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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-11718
MANUFACTURED HOME COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 36-3857664
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
TWO NORTH RIVERSIDE PLAZA, SUITE 800, CHICAGO, ILLINOIS 60606
(Address of principal executive offices) (Zip Code)
(312) 279-1400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 Par Value The New York Stock Exchange
(Title of Class) (Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates was
approximately $470.3 million as of March 1, 2000 based upon the closing price of
$22.81 on such date using beneficial ownership of stock rules adopted pursuant
to Section 13 of the Securities Exchange Act of 1934 to exclude voting stock
owned by Directors and Officers, some of whom may not be held to be affiliates
upon judicial determination.
At March 1, 2000, 22,415,658 shares of the Registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III incorporates by reference the Registrant's Proxy Statement relating to
the Annual Meeting of Stockholders to be held May 9, 2000.
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MANUFACTURED HOME COMMUNITIES, INC.
TABLE OF CONTENTS
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PART I. Page
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Item 1. Business................................................................................................3
Item 2. Properties..............................................................................................7
Item 3. Legal Proceedings......................................................................................12
Item 4. Submission of Matters to a Vote of Security Holders....................................................15
PART II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters..............................16
Item 6. Selected Financial Data and Operating Information......................................................16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................19
Item 7A. Quantitative and Qualitative Disclosure About Market Risk..............................................26
Item 8. Financial Statements and Supplementary Data............................................................26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................26
PART III.
Item 10. Directors and Executive Officers of the Registrant.....................................................26
Item 11. Executive Compensation.................................................................................26
Item 12. Security Ownership of Certain Beneficial Owners and Management.........................................26
Item 13. Certain Relationships and Related Transactions.........................................................26
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................................27
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PART I
ITEM 1. BUSINESS
THE COMPANY
GENERAL
Manufactured Home Communities, Inc. (together with its consolidated
subsidiaries, the "Company") is a fully integrated company which owns and
operates manufactured home communities ("Communities"). Communities are
residential developments designed and improved for the placement of detached,
single-family manufactured homes which are produced off-site and installed
within the community. The owner of each home leases the site on which it is
located. Modern Communities are similar to typical residential subdivisions
containing centralized entrances, paved streets, curbs and gutters and parkways.
In addition, these communities often provide a clubhouse for social activities
and recreation and other amenities, which may include swimming pools,
shuffleboard courts, tennis courts, laundry facilities and cable television
service. Utilities are provided or arranged for by the owner of the community.
Some communities provide water and sewer service through public or private
utilities, while others provide these services to residents from on-site
facilities.
Each Community is generally designed to attract and is marketed to one of
two types of residents - 1) retirees and empty nesters or 2) families and
first-time homeowners. The Company believes both types of Communities are
attractive investments and focuses on owning Communities in or near large
metropolitan markets and retirement destinations.
The Company was formed to continue the property operations, business
objectives and acquisition strategies of an entity that has owned and operated
Communities since 1969. As of December 31, 1999, the Company owned or controlled
a portfolio of 157 Communities and recreational vehicle ("RV") resorts (the
"Properties") located throughout the United States containing 54,007 residential
sites. The Properties are located in 26 states (with the number of Properties in
each state shown parenthetically) -- Florida (48), California (25), Arizona
(19), Michigan (11), Colorado (10), Delaware (7), Nevada (5), Indiana (4),
Oregon (3), Kansas (3), Missouri (3), Illinois (2), Iowa (2), New York (2), Utah
(2), Pennsylvania (1), Maryland (1), Minnesota (1), Montana (1), New Mexico (1),
Ohio (1), Oklahoma (1), Texas (1), Virginia (1), West Virginia (1), and
Washington (1). As of December 31, 1999, the Company also owned a commercial
building located in California.
The Company has approximately 850 full-time employees dedicated to carrying
out the Company's operating philosophy and strategies of value enhancement and
service to residents. The Company typically utilizes a one or two-person
management team (who reside at the Properties) for the on-site management of
each of the Properties. Typically, clerical and maintenance workers are employed
to assist these individuals in the management and care of the Properties. Direct
supervision of on-site management is the responsibility of the Company's
regional vice presidents and regional managers. These individuals have
significant experience in addressing the needs of residents and in finding or
creating innovative approaches to maximize value and increase cash flow from
property operations. Complementing this field management staff are approximately
60 corporate employees who assist on-site management in all property functions.
FORMATION OF THE COMPANY
The Company, formed in March 1993, is a Maryland corporation, which has
elected to be taxed as a real estate investment trust ("REIT"). The Company
generally will not be subject to Federal income tax to the extent it distributes
its REIT taxable income to its stockholders. REITs are subject to a number of
organizational and operational requirements. If the Company fails to qualify as
a REIT, its income is taxable at regular corporate rates. Even if the Company
qualifies for taxation as a REIT, the Company is subject to certain state and
local taxes on its income and property and Federal income and excise taxes on
its undistributed income.
The operations of the Company are conducted through certain entities which
are owned or controlled by the Company. MHC Operating Limited Partnership (the
"Operating Partnership") is the entity through which the Company conducts
substantially all of its operations. Sub-partnerships of the Operating
Partnership were created to: (i) facilitate mortgage financing (the "Financing
Partnerships"); (ii) facilitate the Company's ability to provide financing to
the owners of Communities ("Lending Partnership"); (iii) own the management
operations of the Company ("Management Partnerships"); and (iv) own the assets
and operations of certain utility companies which service the Properties ("MHC
Systems"). The financial results of the Operating Partnership and
sub-partnerships (together, the "Subsidiaries") are consolidated in the
Company's consolidated financial statements.
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In addition, since certain activities, if performed by the Company, may not
be qualifying REIT activities under the Internal Revenue Code of 1986, as
amended (the "Code"), the Company has invested in the non-voting preferred stock
of various corporations which engage in such activities. Realty Systems, Inc.
("RSI") is engaged in the business of purchasing, selling, leasing and financing
manufactured homes that are located or will be located in properties managed by
the Company. RSI also provides brokerage services to residents at such
properties. Typically residents move from a community but do not relocate their
homes. RSI may provide brokerage services, in competition with other local
brokers, by seeking buyers for the homes. RSI also leases homes to prospective
residents with the expectation that the tenant eventually will purchase the
home. LP Management Corp. leases from the Operating Partnership certain real
property within or adjacent to certain of the Properties consisting of golf
courses, pro shops, restaurants and recreational vehicle areas. The Company
believes that the activities of RSI and LP Management Corp. (collectively,
"Affiliates") benefit the Company by maintaining and enhancing occupancy at the
Properties. The Company accounts for its investment in and advances to
Affiliates using the equity method of accounting.
BUSINESS OBJECTIVES AND OPERATING STRATEGIES
The Company seeks to maximize both current income and long-term growth in
income. The Company focuses on Communities that have strong cash flow and
expects to hold such properties for long-term investment and capital
appreciation. In determining cash flow potential, the Company evaluates the
Community's ability to attract and retain high quality residents that take pride
in their community and in their home. These business objectives and their
implementation are determined by the Company's Board of Directors and may be
changed at any time. The Company's investment and operating approach includes:
- Providing consistently high levels of services and amenities in
attractive surroundings to foster a strong sense of community and
pride of home ownership;
- Aggressively managing the Properties to increase operating margins by
maintaining competitive market rents, increasing occupancy and
controlling expenses;
- Increasing income and property values by continuing the strategic
expansion and, where appropriate, renovation of the Properties;
- Utilizing management information systems to evaluate potential
acquisitions, identify and track competing properties and monitor
tenant satisfaction; and
- Selectively acquiring Communities that have potential for long-term
cash flow growth and to create property concentrations in and around
major metropolitan areas and retirement destinations to capitalize on
operating synergies and incremental efficiencies.
The Company is committed to enhancing its reputation as the most respected
brand name in the manufactured home community business. Its strategy is to own
and operate the highest quality communities in major metropolitan areas and
retirement destinations across the United States. The focus is on creating an
attractive residential environment for homeowners by providing a
well-maintained, comfortable community with a variety of organized recreational
and social activities and superior amenities. In addition, the Company regularly
surveys rental rates of competing properties and conducts satisfaction surveys
of residents to determine the factors residents consider most important in
choosing a manufactured home community.
FUTURE ACQUISITIONS
The Company acquired or gained a controlling interest in eighty-eight
Properties during 1997 through 1999, more than doubling its portfolio. The
Company believes that opportunities for property acquisitions are still
available and in general consolidation within the industry will continue (see -
Industry - The Manufactured Home Community Industry - Industry Consolidation).
The company believes that transactions occurring in the private marketplace are
at valuations significantly in excess of our current public market valuations.
As a result, during 1999 the Company accelerated its' stock repurchase program.
The Company's board of directors continues to review the conditions under which
the Company will repurchase its' stock. These conditions include, but are not
limited to, market price, balance sheet flexibility, other opportunities and
capital requirements. (For more information on the Company's stock repurchase
program see Note 4 to the accompanying financial statements.) Increasing
acceptability of and demand for manufactured homes and continued constraints on
development of new manufactured home communities continues to add to their
attractiveness as an investment. The Company believes it has a competitive
advantage in the acquisition of new communities due to its experienced
management, significant presence in major real estate markets and substantial
capital resources. The Company is actively seeking to acquire additional
communities and currently is engaged in various stages of negotiations relating
to the possible acquisition of a number of communities.
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The Company anticipates that newly acquired properties will be located in
the United States. The Company utilizes market information systems to identify
and evaluate acquisition opportunities, including a market database to review
the primary economic indicators of the various locations in which the Company
expects to expand its operations. Acquisitions will be financed from the most
appropriate sources of capital, which may include undistributed funds from
operations, issuance of additional equity securities, sales of investments,
collateralized and uncollateralized borrowings and issuance of debt securities.
In addition, the Company may cause the Operating Partnership to issue units of
limited partnership interests ("OP Units") to finance acquisitions. The Company
believes that an ownership structure which includes the Operating Partnership
will permit the Company to acquire additional Communities in transactions that
may defer all or a portion of the sellers' tax consequences.
When evaluating potential acquisitions, the Company will consider such
factors as: (i) the replacement cost of the property; (ii) the geographic area
and type of property; (iii) the location, construction quality, condition and
design of the property; (iv) the current and projected cash flow of the property
and the ability to increase cash flow; (v) the potential for capital
appreciation of the property; (vi) the terms of tenant leases, including the
potential for rent increases; (vii) the potential for economic growth and the
tax and regulatory environment of the community in which the property is
located; (viii) the potential for expansion of the physical layout of the
property and/or the number of sites; (ix) the occupancy and demand by residents
for properties of a similar type in the vicinity and the residents profile; (x)
the prospects for liquidity through sale, financing or refinancing of the
property; and (xi) competition from existing Communities and the potential for
the construction of new communities in the area. The Company expects to purchase
Communities with physical and market characteristics similar to the Properties
in its current portfolio.
PROPERTY EXPANSIONS
Several of the Company's Properties have available land for expanding the
number of sites available to be leased to residents. Development of these sites
("Expansion Sites") is predicated by local market conditions and permitted by
zoning and other applicable laws. When justified, development of Expansion Sites
allows the Company to leverage existing facilities and amenities to increase the
income generated from the Properties. Where appropriate, facilities and
amenities may be upgraded or added to certain Properties in order to make those
Properties more attractive in their markets. The Company's acquisition
philosophy has included the desire to own Properties with potential Expansion
Site development and has been successful in acquiring a number of such
properties. Several examples of these properties include the 1994 acquisition of
Bulow Village with potential development of approximately 750 Expansion Sites,
the 1997 acquisition of Golf Vista Estates with potential development of
approximately 180 Expansion Sites and the recent acquisition in 1999 of Coquina
Crossing with potential development of approximately 480 Expansion Sites.
Of the 157 Properties, ten may be expanded consistent with existing zoning
regulations. In 2000, the Company expects to develop an additional 100 Expansion
Sites within four of these Properties. As of December 31, 1999, the Company had
approximately 950 Expansion Sites available for occupancy in twenty-one of the
Properties. The Company filled 260 of the Expansion Sites in 1999 and expects to
fill an additional 200 to 300 sites in 2000.
LEASES
The typical lease entered into between the tenant and one of the Company's
Properties for the rental of a site requires a security deposit and is a
month-to-month or year-to-year term, renewable upon the consent of both parties
or, in some instances, as provided by statute. These leases are cancelable,
depending on state law, for non-payment of rent, violation of community rules
and regulations or other specified defaults. Non-cancelable long-term leases,
with remaining terms ranging up to ten years, are in effect at certain sites
within eight of the Properties. These leases are subject to rental rate
increases based on the Consumer Price Index ("CPI"), in some instances taking
into consideration certain floors and ceilings and allowing for pass-throughs of
certain items such as real estate taxes, utility expenses and capital
expenditures. Generally, market rate adjustments are made on an annual basis.
REGULATIONS AND INSURANCE
General. Communities are subject to various laws, ordinances and
regulations, including regulations relating to recreational facilities such as
swimming pools, clubhouses and other common areas. The Company believes that
each Property has the necessary permits and approvals to operate.
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Rent Control Legislation. State and local rent control laws, principally in
California and Florida, limit the Company's ability to increase rents and to
recover increases in operating expenses and the costs of capital improvements at
certain Properties. Enactment of such laws has been considered from time to time
in other jurisdictions. The Company presently expects to continue to maintain
manufactured home communities, and may purchase additional properties, in
markets that are either subject to rent control or in which rent-limiting
legislation exists or may be enacted. For example, Florida has enacted a law
that generally provides that rental increases must be reasonable. Also, certain
jurisdictions in California in which the Company owns Properties limit rent
increases to changes in the CPI or some percentage thereof.
Insurance. Management believes that the Properties are covered by adequate
fire, flood, property, earthquake and business interruption insurance (where
appropriate) provided by reputable companies and with commercially reasonable
deductibles and limits. The Company believes its insurance coverage is adequate
based on the Company's assessment of the risks to be insured, the probability of
loss and the relative cost of available coverage. The Company has obtained title
insurance insuring fee title to the Properties in an aggregate amount which the
Company believes to be adequate.
INDUSTRY
THE MANUFACTURED HOME COMMUNITY INDUSTRY
The Company believes that modern manufactured home communities, such as the
Properties, provide an opportunity for increased cash flows and appreciation in
value. These may be achieved through increases in occupancy rates and rents, as
well as expense controls, expansion of existing Properties and opportunistic
acquisitions, for the following industry specific reasons:
- Barriers to Entry: The Company believes that the supply of new
Communities will be constrained due to barriers to entry into the
industry. The most significant barrier has been the difficulty in
securing zoning from local authorities. This has been the result of
(i) the public's historically poor perception of the industry, and
(ii) the fact that Communities generate less tax revenue because the
homes are treated as personal property (a benefit to the home owner)
rather than real property. Another factor that creates substantial
barriers to entry is the length of time between investment in the
Community's development and the attainment of stabilized occupancy and
the generation of revenues. The initial development of the
infrastructure may take up to two or three years. Once the Community
is ready for occupancy, it may be difficult to attract residents to an
empty Community. Substantial occupancy levels may take a number of
years to achieve.
- Industry Consolidation: According to an industry analyst's
manufactured home Community industry report, there are approximately
50,000 Communities in the United States and approximately 6.5% or
3,250 of the Communities have more than 200 sites and would be
considered "investment-grade" Properties. The five public REITs that
own Communities own approximately 532 or about 16% of the
"investment-grade" Communities. In addition, based on a report
prepared by one analyst, the top 150 owners of Communities own
approximately 25% of the "investment-grade" assets. The Company
believes that this relatively high degree of fragmentation in the
industry provides the Company, as a national organization with
experienced management and substantial financial resources, the
opportunity to purchase additional Communities.
- Stable Tenant Base: The Company believes that Communities tend to
achieve and maintain a stable rate of occupancy due to the following
factors: (i) residents own their own homes, (ii) Communities tend to
foster a sense of Community as a result of amenities such as club
houses, recreational and social activities and (iii) since moving a
manufactured home from one Community to another involves substantial
cost and effort, residents often sell their home in-place (similar to
site-built residential housing) with no interruption of rental
payments.
MANUFACTURED HOUSING
Based on the current growth in the number of individuals living in
manufactured homes, the Company believes that manufactured homes are
increasingly viewed by the public as an attractive and economical form of
housing. According to the industry's trade association, nearly one in four new
single family homes sold in the United States today is factory-built.
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The Company believes that the growing popularity of manufactured housing is
primarily the result of the following factors:
- - Importance of Home Ownership. According to the Fannie Mae ("FNMA") 1999
National Housing Survey renters' desire to own a home is stronger now than
at any time in the 1990's. Security and permanence are thought to be
non-financial reasons to own a home. The commitment to home ownership is
tempered by an awareness of the high cost of owning a home. The
affordability of manufactured housing allows many individuals to achieve
this goal without jeopardizing their financial security.
- - Affordability. For a significant number of persons, manufactured housing
represents the only means of achieving home ownership. In addition, the
total cost of housing in a manufactured home community (home cost, site
rent and related occupancy costs) is competitive with and often lower than
the total cost of alternative housing, such as apartments and condominiums
and generally substantially lower than stick built residential
alternatives.
- - Lifestyle Choice. As the average age of the United States population has
increased, manufactured housing has become an increasingly popular housing
alternative for retirement and "empty-nest" living. According to FNMA, the
surviving baby-boom generation - the 80 million people born between 1945
and 1964 - will constitute 18% of the U.S. population within the next 30
years and more than 32 million will reach age 55 within the next ten years.
Among those people who are nearing retirement (age 40 to 54), approximately
33% plan on moving upon retirement. The Company believes that manufactured
housing is especially attractive to such individuals when located within a
Community that offers an appealing amenity package, close proximity to
local services, social activities, low maintenance and a secure
environment.
- - Construction Quality. Since 1976, all manufactured housing has been
required to meet stringent Federal standards, resulting in significant
increases in the quality of the industry's product. The Department of
Housing and Urban Development's standards for manufactured housing
construction quality are the only Federally regulated standards governing
housing quality of any type in the United States. Manufactured homes
produced since 1976 have received a "red and silver" government seal
certifying that they were built in compliance with the Federal code. The
code regulates manufactured home design and construction, strength and
durability, fire resistance and energy efficiency, and the installation and
performance of heating, plumbing, air conditioning, thermal and electrical
systems. In newer homes, top grade lumber and dry wall materials are
common. Also, manufacturers are required to follow the same fire codes as
builders of site-built structures.
- - Comparability to Site-Built Homes. The manufactured housing industry has
experienced a recent trend towards multi-section homes. Many modern
manufactured homes are longer (up to 80 feet compared to 50 feet in the
1960s) and wider than earlier models. Many homes have vaulted ceilings,
fireplaces and as many as four bedrooms and closely resemble single family
ranch style site-built homes.
ITEM 2. PROPERTIES
The Company believes that the Properties provide attractive amenities and
common facilities that create a comfortable and attractive Community for the
residents, with most offering a clubhouse, a swimming pool, laundry facilities
and cable television service. Many also offer additional amenities such as
sauna/whirlpool spas, golf courses, tennis, shuffleboard and basketball courts
and exercise rooms. Since residents own their homes, it is their responsibility
to maintain their homes and the surrounding area. It is management's role to
insure that residents comply with Community policies and to provide maintenance
of the common areas, facilities and amenities. The Company holds periodic
meetings of its property management personnel for training and implementation of
the Company's strategies. The Properties historically have had and the Company
believes they will continue to have low turnover and high occupancy rates.
The distribution of the Properties throughout the United States reflects
the Company's belief that geographic diversification helps insulate the
portfolio from regional economic influences. The Company intends to target new
acquisitions in or near markets where the Properties are located and will also
consider acquisitions of properties outside such markets. The Company's five
largest markets of Properties owned are Florida (48 Properties), California (25
Properties), Arizona (19 Properties), Michigan (11 Properties) and Colorado (10
Properties). These markets accounted for 35%, 17%, 9%, 4%, and 9%, respectively,
of the Company's total revenues for the year ended December 31, 1999. The
Company also has Properties located in the following markets: Northeast,
Northwest, Midwest, and Nevada/Utah/New Mexico. The Company's largest Property,
Bay Indies, located in Venice, Florida accounted for 3% of the Company's total
revenues for the year ended December 31, 1999.
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The following tables set forth certain information relating to the
Properties owned by the Company as of December 31, 1999, categorized by the
Company's major markets. "Core Portfolio" represents an analysis of Properties
owned as of the beginning of both years under comparison. The table excludes the
following RV resort Properties (5,202 sites) at which rents and occupancy vary
based on seasonality: Sherwood Forest RV (Kissimmee, Florida); Southern Palms
(Eustis, Florida); Mesa Regal (Mesa, Arizona) and Fun & Sun (San Benito, Texas).
The table excludes five Properties (1,521 sites) in which the Company has a
non-controlling joint venture interest and accounts for using the equity method
of accounting.
