<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 001-12258
-------------------
ROC COMMUNITIES, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
MARYLAND 84-1226771
------------------------ ---------------------
(State of incorporation) (IRS Employer ID No.)
6430 SO. QUEBEC ST., ENGLEWOOD, CO 80111
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(303) 741-3707
--------------
(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
--- ---
Number of shares of common stock, $.01 par value, outstanding as of November 13,
1996: 12,581,517
<PAGE>
ROC COMMUNITIES, INC.
FORM 10-Q
INDEX
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of September 30, 1996 and
December 31, 1995 2
Consolidated Statements of Income for the Three
Months Ended September 30, 1996 and 1995; Nine Months
Ended September 30, 1996 and 1995 3
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1996 and 1995 4
Notes to Consolidated Financial Statements 5 - 8
Supplemental Financial Information 9 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 14
PART II. OTHER INFORMATION 15 - 18
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ROC COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ ------------
(UNAUDITED)
Rental property, net $326,952 $272,357
Mortgages receivable 4,859 4,913
Cash and cash equivalents 1,661 652
Deferred financing costs, net 2,404 2,450
Prepaid expenses and other assets, net 8,083 4,830
-------- --------
Total $343,959 $285,202
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage debt $59,538 $60,390
Line of credit 81,604 24,253
Accounts payable and accrued expenses 6,603 2,616
Interest payable 789 553
Other liabilities 1,318 911
Distributions payable 5,096 4,845
-------- --------
Total Liabilities 154,948 93,568
-------- --------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock ($.01 par value;
9,841,983 shares authorized, no
shares issued)
Common stock ($.01 par value; 90,000,000
shares authorized; 12,581,517 and
12,423,500 shares issued and outstanding) 126 124
Additional paid-in capital 212,595 208,868
Cumulative net income 29,448 20,577
Cumulative distributions (53,158) (37,935)
-------- --------
Total Stockholders' Equity 189,011 191,634
-------- --------
Total $343,959 $285,202
-------- --------
-------- --------
See accompanying notes.
2
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ROC COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Rental income $15,754 $12,428 $43,599 $36,153
Management income 284 342 972 927
Other income 161 312 550 808
------- ------- ------- -------
Total Revenue 16,199 13,082 45,121 37,888
------- ------- ------- -------
Expenses:
Property operations and maintenance 5,365 4,209 14,473 11,894
Real estate taxes 1,234 990 3,419 2,874
General and administrative 872 752 2,711 2,329
Interest 2,286 1,223 5,770 3,349
Amortization of debt costs 173 277 547 805
Depreciation and amortization 3,362 2,699 9,330 7,934
------- ------- ------- -------
Total Expenses 13,292 10,150 36,250 29,185
------- ------- ------- -------
Net Income $ 2,907 $ 2,932 $ 8,871 $ 8,703
------- ------- ------- -------
------- ------- ------- -------
Net Income Per Share $ .23 $ .24 $ .71 $ .70
------- ------- ------- -------
------- ------- ------- -------
Weighted Average Shares of
Common Stock Outstanding 12,582 12,424 12,478 12,424
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
See accompanying notes.
3
<PAGE>
ROC COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
-------- --------
Cash Flows From Operating Activities:
Net income $ 8,871 $ 8,703
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,330 7,934
Amortization of debt costs 547 805
Changes in operating assets and liabilities:
Prepaid expenses and other assets (1,168) 277
Accounts payable, accrued expenses, and other
liabilities 4,630 1,117
-------- --------
Net cash provided by operating activities 22,210 18,836
-------- --------
Cash Flows From Investing Activities:
Acquisition of rental properties (56,449) (27,358)
Capital expenditures (3,356) (3,755)
Changes in prepaid expenses and other assets (2,476)
Collection of mortgages receivable 54 49
-------- --------
Net cash used in investing activities (62,227) (31,064)
-------- --------
Cash Flows From Financing Activities:
Proceeds from line of credit 106,505 24,306
Principal payments on line of credit (49,154) (1,111)
Principal payments on mortgages (852) (1,228)
Payment of deferred financing costs (500) (375)
Distributions paid (14,973) (14,411)
-------- --------
Net cash provided by (used in) financing
activities 41,026 7,181
-------- --------
Net Change In Cash and Cash Equivalents 1,009 (5,047)
Cash and Cash Equivalents at Beginning of Period 652 6,720
-------- --------
Cash and Cash Equivalents at End of Period $ 1,661 $ 1,673
-------- --------
-------- --------
Supplemental Cash Flow Information - Interest paid $ 5,532 $ 3,241
-------- --------
-------- --------
Supplemental disclosure of non-cash investing and
financing activities:
Issuance of common stock for acquisitions $ 3,728
See accompanying notes.
