<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
[ ] 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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
20,833,896 shares of Common Stock as of October 31, 2000.
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MANUFACTURED HOME COMMUNITIES, INC.
TABLE OF CONTENTS
PART I - FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
----
Consolidated Balance Sheets as of September 30, 2000
(unaudited) and December 31, 1999 .....................................3
Consolidated Statements of Operations for the quarters
and nine months ended September 30, 2000 and 1999
(unaudited)............................................................4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999 (unaudited)..........................5
Notes to Consolidated Financial Statements.............................6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..........................................15
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.................................................20
ITEM 6. Exhibits and Reports on Form 8-K..................................20
2
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MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
(UNAUDITED)
----------- -----------
<S> <C> <C>
ASSETS
Investment in real estate:
Land .......................................................... $ 271,822 $ 285,337
Land improvements ............................................. 834,627 876,923
Buildings and other depreciable property ...................... 106,093 102,083
----------- -----------
1,212,542 1,264,343
Accumulated depreciation ...................................... (173,067) (150,757)
----------- -----------
Net investment in real estate ............................... 1,039,475 1,113,586
Cash and cash equivalents ........................................ 6,277 6,676
Notes receivable ................................................. 3,297 4,284
Investment in and advances to affiliates ......................... 18,413 11,689
Investment in joint ventures ..................................... 9,331 9,501
Rents receivable ................................................. 1,070 1,338
Deferred financing costs, net .................................... 6,659 5,042
Prepaid expenses and other assets ................................ 13,259 8,222
----------- -----------
Total assets .................................................. $ 1,097,781 $ 1,160,338
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable ........................................ $ 557,623 $ 513,172
Unsecured term loan ........................................... 100,000 100,000
Unsecured line of credit ...................................... 40,900 107,900
Other notes payable ........................................... 3,209 4,192
Accounts payable and accrued expenses ......................... 29,108 20,780
Accrued interest payable ...................................... 4,560 5,612
Rents received in advance and security deposits ............... 7,016 6,831
Distributions payable ......................................... 11,009 11,020
Due to affiliates ............................................. 32 33
----------- -----------
Total liabilities ........................................... 753,457 769,540
----------- -----------
Commitments and contingencies
Minority interest - Common OP Units and other .................... 48,070 54,397
Minority interest- Perpetual Preferred OP Units .................. 125,000 125,000
Stockholders' equity:
Preferred stock, $.01 par value
10,000,000 shares authorized; none issued ................... --- ---
Common stock, $.01 par value
50,000,000 shares authorized; 20,876,070 and 22,813,357
shares issued and outstanding for 2000 and 1999, respectively 209 229
Paid-in capital ............................................... 233,389 275,664
Deferred compensation ......................................... (4,669) (6,326)
Employee notes ................................................ (4,366) (4,540)
Distributions in excess of accumulated earnings ............... (53,309) (53,626)
----------- -----------
Total stockholders' equity .................................. 171,254 211,401
----------- -----------
Total liabilities and stockholders' equity .................... $ 1,097,781 $ 1,160,338
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
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MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED NINE MONTHS ENDED
------------------------- ---------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES
Base rental income ................................. $ 47,218 $ 45,601 $ 141,776 $ 135,646
RV base rental income .............................. 560 1,728 5,435 6,841
Utility and other income ........................... 4,973 4,747 15,701 15,595
Equity in income of affiliates ..................... 857 909 1,649 1,165
Interest income .................................... 267 552 731 1,127
--------- --------- --------- ---------
Total revenues ................................ 53,875 53,537 165,292 160,374
--------- --------- --------- ---------
EXPENSES
Property operating and maintenance ................. 14,653 14,424 44,471 43,173
Real estate taxes .................................. 4,119 4,186 12,807 12,560
Property management ................................ 2,072 2,078 6,631 6,194
General and administrative ......................... 1,346 1,408 5,006 4,567
Interest and related amortization .................. 13,169 13,965 39,654 40,830
Depreciation on corporate assets ................... 291 252 839 732
Depreciation on real estate assets and other costs . 8,510 8,807 25,934 25,351
--------- --------- --------- ---------
Total expenses ................................ 44,160 45,120 135,342 133,407
--------- --------- --------- ---------
Income from operations ....................... 9,715 8,417 29,950 26,967
Gain on sale of Properties and other ............... --- --- 12,053 ---
--------- --------- --------- ---------
Income before allocation to Minority Interests
and extraordinary loss .................... 9,715 8,147 42,003 26,967
(Income) allocated to Common OP Units .............. (1,451) (1,509) (6,822) (4,862)
(Income) allocated to Perpetual Preferred OP Units . (2,813) (31) (8,439) (31)
--------- --------- --------- ---------
Income before extraordinary loss on early
extinguishment of debt .................... 5,451 6,877 26,742 22,074
Extraordinary loss on early extinguishment of debt
