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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-11718
MANUFACTURED HOME COMMUNITIES, INC.
(Exact name of registrant as specified in its Charter)
MARYLAND 36-3857664
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
TWO NORTH RIVERSIDE PLAZA, SUITE 800, CHICAGO, ILLINOIS 60606
(Address of principal executive offices) (Zip Code)
(312) 279-1400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
21,892,609 shares of Common Stock as of July 31, 2000.
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MANUFACTURED HOME COMMUNITIES, INC.
TABLE OF CONTENTS
PART I - FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
----
Consolidated Balance Sheets as of June 30, 2000 (unaudited)
and December 31, 1999............................................. 3
Consolidated Statements of Operations for the quarters
ended June 30, 2000 and 1999 (unaudited).......................... 4
Consolidated Statements of Cash Flows for the quarters
ended June 30, 2000 and 1999 (unaudited).......................... 5
Notes to Consolidated Financial Statements.......................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................ 15
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.............................................. 21
ITEM 6. Exhibits and Reports on Form 8-K............................... 21
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MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2000 AND DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2000 1999
(UNAUDITED)
---------- ----------
ASSETS
Investment in real estate:
Land......................................... $ 271,822 $ 285,337
Land improvements............................ 831,386 876,923
Buildings and other depreciable property..... 104,370 102,083
---------- ----------
1,207,578 1,264,343
Accumulated depreciation..................... (164,442) (150,757)
---------- ----------
Net investment in real estate.............. 1,043,136 1,113,586
Cash and cash equivalents....................... 21,898 6,676
Notes receivable................................ 3,244 4,284
Investment in and advances to affiliates........ 16,202 11,689
Investment in joint ventures.................... 9,401 9,501
Rents receivable .............................. 1,142 1,338
Deferred financing costs, net................... 5,883 5,042
Prepaid expenses and other assets............... 11,994 8,222
---------- ----------
Total assets................................. $1,112,900 $1,160,338
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable....................... $ 558,380 $ 513,172
Unsecured term loan.......................... 100,000 100,000
Unsecured line of credit..................... 25,200 107,900
Other notes payable.......................... 4,192 4,192
Accounts payable and accrued expenses........ 27,657 20,780
Accrued interest payable..................... 3,896 5,612
Rents received in advance and
security deposits.......................... 6,245 6,831
Distributions payable........................ 11,546 11,020
Due to affiliates............................ 32 33
---------- ----------
Total liabilities.......................... 737,148 769,540
---------- ----------
Commitments and contingencies
Minority interest - Common OP Units and other... 52,538 54,397
Minority interest - Perpetual Preferred OP Units 125,000 125,000
Stockholders' equity:
Preferred stock, $.01 par value
10,000,000 shares authorized; none issued --- ---
Common stock, $.01 par value
50,000,000 shares authorized; 22,019,151
and 22,813,357 shares issued and
outstanding for 2000 and 1999,
respectively............................... 221 229
Paid-in capital.............................. 257,522 275,664
Deferred compensation........................ (5,133) (6,326)
Employee notes............................... (4,262) (4,540)
Distributions in excess of
accumulated earnings....................... (50,134) (53,626)
---------- ----------
Total stockholders' equity................. 198,214 211,401
---------- ----------
Total liabilities and stockholders' equity... $1,112,900 $1,160,338
========== ==========
The accompanying notes are an integral part of the financial statements.
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MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
QUARTERS ENDED SIX MONTHS ENDED
-------------------- --------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
-------- -------- -------- --------
REVENUES
Base rental income..................................... $ 47,249 $ 45,224 $ 94,558 $ 90,045
RV base rental income.................................. 1,176 1,585 4,875 5,113
Utility and other income............................... 5,031 5,337 10,729 10,848
Equity in income of affiliates......................... 642 112 792 255
Interest income ..................................... 173 188 464 575
-------- -------- -------- --------
Total revenues.................................... 54,271 52,446 111,418 106,836
-------- -------- -------- --------
EXPENSES
Property operating and maintenance..................... 14,411 14,275 29,818 28,748
Real estate taxes ..................................... 4,363 4,148 8,687 8,374
Property management.................................... 2,171 2,032 4,560 4,115
General and administrative............................. 1,834 1,467 3,660 3,158
Interest and related amortization...................... 13,154 13,512 26,485 26,866
Depreciation on corporate assets....................... 277 234 548 480
Depreciation on real estate assets and other costs..... 8,567 8,301 17,424 16,544
------- -------- -------- --------
Total expenses.................................... 44,777 43,969 91,182 88,285
-------- -------- -------- --------
Income from operations........................... 9,494 8,477 20,236 18,551
Gain on sale of Properties and other................... 12,053 --- 12,053 ---
-------- -------- -------- --------
Income before allocation to Minority Interests
and extraordinary loss........................ 21,547 8,477 32,289 18,551
(Income) allocated to Common OP Units.................. (3,772) (1,509) (5,371) (3,353)
(Income) allocated to Perpetual Preferred OP Units..... (2,813) --- (5,626) ---
-------- -------- -------- --------
Income before extraordinary loss on early
extinguishment of debt........................ 14,962 6,968 21,292 15,198
Extraordinary loss on early extinguishment of debt
(net of $264 allocated to minority interests)..... 1,041 --- 1,041 ---
-------- -------- -------- --------
NET INCOME....................................... $ 13,921 $ 6,968 $ 20,251 $ 15,198
======== ======== ======== ========
Income per share before extraordinary loss - basic..... $ .68 $ .27 $ .96 $ .59
======== ======== ======== ========
Income per share before extraordinary loss - diluted... $ .67 $ .27 $ .95 $ .58
======== ======== ======== ========
Net income per Common Share - basic.................... $ .64 $ .27 $ .92 $ .59
======== ======== ======== ========
Net income per Common Share - diluted.................. $ .63 $ .27 $ .90 $ .58
======== ======== ======== ========
Distributions declared per Common Share................ $ .415 $ .3875 $ .83 $ .775
======== ======== ======== ========
Weighted average Common Shares
outstanding - basic.......................... 21,871 25,773 22,082 25,964
======== ======== ======== ========
Weighted average Common Shares
outstanding - diluted (see Note 2)........... 27,809 31,829 28,024 32,134
======== ======== ======== ========
The accompanying notes are an integral part of the financial statements.
