UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,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, 2001 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER:Commission File Number: 1-11718
MANUFACTURED HOME COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 36-3857664
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) (I.R.S. Employer Identification No.)
TWO NORTH RIVERSIDE PLAZA, SUITE 60606
800, CHICAGO, ILLINOIS (Zip Code)60606
(Address of principal executive offices) (Zip Code)
(312) 279-1400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) OF THE ACT:
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 SECTIONSecurities registered pursuant to Section 12(g) OF THE ACT: NONEof the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark 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 $640.1$665.2 million as of February 11, 200227, 2004 based upon the closing
price of $32.55$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 15, 2002, 21,740,2485, 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, 2002.4, 2004.
MANUFACTURED HOME COMMUNITIES, INC.
TABLE OF CONTENTS
PAGEPage
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PART II.
Item 1. Business................................................................................. 3Business................................................................................................3
Item 2. Properties............................................................................... 8Properties..............................................................................................9
Item 3. Legal Proceedings........................................................................ 13Proceedings......................................................................................14
Item 4. Submission of Matters to a Vote of Security Holders...................................... 16Holders....................................................17
PART IIII.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................ 17Matters..............................18
Item 6. Selected Financial Data and Operating Information........................................ 18Data................................................................................19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 20Operations..................22
Item 7A. Quantitative and Qualitative Disclosure About Market Risk................................ 30Risk..............................................33
Item 8. Financial Statements and Supplementary Data.............................................. 30Data............................................................33
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..... 30Disclosure...................33
Item 9A. Controls and Procedures................................................................................33
PART IIIIII.
Item 10. Directors and Executive Officers of the Registrant....................................... 30Registrant.....................................................34
Item 11. Executive Compensation................................................................... 30Compensation.................................................................................34
Item 12. Security Ownership of Certain Beneficial Owners and Management........................... 30Management.........................................34
Item 13. Certain Relationships and Related Transactions........................................... 30Transactions.........................................................34
Item 14. Principal Accountant Fees and Services.................................................................34
PART IVIV.
Item 14.15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................... 318-K........................................35
2
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. In 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 municipal or regulated 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)- 1) retirees and empty nestersempty-nesters or (2)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 had owned and operated
Communities since 1969. As of December 31, 2001,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 148 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 50,761 residential sites. The Properties are located in 23 states
(withResort and/or lease the number of Properties in each state shown parenthetically) -- Florida
(49), California (25), Arizona (17), Michigan (11), Colorado (10), Delaware (7),
Nevada (5), Indiana (3), Oregon (3), Illinois (2), Iowa (2), New York (2), Utah
(2), Pennsylvania (1), Maryland (1), Minnesota (1), Montana (1), New Mexico (1),
Ohio (1), Texas (1), Virginia (1), West Virginia (1), and Washington (1). As of
December 31, 2001, 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,
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 60 corporate employees who assist on-site
management in all property functions.
FORMATION OF THE COMPANY
The Company, formed in March 1993, is a Maryland corporation which has
elected to be 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
3
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. Subsidiaries ofinitial public
offering and subsequent offerings to the Operating Partnership have been 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"); and (iii) 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 subsidiaries
(together, the
"Subsidiaries")Subsidiaries are consolidated in the Company's consolidated financial
statements. The operations of the Company are managed on a
property-by-property basis therefor the results of our financing, lending and
property management and utility operations are not reviewed separately by
management to make decisions regarding allocation of resources or to assess
performance.
3
In addition, since certain activities, if performed by the Company,
may not have beenbe 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
RV 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
resident 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 industry. ItsOur 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.
4
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 --- The Industry --- Industry Consolidation). However, the Company believes
that transactions occurring during 1999 and 2000 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
4
statements.)
Increasing acceptability of and demand for Site Set homes and vacation cottages
and continued constraints on development of new CommunitiesProperties 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.
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 propertyProperty 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 1993 acquisition of The Heritage with potential
development of approximately 288 Expansion Sites, the 1994 acquisition of Bulow
VillagePlantation with potential development of approximately 725 Expansion Sites, the
1997 acquisition of Golf Vista Estates with potential development of
approximately 12888 Expansion Sites, and the 1999 acquisition in 1999 of Coquina Crossing with
potential development of approximately 393 Expansion Sites, and the acquisition in 2001
acquisitions of Grand Island and The Lakes at Countrywood with combined
potential Expansion Sitesdevelopment of 224 sites.Expansion Sites.
Of the Company's 148our 142 Properties, ten may be expanded consistent with existing zoning
regulations. In 2002, the Company expects2004, we expect to develop an additional 141205 Expansion Sites
within three of these Properties. As of December 31, 2001, the Company2003, we had approximately
817713 Expansion Sites available for occupancy in 2422 of the Properties. The CompanyWe filled
205136 Expansion Sites in 20012003 and expectsexpect to fill an additional 200150 to 250200
Expansion Sites in 2002.2004.
5
LEASES
TheAt our Communities, a typical lease entered into between the resident and
the Company for the rental of a site 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 applicable 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 2225 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.
5
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.
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 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. Due to the lack of available commercially reasonable
coverage, the company iswe are self-insured for terrorist incidents. The Company
believes itsincidents, 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 INDUSTRY
The Company believesWe believe that modern 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 industry
report, there are approximately 50,000 Communities in the United
States, and approximately 6.5% or 3,250 of the Communities have more
than 200 sites and would be considered "investment-grade" properties.
The 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.
-6
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 clubhouses, recreational
and social activities and (iii) since moving a Site 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.
6
SITE SET HOUSING AND VACATION COTTAGES
Based on the current growth in the number of individuals living in Site Set
homes the Company believesand vacation cottages, we believe that Site Setthese 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 Site set.
The Company believesWe believe that the growing popularity of Site Set housingthese homes is primarily the
result of the following factors:
-o Importance of Home Ownership. According to the Fannie Mae ("FNMA") 20002001
National Housing Survey ("FNMA Survey"), renters' desire to own a home
continues to be a top priority.
According to the report, "A home is more than merely
shelter. Owning a home provides a sense of financial security...Americans
view owning a home as the second most important action a person can take
to achieve financial security, behind stating an IRA [401(k)] or other
type of retirement account.
-o Affordability. For a significant number of persons, Site Set housing
representspeople, these homes
represent the only means of achieving home ownership. In addition, the
total cost of housing in a 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" residential
alternatives.
-o Lifestyle Choice. As the average age of the United States population
has increased, Site Setthis 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 Site Setthis 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 Site 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 Site Set housing
construction quality are the only Federally regulated standards
governing housing quality of any type in the United States. Site 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 Site 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 Site Set housing industry has
experienced a recent trend towards multi-section homes. Many modern Site Set
homes are longer (up to 80 feet, compared to 50 feet in the 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.
7
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 residents
in our Properties own their homes, it is their responsibility to maintain their
homes and the surrounding area. It is management'sour role to ensure 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 (49 Properties), California (25
Properties), Arizona (17 Properties), Michigan (11 Properties) and Colorado (10
Properties). These markets accounted for 36%, 17%, 9%, 3%, and 10%,
respectively, of the Company's total revenues for the year ended December 31,
2001. 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, 2001.
82003.
The following table 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 tables settable sets forth certain information relating to the
PropertiesCommunities we owned by the Company as of December 31, 2001,2003, 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 (2,687 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 12/31/0103 12/31/0103 12/31/0002 12/31/0103 12/31/00
-------- -----------------------02
- ---------------------- ------------------------ -------- --------- --------- --------- ---------
FLORIDA
NORTHERN, CENTRAL & EASTERN FLORIDA:
Maralago Cay Lantana FL 602 96.3% 95.7% $417 $405
Brittany Estates Tallahassee FL 299 84.6% 93.6% $285 $270EAST COAST:
Bulow Plantation FLaglerFlagler Beach FL 276 99.4%(b) 97.8%(b) $258 $24497.5%(b) $329 $322
Carriage Cove Daytona Beach FL 418 97.4% 98.3% $399 $37094.3% 95.7% $393 $387
Coquina Crossing St Augustine FL 361 91.1%97.2%(b) 86.8%84.5%(b) $317 $305$341 $324
Coral Cay Margate FL 819 93.4% 96.3% $428 $41189.4% 91.5% $455 $435
Countryside North Vero Beach FL 646 95.7%98.0%(b) 95.5%96.6%(b) $315 $298
Fernwood Deland FL 92 94.6% 95.7% $260 $250
Grand Island Grand Island FL(a) 309 76.4% $282$341 $324
Heritage Village Vero Beach FL 436 97.0% 97.2% $346 $30894.3% 96.1% $368 $354
Holiday Village FL Vero Beach FL 128 78.1% 79.7% $286 $28168.8% 72.7% $313 $307
Holiday Village Ormond Beach FL(a) 301 88.0% 87.4% $339 $313
Indian Oaks Rockledge FL 211 96.2%208 99.5%(b) 94.8%98.1%(b) $243 $234$274 $260
Lakewood Village Melbourne FL 349 95.1% 95.7% $359 $34592.8% 92.8% $394 $387
Lighthouse Pointe Port Orange FL 433 89.1%(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 91.1%84.4%(b) 93.2%88.6%(b) $325 $313$379 $339
Oak Bend Ocala FL 262 87.4%(b) 84.4%88.2%(b) $250 $239
Pickwick Port Orange FL 432 97.2% 94.9% $310 $296$306 $292
Sherwood Forest Kissimmee FL 769 96.6%754 96.0%(b) 94.7%96.9%(b) $334 $319$355 $345
Villas at Spanish Oaks Ocala FL 459 93.9% 93.7% $301 $281
The Landings Port Orange FL 433 88.9%(b) 89.4%(b) $308 $293
The Meadows, FL Palm Beach Gardens FL 380 82.6%(b) 81.1%(b) $331 $314
TAMPA/NAPLES:87.1% 91.5% $334 $317
GULF COAST (TAMPA/NAPLES):
Bay Indies Venice FL 1,309 98.9% 99.9% $323 $31496.3% 98.2% $388 $345
Bay Lake Estates Nokomis FL 228 96.1% 98.2% $370 $354
Boulevard Estates Clearwater FL 297 89.2% 89.6% $349 $33394.7% 95.6% $427 $416
Buccaneer N. Ft. Myers FL 971 99.1% 99.3% $331 $317
Chalet Village Tampa FL 60 90.0% 90.0% $327 $30998.1% 98.5% $368 $348
Country Place New Port Richey FL 515 97.9%99.6%(b) 90.9%99.4%(b) $237 $230$278 $272
Down Yonder Largo FL 361 99.4% 98.9% $375 $356362 98.6% 99.2% $403 $388
East Bay Oaks Largo FL 328 97.3% 97.0% $367 $35194.2% 96.0% $395 $391
Eldorado Village Largo FL 227 96.0% 96.9% $370 $356
Friendly91.6% 94.3% $402 $391
Glen Ellen Clearwater FL(a) 106 85.8% 76.9% $328 $322
Hacienda Village of Kapok Clearwater FL 236 84.3% 84.7% $349 $341New 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 84.2% 80.3% $345 $32279.6% 83.9% $358 $346
Holiday Ranch Largo FL 150 88.7% 92.7% 94.0% $341 $333$370 $353
Lake Fairways N. Ft. Myers FL 896 99.1% 99.4% $364 $34899.6% 99.2% $389 $376
Lake Haven Dunedin FL 379 92.9% 97.6% $382 $37683.6% 89.7% $414 $399
Lakes at Countrywood Plant City FL(a) 421 96.5% $246FL 423 93.4%(b) 94.8%(b) $263 $256
Meadows at Countrywood Plant City FL 736 98.9% 98.8% $285 $277737 98.4% 99.1% $305 $293
Oaks at Countrywood Plant City FL 168 67.9%72.0%(b) 64.9%70.8%(b) $248 $231$275 $266
Pine Lakes N. Ft. Myers FL 584 99.1% 99.8% $439 $421
Satellite100.0% 99.3% $465 $458
Silk Oak Clearwater FL 87 90.8% 90.8% $302 $292FL(a) 180 87.2% 93.3% $367 $358
The Heritage N. Ft. Myers FL 455 83.5%91.2%(b) 79.6%87.3%(b) $306 $290$334 $319
Windmill Manor Bradenton FL 292 95.9% 96.2% $357 $340(d)93.8% 94.9% $382 $370
Windmill Village -- Ft. Myers N. Ft. Myers FL 491 98.0% 98.6% $310 $297
Windmill Village North95.5% 96.3% $329 $323
Winds of St. Armands No Sarasota FL 471 98.5% 99.8% $332 $320
Windmill Village South95.8% 98.1% $373 $346
Winds of St. Armands So Sarasota FL 306 99.3% 100.0% $332 $321
-------99.7% 99.7% $386 $364
------ ------ ----- ------ --------- ----
TOTAL FLORIDA MARKET 19,154 94.3% 94.7% $333 $323
-------19,630 93.2% 93.9% $362 $346
------ ------ ----- ------ --------- ----
FLORIDA MARKET --- CORE PORTFOLIO 18,424 94.6% 95.1% $336 $323
-------18,067 93.1% 94.0% $368 $352
------ ------ ----- ------ ---- ----
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 12/31/01 12/31/01 12/31/00 12/31/01 12/31/00
-------- ----------------------- -------- --------- --------- --------- ---------
CALIFORNIA
NORTHERN CALIFORNIA:
California Hawaiian San Jose CA 419 98.1%(b) 98.1%(b) $636 $600
Colony Park Ceres CA 186 86.0% 76.9% $353 $345
Concord Cascade Pacheco CA 283 98.9% 98.9% $544 $521
Contempo Marin San Rafael CA 396 98.7% 98.7% $644 $631
Coralwood Modesto CA 194 97.4% 92.8% $413 $403
Four Seasons Fresno CA 242 73.6% 71.5% $254 $244
Laguna Lake San Luis Obispo CA 290 99.7% 99.7% $344 $328
Monte del Lago Castroville CA 314 97.8%(b) 99.4%(b) $513 $485
Quail Meadows Riverbank CA 146 100.0% 98.6% $363 $340
Royal Oaks Visalia CA 149 81.9% 83.2% $273 $258
DeAnza Santa Cruz Santa Cruz CA 198 99.5% 100.0% $526 $514
Sea Oaks Los Osos CA 125 100.0% 100.0% $349 $344
Sunshadow San Jose CA 121 100.0% 100.0% $605 $583
Westwinds (4 Properties) San Jose CA 723 98.9% 99.9% $656 $615
SOUTHERN CALIFORNIA:
Date Palm Country Club Cathedral City CA 538 95.9% 93.9% $640 $631
Lamplighter Spring Valley CA 270 98.1% 99.6% $565 $535
Meadowbrook Santee CA 332 99.1% 99.4% $603 $590
Rancho Mesa El Cajon CA 158 99.4% 99.4% $535 $510
Rancho Valley El Cajon CA 140 98.6% 99.3% $550 $518
Royal Holiday Hemet CA 179 64.2% 72.6% $277 $259
Santiago Estates Sylmar CA 299 96.0% 94.6% $617 $591
------- ----- ------ ---- ----
TOTAL CALIFORNIA MARKET 5,702 95.4% 95.2% $538 $516
------- ----- ------ ---- ----
CALIFORNIA MARKET -- CORE PORTFOLIO 5,702 95.4% 95.2% $538 $516
------- ----- ------ ---- ----
ARIZONA
Apollo Village Phoenix AZ 237 91.6%(b) 92.8%(b) $371 $356
Brentwood Manor Mesa AZ 274 93.8% 94.9% $456 $431
Carefree Manor Phoenix AZ 128 97.7% 99.2% $322 $303
Casa del Sol #1 Peoria AZ 246 86.6% 94.7% $422 $407
Casa del Sol #2 Glendale AZ 239 94.1% 97.9% $455 $438
Casa del Sol #3 Glendale AZ 238 94.1% 96.2% $439 $420
Central Park Phoenix AZ 293 95.2% 96.9% $386 $373
Desert Skies Phoenix AZ 164 97.6% 97.0% $317 $293
Fairview Manor Tucson AZ 235 91.1% 92.8% $326 $311
Hacienda de Valencia Mesa AZ 365 85.2% 94.2% $377 $361
Palm Shadows Glendale AZ 294 90.8% 94.9% $355 $336
Sedona Shadows Sedona AZ 198 91.4% 88.0% $327 $306
Sunrise Heights Phoenix AZ 199 90.5% 95.5% $358 $347
The Mark Mesa AZ 410 91.7% 95.9% $383 $361
The Meadows Tempe AZ 391 92.3% 98.0% $439 $416
Whispering Palms Phoenix AZ 116 94.8% 99.1% $282 $267
------- ----- ------ ---- ----
TOTAL ARIZONA MARKET 4,027 91.9% 95.4% $385 $367
------- ----- ------ ---- ----
ARIZONA MARKET -- CORE PORTFOLIO 4,027 91.9% 95.4% $385 $367
------- ----- ------ ---- ----
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 12/31/0103 12/31/0103 12/31/0002 12/31/0103 12/31/00
-------- -----------------------02
- ---------------------- ------------------------ -------- --------- --------- --------- ---------
MICHIGAN
Americana Estate Kalamazoo MI 162 88.9% 93.2%CALIFORNIA
NORTHERN CALIFORNIA:
California Hawaiian San Jose CA 418 98.1% 97.6% $698 $675
Colony Park Ceres CA 186 93.0% 89.8% $386 $375
Concord Cascade Pacheco CA 283 99.3% 98.9% $566 $560
Contempo Marin San Rafael CA 396 98.7% 98.7% $651 $646
Coralwood Modesto CA 194 99.0% 99.0% $457 $438
Four Seasons Fresno CA 242 76.9% 75.6% $277 $267
Laguna Lake San Luis Obispo CA 290 99.7% 99.7% $378 $368
Monte del Lago Castroville CA 310 97.7%(b) 97.7%(b) $584 $560
Quail Meadows Riverbank CA 146 100.0% 100.0% $414 $390
Royal Oaks Visalia CA 149 81.9% 81.9% $299 $290
DeAnza Santa Cruz Santa Cruz CA 198 98.5% 99.0% $572 $558
Sea Oaks Los Osos CA 125 96.8% 97.6% $423 $418
Sunshadow San Jose CA 121 100.0% 100.0% $662 $651
Westwinds (4 Properties) San Jose CA 723 98.5% 99.2% $752 $719
SOUTHERN CALIFORNIA:
Date Palm Country Club Cathedral City CA 538 94.2% 94.1% $720 $679
Lamplighter Spring Valley CA 270 98.5% 99.3% $713 $642
Meadowbrook Santee CA 338 97.6% 100.0% $636 $627
Rancho Mesa El Cajon CA 158 99.4% 99.4% $619 $567
Rancho Valley El Cajon CA 140 100.0% 100.0% $708 $627
Royal Holiday Hemet CA 179 64.2% 67.0% $306 $294
Appletree Walker MI 239 94.1% 96.7% $334 $318
Brighton Village Brighton MI 197 98.0% 99.0% $384 $369
College Heights Auburn Hills MI 162 98.8% 98.1% $392 $372
