Form 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the transition period ____________________ to _____________________ Commission File Number 0-13130 United Mobile Homes, Inc. (Exact name of registrant as specified in its charter) New Jersey 22-1890929 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification number) 125 Wyckoff Road, Eatontown, New Jersey 07724 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (732) 389-3890 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock $.10 par value 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 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 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 X . Based upon the assumption that directors and executive officers of the registrant are not affiliates of the registrant, the aggregate market value of the voting stock of the registrant held by nonaffiliates of the registrant at March 12, 1998 was $79,513,139. Presuming that such directors and executive officers are affiliates of the registrant, the aggregate market value of the voting stock of the registrant held by nonaffiliates of the registrant at March 12, 1998 was $59,223,564. The number of shares outstanding of issuer's common stock as of March 12, 1998 was 6,876,812 shares. Documents Incorporated by Reference: - - Exhibits incorporated by reference are listed in Part IV, Item (a)(3). PART I ITEM I - BUSINESS General Development of Business United Mobile Homes, Inc. (the Company) owns and operates twenty-four manufactured home communities containing 5,609 sites. The communities are located in New Jersey, New York, Ohio, Pennsylvania and Tennessee. The Company was incorporated in the State of New Jersey in 1968. Its executive offices are located at 125 Wyckoff Road, Eatontown, New Jersey 07724. Its telephone number is (732) 389- 3890. Effective January 1, 1992, the Company elected to be taxed as a real estate investment trust (REIT) under Sections 856-858 of the Internal Revenue Code. The Company received from the Internal Revenue Service a favorable revenue ruling that it qualified as a REIT. The Company will not be taxed on the portion of its income which is distributed to shareholders, provided it distributes at least 95% of its taxable income, has at least 75% of its assets in real estate investments and meets certain other requirements for qualification as a REIT. Background Monmouth Capital Corporation, a publicly-owned Small Business Investment Corporation, that had owned approximately 66% of the Company's stock, spun off to its shareholders in a registered distribution three shares of United Mobile Homes, Inc. for each share of Monmouth Capital Corporation. The Company in 1984 and 1985 issued additional shares through rights offerings. The Company has been in operation for twenty-nine years, the last thirteen of which have been as a publicly-owned corporation. Narrative Description of Business The Company's primary business is the ownership and operation of manufactured home communities - leasing manufactured home spaces on a month-to-month basis to private manufactured home owners. The Company also leases homes to residents. A manufactured home community is designed to accommodate detached, single family manufactured housing units, which are produced off-site by manufacturers and delivered by truck to the site. Such dwellings, referred to as manufactured homes (which should be distinguished from travel trailers), are manufactured in a variety of styles and sizes. Manufactured homes, once located, are rarely transported to another site; typically, a manufactured home remains on site and is sold by its owner to a subsequent occupant. This transaction is commonly handled through a broker in the same manner that the more traditional single-family residence is sold. Each owner of a manufactured home leases the site on which the home is located from the Company. Manufactured homes are being accepted by the public as a viable and economically attractive alternative to common stick- built single-family housing. During the past five years, approximately one-fifth of all single-family homes built and sold in the nation have been manufactured homes. -1- The size of a modern manufactured home community is limited, as are other residential communities, by factors such as geography, topography, and funds available for development. Generally, modern manufactured home communities contain buildings for recreation, green areas, and other common area facilities, which, as distinguished from resident owned manufactured homes, are the property of the community owner. In addition to such general improvements, certain manufactured home communities include recreational improvements such as swimming pools, tennis courts and playgrounds. Municipal water and sewer services are available to some manufactured home communities, while other communities supply these facilities on site. The housing provided by the manufactured home community, therefore, includes not only the manufactured dwelling unit (owned by the resident), but also the physical community framework and services provided by the manufactured home community. The community manager interviews prospective residents, ensures compliance with community regulations, maintains public areas and community facilities and is responsible for the overall appearance of the community. The manufactured home community, once fully occupied, tends to achieve a stable rate of occupancy. The cost and effort in moving a home once it is located in a community encourages the owner of the manufactured home to resell his manufactured home there rather than to remove it from the community. This ability to produce relatively predictable income, together with the location of the community, its condition and its appearance, are factors in the long-term appreciation of the community. The long-term industry trend may be toward condominium conversions. A change from investor community ownership to resident ownership would enhance the value of existing manufactured home communities. All of the Company's communities are located in areas of the country that have not yet accepted this concept. Condominium conversion is a long-term possibility and has no impact on the Company's current operations. Investment and Other Policies of the Company The Company may invest in improved and unimproved real property and may develop unimproved real property. Such properties may be located throughout the United States. In the past, it has concentrated on the northeast. The Company may also invest in the securities of other REITs. The Company has no restrictions on how it finances new manufactured home communities. It may finance communities by purchase money mortgages or other financing, including first liens, wraparound mortgages or subordinated indebtedness. In connection with its ongoing activities, the Company may issue notes, mortgages or other senior securities. The Company intends to use both secured and unsecured lines of credit. The Company may issue securities for property, however, this has not occurred to date, and it may repurchase or reacquire its shares from time to time if in the opinion of the Board of Directors such acquisition is advantageous to the Company. Property Maintenance and Improvement Policies It is the policy of the Company to properly maintain, modernize, expand, and make improvements to its properties when required. The Company anticipates that renovation expenditures with respect to its present properties during 1998 will be consistent with 1997 expenditures. It is the policy of the Company to maintain adequate insurance coverage on all of its properties; and, in the opinion of the Company, all of its properties are adequately insured where such insurance is available at a reasonable cost as determined by management. -2- General Risks of Real Estate Ownership The Company's investments will be subject to the risks generally associated with the ownership of real property, including the uncertainty of cash flow to meet fixed obligations, adverse changes in national economic conditions, changes in the relative popularity (and thus the relative price) of the Company's real estate investments when compared to other investments, adverse local market conditions due to changes in general or local economic conditions or neighborhood values, changes in interest rates and in the availability of mortgage funds, costs and terms of mortgage funds, the financial conditions of residents and sellers of properties, changes in real estate tax rates and other operating expenses (including corrections of potential environmental issues as well as more stringent governmental regulations regarding the environment), governmental rules and fiscal policies including possible proposals for rent controls, as well as expenses resulting from acts of God, uninsured losses and other factors which are beyond the control of the Company. The Company's investments are primarily in rental properties and are subject to the risk or inability to attract or retain residents with a consequent decline in rental income as a result of adverse changes in local real estate markets or other factors. Competition for Manufactured Home Community Investments The Company will be competing for manufactured home community investments with numerous other real estate entities, such as individuals, corporations, real estate investment trusts and other enterprises engaged in real estate activities, possibly including certain affiliates of the Company. In many cases, the competing concerns may be larger and better financed than the Company, making it difficult for the Company to secure new manufactured home community investments. Competition among private and institutional purchasers of manufactured home community investments has increased substantially in recent years, with resulting increases in the purchase price paid for manufactured home communities and consequent higher fixed costs. Environmental, Regulatory and Energy Problems The availability of suitable investments and the cost of construction and operation of manufactured home communities in which the Company may invest may be adversely affected by legislative, regulatory, administrative and enforcement action at the local, state and national levels in the areas, among others, of housing and environmental controls. In addition to possible increasingly restrictive zoning regulations and related land use controls, such restrictions may relate to air, ground and water quality standards, wetlands regulations, noise pollution and indirect environmental impacts such as increased motor vehicle activity. The Company owns and operates 11 manufactured home communities which either have their own waste water treatment facility, water distribution system, or both. At these locations, the Company is subject to compliance of monthly, quarterly and yearly testing for contaminants as outlined by the individual state's Department of Environmental Protection Agencies. The Company must also comply with certain Federal Environmental Protection Agency Regulations which may be more stringent than the state and local governmental regulations. The costs of such testing are included in the Company's operating expenses. As of the date of this report, there are no enforcement actions pending by any federal, state or local environmental agencies and management believes that the Company is in compliance with all such regulations. -3- Currently, the Company is not subject to radon or asbestos monitoring requirements. In its normal