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MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
JUNE 30, JUNE 30,
2000 1999
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................. $ 20,251 $ 15,198
Adjustments to reconcile net income to
cash provided by operating activities:
Income allocated to Minority Interests. 10,733 3,353
Gain on sale of Properties and other... (12,053) ---
Depreciation and amortization expense.. 17,475 17,326
Equity in income of affiliates......... (792) (255)
Amortization of deferred compensation
and other............................ 1,193 825
Decrease (increase) in rents
receivable........................... 196 (468)
(Increase) decrease in prepaid
expenses and other assets............ (2,042) 739
Increase in accounts payable and
accrued expenses..................... 5,160 2,849
(Decrease) increase in rents received
in advance and security deposits (586) 1,379
---------- ----------
Net cash provided by operating activities.. 39,535 40,946
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Contributions to) distributions
from affiliates......................... (3,787) 821
Collection (funding) of notes receivable... 1,040 12,533
Investment in joint ventures............... (133) (1,284)
Collection of escrow proceeds, net......... 10,500 ---
Proceeds from disposition of assets........ 44,329 ---
Acquisition of rental properties........... (3,474) (15,511)
Improvements:
Improvements - corporate............... (204) (206)
Improvements - rental properties....... (2,896) (3,619)
Site development costs................. (1,909) (1,546)
---------- ----------
Net cash provided by (used in)
investing activities..................... 43,466 (8,812)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from stock options and
employee stock purchase plan............. 1,932 2,670
Distributions to Common Stockholders,
Common OP Unitholders and Perpetual
Preferred OP Unitholders................. (28,173) (12,737)
Repurchase of Common Stock and OP Units.... (22,431) (18,403)
Collection of principal payments on
employee notes........................... 278 56
Proceeds from line of credit, term loan,
and mortgage notes payable............... 163,924 22,056
Repayments on mortgage notes payable
and line of credit....................... (182,087) (17,199)
Debt issuance costs........................ (1,222) (686)
---------- ----------
Net cash used in financing activities...... (67,779) (24,243)
---------- ----------
Net increase in cash and cash equivalents....... 15,222 7,891
Cash and cash equivalents, beginning of period.. 6,676 13,657
---------- ----------
Cash and cash equivalents, end of period........ $ 21,898 $ 21,548
========== ==========
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest........ $ 27,602 $ 26,503
========== ==========
The accompanying notes are an integral part of the financial statements.
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MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DEFINITION OF TERMS:
Capitalized terms used but not defined herein are as defined in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999 (the
"1999 Form 10-K").
PRESENTATION:
These unaudited Consolidated Financial Statements of Manufactured Home
Communities, Inc., a Maryland corporation, and its subsidiaries (collectively,
the "Company"), have been prepared pursuant to the Securities and Exchange
Commission ("SEC") rules and regulations and should be read in conjunction with
the financial statements and notes thereto included in the 1999 Form 10-K. The
following Notes to Consolidated Financial Statements highlight significant
changes to the Notes included in the 1999 Form 10-K and present interim
disclosures as required by the SEC. The accompanying Consolidated Financial
Statements reflect, in the opinion of management, all adjustments necessary for
a fair presentation of the interim financial statements. All such adjustments
are of a normal and recurring nature. Certain reclassifications have been made
to the prior periods' financial statements in order to conform with current
period presentation.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information" establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. SFAS No. 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The adoption of
SFAS No. 131 did not affect the results of operations or financial position of
the Company. The Company has one reportable segment, which is the operation of
manufactured home communities.
NOTE 2 - EARNINGS PER COMMON SHARE
Earnings per common share is based on the weighted average number of common
shares outstanding during each period. In 1997, the Company adopted SFAS No.
128, "Earnings Per Share". SFAS No. 128 replaces the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. The conversion of Operating Partnership Units ("OP Units")
has been excluded from the basic earnings per share calculation. The conversion
of an OP Unit to a share of common stock will have no material effect on
earnings per common share since the allocation of earnings to an OP Unit is
equivalent to the allocation of earnings to a share of common stock.
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MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - EARNINGS PER COMMON SHARE (CONTINUED)
The following table sets forth the computation of basic and diluted
earnings per share for the quarters and six months ended June 30, 2000 and 1999
(amounts in thousands):
QUARTERS ENDED SIX MONTHS ENDED
------------------------- -------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
NUMERATOR:
Numerator for basic earnings per share -
Net income............................................ $ 13,921 $ 6,968 $ 20,251 $ 15,198
Effect of dilutive securities:
Income allocated to Common OP Units
(net of extraordinary loss of $264 in 2000)........ 3,508 1,509 5,107 3,353
---------- ---------- ---------- ----------
Numerator for diluted earnings per share-
income available to common shareholders
after assumed conversions.......................... $ 17,428 $ 8,477 $ 25,358 $ 18,551
========== ========== ========== ==========
DENOMINATOR:
Denominator for basic earnings per share -
Weighted average Common Stock outstanding............. 21,871 25,773 22,082 25,964
Effect of dilutive securities:
Weighted average Common OP Units.................... 5,598 5,651 5,618 5,765
Employee stock options................................ 340 405 324 405
---------- ---------- ---------- ----------
Denominator for diluted earnings per share-
adjusted weighted average shares and
assumed conversions................................ 27,809 31,829 28,024 32,134
========== ========== ========== ==========
NOTE 3 - COMMON STOCK AND RELATED TRANSACTIONS
On April 14, 2000 and July 14, 2000, the Company paid a $.415 per share
distribution for the quarters ended March 31, 2000 and June 30, 2000,
respectively, to stockholders of record on March 31, 2000 and June 30, 2000,
respectively.
On March 15, 2000, the Company's Board of Directors approved the repurchase
of up to an additional 1 million shares of common stock, in increments of up to
250,000 shares per calendar quarter. In accordance with the plan, the Company
repurchased 250,000 shares during the quarter and 895,100 shares during the six
months ended June 30, 2000. On August 8, 2000, the Company's Board of Directors
approved an increase in the incremental repurchases for the third an fourth
quarters of 2000 to up to 500,000 shares per calendar quarter. As of June 30,
2000, the Company had repurchased 5,312,300 shares of the 6.5 million shares
authorized under the plan.
NOTE 4 - REAL ESTATE
In March 2000, in accordance with SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of",
MHC Acquisition One LLC, a consolidated subsidiary of the Company, recorded an
impairment loss on the DeAnza Santa Cruz water and wastewater service company
business. Recent negotiations for the sale of the business as well as
management's estimates indicated that the undiscounted future cash flows from
the business would be less than the carrying value of the business and its
related assets. The Company recorded an asset impairment loss of $701,000 (or
$.02 per fully diluted share) which is included in other income on the
accompanying statements of operations. This loss represents the difference
between the carrying value of the DeAnza Santa Cruz water and wastewater service
company business and its related assets and their estimated fair market value.
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MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - REAL ESTATE (CONTINUED)
On February 29, 2000, MHC Systems, Inc., a consolidated subsidiary of the
Company, disposed of the water and wastewater service company and facilities
known as FFEC-Six in a cash sale. Net proceeds from the sale of approximately
$4.2 million were used to pay down the Company's line of credit and a gain on
the sale of $719,000 (or $.02 per fully diluted share) was recorded in other
income on the accompanying statements of operations.