Creekside Wyoming MI 165 94.5% 97.6% $374 $356
Groveland Manor Holly MI 186 89.2% 91.4% $358 $346
Hillcrest Acres Kalamazoo MI 150 94.0% 96.0% $319 $307
Metro Romulus MI 227 99.6%$285
Santiago Estates Sylmar CA 300 98.7% $364 $384
Riverview Estates Bay City MI 197 78.2% 78.2% $259 $249
South Lyon Woods South Lyon MI 211 98.6% 98.1% $455 $439
Timberland Ypsilianti MI 185 91.9% 91.4% $343 $332
-------96.3% $678 $646
----- ------ ------ ---- ----
TOTAL MICHIGANCALIFORNIA MARKET 2,081 93.4% 94.4% $359 $344
-------5,704 95.6% 95.8% $598 $574
----- ------ ------ ---- ----
MICHIGANCALIFORNIA MARKET --- CORE PORTFOLIO 2,081 93.4% 94.4% $359 $344
-------5,704 95.6% 95.6% $598 $574
----- ------ ------ ---- ----
COLORADO
Bear Creek Sheridan CO 124 97.6% 100.0%ARIZONA
Apollo Village Phoenix AZ 236 80.9%(b) 83.9%(b) $416 $401
The Highlands at Mesa AZ 273 85.3% 89.0% $498 $475
Brentwood
Carefree Manor Phoenix AZ 128 76.6% 92.2% $355 $342
Casa del Sol #1 Peoria AZ 245 77.6% 81.2% $479 $460
Casa del Sol #2 Glendale AZ 239 77.4% 86.6% $502 $472
Casa del Sol #3 Glendale AZ 236 85.6% 89.8% $500 $471
Central Park Phoenix AZ 293 88.1% 92.5% $426 $409
$385
Cimarron Broomfield CO 327 98.2% 99.1% $417Desert Skies Phoenix AZ 164 91.5% 93.9% $353 $338
Fairview Manor Tucson AZ 235 82.6% 85.1% $358 $342
Hacienda de Valencia Mesa AZ 364 74.7% 79.4% $412 $395
Palm Shadows Glendale AZ 294 80.6% 87.1% $393 $372
Sedona Shadows Sedona AZ 198 93.4% 93.4% $391 Golden Terrace Golden CO 265 98.6% 99.2%$355
Sunrise Heights Phoenix AZ 199 79.9% 88.4% $409 $386
The Mark Mesa AZ 410 61.0% 74.9% $410 $392
The Meadows Tempe AZ 391 74.4% 85.2% $464 $431
Golden Terrace South Golden CO 80 96.3% 100.0% $441 $407
Golden Terrace West Golden CO 316 98.1% 100.0% $454 $424
Hillcrest Village Aurora CO 602 95.5% 96.3% $445 $422
Holiday Hills Denver CO 737 95.4% 97.1% $437 $412
Holiday Village Co. Springs CO 240 96.7% 96.3% $427 $403
Pueblo Grande Pueblo CO 252 96.8% 96.8% $281 $265
Woodland Hills Denver CO 434 97.9% 98.6% $418 $390
-------$455
Whispering Palms Phoenix AZ 116 90.5% 93.1% $316 $295
----- ------ ------ ---- ----
TOTAL COLORADOARIZONA MARKET 3,377 96.8% 97.9% $424 $399
-------4,021 79.6% 85.9% $425 $406
----- ------ ------ ---- ----
COLORADOARIZONA MARKET --- CORE PORTFOLIO 3,377 96.8% 97.9% $424 $399
-------4,021 79.6% 85.9% $425 $406
----- ------ ---- ----
NORTHEAST
Aspen Meadows Rehoboth DE 200 99.5% 100.0% $262 $250
Camelot Meadows Rehoboth DE 319 99.9% 100.0% $265 $252
Mariners Cove Millsboro DE 375 89.3%(b) 88.5%(b) $381 $356
McNicol Rehoboth DE 93 98.9% 97.8% $258 $248
Sweetbriar Rehoboth DE 142 98.6% 100.0% $199 $187
Waterford Estates Bear DE 731 97.4%(b) 96.9%(b) $398 $379
Whispering Pines Lewes DE 393 95.2% 96.9% $269 $258
Pheasant Ridge Mt. Airy MD 101 97.0% 99.0% $453 $424
Brook Gardens Lackawanna NY 424 96.5% 97.2% $435 $423
Greenwood Village Manorville NY 486 99.4%(b) 97.3%(b) $389 $366
Green Acres Breinigsville PA 595 96.1% 97.3% $420 $408
Meadows of Chantilly Chantilly VA 500 96.6% 92.0% $512 $493
Independence Hill Morgantown WV 203 88.2% 90.1% $214 $204
------- ----- ------ ---- ----
TOTAL NORTHEAST MARKET 4,562 96.3% 96.0% $372 $355
------- ----- ------ ---- ----
NORTHEAST MARKET -- CORE PORTFOLIO 4,562 96.3% 96.0% $372 $355
------- ----- ------ ---- ----
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 12/31/0103 12/31/0103 12/31/0002 12/31/0103 12/31/0002
- --------------------- ----------------------- -------- -------------------------------- ---------- --------- ---------
COLORADO
Bear Creek Sheridan CO 122 95.1% 97.6% $471 $446
Cimarron Broomfield CO 327 93.9% 97.6% $464 $445
Golden Terrace Golden CO 265 91.7% 96.6% $512 $492
Golden Terrace South Golden CO 160 85.0% 95.0% $503 $483
Golden Terrace West Golden CO 316 93.4% 96.5% $510 $490
Hillcrest Village Aurora CO 601 88.6% 91.7% $490 $472
Holiday Hills Denver CO 736 92.3% 92.3% $484 $466
Holiday Village Co. Springs CO 240 90.4% 92.9% $494 $446
Pueblo Grande Pueblo CO 251 94.4% 96.4% $311 $296
Woodland Hills Denver CO 434 88.0% 93.8% $456 $439
----- ----- ----- ---- ----
TOTAL COLORADO MARKET 3,452 87.7% 94.2% $472 $452
----- ----- ----- ---- ----
COLORADO MARKET - CORE PORTFOLIO 3,452 91.1% 94.2% $472 $452
----- ----- ----- ---- ----
NORTHEAST
Aspen Meadows Rehoboth DE 200 99.5% 100.0% $288 $277
Camelot Meadows Rehoboth DE 302 99.0% 100.0% $290 $272
Mariners Cove Millsboro DE 374 91.2%(b) 90.1%(b) $424 $399
McNicol Rehoboth DE 93 98.9% 100.0% $293 $278
Sweetbriar Rehoboth DE 146 94.5% 95.9% $246 $228
Waterford Bear DE 731 95.3%(b) 96.4%(b) $423 $410
Whispering Pines Lewes DE 392 87.2% 95.2% $315 $274
Pheasant Ridge Mt. Airy MD(a) --- --- 98.0%(d) --- $468(d)
Brook Gardens Lackawanna NY(a) --- --- 93.9%(d) --- $446(d)
Greenwood Village Manorville NY 512 99.2% 98.8% $428 $406
Green Acres Breinigsville PA 595 93.8% 94.8% $452 $438
Meadows of Chantilly Chantilly VA 500 88.8% 94.8% $604 $544
Independence Hill Morgantown WV(a) --- --- 87.2%(d) --- $221(d)
----- ----- ----- ---- ----
TOTAL NORTHEAST MARKET 3,845 94.1% 95.6% $412 $387
----- ----- ----- ---- ----
NORTHEAST MARKET - CORE PORTFOLIO 3,845 94.1% 96.1% $412 $387
----- ----- ----- ---- ----
12
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 12/31/03 12/31/03 12/31/02 12/31/03 12/31/02
- -------------------- --------------------- -------- --------- --------- --------- ---------
MIDWEST
Five Seasons Cedar Rapids IA 390 79.0%73.1%(b) 79.7%76.4%(b) $253 $240$276 $264
Holiday Village IA SouxSioux City IA 519 80.5% 87.7% $248 $24165.7% 73.8% $252 $252
Golf Vista Estates Monee IL 371 88.4%411 95.9%(b) 90.6%88.1%(b) $387 $344$441 $393
Willow Lake Estates Elgin IL 617 96.8% 97.4% $624 $583
Burns Harbor Estates90.1% 94.2% $694 $660
Forest Oaks Chesterton IN 227 83.7% 89.0% $305 $28771.8% 76.2% $332 $330
Oak Tree Village Portage IN 379 90.0% 93.1% $302 $283361 86.7% 88.9% $342 $332
Windsong Indianapolis IN 268 84.0% 91.4% $292 $277
Camelot Acres Burnsville MN 302 99.8% 99.3% $417 $390
Royal Village Toledo OH 233 90.1% 89.3% $319 $300
-------57.8% 72.0% $320 $309
Creekside Wyoming MI 165 87.3% 93.3% $407 $382
------ ----- ----------- ---- ----
TOTAL MIDWEST MARKET 3,306 88.3% 91.9% $377 $350
-------2,958 79.5% 83.3% $423 $399
------ ----- ----------- ---- ----
MIDWEST MARKET --- CORE PORTFOLIO 3,306 88.3% 91.9% $377 $350
-------2,958 79.5% 83.3% $423 $399
------ ----- ----------- ---- ----
NEVADA, UTAH, NEW MEXICO
Del Rey Albuquerque NM 407 84.5% 90.9% $328 $32867.1% 76.7% $374 $341
Bonanza Las Vegas NV 353 75.9% 81.6% $465 $46568.0% 72.8% $484 $473
Boulder Cascade Las Vegas NV 298 86.9% 89.3% $417 $394299 76.9% 81.9% $446 $436
Cabana Las Vegas NV 263 97.3% 98.9% $432 $41593.5% 95.4% $447 $442
Flamingo West Las Vegas NV 258 84.1%94.6%(b) 80.2%88.8%(b) $430 $406$461 $449
Villa Borega Las Vegas NV 293 91.1% 95.9% $421 $402(d)82.9% 87.0% $454 $433
All Seasons Salt Lake City UT 121 98.3% 97.5% $328 $31593.4% 96.7% $370 $352
Westwood Village Farr West UT 314 96.5%95.2%(b) 95.2%(b) $237 $232
-------$280 $259
------ ----- ----------- ---- ----
TOTAL NEVADA, UTAH, NEW MEXICO MARKET 2,307 88.1% 90.6% $380 $369
-------2,308 81.8% 85.2% $413 $398
------ ----- ----------- ---- ----
NEVADA, UTAH, NEW MEXICO MARKET --- CORE PORTFOLIO 2,307 88.1% 90.6% $380 $369
-------2,308 81.8% 85.2% $413 $396
------ ----- ----------- ---- ----
NORTHWEST
Casa Village Billings MT 491 92.3% 98.0% $282 $27285.9% 88.0% $304 $294
Falcon Wood Village Eugene OR 183 98.9% 98.4% $363 $34590.7% 92.9% $403 $351
Quail Hollow Fairview OR 137 97.8% 98.6% $442 $42692.7% 93.4% $507 $500
Shadowbrook Clackamas OR 156 98.7% 99.4% $444 $42994.2% 96.8% $513 $494
Kloshe Illahee Federal Way WA 258 97.7% 99.6% 99.2% $478 $454
-------$599 $513
------ ----- ----------- ---- ----
TOTAL NORTHWEST MARKET 1,225 96.3% 98.5% $376 $359
-------90.9% 92.9% $436 $402
------ ----- ----------- ---- ----
NORTHWEST MARKET --- CORE PORTFOLIO 1,225 96.3% 98.5% $376 $359
-------90.9% 92.9% $436 $402
------ ----- ----------- ---- ----
GRAND TOTAL ALL MARKETS 45,741 93.6% 94.7% $388 $367
=======43,143 90.5% 92.4% $422 $403
====== ===== =========== ==== ====
GRAND TOTAL ALL MARKETS --- CORE PORTFOLIO 45,011 93.9%41,580 90.4%(c) 94.9%92.4%(c) $384 $367
=======$427 $407
====== ===== =========== ==== ====
- ---------------
(a) Represents a Property that is not part of the Core Portfolio.
(b) The process of filling Expansion Sites at these Properties is ongoing. A
decrease in occupancy may reflect development of additional Expansion
Sites.
(c) Changes in total portfolio occupancy include the impact of acquisitions and
expansion programs and are therefore not comparable.
(d) During 2001, at certain Properties the amounts charged to residents for
utilities were separated ("Unbundled") from their rent charges and recorded
as utility income. For comparison purposes an adjustment was made to base
rental income for 2000. This adjustment is reflected on this tableProperty sold in the
monthly base rent per site amounts for 2000.2003.
See Management's Discussion and Analysis of Financial Condition and Results of
Operations.
1213
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. This
summary provides the history and reasoning underlying the Company's defenseAs a result 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 charges, because DeAnza did not
want to be regulated by 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. DeAnza's 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, the Company. DeAnza and the Company demurred to each of these
complaints on the grounds that the CPUC had exclusive jurisdiction over the
setting of water rates and that residents under rent control had to first
exhaust their administrative remedies before proceeding in a civil action. At
one point, the case was dismissed (with leave to amend) on the basis that
jurisdiction was with the CPUC and, at another point, Mr. Rossman was dismissed
from the case because he had not exhausted his administrative remedies.
On June 29, 1995, a hearing was held before a City 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.
13
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, 1998, 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 decision primarily reflected
the court of appeal's view that CPUC Section 2705.5 operated as a ceiling and
that California Civil Code Section 798.41 allowed for a charge based on actual
costs, including costs of administration, operation and maintenance of the
system, but that the Company had not to provide evidence of such costs. 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 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 ofin punitive damages against the Company and DeAnza. The
Company had previously agreed to indemnify DeAnza on the matter.
14
On April 19, 1999, the trial court denied all of the Company's and DeAnza's
post-trial motions for judgement notwithstanding the verdict, new trial and
remittur. The trial court also awarded $700,000 of attorneys' fees to
plaintiffs. The Company appealed the jury verdict and attorneys' fees award
(which also accrues interest at the statutory rate of 10.0% per annum). The
Company 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.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, as a result,
all post-judgementpost-judgment interest thereon, on the basis that punitive damages are not
available as a remedy for a statutory violation of the MRL.California Mobilehome
Residency Law ("MRL"). 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 or 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 HOAHOA's attorney has filed in
Superior Court, seeking statutory penalties andmade 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.
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 maywould otherwise
be heardreflected in late March, 2002.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 had been
agreed to by the CMHOA in a settlement agreement. The Company intends to
vigorously defend itself
against these claims.
In twothis matter, which has been stayed pending a 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 Californiastate
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.
In a separate matter, 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.of an order dismissing its claims against the City
of San Rafael. The Company believes that such lawsuits will be a consequence of
the residents who
received rent increase notices with respectCompany's efforts to rent increases above those
permitted by the localchange rent control ordinance weresince tenant groups actively desire
to preserve the premium value of their homes in addition to the discounted rents
provided by rent control. The Company has determined that its efforts to
rebalance the regulatory environment despite the risk of litigation from tenant
groups are necessary not covered by the ordinance
eitheronly because they did not comply with the provisions of the ordinance or$15 million annual subsidy to
tenants, but also because they are exempted by state law. On December 29, 2000,of the Superior Court
of California, County of Santa Cruz enjoined such rent increases. The Company
intends to vigorously defend the matter, which may go to trial in the summer of
2002.condemnation risk.
14
ELLENBURG COMMUNITIES
The Company and certain other parties entered into a settlement agreement
("the Settlement"(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
settlementSettlement closed on May 22, 2000 (see Note 5).2000. Only the appealsappeal of one entity remained, the
two
entities remain, neitheroutcome of which iswas 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.substantive appeals on March 13, 2003 as moot. Fund 20 petitioned the
California Supreme Court to review this decision which review was denied.
In October 2001, Fund 20 sued the Company and certain of its affiliates
again, this time in AlmedaAlameda 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 other related proceedings in
Arizona (from which the Company has already been dismissed with prejudice) are
concluded. 15
CANDLELIGHT PROPERTIES, L.L.C
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 was secured by a mortgage on Candlelight
Village ("Candlelight"), a Property in Columbus, Indiana, and was guaranteed by
Ronald E. Farren, the 99% owner of Borrower. The Company accounted forobtained a court order enjoining Fund 20 from proceeding
with its Alameda County action.
In February, 2004, the Loan
as an investment in real estate and, accordingly, Candlelight's rental revenues
and operating costs were included with the Company's rental revenues and
operating costs for financial reporting purposes. Concurrently with the funding
of the Loan, Borrower granted the Operating Partnership the option to acquire
Candlelight upon the maturity of the Loan. The Operating Partnership notified
Borrower that it was exercising its option to acquire Candlelight in March 1999,
and the Loan subsequently matured on May 3, 1999. However, Borrower failed to
repay the Loan and refused to convey Candlelight to the Operating Partnership.
Borrower filed suit in the Circuit Court of Bartholomew County, Indiana
("Court") on May 5, 1999, seeking declaratory judgment on the validity of the
exercise of the option. The Lending Partnership filed suit in the Court the next
day, seeking to foreclose its mortgage, and the suits were consolidated by the
Court.
On September 20, 2001, the partiesCompany entered into a settlement agreement providing for a cash payment of $10.8 millionwith
Fund 20 resolving all remaining matters at no cost to the Lending PartnershipCompany and dismissal with
prejudicemutual 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 all litigation amongapproximately $518,000 with respect to the
parties and their
affiliates, among other terms. The closingProperty known as Countryside at Vero Beach, located in Vero Beach, Florida,
purportedly under the Settlement Agreement
occurred on October 5, 2001. Theterms of an agreement between the County and a prior owner
of the Property. In response, the Company accounted forhas advised the SettlementCounty that these fees
are no longer due and owing as a dispositionresult of a 1996 settlement agreement between
the property.
WESTWINDS
The Operating Partnership isCounty and the ground lessee ("Lessee") of certain
property in San Jose, California under ground leases ("Leases") from the
Nicholson Family Trust ("Lessor"). On February 13, 2001, Lessor filed a petition
for arbitration of disputes over whether certain items constitute "gross
revenue" under the Leases in which petition Lessor seeks damages and termination
of the Leases. Lessee responded on March 12, 2001 disputing Lessor's
contentions. Lessor claims that "gross revenue" for the purpose of calculating
percentage rent owing to Lessor under the ground leases includes certain amounts
Lessee has recouped from tenantsprior owner of the Property, (who are protected by rent
control) relatedproviding for the payment of
$150,000 to ground rent already paidthe County to Lessor. Lessee has successfully
been able to pass-through to tenantsdischarge any further obligation for the payment of
impact or connection fees for sewer service at the property increasesProperty. The Company paid
this settlement amount (with interest) to the County in ground rentconnection with the
Company's acquisition of the Property. Accordingly, the Company believes that
the County'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 Leases. Lessee contendsDelaware 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 Dismiss 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 pass-through results in
reimbursement of lease expense, not "gross revenue." Lessor also contends thatform until the "net income" of RSI. fromState had approved a new form for use at the Property
should be includedas 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 gross
revenue calculation. Lessee disputes thisamount 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 many reasons, including, but notSummary Judgment. The State's appeal is limited to the
fact that RSIsingle 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 notscheduled for March 16, 2004.
On November 14, 2003, the State filed a lessee under the Leases, the sales
activity is not conducted by Lessee, and RSI is a separate company from Lessee.
Lessor's motion for summary judgmentStay Pending Appeal with
the Court, and on December 3, 2003, the Company filed its response opposing the
motion. On December 16, 2003, the Court issued its order on the pass-through issue was denied
by an arbitration panel on November 2, 2001. Lessor and Lessee have agreed to
mediate the dispute prior to arbitration. The Company does not believemotion, holding
that the amounts in question are material even if resolvedCompany may proceed to issue notices of default to tenants who fail to
pay the full 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 Lessee and, based
upon advice of counsel, does not believe thatSupreme Court rules on the Lessor will be successful in
terminating the Leases.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.
16The 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
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 The New York Stock
Exchange under the trading symbol MHC.
DISTRIBUTIONS RETURN OF CAPITAL
CLOSE HIGH LOW MADEReturn of
Distributions Capital
Close High Low Declared GAAP BASIS(A)
-------- -------- --------Basis(a)
------ ------ ------ ------------- ------------------------------
20012003
1st Quarter $27.0000 $28.7500 $25.8800$29.60 $30.86 $27.40 $ .4450 $ .00.4950 $.15
2nd Quarter 28.1000 28.2000 26.4800 .445035.11 35.80 29.56 .4950 .16
3rd Quarter 30.4200 30.4200 28.0500 .4450 .1639.18 39.80 35.11 .4950 .00
4th Quarter 31.2100 31.6400 30.0000 .4450 .11
200037.65 41.92 36.70 8.0000(b) .00
2002
1st Quarter $23.1250 $25.7500 $22.2500$33.00 $33.63 $30.65 $ .4150 $ .14.4750 $.15
2nd Quarter 23.9375 25.7500 23.0625 .4150 .0035.10 35.66 32.50 .4750 .18
3rd Quarter 25.0000 25.2500 23.5000 .415031.88 35.14 30.05 .4750 .17
4th Quarter 29.0000 29.1250 24.3125 .4150 .1229.63 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,
20012003 was approximately 4,400.
175,049.