course of business, the Company does not incur costs related to local or state zoning issues. However, zoning regulations often restrict expansion of the Company's communities, but allow continuing operation of existing communities. Rent control affects only two of the Company's manufactured home communities which are in New Jersey and has resulted in a slower growth of earnings from these properties. Number of Employees On March 12, 1998, the Company had approximately 90 employees, including Officers. During the year, the Company hires approximately 20 part-time and full-time temporary employees as lifeguards, grounds keepers and for emergency repairs. -4- ITEM 2 - PROPERTIES United Mobile Homes, Inc. is engaged in the ownership and operation of manufactured home communities located in New Jersey, New York, Ohio, Pennsylvania and Tennessee. The Company owns twenty-four manufactured home communities. The following is a brief description of the properties owned by the Company: Number 1997 Current of Average Rent Per Name of Community Sites Occupancy Month Per Site Allentown 414 86% $209 4912 Raleigh-Millington Rd. Memphis, TN 38128 Brookview Village 133 85% $285 Route 9N Greenfield Center, NY 12833 Cedarcrest 283 99% $325 1976 North East Avenue Vineland, NJ 08360 Cranberry Village 201 95% $285 201 North Court Mars, PA 16046 Cross Keys Village 133 97% $232 Old Sixth Avenue Rd. RD #1 Duncansville, PA 16635 D & R Village 244 96% $322 Route 146, RD 13 Clifton Park, NY 12065 Edgewood Estates 218 80% $190 700 Edgewood Estates Apollo, PA 15613 Fairview Manor 197 91% $315 2110 Mays Landing Rd. Millville, NJ 08360 Forest Park Village 252 96% $251 724 Slate Avenue Cranberry Twp., PA 16066 Heather Highlands 457 71% $188 109 S. Main Street Pittston, PA 18640 -5- Number 1997 Current of Average Rent Per Name of Community Sites Occupancy Month Per Site Highland Estates 229 88% $312 60 Old Route 22 Kutztown, PA 19530 Kinnebrook 212 92% $312 Route 17-B Monticello, NY 12701 Lake Sherman Village 210 97% $232 7227 Beth Avenue, SW Navarre, OH 44662 Memphis Mobile City 168 86% $193 3894 N. Thomas Street Memphis, TN 38127 Oxford Village 224 100% $326 2 Dolinger Drive West Grove, PA 19390 Pine Ridge Village 137 97% $281 147 Amy Drive Carlisle, PA 17013 Port Royal Village 402 88% $206 400 Patterson Lane Belle Vernon, PA 15012 River Valley Estates 208 82% $177 2066 Victory Rd. Marion, OH 43302 Sandy Valley Estates 364 94% $209 801 First, Route #2 Magnolia, OH 44643 Southwind Village 250 95% $248 435 E. Veterans Highway Jackson, NJ 08527 Spreading Oaks Village 153 92% $147 7140-29 Selby Road Athens, OH 45701 Waterfalls Village 202 100% $303 3450 Howard Road Hamburg, NY 14075 Woodlawn Village 157 97% $400 Route 35 Eatontown, NJ 07724 Wood Valley 161 91% $173 1493 N. Whetstone River Rd. Caledonia, OH 43314 -6- Occupancy rates are very stable with little year-to- year changes once the community is filled (generally 90% or greater occupancy). It is the Company's experience that, once home is set up in the community, it is seldom moved. The home if sold, is sold on-site to a new owner. Residents generally rent on a month-to-month basis. Some residents have one-year leases. Southwind Village and Woodlawn Village (both in New Jersey) are the only communities subject to local rent control laws. There are 14 sites at Sandy Valley which are under a consent order with the Federal Government. This order provides that, as these sites become vacant, they cannot be reused. The restrictions on use were known at the time of purchase, and the item is not material to the operation of Sandy Valley Estates. In connection with the operation of its 5,609 sites, the Company operates approximately 350 rental units. These are homes owned by the Company and rented to residents. The Company engages in the rental of manufactured homes primarily in areas where the communities have existing vacancies. The rental homes produce income on both the home and for the site which might otherwise be non-income producing. The Company sells the older rental homes when the opportunity arises. The Company has approximately 700 sites in various stages of engineering/construction. Due to the difficulties involved in the approval and construction process, it is difficult to predict the number of sites which will be completed in a given year. During 1997, 10 sites were completed at D & R Village, 37 at Fairview Manor, 37 at Highland Estates, 37 at Sandy Valley and 25 at River Valley. Significant Properties The Company operates approximately $61,000,000 (at original cost) in manufactured home properties. These consist of 24 separate manufactured home communities and related equipment and improvements. There are 5,609 sites in the 24 communities. No one community constitutes more than 10% of the total assets of the Company. Port Royal Village with 402 sites, Sandy Valley Estates with 364 sites, Cedarcrest with 283 sites, Allentown with 414 sites and Heather Highlands with 457 sites are the larger properties. The following is a description of these properties: PORT ROYAL VILLAGE The Company acquired Port Royal Village in 1984. This is a 402-space manufactured home community located in Belle Vernon, Pennsylvania. The Company believes this to be a sound acquisition for the following reasons: (a) the community is well- maintained with city water and its own sewer plant, as well as a swimming pool and community building; (b) the community has approximately 88% occupancy; and (c) the community generates substantial revenues and net operating income. Management believes that this community is a successful and valuable manufactured home community. SANDY VALLEY ESTATES The Company acquired Sandy Valley Estates in 1985. This is a 364-space manufactured home community located in Magnolia, Ohio. The Company believes this to be an excellent community because (a) the community is well-maintained with municipal sewer; (b) the community has its own well system; (c) the community has approximately 94% occupancy; and (d) the community generates revenues with an average monthly rental of $209 per site, which rents are competitive with the other manufactured home communities in the area. The Company believes that it is an excellent investment. -7- CEDARCREST On July 15, 1986 the Company paid $760,000 to acquire 94.05% of the partnership interest in a limited partnership that owned a 283-space manufactured home community located in Vineland, New Jersey. On June 30, 1988 the Company paid $40,000 to acquire an additional 4.95% of the partnership interest, bringing the Company's total ownership to 99%. During 1989 the Company acquired the remaining 1% interest. The Company believes this to be an excellent community for the following reasons: (a) the community is well-maintained, (b) the community has municipal sewer and water service; and (c) the community is 99% occupied. Rents average $325 per month per site and they are competitive with other communities in the area. ALLENTOWN On September 15, 1986 the Company paid $850,000 to all of the limited partners to acquire 97% of the partnership interests in a limited partnership that owned a 414-space manufactured home community located in Memphis, Tennessee. Royal Green, Inc., the General Partner of this partnership, retained its 3% interest in the partnership until January, 1990 at which time the Company purchased the 3% interest for $25,500. The Company believes this to be a sound investment for the following reasons: (a) the property is well maintained; (b) the community has municipal sewer and water service; and (c) rents are competitive with other manufactured home communities in the area. Current occupancy is approximately 86%. This is an increase from the prior year occupancy of 82%. The Company is continuing its effort to bring occupancy to 90% or higher. In the future, the Company anticipates that it will be able to increase occupancy. The community has the potential to be fully occupied in one of the nicest areas in Memphis. HEATHER HIGHLANDS On January 30, 1992, the Company acquired an 88.36% interest in a limited partnership operating a 457-space manufactured home community located in Pittston, Pennsylvania. This partnership has partners who are also officers, directors and/or shareholders of the Company. Mr. Eugene Landy, Chairman of the Board, retained the remaining 11.64% limited partnership interest. The purchase price was approximately $2,500,000. This purchase was based on an independent appraisal of fair market value. In January 1995, the Company purchased the remaining 11.64% partnership interest for $132,600. This price per unit was the same price previously paid to non-affiliated sellers. The Company anticipates that the community will ultimately have 415 sites since the use of double wide units reduce the total number of available sites. The Company believes this to be a sound investment for the following reasons: (a) the property is well maintained; (b) the community has municipal sewer and water service; and (c) rents are competitive with other manufactured home communities in the area. Mortgages on Properties The Company has mortgages on various properties. The maturity dates of these mortgages range from the year 2000 to 2003. Interest varies from fixed rates of 7.5% to 10.5%. The aggregate balances of these mortgages total $20,111,023 at December 31, 1997. (For additional information, see Part IV, Item 14(a)(1)(vi), Note 5 of the Notes to Consolidated Financial Statements - Notes and Mortgages Payable). -8- ITEM 3 - LEGAL PROCEEDINGS Legal proceedings are incorporated herein by reference and filed as Part IV, Item 14(a)(1)(vi), Note 12 of the Notes to Consolidated Financial Statements - Legal Matters. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of 1997 to a vote of security holders through the solicitation of proxies or otherwise. -9- PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company became publicly owned on January 3, 1985. As of January 5, 1994, shares of the Company were traded on the American Stock Exchange (symbol UMH). The per share range of high and low quotes for the Company's stock for each quarterly period is as follows: 1997 1996 1995 HIGH LOW HIGH LOW HIGH LOW First Quarter 13-5/8 11-1/4 14 9-5/8 7-3/4 7-1/8 Second Quarter 12-1/4 10-7/8 13-3/8 10-1/4 8-7/16 7-1/2 Third Quarter 12-3/8 11-1/4 12-1/2 10-1/2 10-1/8 8-1/4 Fourth Quarter 12-3/16 11-1/4 12-1/2 11 10-1/2 9-5/8 On March 12, 1998 the closing price of the Company's stock was 11- 9/16. As of December 31, 1997, there were approximately 1,150 holders of the Company's common stock based on the number of record owners. For the years ended December 31, 1997, 1996 and 1995, total dividends paid by the Company amounted to $4,620,296 or $.70 per share, $3,630,891 or $.60 per share and $2,954,847 or $.525 per share, respectively. On December 9, 1997, the Company declared a dividend of $.175 per share to be paid on March 16, 1998 to shareholders of record February 17, 1998. Future dividend policy will depend on the Company's earnings, capital requirements, financial condition, availability and cost of bank financing and other factors considered relevant by the Board of Directors. The Company elected REIT status beginning in 1992. As a REIT, the Company must pay out at least 95% of its taxable income in the form of a cash distribution to shareholders. -10- ITEM 6 - SELECTED FINANCIAL DATA December 31, 1997 1996 1995 1994 1993 Income Statement Data: Rental and Related Income $15,423,111 14,533,218 $13,332,961 $12,318,467 $11,521,677 Income from Community Operations 8,606,017 8,311,469 7,449,168 6,864,080 6,407,937 (Loss) Gain on Sales of Investment Property and Equipment (10,546) 333,647 5,758 59,941 17,022 Net Income 4,197,258 3,729,526 2,491,581 2,141,279 1,346,219 Net Income Per Share-Basic and Diluted .63 .61 .44 .40 .26 ............................................................................... Balance Sheet Data: Total Assets $43,599,259 $35,875,206 $29,758,397 $25,404,015 $25,274,685 Mortgages Payable 20,111,023 17,351,030 17,707,635 15,637,325 17,936,230 Shareholders' Equity 20,830,541 16,426,145 10,290,487 7,721,783 6,229,453 ................................................................................ Average Number of Shares Outstanding 6,617,479 6,072,637 5,639,455 5,365,359 5,071,554 Funds from Operations * $ 6,324,536 $ 5,693,631 $ 4,358,765 $ 3,880,507 $3,145,859 Cash Dividends Per Share .70 .60 .525 .425 .325 * Defined as net income, excluding gains (or losses) from sales of depreciable assets, plus depreciation. Includes gain on sale of land of $290,303 in 1996. Funds from Operations do not replace net income determined in accordance with generally accepted accounting principles (GAAP) as a measure of performance or net cash flows as a measure of liquidity. Funds from Operations is not a GAAP measure of operating performance and should be considered as a supplemental measure of operating performance used by real estate investment trusts. -11- ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Revenue and Expense 1997 vs. 1996 Rental and related income increased from $14,533,218 for the year ended December 31, 1996 to $15,423,111 for the year ended December 31, 1997 primarily due to rental increases to residents, increased occupancy, expansions and the acquisition of a new community. During 1997, the Company was able to obtain rent increases of $5.00 to $15.00 per month on most of its occupied sites. Overall occupancy rates are satisfactory with only eight manufactured home communities experiencing vacancies over ten percent. Some of these vacancies are the result of expansions completed toward the end of the year. The Company has completed a 37 site expansion at Sandy Valley Estates, a 37 site expansion at Fairview Manor, a 37 site expansion at Highland Estates, a 10 site expansion at D&R Village and a 25 site expansion at River Valley. The Company is also evaluating further expansion at selected communities in order to increase the number of available sites. Some of these communities are in various stages of expansion. The Company has also purchased a 202 site community in 1997 located in Hamburg, New York. Community operating expenses increased from $6,221,749 for the year ended December 31, 1996 to $6,817,094 for the year ended December 31, 1997 primarily as a result of the acquisition of an additional community and increased expenses such as advertising, associated with the expansions. The Company's income from community operations continues to show steady growth rising from $8,311,469 in 1996 to $8,606,017 in 1997. General and administrative expenses decreased from $1,512,623 in 1996 to $1,356,736 in 1997 primarily as a result of a decrease in professional fees. Interest expense decreased from $1,434,875 in 1996 to $1,123,445 in 1997. This was primarily as a result of lower average principal balances outstanding and the capitalization of interest during the fourth quarter of 1997 of $250,000 relating to community expansions. Interest and dividend income increased from $93,579 in 1996 to $240,700 in 1997 due to purchases of securities available for sale during 1996 and 1997. Depreciation expense increased from $2,007,449 in 1996 to $2,116,732 in 1997 due primarily to the addition of a new community. Other expenses remained relatively stable in 1997 and 1996. Loss/gain on sales of investment property and equipment decreased from a gain of $333,647 in 1996 to a loss of $10,546 in 1997, primarily due to the sale of 5.5 acres of vacant land at a gain of approximately $290,000 in 1996. -12- For the year ended December 31, 1997, the Company reported net income of $4,197,258 as compared to net income of $3,729,526 for the year ended December 31, 1996. The Company is currently experiencing modest inflation. Modest inflation is believed to have a favorable impact on the Company's financial performance. With modest inflation, the Company believes that it can increase rents sufficiently to match increases in operating expenses. High rates of inflation (more than 10%) could result in an inability to raise rents to meet rising costs and could create political problems such as the imposition of rent controls. The Company anticipates continuing profits in 1998. Revenue and Expense 1996 vs. 1995 Rental and related income increased from $13,332,961 for the year ended December 31, 1995 to $14,533,218 for the year ended December 31, 1996 primarily due to rental increases to residents, increased occupancy and the acquisition of two new communities. During 1996, the Company was able to obtain rent increases of $5.00 to $16.00 per month on most of its occupied sites. Overall occupancy rates are satisfactory with only six manufactured home communities experiencing vacancies over ten percent. The Company purchased two communities in 1996. The Company also completed a 27 site expansion at River Valley Estates. Community operating expenses increased from $5,883,793 for the year ended December 31, 1995 to $6,221,749 for the year ended December 31, 1996 primarily as a result of the acquisitions of two additional communities. Community operating expenses decreased from 44% to 43% of gross revenues. The Company's income from community operations continued to show steady growth rising from $7,449,168 in 1995 to $8,311,469 in 1996. General and administrative expenses increased from $1,228,850 in 1995 to $1,512,623 in 1996 primarily as a result of an increase in personnel costs. Interest expense decreased from $1,675,998 in 1995 to $1,434,875 in 1996. This was primarily as a result of a decrease in the interest rate. During 1995, the Company negotiated new long- term debt. Interest rates dropped from prime plus 1% to a fixed rate of 7.5% on a substantial portion of the Company's debt. Interest and dividend income increased from $65,999 in 1995 to $93,579 in 1996 due to purchases of securities available for sale during 1996. Depreciation expense increased from $1,872,942 in 1995 to $2,007,449 in 1996 due to the addition of two new communities. Other expenses decreased from $251,554 in 1995 to $54,222 in 1996 due to a decrease in amortization expenses. Gain on sales of investment property and equipment increased from $5,758 in 1995 to $333,647 in 1996 primarily due to the sale of 5.5 acres of vacant land at a gain of approximately $290,000. -13- Liquidity and Capital Resources As a real estate company, the Company uses funds for real estate acquisitions, real property improvements and amortization of debt incurred in connection with such acquisitions and improvements. The Company generates funds through cash flow from properties, mortgages on properties and increases in shareholder investments. The Company has liquidity available from a combination of short and long-term sources. The Company currently has mortgages payable totaling $20,111,023 secured by eight communities. The Company also has a $500,000 line of credit with Summit Bank, all of which was utilized at December 31, 1997. The Company believes that its 24 manufactured home communities have market values in excess of historical cost. Management believes that this provides significant additional borrowing capacity. Net cash provided by operating activities increased from $4,642,256 in 1995 to $5,823,597 in 1996 to $6,258,913 in 1997. Cash flow was primarily used for capital improvements, payment of dividends, purchases of securities available for sale, expansion of existing communities and purchase of a new community. The Company meets maturing mortgage obligations by using a combination of cash flow and refinancing. The dividend payments were primarily made from cash flow from operations. In addition to normal operating expenses, the Company requires cash for additional investments in manufactured home communities, capital improvements, purchase of manufactured homes for rent, scheduled mortgage amortization and dividend distributions. As a REIT, the Company must distribute at least 95% of its taxable income. The Company estimates that it will purchase in 1998 approximately 25 manufactured homes to be used as rentals for a total cost of $400,000. Management believes that these manufactured homes will each generate approximately $300 per month in rental income in addition to lot rent. Once rental homes reach 10 years old, the Company generally sells them. Capital improvements include amounts needed to meet environmental and regulatory requirements in connection with the manufactured home communities that provide water or sewer service. Excluding expansions, the Company is budgeting approximately $1,000,000 in capital improvements for 1998. The Company has a Dividend Reinvestment and Stock Purchase Plan (Plan). Cash received from the Plan is a significant additional source of liquidity and capital resources. During 1997, the Company paid $4,620,296 in dividends. Amounts received under the Plan amounted to $4,347,668. The success of the Plan resulted in a substantial improvement in the Company's liquidity and capital resources in 1997. The Company has undeveloped land which it could develop over the next several years. During 1997, approximately 150 sites were completed. In 1998, construction is expected to commence on approximately 180 sites. The Company is also exploring the utilization of vacant land for self storage or town houses. The Company continues to analyze the highest and best use of its vacant land, and uses it accordingly. In addition, the Company purchased an additional community containing 202 sites. The Company plans to continue acquiring additional manufactured home communities. The Company believes that funds generated from operations, together with the financing and refinancing of its properties, will be adequate to meet its needs over the next several years. -14- Impact of Year 2000 The Company is conducting a comprehensive review of its computer systems and third party vendors to identify the systems that could be affected by the "Year 2000" issue. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the Year 2000. This could result in system failure or miscalculations. The Company is devoting the necessary internal and external resources in the development of an implementation plan to address Year 2000. Management anticipates that all year 2000 initiatives and testing will be completed in a timely manner. Expenditures in future years are not expected to have a material impact on the Company. -15- ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data listed in Part IV, Item 14(a)(1) are incorporated herein by reference. The following is the Unaudited Selected Quarterly Financial Data: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) THREE MONTHS ENDED 1997 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 Rental & Related Income $ 3,765,720 $ 3,804,373 $ 3,862,240 $ 3,990,778 Income from Community Operations 2,235,925 2,110,522 2,061,932 2,197,638 Net Income 1,072,954 975,294 889,132 1,259,878 Net Income per Share- Basic and Diluted .16 .15 .13 .19 THREE MONTHS ENDED 1996 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 Rental & Related Income $ 3,561,274 $ 3,582,925 $ 3,671,970 $ 3,717,049 Income from Community Operations 2,025,485 2,084,359 1,968,868 2,232,757 Net Income 1,063,209 916,854 784,134 965,329 Net Income Per Share- Basic and Diluted .18 .15 .12 .16 THREE MONTHS ENDED 1995 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 Rental & Related Income $ 3,247,040 $ 3,304,765 $ 3,382,423 $ 3,398,733 Income from Community Operations 1,839,493 1,814,328 1,838,716 1,956,631 Net Income 589,940 558,878 629,741 713,022 Net Income per Share- Basic and Diluted .11 .10 .11 .12 ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -16- PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Name, Age & Principal Occupation Director Shares Owned Percent Office Held During Past Five Years Since Beneficially (1) of Stock Robert A. Anderson Vice President of The 1980 15,817 0.23% Age: 75 David Cronheim Company; Director past President of the Industrial Real Estate Brokers Association of New York and New Jersey. Ernest V. Bencivenga Financial Consultant; 1969 23,267(2) 0.34% Age: 80 Treasurer and Director Secretary/Treasurer (1961 to present) and Secretary Director (1967 to present) of Monmouth Capital Corporation; Treasurer and Director (1968 to present) of Monmouth Real Estate Investment Corporation. Anna T. Chew Certified Public Accountant; 1994 17,758(3) 0.26% Age: 39 Controller (1991 to present) and Vice President and Director (1993 to present) of Monmouth Chief Financial Real Estate Investment Corporation; Officer Controller (1991 to present) and Director Director (1994 to present) of Monmouth Capital Corporation; Senior Manager (1987 to 1991) of KPMG Peat Marwick LLP Charles P. Kaempffer Investor; Director (1970 1969 50,469(4) 0.73% Age: 60 to present) of Monmouth Director Capital Corporation; Director (1974 to present) of Monmouth Real Estate Investment Corporation; Vice Chairman and Director (1996 to present) of Community Bank of New Jersey; Director (1989 to 1996) of Sovereign Community Bank (formerly Colonial Bank) -17- Name, Age & Principal Occupation Director Shares Owned Percent Office Held During Past Five Years Since Beneficially (1) of Stock Eugene W. Landy Attorney at Law for the 1969 842,970 (5) 12.25% Age: 64 firm of Landy & Landy; Chairman of the President and Director Board and (1961 to present) of Monmouth Director Capital Corporation; President and Director (1968 to present) of Monmouth Real Estate Investment Corporation. Samuel A. Landy Attorney at Law for the 1992 242,709 (6) 3.53% Age: 37 firm of Landy & Landy; President and Director (1989 to present) of Director Monmouth Real Estate Investment Corporation; Director (1994 to present) of Monmouth Capital Corporation. Richard A. Molke Vice President of Remsco 1986 339,153 (7) 4.93% Age: 71 Associates, Inc., Director a construction firm. Eugene Rothenberg Obstetrician and 1977 81,163 (8) 1.18% Age: 65 Gynecologist; Investor Director Robert G. Sampson Investor; Director (1968 1969 131,468 (9) 1.91% Age: 72 to present) of Monmouth Real Director Estate Investment Corporation; Director (1963 to present) of Monmouth Capital Corporation,; Director (1972 to 1993) of United Jersey Bank; General Partner (1983 to present) of Sampco, Ltd., an investment group. TOTALS............. 1,744,774 25.37% -18- 1.) Beneficial ownership, as defined herein, includes common stock as to which a person has or shares voting and/or investment power as of March 14, 1997. 2.) Includes 8,865 shares held by Mr. Bencivenga's wife and 2,599 shares held in the United Mobile Homes, Inc. 401(k) Plan. 3.) Includes 12,977 shares held jointly with Ms. Chew's husband and 4,780 shares held in the United Mobile Homes, Inc. 401(k) Plan. 4.) Includes (a) 48,469 shares held as Trustee for Defined Benefit Pension Plan for which Mr. Kaempffer has power to vote and (b) 2,000 shares held by Mr. Kaempffer's wife. 5.) Includes (a) 54,855 shares held by Mr. Landy's wife, (b) 172,608 shares held by Landy Investments, Ltd. in which Mr. Landy has a beneficial interest, (c) 52,442 shares held in the Landy & Landy, Employee's Pension Plan, of which Mr. Landy is a Trustee with power to vote, and (d) 98,281 shares held in the Landy & Landy, Employees' Profit Sharing Plan, of which Mr. Landy is a Trustee with power to vote. Excludes 199,509 shares held by Mr. Landy's adult children in which he disclaims any beneficial interest. 6.) Includes (a) 23,855 shares held jointly with Mr. Samuel A. Landy's wife, (b) 13,751 in a custodial account for his sons, and (c) 4,550 shares held in the United Mobile Homes, Inc. 401(k) Plan. 7.) Includes (a) 33,870 shares owned by Mr. Molke's wife, (b) 132,849 shares in the Richard H. Molke Grantor Retained Annuity Trust dated December 21, 1992, and (c) 132,849 shares in the Louise G. Molke Grantor Retained Annuity Trust dated December 21, 1992. 8.) Includes (a) 56,878 shares held by Rothenberg Investment, Ltd. in which Dr. Rothenberg has a beneficial interest and (b) 20,173 shares held as Trustee for a Profit Sharing Plan of which Dr. Rothenberg has power to vote. 9.) Includes (a) 32,400 shares held by the Estate of Helen Haskell Sampson and (b) 48,492 shares held by Sampco, Ltd. in which he has a beneficial interest. -19- ITEM 11 - EXECUTIVE COMPENSATION Summary Compensation Table. The following Summary Compensation Table shows compensation paid by the Company for services rendered during 1997, 1996 and 1995 to the Chairman of the Board, President and Vice President. There were no other executive officers whose aggregate cash compensation exceeded $100,000: Name and Annual Compensation Principal Position Options Year Salary Bonus All Other Eugene W. Landy 50,000 1997 $ - $ - $343,850 (1) Chairman of the 50,000 1996 $ - $ - $347,350 (1) Board - 1995 $ - $ - $310,160 (1) Samuel A. Landy 25,000 1997 $181,500 $ 39,981 $ 18,880 (2) President 25,000 1996 $165,000 $ 10,846 $ 18,880 (2) 25,000 1995 $150,000 $ 15,769 $ 16,674 (2) Anna T. Chew 8,000 1997 $100,000 $ 11,846 $ 14,955 (3) Vice President 10,000 1996 $ 86,650 $ 10,333 $ 13,509 (3) Chief Financial 10,000 1995 $ 76,650 $ 10,948 $ 11,428 (3) Officer (1) Represents base compensation of $150,000 in 1997, 1996 and 1995, and a bonus of $15,000 in 1996, as well as Directors' fees and legal fees. Includes an accrual of $160,000, $160,000 and $130,000 for 1997, 1996 and 1995, respectively for pension and other benefits in accordance with Eugene W. Landy's employment contract. (2) Represents Directors' fees, fringe benefits and discretionary contributions by the Company to the Company's 401(k) Plan allocated to an account of the named executive officer. (3) Represents Directors' fees and discretionary contributions by the Company to the Company's 401(k) Plan allocated to an account of the named executive officer. -20- Stock Option Plan. The following table sets forth, for the executive officers named in the Summary Compensation Table, information regarding individual grants of stock options made during the year ended December 31, 1997: Potential Realized Value at Assumed % of Total Price Annual Rates for Options Granted to Per Expiration Option Term Name Granted Employees Share Date 5% 10% Eugene W. Landy 25,000 23% $13.375 3/17/02 $52,500 $153,800 Eugene W. Landy 25,000 23% $13.0625 12/15/02 $52,333 $151,558 Samuel A. Landy 25,000 23% $13.125 1/03/02 $50,775 $150,000 Anna T. Chew 8,000 7% $11.5 6/25/02 $25,440 $ 56,160 The following table sets forth for the executive officers named in the Summary Compensation Table, information regarding stock options outstanding at December 31, 1997: Value of Unexercised Options Number of Unexercised at Year-End Shares Value Options at Year-End Exercisable/ Name Exercised Realized Exercisable/Unexercisable Unexercisable Eugene W. Landy -0- N/A 50,000 / 50,000 $175,000 / $ -0- Samuel A. Landy -0- N/A 75,000 / 25,000 $181,250 / $ -0- Anna T. Chew 10,000 $73,750 40,000 / 8,000 $142,500 / $2,000 Compensation of Directors. The Directors receive a fee of $1,000 for each Board meeting attended. Directors also receive a fixed annual fee of $7,600, payable $1,900 quarterly. Directors appointed to house committees receive $150 for each meeting attended. Those specific committees are Compensation Committee, Audit Committee and Stock Option Committee. Employment Contracts. On December 14, 1993, the Company and Eugene W. Landy entered into an Employment Agreement under which Mr. Eugene Landy receives an annual base compensation of $150,000 plus bonuses and customary fringe benefits, including health insurance, participation in the Company's 401(k) Plan, stock options, five weeks vacation and use of an automobile. In lieu of annual increases in compensation, there will be additional bonuses voted by the Board of Directors. On severance of employment for any reason, Mr. Eugene Landy will receive severance pay of $450,000 payable $150,000 on severance and $150,000 on the first and second anniversaries of severance. If employment is terminated following a change in control of the Company, Mr. Eugene Landy will be entitled to severance pay only if actually severed either at the time of merger or subsequently. -21- In the event of disability, Mr. Eugene Landy's compensation shall continue for a period of three years, payable monthly. On retirement, Mr. Eugene Landy shall receive a pension of $50,000 a year for ten years, payable in monthly installments. In the event of death, Mr. Eugene Landy's designated beneficiary shall receive $450,000, $100,000 thirty days after death and the balance one year after death. The Employment Agreement terminates December 31, 1998. Thereafter, the term of the Employment Agreement shall be automatically renewed and extended for successive one-year periods. Effective January 1, 1996, the Company and Samuel A. Landy entered into a three-year Employment Agreement under which Mr. Samuel Landy receives an annual base salary of $165,000 for 1996, $181,500 for 1997 and $199,650 for 1998 plus bonuses and customary fringe benefits. Bonuses shall be at the discretion of the Board of Directors and shall be based on certain guidelines. Mr. Samuel Landy will also receive four weeks vacation, use of an automobile, and stock options for 25,000 shares in each year of the contract. The Company agrees to loan to Mr. Samuel Landy $100,000 at the Company's corporate borrowing rate with a 5-year maturity and a 15-year principal amortization. Additional amounts, secured by Company stock, may be borrowed at the same terms for the exercise of stock options. On severance and disability, Mr. Samuel Landy is entitled to one year's pay. Effective January 1, 1997, the Company and Anna T. Chew entered into a three-year Employment Agreement under which Ms. Chew receives an annual base salary of $100,000 for 1997, $110,000 for 1998 and $121,000 for 1999 plus bonuses and customary fringe benefits. On severance for any reason, Ms. Chew is entitled to one year's pay. In the event of disability, her salary shall continue for a period of two years. Report of Board of Directors. Overview and Philosophy The Company has a Compensation Committee consisting of two independent outside Directors. This Committee is responsible for making recommendations to the Board of Directors concerning executive compensation. The Compensation Committee takes into consideration three major factors in setting compensation. The first consideration is the overall performance of the Company. The Board believes that the financial interests of the executive officers should be aligned with the success of the Company and the financial interests of its shareholders. Increases in funds from