In April 2000, the California Superior Court approved a settlement
agreement (the "Settlement") in connection with the dissolution proceeding of
Ellenburg Capital Corporation and its affiliated partnerships. The Company had
previously purchased 37 properties (the "Ellenburg Properties") in connection
with the dissolution proceeding. As part of the Settlement, the Company sold
three communities - Mesa Regal RV Resort, Mon Dak and Naples Estates - for an
aggregate sales price of $59.0 million including cash proceeds of $40.0 million
and assumption of debt of $19.0 million in a non-cash transaction. The Company
recorded a $9.1 million gain on the sale of these properties. Also as part of
the Settlement, the Company received the return of $13.5 million previously held
in escrow in connection with the purchase of the Ellenburg Properties and
recorded $3.0 million of interest income related to these funds. Proceeds from
the Settlement were used to pay down the Company's line of credit. See Note 8
for further discussion of the Settlement.
The Company is actively seeking to acquire additional manufactured home
communities and currently is engaged in negotiations relating to the possible
acquisition of a number of manufactured home communities. At any time these
negotiations are at varying stages which may include contracts outstanding to
acquire certain manufactured home communities which are subject to satisfactory
completion of the Company's due diligence review.
NOTE 5 - NOTES RECEIVABLE
At June 30, 2000 and December 31, 1999, the Company had approximately $3.2
million and $4.3 million in notes receivable, respectively. On January 10, 2000,
$1.1 million in purchase money notes receivable were repaid to the Company. The
Company has a $3.2 million loan outstanding, which bears interest at the rate of
approximately 8.5%, is collateralized by the property known as Trails West and
matures on June 1, 2003.
NOTE 6 - LONG-TERM BORROWINGS
As of June 30, 2000 and December 31, 1999, the Company had outstanding
mortgage indebtedness of approximately $558.4 million and $513.2 million,
respectively, encumbering 73 and 72 of the Company's properties, respectively.
As of June 30, 2000 and December 31, 1999, the carrying value of such properties
was approximately $631.2 million and $638 million, respectively.
On June 30, 2000, the Company completed a $110 million debt financing
consisting of two mortgage notes - one for $94.3 million the other for $15.7
million - secured by seven Properties. The proceeds of the financing are being
used to repay $60 million of mortgage debt secured by the seven Properties,
repay amounts outstanding under the Company's line of credit and for working
capital purposes. The Company recorded a $1.3 million charge in connection with
the early repayment of the $60 million of mortgage debt.
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MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - LONG-TERM BORROWINGS (CONTINUED)
The outstanding mortgage indebtedness consists of:
- - A $265.0 million mortgage note (the "$265 Million Mortgage") collateralized
by 29 Properties beneficially owned by MHC Financing Limited Partnership.
The $265 Million Mortgage has a maturity date of January 2, 2028 and pays
interest at 7.015%. There is no principal amortization until February 1,
2008, after which principal and interest are to be paid from available cash
flow and the interest rate will be reset at a rate equal to the then
10-year U.S. Treasury obligations plus 2.0%. The $265 Million Mortgage is
recorded net of a hedge of $3.0 million which is being amortized into
interest expense over the life of the loan.
- - A $66.7 million mortgage note (the "College Heights Mortgage")
collateralized by 18 Properties owned in a joint venture formed by the
Company and Wolverine Investors, LLC. The College Heights Mortgage bears
interest at a rate of 7.19%, amortizes beginning July 1, 1999 over 30 years
and matures July 1, 2008.
- - A $94.3 million mortgage note (the "DeAnza Mortgage") collateralized by 6
Properties beneficially owned by MHC-DeAnza Financing Limited Partnership.
The DeAnza Mortgage bears interest at a rate of 7.82%, amortizes beginning
August 1, 2000 over 30 years and matures July 1, 2010.
- - A $23.2 million mortgage note (the "Bay Indies Mortgage") collateralized by
one Property beneficially owned by MHC-Bay Indies Financing Limited
Partnership. The Bay Indies Mortgage bears interest at a rate of 7.48%,
amortizes beginning September 1, 2000 over 27.5 years and matures July 1,
2004.
- - A $15.7 million mortgage note (the "Date Palm Mortgage") collateralized by
one Property beneficially owned by MHC Date Palm, L.L.C. The Date Palm
Mortgage bears interest at a rate of 7.96%, amortizes beginning August 1,
2000 over 30 years and matures July 1, 2010.
- - Approximately $95.6 million of mortgage debt on 18 other various
Properties, which was recorded at fair market value with the related
discount or premium being amortized over the life of the loan using the
effective interest rate. Scheduled maturities for the outstanding
indebtedness are at various dates through November 30, 2020, and fixed
interest rates range from 7.25% to 9.05%. Included in this debt are two
mortgages which were entered into on February 24, 2000, with combined
principal of $14.6 million at an interest rate of approximately 8.3%,
maturing on March 24, 2010. In addition, the Company has a $2.4 million
loan recorded to account for a direct financing lease entered into in May
1997.
The Company has a $175 million unsecured line of credit with a bank (the
"Credit Agreement") bearing interest at the London Interbank Offered Rate
("LIBOR") plus 1.125%. The Credit Agreement matures on August 17, 2000, at which
time the Company may extend the maturity date to August 17, 2002 and the Credit
Agreement would be converted to a term loan. The Company pays a quarterly fee on
the average unused amount of such credit equal to 0.15% of such amount. As of
June 30, 2000, $25.2 million was outstanding under the Credit Agreement.
The Company has a $100 million unsecured term loan (the "Term Loan") with a
group of banks with interest only payable monthly at a rate of LIBOR plus 1.0%.
The Term Loan maturity has been extended to April 3, 2002.
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MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - LONG-TERM BORROWINGS (CONTINUED)
The Company has approximately $4.2 million of installment notes payable,
secured by a letter of credit, each with an interest rate of 6.5%, maturing
September 1, 2002. Approximately $2.9 million of the notes pay principal
annually and interest quarterly and the remaining $1.3 million of the notes pay
interest only quarterly.
In July 1995, the Company entered into an interest rate swap agreement (the
"1998 Swap") fixing LIBOR on $100 million of the Company's floating rate debt at
6.4% for the period 1998 through 2003. The value of the 1998 Swap was impacted
by changes in the market rate of interest. The Company accounted for the 1998
Swap as a hedge. Payments and receipts under the 1998 Swap were accounted for as
an adjustment to interest expense. On January 10, 2000, the Company terminated
the 1998 Swap and received $1.0 million of proceeds which is being amortized as
an adjustment to interest expense through March 2003.
