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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 20002003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-11718
MANUFACTURED HOME COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 36-3857664
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
incorporation or organization)
TWO NORTH RIVERSIDE PLAZA, SUITE 800, CHICAGO, ILLINOIS 60606
(Address of principal executive offices) (Zip Code)
(312) 279-1400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 Par Value The New York Stock Exchange
(Title of Class) (Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes[X]Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates was
approximately $537.3$665.2 million as of March 1, 2001February 27, 2004 based upon the closing
price of $28.00$33.31 on such date using beneficial ownership of stock rules adopted
pursuant to Section 13 of the Securities Exchange Act of 1934 to exclude voting
stock owned by Directors and Officers, some of whom may not be held to be
affiliates upon judicial determination.
At March 1, 2000, 21,177,7095, 2004, 22,869,603 shares of the Registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III incorporates by reference the Registrant's Proxy Statement relating to
the Annual Meeting of Stockholders to be held on May 8, 2001.4, 2004.
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MANUFACTURED HOME COMMUNITIES, INC.
TABLE OF CONTENTS
PART I. Page
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PART I.
Item 1. Business ............................................................................... 3Business................................................................................................3
Item 2. Properties ............................................................................. 7Properties..............................................................................................9
Item 3. Legal Proceedings ...................................................................... 12Proceedings......................................................................................14
Item 4. Submission of Matters to a Vote of Security Holders .................................... 15Holders....................................................17
PART II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters .............. 16Matters..............................18
Item 6. Selected Financial Data and Operating Information ...................................... 17Data................................................................................19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .. 19Operations..................22
Item 7A. Quantitative and Qualitative Disclosure About Market Risk .............................. 27Risk..............................................33
Item 8. Financial Statements and Supplementary Data ............................................ 27Data............................................................33
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ... 27Disclosure...................33
Item 9A. Controls and Procedures................................................................................33
PART III.
Item 10. Directors and Executive Officers of the Registrant ..................................... 27Registrant.....................................................34
Item 11. Executive Compensation ................................................................. 27Compensation.................................................................................34
Item 12. Security Ownership of Certain Beneficial Owners and Management ......................... 27Management.........................................34
Item 13. Certain Relationships and Related Transactions ......................................... 27Transactions.........................................................34
Item 14. Principal Accountant Fees and Services.................................................................34
PART IV.
Item 14.15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ........................ 288-K........................................35
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PART I
ITEM 1. BUSINESS
THE COMPANY
GENERAL
Manufactured Home Communities, Inc. (together, together with itsMHC Operating Limited
Partnership (the "Operating Partnership") and other consolidated subsidiaries
("Subsidiaries"), are referred to herein as the "Company"), "MHC", "we", "us",
and "our". The Company is a fully integrated company whichthat owns and operates
manufactured home communities ("Communities") and park model communities
("Resorts") (collectively known as "Properties"). The Company was formed to
continue the property operations, business objectives and acquisition strategies
of an entity that had owned and operated Communities since 1969. As of December
31, 2003, we owned or had an ownership interest in a portfolio of 142
Communities and Resorts located throughout the United States containing 51,715
residential sites. These Properties are located in 19 states (with the number of
Properties in each state shown parenthetically) - Florida (52), California (25),
Arizona (21), Colorado (10), Delaware (7), Nevada (5), Oregon (4), Indiana (3),
Illinois (2), Iowa (2), New York (1), Texas (2), Utah (2), Pennsylvania (1),
Montana (1), New Mexico (1), Michigan (1), Virginia (1), and Washington (1).
Communities are residential developments designed and improved for the
placement of detached, single-family manufactured homes whichthat are produced
off-site and installed and set on residential sites ("Site Set") within the
Community. The owner of each home leases the site on which it is located. Modern
Communities are similar to typical residential subdivisions, containing
centralized entrances, paved streets, curbs and gutters and parkways. In
addition, these Communities often provide a clubhouse for social activities and
recreation and other amenities, which may include swimming pools, shuffleboard
courts, tennis courts, laundry facilities and cable television service. UtilitiesIn some
cases, utilities are provided or arranged for by the owner of the Community.Community;
otherwise, the resident contracts for the utility directly. Some Communities
provide water and sewer service through publicmunicipal or privateregulated utilities, while
others provide these services to residents from on-site facilities. Each
Community is generally designed to attract, and is marketed to, one of two types
of residents - 1) retirees and empty nestersempty-nesters or 2) families and first-time
homeowners. The Company believesWe believe both types of Communities are attractive investments and
focusesfocus on owning Communities in or near large metropolitan markets and retirement
destinations.
The Company was formedResorts are similar to continueCommunities in their overall design and the
property operations, business
objectivesamenities they provide. Our Resorts typically include sites designed to
accommodate Site Set homes, park model homes, luxury motor-coaches and acquisition strategiesa variety
of an entity that has owned and operated
Communities since 1969. As of December 31, 2000,recreational vehicles. A park model, sometimes referred to as a vacation
cottage, is a factory built detached single-family structure generally with
approximately 400 square feet. Owners often add sunrooms, porches and/or decks
after the Company ownedhome is placed on site. Our Resorts are marketed to attract residents
seeking a second home or had an
ownership interest invacation home as well as those seeking a portfolio of 154 Communities andlong-term or
full season recreational vehicle ("RV") resorts (the "Properties") located throughoutsite. A majority of our Resort residents own
homes in the United States
containing 51,452 residential sites. The Properties are located in 26 states
(withResort and/or lease the number of Properties in each state shown parenthetically) - Florida
(47), California (25), Arizona (17), Michigan (11), Colorado (10), Delaware (7),
Nevada (5), Indiana (4), Oregon (3), Kansas (3), Missouri (3), Illinois (2),
Iowa (2), New York (2), Utah (2), Pennsylvania (1), Maryland (1), Minnesota (1),
Montana (1), New Mexico (1), Ohio (1), Oklahoma (1), Texas (1), Virginia (1),
West Virginia (1), and Washington (1). As of December 31, 2000, the Company also
ownedsite annually or for a commercial building located in California.
The Company hasfull season.
We have approximately 8001,000 full-time employees dedicated to carrying out
the Company'sour operating philosophy and strategies of value enhancement and service to
residents. The Companyoperations of each Property are coordinated by an on-site team of
employees that typically utilizesincludes a onemanager or two-person management team,
(who reside at the Properties) for the on-site management of
each of the Properties. Typically, clerical and maintenance workers, are employedeach of whom work to assist these individuals in the managementprovide maintenance and
care of the Properties. Direct supervision of on-site management is the
responsibility of the Company'sour regional vice presidents and regional and district
managers. These individuals have significant experience in addressing the needs
of residents and in finding or creating innovative approaches to maximize value
and increase cash flow from property operations. Complementing this field
management staff are approximately 5560 corporate employees who assist on-site
management in all property functions.
FORMATION OF THE COMPANY
The Company, formed in March 1993, is a Maryland corporation which has
elected to be taxedWe believe that we have qualified for taxation as a real estate investment
trust ("REIT"). for federal income tax purposes since our taxable year ended
December 31, 1993. We plan to continue to meet the requirements for taxation as
a REIT. Many of these requirements, however, are highly technical and complex.
We cannot, therefore, guarantee that we have qualified or will qualify in the
future as a REIT. The Company
generally willdetermination that we are a REIT requires an analysis of
various factual matters that may not be subject to Federal income tax tototally within our control and we cannot
provide any assurance that the extent it distributes
its REIT taxable income to its stockholders. REITs are subject to a number of
organizational and operational requirements. If the Company failsInternal Revenue Service ("IRS") will agree with
our analysis. For example, to qualify as a REIT, at least 95% of our gross
income must come from sources that are itemized in the REIT tax laws. We are
also required to distribute to stockholders at least 90% of our REIT taxable
income excluding capital gains. The fact that we hold our assets through MHC
Operating Limited Partnership and its subsidiaries further complicates the
application of the REIT requirements. Even a technical or inadvertent mistake
could jeopardize our REIT status. Furthermore, Congress and the IRS might make
changes to the tax laws and regulations, and the
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courts might issue new rulings that make it more difficult, or impossible, for
us to remain qualified as a REIT. We do not believe, however, that any pending
or proposed tax law changes would jeopardize our REIT status.
If we fail to qualify as a REIT, we would be subject to federal income is taxabletax
at regular corporate rates. Also, unless the IRS granted us relief under certain
statutory provisions, we would remain disqualified as a REIT for four years
following the year we first failed to qualify. Even if the Company qualifies for
taxation as a REIT, the Company is subject to certain state and local taxes on
its income and property and Federal income and excise taxes on its undistributed
income.
The operations of the Company are conducted primarily through certain entities which
are owned or controlled by the Company. MHC Operating
Limited Partnership (the
"Operating Partnership") isPartnership. The Company contributed the entity through which the Company conducts
substantially all ofproceeds from its operations. Sub-partnerships ofinitial public
offering and subsequent offerings to the Operating Partnership were created to: (i) facilitate mortgage financing (the "Financing
Partnerships"); (ii) facilitate the Company's ability to provide financing to
the owners of Communities ("Lending Partnership"); (iii) own the management
operations of the Company ("Management Partnerships"); and (iv) own the assets
and operations of certain utility companies which service the Properties ("MHC
Systems").for a general
partnership interest. The financial results of the Operating Partnership and sub-partnerships (together, the
"Subsidiaries")Subsidiaries are consolidated in the Company's consolidated financial
statements.
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4 In addition, since certain activities, if performed by the Company,
may not be qualifying REIT activities under the Internal Revenue Code of 1986,
as amended (the "Code"), the Company has investedformed taxable REIT subsidiaries as
defined in the non-voting preferred stock
of various corporations whichCode to engage in such activities. Realty Systems, Inc. ("RSI")
is a preferred stockwholly owned subsidiary of the Company that, doing business as Carefree
Sales, is engaged in the business of purchasing, selling leasing and financingleasing
manufactured homes that are located or will be located in Properties owned and
managed by the Company. Carefree Sales also provides brokerage services to
residents at such Properties. Typically, residents move from a Community but do
not relocate their homes. Carefree Sales may provide brokerage services, in
competition with other local brokers, by seeking buyers for the homes. Carefree
Sales also leases inventory homes to prospective residents with the expectation
that the tenant eventually will purchase the home. LP Management
Corp. leasesSubsidiaries of RSI lease
from the Operating Partnership certain real property within or adjacent to
certain of the Properties consisting of golf courses, pro shops, restaurantsstores and
recreational vehicle areas. The Company believes that the
activities of RSI and LP Management Corp. (collectively, "Affiliates") benefit
the Company by maintaining and enhancing occupancy at the Properties. The
Company accounts for its investment in and advances to Affiliates using the
equity method of accounting.restaurants.
BUSINESS OBJECTIVES AND OPERATING STRATEGIES
The CompanyOur strategy seeks to maximize both current income and long-term growth in
income. The Company focusesWe focus on CommunitiesProperties that have strong cash flow and expectswe expect to hold
such Properties for long-term investment and capital appreciation. In
determining cash flow potential, the Company evaluates the
Community'swe evaluate our ability to attract and retain
high quality residents in our Properties who take pride in their CommunityProperty and in
their home. These business objectives and their implementation are determined by
the Company'sour Board of Directors and may be changed at any time. The Company'sOur investment and
operating approach includes:
-o Providing consistently high levels of services and amenities in
attractive surroundings to foster a strong sense of community and
pride of home ownership;
-o Efficiently managing the Properties to increase operating margins by
controlling expenses, increasing occupancy and maintaining competitive
market rents;
-o Increasing income and property values by continuing the strategic
expansion and, where appropriate, renovation of the Properties;
-o Utilizing management information systems to evaluate potential
acquisitions, identify and track competing properties and monitor
tenantresident satisfaction; and
-o Selectively acquiring CommunitiesProperties that have potential for long-term
cash flow growth and to create property concentrations in and around
major metropolitan areas and retirement destinations to capitalize on
operating synergies and incremental efficiencies.
The Company isWe are committed to enhancing itsour reputation as the most respected brand
name in the manufactured home community business. Itsindustry. Our strategy is to own and operate the highest quality
CommunitiesProperties in major metropolitansought-after locations near both urban areas and retirement
destinations across the United States. The focus is on creating an attractive
residential environment for homeowners by providing a well-maintained,
comfortable CommunityProperty with a variety of organized recreational and social
activities and superior amenities. In addition, we regularly conduct evaluations
of the Company regularly
surveyscost of housing in the marketplaces in which our Properties are located
and survey rental rates of competing propertiesCommunities and conductsResorts. From time to time
we also conduct satisfaction surveys of our residents to determine the factors
residentsthey consider most important in choosing a manufactured home community.Property.
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FUTURE ACQUISITIONS
The Company acquiredOver the last eight years our portfolio of Properties has grown by 73
Properties. We continually review the Properties in our portfolio to ensure that
they fit our business objectives. Over the last four years, through the
acquisition or gained a controlling interest in eighty-eightsale of 50 Properties, during 1997 through 1999, more than doubling its portfolio. The
Company believeswe have redeployed capital to markets we
believe have greater long-term potential. We believe that opportunities for
propertyProperty acquisitions are still available and in general consolidation within
the industry will continue (see - Industry - The Manufactured Home Community Industry - Industry Consolidation).
The Company believes that transactions occurring in the private marketplace are
at valuations significantly in excess of the Company's current public market
valuation. As a result, during 1999 and 2000 the Company accelerated its stock
repurchase program. The Company's board of directors continues to review the
conditions under which the Company will repurchase its stock. These conditions
include, but are not limited to, market price, balance sheet flexibility, other
opportunities and capital requirements. (For more information on the Company's
stock repurchase program see Note 4 to the accompanying financial statements.)
Increasing acceptability of and demand for manufacturedSite Set homes and vacation cottages
and continued constraints on development of new manufactured home communities continuesProperties continue to add to
their attractiveness as an investment. The Company believes it hasWe believe we have a competitive
advantage in the acquisition of new Communitiesadditional Properties due to itsour experienced
management, significant presence in major real estate markets and substantial
capital resources. The Company isWe are actively seeking to acquire additional Communities and
currently isResorts and are engaged in various stages of negotiations relating to the
possible acquisition of a number of Communities.
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The Company anticipatesProperties.
We anticipate that newly acquired propertiesProperties will be located in the United
States. The Company utilizesWe utilize market information systems to identify and evaluate
acquisition opportunities, including a market database to review the primary
economic indicators of the various locations in which the Company
expectswe expect to expand itsour
operations. Acquisitions will be financed from the most appropriate sources of
capital, which may include undistributed funds from operations, issuance of
additional equity securities, sales of investments, collateralized and
uncollateralized borrowings and issuance of debt securities. In addition, the
Company may cause the Operating Partnership tomay issue units of limited partnership interest ("OP
Units") to finance acquisitions. The Company
believesWe believe that an ownership structure which
includes the Operating Partnership will permit the Companyus to acquire additional
Communities and Resorts in transactions that may defer all or a portion of the
sellers' tax consequences.
When evaluating potential acquisitions, the Companywe will consider such factors as:
(i)o the replacement cost of the property; (ii)Property,
o the geographic area and type of property; (iii)Property,
o the location, construction quality, condition and design of the
property; (iv)Property,
o the current and projected cash flow of the propertyProperty and the ability to
increase cash flow; (v)flow,
o the potential for capital appreciation of the property; (vi)Property,
o the terms of tenant leases, including the potential for rent
increases; (vii)increases,
o the potential for economic growth and the tax and regulatory
environment of the community in which the propertyProperty is located; (viii)located,
o the potential for expansion of the physical layout of the property and/orProperty and
the number of sites; (ix)sites,
o the occupancy and demand by residents for propertiesProperties of a similar type
in the vicinity and the residents profile; (x)residents' profile,
o the prospects for liquidity through sale, financing or refinancing of
the property;Property, and
(xi)o the competition from existing CommunitiesProperties and the potential for the
construction of new communitiesProperties in the area.
The Company expectsWe expect to purchase CommunitiesProperties with physical and market characteristics
similar to the Properties in itsour current portfolio. When investing capital we
consider all potential uses of the capital including returning capital to our
stockholders. As a result, during 1999 and 2000 we implemented our stock
repurchase program, and our Board of Directors continues to review the
conditions under which we will repurchase our stock. These conditions include,
but are not limited to, market price, balance sheet flexibility, other
opportunities and capital requirements.
PROPERTY EXPANSIONS
Several of the Company'sour Properties have available land for expanding the number of
sites available to be leased to residents. Development of these sites
("Expansion Sites") is predicated by local market conditions and permitted by
zoning and other applicable laws. When justified, development of Expansion Sites
allows the Companyus to leverage existing facilities and amenities to increase the income
generated from the Properties. Where appropriate, facilities and amenities may
be upgraded or added to certain Properties in order to make those Properties more
attractive in their markets. The Company'sOur acquisition philosophy has included the desire
to own Properties with potential Expansion Site development, and the Company haswe have been
successful in acquiring a number of such Properties. Several examples of these
Properties include the 19941993 acquisition of Bulow VillageThe Heritage with potential
development of approximately 750288 Expansion Sites, the 1994 acquisition of Bulow
Plantation with potential development of approximately 725 Expansion Sites, the
1997 acquisition of Golf Vista Estates with potential development of
approximately 18088 Expansion Sites, and the 1999 acquisition in 1999 of Coquina Crossing with
potential development of approximately 480393 Expansion Sites, and the 2001
acquisitions of Grand Island and The Lakes at Countrywood with combined
potential development of 224 Expansion Sites.
Of the Company's 154our 142 Properties, nineten may be expanded consistent with existing zoning
regulations. In 2001, the Company expects2004, we expect to develop an additional 353205 Expansion Sites
within fivethree of these Properties. As of December 31, 2000, the Company2003, we had approximately
1,202713 Expansion Sites available for occupancy in 22 of the Properties. The CompanyWe filled
317136 Expansion Sites in 20002003 and expectsexpect to fill an additional 250150 to 300200
Expansion Sites in 2000.2004.
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LEASES
TheAt our Communities, a typical lease entered into between the tenantresident and
the Company for the rental of a site requires a security deposit and is for a month-to-month or year-to-year
term, renewable upon the consent of both parties or, in some instances, as
provided by statute. These leases are cancelable, depending on stateapplicable law,
for non-payment of rent, violation of communityCommunity rules and regulations or other
specified defaults. Non-cancelable long-term leases, with remaining terms
ranging up to ten years, are in effect at certain sites within eight25 of the
Properties. TheseCommunities. Some of these leases are subject to rental rate increases based on
the Consumer Price Index ("CPI"), in some instances taking into consideration
certain floors and ceilings and allowing for pass-throughs of certain items such
as real estate taxes, utility expenses and capital expenditures. Generally,
market rate adjustments are made on an annual basis.
REGULATIONS AND INSURANCE
General. CommunitiesOur Properties are subject to various laws, ordinances and
regulations, including regulations relating to recreational facilities such as
swimming pools, clubhouses and other common areas. The Company believesWe believe that each Property
has the necessary permits and approvals to operate.
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Rent Control Legislation. StateAt certain of our Communities, state and local
rent control laws, principally in California, and Florida, limit the Company'sour ability to increase
rents and to recover increases in operating expenses and the costs of capital
improvements at
certain Properties.improvements. Enactment of such laws has been considered from time to time in
other jurisdictions. The CompanyWe presently expectsexpect to continue to maintain manufactured home communities,Communities,
and may purchase additional properties,Communities, in markets that are either subject to
rent control or in which rent-limiting legislation exists or may be enacted. For
example, Florida has enacted a law that generally provides that rental increases
must be reasonable. Also, certain jurisdictions in California in which the Company owns Propertieswe own
Communities limit rent increases to changes in the CPI or some percentage
thereof. As part of our effort to realize the value of our Properties subject to
restrictive regulation, we have initiated lawsuits against several
municipalities imposing such regulation in an attempt to balance the interests
of our shareholders with the interests of our residents
Insurance. Management believesWe believe that the Properties are covered by adequate fire,
flood, property, earthquake and business interruption insurance (where
appropriate) provided by reputable companies and with commercially reasonable
deductibles and limits. The Company believes itsDue to the lack of available commercially reasonable
coverage, we are self-insured for terrorist incidents, except at certain
Properties where terrorist insurance coverage is required by debt covenants. We
believe our insurance coverage is adequate based on the Company'sour assessment of the risks
to be insured, the probability of loss and the relative cost of available
coverage. The Company hasWe have obtained title insurance insuring fee title to the Properties in
an aggregate amount which the
Company believeswe believe to be adequate.
INDUSTRY
THE MANUFACTURED HOME COMMUNITY INDUSTRY
The Company believesWe believe that modern manufactured home communities, such as the
Properties similar to ours provide an opportunity
for increased cash flows and appreciation in value. These may be achieved
through increases in occupancy rates and rents, as well as expense controls,
expansion of existing Properties and opportunistic acquisitions, for the
following industry specificindustry-specific reasons:
-o Barriers to Entry: The Company believesWe believe that the supply of new CommunitiesProperties will
be constrained due to barriers to entry into the industry. The most
significant barrier has been the difficulty in securing zoning from
local authorities. This has been the result of (i) the public's
historically poor perception of the industry, and (ii) the fact that
CommunitiesProperties generate less tax revenue because the homes are treated as
personal property (a benefit to the home owner) rather than real
property. Another factor that creates substantial barriers to entry is
the length of time between investment in the
Community'sa Property's development and
the attainment of stabilized occupancy and the generation of revenues.
The initial development of the infrastructure may take up to two or
three years. Once the CommunityProperty is ready for occupancy, it may be
difficult to attract residentscustomers to an empty Community.Property. Substantial
occupancy levels may take several years to achieve.
-o Industry Consolidation: According to an industry analyst's
manufactured home community industry
report, there are approximately 50,000 Communities in the United
States, and approximately 6.5% or 3,250 of the Communities have more
than 200 sites and would be considered "investment-grade" Properties.properties.
The fivefour public REITs that own Communities own approximately 532328 or
about 16%10% of the "investment-grade" Communities. In addition, based on
a report prepared by one analyst, the top 150 owners of Communities
own approximately 69% of the "investment-grade" assets. The Company
believesWe believe
that this relatively high degree of fragmentation in the industry
provides the Company,us, as a national organization with experienced management
and substantial financial resources, the opportunity to purchase
additional Communities.
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o Stable Tenant Base: The Company believesWe believe that CommunitiesProperties tend to achieve and
maintain a stable rate of occupancy due to the following factors: (i)
residents own their own homes, (ii) CommunitiesProperties tend to foster a sense
of community as a result of amenities such as club
houses,clubhouses, recreational
and social activities and (iii) since moving a manufacturedSite Set home or
vacation cottage from one CommunityProperty to another involves substantial
cost and effort, residents often sell their home in-place (similar to
site-built residential housing) with no interruption of rental
payments.
MANUFACTUREDSITE SET HOUSING AND VACATION COTTAGES
Based on the current growth in the number of individuals living in manufacturedSite Set
homes the Company believesand vacation cottages, we believe that manufacturedthese homes are increasingly viewed
by the public as an attractive and economical form of housing.
According to the industry's trade association, nearly one in four new
single family homes sold in the United States today is factory-built.
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The Company believesWe believe that the growing popularity of manufactured housingthese homes is primarily the
result of the following factors:
-o Importance of Home Ownership. According to the Fannie Mae ("FNMA")
19992001
National Housing Survey ("FNMA Survey"), renters' desire to own a home
is stronger
now than at any time in the 1990's. Security and permanence are
thoughtcontinues to be non-financial reasons to own a home. The commitment to
home ownership is tempered by an awareness of the high cost of owning
a home. The affordability of manufactured housing allows many
individuals to achieve this goal without jeopardizing their financial
security.
-top priority.
o Affordability. For a significant number of persons, manufactured
housing representspeople, these homes
represent the only means of achieving home ownership. In addition, the
total cost of housing in a manufactured home communityProperty (home cost, site rent and related
occupancy costs) is competitive with and often lower than the total
cost of alternative housing, such as apartments and condominiums, and
generally substantially lower than stick built"stick-built" residential
alternatives.
-o Lifestyle Choice. As the average age of the United States population
has increased, manufacturedthis housing choice has become an increasingly popular
housing alternative for retirement and "empty-nest" living. According
to the FNMA Survey, the surviving baby-boom generation - the 80 million people
born between 1945 and 1964 - will constitute 18% of the U.S.
population within the next 30 years and more than 32 million people
will reach age 55 within the next ten years. Among those peopleindividuals
who are nearing retirement (age 40 to 54), approximately 33% plan on
moving upon retirement. The Company believesWe believe that manufacturedthis housing choice is
especially attractive to such individuals when located within a
CommunityProperty that offers an appealing amenity package, close proximity to
local services, social activities, low maintenance and a secure
environment.
-o Construction Quality. Since 1976, all manufacturedSite Set housing has been
required to meet stringent Federal standards, resulting in significant
increases in the quality of the industry's product. The Department of
Housing and Urban Development's standards for manufacturedSite Set housing
construction quality are the only Federally regulated standards
governing housing quality of any type in the United States. ManufacturedSite Set
homes produced since 1976 have received a "red and silver" government
seal certifying that they were built in compliance with the Federal
code. The code regulates manufacturedSite Set home design and construction,
strength and durability, fire resistance and energy efficiency, and
the installation and performance of heating, plumbing, air
conditioning, thermal and electrical systems. In newer homes, top
grade lumber and dry wall materials are common. Also, manufacturers
are required to follow the same fire codes as builders of site-built
structures. -In addition, although vacation cottages do not come under
the same regulation, many of the manufacturers of Site Set homes also
produce vacation cottages with many of the same quality standards.
o Comparability to Site-Built Homes. The manufacturedSite Set housing industry has
experienced a recent trend towards multi-section homes. Many modern manufacturedSite Set
homes are longer (up to 80 feet, compared to 50 feet in the 1960s)1960's)
and wider than earlier models. Many such homes have vaulted ceilings,
fireplaces and as many as four bedrooms, and closely resemble single
family ranch style site-built homes.
o Second home demographics. Over the past ten years there has been a
significant increase in the second home market. According to a
November 2002 study by the National Association of Realtors ("NAR"),
sales of second homes have risen almost 36% in ten years. Six percent
of all home sales each year are second homes. The NAR study found that
48% of people who own a second home own either a cabin, cottage or
manufactured home. According to the US Census Bureau, there were 9.2
million homes held by owners in addition to their primary residence.
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AVAILABLE INFORMATION
We file reports electronically with the Securities and Exchange Commission.
The public may read and copy any materials we file with the SEC at the SEC's
Public Reference Room at 450 Fifth Street, NW., Washington, DC 20549. The public
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains
reports, proxy information and statements, and other information regarding
issuers that file electronically with the SEC at http://www.sec.gov. We maintain
an Internet site with information about the Company and hyperlinks to our
filings with the SEC at http://www.mhchomes.com. Requests for copies of our
filings with the SEC and other investor inquiries should be directed to:
Investor Relations Department
Manufactured Home Communities, Inc.
Two North Riverside Plaza
Chicago, Illinois 60606
Phone: 1-800-247-5279
e-mail: investor_relations@mhchomes.com
8
ITEM 2. PROPERTIES
The Company believes that theOur Properties provide attractive amenities and common facilities that
create a comfortable and attractive Communityhome for theour residents, with most offering a
clubhouse, a swimming pool, laundry facilities and cable television service.
Many also offer additional amenities such as sauna/whirlpool spas, golf courses,
tennis, shuffleboard and basketball courts and exercise rooms. Since residentresidents
in our Properties own their homes, it is their responsibility to maintain their
homes and the surrounding area. It is management'sour role to insureensure that residents comply
with Communityour Property policies and to provide maintenance of the common areas,
facilities and amenities. The Company holdsWe hold periodic meetings of its propertywith our Property management
personnel for training and implementation of the Company'sour strategies. The Properties
historically have had, and the Company
believeswe believe they will continue to have, low turnover
and high occupancy rates.
The distribution of theour Properties throughout the United States reflects
the
Company'sour belief that geographic diversification helps insulate the portfolio from
regional economic influences. The Company intendsWe intend to target new acquisitions in or near
markets where theour Properties are located and will also consider acquisitions of
propertiesProperties outside such markets. The Company'sfollowing table identifies our five largest
markets ofand provides information regarding our Properties, including Communities
owned are Florida (47 Properties), California (25
Properties), Arizona (17 Properties), Michigan (11 Properties) and Colorado (10
Properties). These markets accounted for 35%, 17%, 9%, 4%, and 9%, respectively,
of the Company's total revenues for the year ended December 31, 2000. The
Company also has Properties located in the following markets: Northeast,
Northwest, Midwest, and Nevada/Utah/New Mexico. The Company'sjoint ventures.
PERCENT OF TOTAL
NUMBER OF PERCENT OF PROPERTY OPERATING
MAJOR MARKET PROPERTIES TOTAL SITES TOTAL SITES REVENUES
- ------------ ---------- ----------- ----------- ------------------
Florida 52 23,366 45.3% 40.8%
California 25 6,229 12.0% 20.1%
Arizona 21 5,930 11.5% 8.5%
Colorado 10 3,452 6.7% 8.2%
Delaware 7 2,238 4.3% 4.1%
Other 27 10,500 20.2% 18.3%
- ------------ ---------- ----------- ----------- ------------------
Total 142 51,715 100.0% 100.0%
============ ========== =========== =========== ==================
Our largest Property, Bay Indies, located in Venice, Florida, accounted for
3%approximately 3.0% of the Company'sour total revenues for the year ended December 31, 2000.
7
82003.
The following tables settable lists our Resort Properties and those Communities in
which we have a non-controlling joint venture interest:
NUMBER
OF SITES
LOCATION AS OF
PROPERTY CITY, STATE 12/31/03
- ----------------- -------------------- --------
RESORT PROPERTIES
Mt Hood Welches OR 436
Fun & Sun San Benito TX 1,435
Southern Palms Eustis FL 950
Sherwood Forest Kissimmee FL 512
Bulow Flagler Beach FL 352
Tropic Winds Harlingen TX 531
Countryside Apache Junction AZ 560
Golden Sun Apache Junction AZ 329
Breezy Hill Pompano Beach FL 762
Highland Wood Pompano Beach FL 148
Date Palm Cathedral City CA 140
Toby's Arcadia FL 379
Araby Acres Yuma AZ 337
Foothill Yuma AZ 180
-----
TOTAL RESORT PROPERTY SITES 7,051
-----
COMMUNITIES OWNED IN JOINT VENTURES
Trails West Tucson AZ 503
Plantation Calimesa CA 385
Manatee Bradenton FL 290
Home Hallandale FL 136
Villa del Sol Sarasota FL 207
Voyager Tuscon AZ ---
Preferred Interests in College Heights ---
-----
TOTAL SITES OWNED IN JOINT VENTURES 1,521
-----
9
The following table sets forth certain information relating to the
PropertiesCommunities we owned by the Company as of December 31, 2000,2003, categorized by the
Company'sour major markets.
"CoreWe define our core Community portfolio ("Core Portfolio" represents an analysis of Properties) as Communities owned
throughout both yearsperiods of comparison. Excluded from the Core Portfolio are any
Communities acquired or sold during the period, any Resort Properties and any
Communities owned through joint ventures which, together, are referred to as the
"Non-Core" Properties. The following table excludes the following RV
resortResort Properties (3,197 sites) at which rents and occupancy vary based on
seasonality: Sherwood Forest RV (Kissimmee, Florida); Southern Palms (Eustis,
Florida); and Fun & Sun (San Benito, Texas). The table excludes five Properties
(1,521 sites) in which the Company has a non-controlling joint venture interest
and accounts for using the equity method of accounting.any
Communities owned through Joint Ventures.