4
<PAGE>
ROC COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. GENERAL
ROC Communities, Inc. and ROCF, Inc. (collectively, with all other
subsidiaries of ROC Communities, Inc., the "Company") were organized on
March 31, 1993 in Maryland. The Company operates as a real estate
investment trust (a "REIT"). The Company and its predecessors have been
engaged in the ownership, management, acquisition, operation and expansion
of manufactured home communities since 1979. The Company owned 71
communities (21,041 homesites) located in 23 states and fee managed an
additional 36 communities (7,167 homesites) as of September 30, 1996. The
Company also owned six communities (2,700 homesites) located in six states
as part of a joint venture. The Company provides management services for
third-party owners and affiliated entities.
On December 20, 1995, the Company organized RCIP, L.P., a Delaware limited
partnership (the "Operating Partnership"). The Operating Partnership,
which is currently a totally-owned subsidiary of the Company, holds nominal
assets and liabilities. The Operating Partnership was organized as a first
step to reorganize the Company's business in the UPREIT format. The
Company has delayed the completion of such reorganization, which will
involve the contribution by the Company of substantially all of its assets
or beneficial interest therein, subject to liabilities, to the Operating
Partnership, in view of the proposed merger with Chateau Properties, Inc.,
a Maryland corporation ("Chateau"), which is already organized as an
UPREIT.
On June 26, 1996, the Company organized Redwood Acquisition Corp., a
Maryland corporation ("RAC"). RAC, which is a totally-owned subsidiary of
the Company, acquired two communities in June 1996.
The accompanying financial statements and related notes have been prepared
in accordance with generally accepted accounting principles for interim
financial reporting and the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
In the opinion of management, all adjustments (consisting of only normal
recurring accruals) considered necessary for fair presentation of the
Company's financial position, results of operations and cash flows have
been included. These financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-K for the year ended
December 31, 1995. The results of operations for the periods presented are
not necessarily indicative of the results for a full year.
Certain accounts in the prior year financial statements have been
reclassified for comparative purposes to conform with the presentation in
the current year financial statements.
5
<PAGE>
ROC COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
2. ACQUISITION/SALE OF RENTAL PROPERTIES
The Company acquired one manufactured home community in January 1996 for
cash of $9.425 million. The community is located in Cincinnati, Ohio and
is comprised of 354 homesites. The acquisition was funded from the
Company's $45 million line of credit.
The Company acquired one manufactured home community in April 1996 for cash
of $4 million. The community is located in Albion, New York and is
comprised of 235 homesites. In May 1996, the Company acquired one
manufactured home community for cash of $800,000. The community is located
in Shreveport, Louisana and is comprised of 448 homesites. In June 1996,
RAC acquired two communities for $25.5 million. The communities are
located in Thornton, Colorado and aggregate 1,512 homesites. These
acquisitions were funded from the Company's $50 million line of credit (the
"Line of Credit"), $20 million term loan (the "Term Loan"), and issuance of
158,017 shares of non-voting redeemable stock (the "Non-Voting Stock").
In June 1996, the Company sold one 113 homesite community in Yuma, Arizona
for $1.180 million in cash.
The Company acquired one manufactured home community in July 1996 for cash
of $5.7 million. The community is located in Raleigh, North Carolina and
is comprised of 315 homesites. The acquisition was funded from the Line of
Credit.