NOTE 7 - STOCK OPTIONS
Pursuant to the Amended and Restated 1992 Stock Option and Stock Award Plan
as discussed in Note 14 to the 1999 Form 10-K, certain officers, directors,
employees and consultants have been offered the opportunity to acquire shares of
common stock of the Company through stock options ("Options"). During the six
months ended June 30, 2000, Options for 59,668 shares of common stock were
exercised.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
DEANZA SANTA CRUZ MOBILE ESTATES
The residents of DeAnza Santa Cruz Mobile Estates, a property located in
Santa Cruz, California (the "City") previously brought several actions opposing
certain fees and charges in connection with water service at the Property. The
trial of the ongoing utility charge dispute with the residents of this Property
concluded on January 22, 1999. This summary provides the history and reasoning
underlying the Company's defense of the residents' claims and explains the
Company's decision to continue to defend its position, which the Company
believes is fair and accurate.
DeAnza Santa Cruz Mobile Estates is a 198 site community overlooking the
Pacific Ocean. It is subject to the City's rent control ordinance which limits
annual rent increases to 75% of CPI. The Company purchased this Property in
August 1994 from certain unaffiliated DeAnza entities ("DeAnza"). Prior to the
Company's purchase in 1994, DeAnza made the decision to submeter the Property
for both water and sewer in 1993 in the face of the City's rapidly rising
utility costs.
Under California Civil Code Section 798.41, DeAnza was required to reduce
rent by an amount equal to the average cost of usage over the preceding 12
months. This was done. With respect to water, not looking to submit to
jurisdiction of the California Public Utility Commission ("CPUC"), DeAnza relied
on California Public Utilities Code Section 2705.5 ("CPUC Section 2705.5") to
determine what rates would be charged for water on an ongoing basis without
becoming a public utility. This statute provides that in a submetered mobilehome
park, the property owner is not subject to regulation and control of the CPUC so
long as the users are charged what they would be charged by the utility company
if users received their water directly from the utility company. In Santa Cruz,
customers receiving their water directly from the city's water utility were
charged a certain lifeline rate for the first 400 ccfs of water and a greater
rate for usage over 400 ccfs of water, a readiness to serve charge of $7.80 per
month and tax on the total. In reliance on CPUC Section 2705.5, DeAnza
implemented its billings on this schedule notwithstanding that it did not
receive the discount for the first 400 ccfs of water because it was a commercial
and not a residential customer.
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MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
A dispute with the residents ensued over the readiness to serve charge and
tax thereon. The residents argued that California Civil Code Section 798.41
required that the park owner could only pass through its actual costs of water
(and that the excess charges over the amount of the rent rollback were an
improper rent increase) and that CPUC Section 2705.5 was not applicable. DeAnza
unbundled the utility charges from rent consistent with California Civil Code
Section 798.41 and it has generally been undisputed that the rent rollback was
accurately calculated.
In August 1994, when the Company acquired the Property, the Company
reviewed the respective legal positions of the Santa Cruz Homeowners Association
("HOA") and DeAnza and concurred with DeAnza. Their reliance on CPUC Section
2705.5 made both legal and practical sense in that residents paid only what they
would pay if they lived in a residential neighborhood within the city of Santa
Cruz and permitted DeAnza to recoup part of the expenses of operating a
submetered system through the readiness to serve charge.
Over a period of 18 months from 1993 into May of 1995, a series of
complaints were filed by the HOA and Herbert Rossman, a resident, against
DeAnza, and later, the Company. DeAnza and the Company demurred to each of these
complaints on the grounds that the CPUC had exclusive jurisdiction over the
setting of water rates and that residents under rent control had to first
exhaust their administrative remedies before proceeding in a civil action. At
one point, the case was dismissed (with leave to amend) on the basis that
jurisdiction was with the CPUC and, at another point, Mr. Rossman was dismissed
from the case because he had not exhausted his administrative remedies.
On June 29, 1995, a hearing was held before a Santa Cruz rent control
officer on the submetering of both water and sewer. The Company and DeAnza
prevailed on all issues related to sewer and the rent rollback related to water,
but the hearing officer determined that the Company could only pass through its
actual cost of water, i.e., a prorated readiness to serve charge and tax
thereon. The hearing officer did not deal with the subsidy being given to
residents through the quantity charge and ordered a rebate in a fixed amount per
resident. The Company and DeAnza requested reconsideration on this issue, among
others, which reconsideration was denied by the hearing officer.
The Company then took a writ of mandate (an appeal from an administrative
order) to the Superior Court and, pending this appeal, the residents, the
Company and the City agreed to stay the effect of the hearing officer's decision
until the Court rendered judgment.
In July 1996, the Superior Court affirmed the hearing officer's decision
without addressing concerns about the failure to take the subsidy on the
quantity charge into account.
The Company requested that the City and the HOA agree to a further stay
pending appeal to the court of appeals, but they refused and the appeals court
denied the Company's request for a stay in late November 1996. Therefore, on
January 1, 1997, the Company reduced its water charges at this Property to
reflect a pass-through of only the readiness to serve charge and tax at the
master meter (approximately $0.73) and to eliminate the subsidy on the water
charges. On their March 1, 1997 rent billings, residents were credited for
amounts previously "overcharged" for readiness to serve charge and tax. The
amount of the rebate given by the Company was $36,400. In calculating the
rebate, the Company and DeAnza took into account the previous subsidy on water
usage although this issue had not yet been decided by the court of appeals. The
Company and DeAnza felt legally safe in so doing based on language in the
hearing officer's decision that actual costs could be passed through.
11
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MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
On March 12, 1997, the Company also filed an application with the CPUC to
dedicate the water system at this Property to public use and have the CPUC set
cost based rates for water usage. The Company believed it was obligated to take
this action because of its consistent reliance on CPUC Section 2705.5 as a safe
harbor from CPUC jurisdiction. That is, when the Company could no longer charge
for water as the local serving utility would charge, it was no longer exempt
from the CPUC's jurisdiction and control under CPUC Section 2705.5.
On March 20, 1997, the court of appeals issued the writ of mandate
requested by the Company on the grounds that the hearing officer had improperly
calculated the amount of the rebate (meaning the Company had correctly
calculated the rent credits), but also ruling that the hearing officer was
correct when he found that the readiness to serve charge and tax thereon as
charged by DeAnza and the Company were an inappropriate rent increase. The court
of appeals further agreed with the Company that the city's hearing officer did
not have the authority under California Civil Code Section 798.41 to establish
rates that could be charged in the future.
Following this decision, the CPUC granted the Company its certificate of
convenience and necessity on December 17, 1998 and approved cost based rates and
charges for water that exceed what residents were paying under the Company's
reliance on CPUC Section 2705.5. Concurrently, the CPUC also issued an Order
Instituting Investigation ("OII") confirming its exclusive jurisdiction over the
issue of water rates in a submetered system and commencing an investigation into
the confusion and turmoil over billings in submetered properties. Specifically,
the OII states: "The Commission has exclusive and primary jurisdiction over the
establishment of rates for water and sewer services provided by private
entities."