NUMBER MONTHLY MONTHLY
OF SITES OCCUPANCY OCCUPANCY BASE RENT BASE RENT
LOCATION AS OF AS OF AS OF AS OF AS OF
PROPERTY CITY, STATE 12/31/0003 12/31/0003 12/31/9902 12/31/0003 12/31/9902
- ---------------------- ------------------------ -------- ----------- -------- -------- -------- -------- --------
FLORIDA
NORTHERN, CENTRAL & EASTERN:--------- --------- --------- ---------
Arrowhead Lantana FL 602 95.7% 95.5% $405 $388
Brittany Estates Tallahassee FL 299 93.6% 97.7% $248 $233FLORIDA
EAST COAST:
Bulow VillagePlantation Flagler Beach FL 276 97.8% (c) 89.9% (c) $244 $238(b) 97.5%(b) $329 $322
Carriage Cove Daytona Beach FL 418 98.3% 96.9% $370 $335
Colonies of Margate Margate FL 819 96.3% 96.1% $418 $41094.3% 95.7% $393 $387
Coquina Crossing St Augustine FL (a) 273 86.8% (c) 75.2% (c) $281 $276
Country Side North361 97.2%(b) 84.5%(b) $341 $324
Coral Cay Margate FL 819 89.4% 91.5% $455 $435
Countryside Vero Beach FL 646 95.5% (c) 93.5% (c) $298 $283
Fernwood Deland FL 92 95.7% 95.7% $244 $22798.0%(b) 96.6%(b) $341 $324
Heritage Village Vero Beach FL 436 97.2% 97.7% $308 $29194.3% 96.1% $368 $354
Holiday Village FL Vero Beach FL 128 79.7% 82.0% $281 $26868.8% 72.7% $313 $307
Holiday Village Ormond Beach FL(a) 301 88.0% 87.4% $339 $313
Indian Oaks Rockledge FL 211 94.8% (c) 90.5% (c) $240 $236208 99.5%(b) 98.1%(b) $274 $260
Lakewood Village Melbourne FL 348 95.7% 94.8% $345 $331
The Landings349 92.8% 92.8% $394 $387
Lighthouse Pointe Port Orange FL 433 89.4% (c) 89.1% (c) $293 $287(b) 89.1%(b) $332 $324
Maralago Cay Lantana FL 602 92.7% 94.5% $441 $437
Pickwick Port Orange FL 432 99.8% 98.6% $348 $335
The Meadows Palm Beach Gardens FL 380 85.5%(b) 85.3%(b) $386 $373
CENTRAL:
Grand Island Grand Island FL 307 68.7%(b) 71.7%(b) $312 $291
Mid-Florida Lakes Leesburg FL 1,226 93.2% (c) 95.4% (c) $313 $30584.4%(b) 88.6%(b) $379 $339
Oak Bend Ocala FL 262 84.4% (c) 82.1% (c) $239 $226
Pickwick Port Orange FL 432 94.9% 95.1% $296 $28787.4%(b) 88.2%(b) $306 $292
Sherwood Forest Kissimmee FL 769 94.7% (c) 89.1% (c) $319 $286754 96.0%(b) 96.9%(b) $355 $345
Villas at Spanish Oaks Ocala FL 459 93.7% 95.9% $297 $282
The Meadows, FL Palm Beach Gardens FL (a) 380 81.1% (c) 78.7% (c) $332 $318
TAMPA/NAPLES:87.1% 91.5% $334 $317
GULF COAST (TAMPA/NAPLES):
Bay Indies Venice FL 1,309 99.9% 99.8% $314 $30496.3% 98.2% $388 $345
Bay Lake Estates Nokomis FL 228 98.2% 99.6% $354 $348
Boulevard Estates Clearwater FL 297 89.6% 89.6% $279 $28294.7% 95.6% $427 $416
Buccaneer N. Ft. Myers FL 971 99.3% 99.4% $317 $304
Chalet Village Tampa FL 60 90.0% 88.5% $306 $302
Country Meadows Plant City FL 736 98.8%98.1% 98.5% $277 $267$368 $348
Country Place New Port Richey FL 515 90.9% (c) 82.5% (c) $230 $22299.6%(b) 99.4%(b) $278 $272
Down Yonder Largo FL 361 98.9%362 98.6% $351 $34399.2% $403 $388
East Bay Oaks Largo FL 328 97.0% 99.1% $351 $34194.2% 96.0% $395 $391
Eldorado Village Largo FL 227 96.9% 96.0% $356 $343
Friendly91.6% 94.3% $402 $391
Glen Ellen Clearwater FL(a) 106 85.8% 76.9% $328 $322
Hacienda Village of Clearwater FL 236 84.7% 85.6% $293 $282
KapokNew Port Richey FL(a) 505 96.6% 95.0% $320 $305
Harbor View New Port Richey FL(a) 471 98.9% 98.9% $223 $220
Hillcrest Clearwater FL 279 80.3% 83.2% $326 $32079.6% 83.9% $358 $346
Holiday Ranch Largo FL 150 94.0% 94.0% $333 $31588.7% 92.7% $370 $353
Lake Fairways N. Ft. Myers FL 896 99.4% 99.7% $352 $33999.6% 99.2% $389 $376
Lake Haven Dunedin FL 379 97.6% 95.8% $394 $36383.6% 89.7% $414 $399
Lakes at Countrywood Plant City FL 423 93.4%(b) 94.8%(b) $263 $256
Meadows at Countrywood Plant City FL 737 98.4% 99.1% $305 $293
Oaks at Countrywood Plant City FL 168 72.0%(b) 70.8%(b) $275 $266
Pine Lakes N. Ft. Myers FL 584 99.8% 100.0% $421 $410
Satellite99.3% $465 $458
Silk Oak Clearwater FL 87 90.8%FL(a) 180 87.2% 93.3% $253 $243
Sunset Oaks Plant City FL 168 64.9% (c) 56.3% (c) $231 $217$367 $358
The Heritage N. Ft. Myers FL 455 79.6% (c) 76.7% (c) $290 $28291.2%(b) 87.3%(b) $334 $319
Windmill Manor Bradenton FL 292 96.2% 95.9% $363 $35193.8% 94.9% $382 $370
Windmill Village - Ft. N. Ft. Myers FL 491 98.6% 98.6% $297 $291
Myers
Windmill Village North95.5% 96.3% $329 $323
Winds of St. Armands No Sarasota FL 471 99.8% 99.8% $320 $310
Windmill Village South95.8% 98.1% $373 $346
Winds of St. Armands So Sarasota FL 306 100.0% 100.0% $321 $31099.7% 99.7% $386 $364
------ ------ ------ ------ ----------- ----- ----
TOTAL FLORIDA MARKET 18,335 94.7%19,630 93.2% 93.9% $321 $311$362 $346
------ ------ ------ ------ ----------- ----- ----
FLORIDA MARKET - CORE PORTFOLIO 17,682 95.1% 94.5% $333 $31218,067 93.1% 94.0% $368 $352
------ ------ ------ ------ ----------- ---- ----
810
9
NUMBER MONTHLY MONTHLY
OF SITES OCCUPANCY OCCUPANCY BASE RENT BASE RENT
LOCATION AS OF AS OF AS OF AS OF AS OF
PROPERTY CITY, STATE 12/31/0003 12/31/0003 12/31/9902 12/31/0003 12/31/9902
- ---------------------- ------------------------ -------- ----------- -------- -------- -------- -------- --------
CALIFORNIA
NORTHERN
CALIFORNIA:--------- --------- --------- ---------
CALIFORNIA
NORTHERN CALIFORNIA:
California Hawaiian San Jose CA 419418 98.1% (c) 99.3% (c) $600 $58097.6% $698 $675
Colony Park Ceres CA 186 76.9% 71.5% $345 $32593.0% 89.8% $386 $375
Concord Cascade Pacheco CA 283 99.3% 98.9% 99.6% $521 $507$566 $560
Contempo Marin San Rafael CA 396 98.7% 98.7% $631 $613$651 $646
Coralwood Modesto CA 194 92.8% 92.3% $403 $39399.0% 99.0% $457 $438
Four Seasons Fresno CA 242 71.5% 68.6% $244 $24276.9% 75.6% $277 $267
Laguna Lake San Luis Obispo CA 290 99.7% 100.0% $328 $29299.7% $378 $368
Monte del Lago Castroville CA 314 99.4% (c) 99.7% (c) $485 $456310 97.7%(b) 97.7%(b) $584 $560
Quail Meadows Riverbank CA 146 98.6% 92.5% $340 $330100.0% 100.0% $414 $390
Royal Oaks Visalia CA 149 83.2% 80.5% $253 $24781.9% 81.9% $299 $290
DeAnza Santa Cruz Santa Cruz CA 198 100.0% 100.0% $514 $49198.5% 99.0% $572 $558
Sea Oaks Los Osos CA 138 100.0% 100.0% $344 $335125 96.8% 97.6% $423 $418
Sunshadow San Jose CA 121 100.0% 100.0% $583 $561$662 $651
Westwinds (4 Properties) San Jose CA 723 99.9% 99.3% $615 $570
properties)98.5% 99.2% $752 $719
SOUTHERN CALIFORNIA:
Date Palm Country Club Cathedral City CA 538 93.9% 91.4% $631 $59494.2% 94.1% $720 $679
Lamplighter Spring Valley CA 270 99.6% 99.6% $535 $50898.5% 99.3% $713 $642
Meadowbrook Santee CA 332 99.4% 99.1% $604 $560338 97.6% 100.0% $636 $627
Rancho Mesa El Cajon CA 158 99.4% 94.9% $510 $50299.4% $619 $567
Rancho Valley El Cajon CA 140 99.3% 98.6% $517 $494100.0% 100.0% $708 $627
Royal Holiday Hemet CA (a) 179 72.6% 75.0% $257 $25264.2% 67.0% $306 $285
Santiago Estates Sylmar CA 299 94.6% 92.7% $591 $564300 98.7% 96.3% $678 $646
----- ------ ------ ------ ------ ---------- ----
TOTAL CALIFORNIA MARKET 5,715 94.9% 94.3% $509 $4915,704 95.6% 95.8% $598 $574
----- ------ ------ ------ ------ ---------- ----
CALIFORNIA MARKET - CORE PORTFOLIO 5,536 95.7% 94.9% $517 $4795,704 95.6% 95.6% $598 $574
----- ------ ------ ------ ------ ------
---- ----
ARIZONA
Apollo Village Phoenix AZ 237 92.8% (c) 92.4% (c) $356 $337
Brentwood Manor236 80.9%(b) 83.9%(b) $416 $401
The Highlands at Mesa AZ 274 94.9% 96.4% $431 $417273 85.3% 89.0% $498 $475
Brentwood
Carefree Manor Phoenix AZ 127 99.2% 98.4% $303 $277128 76.6% 92.2% $355 $342
Casa del Sol #1 Peoria AZ 246 94.7% 94.3% $407 $394245 77.6% 81.2% $479 $460
Casa del Sol #2 Glendale AZ 239 97.9% 97.9% $438 $42377.4% 86.6% $502 $472
Casa del Sol #3 Glendale AZ 238 96.2% 97.1% $420 $403236 85.6% 89.8% $500 $471
Central Park Phoenix AZ 293 96.9% 95.9% $373 $35588.1% 92.5% $426 $409
Desert Skies Phoenix AZ 164 97.0% 97.0% $299 $27891.5% 93.9% $353 $338
Fairview Manor Tucson AZ 235 92.8% 95.3% $311 $29182.6% 85.1% $358 $342
Hacienda de Valencia Mesa AZ 365 94.2% 93.4% $361 $344364 74.7% 79.4% $412 $395
Palm Shadows Glendale AZ 294 94.9% 94.9% $336 $32680.6% 87.1% $393 $372
Sedona Shadows Sedona AZ 200 88.0% 88.0% $306 $293198 93.4% 93.4% $391 $355
Sunrise Heights Phoenix AZ 199 95.5% 98.0% $347 $32779.9% 88.4% $409 $386
The Mark Mesa AZ 410 95.9% 97.3% $361 $33861.0% 74.9% $410 $392
The Meadows Tempe AZ 391 98.0% 96.7% $416 $39974.4% 85.2% $464 $455
Whispering Palms Phoenix AZ 116 99.1% 100.0% $263 $24790.5% 93.1% $316 $295
----- ------ ------ ------ ------ ---------- ----
TOTAL ARIZONA MARKET 4,028 95.4% 95.7% $367 $3504,021 79.6% 85.9% $425 $406
----- ------ ------ ------ ------ ---------- ----
ARIZONA MARKET - CORE PORTFOLIO 4,028 95.4% 95.7% $367 $3504,021 79.6% 85.9% $425 $406
----- ------ ------ ------ ------ ---------- ----
911
10
NUMBER MONTHLY MONTHLY
OF SITES OCCUPANCY OCCUPANCY BASE RENT BASE RENT
LOCATION AS OF AS OF AS OF AS OF AS OF
PROPERTY CITY, STATE 12/31/0003 12/31/0003 12/31/9902 12/31/0003 12/31/9902
- --------------------- ----------------------- -------- ----------- -------- -------- -------- -------- --------
MICHIGAN--------- ---------- --------- ---------
Americana Estate Kalamazoo MI 162 93.2% 97.5% $262 $254
Appletree Walker MI 239 96.7% 96.2% $290 $276
Brighton Village Brighton MI 197 99.0% 97.0% $330 $326
College Heights Auburn Hills MI 162 98.1% 92.6% $317 $332
Creekside Wyoming MI 165 97.6% 98.8% $356 $344
Groveland Manor Holly MI 186 91.4% 93.0% $320 $317
Hillcrest Acres Kalamazoo MI 150 96.0% 98.0% $289 $283
Metro Romulus MI 227 98.7% 96.0% $328 $300
Riverview Estates Bay City MI 197 78.2% 76.8% $230 $233
South Lyon Woods South Lyon MI 211 98.1% 98.1% $417 $401
Willow Run Ypsilianti MI 185 91.4% 89.2% $272 $281
----- ---- ---- ---- ----
TOTAL MICHIGAN MARKET 2,081 94.4% 93.9% $315 $306
----- ---- ---- ---- ----
MICHIGAN MARKET - CORE PORTFOLIO 2,081 94.4% 93.9% $315 $306
----- ---- ---- ---- ----
COLORADO
Bear Creek Sheridan CO 124 100.0% 100.0% $385 $366122 95.1% 97.6% $471 $446
Cimarron Broomfield CO 327 99.1% 98.8% $391 $36893.9% 97.6% $464 $445
Golden Terrace Golden CO 264 99.2% 98.5% $431 $414265 91.7% 96.6% $512 $492
Golden Terrace South Golden CO 80 100.0% 96.3% $407 $381160 85.0% 95.0% $503 $483
Golden Terrace West Golden CO 316 100.0% 96.2% $424 $40893.4% 96.5% $510 $490
Hillcrest Village Aurora CO 602 96.3% 96.0% $422 $400601 88.6% 91.7% $490 $472
Holiday Hills Denver CO 734 97.1% 95.0% $412 $390736 92.3% 92.3% $484 $466
Holiday Village Co. Springs CO 240 96.3% 98.8% $403 $38490.4% 92.9% $494 $446
Pueblo Grande Pueblo CO 252 96.8%251 94.4% $265 $25396.4% $311 $296
Woodland Hills Denver CO 434 98.6% 97.9% $390 $37588.0% 93.8% $456 $439
----- ---- --------- ----- ---- ----
TOTAL COLORADO MARKET 3,373 97.9% 96.7% $399 $3803,452 87.7% 94.2% $472 $452
----- ---- --------- ----- ---- ----
COLORADO MARKET - CORE PORTFOLIO 3,373 97.9% 96.7% $399 $3803,452 91.1% 94.2% $472 $452
----- ----- ----- ---- ----
---- ----
NORTHEAST
Aspen Meadows Rehoboth DE 199200 99.5% 100.0% 98.0% $250 $228$288 $277
Camelot AcresMeadows Rehoboth DE 319302 99.0% 100.0% 99.4% $380 $363$290 $272
Mariners Cove Millsboro DE 375 88.5% (c) 85.6% (c) $356 $336374 91.2%(b) 90.1%(b) $424 $399
McNicol Rehoboth DE 93 97.8%98.9% 100.0% $248 $240$293 $278
Sweetbriar Rehoboth DE 142 100.0% 99.3% $208 $189146 94.5% 95.9% $246 $228
Waterford Bear DE 731 96.9% (c) 93.8% (c) $379 $36095.3%(b) 96.4%(b) $423 $410
Whispering Pines Lewes DE 392 96.9% 93.6% $258 $24587.2% 95.2% $315 $274
Pheasant Ridge Mt. Airy MD 101 99.0% 99.0% $424 $407MD(a) --- --- 98.0%(d) --- $468(d)
Brook Gardens Lackawanna NY 424 97.2% 97.7% $423 $400NY(a) --- --- 93.9%(d) --- $446(d)
Greenwood Village Manorville NY 474 97.3% (c) 92.0% (c) $366 $361512 99.2% 98.8% $428 $406
Green Acres Breinigsville PA 595 97.3% 98.8% $408 $38693.8% 94.8% $452 $438
Meadows of Chantilly Chantilly VA 500 92.0% 83.0% $493 $48388.8% 94.8% $604 $544
Independence Hill Morgantown WV 203 90.1%WV(a) --- --- 87.2% $204 $194(d) --- $221(d)
----- ---- --------- ----- ---- ----
TOTAL NORTHEAST MARKET 4,548 96.0% 93.5% $365 $ 3393,845 94.1% 95.6% $412 $387
----- ---- --------- ----- ---- ----
NORTHEAST MARKET - CORE PORTFOLIO 4,548 96.0% 93.5% $365 $3393,845 94.1% 96.1% $412 $387
----- ---- --------- ----- ---- ----
1012
11
NUMBER MONTHLY MONTHLY
OF SITES OCCUPANCY OCCUPANCY BASE RENT BASE RENT
LOCATION AS OF AS OF AS OF AS OF AS OF
PROPERTY CITY, STATE 12/31/0003 12/31/0003 12/31/9902 12/31/0003 12/31/9902
- -------------------- --------------------- -------- ----------- -------- -------- -------- -------- --------
MIDWEST--------- --------- --------- ---------
MIDWEST
Five Seasons Cedar Rapids IA 390 79.7% (c) 81.5% (c) $240 $24073.1%(b) 76.4%(b) $276 $264
Holiday Village IA Sioux City IA 519 87.7% 92.1% $241 $22865.7% 73.8% $252 $252
Golf Vista Estates Monee IL 319 90.6% (c) 77.1% (c) $344 $319411 95.9%(b) 88.1%(b) $441 $393
Willow Lake Estates Elgin IL 617 97.4% 96.3% $583 $546
Burns Harbor Estates90.1% 94.2% $694 $660
Forest Oaks Chesterton IN 227 89.0% 93.4% $287 $282
Candlelight Village Columbus IN 585 99.5% 99.1% $207 $19571.8% 76.2% $332 $330
Oak Tree Village Portage IN 379 93.1% 94.5% $283 $267361 86.7% 88.9% $342 $332
Windsong Indianapolis IN 268 91.4% 97.0% $267 $257
Bonner Springs Bonner Springs KS 211 91.9% 93.4% $216 $202
Carriage Park Kansas City KS 143 76.9% (d) 74.1% (d) $208 $196
Quivira Hills Kansas City KS 142 86.6% 82.4% $245 $226
Camelot Burnsville MN 302 99.3% 99.7% $241 $239
Briarwood Brookline MO 166 90.4% 92.2% $195 $175
Dellwood Estates Warrensburg MO 136 81.6% 86.0% $168 $156
North Star Kansas City MO 219 96.3% 95.9% $261 $244
Royal Village Toledo OH 233 89.3% 92.3% $268 $258
Rockwood Tulsa OK 264 98.5% 98.5% $230 $21857.8% 72.0% $320 $309
Creekside Wyoming MI 165 87.3% 93.3% $407 $382
------ ----- ---- --------- ---- ----
TOTAL MIDWEST MARKET 5,120 91.9% 92.2% $287 $2822,958 79.5% 83.3% $423 $399
------ ----- ---- --------- ---- ----
MIDWEST MARKET - CORE PORTFOLIO 5,120 91.9% 92.2% $287 $2822,958 79.5% 83.3% $423 $399
------ ----- ----- ---- ----
---- ----
NEVADA, UTAH, NEW MEXICO
Del Rey Albuquerque NM 407 90.9% 83.8% $316 $35067.1% 76.7% $374 $341
Bonanza Las Vegas NV 353 81.6% 91.8% $440 $44168.0% 72.8% $484 $473
Boulder Cascade Las Vegas NV 299 89.3% 93.3% $457 $44376.9% 81.9% $446 $436
Cabana Las Vegas NV 263 98.9% 99.6% $415 $39293.5% 95.4% $447 $442
Flamingo West Las Vegas NV 258 80.2% (c) 100.0% (c) $406 $40394.6%(b) 88.8%(b) $461 $449
Villa Borega Las Vegas NV 293 95.9% 98.3% $451 $44382.9% 87.0% $454 $433
All Seasons Salt Lake City UT 121 97.5% 97.5% $315 $29293.4% 96.7% $370 $352
Westwood Village Farr West UT 314 95.2% (c) 98.7% (c) $230 $218(b) 95.2%(b) $280 $259
------ ----- ---- --------- ---- ----
TOTAL NEVADA, UTAH, NEW MEXICO MARKET 2,308 90.6% 94.0% $384 $37681.8% 85.2% $413 $398
------ ----- ---- --------- ---- ----
NEVADA, UTAH, NEW MEXICO MARKET - CORE PORTFOLIO 2,308 90.6% 94.0% $384 $37681.8% 85.2% $413 $396
------ ----- ----- ---- ----
---- ----
NORTHWEST
Casa Village Billings MT 491 98.0% 97.0% $272 $26285.9% 88.0% $304 $294
Falcon Wood Village Eugene OR 183 98.4% 99.5% $345 $32990.7% 92.9% $403 $351
Quail Hollow Fairview OR 138 98.6% 99.3% $409 $408137 92.7% 93.4% $507 $500
Shadowbrook Clackamas OR 156 99.4% 100.0% $429 $41794.2% 96.8% $513 $494
Kloshe Illahee Federal Way WA 258 99.2%97.7% 99.6% $454 $433$599 $513
------ ----- ---- --------- ---- ----
TOTAL NORTHWEST MARKET 1,226 98.5% 98.4% $356 $3451,225 90.9% 92.9% $436 $402
------ ----- ---- --------- ---- ----
NORTHWEST MARKET - CORE PORTFOLIO 1,226 98.5% 98.4% $356 $3451,225 90.9% 92.9% $436 $402
------ ----- ---- --------- ---- ----
GRAND TOTAL ALL MARKETS 46,734 94.7% 94.2% $356 $34343,143 90.5% 92.4% $422 $403
====== ==== ========= ===== ==== ====
GRAND TOTAL ALL MARKETS - CORE PORTFOLIO 45,902 94.9% (e) 94.2% (e) $357 $34441,580 90.4%(c) 92.4%(c) $427 $407
====== ==== ========= ===== ==== ====
(a) Represents a Property that is not part of the Core Portfolio.
(c)(b) The process of filling Expansion Sites at these Properties is ongoing. A
decrease in occupancy may reflect development of additional Expansion
Sites.
(d) Carriage Park suffered damage to approximately 85 homes in 1993 due to
flooding; the process of re-leasing these sites is ongoing.
(e)(c) Changes in total portfolio occupancy include the impact of acquisitions and
expansion programs and are therefore not comparable.
(d) Property sold in 2003.
See Management's Discussion and Analysis of Financial Condition and Results of
Operations.
1113
12
ITEM 3. LEGAL PROCEEDINGS
DEANZA SANTA CRUZ MOBILE ESTATES
The residents of DeAnza Santa Cruz Mobile Estates, a propertyProperty 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
trialAs a result 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, whichone action, the
Company believes is fair and accurate.
DeAnza Santa Cruz Mobile Estates is a 198 site community overlooking the
Pacific Ocean. It is subjectrebated approximately $36,000 to the City's rent control ordinance which limits
annual rent increases to 75% of CPI.residents. 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 and separately
bill tenants at the Property for both water and sewer in 1993 in the face of the
City's rapidly rising utility costs.
Under California Civil Code Section 798.41, DeAnza was required to reduce
rent by an amount equal to the average cost of usage over the preceding 12
months. This was done. With respect to water, not looking to submit to
jurisdiction of the California Public Utility Commission ("CPUC"), DeAnza relied
on California Public Utilities Code Section 2705.5 ("CPUC Section 2705.5") to
determine what rates would be charged for water on an ongoing basis without
becoming a public utility. DeAnza and the Company interpreted the statute as
providing that in a submetered mobile home 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 Property 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 inthen proceeded to a residential neighborhood within the City and
permitted DeAnzajury trial alleging these
"overcharges" entitled them to recoup partan award of the expenses of operatingpunitive damages. In January 1999, 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 byjury awarded the HOA and Herbert Rossman, a resident, against
DeAnza, and later,$6.0 million in punitive damages. On December 21, 2001 the
Company. DeAnza and the Company demurred to eachCalifornia Court 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 billing and submetering issues related to both water and sewer. The
Company and DeAnza prevailed on all issues related to sewer and the rent
rollback related to water, but the hearing officer determined that the Company
could only pass through its actual cost of water, i.e., a prorated readiness to
serve charge and tax thereon. The hearing officer did not deal with the subsidy
being given to residents through the quantity charge and ordered a rebate in a
fixed amount per resident. The Company and DeAnza requested reconsideration on
this issue, among others, which reconsideration was denied by the hearing
officer.
The Company then took a writ of mandate (an appeal from an administrative
order) to the Superior Court and, pending this appeal, the residents, the
Company and the City agreed to stay the effect of the hearing officer's decision
until the Court rendered judgment.
In July 1996, the Superior Court affirmed the hearing officer's decision
without addressing concerns about the failure to take the subsidy on the
quantity charge into account.
12
13
The Company requested that the City and the HOA agree to a further stay
pending appeal to the court of appeal, but they refused and the appeal 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 and DeAnza 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 appeal.
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 appeal 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 appeal further agreed
with the Company that the City's hearing officer did not have the authority
under California Civil Code Section 798.41 to establish rates that could be
charged in the future.
Following this decision, the CPUC granted the Company its certificate of
convenience and necessity on December 17, 1998 and approved cost-based rates and
charges for water that exceed what residents were paying under the Company's
reliance on CPUC Section 2705.5. Concurrently, the CPUC also issued an Order
Instituting Investigation ("OII") confirming its exclusive jurisdiction over the
issue of water rates in a submetered system and commencing an investigation into
the confusion and turmoil over billings in submetered properties. Specifically,
the OII states: "The Commission has exclusive and primary jurisdiction over the
establishment of rates for water and sewer services provided by private
entities."
Specifically, the CPUC ruling regarding the Company's application stated:
"The ultimate question of what fees and charges may or may not be assessed,
beyond external supplier pass-through charges, for in-park facilities when a
mobile home park does not adhere to the provisions of CPUC Section 2705.5, must
be decided by the Commission."
After the court of appeal decision, the HOA brought all of its members back
into the underlying civil actionAppeal for the purpose of determining damages,
including punitive damages, againstSixth District reversed the Company. The trial was continued from
July 1998 to January 1999 to give the CPUC time to act on the Company's
application. Notwithstanding the action taken by the CPUC in issuing the OII in
December 1998, the trial court denied the Company's motion to dismiss on
jurisdictional grounds and trial commenced before a jury on January 11, 1999.
Not only did the trial court not consider the Company's motion to dismiss,
the trial court refused to allow evidence of the OII or the Company's CPUC
approval to go before the jury. Notwithstanding the Company's strenuous
objections, the judge also allowed evidence of the Company's and DeAnza's
litigation tactics to be used as evidence of bad faith and oppressive actions
(including evidence of the application to the CPUC requesting a $22.00 readiness
to serve charge). The Company's motion for a mistrial based upon these
evidentiary rulings was denied. On January 22, 1999, the jury returned a verdict
awarding $6.0 million
of punitive damages againstdamage award, 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
(which also accrues interest at the statutory rate of 10.0% per annum) and the
appeal has been fully briefed by both parties. The Company is awaiting notice of
scheduling of oral argument on the appeal.
13
14
In two related appeals, the Company had argued that the trial court's
ability to enter an award of attorneys' fees, in favor of the HOA and, to take
certain other actions was preempted by the exercise of exclusive jurisdiction by
the CPUC over the issue of how to set rates for water inas a submetered mobile
home park. During 2000, the California court of appeal rejected the Company's
preemption argument with respect to these prior rulings in favor of plaintiffs,
one of which had awarded plaintiffs approximately $100,000 of attorneys' fees.
The California Supreme Court declined to accept the case for review and the
Company paid the judgment, includingresult,
all post-judgment interest thereon, and settledon the matter for approximately $200,000 late in 2000.
The jury verdict appeal also raises a similar jurisdictional argument as
well as several other arguments for reversal or reduction of the punitive damage
award or for a new trial. An important distinction between the appellate ruling
in 2000 and the preemption issue as it is presented on appeal in the jury
verdict case is that the preemption argument rejected was "retroactive" while
the preemption issue remaining on appeal is prospective. One of the other
arguments raised by the Company in the jury verdict appeal isbasis that punitive damages are not
available inas a case brought under Section 798.41remedy for a statutory violation of the California Mobilehome
Residency Law ("MRL") since. The decision of the appellate court left the HOA, the
plaintiff in this matter, with the right to seek a new trial in which it must
prove its entitlement to either the statutory penalty and attorneys' fees
available under the MRL containsor punitive damages based on causes of action for fraud,
misrepresentation or other tort. In order to resolve this matter, the Company
accrued for and agreed to pay $201,000 to the HOA. This payment resolved the
punitive damage claim. The HOA's attorney has made a motion asking for an award
of attorneys' fees and costs in the amount of approximately $1.5 million as a
result of this resolution of the litigation. On April 2, 2003 the court awarded
attorney's fees to the HOA's attorney in the amount of $593,000 and court costs
of approximately $20,000. The Company has appealed this award and has not
accrued for the amount in its own
penalty provisions. Although no assurances canconsolidated financial statements.
OTHER CALIFORNIA RENT CONTROL LITIGATION
As part of the Company's effort to realize the value of its Properties
subject to rent control, the Company has initiated lawsuits against several
municipalities in California. The Company's goal is to achieve a level of
regulatory fairness in California's rent control jurisdictions, and in
particular those jurisdictions that prohibit increasing rents to market upon
turnover. This regulatory feature, called vacancy control, allows tenants to
sell their homes for a premium representing the value of the future discounted
rent-controlled rents. In the Company's view, such regulation results in a
transfer of the value of the Company's shareholders' land, which would otherwise
be given,reflected in market rents, to tenants upon the sales of their homes in the
form of an inflated purchase price that cannot be attributed to the value of the
home being sold. As a result, in the Company's view, the Company loses the value
of its asset and the selling tenant leaves the Community with a windfall
premium. The Company has discovered through the litigation process that certain
municipalities considered condemning the Company's Communities at values well
below the value of the underlying land. In the Company's view, a failure to
articulate market rents for sites governed by restrictive rent control would put
the Company at risk for condemnation or eminent domain proceedings based on
artificially reduced rents. Such a physical taking, should it occur, could
represent substantial lost value to shareholders. The Company is cognizant of
the need for affordable housing in the jurisdictions, but asserts that
restrictive rent regulation with vacancy control does not promote this purpose
because the benefits of such regulation are fully capitalized into the prices of
the homes sold. The Company estimates that the annual rent subsidy to tenants in
these jurisdictions is approximately $15 million. In a more well-balanced
regulatory environment, the Company would receive market rents that would
eliminate the subsidy and homes would trade at or near their intrinsic value.
In connection with such efforts, the Company recently announced it has
entered into a settlement agreement with the City of Santa Cruz, California and
that, pursuant to the settlement agreement, the City amended its rent control
ordinance to exempt the Company's property from rent control as long as the
Company offers a long term lease which gives the Company the ability to increase
rents to market upon turnover and bases annual rent increases on the CPI. The
settlement agreement benefits the Company's shareholders by allowing them to
receive the value of their investment in this Community through vacancy
decontrol while preserving annual CPI based rent increases in this age
restricted Property.
The Company's efforts to achieve a balanced regulatory environment
incentivize tenant groups to file lawsuits against the Company seeking large
damage awards. The homeowners association at Contempo Marin ("CMHOA"), a 396
site Property in San Rafael, California, sued the Company in December 2000 over
a prior settlement agreement on a capital pass-through after the Company sued
the City of San Rafael in October 2000 alleging its rent control ordinance is
unconstitutional. In the Contempo Marin case, the CMHOA prevailed on a motion
for summary judgment on an issue that permits the Company to collect only $3.72
out of a monthly pass-through amount of $7.50 that the Company believes the appeal will be successful.
Subsequently, in December 2000 the HOA and certain individual residents of
the Property filed a complaint in the Superior Court of California, County of
Santa Cruz (No. CV 139825) against the Company, certain affiliates of the
Company and certain employees of the Company. The new lawsuit seeks damages,
including punitive damages, for intentional infliction of emotional distress,
unfair business practices, and unlawful retaliation purportedly arising from
allegedly retaliatory rent increases which were noticedhad been
agreed to by the Company to
certain residentsCMHOA in September 2000. The Company believes that the residents who
received rent increase notices with respect to rent increases above those
permitted by the local rent control ordinance were not covered by the ordinance
either because they did not comply with the provisions of the ordinance or
because they are exempted by state law. On December 29, 2000, the Superior Court
of California, County of Santa Cruz enjoined such rent increases.a settlement agreement. The Company intends to
vigorously defend thethis matter, which may gohas been stayed pending a related state
court appeal by the Company of an order dismissing its claims against the City
of San Rafael. The Company believes that such lawsuits will be a consequence of
the Company's efforts to trialchange rent control since tenant groups actively desire
to preserve the premium value of their homes in addition to the summerdiscounted rents
provided by rent control. The Company has determined that its efforts to
rebalance the regulatory environment despite the risk of 2001.litigation from tenant
groups are necessary not only because of the $15 million annual subsidy to
tenants, but also because of the condemnation risk.
14
ELLENBURG COMMUNITIES
The Company and certain other parties entered into a settlement agreement
(the "Settlement"), which was approved by the courtLos Angeles County Superior Court
in April 2000. The settlementSettlement resolved substantially all of the litigation and
appeals involving the Ellenburg Properties, and transactions arising out of the
settlementSettlement closed on May 22, 2000 (see Note 5).2000. Only the appeal of one entity remained, the
outcome of which was not expected to materially affect the Company.
In connection with the Ellenburg 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.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. ThisAlthough this appeal was
one not resolved by the Settlement. The Company believesSettlement, the California Court of Appeal dismissed
Fund 20's allegations are
without merit and will vigorously defend itself.
CANDLELIGHT PROPERTIES, L.L.Csubstantive appeals on March 13, 2003 as moot. Fund 20 petitioned the
California Supreme Court to review this decision which review was denied.
In 1996, 1997 and 1998, the Lending Partnership made loans to Candlelight
Properties, L.L.C. ("Borrower") in the aggregate principal amount of $8,050,000
(collectively, the "Loan". 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 Circuit Court of Bartholomew County, Indiana
("Court") on May 5, 1999, seeking declaratory judgment on the validity of the
exercise of the option. The Lending Partnership filed suit in the Court the next
day, seeking to foreclose its mortgage, and the suits were consolidated
(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 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.
14
15
On May 3, 2000, Hanover Group, Inc. ("Hanover") and Farren filed suit
againstOctober 2001, Fund 20 sued the Company and certain executiveof its affiliates
again, this time in Alameda County, California making substantially the same
allegations. The Company obtained an injunction preventing the case from
proceeding until the Fund 20 appeal is decided and senior officersother related proceedings in
Arizona (from which the Company has already been dismissed with prejudice) are
concluded. The Company obtained a court order enjoining Fund 20 from proceeding
with its Alameda County action.
In February, 2004, the Company entered into a settlement agreement with
Fund 20 resolving all remaining matters at no cost to the Company and with
mutual releases.
COUNTRYSIDE AT VERO BEACH
The Company has received letters dated June 17, 2002 and August 26, 2002
from Indian River County ("County"), claiming that the Company currently owes
sewer impact fees in the amount of approximately $518,000 with respect to the
Property known as Countryside at Vero Beach, located in Vero Beach, Florida,
purportedly under the terms of an agreement between the County and a prior owner
of the Property. In response, the Company has advised the County that these fees
are no longer due and owing as a result of a 1996 settlement agreement between
the County and the prior owner of the Property, providing for the payment of
$150,000 to the County to discharge any further obligation for the payment of
impact or connection fees for sewer service at the Property. The Company paid
this settlement amount (with interest) to the County in connection with the
United States District Court for Southern DistrictCompany's acquisition of Indiana, Indianapolis
Division. The complaint alleges violations of securities laws and fraud arising
from the loan transaction being litigated inProperty. Accordingly, the State Court Litigation and
seeks damages, including treble damages. The Company believes that
the complaint
isCounty's claims are without merit.
DELAWARE DECLARATORY JUDGMENT ACTION
In April 2002, the Company entered into a Stipulation and Consent Order to
Cease and Desist (the "Consent Order") with the State of Delaware (the "State").
The Consent Order resolved various issues raised by the State concerning the
terms of a new lease form used or proposed for use by the Company at certain of
its Properties in Delaware. Among other provisions, the Consent Order
contemplated that the Company would work with the State to develop and implement
a new lease form for use in Delaware. The Consent Order expressly provided that
nothing contained therein would preclude the Company from seeking declaratory
relief from a court as to the legality or enforceability of any provisions which
the Company might wish to incorporate in future leases.
Throughout the summer of 2002, the Company's Delaware legal counsel engaged
in dialogue with representatives of the State concerning various matters,
including the lease provisions to which the State had objected but which the
Company wished to incorporate in future leases. Through this process, it became
apparent that the parties could not reach agreement as to the legality or
enforceability of the proposed lease provisions, and that the Company would need
to seek declaratory relief from a court in order to resolve the matter, as
contemplated by the Consent Order. Accordingly, on August 29, 2002, the Company
filed a Petition for Declaratory Judgment and Other Relief (as amended, the
"Petition") in Sussex County, Delaware Superior Court (the "Court").
In response to the filing of the Petition, on October 1, 2002, the State
filed its Answer to Petition for Declaratory and Other Relief, and Counterclaims
for Civil Enforcement and Contempt (as amended, "Answer and Counterclaim") with
the Court. In the Answer and Counterclaim, the State sought, inter alia,
restitution, statutory penalties, investigative costs and attorneys' fees under
the Delaware Mobile Home Lots and Leases Act, the Consumer Fraud Act, the
Uniform Deceptive
15
Trade Practices Act and the Delaware Consumer Contracts law, and separately
sought a finding of contempt and related contempt penalties for alleged
violations of the Consent Order.
The Company filed a Motion to rulings made byDismiss Respondents' Counterclaims with the
Court on October 29, 2002, and the State filed a Motion for Summary Judgment
with the Court on November 15, 2002. On December 30, 2002, the Company filed a
First Amended Petition for Declaratory Judgment and Other Relief with the Court,
and on January 31, 2003, the State filed an Amended Answer and Counterclaim with
the Court.
On August 29, 2003, the Court issued its decision disposing of all pending
claims in the litigation except one. Specifically, the Court held, inter alia,
that (i) the Company may eliminate the rent cap formula from existing leases at
certain of its Delaware Properties as the leases come up for renewal, (ii)
certain lease provisions proposed by the Company may not be implemented or
enforced under applicable state law, (iii) the change in water supplier at one
of the Properties did not violate the leases at such Property, (iv) the Company
did not violate the Consent Order by filing the Petition, and (v) the Company
did not violate any state statutes as alleged by the State.
The August 29, 2003 decision left open the issue of whether the Company had
violated the Consent Order by continuing to use the disputed lease form (but not
enforce the provisions at issue) at one of its Properties following entry of the
Consent Order (the Company believed that it had no choice but to continue to use
this lease form until the State had approved a new form for use at the Property
as contemplated by the Consent Order). On October 3, 2003, the Court issued its
final order, finding that continued use of the disputed lease form, as to new
tenants but not as to renewal tenants, following entry of the Consent Order
constituted a violation thereof, and assessing a civil penalty in the amount of
$5,000.
On November 3, 2003, the State filed a Notice of Appeal with the Supreme
Court of the State of Delaware, appealing a portion of the Court's order denying
the State's Motion for Summary Judgment. The State's appeal is without merit. Thelimited to the
single issue of whether the Company has the right to eliminate "rent cap"
provisions contained in certain existing leases upon automatic renewal of the
leases in accordance with Delaware law. The appeal has been fully briefed, and
oral argument in the matter is scheduled for March 16, 2004.
On November 14, 2003, the State filed a motion for judgment on the pleadings (which has been fully briefed), and
will continue to 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 performanceStay Pending Appeal 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 agreedon December 3, 2003, the Company filed its response opposing the
motion. On December 16, 2003, the Court issued its order on the motion, holding
that the Company may proceed to a stay in this proceeding pendingissue notices of default to tenants who fail to
pay the outcomefull amount of their current rental obligations, but may not initiate
eviction proceedings against such tenants until April 1, 2004, and may not
enforce any such eviction order until the appeals inSupreme Court rules on the State Court Litigation.appeal.
OTHER
The Company is involved in various other legal proceedings arising in the
ordinary course of business. Management believes that all proceedings herein
described or referred to, taken together, are not expected to have a material
adverse impact on the Company.
16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15The Company held its Annual Meeting of Stockholders on May 13, 2003.
Stockholders holding 17,534,693 Common Shares (being the only class of shares
entitled to vote at the meeting), or 78.8% of the Company's issued and
outstanding Common Shares as of the record date for the meeting, attended the
meeting or were represented by proxy. The Company's shareholders voted on two
matters presented at the meeting and both received the requisite number of votes
to pass. The results of the stockholders' vote on each of the two matters were
as follows:
PROPOSAL 1 - Election of three directors to terms expiring in 2006.
TOTAL VOTE FOR TOTAL VOTE WITHHELD
EACH DIRECTOR* FROM EACH DIRECTOR*
Howard Walker 92.40% 7.60%
Donald S. Chisholm 99.73% .27%
Thomas E. Dobrowski 99.16% .84%
* This percentage represents the number of shares voting in this matter out
of the total number of shares voted at the meeting, not out of the total
shares outstanding. This matter required a plurality of votes cast for
approval.
PROPOSAL 2 - Approval of an amendment to the Company's Charter to eliminate the
current classification of the board (this matter required the affirmative vote
of two-thirds of all votes entitled to be cast on the proposal).
For 16,878,607 96.3%
Against 627,753 3.5%
Abstain 28,332 0.2%
Non-vote 1 0%
17
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth, for the period indicated, the high and low
salessale prices for the Company's common stock as reported by theThe New York Stock
Exchange under the trading symbol MHC.
Distributions Return of
Distributions Capital
Close High Low MadeDeclared GAAP Basis (a)
----- ---- --- ---- --------------Basis(a)
------ ------ ------ ------------- -------------
20002003
1st Quarter $23.1250 $25.7500 $22.2500 $.4150 $.14$29.60 $30.86 $27.40 $ .4950 $.15
2nd Quarter 23.9375 25.7500 23.0625 .4150 .0035.11 35.80 29.56 .4950 .16
3rd Quarter 25.0000 25.2500 23.5000 .415039.18 39.80 35.11 .4950 .00
4th Quarter 37.65 41.92 36.70 8.0000(b) .00
2002
1st Quarter $33.00 $33.63 $30.65 $ .4750 $.15
2nd Quarter 35.10 35.66 32.50 .4750 .18
3rd Quarter 31.88 35.14 30.05 .4750 .17
4th Quarter 29.0000 29.1250 24.3125 .4150 .12
1999
1st Quarter $24.0000 $25.5000 $21.8125 $.3875 $.08
2nd Quarter 26.0000 27.0000 22.3750 .3875 .12
3rd Quarter 23.3750 26.0625 23.0000 .3875 .12
4th Quarter 24.3125 24.5000 22.5625 .3875 .1529.63 31.92 27.50 .4750 .00
(a) Represents distributions per share in excess of net income per share-basic
on a GAAP basis and is not the same as return of capital on a tax basis.
(b) On December 12, 2003, we declared a one-time special distribution of $8.00
per share payable to stockholders of record on January 8, 2004. We used proceeds
from the $501 million borrowing in October, 2003 to pay the special distribution
on January 16, 2004. The special cash dividend will be reflected on
shareholders' 2004 1099-DIV to be issued in January 2005.
The number of beneficial holders of the Company's common stock at December 31,
20002003 was approximately 5,500.
165,049.
18
17
ITEM 6. SELECTED FINANCIAL AND OPERATING INFORMATION
The following table sets forth selected financial and operating information
on a historical basis for the Company. The following information should be read
in conjunction with all of the financial statements and notes thereto included
elsewhere in this Form 10-K. The historical operating data for the years ended
December 31, 2003, 2002, 2001, 2000, 1999, 1998, 1997 and 19961999 have been derived from the
historical Financial Statements of the Company audited by Ernst & Young LLP,
independent auditors.Company.
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED HISTORICAL FINANCIAL INFORMATION
(Amounts in thousands, except for per share and property data)
OPERATING DATA: (1)YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
1998 1997 1996
---- ---- ---- ---- ------------- -------- -------- -------- --------
REVENUES
Base rental income................................... $189,481 $181,672 $165,340 $108,984 $93,109
RVPROPERTY OPERATIONS:
Community base rental income................................income .......................... $ 196,919 $194,640 $190,982 $185,023 $177,411
Resort base rental income ............................. 11,780 9,146 5,748 7,414 9,526 7,153 --- ---
Utility and other income............................. 20,366 20,096 18,219 11,785 8,821income .............................. 20,150 19,684 20,381 19,357 19,549
--------- -------- -------- -------- --------
Property operating revenues ........................ 228,849 223,470 217,111 211,794 206,486
Property operating and maintenance .................... 64,996 62,843 60,807 57,973 56,895
Real estate taxes ..................................... 18,917 17,827 16,882 16,407 15,924
Property management ................................... 9,373 9,292 8,984 8,690 8,337
--------- -------- -------- -------- --------
Property operating expenses ........................ 93,286 89,962 86,673 83,070 81,156
--------- -------- -------- -------- --------
Income from property operations .................. 135,563 133,508 130,438 128,724 125,330
HOME SALES OPERATIONS:
Gross revenues from inventory home sales .............. 36,606 33,537 --- --- ---
Cost of inventory home sales .......................... (31,767) (27,183) --- --- ---
--------- -------- -------- -------- --------
Gross profit from inventory home sales ........... 4,839 6,354 --- --- ---
Brokered resale revenues, net ......................... 1,724 1,592 --- --- ---
Home selling expenses ................................. (7,360) (7,664) --- --- ---
Ancillary services revenues, net ...................... 216 522 --- --- ---
--------- -------- -------- -------- --------
Income from home sales operations ................ (581) 804 --- --- ---
OTHER INCOME AND EXPENSES:
Interest income ....................................... 1,695 967 639 1,009 1,669
Equity in income of affiliates.......................affiliates ........................ --- --- 1,811 2,408 2,065
1,070 800 853
Interest income...................................... 1,009 1,669 3,048 1,941 2,420
-------- -------- -------- -------- -------
Total revenues.................................... 220,678 215,028 194,830 123,510 105,203
-------- -------- -------- -------- -------
EXPENSES
Property operating and maintenance................... 59,199 58,038 53,064 32,343 28,399
Real estate taxes.................................... 16,888 16,460 14,470 8,352 7,947
Property management.................................. 8,690 8,337 7,108 5,079 4,338Other corporate income ................................ 2,065 1,277 1,353 670 280
General and administrative........................... 6,423 6,092 5,411 4,559 4,062administrative ............................ (8,060) (8,192) (6,687) (6,423) (6,092)
Interest and related amortization.................... 53,280 53,775 49,693 21,753 17,782amortization(2) .................. (58,402) (50,729) (51,305) (53,280) (53,775)
Loss on the extinguishment of debt .................... -- -- -- (1,041) --
Depreciation on corporate assets..................... 1,139 1,005 995 590 488assets ...................... (1,240) (1,277) (1,243) (1,139) (1,005)
Depreciation on real estate assets and other costs... 34,411 34,486 28,426 17,365 15,244costs .... (38,034) (35,552) (34,228) (33,713) (33,955)
Gain on sale of properties and other .................. --- --- 8,168 12,053
--------- -------- -------- -------- --------
-------
Total expenses.................................... 180,030 178,193 159,167 90,041 78,260other income and expenses .................. (101,976) (93,506) (81,492) (79,456) (90,813)
--------- -------- -------- -------- --------
-------
Income from operations............................... 40,648 36,835 35,663 33,469 26,943
Gain on sale of property and other................... 12,053 --- --- --- ---
-------- -------- -------- -------- -------
Income before allocation to minority interests and
extraordinary loss on early extinguishment of debt 52,701 36,835 35,663 33,469 26,943MINORITY INTERESTS:
(Income) allocated to Common OP Units................ (8,463) (6,219) (6,733) (4,373) (2,671)Units ................. (4,330) (5,848) (7,688) (7,968) (5,761)
(Income) allocated to Perpetual Preferred OP Units...Units..... (11,252) (11,252) (11,252) (11,252) (2,844)
--------- --------- -------- -------- --------
Income from continuing operations ................ 17,424 23,706 30,006 30,048 25,912
DISCONTINUED OPERATIONS:
Discontinued Operations ............................... 908 2,803 2,598 2,392 2,318
Gain on sale of properties and other .................. 10,826 13,014 --- --- ---
Minority interests on discontinued operations ......... (2,144) (3,078) (521) (495) (458)
--------- -------- -------- -------- --------
-------
Income before extraordinary loss on early
extinguishment of debt............................ 32,986 27,772 28,930 29,096 24,272
Extraordinary loss on early extinguishment
of debt (net of $264 and $105 allocated to
minority interests)............................... (1,041) --- --- (451) ---from discontinued operations .............. 9,590 12,739 2,077 1,897 1,860
--------- -------- -------- -------- --------
-------
NET INCOME........................................ $31,945 $27,772 $28,930 $28,645 $24,272
======= ======= ======= ======= =======
Net income per Common Share before extraordinary item
- basic ............................................. $1.54 $1.10 $1.13 $1.18 $0.98
======= ======= ======= ======= =======
Net income per Common Share before extraordinary item
- diluted............................................ $1.51 $1.09 $1.12 $1.16 $0.98
======= ======= ======= ======= =======
Net income per Common Share - basic.................. $1.49 $1.10 $1.13 $1.16 $0.98
======= ======= ======= ======= =======
Net income per Common Share - diluted................ $1.46 $1.09 $1.12 $1.15 $0.98
======= ======= ======= ======= =======
Dividend declared per Common Share................... $1.66 $1.55 $1.45 $1.32 $1.22
======= ======= ======= ======= =======
Weighted average Common Shares outstanding - basic... 21,469 25,224 25,626 24,689 24,693
Weighted average Common OP Units outstanding......... 5,592 5,704 5,955 3,749 2,715
Weighted average Common Shares outstanding - diluted. 27,408 31,252 31,962 28,762 27,546INCOME AVAILABLE FOR COMMON SHARES ........... $ 27,014 $ 36,445 $ 32,083 $ 31,945 $ 27,772
========= ======== ======== ======== ========
1719
18
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED HISTORICAL FINANCIAL INFORMATION
(continued)
(Amounts in thousands, except for per share and property data)
BALANCE SHEET DATA: (1)AS OF DECEMBER 31,
--------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
1998 1997 1996
---- ---- ---- ---- -------------- ---------- ---------- ---------- ----------
EARNINGS PER COMMON SHARE - BASIC:
Income from continuing operations ..................... $ .79 $ 1.10 $ 1.43 $ 1.40 $ 1.03
Income from discontinued operations ................... $ .43 $ .59 $ .10 $ .09 $ .07
Net income available for Common Shares ................ $ 1.22 $ 1.69 $ 1.53 $ 1.49 $ 1.10
EARNINGS PER COMMON SHARE - FULLY DILUTED:
Income from continuing operations ..................... $ .78 $ 1.07 $ 1.40 $ 1.37 $ 1.01
Income from discontinued operations ................... $ .42 $ .57 $ .09 $ .09 $ .08
Net income available for Common Shares ................ $ 1.20 $ 1.64 $ 1.49 $ 1.46 $ 1.09
Distributions declared per Common Shares
outstanding(2) ....................................... $ 9.485 $ 1.90 $ 1.78 $ 1.66 $ 1.55
Weighted average Common Shares outstanding - basic .... 22,077 21,617 21,036 21,469 25,224
Weighted average Common OP Units outstanding .......... 5,342 5,403 5,466 5,592 5,704
Weighted average Common Shares outstanding - fully
diluted .............................................. 28,002 27,632 27,010 27,408 31,252
BALANCE SHEET DATA:
Real estate, before accumulated depreciation (2).....depreciation(3) ....... $1,315,096 $1,296,007 $1,238,138 $1,218,176 $1,264,343
$1,237,431 $936,318 $597,650
Total assets.........................................assets .......................................... 1,473,915 1,162,850 1,101,805 1,104,304 1,160,338 1,176,841 864,365 567,874
Total mortgages and loans............................ 764,938loans(2) .......................... 1,076,296 760,233 708,857 719,684 725,264
750,849 495,172 254,982
Minority interests...................................interests .................................... 126,716 168,501 171,147 171,271 179,397
70,468 67,453 28,640
Stockholders' equity.................................equity(2) ............................... 5,798 177,619 175,150 168,095 211,401 310,441 280,575 257,952
OTHER DATA:
Funds from operations (3)............................ $63,807 $68,477 $64,089 $50,834 $42,187operations(4) .............................. $ 60,831 $ 68,393 $ 66,957 $ 63,807 $ 68,477
Net cash flow:
Operating activities.............................. $68,001 $72,580 $71,977 $54,581 $49,660activities ................................ $ 75,163 $ 80,176 $ 80,708 $ 68,001 $ 72,580
Investing activities.............................. $23,102 $(37,868) $(262,762) $(239,445) $(60,954)activities ................................ $ (598) $ (72,973) $ (23,067) $ 23,102 $ (37,868)
Financing activities.............................. $(94,932) $(41,693) $203,533 $185,449 $10,858activities ................................ $ 243,905 $ (1,287) $ (59,134) $ (94,932) $ (41,693)
Total Properties (at end of period) (4)..............(5) ................ 142 142 149 154 157 154 121 69
Total sites (at end of period)....................... 51,452 54,007 53,391 44,108 27,356 ........................ 51,715 51,582 50,663 51,304 53,846
Total sites (weighted average) (5)...................average for the year)(6) ........ 43,134 42,962 46,243 46,964 46,914 43,932 29,323 26,621
(1) See the Consolidated Financial Statements of the Company included elsewhere
herein. Certain 2002, 2001, 2000, and 1999 amounts have been reclassified
to conform to the 2003 financial presentation. Such reclassifications have
no effect on the operations or equity as originally presented.