On September 30, 1996, the Company and Chateau completed the acquisition of
six manufactured home communities through a joint venture with each company
owning 50%. The six communities, which include the capacity for a total of
2,700 homesites, were purchased by the joint venture for $21.2 million in
cash. In addition, from the same seller, the Company purchased 100% of a
320-homesite community adjacent to an existing community in Augusta,
Georgia for $1.9 million in cash. These acquisitions were funded by a $12
million demand loan (the "First Demand Loan") which was subsequently repaid
on November 4, 1996 (see Note 9 - Subsequent Events).
6
<PAGE>
ROC COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
3. RENTAL PROPERTY
The following summarizes rental property (in thousands):
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
Land $ 72,907 $ 62,769
Land improvements and buildings 279,057 226,526
Furniture, fixtures and equipment 3,880 3,173
-------- --------
355,844 292,468
Accumulated depreciation (28,892) (20,111)
-------- --------
Rental property, net $326,952 $272,357
-------- --------
-------- --------
Land improvements and buildings consist primarily of infrastructure, roads,
landscaping and clubhouses, storage buildings and common amenities.
4. DISTRIBUTIONS
The Company declared a distribution of $.405 per share on September 16,
1996 payable to stockholders of record on September 30, 1996. The
distribution was paid on October 15, 1996.
5. NON-VOTING STOCK
The outstanding shares of Non-Voting Stock are deemed to be equivalent, on
a share per share basis, to the Company's common stock on all matters,
except that the holders of Non-Voting Stock do not have any voting rights
and shall be able to cause the redemption of such shares anytime after June
30, 2001.
6. LINE OF CREDIT
On May 2, 1996, the Company replaced its $45 million line of credit with
the Line of Credit and the Term Loan from the First National Bank of
Chicago. The Line of Credit, which matures in April 1999, is unsecured and
bears interest at LIBOR + 1.50%. On September 30, 1996, the Company
obtained the First Demand Loan, which was unsecured and bore interest at
8.50%, from the First National Bank of Chicago. The Term Loan, the First
Demand Loan, and $29 million of the Line of Credit were repaid on November
4, 1996 (see Note 9 - Subsequent Events).
7. PROPOSED MERGER
On September 17, 1996, the Company entered into an Amended and Restated
Agreement and Plan of Merger (the "Amended Merger Agreement") among the
Company, Chateau and R Acquisition
7
<PAGE>
ROC COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONCLUDED)
Sub, Inc., a newly-formed Maryland corporation and a subsidiary of Chateau
("Rsub"), which contemplates a strategic business combination transaction
pursuant to which Rsub will merge with the Company, with the Company
surviving the merger (the "Merger"). The Amended Merger Agreement amends
and restates an earlier agreement, dated as of July 17, 1996, entered into
by the Company, Chateau, Rsub and Chateau Communities, Inc., a Maryland
corporation organized by the Company and Chateau.
As a result of the Merger, each outstanding share of common stock, par
value $.01 per share (the "Common Stock"), of the Company and each
outstanding share of non-voting redeemable stock, par value $.01 per share,
of the Company will be converted into 1.042 shares of common stock, par
value $.01 per share, of Chateau ("Chateau Common Stock"). The Amended
Merger Agreement provides that Chateau will declare and pay a stock
dividend on the Chateau Common Stock equal to 3.16% (in the aggregate) of
the outstanding Chateau Common Stock (on a fully diluted basis) to
securityholders of record immediately prior to the effective time of the
Merger. The dividend will be declared prior to, but is contingent upon,
the consummation of the Merger. The Merger is subject to a number of
conditions, as described in the Amended Merger Agreement. The Merger is
expected to be completed in the fourth quarter of 1996 and is subject to
approval by the stockholders of both the Company and Chateau as well as
customary regulatory and other conditions.