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NUMBER MONTHLY MONTHLY
OF SITES OCCUPANCY OCCUPANCY BASE RENT BASE RENT
LOCATION AS OF AS OF AS OF AS OF AS OF
PROPERTY CITY, STATE 12/31/99 12/31/99 12/31/98 12/31/99 12/31/98
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FLORIDA
NORTHERN, CENTRAL & EASTERN:
Arrowhead Lantana FL (b) 602 96% 94% $ 388 $ 384
Brittany Estates Tallahassee FL 299 98% 99% $ 233 $ 179
Colonies of Margate Margate FL (b) 819 96% 96% $ 410 $ 407
Country Side North Vero Beach FL 646 93% 93% $ 283 $ 275
Heritage Village Vero Beach FL (b) 436 98% 98% $ 291 $ 282
Holiday Village Vero Beach FL 128 82% 83% $ 267 $ 250
Lakewood Village Melbourne FL (b) 349 95% 96% $ 331 $ 318
Mid-Florida Lakes Leesburg FL (b) 1,195 95% (c) 95% (c) $ 304 $ 297
Oak Bend Ocala FL (b) 262 82% (c) 82% (c) $ 228 $ 220
Spanish Oaks Ocala FL (b) 459 96% 96% $ 282 $ 277
The Meadows, FL Palm Beach Gardens FL 380 79% (a) $ 318 (a)
Bulow Village Flagler Beach FL (b) 276 90% (c) 82% (c) $ 238 $ 200
Carriage Cove Daytona Beach FL 418 97% 97% $ 357 $ 349
Coquina St Augustine FL 270 75% (a) $ 276 (a)
Fernwood Deland FL 92 97% 98% $ 213 $ 200
Indian Oaks Rockledge FL 211 91% (c) 83% (c) $ 236 $ 229
Landings Port Orange FL 433 89% 88% $ 288 $ 275
Pickwick Port Orange FL 432 95% 95% $ 287 $ 283
Sherwood Forest Kissimmee FL 769 89% 85% $ 305 $ 295
TAMPA/NAPLES:
Bay Indies Venice FL (b) 1,309 100% 100% $ 304 $ 300
Bay Lake Estates Nokomis FL (b) 228 100% 99% $ 348 $ 333
Boulevard Estates Clearwater FL 287 90% 92% $ 280 $ 277
Buccaneer N. Ft. Myers FL (b) 971 99% 99% $ 304 $ 293
Chalet Village Tampa FL 61 90% 93% $ 291 $ 286
Country Meadows Plant City FL 736 99% 99% $ 268 $ 261
Country Place New PortRichey FL (b) 515 83% (c) 80% (c) $ 221 $ 208
Down Yonder Largo FL 363 99% 99% $ 338 $ 326
East Bay Oaks Largo FL (b) 328 99% 98% $ 342 $ 331
Eldorado Village Largo FL (b) 227 96% 96% $ 344 $ 335
Friendly Village of Kapok Clearwater FL 236 86% 85% $ 292 $ 265
Hillcrest Clearwater FL 279 83% 82% $ 319 $ 311
Holiday Ranch Largo FL 150 94% 91% $ 312 $ 311
Lake Fairways N. Ft. Myers FL (b) 896 100% 100% $ 339 $ 332
Lake Haven Dunedin FL (b) 379 96% 95% $ 364 $ 357
Naples Estates Naples FL 484 100% 100% $ 320 $ 320
Pine Lakes N. Ft. Myers FL (b) 584 100% 100% $ 409 $ 401
Satellite Clearwater FL 88 93% 95% $ 244 $ 229
Sunset Oaks Plant City FL 167 56% (c) 49% (c) $ 213 $ 183
The Heritage N. Ft. Myers FL (b) 455 77% (c) 74% (c) $ 281 $ 266
Windmill Manor Bradenton FL 292 96% 97% $ 350 $ 332
Windmill Village - Ft. N. Ft. Myers FL (b) 491 98% 99% $ 291 $ 283
Myers
Windmill Village Sarasota FL (b) 471 100% 99% $ 311 $ 299
North
Windmill Village Sarasota FL (b) 306 100% 100% $ 310 $ 301
South ------------ ---------- ----------- ------------- --------------
TOTAL FLORIDA MARKET 18,779 94% 94% $ 310 $ 303
------------ ---------- ----------- ------------- --------------
FLORIDA MARKET - CORE PORTFOLIO 11,558 96% 95% $ 322 $ 313
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<TABLE>
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NUMBER MONTHLY MONTHLY
OF SITES OCCUPANCY OCCUPANCY BASE RENT BASE RENT
LOCATION AS OF AS OF AS OF AS OF AS OF
PROPERTY CITY, STATE 12/31/99 12/31/99 12/31/98 12/31/99 12/31/98
- ------------------------ --------------------------- ------------ ---------- ---------- ------------ ------------
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CALIFORNIA
NORTHERN CALIFORNIA
California Hawaiian San Jose CA (b) 413 99% 99% $ 580 $ 566
Colony Park Ceres CA 186 72% 73% $ 323 $ 316
Concord Cascade Pacheco CA (b) 283 100% 100% $ 493 $ 477
Contempo Marin San Rafael CA (b) 396 99% 99% $ 614 $ 596
Coralwood Modesto CA (b) 194 92% 92% $ 391 $ 380
Four Seasons Fresno CA (b) 242 69% 71% $ 241 $ 229
Laguna Lake San Luis Obispo CA 290 100% 100% $ 293 $ 286
Monte del Lago Castroville CA (b) 314 100% 96%(c) $ 457 $ 439
Quail Meadows Riverbank CA 146 92% 94% $ 333 $ 321
Royal Oaks Visalia CA (b) 149 81% 81% $ 250 $ 250
Santa Cruz Santa Cruz CA (b) 198 100% 100% $ 490 $ 475
Sea Oaks Los Osos CA (b) 125 100% 100% $ 336 $ 328
Sunshadow San Jose CA (b) 121 100% 100% $ 562 $ 537
Westwinds (4 Properties) San Jose CA (b) 724 99% 99% $ 570 $ 533
SOUTHERN CALIFORNIA:
Date Palm Country Club Cathedral City CA (b) 538 91% 90% $ 593 $ 589
Lamplighter Spring Valley CA (b) 270 100% 97% $ 509 $ 479
Meadowbrook Santee CA 332 99% 93% $ 559 $ 556
Rancho Mesa El Cajon CA 158 95% 92% $ 500 $ 486
Rancho Valley El Cajon CA (b) 140 99% 99% $ 493 $ 468
Santiago Estates Sylmar CA 303 93% 93% $ 566 $ 546
Royal Holiday Hemet CA 180 75% (a) $ 252 (a)
----- --- --- ----- -----
TOTAL CALIFORNIA MARKET 5,702 94% 94% $ 492 $ 482
----- --- --- ----- -----
CALIFORNIA MARKET - CORE PORTFOLIO 4,107 96% 95% $ 514 $ 482
----- --- --- ----- -----
ARIZONA
Apollo Village Phoenix AZ (b) 237 92% (c) 93%(c) $ 338 $ 333
Brentwood Manor Mesa AZ (b) 274 96% 96% $ 417 $ 409
Carefree Manor Phoenix AZ 127 98% 99% $ 280 $ 256
Casa del Sol #1 Peoria AZ (b) 246 94% 96% $ 392 $ 374
Casa del Sol #2 Glendale AZ (b) 239 98% 98% $ 423 $ 409
Casa del Sol #3 Glendale AZ 238 97% 96% $ 403 $ 384
Central Park Phoenix AZ (b) 293 96% 94% $ 356 $ 342
Desert Skies Phoenix AZ 164 97% 96% $ 277 $ 261
Fairview Manor Tucson AZ 235 95% 95% $ 290 $ 283
Hacienda De Valencia Mesa AZ (b) 365 93% 95% $ 343 $ 332
Mon Dak Mesa AZ 162 90% 88% $ 269 $ 254
Palm Shadows Glendale AZ (b) 294 95% 97% $ 326 $ 313
Sedona Shadows Sedona AZ (b) 200 88% 87% $ 295 $ 277
Sunrise Heights Phoenix AZ (b) 199 98% 96% $ 328 $ 307
The Mark Mesa AZ (b) 410 97% 99% $ 338 $ 317
The Meadows Tempe AZ (b) 391 97% 96% $ 399 $ 383
Whispering Palms Phoenix AZ 116 100% 97% $ 250 $ 239
----- --- --- ----- -----
TOTAL ARIZONA MARKET 4,190 95% 94% $ 347 $ 336
----- ---
ARIZONA MARKET - CORE PORTFOLIO 3,148 95% 95% $ 362 $ 347
----- --- --- ----- -----
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
NUMBER MONTHLY MONTHLY
OF SITES OCCUPANCY OCCUPANCY BASE RENT BASE RENT
LOCATION AS OF AS OF AS OF AS OF AS OF
PROPERTY CITY, STATE 12/31/99 12/31/99 12/31/98 12/31/99 12/31/98
- ------------------------ --------------------------- ------------ ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
MICHIGAN
Americana Estate Kalamazoo MI 162 94% 100% $ 248 $ 248
Appletree Walker MI 238 97% 94% $ 263 $ 263
Brighton Village Brighton MI 195 97% 95% $ 365 $ 306
College Heights Auburn Hills MI 162 93% 90% $ 320 $ 316
Creekside Wyoming MI 165 99% 98% $ 344 $ 333
Groveland Manor Holly MI 186 93% 94% $ 324 $ 297
Hillcrest Acres Kalamazoo MI 150 98% 100% $ 272 $ 253
Metro Romulus MI 227 98% 96% $ 311 $ 263
Riverview Estates Bay City MI 198 77% 80% $ 224 $ 210
South Lyon Woods South Lyon MI 211 98% 100% $ 411 $ 370
Willow Run Ypsilianti MI 185 89% 89% $ 291 $ 261
----- --- --- ----- -----
TOTAL MICHIGAN MARKET 2,079 94% 94% $ 309 $ 290
----- --- --- ----- -----
COLORADO
Bear Creek Sheridan CO 126 100% 98% $ 365 $ 355
Cimarron Broomfield CO (b) 327 99% 99% $ 368 $ 348
Golden Terrace Golden CO (b) 265 98% 96% $ 414 $ 396
Golden Terrace South Golden CO (b) 80 96% 100% $ 377 $ 363
Golden Terrace West Golden CO (b) 317 96% 98% $ 408 $ 383
Hillcrest Village Aurora CO (b) 603 96% 95% $ 401 $ 380
Holiday Hills Denver CO (b) 735 95% 95% $ 390 $ 374
Holiday Village CO Co. Springs CO (b) 240 99% 98% $ 384 $ 368
Pueblo Grande Pueblo CO (b) 252 94% 96% $ 252 $ 248
Woodland Hills Denver CO (b) 434 98% 99% $ 374 $ 353
------ --- --- ----- -----
TOTAL COLORADO MARKET 3,379 97% 97% $ 379 $ 361
------ --- --- ----- -----
COLORADO MARKET - CORE PORTFOLIO 3,253 97% 97% $ 380 $ 362
------ --- --- ----- -----
NORTHEAST
Aspen Rehoboth DE 199 98% 96% $ 226 $ 225
Camelot Meadows Rehoboth DE 302 100% 99% $ 239 $ 223
Mariners Cove Millsboro DE (b) 375 86% (c) 85% (c) $ 336 $ 311
McNicol Rehoboth DE 93 100% 99% $ 240 $ 239
Sweetbriar Rehoboth DE 142 99% 98% $ 191 $ 187
Waterford Estates Wilmington DE (b) 731 94% (c) 93% (c) $ 360 $ 345
Whispering Pines Lewes DE (b) 392 94% 93% $ 253 $ 249
Pheasant Ridge Mt. Airy MD (b) 101 99% 99% $ 410 $ 390
Brook Gardens Lackawanna NY 426 98% 98% $ 399 $ 391
Greenwood Manorville NY 474 92% (c) 89% (c) $ 362 $ 353
Green Acres Breinigsville PA (b) 595 99% (c) 98% (c) $ 386 $ 369
Meadows of Chantilly Chantilly VA (b) 500 83% 81% $ 484 $ 470
Independence Hill Morgantown WV (b) 203 87% 87% $ 192 $ 192
----- --- --- ----- -----
TOTAL NORTHEAST MARKET 4,533 93% 92% $ 341 $ 328
----- --- --- ----- -----
NORTHEAST MARKET - CORE PORTFOLIO 2,897 92% 91% $ 358 $ 343
----- --- --- ----- -----
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
NUMBER MONTHLY MONTHLY
OF SITES OCCUPANCY OCCUPANCY BASE RENT BASE RENT
LOCATION AS OF AS OF AS OF AS OF AS OF
PROPERTY CITY, STATE 12/31/99 12/31/99 12/31/98 12/31/99 12/31/98
- ------------------------ --------------------------- ------------ ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
MIDWEST
Five Seasons Cedar Rapids IA 390 82%(c) 81%(c) $ 239 $ 238
Holiday Village, IA Sioux City IA (b) 519 92% 92% $ 228 $ 217
Golf Vistas Monee IL (b) 319 77%(c) 71%(c) $ 317 $ 301
Willow Lake Estates Elgin IL (b) 622 96% 98% $ 546 $ 542
Burns Harbor Estates Chesterton IN (b) 228 93%(c) 96%(c) $ 282 $ 275
Candlelight Village Columbus IN (b) 585 99% 99% $ 195 $ 188
Oak Tree Village Portage IN (b) 380 94% 96% $ 267 $ 255
Windsong Indianapolis IN 268 97% 94% $ 258 $ 252
Bonner Springs Bonner Springs KS (b) 211 93% 92% $ 203 $ 180
Carriage Park Kansas City KS (b) 143 74%(d) 73%(d) $ 208 $ 173
Quivira Hills Kansas City KS (b) 142 82% 82% $ 222 $ 220
Camelot Acres Burnsville MN (b) 319 99% 99% $ 363 $ 340
Briarwood Brookline MO (b) 166 92% 96% $ 176 $ 176
Dellwood Estates Warrensburg MO (b) 136 86% 85% $ 157 $ 156
North Star Kansas City MO (b) 219 96% 95% $ 243 $ 221
Royal Village Toledo OH 233 92% 92% $ 265 $ 242
Rockwood Tulsa OK (b) 265 98% 100% $ 218 $ 205
----- ----- --- ----- -----
TOTAL MIDWEST MARKET 5,145 92% 92% $ 282 $ 271
----- ----- --- ----- -----
MIDWEST MARKET - CORE PORTFOLIO 4,254 93% 93% $ 288 $ 276
----- ----- --- ----- -----
NEVADA, UTAH, NEW MEXICO
Del Rey Albuquerque NM (b) 407 84% 85% $ 350 $ 350
Bonanza Las Vegas NV (b) 353 92% 92% $ 439 $ 439
Boulder Cascade Las Vegas NV 299 93% 95% $ 431 $ 428
Cabana Las Vegas NV (b) 263 100% 99% $ 393 $ 391
Flamingo West Las Vegas NV (b) 205 100% 100% $ 405 $ 380
Villa Borega Las Vegas NV (b) 293 98% 98% $ 444 $ 417
All Seasons Salt Lake City UT (b) 129 91% 98% $ 288 $ 271
Westwood Village Farr West UT (b) 300 99% 100% $ 216 $ 207
------ ----- --- ----- -----
TOTAL NEVADA, UTAH, NEW MEXICO MARKET 2,249 94% 95% $ 374 $ 374
------ ----- --- ----- -----
NEVADA, UTAH, NEW MEXICO MARKET - CORE PORTFOLIO 1,950 94% 95% $ 366 $ 363
------ ----- ----- ----- -----
NORTHWEST
Casa Village Billings MT (b) 493 97%(c) 96%(c) $ 262 $ 250
Falcon Wood Village Eugene OR (b) 183 99% 99% $ 330 $ 308
Quail Hollow Fairview OR (b) 138 99% 100% $ 409 $ 394
Shadowbrook Clackamas OR (b) 156 100% 99% $ 417 $ 394
Kloshe Illahee Federal Way WA (b) 258 100% 99% $ 432 $ 420
------ ----- ------ ----- -----
TOTAL NORTHWEST MARKET 1,228 99% 98% $ 345 $ 329
------ ----- ------ ----- -----
NORTHWEST MARKET - CORE PORTFOLIO 1,228 99% 98% $ 345 $ 329
------ ----- ----- ----- -----
GRAND TOTAL ALL MARKETS 47,284 94.2% 94.0% $ 344 $ 334
====== ===== ===== ===== =====
GRAND TOTAL ALL MARKETS - CORE PORTFOLIO 32,395 95.0%(e) 94.7%(e) $ 358 $ 346
====== ===== ===== ===== =====
</TABLE>
(a) The Company acquired this Property in 1999.
(b) Represents a Property which is part of the Core Portfolio.
(c) The process of filling expansion sites at these properties is ongoing.
(d) Carriage Park suffered damage to approximately 85 homes in 1993 due to
flooding; the process of re-leasing these sites is ongoing.
(e) Changes in total portfolio occupancy include the impact of acquisitions and
expansion programs and are therefore not comparable.
See Management's Discussion and Analysis of Financial Condition and Results of
Operations.
11
<PAGE> 12
ITEM 3. LEGAL PROCEEDINGS
DEANZA SANTA CRUZ MOBILE ESTATES
The residents of DeAnza Santa Cruz Mobile Estates, a property located in
Santa Cruz, California (the "City") previously brought several actions opposing
certain fees and charges in connection with water service at the Property. The
trial of the ongoing utility charge dispute with the residents of this Property
concluded on January 22, 1999. This summary provides the history and reasoning
underlying the Company's defense of the residents' claims and explains the
Company's decision to continue to defend its position, which the Company
believes is fair and accurate.
DeAnza Santa Cruz Mobile Estates is a 198 site community overlooking the
Pacific Ocean. It is subject to the City's rent control ordinance which limits
annual rent increases to 75% of CPI. The Company purchased this Property in
August 1994 from certain unaffiliated DeAnza entities ("DeAnza"). Prior to the
Company's purchase in 1994, DeAnza made the decision to submeter the Property
for both water and sewer in 1993 in the face of the City's rapidly rising
utility costs.
Under California Civil Code Section 798.41, DeAnza was required to reduce
rent by an amount equal to the average cost of usage over the preceding 12
months. This was done. With respect to water, not looking to submit to
jurisdiction of the California Public Utility Commission ("CPUC"), DeAnza relied
on California Public Utilities Code Section 2705.5 ("CPUC Section 2705.5") to
determine what rates would be charged for water on an ongoing basis without
becoming a public utility. This statute provides that in a submetered mobilehome
park, the property owner is not subject to regulation and control of the CPUC so
long as the users are charged what they would be charged by the utility company
if users received their water directly from the utility company. In Santa Cruz,
customers receiving their water directly from the city's water utility were
charged a certain lifeline rate for the first 400 ccfs of water and a greater
rate for usage over 400 ccfs of water, a readiness to serve charge of $7.80 per
month and tax on the total. In reliance on CPUC Section 2705.5, DeAnza
implemented its billings on this schedule notwithstanding that it did not
receive the discount for the first 400 ccfs of water because it was a commercial
and not a residential customer.
A dispute with the residents ensued over the readiness to serve charge and
tax thereon. The residents argued that California Civil Code Section 798.41
required that the park owner could only pass through its actual costs of water
(and that the excess charges over the amount of the rent rollback were an
improper rent increase) and that CPUC Section 2705.5 was not applicable. DeAnza
unbundled the utility charges from rent consistent with California Civil Code
Section 798.41 and it has generally been undisputed that the rent rollback was
accurately calculated.
In August 1994, when the Company acquired the Property, the Company
reviewed the respective legal positions of the Santa Cruz Homeowners Association
("HOA") and DeAnza and concurred with DeAnza. Their reliance on CPUC Section
2705.5 made both legal and practical sense in that residents paid only what they
would pay if they lived in a residential neighborhood within the city of Santa
Cruz and permitted DeAnza to recoup part of the expenses of operating a
submetered system through the readiness to serve charge.
Over a period of 18 months from 1993 into May of 1995, a series of
complaints were filed by the HOA and Herbert Rossman, a resident, against
DeAnza, and later, the Company. DeAnza and the Company demurred to each of these
complaints on the grounds that the CPUC had exclusive jurisdiction over the
setting of water rates and that residents under rent control had to first
exhaust their administrative remedies before proceeding in a civil action. At
one point, the case was dismissed (with leave to amend) on the basis that
jurisdiction was with the CPUC and, at another point, Mr. Rossman was dismissed
from the case because he had not exhausted his administrative remedies.
On June 29, 1995, a hearing was held before a Santa Cruz rent control
officer on the submetering of both water and sewer. The Company and DeAnza
prevailed on all issues related to sewer and the rent rollback related to water,
but the hearing officer determined that the Company could only pass through its
actual cost of water, i.e., a prorated readiness to serve charge and tax
thereon. The hearing officer did not deal with the subsidy being given to
residents through the quantity charge and ordered a rebate in a fixed amount per
resident. The Company and DeAnza requested reconsideration on this issue, among
others, which reconsideration was denied by the hearing officer.
The Company then took a writ of mandate (an appeal from an administrative
order) to the Superior Court and, pending this appeal, the residents, the
Company and the City agreed to stay the effect of the hearing officer's decision
until the Court rendered judgment.
In July 1996, the Superior Court affirmed the hearing officer's decision
without addressing concerns about the failure to take the subsidy on the
quantity charge into account.
12
<PAGE> 13
The Company requested that the City and the HOA agree to a further stay
pending appeal to the court of appeals, but they refused and the appeals court
denied the Company's request for a stay in late November 1996. Therefore, on
January 1, 1997, the Company reduced its water charges at this Property to
reflect a pass-through of only the readiness to serve charge and tax at the
master meter (approximately $0.73) and to eliminate the subsidy on the water
charges. On their March 1, 1997 rent billings, residents were credited for
amounts previously "overcharged" for readiness to serve charge and tax. The
amount of the rebate given by the Company was $36,400. In calculating the
rebate, the Company and DeAnza took into account the previous subsidy on water
usage although this issue had not yet been decided by the court of appeals. The
Company and DeAnza felt legally safe in so doing based on language in the
hearing officer's decision that actual costs could be passed through.
On March 12, 1997, the Company also filed an application with the CPUC to
dedicate the water system at this Property to public use and have the CPUC set
cost based rates for water usage. The Company believed it was obligated to take
this action because of its consistent reliance on CPUC Section 2705.5 as a safe
harbor from CPUC jurisdiction. That is, when the Company could no longer charge
for water as the local serving utility would charge, it was no longer exempt
from the CPUC's jurisdiction and control under CPUC Section 2705.5.
On March 20, 1997, the court of appeals issued the writ of mandate
requested by the Company on the grounds that the hearing officer had improperly
calculated the amount of the rebate (meaning the Company had correctly
calculated the rent credits), but also ruling that the hearing officer was
correct when he found that the readiness to serve charge and tax thereon as
charged by DeAnza and the Company were an inappropriate rent increase. The court
of appeals further agreed with the Company that the city's hearing officer did
not have the authority under California Civil Code Section 798.41 to establish
rates that could be charged in the future.
Following this decision, the CPUC granted the Company its certificate of
convenience and necessity on December 17, 1998 and approved cost based rates and
charges for water that exceed what residents were paying under the Company's
reliance on CPUC Section 2705.5. Concurrently, the CPUC also issued an Order
Instituting Investigation ("OII") confirming its exclusive jurisdiction over the
issue of water rates in a submetered system and commencing an investigation into
the confusion and turmoil over billings in submetered properties. Specifically,
the OII states: "The Commission has exclusive and primary jurisdiction over the
establishment of rates for water and sewer services provided by private
entities."
Specifically, the CPUC ruling regarding the Company's application stated:
"The ultimate question of what fees and charges may or may not be assessed,
beyond external supplier pass-through charges, for in-park facilities when a
mobile home park does not adhere to the provisions of CPUC Section 2705.5, must
be decided by the Commission."
After the court of appeals decision, the HOA brought all of its members
back into the underlying civil action for the purpose of determining damages,
including punitive damages, against the Company. The trial was continued from
July 1998 to January 1999 to give the CPUC time to act on the Company's
application. Notwithstanding the action taken by the CPUC in issuing the OII in
December 1998, the trial court denied the Company's motion to dismiss on
jurisdictional grounds and trial commenced before a jury on January 11, 1999.
Not only did the trial court not consider the Company's motion to dismiss,
the trial court refused to allow evidence of the OII or the Company's CPUC
approval to go before the jury. Notwithstanding the Company's strenuous
objections, the judge also allowed evidence of the Company's and DeAnza's
litigation tactics to be used as evidence of bad faith and oppressive actions
(including evidence of the application to the CPUC requesting a $22.00 readiness
to serve charge). The Company's motion for a mistrial based upon these
evidentiary rulings was denied. On January 22, 1999, the jury returned a verdict
awarding $6.0 million of punitive damages against the Company and DeAnza. The
Company had previously agreed to indemnify DeAnza on the matter.
The Company has bonded the judgment pending appeal in accordance with
California procedural rules, which require a bond equal to 150% of the amount of
the judgment. Post-judgment interest will accrue at the statutory rate of 10.0%
per annum.
13
<PAGE> 14
On April 19, 1999, the trial court denied all of the Company's and DeAnza's
post-trial motions for judgement notwithstanding the verdict, new trial and
remittitur. The trial court also awarded $700,000 of attorneys' fees to
plaintiffs. The Company has appealed the jury verdict and attorneys' fees award
and the Company has filed its opening brief in the jury verdict case. The
Company also has filed two related appeals challenging the result of related
litigation and a resulting attorneys' fee award. The two related appeals are
based on a preemption argument. The Company asserts the superior courts' ability
to enter an attorneys' fee award in an earlier case and take certain other
actions which were preempted by the exercise of exclusive jurisdiction by the
CPUC over the issue of how to set rates for water in a submetered mobilehome
park. The Company is awaiting notice from the court of appeal setting oral
argument in these two appeals. The jury verdict appeal also raises the
jurisdictional argument as well as several other arguments for reversal of the
punitive damage award or for a new trial. One of the arguments raised by the
Company in the jury verdict appeal is that punitive damages are not available in
a case brought under Section 798.41 of the California Mobilehome Residency Law
("MRL") since the MRL contains its own penalty provisions. The court of appeal
granted the Company's request for judicial notice of the legislative history of
the applicable MRL sections, which indicates to the Company that the court of
appeal is receptive to this argument. Although no assurances can be given, the
Company believes the appeals will be successful.
Subsequently, in June 1999 the DeAnza Santa Cruz Homeowners Association
filed a complaint in the Superior Court of California, County of Santa Cruz (No.
135991) against the Company, MHC Acquisition One, L.L.C. and Starland Vistas,
Inc. The new lawsuit seeks damages, including punitive damages, for alleged
violations of California Civil Code Sections 798.31 and 798.41 arising from
implementation of utility rates previously approved by the CPUC. The Company
demurred to (filed a motion to dismiss) the complaint on the grounds that the
Court lacks jurisdiction to hear the subject matter of the complaint given that
the CPUC has exclusive jurisdiction over utility rates and charges at the
Property. The California Superior Court denied the motion to dismiss and the
court of appeal denied the Company's request to review the denial of the
demurrer. The California Superior Court has also denied the Company's motion for
summary judgement. The Company intends to vigorously defend the matter,
including by filing a motion for summary judgement. The matter is expected to go
to trial in March 2000.
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
On September 29, 1995, the United States Environmental Protection Agency
("USEPA") issued its Findings of Violations and Order for Compliance with
respect to the National Pollution Discharge Elimination System ("NPDES") Permit
governing the operation of the onsite waste water treatment plant at one of the
Properties. On October 6, 1995, the USEPA issued its Findings of Violation and
Order for Compliance with respect to NPDES Permit governing the operation of the
onsite wastewater treatment plant at another of the Properties. The Company and
the 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.