(2) On October 17, 2003, we closed 49 mortgage loans collateralized by 51
Properties (the "Recap") providing total proceeds of approximately $501
million at a weighted average interest rate of 5.84% and with a weighted
average maturity of approximately 9 years. Approximately $170 million of
the proceeds were used to repay amounts outstanding on the Company's line
of credit and term loan. Approximately $225 million was used to pay a
special distribution of $8.00 per share on January 16, 2004. The Company believesremaining
funds are being held in short-term investments and will be used for
investment purposes in 2004. The Recap resulted in increased interest and
amortization expense and the special distribution resulted in decreased
stockholder's equity.
(3) We believe that the book value of the Properties, which reflects the
historical costs of such real estate assets less accumulated depreciation,
is less than the current market value of the Properties.
(3) The Company(4) We generally considersconsider Funds From Operations ("FFO") to be an appropriate
measure of the non-GAAP performance of an equity Real Estate Investment
Trust ("REIT"). FFO was redefined by the National Association of Real
Estate Investment Trusts ("NAREIT") in October
1999, effective January 1, 2000,April 2002, 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. For purposes of presenting
FFO, the revised definition of FFO has been given retroactive treatment. The Company believesWe
believe that FFO is helpful to investors as a measure of the performance of
an equity REIT because, along with cash flows from operating activities,
financing activities and investing activities, it provides investors an
understanding of theour ability of the Company to incur and service debt and to make capital
expenditures. The Company computesWe compute 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 REITsREITs'
computations. FFO in and of itself does not represent cash generated from
operating activities in accordance with GAAP and therefore should not be
considered an alternative to net income as an indication of the Company'sour performance
or to net cash flows from operating activities as determined by GAAP as a
measure of liquidity and is not necessarily indicative of cash available to
fund cash needs.
(4)20
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED HISTORICAL FINANCIAL INFORMATION
(continued)
(5) During the year ended December 31, 1996, four1999, three Properties were acquired;
net operating income attributable to such Properties was approximately
$1.8 million, which included approximately $371,000 of depreciation and
amortization expense. During the year ended December 31, 1997, 39
Properties were acquired; net operating income attributable to such
Properties was approximately $3.8 million, which included approximately
$1.7 million of depreciation and amortization expense. During the year
ended December 31, 1998, 41 Properties were acquired; net operating
income attributable to such Properties was approximately $7.6 million,
which included approximately $3.9 million of depreciation and
amortization expense. During the year ended December 31,during 1999 two
Properties were acquired; net operating income attributable to such
Properties was
approximately $87,000, which included approximately $104,000 of
depreciation expense. During the year ended December 31, 2000, three
Properties and a water and wastewater treatment company were sold; net
operating income attributable to such Properties during 2000 was
approximately $1.6 million, which included approximately $623,000 of
depreciation expense. (5)During the year ended December 31, 2001, three
Properties were acquired, including one through the termination of a lease;
net operating income attributable to such Properties during 2001 was
approximately $1.3 million, which included approximately $396,000 of
depreciation expense. Also during the year ended December 31, 2001, eight
Properties were sold; net operating income attributable to such Properties
during 2001 was $1.0 million, which included approximately $235,000 of
depreciation expense. During the year ended December 31, 2002, eleven
Properties were acquired; net operating income attributable to such
Properties during 2002 was approximately $2.0 million, which included
approximately $809,000 of depreciation expense. Also during the year ended
December 31, 2002, eighteen Properties were sold; net operating income
attributable to such Properties during 2002 was $5.4 million, which
included approximately $1.2 million of depreciation expense. During the
year ended December 31, 2003, three Properties were acquired; net operating
loss attributable to such Properties during 2003 was approximately $25,000,
which included approximately $25,000 of depreciation expense. Also during
the year ended December 31, 2003, three Properties were sold; net operating
income attributable to such Properties during 2003 was $908,000, which
included approximately $135,000 of depreciation expense.
(6) Excludes recreational vehicleResort sites and sites heldin Properties owned through unconsolidated
joint ventures.
1821
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Financial Data" and the historical Consolidated Financial Statements and Notes
thereto appearing elsewhere in this Form 10-K. The following discussion may
contain certain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 which reflect management's current
views with respect to future events and financial performance. Such
forward-looking statements are subject to certain risks and uncertainties,
including, but not limited to, the effects of future events on the Company's
financial performance; the adverse impact of external factors such as inflation
and consumer confidence; and the risks associated with real estate ownership.
RESULTS OF OPERATIONS
PROPERTY ACQUISITIONS, JOINT VENTURES AND DISPOSITIONS
The following chart lists the Properties acquired orand sold since January 1,
1998. The Company defines its core manufactured home community portfolio ("Core
Portfolio") as manufactured home Properties owned throughout both periods of
comparison. Excluded from the Core Portfolio are any Properties acquired or sold
during the period and also any recreational vehicle ("RV") Properties which,
together, are referred to as the "Non-Core" Properties.2002:
PROPERTY TRANSACTION DATE SITES
-------- ---------------- -----
TOTAL SITES AS OF JANUARY 1, 1998 ............................................... 32,5692002........................................... 50,663
ACQUISITIONS:
The Ellenburg Communities (37 Properties) .............Throughout 1998 14,498
Quail Meadows .........................................January 8, 1998 146
Sherwood Forest RV Resort .............................April 30, 1998 512
Casa Del Sol Resort III ...............................MayMt. Hood Village...............................March 12, 2002 450
Harbor View Village............................July 10, 2002 471
Countryside....................................July 31, 2002 560
Golden Sun.....................................July 31, 2002 329
Breezy Hill....................................July 31, 2002 762
Highland Woods.................................August 14, 1998 238
The2002 148
Holiday Village................................July 31, 2002 301
Tropic Winds...................................August 7, 2002 531
Silk Oak Lodge.................................October 1, 2002 180
Hacienda Village...............................December 18, 2002 519
Glen Ellen.....................................December 31, 2002 117
Toby's.........................................December 3, 2003 379
Araby Acres....................................December 15, 2003 337
Foothill ......................................December 15, 2003 180
EXPANSION SITE DEVELOPMENT AND OTHER:
Sites added (reconfigured) in 2002............. 90
Sites added (reconfigured) in 2003............. (35)
DISPOSITIONS:
College Heights Communities (18(17 Properties) .......June 4, 1998 3,573
Sunset Oaks ...........................................August................September 1, 2002 (3,220)
Camelot Acres..................................November 13, 1998 167
The Meadows ...........................................April 1, 1999 380
Coquina Crossing ......................................July 23, 1999 270
UNCONSOLIDATED JOINT VENTURES:
Lakeshore Communities and Affiliates (3 properties) ...1998 and 1999 633
Plantation ............................................March 18, 1998 385
Trails West............................................March 18, 1998 503
EXPANSION SITE DEVELOPMENT:
Sites added in 1998.................................... 120
Sites added in 1999.................................... ---
Sites added in 2000.................................... 108
DISPOSITIONS:
Garden West Office Plaza ..............................October 26, 1999 ---
FFEC-Six (water and wastewater service company)........February 29, 2000 ---
Mesa Regal RV Resort...................................May 22, 2000 (2,005)
Naples Estates.........................................May 22, 2000 (484)
Mon Dak................................................May 22, 2000 (161)2002 (319)
Independence Hill..............................June 6, 2003 (203)
Brook Gardens..................................June 6, 2003 (424)
Pheasant Ridge.................................June 30, 2003 (101)
------
TOTAL SITES AS OF DECEMBER 31, 2000................................................... 51,4522003......................................... 51,715
======
1922
20TRENDS
Occupancy in our Properties as well as our ability to increase rental rates
directly affect revenues. In 2003, occupancy in our Core Portfolio decreased
1.9%. Also during 2003, average monthly base rental rates for the Core Portfolio
increased approximately 5.1%. We project continued growth during 2004 in our
Core Portfolio performance. Core Portfolio base rental-rate growth is expected
to be approximately 4%. These projections would result in growth of
approximately 2.5% in Core Portfolio income from operations (also referred to as
net operating income or "NOI").
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States, which require us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and the related disclosures. We believe that
the following critical accounting policies, among others, affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
We periodically evaluate our long-lived assets, including our investments
in real estate, for impairment indicators. Our judgments regarding the existence
of impairment indicators are based on factors such as operational performance,
market conditions and legal factors. Future events could occur which would cause
us to conclude that impairment indicators exist and an impairment loss is
warranted.
Real estate is recorded at cost less accumulated depreciation. Depreciation
is computed on the straight-line basis over the estimated useful lives of the
assets. We use a 30-year estimated life for buildings acquired and structural
and land improvements, a ten-to-fifteen-year estimated life for building
upgrades and a three-to-seven-year estimated life for furniture, fixtures and
equipment. Expenditures for ordinary maintenance and repairs are expensed to
operations as incurred and significant renovations and improvements that improve
the asset and extend the useful life of the asset are capitalized over their
estimated useful life. However, the useful lives, salvage value, and customary
depreciation method used for land improvements and other significant assets may
significantly and materially overstate the depreciation of the underlying assets
and therefore understate the net income of the Company. In addition, the
Financial Accounting Standards Board ("FASB") is currently reviewing the methods
of depreciation and cost capitalization for all industries and in June 2001
issued FASB Exposure Draft, "Accounting in Interim and Annual Financial
Statements for Certain Costs and Activities Related to Property, Plant and
Equipment", the implementation of which, if issued, could also have a material
effect on the Company's results of operations.
The valuation of financial instruments under Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value of Financial
Instruments" ("SFAS No. 107") and Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133") requires us to make estimates and judgments that affect the fair value
of the instruments. Where possible, we base the fair values of our financial
instruments, including our derivative instruments, on listed market prices and
third party quotes. Where these are not available, we base our estimates on
other factors relevant to the financial instrument.
Certain costs, primarily legal costs, relative to our efforts to
effectively change the use and operations of several Properties subject to rent
control (see Note 17) are currently classified in other assets. These costs, to
the extent these efforts are successful, are capitalized to the extent of the
established value of the revised project and included in the net investment in
real estate for the appropriate Properties (see Note 5). To the extent these
efforts are not successful, these costs will be expensed. In addition, we
capitalize certain costs, primarily legal costs, related to entering into lease
agreements which govern the terms under which we may enter into leases with
individual tenants and which are expensed over the term of the lease agreement.
In 2003, due to the successful settlement of litigation related to one Property,
DeAnza Santa Cruz, we reclassified approximately $5.3 million of these costs to
land improvements and will depreciate these costs over 30 years
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). The objective of FIN 46 is to provide
guidance on how to identify a variable interest entity ("VIE") and determine
when the assets, liabilities, non-controlling interests, and results of
operations of a VIE need to be included in the company's consolidated financial
statements. A company that holds variable interests in an entity will need to
consolidate such entity if the company absorbs a majority of the VIE's expected
losses or receive a majority of the entity's expected residual returns if they
occur, or both.
23
The provisions of FIN 46 apply to the Company upon initial involvement with
the respective entity for transactions created after January 31, 2003. The
adoption of FIN 46 in 2003 had no effect on the Company in 2003. The provisions
of FIN 46 and related revised interpretations apply no later than the end of the
first interim reporting period ending March 15, 2004 (March 31, 2004) for
entities created before February 1, 2003. The Company is currently evaluating
and assessing the impact of FIN 46 and the related revised interpretations on
entities created before February 1, 2003.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Prior to January 1, 2003 we accounted for our stock compensation in
accordance with APB No. 25, "Accounting for Stock Issued to Employees", based
upon the intrinsic value method. This method results in no compensation expense
for options issued with an exercise price equal to or exceeding the market value
of the Common Shares on the date of grant. Effective January 1, 2003, we elected
to account for our stock-based compensation in accordance with SFAS No. 123 and
its amendment (SFAS No. 148), "Accounting for Stock Based Compensation", which
will result in compensation expense being recorded based on the fair value of
the stock options and other equity awards issued. SFAS 148 provides three
possible transition methods for changing to the fair value method. We have
elected to use the modified-prospective method. This method requires that we
recognize stock-based employee compensation cost from the beginning of the
fiscal year in which the recognition provisions are first applied as if the fair
value method had been used to account for all employee awards granted, or
settled, in fiscal years beginning after December 15, 1994. The following table
illustrates the effect on net income and earnings per share as if the fair value
method was applied to all outstanding and unvested awards in each period
presented (amounts in thousands, except per share data):
2003 2002 2001
------- ------- -------
Net income available for Common
Shares as reported ................. $27,014 $36,445 $32,083
Add: Stock-based compensation
expense included in net income as
reported ........................... 2,139 2,185 2,549
Deduct: Stock-based compensation
expense determined under the fair
value based method for all awards .. (2,139) (2,086) (2,203)
------- ------- -------
Pro forma net income available for
Common Shares ...................... $27,014 $36,544 $32,429
======= ======= =======
Pro forma net income per Common
Share - Basic ...................... $ 1.22 $ 1.69 $ 1.54
======= ======= =======
Pro forma net income per Common
Share - Fully Diluted .............. $ 1.20 $ 1.65 $ 1.50
======= ======= =======
24
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 20002003 TO YEAR ENDED DECEMBER 31, 19992002
Since December 31, 1998,2001, the gross investment in real estate decreasedincreased from
$1,237$1,238 million to $1,218$1,315 million as of December 31, 2000,2003, due primarily to the
aforementioned acquisitions and dispositions of Properties during the period.
The total number of sites owned or controlled decreasedincreased from 53,39150,663 as of
December 31, 19982001 to 51,45251,715 as of December 31, 2000.2003.
The following table summarizes certain financial and statistical data for
the Property Operations for the Core Portfolio and the Total Portfolio for the
years ended December 31, 20002003 and 1999.2002.
CORE PORTFOLIO TOTAL PORTFOLIO
------------------------------------------- ----------------------------------------
INCREASE/ % INCREASE/ %
(dollars in thousands) 2000 19992003 2002 (DECREASE) % CHANGE 2003 2002 (DECREASE) CHANGE
2000 1999 (DECREASE) CHANGE
- ---------------------- ---- ------------ -------- ---------- ------ ---- ------------ -------- -------- ---------- ------
BaseCommunity base rental income............... $186,148 $178,095 $8,053 4.5% $189,481 $181,672 $7,809 4.3%income ...... $191,655 $185,766 $ 5,889 3.2% $196,919 $194,640 $ 2,279 1.2%
Resort base rental income ......... 256 154 102 66.2% 11,780 9,146 2,634 28.8%
Utility and other income......... 17,986 17,436 550 3.2% 27,780 29,622 (1,842) (6.2%)
Equity in income of affiliates... --- --- --- -- 2,408 2,065 343 16.6%
Interest income.................. --- --- --- -- 1,009 1,669 (660) (39.5%).......... 18,764 18,458 306 7.5% 20,150 19,684 466 2.4%
-------- -------- ------ ------------ ---- -------- -------- ------ ------
Total revenues.............. 204,134 195,531 8,603 4.4% 220,678 215,028 5,650 2.6%------- ----
Property operating revenues ..... 210,675 204,378 6,297 3.1% 228,849 223,470 5,379 2.4%
Property operating and
maintenance................. 54,358 52,096 2,262 4.3% 59,199 58,038 1,161 2.0%maintenance ...................... 56,535 54,510 2,025 3.7% 64,996 62,843 2,153 3.4%
Real estate taxes................ 16,186 15,811 375 2.4% 16,888 16,460 428 2.6%taxes ................. 17,278 16,338 940 5.8% 18,917 17,827 1,090 6.1%
Property management.............. 8,194 7,725 469 6.1% 8,690 8,337 353 4.2%
General and administrative....... --- --- --- -- 6,423 6,092 331 5.4%management ............... 8,629 8,498 131 1.5% 9,373 9,292 81 0.9%
-------- -------- ------ ------------ ---- -------- -------- ------ ------
Total------- ----
Property operating expenses.... 78,738 75,632 3,106 4.1% 91,200 88,927 2,273 2.6%expenses ..... 82,442 79,346 3,096 4.5% 93,286 89,962 3,324 3.7%
-------- -------- ------ ------------ ---- -------- -------- ------ ------------- ----
Income from property operations before
interest, depreciation and
amortization expenses....... 125,396 119,899 5,497 4.6% 129,478 126,101 3,377 2.7%
Interest and related amortization --- --- --- -- 53,280 53,775 (495) (0.9%)
Depreciation on corporate assets. --- --- --- -- 1,139 1,005 134 13.3%
Property depreciation and other.. 31,366 30,912 454... $128,233 $125,032 $ 3,201 2.6% $135,563 $133,508 $ 2,055 1.5% 34,411 34,486 (75) (0.2%)
-------- -------- ------ ----- -------- -------- ------ ------
Income from operations(1)... 94,030 88,987 5,043 5.7% 40,648 36,835 3,813 10.4%
======== ======== ====== ============ ==== ======== ======== ====== ============= ====
Site and Occupancy Information(2)Information(1):
Average total sites.............. 45,894 45,810 84 0.2% 46,964 46,914 50 0.1%sites ............... 41,570 41,578 (8) 0.0% 43,134 43,627 (493) (1.1%)
Average occupied sites........... 43,410 43,138 272 0.6% 44,325 44,110 215 0.5%sites ............ 37,893 38,594 (701) (1.9%) 39,363 40,467 (1,104) (2.7%)
Occupancy %...................... 94.6% 94.2% 0.4% 0.4% 94.4% 94.0% 0.4% 0.4%% ....................... 91.2% 92.8% (1.7%) (1.7%) 91.3% 92.8% (1.5%) (1.5%)
Monthly base rent per site....... $357.35 $344.04 $13.31 3.9% $356.24 $343.22 $13.02 3.8%site ........ $ 421.49 $ 401.11 $ 20.38 5.1% $ 416.89 $ 400.82 $ 16.07 4.0%
Total sites
asAs of December 31,.......... 45,902 45,808 94 0.2% 46,734 47,284 (550) (1.2% .............. 41,580 41,590 (10) 0.0% 43,143 43,178 (35) (0.0%)
Total occupied sites
asAs of December 31,.......... 43,595 43,289 306 0.7% 44,270 44,555 (285) (0.6% .............. 37,479 38,346 (867) (2.3%) 38,946 39,736 (790) (2.0%)
(1) Income from operations for the Core Portfolio does not include an
allocation of income from affiliates, interest income, corporate general
and administrative expense, interest expense and related amortization or
depreciation on corporate assets.
(2) Site and occupancy information does not include the fiveexcludes Resort sites and Properties owned
through unconsolidated joint ventures as well as the sites of Properties
acquired or the three RV properties.
20
21sold during 2002 and 2003.
Property Operating Revenues
The 4.5%3.2% increase in Community base rental income for the Core Portfolio
reflects a 3.9%5.1% increase in monthly base rent per site coupled with a 0.6% increase1.9%
decrease in average occupied sites. The 4.3% increase in base rental income for the Total
Portfolio reflects a 3.8% increase in monthly base rent per site coupled with a
0.5% increase in average occupied sites and also reflects acquisition and
disposition of Non-Core Properties. The increase in utility and other income for
the Core Portfolio is due primarily to increases in pass through items such as
utilities and real estate taxes -utility income, which
resulted from higher expenses for these items.
The decrease in Total Portfolio utility and other income is due primarily
to the sale of Mesa Regal RV resort and other changes in the Non-Core
Properties. Also included in other income is a gain on the sale of the FFEC-Six
water and wastewater treatment company of $719,000, partially offset by an
impairment loss on the DeAnza Santa Cruz water and wastewater service company of
$701,000.
The decrease in interest income is primarily due to the repayment of
certain notes receivable and fewer short-term investments. Short-term
investments had average balances for the years ended December 31, 2000 and 1999
of approximately $1.5 million and $2.8 million, respectively, which earned
interest income at an effective rate of 6.0% and 6.3% per annum, respectively.Property Operating Expenses
The 3.7% increase in property operating and maintenance expense for the
Core Portfolio is due primarily to increases in insurance and other expenses,
utility expenses generally passed
through and included in utility income. Expenses for the Core Portfolio also
reflect increases in repairsexpense, repair and maintenance expense, administrative expense and
payroll and property
general and administrative expenses partially offset by decreased insurance and
other expenses.expense. The 5.8% increase in Core Portfolio real estate taxes increased 2.4%is
generally due to higher property assessments on certain Properties. The increase in Total
Portfolio property operating and maintenance expense and real estate taxes is
also impacted by acquisition and disposition of Non-Core Properties. Property
management expense for the Core Portfolio, which reflects costs of managing the
propertiesProperties and is estimated based on a percentage of Property operating
revenues, increased by 1.5% due to increases in payroll costs and computer
expenses.
25
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF YEAR ENDED DECEMBER 31, 2003 TO YEAR ENDED DECEMBER 31, 2002
(CONTINUED)
Home Sales Operations
The following table summarizes certain financial and statistical data for
the Home Sales Operations for the years ended December 31, 2003 and 2002.
HOME SALES OPERATIONS
---------------------------------------------
INCREASE/
(dollars in thousands) 2003 2002 (DECREASE) % CHANGE
-------- -------- ---------- --------
Gross revenues from new home sales... $ 33,512 $ 30,618 2,894 9.5%
Cost of new home sales .............. (29,064) (24,689) 4,375 17.7%
-------- -------- ------ ------
Gross profit from new home sales .... 4,448 5,929 (1,481) (25.0%)
Gross revenues from used home sales 3,094 2,919 175 6.0%
Cost of used home sales ............. (2,703) (2,494) 209 8.4%
-------- -------- ------ ------
Gross profit from used home sales ... 391 425 (34) (8.0%)
Brokered resale revenues, net ....... 1,724 1,592 132 8.3%
Home selling expenses ............... (7,360) (7,664) (304) (4.0%)
Ancillary services revenues, net .... 216 522 (306) (58.6%)
-------- -------- ------ ------
Income from home sales operations ... $ (581) $ 804 (1,385) (172.3%)
======== ======== ====== ======
HOME SALES VOLUMES:
New home sales .................... 458 420 38 9.0%
Used home sales ................... 189 182 7 3.8%
Brokered home resales ............. 1,102 986 116 11.8%
New home sales gross profit reflects a 9.0% increase in sales volume
coupled with a 6.1%.
General decrease in the gross margin. The average selling price of
new homes remained steady year over year. Used home sales gross profit reflects
a decrease in gross margin on used home sales, partially offset by an increase
in volume. Brokered resale revenues reflects increased resale volumes. The 4.0%
decrease in home selling expenses primarily reflects reductions in advertising
expenses.
Other Income and Expenses
In October, 2003, we received approximately $501 million from the Recap.
The cash received from the Recap was used to pay down our Line of Credit and pay
off our Term Loan, with the remainder placed in short-term investments to be
used for payment of a special distribution in January, 2004 and for future
acquisitions. As a result, interest income increased reflecting additional
interest earned on short-term investments with an average balance of $273
million. The increase in other corporate income reflects increased income from
unconsolidated joint ventures. The decrease in general and administrative
expenses increased primarilyexpense is due to decreased professional fees and public company costs,
partially offset by increased payroll resulting from salary increasescosts and increased public company relatedbanking expenses. Interest and
related amortization decreasedincreased due to lower weighted average
outstanding debt balancesthe Recap and the payment of approximately
$3 million to unwind the 2001 Swap, partially offset by decreased interest rates
during the period. The weighted average outstanding debt balances for the years
ended December 31, 20002003 and 19992002 were $707.5approximately $800 million and $738.1$731.8
million, respectively. The effective interest rate was 7.4%6.4% and 7.2%6.8% per annum
for the years ended December 31, 20002003 and 1999,2002, respectively.
Depreciation on corporate assets increased due to fixed asset additions
related to information and communication systems. Depreciation on real estate
assets and other costs decreased due primarily to the acquisition and
disposition of Non-Core Properties.
2126
22RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF YEAR ENDED DECEMBER 31, 19992002 TO YEAR ENDED DECEMBER 31, 19982001
Since December 31, 1997,2000, the gross investment in real estate increased from
$936$1,218 million to $1,264$1,296 million as of December 31, 19992002, due primarily to the
aforementioned acquisitions and dispositions of Properties during the period.
The total number of sites owned or controlled has increased from 44,10851,304 as of
December 31, 19972000 to 54,00751,582 as of December 31, 1999.2002.
The following table summarizes certain financial and statistical data for
the Property Operations for the Core Portfolio and the Total Portfolio for the
years ended December 31, 19992002 and 1998.2001.
CORE PORTFOLIO TOTAL PORTFOLIO
-------------- --------------------------------------------------------- -----------------------------------------------
INCREASE/ % INCREASE/ %
(dollars in thousands) 1999 19982002 2001 (DECREASE) % CHANGE 2002 2001 (DECREASE) CHANGE
1999 1998 (DECREASE) CHANGE
- ---------------------- ---- ------------ -------- ---------- ------ ---- ------------ -------- -------- ---------- ------
BaseCommunity base rental income............... $131,064 $126,246 $4,818 3.8% $181,672 $165,340 $16,332 9.9%income ...... $186,889 $179,579 $7,310 4.1% $194,640 $190,982 $ 3,658 1.9%
Resort base rental income ......... 494 439 55 12.5% 9,146 5,748 3,398 59.1%
Utility and other income......... 14,885 14,420 465 3.2% 29,622 25,372 4,250 16.8%
Equity in income of affiliates... --- --- --- --- 2,065 1,070 995 93.0%
Interest income.................. --- --- --- --- 1,669 3,048 (1,379) (45.2%.......... 18,244 18,786 (542) (2.9%) 19,684 20,381 (697) (3.4%)
-------- -------- ------ ---- -------- -------- ------- ----
Total revenues.............. 145,949 140,666 5,283 3.8% 215,028 194,830 20,198 10.4%Property operating revenues ..... 205,627 198,804 6,823 3.4% 223,470 217,111 6,359 2.9%
Property operating and
maintenance................. 38,281 37,852 429 1.1% 58,038 53,064 4,974 9.4%maintenance ...................... 54,240 53,024 1,216 2.3% 62,843 60,807 2,036 3.3%
Real estate taxes................ 11,201 10,533 668 6.3% 16,460 14,470 1,990 13.8%taxes ................. 16,443 15,271 1,172 7.7% 17,827 16,882 945 5.6%
Property management.............. 5,764 5,252 512 9.7% 8,337 7,108 1,229 17.3%
General and administrative....... --- --- --- --- 6,092 5,411 681 12.6%management ............... 8,430 8,120 310 3.8% 9,292 8,984 308 3.4%
-------- -------- ------ ---- -------- -------- ------- ----
TotalProperty operating expenses.... 55,246 53,637 1,609 3.0% 88,927 80,053 8,874 11.1%expenses ..... 79,113 76,415 2,698 3.5% 89,962 86,673 3,289 3.8%
-------- -------- ------ ---- -------- -------- ------- ----
Income from property operations before
interest, depreciation and
amortization expenses....... 90,703 87,029 3,674 4.2% 126,101 114,777 11,324 9.9%
Interest and related amortization --- --- --- --- 53,775 49,693 4,082 8.2%
Depreciation on corporate assets --- --- --- --- 1,005 995 10 1.0%
Property depreciation and other 20,667 19,917 750 3.8% 34,486 28,426 6,060 21.3%
-------- -------- ------ ---- -------- -------- ------- ---
Income from operations (1).. 70,036 67,112 2,924 4.4% 36,835 35,663 1,172 3.3%... $126,514 $122,389 $4,125 3.4% $133,508 $130,438 $ 3,070 2.4%
======== ======== ====== ==== ======== ======== ======= =======
Site and Occupancy Information (2)Information(1):
Average total sites............ 32,393 32,358 35sites ............... 41,489 41,428 61 0.1% 46,914 43,932 2,982 6.8%44,552 46,243 (1,691) (3.7%)
Average occupied sites......... 30,708 30,652 56 0.2% 44,110 41,420 2,690 6.5%sites ............ 38,642 39,108 (466) (1.2%) 41,435 43,576 (2,141) (4.9%)
Occupancy %.................... 94.8% 94.7% 0.1% 0.1% 94.0% 94.3% (0.3%% ....................... 93.1% 94.4% (1.3%) (0.3%(1.3%) 93.0% 94.2% (1.2%) (1.2%)
Monthly base rent per site..... $356.06 $343.23 $12.83 3.7% $343.22 $332.65 $10.57 3.2%site ........ $ 403.04 $ 382.65 $20.39 5.3% $ 397.80 $ 371.20 $ 26.61 7.1%
Total sites
asAs of December 31,.......... 32,395 32,384 11 0.0% 47,284 46,446 838 1.8% .............. 41,588 41,472 116 0.3% 43,906 45,743 (1,837) (4.0%)
Total occupied sites
asAs of December 31,.......... 30,789 30,673 116 0.4% 44,555 43,707 848 1.9% .............. 38,399 38,991 (592) (1.5%) 40,410 42,887 (2,477) (5.8%)
(1) Income from operations for the Core Portfolio does not include an
allocation of income from affiliates, interest income, corporate general
and administrative expense, interest expense and related amortization or
depreciation on corporate assets.
(2) Site and occupancy information does not include the fiveexcludes Resort sites and Properties owned
through unconsolidated joint ventures oras well as the four RV properties.
22
23sites of Properties
sold during 2002.
Property Operating Revenues
The 3.8%4.1% increase in Community base rental income for the Core Portfolio
reflects a 3.7%5.3% increase in monthly base rent per site coupled with a 0.2% increase1.2%
decrease in average occupied sites. The 9.9% increase in base rental income for the Total
Portfolio reflects a 3.2% increase in monthly base rent per site coupled with a
6.5% increase in average occupied sites and also reflects acquisition and
disposition of Non-Core Properties. The increasedecrease in utility and other income for
the Core Portfolio is due primarily to increasesdecreases in pass through items such as
utilities and real estate taxes -utility income, which
resulted from higherlower expenses for these items.
The increase in Total Portfolio utility and other income is due primarily
to RV income related to the purchase of three RV resorts during 1998 and other
changes in the Non-Core Properties.
The decrease in interest income is primarily due to the conversion of some
notes receivable to fee simple interests in The Meadows and certain Ellenburg
Communities. Short-term investments had average balances for the years ended
December 31, 1999 and 1998 of approximately $2.8 million and $6.9 million,
respectively, which earned interest income at an effective rate of 6.3% and 5.4%
per annum, respectively.Property Operating Expenses
The increase in property operating and maintenance expense for the Core
Portfolio reflectsis due primarily to increases in repairsproperty payroll, insurance and other
expenses, repair and maintenance expense, payroll expense
and increases in utilityadministrative expenses, passed through and included in utility income.
These increases are partially offset
by decreased property general and
administrative, insurance and other expenses.utility expense. The increase in Core Portfolio real estate taxes
increased 6.3%is generally due to higher property assessments on certain
Properties. The increase in Total Portfolio property operating and maintenance
expense and real estate taxes is also impacted by the acquisition and
disposition of Non-Core Properties. Property
management expense for the Core Portfolio, which reflects costs of managing the
propertiesProperties and is estimated based on a percentage of Property operating
revenues, increased 9.7%by 3.8% due to increases in payroll costs and office
expenses.
27
RESULTS OF OPERATIONS (CONTINUED)
Home Sales Operations
The following table summarizes certain financial and statistical data for
the Home Sales Operations for the years ended December 31, 2002 and 2001.
HOME SALES OPERATIONS
--------------------------------------------------
INCREASE/
(dollars in thousands) 2002 2001 (DECREASE) % CHANGE
-------- ----------- ---------- --------
(Pro forma)
Gross revenues from new home sales . $ 30,618 $ 32,608 (1,990) (6.1%)
Cost of new home sales ............. (24,689) (25,925) 1,236 4.8%
-------- -------- ------ -----
Gross profit from new home sales ... 5,929 6,683 (754) (11.3%)
Gross revenues from used home sales 2,919 3,631 (712) (19.6%)
Cost of used home sales ............ (2,494) (2,561) 67 2.6%
-------- -------- ------ -----
Gross profit from used home sales .. 425 1,070 (645) (60.3%)
Brokered resale revenues, net ...... 1,592 1,723 (131) (7.6%)
Home selling expenses .............. (7,664) (8,240) 576 67.0%
Ancillary services revenues, net ... 522 1,092 (570) (52.2%)
-------- -------- ------ -----
Income from home sales operations .. $ 804 $ 2,328 (1,524) (65.5%)
======== ======== ====== =====
HOME SALES VOLUMES:
New home sales ................... 420 485 (65) (13.4%)
Used home sales .................. 182 250 (68) (27.2%)
Brokered home resales ............ 986 1,114 (128) (11.5%)
Prior to January 1, 2002, the results of operations of RSI were accounted
for using the equity method and reported on a single line item called Equity in
Income of Affiliates. As a result of the acquisition of RSI (see Note 7), the
Company owns and controls RSI and consolidates the financial results of RSI with
those of the Company. The pro forma presentation of detailed 2001 amounts is for
comparison purposes and has no effect on previously reported net income. For the
year ended December 31, 2001, equity in income of affiliates was approximately
$1.8 million and included the $2.3 million of income from home sales operations
presented above as well as $539,000 of interest income, $15,000 of corporate
expenses and $1.0 million of interest expense.
New home sales gross profit reflects a 13.4% decrease in sales volume
coupled with a 1.1% decrease in the gross margin. The average selling price of
new homes increased $6,000 or 8.7% compared to 2001. Used home sales gross
profit reflects a decrease in both volume and gross margin on used home sales.
Brokered resale revenues reflects decreased resale volumes. The 6.9% decrease in
home selling expenses primarily reflects reductions in payroll and advertising
expenses.
Other Income and Expenses
The increase wasin interest income reflects a decrease in notes receivable
offset by an increase in chattel notes receivable acquired through the
acquisition of RSI. The decrease in other corporate income primarily reflects
decreased income from unconsolidated joint ventures. The increase in general and
administrative expense is due to the addition of senior management personnelincreases in the areas of
operations, human resources and accounting and the incremental expensescosts related to management of Properties acquired in 1998 and 1999.
General and administrative expenses increased primarily due tooperating a
public company, increased payroll resulting from salary increasescosts and increased public company related
expenses.consulting and legal
costs. Interest and related amortization increaseddecreased due to higher weighted average
outstanding debt balanceslower interest rates
during the period. The weighted average outstanding debt balances for the years
ended December 31, 19992002 and 19982001 were $738.1$731.8 million and $696.0$713.2 million,
respectively. The effective interest rate was 7.2%6.8% and 7.0% per annum for boththe
years ended December 31, 19992002 and 1998.
Depreciation on corporate assets increased due to fixed asset additions
related to information and communication systems. Depreciation on real estate
assets and other costs increased due to fixed asset additions of Properties
acquired in 1999 and 1998.
232001, respectively.
28
24
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
As of December 31, 2000, the Company2003, we had $2.8$325.7 million in cash and cash equivalents
and $90.1$110.0 million available on its lineour Line of credit. The Company
expectsCredit. We expect to meet itsour
short-term liquidity requirements, including its
distributions, generally through
itsour working capital, net cash provided by operating activities and availability
under the existing lineLine of credit. The
Company expectsCredit. We expect 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 lineour Line of creditCredit and the issuance of debt
securities or additional equity securities in the Company, in addition to
working capital.
In order to qualify as a REIT for federal income tax purposes, the Company
must distribute 95% or more of its taxable income (excluding capital gains). The
following distributions have been declared and / or paid to common stockholders
and minority interests since January 1, 1998.
DISTRIBUTION FOR THE QUARTER SHAREHOLDER RECORD
AMOUNT PER SHARE ENDING DATE PAYMENT DATE
---------------- ------ ---- ------------
$0.3625 March 31, 1998 March 27, 1998 April 10, 1998
$0.3625 June 30, 1998 June 26, 1998 July 10, 1998
$0.3625 September 30, 1998 September 25, 1998 October 9, 1998
$0.3625 December 31, 1998 December 16, 1998 December 30, 1998
- -------------------------------------------------------------------------------------------------------
$0.3875 March 31, 1999 March 26, 1999 April 9, 1999
$0.3875 June 30, 1999 June 25, 1999 July 9, 1999
$0.3875 September 30, 1999 September 24, 1999 October 8, 1999
$0.3875 December 31, 1999 December 31, 1999 January 14, 2000
- -------------------------------------------------------------------------------------------------------
$0.4150 March 31, 2000 March 31, 2000 April 14, 2000
$0.4150 June 30, 2000 June 30, 2000 July 14, 2000
$0.4150 September 30, 2000 September 29, 2000 October 13, 2000
$0.4150 December 31, 2000 December 29, 2000 January 12, 2001
The Operating Partnership paid distributions of 9.0% per annum on the $125
million of Series D Cumulative Redeemable Perpetual Preferred Units ("Preferred
Units"). Distributions on the Preferred Units were paid quarterly on the last
calendar day of each quarter beginning December 31, 1999. The Company expects to
continue to make regular quarterly distributions and has set its 2001
distribution to common stockholders at $1.78 per share per annum.
MORTGAGES AND CREDIT FACILITIES
On February 24, 2000, the Company entered into mortgage agreements
collateralizing two Properties for a total of $14.6 million. The mortgage notes
mature on March 1, 2010, amortize beginning March 1, 2000 over 30 years and bear
interest at a rate of approximately 8.3% per annum.