8. SHAREHOLDER RIGHTS AGREEMENT
On September 17, 1996, the Board of Directors of the Company declared a
dividend of one right to purchase preferred stock ("Right") for each
outstanding share of Common Stock to stockholders of record at the close of
business on September 30, 1996 and for each share of Common Stock issued
(including shares distributed from the Company's treasury) by the Company
thereafter and prior to a certain specified date determined pursuant to the
Rights Agreement (as defined below). Each Right entitles the registered
holder, subject to the terms of the Rights Agreement, to purchase from the
Company one one-thousandth of a share (a "Unit") of Series A Junior
Participating Preferred Stock, par value $.01 per share, of the Company, at
a purchase price of $70.00 per Unit, subject to adjustment. The
description and terms of the Rights are set forth in a Rights Agreement
(the "Rights Agreement") between the Company and KeyBank National
Association, as Rights Agent.
9. SUBSEQUENT EVENTS
On November 4, 1996, the Company placed $70 million of senior unsecured
notes (the "Notes") that mature November 4, 2003 and bear interest at a
fixed rate of 7.52%. The proceeds of the Notes were used to repay the Term
Loan, the First Demand Loan, certain other demand loans, and $29 million of
the Line of Credit.
* * * * *
8
<PAGE>
ROC COMMUNITIES, INC. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION
FUNDS FROM OPERATIONS
The Company believes that funds from operations ("FFO") is an appropriate
measure of performance of an equity REIT. Funds from operations is defined by
the National Association of Real Estate Investment Trusts ("NAREIT") as "net
income (computed in accordance with generally accepted accounting principles),
excluding gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures". While the Company believes that FFO is the
most relevant and widely used measure of operating performance for equity REITs,
it does not represent cash generated from operating activities in accordance
with generally accepted accounting principles and is not indicative of cash
available to fund cash needs. FFO should not be considered as an alternative to
net income as an indication of the Company's operating performance or as an
alternative to cash flow as a measure of liquidity.
In March 1995, NAREIT issued a White Paper which discusses NAREIT's views on
certain interpretative issues under the definition of FFO and also encourages
certain expanded disclosures relating to FFO in the periodic reports issued by
REITs. The White Paper suggests that amortization of deferred financing costs
and depreciation of non-rental real estate assets should no longer be added back
to net income in calculating FFO. The Company reports FFO in accordance with
the interpretative positions set forth in the White Paper. In addition, the
Company provides the expanded disclosures encouraged by the White Paper.
Accordingly, Item A presents FFO for the three months ended September 30, 1996
and 1995 in accordance with the NAREIT definition, giving effect to the
interpretive positions of the White Paper. The Company's presentation of FFO,
however, may not be comparable to other similarly titled measures used by other
equity REITs. Item B sets forth the expanded disclosures encouraged by the
White Paper.
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1995
---- ----
(IN THOUSANDS)
A. FUNDS FROM OPERATIONS
Net Income $2,907 $2,932
Add:
Depreciation (1) 3,180 2,549
Amortization of other intangibles (2) 146 120
------ ------
Funds from operations $6,233 $5,601
------ ------
------ ------
- ------------------
(1) Excludes depreciation of non-rental real estate assets of $36,000 and
$30,000 for 1996 and 1995, respectively.
(2) Excludes amortization of debt costs of $173,000 and $277,000 for 1996 and
1995, respectively.
9
<PAGE>
ROC COMMUNITIES, INC. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION
(CONCLUDED)
B. CAPITAL EXPENDITURES
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1995
---- ----
(IN THOUSANDS)
Normal recurring $ 777 $ 508
Revenue producing 1,581 764
Construction in progress 316 434
------ ------
$2,674 $1,706
------ ------
------ ------
10
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company owned 71 (21,041 homesites) and 66 (18,078 homesites) communities as
of September 30, 1996 and 1995, respectively. In addition, the Company fee
managed 36 (7,167 homesites) and 39 (9,452 homesites) communities as of
September 30, 1996 and 1995, respectively. As of September 30, 1996, the
Company owned six development stage communities in six states as part of a joint
venture (the "Joint Venture") with Chateau Properties, Inc. ("Chateau"). These
six communities contain an aggregate of approximately 2,700 potential homesites,
of which approximately 550 are occupied, approximately 850 are developed and
available for rent, and approximately 1,300 are available for future
development.
