735
======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
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MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1998 1997
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................... $ 21,943 $ 21,850
Adjustments to reconcile net income to
cash provided by operating activities:
Income allocated to minority interests....................... 5,147 2,695
Depreciation and amortization expense........................ 20,919 13,630
Equity in income of affiliates............................... (650) (511)
Amortization of deferred compensation and other.............. 852 654
Writeoff of project costs.................................... --- (258)
(Increase) in rents receivable............................... (346) (22)
(Increase) in prepaid expenses and other assets.............. (2,543) (719)
Increase in accounts payable and accrued expenses............ 21,951 5,113
Increase in rents received in advance and security deposits.. 4,601 2,407
-------- --------
Net cash provided by operating activities....................... 71,874 44,839
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments, net......................... (2,366) (848)
Net proceeds from sale of project related assets................ --- 11,148
Distributions from affiliates................................... 1,826 670
Funding of notes receivable..................................... (14,492) (18,528)
Investment in joint ventures.................................... (7,527) 14,438
Acquisition of rental properties................................ (173,088) (93,498)
Improvements:
Improvements - corporate..................................... (367) (221)
Improvements - rental properties............................. (5,325) (2,469)
Site development costs....................................... (3,477) (1,647)
-------- --------
Net cash used in investing activities........................... (204,816) (90,955)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of stock options...................... 1,836 1,831
Distributions to common stockholders and minority interests...... (23,151) (26,630)
Issuance (repurchase) of common stock............................ 25,536 (7,260)
Collection of principal payments on employee notes............... 401 89
Proceeds from mortgage notes payable, line of credit and term loan 175,679 171,603
Repayments on mortgage notes payable and line of credit.......... (42,601) (93,128)
Debt issuance costs.............................................. (1,578) (300)
-------- --------
Net cash provided by (used in) financing activities.............. 136,122 46,205
-------- --------
Net increase (decrease) in cash and cash equivalents.............. 3,180 89
Cash and cash equivalents, beginning of period.................... 909 324
-------- --------
Cash and cash equivalents, end of period.......................... $ 4,089 $ 413
======== ========
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest.......................... $ 32,371 $ 14,350
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
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MANUFACTURED HOME COMMUNITIES, INC.
PRESENTATION:
These unaudited Consolidated Financial Statements of Manufactured Home
Communities, Inc., a Maryland corporation, and its subsidiaries (collectively,
the "Company"), have been prepared pursuant to the Securities and Exchange
Commission ("SEC") rules and regulations and should be read in conjunction with
the financial statements and notes thereto included in the Company's 1997 Annual
Report on Form 10-K (the "1997 Form 10-K"). The following Notes to Consolidated
Financial Statements highlight significant changes to the Notes included in the
1997 Form 10-K and present interim disclosures as required by the SEC. The
accompanying Consolidated Financial Statements reflect, in the opinion of
management, all adjustments necessary for a fair presentation of the interim
financial statements. All such adjustments are of a normal and recurring
nature. Certain reclassifications have been made to the prior periods'
financial statements in order to conform with current period presentation.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
(a) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(b) Earnings Per Common Share
Earnings per common share are based on the weighted average number of
common shares outstanding during each period. In 1997, the Financial Accounting
Standards Board issued Statement No. 128, "Earnings Per Share" ("SFAS No. 128").
SFAS No. 128 replaces the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. All earnings per
share amounts for all periods have been presented, and where appropriate,
restated to conform to the SFAS No. 128 requirements. The conversion of units
of limited partnership interest ("OP Units") in MHC Operating Limited
Partnership (the "Operating Partnership") into shares of common stock has been
excluded from the basic earnings per share calculation because of certain
restrictions on conversion. The conversion of an OP Unit to a share of common
stock will have no effect on earnings per common share since the allocation of
earnings to an OP Unit is equivalent to earnings allocated to a share of common
stock. The following table sets forth the computation of basic and diluted
earnings per share for the nine months and quarters ended September 30, 1998 and
1997:
<TABLE>
<CAPTION>
For the Nine Months For the Quarters Ended
Ended September 30, September 30,
------------------- -----------------------
1998 1997 1998 1997
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net income.................................... $ 21,943 $ 21,850 $ 6,837 $ 7,642
Income allocated to minority interests........ 5,147 2,695 1,603 1,141
-------- -------- ------- -------
Numerator for diluted earnings per
share - income available to common
stockholders after assumed
conversions................................. $ 27,090 $ 24,545 $ 8,440 $ 8,783
======== ======== ======= =======
Denominator:
Weighted average shares outstanding........... 25,488 24,709 25,988 24,575
Weighted average OP Units outstanding
assuming conversion......................... 5,946 3,076 5,985 3,798
Employee stock options........................ 367 293 366 362
-------- -------- ------- -------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions.............. 31,801 28,078 32,339 28,735
======== ======== ======= =======
</TABLE>
6
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MANUFACTURED HOME COMMUNITIES, INC.
NOTE 2 - COMMON STOCK AND RELATED TRANSACTIONS
On April 10, July 10, and October 9, 1998, the Company paid a $.3625 per
share distribution for the quarters ended March 31, June 30, and September 30,
1998, respectively, to stockholders of record on March 27, June 26, and
September 25, 1998, respectively.
In the first quarter of 1998, the Company, as general partner of the
Operating Partnership, approved the admission of new limited partners to the
Operating Partnership in connection with certain acquisitions of rental property
and investments in joint ventures (see Note 4). The new limited partners
received OP Units which are exchangeable on a one-for-one basis for shares of
the Company's common stock.
On April 23, 1998, the Company completed an offering of 1,048,059 shares of
common stock (the "Unit Trust Offering") and sold the shares to Merrill Lynch,
Pierce, Fenner & Smith Incorporated (the "Underwriter"). The offering price per
share was $25.4375, the closing price for shares of the Company's common stock
on April 23, 1998, resulting in gross offering proceeds of approximately $26.7
million. Net of the Underwriter's discount and offering expenses, the Company
received approximately $25 million. The Underwriter deposited the shares of
common stock with the trustee of the Equity Investor Fund Cohen & Steers Realty
Majors Portfolio, a unit investment trust (the "Trust"), in exchange for units
in the Trust.