On June 30, 2000, the Company obtained $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. 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 $1.0 million extraordinary loss (net of
$264,000 allocated to Minority Interests) in connection with the early repayment
of the $60 million of mortgage debt.
On April 3, 2000, the Company extended to April 3, 2002 the maturity of its
$100 million unsecured term loan (the "Term Loan") with a group of banks with
interest only payable monthly at a rate of the London Interbank Offered Rate
("LIBOR") plus 1.0%.
On August 9, 2000, the Company amended its unsecured line of credit with a
bank (the "Credit Agreement") bearing interest at 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.
24
25
Certain of the Company's mortgage and credit agreements contain covenants
and restrictions including restrictions as to the ratio of secured or unsecured
debt versus encumbered or unencumbered assets, the ratio of fixed
charges-to-earnings before interest, taxes, depreciation and amortization
("EBITDA"), limitations on certain holdings and other restrictions.
ACQUISITIONS, DISPOSITIONS AND INVESTMENTS
On January 6, 1998, the Company funded a $12.3 million loan (the "Meadows
Loan") to Meadows Preservation, Inc. The Meadows Loan was collateralized by The
Meadows manufactured home community located in Palm Beach Gardens, Florida. On
April 1, 1999, the Company effectively exchanged the Meadows Loan for an equity
and debt interest in the partnership that owns The Meadows. The Company
consolidates The Meadows and the related results of operations.
On July 23, 1999, the Company acquired Coquina Crossing, located in St.
Augustine, Florida, for a purchase price of approximately $10.4 million. The
acquisition was funded with a borrowing under the Company's line of credit.
Coquina Crossing is a 748-site senior community with 269 developed sites and
zoned expansion potential for 479 sites. In addition, Realty Systems, Inc.
("RSI"), an affiliate of the Company, purchased the model home inventory at the
community for approximately $1.1 million.
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 statement of operations.
In April 2000, the California Superior Court approved a settlement
agreement (the "Settlement") in connection with the dissolution proceeding of
ECC and its affiliated partnerships. As part of the Settlement, the Company
received $13.5 million previously held in escrow in connection with the purchase
of the Ellenburg Communities and recorded $3.0 million of interest income
related to these funds. In connection with 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 by the purchaser of $19.0 million. The Company recorded a
$9.1 million gain on the sale of these Properties. Proceeds from the Settlement
and property sales were used to pay down the Company's line of credit.
On December 28, 2000, the Company, through its joint venture with Meadows
Management Company, acquired a 50% economic interest in Voyager RV Resort, a
1,576 site RV resort in Tucson, Arizona, for total consideration of $8.0
million. The Company's investment included cash of $3.0 million, its 50%
interest in land held through the joint venture valued at $2.0 million and notes
receivable from the principals of Meadows Management Company totaling $3.0
million.
CAPITAL IMPROVEMENTS
Capital expenditures for improvements are identified by the Company as
recurring capital expenditures ("Recurring CapEx"), site development costs and
corporate headquarters costs. Recurring CapEx was approximately $7.9 million and
$8.7 million for the years ended December 31, 2000 and 1999, respectively. Of
these expenditures, the Company believes that approximately $6.5 million or $130
per site for 2000 and $6.3 million or $122 per site for 1999 are non-revenue
producing improvements which are necessary in order to increase and/or maintain
occupancy levels and maintain competitive market rents for new and renewing
residents. Site development costs were approximately $7.9 million and $4.9
million for the years ended December 31, 2000 and 1999, respectively, and
represent costs to develop expansion sites at certain of the Company's
Properties.
EQUITY TRANSACTIONS
On March 26, 1999, the Operating Partnership repurchased and cancelled
200,000 OP Units from a limited partner of the Operating Partnership.
On September 30, 1999, the Operating Partnership completed a $125 million
private placement of 9.0% Series D Cumulative Perpetual Preferred Units ("POP
Units") to two institutional investors. The POP Units, which are callable by the
Company after five years, have no stated maturity or mandatory redemption. Net
proceeds from the offering of $121 million were used to repay amounts
outstanding under the Company's line of credit facility and for other corporate
purposes.
25
26
In March 1997, the Company's Board of Directors approved a common stock
repurchase plan whereby the Company was authorized to repurchase and retire
shares of its common stock. Under the plan, the Company repurchased
approximately 2.2 million shares of Common Stock at an average price of $24.06
per share during the year ended December 31, 2000 and 4.1 million shares of
Common Stock at an average price of $23.40 per share during the year ended
December 31, 1999, using proceeds from borrowings on the line of credit.
INFLATION
Substantially all of the leases at the Properties allow for monthly or
annual rent increases which provide the Companyus with the opportunity to achieve
increases, where justified by the market, as each lease matures. Such types of
leases generally minimize the riskour risks of inflation to the Company.inflation.
FUNDS FROM OPERATIONS
FFOFunds From Operations ("FFO"), a non-GAAP financial performance measure,
was redefined by NAREITthe National Association of Real Estate Investment Trusts
("NAREIT") in October 1999, effective January 1, 2000,April 2002, as net income (computed in accordance with GAAP),
before allocation to minority interests, excluding gains (or losses) from sales
of property, plus real estate depreciation and after adjustments for
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 REIT'sREITs' computations. 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 areis
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
provideFFO provides 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
dodoes
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 areis not
necessarily indicative of cash available to fund cash needs.
The following table presents a calculation of FFO and FAD for the years ended
December 31, 2000, 19992003, 2002 and 19982001 (amounts in thousands):
2000 1999 1998
---- ---- ----2003 2002 2001
-------- -------- --------
COMPUTATION OF FUNDS FROM OPERATIONS:
Income before extraordinary loss on early
extinguishment of debt ............................Net income available for Common Shares ................... $ 32,98627,014 $ 27,77236,445 $ 28,93032,083
Income allocated to Common OP Units .................. 8,463 6,219 6,733...................... 6,474 8,926 8,209
Depreciation on real estate assets and other costs ... 34,411 34,486 28,426....... 38,034 35,552 34,228
Depreciation expense included in discontinued operations.. 135 484 605
Gain on sale of Properties and other ................. (12,053) -- --..................... (10,826) (13,014) (8,168)
-------- -------- --------
Funds from operations ............................................................... $ 63,80760,831 $ 68,47768,393 $ 64,08966,957
======== ======== ========
Weighted average Common StockShares outstanding - diluted .. 27,408 31,252 31,962
======== ======== ========
COMPUTATION OF FUNDS AVAILABLE FOR DISTRIBUTION:
Funds from operations ................................ $ 63,807 $ 68,477 $ 64,089
Non-revenue producing improvements to real estate .... (7,855) (8,656) (8,005)
-------- -------- --------
Funds available for distribution .................. $ 55,952 $ 59,821 $ 56,084
======== ======== ========
Weighted average Common Stock outstanding - diluted .. 27,408 31,252 31,962..... 28,002 27,632 27,010
======== ======== ========
2629
ACQUISITIONS AND DISPOSITIONS
During the year ended December 31, 2001, we acquired two Florida Properties
for an aggregate purchase price of approximately $17.3 million and completed the
sale of seven properties in Kansas, Missouri and Oklahoma, for a total sale
price of approximately $17.4 million. Also during 2001, we finalized a
settlement agreement whereby we received $10.8 million in proceeds related to
the sale of a Property in Indiana.
During the year ended December 31, 2002, we acquired the eleven Properties
listed in the table below. The acquisitions were funded with borrowings on our
Line of Credit and the assumption of $47.9 million of mortgage debt, which
includes a $3.0 million mark-to-market adjustment. In addition, we purchased
adjacent land and land improvements for several Properties for approximately
$559,000.
TOTAL PURCHASE DEBT
DATE ACQUIRED PROPERTY LOCATION SITES PRICE ASSUMED
- ----------------- ------------------- ------------------- ----- -------- -----------
($ millions) ($ millions)
March 12, 2002 Mt. Hood Village Welches, OR 450 $ 7.2 $ ---
July 10, 2002 Harbor View Village New Port Richey, FL 471 15.5 8.1
July 31, 2002 Golden Sun Apache Junction, AZ 329 6.3 3.1
July 31, 2002 Countryside Apache Junction, AZ 560 7.5 ---
July 31, 2002 Holiday Village Ormond Beach, FL 301 10.4 7.1
July 31, 2002 Breezy Hill Pompano Beach, FL 762 20.5 10.5
August 14, 2002 Highland Woods Pompano Beach, FL 148 3.9 2.5
August 7, 2002 Tropic Winds Harlingen, TX 531 4.9 ---
October 1, 2002 Silk Oak Lodge Clearwater, FL 180 6.2 3.9
December 18, 2002 Hacienda Village New Port Richey, FL 519 16.8 10.2
December 31, 2002 Glen Ellen Clearwater, FL 117 2.4 2.5
----- ------ -----
TOTALS 4,368 $101.6 $47.9
===== ====== =====
During the year ended 2002, we effectively sold 17 Properties as part of a
restructuring of the College Heights Joint Venture discussed hereinafter. In
addition, we sold Camelot Acres, a 319 site Property in Burnsville, Minnesota,
for approximately $14.2 million.
During the year ended December 31, 2003, we sold the three Properties
listed in the table below. Proceeds from the sales were used to repay amounts on
the Company's Line of Credit. Also during the same period, we acquired a parcel
of land adjacent to one of our Properties for approximately $97,000.
TOTAL DISPOSITION GAIN ON
DATE SOLD PROPERTY LOCATION SITES PRICE SALE
- ------------- ----------------- -------------- ----- ------------ ------------
($ millions) ($ millions)
June 6, 2003 Independence Hill Morgantown, WV 203 $ 3.9 $ 2.8
June 6, 2003 Brook Gardens Hamburg, NY 424 17.8 4.1
June 30, 2003 Pheasant Ridge Mount Airy, MD 101 5.4 3.9
--- ----- -----
728 $27.1 $10.8
=== ===== =====
In December, 2003, we acquired three Resort Properties listed in the table
below. The acquisitions were funded with monies held in short-term investments.
The acquisitions included the assumption of liabilities of approximately
$650,000. Also during 2003, we acquired a parcel of land adjacent to one of our
Properties for approximately $97,000.
TOTAL PURCHASE DEBT
DATE ACQUIRED PROPERTY LOCATION SITES PRICE ASSUMED
- ----------------- ----------- ----------- ----- ------------ ------------
($ millions) ($ millions)
December 3, 2003 Toby's Arcadia, FL 379 $4.3 $---
December 15, 2003 Araby Acres Yuma, AZ 337 5.7 3.2
December 15, 2003 Foothill Yuma, AZ 180 1.8 1.4
30
INVESTMENTS IN JOINT VENTURES
Effective September 1, 2002, the Company restructured its investment in
Wolverine Property Investment Limited Partnership (the "College Heights Joint
Venture" or the "Venture"), a joint venture with Wolverine Investors, LLP. The
Venture included 18 Properties with 3,581 sites. The results of operations of
the College Heights Joint Venture prior to restructuring were included with the
results of the Company due to the Company's voting equity interest and control
over the Venture. Pursuant to the restructuring, the Company sold its general
partnership interest, sold all of the Company's voting equity interest and
reduced the Company's total investment in the College Heights Joint Venture. As
consideration for the sale, the Company retained sole ownership of Down Yonder,
a 361 site community in Clearwater, Florida, received cash of approximately $5.2
million and retained preferred limited partnership interests of approximately
$10.3 million, recorded net of a $2.4 million reserve. The continuing preferred
limited partnership interests are accounted for using the equity method and
reported as an investment in a joint venture.
ACQUISITION OF REALTY SYSTEMS, INC.
On January 1, 2002, the Company purchased all of the common stock of Realty
Systems, Inc. ("RSI"). The Company previously owned the non-voting preferred
stock of RSI and had notes receivable from RSI which were recorded as an
investment in affiliate. The Company purchased the common stock of RSI from
Equity Group Investments, Inc., controlled by Samuel Zell, Chairman of the Board
of Directors of the Company, for approximately $675,000. As a result of this
acquisition, the Company owns and controls RSI and consolidates the financial
results of RSI with those of the Company including $839,000 of cash from the
acquisition on January 1, 2002.
CAPITAL IMPROVEMENTS
Capital expenditures for improvements are identified by the Company as
recurring capital expenditures ("Recurring CapEx"), site development costs and
corporate costs. Recurring CapEx was approximately $11.9 million and $13.4
million for the years ended December 31, 2003 and 2002, respectively. Of these
expenditures, the Company believes that approximately $8.0 million or $155 per
site for 2003 and $7.6 million or $147 per site for 2002 are non-revenue
producing improvements which are necessary in order to increase and/or maintain
occupancy levels and maintain competitive market rents for new and renewing
residents. Site development costs were approximately $9.0 million and $10.4
million for the years ended December 31, 2003 and 2002, respectively, and
represent costs to develop expansion sites at certain of the Company's
Properties and costs for improvements to sites when a smaller used home is
replaced with a larger new home.
EQUITY TRANSACTIONS
In order to qualify as a REIT for federal income tax purposes, the Company
must distribute 90% or more of its taxable income (excluding capital gains) to
its stockholders. The following distributions have been declared and/or paid to
common stockholders and minority interests since January 1, 2001.
DISTRIBUTION
AMOUNT PER FOR THE QUARTER STOCKHOLDER
SHARE ENDING RECORD DATE PAYMENT DATE
- ------------ ------------------ ------------------ ----------------
$0.4450 March 31, 2001 March 30, 2001 April 13, 2001
$0.4450 June 30, 2001 June 29, 2001 July 13, 2001
$0.4450 September 30, 2001 September 28, 2001 October 12, 2001
$0.4450 December 31, 2001 December 28, 2001 January 11, 2002
- -------------------------------------------------------------------------------------
$0.4750 March 31, 2002 March 29, 2002 April 12, 2002
$0.4750 June 30, 2002 June 28, 2002 July 12, 2002
$0.4750 September 30, 2002 September 27, 2002 October 11, 2002
$0.4750 December 31, 2002 December 27, 2002 January 10, 2003
- -------------------------------------------------------------------------------------
$0.4950 March 31, 2003 March 28, 2003 April 11, 2003
$0.4950 June 30, 2003 June 27, 2003 July 11, 2003
$0.4950 September 30, 2003 September 26, 2003 October 10, 2003
On December 12, 2003, we declared a one-time special distribution of $8.00
per share payable to stockholders of record on January 8, 2004. We used proceeds
from the $501 million borrowing in October, 2003 to pay the special distribution
on January 16, 2004. The special cash dividend will be reflected on
stockholders' 2004 1099-DIV to be issued in January 2005.
31
EQUITY TRANSACTIONS (CONTINUED)
The Operating Partnership paid distributions of 9.0% per annum on the $125
million of Series D Cumulative Redeemable Perpetual Preferred Units ("Preferred
Units"). Distributions on the Preferred Units were paid annually on the last
calendar day of each quarter beginning December 31, 1999. The Company expects to
continue to make regular annual distributions and has set its 2004 distribution
to common stockholders at $0.05 per share per annum.
MORTGAGES AND CREDIT FACILITIES
On October 17, 2003, we closed 49 mortgage loans collateralized by 51
Properties (the "Recap") providing total proceeds of approximately $501 million
at a weighted average interest rate of 5.84% and with a weighted average
maturity of approximately 9 years. Approximately $170 million of the proceeds
were used to repay amounts outstanding on the Company's Line of Credit and Term
Loan. Approximately $225 million was used to pay a special dividend of $8.00 per
share on January 16, 2004. The remaining funds are being held in short-term
investments and will be used primarily for investments in 2004.
We have an unsecured Line of Credit with a group of banks (the "Line of
Credit") with a total facility of $110 million, bearing interest at the London
Interbank Offered Rate ("LIBOR") plus 1.65% that matures on August 9, 2006. We
pay a quarterly fee on the average unused amount of the total facility equal to
0.15% of such amount. In October, 2003, all amounts outstanding on the Line of
Credit were repaid with proceeds from the Recap. As of December 31, 2003, $110
million was available under the Line of Credit. The Line of Credit had a total
facility of $150 million prior to amendment in December, 2003.
We had a $100 million unsecured term loan (the "Term Loan") with a group of
banks with interest only payable monthly at LIBOR plus 1.375%. In October, 2003,
we paid off the Term Loan with proceeds from the Recap.
On October 29, 2001, we entered into an interest rate swap agreement (the
"2001 Swap"), effectively fixing LIBOR on $100 million of our floating rate debt
at approximately 3.7% per annum for the period October 2001 through August 2004.
The terms of the 2001 Swap required monthly settlements on the same dates
interest payments were due on the debt. In accordance with SFAS No. 133, the
2001 Swap was reflected at market value. In October, 2003, we unwound the 2001
Swap at a cost of approximately $3 million, which is included in interest and
related amortization in 2003 in the accompanying Consolidated Statements of
Operations.
On April 17, 2003, we entered into an agreement to refinance and increase
the Bay Indies Mortgage from approximately $21.9 million to $45 million. Under
the new agreement, the Bay Indies Mortgage bears interest at 5.69% per annum,
amortizes over 25 years and matures April 17, 2013. The net proceeds were used
to pay down the Company's Line of Credit in April, 2003. Also during the year
ended December 31, 2003, mortgage notes payable on four other Properties were
repaid totaling approximately $23.5 million using proceeds from borrowings on
the Company's Line of Credit.
During the year ended December 31, 2002, as part of the purchase of RSI, in
a non-cash transaction, we assumed a $12.5 million note payable ("Conseco
Financing Note"), collateralized by manufactured home inventory. The Conseco
Financing Note was repaid at a discount during 2002 using proceeds from our Line
of Credit. In addition, we repaid a maturing mortgage note in the amount of $1.1
million and $2.1 million of other unsecured notes payable using proceeds from
our Line of Credit.
During the year ended December 31, 2001, we repaid three maturing mortgages
in the aggregate amount of $12.1 million using proceeds from our Line of Credit.
In addition, we entered into a $50.0 million mortgage note (the "Stagecoach
Mortgage") collateralized by 7 Properties beneficially owned by MHC Stagecoach,
L.L.C. The Stagecoach Mortgage bears interest at a rate of 6.98% per annum,
amortizes beginning September 1, 2001 over 10 years and matures August 31, 2011.
Proceeds from the financing were used to reduce borrowings on the Line of Credit
by $37.9 million.
Certain of our mortgage and credit agreements contain covenants and
restrictions including restrictions as to the ratio of secured or unsecured debt
versus encumbered or unencumbered assets, the ratio of fixed charges-to-earnings
before interest, taxes, depreciation and amortization ("EBITDA"), limitations on
certain holdings and other restrictions.
32
MORTGAGES AND CREDIT FACILITIES (CONTINUED)
As of December 31, 2003, we were subject to certain contractual payment
obligations as described in the table below (dollars in thousands). We are not
subject to capital lease obligations or unconditional purchase obligations as of
December 31, 2003.
Contractual Obligations Total 2004 2005 2006 2007 2008 Thereafter
- ----------------------- ----- ---- ---- ---- ---- ---- ----------
Long Term Debt(1)................... $1,076,279 --- $6,478 $17,409 $265,113 $200,908 $586,371
Weighted average interest rates..... 6.4% --- 7.8% 7.4% 7.0% 5.6% 6.6%
(1) Balance excludes net premiums and discounts of $17.
In addition, the Company leases land under non-cancelable operating leases
at certain of the Properties expiring in various years from 2022 to 2031 with
terms which require twelve equal payments per year plus additional rents
calculated as a percentage of gross revenues. For the years ended December 31,
2003, 2002 and 2001, ground lease rent was approximately $1.6 million per year.
Minimum future rental payments under the ground leases are approximately $1.6
million for each of the next five years and approximately $26.3 million
thereafter.
SUBSEQUENT EVENTS
Since December 31, 2003, we invested in 30 Properties as listed in the
table below. The combined investment in these 30 properties was approximately
$137.6 million and was funded with monies held in short-term investments and
additional debt. (amounts in millions, except for total sites)
PURCHASE NET
CLOSING DATE PROPERTY LOCATION TOTAL SITES PRICE DEBT EQUITY
------------ -------- -------- ----------- -------- ----- ------
ACQUISITIONS:
January 15, 2004 O'Connell's(a) Amboy, IL 668 $ 6.6 $ 5.0 $1.6
January 30, 2004 Spring Gulch(b) New Holland, PA 420 6.0 4.8 1.2
February 3, 2004 Paradise(c) Mesa, AZ 950 25.0 20.0 5.0
February 18, 2004 Twin Lakes(d) Chocowinity, NC 400 5.2 3.8 1.4
February 19, 2004 Lakeside(e) New Carlisle, IN 95 1.7 --- 1.7
February 5, 2004 Shangri La Largo, FL 160 (f) 4.5 (f)
February 5, 2004 Terra Ceia Palmetto, FL 203 (f) 2.6 (f)
February 5, 2004 Southernaire Mt. Dora, FL 134 (f) 2.1 (f)
February 5, 2004 Sixth Avenue Zephryhills, FL 140 (f) 2.3 (f)
February 5, 2004 Suni Sands Yuma, AZ 336 (f) 3.2 (f)
February 5, 2004 Topic's Spring Hill, FL 230 (f) 2.2 (f)
February 5, 2004 Coachwood Colony Leesburg, FL 200 (f) 4.3 (f)
February 5, 2004 Waterway Cedar Point, NC 336 (f) 6.3 (f)
February 5, 2004 Desert Paradise Yuma, AZ 260 (f) 1.5 (f)
February 5, 2004 Goose Creek Newport, NC 598 (f) 12.6 (f)
MEZZANINE INVESTMENTS(g):
February 3, 2004 Fiesta Grande I & II Casa Grande, AZ 767 --- --- 3.7
February 3, 2004 Tropical Palms North Ft. Myers, FL 297 --- --- 1.9
February 3, 2004 Island Vista Estates North Ft. Myers, FL 617 --- --- 4.6
February 3, 2004 Foothills West Casa Grande, AZ 188 --- --- 1.5
February 3, 2004 Capri Yuma, AZ 300 --- --- 2.1
February 3, 2004 Casita Verde Casa Grande, AZ 192 --- --- 1.2
February 3, 2004 Rambler's Rest Venice, FL 647 --- --- 6.2
February 3, 2004 Venture In Show Low, AZ 389 --- --- 2.4
February 3, 2004 Scenic Asheville, NC 224 --- --- 1.2
February 3, 2004 Clerbrook Clermont, FL 1,255 --- --- 3.9
February 3, 2004 Inlet Oaks Murrells Inlet, SC 178 --- --- 1.0
JOINT VENTURES(h):
December 18, 2003 Lake Myers Mocksville, NC 425 --- --- 0.4
January 21, 2004 Pine Haven Ocean View, NJ 625 --- --- 0.4
January 27, 2004 Twin Mills Howe, IN 501 --- --- 0.2
February 10, 2004 Plymouth Rock Elkhart Lake, WI 609 --- --- 0.4
(a) Property was purchased from O'Connell's Holding Corp. and O'Connell's, Inc.
(b) Property was purchased from Spring Gulch, Inc.
(c) Property was purchased from PRVR Limited Partnership.
(d) Property was purchased from Twin Lakes Land, LLC and Twin Lakes Camping
Resort, LLC.
(e) Property was purchased from Don-Bar Family Limited Partnership.
(f) The portfolio was acquired for a total purchase price of $62 million and
$20.4 million of net equity. The transaction was funded partially through
loans obtained on the individual properties as shown in the table.
(g) On February 3, 2004, the Company invested approximately $29.7 million in
preferred equity in six entities controlled by Diversified Investments,
Inc. ("Diversified"). In addition, the Company has invested approximately
$1.4 million in the Diversified entities managing these properties.
(h) The Company invested approximately $1.4 million with Diversified in four
separate entities, each controlling a Property.
In addition, on February 17, 2004, we tendered payment of $69 million cash
to acquire a 93% equity interest in entities that own and operate 28 vacation
resort properties, containing 11,357 sites. Twenty of the properties are located
in Florida, six in Texas, and two in California. The acquisition was funded with
monies held in short-term investments and $50 million drawn from the Company's
line of credit.
Beginning in 1996, a series of partnerships were formed between "NHC"
entities and "PAMI" entities. The PAMI entities have sued for specific
performance in Chancery Court in Delaware seeking to acquire the NHC entities'
interests. The NHC entities have filed a counter-suit, and have asked the judge
to schedule a hearing to address the matter within thirty days. Under the terms
and conditions of the partnership agreements, $69 million was paid to acquire
the PAMI entities' interests. Principals of the NHC entities will continue to
operate the properties and maintain an equity position in the new entity. The
existing dispute is related to the PAMI entities' desire to liquidate their
investments. While the possibility of additional litigation and its attendant
risks remain, we believe that providing liquidity to the NHC entities to acquire
the PAMI interests may assist in resolving the dispute.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The Company'sOur earnings are affected by changes in interest rates, assince a portion of
the Company'sour outstanding indebtedness is at variable rates based on LIBOR. The Company's $150 million lineOur Line of
creditCredit ($59.9110 million outstanding at December 31, 2000)2003) bears interest at LIBOR
plus 1.125% and the Company's $100
million Term Loan bears interest at LIBOR plus 1.0%.1.65%, per annum. If LIBOR increased/decreased by 1.0% during 2000,the year
ended December 31, 2003, interest expense would have increased/decreased by
approximately $1.7$1.3 million based on the combined average balance outstanding under the
Company's lineLine of credit and Term Loan forCredit during the year ended December 31, 2000.
In July 1995, the Companyperiod.
On October 29, 2001, we entered into an interestthe 2001 Swap, effectively fixing the
LIBOR rate swap agreement (the
"1998 Swap") fixing LIBOR on $100 million of the Company'sour floating rate debt at 6.4%approximately 3.7% per
annum for the period 1998October 2001 through 2003.August 2004. The terms of the 2001
Swap required monthly settlements on the same dates interest payments were due
on the debt. In the fourth quarter of 2003, we unwound the 2001 Swap for a cost
of the 1998 Swap consisted only
of legal costs that were deemed immaterial. The value of the 1998 Swap was
impacted by changes in the market rate of interest. Had the 1998 Swap been
entered into on December 31, 1999, the applicable LIBOR swap rate would have
been approximately 6.57%. Each 0.01% increase or decrease in the applicable swap
rate for the 1998 Swap increases or decreases the value of the 1998 Swap versus
its current value by approximately $28,000. The Company accounted for the 1998
Swap as a hedge. Payments and receipts under the 1998 Swap were accounted for as
an adjustment to interest expense. On$3 million. Effective January 10, 2000,1, 2001, the Company unwound the
1998 Swap and received $1.0 millionadopted
Statement of proceeds which is amortized into interest
expense through March 2003.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, ("SFAS No. 133"), "Accounting for Derivative
Instruments and Hedging Activities". ("SFAS No. 133") and its amendments, SFAS
No. 137 and SFAS No. 138. In accordance with SFAS No. 133, permits early adoption as of the beginning of
any fiscal quarter after its issuance. In June 1999,interest rate
swap was reflected at market value. We believed the FASB issued Statement
No. 137 which deferred the2001 Swap was a perfectly
effective date ofcash flow hedge, under SFAS No. 133, to all fiscal quarters
for fiscal years beginning after June 15, 2000. The Company will adopt SFAS No.
133and there would be no effect on
January 1, 2001. 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 isnet income as a hedge,
depending on the natureresult of the hedge,mark-to-market adjustment. Mark-to-market 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 recognized2001 Swap prior to its payoff were included in other
comprehensive income until the hedged item is recognized in earnings. The
Company has determined that the effect of SFAS No. 133 on the earnings and
financial position of the Company will not be significant when implemented.income.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Combined Financial Statements on page F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures as of December 31, 2003.
Based on that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective as of December 31, 2003. There were no material
changes in the Company's internal control over financial reporting during the
fourth quarter 2003.
33
PART III
ITEMS 10, 11, 12, 13.10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required to be set forth herein pursuant to Item 401 and
Item 405 of Regulation S-K is contained under the captions "Election of
Directors," "Election of Directors - Committees of the Board; Meetings" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
definitive proxy statement for the Company's 2004 Annual Meeting of Shareholders
to be held on May 4, 2004 (the "2004 Proxy Statement) and such information is
incorporated herein by reference.
In addition, the information that is included under the caption "Election
of Directors - Corporate Governance" in the 2004 Proxy Statement regarding the
Company's written Guidelines on Corporate Governance and the Company's Business
Ethics and Conduct Policy is incorporated herein by reference.
ITEMS 11, 12, 13 AND 14.
EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT, AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND PRINCIPAL
ACCOUNTANT FEES AND SERVICES
The information required by Item 10, Item 11, Item 12, Item 13 and Item 1314 will be
contained in a definitive proxy statement which the Registrant anticipates will be filed no later than April 28, 2001,2004 Proxy Statement, and thus this Part has been omitted in
accordance with General Instruction G(3) to Form 10-K.
2734
28
PART IV
ITEM 14.15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)
(1&2) See Index to Financial Statements and Schedules on page F-1 of
this Form 10-K.
(3) Exhibits:
2(a) Admission Agreement between Equity Financial and
Management Co., Manufactured Home Communities, Inc. and
MHC Operating Partnership
3.1(a) Articles of Incorporation of Manufactured Home
Communities, Inc.
3.2(a) Articles of Amendment and Restatement of Manufactured Home
Communities, Inc.
3.3(g) Amended Bylaws of Manufactured Home Communities, Inc.
4 Not applicable
9 Not applicable
10.1(a) Amended and Restated Agreement of Limited Partnership of
MHC Operating Limited Partnership
10.2(a) Agreement of Limited Partnership of MHC Financing Limited
Partnership
10.3(a) Agreement of Limited Partnership of MHC Management Limited
Partnership
10.4(a) Property Management and Leasing Agreement between MHC
Financing Limited Partnership and MHC Management
Limited Partnership
10.5(a) Property Management and Leasing Agreement between MHC
Operating Limited Partnership and MHC Management
Limited Partnership
10.6(a) Services Agreement between Realty Systems, Inc. and MHC
Management Limited Partnership
10.7(a) Rate Protection Agreement
10.8(a) Revolving Credit Note made by Realty Systems, Inc. to
Equity Financial and Management Co.
10.9(a) Assignment to MHC Operating Limited Partnership of
Revolving Credit Note made by Realty Systems, Inc. to
Equity Financial and Management Co.
10.10(a) Stock Option Plan
10.11A(a) Indenture of Mortgage, Deed of Trust, Security Agreement,
Financing Statement, Fixture Filing and Assignment of
Rents
10.11B(a) Promissory Note
10.11C(a) Assignment of Loan Documents
10.11D(a) Assignment of Leases, Rents and Security Deposits
10.11E(a) Swap Agreement Pledge and Security Agreement
10.11F(a) Cash Collateral Account Security, Pledge and Assignment
Agreement
10.11G(a) Assignment of Property Management and Leasing Agreement
10.11H(a) Trust Agreement
10.12(a) Form of Noncompetition Agreement
10.13(a) Form of Noncompetition Agreement
10.13A(a) Form of Noncompetition Agreement
10.14(a) General Electric Credit Corporation Commitment Letter
10.15(a) Administrative Services Agreement between Realty Systems,
Inc. and Equity Group Investments, Inc.
10.16(a) Registration Rights and Lock-Up Agreement with the Company
(the Original Owners, EF&M, Directors,
Officers and Employees)
10.17(a) Administrative Services Agreement between the Company and
Equity Group Investments, Inc.
10.18(a) Form of Subscription Agreement between the Company and
certain officers and other individuals dated March 3, 1993
10.19(a) Form of Secured Promissory Note payable to the Company by
certain officers dated March 3, 1993
10.20(a) Form of Pledge Agreement between the Company and certain
officers dated March 3, 1993
10.21(a) Loan and Security Agreement between Realty Systems, Inc.
and MHC Operating Limited Partnership
10.22(a) Equity and Registration Rights Agreement with the Company
(the GM Trusts)
10.23(b) Agreement of Limited Partnership of MHC Lending Limited
Partnership
10.23(c) Agreement of Limited Partnership of MHC-Bay Indies
Financing Limited Partnership
10.24(c) Agreement of Limited Partnership of MHC-De Anza Financing
Limited Partnership
10.25(c) Agreement of Limited Partnership of MHC-DAG Management
Limited Partnership
10.26(d) Amendment No. 2 to MHC Operating Limited Partnership
Amended and Restated Partnership Agreement dated
February 15, 1996
10.27(d) Form of Subscription Agreement between the Company and
certain members of management of the Company
dated January 2, 1996
28
29
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
10.28(d) Form of Secured Promissory Note payable to the Company by
certain members of management of the Company dated
January 2, 1996
35
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
10.29(d) Form of Pledge Agreement between the Company and certain
members of management of the Company dated January 2, 1996
10.30(e) Second Amended and Restated MHC Operating Limited
Partnership Agreement of Limited Partnership, dated as of
March 15, 1996
10.31(f) Agreement of Limited Partnership of MHC Financing Limited
Partnership Two
10.32(g) $265,000,000 Mortgage Note dated December 12,1997
10.33(g) Second Amended and Restated Credit Agreement (Revolving
Facility) between the Company, MHC Operating Limited
Partnership, and certain lenders and agents, dated
April 28, 1998
10.34(g) First Amendment to Second Amended and Restated Credit
Agreement (Revolving Facility) between the Company, MHC
Operating Limited Partnership, and certain lenders and
agents, dated December 18, 1998
10.35(h) Second Amendment to Second Amended and Restated Credit
Agreement (Revolving Facility) between the Company, MHC
Operating Limited Partnership, and certain lenders and
agents, dated August 9, 2000
10.36(g) Amended and Restated Credit Agreement (Term Loan) between
the Company, MHC Operating Limited Partnership, and certain
lenders and agent, dated April 28, 1998
10.36(h) First Amendment to Amended and Restated Credit Agreement
(Term Loan) between the Company, MHC Operating Limited
Partnership, and certain lenders and agent, dated
November 21, 2000
10.36(g) Letter Agreement between the Company and Bank of America
National Trust and Savings Association confirming the $100
million swap transaction, dated July 11, 1995
10.39(h) $110,000,000 Amended, Restated and Consolidated Promissory
Note dated June 28, 2000
10.40(h) $15,750,000 Promissory Note Secured by Leasehold Deed of
Trust dated July 13, 2000
10.41(i) Credit Agreement (Term Loan) between the Company, MHC
Operating Limited Partnership and certain lenders and
agents dated February 9, 2002.
10.42(i) Third Amendment to Second Amended and Restated Credit
Agreement (Revolving Facility) between the Company, MHC
Operating Limited Partnership, and certain lenders and
agents, dated February 9, 2002
10.43(i) $50,000,000 Promissory Note secured by Leasehold Deeds of
Trust (Stagecoach Mortgage) dated December 2, 2001.
10.44(j) Fourth Amendment to the Second Amended and Restated Credit
Agreement (Revolving Facility) between the Company, MHC
Operating Limited Partnership, and certain lenders and
agents, dated December 11, 2003.
10.45(j) Loan Agreement dated October 17, 2003 between MHC Sunrise
Heights, L.L.C., as Borrower, and Bank of America, N.A.,
as Lender.
10.45.1(j) Schedule identifying substantially identical agreements to
Exhibit No. 10.45.
10.46(j) Form of Loan Agreement dated October 17, 2003 between MHC
Countryside L.L.C., as Borrower, and Bank of America, N.A.,
as Lender.
10.46.1(j) Schedule identifying substantially identical agreements to
Exhibit No. 10.46.
10.47(j) Form of Loan Agreement dated October 17, 2003 between MHC
Creekside L.L.C., as Borrower, and Bank of America, N.A.,
as Lender.
10.47.1(j) Schedule identifying substantially identical agreements to
Exhibit No. 10.47.
10.48(j) Form of Loan Agreement dated October 17, 2003 between MHC
Golf Vista Estates L.L.C., as Borrowers, and Bank of
America, N.A., as Lender.
10.48.1(j) Schedule identifying substantially identical agreements to
Exhibit No. 10.48.
11 Not applicable
12(h)12(j) Computation of Ratio of Earnings to Fixed Charges
13 Not applicable
14 Not applicable
15 Not applicable
16 Not applicable
17 Not applicable
18 Not applicable
21(h)21(j) Subsidiaries of the registrant
22 Not applicable
23(h)23(j) Consent of Independent Auditors
24.1(h)24.1(j) Power of Attorney for John F. Podjasek, Jr.Joseph B. McAdams dated March 7, 2001
24.2(h)2, 2004
24.2(j) Power of Attorney for Michael A. TorresHoward Walker dated March 23, 2001
24.3(h)2, 2004
24.3(j) Power of Attorney for Thomas E. Dobrowski dated March 6, 2001
24.4(h)1,
2004
24.4(j) Power of Attorney for Gary Waterman dated March 14,
2001
24.5(h)2, 2004
24.5(j) Power of Attorney for Donald S. Chisholm dated March 2,
2001
24.6(h)2004
24.6(j) Power of Attorney for Louis H. MasottiDavid A. Helfand dated March 5,
2001
27 Not applicable
28 Not applicable2, 2004
36
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
31.1(j) Certification of Chief Financial Officer Pursuant To
Section 302 of the Sarbanes-Oxley Act Of 2002
31.2(j) Certification of Chief Executive Officer Pursuant To
Section 302 of the Sarbanes-Oxley Act Of 2002
32.1(j) Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350
32.2(j) Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350
(a) Included as an exhibit to the Company's Form S-11 Registration
Statement, File No. 33-55994, and incorporated herein by reference.
(b) Included as an exhibit to the Company's Report on Form 10-K dated
December 31, 1993, and incorporated herein by reference.
(c) Included as an exhibit to the Company's Report on Form 10-K dated
December 31, 1994, and incorporated herein by reference.
(d) Included as an exhibit to the Company's Report on Form 10-Q for the
quarter ended March 31, 1996, and incorporated herein by reference.
(e) Included as an exhibit to the Company's Report on Form 10-Q for the
quarter ended June 30, 1996, and incorporated herein by reference.
(f) Included as an exhibit to the Company's Report on Form 10-K dated
December 31, 1997, and incorporated herein by reference.
(g) Included as an exhibit to the Company's Form S-3 Registration
Statement, File No. 333-90813, and incorporated herein by
reference.
(h) Included as an exhibit to the Company's Report on Form 10-K dated
December 31, 2000, and incorporated herein by reference.
(i) Included as an exhibit to the Company's Report on Form 10-K dated
December 31, 2002, and incorporated herein by reference.
(j) Filed herewith.
29
30
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
(b) Reports on Form 8-K:
None.Form 8-K dated and filed October 21, 2003, relating to Item 7 -
"Financial Statements and Exhibits" and Item 12 - "Disclosure of
Results of Operations and Financial Condition" regarding release of
3rd Quarter 2003 results of operations and financial condition.
Form 8-K dated and filed December 12, 2003, relating to Item 5 -
"Other Events and Regulation FD Disclosure" regarding declaration of
a special dividend.
Form 8-K dated and filed December 16, 2003, relating to Item 5 -
"Other Events and Regulation FD Disclosure" regarding the tax
treatment of special dividend.
(c) Exhibits:
See Item 14 (a)(3) above.
(d) Financial Statement Schedules:
See Index to Financial Statements attached hereto on page F-1 of this
Form 10-K.
3037
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MANUFACTURED HOME COMMUNITIES, INC.,
a Maryland corporation
Date: March 23, 2001 By: /s/ Howard Walker
-------------------- --------------------------------
Howard Walker
Chief Executive Officer
Date: March 23, 2001 By: /s/ John Zoeller
--------------------- --------------------------------
John Zoeller
Vice President, Treasurer
and Chief Financial Officer
Date: March 23, 2001 By: /s/ Mark Howell
--------------------- --------------------------------
Mark Howell
Principal Accounting Officer
31
MANUFACTURED HOME COMMUNITIES, INC.,
a Maryland corporation
Date: March 10, 2004 By: /s/ Thomas P. Heneghan
-------------------- --------------------------------------
Thomas P. Heneghan
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 10, 2004 By: /s/ Michael B. Berman
-------------------- --------------------------------------
Michael B. Berman
Vice President, Treasurer
and Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
38
32
MANUFACTURED HOME COMMUNITIES, INC. - SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Howard WalkerThomas P. Heneghan President and Chief Executive Officer
- ----------------------------------------
Howard Walker------------------------------
Thomas P. Heneghan *Attorney-in-Fact March 23, 200110, 2004
-----------------------
Vice President, Treasurer
/s/ John ZoellerMichael B. Berman and Chief Financial Officer
- ----------------------------------------
John Zoeller------------------------------
Michael B. Berman *Attorney-in-Fact March 23, 200110, 2004
-----------------------
/s/ Samuel Zell Chairman of the Board
- ----------------------------------------------------------------------
Samuel Zell March 23, 200110, 2004
-----------------------
/s/ Sheli Z. Rosenberg Director
- ----------------------------------------------------------------------
Sheli Z. Rosenberg March 23, 2001
/s/ David10, 2004
-----------------------
*David A. Helfand Director
- ----------------------------------------------------------------------
David A. Helfand March 23, 200110, 2004
-----------------------
*Donald S. Chisholm Director
- ----------------------------------------------------------------------
Donald S. Chisholm March 23, 200110, 2004
-----------------------
*Thomas E. Dobrowski Director
- ----------------------------------------------------------------------
Thomas E. Dobrowski March 23, 2001
*Louis H. Masotti10, 2004
-----------------------
*Howard Walker Director
- ----------------------------------------
Louis H. Masotti------------------------------
Howard Walker March 23, 2001
*John F. Podjasek, Jr.10, 2004
-----------------------
*Joseph B. McAdams Director
- ----------------------------------------
John F. Podjasek, Jr.------------------------------
Joseph B. McAdams March 23, 2001
*Michael A. Torres Director
- ----------------------------------------
Michael A. Torres March 23, 200110, 2004
-----------------------
*Gary L. Waterman Director
- ----------------------------------------------------------------------
Gary L. Waterman March 23, 200110, 2004
-----------------------
3239
33
INDEX TO FINANCIAL STATEMENTS
MANUFACTURED HOME COMMUNITIES, INC.