At September 30, 1996, the Company had total assets of $343,959,000, consisting
primarily of its manufactured housing communities, and total liabilities of
$154,948,000, consisting primarily of mortgage debt of $59,538,000, line of
credit borrowings of $81,604,000 and distributions payable of $5,096,000.
The Company derives its revenues principally from the rental of homesites at its
communities and, to a lesser extent, fee income from its property management
business.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1995.
During the third quarter of 1996, the Company acquired one community aggregating
315 homesites for $5,700,000 as compared to the third quarter of 1995 in which
the Company acquired three communities aggregating 1,589 homesites for
$23,060,000.
The Company had revenues of $16,199,000 and $13,082,000 for the three months
ended September 30, 1996 and 1995, respectively. Rental income increased
$3,326,000 (26.76%). The increase included $664,000 (5.48%) related to the
communities owned during both periods primarily as a result of rental increases
and utility pass-throughs. Management income decreased $58,000 (16.96%)
primarily due to the acquisition in June 1996 of two previously managed
communities. Other income decreased $151,000 (48.40%) primarily as a result of
a debt discount of $98,000 in 1995.
Property operations and maintenance increased $1,156,000 (27.46%). These
expenses increased $155,000 (3.99%) for the communities owned during both
periods primarily due to utility expense increases of $101,000 resulting from
rate and usage increases. Real estate taxes increased $244,000 (24.65%), of
which the communities owned during both periods accounted for $29,000 (2.98%).
General and administrative expenses increased $120,000 (15.96%) as a result of
adding additional office space at the corporate office and two regional offices
and increased payroll expenses. Interest expense increased $1,063,000 (86.21%)
as a result of the 1996 acquisitions that were funded from the Company's $45
million line of credit, the $50
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
million line of credit (the "Line of Credit") and the $20 million term loan (the
"Term Loan"). Depreciation and amortization expenses increased $559,000 as a
result of the 1996 acquisitions.
The Company had net income of $2,907,000 and $2,932,000 for the three months
ended September 30, 1996 and 1995, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1995
The Company had revenues of $45,121,000 and $37,888,000 for the nine months
ended September 30, 1996 and 1995, respectively. Rental income increased
$7,446,000 (20.60%). The increase included $1,942,000 (5.42%) related to the
communities owned during both periods primarily as a result of rental increases
at the communities. Management income increased $45,000 (4.85%) due to the
addition of five fee-managed communities, the sale of two fee-managed
communities, and rental increases at the communities. Other income decreased
$258,000 (31.93%) primarily as a result of a reduction in interest income and
the debt discount received in 1995.
Property operations and maintenance increased $2,579,000 (21.68%). These
expenses increased $557,000 (5.02%) for the communities owned during both
periods primarily due to utility expense increases of $325,000 at the
communities resulting from rate and usage increases and increases in maintenance
expenses of $97,000. Real estate taxes increased $545,000 (18.96%), and the
communities owned during both periods accounted for $69,000 (2.38%) of the
increase. General and administrative expenses increased $382,000 (16.40%) as a
result of adding additional office space at the corporate office and two
regional offices and increased payroll expenses. Interest expense increased
$2,421,000 (72.29%) as a result of the acquisitions that were funded from the
Company's lines of credit or the Term Loan. Depreciation and amortization
expenses increased $1,138,000 as a result of the 1995 and 1996 acquisitions.