NOTE 3 - RENTAL PROPERTY
On September 4, 1997, the Company entered into a portfolio purchase
agreement to acquire 38 manufactured home communities (the "Ellenburg
Communities") from partnerships having Ellenburg Capital Corporation ("ECC") as
the general partner for a puchase price in excess of $300 million. During 1997
and 1998, the Company closed on the acquisition of thirty-one of the Ellenburg
Communities for an aggregate purchase price of approximately $278 million and
gained control of an additional five Ellenburg Communities with acquisition
advances of approximately $57 million to the partnerships which own such
Ellenburg Communities. The Company funded the acquisition advances with
borrowings under the Company's line of credit and term bank facilities.
In connection with the supplemental agreement entered into in December
1997, on February 12, 1998, the Company exercised its right of first refusal to
purchase five of the Ellenburg Communities. A third party, backed by one of the
Company's competitors, has appealed certain orders of the Superior Court for the
State of California, County of Los Angeles related to the Company's acquisition
of the Ellenburg Communities, including the order approving the supplemental
agreement. The Company does not expect the appeals to be successful, or if
successful, to have a material impact on the Company's acquisition of the
Ellenburg Communities.
On July 6, 1998, the Company received approximately $10.4 million,
including approximately $297,000 of interest income, which was being held
subject to the completion of due diligence procedures on the Ellenburg
Communities. The persons appointed to windup the affairs of ECC agreed to the
release of such funds subject to such persons retaining the right to further
review the Company's requested due diligence adjustments. The $10.4 million
will be maintained as a liability until the escrow is closed at which point the
liability will be used to offset the purchase price of the Ellenburg
Communities.
On January 8, 1998, the Company acquired Quail Meadows, located in
Riverbank, California, for a purchase price of approximately $4.7 million. The
acquisition was funded with a borrowing under the Company's line of credit.
Quail Meadows consists of approximately 146 developed sites.
On April 30, 1998, the Company acquired Sherwood Forest RV Resort, located
adjacent to one of the Ellenburg Communities in Kissimmee, Florida, for a
purchase price of approximately $7.0 million. The acquisition was funded with a
borrowing under the Company's line of credit. Sherwood Forest RV Resort
consists of approximately 512 developed sites and a 33 acre expansion parcel.
7
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MANUFACTURED HOME COMMUNITIES, INC.
NOTE 3 - RENTAL PROPERTY (CONTINUED)
On May 14, 1998, the Company acquired Casa Del Sol Resort III, located
adjacent to one of the Company's communities in Peoria, Arizona, for a purchase
price of approximately $9.8 million. The acquisition was funded with a borrowing
under the Company's line of credit. Casa Del Sol Resort III consists of 238
developed sites.
On June 4, 1998, the Company entered into a joint venture agreement with
Wolverine Investors L.L.C. to acquire eighteen manufactured home communities
(the "College Heights Communities"). The aggregate purchase price for the
College Heights Communities was approximately $89 million. The Company
contributed approximately $19 million to the joint venture, Wolverine Investors
L.L.C. contributed approximately $2.0 million to the joint venture and the
remainder of the acquisition was funded with a borrowing from a financial
institution of approximately $68 million. The Company's $19 million
contribution to the joint venture was funded with a borrowing under the
Company's line of credit. Due to the Company's ability to control the joint
venture through its ownership percentage, the joint venture has been
consolidated with the Company for financial reporting purposes.
On August 13, 1998, the Company acquired Sunset Oaks, located in Plant
City, Florida, adjacent to one of the Company's existing properties, for a
purchase price of approximately $3.6 million. The acquisition was funded with a
borrowing under the Company's line of credit. Sunset Oaks consists of 168
developed sites.
The Company is actively seeking to acquire additional manufactured home
communities and currently is engaged in negotiations relating to the possible
acquisition of a number of manufactured home communities. At any time these
negotiations are at varying stages which may include contracts outstanding to
acquire certain manufactured home communities which are subject to satisfactory
completion of the Company's due diligence review.
NOTE 4 - INVESTMENT IN JOINT VENTURE
On March 18, 1998, the Company formed Plantation Company, LLC and Trails
Associates, LLC, an approximate 50% joint venture investments with Meadows
Management Company to own two manufactured home communities known as "Plantation
on the Lake" and "Trails West", for approximately $6.4 million. Plantation on
the Lake is located in Riverside, California and consists of 385 developed sites
and 122 expansion sites. Trails West is located in Tucson, Arizona and consists
of 488 developed sites and 294 expansion sites. The Company's investment was
funded with a $3.9 million borrowing under the Company's line of credit and with
the issuance of approximately $2.5 million in OP Units. Due to the Company's
lack of control over the joint ventures, the Company accounts for its investment
in the joint ventures on the equity method.
NOTE 5 - NOTES RECEIVABLE
At September 30, 1998 and December 31, 1997, the Company had approximately
$15.6 million and $1.1 million in notes receivable, respectively. The Company
has $1.1 million in purchase money notes with monthly principal and interest
payments at 7.0%, maturing on July 31, 2001. On January 6, 1998, the Company
funded a $12.3 million loan (the "Meadows Loan") to Meadows Preservation, Inc.
The Meadows Loan is collateralized by The Meadows manufactured home community
located in Palm Beach Gardens, Florida, bears interest at a nominal rate of 9%,
subject to adjustment based on cash flow of the property, and matures on
November 30, 1998. On May 12, 1998, the Company entered into an agreement to
loan $5.9 million to Trails Associates, LLC (the "Trails West Loan") for
development of the property known as Trails West. On May 12, 1998, the Company
funded $1,750,000 under the loan. This $1,750,000 portion of the Trails West
Loan is collateralized by the property known as Trails West, bears interest at
the rate of 8.5% and matures on June 1, 2003. The Meadows Loan and Trails West
Loan was funded with a borrowing under the Company's line of credit.