(net of $264 allocated to minority interests) . --- --- 1,041 ---
--------- --------- --------- ---------
NET INCOME ................................... $ 5,451 $ 6,877 $ 25,701 $ 22,074
========= ========= ========= =========
Income per share before extraordinary loss - basic . $ 0.26 $ 0.27 $ 1.23 $ .85
========= ========= ========= =========
Income per share before extraordinary loss - diluted $ 0.25 $ 0.27 $ 1.21 $ .84
========= ========= ========= =========
Net income per Common Share - basic ................ $ 0.26 $ 0.27 $ 1.18 $ .85
========= ========= ========= =========
Net income per Common Share - diluted .............. $ 0.25 $ 0.27 $ 1.16 $ .84
========= ========= ========= =========
Distributions declared per Common Share ............ $ 0.4150 $ 0.3875 $ 1.245 $ 1.1625
========= ========= ========= =========
Weighted average Common Shares
outstanding - basic ...................... 21,166 25,613 21,775 25,846
========= ========= ========= =========
Weighted average Common Shares
outstanding - diluted (see Note 2) ....... 27,077 31,586 27,706 31,915
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
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MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................... $ 25,701 $ 22,074
Adjustments to reconcile net income to
cash provided by operating activities:
Income allocated to Minority Interests ......................... 14,997 4,893
Gain on sale of Properties and other ........................... (12,053) ---
Depreciation and amortization expense .......................... 26,526 26,556
Equity in income of affiliates ................................. (1,649) (1,165)
Amortization of deferred compensation and other ................ 1,657 1,238
Decrease (increase) in rents receivable ........................ 268 (552)
(Increase) decrease in prepaid expenses and other assets ....... (3,298) 1,613
Increase in accounts payable and accrued expenses .............. 7,275 6,988
Increase in rents received in advance and security deposits .... 185 1,577
--------- ---------
Net cash provided by operating activities .......................... 59,609 63,222
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Contributions and advances to affiliates ........................... (5,174) (1,911)
Collection of notes receivable ..................................... 987 11,524
Investment in joint ventures ....................................... (197) (1,997)
Collection of escrow proceeds, net ................................. 10,500 ---
Proceeds from disposition of assets ................................ 44,329 ---
Acquisition of rental properties ................................... (3,481) (29,305)
Improvements:
Improvements - corporate ....................................... (357) (471)
Improvements - rental properties ............................... (5,366) (6,520)
Site development costs ......................................... (4,250) (2,665)
--------- ---------
Net cash used in (provided by) investing activities ................ 36,991 (31,345)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from stock options and employee stock purchase plan ... 2,501 2,866
Net proceeds from issuance of Preferred OP units ................... --- 121,890
Distributions to common stockholders and minority interests ........ (42,503) (25,354)
Repurchase of Common Stock ........................................ (50,711) (26,772)
Collection of principal payments on employee notes ................. 174 79
Proceeds from line of credit and refinancing mortgage notes payable 199,953 41,584
Repayments on line of credit and refinancing mortgage notes payable (204,156) (133,896)
Debt issuance costs ................................................ (2,257) (846)
--------- ---------
Net cash used in financing activities .............................. (96,999) (20,449)
--------- ---------
Net (decrease) increase in cash and cash equivalents .................... (399) 11,428
Cash and cash equivalents, beginning of period .......................... 6,676 13,657
--------- ---------
Cash and cash equivalents, end of period ................................ $ 6,277 $ 25,085
========= =========
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest ................................ $ 39,739 $ 39,932
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
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MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DEFINITION OF TERMS:
Capitalized terms used but not defined herein are as defined in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999 (the
"1999 Form 10-K").
PRESENTATION:
These unaudited Consolidated Financial Statements of Manufactured Home
Communities, Inc., a Maryland corporation, and its subsidiaries (collectively,
the "Company"), have been prepared pursuant to the Securities and Exchange
Commission ("SEC") rules and regulations and should be read in conjunction with
the financial statements and notes thereto included in the 1999 Form 10-K. The
following Notes to Consolidated Financial Statements highlight significant
changes to the Notes included in the 1999 Form 10-K and present interim
disclosures as required by the SEC. The accompanying Consolidated Financial
Statements reflect, in the opinion of management, all adjustments necessary for
a fair presentation of the interim financial statements. All such adjustments
are of a normal and recurring nature. Certain reclassifications have been made
to the prior periods' financial statements in order to conform with current
period presentation.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
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.
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information" 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 the results of operations or financial position of
the Company. The Company has one reportable segment, which is the operation of
manufactured home communities.
NOTE 2 - EARNINGS PER COMMON SHARE
Earnings per common share is based on the weighted average number of common
shares outstanding during each period. In 1997, the Company adopted SFAS No.
128, "Earnings Per Share". 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. The conversion of Operating Partnership Units ("OP Units")
has been excluded from the basic earnings per share calculation. The conversion
of an OP Unit to a share of common stock will have no material effect on
earnings per common share since the allocation of earnings to an OP Unit is
equivalent to the allocation of earnings to a share of common stock.