The Company had net income of $8,871,000 and $8,703,000 for the nine months
ended September 30, 1996 and 1995, respectively. The increase in net income of
$168,000 (1.93%) was primarily a result of the operations noted above and the
1995 third quarter acquisition of three communities and the 1996 acquisitions of
five communities.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had cash of $1,661,000, cash reserves,
established pursuant to the terms of the Company's mortgage debt for capital
replacements and real property taxes expected to be incurred during the year, of
$1,277,000, and other current assets of $3,558,000. At September 30, 1996, the
Company had accounts payable and accrued expenses of $6,603,000 including
property taxes payable of $2,736,000, distributions payable of $5,096,000, and
other current liabilities of $789,000. At September 30, 1996, the Company had
$1,750,000 available under its $3 million working capital line of credit. The
Company has $59,538,000 of mortgage debt (the "Mortgage Debt") which bears
interest at a fixed rate of 7.16%. The Mortgage Debt is due and payable on
August 1, 2000. On May 2, 1996, the Company replaced
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
its $45 million line of credit with a new facility through the First National
Bank of Chicago, that included the Line of Credit and the Term Loan. The Line
of Credit, which matures in April 1999, is unsecured and bears interest at LIBOR
+ 1.50%. On September 30, 1996, the Company had $48,354,000 outstanding on the
Line of Credit and $20 million outstanding on the Term Loan. On September 30,
1996, the Company received a $12 million demand loan (the "First Demand Loan"),
which bore interest at 8.50%. The Term Loan, the First Demand Loan, certain
other demand loans, and $29 million of the Line of Credit were repaid on
November 4, 1996 from the proceeds of $70 million of senior unsecured notes (the
"Notes"). The Notes mature November 4, 2003 and bear interest at a fixed rate
of 7.52%.
The Company declared a distribution of $5,096,000, or $.405 per share, on
September 16, 1996 for stockholders of record on September 30, 1996. The
distribution was paid on October 15, 1996.
The Company expects to meet its short-term liquidity requirements, principally
distributions to stockholders and capital improvements to its communities,
through funds generated from operations and working capital, including cash
reserves established pursuant to the terms of the Mortgage Debt.
Expansion of existing manufactured home communities, (including those owned by
the Joint Venture), acquisition of additional communities and the repayment of
principal on the Mortgage Debt or any other debt incurred by the Company,
represent the Company's principal long-term capital requirements. The Company
does not expect to generate sufficient cash flow from operating activities to
meet its long-term liquidity needs described above and intends to finance them
primarily through additional equity offerings, borrowings under the Line of
Credit, or alternative forms of financing or refinancing.
On September 17, 1996, the Company entered into an Amended and Restated
Agreement and Plan of Merger (the "Amended Merger Agreement") among the Company,
Chateau and R Acquisition Sub, Inc., a newly-formed Maryland corporation and a
subsidiary of Chateau ("Rsub"), which contemplates a strategic business
combination transaction pursuant to which Rsub will merge with the Company, with
the Company surviving the merger (the "Merger"). The Amended Merger Agreement
amends and restates an earlier agreement, dated as of July 17, 1996, entered
into by the Company, Chateau, Rsub and Chateau Communities, Inc., a Maryland
corporation organized by the Company and Chateau.
As a result of the Merger, each outstanding share of common stock, par value
$.01 per share, of the Company and each outstanding share of non-voting
redeemable stock, par value $.01 per share, of the Company will be converted
into 1.042 shares of common stock, par value $.01 per share, of Chateau
("Chateau Common Stock"). The Amended Merger Agreement provides that Chateau
will declare and pay a stock dividend on the Chateau Common Stock equal to 3.16%
(in the aggregate) of the outstanding Chateau Common Stock (on a fully diluted
basis) to securityholders of record immediately prior to the effective time of
the Merger. The dividend will be declared prior to, but is contingent upon, the
consummation of the Merger. The Merger
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONCLUDED)
is subject to a number of conditions, as described in the Amended Merger
Agreement. The Merger is expected to be completed in the fourth quarter 1996
and is subject to approval by the stockholders of both the Company and Chateau
as well as customary regulatory and other conditions. The Merger will not
require use of the Company's cash except to pay for certain unreimbursed
expenses relating to such merger. The Company intends to incur additional
borrowings for such purposes in a manner consistent with its policy of
maintaining a ratio of debt-to-total market capitalization of less than 50%.
INFLATION
Substantially all of the leases at the communities allow for monthly or annual
rent increases which provide the Company with the opportunity to achieve
increases in rental income as each lease matures. Such types of leases
generally minimize the risk of inflation to the Company.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In connection with the proposed merger (the "Merger") between ROC Communities,
Inc. (the "Company") and Chateau Properties, Inc. ("Chateau"), a complaint was
filed, on September 12, 1996, in the Circuit Court for Montgomery County,
Maryland by a stockholder of Chateau, Harbor Finance Partnership, purportedly
on behalf of all Chateau stockholders against Chateau and its directors. The
complaint alleges, among other things, that the Chateau directors have
violated their fiduciary duties to stockholders by agreeing to a business
combination with the Company and refusing to endorse the tender offer of
Manufactured Home Communities, Inc. ("MHC") and seeks, among other things,
injunctive relief and unspecified monetary damages, including attorneys' and
experts' fees. Chateau believes the allegations are entirely lacking in merit
and intends to defend against this action.