8
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MANUFACTURED HOME COMMUNITIES, INC.
NOTE 6 - LONG-TERM BORROWINGS
As of September 30, 1998 and December 31, 1997, the Company had outstanding
mortgage indebtedness of approximately $501.4 million and $403.7 million,
respectively, encumbering 72 and 43 of the Company's properties, respectively.
As of September 30, 1998 and December 31, 1997, the carrying value of such
properties was approximately $630 million and $493 million, respectively.
The outstanding indebtedness consists in part of a $265.0 million mortgage
note (the "Mortgage Debt") collateralized by 29 properties beneficially owned by
MHC Financing Limited Partnership. The Mortgage Debt has a maturity date of
January 2, 2028 and pays interest at 7.015%. There is no principal amortization
until February 1, 2008, after which principal and interest are paid from
available cash flow and the interest rate is reset at a rate equal to the then
10-year U.S. Treasury obligations plus 2.0%. In connection with the acquisition
of the College Heights Communities, the joint venture formed by the Company and
Wolverine Investors L.L.C. borrowed approximately $68 million at an interest
rate of 7.19%, maturing July 1, 2008. The Company also has outstanding debt on
8 properties in the aggregate amount of approximately $65 million, which was
recorded at fair market value with the related discount or premium being
amortized over the life of the loan using the effective interest rate. In
addition, the Company recorded a $2.4 million loan in connection with a direct
financing lease entered into in May 1997. Scheduled maturities for the
outstanding indebtedness, excluding the Mortgage Debt, are at various dates
through November 30, 2020, and fixed interest rates range from 7.25% to 9.05%.
The Company has an unsecured line of credit with a bank (the "Credit
Agreement") bearing interest at the London Interbank Offered Rate ("LIBOR") plus
1.125%. On April 28, 1998, the Company amended the Credit Agreement, increasing
the line of credit from $100 million to $150 million. The Credit Agreement
matures on August 17, 2000, at which time the Company may extend the maturity
date to August 17, 2002 and the Credit Agreement would be converted to a term
loan. The Company pays a fee on the average unused amount of such credit equal
to 0.125% of such amount. As of September 30, 1998, $121.5 million was
outstanding under the line of credit. The Company paid fees related to the
amendment which were immaterial.
The Company has a term loan (the "Loan") with a group of banks with
interest only payable monthly at a rate of LIBOR plus 1.0%. On April 28, 1998,
the Company amended the Loan to increase the borrowing from $60 million to $100
million. The Loan matures on April 3, 2000 and may be extended to April 3,
2002. The Company used the $40 million in proceeds to repay a portion of the
$50 million previously borrowed on April 7, 1998 under the facility. The
Company paid fees related to this amendment which were immaterial.
The Company has approximately $6.5 million of installment notes payable,
secured by a letter of credit with interest rates of 7.5%, maturing September 1,
2002. Approximately $5.3 million of the notes pay principal annually and
interest quarterly and the remaining $1.3 million of the notes pay interest
quarterly.
In July 1995, the Company entered into an interest rate swap agreement (the
"1998 Swap") fixing LIBOR on $100 million of the Company's floating rate debt at
6.4% for the period 1998 through 2003. The cost of the 1998 Swap consisted only
of legal costs which were deemed immaterial. The value of the 1998 Swap is
impacted by changes in the market rate of interest. Had the 1998 Swap been
entered into on September 30, 1998, the applicable LIBOR swap rate would have
been 4.87%. Each 0.01% increase or decrease in the applicable swap rate for the
1998 Swap increases or decreases the value of the 1998 Swap versus its current
value by approximately $41,000.
NOTE 7 - STOCK OPTIONS
Pursuant to the Amended and Restated 1992 Stock Option and Stock Award Plan
as discussed in Note 12 to the 1997 Form 10-K, certain officers, directors,
employees and consultants have been offered the opportunity to acquire shares of
common stock of the Company through stock options ("Options"). During the nine
months ended September 30, 1998, Options for 138,333 shares of common stock were
exercised.
9
<PAGE> 10
MANUFACTURED HOME COMMUNITIES, INC.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The residents of DeAnza Santa Cruz, a property located in Santa Cruz,
California (the "City") previously brought several actions opposing certain fees
and charges in connection with water service at the property, specifically
opposing a monthly "readiness to serve" charge. One group of residents, who
have elected to be covered under the City's rent control ordinance
("Ordinance"), had their case heard before the City's rent control board. On
June 29, 1995, the City's hearing officer found that the Company may charge only
its actual costs. The Company appealed this decision and during 1998, the court
of appeals upheld the residents' statutory interpretation regarding imposition
of the "readiness to serve" charge, but upheld the Company's calculation of the
amounts rebated. The residents were subsequently awarded costs and attorneys'
fees of approximately $100,000. The Company previously rebated the amount of
the readiness to serve charge collected. The impact of this decision on the
Company is not expected to be material. The Company believes its actual costs
exceed the amount of the monthly readiness to serve charge and filed an
application with the California Public Utilities Commission requesting the
Commission to set cost based rates for water at this property.
The Santa Cruz Homeowners Association ("HOA"), representing approximately
fifteen residents not covered by the Ordinance, separately filed suit in the
Superior Court of the State of California (Case Number 128001) opposing the same
fees and charges in connection with water service and seeking damages, including
punitive damages, arising out of the imposition of the readiness to serve
charge. The trial court during 1998 allowed a motion by the HOA to allow it to
represent all residents of the property and set the trial in the matter for
early 1999. The Company intends to vigorously defend itself in the matter.