ELLENBURG COMMUNITIES
In connection with the acquisition of the Ellenburg Communities (as
hereinafter defined) and pursuant to orders of the California Superior Court
("Court"), approximately $30 million of the amounts paid by the Company have
been deposited with the court appointed winding up agents (the "Winding Up
Agents"). The deposited amounts relate to claims (the "Karno Claims") of Norton
S. Karno (and related entities) who at various times has been a creditor,
advisor, lawyer and shareholder of certain of the entities related to the
Ellenburg Communities. The Winding Up Agents have disputed the claims and have
filed a complaint against Mr. Karno (and related entities) requesting that the
court determine that the claims be reduced or eliminated.
On October 30, 1998, the Company received notice of a lawsuit filed against
the Company and certain executive officers of the Company in the Los Angeles
County 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.
In connection with the acquisition of the Ellenburg Communities, Mr. Karno
and others have appealed various court orders on which the Company has relied.
Mr. Karno has also sought before both the California Superior Court and Court of
Appeals to take control of ECC (as hereinafter defined), but to date none of his
attempts have been successful.
14
<PAGE> 15
On September 8, 1999, Ellenburg Fund 20 ("Fund 20") filed a cross complaint
in the dissolution proceeding against the Company and certain of its affiliates
alleging causes of action for fraud and other claims in connection with the
Ellenburg acquisition. By stipulation, the Company has not yet had to respond to
the complaint, which the Company believes to be completely without merit. The
Company's defense to the claims include documents and letters signed by the
court-appointed Winding Up Agents supporting the Company's position.
Mr. Karno, the Company and certain other parties have entered into a global
settlement agreement which was filed with the Court in February 2000. The Court
will hold a hearing on the motion to approve the settlement agreement in March
2000. Although the Company can provide no assurances that the settlement will be
approved, should the Court approve the settlement agreement, substantially all
of the litigation and appeals involving the Ellenburg acquisition would be
settled or dismissed. At this time, the global settlement agreement does not
dispose of the Fund 20 lawsuit against the Company. However, the Company
believes that there is a substantial likelihood that settlement with Fund 20
will be reached or, if not, that the Company will ultimately successfully defend
itself against the lawsuit.
CANDLELIGHT PROPERTIES, L.L.C
In 1996, 1997 and 1998, the Lending Partnership made a loan to Candlelight
Properties, L.L.C. ("Borrower") in the principal amount of $8,050,000. The loan
is secured by a mortgage on Candlelight Village ("Candlelight"), a property in
Columbus, Indiana. The Company accounts for the loan as an investment in real
estate and, accordingly, Candlelight's results of operations are consolidated
with the Company's for financial reporting purposes. Concurrently with the
funding of the loan, Borrower granted the Operating Partnership the option to
acquire Candlelight upon the maturity of the loan. The Operating Partnership
notified Borrower that it was exercising its option to acquire Candlelight in
March 1999, and the loan subsequently matured on May 3, 1999. However, Borrower
failed to repay the loan and refused to convey Candlelight to the Operating
Partnership.
Borrower filed suit in the Circuit Court of Bartholomew County, Indiana
("Court") on May 5, 1999, seeking declaratory judgment on the validity of the
exercise of the option. The Lending Partnership filed suit in the Court the next
day, seeking to foreclose its mortgage, and the suits were consolidated by the
Court. The Court issued an Order on December 1, 1999, finding, among other
things, that the Operating Partnership had validly exercised the option. Both
parties have filed motions to correct errors in the Order, which motions are
currently pending before the Court. The Court has not yet ruled on the
foreclosure complaint; however, given the Court's finding in the Order, the
Lending Partnership believes that Borrower has no valid defense in the
foreclosure action. The Operating Partnership and the Lending Partnership intend
to continue vigorously pursuing this matter and believe that, while no assurance
can be given, such efforts will be successful.
The Company is involved in various other legal proceedings arising in the
ordinary course of business. All proceedings herein described or referred to,
taken together, are not expected to have a material adverse impact on the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth for the period indicated, the high and low
sales prices for the Company's common stock as reported by the New York Stock
Exchange under the trading symbol MHC.
<TABLE>
<CAPTION>
Distributions Return of Capital
Close High Low Made GAAP Basis (a)
----- ---- --- ---- --------------
<S> <C> <C> <C> <C> <C>
1999
1st Quarter $ 24.0000 $ 25.5000 $ 21.8125 $ .3875 $ .08
2nd Quarter 26.0000 27.0000 22.3750 .3875 .12
3rd Quarter 23.3750 26.0625 23.0000 .3875 .12
4th Quarter 24.3125 24.5000 22.5625 .3875 .15
1998
1st Quarter $ 25.8750 $ 27.1250 $ 24.5625 $ .3625 $ .05
2nd Quarter 24.1250 27.0000 24.0000 .3625 .08
3rd Quarter 25.4375 27.2500 22.0000 .3625 .10
4th Quarter 25.0625 25.6875 22.8750 .3625 .10
</TABLE>
(a) Represents distributions per share in excess of net income per share-basic
on a GAAP basis and is not the same as return of capital on a tax basis.
The number of beneficial holders of the Company's common stock at December 31,
1999 was approximately 5,500.
ITEM 6. SELECTED FINANCIAL AND OPERATING INFORMATION
The following table sets forth selected financial and operating information
on a historical basis for the Company. The following information should be read
in conjunction with all of the financial statements and notes thereto included
elsewhere in this Form 10-K. The historical operating data for the years ended
December 31, 1999, 1998, 1997 and 1996 have been derived from the historical
Financial Statements of the Company audited by Ernst & Young LLP, independent
auditors. The historical operating data for the year ended December 31, 1995
have been derived from the historical Financial Statements of the Company
audited by Coopers & Lybrand, L.L.P., independent auditors.
16
<PAGE> 17
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED HISTORICAL FINANCIAL INFORMATION
(Amounts in thousands, except for per share and property data)
<TABLE>
<CAPTION>
OPERATING DATA: (1) YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
REVENUES
Base rental income................................... $181,672 $165,340 $108,984 $ 93,109 $ 85,242
RV base rental income................................ 9,526 7,153 --- --- ---
Utility and other income............................. 20,096 18,219 11,785 8,821 8,481
Equity in income of affiliates....................... 2,065 1,070 800 853 885
Interest income...................................... 1,669 3,048 1,941 2,420 2,296
------------- -------------- ------------- -------------- -------------
Total revenues.................................... 215,028 194,830 123,510 105,203 96,904
------------- -------------- ------------- -------------- -------------
EXPENSES
Property operating and maintenance................... 58,038 53,064 32,343 28,399 27,057
Real estate taxes.................................... 16,460 14,470 8,352 7,947 7,241
Property management.................................. 8,337 7,108 5,079 4,338 4,675
General and administrative........................... 6,092 5,411 4,559 4,062 4,537
Interest and related amortization.................... 53,775 49,693 21,753 17,782 18,527
Depreciation on corporate assets..................... 1,005 995 590 488 349
Depreciation on real estate assets and other costs... 34,486 28,426 17,365 15,244 15,773
------------- -------------- ------------- -------------- -------------
Total expenses.................................... 178,193 159,167 90,041 78,260 78,159
------------- -------------- ------------- -------------- -------------
Income from operations............................... 36,835 35,663 33,469 26,943 18,745
Gain (loss) on sale of property...................... --- --- --- --- 1,278
------------- -------------- ------------- -------------- -------------
Income before allocation to minority interests and
extraordinary loss on early extinguishment of debt 36,835 35,663 33,469 26,943 20,023
(Income) allocated to Common OP Units................ (6,219) (6,733) (4,373) (2,671) (2,006)
(Income) allocated to Perpetual Preferred OP Units... (2,844) --- --- --- ---
------------- -------------- ------------- -------------- -------------
Income before extraordinary loss on early
extinguishment of debt............................ 27,772 28,930 29,096 24,272 18,017
Extraordinary loss on early extinguishment
of debt (net of $105 allocated to minority
interests)........................................ --- --- (451) --- ---
------------- -------------- ------------- -------------- -------------
NET INCOME........................................ $ 27,772 $ 28,930 $ 28,645 $ 24,272 $ 18,017
============= ============== ============= ============== =============
Net income per Common Share before extraordinary item
- basic.............................................. $ 1.10 $ 1.13 $ 1.18 $ 0.98 $ 0.74
============= ============== ============= ============== =============
Net income per Common Share before extraordinary item
- diluted............................................ $ 1.09 $ 1.12 $ 1.16 $ 0.98 $ 0.74
============= ============== ============= ============== =============
Net income per Common Share - basic.................. $ 1.10 $ 1.13 $ 1.16 $ 0.98 $ 0.74
============= ============== ============= ============== =============
Net income per Common Share - diluted................ $ 1.09 $ 1.12 $ 1.15 $ 0.98 $ 0.74
============= ============== ============= ============== =============
Dividend declared per Common Share................... $ 1.55 $ 1.45 $ 1.32 $ 1.22 $ 1.18
============= ============== ============= ============== =============
Weighted average Common Shares outstanding - basic... 25,224 25,626 24,689 24,693 24,353
Weighted average Common OP Units outstanding......... 5,704 5,955 3,749 2,715 2,717
Weighted average Common Shares outstanding - diluted. 31,252 31,962 28,762 27,546 27,138
</TABLE>
17
<PAGE> 18
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED HISTORICAL FINANCIAL INFORMATION
(continued)
(Amounts in thousands, except for per share and property data)
<TABLE>
<CAPTION>
BALANCE SHEET DATA: (1) AS OF DECEMBER 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Real estate, before accumulated depreciation (2)..... $1,264,343 $1,237,431 $ 936,318 $ 597,650 $ 543,229
Total assets......................................... 1,160,338 1,176,841 864,365 567,874 523,125
Total debt........................................... 725,264 750,849 495,172 254,982 211,966
Minority interests................................... 179,397 70,468 67,453 28,640 29,305
Stockholders' equity................................. 211,401 310,441 280,575 257,952 261,500
OTHER DATA:
Funds from operations (3)............................ $ 68,477 $ 64,089 $ 50,834 $ 42,187 $ 34,518
Net cash flow:
Operating activities.............................. $ 72,580 $ 71,977 $ 54,581 $ 49,660 $ 40,161
Investing activities.............................. $ (37,868) $ (262,762) $ (239,445) $ (60,954) $ 4,382
Financing activities.............................. $ (41,693) $ 203,533 $ 185,449 $ 10,858 $ (45,707)
Total Properties (at end of period) (4).............. 157 154 121 69 65
Total sites (at end of period)....................... 54,007 53,391 44,108 27,356 25,552
Total sites (weighted average)....................... 46,914 43,932 29,323 26,621 25,375
</TABLE>
(1) See the Consolidated Financial Statements of the Company included
elsewhere herein.
(2) The Company believes that the book value of the Properties, which
reflects the historical costs of such real estate assets less
accumulated depreciation, is less than the current market value of the
Properties.
(3) The Company generally considers Funds From Operations ("FFO") to be an
appropriate measure of the performance of an equity REIT. FFO was
defined by the National Association of Real Estate Investment Trusts
("NAREIT") in March 1995 as net income (computed in accordance with
generally accepted accounting principles ["GAAP"]), before allocation
to minority interests, excluding gains (or losses) from sales of
property, plus real estate depreciation and after adjustments for
significant non-recurring items, if any. In the first quarter of 1996,
the Company adopted this new definition of FFO which is effective for
periods ending after December 31, 1995. For purposes of presenting
FFO, the revised definition of FFO has been given retroactive
treatment. Prior to this adoption, FFO was defined as income before
allocation to minority interests plus certain non-cash items,
primarily depreciation and amortization. The Company believes that FFO
is helpful to investors as a measure of the performance of an equity
REIT because, along with cash flows from operating activities,
financing activities and investing activities, it provides investors
an understanding of the ability of the Company to incur and service
debt and to make capital expenditures. The Company computes FFO in
accordance with the NAREIT definition which may differ from the
methodology for calculating FFO utilized by other equity REITs and,
accordingly, may not be comparable to such other REITs computation.
FFO in and of itself does not represent cash generated from operating
activities in accordance with GAAP and therefore should not be
considered an alternative to net income as an indication of the
Company's performance or to net cash flows from operating activities
as determined by GAAP as a measure of liquidity and is not necessarily
indicative of cash available to fund cash needs.
(4) During the year ended December 31, 1995, two Properties were sold; net
operating income attributable to such Properties was approximately
$235,000, which included approximately $83,000 of depreciation and
amortization expense. During the year ended December 31, 1996, four
Properties were acquired; net operating income attributable to such
Properties was approximately $1.8 million, which included
approximately $371,000 of depreciation and amortization expense.
During the year ended December 31, 1997, 39 Properties were acquired;
net operating income attributable to such Properties was approximately
$3.8 million, which included approximately $1.7 million of
depreciation and amortization expense. During the year ended December
31, 1998, 41 Properties were acquired; net operating income
attributable to such Properties was approximately $7.6 million, which
included approximately $3.9 million of depreciation and amortization
expense. During the year ended December 31, 1999, two Properties were
acquired; net operating income attributable to such Properties was
approximately $87,000, which included approximately $104,000 of
depreciation expense.
18
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Financial Data" and the historical Consolidated Financial Statements and Notes
thereto appearing elsewhere in this Form 10-K. The following discussion may
contain certain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 which reflect management's current
views with respect to future events and financial performance. Such
forward-looking statements are subject to certain risks and uncertainties,
including, but not limited to, the effects of future events on the Company's
financial performance; the adverse impact of external factors such as inflation
and consumer confidence; and the risks associated with real estate ownership.
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 1999 TO YEAR ENDED DECEMBER 31, 1998
Since December 31, 1997, the gross investment in real estate has increased
from $936 million to $1,264 million as of December 31, 1999 due to the
acquisition of the following Properties (collectively, the "1998 & 1999
Acquisition Properties"):
(i) The Ellenburg Communities acquired throughout 1998
(ii) Quail Meadows on January 8, 1998
(iii) Sherwood Forest RV Resort on April 30, 1998
(iv) Casa Del Sol Resort III on May 14, 1998
(v) The College Heights Communities (a portfolio of eighteen
Properties) on June 4, 1998
(vi) Sunset Oaks on August 13, 1998
(vii) The Meadows on April 1, 1999
(viii) Coquina Crossing on July 23, 1999
The total number of sites owned and controlled has increased from 44,108 as of
December 31, 1997 to 54,007 as of December 31, 1999.
The following table summarizes certain weighted average statistics for the
years ended December 31, 1999 and 1998. "Core Portfolio" represents an analysis
of properties owned as of the beginning of both periods of comparison.
<TABLE>
<CAPTION>
Core Portfolio Total Portfolio
-------------------------- --------------------------
1999 1998 1999 1998
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Total sites 32,393 32,358 46,914 43,932
Occupied sites 30,708 30,652 44,110 41,420
Occupancy % 94.8% 94.7% 94.0% 94.3%
Monthly base rent per site $356 $343 $343 $332
</TABLE>
Base rental income ($181.7 million) increased $16.3 million or 9.9%. For
the Core Portfolio, base rental income increased approximately $4.8 million or
3.8%, due to increased base rental rates. The remaining $11.5 million increase
in base rental income was attributed to the 1998 & 1999 Acquisition Properties.
Monthly base rent per site for the total portfolio increased 3.3%,
reflecting a 3.7% increase in monthly base rent per site for the Core Portfolio,
partially offset by the acquisition of Properties with average base rents lower
than the Core Portfolio. Average monthly base rent per site for the 1998 & 1999
Acquisition Properties was $314.69 for the year ended December 31, 1999.
Weighted average occupied sites increased by 2,690 sites while occupancy
percentage decreased 0.3% due to the addition of the 1998 & 1999 Acquisition
Properties to the portfolio with lower occupancy percentages. Occupied sites at
the Core Portfolio remained stable.
RV base rental income ($9.5 million) increased $2.4 million or 33.2%
primarily due to the addition of four RV Properties in 1998.
Utility and other income ($20.1 million) increased $1.9 million or 10.3%
attributed to the 1998 & 1999 Acquisition Properties.
19
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Interest income ($1.7 million) decreased $1.4 million or 45.2%, primarily
due to the conversion of some notes receivable to fee simple interests in The
Meadows and certain Ellenburg Communities. Short-term investments had average
balances for the years ended December 31, 1999 and 1998 of approximately $2.8
million and $6.9 million, respectively, which earned interest income at an
effective rate of 6.3% and 5.4% per annum, respectively.
Property operating and maintenance expenses ($58.0 million) increased $5.0
million or 9.4%. Expenses related to the 1998 & 1999 Acquisition Properties were
approximately $4.6 million. Expenses at the Core Portfolio increased slightly as
increases in repairs and maintenance, payroll and utility expenses were
partially offset by decreased property general and administrative expenses and
insurance and other expenses. Property operating and maintenance expenses
represented 27.0% of total revenues in 1999 and 27.2% in 1998.
Real estate taxes ($16.5 million) increased $2.0 million or 13.8%, of which
approximately $1.3 million was attributed to the 1998 & 1999 Acquisition
Properties and $668,000 relates to slightly increased rates at the Core
Portfolio. Real estate taxes represented 7.7% of total revenues in 1999 and 7.4%
in 1998.
Property management expenses ($8.3 million) increased $1.2 million or
16.9%. The increase was primarily due to the addition of senior management
personnel in the areas of operations, human resources and accounting and the
incremental expenses related to management of the 1998 & 1999 Acquisition
Properties. Property management expenses represented 3.9% of total revenues in
1999 and 3.6% in 1998.
General and Administrative ("G&A") expenses ($6.1 million) increased
$682,000 or 12.6%. The increase was primarily due to increased payroll resulting
from salary increases and increased public company related expenses. G&A expense
represented 2.8% of total revenues in both 1999 and 1998.
Interest and related amortization ($53.8 million) increased $4.1 million or
8.2%. The increase was due to higher weighted average outstanding debt balances
during the period. The weighted average outstanding debt balances for the year
ended December 31, 1999 and 1998 were $738.1 million and $696.0 million,
respectively. The effective interest rate was 7.2% per annum in both 1999 and
1998. Interest and related amortization represented 25.0% of total revenues in
1999 and 25.5% in 1998.
Depreciation on corporate assets ($1.0 million) increased $10,000 or 1.0%
due to fixed asset additions related to information and communication systems.
Depreciation on corporate assets represented 0.5% of total revenues in both 1999
and 1998.
Depreciation on real estate assets and other costs ($34.5 million)
increased $6.1 million or 21.3% as a result of the addition of the 1998 & 1999
Acquisition Properties. Depreciation on real estate assets and other costs
represented 16.0% of total revenues in 1999 and 14.6% in 1998.
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31, 1997
Since December 31, 1996, the gross investment in real estate has increased
from $598 million to $1,237 million as of December 31, 1998 due to the
acquisition of the following Properties (collectively, the "1997 & 1998
Acquisition Properties"):
(i) California Hawaiian on March 14, 1997
(ii) Golf Vista Estates on March 27, 1997
(iii) Golden Terrace South on May 30, 1997
(iv) The MPW Properties ( a portfoilo of twenty Properties) on August 29,
1997
(v) Arrowhead Village on September 16, 1997
(vi) The Ellenburg Communities acquired throughout 1998
(vii) Quail Meadows on January 8, 1998
(viii) Sherwood Forest RV Resort on April 30, 1998
(ix) Casa Del Sol Resort III on May 14, 1998
(x) The College Heights Communities (a portfolio of eighteen Properties)
on June 4, 1998
(xi) Sunset Oaks on August 13, 1998.
The total number of sites owned and controlled has increased from 27,356 as of
December 31, 1996 to 53,391 as of December 31, 1998.
20
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The following table summarizes certain weighted average statistics for the
years ended December 31, 1998 and 1997. "Core Portfolio" represents an analysis
of Properties owned during both periods of comparison.
<TABLE>
<CAPTION>
Core Portfolio Total Portfolio
----------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total sites 27,455 27,432 43,932 29,323
Occupied sites 26,057 25,983 41,420 27,770
Occupancy % 94.9% 94.7% 94.3% 94.7%
Monthly base rent per site $335 $321 $332 $327
</TABLE>
Base rental income ($165 million) increased $56.3 million or 51.7%. For the
Core Portfolio, base rental income increased approximately $4.1 million or 4.1%,
reflecting an increase in base rental rates. The remaining $52.2 million
increase in base rental income was attributed to the 1997 & 1998 Acquisition
Properties.
Monthly base rent per site for the total portfolio increased 1.5%,
reflecting a 4.4% increase in monthly base rent per site for the Core Portfolio
offset by lower monthly base rents for the 1997 & 1998 Acquisition Properties.
Average monthly base rent per site for the 1997 & 1998 Acquisition Properties
was $329 for the year ended December 31, 1998.
Weighted average occupancy decreased 0.4% due to the addition of the 1997 &
1998 Acquisition Properties to the portfolio with lower occupancy percentages,
partially offset by increased occupancy at the Core Portfolio The 0.2% increase
at the Core Portfolio reflects a 0.4% decrease attributed to lower occupancy at
four family properties and lower occupancy at two Properties where the Company
has implemented a program to upgrade the resident profile and housing stock.
Excluding these Properties, occupancy at the Core Portfolio increased 0.6%.
Utility and other income ($25.4 million) increased $13.6 million or 115.3%,
due to an increase of $13.1 million attributed to the 1997 & 1998 Acquisition
Properties, including $7.2 million of RV income. The remaining $500,000 increase
reflected increased utility income, real estate tax pass-ons and other
miscellaneous income at the Core Portfolio.
Interest income ($3.0 million) increased $1.1 million or 57.0%, primarily
due to the issuance of $14.6 million of notes receivable and an increase in
interest earned on short-term investments. Short-term investments had average
balances for the years ended December 31, 1998 and 1997 of approximately $6.9
million and $4.7 million, respectively, which earned interest income at an
effective rate of 5.4% per annum in both years.
Property operating and maintenance expenses ($53.0 million) increased $20.7
million or 64.1%. Of this increase $19.4 million is attributed to the 1997 &
1998 Acquisition Properties. The remaining $1.3 million increase includes
approximately $300,000 of one-time expenses associated with water main breaks,
storm damage and legal costs at the Core Portfolio. The Core Portfolio also
experienced increases in property payroll, property general and administrative
expenses and insurance and other expenses. Property operating and maintenance
expenses represented 27.2% of total revenues in 1998 and 26.2% in 1997.
Real estate taxes ($14.5 million) increased $6.1 million or 73.3% due to
the impact of the 1997 & 1998 Acquisition Properties. Real estate taxes
represented 7.4% of total revenues in 1998 and 6.8% in 1997.
Property management expenses ($7.1 million) increased $2.0 million or
39.9%. The increase was primarily due to an increase in management company
payroll and incremental costs associated with self management of the 1997 & 1998
Acquisition Properties. Property management expenses represented 3.6% of total
revenues in 1998 and 4.1% of total revenues in 1997.
G&A ($5.4 million) increased $851,000 or 18.7%. The increase was primarily
due to increased payroll. G&A expenses represented 2.8% of total revenues in
1998 and 3.7% in 1997.
21
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Interest and related amortization ($49.7 million) increased $27.9 million
or 128.4%. The increase was due to higher weighted average outstanding debt
balances during the period. The weighted average outstanding debt balances for
the years ended December 31, 1998 and 1997 were $696 million and $301.3 million,
respectively. The effective interest rate was 7.2% in 1998 and 7.1% in 1997.
Interest and related amortization represented 25.5% of total revenues in 1998
and 17.6% in 1997.
Depreciation on corporate assets ($995,000) increased $405,000 or 68.8% due
to fixed asset additions in 1997 and 1998 associated with the Company's upgrade
of certain computer systems infrastructure and the wide area network.
Depreciation on corporate assets represented 0.5% of total revenues in both 1998
and 1997.
Depreciation on real estate assets and other costs ($28.4 million)
increased $11.1 million or 63.7% as a result of 1997 & 1998 Acquisition
Properties. Depreciation on real estate assets and other costs represented 14.6%
of total revenues in 1998 and 14.1% in 1997.
LIQUIDITY AND CAPITAL RESOURCES
FOR THE YEAR ENDED DECEMBER 31, 1999
Net cash provided by operating activities increased $608,000 to
approximately $72.6 million for the year ended December 31, 1999 from $72.0
million for the year ended December 31, 1998. Net cash provided by operating
activities reflected a $4.4 million increase in funds from operations ("FFO"),
as discussed below, offset by slower growth in accounts payable and rents
received in advance due to the 1998 & 1999 Acquisition Properties.