6
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MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - EARNINGS PER COMMON SHARE (CONTINUED)
The following table sets forth the computation of basic and diluted
earnings per share for the quarters and nine months ended September 30, 2000 and
1999 (amounts in thousands):
<TABLE>
<CAPTION>
QUARTERS ENDED NINE MONTHS ENDED
---------------------- ------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
-------- --------- ---------- -----------
<S> <C> <C> <C> <C>
NUMERATOR:
Numerator for basic earnings per share -
Net income........................................... $ 5,451 $ 6,877 $ 25,701 $ 22,074
Effect of dilutive securities:
Income allocated to Common OP Units
(net of extraordinary loss on early extinguishment
of debt incurred in the second quarter of 2000) ... 1,451 1,509 6,558 4,862
------- ------- -------- ---------
Numerator for diluted earnings per share-
income available to common shareholders
after assumed conversions.......................... $ 6,902 $ 8,386 $ 32,259 $ 26,936
======= ======= ======== =========
DENOMINATOR:
Denominator for basic earnings per share -
Weighted average Common Stock outstanding............ 21,166 25,613 21,775 25,846
Effect of dilutive securities:
Weighted average Common OP Units..................... 5,583 5,647 5,606 5,725
Employee stock options................................ 328 326 325 344
------- -------- -------- ---------
Denominator for diluted earnings per share-
adjusted weighted average shares and
assumed conversions................................ 27,077 31,586 27,706 31,915
======= ======== ======== =========
</TABLE>
NOTE 3 - COMMON STOCK AND RELATED TRANSACTIONS
On April 14, 2000, July 14, 2000 and October 13, 2000, the Company paid a
$.415 per share distribution for the quarters ended March 31, 2000, June 30,
2000 and September 30, 2000, respectively, to stockholders of record on March
31, 2000, June 30, 2000 and September 29, 2000, respectively.
In accordance with the Common Stock repurchase plan approved by the
Company's Board of Directors, the Company repurchased 500,000 shares of Common
Stock during the quarter ended September 30, 2000. Additionally, the Company
repurchased 670,000 shares of Common Stock in a privately negotiated transaction
approved by the Company's Board of Directors. Altogether, the Company has
repurchased 1,070,000 shares during the quarter ended September 30, 2000 and
2,065,100 shares during the nine months ended September 30, 2000. The Company
has repurchased approximately 6.5 million shares since the plan was approved.
The Common Stock repurchase plan allows for the repurchase of an additional
500,000 shares during the quarter ending December 31, 2000.
7
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MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - REAL ESTATE
In March 2000, in accordance with SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of",
MHC Acquisition One LLC, a consolidated subsidiary of the Company, recorded an
impairment loss on the DeAnza Santa Cruz water and wastewater service company
business. Recent negotiations for the sale of the business as well as
management's estimates indicated that the undiscounted future cash flows from
the business would be less than the carrying value of the business and its
related assets. The Company recorded an asset impairment loss of $701,000 (or
$.02 per fully diluted share) which is included in other income on the
accompanying statements of operations. This loss represents the difference
between the carrying value of the DeAnza Santa Cruz water and wastewater service
company business and its related assets and their estimated fair market value.
On February 29, 2000, MHC Systems, Inc., a consolidated subsidiary of the
Company, disposed of the water and wastewater service company and facilities
known as FFEC-Six in a cash sale. Net proceeds from the sale of approximately
$4.2 million were used to pay down the Company's line of credit and a gain on
the sale of $719,000 (or $.02 per fully diluted share) was recorded in other
income on the accompanying statements of operations.
In April 2000, the California Superior Court approved a settlement
agreement (the "Settlement") in connection with the dissolution proceeding of
Ellenburg Capital Corporation and its affiliated partnerships. The Company had
previously purchased 37 properties (the "Ellenburg Properties") in connection
with the dissolution proceeding. As part of the Settlement, the Company sold
three communities - Mesa Regal RV Resort, Mon Dak and Naples Estates - for an
aggregate sales price of $59.0 million including cash proceeds of $40.0 million
and assumption of debt of $19.0 million in a non-cash transaction. The Company
recorded a $9.1 million gain on the sale of these properties. Also as part of
the Settlement, the Company received the return of $13.5 million previously held
in escrow in connection with the purchase of the Ellenburg Properties and
recorded $3.0 million of interest income related to these funds. Proceeds from
the Settlement were used to pay down the Company's line of credit. See Note 8
for further discussion of the Settlement.
The Company is actively seeking to acquire additional manufactured home
communities and currently is engaged in negotiations relating to the possible
acquisition of a number of manufactured home communities. At any time these
negotiations are at varying stages which may include contracts outstanding to
acquire certain manufactured home communities which are subject to satisfactory
completion of the Company's due diligence review.
NOTE 5 - NOTES RECEIVABLE
At September 30, 2000 and December 31, 1999, the Company had approximately
$3.3 million and $4.3 million in notes receivable, respectively. On January 10,
2000, $1.1 million in purchase money notes receivable were repaid to the
Company. The Company has a $3.3 million loan receivable outstanding, which bears
interest at the rate of approximately 8.5%, is collateralized by the property
known as Trails West and matures on June 1, 2003.
8
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MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - LONG-TERM BORROWINGS
As of September 30, 2000 and December 31, 1999, the Company had outstanding
mortgage indebtedness of approximately $557.6 million and $513.2 million,
respectively, encumbering 73 and 72 of the Company's Properties, respectively.
As of September 30, 2000 and December 31, 1999, the carrying value of such
Properties was approximately $633.7 million and $638 million, respectively.