Specifically, the CPUC ruling regarding the Company's application stated:
"The ultimate question of what fees and charges may or may not be assessed,
beyond external supplier pass-through charges, for in-park facilities when a
mobile home park does not adhere to the provisions of CPUC Section 2705.5, must
be decided by the Commission."
After the court of appeals decision, the HOA brought all of its members
back into the underlying civil action for the purpose of determining damages,
including punitive damages, against the Company. The trial was continued from
July 1998 to January 1999 to give the CPUC time to act on the Company's
application. Notwithstanding the action taken by the CPUC in issuing the OII in
December 1998, the trial court denied the Company's motion to dismiss on
jurisdictional grounds and trial commenced before a jury on January 11, 1999.
Not only did the trial court not consider the Company's motion to dismiss,
the trial court refused to allow evidence of the OII or the Company's CPUC
approval to go before the jury. Notwithstanding the Company's strenuous
objections, the judge also allowed evidence of the Company's and DeAnza's
litigation tactics to be used as evidence of bad faith and oppressive actions
(including evidence of the application to the CPUC requesting a $22.00 readiness
to serve charge). The Company's motion for a mistrial based upon these
evidentiary rulings was denied. On January 22, 1999, the jury returned a verdict
awarding $6.0 million of punitive damages against the Company and DeAnza. The
Company had previously agreed to indemnify DeAnza on the matter.
The Company has bonded the judgment pending appeal in accordance with
California procedural rules, which require a bond equal to 150% of the amount of
the judgment. Post-judgment interest will accrue at the statutory rate of 10.0%
per annum.
12
13
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
On April 19, 1999, the trial court denied all of the Company's and DeAnza's
post-trial motions for judgement notwithstanding the verdict, new trial and
remittitur. The trial court also awarded $700,000 of attorneys' fees to
plaintiffs. The Company has appealed the jury verdict and attorneys' fees award
and this appeal has been fully briefed. The Company is awaiting notice from the
court of appeal setting oral argument in the jury verdict appeal. The jury
verdict appeal raises several arguments for reversal of the punitive damage
award or for a new trial. One of the arguments raised by the Company in the jury
verdict appeal is that punitive damages are not available in a case brought
under Section 798.41 of the California Mobilehome Residency Law ("MRL") since
the MRL contains its own penalty provisions. The court of appeal granted the
Company's request for judicial notice of the legislative history of the
applicable MRL sections, which indicates to the Company that the court of appeal
is receptive to this argument. Although no assurances can be given, the Company
believes the appeal will be successful.
In two previously disclosed related appeals challenging the result of the
earlier litigation and an attorney's fee award of approximately $100,000 to the
plaintiffs, the court of appeal in July 2000 rejected the Company's arguments
that the CPUC had exclusive jurisdiction over the issue of water rates in
submetered moblehome parks. The Company has filed a petition asking the Supreme
Court of California to review this matter.
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
On September 29, 1995, the United States Environmental Protection Agency
("USEPA") issued its Findings of Violations and Order for Compliance with
respect to the National Pollution Discharge Elimination System ("NPDES") Permit
governing the operation of the onsite waste water treatment plant at one of the
Properties. On October 6, 1995, the USEPA issued its Findings of Violation and
Order for Compliance with respect to the NPDES Permit governing the operation of
the onsite wastewater treatment plant at another of the Properties. The Company
and the USEPA have reached agreement on a resolution of the matter in which the
operation of the remaining waste water treatment plant will be subject to a
consent decree that will provide for fines and penalties in the event of future
violations and the Company will pay a fine. The Company is awaiting notice that
the consent decree has been executed by the Government. The Company does not
believe the impact of the settlement will be material and the Company believes
it has established adequate reserves for any amounts that may be paid.
ELLENBURG COMMUNITIES
In connection with the acquisition of the Ellenburg Properties and
pursuant to orders of the California Superior Court ("Court"), approximately $30
million of the amounts paid by the Company were deposited with the court
appointed winding up agents (the "Winding Up Agents"). The deposited amounts
related to claims (the "Karno Claims") of Norton S. Karno (and related entities)
who at various times has been a creditor, advisor, lawyer and shareholder of
certain of the entities related to the Ellenburg Properties. The Winding Up
Agents had disputed the claims and had filed a complaint against Mr. Karno (and
related entities) requesting that the court determine that the claims be reduced
or eliminated.
Mr. Karno, the Company and certain other parties entered into a Settlement
which was filed with the Court in February 2000. In April 2000, the Court
approved the Settlement which resolved substantially all of the litigation and
appeals involving the Ellenburg Properties and the Settlement closed on May 22,
2000 (see also Note 4).
On September 8, 1999, Ellenburg Fund 20 ("Fund 20") filed a cross complaint
in the Ellenburg dissolution proceeding against the Company and certain of its
affiliates alleging causes of action for fraud and other claims in connection
with the Ellenburg acquisition. While this matter was not resolved by the
Settlement, the Company subsequently successfully had the cross complaint
against the Company and its affiliates dismissed with prejudice by the
California Superior Court. However, the Company expects Fund 20 to appeal. The
Company believes Fund 20's allegations are without merit and will vigorously
defend itself against any appeal.
13
14
MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
CANDLELIGHT PROPERTIES, L.L.C
In 1996, 1997 and 1998, the Lending Partnership made a loan to Candlelight
Properties, L.L.C. ("Borrower") in the principal amount of $8,050,000. The loan
is secured by a mortgage on Candlelight Village ("Candlelight"), a Property in
Columbus, Indiana and is guaranteed by Ronald E. Farren ("Farren"), the 99%
owner of the Borrower. The Company accounts for the loan as an investment in
real estate and, accordingly, Candlelight's results of operations are
consolidated with the Company's for financial reporting purposes. Concurrently
with the funding of the loan, Borrower granted the Operating Partnership the
option to acquire Candlelight upon the maturity of the loan. The Operating
Partnership notified Borrower that it was exercising its option to acquire
Candlelight in March 1999, and the loan subsequently matured on May 3, 1999.
However, Borrower failed to repay the loan and refused to convey Candlelight to
the Operating Partnership.
Borrower filed suit in the Superior Court of Bartholomew County, Indiana
("Court") on May 5, 1999, seeking a declaratory judgment on the validity of the
exercise of the option. The Lending Partnership filed suit in the Court the next
day, seeking to foreclose its mortgage, and the suits were consolidated
(collectively, the "State Court Litigation") by the Court. The Court issued an
Order on December 1, 1999, finding, among other things, that the Operating
Partnership had validly exercised the option. Both parties filed motions to
correct errors in the Order, and on May 15, 2000, the Court issued judgments
against Borrower and Farren and in favor of the Operating Partnership in the
option case and the Lending Partnership in the foreclosure case. Borrower and
Farren have appealed both judgments, and have filed motions to stay the
judgments pending such appeals, which the Operating Partnership and the Lending
Partnership are opposing. The Operating Partnership and the Lending Partnership
intend to continue vigorously pursuing this matter and believe that, while no
assurance can be given, such efforts will be successful.