18
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED HISTORICAL FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AND PROPERTY DATA)
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 and 19971999 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)
(1)YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
1998 1997
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)--------- -------- -------- -------- --------
OPERATING DATA:
REVENUES
Base rental income........................................... $195,644 $189,481 $181,672 $165,340 $108,984
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..................................... 22,014 20,366 20,096 18,219 11,785income .............................. 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
Interest income.............................................. 639 1,009 1,669 3,048 1,941
-------- -------- -------- -------- --------
Total revenues............................................. 225,856 220,678 215,028 194,830 123,510
-------- -------- -------- -------- --------
EXPENSES
Property operating and maintenance........................... 62,008 59,199 58,038 53,064 32,343
Real estate taxes............................................ 17,420 16,888 16,460 14,470 8,352
Property management.......................................... 8,984 8,690 8,337 7,108 5,079Other corporate income ................................ 2,065 1,277 1,353 670 280
General and administrative................................... 6,687 6,423 6,092 5,411 4,559administrative ............................ (8,060) (8,192) (6,687) (6,423) (6,092)
Interest and related amortization............................ 51,305 53,280 53,775 49,693 21,753amortization(2) .................. (58,402) (50,729) (51,305) (53,280) (53,775)
Loss on the extinguishment of debt .................... -- -- -- (1,041) --
Depreciation on corporate assets............................. 1,243 1,139 1,005 995 590assets ...................... (1,240) (1,277) (1,243) (1,139) (1,005)
Depreciation on real estate assets and other costs........... 34,833 34,411 34,486 28,426 17,365
--------costs .... (38,034) (35,552) (34,228) (33,713) (33,955)
Gain on sale of properties and other .................. --- --- 8,168 12,053
--------- -------- -------- -------- --------
Total expenses............................................. 182,480 180,030 178,193 159,167 90,041other income and expenses .................. (101,976) (93,506) (81,492) (79,456) (90,813)
--------- -------- -------- -------- --------
MINORITY INTERESTS:
(Income) allocated to Common OP Units ................. (4,330) (5,848) (7,688) (7,968) (5,761)
(Income) allocated to Perpetual Preferred OP 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 from operations....................................... 43,376 40,648 36,835 35,663 33,469
Gain on sale of property and other........................... 8,168 12,053 -- -- --
-------- -------- -------- -------- --------
Income before allocation to minority interests
and extraordinary loss on early extinguishment of debt..... 51,544 52,701 36,835 35,663 33,469
(Income) allocated to Common OP Units........................ (8,209) (8,463) (6,219) (6,733) (4,373)
(Income) allocated to Perpetual Preferred OP Units........... (11,252) (11,252) (2,844) -- --
-------- -------- -------- -------- --------
Income before extraordinary loss on early
extinguishment of debt..................................... 32,083 32,986 27,772 28,930 29,096
Extraordinary loss on early extinguishment of
debt (net of $264 and $105 allocated to
minority interests)........................................ -- (1,041) -- -- (451)
--------discontinued operations .............. 9,590 12,739 2,077 1,897 1,860
--------- -------- -------- -------- --------
NET INCOME.................................................INCOME AVAILABLE FOR COMMON SHARES ........... $ 27,014 $ 36,445 $ 32,083 $ 31,945 $ 27,772
$ 28,930 $ 28,645
======== ================= ======== ======== ======== Net income per Common Share before extraordinary
item -- basic.............................................. $ 1.53 $ 1.54 $ 1.10 $ 1.13 $ 1.18
======== ======== ======== ======== ========
Net income per Common Share before extraordinary
item -- diluted............................................ $ 1.49 $ 1.51 $ 1.09 $ 1.12 $ 1.16
======== ======== ======== ======== ========
Net income per Common Share -- basic......................... $ 1.53 $ 1.49 $ 1.10 $ 1.13 $ 1.16
======== ======== ======== ======== ========
Net income per Common Share -- diluted....................... $ 1.49 $ 1.46 $ 1.09 $ 1.12 $ 1.15
======== ======== ======== ======== ========
Dividend declared per Common Share........................... $ 1.78 $ 1.66 $ 1.55 $ 1.45 $ 1.32
======== ======== ======== ======== ========
Weighted average Common Shares outstanding -- basic.......... 21,036 21,469 25,224 25,626 24,689
Weighted average Common OP Units outstanding................. 5,466 5,592 5,704 5,955 3,749
Weighted average Common Shares outstanding -- diluted........ 27,010 27,408 31,252 31,962 28,762
1819
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED HISTORICAL FINANCIAL INFORMATION
(CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AND PROPERTY DATA)(continued)
(Amounts in thousands, except for per share and property data)
(1)AS OF DECEMBER 31,
----------------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
1998 1997
----------- ----------- ----------- --------------------- ---------- ---------- ---------- ----------
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
Total assets...................................... 1,099,963assets .......................................... 1,473,915 1,162,850 1,101,805 1,104,304 1,160,338 1,176,841 864,365
Total mortgages and loans.........................loans(2) .......................... 1,076,296 760,233 708,857 719,684 725,264
750,849 495,172
Minority interests................................interests .................................... 126,716 168,501 171,147 171,271 179,397
70,468 67,453
Stockholders' equity..............................equity(2) ............................... 5,798 177,619 175,150 168,095 211,401 310,441 280,575
OTHER DATA:
Funds from operations(3)..........................operations(4) .............................. $ 60,831 $ 68,393 $ 66,957 $ 63,807 $ 68,477
$ 64,089 $ 50,834
Net cash flow:
Operating activities...........................activities ................................ $ 75,163 $ 80,176 $ 80,708 $ 68,001 $ 72,580
Investing activities ................................ $ 71,977(598) $ 54,581
Investing activities...........................(72,973) $ (23,067) $ 23,102 $ (37,868)
Financing activities ................................ $ (262,762) $(239,445)
Financing activities...........................243,905 $ (1,287) $ (59,134) $ (94,932) $ (41,693)
$ 203,533 $ 185,449
Total Properties (at end of period)(4)............ 148(5) ................ 142 142 149 154 157 154 121
Total sites (at end of period).................... 50,761 51,452 54,002 53,009 44,108 ........................ 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
- ---------------
(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) During the year ended December 31, 1997, 39 Properties were acquired; net
operating income attributable to such Properties during 1997 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 during 1998 was approximately $7.6 million, which included
approximately $3.9 million of depreciation and amortization expense.20
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED HISTORICAL FINANCIAL INFORMATION
(continued)
(5) During the year ended December 31, 1999, twothree Properties were acquired;
net operating income attributable to such Properties during 1999 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. During the year ended December 31, 2001, twothree
Properties were purchased;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. (5)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.
1921
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,
1999. The Company defines its core Community portfolio ("Core Portfolio") as
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, 1999......................... 53,0092002........................................... 50,663
ACQUISITIONS:
The Meadows............................................. AprilMt. 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, 2002 148
Holiday Village................................July 31, 2002 301
Tropic Winds...................................August 7, 2002 531
Silk Oak Lodge.................................October 1, 1999 380
Coquina Crossing........................................ July 23, 1999 270
Grand Island (f.k.a. Golden Lakes)...................... January2002 180
Hacienda Village...............................December 18, 2002 519
Glen Ellen.....................................December 31, 2002 117
Toby's.........................................December 3, 2001 421
Lakes at Countrywood (f.k.a. Chain O' Lakes)............ January 3, 2001 309
Bulow Resort RV......................................... July 1, 2001 352
INVESTMENT IN UNCONSOLIDATED JOINT VENTURES:
Lakeshore Communities (2 properties).................... 1999 3432003 379
Araby Acres....................................December 15, 2003 337
Foothill ......................................December 15, 2003 180
EXPANSION SITE DEVELOPMENT:DEVELOPMENT AND OTHER:
Sites added (reconfigured) in 1999..................................... --2002............. 90
Sites added (reconfigured) in 2000..................................... 108
Sites added in 2001..................................... 1432003............. (35)
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 (219)
Dellwood Estates........................................ FebruaryCollege Heights (17 Properties)................September 1, 2002 (3,220)
Camelot Acres..................................November 13, 2001 (136)
Briarwood............................................... February 13, 2001 (166)
Bonner Springs.......................................... February 13, 2001 (211)
Carriage Park........................................... February 13, 2001 (143)
North Star.............................................. February 13, 2001 (219)
Quivira Hills........................................... February 13, 2001 (142)
Rockwood................................................ February 13, 2001 (264)
Candlelight............................................. October 5, 2001 (585)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, 2001.......................................... 50,7612003......................................... 51,715
======
2022
TRENDS
Occupancy in the Company'sour Properties as well as theour ability to increase rental rates
directly affectsaffect revenues. In 2001,2003, occupancy in the Company'sour Core Portfolio has remained relatively stable.decreased
1.9%. Also during 2001,2003, average monthly base rental rates for the Core Portfolio
increased approximately 4.5%5.1%. The Company
believes these trends will continue through 2002.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
The Company'sOur consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States, which require the Companyus
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and the related disclosures. The Company believesWe believe that
the following critical accounting policies, among others, affect itsour more
significant judgments and estimates used in the preparation of itsour consolidated
financial statements.
The CompanyWe periodically evaluates itsevaluate our long-lived assets, including itsour investments
in real estate, for impairment indicators. TheOur 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. 107107") and Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133133") requires the Companyus to make estimates and judgments that affect the fair value
of the instruments. The Company, whereWhere possible, baseswe base the fair values of itsour financial
instruments, including itsour derivative instrument,instruments, on listed market prices and
third party quotes. Where these are not available, the Company bases
itswe base our estimates on
other factors relevant to the financial instrument.
21Certain 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, 20012003 TO YEAR ENDED DECEMBER 31, 20002002
Since December 31, 1999,2001, the gross investment in real estate increased from
$1,264$1,238 million to $1,238$1,315 million as of December 31, 2001,2003, due primarily to the
aforementioned acquisitions and dispositions of Properties during the period.
The total number of sites owned or controlled decreasedincreased from 54,00250,663 as of
December 31, 19992001 to 50,76151,715 as of December 31, 2001.2003.
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, 20012003 and 2000.2002.
CORE PORTFOLIO TOTAL PORTFOLIO
----------------------------------------- ------------------------------------------------------------------------------------ ----------------------------------------
INCREASE/ % INCREASE/ %
(dollars in thousands) 2001 20002003 2002 (DECREASE) % CHANGE 2001 20002003 2002 (DECREASE) CHANGE
-------- -------- ---------- -------------- -------- -------- ---------- ------
(DOLLARS IN THOUSANDS)
BaseCommunity base rental income(1)............ $192,160 $183,615 $8,545 4.7% $195,644 $189,064income ...... $191,655 $185,766 $ 6,580 3.5%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......... 20,222 18,664 1,558 8.3% 27,762 28,197 (435) (1.5%)
Equity in income of affiliates... -- -- -- -- 1,811 2,408 (597) (24.8%)
Interest income.................. -- -- -- -- 639 1,009 (370) (36.7%)
-------- -------- ------ ------.......... 18,764 18,458 306 7.5% 20,150 19,684 466 2.4%
-------- -------- ------- ------
Total revenues................. 212,382 202,279 10,103 5.0% 225,856 220,678 5,178 2.3%---- -------- -------- ------- ----
Property operating revenues ..... 210,675 204,378 6,297 3.1% 228,849 223,470 5,379 2.4%
Property operating and
maintenance.................... 57,787 54,150 3,637 6.7% 62,008 59,199 2,809 4.7%maintenance ...................... 56,535 54,510 2,025 3.7% 64,996 62,843 2,153 3.4%
Real estate taxes................ 16,773 16,321 452 2.8% 17,420 16,888 532 3.2%taxes ................. 17,278 16,338 940 5.8% 18,917 17,827 1,090 6.1%
Property management.............. 8,594 8,121 473 5.8% 8,984 8,690 294 3.4%
General and administrative....... -- -- -- -- 6,687 6,423 264 4.1%
-------- -------- ------ ------management ............... 8,629 8,498 131 1.5% 9,373 9,292 81 0.9%
-------- -------- ------- ------
Total operating expenses....... 83,154 78,592 4,562 5.8% 95,099 91,200 3,899 4.3%
-------- -------- ------ ---------- -------- -------- ------- ------
Income from operations before
interest, depreciation and
amortization expenses.......... 129,228 123,687 5,541----
Property operating expenses ..... 82,442 79,346 3,096 4.5% 130,757 129,478 1,279 1.0%
Interest and related
amortization................... -- -- -- -- 51,305 53,280 (1,975) (3.7%)
Depreciation on corporate
assets......................... -- -- -- -- 1,243 1,139 104 9.1%
Property depreciation and
other.......................... 32,243 30,792 1,451 4.7% 34,833 34,411 422 1.2%
-------- -------- ------ ------93,286 89,962 3,324 3.7%
-------- -------- ------- ---------- -------- -------- ------- ----
Income from operations(2)......property operations ... $128,233 $125,032 $ 96,9853,201 2.6% $135,563 $133,508 $ 92,895 $4,090 4.4% $ 43,376 $ 40,648 $ 2,728 6.7%
======== ======== ====== ======2,055 1.5%
======== ======== ======= ========== ======== ======== ======= ====
Site and Occupancy Information(3)Information(1):
Average total sites.............. 44,966 44,828 138 0.3% 46,243 46,964 (721) (1.5%sites ............... 41,570 41,578 (8) 0.0% 43,134 43,627 (493) (1.1%)
Average occupied sites........... 42,384 42,320 61 0.2% 43,576 44,325 (749)sites ............ 37,893 38,594 (701) (1.9%) 39,363 40,467 (1,104) (2.7%)
Occupancy % ....................... 91.2% 92.8% (1.7%) Occupancy %...................... 94.3% 94.4% (0.1%(1.7%) (0.1%91.3% 92.8% (1.5%) 94.2% 94.4% (0.2%) (0.2%(1.5%)
Monthly base rent per site.......site ........ $ 377.82421.49 $ 361.47 $16.35 4.5%401.11 $ 374.1520.38 5.1% $ 355.45416.89 $ 18.70 5.3%400.82 $ 16.07 4.0%
Total sites
asAs of December 31,... 45,011 44,868 143 0.3% 45,743 46,734 (991) (2.1% .............. 41,580 41,590 (10) 0.0% 43,143 43,178 (35) (0.0%)
Total occupied sites
asAs of December 31,................... 42,243 42,529 (286) (0.7% .............. 37,479 38,346 (867) (2.3%) 42,887 44,270 (1,383) (3.1%38,946 39,736 (790) (2.0%)
- ---------------
(1) During 2001, at certain Properties the amounts charged to residents for
utilities were separated ("Unbundled") from their base rent charges and
recorded as utility income. For comparison purposes, a reclassification was
made to base rental income for 2000 on this table. This reclassification is
also reflected in the monthly base rent per site amounts for 2000.
(2) 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.
(3) Site and occupancy information does not include theexcludes Resort sites and Properties owned
through unconsolidated joint ventures as well as the sites of Properties
acquired or the RV Properties.
22
sold during 2002 and 2003.
Property Operating Revenues
The 4.7%3.2% increase in Community base rental income for the Core Portfolio
reflects a 4.5%5.1% increase in monthly base rent per site coupled with a 0.2% increase1.9%
decrease in average occupied sites. 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.
For the Total Portfolio, changesProperty Operating Expenses
The 3.7% increase in base rental incomeproperty operating and utility and other
income generally reflect those ofmaintenance expense for the
Core Portfolio is due primarily to increases in insurance and the effect of
acquisitionother expenses,
utility expense, repair and disposition of the Non-Coremaintenance expense, administrative expense and
payroll expense. The 5.8% increase in Core Portfolio real estate taxes is
generally due to higher property assessments on certain Properties. Equity in income of affiliates decreased 24.8%, reflecting lower sales
volumes. Combined home sales revenue decreased approximately $4.0 million, of
which $3.3 million is attributable to a decline in new home inventory sales
volume. Sales volumes for new home inventory, used home inventory and brokered
home sales were 485, 250 and 1,114, respectively,Property
management expense for the yearCore Portfolio, which reflects costs of managing the
Properties 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, 2001,2003 and 535, 2902002.
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% 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 1,271, respectively,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 the year ended December 31,
2000.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 interest incomegeneral and administrative
expense is primarilydue to decreased professional fees and public company costs,
partially offset by increased payroll costs and banking expenses. Interest and
related amortization increased due to the repaymentRecap and the payment of certain notes receivable, fewer short-term investments and lowerapproximately
$3 million to unwind the 2001 Swap, partially offset by decreased interest rates.
Short-term investments hadrates
during the period. The weighted average outstanding debt balances for the years
ended December 31, 20012003 and 2000 of2002 were approximately $1.9$800 million and $1.5$731.8
million, respectively,
which earnedrespectively. The effective interest income at an effective rate of 3.8%was 6.4% and 6.0%6.8% per annum
for the years ended December 31, 2003 and 2002, respectively.
26
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF YEAR ENDED DECEMBER 31, 2002 TO YEAR ENDED DECEMBER 31, 2001
Since December 31, 2000, the gross investment in real estate increased from
$1,218 million to $1,296 million as of December 31, 2002, due primarily to the
aforementioned acquisitions and dispositions of Properties during the period.
The total number of sites owned or controlled increased from 51,304 as of
December 31, 2000 to 51,582 as of December 31, 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, 2002 and 2001.
CORE PORTFOLIO TOTAL PORTFOLIO
------------------------------------------ -----------------------------------------------
INCREASE/ INCREASE/ %
(dollars in thousands) 2002 2001 (DECREASE) % CHANGE 2002 2001 (DECREASE) CHANGE
-------- -------- ---------- -------- -------- -------- ---------- ------
Community base rental 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 .......... 18,244 18,786 (542) (2.9%) 19,684 20,381 (697) (3.4%)
-------- -------- ------ ---- -------- -------- ------- ----
Property operating revenues ..... 205,627 198,804 6,823 3.4% 223,470 217,111 6,359 2.9%
Property operating and
maintenance ...................... 54,240 53,024 1,216 2.3% 62,843 60,807 2,036 3.3%
Real estate taxes ................. 16,443 15,271 1,172 7.7% 17,827 16,882 945 5.6%
Property management ............... 8,430 8,120 310 3.8% 9,292 8,984 308 3.4%
-------- -------- ------ ---- -------- -------- ------- ----
Property operating expenses ..... 79,113 76,415 2,698 3.5% 89,962 86,673 3,289 3.8%
-------- -------- ------ ---- -------- -------- ------- ----
Income from property operations ... $126,514 $122,389 $4,125 3.4% $133,508 $130,438 $ 3,070 2.4%
======== ======== ====== ==== ======== ======== ======= ====
Site and Occupancy Information(1):
Average total sites ............... 41,489 41,428 61 0.1% 44,552 46,243 (1,691) (3.7%)
Average occupied sites ............ 38,642 39,108 (466) (1.2%) 41,435 43,576 (2,141) (4.9%)
Occupancy % ....................... 93.1% 94.4% (1.3%) (1.3%) 93.0% 94.2% (1.2%) (1.2%)
Monthly base rent per site ........ $ 403.04 $ 382.65 $20.39 5.3% $ 397.80 $ 371.20 $ 26.61 7.1%
Total sites
As of December 31, .............. 41,588 41,472 116 0.3% 43,906 45,743 (1,837) (4.0%)
Total occupied sites
As of December 31, .............. 38,399 38,991 (592) (1.5%) 40,410 42,887 (2,477) (5.8%)
(1) Site and occupancy information excludes Resort sites and Properties owned
through unconsolidated joint ventures as well as the sites of Properties
sold during 2002.
Property Operating Revenues
The 4.1% increase in Community base rental income for the Core Portfolio
reflects a 5.3% increase in monthly base rent per site coupled with a 1.2%
decrease in average occupied sites. The decrease in utility and other income for
the Core Portfolio is due primarily to decreases in utility income, which
resulted from lower expenses for these items.
Property Operating Expenses
The increase in property operating and maintenance expense for the Core
Portfolio is due primarily to increases in property payroll, insurance and other
expenses, repair and maintenance and administrative expenses, partially offset
by decreased utility expenses passed through and
includedexpense. The increase in utility income. Expenses for the Core Portfolio also reflect
increases in payroll and property insurance expenses. Core Portfolio real estate taxes
increased 2.8%is generally due to higher assessed valuesproperty 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 allocated tofor the Core Portfolio, which reflects costs of managing the
Properties and is estimated based on a percentage of Property operating
revenues, increased 5.8%.
Generalby 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 in 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 expenses ("G&A") increased 4.1%expense is due to increasedincreases in costs related to operating a
public company, increased payroll costs and related expensesincreased consulting and promotionallegal
costs. G&A for 2001
includes a charge for additional amortization of deferred compensation offset by
a reversal of legal expenses previously accrued related to the Ellenburg
settlement. Interest and related amortization decreased due to lower interest rates
during the period. The weighted average outstanding debt balances for the years
ended December 31, 2002 and 2001 and 2000 were $713.2$731.8 million and $707.5$713.2 million,
respectively. The effective interest rate was 7.0%6.8% and 7.4%7.0% per annum for the
years ended December 31, 2002 and 2001, and 2000, 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 increased due primarily to the acquisition and
disposition of Non-Core Properties.
23
COMPARISON OF YEAR ENDED DECEMBER 31, 2000 TO YEAR ENDED DECEMBER 31, 1999
Since December 31, 1998, the gross investment in real estate decreased from
$1,237 million to $1,218 million as of December 31, 2000, due primarily to the
aforementioned acquisitions and dispositions of Properties during the period.
The total number of sites owned or controlled decreased from 53,009 as of
December 31, 1998 to 51,452 as of December 31, 2000.
The following table summarizes certain financial and statistical data for
the Core Portfolio and the Total Portfolio for the years ended December 31, 2000
and 1999.
CORE PORTFOLIO TOTAL PORTFOLIO
----------------------------------------- -----------------------------------------
INCREASE/ % INCREASE/ %
(dollars in thousands) 2000 1999 (DECREASE) CHANGE 2000 1999 (DECREASE) CHANGE
-------- -------- ---------- ------ -------- -------- ---------- ------
(DOLLARS IN THOUSANDS)
Base rental income............... $186,148 $178,095 $8,053 4.5% $189,481 $181,672 $ 7,809 4.3%
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%)
-------- -------- ------ ------ -------- -------- ------- ------
Total revenues................. 204,134 195,531 8,603 4.4% 220,678 215,028 5,650 2.6%
Property operating and
maintenance.................... 54,358 52,096 2,262 4.3% 59,199 58,038 1,161 2.0%
Real estate taxes................ 16,186 15,811 375 2.4% 16,888 16,460 428 2.6%
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%
-------- -------- ------ ------ -------- -------- ------- ------
Total operating expenses....... 78,738 75,632 3,106 4.1% 91,200 88,927 2,273 2.6%
-------- -------- ------ ------ -------- -------- ------- ------
Income from 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 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):
Average total sites.............. 45,894 45,810 84 0.2% 46,964 46,914 50 0.1%
Average occupied sites........... 43,410 43,138 272 0.6% 44,325 44,110 215 0.5%
Occupancy %...................... 94.6% 94.2% 0.4% 0.4% 94.4% 94.0% 0.4% 0.4%
Monthly base rent per site....... $ 357.35 $ 344.04 $13.31 3.9% $ 356.24 $ 343.22 $ 13.02 3.8%
Total sites as of December 31,... 45,902 45,808 94 0.2% 46,734 47,284 (550) (1.2%)
Total occupied sites as of
December 31,................... 43,595 43,289 306 0.7% 44,270 44,555 (285) (0.6%)
- ---------------
(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 five Properties owned
through joint ventures or the three RV properties.