On June 30, 2000, the Company completed $110 million in debt financing
consisting of two mortgage notes - one for $94.3 million and one for $15.7
million - secured by seven Properties as discussed below. The proceeds of the
financing were used to repay $60 million of mortgage debt secured by the seven
Properties, to repay amounts outstanding under the Company's line of credit and
for working capital purposes. The Company recorded a $1.3 million charge in
connection with the early repayment of the $60 million of mortgage debt.
The outstanding mortgage indebtedness consists of:
- A $265.0 million mortgage note (the "$265 Million Mortgage")
collateralized by 29 Properties beneficially owned by MHC Financing Limited
Partnership. The $265 Million Mortgage 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 to be paid from
available cash flow and the interest rate will be reset at a rate equal to
the then 10-year U.S. Treasury obligations plus 2.0%. The $265 Million
Mortgage is recorded net of a hedge of $3.0 million which is being
amortized into interest expense over the life of the loan.
- A $66.7 million mortgage note (the "College Heights Mortgage")
collateralized by 18 Properties owned in a joint venture formed by the
Company and Wolverine Investors, LLC. The College Heights Mortgage bears
interest at a rate of 7.19%, amortizes beginning July 1, 1999 over 30 years
and matures July 1, 2008.
- A $94.0 million mortgage note (the "DeAnza Mortgage") collateralized
by 6 Properties beneficially owned by MHC-DeAnza Financing Limited
Partnership. The DeAnza Mortgage bears interest at a rate of 7.82%,
amortizes beginning August 1, 2000 over 30 years and matures July 1, 2010.
- A $23.1 million mortgage note (the "Bay Indies Mortgage")
collateralized by one Property beneficially owned by MHC-Bay Indies
Financing Limited Partnership. The Bay Indies Mortgage bears interest at a
rate of 7.48%, amortizes beginning August 1, 1994 over 27.5 years and
matures July 1, 2004.
- A $15.7 million mortgage note (the "Date Palm Mortgage")
collateralized by one Property beneficially owned by MHC Date Palm, L.L.C.
The Date Palm Mortgage bears interest at a rate of 7.96%, amortizes
beginning August 1, 2000 over 30 years and matures July 1, 2010.
- Approximately $95.2 million of mortgage debt on 18 other various
Properties, which was recorded at fair market value with the related
discount or premium being amortized over the life of the loan using the
effective interest rate. Scheduled maturities for the outstanding
indebtedness are at various dates through November 30, 2020, and fixed
interest rates range from 7.25% to 9.05%. Included in this debt are two
mortgages which were entered into on February 24, 2000, with combined
principal of $14.6 million at an interest rate of approximately 8.3%,
maturing on March 24, 2010. In addition, the Company has a $2.4 million
loan recorded to account for a direct financing lease entered into in May
1997.
9
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MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - LONG-TERM BORROWINGS (CONTINUED)
On August 9, 2000, the Company amended its unsecured line of credit with a
bank (the "Credit Agreement") bearing interest at the London Interbank Offered
Rate ("LIBOR") plus 1.125%. Among other things, the amendment lowered the total
facility under the Credit Agreement to $150 million and extended the maturity to
August 9, 2003. The Company pays a quarterly fee on the average unused amount of
such credit equal to 0.15% of such amount. As of September 30, 2000, $40.9
million was outstanding under the Credit Agreement.
The Company has a $100 million unsecured 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 maturity has been extended to April 3, 2002.
The Company has approximately $3.2 million of installment notes payable,
secured by a letter of credit, each with an interest rate of 6.5%, maturing
September 1, 2002. Approximately $1.9 million of the notes pay principal
annually and interest quarterly and the remaining $1.3 million of the notes pay
interest only quarterly.
In July 1995, the Company entered into an interest rate swap agreement (the
"1998 Swap") fixing LIBOR on $100 million of the Company's floating rate debt at
6.4% for the period 1998 through 2003. The value of the 1998 Swap was impacted
by changes in the market rate of interest. 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 terminated
the 1998 Swap and received $1.0 million of proceeds which is being amortized as
an adjustment to interest expense through March 2003.
NOTE 7 - STOCK OPTIONS
Pursuant to the Amended and Restated 1992 Stock Option and Stock Award Plan
as discussed in Note 14 to the 1999 Form 10-K, certain officers, directors,
employees and consultants have been offered the opportunity to acquire shares of
common stock of the Company through stock options ("Options"). During the nine
months ended September 30, 2000, Options for 83,869 shares of common stock were
exercised.
NOTE 8 - 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.
10
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MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
11
<PAGE> 12
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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." The CPUC has issued a tentive opinion in the OII stating its belief
that legislation is necessary to clarify the issue
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.
12
<PAGE> 13
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
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 this appeal has been fully briefed. The Company is awaiting notice from the
court of appeal setting oral argument in the jury verdict appeal. The jury
verdict appeal raises several 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 appeal will be successful.