Net cash used in investing activities decreased $224.9 million to $37.9
million for the year ended December 31, 1999 from $262.8 million for the year
ended December 31, 1998. This was primarily due to the acquisition of Quail
Meadows, Sherwood Forest RV Resort, Casa Del Sol Resort III, the College Heights
Communities, acquisition advances related to the Ellenberg Communities, the
purchase of short-term investments, the funding of The Meadows Loan (as
hereinafter defined), and the investment in Plantation on the Lake and Trails
West in 1998, partially offset by the investment in The Meadows and the
acquisition of Coquina Crossing in 1999.
On January 6, 1998, the Company funded a $12.3 million loan (the "Meadows
Loan") to Meadows Preservation, Inc. The Meadows Loan was collateralized by The
Meadows manufactured home community located in Palm Beach Gardens, Florida. On
April 1, 1999, the Company effectively exchanged The Meadows Loan for an equity
and debt interest in the partnership that owns The Meadows. The Company accounts
for The Meadows as an acquisition and consolidates the Property and related
results of operations and therefor no interest income was recognized on the
Meadows Loan after the exchange.
On July 23, 1999, the Company acquired Coquina Crossing, located in St.
Augustine, Florida, for a purchase price of approximately $10.4 million. The
acquisition was funded with a borrowing under the Company's line of credit.
Coquina Crossing is a 748-site senior community with 269 developed sites and
zoned expansion potential of 479 sites. In addition, RSI purchased the model
home inventory at the community for approximately $1.1 million.
Capital expenditures for improvements were approximately $14.4 million for
the year ended December 31, 1999 compared to $14.2 million for the year ended
December 31, 1998. Of the $14.4 million, approximately $8.6 million represented
improvements to existing sites. The Company anticipates spending approximately
$7.0 million on improvements to existing sites during 2000. The Company believes
these improvements are necessary in order to increase and/or maintain occupancy
levels and maintain competitive market rents for new and renewing residents. The
remaining $5.8 million represented costs to develop expansion sites at certain
of the Company's Properties and other corporate headquarter costs.
Net cash (used in) provided by financing activities decreased $245.2
million to ($41.7 million) for the year ended December 31, 1999 from $203.5
million for the year ended December 31, 1998. This is primarily due to lower net
borrowings on the line of credit compared to the same period in 1998 and
proceeds from issuance of common stock in the year ended December 31, 1998
compared to repurchases of common stock in the year ended December 31, 1999. On
September 30, 1999, the Operating Partnership completed a $125 million private
placement of 9.0% Series D Cumulative Redeemable Perpetual Preferred Units. The
net proceeds from this placement were used to pay down the line of credit. Also,
during 1999 the Company repurchased over 4 million shares of Common Stock at an
average price of $23.40 per share using proceeds from borrowings on the line of
credit. Net borrowings on the line of credit of $120.1 million for the year
ended December 31, 1998 compare to net repayments on the line of credit of $37.1
million for the year ended December 31, 1999.
22
<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Distributions to common stockholders and minority interests decreased
approximately $6.0 million. This was due primarily to a change in the timing of
the fourth quarter dividend which, for the fourth quarter of 1998, was paid on
December 30, 1998 and, for the fourth quarter of 1999, was not paid until
January 14, 2000. On April 9, 1999, July 9, 1999, October 8, 1999 and January
14, 1999, the Company paid a $.3875 per share distribution for the quarters
ended March 31, 1999, June 30, 1999, September 30, 1999 and December 31, 1999
respectively, to stockholders of record on March 26, 1999, June 25, 1999,
September 24, 1999 and December 31, 1999 respectively.
FOR THE YEAR ENDED DECEMBER 31, 1998
Net cash provided by operating activities increased $17.4 million from
$54.6 million for the year ended December 31, 1997 to $72.0 million for the same
period in 1998. This increase reflected a $13.3 million increase in FFO, which
reflected increases in rental income as discussed in "Results of Operations"
above, and an increase in accounts payable and real estate tax accruals and
rents received in advance related to the property acquisitions, partially offset
by increased prepaid expenses.
Net cash used in investing activities increased $23.3 million from $239.4
million for the year ended December 31, 1997 to $262.8 million for the year
ended December 31, 1998, primarily due to the funding of notes receivable,
improvements made to acquisition properties, and collection of escrow proceeds
related to the acquisition of the Ellenburg Communities, partially offset by the
sale of project related assets in 1997.
On September 4, 1997, the Company entered into a portfolio purchase
agreement (as amended by a supplemental agreement on December 17, 1997) to
acquire 38 Communities (the "Ellenburg Communities") from partnerships having
Ellenburg Capital Corporation ("ECC") as the general partner for a purchase
price in excess of $300 million. From December 17, 1997 through December 31,
1998, the Company closed on the acquisition of thirty-one of the Ellenburg
Communities for an aggregate purchase price of approximately $278 million and
gained control of an additional five Ellenburg Communities with acquisition
advances of approximately $57 million to the partnerships which own such
Ellenburg Communities. The Company funded the acquisition advances with
borrowings under the Company's line of credit and term bank facilities. In
addition, the Company assumed debt of approximately $32 million and issued OP
Units of approximately $4.9 million in connection with this transaction.
During 1998, the Company received approximately $14.3 million, including
approximately $365,000 of interest income, which was being held subject to the
completion of due diligence procedures on the Ellenburg Communities. The persons
appointed to windup the affairs of ECC have released the funds and have
presented a status report to the court. The $14.3 million has been recorded as a
liability until certain related issues are finalized at which point the final
liability will be relieved and the purchase price of the Ellenburg Communities
adjusted accordingly.
On January 6, 1998, the Company funded a $12.3 million loan (the "Meadows
Loan") to Meadows Preservation, Inc. The Meadows Loan is collateralized by The
Meadows manufactured home community located in Palm Beach Gardens, Florida,
bears interest at a nominal rate of 9%, subject to adjustment based on cash flow
of the property, and matures on April 30, 1999.
On January 8, 1998, the Company acquired Quail Meadows, located in
Riverbank, California, for a purchase price of approximately $4.7 million. The
acquisition was funded with a borrowing under the Company's line of credit.
Quail Meadows consists of approximately 146 developed sites.
On April 30, 1998, the Company acquired Sherwood Forest RV Resort, located
adjacent to one of the Ellenburg Communities in Kissimmee, Florida, for a
purchase price of approximately $7.0 million. The acquisition was funded with a
borrowing under the Company's line of credit. Sherwood Forest RV Resort consists
of approximately 512 developed sites and a 33 acre expansion parcel.
On May 14, 1998, the Company acquired Casa Del Sol Resort III, located
adjacent to one of the Company's communities in Peoria, Arizona, for a purchase
price of approximately $9.8 million. The acquisition was funded with a borrowing
under the Company's line of credit. Casa Del Sol Resort III consists of 238
developed sites.
23
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
On June 4, 1998, the Company entered into a joint venture agreement with
Wolverine Investors L.L.C. to acquire the College Heights Communities. The
aggregate purchase price for the College Heights Communities was approximately
$89 million. The Company contributed approximately $19 million to the joint
venture, Wolverine Investors L.L.C. contributed approximately $2.0 million to
the joint venture and the remainder of the acquisition was funded with a
borrowing from a financial institution of approximately $68 million. The
Company's $19 million contribution to the joint venture was funded with a
borrowing under the Company's line of credit. Due to the Company's ability to
control the joint venture through its ownership percentage, the joint venture
has been consolidated with the Company for financial reporting purposes.
On August 13, 1998, the Company acquired Sunset Oaks, located in Plant
City, Florida, adjacent to one of the Company's existing properties, for a
purchase price of approximately $3.6 million. The acquisition was funded with a
borrowing under the Company's line of credit. Sunset Oaks consists of 168
developed sites.
Capital expenditures for improvements were approximately $14.2 million for
the year ended December 31, 1998 compared to $6.4 million for the year ended
December 31, 1997. Of the $14.2 million, approximately $8 million represented
improvements to existing sites including $3.5 million related to newly acquired
properties. The remaining $6.2 million represented costs to develop expansion
sites at certain of the Company's Properties and other corporate headquarter
costs.
Net cash provided by financing activities increased $18.1 million from
$185.4 million for the year ended December 31, 1997 to $203.5 million for the
year ended December 31, 1998 primarily due to the issuance of common stock in
the second quarter of 1998, partially offset by decreased net proceeds from the
line of credit, term loan and mortgage notes payable.
On April 23, 1998, the Company completed an offering of 1,048,059 shares of
common stock (the "Unit Trust Offering") and sold the shares to Merrill Lynch,
Pierce, Fenner & Smith Incorporated (the "Underwriter"). The offering price per
share was $25.4375, the closing price for shares of the Company's common stock
on April 23, 1998, resulting in gross offering proceeds of approximately $26.7
million. Net of the Underwriter's discount and offering expenses, the Company
received approximately $25 million. The Underwriter deposited the shares of
common stock with the trustee of the Equity Investor Fund Cohen & Steers Realty
Majors Portfolio, a unit investment trust (the "Trust"), in exchange for units
in the Trust.
For the year ended December 31, 1999, the Company declared and paid
quarterly distributions totaling $1.55 per share. For the year ended December
31, 1998, the Company declared and paid quarterly distributions totaling $1.45
per share. Return of capital on a GAAP basis was $0.49, $0.33 and $0.17 for the
years ended December 31, 1999, 1998 and 1997, respectively.
Substantially all of the leases at the Properties allow for monthly or
annual rent increases which provide the Company with the opportunity to achieve
increases, where justified by the market, as each lease matures. Such types of
leases generally minimize the risk of inflation to the Company.
The Company expects to meet its short-term liquidity requirements,
including its distributions, generally through its working capital, net cash
provided by operating activities and availability under the existing line of
credit. The Company expects to meet certain long-term liquidity requirements
such as scheduled debt maturities, property acquisitions and capital
improvements by long-term collateralized and uncollateralized borrowings
including borrowings under its existing line of credit and the issuance of debt
securities or additional equity securities in the Company, in addition to
working capital.
In June 1998, the Financial Accounting Standards Board ("FASB") 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. In June 1999, the FASB issued Statement No.
137 which deferred the effective date of SFAS No. 133 to all fiscal quarters for
fiscal years beginning after June 15, 2000. 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, when implemented.
24
<PAGE> 25
FUNDS FROM OPERATIONS
FFO was defined by NAREIT in March 1995 as net income (computed in
accordance with GAAP), before allocation to minority interests, excluding gains
(or losses) from sales of property, plus real estate depreciation and after
adjustments for significant non-recurring items, if any. In the first quarter of
1996, the Company adopted this new definition of FFO which was effective for
periods ending after December 31, 1995. The Company computes FFO in accordance
with the NAREIT definition which may differ from the methodology for calculating
FFO utilized by other equity REITs and, accordingly, may not be comparable to
such other REITs computation. Funds available for distribution ("FAD") is
defined as FFO less non-revenue producing capital expenditures. The Company
believes that FFO and FAD are useful to investors as a measure of the
performance of an equity REIT because, along with cash flows from operating
activities, financing activities and investing activities, they provide
investors an understanding of the ability of the Company to incur and service
debt and to make capital expenditures. FFO and FAD in and of themselves do not
represent cash generated from operating activities in accordance with GAAP and
therefore should not be considered an alternative to net income as an indication
of the Company's performance or to net cash flows from operating activities as
determined by GAAP as a measure of liquidity and are not necessarily indicative
of cash available to fund cash needs.
The following table presents a calculation of FFO and FAD for the years
ended December 31, 1999, 1998 and 1997 (amounts in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
COMPUTATION OF FUNDS FROM OPERATIONS:
Income before extraordinary item............................ $ 27,772 $ 28,930 $ 29,096
Income allocated to Common OP Units......................... 6,219 6,733 4,373
Depreciation on real estate assets and other costs.......... 34,486 28,426 17,365
-------- -------- --------
Funds from operations..................................... $ 68,477 $ 64,089 $ 50,834
======== ======== ========
Weighted average Common Stock outstanding - diluted......... 31,252 31,962 28,762
COMPUTATION OF FUNDS AVAILABLE FOR DISTRIBUTION:
Funds from operations....................................... $ 68,477 $ 64,089 $ 50,834
Non-revenue producing improvements to real estate........... (8,656) (8,005) (4,187)
-------- -------- --------
Funds available for distribution.......................... $ 59,821 $ 56,084 $ 46,647
======== ======== ========
Weighted average Common Stock outstanding - diluted......... 31,252 31,962 28,762
</TABLE>
YEAR 2000
In prior years, the Company discussed the nature and progress of its plans
to become year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company will
continue to monitor its mission critical computer applications and those of its
suppliers and vendors throughout the year 2000 to ensure that any latent Year
2000 matters that may arise are addressed promptly.
25
<PAGE> 26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's earnings are affected by changes in interest rates as a
portion of the Company's outstanding indebtedness is at variable rates based on
LIBOR. The Company's $175 million line of credit ($107.9 million outstanding at
December 31, 1999) bears interest at LIBOR plus 1.125% and the Company's $100
million Term Loan bears interest at LIBOR plus 1.0%. If LIBOR
increased/decreased by 1.0% during 1999, interest expense would have
increased/decreased by approximately $1.0 million based on the average balance
outstanding under the Company's line of credit for the year ended December 31,
1998.
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 that were deemed immaterial. The value of the 1998 Swap was
impacted by changes in the market rate of interest. Had the 1998 Swap been
entered into on December 31, 1999, the applicable LIBOR swap rate would have
been approximately 6.57%. 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 $28,000. The Company accounted for the 1998
Swap as a hedge. Payments and receipts under the 1998 Swap were accounted for as
an adjustment to interest expense. On January 10, 2000, the Company unwound the
1998 SWAP and received $1.0 million of proceeds which will be amortized into
interest expense through March 2003.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Combined Financial Statements on page F-1 of this
Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10, 11, 12, 13.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, EXECUTIVE
COMPENSATION, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 10, Item 11, Item 12, and Item
13 will be contained in a definitive proxy statement which the
Registrant anticipates will be filed no later than April 28,
2000, and thus this Part has been omitted in accordance with
General Instruction G(3) to Form 10-K.
26
<PAGE> 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)
(1&2) See Index to Financial Statements and Schedules on page F-1 of
this Form 10-K.
(3) Exhibits:
2(a) Admission Agreement between Equity Financial and
Management Co., Manufactured Home Communities, Inc.
and MHC Operating Partnership
3.1(a) Articles of Incorporation of Manufactured Home
Communities, Inc.
3.2(a) Articles of Amendment and Restatement of Manufactured
Home Communities, Inc.
3.3(g) Amended Bylaws of Manufactured Home Communities, Inc.
4 Not applicable
9 Not applicable
10.1(a) Amended and Restated Agreement of Limited Partnership
of MHC Operating Limited Partnership
10.2(a) Agreement of Limited Partnership of MHC Financing
Limited Partnership
10.3(a) Agreement of Limited Partnership of MHC Management
Limited Partnership
10.4(a) Property Management and Leasing Agreement between MHC
Financing Limited Partnership and MHC Management
Limited Partnership
10.5(a) Property Management and Leasing Agreement between MHC
Operating Limited Partnership and MHC Management
Limited Partnership
10.6(a) Services Agreement between Realty Systems, Inc. and
MHC Management Limited Partnership
10.7(a) Rate Protection Agreement
10.8(a) Revolving Credit Note made by Realty Systems, Inc. to
Equity Financial and Management Co.
10.9(a) Assignment to MHC Operating Limited Partnership of
Revolving Credit Note made by Realty Systems, Inc. to
Equity Financial and Management Co.
10.10(a) Stock Option Plan
10.11A(a) Indenture of Mortgage, Deed of Trust, Security
Agreement, Financing Statement, Fixture Filing and
Assignment of Rents
10.11B(a) Promissory Note
10.11C(a) Assignment of Loan Documents
10.11D(a) Assignment of Leases, Rents and Security Deposits
10.11E(a) Swap Agreement Pledge and Security Agreement
10.11F(a) Cash Collateral Account Security, Pledge and
Assignment Agreement
10.11G(a) Assignment of Property Management and Leasing
Agreement
10.11H(a) Trust Agreement
10.12(a) Form of Noncompetition Agreement
10.13(a) Form of Noncompetition Agreement
10.13A(a) Form of Noncompetition Agreement
10.14(a) General Electric Credit Corporation Commitment Letter
10.15(a) Administrative Services Agreement between Realty
Systems, Inc. and Equity Group Investments, Inc.
10.16(a) Registration Rights and Lock-Up Agreement with the
Company (the Original Owners, EF&M, Directors,
Officers and Employees)
10.17(a) Administrative Services Agreement between the Company
and Equity Group Investments, Inc.
10.18(a) Form of Subscription Agreement between the Company
and certain officers and other individuals dated
March 3, 1993
10.19(a) Form of Secured Promissory Note payable to the
Company by certain officers dated March 3, 1993
10.20(a) Form of Pledge Agreement between the Company and
certain officers dated March 3, 1993
10.21(a) Loan and Security Agreement between Realty Systems,
Inc. and MHC Operating Limited Partnership
10.22(a) Equity and Registration Rights Agreement with the
Company (the GM Trusts)
10.23(b) Agreement of Limited Partnership of MHC Lending
Limited Partnership
10.23(c) Agreement of Limited Partnership of MHC-Bay Indies
Financing Limited Partnership
10.24(c) Agreement of Limited Partnership of MHC-De Anza
Financing Limited Partnership
10.25(c) Agreement of Limited Partnership of MHC-DAG
Management Limited Partnership
10.26(d) Amendment No. 2 to MHC Operating Limited Partnership
Amended and Restated Partnership Agreement dated
February 15, 1996
10.27(d) Form of Subscription Agreement between the Company
and certain members of management of the Company
dated January 2, 1996
27
<PAGE> 28
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
10.28(d) Form of Secured Promissory Note payable to the
Company by certain members of management of the
Company dated January 2, 1996
10.29(d) Form of Pledge Agreement between the Company and
certain members of management of the Company dated
January 2, 1996
10.30(e) Second Amended and Restated MHC Operating Limited
Partnership Agreement of Limited Partnership, dated
as of March 15, 1996
10.31(f) Agreement of Limited Partnership of MHC Financing
Limited Partnership Two
10.32g) $265,000,000 Mortgage Note dated December 12,1997
10.33(g) Second Amended and Restated Credit Agreement
(Revolving Facility) between the Company, MHC
Operating Limited Partnership, and certain lenders
and agents, dated April 28, 1998
10.34(g) First Amendment to Second Amended and Restated Credit
Agreement between the Company, MHC Operating Limited
Partnership, and certain lenders and agents, dated
December 18, 1998
10.35(g) Amended and Restated Credit Agreement (Term Loan)
between the Company, MHC Operating Limited
Partnership, and certain lenders and agent, dated
April 28, 1998
10.36(g) Letter Agreement between the Company and Bank of
America National Trust and Savings Association
confirming the $100 million swap transaction, dated
July 11, 1995
11 Not applicable
12(h) Computation of Ratio of Earnings to Fixed Charges
13 Not applicable
16 Not applicable
18 Not applicable
21(h) Subsidiaries of the registrant
22 Not applicable
23(h) Consent of Independent Auditors
24.1(h) Power of Attorney for John F. Podjasek, Jr. dated
March 6, 1999
24.2(h) Power of Attorney for Michael A. Torres dated March
6, 1999
24.3(h) Power of Attorney for Thomas E. Dobrowski dated March
7, 1999
24.4(h) Power of Attorney for Gary Waterman dated March 9,
1999
24.5(h) Power of Attorney for Donald S. Chisholm dated March
6, 1999
24.6(h) Power of Attorney for Louis H. Masotti dated March 7,
1999
27(h) Financial Data Schedule
28 Not applicable
(a) Included as an exhibit to the Company's Form S-11 Registration Statement,
File No. 33-55994, and incorporated herein by reference.
(b) Included as an exhibit to the Company's Report on Form 10-K dated December
31, 1993, and incorporated herein by reference.
(c) Included as an exhibit to the Company's Report on Form 10-K dated December
31, 1994, and incorporated herein by reference.
(d) Included as an exhibit to the Company's Report on Form 10-Q for the quarter
ended March 31, 1996, and incorporated herein by reference.
(e) Included as an exhibit to the Company's Report on Form 10-Q for the quarter
ended June 30, 1996, and incorporated herein by reference.
(f) Included as an exhibit to the Company's Report on Form 10-K dated December
31, 1997, and incorporated herein by reference.
(g) Included as an exhibit to the Company's Form S-3 Registration Statement,
File No. 333-90813, and incorporated herein by reference.
(h) Filed herewith.
28
<PAGE> 29
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
(b) Reports on Form 8-K:
None.
(c) Exhibits:
See Item 14 (a)(3) above.
(d) Financial Statement Schedules:
See Index to Financial Statements attached hereto on page F-1 of
this Form 10-K.
29
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MANUFACTURED HOME COMMUNITIES, INC.,
a Maryland corporation
Date: March 9, 2000 By: /s/ Howard Walker
-------------------- ----------------------------------
Howard Walker
President and Chief
Executive Officer
Date: March 9, 2000 By: /s/ Thomas P. Heneghan
--------------------- ----------------------------------
Thomas P. Heneghan
Executive Vice President, Treasurer
and Chief Financial Officer
Date: March 9, 2000 By: /s/ Mark Howell
--------------------- -----------------------------------
Mark Howell
Principal Accounting Officer
30
<PAGE> 31
MANUFACTURED HOME COMMUNITIES, INC. - SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Howard Walker Chief Executive Officer and President
- ---------------------------------------- *Attorney-in-Fact
Howard Walker March 9, 2000
-----------------------
Executive Vice President, Treasurer
/s/ Thomas P. Heneghan and Chief Financial Officer
- ---------------------------------------- *Attorney-in-Fact
Thomas P. Heneghan March 9, 2000
-----------------------
/s/ Samuel Zell Chairman of the Board
- ----------------------------------------
Samuel Zell March 9, 2000
-----------------------
/s/ Sheli Z. Rosenberg Director
- ----------------------------------------
Sheli Z. Rosenberg March 9, 2000
-----------------------
/s/ David A. Helfand Director
- ----------------------------------------
David A. Helfand March 9, 2000
-----------------------
*Donald S. Chisholm Director
- ----------------------------------------
Donald S. Chisholm March 9, 2000
-----------------------
*Thomas E. Dobrowski Director
- ----------------------------------------
Thomas E. Dobrowski March 9, 2000
-----------------------
*Louis H. Masotti Director
- ----------------------------------------
Louis H. Masotti March 9, 2000
-----------------------
*John F. Podjasek, Jr. Director
- ----------------------------------------
John F. Podjasek, Jr. March 9, 2000
-----------------------
*Michael A. Torres Director
- ----------------------------------------
Michael A. Torres March 9, 2000
-----------------------
*Gary L. Waterman Director
- ----------------------------------------
Gary L. Waterman March 9, 2000
-----------------------
</TABLE>
31
<PAGE> 32
INDEX TO FINANCIAL STATEMENTS
MANUFACTURED HOME COMMUNITIES, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors ...............................................................................F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998...................................................F-3
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997.....................F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997...........................................................................F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997.....................F-6
Notes to Consolidated Financial Statements.....................................................................F-7
Schedule II - Valuation and Qualifying Accounts................................................................S-1
Schedule III - Real Estate and Accumulated Depreciation........................................................S-2
Certain schedules have been omitted as they are not applicable to the
Company.
</TABLE>
F-1
<PAGE> 33
Report of Independent Auditors
To the Board of Directors of
Manufactured Home Communities, Inc.
We have audited the accompanying consolidated balance sheets of
Manufactured Home Communities, Inc. as of December 31, 1999 and 1998, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1999. We have also audited the related financial statement schedules listed in
the accompanying index. These financial statements and schedules are the
responsibility of the management of Manufactured Home Communities, Inc. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Manufactured
Home Communities, Inc. at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects the information set forth therein.