operations, the enhancement of the Company's equity portfolio, and the success of the Dividend Reinvestment and Stock Purchase Plan all contribute to increases in stock prices thereby maximizing shareholders' return. -22- The second consideration is the individual achievements made by each officer. The Company is a small real estate investment trust (REIT). The Board of Directors is aware of the contributions made by each officer and makes an evaluation of individual performance based on their own familiarity with the officer. The final criteria in setting compensation is comparable wages in the industry. In this regard, the REIT industry maintains excellent statistics. Evaluation The Company had a satisfactory year. The stock price rose from 11-3/8 at December 31, 1996 to 11-3/4 at December 31, 1997. The Committee reviewed the progress made by Mr. Eugene W. Landy, Chairman of the Board, in expanding the Company. Mr. Eugene Landy completed the purchase of an additional community during 1997. Mr. Eugene Landy is under an employment agreement with the Company. His base compensation under this contract is $150,000 per year. (The Summary Compensation Table shows an annual compensation to Mr. Eugene Landy of $150,000 plus $33,850 in director's and other legal fees plus $160,000 accrual for pension and other benefits for a total of $343,850 in 1997.) The Committee granted Mr. Eugene Landy an option to purchase 25,000 shares for 1996 and an option to purchase 25,000 shares for 1997. Both options were granted in 1997. The Committee also reviewed the progress made by Mr. Samuel A. Landy, President. Net income and funds from operations increased by approximately 13% and 11%, respectively. Mr. Samuel Landy is under an employment agreement with the Company. His base compensation under this contract is $181,500 for 1997 and will increase to $199,650 for 1998. The Committee granted Mr. Samuel Landy a bonus of $33,000 for 1996 which was paid in 1997. COMPARATIVE STOCK PERFORMANCE. The line graph compares the total return of the Company's common stock for the last five years to the NAREIT All REIT Total Return Index published by the National Association of Real Estate Investment Trusts (NAREIT) and to the S&P 500 Index for the same period. The total return reflects stock price appreciation and dividend reinvestment for all three comparative indices. The information herein has been obtained from sources believed to be reliable, but neither its accuracy nor its completeness is guaranteed. 1992 1993 1994 1995 1996 1997 United Mobile Homes, Inc. 100 162 177 249 307 336 NAREIT All REIT 100 119 120 141 192 228 S & P 500 100 110 111 153 188 251 -23- ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT On March 12, 1998, no person owned of record, or was known by the Company to own beneficially more than five percent (5%) of the shares of the Company, except the following: Percent Name and Address Shares Owned of Title of Class of Beneficial Owner Beneficially Class Common Stock Beechmont Co., as Agent 394,400 5.74% 122 East 42nd St. New York, NY 10168 Common Stock Eugene W. Landy 842,970 12.25% 20 Tuxedo Road Rumson, NJ 07760 ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS Certain relationships and related party transactions are incorporated herein by reference to Part IV, Item 14(a)(1)(vi), Note 8 of the Notes to Consolidated Financial Statements - Related Party Transactions. -24- PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (a) (1) The following Financial Statements are filed as part of this report. Page(s) (I) Independent Auditors' Report 27 (ii) Consolidated Balance Sheets as of December 31, 1997 28 and 1996 (iii) Consolidated Statements of Income for the years 29 ended December 31, 1997, 1996 and 1995 (iv) Consolidated Statements of Shareholders' Equity for 30 the years ended December 31, 1997, 1996 and 1995 (v) Consolidated Statements of Cash Flows for the years 31 ended December 31, 1997, 1996 and 1995 (vi) Notes to Consolidated Financial Statements 32-43 (a) (2) The following Financial Statement Schedule for the years ended December 31, 1997, 1996 and 1995 is filed as part of this report. (i) Schedule III - Real Estate and Accumulated 44 Depreciation All other schedules are omitted for the reason that they are not required, are not applicable, or the required information is set forth in the financial statements or notes thereto. -25- PART IV (a) (3) The Exhibits set forth in the following index of Exhibits are filed as a part of this Report. Exhibit No. Description (3) Articles of Incorporation and By-Laws: Articles of Incorporation and By-Laws, Certificate of Incorporation and Amendments thereto are incorporated by reference to the Company's Registration Statement No. 2-92896-NY, and Amendments thereto, filed with the SEC on August 22, 1984. (10) Material Contracts: (a) Stock Option Plan is incorporated by reference to the Company's Proxy Statement dated April 25, 1994 filed with the SEC April 27, 1994. (b) 401(k) Plan Document and Adoption Agreement effective April 1, 1992 is incorporated by reference to that filed with the Company's 1992 Form 10-K filed with the SEC on March 9, 1993. (c) Employment contract with Mr. Eugene W. Landy dated December 14, 1993 is incorporated by reference to that filed with the Company's 1993 Form 10-K filed with the SEC on March 28, 1994. (d) Employment contract with Mr. Ernest V. Bencivenga dated November 9, 1993 is incorporated by reference to that filed with the Company's 1993 Form 10-K filed with the SEC on March 28, 1994. (e) Employment contract with Mr. Samuel A. Landy effective January 1, 1996 is incorporated by reference to that filed with the Company's 1995 Form 10-K filed with the SEC on March 28, 1996. (f) Employment contract with Ms. Anna T. Chew effective January 1, 1997 is incorporated by reference to that filed with the Company's 1996 Form 10-K filed with the SEC on March 27, 1997. (21) Subsidiaries of the Registrant: The Company operates through eight wholly- owned multiple subsidiaries carrying on the same line of business. The parent company of these subsidiaries is the Registrant. The line of business is the operation of manufactured home communities. (23) Consent of KPMG Peat Marwick LLP (a)(3)(b) Reports of Form 8-K On December 19, 1997, the Company filed Form 8-K to report the acquisition of Waterfalls Village. -26- INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders United Mobile Homes, Inc.: We have audited the consolidated financial statements of United Mobile Homes, Inc. as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Mobile Homes, Inc. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Short Hills, New Jersey March 10, 1998 /s/KPMG Peat Marwick LLP -27- UNITED MOBILE HOMES, INC. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND 1996 1997 1996 - ASSETS - INVESTMENT PROPERTY AND EQUIPMENT Land $ 6,351,506 $ 5,927,136 Site and Land Improvements 43,927,856 35,983,165 Buildings and Improvements 2,592,125 1,930,345 Rental Homes and Accessories 5,339,857 4,907,832 ---------- ---------- Total Investment Property 58,211,344 48,748,478 Equipment and Vehicles 2,416,402 2,163,179 ---------- ---------- Total Investment Property and Equipment 60,627,746 50,911,657 Accumulated Depreciation (22,918,677) (21,024,163) ---------- ---------- Net Investment Property and Equipment 37,709,069 29,887,494 ---------- ---------- OTHER ASSETS Cash and Cash Equivalents 191,319 1,195,095 Securities Available for Sale 3,547,236 1,441,037 Notes and Other Receivables 678,280 507,199 Unamortized Financing Costs 172,694 160,744 Prepaid Expenses 109,415 284,993 Land Development Costs 1,191,246 2,398,644 ----------- ---------- Total Other Assets 5,890,190 5,987,712 ----------- ---------- TOTAL ASSETS $ 43,599,259 $ 35,875,206 =========== ========== -LIABILITIES AND SHAREHOLDERS' EQUITY- LIABILITIES: MORTGAGES PAYABLE $ 20,111,023 $ 17,351,030 ---------- ---------- OTHER LIABILITIES Accounts Payable 222,474 206,426 Loans Payable 578,973 -0- Accrued Liabilities and Deposits 1,477,855 1,520,641 Tenant Security Deposits 378,393 370,964 ---------- ---------- Total Other Liabilities 2,657,695 2,098,031 ---------- ---------- Total Liabilities 22,768,718 19,449,061 ---------- ---------- SHAREHOLDERS' EQUITY: Common Stock - $.10 par value per share, 10,000,000 shares authorized, 6,865,312 and 6,433,676 issued and outstanding as of December 31, 1997 and 1996, respectively 686,531 643,368 Additional Paid-In Capital 20,572,786 16,275,434 Unrealized Holding Gains on Securities Available for Sale 239,017 76,501 Accumulated Deficit (667,793) (569,158) ---------- ---------- Total Shareholders'Equity 20,830,541 16,426,145 ---------- ---------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 43,599,259 $ 35,875,206 ========== ========== See Accompanying Notes to Consolidated Financial Statements -28- UNITED MOBILE HOMES, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 1997 1996 1995 Rental and Related Income $ 15,423,111 $ 14,533,218 $ 13,332,961 Community Operating Expenses 6,817,094 6,221,749 5,883,793 ---------- ---------- ---------- Income from Community Operations 8,606,017 8,311,469 7,449,168 Other Expenses (Income): General and Administrative 1,356,736 1,512,623 1,228,850 Interest Expense 1,123,445 1,434,875 1,675,998 Interest and Dividend Income ( 240,700) ( 93,579) ( 65,999) Depreciation Expense 2,116,732 2,007,449 1,872,942 Other 42,000 54,222 251,554 ----------- ---------- ---------- Income Before (Loss) Gain on Sales of Assets 4,207,804 3,395,879 2,485,823 (Loss) Gain on Sales of Assets ( 10,546) 333,647 5,758 ---------- ----------- ----------- Net Income $ 4,197,258 $ 3,729,526 $ 2,491,581 ========== =========== =========== Net Income Per Share - Basic and Diluted $ .63 $ .61 $ .44 ========== =========== =========== Weighted Average Shares Outstanding: Basic 6,617,479 6,072,637 5,639,455 Diluted 6,679,994 6,155,018 5,693,011 See Accompanying Notes to Consolidated Financial Statements -29- UNITED MOBILE HOMES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 Unrealized Holding Gains on Additional Securities Common Stock Paid-In Available Accumulated Number Amount Capital For Sale Deficit Balance 12/31/94 5,496,163 $549,616 $7,839,960 $ -0- $( 667,793) Common Stock Issued with the Dividend Reinvestment and Stock Purchase Plan 354,468 35,447 2,996,523 -0- -0- Distributions -0- -0- -0- (463,266) (2,491,581) Net Income -0- -0- -0- -0- 2,491,581 --------- ------- --------- ------- --------- Balance 12/31/95 5,850,631 585,063 10,373,217 -0- ( 667,793) Common Stock Issued with the Dividend Reinvestment and Stock Purchase Plan 526,045 52,605 5,619,417 -0- -0- Common Stock Issued through the Exercise of Stock Options 57,000 5,700 282,000 -0- -0- Distributions -0- -0- -0- -0- (3,630,891) Net Income -0- -0- -0- -0- 3,729,526 Unrealized Holding Gains on Securities Available for Sale -0- -0- -0- 76,501 -0- --------- ------- ---------- ------ --------- Balance 12/31/96 6,433,676 643,368 16,275,434 76,501 ( 569,158) Common Stock Issued with the Dividend Reinvestment and Stock Purchase Plan 382,636 38,263 4,309,405 -0- -0- Common Stock Issued Through the Exercise of Stock Options 49,000 4,900 312,350 -0- -0- Distributions -0- -0- ( 324,403) (4,295,893) Net Income -0- -0- -0- -0- 4,197,258 Unrealized Holding Gains on Securities Available for Sale -0- -0- -0- 162,516 -0- -------- ------- -------- ------- -------- Balance 12/31/97 6,865,312 $686,531 $20,572,786 $ 239,017 $( 667,793) ========= ======= ========== ======= ========== See Accompanying Notes to Consolidated