On May 3, 2000, Hanover Group, Inc. ("Hanover") and Farren filed suit
against the Company and certain executive and senior officers of the Company in
the United States District Court for the Southern District of Indiana,
Indianapolis Division. The complaint alleges violations of securities laws and
fraud arising from the loan transaction being litigated in the State Court
Litigation and seeks damages, including treble damages. The Company believes
that the complaint is related to rulings made by the Court and is without merit.
The Company has filed a motion for judgment on the pleadings, and will
vigorously defend itself and the officers of the Company.
On May 24, 2000, Hanover and Farren filed suit against the Operating
Partnership in the Superior Court of Marion County, Indiana. The complaint seeks
declaratory relief and specific performance with respect to the Operating
Partnership's alleged obligation to reconvey to Hanover the Operating
Partnership's 1% ownership interest in Borrower. The Company believes that the
complaint is related to rulings made by the Court and is without merit. The
Operating Partnership has filed a motion to dismiss and will vigorously defend
itself.
The Company is involved in various other legal proceedings arising in the
ordinary course of business. All proceedings herein described or referred to,
taken together, are not expected to have a material adverse impact on the
Company.
14
15
MANUFACTURED HOME COMMUNITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following is a discussion of the interim results of operations,
financial condition and liquidity and capital resources of the Company for the
three months and six months ended June 30, 2000 compared to the corresponding
period in 1999. It should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included herein and the 1999 Form 10-K. The
following discussion may contain certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, which reflect
management's current views with respect to future events and financial
performance. Such forward-looking statements are subject to certain risks and
uncertainties, including, but not limited to, the effects of future events on
the Company's financial performance, the adverse impact of external factors such
as inflation and consumer confidence, and the risks associated with real estate
ownership.
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTER ENDED JUNE 30, 2000 TO THE QUARTER ENDED JUNE 30, 1999
Since December 31, 1998, the gross investment in real estate has decreased
from $1,237 million to $1,207 million. The total number of sites owned or
controlled has decreased from 53,391 as of December 31, 1998 to 51,410 as of
June 30, 2000. These changes reflect the following property acquisitions and
dispositions (the sale of FFEC-Six had no effect on the number of sites owned or
controlled):
(i) The Meadows - acquired on April 1, 1999
(ii) Coquina Crossing - acquired on July 23, 1999
(iii) FFEC-Six (water and wastewater service company) - sold
on February 29, 2000
(iv) Mesa Regal RV Resort - sold on May 19, 2000
(v) Naples Estates - sold on May 19, 2000
(vi) Mon Dak - sold on May 19, 2000
The Company defines its core manufactured home community portfolio ("Core
Portfolio") as manufactured home properties owned as of the beginning of both
periods of comparison. Excluded from the Core Portfolio are the aforementioned
acquisitions and dispositions and also the recreational vehicle ("RV")
properties which, together, are referred to as the "Non-Core" Properties.
The following table summarizes certain weighted average statistics for the
quarters ended June 30, 2000 and 1999.
CORE PORTFOLIO TOTAL PORTFOLIO
------------------- -------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
------- ------- ------- -------
Total sites 45,862 45,807 47,122 46,833
Occupied sites 43,335 43,073 44,397 44,000
Occupancy % 94.5% 94.0% 94.2% 94.0%
Monthly base rent per site $355.97 $343.31 $355.76 $342.59
Base rental income ($47.2 million) increased $2.0 million or 4.5%. For the
Core Portfolio, base rental income ($46.3 million) increased approximately $1.9
million or 4.3%, due to increased base rental rates. The remaining $112,000
increase in base rental income reflects an increase of $291,000 attributable to
the Properties acquired in 1999 and a decrease of $179,000 related to the
properties sold in 2000.
15
16
MANUFACTURED HOME COMMUNITIES, INC.
RESULTS OF OPERATIONS (CONTINUED)
Monthly base rent per site for the total portfolio increased 3.8%,
reflecting a 3.7% increase in monthly base rent per site for the Core Portfolio
and slightly higher monthly base rents for the Properties acquired in 1999.
Weighted average occupied sites for the total portfolio increased by 1,395
sites creating a 0.2% increase in occupancy. Core Portfolio occupancy increased
0.5% reflecting an increase in weighted average occupied sites of 262 sites.
RV base rental income ($1.2 million) decreased $409,000 or 25.8% primarily
due to the sale of Mesa Regal RV Resort.
Utility and other income ($5.0 million) decreased $306,000 or 5.7%, with
$290,000 of the decrease attributable to the Non-Core Properties. Within the
Core Portfolio, utility and other income ($4.4 million) decreased $202,000
primarily due to lower utility income - a decrease which is reflected in lower
utility expense for the quarter.
Interest income ($173,000) decreased $15,000 or 8.0%, primarily due to the
repayment of certain notes receivable and a decrease in interest earned on
short-term investments. Short-term investments had average balances for the
quarters ended June 30, 2000 and 1999 of approximately $858,000 and $4.0
million, respectively, which earned interest income at an effective rate of 5.6%
and 4.1% per annum, respectively. As of June 30, 2000, the Company had cash and
cash equivalents and short-term investments of $21.9 million.
Property operating and maintenance expenses ($14.4 million) decreased
$136,000 or 1.0% reflecting a $427,000 decrease attributable to the properties
sold in 2000 and a $241,000 increase attributable to Properties acquired in
1999. Expenses at the Core Portfolio ($13.1 million) increased $324,000 or 2.5%.
Property operating and maintenance expenses represented 26.6% of total revenues
in 2000 and 27.2% in 1999.
Real estate taxes ($4.4 million) increased $215,000 or 5.2%, which was
primarily attributable to the Non-Core Properties. Core Portfolio real estate
tax expense ($4.2 million) increased $39,000 or 0.9%. Real estate taxes
represented 8.0% of total revenues in 2000 and 7.9% in 1999.
Property management expenses ($2.2 million) increased $139,000 or 6.8%. The
increase was primarily due to management staffing changes and incremental
management costs related to the addition of Properties acquired in 1999 and
1998. Property management expenses represented 4.0% of total revenues in 2000
and 3.9% in 1999.
General and administrative expense ("G&A") ($1.8 million) increased
$367,000 or 25.0%. The increase was primarily due to timing of certain public
company costs, legal costs related to an effort to obtain an IRS ruling
regarding income from RV Properties and increased payroll. G&A represented 3.4%
of total revenues in 2000 and 2.8% in 1999.
