1


                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K

            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                  For the Fiscal Year Ended December 31, 19971998

                                       or

          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934


                        Commission File Number: 1-11718

                      MANUFACTURED HOME COMMUNITIES, INC.
             (Exact name of registrant as specified in its charter)

            MARYLAND                                      36-3857664
(State or other jurisdiction of             (I.R.S. Employer ofIdentification No.)
incorporation or organization)                         Identification No.) 

TWO NORTH RIVERSIDE PLAZA, SUITE 800, CHICAGO, ILLINOIS             60606
       (Address of principal executive offices)                   (Zip Code)

                                 (312) 474-1122
              (Registrant's telephone number, including area code)

                                                                              
          Securities registered pursuant to Section 12(b) of the Act:

   Common Stock, $.01 Par Value              The New York Stock Exchange
         (Title of Class)               (Name of exchange on which registered)

        Securities registered pursuant to Section 12(g) of the Act: None



Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes[X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

The aggregate market value of voting stock held by nonaffiliates was
approximately $619$597.2 million as of March 10, 1998February 22, 1999 based upon the closing
price of $25.875$23.9375 on such date using beneficial ownership of stock rules adopted
pursuant to Section 13 of the Securities Exchange Act of 1934 to exclude voting
stock owned by Directors and Officers, some of whom may not be held to be
affiliates upon judicial determination.

    At March 10, 1998 24,915,399February 22, 1999, 26,580,209 shares of the Registrant's Common Stock
                               were outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE:

Part III incorporates by reference the Registrant's Proxy Statement relating to
the Annual Meeting of Stockholders to be held May 12, 1998.11, 1999.

   2

                      MANUFACTURED HOME COMMUNITIES, INC.