On September 29, 1995, the United States Environmental Protection Agency
("USEPA") issued its Findings of Violations and Order for Compliance with
respect to the National Pollution Discharge Elimination System ("NPDES") Permit
governing the operation of the onsite waste water treatment plant at one of the
Company's properties. On October 6, 1995, the USEPA issued its Findings of
Violation and Order for Compliance with respect to the NPDES Permit governing
the operation of the onsite waste water treatment plant at another of the
Company's properties. The Company and USEPA have reached a tentative agreement
to resolve the matter in which the operation of the remaining waste water
treatment plant would be subject to a consent decree that would provide for
fines and penalties in the event of future violations and the Company would
contribute monies to a supplemental environmental project and pay a fine. The
tentative agreement has not yet been reduced to writing and therefore remains
subject to change. The Company does not believe the impact of the settlement
will be material and the Company believes it has established adequate reserves
for any amounts that may be paid.
In connection with the acquisition of the Ellenberg Communities and
pursuant to orders of the California Superior Court, approximately $30 million
of the amounts paid by MHC have been deposited with the court appointed winding
up agents (the "Winding Up Agents"). The deposited amounts relate to claims
(the "Karno Claims") of Norton S. Karno (and related entities) who at various
times has been a creditor, advisor, lawyer and shareholder of certain of the
entities related to the Ellenberg Communities. The Winding Up Agents have
disputed the claims and have filed a complaint against Mr. Karno (and related
entities) requesting that the court determine that the claims be reduced or
eliminated.
On October 30, 1998, the Company received notice of a lawsuit filed against
the Company and certain Executive Officers of the Company in the Los Angeles
Superior Court alleging, among other causes of action, that the Company breached
certain agreements in connection with the Ellenburg acquisition and claiming
damages in excess of $50 million plus punitive damages. The Company believes
most of the claim relates to the disputed Karno Claims discussed above. The
Company believes the claims are without merit, intends to vigorously defend the
defendants in this matter and does not believe the impact of this matter will be
material.
The Company is involved in various other legal proceedings arising in the
ordinary course of business. All proceedings herein described or referred to,
taken together, are not expected to have a material adverse impact on the
Company.
10
<PAGE> 11
MANUFACTURED HOME COMMUNITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following is a discussion of the interim results of operations,
financial condition and liquidity and capital resources of the Company for the
nine months and quarters ended September 30, 1998 compared to the corresponding
periods in 1997. It should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included herein and the 1997 Form 10-K.
The following discussion may contain certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 which
reflect management's current views with respect to future events and financial
performance. Such forward-looking statements are subject to certain risks and
uncertainties; including, but not limited to, the effects of future events on
the Company's financial performance; the adverse impact of external factors such
as inflation and consumer confidence; and the risks associated with real estate
ownership.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
The Company's gross investment in rental property increased from $630
million as of September 30, 1997 to $1.2 billion as of September 30, 1998 due to
the following acquisitions (collectively, the "1998 Acquisition Properties"):
(i) the Ellenburg Communities; (ii) Quail Meadows on January 8, 1998; (iii)
Sherwood Forest RV Park on April 30, 1998; (iv) the College Heights Communities
on June 4, 1998; and (v) Sunset Oaks on August 13, 1998. The total number of
sites owned or controlled increased from 31,993 as of September 30, 1997 to
53,391 as of September 30, 1998.
The following table summarizes certain weighted average occupancy
statistics for the quarters ended September 30, 1998 and 1997. "Core Portfolio"
represents an analysis of properties owned as of the beginning of both years of
comparison.
<TABLE>
<CAPTION>
Core Portfolio Total Portfolio
--------------- ----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Total sites 27,457 27,456 46,392 29,450
Occupied sites 26,039 25,998 43,610 27,878
Occupancy % 94.8% 94.7% 94.0% 94.7%
Monthly base rent per site $336 $323 $332 $328
</TABLE>
Base rental income ($43.5 million) increased $16.0 million or 58%. For the
Core Portfolio, base rental income increased approximately $1.0 million or 4.0%,
reflecting increased base rental rates. The remaining $15.0 million increase in
base rental income was attributed to the properties acquired in 1997 and the
1998 Acquisition Properties (collectively, the "1997 and 1998 Acquisition
Properties").
Monthly base rent per site for the total portfolio increased 1.2%,
reflecting a 4.0% increase in monthly base rent per site for the Core Portfolio,
partially offset by lower monthly base rents for the 1997 and 1998 Acquisition
Properties. Average monthly base rent per site for the 1997 and 1998
Acquisition Properties was $327 for the quarter ended September 30, 1998.
11
<PAGE> 12
MANUFACTURED HOME COMMUNITIES, INC.
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 TO THREE MONTHS ENDED
SEPTEMBER 30, 1997 (CONTINUED)
Weighted average occupancy decreased, with a 0.1% increase at the Core
Portfolio offset by decreased occupancy at the 1997 and 1998 Acquisition
Properties. The increase at the Core Portfolio reflects a 0.4% decrease
attributed to lower occupancy at four family properties and lower occupancy at
two properties where the Company has implemented a program to upgrade the
resident profile and housing stock. Excluding these communities, occupancy at
the Core Portfolio increased 0.4%.
Utility and other income ($5.9 million) increased $2.9 million or 100%,
with $2.7 million attributed to the 1997 and 1998 Acquisition Properties,
including $1.5 million of recreational vehicle ("RV") income. The remaining
$200,000 increase reflected increased utility income and real estate tax
pass-ons at the Core Portfolio.
Interest income ($1.1 million) increased $691,000 or 163%, primarily due to
the collection of interest earned on money being held in escrow pending the
outcome of certain due diligence procedures related to the Ellenburg
Communities, the recognition of additional income related to two of the
Ellenburg Communities, interest earned on the Meadows Loan and an increase in
interest earned on short-term investments. Short-term investments had average
balances for the quarters ended September 30, 1998 and 1997 of approximately
$5.7 million and $3.8 million, respectively, which earned interest income at an
effective rate of 5.2% and 5.3% per annum, respectively. As of September 30,
1998, the Company had cash and cash equivalents and short-term investments of
$6.5 million.