24
Revenues
The 4.5% increase in base rental income for the Core Portfolio reflects a
3.9% increase in monthly base rent per site coupled with a 0.6% increase 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 the 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 -- 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.
Operating Expenses
The increase in property operating and maintenance expense for the Core
Portfolio is due primarily to increases in utility expenses passed through and
included in utility income. Expenses for the Core Portfolio also reflect
increases in repairs and maintenance expense, payroll and property general and
administrative expenses partially offset by decreased insurance and other
expenses. Core Portfolio real estate taxes increased 2.4% 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
Properties and is estimated based on a percentage of Property revenues,
increased 6.1%.
General and administrative expenses increased primarily due to increased
payroll resulting from salary increases and increased public company related
expenses.
Interest and related amortization decreased due to lower weighted average
outstanding debt balances during the period. The weighted average outstanding
debt balances for the years ended December 31, 2000 and 1999 were $707.5 million
and $738.1 million, respectively. The effective interest rate was 7.4% and 7.2%
per annum for the years ended December 31, 2000 and 1999, 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.
2528
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
As of December 31, 2001, the Company2003, we had $1.4$325.7 million in cash and cash equivalents
and $133.8$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, 1999.
DISTRIBUTION FOR THE SHAREHOLDER
AMOUNT PER SHARE QUARTER ENDING RECORD DATE PAYMENT DATE
----------------- ------------------ ------------------ ----------------
$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
- -----------------------------------------------------------------------------------------------
$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
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 2002
distribution to common stockholders at $1.90 per share per annum.
MORTGAGES AND CREDIT FACILITIES
On October 29, 2001, the Company entered into an interest rate swap
agreement, fixing the London Interbank Offered Rate ("LIBOR") on $100 million of
the Company's floating rate debt at approximately 3.7% per annum for the period
October 2001 through August 2004. The terms of the swap require monthly
settlements on the same dates interest payments are due on the debt. In
accordance with SFAS No. 133 as herein defined, the interest rate swap will be
reflected at market value. The Company believes the swap is a perfectly
effective cash flow hedge, under SFAS No. 133 and there will be no effect on net
income as a result of the mark-to-market adjustments.
During the year ended December 31, 2001, the Company borrowed $46.0 million
on its line of credit and paid down $89.7 million on the line of credit. The
line of credit bears interest at a per annum rate of LIBOR plus 1.125%.
In July of 2001, the Company paid off three maturing mortgages in the
amount of $12.1 million. The payoffs were funded with borrowings on the line of
credit.
26
On August 3, 2001, the Company 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.
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 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 per annum rate of LIBOR plus 1.0%. On
February 8, 2002, the Company entered into a term loan credit agreement with the
same group of banks, which extended the Term Loan to August 9, 2005.
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 August 9, 2000, the Company amended its unsecured line of credit with a
bank (the "Credit Agreement") bearing interest at a per annum rate of LIBOR plus
1.125%. Among other things, the amendment lowered the total facility under the
Credit Agreement to $150 million and extended the maturity to August 9, 2003.
The Company pays a quarterly fee on the average unused amount of such credit
equal to 0.15% of such amount. As of December 31, 2001, $133.8 million was
available under the Credit Agreement.
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 September 4, 1997, the Company entered into a portfolio purchase
agreement (as amended by a supplemental agreement on December 17, 1997) to
acquire 37 manufactured home communities (the "Ellenburg Communities") from
partnerships having Ellenburg Capital Corporation ("ECC") as the general
partner, for a purchase price in excess of $300 million. During 1997 and 1998,
the Company closed on the acquisition of 31 of the Ellenburg Communities for an
aggregate purchase price of approximately $278 million and gained control of an
additional five Ellenburg Communities with acquisition advances of approximately
$57 million to the partnerships which owned such Ellenburg Communities. All
fundings related to the acquisition were funded by the Company with borrowings
under the Company's line of credit, term bank facilities, assumed debt and the
issuance of Common OP Units.
During 1998, the Company received approximately $14.3 million, including
approximately $365,000 of interest income, which was being held subject to the
completion of due diligence procedures on the Ellenburg Communities. The $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 price of the
Ellenburg Communities.
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.
27
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 includes
The Meadows in investment in real estate and the related results of operations
in the Statement 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 274 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 .
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.
On January 3, 2001, the Company acquired two Florida Properties, totaling
730 sites, for an aggregate purchase price of approximately $16.3 million. The
Lakes at Countrywood is a 421-site community in Plant City, near Tampa, Florida,
and includes approximately 23 acres for expansion. Grand Island is a 309-site
community in Grand Island, near Orlando, Florida, and includes a marina with 50
boat docks. The acquisition was funded with a borrowing under the Company's line
of credit.
On February 13, 2001, the Company completed the disposition of seven
Properties, totaling 1,281 sites, in Kansas, Missouri and Oklahoma, for a total
sale price of approximately $17.4 million. A gain of $8.1 million was recorded
on the accompanying consolidated statements of operations. Proceeds from the
sale were used to reduce the amount outstanding on the Company's line of credit.
On October 5, 2001, the Company finalized a settlement agreement between
the Lending Partnership, the Operating Partnership and the limited liability
partnership which owns Candlelight Village in Columbus, Indiana. In 1996, the
Company funded a recourse loan to the owner of Candlelight Village and accounted
for the loan as an investment in real estate. The Company received $10.8 million
in proceeds from the settlement, which was accounted for as a sale of real
estate and recorded a $75,000 gain on the sale. Proceeds from the sale were used
as working capital.
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 $12.7 million
and $7.9 million for the years ended December 31, 2001 and 2000, respectively.
Of these expenditures, the Company believes that approximately $7.1 million or
$142 per site for 2001 and $6.5 million or $130 per site for 2000 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 $9.7 million
and $7.9 million for the years ended December 31, 2001 and 2000, 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.
28
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.
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. No shares of Common Stock were repurchased during
the year ended December 31, 2001. However, 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, 2001, 20002003, 2002 and 19992001 (amounts in thousands):
2003 2002 2001 2000 1999
-------- -------- ---------------
COMPUTATION OF FUNDS FROM OPERATIONS:
Income before extraordinary loss on early Extinguishment
of debt................................................Net income available for Common Shares ................... $ 32,08327,014 $ 32,986 $27,77236,445 $ 32,083
Income allocated to Common OP Units.......................Units ...................... 6,474 8,926 8,209 8,463 6,219
Depreciation on real estate assets and other costs........ 34,833 34,411 34,486costs ....... 38,034 35,552 34,228
Depreciation expense included in discontinued operations.. 135 484 605
Gain on sale of Properties and other......................other ..................... (10,826) (13,014) (8,168) (12,053) --
-------- -------- ---------------
Funds from operations..................................operations .................................. $ 60,831 $ 68,393 $ 66,957
$ 63,807 $68,477
======== ======== ===============
Weighted average Common StockShares outstanding -- diluted......- diluted ..... 28,002 27,632 27,010 27,408 31,252
======== ======== =======
COMPUTATION OF FUNDS AVAILABLE FOR DISTRIBUTION:
Funds from operations..................................... $ 66,957 $ 63,807 $68,477
Non-revenue producing improvements to real estate......... (12,689) (7,855) (8,656)
-------- -------- -------
Funds available for distribution....................... $ 54,268 $ 55,952 $59,821
======== ======== =======
Weighted average Common Stock outstanding -- diluted...... 27,010 27,408 31,252
======== ======== =======
29
ITEM 7A. QUANTITATIVEACQUISITIONS AND QUALITATIVE DISCLOSURE OF MARKET RISK
The Company's earnings are affected by changes in interest rates, as a
portion of the Company's outstanding indebtedness is at variable rates based on
LIBOR. The Company's $150 million line of credit ($16.3 million outstanding at
December 31, 2001) bears interest at LIBOR plus 1.125% per annum and the
Company's $100 million Term Loan bears interest at LIBOR plus 1.0% per annum. If
LIBOR increased/decreased by 1.0% during 2001, interest expense would have
increased/decreased by approximately $1.4 million based on the combined average
balance outstanding under the Company's line of credit and Term Loan forDISPOSITIONS
During the year ended December 31, 2001.2001, 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 July 1998,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
"1998"2001 Swap"), effectively fixing LIBOR on $100 million of the Company's floating rate debt at
6.4% for the period 1998 through 2003. The cost of the 1998 Swap consisted only
of legal costs that were deemed immaterial. The value of the 1998 Swap was
impacted by changes in the market rate of interest. Had the 1998 Swap been
entered into on December 31, 1999, the applicable LIBOR swap rate would have
been approximately 6.57%. Each 0.01% increase or decrease in the applicable swap
rate for the 1998 Swap increases or decreases the value of the 1998 Swap versus
its current value by approximately $28,000. The Company accounted for the 1998
Swap as a hedge. Payments and receipts under the 1998 Swap were accounted for as
an adjustment to interest expense. On January 10, 2000, the Company unwound the
1998 Swap and received $1.0 million of proceeds which is amortized into interest
expense through March 2003.
On October 29, 2001, the Company entered into an interest rate swap
agreement, fixing LIBOR on $100 million of the Company'sour floating rate debt
at approximately 3.7% per annum for the period October 2001 through August 2004.
The terms of the swap require2001 Swap required monthly settlements on the same dates
that interest payments arewere due on the debt. In accordance with SFAS No. 133, the
interest rate swap is2001 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 believesinvested 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
Our earnings are affected by changes in interest rates, since a portion of
our outstanding indebtedness is at variable rates based on LIBOR. Our Line of
Credit ($110 million outstanding at December 31, 2003) bears interest at LIBOR
plus 1.65%, per annum. If LIBOR increased/decreased by 1.0% during the year
ended December 31, 2003, interest expense would have increased/decreased by
approximately $1.3 million based on the average balance outstanding under the
Company's Line of Credit during the period.
On October 29, 2001, we entered into the 2001 Swap, effectively fixing the
LIBOR rate 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 the fourth quarter of 2003, we unwound the 2001 Swap for a cost
of approximately $3 million. Effective January 1, 2001, the Company adopted
Statement of Financial Accounting Standards 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, the interest rate
swap iswas reflected at market value. We believed the 2001 Swap was a perfectly
effective cash flow hedge, perunder SFAS No. 133, and there willwould be no effect on
net income as a result of the mark-to-market adjustment. The value of the hedge as
of December 31, 2001 was approximately $489,000 and is recorded as an asset and
included in other assets. Mark-to-market changechanges
in the value of the swap are2001 Swap prior to its payoff were included in other
comprehensive income.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and
Hedging Activities" and its amendments, Statements 137 and 138 in June 1999 and
June 2000, respectively. 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
adopted SFAS No. 133 effective January 1, 2001. SFAS No. 133 requires the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings.
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, 2002,2004 Proxy Statement, and thus this Part has been omitted in
accordance with General Instruction G(3) to Form 10-K.
3034
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
3110.28(d) Form of Secured Promissory Note payable to the Company by
certain members of management of the Company dated
January 2, 1996
35
ITEM 14.15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
10.28(d) Form of Secured Promissory Note payable to the Company by
certain members of management of the Company dated January 2,
1996
10.29(d) Form of Pledge Agreement between the Company and certain
members of management of the Company dated January 2, 1996
10.30(e) Second Amended and Restated MHC Operating Limited
Partnership Agreement of Limited Partnership, dated as of
March 15, 1996
10.31(f) Agreement of Limited Partnership of MHC Financing Limited
Partnership Two
10.32(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 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.
11 Not applicable
12(i) Computation of Ratio of Earnings to Fixed Charges
13 Not applicable
16 Not applicable
18 Not applicable
21(i) Subsidiaries of the registrant
22 Not applicable
23(i) Consent of Independent Auditors
24.1(i) Power of Attorney for John F. Podjasek, Jr. dated March 27, 2002
24.2(i) Power of Attorney for Michael A. Torres dated March 19, 2002
24.3(i) Power of Attorney for Thomas E. Dobrowski dated March 15, 2002
24.4(i) Power of Attorney for Gary Waterman dated March 27, 2002
24.5(i) Power of Attorney for Donald S. Chisholm dated March 19, 2002
24.6(i) Power of Attorney for Louis H. Masotti dated March 15, 2002
27 Not applicable
28 Not applicable
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(j) Subsidiaries of the registrant
22 Not applicable
23(j) Consent of Independent Auditors
24.1(j) Power of Attorney for Joseph B. McAdams dated March 2, 2004
24.2(j) Power of Attorney for Howard Walker dated March 2, 2004
24.3(j) Power of Attorney for Thomas E. Dobrowski dated March 1,
2004
24.4(j) Power of Attorney for Gary Waterman dated March 2, 2004
24.5(j) Power of Attorney for Donald S. Chisholm dated March 2,
2004
24.6(j) Power of Attorney for David A. Helfand dated March 2, 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.
32
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
(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.
(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)14 (a)(3) above.
(d) Financial Statement Schedules:
See Index to Financial Statements attached hereto on page F-1 of this
Form 10-K.
3337
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 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
MANUFACTURED HOME COMMUNITIES, INC.,
a Maryland corporation
Date: March 29, 2002 By: /s/ HOWARD WALKER
-------------- ------------------------------------
Howard Walker
Chief Executive Officer
Date: March 29, 2002 By: /s/ JOHN ZOELLER
-------------- ------------------------------------
John Zoeller
Executive Vice President, Treasurer
and Chief Financial Officer
Date: March 29, 2002 By: /s/ MARK HOWELL
-------------- ------------------------------------
Mark Howell
Principal Accounting Officer
34
- 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
---- ----- ----Name Title Date
/s/ HOWARD WALKERThomas P. Heneghan President and Chief Executive Officer
- ------------------------------
Thomas P. Heneghan *Attorney-in-Fact March 29, 2002
------------------------------------------ *Attorney-in-Fact --------------
Howard Walker
/s/ JOHN ZOELLER10, 2004
-----------------------
Vice President, Treasurer
March 29, 2002
------------------------------------------/s/ Michael B. Berman and Chief Financial Officer
--------------
John Zoeller- ------------------------------
Michael B. Berman *Attorney-in-Fact March 10, 2004
-----------------------
/s/ SAMUEL ZELLSamuel Zell Chairman of the Board
March 29, 2002
------------------------------------------ --------------- ------------------------------
Samuel Zell /s/ SHELI Z. ROSENBERG Director March 29, 2002
------------------------------------------ --------------10, 2004
-----------------------
/s/ Sheli Z. Rosenberg /s/ DAVIDDirector
- ------------------------------
Sheli Z. Rosenberg March 10, 2004
-----------------------
*David A. HELFANDHelfand Director
March 29, 2002
------------------------------------------ --------------- ------------------------------
David A. Helfand *DONALDMarch 10, 2004
-----------------------
*Donald S. CHISHOLMChisholm Director
March 29, 2002
------------------------------------------ --------------- ------------------------------
Donald S. Chisholm *THOMASMarch 10, 2004
-----------------------
*Thomas E. DOBROWSKIDobrowski Director
March 29, 2002
------------------------------------------ --------------- ------------------------------
Thomas E. Dobrowski *LOUIS H. MASOTTIMarch 10, 2004
-----------------------
*Howard Walker Director
- ------------------------------
Howard Walker March 29, 2002
------------------------------------------ --------------
Louis H. Masotti
*JOHN F. PODJASEK, JR.10, 2004
-----------------------
*Joseph B. McAdams Director
- ------------------------------
Joseph B. McAdams March 29, 2002
------------------------------------------ --------------
John F. Podjasek, Jr.
*MICHAEL A. TORRES10, 2004
-----------------------
*Gary Waterman Director
- ------------------------------
Gary Waterman March 29, 2002
------------------------------------------ --------------
Michael A. Torres
*GARY L. WATERMAN Director March 29, 2002
------------------------------------------ --------------
Gary L. Waterman10, 2004
-----------------------
3539
INDEX TO FINANCIAL STATEMENTS
MANUFACTURED HOME COMMUNITIES, INC.
PAGE
----
Report of Independent Auditors.......................................................................................Auditors ............................................................................... F-2
Consolidated Balance Sheets as of December 31, 20012003 and 2000.........................................................2002................................................... F-3
Consolidated Statements of Operations for the years ended December 31, 2001, 20002003, 2002 and 1999...........................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, 2001, 20002003, 2002 and 1999...... F-52001........................................................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 20002003, 2002 and 1999........................... 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.