                               TABLE OF CONTENTS

PART I. Page ---- Item 1. Business..................................................................................3Business................................................................................................3 Item 2. Properties................................................................................7Properties..............................................................................................7 Item 3. Legal Proceedings........................................................................12Proceedings......................................................................................12 Item 4. Submission of Matters to a Vote of Security Holders......................................12Holders....................................................15 PART II. Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................13Matters..............................15 Item 6. Selected Financial Data and Operating Information........................................13Information......................................................15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....16Operations..................18 Item 7A. Quantitative and Qualitative Disclosure About Market Risk..............................................25 Item 8. Financial Statements and Supplementary Data..............................................23Data............................................................25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.....23Disclosure...................25 PART III. Item 10. Directors and Executive Officers of the Registrant.......................................23Registrant.....................................................25 Item 11. Executive Compensation...................................................................23Compensation.................................................................................25 Item 12. Security Ownership of Certain Beneficial Owners and Management...........................23Management.........................................25 Item 13. Certain Relationships and Related Transactions...........................................23Transactions.........................................................25 PART IV. Item 14. Exhibits, Financial Statements,Statement Schedules and Reports on Form 8-K........................248-K........................................26
2 3 PART I ITEM 1. BUSINESS THE COMPANY GENERAL Manufactured Home Communities, Inc. (together with its consolidated subsidiaries, the "Company") is a fully integrated company which owns and operates manufactured home communities. Manufactured home communities are residential developments designed and improved for the placement of detached, single-family manufactured homes which are produced off-site and installed within the community. The owner of each home leases the site on which it is located. Modern manufactured home communities are similar to typical residential subdivisions containing centralized entrances, paved streets, curbs and gutters and parkways. In addition, these communities often provide a clubhouse for social activities and recreation and other amenities, which may include swimming pools, shuffleboard courts, tennis courts, laundry facilities and cable television service. Utilities are provided or arranged for by the owner of the community. Some communities provide water and sewer service through public or private utilities, while others provide these services to residents from on-site facilities. The Company was formed to continue the property operations, business objectives and acquisition strategies of an entity that has owned and operated manufactured home communities since 1969. As of December 31, 1997,1998, the Company owned or controlled a portfolio of 121154 manufactured home communities and recreational vehicle ("RV") resorts (the "Properties") located throughout the United States containing 44,10853,391 residential sites. The Properties are located in 2426 states (with the number of Properties in each state shown parenthetically) -- Florida (34)(45), California (19)(25), Arizona (17)(19), Michigan (11), Colorado (10), Delaware (7), Nevada (5), Indiana (4), Oregon (3), Kansas (3), Missouri (3), Indiana (3), Illinois (2), Iowa (2), New York (2), Utah (2), New York (2)Pennsylvania (1), Maryland (1), Minnesota (1), Montana (1), New Mexico (1), Ohio (1), Oklahoma (1), PennsylvaniaTexas (1), Virginia (1), West Virginia (1), Michigan (1) and Washington (1). As of December 31, 1997,1998, the Company also owned two officecommercial buildings located in California. The Company has approximately 778800 full-time employees dedicated to carrying out the Company's operating philosophy and strategies of value enhancement and service to residents. The Company typically utilizes a one or two-person management team (who reside at the Properties) for the on-site management of each of the Properties. Typically, clerical and maintenance workers are employed to assist these individuals in the management and care of the Properties. Direct supervision of on-site management is the responsibility of the Company's five regional vice presidents.presidents and five regional managers. These individuals have significant experience in addressing the needs of residents and in finding or creating innovative approaches to maximize value and increase cash flow from property operations. Complementing this field management staff are approximately 5150 corporate employees who assist on-site management in all property functions. FORMATION OF THE COMPANY The Company, formed in March 1993, is a Maryland corporation, which has elected to be taxed as a real estate investment trust ("REIT"). The Company generally will not be subject to Federal income tax to the extent it distributes its REIT taxable income to its stockholders. REITs are subject to a number of organizational and operational requirements. If the Company fails to qualify as a REIT, its income is taxable at regular corporate rates. Even if the Company qualifies for taxation as a REIT, the Company is subject to certain state and local taxes on its income and property and Federal income and excise taxes on its undistributed income. The operations of the Company are conducted through certain entities which are owned or controlled by the Company. MHC Operating Limited Partnership (the "Operating Partnership") is the entity through which the Company conducts substantially all of its operations. Sub-partnerships of the Operating Partnership were created to: (i) facilitate mortgage financing (the "Financing Partnerships"); (ii) facilitate the Company's ability to provide financing to the owners of manufactured home communities ("Lending Partnership"); (iii) own the management operations of the Company ("Management Partnerships"); and (iv) own the assets and operations of certain utility companies which service the Properties ("MHC Systems"). The financial results of the Operating Partnership and sub-partnerships (together the "Subsidiaries") are consolidated in the Company's consolidated financial statements. 3 4 In addition, since certain activities, if performed by the Company, may not be qualifying REIT activities under the Internal Revenue Code of 1986, as amended (the "Code"), the Company has invested in the non-voting preferred stock of various corporations which engage in such activities. Realty Systems, Inc. ("RSI") is engaged in the business of purchasing, selling, leasing and financing manufactured homes that are located or will be located in properties managed by the Company. RSI also provides brokerage services to residents at such properties. Typically residents move from a community but do not relocate their homes. RSI may provide brokerage services, in competition with other local brokers, by seeking buyers for the homes. RSI also leases homes to prospective residents with the expectation that the tenant eventually will purchase the home. LP Management Corp. leases from the Operating Partnership certain real property within or adjacent to certain of the Properties consisting of golf courses, pro shops, restaurants and recreational vehicle areas. LP Management Corp. pays a management fee to an independent contractor who manages and operates these businesses. The Company believes that RSI's and LP Management Corp.'s (collectively, "Affiliates") activities benefit the Company by maintaining and enhancing occupancy at the Properties. The Company accounts for its investment in and advances to Affiliates using the equity method of accounting. BUSINESS OBJECTIVES AND OPERATING STRATEGIES The Company seeks to maximize both current income and long-term growth in income. The Company focuses on manufactured home communities that have strong cash flow growth potential and expects to hold such properties for long-term investment and capital appreciation. These business objectives and their implementation are determined by the Company's Board of Directors and may be changed at any time. The Company's investment and operating approach includes: - Aggressively managing the Properties to increase operating margins through rent and/orby maintaining competitive market rents, increasing occupancy increases and expense control; - Increasing income and property values by continuing the strategic expansion and, where appropriate, renovation of the Properties; - Utilizing management information systems to evaluate potential acquisitions, identify and track competing properties and monitor tenant satisfaction; and - Selectively acquiring manufactured home communities that have potential for long-term cash flow growth. The Company is committed to enhancing its reputation as the most respected brand name in the manufactured home community business. Its strategy is to own and operate the highest quality communities in premiermajor metropolitan areas and retirement destinations locations across the United States. The focus is on creating an attractive residential environment for homeowners by providing a well-maintained, comfortable community with a variety of organized recreational and social activities and superior amenities. In addition, the Company regularly surveys rental rates of competing properties and conducts satisfaction surveys of residents to determine the factors residents consider most important in choosing a manufactured home community. FUTURE ACQUISITIONS The Company almost doubledacquired or gained a controlling interest in eighty-five properties during 1997 and 1998, more than doubling its portfolio of manufactured home communities in 1997 through acquisitions.portfolio. The Company believes that opportunities for property acquisitions are particularly attractive at this time because of increasing acceptability of and demand for manufactured homes and continued constraints on development of new manufactured home communities. The Company believes it has a competitive advantage in the acquisition of new communities due to its experienced management, significant presence in major real estate markets and substantial capital resources. The Company is actively seeking to acquire additional communities and currently is engaged in various stages of negotiations relating to the possible acquisition of a number of communities. 4 5 The Company anticipates that newly acquired properties will be located in the United States. The Company utilizes market information systems to identify and evaluate acquisition opportunities, including a market data base to review the primary economic indicators of the various locations in which the Company expects to expand its operations. Acquisitions will be financed from the most appropriate sources of capital, which may include undistributed funds from operations, issuance of additional equity securities, sales of investments, collateralized and uncollateralized borrowings and issuance of debt securities. In addition, the Company may cause the Operating Partnership to issue units of limited partnership interests ("OP UnitsUnits") to finance acquisitions. The Company believes that an ownership structure which includes the Operating Partnership will permit the Company to acquire additional manufactured home communities in transactions that may defer all or a portion of the sellers' tax consequences. When evaluating potential acquisitions, the Company will consider such factors as: (i) the replacement cost of the property; (ii) the geographic area and type of property; (iii) the location, construction quality, condition and design of the property; (iv) the current and projected cash flow of the property and the ability to increase cash flow; (v) the potential for capital appreciation of the property; (vi) the terms of tenant leases, including the potential for rent increases; (vii) the potential for economic growth and the tax and regulatory environment of the community in which the property is located; (viii) the potential for expansion of the physical layout of the property and/or the number of sites; (ix) the occupancy and demand by residents for properties of a similar type in the vicinity and the residents profile; (x) the prospects for liquidity through sale, financing or refinancing of the property; and (xi) competition from existing manufactured home communities and the potential for the construction of new communities in the area. The Company expects to purchase manufactured home communities with physical and market characteristics similar to the Properties in its current portfolio. PROPERTY EXPANSIONS The Company will seek to increase the income generated from the Properties and from any additional properties acquired by expanding the number of sites available to be leased to residents if justified by local market conditions and permitted by zoning and other applicable laws. Of the 121154 Properties, eleventen may be expanded consistent with existing zoning regulations. In 1998,1999, the Company expects to develop an additional 9050 expansion sites at Golf Vista.within two of these Properties. In addition, where appropriate, the Company will consider upgrading or adding facilities and amenities to certain Properties in order to make those Properties more attractive in their markets. As of December 31, 1997,1998, the Company had more than 9001,050 expansion sites locatedavailable for occupancy in sixteeneighteen of the Properties. The Company filled 228207 of the expansion sites in 19971998 and expects to fill an additional 200 to 300 sites in 1998.1999. LEASES The typical lease entered into between the tenant and one of the Company's manufactured home communities for the rental of a site requires a security deposit and is month-to-month or year-to-year, renewable upon the consent of both parties or, in some instances, as provided by statute. These leases are cancelable, depending on state law, for non-payment of rent, violation of community rules and regulations or other specified defaults. Non-cancelable long-term leases, with remaining terms ranging from oneup to fifteeneleven years, are in effect at certain sites within seven of the Properties. In addition, lifetime leases are in effect at certain sites within fiveeight of the Properties. These leases are subject to rental rate increases based on the Consumer Price Index ("CPI"), in some instances taking into consideration certain floors and ceilings and allowing for pass-throughs of certain items such as real estate taxes, utility expenses and capital expenditures. Generally, market rate adjustments are made on an annual basis. REGULATIONS AND INSURANCE General. Manufactured home communities are subject to various laws, ordinances and regulations, including regulations relating to recreational facilities such as swimming pools, clubhouses and other common areas. The Company believes that each Property has the necessary permits and approvals to operate. 