PAGE
----
Report of Independent Auditors ............................................................................................................................................ F-2
Consolidated Balance Sheets as of December 31, 20002003 and 1999 ...............................2002................................................... F-3
Consolidated Statements of Operations for the years ended December 31, 2000, 19992003, 2002 and 1998 .2001..................... F-4 and F-5
Consolidated Statements of Other Comprehensive Income for the years ended December 31, 2003, 2002, and 2001.... F-5
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 2000, 19992003, 2002 and 1998 ....................................................... F-52001........................................................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 19992003, 2002 and 1998 . F-62001..................... F-7
Notes to Consolidated Financial Statements ................................................. F-7Statements..................................................................... F-8
Schedule II - Valuation and Qualifying Accounts ............................................Accounts................................................................ S-1
Schedule III - Real Estate and Accumulated Depreciation ....................................Depreciation........................................................ S-2
Certain schedules have been omitted as they are not applicable to the Company.
Certain schedules have been omitted as they are not applicable to the
Company
F-1
34
Report of Independent Auditors
To the Board of Directors of
Manufactured Home Communities, Inc.
We have audited the accompanying consolidated balance sheets of
Manufactured Home Communities, Inc. as of December 31, 20002003 and 1999,2002, and the
related consolidated statements of operations, other comprehensive income,
changes in stockholders' equity and cash flows for each of the three years in
the period ended December 31, 2000.2003. We have also audited the related financial
statement schedules listed in the accompanying index.index at Item 15(a). These financial
statements and schedules are the responsibility of the management of
Manufactured Home Communities, Inc. Our responsibility is to express an opinion
on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Manufactured
Home Communities, Inc. at December 31, 20002003 and 1999,2002, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000,2003, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, in 2003
Manufactured Home Communities, Inc. changed its method of accounting for
stock-based employee compensation. In addition, in 2002 Manufactured Home
Communities, Inc. changed its method of accounting for discontinued operations.
ERNST & YOUNG LLP
Chicago, Illinois
January 25, 2001,27, 2004, except for Note 18
as to which the date is February 13, 200119, 2004 and
Note 17 as to which the date is February 24, 2004
F-2
35
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 20002003 AND 19992002
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
2000 1999
---- ----DECEMBER 31, DECEMBER 31,
2003 2002
------------ ------------
ASSETS
Investment in real estate:
Land ........................................................................................................................ $ 271,822282,803 $ 285,337284,219
Land improvements .............................................. 839,725 876,923................................................ 911,176 893,839
Buildings and other depreciable property ....................... 106,629 102,083
----------- -----------
1,218,176 1,264,343......................... 121,117 117,949
---------- ----------
..................................................................... 1,315,096 1,296,007
Accumulated depreciation ....................................... (181,580) (150,757)
----------- -----------......................................... (272,497) (238,098)
---------- ----------
Net investment in real estate ................................ 1,036,596 1,113,586.................................. 1,042,599 1,057,909
Cash and cash equivalents ......................................... 2,847 6,676.......................................... 325,740 7,270
Notes receivable .................................................. 4,984 4,284
Investment in and advances to affiliates .......................... 21,215 11,689................................................... 11,551 10,044
Investment in joint ventures ...................................... 13,267 9,501....................................... 18,828 19,634
Rents receivable, .................................................. 1,440 1,338net .............................................. 2,385 1,735
Deferred financing costs, net ..................................... 6,344 5,042...................................... 14,164 5,030
Inventory .......................................................... 31,604 33,638
Prepaid expenses and other assets ................................. 17,611 8,222
----------- -----------.................................. 27,044 27,590
---------- ----------
Total assets ................................................... $ 1,104,304 $ 1,160,338
=========== ===========..................................................... $1,473,915 $1,162,850
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable .................................................................................... $1,076,183 $ 556,578 $ 513,172575,370
Unsecured term loan ............................................ 100,000.............................................. -- 100,000
Unsecured line of credit ....................................... 59,900 107,900......................................... -- 84,750
Other notes payable ............................................ 3,206 4,192.............................................. 113 113
Accounts payable and accrued expenses .......................... 23,822 20,780............................ 27,815 31,010
Accrued interest payable ....................................... 5,116 5,612......................................... 5,978 6,415
Rents received in advance and security deposits ................ 5,184 6,831.................. 6,616 5,966
Distributions payable .......................................... 11,100 11,020
Due to affiliates .............................................. 32 33
----------- -----------............................................ 224,696 13,106
---------- ----------
Total liabilities ............................................ 764,938 769,540
----------- -----------.............................................. 1,341,401 816,730
Commitments and contingencies
Minority Interestinterest - Common OP Units and other ..................... 46,271 54,397...................... 1,716 43,501
Minority Interestinterest - Perpetual Preferred OP Units ..................................... 125,000 125,000
Stockholders' equity:
Preferred stock, $.01 par value
10,000,000 shares authorized; none issued .................... -- --...................... --- ---
Common Stock,stock, $.01 par value
50,000,000 shares authorized; 21,064,78522,563,348 and 22,813,35722,093,240
shares issued and outstanding for 20002003 and 1999, respectively 210 2292002, respectively... 222 218
Paid-in capital ................................................ 235,681 275,664.................................................. 263,066 256,394
Deferred compensation .......................................... (5,969) (6,326)............................................ (494) (3,069)
Employee notes ................................................. (4,205) (4,540)................................................... -- (2,713)
Distributions in excess of accumulated earnings ................ (57,622) (53,626)
----------- -----------.................. (256,996) (68,713)
Accumulated other comprehensive (loss) income .................... -- (4,498)
---------- ----------
Total stockholders' equity ................................... 168,095 211,401
----------- -----------..................................... 5,798 177,619
---------- ----------
Total liabilities and stockholders' equity ..................... $ 1,104,304 $ 1,160,338
=========== ===========....................... $1,473,915 $1,162,850
========== ==========
The accompanying notes are an integral part of the financial statements
F-3
36
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 19992003, 2002 AND 19982001
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
2000 1999 1998
---- ---- ----2003 2002 2001
--------- -------- --------
REVENUES
Base rental income ............................................ $ 189,481 $ 181,672 $ 165,340
RVPROPERTY OPERATIONS:
Community base rental income ......................................... 7,414 9,526 7,153..................... $ 196,919 $194,640 $190,982
Resort base rental income ........................ 11,780 9,146 5,748
Utility and other income ...................................... 20,366 20,096 18,219......................... 20,150 19,684 20,381
--------- -------- --------
Property operating revenues .................... 228,849 223,470 217,111
Property operating and maintenance ............... 64,996 62,843 60,807
Real estate taxes ................................ 18,917 17,827 16,882
Property management .............................. 9,373 9,292 8,984
--------- -------- --------
Property operating expenses ...................... 93,286 89,962 86,673
--------- -------- --------
Income from property operations ................ 135,563 133,508 130,438
HOME SALES OPERATIONS:
Gross revenues from inventory home sales ......... 36,606 33,537 ---
Cost of inventory home sales ..................... (31,767) (27,183) ---
--------- -------- --------
Gross profit from inventory home sales ......... 4,839 6,354 ---
Brokered resale revenues, net .................... 1,724 1,592 ---
Home selling expenses ............................ (7,360) (7,664) ---
Ancillary services revenues, net ................. 216 522 ---
--------- -------- --------
Income (loss) from home sales operations ....... (581) 804 ---
OTHER INCOME AND EXPENSES:
Interest income .................................. 1,695 967 639
Equity in income of affiliates ................................ 2,408................... --- --- 1,811
Equity in income of unconsolidated joint ventures 2,065 1,070
Interest income ............................................... 1,009 1,669 3,048
--------- --------- ---------
Total revenues ............................................. 220,678 215,028 194,830
--------- --------- ---------
EXPENSES
Property operating and maintenance ............................ 59,199 58,038 53,064
Real estate taxes ............................................. 16,888 16,460 14,470
Property management ........................................... 8,690 8,337 7,1081,277 1,353
General and administrative .................................... 5,955 5,550 4,668
General and administrative - affiliates ....................... 468 542 743(8,060) (8,192) (6,687)
Interest and related amortization ............................. 53,280 53,775 49,693................ (58,402) (50,729) (51,305)
Depreciation on corporate assets .............................. 1,139 1,005 995................. (1,240) (1,277) (1,243)
Depreciation on real estate assets and other costs ............ 34,411 34,486 28,426
--------- --------- ---------
Total expenses ............................................. 180,030 178,193 159,167
--------- --------- ---------
Income from operations ........................................ 40,648 36,835 35,663(38,034) (35,552) (34,228)
Gain on sale of Propertiesproperties and other .......................... 12,053 -- --............. --- --- 8,168
--------- --------- ---------
Income before allocation to Minority Interests-------- --------
Total other income and extraordinary loss on early extinguishment of debt 52,701 36,835 35,663expenses ................ (101,976) (93,506) (81,492)
MINORITY INTERESTS:
(Income) allocated to Common OP Units ......................... (8,463) (6,219) (6,733)............ (4,330) (5,848) (7,688)
(Income) allocated to Perpetual Preferred OP Units (11,252) (11,252) (11,252)
--------- -------- --------
Income from continuing operations .............. 17,424 23,706 30,006
DISCONTINUED OPERATIONS:
Discontinued operations .......................... 1,043 3,287 3,203
Depreciation on discontinued operations .......... (135) (484) (605)
Gain on sale of properties and other ............. 10,826 13,014 ---
Minority interests on discontinued operations .... (2,144) (3,078) (521)
--------- -------- --------
Income from discontinued operations ............ (11,252) (2,844) --9,590 12,739 2,077
--------- --------- ---------
Income before extraordinary loss on early
extinguishment of debt ..................................... 32,986 27,772 28,930
Extraordinary loss on early extinguishment
of debt (net of $264 allocated to Minority Interests) ..... 1,041 -- --
--------- --------- ----------------- --------
NET INCOME .................................................AVAILABLE FOR COMMON SHARES ....... $ 31,94527,014 $ 27,77236,445 $ 28,93032,083
========= ========= =========
Net income per Common Share before extraordinary item - basic . $ 1.54 $ 1.10 $ 1.13
========= ========= =========
Net income per Common Share before extraordinary item - diluted $ 1.51 $ 1.09 $ 1.12
========= ========= =========
Net income per Common Share - basic ........................... $ 1.49 $ 1.10 $ 1.13
========= ========= =========
Net income per Common Share - diluted ......................... $ 1.46 $ 1.09 $ 1.12
========= ========= =========
Weighted average Common Shares outstanding - basic ............ 21,469 25,224 25,626
========= ========= =========
Weighted average Common Shares outstanding - diluted (Note 3) . 27,408 31,252 31,962
========= ========= =========
Distributions declared per Common Share outstanding ........... $ 1.66 $ 1.55 $ 1.45
========= ========= =========
Tax status of distributions paid during the year:
Ordinary income ............................................ $ 1.32 $ 1.16 $ 1.14
========= ========= =========
Capital gain ............................................... $ -- $ -- $ --
========= ========= =========
Return of capital .......................................... $ 0.31 $ -- $ 0.31
========= ========= ================= ========
The accompanying notes are an integral part of the financial statements
F-4
37MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
2003 2002 2001
------- ------- -------
EARNINGS PER COMMON SHARE - BASIC:
Income from continuing operations ...................... $ .79 $ 1.10 $ 1.43
======= ======= =======
Income from discontinued operations .................... $ .43 $ .59 $ .10
======= ======= =======
Net income available for Common Shares ................. $ 1.22 $ 1.69 $ 1.53
======= ======= =======
EARNINGS PER COMMON SHARE - FULLY DILUTED:
Income from continuing operations ...................... $ .78 $ 1.07 $ 1.40
======= ======= =======
Income from discontinued operations .................... $ .42 $ .57 $ .09
======= ======= =======
Net income available for Common Shares ................. $ 1.20 $ 1.64 $ 1.49
======= ======= =======
Distributions declared per Common Shares outstanding ... $ 9.485 $ 1.90 $ 1.78
======= ======= =======
Tax status of Common Shares distributions paid during the
year:
Ordinary income ........................................ $ .68 $ 1.50 $ 1.31
======= ======= =======
Long-term capital gain ................................. $ .57 $--- $---
======= ======= =======
Unrecaptured section 1250 gain ......................... $ .16 $--- $---
======= ======= =======
Return of capital ...................................... $ .55 $ 0.37 $ 0.44
======= ======= =======
Weighted average Common Shares outstanding - basic ....... 22,077 21,617 21,036
======= ======= =======
Weighted average Common Shares outstanding - fully diluted 28,002 27,632 27,010
======= ======= =======
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(AMOUNTS IN THOUSANDS)
2003 2002 2001
------- -------- -------
Net income available for Common Shares ..................... $27,014 $ 36,445 $32,083
Net unrealized holding gains (losses) on derivative
instruments ............................................. 4,498 (4,987) 489
------- -------- -------
Net other comprehensive income available for Common Shares $31,512 $ 31,458 $32,572
======= ======== =======
The accompanying notes are an integral part of the financial statements
F-5
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 19992003, 2002 AND 19982001
(AMOUNTS IN THOUSANDS)
2000 1999 1998
---- ---- ----2003 2002 2001
--------- --------- ---------
PREFERRED STOCK, $.01 PAR VALUE ....................................................................... $ ----- $ ----- $ -----
========= ========= =========
COMMON STOCK, $.01 PAR VALUE
Balance, beginning of year ................................................................................. $ 229218 $ 262215 $ 248210
Issuance of Common Stock through restricted stock grants ............... --- 1 1 2
Exercise of options ........................................... 1 1 1
(Repurchase) issuance of Common Stock ......................... (21) (35) 11.............................................. 4 2 4
--------- --------- ---------
Balance, end of year ............................................................................................. $ 210222 $ 229218 $ 262215
========= ========= =========
PAID - IN CAPITAL
Balance, beginning of year ................................................................................. $ 275,664256,394 $ 364,603245,827 $ 321,915235,681
Issuance of Common Stock for employee notes ................... -- -- 129...................... --- --- ---
Conversion of OP Units to Common Stock ........................ 494 1,525 1,100........................... 343 227 599
Issuance of Common Stock through exercise of options .......... 2,719 2,034 2,372............. 6,323 5,782 7,743
Issuance of Common Stock through restricted stock grants ...... 3,310 1,507 6,118......... --- 2,709 1,627
Issuance of Common Stock through employee stock purchase plan . 1,435 1,195 940
(Repurchase) issuance of Common Stock ......................... (53,112) (98,160) 24,613.... 3,254 2,512 2,365
Compensation expense related to stock options and restricted stock 611 --- ---
Transition adjustment - FAS 123 .................................. (1,047) --- ---
Adjustment for Common OP Unitholders
in the Operating Partnership ................................ 5,171 2,960 7,416.................................... (2,812) (663) (2,188)
--------- --------- ---------
Balance, end of year ............................................................................................. $ 235,681263,066 $ 275,664256,394 $ 364,603245,827
========= ========= =========
DEFERRED COMPENSATION
Balance, beginning of year ................................................................................. $ (6,326)(3,069) $ (7,442)(4,062) $ (2,885)(5,969)
Issuance of Common Stock through restricted stock grants ...... (3,311) (536) (5,692)......... --- (2,709) (1,628)
Transition adjustment - FAS 123 .................................. 1,047 -- --
Recognition of deferred compensation expense .................. 3,668 1,652 1,135..................... 1,528 3,702 3,535
--------- --------- ---------
Balance, end of year ............................................................................................. $ (5,969)(494) $ (6,326)(3,069) $ (7,442)(4,062)
========= ========= =========
EMPLOYEE NOTES
Balance, beginning of year ................................................................................. $ (4,540)(2,713) $ (4,654)(3,841) $ (4,967)
Notes received for issuance of Common Stock ................... -- -- (129)(4,205)
Principal payments ............................................ 335 114 442............................................... 2,713 1,128 364
--------- --------- ---------
Balance, end of year ............................................................................................. $ (4,205)-- $ (4,540)(2,713) $ (4,654)(3,841)
========= ========= =========
DISTRIBUTIONS IN EXCESS OF ACCUMULATED COMPREHENSIVE EARNINGS
Balance, beginning of year ................................................................................. $ (53,626)(73,211) $ (42,328)(62,989) $ (33,736)(57,622)
Net income ....................................................... 27,014 36,445 32,083
Other comprehensive income:
Unrealized holding (losses) gains on derivative instruments .... 4,498 (4,987) 489
--------- --------- ---------
Comprehensive income ......................................... 31,512 31,458 32,572
--------- --------- ---------
Distributions .................................................... 31,945 27,772 28,930
Distributions ................................................. (35,941) (39,070) (37,522)(215,296) (41,680) (37,939)
--------- --------- ---------
Balance, end of year ............................................................................................. $(256,995) $ (57,622)(73,211) $ (53,626) $ (42,328)
========= ========= =========
The accompanying notes are an integral part of the financial statements
F-5
38
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(AMOUNTS IN THOUSANDS)
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................................ $ 31,945 $ 27,772 $ 28,930
Adjustments to reconcile net income to
cash provided by operating activities:
Income allocated to minority interests ........................... 19,451 9,063 6,733
Gain on sale of Properties and other ............................. (12,053) -- --
Depreciation and amortization expense ............................ 36,511 33,871 29,680
Equity in income of affiliates and joint ventures ................ (2,928) (2,065) (1,070)
Amortization of deferred compensation and other .................. 3,668 2,623 1,563
(Decrease) increase in rents receivable .......................... (102) (667) 116
(Increase) in prepaid expenses and other assets .................. (9,389) (844) (3,359)
Increase in accounts payable and accrued expenses ................ 2,545 2,491 5,188
(Decrease) increase in rents received in advance
and security deposits........................................ (1,647) 336 4,196
--------- --------- ---------
Net cash provided by operating activities ............................. 68,001 72,580 71,977
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Collection of escrow proceeds on acquisition .......................... -- -- 14,295
(Contributions to) distributions from Affiliates ...................... (7,250) (1,959) 399
Collections (funding) of notes receivable ............................. (700) 11,426 (14,563)
Investment in joint ventures .......................................... (3,758) (2,279) (7,584)
Proceeds from dispositions of assets .................................. 46,490 -- --
Return of escrow (funding) for acquisition of rental properties - net . 4,581 (30,640) (241,076)
Improvements:
Improvements - corporate ........................................... (498) (878) (1,487)
Improvements - rental properties ................................... (7,855) (8,656) (8,005)
Site development costs ............................................. (7,908) (4,882) (4,741)
--------- --------- ---------
Net cash provided by (used in) investing activities ................... 23,102 (37,868) (262,762)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from stock options and employee stock purchase plan ...... 4,142 3,229 3,313
Net proceeds from issuance of Perpetual Preferred OP Units ............ -- 121,890 --
Distributions to Common Stockholders, Common OP Unitholders
and Perpetual Preferred OP Unitholders ............................. (56,298) (40,445) (46,491)
(Repurchase) issuance of Common Stock and OP Units .................... (54,595) (99,847) 24,623
Collection of principal payments on employee notes .................... 335 114 442
Line of credit:
Proceeds ........................................................... 103,900 113,400 159,000
Repayments ......................................................... (151,900) (150,500) (39,000)
Refinancing - net proceeds ............................................ 65,998 16,248 107,847
Principal payments .................................................... (4,249) (4,733) (4,298)
Debt issuance costs ................................................... (2,265) (1,049) (1,903)
--------- --------- ---------
Net cash (used in) provided by financing activities ................... (94,932) (41,693) 203,533
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents ...................... (3,829) (6,981) 12,748
Cash and cash equivalents, beginning of year .............................. 6,676 13,657 909
--------- --------- ---------
Cash and cash equivalents, end of year .................................... $ 2,847 $ 6,676 $ 13,657
========= ========= =========
SUPPLEMENTAL INFORMATION
Cash paid during the year for interest .................................... $ 52,947 $ 52,323 $ 45,674(62,989)
========= ========= =========
The accompanying notes are an integral part of the financial statements
F-6
39MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(AMOUNTS IN THOUSANDS)
2003 2002 2001
--------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................................ $ 27,014 $ 36,445 $ 32,083
Adjustments to reconcile net income to cash provided by operating
activities:
Income allocated to minority interests .................................. 17,726 20,178 19,461
Gain on sale of Properties and other ................................. (10,826) (13,014) (8,168)
Depreciation expense ................................................. 39,403 37,094 36,076
Amortization expense ................................................. 5,031 963 1,108
Equity in income of affiliates and joint ventures .................... (1,998) (1,158) (2,782)
Amortization of deferred compensation and other ...................... 2,139 3,930 3,535
Increase in provision for uncollectable rents receivable ............. 126 941 427
Changes in assets and liabilities:
Increase in rents receivable ......................................... (774) (1,186) (953)
Decrease in inventory ................................................ 1,846 1,887 ---
(Increase) decrease in prepaid expenses and other assets ............. (1,439) (7,610) 1,330
Increase (decrease) in accounts payable and accrued expenses ......... (3,055) 1,471 (1,358)
Increase (decrease) in rents received in advance and security deposits (30) 235 (51)
--------- -------- --------
Net cash provided by operating activities ............................... 75,163 80,176 80,708
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of rental properties .......................................... (6,836) (56,531) (17,770)
Proceeds from dispositions of assets ...................................... 27,170 14,171 24,209
Distributions from (investment in) joint ventures ......................... 1,535 (7,149) 1,697
Proceeds from restructuring of College Heights joint venture, net ......... --- 4,647 ---
Contributions to and distributions from Affiliates, net ................... --- --- (11,493)
Purchase of RSI ........................................................... --- (675) ---
Cash received in acquisition of RSI ....................................... --- 839 ---
Collections (funding) of notes receivable ................................. (1,507) (3,784) 3,478
Improvements:
Improvements-corporate .................................................. (72) (681) (840)
Improvements-rental properties .......................................... (11,912) (13,377) (12,689)
Site development costs .................................................. (8,976) (10,433) (9,659)
--------- -------- --------
Net cash (used in) investing activities ................................... (598) (72,973) (23,067)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from stock options and employee stock purchase plan .......... 9,581 8,296 10,112
Distributions to Common Stockholders, Common OP Unitholders
and Perpetual Preferred OP Unitholders ................................... (65,687) (58,314) (58,111)
Repurchase of Common Stock and OP Units ................................... --- --- (41)
Collection of principal payments on employee notes ........................ 2,713 1,128 364
Line of credit:
Proceeds ................................................................ 53,000 82,000 46,000
Repayments .............................................................. (137,750) (13,500) (89,650)
Repayment of term loan .................................................... (100,000) --- ---
Refinancing - net proceeds (repayments) ................................... 501,057 (16,096) 37,870
Principal payments ........................................................ (4,844) (4,217) (5,047)
Debt issuance costs ....................................................... (14,165) (584) (631)
--------- -------- --------
Net cash provided by (used in) financing activities ....................... 243,905 (1,287) (59,134)
--------- -------- --------
Net increase (decrease) in cash and cash equivalents ........................ 318,470 5,916 (1,493)
Cash and cash equivalents, beginning of year ................................ 7,270 1,354 2,847
--------- -------- --------
Cash and cash equivalents, end of year ...................................... $ 325,740 $ 7,270 $ 1,354
========= ======== ========
SUPPLEMENTAL INFORMATION
Cash paid during the year for interest ...................................... $ 52,396 $ 46,097 $ 52,947
========= ======== ========
The accompanying notes are an integral part of the financial statements
F-7
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION OF THE COMPANY AND BASIS OF PRESENTATION
Manufactured Home Communities, Inc. (together, together with itsMHC Operating Limited
Partnership (the "Operating Partnership") and other consolidated subsidiaries
("Subsidiaries"), are referred to herein as the "Company"), formed in March 1993, is a Maryland corporation
which has elected to be taxed"MHC", "we", "us",
and "our". We believe that we have qualified for taxation as a real estate
investment trust ("REIT") for federal income tax purposes since our taxable year
ended December 31, 1993. We plan to continue to meet the requirements for
taxation as a REIT. Many of these requirements, however, are highly technical
and complex. We cannot, therefore, guarantee that we have qualified or will
qualify in the future as a REIT. The determination that we are a REIT requires
an analysis of various factual matters that may not be totally within our
control and we cannot provide any assurance that the Internal Revenue Service
("IRS") will agree with our analysis. For example, to qualify as a REIT, at
least 95% of our gross income must come from sources that are itemized in the
REIT tax laws. We are also required to distribute to stockholders at least 90%
of our REIT taxable income excluding capital gains. The fact that we hold our
assets through MHC Operating Limited Partnership and its subsidiaries further
complicates the application of the REIT requirements. Even a technical or
inadvertent mistake could jeopardize our REIT status. Furthermore, Congress and
the IRS might make changes to the tax laws and regulations, and the courts might
issue new rulings that make it more difficult, or impossible, for us to remain
qualified as a REIT. We do not believe, however, that any pending or proposed
tax law changes would jeopardize our REIT status.
If we fail to qualify as a REIT, we would be subject to federal income tax
at regular corporate rates. Also, unless the IRS granted us relief under certain
statutory provisions, we would remain disqualified as a REIT for four years
following the year we first failed to qualify. Even if the Company qualifies for
taxation as a REIT, the Company is subject to certain state and local taxes on
its income and property and Federal income and excise taxes on its undistributed
income.
We are a fully integrated company that owns and operates manufactured home
communities ("Communities") and park model communities ("Resorts"). The Company
ownswas formed to continue the property operations, business objectives and
acquisition strategies of an entity that had owned and operated Communities
since 1969. As of December 31, 2003, we owned or has a controllinghad an ownership interest in 154 manufactured home communitiesa
portfolio of 142 Communities and Resorts (the "Properties") located in 26 states, consisting of 51,452throughout
the United States containing 51,715 residential sites. The Company
generally will not be subject to Federal income tax to the extent it distributes
its REIT taxable income to its stockholders.
The operations of the Company are conducted primarily through certain entities that
are owned or controlled by the Company. MHC Operating
Limited Partnership (the
"Operating Partnership") is the entity through which the Company conducts
substantially all of its operations.Partnership. The Company contributed the proceeds from its initial public
offering to the Operating Partnership for a general partnership interest. The
financial results of the Operating Partnership and the Subsidiaries are
consolidated in the Company's consolidated financial statements. In addition,
since certain activities, if performed by the Company, may not have been
qualifying REIT activities under the Internal Revenue Code of 1986, as amended
(the "Code"), the Company has formed certain taxable REIT subsidiaries, as
defined in the Code, to engage in such activities. Realty Systems, Inc. ("RSI")
is a wholly owned subsidiary of the Company that, doing business as Carefree
Sales, is engaged in the business of purchasing, selling and leasing
manufactured homes that are located or will be located in Properties owned and
managed by the Company. Carefree Sales also provides brokerage services to
residents at such Properties. Typically, residents move from a Community but do
not relocate their homes. Carefree Sales may provide brokerage services, in
competition with other local brokers, by seeking buyers for the homes. Carefree
Sales also leases homes to prospective residents with the expectation that the
tenant eventually will purchase the home. Subsidiaries of RSI lease from the
Operating Partnership certain real property within or adjacent to certain of the
Properties consisting of golf courses, pro shops, stores and restaurants.
F-8
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION OF THE COMPANY AND BASIS OF PRESENTATION (CONTINUED)
The limited partners of the Operating Partnership (the "Common OP
Unitholders") receive an allocation of net income which is based on their
respective ownership percentage of the Operating Partnership which is shown on
the Consolidated Financial Statements as Minority InterestInterests - Common OP Units.
As of December 31, 2000,2003, the Minority Interests - Common OP Units represented
5,514,3305,312,387 units of limited partnership interest ("OP Units") which are
convertible into an equivalent number of shares of the Company's common stock.
The issuance of additional shares of common stock or common OP Units changes the
respective ownership of the Operating Partnership for both the Minority
Interests and the Company.
Sub-partnerships of the Operating Partnership were created to (i)
facilitate mortgage financing (the "Financing Partnerships"); (ii) facilitate
the Company's ability to provide financing to owners of communities ("Lending
Partnership"); (iii) own the management operations of the Company ("Management
Partnerships"); and (iv) own the assets and operations of certain utility
companies which service the Company's properties ("MHC Systems").
The accompanying financial statements represent the consolidated financial
information of the Company and its subsidiaries. Due to the Company's ability as
general partner to control either through ownership or by contract the Operating
Partnership, the Financing Partnerships, the Lending Partnership, the Management
Partnerships and MHC Systems, each such subsidiary has been consolidated with
the Company for financial reporting purposes.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131") requires
certain disclosures of selected information about operating segments in the
annual financial statements and 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. The Company has concentrations of Properties within the following
states: Florida (45 Properties), California (25 Properties), Arizona (17
Properties), Michigan (11 Properties) and Colorado (10 Properties). These
concentrations of Properties accounted for 35%, 17%, 9%, 4%, and 9%,
respectively, of the Company's total revenues for the year ended December 31,
2000. The Company also has Properties located in the following areas of the
United States: Northeast, Northwest, Midwest, and Nevada/Utah/New Mexico. The
Company's largest Property, Bay Indies, located in Venice, Florida, accounted
for 3% of the Company's total revenues for the year ended December 31, 2000. The
distribution of the Properties throughout the United States reflects the
Company's belief that geographic diversification helps insulate the portfolio
from regional economic influences. The Company intends to target new
acquisitions in or near markets where the Properties are located and will also
consider acquisitions of properties outside such markets.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Consolidation
The Company consolidates its majority owned subsidiaries in which it
has the ability to control the operations of the subsidiaries. The Company
does not consolidate entities with respect to which it does not have sole
control over the major decisions. All inter-company transactions have been
eliminated in consolidation. The Company's acquisitions were all accounted
for as purchases in accordance with Accounting Principles Board Opinion No.
16 "Business Combinations" for those transactions initiated before June 30,
2001 and in accordance with Statement of Financial Accounting Standards No.
141 ("SFAS No. 141") "Business Combinations" for those transactions
completed after June 30, 2001.
In accordance with SFAS 141, the Company allocates the purchase price
of real estate to land, land improvements, building and, if determined to
be material, intangibles, such as the value of above, below and at-market
leases and origination costs associated with the in-place leases. We
depreciate the amount allocated to land improvements, building and other
intangible assets over their estimated useful lives, which generally range
from three to thirty years. The values of the above and below market leases
are amortized and recorded as either an increase (in the case of below
market leases) or a decrease (in the case of above market leases) to rental
income over the remaining term of the associated lease. The value
associated with in-place leases is amortized over the expected term, which
includes an estimated probability of lease renewal.
In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46, Consolidation of Variable Interest Entities
("FIN 46"). The objective of this Interpretation is to provide guidance on
how to identify a variable interest entity ("VIE") and determine when the
assets, liabilities, non-controlling interests, and results of operations
of a VIE need to be included in the company's consolidated financial
statements. A company that holds variable interests in an entity will need
to consolidate such entity if the company absorbs a majority of the VIE's
expected losses or receives a majority of the entity's expected residual
returns if they occur, or both.
The provisions of FIN 46 apply to the Company upon initial involvement
with the respective entity for transactions created after January 31, 2003.
The adoption of FIN 46 in 2003 had no effect on the Company in 2003. The
provisions of FIN 46 and related revised interpretations apply no later
than the end of the first interim reporting period ending March 15, 2004
(March 31, 2004) for entities created before February 1, 2003. The Company
is currently evaluating and assessing the impact of FIN 46 and the related
revised interpretations on entities created before February 1, 2003.
(b) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
F-7F-9
40
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(b)(c) Segments
We manage all our operations on a property by property basis. Since
each property has similar economic and operational characteristics, the
Company has one reportable segment, which is the operation of manufactured
home communities. The following table identifies our five largest markets
and provides information regarding our Communities and Resorts including
Communities owned in joint ventures.
NUMBER OF PERCENT OF PERCENT OF TOTAL PROPERTY
MAJOR MARKET PROPERTIES TOTAL SITES TOTAL SITES OPERATING REVENUES
- ------------ ---------- ----------- ----------- -------------------------
Florida 52 23,366 45.3% 40.8%
California 25 6,229 12.0% 20.1%
Arizona 21 5,930 11.5% 8.5%
Colorado 10 3,452 6.7% 8.2%
Delaware 7 2,238 4.3% 4.1%
Other 27 10,500 20.2% 18.3%
- ---------- --- ------ ----- -----
Total 142 51,715 100.0% 100.0%
========== === ====== ===== =====
Our largest Property, Bay Indies, located in Venice, Florida,
accounted for approximately 3.0% of our total property operating revenues
for the year ended December 31, 2003. The operation of manufactured home
communities segment comprised approximately 97%, 97.8% and 97.2% of total
property operating revenues for the years ended December 31, 2003, 2002 and
2001, respectively. The operation of manufactured home communities segment
comprised approximately 93.5% and 92.2% of total assets at December 31,
2003 and 2002, respectively. The distribution of the Properties throughout
the United States reflects our belief that geographic diversification helps
insulate the portfolio from regional economic influences. We intend to
target new acquisitions in or near markets where the Properties are located
and will also consider acquisitions of properties outside such markets.
(d) Inventory
Inventory consists of new and used manufactured homes, is stated at
the lower of cost or market after consideration of the N.A.D.A. (National
Automobile Dealers Association) Manufactured Housing Appraisal Guide and
the current market value of each home included in the manufactured home
inventory. Inventory sales revenues and resale revenues are recognized when
the home sale is closed. Resale revenues are stated net of commissions paid
to employees of $893,000 for the year ended December 31, 2003.
(e) Real Estate
Real estate is recorded at cost less accumulated depreciation. The
Company evaluates rental properties for impairment when conditions exist
which may indicate that it is probable that the sum of expected future cash
flows (undiscounted) from a property is less than its carrying value. Upon
determination that a permanent impairment has occurred, rental properties
are reduced to fair value. During the year ended December 31, 2000, MHC
Acquisition One L.L.C., a consolidated subsidiary of the Company, recorded
an impairment loss on the DeAnza Santa Cruz water and wastewater service
company business (see Notes 5 and 17). For the year ended December 31,
1999, permanent impairment conditions did not exist at any of the Company's
Properties.
Depreciation is computed on the straight-line basis over the estimated
useful lives of the assets. The Company usesWe use a 30-year estimated life for buildings
acquired and structural and land improvements, a ten-to-fifteen-year
estimated life for building upgrades and a three-to-seven-year estimated
life for furniture, fixtures and equipment. Expenditures for ordinary
maintenance and repairs are expensed to operations as incurred and
significant renovations and improvements that improve the asset and extend
the useful life of the asset are capitalized and then expensed over their
estimated useful life.
Initial direct leasing costs are expensed
as incurred.In addition, the FASB is currently reviewing the methods of
depreciation and cost capitalization for all industries and in June 2001
issued FASB Exposure Draft, "Accounting in Interim and Annual Financial
Statements for Certain Costs and Activities Related to Property, Plant and
Equipment", the implementation of which, if issued, could also have a
material effect on the Company's results of operations. Total depreciation
expense was $35.6$39.4 million, $35.5$37.3 million and $29.4$36.0 million for the years
ended December 31, 2000, 19992003, 2002 and 1998,2001, respectively.
(c)F-10
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(e) Real Estate (continued)
We evaluate our Properties for impairment when conditions exist which
may indicate that it is probable that the sum of expected future cash flows
(undiscounted) from a Property over the anticipated holding period is less
than its carrying value. Upon determination that a permanent impairment has
occurred, the applicable Property is reduced to fair value. For the year
ended December 31, 2003, permanent impairment conditions did not exist at
any of our Properties. For properties to be disposed of, an impairment loss
is recognized when the fair value of the property, less the estimated cost
to sell, is less than the carrying amount of the property measured at the
time the Company has a commitment to sell the property and/or is actively
marketing the property for sale. A property to be disposed of is reported
at the lower of its carrying amount or its estimated fair value, less costs
to sell. Subsequent to the date that a property is held for disposition,
depreciation expense is not recorded. In August 2001, the FASB issued
Statement of Financial Accounting Standards No. 144 ("SFAS No. 144"),
"Accounting for the Impairment or Disposal of Long-Lived Assets" which is
effective for fiscal years beginning after December 15, 2001. The Company
adopted SFAS No. 144 during 2002 and we have shown separately as
discontinued operations in all periods presented the results of operations
for all assets sold during 2003 and 2002 or assets classified as real
estate held for disposition as of December 31, 2003 and 2002. The gain on
sale of discontinued operations for 2003 and 2002 is included in the gain
on sale of properties and other.
Certain costs, primarily legal costs, relative to our efforts to
effectively change the use and operations of several Properties subject to
rent control (see Note 17) are currently classified in other assets. These
costs, to the extent these efforts are successful, are capitalized to the
extent of the established value of the revised project and included in the
net investment in real estate for the appropriate Properties (see Note 5).
To the extent these efforts are not successful, these costs will be
expensed. In addition, we capitalize certain costs, primarily legal costs,
related to entering into lease agreements which govern the terms under
which we may enter into leases with individual tenants and which are
expensed over the term of the lease agreement.
(f) Cash and Cash Equivalents
The Company considersWe consider all demand and money market accounts and certificates of
deposit with a maturity, when purchased, of three months or less to be cash
equivalents.
(d)(g) Notes Receivable
Notes receivable generally are stated at their outstanding unpaid
principal balances net of any deferred fees or costs on originated loans,
or unamortized discounts or premiums.premiums net of a valuation allowance. Interest
income is accrued on the unpaid principal balance. Discounts or premiums
are amortized to income using the interest method. (e)In certain cases we
finance the sale of homes to our residents (referred to as "Chattel Loans")
which loans are secured by the homes. The valuation allowance for the
Chattel Loans is calculated based a comparison of the outstanding principal
balance of each note compared to the N.A.D.A. value and the current market
value of the underlying manufactured home collateral.
(h) Investments in Joint Ventures
Investments in unconsolidated joint ventures are accounted for using
the equity method of accounting because we do not have control over the
activities of the investees. Our net equity investment is reflected on the
consolidated balance sheets, and the consolidated statements of operations
include our share of net income or loss from the unconsolidated joint
ventures. Any difference between the carrying amount of these investments
on our consolidated balance sheet and the historical cost of the underlying
equity is depreciated as an adjustment to income from unconsolidated joint
ventures generally over 30 years.
F-11
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(i) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" requires disclosures about the fair
value of financial instruments whether or not such instruments are
recognized in the balance sheet.
The Company's financial instruments include short-term investments,
notes receivable, accounts receivable, accounts payable, other accrued
expenses, mortgage notes payable and interest rate hedge arrangements. The
fair values of all financial instruments, including notes receivable, were
not materially different from their carrying values at December 31, 20002003
and 1999.
(f)2002.
(j) Deferred Financing Costs
Deferred financing costs include fees and costs incurred to obtain
long-term financing. The costs are being amortized over the terms of the
respective loans on a level yield basis. Unamortized deferred financing
fees are written-off when debt is retired before the maturity date. Upon
amendment of the Line of Credit, unamortized deferred financing fees are
accounted for in accordance with EITF No. 98-14, "Debtor's Accounting for
Changes in Line-of-Credit or Revolving-Debt Arrangements." Accumulated
amortization for such costs was $1.9$2.7 million and $1.8$2.4 million at December
31, 20002003 and 1999,2002, respectively.
(g)(k) Revenue Recognition
Rental income attributable to leases is recorded when earned from
tenants. F-8
41
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(h)We will reserve for receivables when we believe the ultimate
collection is less than probable. Our provision for uncollectable rents
receivable was $827,000 as of December 31, 2003 and $700,000 as of December
31, 2002. Income from home sales is recognized when the earnings process is
complete. The earnings process is complete when the home has been
delivered, the purchaser has accepted the home and title has transferred.
(l) Minority Interests
Net income is allocated to Common OP Unitholders based on their
respective ownership percentage of the Operating Partnership. An ownership
percentage is represented by dividing the number of Common OP Units held by
the Common OP Unitholders (5,514,330(5,312,387 and 5,633,1835,359,927 at December 31, 20002003 and
1999,2002, respectively) by OP Units and common stockshares of Common Stock outstanding.
Issuance of additional shares of common stockCommon Stock or commonCommon OP Units changes
the percentage ownership of both the Minority Interests and the Company.
Due in part to the exchange rights (which provide for the conversion of
Common OP Units into shares of Common Stock on a one-for-one basis), such
transactions and the proceeds therefrom are treated as capital transactions
and result in an allocation between stockholders' equity and Minority
Interests to account for the change in the respective percentage ownership
of the underlying equity of the Operating Partnership.