Property operating and maintenance expenses ($13.9 million) increased $5.6
million or 69%. Approximately $5.3 million of the increase was attributed to
the 1997 and 1998 Acquisition Properties. The remaining increase was due to an
overall increase in expenses at the Core Portfolio. Property operating and
maintenance expenses represented 27.3% of total revenues in 1998 and 26.5% in
1997.
Real estate taxes ($3.8 million) increased $1.7 million or 83% attributed
to the 1997 and 1998 Acquisition Properties. Real estate taxes represented 7.4%
of total revenues in 1998 and 6.6% in 1997.
Property management expenses ($1.8 million) increased $591,000 or 48%. The
increase was primarily due to the addition of a regional office in San Jose,
California, an increase in management company payroll and management fee expense
on the College Height Communities. Property management expenses represented
3.6% of total revenues in 1998 and 4.0% in 1997.
General and administrative expense ("G&A") ($1.3 million) increased
$274,000 or 27%. The increase was primarily due to increased payroll expense
resulting from salary increases, increased professional fees and public company
related expenses. G&A represented 2.6% of total revenues in 1998 and 3.3% in
1997.
Interest and related amortization ($13.7 million) increased $8.1 million or
146%. The increase was due to higher weighted average outstanding debt balances
during the period. The weighted average outstanding debt balances for the
quarters ended September 30, 1998 and 1997 were $736.0 million and $290.2
million, respectively. The effective interest rate was 7.3% in both periods.
Interest and related amortization represented 26.9% of total revenues in 1998
and 17.8% in 1997.
12
<PAGE> 13
MANUFACTURED HOME COMMUNITIES
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 TO THREE MONTHS ENDED
SEPTEMBER 30, 1997 (CONTINUED)
In July 1995, the Company entered into the 1998 Swap fixing LIBOR on $100
million of the Company's floating rate debt at 6.4% for the period 1998 through
2003. The cost of the 1998 Swap consisted only of legal costs which were deemed
immaterial. The value of the 1998 Swap is impacted by changes in the market
rate of interest. Had the 1998 Swap been entered into on September 30, 1998,
the applicable LIBOR swap rate would have been 4.87%. Each 0.01% increase or
decrease in the applicable swap rate for the 1998 Swap increases or decreases
the value of the 1998 Swap versus its current value by approximately $41,000.
Depreciation on corporate assets ($235,000) increased $87,000 or 59% due to
fixed asset additions associated with information systems. Depreciation on
corporate assets represented 0.5% of total revenues in both 1998 and 1997.
Depreciation on real estate assets and other costs ($7.7 million) increased
$3.6 million or 88% as a result of the 1997 and 1998 Acquisition Properties.
Depreciation on real estate assets and other costs represented 15.1% of total
revenues in 1998 and 13.2% in 1997.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
The following table summarizes certain weighted average occupancy
statistics for the nine months ended September 30, 1998 and 1997. "Core
Portfolio" represents an analysis of properties owned as of the beginning of
both years of comparison.
<TABLE>
<CAPTION>
Core Portfolio Total Portfolio
--------------- ----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Total sites 27,454 27,425 43,075 28,334
Occupied sites 26,058 25,962 40,668 26,817
Occupancy % 94.9% 94.7% 94.4% 94.6%
Monthly base rent per site $335 $322 $332 $325
</TABLE>
Base rental income ($121.6 million) increased $43.2 million or 55%. For
the Core Portfolio, base rental income increased approximately $3.2 million or
4.2%, reflecting a 4.1% increase in base rental rates and a 0.1% increase
related to occupancy. The remaining $40.0 million increase was attributed to
the 1997 and 1998 Acquisition Properties.
Monthly base rent per site for the total portfolio increased 2.2%,
reflecting a 4.0% increase in monthly base rent per site for the Core Portfolio,
partially offset by lower monthly base rents for the 1997 and 1998 Acquisition
Properties. Average monthly base rent per site for the 1997 and 1998
Acquisition Properties was $329 for the nine months ended September 30, 1998.
Weighted average occupancy decreased 0.2% due to the addition of the 1997
and 1998 Acquisition Properties to the portfolio with lower occupancy
percentages, partially offset by increased occupancy at the Core Portfolio. The
increase at the Core Portfolio reflects a 0.4% decrease attributed to lower
occupancy at four family properties and lower occupancy at two properties where
the Company has implemented a program to upgrade the resident profile and
housing stock. Excluding these communities, occupancy at the Core Portfolio
increased 0.6%.
13
<PAGE> 14
MANUFACTURED HOME COMMUNITIES, INC.
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 TO NINE MONTHS ENDED
SEPTEMBER 30, 1997 (CONTINUED)
Utility and other income ($18.6 million) increased $10.1 million or 120%,
with $9.7 million attributed to the 1997 and 1998 Acquisition Properties,
including $4.9 million of RV income. The remaining $400,000 increase reflected
increased utility income and real estate tax pass-ons at the Core Portfolio.
Interest income ($2.7 million) increased $1.1 million or 64%, primarily due
to the collection of interest income earned on money being held in escrow
pending the outcome of certain due diligence procedures related to the Ellenburg
Communities, the recognition of additional income related to two of the
Ellenburg Communities, interest earned on the Meadows Loan and an increase in
interest earned on short-term investments. Short-term investments had average
balances for the nine months ended September 30, 1998 and 1997 of approximately
$8.0 million and $4.0 million, respectively, which earned interest income at an
effective rate of 5.4% and 5.3% per annum, respectively.
Property operating and maintenance expenses ($39.1 million) increased $15.6
million or 66%. The increase was attributed to the 1997 and 1998 Acquisition
Properties. Property operating and maintenance expense at the Core Portfolio
increased approximately $261,000 with increased payroll expense, general and
administrative expense and insurance and other expenses, offset by decreased
repairs and maintenance expense and utility expense. Property operating and
maintenance expenses represented 27.3% of total revenues in 1998 and 26.4% in
1997.