In two previously disclosed related appeals challenging the result of the
earlier litigation and an attorney's fee award of approximately $100,000 to the
plaintiffs, the court of appeal in July 2000 rejected the Company's arguments
that the CPUC had exclusive jurisdiction over the issue of water rates in
submetered moblehome parks. The Company's request that the Supreme Court of
California to review this matter was denied and the Company paid the attorney's
fees awarded, including interest at the statutory rate thereon and appellate
fees, in an amount of approximately $185,000.
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 the NPDES Permit governing the operation of
the onsite wastewater treatment plant at another of the Properties. The Company
and the USEPA have reached agreement on a resolution of the matter in which the
operation of the remaining waste water treatment plant will be subject to a
consent decree that will provide for fines and penalties in the event of future
violations and the Company will pay a fine. 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
The Company and certain other parties entered into a Settlement which was
filed with the Court in February 2000. In April 2000, the Court approved the
Settlement which resolved substantially all of the litigation and appeals
involving the Ellenburg Properties and the Settlement closed on May 22, 2000
(see also Note 4).
13
<PAGE> 14
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
In connection with the Ellenberg Acquisition, on September 8, 1999,
Ellenburg Fund 20 ("Fund 20") filed a cross complaint in the Ellenburg
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. The Company subsequently successfully had the cross
complaint against the Company and its affiliates dismissed with prejudice by the
California Superior Court. However, Fund 20 has appealed. The Company believes
Fund 20's allegations are without merit and will vigorously defend itself.
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, and is guaranteed by Ronald E. Farren ("Farren"), the 99%
owner of Borrower. 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 Superior Court of Bartholomew County, Indiana
("Court") on May 5, 1999, seeking a 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
(collectively, the "State Court Litigation") 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 filed motions to
correct errors in the Order, and on May 15, 2000, the Court issued judgments
against Borrower and Farren and in favor of the Operating Partnership in the
option case and the Lending Partnership in the foreclosure case. Borrower and
Farren have appealed both judgments, and the court has stayed the judgments
pending such appeals. 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.
On May 3, 2000, Hanover Group, Inc. ("Hanover") and Farren filed suit
against the Company and certain executive and senior officers of the Company in
the United States District Court for the Southern District of Indiana,
Indianapolis Division. The complaint alleges violations of securities laws and
fraud arising from the loan transaction being litigated in the State Court
Litigation and seeks damages, including treble damages. The Company believes
that the complaint is related to rulings made by the Court and is without merit.
The Company has filed a motion for judgment on the pleadings, and will
vigorously defend itself and the officers of the Company.
On May 24, 2000, Hanover and Farren filed suit against the Operating
Partnership in the Superior Court of Marion County, Indiana. The complaint seeks
declaratory relief and specific performance with respect to the Operating
Partnership's alleged obligation to reconvey to Hanover the Operating
Partnership's 1% ownership interest in Borrower. The Company believes that the
complaint is related to rulings made by the Court and is without merit. The
parties have agreed to a stay in this proceeding pending the outcome of the
appeals in the State Court Litigation.
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.
14
<PAGE> 15
MANUFACTURED HOME COMMUNITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following is a discussion of the interim results of operations,
financial condition and liquidity and capital resources of the Company for the
three months and nine months ended September 30, 2000 compared to the
corresponding period in 1999. It should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included herein and the 1999
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 THE QUARTER ENDED SEPTEMBER 30, 2000 TO THE QUARTER ENDED
SEPTEMBER 30, 1999
Since December 31, 1998, the gross investment in real estate has decreased
from $1,237 million to $1,213 million. The total number of sites owned or
controlled has decreased from 53,391 as of December 31, 1998 to 51,437 as of
September 30, 2000. These changes reflect the following property acquisitions
and dispositions (the sale of FFEC-Six had no effect on the number of sites
owned or controlled):
(i) The Meadows - acquired on April 1, 1999
(ii) Coquina Crossing - acquired on July 23, 1999
(iii) FFEC-Six (water and wastewater service company) - sold on
February 29, 2000
(iv) Mesa Regal RV Resort - sold on May 19, 2000
(v) Naples Estates - sold on May 19, 2000
(vi) Mon Dak - sold on May 19, 2000
The Company defines its core manufactured home community portfolio ("Core
Portfolio") as manufactured home properties owned as of the beginning of both
periods of comparison. Excluded from the Core Portfolio are the aforementioned
acquisitions and dispositions and also the recreational vehicle ("RV")
properties which, together, are referred to as the "Non-Core" Properties.
The following table summarizes certain weighted average statistics for the
quarters ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
CORE PORTFOLIO TOTAL PORTFOLIO
----------------------- --------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
--------- --------- ---------- ------------
<S> <C> <C> <C> <C>
Total sites 45,888 45,807 46,718 47,073
Occupied sites 43,438 43,148 44,093 44,251
Occupancy % 94.7% 94.2% 94.4% 94.0%
Monthly base rent per site $357.85 $344.44 $356.95 $343.50
</TABLE>
15
<PAGE> 16
MANUFACTURED HOME COMMUNITIES, INC.
RESULTS OF OPERATIONS (CONTINUED)
Base rental income ($47.2 million) increased $1.6 million or 3.5%. For the
Core Portfolio, base rental income ($46.6 million) increased approximately $2.0
million or 4.6%, primarily due to increased base rental rates. The remaining
$430,000 decrease in base rental income reflects an increase of $146,000
attributable to the Properties acquired in 1999 and a decrease of $577,000
related to the Properties sold in 2000.