5 6 Rent Control Legislation. State and local rent control laws, principally in California and Florida, limit the Company's ability to increase rents and to recover increases in operating expenses and the costs of capital improvements. Enactment of such laws has been considered from time to time in other jurisdictions. The Company presently expects to continue to maintain manufactured home communities, and may purchase additional properties, in markets that are either subject to rent control or in which rent-limiting legislation exists or may be enacted. For example, Florida has enacted a law which generally provides that rental increases must be reasonable. Also, certain jurisdictions in California in which the Company owns Properties limit rent increases to changes in the Consumer Price IndexCPI or some percentage thereof. Insurance. Management believes that the Properties are covered by adequate fire, flood, property, earthquake and earthquakebusiness interruption insurance (where appropriate) provided by reputable companies and with commercially reasonable deductibles and limits. The Company believes its insurance coverage is adequate based on the Company's assessment of the risks to be insured, the probability of loss and the relative cost of available coverage. The Company has obtained title insurance insuring fee title to the Properties in an aggregate amount which the Company believes to be adequate. INDUSTRY THE MANUFACTURED HOME COMMUNITY INDUSTRY The Company believes that modern manufactured home communities, like the Properties, provide an opportunity for increased cash flows and appreciation in value. These may be achieved through increases in occupancy rates and rents, as well as expense controls, expansion of existing Properties and opportunistic acquisitions, for the following industry specific reasons: - Barriers to Entry: The Company believes that the supply of new manufactured home communities will be constrained due to barriers to entry into the industry. The most significant barrier has been the difficulty in securing zoning from local authorities. This has been the result of (i) the public's historically poor perception of the business, and (ii) the fact that manufactured home communities generate less tax revenue because the homes are treated as personal property (a benefit to the home owner) rather than real property. Another factor that creates substantial barriers to entry is the length of time between investment in the communities' development and the attainment of stabilized occupancy and the generation of revenues. The initial development of the infrastructure may take up to two or three years. Once the community is ready for occupancy, it may be difficult to attract residents to an empty community. Substantial occupancy levels may take a number of years to achieve. - Industry Consolidation: According to an industry analyst's manufactured home community industry report, there are approximately 24,00050,000 manufactured home communities in the United States.States and approximately 24,000 of these communities have more than 60 sites. The Company believes that approximately 20% or 4,800 of thesethe communities with more than 60 sites would be considered "investment-grade". The fivesix public companies which own manufactured home communities own approximately 382520 or less thanabout 10% of the "investment-grade" communities. In addition, based on a report prepared by one analyst, the top 50 owners of manufactured home communities own approximately 25%38% of the "investment-grade" assets. The Company believes that this relatively high degree of fragmentation in the industry provides the Company, as a national organization with experienced management and substantial financial resources, the opportunity to purchase additional manufactured home communities at favorable prices. - Stable Tenant Base: The Company believes that manufactured home communities tend to achieve and maintain a stable rate of occupancy due to the following factors: (i) residents own their own homes, (ii) manufactured home communities tend to foster a sense of community as a result of amenities such as club houses, recreational and (ii)social activities and (iii) since moving a manufactured home from one community to another involves substantial cost and effort, andresidents often results in the abandonmentsell their home in-place (similar to site-built residential housing) with no interruption of on-site improvements made by the tenant such as decks, garages, carports and landscaping.rental payments. MANUFACTURED HOUSING Based on the current growth in the number of individuals living in manufactured homes, the Company believes that manufactured homes are increasingly viewed by the public as an attractive and economical form of housing. According to the industry's trade association, nearly one in threefour new single family homes sold in the United States today is factory-built. 6 7 The Company believes that the growing popularity of manufactured housing is primarily the result of the following factors: - Importance of Home Ownership. A 1996 survey byAccording to the FederalFannie Mae 1998 National Mortgage Association indicated that most people would make a wide range of trade-offs in orderHousing Survey ("FNMA Survey") renters' desire to own their own home.a home is stronger now than at any time in the 1990's. Security and permanence are thought to be non-financial reasons to own a home. The commitment to home ownership is tempered by an awareness of the high cost of owning a home. The affordability of manufactured housing allows many individuals to achieve this goal without jeopardizing their financial security. - Affordability. For a significant number of persons, manufactured housing represents the only means of achieving home ownership. In addition, the total cost of housing in a manufactured home community (home cost, site rent and related occupancy costs) is competitive with and often lower than the total cost of alternative housing, such as apartments and condominiums. - Lifestyle Choice. As the average age of the United States population has increased, manufactured housing has become an increasingly popular housing alternative for retirement and "empty-nest" living. The percentage of buyers of manufactured homesAccording to the FNMA, among those people who are nearing retirement (age 40 to 49 years old has more than doubled since 198154), approximately 33% plan on moving upon retirement. Approximately 44% of adults age 40 to 54 and 14% of adults age 55 and over are expected to become "empty nesters" within the percentage of buyers who are 50 to 59 years old increased 40% in the same period.next ten years. The Company believes that manufactured housing is especially attractive to such individuals when located within a community that offers an appealing amenity package, close proximity to local services, social activities, low maintenance and a secure environment. - Construction Quality. Since 1976, all manufactured housing has been required to meet stringent Federal standards, resulting in significant increases in the quality of the industry's product. The Department of Housing and Urban Development's standards for manufactured housing construction quality are the only Federally regulated standards governing housing quality of any type in the United States. Manufactured homes produced since 1976 have received a "red and silver" government seal certifying that they were built in compliance with the Federal code. The code regulates manufactured home design and construction, strength and durability, fire resistance and energy efficiency, and the installation and performance of heating, plumbing, air conditioning, thermal and electrical systems. In newer homes, top grade lumber and dry wall materials are common. Also, manufacturers are required to follow the same fire codes as builders of site-built structures. - Comparability to Site-Built Homes. The manufactured housing industry has experienced a recent trend towards multi-section homes. Many modern manufactured homes are longer (up to 80 feet compared to 50 feet in the 1960s) and wider than earlier models. Many homes have vaulted ceilings, fireplaces and as many as four bedrooms and closely resemble single family site-built homes. ITEM 2. PROPERTIES The Company believes that the Properties provide attractive amenities and common facilities that create a comfortable and attractive community for the residents, with most offering a clubhouse, a swimming pool, laundry facilities and cable television service. Many also offer additional amenities such as sauna/whirlpool spas, golf courses, tennis, shuffleboard and basketball courts and exercise rooms. Since residents own their homes, it is their responsibility to maintain their homes and the surrounding area. It is management's role to insure that residents comply with community policies and to provide maintenance of the common areas, facilities and amenities. The Company holds periodic meetings of its property management personnel for training and implementation of the Company's strategies. The Properties historically have had and the Company believes they will continue to have low turnover and high occupancy rates due in part to this strategy. The distribution of the Properties throughout the United States reflects the Company's belief that geographic diversification helps insulate the portfolio from regional economic influences. The Company intends to target new acquisitions in or near markets where the Properties are located and will also consider acquisitions of properties outside such markets. The Company's five largest markets of Properties owned are Florida (28(45 Properties), California (18(25 Properties), Arizona (15(19 Properties), Colorado (10Michigan (11 Properties) and the Northeast (8Colorado (10 Properties). These markets accountaccounted for 34%, 15%, 10%17%, 11%, 4%, and 9%8%, respectively, of the Company's total revenues for the year ended December 31, 1997.1998. The Company also has Properties located in the following markets: Northeast, Northwest, Midwest, and Nevada area.Nevada/Utah/New Mexico. The Company's largest Property, Bay Indies, located in Venice, Florida accounted for 4.4%3% of the Company's total revenues for the year ended December 31, 1997.1998. 7 8 The following tables set forth certain information relating to the Properties owned by the Company as of December 31, 19971998, categorized by the Company's major markets. "Core Portfolio" represents an analysis of Properties owned as of the beginning of both years under comparison. The table excludes the following RV resort Properties at which rents and occupancy vary based on seasonality: Sherwood Forest RV (Kissimmee, Florida); Southern Palms (Eustis, Florida); Mesa Regal (Mesa, Arizona) and Fun & Sun (San Benito, Texas). The table excludes five Properties in which the Company has a non-controlling joint venture interest and accounts for using the equity method of accounting.
Number Monthly Monthly of Sites Occupancy Occupancy Base Rent Base Rent Location Approximate as of as of as of as of as of Community City, State Acreage12/31/98 12/31/98 12/31/97 12/31/97 12/31/9698 12/31/97 12/31/96 - ------------------------ ------------------------------------------- ---------------------- ---------- ------------ ------------ ---------- ----------- -------- --------- --------- --------- --------- FLORIDA CENTRAL FLORIDA: Mid-FloridaFLORIDA TAMPA/NAPLES CORRIDOR: Bay Indies Venice FL (b) 1,309 100% 100% $299 $292 Bay Lake Estates Nokomis FL (b) 228 100% 100% $330 $320 Boulevard Estates Clearwater FL 288 97% (a) $263 (a) Buccaneer Estates N. Ft. Myers FL (b) 971 100% 100% $293 $286 Chalet Village Tampa FL 60 92% (a) $291 (a) Country Meadows Plant City FL 736 99% (a) $261 (a) Country Place New PortRichey FL (b) 515 78% (c) 72% (c) $213 $205 Down Yonder Largo FL 361 98% (a) $326 (a) East Bay Oaks Largo FL (b) 328 99% 99% $328 $314 Eldorado Village Largo FL (b) 227 97% 100% $331 $314 Friendly Village of Kapok Clearwater FL 236 87% (a) $258 (a) Hillcrest Clearwater FL 279 84% 82% $304 $278 Holiday Ranch Largo FL 150 95% 89% $311 $288 Lake Fairways N. Ft. Myers FL (b) 896 100% 100% $331 $323 Lake Haven Dunedin FL (b) 379 97% 98% $351 $336 Naples Estates Naples FL 484 100% (a) $320 (a) Pine Lakes LeesburgN. Ft. Myers FL 290 1,195 95% (b) 94% (b) $288 $280 Oak Bend Ocala585 100% 100% $402 $392 Satellite Park Clearwater FL 100 262 79% (b) 78% (b) $208 $200 Spanish Oaks Ocala FL 78 459 98% 99% $260 $245 The Landings Port Orange FL 80 436 91% (a) $274 (a) Pickwick Village Port Orange FL 84 43287 94% (a) $271$231 (a) Sunset Oaks Plant City FL 167 41% (c) (a) $222 (a) The Heritage N. Ft. Myers FL (b) 455 72% (c) 67% (c) $274 $270 Windmill Manor Bradenton FL 292 95% 98% $340 $334 Windmill Village N. Ft. Myers FL (b) 491 99% 100% $282 $274 Windmill Village North Sarasota FL (b) 471 100% 100% $298 $287 Windmill Village South Sarasota FL (b) 306 100% 100% $301 $288 NORTHERN, CENTRAL AND EASTERN FLORIDA: Carriage Cove Daytona BeachArrowhead Village Lantana FL 78 418 99%602 95% 96% $381 $362 Brittany Estates Tallahassee FL 298 88% (a) $334$202 (a) Bulow Village Flagler Beach FL 40(b) 276 76% (c) 65% (b) 100%(c) $215 $196 $182 Arrowhead Village LantanaCarriage Cove Daytona Beach FL 102 603 96% (a) $362 (a)419 98% 99% $347 $334 Colonies of Margate Margate FL 125(b) 819 97% 98% 97%$404 $392 $383 Lakewood Village MelbourneCountryside North Vero Beach FL 69 349646 92% (a) $277 (a) Fernwood Deland FL 92 96% 96% $306 $291(a) $207 (a) Heritage Village Vero Beach FL 64(b) 436 98% 98% $281 $269 $261Holiday Village Vero Beach FL 128 82% (a) $250 (a) Indian Oaks Rockledge FL 38 211 82% (c) 80% (c) $228 $221 Lakewood Village Melbourne FL (b) 349 96% 96% $318 $306 Mid-Florida Lakes Leesburg FL (b) 1,195 96% (c) 95% (c) $296 $288 Oak Bend Ocala FL (b) 262 82% (c) 79% (c) $219 $208 Pickwick Village Port Orange FL 432 95% 94% $283 $277 Sherwood Forest Kissimmee FL 769 84% (a) $221$299 (a) WESTERN FLORIDA Bay Indies VeniceSpanish Oaks Ocala FL 211 1,309 100% 100% $292 $284 Bay Lake Estates Nokomis(b) 459 97% 98% $274 $260 The Landings Port Orange FL 35 228 100% 100% $320 $305 Buccaneer Estates N. Ft. Myers FL 223 971 100% 100% $286 $270 Country Place New PortRichey FL 82 515 72% (b) 65% (b) $205 $195 East Bay Oaks Largo FL 41 328 99% 99% $314 $302 Eldorado Village Largo FL 25 227 100% 99% $314 $304 Hillcrest Clearwater FL 25 279 90% (b) (a) $278 (a) Holiday Ranch Largo FL 13 150 89% (a) $313 (a) Lake Fairways N. Ft. Myers FL 259 896 100% 100% $323 $312 Lake Haven Dunedin FL 48 379 98% 98% $336 $324 Pine Lakes N. Ft. Myers FL 298 585 100% 97% $392 $381 The Heritage N. Ft. Myers FL 214 454 67% (b) 60% (b) $270 $264 Windmill Manor Bradenton FL 44 292 98% (a) $316 (a) Windmill Village N. Ft. Myers FL 69 491 100% 99% $278 $272 Windmill Village South Sarasota FL 61 306 100% 100% $288 $276 Windmill Village North Sarasota FL 74 471 100% 99% $287 $276 -------- --------- --------- --------- ---------436 88% 91% $277 $274 ---------- ------------ ------------ ----------- ----------- Total Florida Market 13,77718,130 94% 95% 95%$303 $301 $290 -------- --------- --------- --------- ------------------- ------------ ------------ ----------- ---------- Florida Core Portfolio 10,95610,957 95% 95% $309 $300 $290 -------- --------- --------- --------- ------------------- ------------ ------------ ----------- ----------
8 9
Number Monthly Monthly of Sites Occupancy Occupancy Base Rent Base Rent Location Approximate as of as of as of as of as of Community City, State Acreage12/31/98 12/31/98 12/31/97 12/31/97 12/31/9698 12/31/97 12/31/96 - ------------------------ ---------------------------------------- ---------- ------------ ------------- ----------- -------- --------- --------- --------- --------- CALIFORNIA----------- Northern California:CALIFORNIA NORTHERN CALIFORNIA: California Hawaiian San Jose CA 50 413 99% 100% (a)$565 $544 (a) Colony Park Ceres CA 10 187 77% (a)186 73% 72% $316 $319 (a) Concord Cascade Pacheco CA 31(b) 283 100% 99% 99%$476 $473 $468 Contempo Marin San Rafael CA 61(b) 396 99% 100% 100%$595 $582 $566 Coralwood Modesto CA 22 194 92% 93% (a)$397 $373 (a) De Anza Santa Cruz Santa Cruz CA 30(b) 198 100% 100% $473 $460 $450 Four Seasons Fresno CA 40 242 69% 67% $229 $226 Laguna Lakes San Luis Obispo CA 290 100% (a) $230$285 (a) Monte del Lago Castroville CA 54 314 95% (c) 86% (b)(c) $447 $431 Quail Meadows Riverbank CA 146 95% (a) $431$319 (a) Royal Oaks Visalia CA 29 149 83% 85% (a)$242 $240 (a) San JoseWestwinds I-IV (c)(d) San Jose CA 88 724 99% 100% (a)$534 $501 (a) Sea Oaks Los Osos CA 18 125 100% (a)100% $331 $323 (a) Sun Shadow San Jose CA 30 121 99% 100% (a)$542 $527 (a) Southern California:SOUTHERN CALIFORNIA: Date Palm Cathedral City CA 145(b) 538 90% 91%90% $589 $573 $560 Lamplighter Spring Valley CA 32(b) 270 96% 96% $486 $477 $454Meadowbrook Santee CA 340 93% (a) $554 (a) Rancho Mesa El Cajon CA 158 92% (a) $492 (a) Rancho Valley El Cajon CA 19(b) 140 97% 94% $481 $474 Santiago Estates Sylmar CA 305 93% $474 $456 -------- --------- --------- --------- ---------(a) $549 (a) ---------- ------------ ------------ ----------- ----------- Total California Market 4,2945,532 94% 96%94% $482 $474 $511 -------- --------- --------- --------- ------------------- ------------ ------------ ----------- ----------- California Core Portfolio 1,825 96% 96% $536 $523 $511 -------- --------- --------- --------- ---------