F-1
REPORT OF INDEPENDENT AUDITORSReport 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, 20012003 and 2000,2002, 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, 2001.2003. 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, 20012003 and 2000,2002, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2001,2003, 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 29, 2002, except for Note 10
as to which the date is February 8, 2002 and27, 2004, except for Note 18
as to which the date is February 22, 200219, 2004 and
Note 17 as to which the date is February 24, 2004
F-2
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2001 and 20002003 AND 2002
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
2001 2000
---------- ----------DECEMBER 31, DECEMBER 31,
2003 2002
------------ ------------
ASSETS
Investment in real estate:
Land......................................................Land ............................................................. $ 271,871282,803 $ 271,822284,219
Land improvements......................................... 855,296 839,725improvements ................................................ 911,176 893,839
Buildings and other depreciable property.................. 110,971 106,629property ......................... 121,117 117,949
---------- ----------
1,238,138 1,218,176..................................................................... 1,315,096 1,296,007
Accumulated depreciation.................................. (211,878) (181,580)depreciation ......................................... (272,497) (238,098)
---------- ----------
Net investment in real estate.......................... 1,026,260 1,036,596estate .................................. 1,042,599 1,057,909
Cash and cash equivalents................................... 1,354 2,847equivalents .......................................... 325,740 7,270
Notes receivable............................................ 1,506 4,984
Investment in and advances to affiliates.................... 34,387 21,215receivable ................................................... 11,551 10,044
Investment in joint ventures................................ 11,853 13,267ventures ....................................... 18,828 19,634
Rents receivable............................................ 1,966 1,440receivable, net .............................................. 2,385 1,735
Deferred financing costs, net............................... 5,867 6,344net ...................................... 14,164 5,030
Inventory .......................................................... 31,604 33,638
Prepaid expenses and other assets........................... 16,770 17,611assets .................................. 27,044 27,590
---------- ----------
Total assets.............................................. $1,099,963 $1,104,304assets ..................................................... $1,473,915 $1,162,850
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable....................................payable ........................................... $1,076,183 $ 590,371 $ 556,578575,370
Unsecured term loan....................................... 100,000loan .............................................. -- 100,000
Unsecured line of credit.................................. 16,250 59,900credit ......................................... -- 84,750
Other notes payable....................................... 2,236 3,206payable .............................................. 113 113
Accounts payable and accrued expenses..................... 23,000 23,822expenses ............................ 27,815 31,010
Accrued interest payable.................................. 4,582 5,116payable ......................................... 5,978 6,415
Rents received in advance and security deposits........... 5,133 5,184deposits .................. 6,616 5,966
Distributions payable..................................... 12,062 11,100
Due to affiliates......................................... 32 32payable ............................................ 224,696 13,106
---------- ----------
Total liabilities...................................... 753,666 764,938liabilities .............................................. 1,341,401 816,730
Commitments and contingencies
Minority Interest --interest - Common OP Units and other.............. 46,147 46,271other ...................... 1,716 43,501
Minority Interest --interest - Perpetual Preferred OP Units...........Units ................... 125,000 125,000
Stockholders' equity:
Preferred stock, $.01 par value
10,000,000 shares authorized; none issued................................ -- --issued ...................... --- ---
Common Stock,stock, $.01 par value
50,000,000 shares authorized; 21,562,34322,563,348 and 21,064,78522,093,240
shares issued and outstanding for 20012003 and 2000, respectively........................ 215 2102002, respectively... 222 218
Paid-in capital........................................... 245,827 235,681capital .................................................. 263,066 256,394
Deferred compensation..................................... (4,062) (5,969)compensation ............................................ (494) (3,069)
Employee notes............................................ (3,841) (4,205)notes ................................................... -- (2,713)
Distributions in excess of accumulated earnings........... (63,478) (57,622)earnings .................. (256,996) (68,713)
Accumulated other comprehensive income.................... 489(loss) income .................... -- (4,498)
---------- ----------
Total stockholders' equity............................. 175,150 168,095equity ..................................... 5,798 177,619
---------- ----------
Total liabilities and stockholders' equity................ $1,099,963 $1,104,304equity ....................... $1,473,915 $1,162,850
========== ==========
The accompanying notes are an integral part of the financial statements
F-3
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 20002003, 2002 AND 19992001
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
2003 2002 2001
2000 1999
----------------- -------- --------
REVENUES
Base rental income............................................ $195,644 $189,481 $181,672
RVPROPERTY OPERATIONS:
Community base rental income.........................................income ..................... $ 196,919 $194,640 $190,982
Resort base rental income ........................ 11,780 9,146 5,748 7,414 9,526
Utility and other income...................................... 22,014 20,366 20,096income ......................... 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................................affiliates ................... --- --- 1,811
2,408Equity in income of unconsolidated joint ventures 2,065 Interest income............................................... 639 1,009 1,669
-------- -------- --------
Total revenues............................................. 225,856 220,678 215,028
-------- -------- --------
EXPENSES
Property operating and maintenance............................ 62,008 59,199 58,038
Real estate taxes............................................. 17,420 16,888 16,460
Property management........................................... 8,984 8,690 8,337
General and administrative.................................... 6,231 5,955 5,5501,277 1,353
General and administrative -- affiliates...................... 456 468 542....................... (8,060) (8,192) (6,687)
Interest and related amortization............................. 51,305 53,280 53,775amortization ................ (58,402) (50,729) (51,305)
Depreciation on corporate assets.............................. 1,243 1,139 1,005assets ................. (1,240) (1,277) (1,243)
Depreciation on real estate assets and other costs............ 34,833 34,411 34,486
-------- -------- --------
Total expenses............................................. 182,480 180,030 178,193
-------- -------- --------
Income from operations........................................ 43,376 40,648 36,835costs (38,034) (35,552) (34,228)
Gain on sale of Propertiesproperties and other..........................other ............. --- --- 8,168
12,053 ----------- -------- --------
--------
Income before allocation to Minority InterestsTotal other income and extraordinary loss on early extinguishment of debt... 51,544 52,701 36,835expenses ................ (101,976) (93,506) (81,492)
MINORITY INTERESTS:
(Income) allocated to Common OP Units......................... (8,209) (8,463) (6,219)Units ............ (4,330) (5,848) (7,688)
(Income) allocated to Perpetual Preferred OP Units............Units (11,252) (11,252) (2,844)
--------(11,252)
--------- -------- --------
Income before extraordinary lossfrom continuing operations .............. 17,424 23,706 30,006
DISCONTINUED OPERATIONS:
Discontinued operations .......................... 1,043 3,287 3,203
Depreciation on early extinguishmentdiscontinued operations .......... (135) (484) (605)
Gain on sale of debt.................................................... 32,083 32,986 27,772
Extraordinary lossproperties and other ............. 10,826 13,014 ---
Minority interests on early extinguishment of debt
(net of $264 allocated to Minority Interests).............. -- 1,041 --discontinued operations .... (2,144) (3,078) (521)
--------- -------- --------
Income from discontinued operations ............ 9,590 12,739 2,077
--------- -------- --------
NET INCOME.................................................INCOME AVAILABLE FOR COMMON SHARES ....... $ 27,014 $ 36,445 $ 32,083
$ 31,945 $ 27,772
======== ======== ========
Net income per Common Share before extraordinary
item -- basic.............................................. $ 1.53 $ 1.54 $ 1.10
======== ======== ========
Net income per Common Share before extraordinary
item -- diluted............................................ $ 1.49 $ 1.51 $ 1.09
======== ======== ========
Net income per Common Share -- basic.......................... $ 1.53 $ 1.49 $ 1.10
======== ======== ========
Net income per Common Share -- diluted........................ $ 1.49 $ 1.46 $ 1.09
======== ======== ========
Weighted average Common Shares outstanding -- basic........... 21,036 21,469 25,224
======== ======== ========
Weighted average Common Shares outstanding -- diluted
(Note 3)................................................... 27,010 27,408 31,252
======== ======== ========
Distributions declared per Common Share outstanding........... $ 1.78 $ 1.66 $ 1.55
======== ======== ========
Tax status of distributions paid during the year:
Ordinary income............................................ $ 1.31 $ 1.32 $ 1.16
======== ======== ========
Capital gain............................................... $ -- $ -- $ --
======== ======== ========
Return of capital.......................................... $ 0.44 $ 0.31 $ --
================= ======== ========
The accompanying notes are an integral part of the financial statements
F-4
MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITYOPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2000(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 19992001
(AMOUNTS IN THOUSANDS)
2003 2002 2001
2000 1999
--------- --------- ---------------- -------- -------
PREFERRED STOCK, $.01 PAR VALUE............................. $ -- $ -- $ --
======== ======== ========
COMMON STOCK, $.01 PAR VALUE
Balance, beginning of year.................................. $ 210 $ 229 $ 262
Issuance of Common Stock through restricted stock
grants................................................. 1 1 1
Exercise of options....................................... 4 1 1
(Repurchase) issuance of Common Stock..................... -- (21) (35)
-------- -------- --------
Balance, end of year........................................ $ 215 $ 210 $ 229
======== ======== ========
PAID -- IN CAPITAL
Balance, beginning of year.................................. $235,681 $275,664 $364,603
Issuance of Common Stock for employee notes............... -- -- --
Conversion of OP Units to Common Stock.................... 599 494 1,525
Issuance of Common Stock through exercise of options...... 7,743 2,719 2,034
Issuance of Common Stock through restricted stock
grants................................................. 1,627 3,310 1,507
Issuance of Common Stock through employee stock purchase
plan................................................... 2,365 1,435 1,195
Repurchase of Common Stock................................ -- (53,112) (98,160)
AdjustmentNet income available for Common OP Unitholders in the Operating
Partnership............................................ (2,188) 5,171 2,960
-------- -------- --------
Balance, end of year........................................ $245,827 $235,681 $275,664
======== ======== ========
DEFERRED COMPENSATION
Balance, beginning of year..................................Shares ..................... $27,014 $ (5,969) $ (6,326) $ (7,442)
Issuance of Common Stock through restricted stock
grants................................................. (1,628) (3,311) (536)
Recognition of deferred compensation expense.............. 3,535 3,668 1,652
-------- -------- --------
Balance, end of year........................................ $ (4,062) $ (5,969) $ (6,326)
======== ======== ========
EMPLOYEE NOTES
Balance, beginning of year.................................. $ (4,205) $ (4,540) $ (4,654)
Notes received for issuance of Common Stock............... -- -- --
Principal payments........................................ 364 335 114
-------- -------- --------
Balance, end of year........................................ $ (3,841) $ (4,205) $ (4,540)
======== ======== ========
DISTRIBUTIONS IN EXCESS OF ACCUMULATED EARNINGS
Balance, beginning of year.................................. $(57,622) $(53,626) $(42,328)36,445 $32,083
Net income................................................ 32,083 31,945 27,772
Other comprehensive income:
Unrealizedunrealized holding gains (losses) on derivative
instruments.....instruments ............................................. 4,498 (4,987) 489
-- --------- -------- -------- --------
Comprehensive income................................. 32,572 31,945 27,772
-------- -------- --------
Distributions............................................. (37,939) (35,941) (39,070)
-------- -------- --------
Balance, end of year........................................ $(62,989) $(57,622) $(53,626)-------
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 CASH FLOWSCHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 20002003, 2002 AND 19992001
(AMOUNTS IN THOUSANDS)
2003 2002 2001 2000 1999
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................PREFERRED STOCK, $.01 PAR VALUE .................................... $ 32,083--- $ 31,945--- $ 27,772
Adjustments---
========= ========= =========
COMMON STOCK, $.01 PAR VALUE
Balance, beginning of year ......................................... $ 218 $ 215 $ 210
Issuance of Common Stock through restricted stock grants ......... --- 1 1
Exercise of options .............................................. 4 2 4
--------- --------- ---------
Balance, end of year ............................................... $ 222 $ 218 $ 215
========= ========= =========
PAID - IN CAPITAL
Balance, beginning of year ......................................... $ 256,394 $ 245,827 $ 235,681
Issuance of Common Stock for employee notes ...................... --- --- ---
Conversion of OP Units to reconcile net incomeCommon Stock ........................... 343 227 599
Issuance of Common Stock through exercise of options ............. 6,323 5,782 7,743
Issuance of Common Stock through restricted stock grants ......... --- 2,709 1,627
Issuance of Common Stock through employee stock purchase plan .... 3,254 2,512 2,365
Compensation expense related to cash provided by
operating activities:
Income allocated to minority interests................ 19,461 19,451 9,063
Gain on salestock options and restricted stock 611 --- ---
Transition adjustment - FAS 123 .................................. (1,047) --- ---
Adjustment for Common OP Unitholders
in the Operating Partnership .................................... (2,812) (663) (2,188)
--------- --------- ---------
Balance, end of Properties and other.................. (8,168) (12,053)year ............................................... $ 263,066 $ 256,394 $ 245,827
========= ========= =========
DEFERRED COMPENSATION
Balance, beginning of year ......................................... $ (3,069) $ (4,062) $ (5,969)
Issuance of Common Stock through restricted stock grants ......... --- (2,709) (1,628)
Transition adjustment - FAS 123 .................................. 1,047 -- Depreciation and amortization expense................. 37,184 36,511 33,871
Equity in income of affiliates and joint ventures..... (2,782) (2,928) (2,065)
Amortization--
Recognition of deferred compensation and other.......expense ..................... 1,528 3,702 3,535 3,668 2,623
Increase in rents receivable.......................... (526) (102) (667)
Decrease (increase) in prepaid expenses and other
assets............................................. 1,330 (9,389) (844)
(Decrease) increase in accounts payable and accrued
expenses........................................... (1,358) 2,545 2,491
(Decrease) increase in rents received in advance and
security deposits.................................. (51) (1,647) 336
--------- --------- ---------
Net cash provided by operating activities................. 80,708 68,001 72,580Balance, end of year ............................................... $ (494) $ (3,069) $ (4,062)
========= ========= =========
EMPLOYEE NOTES
Balance, beginning of year ......................................... $ (2,713) $ (3,841) $ (4,205)
Principal payments ............................................... 2,713 1,128 364
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Contributions to and distributions from Affiliates, net... (11,493) (7,250) (1,959)
Collections (funding)Balance, end of notes receivable................. 3,478 (700) 11,426
Distribution from (investment in) joint ventures.......... 1,697 (3,758) (2,279)
Proceeds from dispositionsyear ............................................... $ -- $ (2,713) $ (3,841)
========= ========= =========
DISTRIBUTIONS IN EXCESS OF ACCUMULATED COMPREHENSIVE EARNINGS
Balance, beginning of assets...................... 24,209 46,490 --
(Funding) return of escrow for acquisition of rental
properties -- net....................................... (17,770) 4,581 (30,640)
Improvements:
Improvements -- corporate............................... (840) (498) (878)
Improvements -- rental properties....................... (12,689) (7,855) (8,656)
Site development costs.................................. (9,659) (7,908) (4,882)year ......................................... $ (73,211) $ (62,989) $ (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
--------- --------- ---------
Net cash (used in) provided by investing activities....... (23,067) 23,102 (37,868)Comprehensive income ......................................... 31,512 31,458 32,572
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from stock options and employee stock
purchase plan........................................... 10,112 4,142 3,229
Net proceeds from issuance of Perpetual Preferred OP
Units................................................... -- -- 121,890
Distributions to Common Stockholders, Common OP
Unitholders and Perpetual Preferred OP Unitholders...... (58,111) (56,298) (40,445)
Repurchase of Common Stock and OP Units................... (41) (54,595) (99,847)
Collection of principal payments on employee notes........ 364 335 114
Line of credit:
Proceeds................................................ 46,000 103,900 113,400
Repayments.............................................. (89,650) (151,900) (150,500)
Refinancing -- net proceeds............................... 37,870 65,998 16,248
Principal payments........................................ (5,047) (4,249) (4,733)
Debt issuance costs....................................... (631) (2,265) (1,049).................................................... (215,296) (41,680) (37,939)
--------- --------- ---------
Net cash used in financing activities..................... (59,134) (94,932) (41,693)
--------- --------- ---------
Net (decrease) in cash and cash equivalents................. (1,493) (3,829) (6,981)
Cash and cash equivalents, beginning of year................ 2,847 6,676 13,657
--------- --------- ---------
Cash and cash equivalents,Balance, end of year......................year ............................................... $(256,995) $ 1,354(73,211) $ 2,847 $ 6,676
========= ========= =========
SUPPLEMENTAL INFORMATION
Cash paid during the year for interest...................... $ 50,781 $ 52,947 $ 52,323(62,989)
========= ========= =========
The accompanying notes are an integral part of the financial statements
F-6
MANUFACTURED 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 148 manufactured home communitiesa
portfolio of 142 Communities and Resorts (the "Properties") located in 23 states, consisting of 50,761throughout
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 Interests --- Common OP Units.
As of December 31, 2001,2003, the Minority Interests --- Common OP Units represented
5,426,3745,312,387 units of limited partnership interest ("OP Units") which are
convertible into an equivalent number of shares of the Company's Commoncommon 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.
Subsidiaries of the Operating Partnership have been created to (i)
facilitate mortgage financing (the "Financing Partnerships"); (ii) facilitate
the Company's ability to provide financing to owners of manufactured home
communities ("Lending Partnership"); (iii) own the management operations of the
Company ("Management Partnership"); 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
Partnership 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, in June
1998, did not affect the results of operations or financial position of the
Company. The Company manages 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 Company has concentrations of Properties within the following
states: Florida (49 Properties), California (25 Properties), Arizona (17
Properties), Michigan (11 Properties) and Colorado (10 Properties). These
concentrations of Properties accounted for 36%, 19%, 8%, 4% and 8%,
respectively, of the Company's total revenues for the year ended December 31,
2001. 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, 2001. 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 allits majority owedowned subsidiaries due to itsin 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. F-7
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)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-9
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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. For the year ended December 31, 2001, permanent
impairment conditions did not exist at any of the Company's Properties. 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). In August
2001, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment of Long-Lived
Assets" which is effective for fiscal years beginning after December 15, 2001.
The application of the provisions of this Statement is not expected to affect
the earnings and financial position of the Company.
Certain costs, including legal costs, relative to efforts by the Company to
effectively change the use and operations of several Properties are currently
recorded 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. To the extent these efforts are not successful, these
costs will be expensed.
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 $36.1$39.4 million, $35.6$37.3 million and $35.5$36.0 million for the years
ended December 31, 2003, 2002 and 2001, 2000respectively.
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 1999,
respectively.
(d)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.
(e)(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. (f)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, 20012003
and 2000.
F-8
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(g)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 $3.0$2.7 million and $1.9$2.4 million at December
31, 20012003 and 2000,2002, respectively.
(h)(k) Revenue Recognition
Rental income attributable to leases is recorded when earned from
tenants. The CompanyWe will reserve for receivables when the Company believeswe believe the ultimate
collection is less than probable. (i)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 (5,426,374(5,312,387 and 5,514,3305,359,927 at December 31, 20012003 and
2000,2002, respectively) by OP Units and shares of Common Stock outstanding.
Issuance of additional shares of Common 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.
(j)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 $50,000, $78,000$56,000,
$20,000 and $85,000$50,000 during the years ended December 31, 2003, 2002 and
2001, 2000respectively. In addition, taxable income from non-REIT activities
managed through taxable REIT subsidiaries is subject to federal, state and
1999, respectively.local income taxes. As of December 31, 2001,2003, net investment in real estate
and notes receivable had a Federal tax basis of approximately $710$743.3
million and $20$27.6 million, respectively.
(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" and its amendments, Statements 137 and 138 in June of 1999
and June of 2000, respectively. The Company adopted SFAS No. 133 effective
January 1, 2001. SFAS No. 133 requires 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.
On
October 29,(o) Reclassifications
Certain 2002 and 2001 amounts have been reclassified to conform to the
Company entered into a swap agreement.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. 123 and its amendment (SFAS No. 148),
"Accounting for Stock Based Compensation", which resulted in compensation
expense being recorded based on the fair value of the stock options and
other equity awards issued (see Note 10)
F-9
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS14).
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 2000, 1999
(amounts in thousands):
YEARS ENDED DECEMBER 31,
-------------------------------
2003 2002 2001 2000 1999
------- ------- -------
NUMERATOR:
NumeratorNUMERATORS:
INCOME FROM CONTINUING OPERATIONS:
Income from continuing operations - basic ........... $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 available for Common Shares - basic earnings per share --...... $27,014 $36,445 $32,083
Amounts allocated to dilutive securities ............ 6,474 8,926 8,209
------- ------- -------
Net income............................................. $32,083 $31,945 $27,772income 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)............................................ 8,209 8,199 6,219for 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........................ $40,292 $40,144 $33,991
======= ======= =======
DENOMINATOR:
Denominator for basic earnings per share -- Weighted average Common Stock outstanding................... 21,036 21,469 25,224
Effect of dilutive securities:
Weighted average Common OP Units................... 5,466 5,592 5,704
Employee stock options............................. 508 347 324
------- ------- -------
Denominator forShares outstanding - fully
diluted earnings per share --
Adjusted weighted average Common Stock Outstanding
after assumed conversions...................................................................... 28,002 27,632 27,010 27,408 31,252
======= ======= =======
NOTE 4 --- COMMON STOCK AND OTHER EQUITY RELATED TRANSACTIONS
The following table presents the changes in the Company's outstanding
Common Stock for the years ended December 31, 2001, 20002003, 2002 and 19992001 (excluding OP
Units of 5,426,374, 5,514,3305,312,387, 5,359,927 and 5,633,1835,426,374 outstanding at December 31, 2001,
20002003,
2002 and 1999,2001, respectively):
2003 2002 2001 2000 1999
---------- ---------- ----------
Shares outstanding at January 1,.............................. ......................... 22,093,240 21,562,343 21,064,785 22,813,357 26,417,029
Common Stock issued through conversion of OP Units..........Units ..... 47,540 66,447 87,956 59,190 143,637
Common Stock issued through exercise of Options.............options ........ 302,526 282,959 387,115 138,029 126,565
Common Stock issued through stock grants....................grants ............... 35,000 108,341 57,000 92,070 95,666
Common Stock issued through Employee Stock Purchase Plan....Plan 85,042 73,150 98,987 68,739 59,060
Common Stock repurchased and retired........................retired ................... --- --- (133,500) (2,106,600) (4,028,600)
---------- ---------- ----------
Shares outstanding at December 31,............................ ....................... 22,563,348 22,093,240 21,562,343 21,064,785 22,813,357
========== ========== ==========
As of December 31, 2001,2003 and 2002, the Company's percentage ownership of the
Operating Partnership was approximately 80%. The remaining approximately 20% is
owned by the Common OP Unitholders.
F-10F-14
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. No shares of Common Stock were repurchased during
the year ended December 31, 2001. However, under the plan, the Company
repurchased approximately 2.1 million shares of Common Stock at an average price
of $24.06 per share during the year ended December 31, 2000 and approximately
4.0 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.
During the year ended December 31, 2000, the Operating Partnership
repurchased and cancelled approximately 60,000 OP Units from various holders. 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") 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 fromThe Operating Partnership pays distributions of 9.0% per annum on the offering$125
million of $121 million were used to repay amounts
outstanding underPOP Units. Distributions on the Company's linePOP Units are paid quarterly on the
last calendar day of credit facility and for other corporate
purposes.each quarter.
The following distributions have been declared and/or paid to common
stockholders and Minority Interests since January 1, 1999.2001:
DISTRIBUTION FOR THE QUARTER SHAREHOLDER
AMOUNT PER SHARE ENDING RECORD DATE PAYMENT DATE
------------------- ----------------------- ---------------- ------------------ ------------------ ----------------
$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
- -----------------------------------------------------------------------------------------------
$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 Operating Partnership pays distributions of 9.0% per annumspecial cash dividend will be reflected on
the $125
million of POP Units. Distributions on the POP Units were paid quarterly on the
last calendar day of each quarter beginning December 31, 1999.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
Stock of the Company. The aggregate number of shares of Common Stock available
under the ESPP shall not exceed 1,000,000, subject to adjustment by the
Company's Board of Directors. The Common 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, 2003, 2002 and
2001 2000were 82,943, 71,107 and 1999 were 96,485, 68,739 and 59,060, respectively.
F-11F-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, the Company entered into a portfolio purchase
agreement (as amended by a supplemental agreement on December 17, 1997) to
acquire 37 manufactured home communities (the "Ellenburg Communities") from
partnerships having Ellenburg Capital Corporation ("ECC") as the general
partner, for a purchase price in excess of $300 million. During 1997 and 1998,
the Company closed on the acquisition of 31 of the Ellenburg Communities for an
aggregate purchase price of approximately $278 million and gained control of an
additional five Ellenburg Communities with acquisition advances of approximately
$57 million to the partnerships which owned such Ellenburg Communities. All
fundings related to the acquisition were funded by the Company with borrowings
under the Company's line of credit, term bank facilities, assumed debt and the
issuance of Common OP Units.
During 1998, the Company received approximately $14.3 million, including
approximately $365,000 of interest income, which was being held subject to the
completion of due diligence procedures on the Ellenburg Communities. The $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 price of the
Ellenburg Communities.
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. See Note
17 for further discussion of the Settlement.
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 includes
The Meadows in investment in real estate and the related results of operations
in the statement 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.
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. 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 as a reduction of
other income in the accompanying statement of operations for the year ended December 31, 2000. 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 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 statement of operations for the year ended December 31, 2000.