Monthly base rent per site for the total portfolio increased 3.9%,
reflecting a 3.9% increase in monthly base rent per site for the Core Portfolio
and slightly higher monthly base rents for the Properties acquired in 1999.
Weighted average occupied sites for the total portfolio decreased by 158
sites resulting in a 0.4% increase in occupancy, due to the disposition of Mesa
Regal RV Resort, Naples Estates and Mon Dak. Core Portfolio occupancy increased
0.5% reflecting an increase in weighted average occupied sites of 290 sites.
RV base rental income ($560,000) decreased $1.2 million or 67.6% primarily
due to the sale of Mesa Regal RV Resort.
Utility and other income ($4.9 million) increased $226,000 or 4.8%. Within
the Core Portfolio, utility and other income ($4.6 million) increased $598,000
primarily due to higher utility income - an increase which is reflected in
higher utility expense for the quarter for the Core Portfolio. This increase is
offset by a $372,000 decrease attributable to the net effect of properties sold
in 2000.
Interest income ($267,000) decreased $285,000 or 51.6%, primarily due to
the repayment of certain notes receivable and a decrease in interest earned on
short-term investments. Short-term investments had average balances for the
quarters ended September 30, 2000 and 1999 of approximately $1.2 million and
$1.6 million, respectively, which earned interest income at an effective rate of
6.8% and 5.3% per annum, respectively. As of September 30, 2000, the Company had
cash and cash equivalents and short-term investments of $6.3 million.
Property operating and maintenance expenses ($14.7 million) increased
$229,000 or 1.6% reflecting a $708,000 decrease attributable to the Properties
sold in 2000 and a $132,000 increase attributable to Properties acquired in
1999. Expenses at the Core Portfolio ($13.8 million) increased $813,000 or 6.2%.
Property operating and maintenance expenses represented 27.2% of total revenues
in 2000 and 26.9% in 1999.
Real estate taxes ($4.1 million) decreased $67,000 or 1.6%, which was
primarily attributable to the Non-Core Properties. Core Portfolio real estate
tax expense ($3.9 million) increased $16,000 or 0.4%. Real estate taxes
represented 7.6% of total revenues in 2000 and 7.8% in 1999.
Property management expenses ($2.1 million) decreased $6,000 or 0.3%. The
decrease was primarily due to management staffing changes and partially offset
by incremental management costs. Property management expenses represented 3.8%
of total revenues in 2000 and 3.9% in 1999.
General and administrative expense ("G&A") ($1.3 million) decreased $63,000
or 4.5%. G&A represented 2.5% of total revenues in 2000 and 2.6% in 1999.
16
<PAGE> 17
MANUFACTURED HOME COMMUNITIES, INC.
RESULTS OF OPERATIONS (CONTINUED)
Interest and related amortization ($13.2 million) decreased $796,000 or
5.7%. The decrease was due to lower weighted average outstanding debt balances
during the period, partially offset by a slightly increased effective interest
rate. The weighted average outstanding debt balances for the quarters ended
September 30, 2000 and 1999 were $690.3 million and $761.3 million,
respectively. The effective interest rates were 7.5% and 7.3%, respectively.
Interest and related amortization represented 24.4% of total revenues in 2000
and 26.1% in 1999.
Depreciation on corporate assets ($291,000) increased $39,000 or 15.5%. The
increase was due to fixed asset purchases related to computer software upgrades.
Depreciation on corporate assets represented 0.5% of total revenues in both 2000
and 1999.
Depreciation on real estate assets and other costs ($8.5 million) decreased
$297,000 or 3.4% as a result of the disposition of Properties in 2000.
Depreciation on real estate assets and other costs represented 15.8% of total
revenues in 2000 and 16.4% in 1999.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2000 TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1999
The following table summarizes certain weighted average statistics for the
nine months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
CORE PORTFOLIO TOTAL PORTFOLIO
--------------------- --------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Total sites 45,855 45,810 47,043 46,789
Occupied sites 43,267 43,077 44,262 43,992
Occupancy % 94.4% 94.0% 94.1% 94.0%
Monthly base rent per site $357.11 $343.57 $355.90 $343.62
</TABLE>
Base rental income ($141.8 million) increased $6.1 million or 4.5%. For the
Core Portfolio, base rental income ($139 million) increased approximately $5.9
million or 4.4%, due primarily to increased base rental rates. The remaining
$272,000 increase in base rental income reflects an increase of $1.0 million
attributable to the Properties acquired in 1999 and a decrease of $737,000
related to the Properties sold in 2000.
Monthly base rent per site for the total portfolio increased 3.6%,
primarily due to increased monthly base rent per site for the Core Portfolio.
Weighted average occupied sites for the total portfolio decreased by 270
sites creating a 0.1% increase in occupancy. Core Portfolio occupancy increased
0.4% reflecting an increase in weighted average occupied sites of 190 sites.
RV base rental income ($5.4 million) decreased $1.4 million or 20.5%
primarily due to the sale of Mesa Regal RV Resort.