On September 30, 1999, the Operating Partnership completed a $125
million private placement of 9.0% Series D Cumulative Perpetual Preferred
Units ("POP Units") with two institutional investors. The POP Units, which
are callable by the Company after five years, have no stated maturity or
mandatory redemption, have no voting rights and are not convertible into OP
Units or Common Stock. Income is allocated to the POP Units at a preferred
rate per annum of 9.0% on the original capital contribution of $125
million. Costs related to the placement of $3.1 million were recorded as a
reduction to additional paid-in capital.
(i)F-12
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(m) Income Taxes
Due to the structure of the Company as a REIT, the results of
operations contain no provision for Federal income taxes. However, the
Company may be subject to certain state and local income, excise or
franchise taxes. The CompanyWe paid state and local taxes of approximately $78,000, $85,000$56,000,
$20,000 and $78,000$50,000 during the years ended December 31, 2000, 19992003, 2002 and
1998.2001, respectively. In addition, taxable income from non-REIT activities
managed through taxable REIT subsidiaries is subject to federal, state and
local income taxes. As of December 31, 2000,2003, net investment in real estate
and notes receivable had a federalFederal tax basis of approximately $742$743.3
million and $24$27.6 million, respectively.
(j)Reclassifications
Certain 1999 and 1998 amounts have been reclassified to conform to the
2000 financial presentation. Such reclassifications have no effect on the
operations or equity as originally presented.
(k)(n) Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments
and Hedging Activities". 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 will adopt SFAS No. 133 on January 1, 2001. SFAS No. 133 will
require the Company toWe 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 determined
that(o) Reclassifications
Certain 2002 and 2001 amounts have been reclassified to conform to the
2003 financial presentation. Such reclassifications have no effect on the
operations or equity as originally presented.
(p) Stock Compensation
Prior to January 1, 2003, we accounted for our stock compensation in
accordance with APB No. 25, "Accounting for Stock Issued to Employees",
based upon the intrinsic value method. This method results in no
compensation expense for options issued with an exercise price equal to or
exceeding the market value of the Common Stock on the date of grant.
Effective January 1, 2003, we elected to account for our stock compensation
in accordance with SFAS No. 133123 and its amendment (SFAS No. 148),
"Accounting for Stock Based Compensation", which resulted in compensation
expense being recorded based on the earnings and financial positionfair value of the Company will not be significant when implemented.
F-9
42
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSstock options and
other equity awards issued (see Note 14).
NOTE 3 - EARNINGS PER COMMON SHARE
Earnings per common share are based on the weighted average number of
common shares outstanding during each year. Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS No. 128") defines the calculation
of basic and fully diluted earnings per share. Basic and fully diluted earnings
per share are based on the weighted average shares outstanding during each year
and basic earnings per share excludes any dilutive effects of options, warrants
and convertible securities. The conversion of OP Units has been excluded from
the basic earnings per share calculation. The conversion of an OP Unit to a
share of common stockCommon Stock has no material effect on earnings per common share.
F-13
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - EARNINGS PER COMMON SHARE (CONTINUED)
The following table sets forth the computation of basic and diluted
earnings per share for the years ended December 31, 2003, 2002, and 2001
(amounts in thousands):
2000 1999 1998
---- ---- ----YEARS ENDED DECEMBER 31,
-------------------------------
2003 2002 2001
------- ------- -------
NUMERATOR:
Numerator forNUMERATORS:
INCOME FROM CONTINUING OPERATIONS:
Income from continuing operations - basic earnings per share........... $17,424 $23,706 $30,006
Amounts allocated to dilutive securities ............ 4,330 5,848 7,688
------- ------- -------
Income from continuing operations - fully diluted ... $21,754 $29,554 $37,694
======= ======= =======
INCOME FROM DISCONTINUED OPERATIONS:
Income from discontinued operations - basic ......... $ 9,590 $12,739 $ 2,077
Amounts allocated to dilutive securities ............ 2,144 3,078 521
------- ------- -------
Income from discontinued operations - fully diluted.. $11,734 $15,817 $ 2,598
======= ======= =======
NET INCOME AVAILABLE FOR COMMON SHARES:
Net income ................................ $31,945 $27,772 $28,930available for Common Shares - basic ...... $27,014 $36,445 $32,083
Amounts allocated to dilutive securities ............ 6,474 8,926 8,209
------- ------- -------
Net income available for Common Shares - fully
diluted ............................................ $33,488 $45,371 $40,292
======= ======= =======
DENOMINATOR:
Weighted average Common Shares outstanding - basic .... 22,077 21,617 21,036
Effect of dilutive securities:
Income allocated toRedemption of Common OP Units (net of extraordinary loss on early
extinguishment of debt) ................... 8,199 6,219 6,733for Common Shares ....... 5,342 5,403 5,466
Employee stock options and restricted shares .......... 583 612 508
------- ------- -------
Numerator for diluted earnings per share -
income available to Common Stockholders
after assumed conversions ................. $40,144 $33,991 $35,663
======= ======= =======
DENOMINATOR:
Denominator for basic earnings per share -
Weighted average Common StockShares outstanding . 21,469 25,224 25,626
Effect of dilutive securities:
Weighted average Common OP Units .......... 5,592 5,704 5,955
Employee stock options .................... 347 324 381
------- ------- -------
Denominator for- fully
diluted earnings per share -
adjusted weighted average Common Stock
outstanding after assumed conversions ..... 27,408 31,252 31,962.............................................. 28,002 27,632 27,010
======= ======= =======
NOTE 4 - COMMON STOCK AND OTHER EQUITY RELATED TRANSACTIONS
The following table presents the changes in the Company's outstanding
common stockCommon Stock for the years ended December 31, 2000, 19992003, 2002 and 19982001 (excluding OP
Units of 5,514,330, 5,633,1835,312,387, 5,359,927 and 5,976,8205,426,374 outstanding at December 31, 2000,
19992003,
2002 and 1998,2001, respectively):
2000 1999 1998
---- ---- ----2003 2002 2001
---------- ---------- ----------
Shares outstanding at January 1, ................................ 22,813,357 26,417,029 24,771,180
Common Stock purchased by key employees of the Company ..... -- -- 5,000......................... 22,093,240 21,562,343 21,064,785
Common Stock issued through conversion of OP Units ......... 59,190 143,637 99,552..... 47,540 66,447 87,956
Common Stock issued through exercise of Options ............ 138,029 126,565 141,403options ........ 302,526 282,959 387,115
Common Stock issued through stock grants ................... 92,070 95,666 328,831............... 35,000 108,341 57,000
Common Stock issued through Employee Stock Purchase Plan ... 68,739 59,060 44,804
Common Stock issued through Unit Trust Offering ............ -- -- 1,048,05985,042 73,150 98,987
Common Stock repurchased and retired ....................... (2,106,600) (4,028,600) (21,800)................... --- --- (133,500)
---------- ---------- -----------------
Shares outstanding at December 31, .............................. 21,064,785 22,813,357 26,417,029....................... 22,563,348 22,093,240 21,562,343
========== ========== ==========
As of December 31, 2000,2003 and 2002, the Company's percentage ownership of the
Operating Partnership was approximately 79%80%. The remaining 21%approximately 20% is
owned by the Common OP Unitholders.
F-10F-14
43
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - COMMON STOCK AND OTHER EQUITY RELATED TRANSACTIONS (CONTINUED)
In March 1997, the Company's Board of Directors approved a common stock
repurchase plan whereby the Company was authorized to repurchase and retire
shares of its common stock. Under the plan, the Company repurchased
approximately 2.2 million shares of Common Stock at an average price of $24.06
per share during the year ended December 31, 2000, 4.1 million shares of Common
Stock at an average price of $23.40 per share during the year ended December 31,
1999 and 21,800 shares of Common Stock at an average price of $23.48 per share
during the year ended December 31, 1998 using proceeds from borrowings on the
line of credit.
During 1998, the Company, as general partner of the Operating Partnership,
approved the admission of new limited partners (the "1998 Acquisition Partners")
to the Operating Partnership in connection with certain acquisitions of real
estate and investments in joint ventures (see Notes 5 and 6). The 1998
Acquisition Partners received 342,438 OP Units, which are exchangeable on a
one-for-one basis for shares of the Company's common stock.
On April 23, 1998, the Company completed an offering of 1,048,059 shares of
common stock (the "Unit Trust Offering") and sold the shares to Merrill Lynch,
Pierce, Fenner & Smith Incorporated (the "Underwriter"). The offering price per
share was $25.4375, the closing price for shares of the Company's common stock
on April 23, 1998, resulting in gross offering proceeds of approximately $26.7
million. Net of the Underwriter's discount and offering expenses, the Company
received approximately $25 million. The Underwriter deposited the shares of
common stock with the trustee of the Equity Investor Fund Cohen & Steers Realty
Majors Portfolio, a unit investment trust (the "Trust"), in exchange for units
in the Trust.
On March 26, 1999, the Operating Partnership repurchased and cancelled
200,000 OP Units from a limited partner of the Operating Partnership. During the
year ended December 31, 2000, the Operating Partnership repurchased and
cancelled approximately 60,000 OP Units from various holders.
On September 30, 1999, the Operating Partnership completed a $125 million
private placement of 9.0% Series D Cumulative Perpetual Preferred Units ("POP
Units") with two institutional investors. The POP Units, which are callable by
the Company after five years, have no stated maturity or mandatory redemption.
Net proceeds from the offering of $121 million were used to repay amounts
outstanding under the Company's line of credit facility and for other corporate
purposes.
The following distributions have been declared and / or paid to common
stockholders and minority interests since January 1, 1998.
DISTRIBUTION FOR THE QUARTER SHAREHOLDER RECORD
AMOUNT PER SHARE ENDING DATE PAYMENT DATE
---------------- ------ ---- ------------
$0.3625 March 31, 1998 March 27, 1998 April 10, 1998
$0.3625 June 30, 1998 June 26, 1998 July 10, 1998
$0.3625 September 30, 1998 September 25, 1998 October 9, 1998
$0.3625 December 31, 1998 December 16, 1998 December 30, 1998
- -------------------------------------------------------------------------------------------------------
$0.3875 March 31, 1999 March 26, 1999 April 9, 1999
$0.3875 June 30, 1999 June 25, 1999 July 9, 1999
$0.3875 September 30, 1999 September 24, 1999 October 8, 1999
$0.3875 December 31, 1999 December 31, 1999 January 14, 2000
- -------------------------------------------------------------------------------------------------------
$0.4150 March 31, 2000 March 31, 2000 April 14, 2000
$0.4150 June 30, 2000 June 30, 2000 July 14, 2000
$0.4150 September 30, 2000 September 29, 2000 October 13, 2000
$0.4150 December 31, 2000 December 29, 2000 January 12, 2001
- -------------------------------------------------------------------------------------------------------
The Operating Partnership paidpays distributions of 9.0% per annum on the $125
million of POP Units. Distributions on the POP Units wereare paid quarterly on the
last calendar day of each quarter beginningquarter.
The following distributions have been declared and/or paid to common
stockholders and Minority Interests since January 1, 2001:
DISTRIBUTION FOR THE QUARTER SHAREHOLDER
AMOUNT PER SHARE ENDING RECORD DATE PAYMENT DATE
- ---------------- ------------------ ------------------ ----------------
$0.4450 March 31, 2001 March 30, 2001 April 13, 2001
$0.4450 June 30, 2001 June 29, 2001 July 13, 2001
$0.4450 September 30, 2001 September 28, 2001 October 12, 2001
$0.4450 December 31, 2001 December 28, 2001 January 11, 2002
- -----------------------------------------------------------------------------------------
$0.4750 March 31, 2002 March 29, 2002 April 12, 2002
$0.4750 June 30, 2002 June 28, 2002 July 12, 2002
$0.4750 September 30, 2002 September 27, 2002 October 11, 2002
$0.4750 December 31, 2002 December 27, 2002 January 10, 2003
- -----------------------------------------------------------------------------------------
$0.4950 March 31, 2003 March 28, 2003 April 11, 2003
$0.4950 June 30, 2003 June 27, 2003 July 11, 2003
$0.4950 September 30, 2003 September 26, 2003 October 10, 2003
On December 31, 1999.
F-11
44
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - COMMON STOCK AND OTHER EQUITY RELATED TRANSACTIONS (CONTINUED)12, 2003, we declared a one-time special distribution of $8.00
per share payable to stockholders of record on January 8, 2004. We used proceeds
from the $501 million borrowing in October, 2003 to pay the special distribution
on January 16, 2004. The special cash dividend will be reflected on
stockholders' 2004 1099-DIV to be issued in January 2005.
The Company adopted, effective July 1, 1997, the 1997 Non-Qualified
Employee Stock Purchase Plan ("ESPP"). Pursuant to the ESPP, certain employees
and directors of the Company may each annually acquire up to $250,000 of common
stockCommon
Stock of the Company. The aggregate number of shares of common stockCommon Stock available
under the ESPP shall not exceed 1,000,000, subject to adjustment by the
Company's Board of Directors. The common stockCommon Stock may be purchased monthly at a
price equal to 85% of the lesser of: (a) the closing price for a share of Common
Stock on the last day of such month;the offering period; and (b) the greater of: (i) the closing price for a
share of Common Stock on the first day of such month, and (ii) the average closing price
for a share of Common Stock for all the business days in the month.offering period. Shares of Common
Stock issued through the ESPP for the years ended December 31, 2000, 19992003, 2002 and
19982001 were 68,739, 59,06082,943, 71,107 and 44,804,96,485, respectively.
F-15
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INVESTMENT IN REAL ESTATE
Land improvements consist primarily of improvements such as grading,
landscaping and infrastructure items such as streets, sidewalks or water mains.
Depreciable property consists of permanent buildings in the Properties such as
clubhouses, laundry facilities, maintenance storage facilities, and furniture,
fixtures and equipment.
On September 4, 1997,During the Company entered into a portfolio purchase
agreement (as amended by a supplemental agreement onyear ended December 17, 1997) to
acquire 37 manufactured home communities (the "Ellenburg Communities") from
partnerships having Ellenburg Capital Corporation ("ECC") as the general
partner, for a purchase price in excess of $300 million. During 1997 and 1998,
the Company closed on the acquisition of thirty-one of the Ellenburg Communities31, 2001, we acquired two Florida
Properties, totaling 730 sites, for an aggregate purchase price of approximately
$278$17.3 million and gained controlcompleted the sale of an additional five Ellenburg Communities with acquisition advancesseven Properties, totaling 1,281 sites,
in Kansas, Missouri and Oklahoma, for a total sale price of approximately $57$17.4
million. A gain of $8.1 million was recorded on the sale. In addition, we
terminated a lease to a third-party operator for the partnerships which owned such Ellenburg
Communities. All fundingscampground and RV resort
facilities at the Property known as Bulow Plantation in Flagler Beach, Florida,
and assumed operation of these facilities directly. Also during 2001, we
finalized a settlement agreement whereby we received $10.8 million in proceeds
related to the acquisitionsale of a Property in Indiana.
During the year ended December 31, 2002, we acquired the eleven Properties
listed in the table below. The acquisitions were funded by the Company
with borrowings under the Company's lineon our
Line of credit, term bank facilities,
assumed debtCredit and the issuanceassumption of Common OP Units.
During 1998, the Company received$47.9 million of mortgage debt, which
includes a $3.0 million discount mark-to-market adjustment. In addition, we
purchased adjacent land and land improvements for several Properties for
approximately $14.3 million, including
approximately $365,000$559,000.
TOTAL PURCHASE DEBT
DATE ACQUIRED PROPERTY LOCATION SITES PRICE ASSUMED
- ------------- ------------------- ------------------- ----- ------------ ------------
($ millions) ($ millions)
March 12, 2002 Mt. Hood Village Welches, OR 450 $ 7.2 $ ---
July 10, 2002 Harbor View Village New Port Richey, FL 471 15.5 8.1
July 31, 2002 Golden Sun Apache Junction, AZ 329 6.3 3.1
July 31, 2002 Countryside Apache Junction, AZ 560 7.5 ---
July 31, 2002 Holiday Village Ormond Beach, FL 301 10.4 7.1
July 31, 2002 Breezy Hill Pompano Beach, FL 762 20.5 10.5
August 14, 2002 Highland Woods Pompano Beach, FL 148 3.9 2.5
August 7, 2002 Tropic Winds Harlingen, TX 531 4.9 ---
October 1, 2002 Silk Oak Lodge Clearwater, FL 180 6.2 3.9
December 18, 2002 Hacienda Village New Port Richey, FL 519 16.8 10.2
December 31, 2002 Glen Ellen Clearwater, FL 117 2.4 2.5
----- ------ -----
TOTALS 4,368 $101.6 $47.9
===== ====== =====
Also during 2002, we effectively sold 17 Properties as part of interest income, which was being held subject to the
completion of due diligence procedures on the Ellenburg Communities. The $14.3
million was initially recorded as a
liability until 1999 when a settlement of
certain related issues was substantially complete and accordingly, in a non-cash
transaction, relieved the liability and adjusted the purchase pricerestructuring of the Ellenburg Communities.College Heights Joint Venture discussed hereinafter. In
April 2000,addition, we sold Camelot Acres, a 319 site Property in Burnsville, Minnesota,
for approximately $14.2 million.
During the California Superior Court approved a settlement
agreement (the "Settlement")year ended December 31, 2003, we sold the three properties
listed in connection with the dissolution proceeding of
ECC and its affiliated partnerships. As part of the Settlement, the Company
received $13.5 million previously held in escrow in connection with the purchase
of the Ellenburg Communities and recorded $3.0 million of interest income
related to these funds. In connection with 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 by the purchaser of $19.0 million. The Company recorded a
$9.1 million gain on the sale of these Properties.table below. Proceeds from the Settlement
and property sales were used to pay downrepay amounts on
the Company's lineLine of credit. See Note
17 for further discussion of the Settlement.
On January 8, 1998, the Company acquired Quail Meadows, located in
Riverbank, California, for a purchase price of approximately $4.7 million. The
acquisition was funded with a borrowing under the Company's line of credit.
Quail Meadows consists of approximately 146 developed sites.
On April 30, 1998, the Company acquired Sherwood Forest RV Resort, located
adjacent to one of the Ellenburg Communities in Kissimmee, Florida, for a
purchase price of approximately $7.0 million. The acquisition was funded with a
borrowing under the Company's line of credit. Sherwood Forest RV Resort consists
of approximately 512 developed sites and a 33 acre expansion parcel.
On May 14, 1998, the Company acquired Casa Del Sol Resort III, located
adjacent to one of the Company's Properties in Peoria, Arizona, for a purchase
price of approximately $9.8 million. The acquisition was funded with a borrowing
under the Company's line of credit. Casa Del Sol Resort III consists of 238
developed sites.
F-12Credit.
TOTAL DISPOSITION GAIN ON
DATE DISPOSED PROPERTY LOCATION SITES PRICE SALE
- ------------- ----------------- -------------- ----- ------------ ------------
($ millions) ($ millions)
June 6, 2003 Independence Hill Morgantown, WV 203 $ 3.9 $ 2.8
June 6, 2003 Brook Gardens Hamburg, NY 424 17.8 4.1
June 30, 2003 Pheasant Ridge Mount Airy, MD 101 5.4 3.9
--- ----- -----
728 $27.1 $10.8
=== ===== =====
F-16
45
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INVESTMENT IN REAL ESTATE (CONTINUED)
On June 4, 1998,In December, 2003, we acquired three Resort Properties listed in the Company entered into a joint venture agreement with
Wolverine Investors L.L.C. to acquire eighteen manufactured home communities
(the "College Heights Communities").table
below. The aggregate purchase price for the
College Heights Communities was approximately $89 million. The Company
contributed approximately $19 million to the joint venture, Wolverine Investors
L.L.C. contributed approximately $2.0 million to the joint venture and the
remainder of the acquisition wasacquisitions were funded with a borrowing from a financial
institutionmonies held in short-term investments.
The acquisitions included the assumption of liabilities of approximately
$68 million. The Company's $19 million contribution
to the joint venture was funded with$650,000. Also during 2003, we acquired a borrowing under the Company's lineparcel of credit. Due to the Company's ability to control the joint venture through its
approximate 95% interest, the College Heights Communities and related operations
have been consolidated for financial reporting purposes.
On August 13, 1998, the Company acquired Sunset Oaks, located in Plant
City, Florida,land adjacent to one of the Company's existingour
Properties for a
purchase price of approximately $3.6 million. The acquisition was funded with a
borrowing under the Company's line of credit. Sunset Oaks consists of 168
developed sites.
On July 23, 1999, the Company acquired Coquina Crossing, located in St.
Augustine, Florida, for a purchase price of approximately $10.4 million. The
acquisition was funded with a borrowing under the Company's line of credit.
Coquina Crossing is a 748-site senior community with 269 developed sites and
zoned expansion potential for 479 sites. In addition, RSI, an affiliate of the
Company, purchased the model home inventory at the community for approximately
$1.1 million.
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 L.L.C., 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
$0.03 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 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 $0.03 per fully diluted share) was recorded in other income
on the accompanying statements of operations.
The$97,000.
TOTAL PURCHASE DEBT
DATE ACQUIRED PROPERTY LOCATION SITES PRICE ASSUMED
- ------------- ----------- ----------- ----- ------------ ------------
($ millions) ($ millions)
December 3, 2003 Toby's Arcadia, FL 379 $4.3 $---
December 15, 2003 Araby Acres Yuma, AZ 337 5.7 3.2
December 15, 2003 Foothill Yuma, AZ 180 1.8 1.4
All acquisitions have been accounted for utilizing the purchase method of
accounting and, accordingly, the results of operations of acquired assets are
included in the statementstatements of operations from the dates of acquisition. The
CompanyWe
acquired all of thethese Properties from unaffiliated third parties.
The Company isDuring the years ended December 31, 2003 and 2002, we capitalized
approximately $1.5 million and $5.7 million of costs, respectively, primarily
legal costs, relative to our efforts to effectively change the use and
operations of several Properties which are currently recorded in other assets.
These costs will be expensed if management determines these efforts will not be
successful. Due to the successful settlement of litigation related to one
Property, DeAnza Santa Cruz, we reclassified approximately $5.3 million of these
costs to land improvements and will depreciate these costs over 30 years (see
Note 17).
We actively seekingseek to acquire additional communitiesProperties and currently isare engaged
in negotiations relating to the possible acquisition of a number of communities.Properties.
At any time these negotiations are at varying stages which may include contracts
outstanding to acquire certain manufactured home
communitiesproperties which are subject to satisfactory
completion of the Company'sour due diligence review.review (see Note 18).
NOTE 6 - INVESTMENT IN JOINT VENTURE
On March 18, 1998, the Company joined Plantation Company, L.L.C. and Trails
Associates, L.L.C., two 50% joint venture investments with the principals of
Meadows Management Company, to own two manufactured home communities known as
"Plantation on the Lake" and "Trails West", for approximately $6.5 million.
Plantation on the Lake is located in Riverside, California and consists of 385
developed sites and 122 expansion sites. Trails West is located in Tucson,
Arizona and consists of 488 developed sites.VENTURES
The Company's investments were
funded with a $3.9 million borrowing under the Company's line of credit and with
the issuance of approximately $2.6 million in OP Units. During the year ended
December 31, 2000, the Company recorded approximately $7,000$2.1 million, $1.3 million, and $971,000
of net income from joint ventures in the years ended December 31, 2003, 2002 and
2001, respectively; and received approximately $230,000 in cash flow distributions.
F-13
46
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - INVESTMENT IN JOINT VENTURE (CONTINUED)
On December 28, 2000, the Company, through a joint venture with the
principals of Meadows Management Company (the "Voyager Joint Venture"), acquired
a 50% economic interest in Voyager RV Resort, a 1,576 site RV resort in Tucson,
Arizona, for total consideration of $8.0 million. Voyager RV Resort is adjacent
to Trails West. The Company's investment included cash of $3.0 million, its 50%
interest in land held through the joint venture valued at $2.0$1.5 million and notes
receivable$607,000 in
distributions from joint ventures in the principals of Meadows Management Company totaling $3.0
million.years ended December 31, 2003 and 2002,
respectively. Due to the Company's inability to control the joint ventures, the
Company accounts for its investment in the joint ventures on the equity method. During
the year ended December 31, 2000, the Company recorded approximately $7,000 of
Net Income from joint ventures and received approximately $230,000 in cash flow
distributions.
NOTE 7 - INVESTMENT IN AND ADVANCES TO AFFILIATES
Investment in and advances to affiliates consists principally of preferred
stock of RSI and LP Management Corp. (collectively "Affiliates") and advances
under a line of credit between the Company and RSI. The Company accounts for the
investment in and advances to Affiliates using the equity
method of accounting.
FollowingThe following is unaudited financial information fora summary of the Affiliates for the
years ended December 31, 2000 and 1999 (amountsCompany's investments in thousands):unconsolidated
joint ventures:
2000 1999
---- ----NUMBER OF ECONOMIC INVESTMENT AS OF INVESTMENT AS OF
PROPERTY LOCATION SITES INTEREST (a) DEC. 31, 2003 DEC. 31, 2002
- -------- -------------- --------- ------------ ---------------- ----------------
(in thousands) (in thousands)
Assets
Trails West .......................... Tucson, AZ 503 50% $ 34,2001,752 $ 23,201
Liabilities,1,917
Plantation ........................... Calimesa, CA 385 50% 2,825 2,861
Manatee .............................. Bradenton, FL 290 90% 45 631
Home ................................. Hallandale, FL 136 90% 1,082 1,092
Villa del Sol ........................ Sarasota, FL 207 90% 654 726
Voyager .............................. Tucson, AZ --- 25% 4,412 4,463
Preferred Interests in College Heights --- 17% 8,058 7,944
----- ------- -------
1,521 $18,828 $19,634
===== ======= =======
(a) The percentages shown approximate the Company's economic interest. The
Company's legal interest may differ.
F-17
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - INVESTMENT IN JOINT VENTURE (CONTINUED)
Effective September 1, 2002, the Company restructured its investment in
Wolverine Property Investment Limited Partnership (the "College Heights Joint
Venture" or the "Venture"), a joint venture with Wolverine Investors, LLP. The
Venture included 18 Properties with 3,581 sites. The results of operations of
the College Heights Joint Venture prior to restructuring were included with the
results of the Company due to the Company's voting equity interest and control
over the Venture. Pursuant to the restructuring, the Company sold its general
partnership interest, sold all of the Company's voting equity interest and
reduced the Company's total investment in the College Heights Joint Venture. As
consideration for the sale, the Company retained sole ownership of Down Yonder,
a 361 site Community in Clearwater, Florida, received cash of approximately $5.2
million and retained preferred limited partnership interests of approximately
$10.3 million, recorded net of a $2.4 million reserve. The continuing preferred
limited partnership interests will be accounted for using the equity method and
reported as an investment in a joint venture.
NOTE 7 - ACQUISITION OF REALTY SYSTEMS, INC.
On January 1, 2002, the Company purchased all of the common stock of Realty
Systems, Inc. ("RSI"). The Company previously owned the non-voting preferred
stock of RSI and had notes receivable from RSI which were recorded as an
investment in affiliate. The Company purchased the common stock of RSI from
Equity Group Investments, Inc., controlled by Samuel Zell, Chairman of the Board
of Directors of the Company, for approximately $675,000. As a result of this
acquisition, the Company owns and controls RSI and consolidates the financial
results of RSI with those of the Company. Prior to the purchase of the common
stock of RSI, we accounted for our investment in RSI using the equity method and
classified the investment as investment in and advances to affiliates.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition:
(amounts in thousands)
ASSETS
Buildings and other depreciable property.. $ 6,656
Cash and cash equivalents ................ 839
Notes receivable ......................... 4,772
Investment in joint ventures ............. 200
Inventory ................................ 35,524
Prepaid expenses and other assets ........ 2,724
--------
Total assets acquired .................. 50,715
LIABILITIES
Other notes payable ...................... (12,862)
Accounts payable and accrued expenses .... (2,718)
Accrued interest payable ................. (73)
--------
Total liabilities assumed .............. (15,653)
Conversion of amounts due
to the Company (12,985) (11,512)previous investment ........ (34,387)
--------
--------
Net investment in AffiliatesCash paid for common equity interest ..... $ 21,215 $ 11,689
======== ========
Home sales $ 42,645 $ 34,662
Cost of sales (29,819) (27,029)
Other revenues and expenses, net (10,418) (5,568)
-------- --------
Equity in income of Affiliates $ 2,408 $ 2,065
========(675)
========
NOTE 8 - NOTES RECEIVABLE
At December 31, 20002003 and 1999,2002, the Company had approximately $5.0$11.6 million
and $4.3$10.0 million in notes receivable, respectively.
On January 6, 1998, the Company funded a $12.3 million loan (the "Meadows
Loan") to Meadows Preservation, Inc. The Meadows Loan was collateralized by The
Meadows manufactured home community located in Palm Beach Gardens, Florida, bore
interest at the lesser of 9% or the cash flow of the Property and matured on
April 30, 1999, as amended. On April 1, 1999, the Company effectively exchanged
The Meadows Loan for an equity interest in the partnership that owns The
Meadows. The Company accounts for The Meadows as an acquisition and consolidates
the Property and related results of operations.
On May 12, 1998, the Company entered into an agreement to loan $5.9 million
to Trails Associates, L.L.C. (the "Trails West Loan") for development of the
Property known as Trails West. Subsequently, the Company had funded $3.2 million
under the Trails West Loan. However, pursuant to the aforementioned Voyager
Joint Venture transaction much of the land under development by Trails
Associates, L.L.C. was contributed to the Voyager Joint Venture and $1.2 million
of the Trails West Loan was repaid. The balance of $1.9 million on the Trails
West Loan is collateralized by the Property known as Trails West, bears interest
at the rate of approximately 8.5%, requires monthly interest payments and
matures on June 1, 2003.
F-14
47
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - NOTES RECEIVABLE (CONTINUED) On December 28, 2000, the
Company, in connection with the Voyager Joint Venture, entered into an agreement
to loan $3.0 million to certain principals of Meadows Management Company. The
notes are collateralized with a combination of Common OP Units and partnership
interests in this and other joint ventures. The notes bear interest at Primeprime
plus 0.5%, per annum, require quarterly interest only payments and mature on
December 31, 2011. The outstanding balance on these notes as of December 31,
2003 is $1.6 million.
F-18
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - NOTES RECEIVABLE (CONTINUED)
The Company has approximately $9.9 million in Chattel Loans receivable,
which yield interest at a per annum average rate of approximately 9.9%, have an
average term and amortization of 5 to 15 years, require monthly principal and
interest payments and are collateralized by manufactured homes at certain of the
Properties.
NOTE 9 - EMPLOYEE NOTES RECEIVABLE
InAs of December 1992, certain directors, officers and other individuals each
entered into subscription agreements with31, 2002, the Company to acquire 440,000had employee notes receivable of
approximately $2.7 million which were repaid in 2003. These notes were
collateralized by shares of the Company's common stock at $7.25 per share. The Company received from
these individuals notes (the "1993 Employee Notes") in exchange for their
shares. The 1993 Employee Notes accrue interest at 6.77%, mature on March 2,
2003,Common Stock and are recourse against the employees in the event the pledged shares are
insufficient to repay the obligations.
On January 2, 1996, certain memberspresented as a
reduction of management of the Company entered
into subscription agreements with the Company to acquire a total of 270,000
shares of the Company's common stock at $17.375 per share, the market price on
that date. The Company received from these individuals notes (the "1996 Employee
Notes") in exchange for their shares. The 1996 Employee Notes accrue interest at
5.91%, mature on January 2, 2005, and are recourse against the employees in the
event the pledged shares are insufficient to repay the obligations.
On March 23, 1998, a member of management of the Company entered into a
subscription agreement with the Company to acquire a total of 5,000 shares of
the Company's common stock at $25.75 per share, the market price on that date.
The Company received from this individual a note in exchange for his shares. The
note accrued interest at 5.97%, matured on March 23, 2008, and is recourse
against the employee in the event the pledged shares are insufficient to repay
the obligation. In January, 2000, the individual returned the shares of common
stock and the note was cancelled.Stockholders' Equity.
NOTE 10 - LONG-TERM BORROWINGS
As of December 31, 20002003 and December 31, 1999,2002, the Company had outstanding
mortgage indebtedness of approximately $556.6$1,076 million and $513.2$575.4 million,
respectively, encumbering 73114 and 7266 of the Company's Properties, respectively.
As of December 31, 20002003 and December 31, 1999,2002, the carrying value of such
Properties was approximately $631$1,124 million and $638$720 million, respectively.
On February 24, 2000, the Company entered intoThe outstanding mortgage agreements
collateralizing two Properties for a totalindebtedness as of $14.6 million. The mortgage notes
mature on March 1, 2010, amortize beginning March 1, 2000 over 30 years and bear
interest at a rate of approximately 8.3% per annum.
On June 30, 2000, the Company obtained $110 million in debt financing
consisting of two mortgage notesDecember 31, 2003 consists of:
- 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 $60Approximately $501.4 million of mortgage debt secured("Mortgage Debt") consisting
of 49 loans collateralized by the seven51 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 repaymentbeneficially owned by separate
legal entities that are subsidiaries of the $60Company, which we closed on
October 17, 2003 (the "Recap"). Of this Mortgage Debt, $177.9 million of mortgage debt.bears
interest at 5.35% per annum and matures November 1, 2008; $71.1 million
bears interest at 5.72% per annum and matures November 1, 2010; $79.1
million bears interest at 6.02% per annum and matures November 1, 2013; and
$173.3 million bears interest at 6.33% per annum and matures November 1,
2015. The outstanding mortgage indebtedness consists of:Mortgage Debt amortizes over 30 years.
- - A $265.0 million mortgage note (the "$265 Million Mortgage") collateralized
by 2928 Properties beneficially owned by MHC Financing Limited Partnership.
The $265 Million Mortgage has a maturity date of January 2, 2028 and paysbears
interest at 7.015%. per annum. 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 presented net of a settled hedge of $3.0 million (net of
accumulated amortization of $110,000)$357,000) which is being amortized into
interest expense over the life of the loan.
- - A $66.5 million mortgage note (the "College Heights Mortgage")
collateralized by the 18 College Heights Communities. 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.
F-15
48
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - LONG-TERM BORROWINGS (CONTINUED)
- - A $93.8$91.4 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%, per annum, amortizes
beginning August 1, 2000 over 30 years and matures July 1, 2010.
- - A $22.9$48.9 million mortgage note (the "Stagecoach Mortgage") collateralized by
7 Properties beneficially owed by MHC Stagecoach L.L.C. The Stagecoach
Mortgage bears interest at a rate of 6.98% per annum, amortizes beginning
September 1, 2001 over 10 years and matures September 1, 2011.
- - A $44.5 million mortgage note (the "Bay Indies Mortgage") collateralized by
one Property beneficially owned by MHC-BayMHC Bay Indies, Financing Limited
Partnership. TheL.L.C. On April 17,
2003, we entered into an agreement to refinance and increase the Bay Indies
Mortgage from approximately $21.9 million to $45 million. Under the new
agreement, the Bay Indies Mortgage bears interest at a rate of 7.48%,5.69% per annum,
amortizes beginning August 1, 1994 over 27.525 years and matures July 1,
2004.April 17, 2013.
F-19
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - LONG-TERM BORROWINGS (CONTINUED)
- A $15.7$15.3 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%, per
annum, amortizes beginning August 1, 2000 over 30 years and matures
July 1, 2010.
- - Approximately $94.8$112.2 million of mortgage debt on 1820 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 7.15%6.5% to 8.92%.9.3% per annum. Included in this
debt, the Company has a $2.4 million loan recorded to account for a
direct financing lease entered into in May 1997. On August 9, 2000,In addition, $4.6
million of this debt was assumed in the Company amended itsacquisition of three
Properties in December, 2003 (see Note 5).
We have an unsecured lineLine of creditCredit with a bankgroup of banks (the "Credit Agreement""Line of
Credit") with a total facility of $110 million, 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 to1.65% that matures on August 9, 2003. The Company pays2006. We
pay a quarterly fee on the average unused amount of such creditthe total facility equal to
0.15% of such amount. In October, 2003, all amounts outstanding on the Line of
Credit were repaid with proceeds from the Recap. As of December 31, 2000, $59.92003, $110
million was outstandingavailable under the Credit Agreement. The Company hasLine of Credit had a total
facility of $150 million prior to amendment in December, 2003.
We had 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%1.375%. TheIn October, 2003,
we paid off 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 ofproceeds from 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 CompanyRecap.
On October 29, 2001, we entered into an interest rate swap agreement (the
"1998"2001 Swap"), effectively fixing LIBOR on $100 million of the Company'sour floating rate debt
at 6.4%approximately 3.7% per annum for the period 1998October 2001 through 2003.August 2004.
The valueterms of the 19982001 Swap required monthly settlements on the same dates
interest payments were due on the debt. In accordance with SFAS No. 133 as
herein defined, the 2001 Swap was impacted
by changesreflected at market value. In November, 2003,
we unwound the 2001 Swap at a cost of approximately $3 million, which is
included in interest and related amortization in 2003 in the market rateaccompanying
Consolidated Statements 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.Operations.
Aggregate payments of principal on long-term borrowings for each of the
next five years and thereafter are as follows (amounts in thousands):
YEAR AMOUNT
---- ------- -------------------------------------- ----------
20012004 $ 14,921
2002 105,667
2003 73,360
2004 32,677--
2005 3,2276,478
2006 17,409
2007 265,113
2008 200,908
Thereafter 489,832
---------586,371
Net unamortized premiums and discounts 17
----------
Total $ 719,684
=========$1,076,296
==========
F-16F-20
49
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - LEASE AGREEMENTS
The leases entered into between the tenant and the Company for the rental
of a site are generally month-to-month or for a period of one to ten years,
renewable upon the consent of the parties or, in some instances, as provided by
statute. NoncancelableNon-cancelable long-term leases with remaining terms up to eleven years, are in effect at certain sites within
nineteenapproximately 25 of the Properties. Rental rate increases at these Properties
are primarily a function of increases in the Consumer Price Index, taking into
consideration certain floors and ceilings. Additionally, periodic market rate
adjustments are made as deemed necessary. Future minimum rents are scheduled to
be received under noncancelablenon-cancelable tenant leases at December 31, 20002003 as follows
(amounts in thousands):
YEAR AMOUNT
---- ------- ---------- --------
2001 $ 37,389
2002 20,016
2003 8,213
2004 4,27246,415
2005 4,39348,112
2006 38,750
2007 31,794
2008 22,253
Thereafter 23,92120,708
--------
Total $ 98,204$208,032
========
NOTE 12 - GROUND LEASES
The Company leases land under noncancellablenon-cancelable operating leases at certain of
the Properties expiring in various years from 2022 to 2031 with terms which
require twelve equal payments per year plus additional rents calculated as a
percentpercentage of gross revenues. For the years ended December 31, 2000, 19992003, 2002 and
1998,2001, ground lease rent was approximately $1.6 million.million per year. Minimum future
rental payments under the ground leases are approximately $1.6 million for each
of the next five years and $29.5approximately $26.3 million thereafter.
NOTE 13 - TRANSACTIONS WITH RELATED PARTIES
Equity Group Investments, Inc. ("EGI"), an entity controlled by Mr. Samuel
Zell, Chairman of the Company's Board of Directors, and certain of its
affiliates have provided services such as administrative support and investor
relations, corporate
secretarial, real estate tax evaluation services, market consulting and research
services, and computer and support services.relations. Fees paid to EGI and its affiliates amounted to approximately $26,000, $74,000$300,
$1,000 and $104,000$2,000 for the years ended December 31, 2000, 19992003, 2002 and 1998,2001,
respectively. There were no significant amounts due to these affiliates as of
December 31, 20002003 and 1999,2002, respectively.
Certain related entities, owned by persons affiliated with Mr. Zell, have provided services
to the Company. These entities include, but are not limited to, Rosenberg & Liebentritt, P.C. which provided legal services including
property acquisition services in 1999 and 1998; The Riverside
Agency, Inc. which provided insurance brokerage services and Equity Office Properties TrustTwo North Riverside
Plaza Joint Venture Limited Partnership from which providedthe Company leases office
space to the Company.space. Fees paid to these entities amounted to approximately $442,000, $473,000$404,000, $645,000
and $850,000$454,000 for the years December 31, 2000,
19992003, 2002 and 1998,2001, respectively.
Amounts due to these affiliates were approximately $32,000 and $33,000$52,000 as of
December 31, 20002003 and 1999,2002, respectively. OfIn addition, during 2003, we paid
$25,000 to J. Green & Co., L.L.C. for services provided by Mr. Berman, the
amounts chargedCompany's current Chief Financial Officer, prior to his employment by these affiliates during the
years ended December 31, 2000,
1999 and 1998, approximately $0, $12,000 and $175,000, respectively, were
capitalized.Company.
Related party agreements or fee arrangements are generally for a term of
one year and approved by independent members of the Company's Board of
Directors.