F-12
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 -- INVESTMENT IN REAL ESTATE (CONTINUED)
On January 3, 2001, the Companywe acquired two Florida
communities,Properties, totaling 730 sites, for an aggregate purchase price of approximately
$17.3 million. The
Lakes at Countrywood is a 422-site community in Plant City, near Tampa, Floridamillion and includes approximately 23 acres for expansion. Grand Island is a 308-site
community in Grand Island, near Orlando, Florida, and includes a marina with 50
boat docks. The acquisition was funded with a borrowing under the Company's line
of credit.
On February 13, 2001, the Company completed the dispositionsale of the
following seven communities,Properties, totaling 1,281 sites,
in Kansas, Missouri and Oklahoma, for a total sale price of approximately $17.4
million:
Dellwood Estates........ 136 sites
Briarwood............... 166 sites
Bonner Springs.......... 211 sites
Carriage Park........... 143 sites
North Star.............. 219 sites
Quivira Hills........... 142 sites
Rockwood................ 264 sites
million. A gain of $8.1 million was recorded on the sale. Proceeds from the sale were
used to reduce the amount outstanding on the Company's line of credit.
Effective June 30, 2001, the CompanyIn addition, we
terminated itsa lease to a third-party operator for the campground and RV resort
facilities at the Property known as Bulow Plantation in Flagler Beach, Florida,
and assumed operation of these facilities directly. Beginning July 1,Also during 2001, the Company no longer records lease
income from Bulow RV Resort, however, the results of operations for Bulow RV
Resort are included in the Company's results of operations.
On October 5, 2001, the Companywe
finalized a settlement agreement between
MHC Lending Partnership, the Operating Partnership and the limited liability
company which owns Candlelight in Columbus, Indiana. In 1996, the Company funded
a recourse loan to the owner of Candlelight Village and accounted for the loan
as an investment in real estate. The Companywhereby we received $10.8 million in proceeds
fromrelated to the settlement, which was accounted for as a sale of real estatea 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 recordedthe assumption of $47.9 million of mortgage debt, which
includes a $75,000 gain on$3.0 million discount 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
===== ====== =====
Also during 2002, we effectively sold 17 Properties as part of a
restructuring of the sale.College Heights Joint Venture discussed hereinafter. In
addition, we sold Camelot Acres, a 319 site Property in Burnsville, Minnesota,
for approximately $14.2 million.
During the year ended December 31, 2003, we sold the three properties
listed in the table below. Proceeds from the salesales were used as working
capital.to repay amounts on
the Company's Line of Credit.
TOTAL DISPOSITION GAIN ON
DATE DISPOSED PROPERTY LOCATION SITES PRICE SALE
- ------------- ----------------- -------------- ----- ------------ ------------
($ 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
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INVESTMENT IN REAL ESTATE (CONTINUED)
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
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 statements of operations from the dates of acquisition. The
CompanyWe
acquired all of thethese Properties from unaffiliated third parties.
During the yearyears ended December 31, 2001, the Company2003 and 2002, we capitalized
approximately $2.4$1.5 million and $5.7 million of costs, includingrespectively, primarily
legal costs, relative to our efforts
by the Company 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. The Company isDue 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 manufactured home
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.
F-13
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSreview (see Note 18).
NOTE 6 --- INVESTMENT IN JOINT VENTURE
On March 18, 1998, theVENTURES
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", forrecorded 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. The Company's investments were
funded with a $3.9$2.1 million, borrowing under the Company's line of credit and with
the issuance of approximately $2.6 million in OP Units.
On December 28, 2000, the Company, through a joint venture with the
principals of Meadows Management Company (the "Voyager Joint Venture"), acquired
a 25% interest in Voyager RV Resort, a 1,576 site RV resort in Tucson, Arizona,
for total consideration of $4.0 million. Voyager RV Resort is adjacent to Trails
West. The Company's investment included cash of $3.0$1.3 million, and its 50%
interest$971,000
of net income from joint ventures in land held through the Trails Westyears ended December 31, 2003, 2002 and
2001, respectively; and received approximately $1.5 million and $607,000 in
distributions from joint venture valued at $2.0
million.ventures in the 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 using the equity
method of accounting.
The Company recorded approximately $283,000 and $8,000following is a summary of net income
fromthe Company's investments in unconsolidated
joint ventures in the years ended December 31, 2001 and 2000, respectively;
and received approximately $1.6 million and $400,000 in distributions.
NOTE 7 -- INVESTMENT IN AND ADVANCES TO AFFILIATES
Investment in and advances to affiliates consists principally of preferred
stock of Realty Systems, Inc. ("RSI") and its subsidiaries (collectively
"Affiliates") and advances under a line of credit between the Company and RSI.
The Company accounts for the investment in and advances to Affiliates using the
equity method of accounting.
Following is unaudited financial information for the Affiliates for the
years ended December 31, 2001 and 2000 (amounts in thousands):ventures:
2001 2000NUMBER 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% $ 51,6191,752 $ 37,501
Liabilities, net of amounts due
to the Company (17,232) (16,286)
-------- --------
Net investment1,917
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 Affiliates $ 34,387 $ 21,215
======== ========
Home sales $ 38,621 $ 39,952
Cost of sales (30,657) (31,837)
Other revenues and expenses, net (6,153) (5,707)
-------- --------
Equity in income of Affiliates $ 1,811 $ 2,408
======== ========College Heights --- 17% 8,058 7,944
----- ------- -------
1,521 $18,828 $19,634
===== ======= =======
F-14(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 previous investment ........ (34,387)
--------
Cash paid for common equity interest ..... $ (675)
========
NOTE 8 --- NOTES RECEIVABLE
At December 31, 20012003 and 2000,2002, the Company had approximately $1.5$11.6 million
and $5.0$10.0 million in notes receivable, respectively.
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 funded $3.2 million
under the Trails West Loan. In December 2000, $1.2 million of the Trails West
Loan was repaid and during 2001, the remaining balance on the Trails West Loan
was repaid. 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 prime
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,
20012003 is $1.5$1.6 million.
NOTE 9 -- EMPLOYEE NOTES RECEIVABLE
As of December 31, 2001 and 2000, the Company had employee notes receivable
of approximately $3.8 million and $4.2 million respectively, collateralized by
the Company's Common Stock. These notes are presented as a reduction of
Stockholder's Equity.
In December 1992, certain directors, officers and other individuals each
entered into subscription agreements with the Company to acquire a total of
440,000 shares of the Company's common stock at $7.25 per share. The Company
received from these individuals notes (the "1993 Employee Notes") in exchange
for their shares. The 1993 Employee Notes accrue interest at 6.77% per annum,
mature on March 2, 2003, and are recourse against the employees in the event the
pledged shares are insufficient to repay the obligations.
On January 2, 1996, certain members of management of the Company 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% per annum, mature on January 2, 2005, and are recourse against the
employees in the event the pledged shares are insufficient to repay the
obligations.
F-15F-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
As of December 31, 2002, the Company had 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 and are presented as a
reduction of Stockholders' Equity.
NOTE 10 --- LONG-TERM BORROWINGS
As of December 31, 20012003 and December 31, 2000,2002, the Company had outstanding
mortgage indebtedness of approximately $590.4$1,076 million and $556.6$575.4 million,
respectively, encumbering 77114 and 7366 of the Company's Properties, respectively.
As of December 31, 20012003 and December 31, 2000,2002, the carrying value of such
Properties was approximately $693$1,124 million and $631$720 million, respectively.
On August 3, 2001, the Company entered into a $50.0 million mortgage note
(the "Stagecoach Mortgage") collateralized by 7 Properties. The proceeds were
used to repay amounts under the Company's line of credit and for working capital
purposes.
The outstanding mortgage indebtedness as of December 31, 20012003 consists of:
- - Approximately $501.4 million of mortgage debt ("Mortgage Debt") consisting
of 49 loans collateralized by 51 Properties, beneficially owned by separate
legal entities that are subsidiaries of the Company, which we closed on
October 17, 2003 (the "Recap"). Of this Mortgage Debt, $177.9 million 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 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 $137,000)$357,000) which is being amortized into
interest expense over the life of the loan.
- A $65.9 million mortgage note (the "College Heights Mortgage")
collateralized by 18 Properties. The College Heights Mortgage bears
interest at a rate of 7.19%, amortizes beginning July 1, 1999 over 30
years and matures July 1, 2008.
- A $93.0$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 $49.9$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 $22.5$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 $15.6$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 $78.5$112.2 million of mortgage debt on 1520 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 8.75%.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 group 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, 2001, $133.82003, $110
million was available under the Credit Agreement. F-16
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 -- LONG-TERM BORROWINGS (CONTINUED)
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%. The Term Loan maturity has been extended to April 3, 2002. On February 8, 2002,
the Company entered into a term loan credit agreement with the same group of
banks, which extendedIn October, 2003,
we paid off the Term Loan to August 9, 2005.with proceeds from the Recap.
On October 29, 2001, the Companywe entered into an interest rate swap agreement (the
"2001 Swap"), effectively fixing at LIBOR on $100 million of the Company'sour floating rate debt
at approximately 3.7% per annum for the period October 2001 through August 2004.
The terms of the swap require2001 Swap required monthly settlements on the same dates
interest payments arewere due on the debt. In accordance with SFAS No. 133 as
herein defined, the interest rate swap will be2001 Swap was reflected at market value. The Company believesIn November, 2003,
we unwound the swap is2001 Swap at a perfectly
effective cash flow hedge under SFAS No. 133 and there will be no effect on net
income as a resultcost of the mark-to-market adjustment. As of December 31, 2001 the
swap had a market value of $489,000approximately $3 million, which is
included in other assets. The
effect of the mark-to-market adjustment, is reflectedinterest and related amortization in other comprehensive
income.
In July 1998, the Company entered into an interest rate swap agreement (the
"1998 Swap") fixing LIBOR on $100 million of the Company's floating rate debt at
6.4% for the period 1998 through 2003. The value of the 1998 Swap was impacted
by changes2003 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.
The Company has approximately $2.2 million of installment notes payable,
secured by a letter of credit, each with an interest rate of 6.5%, maturing
September 1, 2002. Approximately $900,000 of the notes pay principal annually
and interest quarterly and the remaining $1.3 million of the notes pay interest
only quarterly.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
- -------------------------------------- ---------- --------
20022004 $ 6,190
2003 30,275
2004 33,231--
2005 109,0186,478
2006 20,38417,409
2007 265,113
2008 200,908
Thereafter 509,759
--------586,371
Net unamortized premiums and discounts 17
----------
Total $708,857
========$1,076,296
==========
F-17F-20
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 are in effect at certain sites within
22approximately 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, 20012003 as follows
(amounts in thousands):
YEAR AMOUNT
- ---------- --------
2002 $ 41,906
2003 29,654
2004 26,57446,415
2005 25,33948,112
2006 17,37238,750
2007 31,794
2008 22,253
Thereafter 45,12020,708
--------
Total $185,965$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, 2001, 20002003, 2002 and
1999,2001, 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 $27.9approximately $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.relations. Fees paid to EGI and its affiliates amounted to approximately $2,000,
$26,000$300,
$1,000 and $74,000$2,000 for the years ended December 31, 2001, 20002003, 2002 and 1999,2001,
respectively. There were no significant amounts due to these affiliates as of
December 31, 20012003 and 2000,2002, 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; The Riverside
Agency, Inc. which provided insurance brokerage services. In addition, Equity Office Properties Trust, ofservices and Two North Riverside
Plaza Joint Venture Limited Partnership from which Mr. Zell is the Chairman of the Board, providesCompany leases office
space to the
Company.space. Fees paid to these entities amounted to approximately $454,000,
$442,000$404,000, $645,000
and $473,000$454,000 for the years December 31, 2001, 20002003, 2002 and 1999,2001, respectively.
Amounts due to these affiliates were approximately $32,000 and $52,000 as of
both December 31, 20012003 and 2000,2002, respectively. In addition, during 2003, we paid
$25,000 to J. Green & Co., L.L.C. for services provided by Mr. Berman, the
Company's current Chief Financial Officer, prior to his employment by the
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-18
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 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 Internal Revenue Code.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, 2001,2003 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 wereare 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, 2001.15, 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 2001, 2000 and 1999,1998, the Company issued 0, 19,181 and 14,666 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
$0, $525,000 and $352,000 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 2003, 2002, and 2001,
2000 andrespectively. The balance of unamortized deferred compensation related to these
Restricted Stock Grants is $0 as of December 31, 2003.
In 1999, respectively.
In 1998, 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 $2.0 million$167,000, $239,000 and $593,000$239,000
related to these Restricted Stock Grants in 20012003, 2002 and 2000,2001, respectively.
The balance of unamortized deferred compensation related to these Restricted
Stock Grants is $2,206,000approximately $335,000 as of December 31, 2001.2003.
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 vesting in 1999. The fair market value of these Stock Grants of
approximately $1.5 million as of the date of grant was treated in 1999 as
deferred compensation. The Company amortized approximately $386,000 and $385,000
related to these Stock Grants in 2001 and 2000, respectively.
In 2000, the Company awarded 69,750 Stock Grants to certain members of
senior management of the Company. These Stock Grants vest over three years with
one-half vesting in 2000. The fair market value of these Stock Grants of
approximately $1.9 million as of the date of grant was treated in 2000 as
deferred compensation. The Company amortized approximately $478,000 and $955,000
related to these Stock Grants in 2001 and 2000 respectively. The balance of
unamortized deferred compensation related to these Stock Grants is $478,000 as
of December 31, 2001.
In 2001, the Company awarded 43,000 Stock Grants to certain members of
senior management of the Company. These Stock Grants vest over five years, but may be restricted for a period of up to ten years
depending upon certain performance benchmarks tied to increases in funds from
operations being met. The fair market value of these Restricted Stock Grants of
approximately $1.2$2.2 million as of the date of grant was treated in 20012002 as
deferred compensation.compensation and amortized in accordance with their vesting. The
Company amortizedrecognized compensation expense of approximately $239,000$380,000 and $1.4
million related to these Restricted Stock Grants in 2001.2003 and 2002, respectively.
The balance of unamortized deferred compensation related to these Restricted
Stock Grants is approximately $957,000$0 as of December 31, 2001.2003.
In 1999,2003, 2002, and 2001, the Plan was amendedCompany awarded 35,000, 16,000, and 16,000
Restricted Stock Grants, respectively, to providedirectors with a Stock Grant of 2,000 shares
vesting over three years in lieu of the 10,000 Options granted after the
amendment to each director, if the director so elects. The fair market value of
Stock Grants awarded to directorsapproximately $733,000, $376,000 and $302,000 in 2003, 2002 and 2001
respectively. The Company recognized compensation expense of approximately
$386,000, $401,000 and
$432,000 in 1999, 2000 and 2001 respectively, were treated as deferred
compensation. The Company amortized approximately $406,280$470,000 related to these Restricted Stock Grants in 2001.2003. The balance of
unamortized deferred compensation related to the 1999, 2000,2002 and 2001 Restricted Stock
Grants is $0, $134,000$125,000 and $288,000$0, respectively, as of December 31, 2001.
F-192003.
F-23
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 --- STOCK OPTION PLAN AND STOCK GRANTS (CONTINUED)
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its Options and Stock Grants because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123")
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's Options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized. Additionally, the amount
recognized as expense for the Stock Grants during any given year of the
performance period is dependent on certain performance benchmarks being met.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its Options and Stock Grants under the fair value method of that
Statement. The fair value for the Options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 2001, 2000 and 1999, respectively: risk-free interest rates of
3.5%, 5.5% and 6.3%; dividend yields of 6.3%, 6.3% and 6.3%; volatility factors
of the expected market price of the Company's common Stock of .19, .20 and .21;
and a weighted-average expected life of the Options of 5 years.
The fair value of the Stock Grants granted in 2001, 2000 and 1999 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, 2001, 2000 and 1999 was $648,000 ($0.02 per share),
$134,000 ($0.0 per share) and $138,000 ($0.0 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, 2001, 20002003, 2002 and 19992001 follows:
WEIGHTED AVERAGE
SHARES SUBJECT EXERCISE PRICE PER
TO OPTIONS PER SHARE
-------------- ----------------------------------
Balance at December 31, 1998 1,899,379 $21.082000 2,107,871 $22.30
Options granted 313,400 23.91.......... 177,150 30.03
Options exercised (126,565) 19.25
Options canceled (66,767) 24.08
---------
Balance at December 31, 1999 2,019,447 21.72
Options granted 440,077 25.94
Options exercised (250,092) 23.17
Options canceled (101,227) 24.33
---------
Balance at December 31, 2000 2,108,205 22.30
Options granted 234,150 29.44
Options exercised........ (387,115) 19.98
Options canceled (69,891) 25.05......... (69,558) 25.04
---------
Balance at December 31, 2001 1,885,349 23.571,828,348 23.44
Options granted .......... 20,000 33.55
Options exercised ........ (282,959) 20.48
Options canceled ......... (49,492) 24.94
---------
Balance at December 31, 2002 1,515,897 24.08
Options granted .......... 20,000 32.67
Options exercised ........ (302,526) 21.06
Options canceled ......... (9,437) 25.60
---------
Balance at December 31, 2003 1,223,934 24.95
=========
F-20The 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, 2003, 2002 and 2001, 2,148,524 shares, 2,194,087 shares
and 2,250,345 shares remained available for grant, respectively; of these
1,036,853, shares, 1,071,853 shares and 1,157,603 shares, respectively, remained
available for Restricted Stock Grants.
F-24
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 -- STOCK OPTION PLAN AND STOCK GRANTS (CONTINUED)
On March 23, 2001, the Company's Board of Directors approved resolutions
amending and restating the Plan effective March 23, 2001 (the "Amended Plan") to
increase the number of Common Shares issuable thereunder by 2,000,000 shares of
Common Stock to an aggregate of 6,000,000 shares. On May 8, 2001, the Company's
shareholder's approved the Amended Plan.
As of December 31, 2001, 2000 and 1999, 1,252,344 shares, 416,603 shares
and 747,258 shares remained available for grant, respectively, and 1,422,211
shares, 1,562,074 shares and 1,426,072 shares were exercisable, respectively.
Exercise prices for Options outstanding as of December 31, 2001 ranged from
$12.88 to $30.65, with the substantial majority of the exercise prices exceeding
$17.25. The remaining weighted-average contractual life of those Options was 6.2
years. The weighted average exercise price of outstanding and exercisable
options was $22.39 as of December 31, 2001.
NOTE 15 --- PREFERRED STOCK
The Company's Board of Directors is authorized under the Company's charter,
without further stockholder approval, to issue, from time to time, in one or
more series, 10,000,000 shares of $.01 par value preferred stock (the "Preferred
Stock"), with specific rights, preferences and other attributes as the Board may
determine, which may include preferences, powers and rights that are senior to
the rights of holders of the Company's Common Stock. However, under certain
circumstances, the issuance of preferred stock may require stockholder approval
pursuant to the rules and regulations of The New York Stock Exchange. As of
December 31, 20012003 and 2000,2002, no Preferred Stock was issued by the Company.
NOTE 16 --- SAVINGS PLAN
The Company has a qualified retirement plan, with a salary deferral feature
designed to qualify under Section 401 of the Code (the "401(k) Plan"), to cover
its employees and those of its Subsidiaries, if any. The 401(k) Plan permits
eligible employees of the Company and those of any Subsidiary to defer up to 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 $353,000, $315,000$240,000, $248,000, and $385,000,$353,000, for the years ended
December 31, 2001, 20002003, 2002, and 1999,2001, respectively.
The Company'sCompany 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 $139,000 for the year
ended December 31, 2001.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. This
summary provides the history and reasoning underlying the Company's defenseAs a result 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.
F-21
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
Under California Civil Code Section 798.41, DeAnza was required to reduce
rent by an amount equal to the average cost of usage over the preceding 12
months. This was done. With respect to water charges, because DeAnza did not
want to be regulated by 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. DeAnza's 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, the Company. DeAnza and the Company demurred to each of these
complaints on the grounds that the CPUC had exclusive jurisdiction over the
setting of water rates and that residents under rent control had to first
exhaust their administrative remedies before proceeding in a civil action. At
one point, the case was dismissed (with leave to amend) on the basis that
jurisdiction was with the CPUC and, at another point, Mr. Rossman was dismissed
from the case because he had not exhausted his administrative remedies.
On June 29, 1995, a hearing was held before a City 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.
F-22
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
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, 1998, 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 decision primarily reflected
the court of appeal's view that CPUC Section 2705.5 operated as a ceiling and
that California Civil Code Section 798.41 allowed for a charge based on actual
costs, including costs of administration, operation and maintenance of the
system, but that the Company had not to provide evidence of such costs. 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 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 ofin punitive damages against the Company and DeAnza. The
Company had previously agreed to indemnify DeAnza on the matter.
F-23
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company 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
remittur. The trial court also awarded $700,000 of attorneys' fees to
plaintiffs. The Company appealed the jury verdict and attorneys' fees award
(which also accrues interest at the statutory rate of 10.0% per annum).damages. On December 21, 2001 the
California Court of Appeal for the Sixth District reversed the $6.0 million
punitive damage award, and the related award of attorneys' fees, and, as a result,
all post-judgment interest thereon, on the basis that punitive damages are not
available as a remedy for a statutory violation of the MRL.California Mobilehome
Residency Law ("MRL"). 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 or 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 expectshas appealed this award and has not
accrued for the HOAamount in its consolidated financial statements.