17
<PAGE> 18
MANUFACTURED HOME COMMUNITIES, INC.
RESULTS OF OPERATIONS (CONTINUED)
Utility and other income ($15.7 million) increased $107,000 or 0.7%,
primarily attributable to the Core Portfolio. Within the Core Portfolio, utility
and other income ($13.5 million) increased $400,000 primarily due to increased
real estate pass through and other income. Other income includes a gain on the
sale of FFEC-Six of $719,000, partially offset by an impairment loss on the
DeAnza Santa Cruz water and wastewater service company of $701,000 as discussed
in Note 4 to the Consolidated Financial Statements.
Interest income ($731,000) decreased $396,000 or 35.1%, primarily due to
the repayment of certain notes receivable and a decrease in interest earned on
short-term investments. Short-term investments had average balances for the nine
months ended September 30, 2000 and 1999 of approximately $1.5 million and $3.1
million, respectively, which earned interest income at an effective rate of 5.9%
and 4.6% per annum, respectively.
Property operating and maintenance expenses ($44.5 million) increased $1.3
million or 3.0% reflecting a $1.2 million decrease attributable to the
Properties sold in 2000 and a $687,000 increase attributable to Properties
acquired in 1999. Expenses at the Core Portfolio ($40.5 million) increased $1.9
million or 4.9%. Property operating and maintenance expenses represented 26.9%
of total revenues in both 2000 and 1999.
Real estate taxes ($12.8 million) increased $246,000 or 2.0%, which was
primarily attributable to the Core Portfolio. Core Portfolio real estate tax
expense ($12.2 million) increased $209,000 or 1.7%. Real estate taxes
represented 7.8% of total revenues in both 2000 and 1999.
Property management expenses ($6.6 million) increased $438,000 or 7.1%. The
increase was primarily due to management staffing changes and incremental
management costs related to the addition of Properties acquired in 1999 and
1998. Property management expenses represented 4.0% of total revenues in 2000
and 3.9% in 1999.
General and administrative expense ("G&A") ($5.0 million) increased
$439,000 or 9.6%. The increase was primarily due to timing of certain public
company costs, legal costs related to an effort to obtain an IRS ruling
regarding income from RV Properties and increased payroll. G&A represented 3.0%
of total revenues in 2000 and 2.8% in 1999.
Interest and related amortization ($39.7 million) decreased $1.2 million or
2.9%. The decrease was due to lower weighted average outstanding debt balances
during the period, partially offset by a slightly increased effective interest
rate. The weighted average outstanding debt balances for the nine months ended
September 30, 2000 and 1999 were $720.0 million and $750.6 million,
respectively. The effective interest rates were 7.2% and 7.2%, respectively.
Interest and related amortization represented 24.0% of total revenues in 2000
and 25.5% in 1999.
Depreciation on corporate assets ($839,000) increased $107,000 or 14.6%.
The increase was due to fixed asset purchases related to computer software
upgrades. Depreciation on corporate assets represented 0.5% of total revenues in
both 2000 and 1999.
Depreciation on real estate assets and other costs ($25.9 million)
increased $583,000 or 2.3% as a result of the addition of the Properties
purchased in 1999. Depreciation on real estate assets and other costs
represented 15.7% of total revenues in both 2000 and 15.8% in 1999.
18
<PAGE> 19
MANUFACTURED HOME COMMUNITIES, INC.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $399,000 when compared to December
31, 1999.
Net cash provided by operating activities decreased $3.6 million from $63.2
million for the nine months ended September 30, 1999 to $59.6 million for the
nine months ended September 30, 2000. This decrease reflects an extraordinary
loss on early retirement of debt of $1.3 million, a gain of $12.0 million on the
sale of Properties and other, increased prepaid expenses and other non-cash
items, and a $4.8 million decrease in funds from operations ("FFO"), as
discussed below.
FFO was redefined by the National Association of Real Estate Investment
Trusts ("NAREIT") in October 1999, effective January 1, 2000, 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
unconsolidated partnerships and joint ventures. The Company computes FFO in
accordance with the NAREIT definition, which may differ from the methodology for
calculating FFO utilized by other equity REITs and, accordingly, may not be
comparable to such other REITs. Funds available for distribution ("FAD") is
defined as FFO less non-revenue producing capital expenditures and amortization
payments on mortgage loan principal. The Company believes that FFO and FAD are
useful to investors as a measure of the performance of an equity REIT because,
along with cash flows from operating activities, financing activities and
investing activities, they provide investors an understanding of the ability of
the Company to incur and service debt and to make capital expenditures. FFO and
FAD in and of themselves do not represent cash generated from operating
activities in accordance with GAAP and therefore should not be considered an
alternative to net income as an indication of the Company's performance or to
net cash flows from operating activities as determined by GAAP as a measure of
liquidity and are not necessarily indicative of cash available to fund cash
needs.