On September 17, 1996, Chateau filed suit in the United States District Court
for the District of Maryland (the "District Court") against MHC and its
operating partnership. In its complaint, Chateau alleges that (i) MHC's
tender offer has been made in violation of federal securities laws because it
contains untrue statements of material fact and omits to state material facts
and (ii) MHC has begun a proxy solicitation in opposition to the Merger and
has made material misstatements of facts and omitted to disclose other
material facts as part of that solicitation effort in violation of applicable
federal law, and seeks injunctive relief and monetary damages in respect
thereof. In addition, the complaint seeks a declaratory judgment that (i) the
purchase of common stock of Chateau pursuant to MHC's tender offer would
violate Article VI of Chateau's charter, (ii) the second step merger proposed
in MHC's tender offer would be subject to the restrictions contained in the
Maryland Business Combination Law, and (iii) Chateau's Board of Directors is
not required to exempt the purchase of Chateau's common stock pursuant to
MHC's tender offer from the ownership limit specified in Chateau's charter or
from the Maryland Business Combination Law.
On September 25, 1996, MHC and its operating partnership filed an answer to
Chateau's complaint, counterclaims and a third-party complaint in the District
Court. The counterclaims name as counterclaim defendants Chateau, the Company
and the directors of Chateau (the "Director Defendants") and allege that,
among other things: (i) Chateau violated Section 14(e) of the Securities
Exchange Act of 1934 (the "Exchange Act") by falsely stating that the excess
stock provisions in Chateau's charter would apply to MHC's tender offer, and
by failing to disclose the full, negative tax implications of the revised
Merger with the Company, (ii) Chateau violated Section 14(d) of the Exchange
Act by making an unauthorized solicitation designed to discourage stockholders
from tendering their shares of Chateau's common stock, (iii) Chateau violated
Section 14(e) of the Exchange Act by falsely stating that Chateau was
prohibited from negotiating with other parties by the terms of the merger
agreement between the Company and Chateau, (iv) the Director Defendants
breached their fiduciary duties of good faith and due care by self-dealing and
pursuing their own financial interest to the detriment of Chateau's
stockholders, and (v) the Company knowingly participated in and aided and
abetted the Director Defendants' breaches and self dealing.
The counterclaims seek, among other things, a court order: (i) enjoining
Chateau and the Director Defendants from carrying out Chateau's Share
Repurchase Program, (ii) enjoining the Company from purchasing up to 350,000
shares of Chateau's common stock, (iii) enjoining the counterclaim defendants
from consummating or proceeding with the Merger, (iv) directing Chateau to
issue public statements
15
<PAGE>
PART II. OTHER INFORMATION
(CONTINUED)
correcting any previously made false statements, (v) declaring that stock
purchased by MHC pursuant to its tender offer would not be deemed excess stock
under the terms of Chateau's charter, (vi) directing the Director Defendants
to exempt MHC from the Maryland Business Combination Law, and (vii) awarding
MHC compensatory damages and its costs and expenses, including attorneys'
fees.
In addition, on the same date, MHC and its operating partnership filed a
motion for a temporary restraining order, together with a memorandum in
support of the motion. The motion for a temporary restraining order requested
the District Court to enjoin Chateau from purchasing or selling any shares of
its common stock or from taking any other actions that would effectively alter
the status quo. On September 26, 1996, the District Court, denied MHC's
motion for a temporary restraining order.