Financial Statements -30- UNITED MOBILE HOMES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 1997 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 4,197,258 $ 3,729,526 $ 2,491,581 Depreciation 2,116,732 2,007,449 1,872,942 Amortization 42,000 54,222 251,554 Gains on Sales of Securities ( 92,811) -0- -0- Available for Sale (Loss) Gain on Sales of Investment Property and Equipment 10,546 ( 333,647) ( 5,758) Changes in Operating Assets and Liabilities - Notes and Other Receivables ( 171,081) 40,580 129,475) Prepaid Expenses 175,578 ( 12,289) 13,444 Accounts Payable 16,048 9,069 45,809 Accrued Liabilities & Deposits ( 42,786) 276,955 76,955 Tenant Security Deposits 7,429 51,732 25,204 --------- --------- --------- Net Cash Provided by Operating Activities 6,258,913 5,823,597 4,642,256 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Manufactured Home Communities (4,236,000) (3,435,506) ( 1,810,906) Acquisition of Minority Interest -0- -0- ( 132,600) Purchase of Investment Property and Equipment (2,537,589) (2,217,809) ( 1,778,402) Proceeds from Sales of Investment Property and Equipment 332,615 636,731 288,494 Additions to Land Development (2,300,481) (2,247,827) ( 955,546) Purchase of Securities Available for Sale (2,743,605) (1,364,536) -0- Proceeds from Sales of Securities Available for Sale 892,733 -0- -0- --------- --------- --------- Net Cash Used by Investing Activities (10,592,327) (8,628,947) ( 4,388,960) ---------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Mortgages and Loans 3,150,000 1,300,000 18,700,000 Net Proceeds from (Repayments of Short-Term Borrowings 578,973 -0- ( 500,000) Principal Payments of Mortgages and Loans ( 390,007) (1,656,605) (16,629,690 Financing Costs on Debt ( 53,950) ( 15,863) 214,994) Proceeds from Dividend Reinvestment and Stock Purchase Plan 2,522,815 4,219,869 1,729,159 Proceeds from Exercise of Stock Options 317,250 288,500 -0- Dividends Paid ( 2,795,443) (2,178,738) ( 1,652,036) ----------- --------- ---------- Net Cash Provided by Financing Activities 3,329,638 1,957,163 1,432,439 ----------- --------- ---------- NET (DECREASE) INCREASE IN CASH ( 1,003,776) ( 848,187) 1,685,735 CASH & CASH EQUIVALENTS - BEGINNING 1,195,095 2,043,282 357,547 --------- --------- --------- CASH & CASH EQUIVALENTS - ENDING $ 191,319 $1,195,095 $ 2,043,282 ========== ========= ========== See Accompanying Notes to Consolidated Financial Statements -31- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ELECTION TO BE TAXED AS A REAL ESTATE INVESTMENT TRUST Effective January 1, 1992, United Mobile Homes, Inc. (the Company) elected to be taxed as a Real Estate Investment Trust (REIT) under Sections 856-858 of the Internal Revenue Code. The Company will not be taxed on the portion of its income which is distributed to shareholders, provided it distributes at least 95% of its taxable income, has at least 75% of its assets in real estate investments and meets certain other requirements for qualification as a REIT. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF THE BUSINESS - The Company owns and operates twenty- four manufactured home communities containing 5,609 sites. The communities are located in New Jersey, New York, Ohio, Pennsylvania and Tennessee. These manufactured home communities are listed by trade names as follows: MANUFACTURED HOME COMMUNITY LOCATION Allentown Memphis, Tennessee Brookview Village Greenfield Center, New York Cedarcrest Vineland, New Jersey Cranberry Village Cranberry Twp., Pennsylvania Cross Keys Village Duncansville, Pennsylvania D & R Village Clifton Park, New York Edgewood Estates Apollo, Pennsylvania Fairview Manor Millville, New Jersey Forest ParK Village Cranberry Township, Pennsylvania Heather Highlands Inkerman, Pennsylvania Highland Estates Kutztown, Pennsylvania Kinnebrook Monticello, New York Lake Sherman Village Navarre, Ohio Memphis Mobile City Memphis, Tennessee Oxford Village West Grove, Pennsylvania Pine Ridge Village Carlisle, Pennsylvania Port Royal Village Belle Vernon, Pennsylvania River Valley Estates Marion, Ohio Sandy Valley Estates Magnolia, Ohio Southwind Village Jackson, New Jersey Spreading Oaks Village Athens, Ohio Waterfalls Village Hamburg, New York Woodlawn Village Eatontown, New Jersey Wood Valley Caledonia, Ohio BASIS OF PRESENTATION - The consolidated financial statements of the Company include all of its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. USE OF ESTIMATES - In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as contingent assets and liabilities as of the dates of the consolidated balance sheets and revenue and expenses for the years then ended. Actual results could differ significantly from these estimates and assumptions. -32- INVESTMENT PROPERTY AND EQUIPMENT AND DEPRECIATION - Property and equipment are carried at cost. Depreciation for Sites and Building (15 to 27.5 years) is computed principally on the straight-line method over the estimated useful lives of the assets. Depreciation of Improvements to Sites and Buildings, Rental Homes and Equipment and Vehicles (3 to 27.5 years) is computed principally on the straight-line method. Land Development Costs are not depreciated until they are put in use, at which time they are capitalized as Sites or Site Improvements. Maintenance and repairs are charged to income as incurred and improvements are capitalized. The costs and related accumulated depreciation of property sold or otherwise disposed of are removed from the accounts and any gain or loss is reflected in the current year's results of operations. If there is an event or change in circumstances that indicates that the basis of an investment property may not be recoverable, management assesses the possible impairment of value through evaluation of the estimated future cash flows of the property, on an undiscounted basis, as compared to the property's current carrying value. If a property is determined to be impaired, it will be recorded at fair value. UNAMORTIZED FINANCING COSTS - Legal fees and loan processing fees for new and restructured mortgages are being amortized over the life of the related debt. Amortization expenses charged to Other Expenses for the years ended December 31, 1997, 1996 and 1995 were $42,000, $54,222 and $251,554, respectively. CASH AND CASH EQUIVALENTS - Cash and cash equivalents include certificates of deposit and bank repurchase agreements with maturities of 90 days or less. SECURITIES AVAILABLE FOR SALE - The Company's securities are classified as available-for-sale and are carried at fair value. Gains or losses on the sale of securities are based on identifiable cost and are accounted for on a trade date basis. Unrealized holding gains and losses are excluded from earnings and reported as a separate component of Shareholders' Equity until realized. MINORITY INVESTMENTS - The Company consolidates the results of certain operations that have minority interests. On January 30, 1992, the Company acquired an 88.36% interest in a limited partnership. On February 3, 1995, the Company acquired the remaining 11.64% interest in this limited partnership. REVENUE RECOGNITION - The Company derives its income from the rental of manufactured home sites. The Company also owns approximately 350 rental units which are rented to residents. Revenue is recognized on the accrual basis. NET INCOME PER SHARE - Effective December 31, 1997, the Company adopted the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share." All prior years' net income per share have been restated in accordance with the Statement. Basic net income per share is calculated by dividing net income by the weighted- average number of common shares outstanding during the period (6,617,479, 6,072,637 and 5,639,455 in 1997, 1996 and 1995, respectively). Diluted net income per share is calculated by dividing net income by the weighted-average number of common shares outstanding plus the weighted-average number of net shares that would be issued upon exercise of stock options pursuant to the treasury stock method (6,679,994, 6,155,018 and 5,693,011 in 1997, 1996 and 1995, respectively (See Note 6). Options in the amount of 62,515, 82,381 and 53,556 for 1997, 1996 and 1995, respectively, are included in the diluted weighted average shares outstanding. STOCK OPTION PLANS - Stock option plans are accounted for under the intrinsic value based method as prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees". Included in these Notes to Consolidated Financial Statements are the pro forma disclosures required by SFAS No. 123, "Accounting for Stock-Based Compensation," which assumes the fair value based method of accounting had been adopted. -33- NOTE 3 - INVESTMENT PROPERTY AND EQUIPMENT On January 10, 1996, the Company acquired Wood Valley, a 161- space manufactured home community located in Caledonia, Ohio. The purchase price, including closing costs, totaled $2,013,706. On March 28, 1996, the Company sold 5.5 acres of excess vacant land at a sales price of $385,000 for a net gain of $290,303. On August 1, 1996, the Company acquired Spreading Oaks Village, a 153-space manufactured home community located in Athens, Ohio. This community was purchased from a partnership whose partners are also officers, directors and shareholders of the Company. The purchase price, including closing costs totaled $1,421,800. This purchase was based on an independent appraisal of fair market value. On October 11, 1996, the Company purchased approximately sixty-five acres of vacant land adjacent to one of its communities in Vineland, New Jersey for a purchase price of $390,000. On December 19, 1997, the Company acquired Waterfalls Village, a 202-space manufactured home community located in Hamburg, New York. The purchase price, including closing costs, totaled $4,236,000. The Company is currently conducting an expansion program at a number of its communities. During 1997, 146 spaces were added to existing communities. The following is a summary of accumulated depreciation by major classes of assets: December 31, 1997 December 31, 1996 Site & Land Improvements $ 19,018,397 $ 17,528,736 Buildings & Improvements 1,129,522 1,026,567 Rental Homes & Accessories 1,251,986 1,099,786 Equipment & Vehicles 1,518,772 1,369,074 ---------- ---------- Total Accumulated Depreciation $ 22,918,677 $ 21,024,163 ========== ========== -34- NOTE 4 - SECURITIES AVAILABLE FOR SALE The following is a summary of securities available for sale at December 31, 1997 and 1996: 1997 1996 Market Market Cost Value Cost Value Equity Securities: Monmouth Real Estate Investment * Corporation (203,550 shares and 72,433 shares at December 31, 1997 and 1996, respectively) $1,183,693 $1,323,078 $ 415,587 $ 416,486 Monmouth Capital Corporation * (21,269 shares and 18,195 shares at December 31, 1997 and 1996, respectively) 54,036 61,148 44,561 45,488 Other Equity Securities 995,480 1,021,635 308,428 362,625 Debt Securities 1,075,010 1,141,375 595,960 616,438 --------- --------- --------- --------- Total $3,308,219 $3,547,236 $1,364,536 $1,441,037 ========= ========= ========= ========= * Related Company - See Note 8. Gross unrealized gains and losses on the above securities amounted to $240,470 and $1,453, respectively, at December 31, 1997 and $76,501 and $-0-, respectively at December 31, 1996. The maturity dates on debt securities range from 2001 to 2003. NOTE 5 - NOTES AND MORTGAGES PAYABLE The following is a summary of mortgages payable at December 31, 1997 and 1996: Interest Mortgages Due Rate 1997 1996 Date D & R Village 09-01-00 8.35% $ 1,790,191 $ 1,815,738 