ERNST & YOUNG LLP
Chicago, Illinois
January 24, 2000
F-2
<PAGE> 34
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 19999 AND 1998
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Investment in real estate:
Land ................................................................ $ 285,337 $ 272,225
Land improvements ................................................... 876,923 865,720
Buildings and other depreciable property ............................ 102,083 95,669
Advances on real estate acquisitions ................................ -- 3,817
----------- -----------
1,264,343 1,237,431
Accumulated depreciation ............................................ (150,757) (118,021)
----------- -----------
Net investment in real estate ..................................... 1,113,586 1,119,410
Cash and cash equivalents .............................................. 6,676 13,657
Notes receivable ....................................................... 4,284 15,710
Investment in and advances to affiliates ............................... 11,689 7,797
Investment in joint ventures ........................................... 9,501 7,584
Rents receivable ....................................................... 1,338 671
Deferred financing costs, net .......................................... 5,042 4,634
Prepaid expenses and other assets ...................................... 8,222 7,325
Due from affiliates .................................................... -- 53
----------- -----------
Total assets ........................................................ $ 1,160,338 $ 1,176,841
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable .............................................. $ 513,172 $ 500,573
Unsecured term loan ................................................. 100,000 100,000
Unsecured line of credit ............................................ 107,900 145,000
Other notes payable ................................................. 4,192 5,276
Accounts payable and accrued expenses ............................... 20,780 33,341
Accrued interest payable ............................................ 5,612 4,911
Rents received in advance and security deposits ..................... 6,831 6,495
Distributions payable ............................................... 11,020 294
Due to affiliates ................................................... 33 42
----------- -----------
Total liabilities ................................................. 769,540 795,932
----------- -----------
Commitments and contingencies
Minority Interest - Common OP Units and other .......................... 54,397 70,468
Minority Interest - Perpetual Preferred OP Units ....................... 125,000 --
Stockholders' equity:
Preferred stock, $.01 par value
10,000,000 shares authorized; none issued ......................... -- --
Common Stock, $.01 par value
50,000,000 shares authorized; 22,813,357 and 26,417,029
shares issued and outstanding for 1999 and 1998, respectively ..... 229 262
Paid-in capital ..................................................... 275,664 364,603
Deferred compensation ............................................... (6,326) (7,442)
Employee notes ...................................................... (4,540) (4,654)
Distributions in excess of accumulated earnings ..................... (53,626) (42,328)
----------- -----------
Total stockholders' equity ........................................ 211,401 310,441
----------- -----------
Total liabilities and stockholders' equity .......................... $ 1,160,338 $ 1,176,841
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-3
<PAGE> 35
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
REVENUES
Base rental income ........................................................ $ 181,672 $ 165,340 $ 108,984
RV base rental income ..................................................... 9,526 7,153 --
Utility and other income .................................................. 20,096 18,219 11,785
Equity in income of affiliates ............................................ 2,065 1,070 800
Interest income ........................................................... 1,669 3,048 1,941
--------- --------- ---------
Total revenues ......................................................... 215,028 194,830 123,510
--------- --------- ---------
EXPENSES
Property operating and maintenance ........................................ 58,038 53,064 32,343
Real estate taxes ......................................................... 16,460 14,470 8,352
Property management ....................................................... 8,337 7,108 5,079
General and administrative ................................................ 5,550 4,668 4,091
General and administrative - affiliates ................................... 542 743 468
Interest and related amortization ......................................... 53,775 49,693 21,753
Depreciation on corporate assets .......................................... 1,005 995 590
Depreciation on real estate assets and other costs ........................ 34,486 28,426 17,365
--------- --------- ---------
Total expenses ......................................................... 178,193 159,167 90,041
--------- --------- ---------
Income before allocation to Minority Interests and
extraordinary loss on early extinguishment of debt ..................... 36,835 35,663 33,469
(Income) allocated to Common OP Units ..................................... (6,219) (6,733) (4,373)
(Income) allocated to Perpetual Preferred OP Units ........................ (2,844) -- --
--------- --------- ---------
Income before extraordinary loss on early
extinguishment of debt ................................................. 27,772 28,930 29,096
--------- --------- ---------
Extraordinary loss on early extinguishment
of debt (net of $105 allocated to Minority Interests) ................. -- -- (451)
--------- --------- ---------
NET INCOME ............................................................. $ 27,772 $ 28,930 $ 28,645
========= ========= =========
Net income per Common Share before extraordinary item - basic ............. $ 1.10 $ 1.13 $ 1.18
========= ========= =========
Net income per Common Share before extraordinary item - diluted ........... $ 1.09 $ 1.12 $ 1.16
========= ========= =========
Net income per Common Share - basic ....................................... $ 1.10 $ 1.13 $ 1.16
========= ========= =========
Net income per Common Share - diluted ..................................... $ 1.09 $ 1.12 $ 1.15
========= ========= =========
Weighted average Common Shares outstanding - basic ........................ 25,224 25,626 24,689
========= ========= =========
Weighted average Common Shares outstanding - diluted (Note 3) ............. 31,252 31,962 28,762
========= ========= =========
Distributions declared per Common Share outstanding ....................... $ 1.55 $ 1.45 $ 1.32
========= ========= =========
Tax status of distributions paid during the year:
Ordinary income ........................................................ $ 1.16 $ 1.14 $ 1.12
========= ========= =========
Capital gain .................................................................. $ -- $ -- $ --
========= ========= =========
Return of capital ............................................................. $ -- $ 0.31 $ 0.20
========= ========= =========
</TABLE>
F-4
The accompanying notes are an integral part of the financial statements
<PAGE> 36
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
PREFERRED STOCK, $.01 PAR VALUE ....................................... $ -- $ -- $ --
========= ========= =========
COMMON STOCK, $.01 PAR VALUE
Balance, beginning of year ............................................ $ 262 $ 248 $ 249
Issuance of Common Stock through restricted stock grants .......... 1 2 1
Exercise of options ............................................... 1 1 1
(Repurchase) issuance of Common Stock ............................. (35) 11 (3)
--------- --------- ---------
Balance, end of year .................................................. $ 229 $ 262 $ 248
========= ========= =========
PAID - IN CAPITAL
Balance, beginning of year ............................................ $ 364,603 $ 321,915 $ 296,997
Issuance of Common Stock for employee notes ....................... -- 129 --
Conversion of OP Units to Common Stock ............................ 1,525 1,100
Issuance of Common Stock through exercise of options .............. 2,034 2,372 2,070
Issuance of Common Stock through restricted stock grants .......... 1,507 6,118 2,468
Issuance of Common Stock through employee stock purchase plan ..... 1,195 940 587
(Repurchase) issuance of Common Stock ............................. (98,160) 24,613 (7,257)
Adjustment for Common OP Unitholders
in the Operating Partnership .................................... 2,960 7,416 27,050
--------- --------- ---------
Balance, end of year .................................................. $ 275,664 $ 364,603 $ 321,915
========= ========= =========
DEFERRED COMPENSATION
Balance, beginning of year ............................................ $ (7,442) $ (2,885) $ (3,485)
Issuance of Common Stock through restricted stock grants .......... (536) (5,692) (2,074)
Recognition of deferred compensation expense ...................... 1,652 1,135 2,674
--------- --------- ---------
Balance, end of year .................................................. $ (6,326) $ (7,442) $ (2,885)
========= ========= =========
EMPLOYEE NOTES
Balance, beginning of year ............................................ $ (4,654) $ (4,967) $ (6,158)
Notes received for issuance of Common Stock ....................... -- (129) --
Principal payments ................................................ 114 442 1,191
--------- --------- ---------
Balance, end of year .................................................. $ (4,540) $ (4,654) $ (4,967)
========= ========= =========
DISTRIBUTIONS IN EXCESS OF ACCUMULATED EARNINGS
Balance, beginning of year ............................................ $ (42,328) $ (33,736) $ (29,651)
Net income ........................................................ 27,772 28,930 28,645
Distributions ..................................................... (39,070) (37,522) (32,730)
--------- --------- ---------
Balance, end of year .................................................. $ (53,626) $ (42,328) $ (33,736)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-5
<PAGE> 37
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................................. $ 27,772 $ 28,930 $ 28,645
Adjustments to reconcile net income to
cash provided by operating activities:
Income allocated to minority interests ............................ 9,063 6,733 4,268
Depreciation and amortization expense ............................. 33,871 29,680 19,018
Equity in income of Affiliates .................................... (2,065) (1,070) (800)
Amortization of deferred compensation ............................. 2,623 1,563 3,068
Write-off of a management contract and project costs .............. -- -- (575)
(Increase) decrease in rents receivable ........................... (667) 116 (64)
(Increase) in prepaid expenses and other assets ................... (844) (3,359) (2,228)
Increase in accounts payable and accrued expenses ................. 2,491 5,188 2,847
Increase in rents received in advance and security deposits ....... 336 4,196 402
--------- --------- ---------
Net cash provided by operating activities .............................. 72,580 71,977 54,581
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Redemption of short-term investments, net .............................. -- -- 1,968
Sale of project related assets ......................................... -- -- 11,147
Collection of escrow proceeds on acquisition ........................... -- 14,295 --
Advances on real estate acquisitions ................................... -- -- (22,811)
(Advances to) distributions from Affiliates ............................ (1,959) 399 388
Collections (funding) on notes receivable .............................. 11,426 (14,563) 16,342
Investment in joint ventures ........................................... (2,279) (7,584) --
Acquisition of rental properties ....................................... (30,640) (241,076) (240,083)
Improvements:
Improvements - corporate ............................................ (878) (1,487) (357)
Improvements - rental properties .................................... (8,656) (8,005) (4,187)
Site development costs .............................................. (4,882) (4,741) (1,852)
--------- --------- ---------
Net cash used in investing activities .................................. (37,868) (262,762) (239,445)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from stock options and employee stock purchase plan ....... 3,229 3,313 2,658
Net proceeds from issuance of Perpetual Preferred OP Units ............. 121,890 -- --
Distributions to Common Stockholders, Common OP Unitholders
and Perpetual Preferred OP Unitholders .............................. (40,445) (46,491) (46,886)
(Repurchase) issuance of Common Stock and OP Units ..................... (99,847) 24,623 (7,260)
Collection of principal payments on employee notes ..................... 114 442 1,191
Proceeds from line of credit, term loan, and mortgage notes payable .... 113,484 266,847 510,731
Repayments on mortgage notes payable and line of credit ................ (139,069) (43,298) (272,674)
Debt issuance costs .................................................... (1,049) (1,903) (2,311)
--------- --------- ---------
Net cash (used in) provided by financing activities .................... (41,693) 203,533 185,449
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents ....................... (6,981) 12,748 585
Cash and cash equivalents, beginning of year ............................... 13,657 909 324
--------- --------- ---------
Cash and cash equivalents, end of year ..................................... $ 6,676 $ 13,657 $ 909
========= ========= =========
SUPPLEMENTAL INFORMATION
Cash paid during the year for interest ..................................... $ 52,323 $ 45,674 $ 20,667
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-6
<PAGE> 38
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION OF THE COMPANY AND BASIS OF PRESENTATION
Manufactured Home Communities, Inc. (together with its consolidated
subsidiaries, the "Company"), formed in March 1993, is a Maryland corporation
which has elected to be taxed as a real estate investment trust ("REIT"). The
Company owns or has a controlling interest in 157 manufactured home communities
(the "Properties") located in 26 states, consisting of 54,007 sites. The Company
generally will not be subject to Federal income tax to the extent it distributes
its REIT taxable income to its stockholders.
The operations of the Company are conducted through certain entities that
are owned or controlled by the Company. MHC Operating Limited Partnership (the
"Operating Partnership") is the entity through which the Company conducts
substantially all of its operations. The Company contributed the proceeds from
its initial public offering to the Operating Partnership for a general
partnership interest. The limited partners of the Operating Partnership (the
"Common OP Unitholders") receive an allocation of net income which is based on
their respective ownership percentage of the Operating Partnership which is
shown on the Consolidated Financial Statements as Minority Interest - Common OP
Units. As of December 31, 1999, the Minority Interests - Common OP Units
represented 5,633,183 units of limited partnership interest ("OP Units") which
are convertible into an equivalent number of shares of the Company's stock. The
issuance of additional shares of common stock or common OP Units changes the
respective ownership of the Operating Partnership for both the Minority
Interests and the Company.
Sub-partnerships of the Operating Partnership were created to (i)
facilitate mortgage financing (the "Financing Partnerships"); (ii) facilitate
the Company's ability to provide financing to Communities ("Lending
Partnership"); (iii) own the management operations of the Company ("Management
Partnerships"); and (iv) own the assets and operations of certain utility
companies which service the Company's properties ("MHC Systems").
The accompanying financial statements represent the consolidated financial
information of the Company and its subsidiaries. Due to the Company's ability as
general partner to control either through ownership or by contract the Operating
Partnership, the Financing Partnerships, the Lending Partnerships, the
Management Partnerships and MHC Systems, each such subsidiary has been
consolidated with the Company for financial reporting purposes.
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131") which was effective for fiscal years beginning after December
15, 1997. SFAS No. 131 superseded Statement of Financial Accounting Standards
No. 14, "Financial Reporting for Segments of a Business Enterprise". SFAS No.
131 establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The adoption of SFAS No. 131 did not affect results of operations or financial
position of the Company. The Company has one reportable segment which is the
operation of manufactured home communities. The Company has concentrations of
Properties within the following states: Florida (48 Properties), California (25
Properties), Arizona (19 Properties), Michigan (11 Properties) and Colorado (10
Properties). These concentrations of Properties accounted for 35%, 17%, 9%, 4%,
and 9%, respectively, of the Company's total revenues for the year ended
December 31, 1999. The Company also has Properties located in the following
areas of the United States: Northeast, Northwest, Midwest, and Nevada/Utah/New
Mexico. The Company's largest Property, Bay Indies, located in Venice, Florida,
accounted for 3% of the Company's total revenues for the year ended December 31,
1999. The distribution of the Properties throughout the United States reflects
the Company's belief that geographic diversification helps insulate the
portfolio from regional economic influences. The Company intends to target new
acquisitions in or near markets where the Properties are located and will also
consider acquisitions of properties outside such markets.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
F-7
<PAGE> 39
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(b) Real Estate
Real estate is recorded at cost less accumulated depreciation. The
Company evaluates rental properties for impairment when conditions exist
which may indicate that it is probable that the sum of expected future cash
flows (undiscounted) from a property is less than its carrying value. Upon
determination that a permanent impairment has occurred, rental properties
are reduced to fair value. For the year(s) ended December 31, 1999 and
1998, permanent impairment conditions did not exist at any of the Company's
properties.
Depreciation is computed on the straight-line basis over the estimated
useful lives of the assets. The Company uses a 30-year estimated life for
buildings acquired and structural and land improvements, a ten-to-fifteen
year estimated life for building upgrades and a three-to-seven year
estimated life for furniture, fixtures and equipment. Expenditures for
ordinary maintenance and repairs are expensed to operations as incurred and
significant renovations and improvements that improve the asset and extend
the useful life of the asset are capitalized over their estimated useful
life. Initial direct leasing costs are expensed as incurred. Total
depreciation expense was $35.5 million, $29.1 million and $18.0 million for
the year(s) ended December 31, 1999, 1998 and 1997, respectively.
(c) Cash and Cash Equivalents
The Company considers all demand and money market accounts and
certificates of deposit with a maturity when purchased of three months or
less, to be cash equivalents.
(d) Notes Receivable
Notes receivable generally are stated at their outstanding unpaid
principal balances net of any deferred fees or costs on originated loans,
or unamortized discounts. Interest income is accrued on the unpaid
principal balance. Discounts are amortized to income using the interest
method.
(e) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" requires disclosures about the fair
value of financial instruments whether or not such instruments are
recognized in the balance sheet. The Company's financial instruments
include short-term investments, notes receivable, accounts receivable,
accounts payable, other accrued expenses, mortgage notes payable and
interest rate hedge arrangements. The fair value of all financial
instruments, including notes receivable, were not materially different from
their carrying values at December 31, 1999 and 1998, except the fair market
value of certain derivatives related to mortgage debt (see Note 10).
(f) Deferred Financing Costs
Deferred financing costs include fees and costs incurred to obtain
long-term financing. The costs are being amortized over the terms of the
respective loans on a level yield basis. Unamortized deferred financing
fees are written-off when debt is retired before the maturity date.
Accumulated amortization for such costs was $1.8 million and $1.2 million
at December 31, 1999 and 1998, respectively.
(g) Revenue Recognition
Rental income attributable to leases is recorded when earned from
tenants.
F-8
<PAGE> 40
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(h) Minority Interests
Net income is allocated to Common OP Unitholders based on their
respective ownership percentage of the Operating Partnership. An ownership
percentage is represented by dividing the number of OP Units held by the
Common OP Unitholders (5,633,183 and 5,976,820 at December 31, 1999 and
1998, respectively) by OP Units and common stock outstanding. Issuance of
additional shares of common stock or common OP Units changes the percentage
ownership of both the Minority Interests and the Company. Due in part to
the exchange rights, such transactions and the proceeds therefrom are
treated as capital transactions and result in an allocation between
stockholders' equity and Minority Interests to account for the change in
the respective percentage ownership of the underlying equity of the
Operating Partnership.
On September 30, 1999, the Operating Partnership completed a $125
million private placement of 9.0% Series D Cumulative Perpetual Preferred
Units ("POP Units") to two institutional investors. The POP Units, which
are callable by the Company after five years, have no stated maturity or
mandatory redemption, have no voting rights and are not convertible into OP
Units or Common Stock. Income is allocated to the POP Units at a preferred
rate per annum of 9.0% on the original capital contribution of $125
million. Costs related to the placement of $3.1 million were recorded as a
reduction to additional paid-in capital.
(i) Income Taxes
Due to the structure of the Company as a REIT, the results of
operations contain no provision for Federal income taxes. However, the
Company may be subject to certain state and local income, excise or
franchise taxes. The Company paid state and local taxes of approximately
$85,000 and $78,000 during the years ended December 31, 1999 and 1998. As
of December 31, 1999, net investment in real estate and notes receivable
had a federal tax basis of approximately $794 million and $59 million,
respectively.
(j) Reclassifications
Certain 1998 and 1997 amounts have been reclassified to conform to the
1999 financial presentation. Such reclassifications have no effect on the
operations or equity as originally presented.
F-9
<PAGE> 41
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - EARNINGS PER COMMON SHARE
Earnings per common share are based on the weighted average number of common
shares outstanding during each year. In 1997, the Financial Accounting Standards
Board issued Statement No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No.
128 replaces the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to the SFAS No. 128 requirements. The conversion of OP Units has been
excluded from the basic earnings per share calculation. The conversion of an OP
Unit to common stock will have no material effect on earnings per common share.
The following table sets forth the computation of basic and diluted
earnings per share (amounts in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
NUMERATOR:
Numerator for basic earnings per share -
Net income ................................................................ $27,772 $28,930 $28,645
Effect of dilutive securities:
Income allocated to Common OP Units ....................................... 6,219 6,733 4,373
------- ------- -------
Numerator for diluted earnings per share -
income available to Common Stockholders
after assumed conversions ................................................. $33,991 $35,663 $33,018
======= ======= =======
DENOMINATOR:
Denominator for basic earnings per share - Weighted average Common Stock
outstanding ............................................................... 25,224 25,626 24,689
Effect of dilutive securities:
Weighted average Common OP Units .......................................... 5,704 5,955 3,749
Employee stock options .................................................... 324 381 324
------- ------- -------
Denominator for diluted earnings per share -
adjusted weighted average Common Stock
outstanding after assumed conversions ..................................... 31,252 31,962 28,762
======= ======= =======
</TABLE>
NOTE 4 - COMMON STOCK AND OTHER EQUITY RELATED TRANSACTIONS
The following table presents the changes in the Company's outstanding
common stock for the years ended December 31, 1999, 1998 and 1997 (excluding OP
Units of 5,633,183, 5,976,820 and 5,733,815 outstanding at December 31, 1999,
1998 and 1997, respectively):
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Shares outstanding at January 1, ................................ 26,417,029 24,771,180 24,951,948
Common Stock purchased by key employees of the Company ..... -- 5,000 --
Common Stock issued through conversion of OP Units ......... 143,637 99,552 --
Common Stock issued through exercise of Options ............ 126,565 141,403 107,147
Common Stock issued through stock grants ................... 95,666 328,831 14,777
Common Stock issued through ESPP ........................... 59,060 44,804 27,608
Common Stock issued through Unit Trust Offering ............ -- 1,048,059 --
Common Stock repurchased and retired ....................... (4,028,600) (21,800) (330,300)
---------- ---------- ----------
Shares outstanding at December 31, .............................. 22,813,357 26,417,029 24,771,180
========== ========== ==========
</TABLE>
As of December 31, 1999, the Company's percentage ownership of the
Operating Partnership was approximately 80%. The remaining 20% are owned by the
Common OP Unitholders.
F-10
<PAGE> 42
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - COMMON STOCK AND OTHER EQUITY RELATED TRANSACTIONS (CONTINUED)
In March 1997, the Company's Board of Directors approved a common stock
repurchase plan whereby the Company was authorized to repurchase and retire up
to 1,000,000 shares of its common stock. The Company's Board of Directors
authorized the repurchase of additional shares on May 11, 1999, September 30,
1999, October 4, 1999 and November 29, 1999 of 1,000,000 shares each for a total
authorized repurchase of up to 5,000,000 shares. Shares of common stock
repurchased and retired under the plan for the years ended December 31, 1999,
1998 and 1997 were 4,028,600, 21,800 and 330,300 respectively.
On August 29, 1997, the Company, as general partner of the Operating
Partnership, approved the addition of new limited partners (the "MPW Limited
Partners") to the Operating Partnership in connection with the acquisition of
properties from limited partners and joint ventures affiliated with Mobileparks
West, a California limited partnership. The MPW Limited Partners received
3,018,926 OP Units which are exchangeable on a one-for-one basis for shares of
the Company's common stock.
During 1998, the Company, as general partner of the Operating Partnership,
approved the admission of new limited partners (the "1998 Acquisition Partners")
to the Operating Partnership in connection with certain acquisitions of real
estate and investments in joint ventures (see Notes 5 and 6). The 1998
Acquisition Partners received 342,438 OP Units which are exchangeable on a
one-for-one basis for shares of the Company's common stock.
On April 23, 1998, the Company completed an offering of 1,048,059 shares of
common stock (the "Unit Trust Offering") and sold the shares to Merrill Lynch,
Pierce, Fenner & Smith Incorporated (the "Underwriter"). The offering price per
share was $25.4375, the closing price for shares of the Company's common stock
on April 23, 1998, resulting in gross offering proceeds of approximately $26.7
million. Net of the Underwriter's discount and offering expenses, the Company
received approximately $25 million. The Underwriter deposited the shares of
common stock with the trustee of the Equity Investor Fund Cohen & Steers Realty
Majors Portfolio, a unit investment trust (the "Trust"), in exchange for units
in the Trust.
On March 26, 1999, the Operating Partnership repurchased and cancelled
200,000 OP Units from a limited partner of the Operating Partnership.
On September 30, 1999, the Operating Partnership completed a $125 million
private placement of 9.0% Series D Cumulative Perpetual Preferred Units ("POP
Units") to two institutional investors. The POP Units, which are callable by the
Company after five years, have no stated maturity or mandatory redemption. Net
proceeds from the offering of $121 million were used to repay amounts
outstanding under the Company's credit facility and for other corporate
purposes.
On April 9, 1999, July 9, 1999, October 8, 1999 and January 14, 2000, the
Company paid a $.3875 per share distribution for the quarters ended March 31,
1999, June 30, 1999, September 30, 1999 and December 31, 1999, respectively, to
stockholders of record on March 26, 1999, June 25, 1999, September 24, 1999 and
December 31, 1999, respectively.
The Company adopted, effective July 1, 1997, the 1997 Non Qualified
Employee Stock Purchase Plan ("ESPP"). Pursuant to the ESPP, certain employees
and directors of the Company may each annually acquire up to $100,000 of common
stock of the Company. The aggregate number of shares of common stock available
under the ESPP shall not exceed 1,000,000, subject to adjustment by the Board of
Directors. The common stock may be purchased quarterly at a price equal to 85%
of the lesser of: (a) the closing price for a share on the last day of such
month; and (b) the greater of: (i) the closing price for a share on the first
day of such month, and (ii) the average closing price for a share for all the
business days in the month. Shares of common stock issued through the ESPP for
the years ended December 31, 1999, 1998 and 1997 were 59,060, 44,804 and 27,608,
respectively.
NOTE 5 - REAL ESTATE
Land improvements consist primarily of improvements such as grading,
landscaping, and infrastructure items such as streets, sidewalks or water mains.