Real estate taxes ($10.9 million) increased $4.9 million or 82% with $4.8
million attributed to the 1997 and 1998 Acquisition Properties. The remaining
$100,000 increase reflected increased rates at the Core Portfolio. Real estate
taxes represented 7.6% of total revenues in 1998 and 6.7% in 1997.
Property management expenses ($5.3 million) increased $1.6 million or 45%.
The increase was primarily due to the addition of a regional office in San Jose,
California, an increase in management company payroll and additional management
fee expense related to the College Heights Communities. Property management
expenses represented 3.7% of total revenues in 1998 and 4.1% in 1997.
G&A ($4.2 million) increased $999,000 or 31%. The increase was primarily
due to increased payroll expense resulting from salary increases, increased
professional fees and public company related expenses. G&A represented 3.0% of
total revenues in 1998 and 3.6% in 1997.
Interest and related amortization ($36.2 million) increased $20.6 million
or 132%. The increase was due to higher weighted average outstanding debt
balances during the period, as well as a slightly increased effective interest
rate. The weighted average outstanding debt balances for the nine months ended
September 30, 1998 and 1997 were $648.6 million and $272.0 million,
respectively. The effective interest rates were 7.4% and 7.2%, respectively.
Interest and related amortization represented 25.2% of total revenues in 1998
and 17.5% in 1997.
Depreciation on corporate assets ($695,000) increased $258,000 or 59% due
to fixed asset additions associated with information systems. Depreciation on
corporate assets represented 0.5% of total revenues in both 1998 and 1997.
Depreciation on real estate assets and other costs ($20.1 million)
increased $7.9 million or 65% as a result of the 1997 and 1998 Acquisition
Properties. Depreciation on real estate assets and other costs represented
14.0% of total revenues in 1998 and 13.6% in 1997.
14
<PAGE> 15
MANUFACTURED HOME COMMUNITIES, INC.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $3.2 million when compared to
December 31, 1997. The major components of this increase were increased cash
provided by operating activities, distributions from affiliates, issuance of
common stock, and borrowings from the line of credit, partially offset by the
purchase of short-term investments, funding of notes receivable, payment for the
1998 Acquisition Properties, additional acquisition advances related to the
Ellenburg Communities and the investment in Plantation on the Lake and Trails
West.
Net cash provided by operating activities increased $27.0 million from
$44.8 million for the nine months ended September 30, 1997 to $71.9 million for
the nine months ended September 30, 1998. This increase reflected a $10.5
million increase in funds from operations ("FFO") and the collection of
approximately $10.4 in escrow monies related to the Ellenburg Communities (see
discussion below), increased accounts payable accruals related to real estate
taxes of $5.7 million, interest on notes payable of $3.4 million and other
accruals related to the 1998 Acquisition Properties, partially offset by
increased prepaid expenses and other assets. The Company anticipates spending
approximately $7.7 million for payment of real estate taxes in the fourth
quarter of 1998.
FFO was defined by the National Association of Real Estate Investment
Trusts ("NAREIT") in March 1995 as net income (computed in accordance with
generally accepted accounting principles ["GAAP"]), before allocation to
minority interests, excluding gains (or losses) from sales of property, plus
real estate depreciation and after adjustments for significant non-recurring
items, if any. The Company computes FFO in accordance with the NAREIT
definition, which may differ from the methodology for calculating FFO utilized
by other equity REITs and, accordingly, may not be comparable to such other
REITs. Funds available for distribution ("FAD") is defined as FFO less
non-revenue producing capital expenditures and amortization payments on mortgage
loan principal. The Company believes that FFO and FAD are useful to investors
as a measure of the performance of an equity REIT because, along with cash flows
from operating activities, financing activities and investing activities, they
provide investors an understanding of the ability of the Company to incur and
service debt and to make capital expenditures. FFO and FAD in and of themselves
do not represent cash generated from operating activities in accordance with
GAAP and therefore should not be considered an alternative to net income as an
indication of the Company's performance or to net cash flows from operating
activities as determined by GAAP as a measure of liquidity and are not
necessarily indicative of cash available to fund cash needs.
The following table presents a calculation of FFO and FAD for the quarters
and nine months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
For the Nine Months For the Quarters
Ended Ended
September 30, September 30,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Computation of funds from operations:
Income before allocation to minority
interests........................... $27,090 $24,545 $ 8,440 $ 8,783
Depreciation on real estate assets and
other costs......................... 20,072 12,136 7,690 4,102
------- ------- ------- -------
Funds from operations................. $47,162 $36,681 $16,130 $12,885
======= ======= ======= =======
Computation of funds available for
distribution:
Funds from operations................. $47,162 $36,681 $16,130 $12,885
Non-revenue producing improvements-
rental properties................... (5,325) (2,469) (1,904) (1,503)
------- ------- ------- -------
Funds available for distribution...... $41,837 $34,212 $14,226 $11,382
======= ======= ======= =======
</TABLE>
15
<PAGE> 16
MANUFACTURED HOME COMMUNITIES, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
On July 6, 1998, the Company received approximately $10.4 million,
including approximately $297,000 of interest income, which was being held
subject to the completion of due diligence procedures on the Ellenburg
Communities. The persons appointed to windup the affairs of ECC agreed to the
release of such funds subject to such persons retaining the right to further
review the Company's requested due diligence adjustments. The $10.4 million
will be maintained as a liability until the escrow is closed at which point the
liability will be used to offset the purchase price of the Ellenburg
Communities.
Net cash used in investing activities increased $113.8 million from $91.0
million for the nine months ended September 30, 1997 to $204.8 million for the
nine months ended September 30, 1998 primarily due to the purchase of short-term
investments, the funding of the Meadows Loan, increased payments for
acquisitions and the investment in Plantation on the Lake and Trails West in
1998, increased payments for recurring improvements to rental properties due to
the acquisitions, increased payments for site development due to additional
expansion activity in 1998 and the one-time collection of proceeds from the sale
of project related assets in 1997.