Sandy Valley 05-01-00 10.50% 862,238 878,944 Waterfalls Village 01-01-03 7.625% 3,150,000 -0- Various 5 properties) 12-01-00 7.50% 14,308,594 14,656,348 ---------- ---------- TOTAL MORTGAGES PAYABLE $20,111,023 $17,351,030 ========== ========== At December 31, 1997 and 1996, mortgages are collateralized by real property with a carrying value of $20,584,479 and $15,038,668, respectively, before accumulated depreciation and amortization. Interest costs amounting to $250,000 was capitalized during the fourth quarter of 1997 in connection with the Company's expansion program. -35- UNSECURED LINE OF CREDIT The Company has a $500,000 unsecured line of credit with Summit Bank, all of which was utilized at December 31, 1997. The interest rate on this line of credit is prime plus 1/2%. This line of credit expired on December 20, 1997 but was extended and increased to $1,000,000 in January 1998. RECENT FINANCING On December 19, 1997, the Company entered into a $3,150,000 mortgage payable to Summit Bank. The interest rate on this mortgage is fixed at 7.625%. This mortgage loan is due on January 1, 2003. Proceeds of this mortgage were used to purchase Waterfalls Village (See Note 3). The aggregate principal payments of all mortgages payable are scheduled as follows: 1998 - $ 487,728 1999 - 527,032 2000 - 16,160,692 2001 - 83,431 2002 - 90,114 Thereafter - 2,762,026 ---------- Total - $ 20,111,023 ========== NOTE 6 - EMPLOYEE STOCK OPTIONS Effective January 1, 1984, the shareholders approved a Stock Option Plan for officers and key employees. This plan expired during 1994. As of December 31, 1997 and 1996, 14,000 and 41,000 shares, respectively, of stock options previously granted remained outstanding under this plan. On May 26, 1994, the shareholders approved and ratified the Company's 1994 Stock Option Plan authorizing the grant to officers and key employees of options to purchase up to 750,000 shares of common stock. Options may be granted any time up to December 31, 2003. No option shall be available for exercise beyond ten years. All options are exercisable after one year from the date of grant. The option price shall not be below the fair market value at date of grant. Cancelled or expired options are added back to the "pool" of shares available under the plan. -36- A summary of the status of the Company's stock option plans as of December 31, 1997, 1996 and 1995 and changes during the years then ended are as follows: 1997 1996 1995 Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at Beginning of year 278,000 $ 8.31 272,000 7.08 160,000 Granted 107,500 12.69 63,000 10.70 112,000 8.29 Exercised ( 49,000 6.47 ( 57,000) 5.06 -0- -0- Outstanding at ------- ------- ------- End of year 336,500 9.97 278,000 8.31 272,000 7.08 ======= ======= ======= Options exercisable at end of year 229,000 215,000 160,000 Weighted-average Fair value of Options granted During the year 1.99 2.08 1.61 The Company elected to continue following APB Opinion No. 25 in accounting for its stock option plans and, accordingly, no compensation cost has been recognized. Had compensation cost been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts as follows: 1997 1996 1995 Net Income As reported $4,197,258 $3,729,526 $2,491,581 Pro forma 4,066,414 3,603,216 2,349,981 Net Income Per Share - Basic As reported .63 .61 .44 and Diluted Pro forma .61 .59 .41 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997, 1996 and 1995: dividend yield of 5 percent; expected volatility of 25 percent; risk-free interest rates of 6.24 percent in 1997 and 6.5 percent in 1996 and 1995; and expected lives of five years. -37- The following is a summary of stock options outstanding as of December 31, 1997: Date of Number of Number of Option Expiration Grant Employees Shares Price Date 07/27/93 2 4,000 * 5.625 07/27/98 09/27/93 1 10,000 * 6.50 09/27/98 05/31/94 1 25,000 * 9.125 05/31/99 10/18/94 6 29,000 * 7.125 10/18/99 01/05/95 2 75,000 * 8.25 01/05/00 08/03/95 4 14,000 * 8.375 08/03/00 08/17/95 2 15,000 * 8.375 08/17/00 01/10/96 1 25,000 * 10.625 01/10/01 06/27/96 6 32,000 * 10.75 06/27/01 01/03/97 1 25,000 13.125 01/03/02 03/17/97 1 25,000 13.375 03/17/02 06/25/97 8 32,500 11.50 06/25/02 12/15/97 1 25,000 13.0625 12/15/02 ------- 336,500 ======= * Exercisable As of December 31, 1997, there were 405,500 shares available for grant under these plans. NOTE 7 - 401(K) PLAN All full-time employees who are over 21 years old and have completed one year of service (as defined) are eligible for the Company's 401(k) Plan (Plan). Under this Plan, an employee may elect to defer his/her compensation (up to a maximum of 18%) and have it contributed to the Plan. Employer contributions to the Plan are at the discretion of the Company. During 1997, 1996 and 1995, the Company made matching contributions to the Plan of up to 50% of the first 6% of employee salary. This amounted to $33,218, $36,445 and $34,056 for 1997, 1996 and 1995, respectively. NOTE 8 - RELATED PARTY TRANSACTIONS AND OTHER MATTERS TRANSACTIONS WITH AFFILIATED PARTNERSHIPS Royal Green Ltd., a partnership in which Mr. Eugene W. Landy has a significant ownership interest, owns 30 homes located in Allentown in Memphis, Tennessee. The Company charges Royal Green, Ltd. market rent on each occupied unit. TRANSACTIONS WITH MONMOUTH REAL ESTATE INVESTMENT CORPORATION During 1997 and 1996, the Company purchased shares of Monmouth Real Estate Investment Corporation (MREIC) common stock primarily through its Dividend Reinvestment and Stock Purchase Plan (See Note 4). There are five Directors of the Company who are also Directors and shareholders of MREIC. -38- TRANSACTIONS WITH MONMOUTH CAPITAL CORPORATION AND THE MOBILE HOME STORE, INC. During 1997 and 1996, the Company purchased shares of Monmouth Capital Corporation (MCC) common stock primarily through its Dividend Reinvestment and Stock Purchase Plan (See Note 4). Six directors of the Company are also directors and shareholders of MCC. The Company receives rental income from The Mobile Home Store, Inc. (MHS), a wholly-owned subsidiary of MCC. MHS sells and finances the sales of manufactured homes. MHS pays the Company market rent on sites where MHS has a home for sale. Total site rental income from MHS amounted to $117,709, $98,167 and $40,423, respectively for the years ended December 31, 1997 and 1996 and 1995. Effective April 1, 1995, the Company and MHS entered into an agreement whereby MHS leases space from the Company to be used as sales lots, at market rates, at most of the Company's communities. Total rental income relating to these leases amounted to $90,000, $90,000 and $67,500 for the years ended December 31, 1997, 1996 and 1995, respectively. As a REIT, the Company cannot be in the business of selling manufactured homes for profit. During 1997, 1996 and 1995, the Company had approximately $134,000, $64,000 and $180,000 respectively, of rental homes that were sold to MHS at book value. During 1997, 1996 and 1995, the Company purchased from MHS at its cost 7, 13 and 10 new homes, respectively totaling $198,374, $298,025 and $196,952, respectively to be used as rental homes. DIRECTORS', MANAGEMENT AND LEGAL FEES During the years ended December 31, 1997, 1996 and 1995, Directors', management, and legal fees to Mr. Eugene W. Landy and the law firm of Landy & Landy amounted to $183,850, $187,350 and $180,160, respectively. OTHER MATTERS During 1994, the Company entered into a three-year employment agreement and a five-year employment agreement with two of its executive officers. The agreements provide for base compensation, bonuses and fringe benefits, in addition to specified severance and retirement benefits. The Company is accruing these benefits over the terms of the agreements. Included in general and administrative expense for the years ended December 31, 1997, 1996 and 1995 were $167,500, $174,050 and $155,650, respectively, relating to these agreements. -39- NOTE 9 - DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN The Company has a Dividend Reinvestment and Stock Purchase Plan (DRIP). Under the terms of the DRIP, shareholders who participate may reinvest all or part of their dividends in additional shares of the Company at approximately 95% of the market price. Shareholders may also purchase additional shares at approximately 95% of their market price by making optional cash payments. Generally, dividend reinvestments and purchases of shares are made quarterly on March 15, June 15, September 15 and December 15. Amounts received and shares issued in connection with the DRIP for the years ended December 31, 1997, 1996 and 1995 were as follows: 1997 1996 1995 Amounts Received/Dividends $4,347,668 $5,672,022 $3,031,970 Reinvested Number of Shares Issued 382,636 526,045 354,468 NOTE 10 - DISTRIBUTIONS The following dividends were paid to shareholders during the years ended December 31, 1997, 1996 and 1995: 1997 1996 1995 Quarter Ended Amount Per Share Amount Per Share Amount Per Share March 31 $1,129,043 $ .175 $ 877,906 $ .15 $687,020 $ .125 June 30 1,144,741 .175 894,971 .15 696,425 .125 September 30 1,163,882 .175 915,813 .15 707,884 .125 December 31 1,182,630 .175 942,201 .15 863,518 .150 --------- ---- --------- ----- --------- ----- $4,620,296 $ .70 $3,630,891 $ .60 $2,954,847 $ .525 ========= ==== ========= ===== ========= ===== Total distributions to shareholders for 1997 amounted to $4,620,296, or $.70 per share, of which $.608 per share was taxed as ordinary income, $.012 per share was taxed as a capital gain and $.08 per share was a return of capital. This amount does not include the dividend resulting from the discount on shares purchased through the Company's Dividend Reinvestment and Stock Purchase Plan. On December 9, 1997, the Company declared a dividend of $.175 per share to be paid on March 16, 1998 to shareholders of record February 17, 1998. NOTE 11 - FEDERAL INCOME TAXES The Company elected to be taxed as a REIT. As the Company has distributed all of its income currently, no provision has been made for Federal income or excise taxes for the years ended December 31, 1997, 1996 and 1995. -40- NOTE 12 - LEGAL MATTERS There are no lawsuits pending against the Company that management believes will have a material effect on the financial condition or results of operations of the Company. The Company is a Defendant in various personal injury cases, all of which are being defended by our insurance company. The Company was also a Defendant in a case Jackson Township v. Southwind Village. The Township alleged that the Company was wrongfully refusing to comply with the Township ordinance requiring operation of the community as a "senior citizen" manufactured home community. The Company believed that under Federal law, the Company cannot exclude families from the community. On June 15, 1995, the Company was granted a Summary Judgment Order allowing families into Southwind Village in Jackson, New Jersey. In January 1996, the Company was awarded $70,000 for legal fees and other damages. The Company was a Plaintiff in a lawsuit, United Mobile Homes, Inc., et al v. Bondy Oil, Inc., et al. The Company spent approximately $200,000 in 1990 and 1991 to remedy contamination to soil from home heating oil. United Mobile Homes, Inc. seeks to recover that money from the oil suppliers. This case was settled for $80,000 in January 1996. The Company was a Plaintiff in a lawsuit, Heather Highlands v. Jenkins Township Sanitary Authority. Jenkins Township Sanitary Authority constructed public sewers and attempted to extract connection fees from the