Depreciable property consists of permanent buildings in the communities such as
clubhouses, laundry facilities, maintenance storage facilities, and furniture,
fixtures and equipment.
F-11
<PAGE> 43
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - REAL ESTATE (CONTINUED)
During the year ended December 31, 1997, the Company acquired twenty-two
communities for an aggregate purchase price of approximately $156.4 million.
These acquisitions were funded with approximately $60.6 million in borrowings
under the Company's line of credit, issuance of approximately $64 million of OP
Units, assumption of approximately $13 million in debt, approximately $7.4
million of existing available cash, issuance of installment notes totaling
approximately $6 million and entry into a lease, accounted for as a capital
lease, valued at approximately $2.4 million. In connection with the acquisition
of one of the communities, the Company issued an additional $1.1 million of OP
units in 1998.
On September 4, 1997, the Company entered into a portfolio purchase
agreement (as amended by a supplemental agreement on December 17, 1997) to
acquire 37 manufactured home communities (the "Ellenburg Communities") from
partnerships having Ellenburg Capital Corporation ("ECC") as the general partner
for a purchase price in excess of $300 million. During 1997 and 1998, the
Company closed on the acquisition of thirty-one of the Ellenburg Communities for
an aggregate purchase price of approximately $278 million and gained control of
an additional five Ellenburg Communities with acquisition advances of
approximately $57 million to the partnerships which own such Ellenburg
Communities. The Company funded the acquisition advances with borrowings under
the Company's line of credit and term bank facilities. In addition, the Company
assumed debt of approximately $32 million and issued OP Units of approximately
$4.9 million in connection with this transaction.
In connection with the supplemental agreement entered into in December
1997, on February 12, 1998, the Company exercised its right of first refusal to
purchase five of the Ellenburg Communities. A third party, backed by one of the
Company's competitors upon denial of a stay of the sale, has appealed certain
orders of the Superior Court for the State of California, County of Los Angeles,
related to the Company's acquisition of the Ellenburg Communities, including the
order approving the supplemental agreement. The Company does not expect the
appeals to be successful, or if successful, to have a material impact on the
Company's acquisition of the Ellenburg Communities.
During 1998, the Company received approximately $14.3 million, including
approximately $365,000 of interest income, which was being held subject to the
completion of due diligence procedures on the Ellenburg Communities. The persons
appointed to windup the affairs of ECC have released the funds and have
presented a status report to the court. The $14.3 million was initially recorded
as a liability until certain related issues were finalized. The Company
believes, at this time, a settlement of these issues is substantially complete
and has accordingly, in a non-cash transaction, relieved the liability and
adjusted 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.
On May 14, 1998, the Company acquired Casa Del Sol Resort III, located
adjacent to one of the Company's communities in Peoria, Arizona, for a purchase
price of approximately $9.8 million. The acquisition was funded with a borrowing
under the Company's line of credit. Casa Del Sol Resort III consists of 238
developed sites.
On June 4, 1998, the Company entered into a joint venture agreement with
Wolverine Investors L.L.C. to acquire eighteen manufactured home communities
(the "College Heights Communities"). The aggregate purchase price for the
College Heights Communities was approximately $89 million. The Company
contributed approximately $19 million to the joint venture, Wolverine Investors
L.L.C. contributed approximately $2.0 million to the joint venture and the
remainder of the acquisition was funded with a borrowing from a financial
institution of approximately $68 million. The Company's $19 million contribution
to the joint venture was funded with a borrowing under the Company's line of
credit. Due to the Company's ability to control the joint venture through its
approximate 95% interest, the joint venture properties and related operations
have been consolidated for financial reporting purposes.
On August 13, 1998, the Company acquired Sunset Oaks, located in Plant
City, Florida, adjacent to one of the Company's existing properties, for a
purchase price of approximately $3.6 million. The acquisition was funded with a
borrowing under the Company's line of credit. Sunset Oaks consists of 168
developed sites.
F-12
<PAGE> 44
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - REAL ESTATE (CONTINUED)
On July 23, 1999, the Company acquired Coquina Crossing, located in St.
Augustine, Florida, for a purchase price of approximately $10.4 million. The
acquisition was funded with a borrowing under the Company's line of credit.
Coquina Crossing is a 748-site senior community with 269 developed sites and
zoned expansion potential of 479 sites. In addition, Realty Systems, Inc., an
affiliate of the Company, purchased the model home inventory at the community
for approximately $1.1 million.
The acquisitions have been accounted for utilizing the purchase method of
accounting and, accordingly, the results of operations of acquired assets are
included in the statement of operations from the dates of acquisitions. The
Company acquired all of the communities from unaffiliated third parties.
The Company is actively seeking to acquire additional communities and
currently is engaged in negotiations relating to the possible acquisition of a
number of communities. At any time these negotiations are at varying stages
which may include contracts outstanding to acquire certain manufactured home
communities which are subject to satisfactory completion of the Company's due
diligence review.
The following unaudited, summarized pro forma financial information
presents the effect of all material transactions which transpired from January
1, 1997 to December 31, 1999. In management's opinion, the summarized pro forma
financial information does not purport to present what actual results would have
been had the above transactions occurred on January 1, 1997, or to project
results for any future period. The amounts presented in the following table are
in thousands, except for per share amounts:
<TABLE>
<CAPTION>
For the Years Ended
1999 1998 1997
---------- ---------- -----------
<S> <C> <C> <C>
Total revenues $ 215,028 $ 205,358 $ 196,996
Pro Forma net income $ 27,772 $ 35,450 $ 23,024
Pro Forma net income per share - basic $ 1.10 $ 1.12 $ .89
Pro Forma net income per share - fully diluted $ 1.09 $ 1.11 $ .88
</TABLE>
NOTE 6 - INVESTMENT IN JOINT VENTURE
On March 18, 1998, the Company joined Plantation Company, LLC and Trails
Associates, LLC, two 49% joint venture investments with Meadows Management
Company to own two manufactured home communities known as "Plantation on the
Lake" and "Trails West", for approximately $6.5 million. Plantation on the Lake
is located in Riverside, California and consists of 385 developed sites and 122
expansion sites. Trails West is located in Tucson, Arizona and consists of 488
developed sites and 294 expansion sites. The Company's investments were funded
with a $3.9 million borrowing under the Company's line of credit and with the
issuance of approximately $2.6 million in OP Units. Due to the Company's
inability to control the joint ventures, the Company accounts for its investment
in the joint ventures on the equity method.
F-13
<PAGE> 45
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - INVESTMENT IN AND ADVANCES TO AFFILIATES
Investment in and advances to affiliates consists principally of preferred
stock of Realty Systems, Inc. ("RSI") and LP Management Corp. (collectively
"Affiliates") and advances under a line of credit between the Company and RSI.
The Company accounts for the investment in and advances to Affiliates using the
equity method of accounting.
Following is unaudited financial information for the Affiliates for the
year ended December 31, 1999 and 1998 (amounts in thousands):
1999 1998
---------- ----------
Assets $ 23,201 $ 16,906
Liabilities, net of amounts due
to the Company (11,512) (9,109)
---------- ---------
Net investment in Affiliates $ 11,689 $ 7,797
========== =========
Home sales $ 34,662 $ 24,662
Cost of sales (27,029) (18,999)
Other revenues and expenses, net (5,568) (4,593)
---------- ---------
Equity in income of Affiliates $ 2,065 $ 1,070
========== =========
NOTE 8 - NOTES RECEIVABLE
At December 31, 1999 and 1998, the Company had approximately $4.3 million
and $15.7 million in notes receivable, respectively. The Company has $1.1
million in purchase money notes with monthly principal and interest payments at
7.0%, maturing on July 31, 2001.
On January 6, 1998, the Company funded a $12.3 million loan (the "Meadows
Loan") to Meadows Preservation, Inc. The Meadows Loan is collateralized by The
Meadows manufactured home community located in Palm Beach Gardens, Florida,
bears interest at the lesser of 9% or the cash flow of the property and matured
on April 30, 1999, as amended. On April 1, 1999, the Company effectively
exchanged The Meadows Loan for an equity interest in the partnership that owns
The Meadows. The Company accounts for The Meadows as an acquisition and
consolidates the property and related results of operations.
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. Subsequently, the Company has funded $3.2 million
under the Trails West Loan. This loan is collateralized by the property known as
Trails West, bears interest at the rate of approximately 8.5% and matures on
June 1, 2003.
NOTE 9 - EMPLOYEE NOTES RECEIVABLE
In December 1992, certain directors, officers and other individuals each
entered into subscription agreements with the Company to acquire 440,000 shares
of the Company's common stock at $7.25 per share. The Company received from
these individuals notes (the "1993 Employee Notes") in exchange for their
shares. The 1993 Employee Notes accrue interest at 6.77%, mature on March 2,
2003, and are recourse against the employees in the event the pledged shares are
insufficient to repay the obligations.
On January 2, 1996, certain members of management of the Company each
entered into subscription agreements with the Company to acquire a total of
270,000 shares of the Company's common stock at $17.375 per share, the market
price on that date. The Company received from these individuals notes (the "1996
Employee Notes") in exchange for their shares. The 1996 Employee Notes accrue
interest at 5.91%, mature on January 2, 2005, and are recourse against the
employees in the event the pledged shares are insufficient to repay the
obligations.
F-14
<PAGE> 46
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - EMPLOYEE NOTES RECEIVABLE (CONTINUED)
On March 23, 1998, a member of management of the Company entered into a
subscription agreement with the Company to acquire a total of 5,000 shares of
the Company's common stock at $25.75 per share, the market price on that date.
The Company received from this individual a note in exchange for his shares. The
note accrues interest at 5.97%, matures on March 23, 2008, and is recourse
against the employee in the event the pledged shares are insufficient to repay
the obligation.
At December 31, 1999 and 1998, the Company had approximately $4.5 million
and $4.7 million in employee notes receivable, respectively.
NOTE 10 - LONG-TERM BORROWINGS
As of December 31, 1999 and 1998, the Company had outstanding mortgage
indebtedness of approximately $513.1 million and $500.6 million, respectively,
encumbering 73 and 72 of the Company's properties, respectively. As of December
31, 1999 and 1998, the carrying value of such properties was approximately $638
million and $634 million, respectively.
The outstanding mortgage indebtedness consists in part of a $265.0 million
mortgage note (the "Mortgage Debt") collateralized by 29 properties beneficially
owned by MHC Financing Limited Partnership. The Mortgage Debt has a maturity
date of January 2, 2028 and pays interest at 7.015%. There is no principal
amortization until February 1, 2008, after which principal and interest are paid
from available cash flow and the interest rate is reset at a rate equal to the
then 10-year U.S. Treasury obligations plus 2.0%.
In connection with the acquisition of the College Heights Communities, the
joint venture formed by the Company and Wolverine Investors L.L.C. borrowed
approximately $68 million (the "College Heights Debt") at an interest rate of
7.19%, maturing July 1, 2008. As of December 31, 1999 and 1998, the principal
balance on this debt was $67.1 million and $67.6 million, respectively.
As of December 31, 1999 and 1998, the Company also had outstanding debt on
25 and 23 properties in the aggregate amounts of approximately $182 million and
$169 million, respectively. The related discount or premium is amortized over
the life of the loan using the effective interest rate. In addition, the Company
recorded a $2.4 million loan in connection with a direct financing lease entered
into in May 1997. Scheduled maturities for the outstanding indebtedness,
excluding the Mortgage Debt and College Heights Debt, are at various dates
through November 30, 2020, and fixed interest rates range from 7.25% to 9.05%.
The Company has a $175 million unsecured line of credit with a group of
banks (the "Credit Agreement") bearing interest at the London Interbank Offered
Rate ("LIBOR") plus 1.125%. The Credit Agreement matures on August 17, 2000, at
which time the Company may extend the maturity date to August 17, 2002 and the
Credit Agreement would be converted to a term loan. The Company pays a fee on
the average unused amount of such credit equal to 0.15% of such amount. As of
December 31, 1999 and 1998, $107.9 million and $145 million was outstanding
under the Credit Agreement, respectively.
The Company has a $100 million term loan (the "Term Loan") with a group of
banks with interest only payable monthly at a rate of LIBOR plus 1.0%. The Term
Loan matures on April 3, 2000 and may be extended to April 3, 2002. The
Company's only obligation for extension is to provide the creditor with adequate
notice. The Company expects to provide such notice and extend the maturity in
accordance with the loan agreement.
The Company has installment notes payable, secured by a letter of credit,
with interest rates of 7.5%, maturing September 1, 2002. Approximately $2.9
million of the notes pay principal annually and interest quarterly and the
remaining $1.3 million of the notes pay interest quarterly. As of December 31,
1999 and 1998, approximately $4.2 million and $5.3 million was outstanding on
the installment notes, respectively.
F-15
<PAGE> 47
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - LONG-TERM BORROWINGS (CONTINUED)
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 was
impacted by changes in the market rate of interest. Had the 1998 Swap been
entered into on December 31, 1999, the applicable LIBOR swap rate would have
been approximately 6.57%. 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 $28,000. The Company accounts for the 1998
Swap as a hedge. Payments and receipts under the 1998 Swap were accounted for as
an adjustment to interest expense. On January 10, 2000, the Company terminated
the 1998 Swap and received $1.0 million of proceeds which will be amortized as
an adjustment to interest expense through March 2003.
Aggregate payments of principal on long-term borrowings for each of the
next five years and thereafter are as follows (amounts in thousands):
YEAR AMOUNT
----------- ------------
2000 $ 112,924 (a)
2001 85,817
2002 104,983 (b)
2003 31,287
2004 31,391
Thereafter 358,862
-----------
Total $ 725,264
===========
(a) Includes the Credit Agreement which the Company can, at its option, extend
maturity through August 17, 2002.
(b) Assumes extension of the Term Loan
NOTE 11 - LEASE AGREEMENTS
The leases entered into between the tenant and the Company for the rental
of a site are month-to-month or for a period of one to ten years, renewable upon
the consent of the parties or, in some instances, as provided by statute.
Non-cancelable long-term leases, with remaining terms up to eleven years, are in
effect at certain sites within nineteen of the Properties. Rental rate increases
at these properties are primarily a function of increases in the Consumer Price
Index taking into consideration certain floors and ceilings. Additionally,
periodic market rate adjustments are made as deemed necessary. Future minimum
rents are scheduled to be received under noncancelable tenant leases at December
31, 1999 as follows (amounts in thousands):
YEAR AMOUNT
---------- ------------
2000 $ 38,319
2001 37,423
2002 20,028
2003 8,353
2004 4,350
Thereafter 29,351
-----------
Total $ 137,824
===========
NOTE 12 - GROUND LEASES
The Company leases land under noncancellable operating leases at certain of
the properties expiring in various years from 2022 to 2031 with terms which
require twelve equal payments per year plus additional rents calculated as a
percent of gross revenues. For the year(s) ended December 31, 1999,1998 and 1997
ground lease rent was $1.6 million. Minimum future rental payments under the
ground lease are $1.6 million for each of the next five years and $31.1 million
thereafter.
F-16
<PAGE> 48
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - TRANSACTIONS WITH RELATED PARTIES
Equity Group Investments, Inc. ("EGI"), an entity controlled by Mr. Samuel
Zell, Chairman of the Board of Directors, and certain of its affiliates have
provided services such as administrative support, investor relations, corporate
secretarial, real estate tax evaluation services, market consulting and research
services, and computer and support services. Fees paid to EGI and its affiliates
amounted to approximately $74,000, $104,000 and $140,000 for the years ended
December 31, 1999, 1998 and 1997, respectively. Amounts due to these affiliates
were approximately $4,000, $7,000 and $15,000 as of December 31, 1999, 1998 and
1997, respectively.
Certain related entities, owned by persons affiliated with Mr. Zell, have
provided services to the Company. These entities include, but are not limited
to, Rosenberg & Liebentritt, P.C. which provided legal services, including
property acquisition services; The Riverside Agency, Inc. which provided
insurance brokerage services; Equity Office Properties Trust which provided
office space to the Company; and Equity Properties & Development, LP which
provided accounting services. Fees paid to these entities amounted to
approximately $473,000, $850,000 and $459,000 for the years December 31, 1999,
1998 and 1997, respectively. Amounts due to these affiliates were approximately
$33,000, $35,000 and $63,000 as of December 31, 1999, 1998 and 1997,
respectively. Of the amounts charged by these affiliates during the years ended
December 31, 1999, 1998 and 1997, approximately $12,000, $175,000 and $105,000,
respectively, were capitalized.
Related party agreements or fee arrangements are generally for a term of
one year and approved by independent members of the Board of Directors.
NOTE 14 - STOCK OPTION PLAN AND STOCK GRANTS
A Stock Option Plan (the "Plan") was adopted by the Company in December
1992. Pursuant to the Plan, certain officers, directors, employees and
consultants of the Company may be offered the opportunity to acquire shares of
common stock through the grant of stock options ("Options"), including
non-qualified stock options and, for key employees, incentive stock options
within the meaning of Section 422 of the Code. The Compensation Committee will
determine the vesting schedule, if any, of each Option and the term, which term
shall not exceed ten years from the date of grant. As to the Options that have
been granted through December 31, 1999, generally, one-third are exercisable one
year after the initial grant, one-third are exercisable two years following the
date such Options were granted and the remaining one-third are exercisable three
years following the date such Options were granted. The Plan allows for 10,000
Options to be granted annually to each director. The common stock with respect
to which the Options may be granted during any calendar year to any grantee
shall not exceed 250,000 shares. In addition, the Plan provides for the granting
of stock appreciation rights ("SARs") and restricted stock grants ("Stock
Grants"). A maximum of 4,000,000 shares of common stock was available for grant
under the Plan as of December 31, 1999.
In 1999, 1998 and 1997, the Company issued 14,666, 18,238 and 14,777 shares
related to Stock Grants, respectively, which represented a portion of certain
employee's bonuses. The shares related to the Stock Grants shall be restricted
for a period of two years from the date of grant. The fair market value of these
Stock Grants of approximately $351,984, $445,000 and $394,361 at the date of
grant was recorded as compensation expense by the Company in 1999, 1998 and
1997, respectively.
In 1997, the Company awarded 77,750 Stock Grants to certain members of
senior management of the Company. These Stock Grants vest over three years and
are dependent upon certain performance benchmarks tied to total returns to
shareholders being met. The fair market value of these Stock Grants of
approximately $2.1 million as of the date of grant was treated in 1997 as
deferred compensation. The Company amortized approximately $519,000, $519,000
and $1.0 million related to these Stock Grants in 1999, 1998 and 1997
respectively.
In 1998, the Company awarded 233,500 Stock Grants to certain members of
senior management of the Company. These Stock Grants vest over five years, but
may be restricted for a period of up to ten years depending upon certain
performance benchmarks tied to increases in funds from operations being met. The
fair market value of these Stock Grants of approximately $5.7 million as of the
date of grant was treated in 1998 as deferred compensation. The Company
amortized approximately $569,000 related to these Stock Grants in 1999.
F-17
<PAGE> 49
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - STOCK OPTION PLAN (CONTINUED)
In 1999, the Company awarded 32,500 Stock Grants to certain members of
senior management of the Company. These Stock Grants vest over three years with
one-half vesting in 1999 and are dependent upon certain performance benchmarks
tied to total returns to shareholders being met. The fair market value of these
Stock Grants of approximately $770,000 as of the date of grant was treated in
1999 as deferred compensation. The Company amortized approximately $385,000
related to these Stock Grants in 1999.
In 1999, the Plan was amended to provide a Stock Grant of 2,000 shares
vesting over three years in lieu of the 10,000 Options granted after the
amendment to each director, if the director so elects. The Company recognized
approximately $129,000 of expense and recorded approximately $257,000 of
deferred compensation related to these Stock Grants in 1999.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its Options and Stock Grants because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123")
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's Options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized. Additionally, the amount
recognized as expense for the Stock Grants during any given year of the
performance period is dependent on certain performance benchmarks being met.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its Options and Stock Grants under the fair value method of that
Statement. The fair value for the Options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1999, 1998 and 1997, respectively: risk-free interest rates of
6.3%, 5.7% and 6.3%; dividend yields of 6.3%, 5.8% and 5.5%; volatility factors
of the expected market price of the Company's common stock of .21, .23 and .24;
and a weighted-average expected life of the Options of 5 years. The fair value
of the Stock Grants granted in 1997, 1998 and 1999 has been estimated at
approximately 30% below the calculated fair market value on the date of grant
because these Stock Grants may remain restricted even after they become fully
vested.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's Options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its Options.
For purposes of pro forma disclosures, the estimated fair value of the
Options is amortized to expense over the Options' vesting period and the
estimated fair value of the Stock Grants are amortized to expense over the same
period. The pro forma effect of SFAS No. 123 on the Company's net income for the
years ended December 31, 1999, 1998 and 1997 was ($138,000) ($0 per share),
$225,000 ($0.01 per share) and $0 ($0 per share), respectively.
F-18
<PAGE> 50
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - STOCK OPTION PLAN (CONTINUED)
A summary of the Company's stock option activity, and related information
for the years ended December 31, 1999, 1998 and 1997 follows:
Weighted Average
Shares Subject Exercise Price Per
to Option Share
-------------- ------------------
Balance at December 31, 1996 1,450,652 $18.31
Options granted 404,450 25.37
Options exercised (107,147) 18.82
Options canceled (57,462) 19.75
--------- ------
Balance at December 31, 1997 1,690,493 19.91
Options granted 378,986 22.04
Options exercised (141,403) 18.07
Options canceled (28,697) 24.09
--------- ------
Balance at December 31, 1998 1,899,379 21.08
Options granted 313,400 23.91
Options exercised (126,565) 19.25
Options canceled (66,767) 24.08
--------- ------
Balance at December 31, 1999 2,019,447 $21.72
========= ======
As of December 31, 1999, 1998 and 1997, 747,258 shares, 1,075,091 shares
and 1,755,532 shares remained available for grant, respectively, and 1,426,072
shares, 1,269,982 shares and 1,071,890 shares were exercisable, respectively.
Exercise prices for Options outstanding as of December 31, 1999 ranged from
$12.875 to $26.750, with the substantial majority of the exercise prices
exceeding $17.25. The remaining weighted-average contractual life of those
Options was 6.4 years.
NOTE 15 - PREFERRED STOCK
The Company's Board of Directors is authorized under the Company's charter,
without further stockholder approval, to issue, from time to time, in one or
more series, 10,000,000 shares of $.01 par value preferred stock (the "Preferred
Stock"), with specific rights, preferences and other attributes as the Board may
determine, which may include preferences, powers and rights that are senior to
the rights of holders of the Company's common stock. However, under certain
circumstances, the issuance of preferred stock may require stockholder approval
pursuant to the rules and regulations of the New York Stock Exchange. As of
December 31, 1999 and 1998, no Preferred Stock was issued by the Company.
NOTE 16 - SAVINGS PLAN
The Company has a qualified retirement plan, with a salary deferral feature
designed to qualify under Section 401 of the Code (the "401(k) Plan"), to cover
its employees and those of its Subsidiaries, if any. The 401(k) Plan permits
eligible employees of the Company and those of any Subsidiary to defer a portion
of their compensation up to 16% of their eligible compensation on a pre-tax
basis subject to certain maximum amounts. In addition, the Company will match
dollar-for-dollar the participant's contribution up to 4% of the participant's
eligible compensation.
In addition, amounts contributed by the Company will vest, on a prorated
basis, according to the participant's vesting schedule. After five years of
employment with the Company, the participants will be 100% vested for all
amounts contributed by the Company. Additionally, a discretionary profit sharing
component of the 401(k) Plan provides for a contribution to be made annually for
each participant in an amount, if any, as determined by the Company. All
employee contributions are 100% vested. The Company's contribution to the 401(k)
Plan was approximately $385,000, $256,000 and $262,000, for the years ended
December 31, 1999, 1998 and 1997, respectively. The Company's anticipated plan
contribution for the profit sharing component of the 401(k) Plan is
approximately $165,000 for the year ended December 31, 1999.
F-19
<PAGE> 51
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - COMMITMENTS AND CONTINGENCIES
DEANZA SANTA CRUZ MOBILE ESTATES
The residents of DeAnza Santa Cruz Mobile Estates, a property located in
Santa Cruz, California (the "City") previously brought several actions opposing
certain fees and charges in connection with water service at the Property. The
trial of the ongoing utility charge dispute with the residents of this Property
concluded on January 22, 1999. This summary provides the history and reasoning
underlying the Company's defense of the residents' claims and explains the
Company's decision to continue to defend its position, which the Company
believes is fair and accurate.