On September 25, 1996, MHC also filed a motion in the District Court seeking a
preliminary injunction against, among other things, Chateau and the Company
taking steps to consummate the Merger, repurchasing (or, in the case of the
Company, purchasing) Chateau's common stock, treating the acquisition by MHC's
operating partnership of more than 7% of Chateau's outstanding common shares
as excess stock pursuant to the terms of Chateau's charter, or declaring that
MHC and its operating partnership are subject to the Maryland Business
Combination Law. A hearing on this motion had been scheduled for November 14,
1996. However, MHC has withdrawn its motion.
On or about September 27, 1996, a purported class action complaint encaptioned
NILES v. CHATEAU PROPERTIES, ET AL. (Case No.158284), was filed in the Circuit
Court for Montgomery County, Maryland by a stockholder of Chateau purportedly
on behalf of all such stockholders against Chateau and its directors. The
complaint alleges, among other things, that Chateau's directors have violated
their fiduciary duties by agreeing to a business combination with the Company
and by refusing to endorse MHC's tender offer or the proposal by Sun
Communities, Inc., and seeks injunctive relief and unspecified monetary
damages. Chateau believes the allegations are entirely lacking in merit and
intends to defend against this action.
On October 4, 1996, a purported class action and derivative complaint
encaptioned ZSA ASSET ALLOCATION FUND v. BOLL, ET AL. (Case No. 158652), was
filed in the Circuit Court for Montgomery County, Maryland by a stockholder of
Chateau purportedly on behalf of all such stockholders against Chateau and its
directors and on behalf of Chateau and its stockholders against Chateau's
directors. The complaint alleges, among other things, that Chateau's
directors have violated their fiduciary duties by agreeing to a business
combination with the Company, and by refusing to endorse MHC's tender offer or
the proposal by Sun Communities, Inc., and seeks injunctive relief and
unspecified monetary damages. Chateau believes the allegations are entirely
lacking in merit and that the plaintiff is not entitled to advance the claims
purportedly brought on behalf of Chateau, and intends to defend against this
action.
By an order dated November 1, 1996, the Circuit Court for Montgomery County,
Maryland, consolidated these three state court cases.
16
<PAGE>
PART II. OTHER INFORMATION
(CONCLUDED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedules
(b) Reports on Form 8-K
During the quarter ended September 30, 1996, the Company filed the
following Current Reports on Form 8-K:
1. Form 8-K, filed July 11, 1996, reporting, under Item 2 - Acquisition or
Disposition of Assets, the acquisition by the Company of an aggregate
of six manufactured home communities, containing a total of 2,864
homesites, through the date thereof.
2. Form 8-K, filed July 29, 1996, reporting, under Item 5 - Other Events,
the execution of an Agreement and Plan of Merger among the Company,
Chateau Properties, Inc., Chateau Communities, Inc. and R Acquisition
Sub, Inc.
3. Form 8-K/A, filed September 9, 1996, amending the Form 8-K, filed July
11, 1996, to include the financial statements required under Item 7 -
Financial Statements, Pro Forma Financial Information and Exhibits to
be filed in connection with the Company's acquisition of the six
manufactured home communities.
4. Form 8-K, filed September 20, 1996, reporting, under Item 5 - Other
Events, the execution of an Amended and Restated Agreement and Plan of
Merger among the Company, Chateau Properties, Inc. and R Acquisition
Sub, Inc., the execution of a Rights Agreement between the Company and
KeyBank National Association, and the amendment of the Company's
Bylaws.
17
<PAGE>
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.
ROC COMMUNITIES, INC.
(Registrant)
By: /s/ Gary P. McDaniel
------------------------------------------
Gary P. McDaniel
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 1996
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME FOUND
ON PAGES 2 AND 3 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1661
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 355844
<DEPRECIATION> (28892)
<TOTAL-ASSETS> 343959
<CURRENT-LIABILITIES> 0
<BONDS> 141142
0
0
<COMMON> 126
<OTHER-SE> 188885
<TOTAL-LIABILITY-AND-EQUITY> 343959
<SALES> 0
<TOTAL-REVENUES> 45121
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 30480
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5770
<INCOME-PRETAX> 8871
<INCOME-TAX> 0
<INCOME-CONTINUING> 8871
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8871
<EPS-PRIMARY> .71
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