Interest and related amortization ($13.2 million) decreased $358,000 or
2.6%. The decrease was due to lower weighted average outstanding debt balances
during the period, partially offset by a slightly increased effective interest
rate. The weighted average outstanding debt balances for the quarters ended June
30, 2000 and 1999 were $705.9 million and $752.4 million, respectively. The
effective interest rates were 7.4% and 7.1%, respectively. Interest and related
amortization represented 24.2% of total revenues in 2000 and 25.8% in 1999.
16
17
MANUFACTURED HOME COMMUNITIES, INC.
RESULTS OF OPERATIONS (CONTINUED)
Depreciation on corporate assets ($277,000) increased $43,000 or 18.4%. The
increase was due to fixed asset purchases related to computer software upgrades.
Depreciation on corporate assets represented 0.5% of total revenues in 2000 and
0.4% in 1999.
Depreciation on real estate assets and other costs ($8.6 million) increased
$266,000 or 3.2% as a result of the addition of the Properties purchased in
1999. Depreciation on real estate assets and other costs represented 15.8% of
total revenues in both 2000 and 1999.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2000 TO THE SIX MONTHS ENDED JUNE
30, 1999
The following table summarizes certain weighted average statistics for the
six months ended June 30, 2000 and 1999.
CORE PORTFOLIO TOTAL PORTFOLIO
------------------- -------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
------- ------- ------- -------
Total sites 45,838 45,812 47,206 46,648
Occupied sites 43,330 43,077 44,497 43,860
Occupancy % 94.5% 94.0% 94.3% 94.0%
Monthly base rent per site $355.51 $342.85 $354.68 $342.16
Base rental income ($94.6 million) increased $4.5 million or 5.0%. For the
Core Portfolio, base rental income ($92.4 million) increased approximately $3.8
million or 4.3%, due to increased base rental rates. The remaining $703,000
increase in base rental income reflects an increase of $863,000 attributable to
the Properties acquired in 1999 and a decrease of $160,000 related to the
properties sold in 2000.
Monthly base rent per site for the total portfolio increased 3.7%,
primarily due to increased monthly base rent per site for the Core Portfolio.
Weighted average occupied sites for the total portfolio increased by 635
sites creating a 0.3% increase in occupancy. Core Portfolio occupancy increased
0.5% reflecting an increase in weighted average occupied sites of 253 sites.
RV base rental income ($4.9 million) decreased $238,000 or 4.6% primarily
due to the sale of Mesa Regal RV Resort.
Utility and other income ($10.7 million) decreased $119,000 or 1.1%,
primarily attributable to the Core Portfolio. Within the Core Portfolio, utility
and other income ($9.0 million) decreased $175,000 primarily due to lower
utility income - a decrease which is reflected in lower utility expense for the
six months. Additionally, other income includes a gain on the sale of FFEC-Six
of $719,000, partially offset by an impairment loss on the DeAnza Santa Cruz
water and wastewater service company of $701,000 as discussed in Note 4 to the
Consolidated Financial Statements.
Interest income ($464,000) decreased $111,000 or 19.3%, primarily due to
the repayment of certain notes receivable and a decrease in interest earned on
short-term investments. Short-term investments had average balances for the six
months ended June 30, 2000 and 1999 of approximately $2.5 million and $3.9
million, respectively, which earned interest income at an effective rate of 5.6%
and 4.5% per annum, respectively.
17
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MANUFACTURED HOME COMMUNITIES, INC.
RESULTS OF OPERATIONS (CONTINUED)
Property operating and maintenance expenses ($29.8 million) increased $1.0
million or 3.7% reflecting a $427,000 decrease attributable to the properties
sold in 2000 and a $560,000 increase attributable to properties acquired in
1999. Expenses at the Core Portfolio ($26.7 million) increased $1.1 million or
4.2%. Property operating and maintenance expenses represented 26.8% of total
revenues in 2000 and 26.9% in 1999.
Real estate taxes ($8.6 million) increased $313,000 or 3.7%, which was
primarily attributable to the Non-Core Properties. Core Portfolio real estate
tax expense ($8.3 million) increased $51,000 or 0.6%. Real estate taxes
represented 7.8% of total revenues in both 2000 and 1999.
Property management expenses ($4.6 million) increased $445,000 or 10.8%.
The increase was primarily due to management staffing changes and incremental
management costs related to the addition of Properties acquired in 1999 and
1998. Property management expenses represented 4.1% of total revenues in 2000
and 3.9% in 1999.
General and administrative expense ("G&A") ($3.7 million) increased
$502,000 or 15.9%. The increase was primarily due to timing of certain public
company costs, legal costs related to an effort to obtain an IRS ruling
regarding income from RV Properties and increased payroll. G&A represented 3.3%
of total revenues in 2000 and 3.0% in 1999.
Interest and related amortization ($26.5 million) decreased $381,000 or
1.4%. The decrease was due to lower weighted average outstanding debt balances
during the period, partially offset by a slightly increased effective interest
rate. The weighted average outstanding debt balances for the six months ended
June 30, 2000 and 1999 were $716.5 million and $752.4 million, respectively. The
effective interest rates were 7.4% and 7.2%, respectively. Interest and related
amortization represented 23.8% of total revenues in 2000 and 25.1% in 1999.
Depreciation on corporate assets ($548,000) increased $68,000 or 14.2%. The
increase was due to fixed asset purchases related to computer software upgrades.
Depreciation on corporate assets represented 0.5% of total revenues in 2000 and
0.4% in 1999.
Depreciation on real estate assets and other costs ($17.4 million)
increased $880,000 or 5.3% as a result of the addition of the Properties
purchased in 1999. Depreciation on real estate assets and other costs
represented 15.6% of total revenues in 2000 and 15.5% in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $15.2 million when compared to
December 31, 1999 due primarily to the timing of a release of escrow funds
pursuant to the Date Palm Mortgage entered into on June 30, 2000.
Net cash provided by operating activities decreased $1.4 million from $40.9
million for the six months ended June 30, 1999 to $39.5 million for the six
months ended June 30, 2000. This decrease reflected an extraordinary loss on
early retirement of debt of $1.3 million and increased prepaid expenses and
other non-cash items included in FFO, partially offset by a $3.0 million
increase in funds from operations ("FFO"), as discussed below.