F-25
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
OTHER CALIFORNIA RENT CONTROL LITIGATION
As part of the Company's effort to seekrealize 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 new trial
during 2002.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 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 Consumer
Price Index ("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 had been
agreed to by the CMHOA in a settlement agreement. The Company intends to
vigorously defend itself.
In twothis matter, which has been stayed pending a 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 Californiastate
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.
In a separate matter, 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.of an order dismissing its claims against the City
of San Rafael. The Company believes that such lawsuits will be a consequence of
the residents who
received rent increase notices with respectCompany's efforts to rent increases above those
permitted by the localchange rent control ordinance weresince tenant groups actively desire
to preserve the premium value of their homes in addition to the discounted rents
provided by rent control. The Company has determined that its efforts to
rebalance the regulatory environment despite the risk of litigation from tenant
groups are necessary not covered by the ordinance
eitheronly because they did not comply with the provisions of the ordinance or$15 million annual subsidy to
tenants, but also because they are exempted by state law. On December 29, 2000,of the Superior Court
of California, County of Santa Cruz enjoined such rent increases. The Company
intends to vigorously defend the matter, which may go to trial in the summer of
2002.condemnation risk.
ELLENBURG COMMUNITIES
The Company and certain other parties entered into a settlement agreement
("the Settlement"(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
settlementSettlement closed on May 22, 2000 (see Note 5).2000. Only the appealsappeal of one entity remained, the
two
entities remain, neitheroutcome of which iswas not expected to materially affect the Company.
F-26
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
ELLENBURG COMMUNITIES (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.
F-24
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)substantive appeals on March 13, 2003 as moot. Fund 20 petitioned the
California Supreme Court to review this decision which review was denied.
In October 2001, Fund 20 sued the Company and certain of its affiliates
again, this time in AlmedaAlameda 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 other related proceedings in
Arizona (from which the Company has already been dismissed with prejudice) are
concluded. CANDLELIGHT PROPERTIES, L.L.C
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 was secured by a mortgage on Candlelight
Village ("Candlelight"), a Property in Columbus, Indiana, and was guaranteed by
Ronald E. Farren, the 99% owner of Borrower. The Company accounted forobtained a court order enjoining Fund 20 from proceeding
with its Alameda County action.
In February, 2004, the Loan
as an investment in real estate and, accordingly, Candlelight's rental revenues
and operating costs were included with the Company's rental revenues and
operating costs for financial reporting purposes. Concurrently with the funding
of the Loan, Borrower granted the Operating Partnership the option to acquire
Candlelight upon the maturity of the Loan. The Operating Partnership notified
Borrower that it was exercising its option to acquire Candlelight in March 1999,
and the Loan subsequently matured on May 3, 1999. However, Borrower failed to
repay the Loan and refused to convey Candlelight to the Operating Partnership.
Borrower filed suit in the Circuit Court of Bartholomew County, Indiana
("Court") on May 5, 1999, seeking declaratory judgment on the validity of the
exercise of the option. The Lending Partnership filed suit in the Court the next
day, seeking to foreclose its mortgage, and the suits were consolidated by the
Court.
On September 20, 2001, the partiesCompany entered into a settlement agreement providing for a cash payment of $10.8 millionwith
Fund 20 resolving all remaining matters at no cost to the Lending PartnershipCompany and dismissal with
prejudicemutual 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 all litigation amongapproximately $518,000 with respect to the
parties and their
affiliates, among other terms. The closingProperty known as Countryside at Vero Beach, located in Vero Beach, Florida,
purportedly under the Settlement Agreement
occurred on October 5, 2001. Theterms of an agreement between the County and a prior owner
of the Property. In response, the Company accounted forhas advised the SettlementCounty that these fees
are no longer due and owing as a dispositionresult of a 1996 settlement agreement between
the property.
WESTWINDS
The Operating Partnership isCounty and the ground lessee ("Lessee") of certain
property in San Jose, California under ground leases ("Leases") from the
Nicholson Family Trust ("Lessor"). On February 13, 2001, Lessor filed a petition
for arbitration of disputes over whether certain items constitute "gross
revenue" under the Leases in which petition Lessor seeks damages and termination
of the Leases. Lessee responded on March 12, 2001 disputing Lessor's
contentions. Lessor claims that "gross revenue" for the purpose of calculating
percentage rent owing to Lessor under the ground leases includes certain amounts
Lessee has recouped from tenantsprior owner of the Property, (who are protected by rent
control) relatedproviding for the payment of
$150,000 to ground rent already paidthe County to Lessor. Lessee has successfully
been able to pass-through to tenantsdischarge any further obligation for the payment of
impact or connection fees for sewer service at the property increasesProperty. The Company paid
this settlement amount (with interest) to the County in ground rentconnection with the
Company's acquisition of the Property. Accordingly, the Company believes that
the County'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 Leases. Lessee contendsDelaware 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 Dismiss 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 pass-through results in
reimbursement of lease expense, not "gross revenue." Lessor also contends thatform until the "net income" of RSI fromState had approved a new form for use at the Property
should be includedas 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 gross
revenue calculation. Lessee disputes thisamount 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 many reasons, including, but notSummary Judgment. The State's appeal is limited to the
fact that RSIsingle 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 notscheduled for March 16, 2004.
On November 14, 2003, the State filed a lessee under the Leases, the sales
activity is not conducted by Lessee, and RSI is a separate company from Lessee.
Lessor's motion for summary judgmentStay Pending Appeal with
the Court, and on December 3, 2003, the Company filed its response opposing the
motion. On December 16, 2003, the Court issued its order on the pass-through issue was denied
by an arbitration panel on November 2, 2001. Lessor and Lessee have agreed to
mediate the dispute prior to arbitration. The Company does not believemotion, holding
that the amounts in question are material even if resolvedCompany may proceed to issue notices of default to tenants who fail to
pay the full 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 Lessee and, based
upon advice of counsel, does not believe thatSupreme Court rules on the Lessor will be successful in
terminating the Leases.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-25F-28
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 --- SUBSEQUENT EVENTS
Effective January 1, 2002,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 purchased all of the outstanding
Common Stock of RSI from affiliated and non-affiliated owners forinvested approximately $675,000. As a result,$29.7 million in
preferred equity in six entities controlled by Diversified Investments,
Inc. ("Diversified"). In addition, the Company owns and controls RSI and will consolidate
RSI as of January 1, 2002.
F-26has 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.
F-29
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 --- QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is unaudited quarterly data for 2001, 20002003 and 19992002 (amounts in
thousands, except for per share amounts):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
20012003 3/31 6/30 9/30 12/31
---- ------- ------- ------- -------
Total Revenues......................................... $57,532 $56,218 $55,536 $56,570revenues(a) ................................................. $64,569 $66,760 $68,760 $71,066
Income before allocation to Minority Interests and
extraordinary loss on early extinguishment of debt... $18,739 $10,512 $10,468 $11,825from 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............ $12,644shareholders ................ $ 6,1357,674 $14,400 $ 6,0975,208 $ 7,207(268)
Weighted average Common Shares outstanding -- Basic.... 20,793 20,969 21,108 21,266- Basic ................ 21,918 22,027 22,114 22,247
Weighted average Common Shares outstanding -- Diluted.. 26,771 26,898 27,071 27,293- Diluted .............. 27,276 27,371 27,458 27,568
Net income (loss) per Common Share outstanding -- Basic.......- Basic ............ $ 0.61.35 $ 0.29.65 $ 0.29.24 $ 0.34(.01)
Net income (loss) per Common Share outstanding -- Diluted.....- Diluted .......... $ 0.59.34 $ 0.29.64 $ 0.28.23 $ 0.33(.01)
(a) Amounts may differ from previously disclosed amounts due to
reclassification of discontinued operations.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
20002002 3/31 6/30 9/30 12/31
---- --------------- ------- ------- -------
Total Revenues......................................... $57,148 $54,271 $53,875 $55,384revenues(a) .................................................. $63,222 $64,414 $65,223 $68,508
Income before allocation to Minority Interests......... $10,743 $21,547from continuing operations(a) ............................... $ 9,715 $10,6966,584 $ 5,952 $ 5,080 $ 6,090
Income from discontinued operations(a) ............................. $ 531 $ 486 $ 1,632 $10,090
Net income available to common shareholders............shareholders ........................ $ 6,331 $13,9217,115 $ 5,4516,438 $ 6,2446,712 $16,180
Weighted average Common Shares outstanding -- Basic.... 22,297 21,871 21,166 20,559- Basic ................. 21,433 21,563 21,676 21,794
Weighted average Common Shares outstanding -- Diluted.. 28,242 27,809 27,077 26,520- Diluted ............... 27,508 27,664 27,693 27,678
Net income per Common Share outstanding -- Basic.......- Basic .................... $ 0.280.33 $ 0.640.30 $ 0.260.31 $ 0.300.74
Net income per Common Share outstanding -- Diluted.....- Diluted .................. $ 0.280.32 $ 0.630.29 $ 0.250.30 $ 0.300.73
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
1999 3/31 6/30 9/30 12/31
---- ------- ------- ------- -------
Total Revenues......................................... $54,390 $52,446 $53,537 $54,654
Income before allocation to Minority Interests......... $10,078 $ 8,477 $ 8,417 $ 7,056
Net income available to common shareholders............ $ 8,234 $ 6,968 $ 6,877 $ 5,693
Weighted average Common Shares outstanding -- Basic.... 26,157 25,773 25,613 23,381
Weighted average Common Shares outstanding -- Diluted.. 32,340 31,829 31,586 29,281
Net income per Common Share outstanding -- Basic....... $ 0.31 $ 0.27 $ 0.27 $ 0.24
Net income per Common Share outstanding -- Diluted..... $ 0.31 $ 0.27 $ 0.27 $ 0.24
F-27(a) Amounts may differ from previously disclosed amounts due to
reclassification of discontinued operations.
F-30
SCHEDULE II
MANUFACTURED HOME COMMUNITIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 21, 200131, 2003
ADDITIONS
--------------------------------------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING CHARGED TO TO OTHER AT END OF
OF PERIOD INCOME ACCOUNTS DEDUCTIONS(1) PERIOD
---------- ---------- ------------------ ------------- -------------------
For the year ended December 31, 1999:2001:
Allowance for doubtful accounts..... $250,000 $413,573 $ --accounts ................. $300,000 $426,579 $--- ($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, 2001:2003:
Allowance for doubtful accounts..... $300,000 $426,579 $ --accounts ................. $700,000 $820,822 $--- ($426,579) $300,000693,822) $827,000
- ---------------
(1) Deductions represent tenant receivables deemed uncollectible.
S-1
SCHEDULE III
MANUFACTURED HOME COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 20012003
(AMOUNTS IN THOUSANDS)
COSTS CAPITALIZED
SUBSEQUENT TO
INITIAL COST TO ACQUISITION
COMPANY (IMPROVEMENTS)
------------------------Costs
Capitalized
Subsequent to
Initial Cost to Acquisition
Company (Improvements)
-------------------- DEPRECIABLE DEPRECIABLE
REAL ESTATE LOCATION ENCUMBRANCES LAND PROPERTY LAND PROPERTY-------------------
Depreciable Depreciable
Real Estate Location Encumbrances Land Property Land Property
- ----------- ----------------- ---- ------------ -------- ----------- ------ -------------------------------------------------------------------------------------------------------------------------------
Apollo Village ........... Phoenix AZ 5,2844,009 932 3,219 0 446515
Araby Acres .............. Yuma AZ 3,250 1,440 4,345 0 0
The Highlands at Brentwood Manor Mesa AZ 4,575 1,99810,910 1,997 6,024 (1) 2920 526
Carefree Manor ........... Phoenix AZ 3,398 706 3,040 0 706 3,307 0 (135)219
Casa del Sol #1 .......... Peoria AZ 6,78610,445 2,215 6,467 0 329874
Casa del Sol #2 .......... Glendale AZ 6,920 2,1049,827 2,103 6,283 (1) 2700 604
Casa del Sol #3 .......... Glendale AZ 6,63111,188 2,450 7,452 0 166334
Central Park ............. Phoenix AZ 7,1855,139 1,612 3,784 0 452584
Countryside .............. Phoenix AZ 3,787 2,056 6,241 0 171
Desert Skies ............. Phoenix AZ 5,046 792 3,126 0 792 3,629 0 (432)185
Fairview Manor ........... Tucson AZ 05,114 1,674 4,708 0 8751,113
Foothill ................. Yuma AZ 1,350 459 1,402 0 0
Golden Sun ............... Scottsdale AZ 3,029 1,678 5,049 0 27
Hacienda De Valencia ..... Mesa AZ 8,4215,676 833 2,701 0 8501,659
Palm Shadows ............. Glendale AZ 3,1218,480 1,400 4,218 0 356368
Sedona Shadows ........... Sedona AZ 2,6452,521 1,096 3,431 0 286391
Sunrise Heights .......... Phoenix AZ 05,636 1,000 3,016 0 269369
The Mark ................. Mesa AZ 08,943 1,354 4,660 6 718793
The Meadows .............. Tempe AZ 9,26012,060 2,613 7,887 0 439533
Whispering Palms ......... Phoenix AZ 3,219 670 2,141 0 670 2,399 0 (138)161
California Hawaiian ...... San Jose CA 17,97627,449 5,825 17,755 0 8131,532
Colony Park .............. Ceres CA 5,826 890 2,837 0 890 4,513 0 (1,610)262
Concord Cascade .......... Pacheco CA 10,3815,291 985 3,016 0 682840
Contempo Marin ........... San Rafael CA 16,149 4,78825,669 4,787 16,379 (1) 1,8510 2,318
Coralwood ................ Modesto CA 06,200 0 5,047 0 148245
Date Palm Country Club ... Cathedral City CA 15,60815,340 4,138 14,064 (23) 1,7962,755
Date Palm ................ Cathedral City CA 0 0 216 0 26
Four Seasons ............. Fresno CA 0 756 2,348 0 126199
Laguna Lake .............. San Luis Obispo CA 5,5705,128 2,845 7,640 1 (959)6,520 0 241
Lamplighter .............. Spring Valley CA 9,3933,806 633 2,201 0 502648
Meadowbrook .............. Santee CA 0 4,345 12,528 0 9241,277
Monte del Lago ........... Castroville CA 8,1607,845 3,150 9,469 0 6291,026
Quail Meadows ............ Riverbank CA 05,280 1,155 3,469 0 149259
Nicholson Plaza .......... San Jose CA 0 --0 4,512 0 4453
Rancho Mesa .............. El Cajon CA 9,600 2,130 6,389 0 2,130 6,616 0 (173)
Rancho Valley El Cajon CA 4,645 685 1,902 0 469
Royal Holiday Hemet CA 0 778 0 2,840
Royal Oaks Visalia CA 0 602 1,921 0 146
DeAnza Santa Cruz Santa Cruz CA 5,581 2,103 7,201 0 2,103
Santiago Estates Sylmar CA 0 3,562 14,205 0 (3,098)
Sea Oaks Los Osos CA 0 871 2,703 0 128204
GROSS AMOUNT CARRIED
AT CLOSE OF PERIODGross Amount Carried
at Close of
Period 12/31/01
-------------------------
DEPRECIABLE ACCUMULATED DATE OF
REAL ESTATE LAND PROPERTY TOTAL DEPRECIATION ACQUISITION03
------------------------------
Depreciable Accumulated Date of
Real Estate Location Land Property Total Depreciation Acquisition
- ----------- -------- ----------- ---------- ------------ ---------------------------------------------------------------------------------------------------------------------------------
Apollo Village ........... Phoenix AZ 932 3,665 4,597 (883)3,734 4,666 (1,163) 1994
Araby Acres .............. Yuma AZ 1,440 4,345 5,785 (12) 2003
The Highlands at Brentwood ManorMesa AZ 1,997 6,316 8,313 (1,846)6,550 8,547 (2,315) 1993
Carefree Manor ........... Phoenix AZ 706 3,172 3,878 (425)3,259 3,965 (683) 1998
Casa del Sol #1 .......... Peoria AZ 2,215 6,796 9,011 (936)7,341 9,556 (1,355) 1996
Casa del Sol #2 .......... Glendale AZ 2,103 6,553 8,656 (875)6,887 8,990 (1,248) 1996
Casa del Sol #3 .......... Glendale AZ 2,450 7,618 10,068 (909)7,786 10,236 (1,448) 1998
Central Park ............. Phoenix AZ 1,612 4,236 5,848 (2,442)4,368 5,980 (2,781) 1983
Countryside .............. Phoenix AZ 2,056 6,412 8,468 (284) 2002
Desert Skies ............. Phoenix AZ 792 3,197 3,989 (419)3,311 4,103 (693) 1998
Fairview Manor ........... Tucson AZ 1,674 5,583 7,257 (720)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 3,551 4,384 (1,931)4,360 5,193 (2,248) 1984
Palm Shadows ............. Glendale AZ 1,400 4,574 5,974 (1,324)4,586 5,986 (1,667) 1993
Sedona Shadows ........... Sedona AZ 1,096 3,717 4,813 (550)3,822 4,918 (835) 1997
Sunrise Heights .......... Phoenix AZ 1,000 3,285 4,285 (861)3,385 4,385 (1,104) 1994
The Mark ................. Mesa AZ 1,360 5,378 6,738 (1,284)5,453 6,813 (1,691) 1994
The Meadows .............. Tempe AZ 2,613 8,326 10,939 (2,204)8,420 11,033 (2,787) 1994
Whispering Palms ......... Phoenix AZ 670 2,261 2,931 (300)2,302 2,972 (493) 1998
California Hawaiian ...... San Jose CA 5,825 18,568 24,393 (2,880)19,287 25,112 (4,206) 1997
Colony Park .............. Ceres CA 890 2,903 3,793 (375)3,099 3,989 (776) 1998
Concord Cascade .......... Pacheco CA 985 3,698 4,683 (2,019)3,856 4,841 (2,317) 1983