F-17
50
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - STOCK OPTION PLAN AND STOCK GRANTS
AThe Company's Stock Option and Stock Award Plan (the "Plan") was adopted by the Company in
December 1992.1992 and amended and restated from time to time, most recently
effective March 23, 2001. Pursuant to the Plan, certain officers, directors, employees
and consultants of the Company may beare offered the opportunity (i) to acquire shares
of common stockCommon Stock through the grant of stock options ("Options"), including
non-qualified stock options and, for key employees, incentive stock options
within the meaning of Section 422 of the Code.Internal Revenue Code; and (ii) to be
awarded shares of Common Stock ("Restricted Stock Grants"), subject to
conditions and restrictions determined by the Compensation, Nominating, and
Corporate Governance Committee of the Board (the "Compensation Committee"). The
Compensation Committee will determine the vesting schedule, if any, of each
Option and the term, which term shall not exceed ten years from the date of
grant. As to the Options that have been granted through December 31, 2000,2003 to
officers, employees and consultants, generally, one-third are exercisable one
year after
F-21
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - STOCK OPTION PLAN AND STOCK GRANTS (CONTINUED)
the initial grant, one-third are exercisable two years following the date such
Options were granted and the remaining one-third are exercisable three years
following the date such Options were granted. The Plan allows for 10,000
Options to be granted annually to each director. The common stock with respect
to which the Options may be granted during any calendar year to any grantee
shall not exceed 250,000 shares. In addition, the Plan provides for the granting
of stock appreciation rights ("SARs") and restricted stock grants ("Stock
Grants"). A maximum of 4,000,0006,000,000 shares of
common stock wasCommon Stock are available for grant under the Plan and no more than 250,000
shares may be subject to grants to any one individual in any calendar year.
Grants under the Plan are made by the Compensation Committee, which
determines the individuals eligible to receive awards, the types of awards, and
the terms, conditions and restrictions applicable to any award. In addition, the
terms of two specific types of awards are contemplated under the Plan:
- The first type of award is a grant of Options or Restricted Stock
Grants of Common Stock made to each member of the Board at the meeting
held immediately after each annual meeting of the Company's
stockholders. Generally, if the director elects to receive Options,
the grant will cover 10,000 shares of Common Stock at an exercise
price equal to the fair market value on the date of grant. If the
director elects to receive a Restricted Stock Grant of Common Stock,
he or she will receive an award of 2,000 shares. Exercisability or
vesting with respect to either type of award will be with respect to
one-third of the award after six months, two-thirds of the award after
one year, and the full award after two years.
- The second type of award is a grant of Common Stock in lieu of 50% of
their bonus otherwise payable to individuals with a title of Vice
President or above. A recipient can request that the Compensation
Committee pay a greater or lesser portion of the bonus in shares of
Common Stock.
Prior to 2003, we accounted for our stock compensation in accordance with
APB No. 25, "Accounting for Stock Issued to Employees", based upon the intrinsic
value method. This method results in no compensation expense for Options issued
with an exercise price equal to or exceeding the market value of the Common
Stock on the date of grant. Effective January 1, 2003, we elected to account for
our stock-based compensation in accordance with SFAS No. 123 and its amendment
(SFAS No. 148), "Accounting for Stock Based Compensation", which will result in
compensation expense being recorded based on the fair value of the Options and
other equity awards issued. SFAS No. 148 provides three possible transition
methods for changing to the fair value method. We have elected to use the
modified-prospective method. This method requires that we recognize stock-based
employee compensation cost from the beginning of the fiscal year in which the
recognition provisions are first applied as ofif the fair value method had been
used to account for all employee awards granted, or settled in fiscal years
beginning after December 31, 2000.15, 1994. The following table illustrates the effect on
net income and earnings per share as if the fair value method was applied to all
outstanding and unvested awards in each period presented (amounts in thousands,
except per share data):
2003 2002 2001
------- ------- -------
Net income available for Common
Shares as reported ................ $27,014 $36,445 $32,083
Add: Stock-based compensation
expense included in net income as
reported .......................... 2,139 2,185 2,549
Deduct: Stock-based compensation
expense determined under the fair
value based method for all awards.. (2,139) (2,086) (2,203)
------- ------- -------
Pro forma net income available for
Common Shares ..................... $27,014 $36,544 $32,429
======= ======= =======
Pro forma net income per Common
Share - Basic ..................... $ 1.22 $ 1.69 $ 1.54
======= ======= =======
Pro forma net income per Common
Share - Fully Diluted ............. $ 1.20 $ 1.65 $ 1.50
======= ======= =======
F-22
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - STOCK OPTION PLAN AND STOCK GRANTS (CONTINUED)
Restricted Stock Grants
In 2000, 1999 and 1998, the Company issued 19,181, 14,666 and 18,238 shares
related toawarded 233,500 Restricted Stock Grants respectively, which representedto certain
members of management of the Company. These Restricted Stock Grants vested over
five years, but may be restricted for a portionperiod of up to ten years depending upon
certain employee bonuses.performance benchmarks tied to increases in funds from operations being
met. The fair market value of these Restricted Stock Grants of approximately
$525,000, $352,000 and $445,000 at$5.7 million as of the date of grant was recordedtreated in 1998 as deferred
compensation and amortized in accordance with their vesting. The Company
recognized compensation expense by the Companyof approximately $722,000, $1.1 million and $2.0
million related to these Restricted Stock Grants in 2000, 1999and 1998,2003, 2002, and 2001,
respectively. The balance of unamortized deferred compensation related to these
Restricted Stock Grants is $0 as of December 31, 2003.
In 1998,1999, the Company awarded 233,50065,000 Restricted Stock Grants to certain
members of senior management of the Company. These Restricted Stock Grants
vested over three years with one-half vesting in 1999. The fair market value of
these Restricted Stock Grants of approximately $1.5 million as of the date of
grant was treated in 1999 as deferred compensation and amortized in accordance
with their vesting. The Company recognized compensation expense of approximately
$0, $0, and $386,000 related to these Restricted Stock Grants in 2003, 2002, and
2001, respectively. The balance of unamortized deferred compensation related to
these Restricted Stock Grants is $0 as of December 31, 2003.
In 2000, the Company awarded 69,750 Restricted Stock Grants to certain
members of senior management of the Company. These Restricted Stock Grants
vested over three years with one-half vesting in 2000. The fair market value of
these Restricted Stock Grants of approximately $1.9 million as of the date of
grant was treated in 2000 as deferred compensation and amortized in accordance
with their vesting. The Company recognized compensation expense of approximately
$0, $478,000, and $478,000 related to these Restricted Stock Grants in 2003,
2002, and 2001, respectively. The balance of unamortized deferred compensation
related to these Restricted Stock Grants is $0 as of December 31, 2003.
In 2001, the Company awarded 43,000 Restricted Stock Grants to certain
members of management of the Company. These Restricted Stock Grants vest over
five years, but may be restricted for a period of up to ten years depending upon
certain performance benchmarks tied to increases in funds from operations being
met. The fair market value of these Restricted Stock Grants of approximately
$5.7$1.2 million as of the date of grant was treated in 19982001 as deferred
compensation.compensation and amortized in accordance with their vesting. The Company
amortizedrecognized compensation expense of approximately $593,000$167,000, $239,000 and $569,000$239,000
related to these Restricted Stock Grants in 20002003, 2002 and 1999, respectively, and2001, respectively.
The balance of unamortized deferred compensation related to these Restricted
Stock Grants totalingis approximately 12,000
shares valued at $295,000 were cancelled.$335,000 as of December 31, 2003.
In 1999,2002, the Company awarded 65,00069,750 Restricted Stock Grants to certain
members of senior management of the Company. These Restricted Stock Grants vest
over three years, with
one-half vestingbut may be restricted for a period of up to ten years
depending upon certain performance benchmarks tied to increases in 1999.funds from
operations being met. The fair market value of these Restricted Stock Grants of
approximately $1.5$2.2 million as of the date of grant was treated in 19992002 as
deferred compensation.compensation and amortized in accordance with their vesting. The
Company amortizedrecognized compensation expense of approximately $385,000$380,000 and $770,000$1.4
million related to these Restricted Stock Grants in 20002003 and 1999,2002, respectively.
The balance of unamortized deferred compensation related to these Restricted
Stock Grants is $0 as of December 31, 2003.
In 2000,2003, 2002, and 2001, the Company awarded 69,75035,000, 16,000, and 16,000
Restricted Stock Grants, respectively, to certain members of
senior management of the Company. These Stock Grants vest over three yearsdirectors with one-half vesting in 2000. Thea fair market value of
these Stock Grantsapproximately $733,000, $376,000 and $302,000 in 2003, 2002 and 2001
respectively. The Company recognized compensation expense of approximately
$1.9 million as of the date of grant was treated in 2000 as
deferred compensation. The Company amortized approximately $955,000$470,000 related to these Restricted Stock Grants in 2000.
In 1999, the Plan was amended to provide a Stock Grant2003. The balance of
2,000 shares
vesting over three years in lieu of the 10,000 Options granted after the
amendment to each director, if the director so elects. The Company recognized
approximately $134,000 and $129,000 of expense and recorded approximately
$267,000 and $257,000 ofunamortized deferred compensation in 2000 and 1999, respectively,
related to 16,000the 2002 and 2001 Restricted Stock
Grants in both 2000is $125,000 and 1999.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its Options and Stock Grants because,$0, respectively, as discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123")
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's Options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized. Additionally, the amount
recognized as expense for the Stock Grants during any given year of the
performance period is dependent on certain performance benchmarks being met.
F-18December 31, 2003.
F-23
51
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - STOCK OPTION PLAN AND STOCK GRANTS (CONTINUED)
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for itsStock Options and Stock Grants under the fair value method of that
Statement. The fair value for the Options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 2000, 1999 and 1998, respectively: risk-free interest rates of
5.5%, 6.3% and 5.7%; dividend yields of 6.3%, 6.3% and 5.8%; volatility factors
of the expected market price of the Company's common stock of .20, .21 and .23;
and a weighted-average expected life of the Options of 5 years.
The fair value of the Stock Grants granted in 2000, 1999 and 1998 has beeneach grant is estimated at
approximately 30% below the calculated fair market value on the grant date of grant
because these Stock Grants may remain restricted even after they become fully
vested.using the
Black-Scholes model. The Black-Scholes option valuation model was developed for use in
estimatingfollowing table includes the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's Options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of the Company's Options. In addition, the existing
models are not representative of the effects on reported net income for future
years.
For purposes of pro forma disclosures, the estimated fair value of the
Options is amortized to expense over the Options' vesting periodthat were made
and the estimated fair value of the Stock Grants is amortized to expense over the same
period. The pro forma effect of SFAS No. 123 on the Company's net income for the
years ended December 31, 2000, 1999 and 1998 was ($134,000) ($0 per share),
($138,000) ($0 per share) and $225,000 ($0.01 per share), respectively.values:
ASSUMPTION 2003 2002 2001
------- ----------- -----------
(pro forma) (pro forma)
Dividend yield 5.6 6.3 6.3
Risk-free interest rate 3.5 3.5 5.5
Expected life 5 years 5 years 5 years
Expected volatility .14 .19 .20
- ---------------------------------------------------------------------------------------------------------
Estimated Fair Value of Options Granted $40,600 $37,432 $428,861
A summary of the Company's stock option activity, and related information
for the years ended December 31, 2000, 19992003, 2002 and 19982001 follows:
Shares Subject Weighted Average
to Options Share Exercise Price Per Share
---------------- ------------------------WEIGHTED AVERAGE
SHARES SUBJECT EXERCISE PRICE PER
TO OPTIONS SHARE
-------------- ------------------
Balance at December 31, 1997 1,690,493 $19.912000 2,107,871 $22.30
Options granted 378,986 22.04.......... 177,150 30.03
Options exercised (141,403) 18.07........ (387,115) 19.98
Options canceled (28,697) 24.09......... (69,558) 25.04
--------- ------
Balance at December 31, 1998 1,899,379 21.082001 1,828,348 23.44
Options granted 313,400 23.91.......... 20,000 33.55
Options exercised (126,565) 19.25........ (282,959) 20.48
Options canceled (66,767) 24.08......... (49,492) 24.94
--------- ------
Balance at December 31, 1999 2,019,447 $21.722002 1,515,897 24.08
Options granted 440,077 25.94.......... 20,000 32.67
Options exercised (250,092) 23.17........ (302,526) 21.06
Options canceled (101,227) 24.33......... (9,437) 25.60
--------- ------
Balance at December 31, 2000 2,108,205 $22.302003 1,223,934 24.95
=========
The following table summarizes information regarding Options outstanding at
December 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- --------------------------------
WEIGHTED
AVERAGE
OUTSTANDING WEIGHTED
CONTRACTUAL WEIGHTED AVERAGE AVERAGE
RANGE OF EXERCISE PRICES OPTIONS LIFE (IN YEARS) EXERCISE PRICE OPTIONS EXERCISE PRICE
- ------------------------ ---------- --------------- ---------------- --------- --------------
$15.63 to $21.38 183,500 2.4 $18.85 183,500 $18.85
$22.00 to $24.38 412,737 4.7 $23.55 412,737 $23.55
$25.06 to $26.99 446,443 5.4 $26.23 446,443 $26.23
$30.65 to $33.55 181,254 8.1 $31.19 112,958 $31.11
--------- --- ------ --------- ------
1,223,934 5.1 $24.95 1,155,638 $24.58
========= === ====== ========= ======
As of December 31, 2000, 19992003, 2002 and 1998, 416,6032001, 2,148,524 shares, 747,2582,194,087 shares
and 1,075,0912,250,345 shares remained available for grant, respectively, and 1,562,074respectively; of these
1,036,853, shares, 1,426,0721,071,853 shares and 1,269,9821,157,603 shares, were exercisable, respectively.
Exercise pricesrespectively, remained
available for Options outstanding as of December 31, 2000 ranged from
$12.875 to $26.750, with the substantial majority of the exercise prices
exceeding $17.25. The remaining weighted-average contractual life of those
Options was 6.3 years.Restricted Stock Grants.
F-24
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - PREFERRED STOCK
The Company's Board of Directors is authorized under the Company's charter,
without further stockholder approval, to issue, from time to time, in one or
more series, 10,000,000 shares of $.01 par value preferred stock (the "Preferred
Stock"), with specific rights, preferences and other attributes as the Board may
determine, which may include preferences, powers and rights that are senior to
the rights of holders of the Company's common stock.Common Stock. However, under certain
circumstances, the issuance of preferred stock may require stockholder approval
pursuant to the rules and regulations of theThe New York Stock Exchange. As of
December 31, 20002003 and 1999,2002, no Preferred Stock was issued by the Company.
F-19
52
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - SAVINGS PLAN
The Company has a qualified retirement plan, with a salary deferral feature
designed to qualify under Section 401 of the Code (the "401(k) Plan"), to cover
its employees and those of its Subsidiaries, if any. The 401(k) Plan permits
eligible employees of the Company and those of any Subsidiary to defer up to 16%19%
of their eligible compensation on a pre-tax basis subject to certain maximum
amounts. In addition, the Company will match dollar-for-dollar the participant's
contribution up to 4% of the participant's eligible compensation.
In addition, amounts contributed by the Company will vest, on a prorated
basis, according to the participant's vesting schedule. After five years of
employment with the Company, the participants will be 100% vested for all
amounts contributed by the Company. Additionally, a discretionary profit sharing
component of the 401(k) Plan provides for a contribution to be made annually for
each participant in an amount, if any, as determined by the Company. All
employee contributions are 100% vested. The Company's contribution to the 401(k)
Plan was approximately $315,000, $385,000$240,000, $248,000, and $256,000,$353,000, for the years ended
December 31, 2000, 19992003, 2002, and 1998,2001, respectively.
The Company's anticipatedCompany has established a supplemental executive retirement plan contribution(the
"SERP") to provide certain officers and directors an opportunity to defer a
portion of their eligible compensation in order to save for retirement and for
the profit sharing componenteducation of their children. The SERP is restricted to investments in
Company common shares, certain marketable securities that have been specifically
approved, or cash equivalents. In accordance with EITF 97-14 "Accounting for
Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi
Trust and Invested", the deferred compensation liability represented in the SERP
and the securities issued to fund such deferred compensation liability are
consolidated by the Company on the balance sheet. Assets held in the SERP are
included in other assets and are classified as trading securities and reported
at fair value, with unrealized gains and losses included in earnings. Company
shares held in the SERP are classified in stockholders equity due to the
inability of the 401(k) Plan is
approximately $85,000 for the year ended December 31, 2000.Company to repurchase these shares.
NOTE 17 - COMMITMENTS AND CONTINGENCIES
DEANZA SANTA CRUZ
MOBILE ESTATES
The residents of DeAnza Santa Cruz Mobile Estates, a propertyProperty 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
trialAs a result 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, whichone action, the
Company believes is fair and accurate.
DeAnza Santa Cruz Mobile Estates is a 198-site community overlooking the
Pacific Ocean. It is subjectrebated approximately $36,000 to the City's rent control ordinance which limits
annual rent increases to 75% of CPI.residents. 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 and separately
bill tenants at the Property for both water and sewer in 1993 in the face of the
City's rapidly rising utility costs.
Under California Civil Code Section 798.41, DeAnza was required to reduce
rent by an amount equal to the average cost of usage over the preceding 12
months. This was done. With respect to water, not looking to submit to
jurisdiction of the California Public Utility Commission ("CPUC"), DeAnza relied
on California Public Utilities Code Section 2705.5 ("CPUC Section 2705.5") to
determine what rates would be charged for water on an ongoing basis without
becoming a public utility. DeAnza and the Company interpreted the statute as
providing that in a submetered mobile home 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 Property 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") then proceeded to a jury trial alleging these
"overcharges" entitled them to an award of punitive damages. In January 1999, a
jury awarded the HOA $6.0 million in punitive damages. On December 21, 2001 the
California Court of Appeal for the Sixth District reversed the $6.0 million
punitive damage award, the related award of attorneys' fees, and, DeAnza and concurred with DeAnza. Their relianceas a result,
all post-judgment interest thereon, on CPUC Section
2705.5 made both legal and practical sense inthe basis that residents paid only what they
would pay if they lived inpunitive damages are not
available as a residential neighborhood within the City and
permitted DeAnza to recoup partremedy for a statutory violation of the expensesCalifornia Mobilehome
Residency Law ("MRL"). The decision of operatingthe appellate court left the HOA, the
plaintiff in this matter, with the right to seek a submetered system
throughnew trial in which it must
prove its entitlement to either the readinessstatutory penalty and attorneys' fees
available under the MRL or punitive damages based on causes of action for fraud,
misrepresentation or other tort. In order to serve charge.
F-20resolve this matter, the Company
accrued for and agreed to pay $201,000 to the HOA. This payment resolved the
punitive damage claim. The HOA's attorney has made a motion asking for an award
of attorneys' fees and costs in the amount of approximately $1.5 million as a
result of this resolution of the litigation. On April 2, 2003 the court awarded
attorney's fees to the HOA's attorney in the amount of $593,000 and court costs
of approximately $20,000. The Company has appealed this award and has not
accrued for the amount in its consolidated financial statements.
F-25
53
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
OverOTHER CALIFORNIA RENT CONTROL LITIGATION
As part of the Company's effort to realize the value of its Properties
subject to rent control, the Company has initiated lawsuits against several
municipalities in California. The Company's goal is to achieve a periodlevel of
18 months from 1993 into Mayregulatory fairness in California's rent control jurisdictions, and in
particular those jurisdictions that prohibit increasing rents to market upon
turnover. This regulatory feature, called vacancy control, allows tenants to
sell their homes for a premium representing the value of 1995,the future discounted
rent-controlled rents. In the Company's view, such regulation results in a
seriestransfer of complaints were filed by the HOA and Herbert Rossman,value of the Company's shareholders' land, which would otherwise
be reflected in market rents, to tenants upon the sales of their homes in the
form of an inflated purchase price that cannot be attributed to the value of the
home being sold. As a resident, against
DeAnza, and later,result, in the Company. DeAnzaCompany's view, the Company loses the value
of its asset and the selling tenant leaves the Community with a windfall
premium. The Company demurredhas discovered through the litigation process that certain
municipalities considered condemning the Company's Communities at values well
below the value of the underlying land. In the Company's view, a failure to
eacharticulate market rents for sites governed by restrictive rent control would put
the Company at risk for condemnation or eminent domain proceedings based on
artificially reduced rents. Such a physical taking, should it occur, could
represent substantial lost value to shareholders. The Company is cognizant of
the need for affordable housing in the jurisdictions, but asserts that
restrictive rent regulation with vacancy control does not promote this purpose
because the benefits of such regulation are fully capitalized into the prices of
the homes sold. The Company estimates that the annual rent subsidy to tenants in
these complaintsjurisdictions is approximately $15 million. In a more well-balanced
regulatory environment, the Company would receive market rents that would
eliminate the subsidy and homes would trade at or near their intrinsic value.
In connection with such efforts, the Company recently announced it has
entered into a settlement agreement with the City of Santa Cruz, California and
that, pursuant to the settlement agreement, the City amended its rent control
ordinance to exempt the Company's property from rent control as long as the
Company offers a long term lease which gives the Company the ability to increase
rents to market upon turnover and bases annual rent increases on the grounds thatConsumer
Price Index ("CPI"). The settlement agreement benefits the CPUC had exclusive jurisdictionCompany's
shareholders by allowing them to receive the value of their investment in this
Community through vacancy decontrol while preserving annual CPI based rent
increases in this age restricted Property.
The Company's efforts to achieve a balanced regulatory environment
incentivize tenant groups to file lawsuits against the Company seeking large
damage awards. The homeowners association at Contempo Marin ("CMHOA"), a 396
site Property in San Rafael, California, sued the Company in December 2000 over
a prior settlement agreement on a capital pass-through after the settingCompany sued
the City of water rates and that residents underSan Rafael in October 2000 alleging its rent control had to first
exhaust their administrative remedies before proceeding in a civil action. At
one point,ordinance is
unconstitutional. In the Contempo Marin 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 billing and submetering issues related to both water and sewer. The
Company and DeAnzaCMHOA prevailed on all issues relateda motion
for summary judgment on an issue that permits the Company to sewer and the rent
rollback related to water, but the hearing officer determinedcollect only $3.72
out of a monthly pass-through amount of $7.50 that the Company could only pass through its actual cost of water, i.e., a prorated readinessbelieves had been
agreed to serve charge and tax thereon. The hearing officer did not deal withby the subsidy
being given to residents through the quantity charge and ordered a rebateCMHOA 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.
The Company requested that the City and the HOA agree to a further stay
pending appeal to the court of appeal, but they refused and the appeal 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 and DeAnza 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 appeal.
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 appeal 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 appeal further agreed
with the Company that the City's hearing officer did not have the authority
under California Civil Code Section 798.41 to establish rates that could be
charged in the future.
Following this decision, the CPUC granted the Company its certificate of
convenience and necessity on December 17, 1998 and approved cost-based rates and
charges for water that exceed what residents were paying under the Company's
reliance on CPUC Section 2705.5. Concurrently, the CPUC also issued an Order
Instituting Investigation ("OII") confirming its exclusive jurisdiction over the
issue of water rates in a submetered system and commencing an investigation into
the confusion and turmoil over billings in submetered properties. Specifically,
the OII states: "The Commission has exclusive and primary jurisdiction over the
establishment of rates for water and sewer services provided by private
entities."
Specifically, the CPUC ruling regarding the Company's application stated:
"The ultimate question of what fees and charges may or may not be assessed,
beyond external supplier pass-through charges, for in-park facilities when a
mobile home park does not adhere to the provisions of CPUC Section 2705.5, must
be decided by the Commission."
F-21
54
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
After the court of appeal decision, the HOA brought all of its members back
into the underlying civil action for the purpose of determining damages,
including punitive damages, against the Company. The trial was continued from
July 1998 to January 1999 to give the CPUC time to act on the Company's
application. Notwithstanding the action taken by the CPUC in issuing the OII in
December 1998, the trial court denied the Company's motion to dismiss on
jurisdictional grounds and trial commenced before a jury on January 11, 1999.
Not only did the trial court not consider the Company's motion to dismiss,
the trial court refused to allow evidence of the OII or the Company's CPUC
approval to go before the jury. Notwithstanding the Company's strenuous
objections, the judge also allowed evidence of the Company's and DeAnza's
litigation tactics to be used as evidence of bad faith and oppressive actions
(including evidence of the application to the CPUC requesting a $22.00 readiness
to serve charge). The Company's motion for a mistrial based upon these
evidentiary rulings was denied. On January 22, 1999, the jury returned a verdict
awarding $6.0 million of punitive damages against the Company and DeAnza. The
Company had previously agreed to indemnify DeAnza on the matter.
The Company has bonded the judgment pending appeal in accordance with
California procedural rules, which require a bond equal to 150% of the amount of
the judgment. Post-judgment interest will accrue at the statutory rate of 10.0%
per annum.
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
(which also accrues interest at the statutory rate of 10.0% per annum) and the
appeal has been fully briefed by both parties. The Company is awaiting notice of
scheduling of oral argument on the appeal.
In two related appeals, the Company had argued that the trial court's
ability to enter an award of attorneys' fees in favor of the HOA and to take
certain other actions was preempted by the exercise of exclusive jurisdiction by
the CPUC over the issue of how to set rates for water in a submetered mobile
home park. During 2000, the California court of appeal rejected the Company's
preemption argument with respect to these prior rulings in favor of plaintiffs,
one of which had awarded plaintiffs approximately $100,000 of attorneys' fees.
The California Supreme Court declined to accept the case for review and the
Company paid the judgment, including post-judgment interest thereon, and settled
the matter for approximately $200,000 late in 2000.
The jury verdict appeal also raises a similar jurisdictional argument as
well as several other arguments for reversal or reduction of the punitive damage
award or for a new trial. An important distinction between the appellate ruling
in 2000 and the preemption issue as it is presented on appeal in the jury
verdict case is that the preemption argument rejected was "retroactive" while
the preemption issue remaining on appeal is prospective. One of the other
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. Although no assurances can be given, the Company believes
the appeal will be successful.
Subsequently, in December 2000 the HOA and certain individual residents of
the Property filed a complaint in the Superior Court of California, County of
Santa Cruz (No. CV 139825) against the Company, certain affiliates of the
Company and certain employees of the Company. The new lawsuit seeks damages,
including punitive damages, for intentional infliction of emotional distress,
unfair business practices, and unlawful retaliation purportedly arising from
allegedly retaliatory rent increases which were noticed by the Company to
certain residents in September 2000. The Company believes that the residents who
received rent increase notices with respect to rent increases above those
permitted by the local rent control ordinance were not covered by the ordinance
either because they did not comply with the provisions of the ordinance or
because they are exempted by state law. On December 29, 2000, the Superior Court
of California, County of Santa Cruz enjoined such rent increases.settlement agreement. The Company intends to
vigorously defend thethis matter, which may gohas been stayed pending a related state
court appeal by the Company of an order dismissing its claims against the City
of San Rafael. The Company believes that such lawsuits will be a consequence of
the Company's efforts to trialchange rent control since tenant groups actively desire
to preserve the premium value of their homes in addition to the summerdiscounted rents
provided by rent control. The Company has determined that its efforts to
rebalance the regulatory environment despite the risk of 2001.
F-22litigation from tenant
groups are necessary not only because of the $15 million annual subsidy to
tenants, but also because of the condemnation risk.
ELLENBURG COMMUNITIES
The Company and certain other parties entered into a settlement agreement
(the "Settlement"), which was approved by the Los Angeles County Superior Court
in April 2000. The Settlement resolved substantially all of the litigation and
appeals involving the Ellenburg Properties, and transactions arising out of the
Settlement closed on May 22, 2000. Only the appeal of one entity remained, the
outcome of which was not expected to materially affect the Company.
F-26
55
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
ELLENBURG COMMUNITIES The Company and certain other parties entered into a settlement agreement,
which was approved by the court in April 2000. The settlement resolved
substantially all of the litigation and appeals involving the Ellenburg
Properties, and transactions arising out of the settlement closed on May 22,
2000 (see Note 5).(CONTINUED)
In connection with the Ellenburg 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.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. ThisAlthough this appeal was
one not resolved by the Settlement. The Company believesSettlement, the California Court of Appeal dismissed
Fund 20's allegations are
without merit and will vigorously defend itself.
CANDLELIGHT PROPERTIES, L.L.Csubstantive appeals on March 13, 2003 as moot. Fund 20 petitioned the
California Supreme Court to review this decision which review was denied.
In 1996, 1997 and 1998, the Lending Partnership made loans to Candlelight
Properties, L.L.C. ("Borrower") in the aggregate principal amount of $8,050,000
(collectively, the "Loan". 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 Circuit Court of Bartholomew County, Indiana
("Court") on May 5, 1999, seeking declaratory judgment on the validity of the
exercise of the option. The Lending Partnership filed suit in the Court the next
day, seeking to foreclose its mortgage, and the suits were consolidated
(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 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
againstOctober 2001, Fund 20 sued the Company and certain executiveof its affiliates
again, this time in Alameda County, California making substantially the same
allegations. The Company obtained an injunction preventing the case from
proceeding until the Fund 20 appeal is decided and senior officersother related proceedings in
Arizona (from which the Company has already been dismissed with prejudice) are
concluded. The Company obtained a court order enjoining Fund 20 from proceeding
with its Alameda County action.
In February, 2004, the Company entered into a settlement agreement with
Fund 20 resolving all remaining matters at no cost to the Company and with
mutual releases.
COUNTRYSIDE AT VERO BEACH
The Company has received letters dated June 17, 2002 and August 26, 2002
from Indian River County ("County"), claiming that the Company currently owes
sewer impact fees in the amount of approximately $518,000 with respect to the
Property known as Countryside at Vero Beach, located in Vero Beach, Florida,
purportedly under the terms of an agreement between the County and a prior owner
of the Property. In response, the Company has advised the County that these fees
are no longer due and owing as a result of a 1996 settlement agreement between
the County and the prior owner of the Property, providing for the payment of
$150,000 to the County to discharge any further obligation for the payment of
impact or connection fees for sewer service at the Property. The Company paid
this settlement amount (with interest) to the County in connection with the
United States District Court for Southern DistrictCompany's acquisition of Indiana, Indianapolis
Division. The complaint alleges violations of securities laws and fraud arising
from the loan transaction being litigated inProperty. Accordingly, the State Court Litigation and
seeks damages, including treble damages. The Company believes that
the complaint
isCounty's claims are without merit.
DELAWARE DECLARATORY JUDGMENT ACTION
In April 2002, the Company entered into a Stipulation and Consent Order to
Cease and Desist (the "Consent Order") with the State of Delaware (the "State").
The Consent Order resolved various issues raised by the State concerning the
terms of a new lease form used or proposed for use by the Company at certain of
its Properties in Delaware. Among other provisions, the Consent Order
contemplated that the Company would work with the State to develop and implement
a new lease form for use in Delaware. The Consent Order expressly provided that
nothing contained therein would preclude the Company from seeking declaratory
relief from a court as to the legality or enforceability of any provisions which
the Company might wish to incorporate in future leases.
Throughout the summer of 2002, the Company's Delaware legal counsel engaged
in dialogue with representatives of the State concerning various matters,
including the lease provisions to which the State had objected but which the
Company wished to incorporate in future leases. Through this process, it became
apparent that the parties could not reach agreement as to the legality or
enforceability of the proposed lease provisions, and that the Company would need
to seek declaratory relief from a court in order to resolve the matter, as
contemplated by the Consent Order. Accordingly, on August 29, 2002, the Company
filed a Petition for Declaratory Judgment and Other Relief (as amended, the
"Petition") in Sussex County, Delaware Superior Court (the "Court").
F-27
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
DELAWARE DECLARATORY JUDGMENT ACTION (CONTINUED)
In response to the filing of the Petition, on October 1, 2002, the State
filed its Answer to Petition for Declaratory and Other Relief, and Counterclaims
for Civil Enforcement and Contempt (as amended, "Answer and Counterclaim") with
the Court. In the Answer and Counterclaim, the State sought, inter alia,
restitution, statutory penalties, investigative costs and attorneys' fees under
the Delaware Mobile Home Lots and Leases Act, the Consumer Fraud Act, the
Uniform Deceptive Trade Practices Act and the Delaware Consumer Contracts law,
and separately sought a finding of contempt and related contempt penalties for
alleged violations of the Consent Order.
The Company filed a Motion to rulings made byDismiss Respondents' Counterclaims with the
Court on October 29, 2002, and the State filed a Motion for Summary Judgment
with the Court on November 15, 2002. On December 30, 2002, the Company filed a
First Amended Petition for Declaratory Judgment and Other Relief with the Court,
and on January 31, 2003, the State filed an Amended Answer and Counterclaim with
the Court.
On August 29, 2003, the Court issued its decision disposing of all pending
claims in the litigation except one. Specifically, the Court held, inter alia,
that (i) the Company may eliminate the rent cap formula from existing leases at
certain of its Delaware Properties as the leases come up for renewal, (ii)
certain lease provisions proposed by the Company may not be implemented or
enforced under applicable state law, (iii) the change in water supplier at one
of the Properties did not violate the leases at such Property, (iv) the Company
did not violate the Consent Order by filing the Petition, and (v) the Company
did not violate any state statutes as alleged by the State.
The August 29, 2003 decision left open the issue of whether the Company had
violated the Consent Order by continuing to use the disputed lease form (but not
enforce the provisions at issue) at one of its Properties following entry of the
Consent Order (the Company believed that it had no choice but to continue to use
this lease form until the State had approved a new form for use at the Property
as contemplated by the Consent Order). On October 3, 2003, the Court issued its
final order, finding that continued use of the disputed lease form, as to new
tenants but not as to renewal tenants, following entry of the Consent Order
constituted a violation thereof, and assessing a civil penalty in the amount of
$5,000.
On November 3, 2003, the State filed a Notice of Appeal with the Supreme
Court of the State of Delaware, appealing a portion of the Court's order denying
the State's Motion for Summary Judgment. The State's appeal is without merit. Thelimited to the
single issue of whether the Company has the right to eliminate "rent cap"
provisions contained in certain existing leases upon automatic renewal of the
leases in accordance with Delaware law. The appeal has been fully briefed, and
oral argument in the matter is scheduled for March 16, 2004.
On November 14, 2003, the State filed a motion for judgment on the pleadings (which has been fully briefed), and
will continue to 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 performanceStay Pending Appeal 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
agreedon December 3, 2003, the Company filed its response opposing the
motion. On December 16, 2003, the Court issued its order on the motion, holding
that the Company may proceed to a stay in this proceeding pendingissue notices of default to tenants who fail to
pay the outcomefull amount of their current rental obligations, but may not initiate
eviction proceedings against such tenants until April 1, 2004, and may not
enforce any such eviction order until the appeals inSupreme Court rules on the State Court Litigation.appeal.
OTHER
The Company is involved in various other legal proceedings arising in the
ordinary course of business. Management believes that all proceedings herein
described or referred to, taken together, are not expected to have a material
adverse impact on the Company.
F-23F-28
56
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - SUBSEQUENT EVENTS
On January 3, 2001,Since December 31, 2003, we invested in 30 Properties as listed in the
Companytable below. The combined investment in these 30 properties was approximately
$137.6 million and was funded with monies held in short-term investments and
additional debt. (amounts in millions, except for total sites)
PURCHASE NET
CLOSING DATE PROPERTY LOCATION TOTAL SITES PRICE DEBT EQUITY
------------ -------- -------- ----------- -------- ----- ------
ACQUISITIONS:
January 15, 2004 O'Connell's(a) Amboy, IL 668 $ 6.6 $ 5.0 $1.6
January 30, 2004 Spring Gulch(b) New Holland, PA 420 6.0 4.8 1.2
February 3, 2004 Paradise(c) Mesa, AZ 950 25.0 20.0 5.0
February 18, 2004 Twin Lakes(d) Chocowinity, NC 400 5.2 3.8 1.4
February 19, 2004 Lakeside(e) New Carlisle, IN 95 1.7 --- 1.7
February 5, 2004 Shangri La Largo, FL 160 (f) 4.5 (f)
February 5, 2004 Terra Ceia Palmetto, FL 203 (f) 2.6 (f)
February 5, 2004 Southernaire Mt. Dora, FL 134 (f) 2.1 (f)
February 5, 2004 Sixth Avenue Zephryhills, FL 140 (f) 2.3 (f)
February 5, 2004 Suni Sands Yuma, AZ 336 (f) 3.2 (f)
February 5, 2004 Topic's Spring Hill, FL 230 (f) 2.2 (f)
February 5, 2004 Coachwood Colony Leesburg, FL 200 (f) 4.3 (f)
February 5, 2004 Waterway Cedar Point, NC 336 (f) 6.3 (f)
February 5, 2004 Desert Paradise Yuma, AZ 260 (f) 1.5 (f)
February 5, 2004 Goose Creek Newport, NC 598 (f) 12.6 (f)
MEZZANINE INVESTMENTS(g):
February 3, 2004 Fiesta Grande I & II Casa Grande, AZ 767 --- --- 3.7
February 3, 2004 Tropical Palms North Ft. Myers, FL 297 --- --- 1.9
February 3, 2004 Island Vista Estates North Ft. Myers, FL 617 --- --- 4.6
February 3, 2004 Foothills West Casa Grande, AZ 188 --- --- 1.5
February 3, 2004 Capri Yuma, AZ 300 --- --- 2.1
February 3, 2004 Casita Verde Casa Grande, AZ 192 --- --- 1.2
February 3, 2004 Rambler's Rest Venice, FL 647 --- --- 6.2
February 3, 2004 Venture In Show Low, AZ 389 --- --- 2.4
February 3, 2004 Scenic Asheville, NC 224 --- --- 1.2
February 3, 2004 Clerbrook Clermont, FL 1,255 --- --- 3.9
February 3, 2004 Inlet Oaks Murrells Inlet, SC 178 --- --- 1.0
JOINT VENTURES(h):
December 18, 2003 Lake Myers Mocksville, NC 425 --- --- 0.4
January 21, 2004 Pine Haven Ocean View, NJ 625 --- --- 0.4
January 27, 2004 Twin Mills Howe, IN 501 --- --- 0.2
February 10, 2004 Plymouth Rock Elkhart Lake, WI 609 --- --- 0.4
(a) Property was purchased from O'Connell's Holding Corp. and O'Connell's, Inc.
(b) Property was purchased from Spring Gulch, Inc.
(c) Property was purchased from PRVR Limited Partnership.
(d) Property was purchased from Twin Lakes Land, LLC and Twin Lakes Camping
Resort, LLC.
(e) Property was purchased from Don-Bar Family Limited Partnership.
(f) The portfolio was acquired two Florida communities, totaling
729 sites, for an aggregatea total purchase price of approximately $16.3 million.
Golden Lakes is a 421-site community$62 million and
$20.4 million of net equity. The transaction was funded partially through
loans obtained on the individual properties as shown in Plant City, near Tampa, Florida and
includes approximately 23 acres for expansion. Chain O' Lakes is a 308-site
community in Grand Island, near Orlando, Florida, and includes a marina with 50
boat docks.the table.
(g) On February 13, 2001,3, 2004, the Company closedinvested approximately $29.7 million in
preferred equity in six entities controlled by Diversified Investments,
Inc. ("Diversified"). In addition, the sale of seven communities,
totaling 1,282 sites,Company has invested approximately
$1.4 million in Kansas, Missouri and Oklahoma forthe Diversified entities managing these properties.
(h) The Company invested approximately $1.4 million with Diversified in four
separate entities, each controlling a total sale price of
approximately $19.1 million.
F-24Property.
F-29
57
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is unaudited quarterly data for 2000, 19992003 and 19982002 (amounts in
thousands, except for per share amounts):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
20002003 3/31 6/30 9/30 12/31
---- ---- ---- ---- ------------ ------- ------- -------
Total Revenues............................................. $57,148 $54,271 $53,875 $55,384revenues(a) ................................................. $64,569 $66,760 $68,760 $71,066
Income before allocation to Minority Interests and
extraordinary loss on early extinguishment of debt..... $10,743 $21,547 $9,715 $10,696from continuing operations(a) .............................. $ 7,380 $ 5,112 $ 5,200 $ (268)
Income from discontinued operations(a) ............................ $ 294 $ 9,288 $ 8 $ --
Net income (loss) available to common shareholders................ $6,331 $13,921 $5,451 $6,244shareholders ................ $ 7,674 $14,400 $ 5,208 $ (268)
Weighted average Common Shares outstanding - Basic......... 22,297 21,871 21,166 20,559Basic ................ 21,918 22,027 22,114 22,247
Weighted average Common Shares outstanding - Diluted....... 28,242 27,809 27,077 26,520Diluted .............. 27,276 27,371 27,458 27,568
Net income (loss) per Common Share outstanding - Basic............ $0.28 $0.64 $0.26 $0.30Basic ............ $ .35 $ .65 $ .24 $ (.01)
Net income (loss) per Common Share outstanding - Diluted.......... $0.28 $0.63 $0.25 $0.30Diluted .......... $ .34 $ .64 $ .23 $ (.01)
(a) Amounts may differ from previously disclosed amounts due to
reclassification of discontinued operations.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
19992002 3/31 6/30 9/30 12/31
---- ---- ---- ---- ------------- ------- ------- -------
Total Revenues............................................. $54,390 $52,446 $53,537 $54,654revenues(a) .................................................. $63,222 $64,414 $65,223 $68,508
Income before allocation to Minority Interests............. $10,078 $8,477 $8,417 $7,056from continuing operations(a) ............................... $ 6,584 $ 5,952 $ 5,080 $ 6,090
Income from discontinued operations(a) ............................. $ 531 $ 486 $ 1,632 $10,090
Net income available to common shareholders................ $8,234 $6,968 $6,877 $5,693shareholders ........................ $ 7,115 $ 6,438 $ 6,712 $16,180
Weighted average Common Shares outstanding - Basic......... 26,157 25,773 25,613 23,381Basic ................. 21,433 21,563 21,676 21,794
Weighted average Common Shares outstanding - Diluted....... 32,340 31,829 31,586 29,281Diluted ............... 27,508 27,664 27,693 27,678
Net income per Common Share outstanding - Basic............ $0.31 $0.27 $0.27 $0.24Basic .................... $ 0.33 $ 0.30 $ 0.31 $ 0.74
Net income per Common Share outstanding - Diluted.......... $0.31 $0.27 $0.27 $0.24Diluted .................. $ 0.32 $ 0.29 $ 0.30 $ 0.73
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
1998 3/31 6/30 9/30 12/31
---- ---- ---- ---- -----
Total Revenues............................................. $44,872 $47,894 $50,809 $51,254
Income before allocation to Minority Interests............. $9,586 $9,066 $8,440 $8,570
Net income available to common shareholders................ $7,765 $7,343 $6,837 $6,984
Weighted average Common Shares outstanding - Basic......... 24,805 25,659 25,988 26,033
Weighted average Common Shares outstanding - Diluted....... 31,095 32,095 32,339 32,382
Net income per Common Share outstanding - Basic............ $0.31 $0.29 $0.26 $0.27
Net income per Common Share outstanding - Diluted.......... $0.31 $0.28 $0.26 $0.26
F-25(a) Amounts may differ from previously disclosed amounts due to
reclassification of discontinued operations.