---------- ------------ ------------ ----------- ----------- ARIZONA Apollo Village Phoenix AZ 29(b) 238 93% (b)(c) 93% (b)(c) $334 $316 $294 Brentwood Manor Mesa AZ 45(b) 275 97% 99% 98%$403 $386 $368 Carefree Manor Phoenix AZ 16 127126 96% 98% (a)$265 $264 (a) Casa del Sol Resort #1 Peoria AZ 24(b) 246 95% 97% 96%$377 $368 $348 Casa del Sol Resort #2 Glendale AZ 29(b) 239 98% 100% 99%$408 $393 $373Casa del Sol Resort #3 Glendale AZ 238 96% (a) $386 (a) Central Park Phoenix AZ 40(b) 293 95% 94% 94%$340 $329 $314 Desert Skies Phoenix AZ 24 170164 96% 97% (a) $252 (a) Em Ja Ha Phoenix AZ 100 115 100% (a) $227 (a)$259 $256 Fairview Manor Tucson AZ 28 235 96% 99% (a) $270 (a)$279 $274 Hacienda De Valencia Mesa AZ 51(b) 366 95% 94% 93%$329 $316 $299Mon Dak Mesa AZ 212 88% (a) $255 (a) Palm Shadows Glendale AZ 33(b) 294 97% 98% 99%$311 $297 $279 Sedona Shadows Sedona AZ 41 200 87% 86% (a)$279 $267 (a) Sunrise Heights Phoenix AZ 28(b) 200 95% 94% 92%$314 $304 $281 The Mark Mesa AZ 61 409(b) 410 99% 92%99% $316 $295 $276 The Meadows Tempe AZ 57(b) 391 96% 96% $384 $366 $347 -------- --------- --------- --------- ---------Whispering Palms (d) Phoenix AZ 116 97% 100% $237 $227 ---------- ------------ ------------ ----------- ----------- Total Arizona Market 3,7984,243 95% 96% 95%$332 $317 $317 -------- --------- --------- --------- ------------------- ------------ ------------ ----------- ----------- Arizona Core Portfolio 2,4662,952 96% 94% $325 $308 -------- --------- --------- --------- ---------96% $351 $336 ---------- ------------ ------------ ----------- -----------
9 10
Number Monthly Monthly of Sites Occupancy Occupancy Base Rent Base Rent Location Approximate as of as of as of as of as of Community City, State Acreage12/31/98 12/31/98 12/31/97 12/31/97 12/31/9698 12/31/97 12/31/96 - ------------------------ --------------------------------------- ---------- ------------ ------------- ----------- -------- --------- --------- --------- --------- COLORADO----------- MICHIGAN Americana Estates Kalamazoo MI 161 98% (a) $254 (a) Appletree Walker MI 238 94% (a) $292 (a) Brighton Brighton MI 196 92% (a) $306 (a) College Heights Auburn Hills MI 161 94% (a) $316 (a) Creekside Wyoming MI 165 96% 98% $342 $340 Groveland Manor Holly MI 186 95% (a) $293 (a) Hillcrest Acres Kalamazoo MI 150 98% (a) $258 (a) Metro Park Romulus MI 227 86% (a) $290 (a) Riverview Bay City MI 198 87% (a) $210 (a) Willow Run Ypsilanti MI 185 91% (a) $257 (a) South Lyon Woods South Lyon MI 211 100% (a) $370 (a) ---------- ------------ ------------ ----------- ----------- ---------- ------------ ------------ ----------- ----------- Total Michigan Market 2,078 93% 98% $292 $340 ---------- ------------ ------------ ----------- ----------- COLORADO Bear Creek Sheridan CO 6 127126 98% 99% (a)$357 $354 (a) Cimarron Broomfield CO 48(b) 327 98% 98% $350 $332 $318 Golden Terrace Golden CO 36(b) 265 96% 99% 99%$398 $369 $349 Golden Terrace West Golden CO 38(b) 317 97% 98% 98%$388 $362 $343 Golden Terrace South Golden CO 14 80 98% 99% (a)$366 $337 (a) Hillcrest Village Aurora CO 73(b) 603 95% 94%95% $380 $359 $343 Holiday Hills Denver CO 99(b) 737 96% 97% 96%$368 $346 $328 Holiday Village - CO Co. Springs CO 39(b) 240 97% 98%97% $368 $348 $324 Pueblo Grande Pueblo CO 33(b) 252 98% 98% $241 $226 $207 Woodland Hills Denver CO 57(b) 434 98% 99% 99%$353 $336 $311 -------- --------- --------- --------- ------------------- ------------ ------------ ----------- ----------- Total Colorado Market 3,3823,381 97% 97% $360 $340 $321 -------- --------- --------- --------- ------------------- ------------ ------------ ----------- ----------- Colorado Core Portfolio 3,175 97% 97% $360 $340 $321 -------- --------- --------- --------- ---------
---------- ------------ ------------ ----------- ----------- NORTHEAST Aspen Meadows Rehoboth DE 199 95% (a) $228 (a) Camelot Rehoboth DE 302 97% (a) $228 (a) Mariner's Cove Millsboro DE 110(b) 375 84% (c) 83% (b) 81% (b)(c) $314 $302 $278 Nassau LewesMcNicol Rehoboth DE 67 392 97% 99% $245 $23293 100% (a) $239 (a) Sweetbriar Rehoboth DE 142 98% (a) $189 (a) Waterford Wilmington DE 160(b) 731 92% (c) 89% (c) $350 $337 Whispering Pines (d) Lewes DE (b) 85% (b) $337 $324392 94% 97% $246 $241 Pheasant Ridge Mt. Airy MD 98(b) 101 100% 100% $389 $368 $344 Meadows of Chantilly Chantilly VA 82(b) 500 82% 86% 91% $463 $443$466 $457 Independence Hill Morgantown WV 55(b) 203 89% 98% 99%$187 $178 $167 Green Acres Breinigsville PA 149(b) 595 98% (b) 95% (b)(c) 98% (c) $369 $357 $339 Brook Gardens Lackawanna NY 87 426 98% 99% $392 $388 Greenwood Village Manorville NY 477 88% (c) (a) $388$358 (a) -------- --------- --------- --------- ------------------- ------------ ------------ ----------- ----------- Total Northeast Market 3,3234,536 92% 91%92% $329 $340 $318 -------- --------- --------- --------- ------------------- ------------ ------------ ----------- ----------- Northeast Core Portfolio 2,166 92% 93% $330 $316 -------- --------- --------- --------- ---------
MIDWEST Five Seasons Cedar Rapids IA 62 3892,897 91% (b) (a) $224 (a) Holiday Village - IA Sioux City IA 160 519 95% 94% $204 $190 Camelot Acres Burnsville MN 180 319 96% 94% $335 $314 Golf Vista Estates Monee IL 144 229 86% (b) (a) $283 (a) Willow Lake Estates Elgin IL 110 616 99% 100% $527 $500 Burns Harbor Chesterton IN 42 228 97% 98% $268 $253 Candlelight Village Columbus IN 101 585 97% (b) 93% $164 $157 Oak Tree Village Portage IN 76 380 98% 98% $250 $236 Creekside Wyoming MI 8 165 98% (a) $340 (a) Bonner Springs Bonner Springs KS 33 210 77% 78% $175 $175 Carriage Park Kansas City KS 24 143 67% (d) 60% (d) $172 $174 Quivira Hills Kansas City KS 54 142 80% 78% $212 $207 Rockwood Village Tulsa OK 38 265 99% 99% $191 $182 Briarwood Brookline MO 27 166 95% 94% $169 $159 Dellwood Manor Warrensburg MO 46 136 89% 89% $156 $144 Northstar Village Kansas City MO 61 219 85% 87% $219 $209 -------- --------- --------- --------- --------- Total Midwest Market 4,711 93% 92% $266 $253 -------- --------- --------- --------- --------- Midwest Core Portfolio 3,343 93% 92% $284 $270 -------- --------- --------- --------- ---------91% $344 $332 ---------- ------------ ------------ ----------- -----------
10 11
Number Monthly Monthly of Sites Occupancy Occupancy Base Rent Base Rent Location Approximate as of as of as of as of as of Community City, State Acreage12/31/98 12/31/98 12/31/97 12/31/97 12/31/9698 12/31/97 12/31/96 - ------------------------ ---------------------------------------- ---------- ------------ ------------- ----------- -------- --------- --------- --------- --------- NEVADA, UTAH, NEW MEXICO----------- MIDWEST Five Seasons Cedar Rapids IA 390 83% (c) 91% (c) $238 $228 Holiday Village - IA Sioux City IA (b) 519 93% 95% $216 $204 Camelot Acres Burnsville MN (b) 319 95% 96% $351 $335 Golf Vista Estates Monee IL 319 67% (c) 86% (c) $301 $283 Willow Lake Estates Elgin IL (b) 616 98% 99% $538 $527 Burns Harbor Chesterton IN (b) 228 95% 97% $276 $268 Candlelight Village Columbus IN (b) 585 99% (c) 97% (c) $188 $164 Oak Tree Village Portage IN (b) 380 96% 98% $255 $250 Windsong Indianapolis IN 268 96% (a) $252 (a) Royal Village Toledo OH 233 96% (a) $234 (a) Bonner Springs Bonner Springs KS (b) 210 90% 77% $186 $175 Carriage Park Kansas City KS (b) 143 66% (e) 67% (e) $187 $172 Quivira Hills Kansas City KS (b) 142 82% 80% $220 $212 Rockwood Village Tulsa OK (b) 265 100% 99% $204 $191 Briarwood Brookline MO (b) 166 96% 95% $173 $169 Dellwood Manor Warrensburg MO (b) 136 82% 89% $165 $156 Northstar Village Kansas City MO (b) 219 89% 85% $232 $219 ---------- ------------ ------------ ----------- ----------- Total Midwest Market 5,138 92% 93% $272 $263 ---------- ------------ ------------ ----------- ----------- Midwest Core Portfolio 3,928 94% 93% $277 $266 ---------- ------------ ------------ ----------- ----------- NEVADA, UTAH, NEW MEXICO Del Rey Albuquerque NM 59(b) 407 89% 95% 99%$351 $337 $320 All Seasons Salt Lake City UT 29 121 99% 100% (a)$267 $251 (a) Westwood Village Farr West UT 93 294 100% (a)100% $206 $204 (a) Bonanza Las Vegas NV 43(b) 353 95% 99% 99%$439 $415 $398Boulder Cascade Las Vegas NV 299 98% (a) $428 (a) Flamingo West Las Vegas NV 36(b) 205 100% 100% $379 $375 $383 The Cabana Las Vegas NV 37(b) 263 100% 100% $387 $378 $364 Villa Borega Las Vegas NV 40 293 99% 98% (a)$413 $403 (a) -------- --------- --------- --------- ------------------- ------------ ------------ ----------- ----------- Total Nevada, Utah, New Mexico Market 1,9362,235 97% 98% 100%$366 $348 $362 -------- --------- --------- --------- ------------------- ------------ ------------ ---------- ----------- Nevada, Utah, New Mexico Core Portfolio 1,228 95% 98% 100%$389 $380 $362 -------- --------- --------- --------- ---------
---------- ------------ ------------- ----------- ----------- NORTHWEST Kloshe Illahee Federal Way WA 50 258 100% (a)100% $413 $397 (a) Falconwood Eugene OR 30 183 98% (a)98% $312 $285 (a) Quail Hollow Fairview OR 17 137 100% (a)100% $394 $373 (a) Shadowbrook Clackamas OR 20 156 100% (a)100% $390 $384 (a) Casa Village Billings MT 65 491(b) 497 93% (c) 97% 96%(c) $257 $240 $232 -------- --------- --------- --------- ------------------- ------------ ------------ ----------- ----------- Total Northwest Market 1,2251,231 97% 98% 96%$332 $313 $232 -------- --------- --------- --------- ------------------- ------------ ------------ ----------- ----------- Northwest Core Portfolio 491497 93% 97% 96%$257 $240 $232 -------- --------- --------- --------- ------------------- ------------ ------------ ----------- ----------- Grand Total Company Portfolio 36,44646,504 94% (f) 95% (e) 95% (e)(f) $334 $329 $313 ======== ========= ========= ========= =================== ============ ============ =========== =========== Grand Total Core Portfolio 25,65027,459 95% 95% $327 $314 ======== ========= ========= ========= =========$337 $325 ========== ============ ============ =========== ===========
(a) The Company acquired this Property in 1997.1998. (b) Represents a Property which is part of the Core Portfolio. (c) The process of filling expansion sites at these properties is ongoing. (c)(d) Westwinds I-IV formerly known as San Jose I-IV was subsequently renamed Westwinds. (d)I-IV; Whispering Palms formerly known as Em Ja Ha; and Whispering Pines formerly known as Nassau. (e) Carriage Park suffered damage to approximately 85 homes in 1993 due to flooding; the process of re-leasingreleasing these sites is ongoing. (e)(f) Changes in total portfolio occupancy includesinclude the impact of acquisitions and expansion programs and are therefore not comparable. See Management's Discussion and Analysis of Financial Condition and Results of Operations. 11 12 ITEM 3. LEGAL PROCEEDINGS Richard M. Perlman, a former employee of companies controlled by Mr. Samuel Zell, Chairman of the Board of Directors, filed a legal proceeding against Mr. Zell and various partnerships and corporations controlled by Mr. Zell claiming, inter alia, that he had an interest in certain of the properties previously owned by Mobile Home Communities, Inc. which were contributed to the Operating Partnership at the time of the Company's initial public offering and that he suffered damages when those properties were transferred in the Operating Partnership. The proceeding was filed on July 21, 1995 (Richard M. Perlman et al. v. Samuel Zell et al.) (United States District Court for the Northern District of Illinois-Eastern Division, Case No. 95 C 4242). Mr Perlman voluntarily dismissed the action that he previously filed in the Circuit Court of Cook County, Illinois, which was known as Richard M. Perlman v. Samuel Zell, et. al, Case No. 92 CH 19915. The Company is not party to this lawsuit. This action has proceeded to a jury verdict and the Company has incurred no liability and will incur no losses in connection with such action. In a separate matter, residents of DeAnza Santa Cruz Mobile Estates, a Propertyproperty located in Santa Cruz, California (the "City") previously brought several actions opposing certain fees and charges in connection with water service at the Property. The trial of the ongoing utility charge dispute with the residents of this Property specifically opposingconcluded 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 monthly "readiness198 site community overlooking the Pacific Ocean. It is subject to serve" charge. One group of residents, who have elected to be covered under 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 ("Ordinance"DeAnza"), had their case heard before. 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 control board. On June 29, 1995,by an amount equal to the City's hearing officer found thataverage cost of usage over the Company may charge only its actual costs. The Company believes its actual costs exceed the amountpreceding 12 months. This was done. With respect to water, not looking to submit to jurisdiction of the monthlyPublic Utility Commission ("PUC"), DeAnza relied on Public Utilities Code Section 2705.5 ("PUC 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 PUC 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 PUC Section 2705.5, DeAnza implemented its billings on this schedule notwithstanding that it did not receive the discount for the first 400 ccfs of water because it was a commercial and not a residential customer. A dispute with the residents ensued over the readiness to serve charge and tax thereon. The residents argued that California Civil Code Section 798.41 required that the 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 PUC Section 2705.5 was not applicable. DeAnza unbundled the utility charges from rent consistent with California Civil Code Section 798.41 and it has appealedgenerally 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 PUC 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 PUC 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 PUC 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. 12 13 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. On March 12, 1997, the Company also filed an application with the California Public Utilities Commission requestingPUC to dedicate the Commissionwater system at this Property to public use and have the PUC set cost based rates for water atusage. The Company believed it was obligated to take this Property. In connection withaction because of its consistent reliance on PUC Section 2705.5 as a safe harbor from PUC 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 PUC's jurisdiction and control under PUC 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's decision,officer had improperly calculated the residents were awarded costsamount of approximately $50,000 andthe rebate (meaning the Company has rebatedhad correctly calculated the rent credits), but also ruling that the hearing officer was correct when he found that the readiness to serve charge collected sinceand 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 PUC granted the Company its acquisitioncertificate 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 PUC Section 2705.5. Concurrently, the PUC 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 PUC 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 PUC 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 PUC time to act on the Company's application. Notwithstanding the action taken by the PUC 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 Property in August, 1994.OII or the Company's PUC 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 PUC requesting a $22.00 readiness to serve charge). The impactCompany'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 this decisionpunitive damages against the Company and DeAnza. The Company had previously agreed to indemnify DeAnza on the financial condition or results of operationsmatter. The Company is preparing to bond 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. 