Contempo Marin ........... San Rafael CA 4,787 18,230 23,017 (4,319)18,697 23,484 (5,712) 1994
Coralwood ................ Modesto CA 0 5,195 5,195 (760)5,292 5,292 (1,149) 1997
Date Palm Country Club ... Cathedral City CA 4,115 15,860 19,975 (3,774)16,819 20,934 (5,038) 1994
Date Palm ................ Cathedral City CA 0 242 242 (85) 1994
Four Seasons ............. Fresno CA 756 2,474 3,230 (370)2,547 3,303 (566) 1997
Laguna Lake 2,846 6,681 9,527 (1,004).............. San Luis Obispo CA 2,845 6,761 9,606 (1,461) 1998
Lamplighter .............. Spring Valley CA 633 2,703 3,336 (1,510)2,849 3,482 (1,739) 1983
Meadowbrook .............. Santee CA 4,345 13,452 17,797 (1,677)13,805 18,150 (2,587) 1998
Monte del Lago ........... Castroville CA 3,150 10,098 13,248 (1,468)10,495 13,645 (2,213) 1997
Quail Meadows ............ Riverbank CA 1,155 3,618 4,773 (454)3,728 4,883 (712) 1998
Nicholson Plaza .......... San Jose CA 0 4,556 4,556 (658)4,565 4,565 (970) 1997
Rancho Mesa .............. El Cajon CA 2,130 6,443 8,573 (821)6,593 8,723 (1,223) 1998
Rancho Valley 685 2,371 3,056 (1,320) 1983
Royal Holiday 778 2,840 3,618 (97) 1998
Royal Oaks 602 2,067 2,669 (301) 1997
DeAnza Santa Cruz 2,103 9,304 11,407 (1,677) 1994
Santiago Estates 3,562 11,107 14,669 (1,233) 1998
Sea Oaks 871 2,831 3,702 (409) 1997
S-2
SCHEDULE III
MANUFACTURED HOME COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 20012003
(AMOUNTS IN THOUSANDS)
COSTS CAPITALIZED
SUBSEQUENT TO
INITIAL COST TO ACQUISITION
COMPANY (IMPROVEMENTS)
------------------------ ----------------------
DEPRECIABLE DEPRECIABLE
REAL ESTATE LOCATION ENCUMBRANCES LAND PROPERTY LAND PROPERTYCosts
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 89129
Westwinds (4 properties) San Jose CA 0 0 17,616 0 4,1314,988
Bear Creek Sheridan CO 4,880 1,100 3,359 0 1,100 31,559 0 (28,094)209
Cimarron Broomfield CO 8,0864,653 863 2,790 0 464604
Golden Terrace Golden CO 8,0414,245 826 2,415 0 436643
Golden Terrace South Golden CO 2,400 750 2,265 0 477548
Golden Terrace West Golden CO 9,7378,432 1,694 5,065 0 750955
Hillcrest Village Aurora CO 15,47610,581 1,912 5,202 290 1,967289 2,277
Holiday Hills Denver CO 19,43714,856 2,159 7,780 1 3,1560 3,652
Holiday Village CO Co. Springs CO 6,2643,536 567 1,759 0 588909
Pueblo Grande Pueblo CO 3,4761,890 241 1,069 0 334419
Woodland Hills Denver CO 11,7657,499 1,928 4,408 0 2,1922,391
Aspen Meadows Rehoboth Beach DE 5,620 1,148 3,460 0 1,148 4,543 0 (948)192
Camelot AcresMeadows Rehoboth Beach DE 7,0037,400 527 2,058 0 5741,251 3,643
Mariners Cove Millsboro DE 016,452 990 2,971 0 2,9493,393
McNicol Rehoboth Beach DE 2,710 563 1,710 0 563 2,106 0 (347)58
Sweetbriar Rehoboth Beach DE 3,040 498 1,527 0 498 3,027 1 (1,337)268
Waterford Estates Bear DE 030,954 5,250 16,202 0 370479
Whispering Pines Lewes DE 09,871 1,536 4,609 0 724911
Maralago Cay Lantana FL 021,600 5,325 15,420 0 1,0902,613
Bay Indies Venice FL 22,52544,524 10,483 3,390 0 29,54931,559 10 3,054
Bay Lake Estates Nokomis FL 4,6513,708 990 3,3043,390 0 495875
Breezy Hill Pompano Beach FL 10,281 5,510 16,555 0 46
Buccaneer N. Ft. Myers FL 19,53213,902 4,207 14,410 0 7561,085
Bulow Village Resort Flagler Beach FL 0 0 228 0 37
Bulow Village Flagler Beach FL 1,11010,404 3,637 949 0 4,1865,106
Carriage Cove Daytona Beach FL 8,2218,084 2,914 10,1768,682 0 (1,168)756
Coral Cay Margate FL 16,74220,195 5,890 20,211 0 1,5802,518
Coquina St Augustine FL 0 5,286 5,545 0 2,3635,276
Meadows at Countrywood Plant City FL 018,292 4,514 13,175 0 1,442
Country Place New Port Richey FL 4,008 663 0 18 6,288
Country Side North Vero Beach FL 0 3,711 14,751 0 (2,646)
East Bay Oaks Largo FL 6,674 1,240 3,322 0 377
Eldorado Village Largo FL 4,576 778 0 0 2,669
Grand Island Grand island FL 0 1,723 5,208 38 629
Heritage Village Vero Beach FL 0 2,403 7,259 0 327
Hillcrest Clearwater FL 0 1,278 5,850 0 (1,624)
Holiday Ranch Largo FL 0 925 3,142 0 (155)2,575
GROSS AMOUNT CARRIED
AT CLOSE OF PERIODGross Amount Carried
at Close of
Period 12/31/01
------------------------
DEPRECIABLE ACCUMULATED DATE OF
REAL ESTATE LAND PROPERTY TOTAL DEPRECIATION ACQUISITION03
------------------------------
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 5,796 5,796 (848)5,836 5,836 (1,259) 1997
Westwinds (4 properties) San Jose CA 0 21,747 21,747 (3,185)22,604 22,604 (4,951) 1997
Bear Creek Sheridan CO 1,100 3,465 4,565 (460)3,568 4,668 (705) 1998
Cimarron Broomfield CO 863 3,254 4,117 (1,864)3,394 4,257 (2,128) 1983
Golden Terrace Golden CO 826 2,851 3,677 (1,515)3,058 3,884 (1,751) 1983
Golden Terrace South Golden CO 750 2,742 3,492 (399)2,813 3,563 (611) 1997
Golden Terrace West Golden CO 1,694 5,815 7,509 (2,753)6,020 7,714 (3,184) 1986
Hillcrest Village 2,202 7,169 9,371 (3,903)Aurora CO 2,201 7,479 9,680 (4,535) 1983
Holiday Hills 2,160 10,936 13,096 (5,705)Denver CO 2,159 11,432 13,591 (6,672) 1983
Holiday Village CO Co. Springs CO 567 2,347 2,914 (1,236)2,668 3,235 (1,462) 1983
Pueblo Grande Pueblo CO 241 1,403 1,644 (780)1,488 1,729 (904) 1983
Woodland Hills Denver CO 1,928 6,600 8,528 (1,767)6,799 8,727 (2,272) 1994
Aspen Meadows Rehoboth Beach DE 1,148 3,595 4,743 (495)3,652 4,800 (762) 1998
Camelot Acres 527 2,632 3,159 (1,449) 1983Meadows Rehoboth Beach DE 1,778 5,701 7,479 (1,119) 1998
Mariners Cove Millsboro DE 990 5,920 6,910 (2,071)6,364 7,354 (2,594) 1987
McNicol Rehoboth Beach DE 563 1,759 2,322 (232)1,768 2,331 (350) 1998
Sweetbriar 499 1,690 2,189 (211)Rehoboth Beach DE 498 1,795 2,293 (427) 1998
Waterford Estates Bear DE 5,250 16,572 21,822 (1,969)16,681 21,931 (2,679) 1996
Whispering Pines Lewes DE 1,536 5,333 6,869 (2,232)5,520 7,056 (2,638) 1998
Maralago Cay Lantana FL 5,325 16,510 21,835 (2,291)18,033 23,358 (3,579) 1997
Bay Indies 10,483 32,939 43,422 (8,621)Venice FL 10,493 34,613 45,106 (10,939) 1994
Bay Lake Estates Nokomis FL 990 3,799 4,789 (965)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 15,166 19,373 (3,709)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 5,135 8,772 (768)6,055 9,692 (1,170) 1994
Carriage Cove Daytona Beach FL 2,914 9,008 11,922 (1,199)9,438 12,352 (1,955) 1998
Coral Cay Margate FL 5,890 21,791 27,681 (5,185)22,729 28,619 (6,732) 1994
Coquina St Augustine FL 5,286 7,908 13,194 (404)10,821 16,107 (1,155) 1999
Meadows at Countrywood Plant City FL 4,514 14,617 19,131 (1,948) 1998
Country Place 681 6,288 6,969 (1,973) 1986
Country Side North 3,711 12,105 15,816 (1,597) 1998
East Bay Oaks 1,240 3,699 4,939 (2,156) 1983
Eldorado Village 778 2,669 3,447 (1,541) 1983
Grand Island 1,761 5,837 7,598 (170) 2001
Heritage Village 2,403 7,586 9,989 (1,946) 1994
Hillcrest 1,278 4,226 5,504 (537) 1998
Holiday Ranch 925 2,987 3,912 (396)15,750 20,264 (2,949) 1998
S-3
SCHEDULE III
MANUFACTURED HOME COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 20012003
(AMOUNTS IN THOUSANDS)
COSTS CAPITALIZED
SUBSEQUENT TO
INITIAL COST TO ACQUISITION
COMPANY (IMPROVEMENTS)
------------------------ ----------------------
DEPRECIABLE DEPRECIABLE
REAL ESTATE LOCATION ENCUMBRANCES LAND PROPERTY LAND PROPERTYCosts
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 1,7921,374 0 (313)132
Holiday Village Ormond Beach FL 7,049 2,610 7,837 0 62
Indian Oaks Rockledge FL 3,0914,449 1,089 4,5273,376 0 (518)712
Lake Fairways N. Ft. Myers FL 030,460 6,075 18,134 0 81035 1,376
Lake Haven Dunedin FL 8,0717,862 1,135 4,047 0 7632,011
Lakewood Village Melbourne FL 9,818 1,862 5,627 0 1,863 5,627 (1) 385
Landings557
Lighthouse Pointe Port Orange FL 012,701 2,446 8,496 0 (576)7,483 23 816
Mid-Florida Lakes Leesburg FL 25,11221,815 5,997 20,635 0 2,6834,284
Oak Bend Ocala FL 05,772 850 2,572 0 605850
Pickwick Port Orange FL 8,37510,438 2,803 8,870 0 46474
Pine Lakes N. Ft. Myers FL 031,464 6,306 14,579 0 4,77021 5,311
Sherwood Forest Kissimmee FL 9,63727,355 4,852 19,64214,596 0 (2,849)3,531
Sherwood Forest RV ParkResort Kissimmee FL 0 2,870 3,621 568 6361,287
Silk Oak Clearwater FL 3,854 1,670 5,028 0 36
Southern Palms Eustis FL 05,727 2,169 5,884 0 1,0131,471
Spanish Oaks Ocala FL 7,4457,164 2,250 6,922 0 509847
Oaks at Countrywood Plant City FL 01,318 1,111 2,513 (340) 188(265) 1,325
The Heritage N. Ft. Myers FL 09,791 1,438 4,371 249 2,046346 3,030
The Lakes at Countrywood Plant cityCity FL 9,711 2,377 7,085 0 2,377 7,086 37 627753
The Meadows, FL Palm Beach Gardens FL 6,2026,106 3,229 9,870 0 2201,088
Gardens
Toby's Arcadia FL 0 1,093 3,280 0 0
Windmill Manor Bradenton FL 6,2828,022 2,153 6,125 (1) 8740 1,058
Windmill Village --- Ft. Myers N. Ft. Myers FL 9,4068,835 1,417 5,440 0 942
Windmill Village North Sarasota FL 9,069 1,523 5,063 0 580
Windmill Village South Sarasota FL 5,563 1,106 3,162 0 311
Five Seasons Cedar Rapids IA 0 1,053 5,361 0 (1,440)
Holiday Village, IA Sioux City IA 0 313 3,744 0 351
Golf Vistas Monee IL 0 2,843 4,719 0 3,529
Willow Lake Estates Elgin IL 21,392 6,138 21,033 0 1,953
Burns Harbor Estates Chesterton IN 0 916 2,909 0 1,469
Oak Tree Village Portage IN 6,092 0 0 569 3,465
Windsong Indianapolis IN 0 1,482 6,509 0 (1,916)
Pheasant Ridge Mt. Airy MD 0 376 1,779 0 356
Creekside Wyoming MI 0 1,109 3,646 0 (19)
Camelot Acres Burnsville MN 0 1,778 6,577 0 (901)
Casa Village Billings MT 8,040 1,011 3,109 181 1,913
Del Rey Albuquerque NM 0 1,926 5,800 0 677
Bonanza Las Vegas NV 9,988 908 2,643 0 613
Boulder Cascade Las Vegas NV 7,878 2,995 12,413 0 (2,756)1,226
GROSS AMOUNT CARRIED
AT CLOSE OF PERIODGross Amount Carried
at Close of
Period 12/31/01
------------------------
DEPRECIABLE ACCUMULATED DATE OF
REAL ESTATE LAND PROPERTY TOTAL DEPRECIATION ACQUISITION03
------------------------------
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 1,479 1,829 (176)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 4,009 5,098 (518)4,088 5,177 (905) 1998
Lake Fairways 6,075 18,944 25,019 (4,500)N. Ft. Myers FL 6,110 19,510 25,620 (5,849) 1994
Lake Haven Dunedin FL 1,135 4,810 5,945 (2,645)6,058 7,193 (3,060) 1983
Lakewood Village Melbourne FL 1,862 6,012 7,874 (1,537)6,184 8,046 (1,984) 1994
Landings 2,446 7,920 10,366 (1,068)Lighthouse Pointe Port Orange FL 2,469 8,299 10,768 (1,730) 1998
Mid-Florida Lakes Leesburg FL 5,997 23,318 29,315 (5,489)24,919 30,916 (7,209) 1994
Oak Bend Ocala FL 850 3,177 4,027 (853)3,422 4,272 (1,110) 1993
Pickwick Port Orange FL 2,803 8,916 11,719 (1,161)9,344 12,147 (1,831) 1998
Pine Lakes 6,306 19,349 25,655 (4,505)N. Ft. Myers FL 6,327 19,890 26,217 (5,887) 1994
Sherwood Forest Kissimmee FL 4,852 16,793 21,645 (2,048)18,127 22,979 (3,404) 1998
Sherwood Forest RV ParkResort Kissimmee FL 3,438 4,257 7,695 (506)4,908 8,346 (877) 1998
Silk Oak Clearwater FL 1,670 5,064 6,734 (184) 2002
Southern Palms Eustis FL 2,169 6,897 9,066 (654)7,355 9,524 (1,381) 1998
Spanish Oaks Ocala FL 2,250 7,431 9,681 (2,003)7,769 10,019 (2,551) 1993
Oaks at Countrywood 771 2,701 3,472 (285)Plant City FL 846 3,838 4,684 (549) 1998
The Heritage 1,687 6,417 8,104 (1,657)N. Ft. Myers FL 1,784 7,401 9,185 (2,191) 1993
The Lakes at Countrywood 2,414 7,713 10,127 (226)Plant City FL 2,377 7,838 10,215 (766) 2001
The Meadows, FL Palm Beach FL 3,229 10,090 13,319 (824)10,958 14,187 (1,695) 1999
Gardens
Toby's Arcadia FL 1,093 3,280 4,373 (9) 2003
Windmill Manor 2,152 6,999 9,151 (939)Bradenton FL 2,153 7,183 9,336 (1,350) 1998
Windmill Village --- Ft. Myers N. Ft. Myers FL 1,417 6,382 7,799 (3,575)6,666 8,083 (4,108) 1983
Windmill Village North 1,523 5,643 7,166 (3,230) 1983
Windmill Village South 1,106 3,473 4,579 (2,025) 1983
Five Seasons 1,053 3,921 4,974 (579) 1998
Holiday Village, IA 313 4,095 4,408 (2,074) 1986
Golf Vistas 2,843 8,248 11,091 (1,071) 1997
Willow Lake Estates 6,138 22,986 29,124 (5,432) 1994
Burns Harbor Estates 916 4,378 5,294 (1,236) 1993
Oak Tree Village 569 3,465 4,034 (1,268) 1987
Windsong 1,482 4,593 6,075 (621) 1998
Pheasant Ridge 376 2,135 2,511 (1,198) 1988
Creekside 1,109 3,627 4,736 (481) 1998
Camelot Acres 1,778 5,676 7,454 (761) 1998
Casa Village 1,192 5,022 6,214 (2,398) 1983
Del Rey 1,926 6,477 8,403 (1,883) 1993
Bonanza 908 3,256 4,164 (1,806) 1983
Boulder Cascade 2,995 9,657 12,652 (1,183) 1998
S-4
SCHEDULE III
MANUFACTURED HOME COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 20012003
(AMOUNTS IN THOUSANDS)
COSTS CAPITALIZED
SUBSEQUENT TO
INITIAL COST TO ACQUISITION
COMPANY (IMPROVEMENTS)
------------------------ ----------------------
DEPRECIABLE DEPRECIABLE
REAL ESTATE LOCATION ENCUMBRANCES LAND PROPERTY LAND PROPERTYCosts
Capitalized
Subsequent to
Initial Cost to Acquisition
Company (Improvements)
------------------- -------------------
Depreciable Depreciable
Real Estate Location Encumbrances Land Property Land Property
- ----------- ------------------------ ------------ -------- ----------- ------ -------------------------------------------------------------------------------------------------------------------------------
Winds of St. Armands North
(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 IA 0 313 3,744 0 457
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 11,040 1,011 3,109 181 2,421
Del Rey Albuquerque NM 0 1,926 5,800 0 721
Bonanza Las Vegas NV 4,742 908 2,643 0 787
Boulder Cascade Las Vegas NV 8,980 2,995 9,020 0 794
Cabana Las Vegas NV 8,4259,363 2,648 7,989 0 174259
Flamingo West Las Vegas NV 010,788 1,730 5,266 0 6881,201
Villa Borega Las Vegas NV 7,4707,170 2,896 8,774 0 186
Brook Gardens Lackawanna NY 0 3,828 10,310 0 1,099273
Greenwood Village Manorville NY 017,698 3,667 9,414 485 2,814484 3,433
Falcon Wood Village Eugene OR 45,200 1,112 3,426 0 109164
Quail Hollow Fairview OR 0 0 3,249 0 102161
Shadowbrook Clackamas OR 06,320 1,197 3,693 0 102125
Mt. Hood Village Welches OR 0 1,817 5,733 0 (308)
Green Acres Breinigsville PA 16,01413,839 2,680 7,479 0 2,1492,502
Fun n Sun RV Park San Benito TX 0 2,533 0 417 9,609
Tropic Winds Harlingen TX 0 8,4141,221 3,809 0 82
All Seasons Salt Lake City UT 03,491 510 1,623 0 163207
Westwood Village Farr West UT 07,591 1,346 4,179 0 1,0301,107
Meadows of Chantilly Chantilly VA 027,284 5,430 16,440 0 1,6273,091
Kloshe Illahee Federal Way WA 6,4696,222 2,408 7,286 0 83
Independence Hill Morgantown WV 0 299 898 0 259
College Heights Consolidated
(18 properties) Various 65,914 17,045 71,382 0 493
Management Business Chicago IL 0 0 436 0 7,542
-------- -------- -------- ------ -------
$589,954 $269,795 $871,001 $2,076 $95,266
======== ======== ======== ====== =======209
GROSS AMOUNT CARRIED
AT CLOSE OF PERIODGross Amount Carried
at Close of
Period 12/31/01
------------------------
DEPRECIABLE ACCUMULATED DATE OF
REAL ESTATE LAND PROPERTY TOTAL DEPRECIATION ACQUISITION03
------------------------------
Depreciable Accumulated Date of
Real Estate Location Land Property Total Depreciation Acquisition
- ----------- -------- ----------- ---------- ------------ ---------------------------------------------------------------------------------------------------------------------------------
Winds of St. Armands North
(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 IA 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 5,530 6,722 (2,865) 1983
Del Rey Albuquerque NM 1,926 6,521 8,447 (2,365) 1993
Bonanza Las Vegas NV 908 3,430 4,338 (2,091) 1983
Boulder Cascade Las Vegas NV 2,995 9,814 12,809 (1,961) 1998
Cabana Las Vegas NV 2,648 8,163 10,811 (2,075)8,248 10,896 (2,648) 1994
Flamingo West Las Vegas NV 1,730 5,954 7,684 (1,416)6,467 8,197 (1,861) 1994
Villa Borega Las Vegas NV 2,896 8,960 11,856 (1,315)9,047 11,943 (1,945) 1997
Brook Gardens 3,828 11,409 15,237 (1,575) 1998
Greenwood Village 4,152 12,228 16,380 (1,482)Manorville NY 4,151 12,847 16,998 (2,156) 1998
Falcon Wood Village Eugene OR 1,112 3,535 4,647 (512)3,590 4,702 (772) 1997
Quail Hollow Fairview OR 0 3,351 3,351 (490)3,410 3,410 (737) 1997
Shadowbrook Clackamas OR 1,197 3,795 4,992 (577)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 9,628 12,308 (4,016)9,981 12,661 (4,718) 1988
Fun n Sun RV Park 2,533 8,414 10,947 (1,155)San Benito TX 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 1,786 2,296 (274)1,830 2,340 (421) 1997
Westwood Village Farr West UT 1,346 5,209 6,555 (745)5,286 6,632 (1,161) 1997
Meadows of Chantilly Chantilly VA 5,430 18,067 23,497 (4,707)19,531 24,961 (6,053) 1994
Kloshe Illahee Federal Way WA 2,408 7,369 9,777 (1,072) 1997
Independence Hill 299 1,157 1,456 (450) 1990
College Heights Consolidated
(18 properties) 17,045 71,875 88,920 (8,387) 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 0 7,978 7,978 (5,700)0 436 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
-------- -------- ---------- ---------
$271,871 $966,267 $1,238,138 $(211,878)
======== ======== ========== =========------------------------------------------------
$282,803 $1,032,293 1,301,505 ($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, 2001.2003.
(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, 2001.2003.
(5) All Properties were acquired, except for Country Place Village, which was
constructed.
S-5S-6
SCHEDULE III
MANUFACTURED HOME COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 20012003
(AMOUNTS IN THOUSANDS)
The changes in total real estate for the years ended December 31, 2001,
20002003, 2002 and
19992001 were as follows:
2003 2002 2001 2000 1999
---------- ---------- ----------
Balance, beginning of year....year ................. $1,296,007 $1,238,138 $1,218,176
$1,264,343 $1,237,431
Acquisitions(1)............. ......................... 12,116 107,138 17,770
(4,581) 12,496
Improvements................ 23,140 16,261 16,700Improvements ............................. 20,960 24,491 23,188
Dispositions(2) and other... (20,948) (57,847) (2,284)other ............... (13,987) (73,760) (20,996)
---------- ---------- ----------
Balance, end of year..........year ....................... $1,315,096 $1,296,007 $1,238,138 $1,218,176 $1,264,343
========== ========== ==========
- ---------------
(1) Acquisitions for the year ended December 31, 2000 include return of escrow
proceeds.
(2) Dispositions for 20002002 include 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, 2001, 20002003,
2002 and 19992001 were as follows:
2003 2002 2001 2000 1999
-------- -------- --------
Balance, beginning of year....year .................... $238,098 $211,878 $181,580
$150,757 $118,021
Depreciation expense........expense ........................ 39,409 37,188 35,205 35,548 35,020
Dispositions and other......other ...................... (5,010) (10,968) (4,907) (4,725) (2,284)
-------- -------- --------
Balance, end of year..........year .......................... $272,497 $238,098 $211,878 $181,580 $150,757
======== ======== ========
S-6S-7