19
<PAGE> 20
MANUFACTURED HOME COMMUNITIES, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The following table presents a calculation of FFO and FAD for the quarters
and nine months ended September 30, 2000 and 1999 (amounts in thousands):
<TABLE>
<CAPTION>
QUARTERS ENDED NINE MONTHS ENDED
----------------------- ----------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
COMPUTATION OF FUNDS FROM OPERATIONS:
Income before extraordinary loss on early
extinguishment of debt .................... $ 5,451 $ 6,877 $ 26,742 $ 22,074
Income allocated to Common OP Units ........ 1,451 1,509 6,822 4,862
Gain on sale of Properties and other ....... --- --- (12,053) ---
Depreciation on real estate assets and
other costs ............................... 8,510 8,807 25,934 25,351
-------- -------- -------- --------
Funds from operations ........................ $ 15,412 $ 17,193 $ 47,445 $ 52,287
======== ======== ======== ========
Weighted average Common
Shares outstanding - diluted ............. 27,077 31,586 27,706 31,915
======== ======== ======== ========
COMPUTATION OF FUNDS AVAILABLE FOR DISTRIBUTION:
Funds from operations ........................ $ 15,412 $ 17,193 $ 47,445 $ 52,287
Non-revenue producing improvements -
rental properties .................. (2,470) (2,901) (5,366) (6,519)
-------- -------- -------- --------
Funds available for distribution ........... $ 12,942 $ 14,292 $ 42,079 $ 45,768
======== ======== ======== ========
Weighted average Common
Shares outstanding - diluted ............. 27,077 31,586 27,706 31,915
======== ======== ======== ========
</TABLE>
Net cash provided by (used in) investing activities increased $68.3 million
from $(31.3) million for the nine months ended September 30, 1999 to $36.9
million for the nine months ended September 30, 2000 primarily due to the
Settlement regarding the Ellenburg Properties (see Note 4 and Note 8 to the
Consolidated Financial Statements) whereby the Company received total cash
proceeds of $53.5 million, the sale of the FFEC-Six water and wastewater service
company and the acquisition of Properties in 1999, partially offset by the
repayment of notes receivable in 1999 and increased contributions to affiliates
in 2000.
Capital expenditures for improvements were approximately $9.9 million for
the nine months ended September 30, 2000 compared to $9.7 million for the nine
months ended September 30, 1999. Of the $9.9 million, approximately $5.4 million
represented improvements to existing sites. The Company anticipates spending
approximately $2.3 million on improvements to existing sites during the
remainder of 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 $4.5 million
represented $4.2 million in costs to develop expansion sites at certain of the
Company's Properties and $357,000 of other corporate headquarters costs. The
Company is currently developing an additional 10 sites which should be available
for occupancy in 2000.
Net cash used in financing activities increased $76.6 million from $20.4
million for the nine months ended September 30, 1999 to $96.9 million for the
nine months ended September 30, 2000, primarily due to the timing of
distributions to Common Stockholders and Common OP Unitholders and net
repayments on the line of credit with proceeds from the Settlement.
20
<PAGE> 21
MANUFACTURED HOME COMMUNITIES, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Distributions to Common Stockholders and Common OP Unitholders increased
approximately $17.1 million due to the timing of the fourth quarter 1999
dividend payment. On April 14, 2000, July 14, 2000 and October 13, 2000, the
Company paid a $.415 per share distribution for the quarters ended March 31,
2000, June 30, 2000 and September 30, 2000, respectively, to stockholders of
record on March 31, 2000, June 30, 2000 and September 29, 2000, respectively.
Return of capital on a GAAP basis was $0.135 per share, $0.00 per share, and
$.0155 per share for the first, second and third quarters of 2000, respectively.
The Company expects to meet its short-term liquidity requirements,
including its distributions, generally through its working capital, net cash
provided by operating activities and availability under the existing line of
credit. The Company expects to meet certain long-term liquidity requirements
such as scheduled debt maturities, property acquisitions and capital
improvements by long-term collateralized and uncollateralized borrowings
including borrowings under its existing line of credit and the issuance of debt
securities or additional equity securities in the Company, in addition to
working capital.
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.
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MANUFACTURED HOME COMMUNITIES, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(see Note 8 of the Consolidated Financial Statements contained herein)
ITEM 5. OTHER INFORMATION
On May 9, 2000, the Board of Directors of the Company appointed Thomas P.
Heneghan as the Company's President and Chief Operating Officer. Mr. Heneghan,
36, has served for the last five years as the Company's Chief Financial Officer.
Gary Powell, the Company's Executive Vice President of Property Operations
became President and Chief Executive Officer of the Company's sales and
marketing affiliate, Realty Systems Inc. In addition, the Board of Directors of
the Company appointed John M. Zoeller as Vice President and Chief Financial
Officer of the Company. Mr. Zoeller, 39, has over 18 years of accounting
experience including 12 years with various affiliates of Equity Group
Investments. Mr. Zoeller, a CPA, holds a BS in Accounting from the University of
Illinois, Champaign - Urbana.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
MANUFACTURED HOME COMMUNITIES, INC.
BY: /s/ John M. Zoeller
---------------------------------
John M. Zoeller
Vice President, Treasurer and
Chief Financial Officer
BY: /s/ Mark Howell
---------------------------------
Mark Howell
Principal Accounting Officer and
Assistant Treasurer
DATE: November 10, 2000
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