13 14 The Company will participate in post trial motions including a case management conference before March 15, 1999. The post trial motions will include a motion for judgment notwithstanding the verdict, new trial and remittitur (a procedure whereby the trial judge could unilaterally reduce the punitive damages award). To the extent the Company is unable to obtain relief in the form of reversal or reduction of the award in the trial court pursuant to post trial motions, relief from the verdict, if any, will have to come on appeal. Generally, the Company's appeal will focus on two areas: 1) lack of jurisdiction in the trial court; and 2) trial error. Given that the PUC has issued an OII confirming its exclusive jurisdiction over the issue of water rates in a submetered system, that there was generally no dispute with respect to the rent roll back to achieve relief from rent control, the magnitude of the verdict in light of reasonable reliance on the PUC's statutory authority, use of prejudicial evidence against the Company and denial of the Company's rights to present the PUC decision and related evidence, the Company believes the court of appeals will reverse or substantially reduce the punitive damage award. However, there can be no assurances that this will occur. The Company's view is that the range of possible loss on this matter at this time based on the opposing legal theories is from 0 (zero) (without considering the Company's litigation expense which is not expected to be material. The Santa Cruz Homeowners Association, representing approximately fifteen residents not covered bymaterial) to $6 million (plus costs which the Ordinance, separately filed suit inCompany expect plaintiffs' counsel to claim, the Superior CourtCompany's litigation expense, cost of the State of California (Case Number 128001) opposing the samebond and post-judgment interest). The HOA is also seeking to recover attorneys fees and charges in connection with water service and seeking damages,the trial, including punitive damages, arising outa multiplier of such fees which may result in an attorneys fee award in the range of $700,000 to $900,000. This is in addition to the $100,000 award referred to above. The Company will vigorously oppose such award of attorney fees. Under the Company's theory of the impositioncase, once appropriate unbundling of the readinessutility service from rent has occurred, only the PUC has exclusive jurisdiction regarding rates that may be charged for utility services on a prospective basis. The Company believes the actions by the PUC in reiterating its exclusive jurisdiction, agreeing with the Company's interpretation of PUC Section 2705.5, and in certificating the Company's utility company through the establishment of cost based rates for the Property validate its previous reliance on PUC Section 2705.5 as a means of recovering a portion of the cost of providing water at the Property. Based on the PUC's rulings, while legal expense will be incurred in further defense, it follows that residents did not incur any actual damages (in the form of "overcharges") and may be liable to serve charge. A trialreturn amounts previously repaid by the Company and DeAnza. Obviously, plaintiff's theory as described herein has resulted not only in a refund to residents of amounts "overcharged", but also in the punitive damage award. To avoid trying this case on the merits, plaintiffs introduced substantial evidence of legal strategy and objected strenuously (and successfully) to introduction of evidence supporting the Company on the merits. Currently, there is little or no settlement potential unless the trial court indicates to plaintiffs at a scheduled case management conference (February 24, 1999) that it is seriously considering granting a new trial or other relief to the Company based on post trial motions. Estimated legal expense, if this matter is set for July 1998not resolved prior to appeal, during the next 15 months could reach between $300,000 and the Company intends to vigorously defend itself in the matter. On$500,000. In a separate matter, 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 onsiteon-site waste water treatment plant at one of the Company's 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 onsiteon-site waste water treatment plant at another of the Company's Properties. Applicable law providesThe Company and USEPA have reached a tentative agreement to resolve the matter in which the operation of the remaining waste water treatment plant would be subject to a consent decree that would provide for fines and penalties in the event of future violations and the Company would contribute monies to a supplemental environmental project and pay a fine. The tentative agreement has not yet been reduced to writing and therefore remains subject to change. The Company does not believe the impact of the settlement will be material and the Company believes it has established adequate reserves for these violations. Although no fines or penaltiesany amounts that may be paid. In another matter, in connection with the acquisition of the Ellenburg Communities and pursuant to orders of the California Superior Court, approximately $30 million of the amounts paid by the Company have been assesseddeposited with the court appointed winding up agents (the "Winding Up Agents"). The deposited amounts relate to date, USEPA continuesclaims (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 threaten the impositionEllenburg Communities. The Winding Up Agents have disputed the claims and have filed a complaint against Mr. Karno (and related entities) requesting that the court determine that the claims be reduced or eliminated. 14 15 On October 30, 1998, the Company received notice of fines, penaltiesa lawsuit filed against the Company and further legal proceedings regarding these matters.certain Executive Officers of the Company in the Los Angeles Superior Court alleging, among other causes of action, that the Company breached certain agreements in connection with the acquisition of the Ellenburg Communities and claiming damages in excess of $50 million plus punitive damages. Based upon jurisdictional issues, in February 1999 the claims against the Executive Officers of the Company were dismissed. The Company believes it complied with one order by connectingmost of the claim relates to the local municipal waste water system, whichdisputed Karno Claims discussed above. The Company believes the claims are without merit, intends to vigorously defend the defendants in this matter and does not believe the impact of this matter will be material. In connection was completed in 1997 and will further upgrade the waste water treatment plant at the other Property during 1998 to further comply with the remaining order.acquisition of the Ellenburg Communities, Mr. Karno and others have appealed various court orders on which the Company has relied. The court of appeals has recently requested briefing on the issue of whether certain appeals are moot. Mr. Karno has also sought before both the California Superior Court and Court of Appeals to take control of ECC, but to date none of his attempts have been successful. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 12 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following table sets forth for the period indicated, the high and low sales prices for the Company's common stock as reported by the New York Stock Exchange under the trading symbol MHC.
Distributions Return of Capital Close High Low Made GAAP Basis (a) ----- ---- --- ---- ------------------------------- 1998 1st Quarter $25.8750 $27.1250 $24.5625 $.3625 $.05 2nd Quarter 24.1250 27.0000 24.0000 .3625 .08 3rd Quarter 25.4375 27.2500 22.0000 .3625 .10 4th Quarter 25.0625 25.6875 22.8750 .3625 .10 1997 1st Quarter $ 21.875 $ 24.25 $ 21.375$21.8750 $24.2500 $21.3750 $ .33 $ .05$.05 2nd Quarter 23.0625 23.75 20.12523.7500 20.1250 .33 .04 3rd Quarter 26.0026.0000 26.4375 23.0625 .33 .02 4th Quarter 27.00 27.50 25.62527.0000 27.5000 25.6250 .33 .04 1996 1st Quarter $ 17.75 $ 19.75 $ 17.25 $.305 $.065 2nd Quarter 19.25 19.375 17.00 .305 .065 3rd Quarter 19.25 19.625 17.875 .305 .045 4th Quarter 23.25 23.25 19.00 .305 .065
(a) Represents distributions per share in excess of net income per share-basic on a GAAP basis and is not the same as return of capital on a tax basis. The number of beneficial holders of the Company's common stock at December 31, 19971998 was approximately 5,600. ITEM 6. SELECTED FINANCIAL AND OPERATING INFORMATION The following table sets forth selected financial and operating information on a historical basis for the Company. The following information should be read in conjunction with all of the financial statements and notes thereto included elsewhere in this Form 10-K. The historical operating data for the years ended December 31, 1998, 1997 and 1996 has been derived from the historical Financial Statements of the Company audited by Ernst & Young LLP, independent auditors. The historical operating data for the years ended December 31, 1995 and 1994 and 1993 havehas been derived from the historical Financial Statements of the Company audited by Coopers & Lybrand, L.L.P., independent auditors. On April 22, 1994, a two-for-one stock split became effective. For purposes of presenting outstanding shares, distribution per share and units of limited partnership interest ("OP Units"),Units, the impact of the stock split has been given retroactive treatment. 1315 1416 Manufactured Home Communities, Inc. Consolidated Historical
(1) Years ended December 31, --------------------------------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 1993 --------- -------- --------- --------- ---------------------- -------------- --------------- ------------- ------------ (Amounts in thousands, except for per share and property data) OPERATING DATA: REVENUES Base rental income $ 165,340 $ 108,984 $ 93,109 $ 85,242 $ 60,085 $ 36,112 Utility and other income 25,372 11,785 8,821 8,481 4,348 2,711 Equity in income of affiliates 1,070 800 853 885 727 1,195 Interest income 3,048 1,941 2,420 2,296 3,599 1,958--------- --------- --------- -------- --------- --------- --------- Total revenues 194,830 123,510 105,203 96,904 68,759 41,976--------- --------- --------- -------- --------- --------- --------- EXPENSES Property operating and maintenance 53,064 32,343 28,399 27,057 19,203 11,350 Real estate taxes 14,470 8,352 7,947 7,241 4,214 2,329 Property management 7,108 5,079 4,338 4,675 4,099 2,168 General and administrative 5,411 4,559 4,062 4,537 3,668 1,383 Depreciation and other costs (2) 29,421 17,955 15,732 16,122 9,520 5,201 Interest and related amortization (3) 49,693 21,753 17,782 18,527 11,146 8,588--------- --------- -------- --------- ----------------- --------- Total expenses 159,167 90,041 78,260 78,159 51,850 31,019--------- --------- -------- --------- ----------------- --------- Income from operations 35,663 33,469 26,943 18,745 16,909 10,957 Gain (loss) on sale of property --- --- --- 1,278 (293) ------------ --------- -------- --------- ----------------- --------- Income before allocation to minority interests and extraordinary item 35,663 33,469 26,943 20,023 16,616 10,957 Income allocated to minority interests (6,733) (4,373) (2,671) (2,006) (1,568) (522)--------- --------- -------- --------- ----------------- --------- Income before extraordinary item 28,930 29,096 24,272 18,017 15,048 10,435 Extraordinary loss on early extinguishment of debt (net of income allocated to minority interests) --- (451) --- --- --- ------------ --------- -------- --------- ----------------- --------- Net income $ 28,930 $ 28,645 $ 24,272 $ 18,017 $ 15,048 $ 10,435========= ========= ======== ========= ================= ========= Net income per common share before extraordinary item - basic $ 1.13 $ 1.18 $ .98 $ .74 $ .70 $ .70========= ========= ======== ========= ================= ========= Net income per common share before extraordinary item - diluted (4) $ 1.161.12 $ 1.15 $ .98 $ .74 $ .70 $ .69========= ========= ======== ========= ================= ========= Net income per common share - basic $ 1.13 $ 1.16 $ .98 $ .74 $ .70 $ .70========= ========= ======== ========= ================= ========= Net income per common share - diluted (4)$ 1.12 $ 1.15 $ .98 $ .74 $ .70 $ .69========= ========= ======== ========= ================= ========= Dividend per share (5)$ 1.45 $ 1.32 $ 1.22 $ 1.18 $ 1.14 $ 1.03========= ========= ======== ========= ================= ========= Weighted average common shares outstanding - basic, excluding OP Units of 5,977, 3,749, 2,715, 2,717 and 2,397, and 2,279, respectively 25,626 24,689 24,693 24,353 21,508 14,918========= ========= ======== ========= ================= ========= Weighted average common shares outstanding - diluted, including OP Units of 5,977, 3,749, 2,715, 2,717 and 2,397, and 2,279, respectively 31,962 28,762 27,546 27,138 23,942 17,344========= ========= ======== ========= ================= ========= OTHER DATA: Funds from operations (6)(4) $ 64,089 $ 50,834 $ 42,187 $ 34,518 $ 26,186 $ 16,094 Net cash flow: Operating activities $ 71,977 $ 54,581 $ 49,660 $ 40,161 $ 24,910 $ 16,724 Investing activities $(262,762) $(239,445) $(60,954) $ 4,382 $(220,707) $(178,059) Financing activities $ 203,533 $ 185,449 $ 10,858 $ (45,707)$(45,707) $ 170,427 $ 188,449 Total Properties (at end of period) (7)(5) 154 121 69 65 67 47 Total sites (at end of period) 53,391 44,108 27,356 25,552 25,860 14,474 Total sites (weighted average) 49,932 29,323 26,621 25,375 18,164 13,144
1416 1517
(1) December 31, --------------------------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 1993 --------- -------- ---------- --------- ---------------------- -------------- --------------- ------------- -------------- (In thousands) BALANCE SHEET DATA: Real estate, before accumulated $1,237,431 $936,318 $597,650 $543,229 $541,775 depreciation (8) $ 936,318 $597,650 $ 543,229 $ 541,775 $ 197,812(6) Total assets 1,176,841 864,365 567,874 523,125 544,106 341,728 Total debt 750,849 495,172 254,982 211,966 226,670 103,000 Minority interests 70,468 67,453 28,640 29,305 30,507 23,432 Stockholders' equity 310,441 280,575 257,952 261,500 270,602 204,426