Company of over $150,000. The Company challenged the legality of the proposed fees. The Company settled this matter and has paid Jenkins Township Sanitary Authority $104,760 plus interest for a total of $111,042. On May 13, 1997 an engineering firm, Stults and Associates, Inc. (Stults) obtained a judgment against the Company in the amount of $59,071. The Company has refused to pay Stults since the Company believes that the work was not done pursuant to the contract. The Company filed a counterclaim against Stults which was dismissed by the trial judge. The Company and Stults continue to appeal. The Company seeks $200,000 from Stults based on the dismissed counterclaim. Stults seeks attorneys fees and additional fees by way of appeal. Management believes that the outcome of this lawsuit will not have a material effect on the financial condition or results of operations of the Company. On January 17, 1996, a home owned by a resident at one of the Company's communities was damaged due to a propane gas explosion in the resident's home. This explosion damaged other surrounding resident owned homes. Along with the gas company, the Company was named in a lawsuit by a resident. This suit is in discovery stages and is being defended by our insurance company. -41- NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS The Company is required to disclose certain information about fair values of financial instruments, as defined in SFAS No. 107, "Disclosures About Fair Value of Financial Instruments." Limitations Estimates of fair value are made at a specific point in time, based upon, where available, relevant market prices and information about the financial instrument. Such estimates do not include any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. For a portion of the Company's financial instruments, no quoted market value exists. Therefore, estimates of fair value are necessarily based on a number of significant assumptions (many of which involve events outside the control of management). Such assumptions include assessments of current economic conditions, perceived risks associated with these financial instruments and their counterparties, future expected loss experience and other factors. Given the uncertainties surrounding these assumptions, the reported fair values represent estimates only and, therefore, cannot be compared to the historical accounting model. Use of different assumptions or methodologies is likely to result in significantly different fair value estimates. The fair value of cash and cash equivalents and notes receivables approximates their current carrying amounts since all such items are short-term in nature. The fair value of securities available for sale is based upon quoted market values (See Note 4). The fair value of mortgages payable approximates their current carrying amounts since such amounts payable are at a current market rate of interest. NOTE 14 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1997, FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (Statement 130). Statement 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Under Statement 130, comprehensive income is divided into net income and other comprehensive income. Other comprehensive income includes items previously recorded directly in equity, such as unrealized gains or losses on securities available for sale. Statement 130 is effective for interim and annual periods beginning after December 15, 1997. Comparative financial statements provided for earlier periods are required to be reclassified to reflect application of the provisions of the Statement. The adoption of Statement 130 is not expected to have a material impact on the Company's consolidated financial statements. -42- NOTE 15 - SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the years ended December 31, 1997, 1996 and 1995 for interest was $1,373,445, $1,434,875 and $1,701,454, respectively. During the years ended December 31, 1997, 1996 and 1995, land development costs of $3,507,879, $518,058 and $843,448, respectively were transferred to investment property and equipment and placed in service. During the year ended December 31, 1995, the Company purchased Edgewood Estates. This purchase calls for an additional $200,000 payment if certain conditions are met. This amount, which is included in accrued liabilities, has been added to investment property and equipment. During the years ended December 31, 1997, 1996 and 1995, the Company had dividend reinvestments of $1,824,853, $1,452,153 and $1,302,811, respectively which required no cash transfers. -43- UNITED MOBILE HOMES, INC. SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997 Column A Column B Column C Column D Year of Acquisition Site, Land Capitalization & Building Subsequent to Description Encumbrances Land Improvements Acquisition Memphis, TN $ -0- $250,000 $ 2,569,101 $ 888,611 Greenfield Center, NY -0- 37,500 232,547 1,405,698 Vineland, NJ (3) 320,000 1,866,323 602,844 Cranberry Township, PA -0- 181,930 1,922,931 170,674 Duncansville, PA -0- 60,774 378,093 270,140 Clifton Park, NY 1,790,191 391,724 704,021 550,318 Apollo, PA -0- 670,000 1,336,600 391,585 Millville, NJ -0- 216,000 1,166,517 1,688,009 Zelienople, PA -0- 75,000 977,225 994,080 Inkerman, PA -0- 572,500 2,151,569 1,462,149 Kutztown, PA -0- 145,000 1,695,041 1,678,571 Monticello, NY -0- 235,600 1,402,572 1,327,221 Navarre, OH -0- 290,000 1,457,673 612,109 Memphis, TN -0- 78,435 810,477 1,126,160 West Grove, PA (3) 175,000 990,515 820,168 Carlisle, PA -0- 37,540 198,321 636,676 Belle Vernon, PA (3) 150,000 2,491,796 1,183,947 Marion, OH -0- 236,000 785,293 1,297,114 Magnolia, OH 862,238 270,000 1,941,430 1,344,360 Jackson, NJ (3) 100,095 602,820 1,275,526 Athens, OH -0- 67,000 1,326,800 37,638 Hamburg, NY 3,150,000 424,000 3,812,000 -0- Caledonia, OH -0- 260,000 1,753,206 49,038 Eatontown, NJ (3) 157,421 280,749 129,422 ---------- --------- ---------- ---------- 5,802,429 $5,401,519 $32,853,620 $19,942,058 ========= ========== ========== Various 14,308,594(3) ---------- $20,111,023 ========== -44- UNITED MOBILE HOMES, INC. SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997 Column A Column E(1)(2) Column F(1) Gross Amount at Which Carried at 12/31/97 Site, Land & Building Accumulated Description Land Improvements Total Depreciation Memphis, TN $ 250,000 $ 3,457,712 $ 3,707,712 $1,803,530 Greenfield Center, NY 37,500 1,638,245 1,675,745 848,426 Vineland, NJ 408,206 2,380,961 2,789,167 1,256,095 Cranberry Twp., PA 181,930 2,093,605 2,275,535 1,159,102 Duncansville, PA 60,774 648,233 709,007 511,510 Clifton Park, NY 391,724 1,254,339 1,646,063 845,116 Apollo, PA 670,000 1,728,185 2,398,185 164,564 Millville, NJ 631,137 2,439,389 3,070,526 901,311 Zelienople, PA 75,000 1,971,305 2,046,305 1,461,576 Inkerman, PA 572,500 3,613,718 4,186,218 631,318 Kutztown, PA 422,839 3,095,773 3,518,612 685,260 Monticello, NY 318,472 2,646,921 2,965,393 753,401 Navarre, OH 290,000 2,069,782 2,359,782 801,223 Memphis, TN 78,435 1,936,637 2,015,072 796,686 West Grove, PA 175,000 1,810,683 1,985,683 1,322,141 Carlisle, PA 145,473 727,064 872,537 645,685 Belle Vernon, PA 150,000 3,675,743 3,825,743 2,739,576 Marion, OH 236,000 2,082,407 2,318,407 615,045 Magnolia, OH 270,000 3,285,790 3,555,790 1,506,171 Jackson, NJ 100,095 1,878,346 1,978,441 1,368,785 Athens, OH 67,000 1,364,438 1,431,438 68,153 Hamburg, NY 424,000 3,812,000 4,236,000 -0- Caledonia, OH 260,000 1,802,244 2,062,244 126,841 Eatontown, NJ 135,421 432,171 567,592 377,409 --------- ---------- ---------- ---------- $6,351,506 $51,845,691 $58,197,197 $21,388,924 ========= ========== ========== ========== -44a- UNITED MOBILE HOMES, INC. SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997 Column A Column G Column H Column I Date of Date Depreciable Description Construction Acquired Life Memphis, TN prior to 1980 1986 3 to 27.5 Greenfield Center, NY prior to 1970 1977 3 to 27.5 Vineland, NJ 1973 1986 3 to 27.5 Cranberry Twp., PA 1974 1986 5 to 27.5 Duncansville, PA 1961 1979 3 to 27.5 Clifton Park, NY 1972 1978 3 to 27.5 Apollo, PA prior to 1980 1995 5 to 27.5 Millville, NJ prior to 1980 1985 3 to 27.5 Zelienople, PA prior to 1980 1982 3 to 27.5 Inkerman, PA 1970 1992 5 to 27.5 Kutztown, PA 1971 1979 5 to 27.5 Monticello, NY 1972 1988 5 to 27.5 Navarre, OH prior to 1980 1987 5 to 27.5 Memphis, TN 1955 1985 3 to 27.5 West Grove, PA 1971 1974 5 to 27.5 Carlisle, PA 1961 1969 3 to 27.5 Belle Vernon, PA 1973 1983 3 to 27.5 Marion, OH 1950 1986 3 to 27.5 Magnolia, OH prior to 1980 1985 5 to 27.5 Jackson, NJ 1969 1969 3 to 27.5 Athens, OH prior to 1980 1996 5 to 27.5 Hamburg, NY prior to 1980 1997 27.5 Caledonia, OH prior to 1980 1996 5 to 27.5 Eatontown, NJ 1964 1978 3 to 27.5 -44b- /------FIXED ASSETS-----/ (1) Reconciliation: 12/31/97 12/31/96 12/31/95 Balance - Beginning of Year $ 48,733,757 $ 43,300,828 $ 39,505,503 ---------- ---------- ---------- Additions: Acquisitions 4,236,000 3,407,006 2,006,600 Improvements 5,628,858 2,410,284 2,237,114 Depreciation -0- -0- -0- ---------- ---------- ---------- Total Additions 9,864,858 5,817,290 4,243,714 ---------- ---------- ---------- Deletions 401,418 384,361 448,389 ---------- ---------- ---------- Balance - End of Year $ 58,197,197 $ 48,733,757 $ 43,300,828 ========== ========== ========== /--ACCUMULATED DEPRECIATION---/ 12/31/97 12/31/96 12/31/95 Balance - Beginning of Year $ 19,646,362 $ 18,013,841 $ 16,544,208 Additions: Acquisitions -0- -0- -0- Improvements -0- -0- -0- Depreciation 1,812,903 1,743,042 1,649,255 ---------- ---------- ---------- Total Additions 1,812,903 1,743,042 1,649,255 ---------- ---------- ---------- Deletions 70,341 110,521 179,622 ---------- ---------- ---------- Balance - End of Year $ 21,388,924 $ 19,646,362 $ 18,013,841 ========== ========== ========== (2) The aggregate cost for Federal tax purposes approximates historical cost. (3) Represents one mortgage note payable secured by five properties. -44c- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNITED MOBILE HOMES, INC. By:/s/Eugene W. Landy EUGENE W. LANDY Chairman of the Board Dated: March 16, 1998 Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been duly signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Title Date /s/Eugene W. Landy Chairman of the Board and March 16, 1998 EUGENE W. LANDY Director /s/Samuel A. Landy President and March 16, 1998 SAMUEL A. LANDY Director /s/Anna T. Chew Vice President and March 16, 1998 ANNA T. CHEW Chief Financial Officer and Director /s/Ernest V. Bencivenga Secretary/Treasurer and March 16, 1998 ERNEST V. BENCIVENGA Director /s/Robert J. Anderson Director March 16, 1998 ROBERT J. ANDERSON /s/Charles P. Kaempffer Director March 16, 1998 CHARLES P. KAEMPFFER /s/Richard H. Molke Director March 16, 1998 RICHARD H. MOLKE /s/Eugene Rothenberg Director March 16, 1998 EUGENE ROTHENBERG /s/Robert G. Sampson Director March 16, 1998 ROBERT G. SAMPSON -45- EXHIBIT 23 INDEPENDENT ACCOUNTANTS' CONSENT The Board of Directors United Mobile Homes, Inc. We consent to incorporation by reference in the Registration Statement (No. 333-13053) on Form S-8 of our report dated March 10, 1998, relating to the consolidated balance sheets of United Mobile Homes, Inc. as of December 31, 1997 and 1996 and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three- year period ended December 31, 1997 and the related schedule, which report appears in the December 31, 1997 annual report on Form 10-K of United Mobile Homes, Inc. /s/KPMG Peat Marwick LLP KPMG Peat Marwick LLP Short Hills, New Jersey March 16, 1998