F-30
58
SCHEDULE II
MANUFACTURED HOME COMMUNITIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 20002003
ADDITIONS
---------------------------------
BALANCE AT CHARGED BALANCE AT
BEGINNING CHARGED TO TO OTHER END OF
OF PERIOD INCOME ACCOUNTS DEDUCTIONS(1) PERIOD
--------- ---------------- ---------- -------- ------------- ----------------
For the year ended December 31, 1998:2001:
Allowance for doubtful accounts......... $250,000 $167,774 $ --accounts ................. $300,000 $426,579 $--- ($167,774) $250,000
For the year ended December 31, 1999:
Allowance for doubtful accounts......... $250,000 $413,573 $ -- ($363,573)426,579) $300,000
For the year ended December 31, 2000:2002:
Allowance for doubtful accounts.........accounts ................. $300,000 $322,574 $ --$940,565 $--- ($322,574) $300,000540,565) $700,000
For the year ended December 31, 2003:
Allowance for doubtful accounts ................. $700,000 $820,822 $--- ($693,822) $827,000
(1) Deductions represent tenant receivables deemed uncollectible.
S-1
59
SCHEDULE III
MANUFACTURED HOME COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 20002003
(AMOUNTS IN THOUSANDS)
Costs
Capitalized
Subsequent to
Initial Cost to Acquisition
Company (Improvements)
------- ---------------------------------- -------------------
Depreciable Depreciable
Real Estate Location Encumbrances Land Property Land Property
----------- -------- ------------ ---- -------- ---- --------- --------------------------------------------------------------------------------------------------------------------
Apollo Village ........... Phoenix AZ 04,009 932 3,219 0 363515
Araby Acres .............. Yuma AZ 3,250 1,440 4,345 0 0
The Highlands at Brentwood Manor Mesa AZ 4,701 1,99810,910 1,997 6,024 0 240526
Carefree Manor ........... Phoenix AZ 03,398 706 3,040 0 85219
Casa del Sol #1 .......... Peoria AZ 6,78310,445 2,215 6,467 0 193874
Casa del Sol #2 .......... Glendale AZ 6,917 2,1049,827 2,103 6,283 0 133604
Casa del Sol #3 .......... Glendale AZ 011,188 2,450 7,452 0 67334
Central Park ............. Phoenix AZ 7,1825,139 1,612 3,784 0 387584
Countryside .............. Phoenix AZ 3,787 2,056 6,241 0 171
Desert Skies ............. Phoenix AZ 05,046 792 3,126 0 42185
Fairview Manor ........... Tucson AZ 5,114 1,674 4,708 0 1,674 5,1001,113
Foothill ................. Yuma AZ 1,350 459 1,402 0 4260
Golden Sun ............... Scottsdale AZ 3,029 1,678 5,049 0 27
Hacienda De Valencia ..... Mesa AZ 8,4175,676 833 2,701 0 7531,659
Palm Shadows ............. Glendale AZ 3,2088,480 1,400 4,218 0 288368
Sedona Shadows ........... Sedona AZ 2,6662,521 1,096 3,431 0 180391
Sunrise Heights .......... Phoenix AZ 05,636 1,000 3,016 0 235369
The Mark ................. Mesa AZ 08,943 1,354 4,660 6 615793
The Meadows .............. Tempe AZ 9,25612,060 2,613 7,887 0 388533
Whispering Palms ......... Phoenix AZ 03,219 670 2,141 0 60161
California Hawaiian ...... San Jose CA 17,96827,449 5,825 17,755 0 7761,532
Colony Park .............. Ceres CA 05,826 890 2,837 0 42262
Concord Cascade .......... Pacheco CA 10,3775,291 985 3,016 0 540840
Contempo Marin ........... San Rafael CA 16,142 4,78825,669 4,787 16,379 0 1,3532,318
Coralwood ................ Modesto CA 06,200 0 5,047 0 110245
Date Palm Country Club ... Cathedral City CA 15,71715,340 4,138 14,064 (23) 1,3162,755
Date Palm ................ Cathedral City CA 0 0 216 0 26
Four Seasons ............. Fresno CA 0 756 2,348 0 90199
Laguna Lake .............. San Luis Obispo CA 5,6695,128 2,845 6,520 0 49241
Lamplighter .............. Spring Valley CA 9,3893,806 633 2,201 0 436648
Meadowbrook .............. Santee CA 0 4,345 13,13912,528 0 2321,277
Monte del Lago ........... Castroville CA 8,3007,845 3,150 9,469 0 4841,026
Quail Meadows ............ Riverbank CA 05,280 1,155 3,469 0 137259
Nicholson Plaza .......... San Jose CA 0 0 4,512 0 (3)53
Rancho Mesa .............. El Cajon CA 09,600 2,130 6,389 0 39
Rancho Valley El Cajon CA 4,643 685 1,902 0 367
Royal Holiday Hemet CA 0 778 2,643 0 140
Royal Oaks Visalia CA 0 602 1,921 0 88
DeAnza Santa Cruz Santa Cruz CA 5,629 2,103 7,201 0 (418)
Santiago Estates Sylmar CA 0 3,562 10,767 0 146
Sea Oaks Los Osos CA 0 871 2,703 0 105
204
Gross Amount Carried
at Close of
Period 12/31/00
---------------03
------------------------------
Depreciable Accumulated Date of
Real Estate Location Land Property Total Depreciation Acquisition
----------- -------- ---- -------- ----- ------------ ------------ ----------------------------------------------------------------------------------------------------------------------
Apollo Village ........... Phoenix AZ 932 3,582 4,514 (749)3,734 4,666 (1,163) 1994
Araby Acres .............. Yuma AZ 1,440 4,345 5,785 (12) 2003
The Highlands at Brentwood Manor Mesa AZ 1,998 6,264 8,262 (1,626)1,997 6,550 8,547 (2,315) 1993
Carefree Manor ........... Phoenix AZ 706 3,125 3,831 (312)3,259 3,965 (683) 1998
Casa del Sol #1 .......... Peoria AZ 2,215 6,660 8,875 (741)7,341 9,556 (1,355) 1996
Casa del Sol #2 .......... Glendale AZ 2,104 6,416 8,520 (696)2,103 6,887 8,990 (1,248) 1996
Casa del Sol #3 .......... Glendale AZ 2,450 7,519 9,969 (649)7,786 10,236 (1,448) 1998
Central Park ............. Phoenix AZ 1,612 4,171 5,783 (2,281)4,368 5,980 (2,781) 1983
Countryside .............. Phoenix AZ 2,056 6,412 8,468 (284) 2002
Desert Skies ............. Phoenix AZ 792 3,168 3,960 (310)3,311 4,103 (693) 1998
Fairview Manor ........... Tucson AZ 1,674 5,526 7,200 (519)5,821 7,495 (1,122) 1998
Foothill ................. Yuma AZ 459 1,402 1,861 (4) 2003
Golden Sun ............... Scottsdale AZ 1,678 5,076 6,754 (229) 2002
Hacienda De Valencia ..... Mesa AZ 833 3,454 4,287 (1,787)4,360 5,193 (2,248) 1984
Palm Shadows ............. Glendale AZ 1,400 4,506 5,906 (1,155)4,586 5,986 (1,667) 1993
Sedona Shadows ........... Sedona AZ 1,096 3,611 4,707 (415)3,822 4,918 (835) 1997
Sunrise Heights .......... Phoenix AZ 1,000 3,251 4,251 (744)3,385 4,385 (1,104) 1994
The Mark ................. Mesa AZ 1,360 5,275 6,635 (1,086)5,453 6,813 (1,691) 1994
The Meadows .............. Tempe AZ 2,613 8,275 10,888 (1,911)8,420 11,033 (2,787) 1994
Whispering Palms ......... Phoenix AZ 670 2,201 2,871 (218)2,302 2,972 (493) 1998
California Hawaiian ...... San Jose CA 5,825 18,531 24,356 (2,254)19,287 25,112 (4,206) 1997
Colony Park .............. Ceres CA 890 2,879 3,769 (277)3,099 3,989 (776) 1998
Concord Cascade .......... Pacheco CA 985 3,556 4,541 (1,878)3,856 4,841 (2,317) 1983
Contempo Marin ........... San Rafael CA 4,788 17,732 22,520 (3,668)4,787 18,697 23,484 (5,712) 1994
Coralwood ................ Modesto CA 0 5,157 5,157 (577)5,292 5,292 (1,149) 1997
Date Palm Country Club ... Cathedral City CA 4,115 15,380 19,495 (3,191)16,819 20,934 (5,038) 1994
Date Palm ................ Cathedral City CA 0 242 242 (85) 1994
Four Seasons ............. Fresno CA 756 2,438 3,194 (278)2,547 3,303 (566) 1997
Laguna Lake .............. San Luis Obispo CA 2,845 6,569 9,414 (762)6,761 9,606 (1,461) 1998
Lamplighter .............. Spring Valley CA 633 2,637 3,270 (1,403)2,849 3,482 (1,739) 1983
Meadowbrook .............. Santee CA 4,345 13,371 17,716 (1,217)13,805 18,150 (2,587) 1998
Monte del Lago ........... Castroville CA 3,150 9,953 13,103 (1,113)10,495 13,645 (2,213) 1997
Quail Meadows ............ Riverbank CA 1,155 3,606 4,761 (329)3,728 4,883 (712) 1998
Nicholson Plaza .......... San Jose CA 0 4,509 4,509 (504)4,565 4,565 (970) 1997
Rancho Mesa .............. El Cajon CA 2,130 6,428 8,558 (600)6,593 8,723 (1,223) 1998
Rancho Valley El Cajon CA 685 2,269 2,954 (1,231) 1983
Royal Holiday Hemet CA 778 2,783 3,561 58 1998
Royal Oaks Visalia CA 602 2,009 2,611 (223) 1997
DeAnza Santa Cruz Santa Cruz CA 2,103 6,783 8,886 (1,402) 1994
Santiago Estates Sylmar CA 3,562 10,913 14,475 (867) 1998
Sea Oaks Los Osos CA 871 2,808 3,679 (310) 1997
S-2
60
SCHEDULE III
MANUFACTURED HOME COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 20002003
(AMOUNTS IN THOUSANDS)
Costs
Capitalized
Subsequent to
Initial Cost to Acquisition
Company (Improvements)
------- ---------------------------------- --------------------
Depreciable Depreciable
Real Estate Location Encumbrances Land Property Land Property
----------- -------- ------------ ---- -------- ---- --------- --------------------------------------------------------------------------------------------------------------------
Rancho Valley El Cajon CA 3,668 685 1,902 0 769
Royal Holiday Hemet CA 0 778 2,643 0 270
Royal Oaks Visalia CA 0 602 1,921 0 274
DeAnza Santa Cruz Santa Cruz CA 10,456 2,103 7,201 0 5,514
Santiago Estates Sylmar CA 16,205 3,562 10,767 0 633
Sea Oaks Los Osos CA 0 871 2,703 0 243
Sunshadow San Jose CA 0 0 5,707 0 73129
Westwinds (4 properties) San Jose CA 0 0 17,616 0 3,9464,988
Bear Creek Sheridan CO 04,880 1,100 3,359 0 69209
Cimarron Broomfield CO 8,0834,653 863 2,790 0 410604
Golden Terrace Golden CO 8,0384,245 826 2,415 0 306643
Golden Terrace South Golden CO 2,400 750 2,265 0 341548
Golden Terrace West Golden CO 9,7338,432 1,694 5,065 0 723955
Hillcrest Village Aurora CO 15,47010,581 1,912 5,202 289 1,7442,277
Holiday Hills Denver CO 19,42914,856 2,159 7,780 0 2,6953,652
Holiday Village CO Co. Springs CO 6,2613,536 567 1,759 0 425909
Pueblo Grande Pueblo CO 3,4751,890 241 1,069 0 287419
Woodland Hills Denver CO 07,499 1,928 4,408 0 2,0602,391
Aspen Meadows Rehoboth Beach DE 05,620 1,148 3,460 0 114192
Camelot AcresMeadows Rehoboth Beach DE 7,000 1,778 5,423 0 2187,400 527 2,058 1,251 3,643
Mariners Cove Millsboro DE 016,452 990 2,971 0 2,7383,393
McNicol Rehoboth Beach DE 02,710 563 1,710 0 3758
Sweetbriar Rehoboth Beach DE 03,040 498 1,527 0 95268
Waterford Estates Bear DE 030,954 5,250 16,202 0 271479
Whispering Pines Lewes DE 09,871 1,536 4,609 0 638
Arrowhead911
Maralago Cay Lantana FL 021,600 5,325 15,420 0 5352,613
Bay Indies Venice FL 23,00044,524 10,483 3,390 0 29,29031,559 10 3,054
Bay Lake Estates Nokomis FL 4,6913,708 990 3,3043,390 0 (24)875
Breezy Hill Pompano Beach FL 10,281 5,510 16,555 0 46
Buccaneer N. Ft. Myers FL 19,70213,902 4,207 14,410 0 6681,085
Bulow Village Resort Flagler Beach FL 0 0 228 0 37
Bulow Village Flagler Beach FL 1,22010,404 3,637 949 0 3,2665,106
Carriage Cove Daytona Beach FL 8,2818,084 2,914 8,682 0 218
Colonies of Margate756
Coral Cay Margate FL 16,88720,195 5,890 20,211 0 7812,518
Coquina St Augustine FL 0 5,286 5,545 0 1,611
Country5,276
Meadows at Countrywood Plant City FL 18,292 4,514 13,175 0 4,514 13,542 0 575
Country Place New Port Richey FL 4,006 663 0 18 5,992
Country Side North Vero Beach FL 0 3,711 11,133 0 608
East Bay Oaks Largo FL 6,671 1,240 3,322 0 314
Eldorado Village Largo FL 4,574 778 0 0 2,607
Heritage Village Vero Beach FL 0 2,403 7,259 0 248
Hillcrest Clearwater FL 0 1,278 3,928 0 148
Holiday Ranch Largo FL 0 925 2,866 0 90
Holiday Village FL Vero Beach FL 0 350 1,374 0 88
2,575
Gross Amount Carried
at Close of
Period 12/31/00
---------------03
------------------------------
Depreciable Accumulated Date of
Real Estate Location Land Property Total Depreciation Acquisition
----------- -------- ---- -------- ----- ------------ ------------ ----------------------------------------------------------------------------------------------------------------------
Rancho Valley El Cajon CA 685 2,671 3,356 (1,524) 1983
Royal Holiday Hemet CA 778 2,913 3,691 (497) 1998
Royal Oaks Visalia CA 602 2,195 2,797 (470) 1997
DeAnza Santa Cruz Santa Cruz CA 2,103 12,715 14,818 (2,366) 1994
Santiago Estates Sylmar CA 3,562 11,400 14,962 (2,317) 1998
Sea Oaks Los Osos CA 871 2,946 3,817 (616) 1997
Sunshadow San Jose CA 0 5,780 5,780 (646)5,836 5,836 (1,259) 1997
Westwinds (4 properties) San Jose CA 0 21,562 21,562 (2,142)22,604 22,604 (4,951) 1997
Bear Creek Sheridan CO 1,100 3,428 4,528 (338)3,568 4,668 (705) 1998
Cimarron Broomfield CO 863 3,200 4,063 (1,739)3,394 4,257 (2,128) 1983
Golden Terrace Golden CO 826 2,721 3,547 (1,406)3,058 3,884 (1,751) 1983
Golden Terrace South Golden CO 750 2,606 3,356 (301)2,813 3,563 (611) 1997
Golden Terrace West Golden CO 1,694 5,788 7,482 (2,565)6,020 7,714 (3,184) 1986
Hillcrest Village Aurora CO 2,201 6,946 9,147 (3,593)7,479 9,680 (4,535) 1983
Holiday Hills Denver CO 2,159 10,475 12,634 (5,240)11,432 13,591 (6,672) 1983
Holiday Village CO Co. Springs CO 567 2,184 2,751 (1,170)2,668 3,235 (1,462) 1983
Pueblo Grande Pueblo CO 241 1,356 1,597 (724)1,488 1,729 (904) 1983
Woodland Hills Denver CO 1,928 6,468 8,396 (1,517)6,799 8,727 (2,272) 1994
Aspen Meadows Rehoboth Beach DE 1,148 3,574 4,722 (366)3,652 4,800 (762) 1998
Camelot AcresMeadows Rehoboth Beach DE 527 2,569 3,096 (1,346) 19831,778 5,701 7,479 (1,119) 1998
Mariners Cove Millsboro DE 990 5,709 6,699 (1,821)6,364 7,354 (2,594) 1987
McNicol Rehoboth Beach DE 563 1,747 2,310 (173)1,768 2,331 (350) 1998
Sweetbriar Rehoboth Beach DE 498 1,622 2,120 (154)1,795 2,293 (427) 1998
Waterford Estates Bear DE 5,250 16,473 21,723 (1,617)16,681 21,931 (2,679) 1996
Whispering Pines Lewes DE 1,536 5,247 6,783 (2,034)5,520 7,056 (2,638) 1998
ArrowheadMaralago Cay Lantana FL 5,325 15,955 21,280 (1,724)18,033 23,358 (3,579) 1997
Bay Indies Venice FL 10,483 32,680 43,163 (7,502)10,493 34,613 45,106 (10,939) 1994
Bay Lake Estates Nokomis FL 990 3,280 4,270 (819)4,265 5,255 (1,287) 1994
Breezy Hill Pompano Beach FL 5,510 16,601 22,111 (735) 2002
Buccaneer N. Ft. Myers FL 4,207 15,078 19,285 (3,181)15,495 19,702 (4,795) 1994
Bulow Village Resort Flagler Beach FL 0 265 265 (31) 2001
Bulow Village Flagler Beach FL 3,637 4,215 7,852 (606)6,055 9,692 (1,170) 1994
Carriage Cove Daytona Beach FL 2,914 8,900 11,814 (889)9,438 12,352 (1,955) 1998
Colonies of MargateCoral Cay Margate FL 5,890 20,992 26,882 (4,450)22,729 28,619 (6,732) 1994
Coquina St Augustine FL 5,286 7,156 12,442 (181)10,821 16,107 (1,155) 1999
Country Meadows at Countrywood Plant City FL 4,514 14,117 18,631 (1,434) 1998
Country Place New Port Richey FL 681 5,992 6,673 (1,737) 1986
Country Side North Vero Beach FL 3,711 11,741 15,452 (1,180) 1998
East Bay Oaks Largo FL 1,240 3,636 4,876 (2,018) 1983
Eldorado Village Largo FL 778 2,607 3,385 (1,443) 1983
Heritage Village Vero Beach FL 2,403 7,507 9,910 (1,677) 1994
Hillcrest Clearwater FL 1,278 4,076 5,354 (395) 1998
Holiday Ranch Largo FL 925 2,956 3,881 (291) 1998
Holiday Village FL Vero Beach FL 350 1,462 1,812 (99)15,750 20,264 (2,949) 1998
S-3
61
SCHEDULE III
MANUFACTURED HOME COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 20002003
(AMOUNTS IN THOUSANDS)
Costs
Capitalized
Subsequent to
Initial Cost to Acquisition
Company (Improvements)
------- -------------------------------- -------------------
Depreciable Depreciable
Real Estate Location Encumbrances Land Property Land Property
----------- -------- ------------ ---- -------- ---- --------- --------------------------------------------------------------------------------------------------------------------
Country Place New Port Richey FL 8,500 663 0 18 7,095
Country Side North Vero Beach FL 17,347 3,711 11,133 0 1,597
Down Yonder Largo FL 7,776 2,652 7,981 0 53
East Bay Oaks Largo FL 5,532 1,240 3,322 0 499
Eldorado Village Largo FL 3,910 778 2,341 0 458
Glen Ellen Clearwater FL 2,440 627 1,882 0 22
Grand Island Grand Island FL 0 1,723 5,208 125 1,711
Hacienda Village New Port Richey FL 10,028 4,362 13,088 0 192
Harbor View New Port Richey FL 8,053 4,045 12,146 0 48
Heritage Village Vero Beach FL 13,520 2,403 7,259 0 631
Highland Wood Pompano Beach FL 2,408 1,043 3,130 0 4
Hillcrest Clearwater FL 4,297 1,278 3,928 0 647
Holiday Ranch Largo FL 3,835 925 2,866 0 191
Holiday Village FL Vero Beach FL 0 350 1,374 0 132
Holiday Village Ormond Beach FL 7,049 2,610 7,837 0 62
Indian Oaks Rockledge FL 1,6584,449 1,089 3,376 0 536712
Lake Fairways N. Ft. Myers FL 030,460 6,075 18,134 0 48035 1,376
Lake Haven Dunedin FL 8,0687,862 1,135 4,047 0 4822,011
Lakewood Village Melbourne FL 0 1,8639,818 1,862 5,627 0 263
Landings557
Lighthouse Pointe Port Orange FL 012,701 2,446 7,483 0 29423 816
Mid-Florida Lakes Leesburg FL 25,33021,815 5,997 20,635 0 2,1844,284
Oak Bend Ocala FL 05,772 850 2,572 0 466850
Pickwick Port Orange FL 6,37410,438 2,803 8,4978,870 0 173474
Pine Lakes N. Ft. Myers FL 031,464 6,306 14,579 0 4,63621 5,311
Sherwood Forest Kissimmee FL 10,01227,355 4,852 14,596 0 1,8523,531
Sherwood Forest RV ParkResort Kissimmee FL 0 2,870 3,621 568 3471,287
Silk Oak Clearwater FL 3,854 1,670 5,028 0 36
Southern Palms Eustis FL 5,727 2,169 5,884 0 2,169 6,492 0 3251,471
Spanish Oaks Ocala FL 7,5707,164 2,250 6,922 0 394
Sunset847
Oaks at Countrywood Plant City FL 01,318 1,111 2,513 (340) 120(265) 1,325
The Heritage N. Ft. Myers FL 09,791 1,438 4,371 249 1,838346 3,030
The Lakes at Countrywood Plant City FL 9,711 2,377 7,085 0 753
The Meadows, FL Palm Beach FL 6,2466,106 3,229 9,870 0 (69)1,088
Gardens
Toby's Arcadia FL 0 1,093 3,280 0 0
Windmill Manor Bradenton FL 4,2858,022 2,153 6,8426,125 0 1261,058
Windmill Village - Ft. Myers N. Ft. Myers FL 9,4028,835 1,417 5,440 0 827
Windmill Village North Sarasota FL 9,065 1,523 5,063 0 462
Windmill Village South Sarasota FL 5,561 1,106 3,162 0 223
Five Seasons Cedar Rapids IA 0 1,053 3,436 0 421
Holiday Village, IA Sioux City IA 0 313 3,744 0 319
Golf Vistas Monee IL 0 2,843 4,719 0 2,476
Willow Lake Estates Elgin IL 21,578 6,138 21,033 0 1,405
Burns Harbor Estates Chesterton IN 0 916 2,909 0 1,363
Candlelight Village Columbus IN 0 1,513 4,538 250 1,949
Oak Tree Village Portage IN 6,089 0 0 569 3,400
Windsong Indianapolis IN 0 1,482 4,480 0 104
Bonner Springs Bonner Springs KS 0 343 1,041 0 200
Carriage Park Kansas City KS 0 309 938 0 418
Quivira Hills Kansas City KS 0 376 1,139 0 184
Pheasant Ridge Mt. Airy MD 0 376 1,779 0 181
Creekside Wyoming MI 0 1,109 3,416 0 163
Camelot Burnsville MN 0 527 2,058 0 511
Briarwood Brookline MO 0 423 1,282 0 189
Dellwood Estates Warrensburg MO 0 300 912 0 110
1,226
Gross Amount Carried
at Close of
Period 12/31/00
---------------03
------------------------------
Depreciable Accumulated Date of
Real Estate Location Land Property Total Depreciation Acquisition
----------- -------- ---- -------- ----- ------------ ------------ ----------------------------------------------------------------------------------------------------------------------
Country Place New Port Richey FL 681 7,095 7,776 (2,539) 1986
Country Side North Vero Beach FL 3,711 12,730 16,441 (2,709) 1998
Down Yonder Largo FL 2,652 8,034 10,686 (359) 1998
East Bay Oaks Largo FL 1,240 3,821 5,061 (2,438) 1983
Eldorado Village Largo FL 778 2,799 3,577 (1,746) 1983
Glen Ellen Clearwater FL 627 1,904 2,531 (70) 2002
Grand Island Grand Island FL 1,848 6,919 8,767 (621) 2001
Hacienda Village New Port Richey FL 4,362 13,280 17,642 (476) 2002
Harbor View New Port Richey FL 4,045 12,194 16,239 (542) 2002
Heritage Village Vero Beach FL 2,403 7,890 10,293 (2,492) 1994
Highland Wood Pompano Beach FL 1,043 3,134 4,177 (139) 2002
Hillcrest Clearwater FL 1,278 4,575 5,853 (1,023) 1998
Holiday Ranch Largo FL 925 3,057 3,982 (638) 1998
Holiday Village FL Vero Beach FL 350 1,506 1,856 (336) 1998
Holiday Village Ormond Beach FL 2,610 7,899 10,509 (354) 2002
Indian Oaks Rockledge FL 1,089 3,912 5,001 (375)4,088 5,177 (905) 1998
Lake Fairways N. Ft. Myers FL 6,075 18,614 24,689 (3,852)6,110 19,510 25,620 (5,849) 1994
Lake Haven Dunedin FL 1,135 4,529 5,664 (2,470)6,058 7,193 (3,060) 1983
Lakewood Village Melbourne FL 1,863 5,890 7,753 (1,320)1,862 6,184 8,046 (1,984) 1994
LandingsLighthouse Pointe Port Orange FL 2,446 7,777 10,223 (788)2,469 8,299 10,768 (1,730) 1998
Mid-Florida Lakes Leesburg FL 5,997 22,819 28,816 (4,677)24,919 30,916 (7,209) 1994
Oak Bend Ocala FL 850 3,038 3,888 (731)3,422 4,272 (1,110) 1993
Pickwick Port Orange FL 2,803 8,670 11,473 (860)9,344 12,147 (1,831) 1998
Pine Lakes N. Ft. Myers FL 6,306 19,215 25,521 (3,839)6,327 19,890 26,217 (5,887) 1994
Sherwood Forest Kissimmee FL 4,852 16,448 21,300 (1,462)18,127 22,979 (3,404) 1998
Sherwood Forest RV ParkResort Kissimmee FL 3,438 3,968 7,406 (342)4,908 8,346 (877) 1998
Silk Oak Clearwater FL 1,670 5,064 6,734 (184) 2002
Southern Palms Eustis FL 2,169 6,817 8,986 (406)7,355 9,524 (1,381) 1998
Spanish Oaks Ocala FL 2,250 7,316 9,566 (1,734)7,769 10,019 (2,551) 1993
Sunset Oaks at Countrywood Plant City FL 771 2,633 3,404 (194)846 3,838 4,684 (549) 1998
The Heritage N. Ft. Myers FL 1,687 6,209 7,896 (1,415)1,784 7,401 9,185 (2,191) 1993
The Lakes at Countrywood Plant City FL 2,377 7,838 10,215 (766) 2001
The Meadows, FL Palm Beach FL 3,229 9,801 13,030 (477)10,958 14,187 (1,695) 1999
Gardens
Toby's Arcadia FL 1,093 3,280 4,373 (9) 2003
Windmill Manor Bradenton FL 2,153 6,968 9,121 (694)7,183 9,336 (1,350) 1998
Windmill Village - Ft. Myers N. Ft. Myers FL 1,417 6,267 7,684 (3,319)6,666 8,083 (4,108) 1983
Windmill Village North Sarasota FL 1,523 5,525 7,048 (3,025) 1983
Windmill Village South Sarasota FL 1,106 3,385 4,491 (1,900) 1983
Five Seasons Cedar Rapids IA 1,053 3,857 4,910 (412) 1998
Holiday Village, IA Sioux City IA 313 4,063 4,376 (1,914) 1986
Golf Vistas Monee IL 2,843 7,195 10,038 (642) 1997
Willow Lake Estates Elgin IL 6,138 22,438 28,576 (4,621) 1994
Burns Harbor Estates Chesterton IN 916 4,272 5,188 (1,015) 1993
Candlelight Village Columbus IN 1,763 6,487 8,250 (661) 1996
Oak Tree Village Portage IN 569 3,400 3,969 (1,092) 1987
Windsong Indianapolis IN 1,482 4,584 6,066 (401) 1998
Bonner Springs Bonner Springs KS 343 1,241 1,584 (448) 1989
Carriage Park Kansas City KS 309 1,356 1,665 (507) 1989
Quivira Hills Kansas City KS 376 1,323 1,699 (480) 1989
Pheasant Ridge Mt. Airy MD 376 1,960 2,336 (1,150) 1988
Creekside Wyoming MI 1,109 3,579 4,688 (351) 1998
Camelot Burnsville MN 1,778 5,641 7,419 (564) 1998
Briarwood Brookline MO 423 1,471 1,894 (545) 1989
Dellwood Estates Warrensburg MO 300 1,022 1,322 (378) 1989
S-4
62
SCHEDULE III
MANUFACTURED HOME COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 20002003
(AMOUNTS IN THOUSANDS)
Costs
Capitalized
Subsequent to
Initial Cost to Acquisition
Company (Improvements)
------- --------------------------------- -------------------
Depreciable Depreciable
Real Estate Location Encumbrances Land Property Land Property
----------- -------- ------------ ---- -------- ---- --------- --------------------------------------------------------------------------------------------------------------------
Winds of St. Armands North
Star Kansas(fka Windmill North) Sarasota FL 8,589 1,523 5,063 0 1,272
Winds of St. Armands South
(fka Windmill South) Sarasota FL 5,486 1,106 3,162 0 751
Five Seasons Cedar Rapids IA 0 1,053 3,436 0 558
Holiday Village, IA Sioux City MOIA 0 451 1,365313 3,744 0 263457
Golf Vistas Monee IL 14,593 2,843 4,719 0 5,415
Willow Lake Estates Elgin IL 21,365 6,138 21,033 0 3,107
Forest Oaks (fka Burns
Harbor) Chesterton IN 0 916 2,909 0 1,672
Oak Tree Village Portage IN 4,507 0 0 569 3,554
Windsong Indianapolis IN 0 1,482 4,480 0 167
Creekside Wyoming MI 3,760 1,109 3,646 0 40
Casa Village Billings MT 8,03711,040 1,011 3,109 181 1,6542,421
Del Rey Albuquerque NM 0 1,926 5,800 0 534721
Bonanza Las Vegas NV 9,9844,742 908 2,643 0 542787
Boulder Cascade Las Vegas NV 8,0278,980 2,995 9,020 0 399794
Cabana Las Vegas NV 09,363 2,648 7,989 0 136259
Flamingo West Las Vegas NV 010,788 1,730 5,266 0 5851,201
Villa Borega Las Vegas NV 7,5987,170 2,896 8,774 0 124
Brook Gardens Lackawanna NY 0 3,828 11,045 0 311273
Greenwood Village Manorville NY 017,698 3,667 11,361 0 539
Rockwood Tulsa OK 0 645 1,622 0 2909,414 484 3,433
Falcon Wood Village Eugene OR 75,200 1,112 3,426 0 63164
Quail Hollow Fairview OR 0 0 3,249 0 69161
Shadowbrook Clackamas OR 06,320 1,197 3,693 0 68125
Mt. Hood Village Welches OR 0 1,817 5,733 0 (308)
Green Acres Breinigsville PA 16,00713,839 2,680 7,479 0 1,9922,502
Fun n Sun RV Park San Benito TX 0 2,533 7,572 0 567417 9,609
Tropic Winds Harlingen TX 0 1,221 3,809 0 82
All Seasons Salt Lake City UT 03,491 510 1,623 0 112207
Westwood Village Farr West UT 07,591 1,346 4,179 0 8451,107
Meadows of Chantilly Chantilly VA 027,284 5,430 16,440 0 1,3213,091
Kloshe Illahee Federal Way WA 6,5806,222 2,408 7,286 0 49
Independence Hill Morgantown WV 0 299 898 0 198
College Heights Consolidated (18 properties) Various 66,484 17,045 71,382 0 523
Management Business Chicago IL 0 0 436 0 6,703
-------- -------- -------- ------ --------
$555,847 $270,055 $824,426 $1,767 $121,928
======== ======== ======== ====== ========
209
Gross Amount Carried
at Close of
Period 12/31/00
---------------03
------------------------------
Depreciable Accumulated Date of
Real Estate Location Land Property Total Depreciation Acquisition
----------- -------- ---- -------- ----- ------------ ------------ ----------------------------------------------------------------------------------------------------------------------
Winds of St. Armands North
Star Kansas(fka Windmill North) Sarasota FL 1,523 6,335 7,858 (3,680) 1983
Winds of St. Armands South
(fka Windmill South) Sarasota FL 1,106 3,913 5,019 (2,296) 1983
Five Seasons Cedar Rapids IA 1,053 3,994 5,047 (1,065) 1998
Holiday Village, IA Sioux City MO 451 1,628 2,079 (601) 1989IA 313 4,201 4,514 (2,400) 1986
Golf Vistas Monee IL 2,843 10,134 12,977 (1,753) 1997
Willow Lake Estates Elgin IL 6,138 24,140 30,278 (7,160) 1994
Forest Oaks (fka Burns
Harbor) Chesterton IN 916 4,581 5,497 (1,693) 1993
Oak Tree Village Portage IN 569 3,554 4,123 (1,613) 1987
Windsong Indianapolis IN 1,482 4,647 6,129 (1,118) 1998
Creekside Wyoming MI 1,109 3,686 4,795 (763) 1998
Casa Village Billings MT 1,192 4,763 5,955 (2,173)5,530 6,722 (2,865) 1983
Del Rey Albuquerque NM 1,926 6,334 8,260 (1,646)6,521 8,447 (2,365) 1993
Bonanza Las Vegas NV 908 3,185 4,093 (1,668)3,430 4,338 (2,091) 1983
Boulder Cascade Las Vegas NV 2,995 9,419 12,414 (846)9,814 12,809 (1,961) 1998
Cabana Las Vegas NV 2,648 8,125 10,773 (1,791)8,248 10,896 (2,648) 1994
Flamingo West Las Vegas NV 1,730 5,851 7,581 (1,207)6,467 8,197 (1,861) 1994
Villa Borega Las Vegas NV 2,896 8,898 11,794 (1,006)9,047 11,943 (1,945) 1997
Brook Gardens Lackawanna NY 3,828 11,356 15,184 (1,169) 1998
Greenwood Village Manorville NY 3,667 11,900 15,567 (1,130)4,151 12,847 16,998 (2,156) 1998
Rockwood Tulsa OK 645 1,912 2,557 (1,022) 1983
Falcon Wood Village Eugene OR 1,112 3,489 4,601 (389)3,590 4,702 (772) 1997
Quail Hollow Fairview OR 0 3,318 3,318 (372)3,410 3,410 (737) 1997
Shadowbrook Clackamas OR 1,197 3,761 4,958 (438)3,818 5,015 (863) 1997
Mt. Hood Village Welches OR 1,817 5,425 7,242 (377) 2002
Green Acres Breinigsville PA 2,680 9,471 12,151 (3,673)9,981 12,661 (4,718) 1988
Fun n Sun RV Park San Benito TX 2,533 8,139 10,672 (841)2,950 9,609 12,559 (1,707) 1998
Tropic Winds Harlingen TX 1,221 3,891 5,112 (176) 2002
All Seasons Salt Lake City UT 510 1,735 2,245 (204)1,830 2,340 (421) 1997
Westwood Village Farr West UT 1,346 5,024 6,370 (547)5,286 6,632 (1,161) 1997
Meadows of Chantilly Chantilly VA 5,430 17,761 23,191 (4,045)19,531 24,961 (6,053) 1994
Kloshe Illahee Federal Way WA 2,408 7,335 9,743 (821) 1997
Independence Hill Morgantown WV 299 1,096 1,395 (403) 1990
College Heights Consolidated (18 properties) Various 17,045 71,905 88,950 (5,904) 19987,495 9,903 (1,582) 1997
S-5
SCHEDULE III
MANUFACTURED HOME COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2003
(AMOUNTS IN THOUSANDS)
Costs Capitalized
Subsequent to
Initial Cost to Acquisition
Company (Improvements)
-------------------- ---------------------
Depreciable Depreciable
Real Estate Location Encumbrances Land Property Land Property
- --------------------------------------------------------------------------------------------------------------------
Realty Systems, Inc. 0 0 0 0 4,191
Management Business Chicago IL 0 7,139 7,139 (4,880)
-------- -------- ---------- ---------
$271,822 $946,354 $1,218,1760 436 0 8,973
-------------------------------------------------------------
$1,076,184 $278,748 $850,290 $4,055 $182,003
-============================================================
Gross Amount Carried
at Close of
Period 12/31/03
--------------------------------
Depreciable Accumulated Date of
Real Estate Location Land Property Total Depreciation Acquisition
- ----------------------------------------------------------------------------------------------------------------------
Realty Systems, Inc. 0 4,191 4,191 0 2002
Management Business 0 9,409 9,409 (8,349) 1990
------------------------------------------------
$282,803 $1,032,293 1,301,505 ($181,580)
======== ======== ========== =========272,497)
================================================
NOTES:
(1) For depreciable property, the Company uses a 30-year estimated life for
buildings acquired and structural and land improvements, a ten-to-fifteen
year estimated life for building upgrades and a three-to-seven year
estimated life for furniture and fixtures.
(2) The schedule excludes five Properties in which the Company has a non-controlling
joint venture interest and accounts for using the equity method of
accounting.
(3) The balance of furniture and fixtures included in the total amounts was
approximately $12.2$21.3 million as of December 31, 2000.2003.
(4) The aggregate cost of land and depreciable property for Federal income tax
purposes was approximately $1.1$1.2 billion, as of December 31, 2000.2003.
(5) All Properties were acquired, except for Country Place Village, which was
constructed.
S-5S-6
63
SCHEDULE III
MANUFACTURED HOME COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 20002003
(AMOUNTS IN THOUSANDS)
The changes in total real estate for the years ended December 31, 2000, 19992003, 2002 and
19982001 were as follows:
2000 1999 1998
---- ---- ----2003 2002 2001
---------- ---------- ----------
Balance, beginning of year ...... $ 1,264,343 $ 1,237,431 $ 936,318
Acquisitions (1) ............ (4,581) 12,496 286,880................. $1,296,007 $1,238,138 $1,218,176
Acquisitions(1) ......................... 12,116 107,138 17,770
Improvements ................ 16,261 16,700 14,566
Dispositions (2)............................. 20,960 24,491 23,188
Dispositions(2) and other .. (57,847) (2,284) (333)
----------- ----------- -----------............... (13,987) (73,760) (20,996)
---------- ---------- ----------
Balance, end of year ............ $ 1,218,176 $ 1,264,343 $ 1,237,431
=========== =========== ===========....................... $1,315,096 $1,296,007 $1,238,138
========== ========== ==========
(1) Acquisitions for the year ended December 31, 20002002 include return of escrow
proceeds.
(2) Dispositions includes the non-cash
assumption by the Company of $19.0$47.9 million of debt by
the purchasermortgage debt.
(2) Dispositions and other for 2003 includes non-cash capitalization of a Property.legal
fees of $5.3 million related to DeAnza Santa Cruz (see Note 5).
The changes in accumulated depreciation for the years ended December 31, 2000, 19992003,
2002 and 19982001 were as follows:
2000 1999 1998
---- ---- ----2003 2002 2001
-------- -------- --------
Balance, beginning of year .. $ 150,757 $ 118,021 $ 89,208.................... $238,098 $211,878 $181,580
Depreciation expense .... 35,548 35,020 29,146........................ 39,409 37,188 35,205
Dispositions and other .. (4,725) (2,284) (333)
--------- --------- ---------...................... (5,010) (10,968) (4,907)
-------- -------- --------
Balance, end of year ........ $ 181,580 $ 150,757 $ 118,021
========= ========= =========.......................... $272,497 $238,098 $211,878
======== ======== ========
S-6S-7