- ------------------------------____________ (1) See the Consolidated Financial Statements of the Company included elsewhere herein. (2) Depreciation and other costs include depreciation on corporate assets of approximately $995,000, $590,000, $488,000, $349,000 $243,000, and $64,000$243,000 for the years ended December 31, 1998, 1997, 1996, 1995 1994, and 1993,1994, respectively. (3) The $265 million mortgage notesnote payable (the "New Mortgage"Mortgage Debt") bearbears interest at 7.015% through February 1, 2008. The Company has a $100$175 million credit facility bearing interest at the London Interbank Offered Rate ("LIBOR") plus 1.125% ($25145 million was outstanding at December 31, 1997)1998). In July 1995, the Company entered into an interest rate swap agreement (the "Swap""1998 Swap") fixing the LIBOR on $100 million of the Company's floating rate debt at 6.4% for the period, March, 1998 through 2003. By fixing the rate on $100 million of debt, the Company avoids the general uncertainty relating to the floating interest rate on the Company's variable rate debt through such time. (4) The earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). For further discussion of earnings per share and the impact of SFAS No. 128, see the notes to the consolidated financial statements beginning on page F-8. (5) The Company went public on March 3, 1993. The 1993 first quarter dividend of $.08 reflected the period from March 3, 1993 to March 31, 1993 and was prorated to $.25. (6) The Company generally considers Funds From Operations ("FFO") to be an appropriate measure of the performance of an equity REIT. FFO was defined by the National Association of Real Estate Investment Trusts ("NAREIT") in March 1995 as net income (computed in accordance with GAAP)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 significant non-recurring items, if any. In the first quarter of 1996, the Company adopted this new definition of FFO which is effective for periods ending after December 31, 1995. For purposes of presenting FFO, the revised definition of FFO has been given retroactive treatment. Prior to this adoption, FFO was defined as income before allocation to minority interests plus certain non-cash items, primarily depreciation and amortization. The Company believes that FFO is helpful to investors as a measure of the performance of an equity REIT because, along with cash flows from operating activities, financing activities and investing activities, it provides investors an understanding of the ability of the Company to incur and service debt and to make capital expenditures. 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. FFO in and of itself does not represent cash generated from operating activities in accordance with GAAP and therefore should not be considered an alternative to net income as an indication of the Company's performance or to net cash flows from operating activities as determined by GAAP as a measure of liquidity and is not necessarily indicative of cash available to fund cash needs. 1517 16 (7) During the year ended December 31, 1993, seven Properties were acquired which had aggregate net operating income of $1.5 million in 1993, which included approximately $500,000 of depreciation and amortization expense.18 (5) During 1994, 23 Properties were acquired, which had an aggregate net operating income of $10.3 million in 1994, which included approximately $3.7 million of depreciation and amortization expense. Also during 1994, three properties were sold; net operating income attributable to such properties was approximately $30,500, which included approximately $32,000 of depreciation and amortization expense. During the year ended December 31, 1995, two properties were sold; net operating income attributable to such properties was approximately $235,000, which included approximately $83,000 of depreciation and amortization expense. During the year ended December 31, 1996, four Properties were acquired; net operating income attributable to such Properties was approximately $1.8 million, which included approximately $371,000 of depreciation and amortization expense. During the year ended December 31, 1997, 39 Properties were acquired; net operating income attributable to such Properties was approximately $3.8 million, which included approximately $1.7 million of depreciation and amortization expense. (8)During the year ended December 31, 1998, 41 Properties were acquired; net operating income attributable to such Properties was approximately $7.6 million, which included approximately $3.9 million of depreciation and amortization expense. (6) During 1994, 23 Properties were acquired, which had an aggregate net The Company believes that the book value of the Properties, which reflectsreflectsx historical costs of such real estate assets less accumulated depreciation, is less than the current market value of the Properties. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with "Selected Financial Data" and the historical Consolidated Financial Statements and Notes thereto appearing elsewhere in this Annual Report.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 YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31, 1997 Since December 31, 1997, the gross investment in rental property has increased from $936 million to $1,237 million as of December 31, 1998 due to the acquisition of the following properties (collectively, the "1998 Acquisition Properties"): (i) the Ellenburg Communities; (ii) Quail Meadows on January 8, 1998; (iii) Sherwood Forest RV Resort on April 30, 1998; (iv) Casa Del Sol Resort III on May 14, 1998; (v) a portfolio of eighteen properties (the "College Heights Communities") on June 4, 1998; and (vi) Sunset Oaks on August 13, 1998. The total number of sites owned and controlled has increased from 44,108 as of December 31, 1997 to 53,391 as of December 31, 1998. The following table summarizes certain weighted average statistics for the years ended December 31, 1998 and 1997. "Core Portfolio" represents an analysis of properties owned during both periods of comparison.
Core Portfolio Total Portfolio ----------------------------- ------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ---------- Total sites 27,455 27,432 43,932 29,323 Occupied sites 26,057 25,983 41,420 27,770 Occupancy % 94.9% 94.7% 94.3% 94.7% Monthly base rent per site $ 335 $ 321 $ 332 $ 327
Base rental income ($165 million) increased $56.3 million or 51.7%. For the Core Portfolio, base rental income increased approximately $4.1 million or 4.1%, reflecting an increase in base rental rates. The remaining $52.2 million increase in base rental income was attributed to the properties acquired in 1997 and the 1998 Acquisition Properties (collectively, the "1997 and 1998 Acquisition Properties"). 18 19 Monthly base rent per site for the total portfolio increased 1.5%, reflecting a 4.4% increase in monthly base rent per site for the Core Portfolio offset by lower monthly base rents for the 1997 and 1998 Acquisition Properties. Average monthly base rent per site for the 1997 and 1998 Acquisition Properties was $329 for the year ended December 31, 1998. Weighted average occupancy decreased 0.4% due to the addition of the 1997 and 1998 Acquisition Properties to the portfolio with lower occupancy percentages, partially offset by increased occupancy at the Core Portfolio The 0.2% increase at the Core Portfolio reflects a 0.4% decrease attributed to lower occupancy at four family properties and lower occupancy at two properties where the Company has implemented a program to upgrade the resident profile and housing stock. Excluding these communities, occupancy at the Core Portfolio increased 0.6%. Utility and other income ($25.4 million) increased $13.6 million or 115.3%, due to an increase of $13.1 million attributed to the 1997 and 1998 Acquisition Properties, including $7.2 million of RV income. The remaining $500,000 increase reflected increased utility income, real estate tax pass-ons and other miscellaneous income at the Core Portfolio. Interest income ($3.0 million) increased $1.1 million or 57.0%, primarily due to the issuance of $14.6 million of notes receivable and an increase in interest earned on short-term investments. Short-term investments had average balances for the years ended December 31, 1998 and 1997 of approximately $6.9 million and $4.7 million, respectively, which earned interest income at an effective rate of 5.4% per annum in both years. Property operating and maintenance expenses ($53.0 million) increased $20.7 million or 64.1%. Of this increase $19.4 million is attributed to the 1997 and 1998 Acquisition Properties. The remaining $1.3 million increase includes approximately $300,000 of one-time expenses associated with water main breaks, storm damage and legal costs at the Core Portfolio. The Core Portfolio also experienced increases in property payroll, property general and administrative expenses and insurance and other expenses. Property operating and maintenance expenses represented 27.2% of total revenues in 1998 and 26.2% in 1997. Real estate taxes ($14.5 million) increased $6.1 million or 73.3% due to the impact of the 1997 and 1998 Acquisition Properties. Real estate taxes represented 7.4% of total revenues in 1998 and 6.8% in 1997. Property management expenses ($7.1 million) increased $2.0 million or 39.9%. The increase was primarily due to an increase in management company payroll and incremental costs associated with self management of the 1997 and 1998 Acquisition Properties. Property management expenses represented 3.6% of total revenues in 1998 and 4.1% of total revenues in 1997. General and Administrative expenses ("G&A") ($5.4 million) increased $851,000 or 18.7%. The increase was primarily due to increased payroll. G&A represented 2.8% of total revenues in 1998 and 3.7% in 1997. Earnings before interest, taxes, depreciation and amortization ("EBITDA") increased $41.6 million or 56.8%. Approximately $37.6 million of the increase related to the 1997 and 1998 Acquisition Properties. The remaining increase reflected increased base rental income at the Core Portfolio. EBITDA represented 58.9% of total revenues in 1998 and 59.2% in 1997. Interest and related amortization ($49.7 million) increased $27.9 million or 128.4%. The increase was due to higher weighted average outstanding debt balances during the period. The weighted average outstanding debt balances for the years ended December 31, 1998 and 1997 were $696 million and $301.3 million, respectively. The effective interest rate was 7.2% in 1998 and 7.1% in 1997. Interest and related amortization represented 25.5% of total revenues in 1998 and 17.6% in 1997. The Company has a $265.0 million mortgage note (the "Mortgage Debt") collateralized by 29 properties beneficially owned by MHC Financing Limited Partnership. The Mortgage Debt has a maturity date of January 2, 2028 and pays interest only at 7.015%. There is no principal amortization until February 1, 2008 after which principal and interest are paid from available cash flow and the interest rate is reset at a rate equal to the then 10-year U.S. Treasury obligations plus 2.0%. The Company has an unsecured line of credit with a bank (the "Credit Agreement") bearing interest at the London Interbank Offered Rate ("LIBOR") plus 1.125%. On April 28, 1998, the Company amended the Credit Agreement, increasing the line of credit from $100 million to $150 million. On December 18, 1998, the Company further amended the Credit Agreement, increasing the line of credit from $150 million to $175 million. 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 fee on the average unused amount of such credit equal to 0.15% of such amount. As of December 31, 1998, $145 million was outstanding under the Credit Agreement. The Company paid fees related to the amendments which were immaterial. 19 20 The Company has a term loan (the "Term Loan") with a group of banks with interest only payable monthly at a rate of LIBOR plus 1.0%. On April 28, 1998, the Company amended the Term Loan to increase the borrowing from $60 million to $100 million. The Term Loan matures on April 3, 2000 and may be extended to April 3, 2002. The Company used the $40 million in proceeds to repay a portion of the $50 million previously borrowed on April 7, 1998 under the Term Loan. The Company paid fees related to this amendment which were immaterial. 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 cost of the 1998 Swap consisted only of legal costs which were deemed immaterial. The value of the 1998 Swap is impacted by changes in the market rate of interest. Had the 1998 Swap been entered into on December 31, 1998, the applicable LIBOR swap rate would have been 4.56%. Each 0.01% increase or decrease in the applicable swap rate for the 1998 Swap increases or decreases the value of the 1998 Swap versus its current value by approximately $39,000. The Company accounts for the 1998 Swap as a hedge. Payments and receipts under the 1998 Swap are accounted for as an adjustment to interest expense. Depreciation on corporate assets ($995,000) increased $405,000 or 68.8% due to fixed asset additions in 1997 and 1998 associated with the Company's upgrade of certain computer systems infrastructure and the wide area network. Depreciation on corporate assets represented 0.5% of total revenues in both 1998 and 1997. Depreciation on real estate assets and other costs ($28.4 million) increased $11.1 million or 63.7% as a result of 1997 and 1998 Acquisition Properties. Depreciation on real estate assets and other costs represented 14.6% of total revenues in 1998 and 14.1% in 1997. COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996 Since December 31, 1996, the gross investment in rental property has increased from $598 million to $936 million as of December 31, 1997 due to the acquisition of the following properties (the "Acquisition"1997 Acquisition Properties"): (i) California Hawaiian on March 14, 1997; (ii) Golf Vista Estates on March 27, 1997; (iii) Golden Terrace South on May 30, 1997; (iv) a portfolio of eighteen manufactured home communities and two commercial properties (collectively, the "MPW Properties") on August 29, 1997; (v) Arrowhead Village on September 16, 1997, and (vi) seventeen of the Ellenburg Communities on December 18, 1997. The total number of sites owned and controlled has increased from 27,356 as of December 31, 1996 to 44,108 as of December 31, 1997. The following table summarizes certain weighted average occupancy statistics for the years ended December 31, 1997 and 1996. "Core Portfolio" represents an analysis of properties owned during both periods of comparison.
Core Portfolio Total Portfolio --------------- --------------------------------------------- ------------------------- 1997 1996 1997 1996 ------ ------ ------ ----------------- ----------- ----------- ---------- Total sites 25,631 25,554 29,323 26,621 Occupied sites 24,319 24,098 27,770 25,025 Occupancy % 94.9% 94.3% 94.7% 94.0% Monthly base rent per site $325 $312 $327 $310$ 325 $ 312 $ 327 $ 310
Base rental income ($109 million) increased $15.9 million or 17.0%. For the Core Portfolio, base rental income increased approximately $4.7 million or 5.2%, reflecting a 4.3% increase in base rental rates and a 0.9% increase related to occupancy. The remaining $11.2 million increase in base rental income was attributed to the 1997 Acquisition Properties. Monthly base rent per site for the total portfolio increased 5.5%, reflecting a 4.2% increase in monthly base rent per site for the Core Portfolio and higher monthly base rents for the 1997 Acquisition Properties. Average monthly base rent per site for the 1997 Acquisition Properties was $343 for the year ended December 31, 1997. Weighted average occupancy increased 0.7% due to increased occupancy at the expansion communities and the addition of the 1997 Acquisition Properties with higher occupancy percentages to the portfolio. 16 17 Utility and other income ($11.8 million) increased $3.0 million or 33.6%, primarily due to an increase of $1.2 million attributed to the 1997 Acquisition Properties, the collection of dividend income of $173,000 in the first quarter of 1997, and increased utility income, real estate tax pass-ons and other miscellaneous income at the Core Portfolio. 20 21 Interest income ($1.9 million) decreased $479,000 or 19.8%, primarily due to the repayment of $13 million of notes receivable in August 1997, partially offset by an increase in interest earned on short-term investments. Short-term investments had average balances for the years ended December 31, 1997 and 1996 of approximately $4.7 million and $3.4 million, respectively, which earned interest income at an effective rate of 5.4% per annum in both years. Property operating and maintenance expenses ($32.3 million) increased $3.9 million or 13.9% due to the impact of the 1997 Acquisition Properties and an increase in property payroll, property general and administrative expenses and insurance and other expenses at the Core Portfolio. Partially offsetting these increases was a decrease in repairs and maintenance expense and utility expense at the Core Portfolio. Property operating and maintenance expenses represented 26.2% of total revenues in 1997 and 27.0% in 1996. Real estate taxes ($8.4 million) increased $405,000 or 5.1% due to the impact of the Acquisiton1997 Acquisition Properties, partially offset by a decrease in the Core Portfolio due to lower than expected assessed values at certain of the properties based on actual bills received. Real estate taxes represented 6.8% of total revenues in 1997 and 7.6% in 1996. Property management expenses ($5.1 million) increased $741,000 or 17.1%. The increase was primarily due to an increase in management company payroll and incremental costs associated with self management of the 1997 Acquisition Properties. Property management expenses represented 4.1% of total revenues in both 1997 and 1996. General and Administrative expenses ("G&A")&A ($4.6 million) increased $497,000 or 12.2%. The increase was primarily due to increased payroll resulting from salary increases. G&A represented 3.7% of total revenues in 1997 and 3.9% in 1996. Earnings before interest, taxes, depreciation and amortization ("EBITDA")EBITDA increased $12.7 million or 21%. Approximately $7.6 million of the increase related to the 1997 Acquisition Properties. The remaining increase reflected increased base rental income and decreased repairs and maintenance expense, utility expense and real estate tax expense, partially offset by increased payroll expense, property general and administrative expense and insurance and other expenses at the Core Portfolio. In addition, corporate G&A and property management expenses increased. EBITDA represented 59.2% of total revenues in 1997 and 57.5% in 1996. Interest and related amortization ($21.8 million) increased $4.0 million or 22.3%. The increase was due to higher weighted average outstanding debt balances during the period. The weighted average outstanding debt balances for the years ended December 30,31, 1997 and 1996 were $301.3 million and $234.9 million, respectively. The effective interest rate was 7.1% in 1997 and 7.2% in 1996. Interest and related amortization represented 17.6% of total revenues in 1997 and 16.9% in 1996. On December 12, 1997, the Company refinanced the $100.0 million mortgage note (the "Original Mortgage Debt") with a $265.0 million mortgage note (the "New Mortgage Debt") collateralized by 29 properties beneficially owned by MHC Financing Limited Partnership. The New Mortgage Debt has a maturity date of January 2, 2028 and pays interest only at 7.015%. There is no principal amortization until February 1, 2008 after which principal and interest are paid from available cash flow and the interest rate is reset at a rate equal to the then 10-year U.S. Treasury obligations plus 2.0%(see discussion above). In October 1996, the Company entered into an interest rate swap agreement (the "1997 Swap") fixing LIBOR on the Original Mortgage Debt at 5.57% effective January 10, 1997 through March 3, 1998. The Company sold the 1997 Swap in December 31, 1997 for approximately $26,000 in connection with the refinancing. On March 1, 1997, the Company amended the credit agreement for its $100.0 million line of credit reducing the interest rate from LIBOR plus 1.375% to LIBOR plus 1.125%. In addition, the fee on the average unused amount was reduced to 0.125% of such amount from 0.15%. The Company did not pay any fees in connection with this amendment. On April 3, 1997, the Company entered into a $60.0 million term loan (the "Loan") with a group of banks with interest only payable monthly at a rate of LIBOR plus 1.0%. The Loan matures on April 3, 2000 and may be extended to April 3, 2002. In connection with the Loan, the outstanding balance under the $100.0 million line of credit was reduced by $60.0 million. 