18
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MANUFACTURED HOME COMMUNITIES, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
FFO was redefined by the National Association of Real Estate Investment
Trusts ("NAREIT") in October 1999, effective January 1, 2000, as net income
(computed in accordance with generally accepted accounting principles ["GAAP"]),
before allocation to minority interests, excluding gains (or losses) from sales
of property, plus real estate depreciation and after adjustments for
unconsolidated partnerships and joint ventures. The Company computes FFO in
accordance with the NAREIT definition, which may differ from the methodology for
calculating FFO utilized by other equity REITs and, accordingly, may not be
comparable to such other REITs. Funds available for distribution ("FAD") is
defined as FFO less non-revenue producing capital expenditures and amortization
payments on mortgage loan principal. The Company believes that FFO and FAD are
useful to investors as a measure of the performance of an equity REIT because,
along with cash flows from operating activities, financing activities and
investing activities, they provide investors an understanding of the ability of
the Company to incur and service debt and to make capital expenditures. FFO and
FAD in and of themselves do not represent cash generated from operating
activities in accordance with GAAP and therefore should not be considered an
alternative to net income as an indication of the Company's performance or to
net cash flows from operating activities as determined by GAAP as a measure of
liquidity and are not necessarily indicative of cash available to fund cash
needs.
The following table presents a calculation of FFO and FAD for the quarters
and six months ended June 30, 2000 and 1999 (amounts in thousands):
QUARTERS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
COMPUTATION OF FUNDS FROM OPERATIONS:
Income before extraordinary loss on early
extinguishment of debt.................. $ 14,962 $ 6,968 $ 21,292 $ 15,198
Income allocated to Common OP Units...... 3,772 1,509 5,371 3,353
Gain on sale of Properties and other..... (12,053) --- (12,053) ---
Depreciation on real estate assets and
other costs............................. 8,567 8,301 17,424 16,544
---------- ---------- ---------- ----------
Funds from operations...................... $ 15,248 $ 16,778 $ 32,034 $ 35,095
========== ========== ========== ==========
Weighted average Common
Shares outstanding - diluted........... 27,809 31,829 28,024 32,134
========== ========== ========== ==========
COMPUTATION OF FUNDS AVAILABLE FOR DISTRIBUTION:
Funds from operations...................... $ 15,248 $ 16,778 $ 32,034 $ 35,095
Non-revenue producing improvements -
rental properties................ (2,032) (2,014) (2,896) (3,619)
---------- ---------- ---------- ----------
Funds available for distribution......... $ 13,216 $ 14,764 $ 29,138 $ 31,476
========== ========== ========== ==========
Weighted average Common
Shares outstanding - diluted........... 27,809 31,829 28,024 32,134
========== ========== ============ ==========
19
20
MANUFACTURED HOME COMMUNITIES, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Net cash provided by (used in) investing activities increased $52.3 million
from $(8.8) million for the six months ended June 30, 1999 to $43.5 million for
the six months ended June 30, 2000 primarily due to the Settlement regarding the
Ellenburg Properties (see Note 4 and Note 8 to the Consolidated Financial
Statements) whereby the Company received total cash proceeds of $53.5 million,
the sale of the FFEC-Six water and wastewater service company and the
acquisition of properties in 1999, partially offset by the repayment of notes
receivable in 1999 and increased contributions to affiliates.
Capital expenditures for improvements were approximately $5.0 million for
the six months ended June 30, 2000 compared to $5.4 million for the six months
ended June 30, 1999. Of the $5.0 million, approximately $2.9 million represented
improvements to existing sites. The Company anticipates spending approximately
$6.2 million on improvements to existing sites during the remainder of 2000. The
Company believes these improvements are necessary in order to increase and/or
maintain occupancy levels and maintain competitive market rents for new and
renewing residents. The remaining $2.1 million represented $1.9 million in costs
to develop expansion sites at certain of the Company's Properties and $200,000
of other corporate headquarters costs. The Company is currently developing an
additional 61 sites which should be available for occupancy in 2000.
Net cash used in financing activities increased $43.6 million from $24.2
million for the six months ended June 30, 1999 to $67.8 million for the six
months ended June 30, 2000, primarily due to the timing of distributions to
Common Stockholders and Common OP Unitholders and net repayments on the line of
credit with proceeds from the Settlement.
Distributions to Common Stockholders and Common OP Unitholders increased
approximately $15.4 million due to the timing of the fourth quarter 1999
dividend payment. On April 14, 2000 and July 14, 2000, the Company paid a $.415
per share distribution for the quarters ended March 31, 2000 and June 30,
respectively, 2000 to stockholders of record on March 31, 2000 and June 30,
2000, respectively. Return of capital on a GAAP basis was $0.135 per share and
$0.00 per share for the first and second quarters of 2000, respectively.
The Company expects to meet its short-term liquidity requirements,
including its distributions, generally through its working capital, net cash
provided by operating activities and availability under the existing line of
credit. The Company expects to meet certain long-term liquidity requirements
such as scheduled debt maturities, property acquisitions and capital
improvements by long-term collateralized and uncollateralized borrowings
including borrowings under its existing line of credit and the issuance of debt
securities or additional equity securities in the Company, in addition to
working capital.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and
Hedging Activities", which is required to be adopted in years beginning after
June 15, 1999. SFAS No. 133 permits early adoption as of the beginning of any
fiscal quarter after its issuance. In June 1999, the FASB issued Statement No.
137 which deferred the effective date of SFAS No. 133 to all fiscal quarters for
fiscal years beginning after June 15, 2000. The Company has not yet determined
the date at which it will adopt SFAS No. 133. SFAS No. 133 will require the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The Company has not yet determined what the effect of SFAS No. 133
will be on the earnings and financial position of the Company, when implemented.
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MANUFACTURED HOME COMMUNITIES, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(see Note 8 of the Consolidated Financial Statements contained herein)
ITEM 5. OTHER INFORMATION
On May 9, 2000, the Board of Directors of the Company appointed Thomas P.
Heneghan as the Company's President and Chief Operating Officer. Mr. Heneghan,
36, has served for the last five years as the Company's Chief Financial Officer.
Gary Powell, the Company's Executive Vice President of Property Operations will
become President and Chief Executive Officer of the Company's sales and
marketing affiliate, RSI. In addition, the Board of Directors of the Company
appointed John M. Zoeller as Vice President and Chief Financial Officer of the
Company. Mr. Zoeller, 39, has over 18 years of accounting experience including
12 years with various affiliates of Equity Group Investments. Mr. Zoeller, a
CPA, holds a BS in Accounting from the University of Illinois, Champaign -
Urbana.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
Form 8-K dated and filed June 7, 2000, relating to Item 5
- "Other Events" on the Settlement in connection with the
acquisition of the Ellenburg Properties.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
MANUFACTURED HOME COMMUNITIES, INC.
BY: /s/ John M. Zoeller
--------------------------------
John M. Zoeller
Vice President, Treasurer and
Chief Financial Officer
BY: /s/ Mark Howell
--------------------------------
Mark Howell
Principal Accounting Officer and
Assistant Treasurer
DATE: August 11, 2000
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