On September 4, 1997, the Company entered into a portfolio purchase
agreement to acquire the Ellenburg Communities from partnerships having ECC as
the general partner for a puchase price in excess of $300 million. During 1997
and 1998, the Company closed on the acquisition of thirty-one of the Ellenburg
Communities for an aggregate purchase price of approximately $278 million and
gained control of an additional five Ellenburg Communities with acquisition
advances of approximately $57 million to the partnerships which own such
Ellenburg Communities. The Company funded the acquisition advances with
borrowings under the Company's line of credit and term bank facilities. In
connection with the supplemental agreement entered into in December 1997, on
February 12, 1998, the Company exercised its right of first refusal to purchase
five of the Ellenburg Communities. A third party, backed by one of the
Company's competitors, has appealed certain orders of the Superior Court for the
State of California, County of Los Angeles related to the Company's acquisition
of the Ellenburg Communities, including the order approving the supplemental
agreement. The Company does not expect the appeals to be successful, or if
successful, to have a material impact on the Company's acquisition of the
Ellenburg Communities.
On January 6, 1998, the Company funded the $12.3 million Meadows Loan to
Meadows Preservation, Inc. The Meadows Loan is collateralized by The Meadows
manufactured home community located in Palm Beach Gardens, Florida, bears
interest at a nominal rate of 9%, subject to adjustment based on cash flow of
the property, and matures on November 30, 1998.
On January 8, 1998, the Company acquired Quail Meadows, located in
Riverbank, California, for a purchase price of approximately $4.7 million. The
acquisition was funded with a borrowing under the Company's line of credit.
Quail Meadows consists of approximately 146 developed sites.
On March 18, 1998, the Company formed Plantation Company LLC and Trails
Associates, LLC, an approximate 50% joint venture investments with Meadows
Management Company to own two manufactured home communities known as "Plantation
on the Lake" and "Trails West", for approximately $6.4 million. Plantation on
the Lake is located in Riverside, California and consists of 385 developed sites
and 122 expansion sites. Trails West is located in Tucson, Arizona and consists
of 488 developed sites and 294 expansion sites. The Company's investment was
funded with a $3.9 million borrowing under the Company's line of credit and with
the issuance of approximately $2.5 million in OP Units.
On April 30, 1998, the Company acquired Sherwood Forest RV Resort, located
adjacent to one of the Ellenburg Communities in Kissimmee, Florida, for a
purchase price of approximately $7.0 million. The acquisition was funded with a
borrowing under the Company's line of credit. Sherwood Forest RV Resort
consists of approximately 512 developed sites and 144 expansion sites.
16
<PAGE> 17
MANUFACTURED HOME COMMUNITIES, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
On May 14, 1998, the Company acquired Casa del Sol Resort III, located
adjacent to one of the Company's communities in Peoria, Arizona, for a purchase
price of approximately $9.8 million. The acquisition was funded with a borrowing
under the Company's line of credit. Casa Del Sol Resort III consists of 238
developed sites.
On June 4, 1998, the Company entered into a joint venture agreement with
Wolverine Investors L.L.C. to acquire eighteen manufactured home communities
(the "College Heights Communities"). The aggregate purchase price for the
College Heights Communities was approximately $89 million. The Company
contributed approximately $19 million to the joint venture, Wolverine Investors
L.L.C. contributed approximately $2.0 million to the joint venture and the
remainder of the acquisition was funded with a borrowing from a bank of
approximately $68 million. The Company's $19 million contribution to the joint
venture was funded with a borrowing under the Company's line of credit.
On August 13, 1998, the Company acquired Sunset Oaks, located in Plant
City, Florida, for a purchase price of approximately $3.6 million. The
acquisition was funded with a borrowing under the Company's line of credit.
Sunset Oaks consists of 168 developed sites.
Capital expenditures for improvements were approximately $9.2 million for
the nine months ended September 30, 1998 compared to $4.3 million for the nine
months ended September 30, 1997. Of the $10.0 million, approximately $5.3
million represented improvements to existing sites. The Company anticipates
spending approximately $320,000 on improvements to existing sites during the
remainder of 1998. The Company believes these improvements are necessary in
order to increase and/or maintain occupancy levels and maximize rental rates
charged to new and renewing residents. The remaining $3.9 million represented
costs to develop expansion sites at certain of the Company's properties and
other corporate headquarter costs.
Net cash provided by financing activities increased $90.0 million from
$46.2 million for the nine months ended September 30, 1997 to $136.1 million for
the nine months ended September 30, 1998 primarily due to additional borrowings
under the line of credit, a borrowing with a bank for the acquisition of the
College Heights Communities, the issuance of common stock in the second quarter
of 1998, and a decrease in distributions paid in the first nine months of 1998.
Distributions to common stockholders and minority interests decreased
approximately $3.5 million due to the timing of the payment of the
distributions. On April 10, 1998 and July 10, 1998, the Company paid a $.3625
per share distribution for the quarters ended March 31, 1998 and June 30, 1998,
respectively, to stockholders of record on March 27, 1998 and June 26, 1998,
respectively. Return of capital on a GAAP basis was $.05 per share, $.07 per
share and $.10 per share for the quarters ended March 31, 1998, June 30, 1998
and September 30, 1998, respectively.
The Company expects to meet its short-term liquidity requirements,
including its distributions, generally through its working capital, net cash
provided by operating activities and availability under the existing line of
credit. The Company expects to meet certain long-term liquidity requirements
such as scheduled debt maturities, property acquisitions and capital
improvements by long-term collateralized and uncollateralized borrowings
including borrowings under its existing line of credit and the issuance of debt
securities or additional equity securities in the Company, in addition to
working capital.