17 18 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 March, 1998 through 2003. By fixing the rate on $100 million of debt, the Company avoids the general uncertainty relating to the floating interest rate on the Company's variable rate debt through such time. The cost of the 1998 Swap consisted only of legal costs which were deemed immaterial. The value of the 1998 Swap is impacted by changes in the market rate of interest. Had the 1998 Swap been entered into on December 31, 1997, the applicable LIBOR swap rate would have been 5.97%. Each 0.01% increase or decrease in the applicable swap rate for the 1998 Swap increases or decreases the value of the 1998 Swap entered into by the Company versus its current value by approximately $43,245. Depreciation on corporate assets ($590,000) increased $102,000 or 20.9% due to fixed asset additions in 1996 associated with the Company's conversion to a new accounting software system. Depreciation on corporate assets represented 0.5% of total revenues in both 1997 and 1996. Depreciation on real estate assets and other costs ($17.4 million) increased $2.1 million or 13.9% as a result of the 1997 Acquisition Properties. In addition, the Company recognized a one-time gain of $18,000 representing gains on the prepayment of notes receivable and the sale of certain assets related to the Chateau Communities, Inc. ("Chateau") merger attempt, partially offset by the write-off of certain deferred compensation. Depreciation on real estate assets and other costs represented 14.1% of total revenues in 1997 and 14.5% in 1996. In the fourth quarter of 1997, the Company recognized an extraordinary item for early extinguishment of the Original Mortgage Debt of $556,000. COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995 Since December 31, 1995, the gross investment in rental property had21 22 LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities increased $17.4 million from $543 million to $598 million when compared to December 31, 1996 due to the acquisition of Waterford on February 28, 1996, the funding of the Candlelight Village loan, which was accounted for as a purchase, on May 9, 1996, and the acquisition of Casa del Sol Resort No. 1 and Casa del Sol Resort No. 2 (collectively, the "Casa del Sol Resorts") on October 23, 1996. The total number of sites increased from 25,552 as of December 31, 1995 to 27,356 as of December 31, 1996. The following table summarizes certain weighted average occupancy statistics for the years ended December 31, 1996 and 1995.
Core Portfolio Total Portfolio --------------- ---------------- 1996 1995 1996 1995 ------ ------ ------ ------ Total sites 25,554 25,375 26,621 25,375 Occupied sites 24,098 23,787 25,025 23,787 Occupancy % 94.3% 93.7% 94.0% 93.7% Monthly base rent per site $312 $297 $310 $297
Base rental income ($93.1 million) increased $7.9 million or 9.2%. For the Core Portfolio, base rental income increased approximately $5.4 million or 6.3%, reflecting a 5.0% increase in base rental rates and a 1.3% increase related to occupancy. Base rental income at Waterford, Candlelight Village and the Casa del Sol Resorts (collectively, the "1996 Acquisitions") was approximately $3.0$54.6 million for the year ended December 31, 1996. Partially offsetting this1997 to $72.0 million for the same period in 1998. This increase wasreflected a $502,000 decrease$13.3 million increase in baseFFO, which reflected increases in rental income resulting from the saleas discussed in "Results of two properties in 1995. Monthly base rent per site for the total portfolio increased 4.4% reflecting a 5.0%Operations" above, and an increase in the Core Portfolio, partially offset by lower monthly base rents for the 1996 Acquisitions. Average monthly base rent per site for the 1996 Acquisitions was $270. Weighted average occupancy increased 0.4% primarily due to increased occupancy at the expansion communities. Utility and other income ($8.8 million) increased $340,000 or 4% primarily due to increased utility incomeaccounts payable and real estate tax pass-on income. 18 19 Interest income ($2.4 million) increased $124,000 or 5%, primarily due to interest earned on the employee notes granted on January 2, 1996, partially offset by a decreaseaccruals and rents received in interest earned on short-term investments. Short-term investments had average balances for the years ended December 31, 1996 and 1995 of approximately $3.4 million and $3.5 million, respectively, which earned interest income at an effective rate of 5.4% in both years. Property operating and maintenance expenses ($28.4 million) increased $1.3 million or 5% due to the impact of the 1996 Acquisitions, an increase in utility expense, insurance and other expenses, and repairs and maintenance expense at the Core Portfolio. Partially offsetting the increase was a decrease resulting from the sale of two properties in 1995 and a decrease in property payroll and property general and administrative expense at the Core Portfolio. Property operating and maintenance expenses represented 27.0% of total revenues in 1996 and 27.9% in 1995. Real estate taxes ($7.9 million) increased $706,000 or 10% due to the expected increase in assessed values at certain Properties in 1996. Real estate taxes represented 7.6% of total revenues in 1996 and 7.5% in 1995. Property management expenses ($4.3 million) decreased $337,000 or 7%. The decrease was primarily due to a decrease in management company payroll as a result of the staffing reductions in 1995. Property management expenses represented 4.1% of total revenues in 1996 and 4.8% in 1995. G&A expenses ($4.0 million) decreased $475,000 or 11%. The Company continued to focus on reducing G&A expenses as a percentage of revenues and, as a result these costs decreased significantly in 1996. In addition, professional fees decreased resulting from the write-off in 1995 of legal due diligence and related costs associated with acquisitions which did not materialize. G&A expenses represented 3.9% of total revenues in 1996 and 4.7% in 1995. EBITDA increased $7.1 million or 21%. Approximately $2.2 million of the increaseadvance related to the 1996 Acquisitions, partially offset by a decrease resulting from the sale of two properties in 1995. The remaining increase reflected increased base rental income and decreased payroll expense and property general and administrative expenses,acquisitions, partially offset by increased repairs and maintenance expense, utility expense, insurance and other expenses and real estate expense at the Core Portfolio. In addition, corporate G&A increased and property management expenses decreased. EBITDA represented 57.5% of total revenues in 1996 and 55.1% in 1995. Interest expense and related amortization ($17.8 million) decreased by $745,000 or 4%. Interest expense decreased $13,000 due to a decrease in the interest rate on the Original Mortgage Debt resulting from the interest rate swap agreement entered into in December 1995 (see discussion below), partially offset by an increase in interest on the line of credit resulting from additional borrowings in 1996. The weighted average outstanding debt balances for the years ended December 31, 1996 and 1995 were $234.9 million and $228.4 million, respectively. The effective interest rates were 7.2% and 7.6% for the years ended December 31, 1996 and 1995, respectively. Amortization decreased $732,000 due to the write-off in 1995 of approximately $385,000 of loan costs related to the $50 million line of credit with General Electric Credit Corp. which expired in March 1995. In addition, the Company sold a portion of the interest rate cap on the Original Mortgage Debt related to 1996 which decreased amortization in 1996. Interest expense and related amortization represented 16.9% of total revenues in 1996 and 19.1% in 1995. The Company had an interest rate cap for the term of the Original Mortgage Debt which eliminated exposure to increases in LIBOR over 6%, plus 1.05%. In connection with the 1997 Swap and 1998 Swap, the Company sold portions of the interest rate cap related to 1996 and 1997 and recorded a non-cash write-off of approximately $650,000 in the fourth quarter of 1995 and $482,000 in the fourth quarter of 1996. Depreciation expense and other costs ($15.7 million) increased $390,000 or 2% as a result of the 1996 Acquisitions. In addition, the Company sold a portion of the interest rate cap on the Original Mortgage Debt related to 1996 and 1997 and incurred non-cash charges of $482,000 and $650,000 in 1996 and 1995, respectively. Depreciation expense represented 14.5% of total revenues in 1996 and 15.6% in 1995. 19 20 LIQUIDITY AND CAPITAL RESOURCESprepaid expenses. Net cash provided by operating activities increased $4.9 million from $49.7 million for the year ended December 31, 1996 to $54.6 million for the same period in 1997. This increase reflected an $8.6 million increase in FFO, which reflected increases in rental income and decreases of certain expenses as discussed in "Results of Operations" above, and an increase in collection of rents received in advance and security deposits related to the property acquisitions, partially offset by an increase in prepaid expenses and rents receivable and decreased accounts payable accruals. Net cash provided by operating activities increased $9.5 million from $40.2 million for the year ended December 31, 1995 to $49.7 million for the same period in 1996. This increase reflected a $7.7 million increase in FFO, which reflected increases in rental income and decreases of certain expenses as discussed in "Results of Operations" above, an increase in accounts payable accruals of approximately $1.6 million primarily related to acquisition activities and real estate taxes, and an increase in collection of rents receivable of $498,000, partially offset by decreased collections of miscellaneous receivables. FFO was defined by NAREIT in March 1995 as net income (computed in accordance with generally accepted accounting principles ["GAAP"])GAAP), before allocation to minority interests, excluding gains (or losses) from sales of propery,property, plus real estate depreciation and after adjustments for significant non-recurring items, if any. In the first quarter of 1996, the Company adopted this new definition of FFO which was effective for periods ending after December 31, 1995. Prior to this adoption, FFO was defined as income before allocation to minority interests plus certain non-cash items, primarily depreciation and amortization. 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. 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 years ended December 31, 1998, 1997 1996 and 19951996 (amounts in the thousands):
For the Years Ended December 31, ------------------------------------------------------------------------- Computation of funds from operations: 1998 1997 1996 1995 ------- ------- ----------------- --------- ---------- Income before allocation to minority interests and extraordinary item............... $33,469 $26,943 $20,023item...................... $ 35,663 $ 33,469 $ 26,943 Depreciation on real estate assets and other costs.....costs.......................... 28,426 17,365 15,244 15,773 Gain on sale of assets........assets.................... --- --- (1,278) ------- ------- ---------- ---------- --------- ---------- Funds from operations (a)............ $50,834 $42,187 $34,518 ======= ======= =======operations......................... $ 64,089 $ 50,834 $ 42,187 ========= ========= ========== Computation of funds available for distribution: Funds from operations (a)............ $50,834 $42,187 $34,518operations......................... $ 64,089 $ 50,834 $ 42,187 Non-revenue producing improvements - rental properties................properties...................... (8,005) (4,187) (3,402) (3,286) ------- ------- ----------------- --------- ---------- Funds available for distribution....... $46,647 $38,785 $31,232 ======= ======= =======distribution................... $ 56,084 $ 46,647 $ 38,785 ========= ========= ==========