DeAnza Santa Cruz Mobile Estates is a 198 site community overlooking the
Pacific Ocean. It is subject to the City's rent control ordinance which limits
annual rent increases to 75% of CPI. The Company purchased this Property in
August 1994 from certain unaffiliated DeAnza entities ("DeAnza"). Prior to the
Company's purchase in 1994, DeAnza made the decision to submeter the Property
for both water and sewer in 1993 in the face of the City's rapidly rising
utility costs.
Under California Civil Code Section 798.41, DeAnza was required to reduce
rent by an amount equal to the average cost of usage over the preceding 12
months. This was done. With respect to water, not looking to submit to
jurisdiction of the California Public Utility Commission ("CPUC"), DeAnza relied
on California Public Utilities Code Section 2705.5 ("CPUC Section 2705.5") to
determine what rates would be charged for water on an ongoing basis without
becoming a public utility. This statute provides that in a submetered mobilehome
park, the property owner is not subject to regulation and control of the CPUC so
long as the users are charged what they would be charged by the utility company
if users received their water directly from the utility company. In Santa Cruz,
customers receiving their water directly from the city's water utility were
charged a certain lifeline rate for the first 400 ccfs of water and a greater
rate for usage over 400 ccfs of water, a readiness to serve charge of $7.80 per
month and tax on the total. In reliance on CPUC Section 2705.5, DeAnza
implemented its billings on this schedule notwithstanding that it did not
receive the discount for the first 400 ccfs of water because it was a commercial
and not a residential customer.
A dispute with the residents ensued over the readiness to serve charge and
tax thereon. The residents argued that California Civil Code Section 798.41
required that the park owner could only pass through its actual costs of water
(and that the excess charges over the amount of the rent rollback were an
improper rent increase) and that CPUC Section 2705.5 was not applicable. DeAnza
unbundled the utility charges from rent consistent with California Civil Code
Section 798.41 and it has generally been undisputed that the rent rollback was
accurately calculated.
In August 1994, when the Company acquired the Property, the Company
reviewed the respective legal positions of the Santa Cruz Homeowners Association
("HOA") and DeAnza and concurred with DeAnza. Their reliance on CPUC Section
2705.5 made both legal and practical sense in that residents paid only what they
would pay if they lived in a residential neighborhood within the city of Santa
Cruz and permitted DeAnza to recoup part of the expenses of operating a
submetered system through the readiness to serve charge.
Over a period of 18 months from 1993 into May of 1995, a series of
complaints were filed by the HOA and Herbert Rossman, a resident, against
DeAnza, and later, the Company. DeAnza and the Company demurred to each of these
complaints on the grounds that the CPUC had exclusive jurisdiction over the
setting of water rates and that residents under rent control had to first
exhaust their administrative remedies before proceeding in a civil action. At
one point, the case was dismissed (with leave to amend) on the basis that
jurisdiction was with the CPUC and, at another point, Mr. Rossman was dismissed
from the case because he had not exhausted his administrative remedies.
On June 29, 1995, a hearing was held before a Santa Cruz rent control
officer on the submetering of both water and sewer. The Company and DeAnza
prevailed on all issues related to sewer and the rent rollback related to water,
but the hearing officer determined that the Company could only pass through its
actual cost of water, i.e., a prorated readiness to serve charge and tax
thereon. The hearing officer did not deal with the subsidy being given to
residents through the quantity charge and ordered a rebate in a fixed amount per
resident. The Company and DeAnza requested reconsideration on this issue, among
others, which reconsideration was denied by the hearing officer.
The Company then took a writ of mandate (an appeal from an administrative
order) to the Superior Court and, pending this appeal, the residents, the
Company and the City agreed to stay the effect of the hearing officer's decision
until the Court rendered judgment.
F-20
<PAGE> 52
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
In July 1996, the Superior Court affirmed the hearing officer's decision
without addressing concerns about the failure to take the subsidy on the
quantity charge into account.
The Company requested that the City and the HOA agree to a further stay
pending appeal to the court of appeals, but they refused and the appeals court
denied the Company's request for a stay in late November 1996. Therefore, on
January 1, 1997, the Company reduced its water charges at this Property to
reflect a pass-through of only the readiness to serve charge and tax at the
master meter (approximately $0.73) and to eliminate the subsidy on the water
charges. On their March 1, 1997 rent billings, residents were credited for
amounts previously "overcharged" for readiness to serve charge and tax. The
amount of the rebate given by the Company was $36,400. In calculating the
rebate, the Company and DeAnza took into account the previous subsidy on water
usage although this issue had not yet been decided by the court of appeals. The
Company and DeAnza felt legally safe in so doing based on language in the
hearing officer's decision that actual costs could be passed through.
On March 12, 1997, the Company also filed an application with the CPUC to
dedicate the water system at this Property to public use and have the CPUC set
cost based rates for water usage. The Company believed it was obligated to take
this action because of its consistent reliance on CPUC Section 2705.5 as a safe
harbor from CPUC jurisdiction. That is, when the Company could no longer charge
for water as the local serving utility would charge, it was no longer exempt
from the CPUC's jurisdiction and control under CPUC Section 2705.5.
On March 20, 1997, the court of appeals issued the writ of mandate
requested by the Company on the grounds that the hearing officer had improperly
calculated the amount of the rebate (meaning the Company had correctly
calculated the rent credits), but also ruling that the hearing officer was
correct when he found that the readiness to serve charge and tax thereon as
charged by DeAnza and the Company were an inappropriate rent increase. The court
of appeals further agreed with the Company that the city's hearing officer did
not have the authority under California Civil Code Section 798.41 to establish
rates that could be charged in the future.
Following this decision, the CPUC granted the Company its certificate of
convenience and necessity on December 17, 1998 and approved cost based rates and
charges for water that exceed what residents were paying under the Company's
reliance on CPUC Section 2705.5. Concurrently, the CPUC also issued an Order
Instituting Investigation ("OII") confirming its exclusive jurisdiction over the
issue of water rates in a submetered system and commencing an investigation into
the confusion and turmoil over billings in submetered properties. Specifically,
the OII states: "The Commission has exclusive and primary jurisdiction over the
establishment of rates for water and sewer services provided by private
entities."
Specifically, the CPUC ruling regarding the Company's application stated:
"The ultimate question of what fees and charges may or may not be assessed,
beyond external supplier pass-through charges, for in-park facilities when a
mobile home park does not adhere to the provisions of CPUC Section 2705.5, must
be decided by the Commission."
After the court of appeals decision, the HOA brought all of its members
back into the underlying civil action for the purpose of determining damages,
including punitive damages, against the Company. The trial was continued from
July 1998 to January 1999 to give the CPUC time to act on the Company's
application. Notwithstanding the action taken by the CPUC in issuing the OII in
December 1998, the trial court denied the Company's motion to dismiss on
jurisdictional grounds and trial commenced before a jury on January 11, 1999.
Not only did the trial court not consider the Company's motion to dismiss,
the trial court refused to allow evidence of the OII or the Company's CPUC
approval to go before the jury. Notwithstanding the Company's strenuous
objections, the judge also allowed evidence of the Company's and DeAnza's
litigation tactics to be used as evidence of bad faith and oppressive actions
(including evidence of the application to the CPUC requesting a $22.00 readiness
to serve charge). The Company's motion for a mistrial based upon these
evidentiary rulings was denied. On January 22, 1999, the jury returned a verdict
awarding $6.0 million of punitive damages against the Company and DeAnza. The
Company had previously agreed to indemnify DeAnza on the matter.
The Company has bonded the judgment pending appeal in accordance with
California procedural rules, which require a bond equal to 150% of the amount of
the judgment. Post-judgment interest will accrue at the statutory rate of 10.0%
per annum.
F-21
<PAGE> 53
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
On April 19, 1999, the trial court denied all of the Company's and DeAnza's
post-trial motions for judgement notwithstanding the verdict, new trial and
remittitur. The trial court also awarded $700,000 of attorneys' fees to
plaintiffs. The Company has appealed the jury verdict and attorneys' fees award
and the Company has filed its opening brief in the jury verdict case. The
Company also has filed two related appeals challenging the result of related
litigation and a resulting attorneys' fee award. The two related appeals are
based on a preemption argument. The Company asserts the superior courts' ability
to enter an attorneys' fee award in an earlier case and take certain other
actions which were preempted by the exercise of exclusive jurisdiction by the
CPUC over the issue of how to set rates for water in a submetered mobilehome
park. The Company is awaiting notice from the court of appeal setting oral
argument in these two appeals. The jury verdict appeal also raises the
jurisdictional argument as well as several other arguments for reversal of the
punitive damage award or for a new trial. One of the arguments raised by the
Company in the jury verdict appeal is that punitive damages are not available in
a case brought under Section 798.41 of the California Mobilehome Residency Law
("MRL") since the MRL contains its own penalty provisions. The court of appeal
granted the Company's request for judicial notice of the legislative history of
the applicable MRL sections, which indicates to the Company that the court of
appeal is receptive to this argument. Although no assurances can be given, the
Company believes the appeals will be successful.
Subsequently, in June 1999 the DeAnza Santa Cruz Homeowners Association
filed a complaint in the Superior Court of California, County of Santa Cruz (No.
135991) against the Company, MHC Acquisition One, L.L.C. and Starland Vistas,
Inc. The new lawsuit seeks damages, including punitive damages, for alleged
violations of California Civil Code Sections 798.31 and 798.41 arising from
implementation of utility rates previously approved by the CPUC. The Company
demurred to (filed a motion to dismiss) the complaint on the grounds that the
Court lacks jurisdiction to hear the subject matter of the complaint given that
the CPUC has exclusive jurisdiction over utility rates and charges at the
Property. The California Superior Court denied the motion to dismiss and the
court of appeal denied the Company's request to review the denial of the
demurrer. The California Superior Court has also denied the Company's motion for
summary judgement. The Company intends to vigorously defend the matter,
including by filing a motion for summary judgement. The matter is expected to go
to trial in March 2000.
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
On September 29, 1995, the United States Environmental Protection Agency
("USEPA") issued its Findings of Violations and Order for Compliance with
respect to the National Pollution Discharge Elimination System ("NPDES") Permit
governing the operation of the onsite waste water treatment plant at one of the
Properties. On October 6, 1995, the USEPA issued its Findings of Violation and
Order for Compliance with respect to NPDES Permit governing the operation of the
onsite wastewater treatment plant at another of the Properties. The Company and
the 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.
ELLENBURG COMMUNITIES
In connection with the acquisition of the Ellenburg Communities (as
hereinafter defined) and pursuant to orders of the California Superior Court
("Court"), approximately $30 million of the amounts paid by the Company have
been deposited with the court appointed winding up agents (the "Winding Up
Agents"). The deposited amounts relate to claims (the "Karno Claims") of Norton
S. Karno (and related entities) who at various times has been a creditor,
advisor, lawyer and shareholder of certain of the entities related to the
Ellenburg Communities. The Winding Up Agents have disputed the claims and have
filed a complaint against Mr. Karno (and related entities) requesting that the
court determine that the claims be reduced or eliminated.
On October 30, 1998, the Company received notice of a lawsuit filed against
the Company and certain executive officers of the Company in the Los Angeles
County 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.
F-22
<PAGE> 54
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
In connection with the acquisition of the Ellenburg Communities, Mr. Karno
and others have appealed various court orders on which the Company has relied.
Mr. Karno has also sought before both the California Superior Court and Court of
Appeals to take control of ECC (as hereinafter defined), but to date none of his
attempts have been successful.
On September 8, 1999, Ellenburg Fund 20 ("Fund 20") filed a cross complaint
in the dissolution proceeding against the Company and certain of its affiliates
alleging causes of action for fraud and other claims in connection with the
Ellenburg acquisition. By stipulation, the Company has not yet had to respond to
the complaint, which the Company believes to be completely without merit. The
Company's defense to the claims include documents and letters signed by the
court-appointed Winding Up Agents supporting the Company's position.
Mr. Karno, the Company and certain other parties have entered into a global
settlement agreement which was filed with the Court in February 2000. The Court
will hold a hearing on the motion to approve the settlement agreement in March
2000. Although the Company can provide no assurances that the settlement will be
approved, should the Court approve the settlement agreement, substantially all
of the litigation and appeals involving the Ellenburg acquisition would be
settled or dismissed. At this time, the global settlement agreement does not
dispose of the Fund 20 lawsuit against the Company. However, the Company
believes that there is a substantial likelihood that settlement with Fund 20
will be reached or, if not, that the Company will ultimately successfully defend
itself against the lawsuit.
CANDLELIGHT PROPERTIES, L.L.C
In 1996, 1997 and 1998, the Lending Partnership made a loan to Candlelight
Properties, L.L.C. ("Borrower") in the principal amount of $8,050,000. The loan
is secured by a mortgage on Candlelight Village ("Candlelight"), a property in
Columbus, Indiana. The Company accounts for the loan as an investment in real
estate and, accordingly, Candlelight's results of operations are consolidated
with the Company's for financial reporting purposes. Concurrently with the
funding of the loan, Borrower granted the Operating Partnership the option to
acquire Candlelight upon the maturity of the loan. The Operating Partnership
notified Borrower that it was exercising its option to acquire Candlelight in
March 1999, and the loan subsequently matured on May 3, 1999. However, Borrower
failed to repay the loan and refused to convey Candlelight to the Operating
Partnership.
Borrower filed suit in the Circuit Court of Bartholomew County, Indiana
("Court") on May 5, 1999, seeking declaratory judgment on the validity of the
exercise of the option. The Lending Partnership filed suit in the Court the next
day, seeking to foreclose its mortgage, and the suits were consolidated by the
Court. The Court issued an Order on December 1, 1999, finding, among other
things, that the Operating Partnership had validly exercised the option. Both
parties have filed motions to correct errors in the Order, which motions are
currently pending before the Court. The Court has not yet ruled on the
foreclosure complaint; however, given the Court's finding in the Order, the
Lending Partnership believes that Borrower has no valid defense in the
foreclosure action. The Operating Partnership and the Lending Partnership intend
to continue vigorously pursuing this matter and believe that, while no assurance
can be given, such efforts will be successful.
The Company is involved in various other legal proceedings arising in the
ordinary course of business. Management believes that all proceedings herein
described or referred to, taken together, are not expected to have a material
adverse impact on the Company.
F-23
<PAGE> 55
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is unaudited quarterly data for 1999 and 1998 (amounts in
thousands, except for per share amounts):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
1999 3/31 6/30 9/30 12/31
- ----------------------------------------------------------------------- -------- ------- -------- -------
<S> <C> <C> <C> <C>
Total Revenues ......................................................... $54,390 $52,446 $53,537 $54,654
Income before allocation to Common OP Units ............................ $10,078 $ 8,477 $ 8,417 $ 7,056
Net income available to common shareholders ............................ $ 8,234 $ 6,968 $ 6,877 $ 5,693
Weighted average Common Shares outstanding - Basic...................... 26,157 25,773 25,613 23,381
Weighted average Common Shares outstanding - Diluted.................... 32,340 31,829 31,586 29,281
Net income per Common Share outstanding - Basic ........................ $ 0.31 $ 0.27 $ 0.27 $ 0.24
Net income per Common Share outstanding - Diluted ...................... $ 0.31 $ 0.27 $ 0.27 $ 0.24
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
1998 3/31 6/30 9/30 12/31
- ------------------------------------------------------------------------ ------- ------- ------- -------
<S> <C> <C> <C> <C>
Total Revenues ......................................................... $44,872 $47,894 $50,809 $51,254
Income before allocation to Common OP Units ............................ $ 9,586 $ 9,066 $ 8,440 $ 8,570
Net income available to common shareholders ............................ $ 7,765 $ 7,343 $ 6,837 $ 6,984
Weighted average Common Shares outstanding - Basic...................... 24,805 25,659 25,988 26,033
Weighted average Common Shares outstanding - Diluted.................... 31,095 32,095 32,339 32,382
Net income per Common Share outstanding - Basic ........................ $ 0.31 $ 0.29 $ 0.26 $ 0.27
Net income per Common Share outstanding - Diluted ...................... $ 0.31 $ 0.28 $ 0.26 $ 0.26
</TABLE>
F-24
<PAGE> 56
SCHEDULE II
MANUFACTURED HOME COMMUNITIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
ADDITIONS
--------------------------
BALANCE AT CHARGED CHARGED BALANCE AT
BEGINNING TO TO OTHER END OF
OF PERIOD INCOME ACCOUNTS DEDUCTIONS(1) PERIOD
------------ ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
For the year ended December 31, 1997:
Allowance for doubtful accounts......... $250,000 $150,985 $ -- ($150,985) $250,000
For the year ended December 31, 1998:
Allowance for doubtful accounts......... $250,000 $167,774 $ -- ($167,774) $250,000
For the year ended December 31, 1999:
Allowance for doubtful accounts......... $250,000 $413,573 $ -- ($363,573) $300,000
</TABLE>
(1) Deductions represent tenant receivables deemed uncollectible.
S-1
<PAGE> 57
SCHEDULE III
MANUFACTURED HOME COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Costs
Capitalized
Subsequent to
Initial Cost to Acquisition
Company (Improvements)
------------------- -----------------
Depreciable Depreciable
Real Estate Location Encumbrances Land Property Land Property
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Apollo Village Phoenix AZ 0 932 3,219 0 320
Brentwood Manor Mesa AZ 4,819 1,998 6,024 0 187
Casa del Sol #1 Peoria AZ 6,781 2,215 6,467 0 119
Casa del Sol #2 Glendale AZ 6,914 2,104 6,283 0 123
Casa del Sol #3 Glendale AZ 0 2,450 7,452 0 16
Central Park Phoenix AZ 7,178 1,612 3,784 0 326
Hacienda De Valencia Mesa AZ 8,413 833 2,701 0 694
Palm Shadows Glendale AZ 3,288 1,400 4,218 0 234
Sedona Shadows Sedona AZ 2,708 1,096 3,431 0 241
Sunrise Heights Phoenix AZ 0 999 3,016 0 219
The Mark Mesa AZ 0 1,354 4,660 5 433
The Meadows Tempe AZ 0 2,614 7,887 0 319
California Hawaiian San Jose CA 17,961 5,825 17,755 0 132
Concord Cascade Pacheco CA 10,373 985 3,016 0 501
Contempo Marin San Rafael CA 16,134 4,779 16,379 8 1,146
Coralwood Modesto CA 0 0 5,047 0 73
Date Palm Country Club Cathedral City CA 9,433 4,138 14,064 (23) 1,013
Four Seasons Fresno CA 0 756 2,348 0 77
Garden West Office Plaza Monterey CA 0 535 1,702 (535) (1,702)
Lamplighter Spring Valley CA 9,386 633 2,201 0 396
Monte del Lago Castroville CA 8,429 3,150 9,469 0 363
Nicholson Plaza San Jose CA 0 0 4,512 0 (7)
Quail Meadows Riverbank CA 0 1,155 3,469 0 108
Rancho Valley El Cajon CA 4,642 685 1,902 0 345
Royal Oaks Visalia CA 0 602 1,921 0 41
Santa Cruz Santa Cruz CA 4,309 2,103 7,204 0 202
Sea Oaks Los Osos CA 0 871 2,703 0 46
Sunshadow San Jose CA 0 0 5,707 0 56
Westwinds (4 Properties) San Jose CA 0 0 17,616 0 3,632
Cimarron Broomfield CO 8,080 863 2,790 0 361
Golden Terrace Golden CO 8,034 826 2,415 0 205
Golden Terrace South Golden CO 2,400 750 2,265 0 246
Golden Terrace West Golden CO 9,728 1,694 5,065 0 617
Hillcrest Village Aurora CO 15,464 1,912 5,202 289 1,608
Holiday Hills Denver CO 19,420 2,159 7,780 0 2,411
Holiday Village CO Co. Springs CO 6,259 567 1,759 0 377
<CAPTION>
Gross Amount Carried
at Close of
Period 12/31/99
----------------------------
Depreciable Accumulated Date of
Land Property Total Depreciation Acquisition
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Apollo Village 932 3,539 4,471 (622) 1994
Brentwood Manor 1,998 6,211 8,209 (1,408) 1993
Casa del Sol #1 2,215 6,586 8,801 (557) 1996
Casa del Sol #2 2,104 6,406 8,510 (524) 1996
Casa del Sol #3 2,450 7,468 9,918 (394) 1998
Central Park 1,612 4,110 5,722 (2,125) 1983
Hacienda De Valencia 833 3,395 4,228 (1,645) 1984
Palm Shadows 1,400 4,452 5,852 (993) 1993
Sedona Shadows 1,096 3,672 4,768 (283) 1997
Sunrise Heights 999 3,235 4,234 (628) 1994
The Mark 1,359 5,093 6,452 (895) 1994
The Meadows 2,614 8,206 10,820 (1,621) 1994
California Hawaiian 5,825 17,887 23,712 (1,644) 1997
Concord Cascade 985 3,517 4,502 (1,740) 1983
Contempo Marin 4,787 17,525 22,312 (3,041) 1994
Coralwood 0 5,120 5,120 (399) 1997
Date Palm Country Club 4,115 15,077 19,192 (2,663) 1994
Four Seasons 756 2,425 3,181 (190) 1997
Garden West Office Plaza 0 0 0 0 1997
Lamplighter 633 2,597 3,230 (1,302) 1983
Monte del Lago 3,150 9,832 12,982 (763) 1997
Nicholson Plaza 0 4,505 4,505 (350) 1997
Quail Meadows 1,155 3,577 4,732 (207) 1998
Rancho Valley 685 2,247 2,932 (1,145) 1983
Royal Oaks 602 1,962 2,564 (153) 1997
Santa Cruz 2,103 7,406 9,509 (1,139) 1994
Sea Oaks 871 2,749 3,620 (214) 1997
Sunshadow 0 5,763 5,763 (449) 1997
Westwinds (4 Properties) 0 21,248 21,248 (1,531) 1997
Cimarron 863 3,151 4,014 (1,618) 1983
Golden Terrace 826 2,620 3,446 (1,301) 1983
Golden Terrace South 750 2,511 3,261 (208) 1997
Golden Terrace West 1,694 5,682 7,376 (2,362) 1986
Hillcrest Village 2,201 6,810 9,011 (3,290) 1983
Holiday Hills 2,159 10,191 12,350 (4,817) 1983
Holiday Village CO 567 2,136 2,703 (1,063) 1983
</TABLE>
S-2
<PAGE> 58
SCHEDULE III
MANUFACTURED HOME COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Costs
Capitalized
Subsequent to
Initial Cost to Acquisition
Company (Improvements)
------------------- ------------------