17
<PAGE> 18
MANUFACTURED HOME COMMUNITIES, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging
Activities", which is required to be adopted in years beginning after June 15,
1999. SFAS No. 133 permits early adoption as of the beginning of any fiscal
quarter after its issuance. The Company has not yet determined the date at
which it will adopt SFAS No. 133. SFAS No. 133 will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
Company has not yet determined what the effect of SFAS No. 133 will be on the
earnings and financial position of the Company.
YEAR 2000
The year 2000 issue ("Year 2000") is the result of computer programs and
embedded processors ("Systems") failing to properly account for the end of the
20th century and the rollover to the year 2000. The Year 2000 issue comes from
three date-related problems and practices. First some Systems define the
year-portion of date fields with two digits instead of four. As a result,
programs and equipment that have time-sensitive functions may interpret a date
using "00" as being 1900 rather than 2000. Second, the year 2000 is a leap
year. There is a possibility that some Systems may fail to account for the leap
day properly. Third, in practice, an artificial date of "9/9/99" is sometimes
used as a fictitious date when testing systems. It is possible that some
Systems will reject the actual date of "September 9, 1999" as fictitious.
Problems arising from one or more of these problems and practices could result
in failure of one or more Systems causing a disruption of operations, including
among other things, a temporary inability to process transactions, collect
rents, or engage in similar normal business activities.
Utilizing purchasing records, inventory listings, and direct communication
with employees, the Company is in the process of identifying all of its
information technology ("IT") and non-IT systems and assessing them for Year
2000 readiness. Critical systems include, but are not limited to: accounts
receivable, sales and inventory, human resources and payroll, accounts payable
and general ledger, Lotus Notes, Microsoft Office, tax preparation and filing
software, computers, data networking equipment, telephone systems, fax machines
and copiers, security and life safety systems (elevators, alarm systems),
process control systems (pool pumps and chlorine systems, sprinkler systems),
cable television systems, and wastewater treatment plants. Research and review
of IT and non-IT systems controlled by the Company is expected to be completed
by November 30, 1998. The Company is in the process of retaining a consultant
to handle assessment of its wastewater treatment and cable television facilities
for which it is responsible. The Company has initiated formal communications
with all of its significant suppliers to determine the extent to which the
Company's interface systems are vulnerable to those third parties' failure to
remediate their own Year 2000 issues. The Company anticipates that scheduled
system upgrades to its accounts receivable system, accounts payable and general
ledger system, and payroll system will remediate current Year 2000 concerns.
The Company expects assurances from all of significant suppliers that systems
will be Year 2000 compliant by December 31, 1998. Systems that are not ready by
then will be targeted for replacement in the first three months of 1999. There
can be no guarantee that the systems of other companies on which the Company's
systems rely will be timely converted and would not have an adverse effect on
the Company's systems.
18
<PAGE> 19
MANUFACTURED HOME COMMUNITIES, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
YEAR 2000 (CONTINUED)
Through September 30, 1998, the Company's costs associated with remediation
efforts have been immaterial. In 1998, the Company retained a full-time
contract employee to perform Year 2000 research and documentation at an annual
fee of approximately $45,000 and has budgeted to retain the employee through
1999. The cost to retain a consultant to assess the waste water treatment and
cable television facilities has been budgeted at less than $50,000. The Company
expects that replacement of approximately 75 computers will be required with a
capital budget of approximately $200,000. The Company's total Year 2000 project
costs and estimates to complete do not include the estimated costs and time
associated with the impact of third-party Year 2000 issues. The total cost of
the Year 2000 project is estimated to be immaterial assuming third parties
remediate their own Year 2000 issues. This assumption is based on management's
best estimates, which were derived utilizing numerous assumptions of future
events, and there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated.
The Company has commenced its contingency planning for critical operational
areas that might be affected by the Year 2000 issue if compliance is delayed.
Aside from catastrophic failure of banks, governmental agencies, etc., the
Company believes that it could continue operations. For example, rent can be
collected and recorded by manual methods using hardcopy reports from previous
months; payroll can be processed by issuing manual checks relying on existing
payroll registers; bills can be paid as long as banks can process checks; and
basic financial statements can be prepared manually.
19
<PAGE> 20
MANUFACTURED HOME COMMUNITIES, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The discussion in Note 8 of Notes to Consolidated Financial Statements
is incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
Form 8-K/A dated June 4, 1998, filed August 11, 1998,
relating to Item 2 - "Acquisition of Assets" and Item 7
"Financial Statements and Exhibits" on the acquisition of
the College Height Communities.
20
<PAGE> 21
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
MANUFACTURED HOME COMMUNITIES, INC.
BY: /s/ Thomas P. Heneghan
---------------------------------------
Thomas P. Heneghan
Executive Vice President, Treasurer and
Chief Financial Officer
BY: /s/ Judy A. Pultorak
---------------------------------------
Judy A. Pultorak
Principal Accounting Officer
DATE: November 6, 1998
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<CIK> 0000895417
<NAME> MANUFACTURED HOME COMMUNITIES, INC.
<MULTIPLIER> 1
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 6,455
<SECURITIES> 0
<RECEIVABLES> 1,133
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 25,280
<PP&E> 1,230,784
<DEPRECIATION> (109,455)
<TOTAL-ASSETS> 1,169,775
<CURRENT-LIABILITIES> 59,419
<BONDS> 0
0
0
<COMMON> 260
<OTHER-SE> 313,319
<TOTAL-LIABILITY-AND-EQUITY> 1,169,775
<SALES> 140,192
<TOTAL-REVENUES> 143,576
<CGS> 0
<TOTAL-COSTS> 55,301
<OTHER-EXPENSES> 4,240
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,178
<INCOME-PRETAX> 27,090
<INCOME-TAX> 0
<INCOME-CONTINUING> 21,943
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,943
<EPS-PRIMARY> .86
<EPS-DILUTED> .85
</TABLE>