Depreciable Depreciable
Real Estate Location Encumbrances Land Property Land Property
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Pueblo Grande Pueblo CO 3,473 241 1,069 0 260
Woodland Hills Denver CO 0 1,928 4,408 0 1,956
Camelot Acres Rehoboth DE 6,997 527 2,058 0 402
Mariners Cove Millsboro DE 0 990 2,971 0 2,570
Waterford Estates Wilmington DE 0 5,250 16,202 0 243
Whispering Pines Lewes DE 0 1,536 4,609 0 558
Arrowhead Lantana FL 0 5,325 15,420 0 353
Bay Indies Venice FL 23,431 10,483 31,559 0 585
Bay Lake Estates Nokomis FL 2,037 990 3,390 0 257
Buccaneer N. Ft. Myers FL 7,382 4,207 14,410 0 355
Bulow Village Flagler Beach FL 1,220 3,633 949 4 2,733
Colonies of Margate Margate FL 12,171 5,890 20,211 0 546
Coquina St Augustine FL 0 5,286 5,545 0 0
Country Place New PortRichey FL 4,004 663 0 18 5,576
East Bay Oaks Largo FL 6,669 1,240 3,322 0 292
Eldorado Village Largo FL 4,572 778 2,341 0 240
FFEC-Six (Water Company) N. Ft. Myers FL 0 401 3,608 0 139
Heritage Village Vero Beach FL 0 2,403 7,259 0 204
Lake Fairways N. Ft. Myers FL 0 6,075 18,134 0 389
Lake Haven Dunedin FL 8,065 1,135 4,047 0 428
Lakewood Village Melbourne FL 0 1,863 5,627 0 229
Mid-Florida Lakes Leesburg FL 12,333 5,997 20,635 0 1,683
Oak Bend Ocala FL 0 850 2,572 0 386
Pine Lakes N. Ft. Myers FL 0 6,306 14,579 0 4,534
Sherwood Forest RV Park Kissimmee FL 0 3,437 3,621 0 291
Spanish Oaks Ocala FL 7,688 2,250 6,922 0 316
Sunset Oaks Plant City FL 0 1,111 2,513 (340) (23)
The Heritage N. Ft. Myers FL 0 1,438 4,371 0 1,680
The Meadows, FL Palm Beach Gardens FL 9,398 3,312 9,870 0 0
Windmill Village - Ft. Myers N. Ft. Myers FL 9,061 1,417 5,440 0 717
Windmill Village North Sarasota FL 5,559 1,523 5,063 0 428
Windmill Village South Sarasota FL 9,252 1,106 3,162 0 211
Holiday Village, IA Sioux City IA 0 313 3,744 0 294
Golf Vistas Monee IL 0 2,843 4,719 0 1,359
Willow Lake Estates Elgin IL 11,908 6,136 21,033 0 807
Burns Harbor Estates Chesterton IN 0 916 2,909 0 945
Candlelight Village Columbus IN 0 1,513 4,538 250 1,949
<CAPTION>
Gross Amount Carried
at Close of
Period 12/31/99
--------------------------
Depreciable Accumulated Date of
Land Property Total Depreciation Acquisition
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Pueblo Grande 241 1,329 1,570 (669) 1983
Woodland Hills 1,928 6,364 8,292 (1,270) 1994
Camelot Acres 527 2,460 2,987 (1,247) 1983
Mariners Cove 990 5,541 6,531 (1,575) 1987
Waterford Estates 5,250 16,445 21,695 (1,267) 1996
Whispering Pines 1,536 5,167 6,703 (1,842) 1988
Arrowhead 5,325 15,773 21,098 (1,167) 1997
Bay Indies 10,483 32,144 42,627 (6,381) 1994
Bay Lake Estates 990 3,647 4,637 (678) 1994
Buccaneer 4,207 14,765 18,972 (2,655) 1994
Bulow Village 3,637 3,682 7,319 (450) 1994
Colonies of Margate 5,890 20,757 26,647 (3,719) 1994
Coquina 5,286 5,545 10,831 (56) 1999
Country Place 681 5,576 6,257 (1,525) 1986
East Bay Oaks 1,240 3,614 4,854 (1,883) 1983
Eldorado Village 778 2,581 3,359 (1,347) 1983
FFEC-Six (Water Company) 401 3,747 4,148 (640) 1994
Heritage Village 2,403 7,463 9,866 (1,410) 1994
Lake Fairways 6,075 18,523 24,598 (3,207) 1994
Lake Haven 1,135 4,475 5,610 (2,315) 1983
Lakewood Village 1,863 5,856 7,719 (1,105) 1994
Mid-Florida Lakes 5,997 22,318 28,315 (3,875) 1994
Oak Bend 850 2,958 3,808 (613) 1993
Pine Lakes 6,306 19,113 25,419 (3,150) 1994
Sherwood Forest RV Park 3,437 3,912 7,349 (191) 1998
Spanish Oaks 2,250 7,238 9,488 (1,474) 1993
Sunset Oaks 771 2,490 3,261 (105) 1998
The Heritage 1,438 6,051 7,489 (1,173) 1993
The Meadows, FL 3,312 9,870 13,182 (217) 1999
Windmill Village - Ft. Myers 1,417 6,157 7,574 (3,099) 1983
Windmill Village North 1,523 5,491 7,014 (2,826) 1983
Windmill Village South 1,106 3,373 4,479 (1,778) 1983
Holiday Village, IA 313 4,038 4,351 (1,755) 1986
Golf Vistas 2,843 6,078 8,921 (551) 1997
Willow Lake Estates 6,136 21,840 27,976 (3,846) 1994
Burns Harbor Estates 916 3,854 4,770 (843) 1993
Candlelight Village 1,763 6,487 8,250 (496) 1996
</TABLE>
S-3
<PAGE> 59
SCHEDULE III
MANUFACTURED HOME COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Costs
Capitalized
Subsequent to
Initial Cost to Acquisition
Company (Improvements)
------------------------- ------------------------
Depreciable Depreciable
Real Estate Location Encumbrances Land Property Land Property
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Oak Tree Village Portage IN 6,087 0 0 569 3,357
Bonner Springs Bonner Springs KS 0 343 1,041 0 189
Carriage Park Kansas City KS 0 309 938 0 398
Quivira Hills Kansas City KS 0 376 1,139 0 158
Pheasant Ridge Mt. Airy MD 0 376 1,779 0 144
Briarwood Brookline MO 0 423 1,282 0 172
Dellwood Estates Warrensburg MO 0 300 912 0 98
North Star Kansas City MO 0 451 1,365 0 219
Casa Village Billings MT 8,033 1,011 3,109 181 1,425
Del Rey Albuquerque NM 0 1,926 5,800 0 466
Bonanza Las Vegas NV 9,980 908 2,643 0 470
Cabana Las Vegas NV 0 2,648 7,989 0 106
Flamingo West Las Vegas NV 0 1,732 5,266 0 232
Villa Borega Las Vegas NV 7,721 2,896 8,774 0 106
Rockwood Tulsa OK 0 645 1,622 0 243
Falcon Wood Village Eugene OR 9 1,112 3,426 0 27
Quail Hollow Fairview OR 0 0 3,249 0 41
Shadowbrook Clackamas OR 0 1,197 3,693 0 121
Green Acres Breinigsville PA 16,001 2,680 7,479 0 1,883
All Seasons Salt Lake City UT 0 510 1,623 0 126
Westwood Village Farr West UT 0 1,346 4,179 0 685
Meadows of Chantilly Chantilly VA 0 5,430 16,440 0 1,147
Kloshe Illahee Federal Way WA 6,684 2,408 7,286 0 38
Independence Hill Morgantown WV 0 299 898 0 168
College Heights Portfolio
(18 Properties) Various 67,104 17,045 71,382 0 0
Ellenberg (37 Properties) Various 56,181 82,633 261,347 0 0
Management Business Chicago IL 0 0 436 0 6,257
-------------------------------------------------------------------
$ 513,172 $ 284,911 $ 911,360 $ 426 $67,646
===================================================================
<CAPTION>
Gross Amount Carried
at Close of
Period 12/31/99
--------------------------------------
Depreciable Accumulated Date of
Land Property Total Depreciation Acquisition
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Oak Tree Village 569 3,357 3,926 (920) 1987
Bonner Springs 343 1,230 1,573 (399) 1989
Carriage Park 309 1,336 1,645 (448) 1989
Quivira Hills 376 1,297 1,673 (431) 1989
Pheasant Ridge 376 1,923 2,299 (1,104) 1988
Briarwood 423 1,454 1,877 (489) 1989
Dellwood Estates 300 1,010 1,310 (340) 1989
North Star 451 1,584 2,035 (537) 1989
Casa Village 1,192 4,534 5,726 (1,972) 1983
Del Rey 1,926 6,266 8,192 (1,414) 1993
Bonanza 908 3,113 4,021 (1,532) 1983
Cabana 2,648 8,095 10,743 (1,510) 1994
Flamingo West 1,732 5,498 7,230 (1,013) 1994
Villa Borega 2,896 8,880 11,776 (699) 1997
Rockwood 645 1,865 2,510 (952) 1983
Falcon Wood Village 1,112 3,453 4,565 (270) 1997
Quail Hollow 0 3,290 3,290 (258) 1997
Shadowbrook 1,197 3,814 5,011 (300) 1997
Green Acres 2,680 9,362 12,042 (3,339) 1988
All Seasons 510 1,749 2,259 (140) 1997
Westwood Village 1,346 4,864 6,210 (371) 1997
Meadows of Chantilly 5,430 17,587 23,017 (3,376) 1994
Kloshe Illahee 2,408 7,324 9,732 (573) 1997
Independence Hill 299 1,066 1,365 (357) 1990
College Heights Portfolio
(18 Properties) 17,045 71,382 88,427 (3,406) 1998
Ellenberg (37 Properties) 82,633 261,347 343,980 (15,542) 1998
Management Business 0 6,693 6,693 (3,381)
------------------------------------------------------
$ 285,337 $ 979,006 $ 1,264,343 ($150,757)
======================================================
</TABLE>
NOTES:
(1) For depreciable property, the Company uses a 30-year estimated life for
buildings acquired and structural and land improvements, a ten-to-fifteen
year estimated life for building upgrades and a three-to-seven year
estimated life for furniture and fixtures.
(2) The schedule excludes five Properties in which the Company has a
non-controlling joint venture interest and accounts for using the equity
method of accounting.
(3) The balance of furniture and fixtures included in the total amounts was
approximately $10.8 million as of December 31, 1999.
(4) The aggregate cost of land and depreciable property for Federal income tax
purposes was approximately $1.1 billion, as of December 31, 1999.
(5) All properties were acquired, except for Country Place Village which was
constructed.
S-4
<PAGE> 60
SCHEDULE III
MANUFACTURED HOME COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
The changes in total real estate for the years ended December 31, 1999, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of year .... $ 1,237,431 $ 936,318 $ 597,650
Acquisitions .............. 12,496 286,880 332,272
Improvements .............. 16,700 14,566 6,643
Dispositions and other .... (2,284) (333) (247)
----------- ----------- -----------
Balance, end of year .......... $ 1,264,343 $ 1,237,431 $ 936,318
=========== =========== ===========
</TABLE>
The changes in accumulated depreciation for the years ended December 31, 1999,
1998 and 1997 were as follows:
1999 1998 1997
--------- --------- ---------
Balance, beginning of year ..... $ 118,021 $ 89,208 $ 71,481
Depreciation expense ....... 35,020 29,146 17,974
Dispositions and other ..... (2,284) (333) (247)
--------- --------- ---------
Balance, end of year ........... $ 150,757 $ 118,021 $ 89,208
========= ========= =========
S-5
<PAGE> 1
EXHIBIT 12
MANUFACTURED HOME COMMUNITIES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
1999 1998 1997 1996 1995
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income before allocation to Minority
Interests and extraordinary loss on early
extinguishment of debt $36,835 $35,663 $33,469 $26,943 $20,023
Fixed Charges 56,619 49,693 21,753 18,264 19,562
--------------------------------------------------
Earnings $93,454 $85,356 $55,222 $45,207 $39,585
==================================================
Interest incurred $53,134 $49,160 $20,708 $16,794 $16,807
Amortization of deferred financing costs 641 533 1,045 1,470 2,755
Perpetual Preferred OP Unit Distributions 2,844
--------------------------------------------------
Fixed Charges $56,619 $49,693 $21,753 $18,264 $19,562
==================================================
Earnings/Fixed Charges 1.65 1.72 2.54 2.48 2.02
==================================================
</TABLE>
<PAGE> 1
EXHIBIT 21
MANUFACTURED HOME COMMUNITIES, INC.
SUBSIDIARIES OF THE REGISTRANT
State of Incorporation
or Organization
---------------
MHC Operating Limited Partnership Illinois
MHC Financing Limited Partnership Illinois
MHC Management Limited Partnership Illinois
MHC Financing Limited Partnership Two Delaware
Blue Ribbon Communities Limited Partnership Delaware
LP Management Corporation Delaware
MHC-QRS, Inc. Delaware
MHC-QRS Two, Inc. Delaware
MHC-QRS Blue Ribbon Communities, Inc. Delaware
MHC Lending Limited Partnership Illinois
MHC-Lending QRS, Inc. Illinois
MHC-DeAnza Financing Limited Partnership Illinois
MHC-QRS DeAnza, Inc. Illinois
MHC-DAG Management Limited Partnership Illinois
MHC-Bay Indies Financing Limited Partnership Illinois
MHC-QRS Bay Indies, Inc. Illinois
MHC Systems, Inc. Illinois
<PAGE> 1
EXHIBIT 23
MANUFACTURED HOME COMMUNITIES, INC.
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-68473, No. 333-28469, No. 333-25295, and No. 33-76486, and
Form S-3 No. 333-90813, No. 333-65515, No. 333-25297, No. 333-1710, No. 33-82902
and No. 33-97288) of Manufactured Home Communities, Inc., and in the related
Prospectuses, of our report dated January 24, 2000, with respect to the
consolidated financial statements and schedules of Manufactured Home
Communities, Inc., included in this Annual Report (Form 10-K) for the year ended
December 31, 1999.
ERNST & YOUNG LLP
Chicago, Illinois
March 9, 2000
<PAGE> 1
POWER OF ATTORNEY
Exhibit 24.1
STATE OF ILLINOIS )
)SS
COUNTY OF COOK )
KNOW ALL MEN BY THESE PRESENTS that John F. Podjasek, Jr., having an
address at Barrington, Illinois, has made, constituted and appointed and BY
THESE PRESENTS, does make, constitute and appoint Thomas P. Heneghan and Howard
Walker, or either of them, having an address at Two North Riverside Plaza,
Chicago, Illinois 60606, his true and lawful Attorney-in-Fact for him and in his
name, place and stead to sign and execute in any and all capacities this Annual
Report on Form 10-K and any or all amendments to this Annual Report on Form
10-K, and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, giving and
granting unto each of such, Attorney-in-Fact, full power and authority to do and
perform each and every act and thing, requisite and necessary to be done in and
about the premises, as fully, to all intents and purposes as he might or could
do if personally present at the doing thereof, with full power of substitution
and revocation, hereby ratifying and confirming all that each of such
Attorney-in-Fact or his substitutes shall lawfully do or cause to be done by
virtue hereof.
This power of Attorney shall remain in full force and effect until
terminated by the undersigned through the instrumentality of a signed writing.
IN WITNESS WHEREOF, John F. Podjasek, Jr., has hereunto, set his hand this
6th day of March, 2000.
/s/ John F. Podjasek, Jr.
-------------------------
John F. Podjasek, Jr.
I, Juanita Tarantino, a Notary Public in and for said County in the State
aforesaid, do hereby certify that John F. Podjasek, Jr., personally know to me
to be the same person whose name is subscribed to the foregoing instrument
appeared before me this day in person and acknowledged that he signed and
delivered said instrument as his own free voluntary act for the uses and
purposes therein set forth.
Given under my hand and notarial seal this 6th day of March, 2000.
/s/ Juanita Tarantino
---------------------
(Notary Public)
My Commission Expires:
May 5, 2003
<PAGE> 1
POWER OF ATTORNEY
Exhibit 24.2
STATE OF CALIFORNIA )
)SS
COUNTY OF ALAMEDA )
KNOW ALL MEN BY THESE PRESENTS that Michael A. Torres, having an address at
Alameda, California, has made, constituted and appointed and BY THESE PRESENTS,
does make, constitute and appoint Thomas P. Heneghan and Howard Walker, or
either of them, having an address at Two North Riverside Plaza, Chicago,
Illinois 60606, his true and lawful Attorney-in-Fact for him and in his name,
place and stead to sign and execute in any and all capacities this Annual Report
on Form 10-K and any or all amendments to this Annual Report on Form 10-K, and
to file the same with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, giving and granting unto
each of such, Attorney-in-Fact, full power and authority to do and perform each
and every act and thing, requisite and necessary to be done in and about the
premises, as fully, to all intents and purposes as he might or could do if
personally present at the doing thereof, with full power of substitution and
revocation, hereby ratifying and confirming all that each of such
Attorney-in-Fact or his substitutes shall lawfully do or cause to be done by
virtue hereof.
This power of Attorney shall remain in full force and effect until
terminated by the undersigned through the instrumentality of a signed writing.
IN WITNESS WHEREOF, Michael A. Torres, has hereunto, set his hand this 6th
day of March, 2000.
/s/ Michael A. Torres
-------------------------
Michael A. Torres
I, Nancy K. Hagel, a Notary Public in and for said County in the State
aforesaid, do hereby certify that Michael A. Torres, personally know to me to be
the same person whose name is subscribed to the foregoing instrument appeared
before me this day in person and acknowledged that he signed and delivered said
instrument as his own free voluntary act for the uses and purposes therein set
forth.
Given under my hand and notarial seal this 6th day of March, 2000.
/s/ Nancy K. Hagel
-------------------------
(Notary Public)
My Commission Expires:
March 16, 2001
<PAGE> 1
POWER OF ATTORNEY
Exhibit 24.3
STATE OF NEW YORK )
)SS
COUNTY OF NEW YORK )
KNOW ALL MEN BY THESE PRESENTS that Thomas E. Dobrowski, having an address
at New York, New York, has made, constituted and appointed and BY THESE
PRESENTS, does make, constitute and appoint Thomas P. Heneghan and Howard
Walker, or either of them, having an address at Two North Riverside Plaza,
Chicago, Illinois 60606, his true and lawful Attorney-in-Fact for him and in his
name, place and stead to sign and execute in any and all capacities this Annual
Report on Form 10-K and any or all amendments to this Annual Report on Form
10-K, and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, giving and
granting unto each of such, Attorney-in-Fact, full power and authority to do and
perform each and every act and thing, requisite and necessary to be done in and
about the premises, as fully, to all intents and purposes as he might or could
do if personally present at the doing thereof, with full power of substitution
and revocation, hereby ratifying and confirming all that each of such
Attorney-in-Fact or his substitutes shall lawfully do or cause to be done by
virtue hereof.
This power of Attorney shall remain in full force and effect until
terminated by the undersigned through the instrumentality of a signed writing.
IN WITNESS WHEREOF, Thomas E. Dobrowski, has hereunto, set his hand this
7th day of March, 2000.
/s/ Thomas E. Dobrowski
-------------------------
Thomas E. Dobrowski
I, Rosemarie Sobel, a Notary Public in and for said County in the State
aforesaid, do hereby certify that Thomas E. Dobrowski, personally know to me to
be the same person whose name is subscribed to the foregoing instrument appeared
before me this day in person and acknowledged that he signed and delivered said
instrument as his own free voluntary act for the uses and purposes therein set
forth.
Given under my hand and notarial seal this 7th day of March, 2000.
/s/ Rosemarie Sobel
--------------------------
(Notary Public)
My Commission Expires:
October 31, 2000
<PAGE> 1
POWER OF ATTORNEY
Exhibit 24.4
STATE OF WASHINGTON )
)SS
COUNTY OF KITSAP )
KNOW ALL MEN BY THESE PRESENTS that Gary L. Waterman, having an address at
Bainbridge, Washington, has made, constituted and appointed and BY THESE
PRESENTS, does make, constitute and appoint Thomas P. Heneghan and Howard
Walker, or either of them, having an address at Two North Riverside Plaza,
Chicago, Illinois 60606, his true and lawful Attorney-in-Fact for him and in his
name, place and stead to sign and execute in any and all capacities this Annual
Report on Form 10-K and any or all amendments to this Annual Report on Form
10-K, and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, giving and
granting unto each of such, Attorney-in-Fact, full power and authority to do and
perform each and every act and thing, requisite and necessary to be done in and
about the premises, as fully, to all intents and purposes as he might or could
do if personally present at the doing thereof, with full power of substitution
and revocation, hereby ratifying and confirming all that each of such
Attorney-in-Fact or his substitutes shall lawfully do or cause to be done by
virtue hereof.
This power of Attorney shall remain in full force and effect until
terminated by the undersigned through the instrumentality of a signed writing.
IN WITNESS WHEREOF, Gary L. Waterman, has hereunto, set his hand this 9th
day of March, 2000.
/s/ Gary L. Waterman
---------------------
Gary L. Waterman
I, Judy S. Cooley, a Notary Public in and for said County in the State
aforesaid, do hereby certify that Gary L. Waterman, personally know to me to be
the same person whose name is subscribed to the foregoing instrument appeared
before me this day in person and acknowledged that he signed and delivered said
instrument as his own free voluntary act for the uses and purposes therein set
forth.
Given under my hand and notarial seal this 9th day of March, 2000.
/s/ Judy S. Cooley
------------------
(Notary Public)
My Commission Expires:
August 29, 2002
<PAGE> 1
POWER OF ATTORNEY
Exhibit 24.5
STATE OF MICHIGAN )
)SS
COUNTY OF WASHTENAW )
KNOW ALL MEN BY THESE PRESENTS that Donald S. Chisholm, having an address
at Ann Arbor, Michigan, has made, constituted and appointed and BY THESE
PRESENTS, does make, constitute and appoint Thomas P. Heneghan and Howard
Walker, or either of them, having an address at Two North Riverside Plaza,
Chicago, Illinois 60606, his true and lawful Attorney-in-Fact for him and in his
name, place and stead to sign and execute in any and all capacities this Annual
Report on Form 10-K and any or all amendments to this Annual Report on Form
10-K, and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, giving and
granting unto each of such, Attorney-in-Fact, full power and authority to do and
perform each and every act and thing, requisite and necessary to be done in and
about the premises, as fully, to all intents and purposes as he might or could
do if personally present at the doing thereof, with full power of substitution
and revocation, hereby ratifying and confirming all that each of such
Attorney-in-Fact or his substitutes shall lawfully do or cause to be done by
virtue hereof.
This power of Attorney shall remain in full force and effect until
terminated by the undersigned through the instrumentality of a signed writing.
IN WITNESS WHEREOF, Donald S. Chisholm, has hereunto, set his hand this 6th
day of March, 2000.
/s/ Donald S. Chisholm
-----------------------
Donald S. Chisholm
I, Sharon J. Place, a Notary Public in and for said County in the State
aforesaid, do hereby certify that Donald S. Chisholm, personally know to me to
be the same person whose name is subscribed to the foregoing instrument appeared
before me this day in person and acknowledged that he signed and delivered said
instrument as his own free voluntary act for the uses and purposes therein set
forth.
Given under my hand and notarial seal this 6th day of March, 2000.
/s/ Sharon J. Place
-------------------
(Notary Public)
My Commission Expires:
October 5, 2000
<PAGE> 1
POWER OF ATTORNEY
Exhibit 24.6
STATE OF CALIFORNIA )
)SS
COUNTY OF SAN DIEGO )
KNOW ALL MEN BY THESE PRESENTS that Louis H. Masotti, having an address at
San Diego, California, has made, constituted and appointed and BY THESE
PRESENTS, does make, constitute and appoint Thomas P. Heneghan and Howard
Walker, or either of them, having an address at Two North Riverside Plaza,
Chicago, Illinois 60606, his true and lawful Attorney-in-Fact for him and in his
name, place and stead to sign and execute in any and all capacities this Annual
Report on Form 10-K and any or all amendments to this Annual Report on Form
10-K, and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, giving and
granting unto each of such, Attorney-in-Fact, full power and authority to do and
perform each and every act and thing, requisite and necessary to be done in and
about the premises, as fully, to all intents and purposes as he might or could
do if personally present at the doing thereof, with full power of substitution
and revocation, hereby ratifying and confirming all that each of such
Attorney-in-Fact or his substitutes shall lawfully do or cause to be done by
virtue hereof.
This power of Attorney shall remain in full force and effect until
terminated by the undersigned through the instrumentality of a signed writing.
IN WITNESS WHEREOF, Louis H. Masotti, has hereunto, set his hand this 7th
day of March, 2000.
/s/ Louis H. Masotti
---------------------
Louis H. Masotti
I, Ann Randall Masotti, a Notary Public in and for said County in the State
aforesaid, do hereby certify that Louis H. Masotti, personally know to me to be
the same person whose name is subscribed to the foregoing instrument appeared
before me this day in person and acknowledged that he signed and delivered said
instrument as his own free voluntary act for the uses and purposes therein set
forth.
Given under my hand and notarial seal this 7th day of March, 2000.
/s/ Ann Randall Masotti
-----------------------
(Notary Public)
My Commission Expires:
April 25, 2002
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and statements of operations and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000895417
<NAME> MANUFACTURED HOME COMMUNITIES, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 6,676
<SECURITIES> 0
<RECEIVABLES> 1,338
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 32,967
<PP&E> 1,264,343
<DEPRECIATION> (150,757)
<TOTAL-ASSETS> 1,160,338
<CURRENT-LIABILITIES> 44,276
<BONDS> 0
0
0
<COMMON> 229
<OTHER-SE> 211,172
<TOTAL-LIABILITY-AND-EQUITY> 1,160,338
<SALES> 211,294
<TOTAL-REVENUES> 215,028
<CGS> 0
<TOTAL-COSTS> 82,835
<OTHER-EXPENSES> 6,092
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 53,775
<INCOME-PRETAX> 36,835
<INCOME-TAX> 0
<INCOME-CONTINUING> 27,772
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,772
<EPS-BASIC> 1.10
<EPS-DILUTED> 1.09
</TABLE>