- --------------- (a) FFO for the year ended December 31, 1995 has been restated pursuant to the new definition of FFO adopted by the Company for periods ending after December 31, 1995. 20 21 Net cash used in investing activities increased $178.5$23.3 million from $70$239.4 million for the year ended December 31, 1997 to $262.8 million for the year ended December 31, 1998, primarily due to the funding of notes receivable, improvements made to acquisition properties, and collection of escrow proceeds related to the acquisition of the Ellenburg Communities, partially offset by the sale of project related assets in 1997. 22 23 Net cash used in investing activities increased $178.4 million from $61 million for the year ended December 31, 1996 to $239.4 million for the year ended December 31, 1997, primarily due to increased payments for acquisitions in 1997 and the Company's investment in partnerships, partially offset by the collection of principal payments on notes receivable, net proceeds from the sale of project related assets and decreased purchases of short-term investments, all of which had maturitites of three months or less. Net cash used in investing activities increased $65.4 million from $4.4 million provided by investing activities for the year ended December 31, 1995 to $61.0 million used in investing activities for the year ended December 31, 1996, primarily due to the acquisitions of Waterford and the Casa del Sol Resorts, the financing of Candlelight Village, the costs incurred in pursuit of a proposed merger, a decrease in cash from the sale of rental properties in 1996 when compared to 1995 and the purchase of short-term investments. Partially offsetting this increase were increased distributions from RSI. During 1996, the Company offered a merger proposal to Chateau in opposition to Chateau's proposed merger with ROC Communities, Inc. ("ROC") and incurred approximately $1.3 million in project related costs and invested in certain project related saleable assets with a book value of approximately $9.9 million. These expenditures were included in prepaid expenses and other assets at December 31, 1996. On February 11, 1997, Chateau's shareholders approved Chateau's merger with ROC. Thus, during 1997, the Company sold the related assets it had acquired for approximately $11.1 million and incurred a net gain of approximately $259,000. During 1997, notes receivable of approximately $15 million were repaid. In connection with the repayments, the Company recognized a one-time gain of $525,000 representing the collection of a $1.4 million prepayment penalty, partially offset by the write-off of the apportioned purchase price originally allocated to the management contract for the property collateralizing one note and write-off of the unamortized discount on another note. On March 14, 1997, the Company acquired California Hawaiian, located in San Jose, California, for a purchase price of approximately $23.3 million. The acquisition was funded with a borrowing under the Company's line of credit. On March 27, 1997, the Company acquired Golf Vista, located in Monee, Illinois. The purchase price of approximately $7.4 million, including deferred payments of $150,000 per year for the next five years, was funded with existing available cash. On May 30, 1997, the Company entered into a capital lease with East Tincup Village, Inc., a Colorado corporation, for Golden Terrace South (formerly known as East Tincup Village). The lease term is 110 months commencing on May 29, 1997 with monthly rental payments of approximately $18,000. The lease contains an option for the Company to purchase Golden Terrace South at the termination of the lease for $2.4 million. For financial accounting purposes, the Company accounts for the lease as a direct financing lease and, accordingly, the Company has recorded an investment in real estate and a note payable. On August 29, 1997, the Company acquired the MPW Properties from limited partnerships and joint ventures affiliated with MPW. The aggregate purchase price of the MPW Properties was approximately $103 million. Approximately $64 million of the purchase price was in the form of units of limited partnership interest ("OP Units"), approximately $6 million was in the form of installment notes payable, approximately $17 million was in the form of cash funded from a borrowing under the Company's line of credit, and the Company assumed debt of approximately $13 million. In addition, the Company capitalized approximately $1.8 million of costs associated with the acquisition. On September 16, 1997, the Company acquired Arrowhead Village, located in Lantana, Florida for a purchase price of approximately $20.3 million. The acquisition was funded with a borrowing under the Company's line of credit. 21 22 On September 4, 1997, the Company entered into a portfolio purchase agreement (as amended by a supplemental agreement on December 17, 1997) to acquire 38 manufactured home communities (the "Ellenburg Communities") from partnerships having Ellenburg Capital Corporation ("ECC") as the general partner for a purchase price in excess of $300 million. The agreement immediately transferred property management of the 38 communities to the Company. The Ellenburg Communities are being sold pursuant to an order of the Superior Court for the State of California (the "California Court") which is overseeing the involuntary dissolution of ECC. The California Court has appointed winding-up agents to liquidate and wind-up the affairs of ECC. InFrom December 17, 1997 the Company entered into a supplemental agreement (the "Supplemental Agreement") in furtherance of its acquisition of the Ellenburg Communities which was approved by the California Court. Sales of the Ellenburg Communities are subject to limited partner approval. Inthrough December 1997, the Company closed on the acquisition of seventeen of the Ellenburg Communities for approximately $143 million and gained effective control of an additional twelve communities. In31, 1998, the Company closed on the acquisition of two additionalthirty-one of the Ellenburg Communities for an aggregate purchase price of approximately $278 million and madegained control of an additional five Ellenburg Communities with acquisition advances of approximately $57 million to the partnerships which own seven of thesuch Ellenburg Communities. The Company has also acquired certain other undivided minority interests in certain offunded the properties. The Company is in the process of obtaining limited partner approval to acquire the remaining Ellenburg Communities. The Company has 120 days to complete certain post-closing due diligence procedures and adjust the purchase price to the extent that: (i) the net operating income of the communities is less than the amount used to determine the purchase price; (ii) the community requires environmental, structural engineering, deferred maintenance and other physical or legal costs which may be in excess of anticipated amounts for such items, and (iii) the community has negative working capital. The maximum amount for such adjustments will be equal to 25% of the net equity value of the community which will be held in escrow for 120 days from closing. The acquisitions are being financed through assumption of debt securitizationacquisition advances with a bank and through borrowings under the Company's line of credit and term bank facilities. In addition, the Company assumed debt of approximately $32 million and issued OP Units of approximately $4.9 million in connection with this transaction. During 1998, the Company received approximately $14.3 million, including approximately $365,000 of interest income, which was being held subject to the completion of due diligence procedures on the Ellenburg Communities. The persons appointed to windup the affairs of ECC have released the funds and have presented a status report to the court. The $14.3 million has been recorded as a liability until certain related issues are finalized at which point the final liability will be relieved and the purchase price of the Ellenburg Communities adjusted accordingly. On January 6, 1998, the Company funded a $12.3 million loan (the "Meadows Loan") to Meadows Preservation, Inc. The Meadows Loan is collateralized by The Meadows manufactured home community located in Palm Beach Gardens, Florida, bears interest at a nominal rate of 9%, subject to adjustment based on cash flow of the property, and matures on April 30, 1999. On January 8, 1998, the Company acquired Quail Meadows, located in Riverbank, California, for a purchase price of approximately $4.7 million. The acquisition was funded with a borrowing under the Company's line of credit. Quail Meadows consists of approximately 146 developed sites. On April 30, 1998, the Company acquired Sherwood Forest RV Resort, located adjacent to one of the Ellenburg Communities in Kissimmee, Florida, for a purchase price of approximately $7.0 million. The acquisition was funded with a borrowing under the Company's line of credit. Sherwood Forest RV Resort consists of approximately 512 developed sites and a 33 acre expansion parcel. On May 14, 1998, the Company acquired Casa Del Sol Resort III, located adjacent to one of the Company's communities in Peoria, Arizona, for a purchase price of approximately $9.8 million. The acquisition was funded with a borrowing under the Company's line of credit. Casa Del Sol Resort III consists of 238 developed sites. On June 4, 1998, the Company entered into a joint venture agreement with Wolverine Investors L.L.C. to acquire the College Heights Communities. The aggregate purchase price for the College Heights Communities was approximately $89 million. The Company contributed approximately $19 million to the joint venture, Wolverine Investors L.L.C. contributed approximately $2.0 million to the joint venture and the remainder of the acquisition was funded with a borrowing from a financial institution of approximately $68 million. The Company's $19 million contribution to the joint venture was funded with a borrowing under the Company's line of credit. Due to the Company's ability to control the joint venture through its ownership percentage, the joint venture has been consolidated with the Company for financial reporting purposes. On August 13, 1998, the Company acquired Sunset Oaks, located in Plant City, Florida, adjacent to one of the Company's existing properties, for a purchase price of approximately $3.6 million. The acquisition was funded with a borrowing under the Company's line of credit. Sunset Oaks consists of 168 developed sites. 23 24 Capital expenditures for improvements were approximately $14.2 million for the year ended December 31, 1998 compared to $6.4 million for the year ended December 31, 1997 compared to $8.1 million for the year ended December 31, 1996.1997. Of the $6.4$14.2 million, approximately $4.2$8 million represented improvements to existing sites.sites including $3.5 million related to newly acquired properties. The Company anticipates spending approximately $4.5$6.7 million on improvements to existing sites during 1998.1999. The Company believes these improvements are necessary in order to increase and/or maintain occupancy levels and maximize rental rates charged tomaintain competitive market rents for new and renewing residents. The remaining $2.2$6.2 million represented costs to develop expansion sites at certain of the Company's Properties and other corporate headquarter costs. The Company is currently developing 90 additional sites at Golf Vista Estates which should be availableNet cash provided by financing activities increased $18.1 million from $185.4 million for occupancythe year ended December 31, 1997 to $203.5 million for the year ended December 31, 1998 primarily due to the issuance of common stock in 1998.the second quarter of 1998, partially offset by decreased net proceeds from the line of credit, term loan and mortgage notes payable. Net cash provided by financing activities increased $174.6 million from $10.9 million for the year ended December 31, 1996 to $185.4 million for the year ended December 31, 1997 primarily due to the addition of the New Mortgage Debt whereby the Company borrowed an additional $165 million, increased borrowings on the line of credit, and an increase in proceeds from the exercise of stock options and issuance of common stock under the employee stock purchase plan, partially offset by the purchase of 330,300 shares of the Company's common stock under the common stock repurchase plan, increased distributions to common stockholders and the payment of debt issuance costs related to the Debt Refinancing. On April 23, 1998, the Company completed an offering of 1,048,059 shares of common stock (the "Unit Trust Offering") and sold the shares to Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter"). The offering price per share was $25.4375, the closing price for shares of the Company's common stock on April 23, 1998, resulting in gross offering proceeds of approximately $26.7 million. Net cash provided by financing activities increased $56.6 million from $45.7 million usedof the Underwriter's discount and offering expenses, the Company received approximately $25 million. The Underwriter deposited the shares of common stock with the trustee of the Equity Investor Fund Cohen & Steers Realty Majors Portfolio, a unit investment trust (the "Trust"), in financing activitiesexchange for units in the Trust. For the year ended December 31, 1995 to $10.9 million provided by financing activities for1998, the year ended December 31, 1996 primarily due to $52.1 million of borrowings under the line of credit for the acquisitions of WaterfordCompany declared and the Casa del Sol Resorts and the financing of Candlelight Village. Distributions to common stockholders and minority interests increased $13.8 million for the year ended December 31, 1997 when compared to the same period in 1996 due to an increase in the distributionpaid quarterly distributions totaling $1.45 per share and number of shares and OP units outstanding.share. For the year ended December 31, 1997, the Company declared and paid quarterly distributions totaling $1.32 per share. For the year ended December 31, 1996, the Company declared and paid quarterly distributions totaling $1.22 per share, which included the fourth quarter distribution paid on January 10, 1997. Return of capital on a GAAP basis was $0.33, $0.15 $0.24 and $0.44$0.24 for the years ended December 31, 1998, 1997 1996 and 1995,1996, respectively. Substantially all of the leases at the Properties allow for monthly or annual rent increases which provide the Company with the opportunity to achieve increases, where justified by the market, in rental income as each lease matures. Such types of leases generally minimize the risk of inflation to the Company. 22 23 The year 2000 issue ("Year 2000") is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer 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 a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, collect rents, or engage in similar normal business activities. Based on a recent assessment, the Company determined that a majority of its applications will function properly with respect to dates in the year 2000 and thereafter. The Company has initiated formal communications with all of its significant suppliers to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own year 2000 issues. The Company's total Year 2000 project cost and estimates to complete do not include the estimated costs and time associated with the impact of third party Year 2000 issues. There can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted and would not have an adverse effect on the Company's systems. The Company anticipates completing its Year 2000 project no later than December 31, 1998, which is prior to any impact on its operating systems. The total cost of the Year 2000 project is estimated to be immaterial assuming third parties remediate their own year 2000 issues. This assumption is based on management's best estimates, which were derived utilizing numerous assumptions of future events, and there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. 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 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. 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. 24 25 YEAR 2000 The year 2000 issue ("Year 2000") is the result of computer programs and embedded processors ("Systems") failing to properly account for the end of 1999 and the rollover to the year 2000. The Year 2000 issue comes from three date-related problems and practices. First some Systems define the year-portion of date fields with two digits instead of four. As a result, programs and equipment that have time-sensitive functions may interpret a date using "00" as being 1900 rather than 2000. Second, the year 2000 is a leap year. There is a possibility that some Systems may fail to account for the leap day properly. Third, in practice, an artificial date of "9/9/99" is sometimes used as a fictitious date when testing Systems. It is possible that some Systems will reject the actual date of "September 9, 1999" as fictitious. Problems arising from one or more of these problems and practices could result in failure of one or more Systems causing a disruption of operations, including, among other things, a temporary inability to process transactions, collect rents, or engage in similar normal business activities. Utilizing purchasing records, inventory listings, and direct communication with employees, the Company is in the process of identifying all of its information technology ("IT") and non-IT systems and assessing them for Year 2000 readiness. Critical systems include, but are not limited to: accounts receivable, sales and inventory, human resources and payroll, accounts payable and general ledger, Lotus Notes, Microsoft Office, tax preparation and filing software, computers, data networking equipment, telephone systems, fax machines and photocopiers, security and life safety systems (elevators, alarm systems), process control systems (pool pumps and chlorine systems, sprinkler systems), cable television systems, lift stations, and drinking water and waste water treatment plants. The Company has completed the inventory and research phases of its preparations for the Year 2000. Review of the research material continues in the first quarter of 1999, as does on-site inspections of the utilities (drinking water and waste water treatment plants, lift stations, and cable television systems). The Company has retained consultants to handle assessment of its drinking water, waste water treatment, lift station and cable television facilities for which it is responsible. The Company has initiated formal communications with all of its significant suppliers to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 issues. The Company anticipates that scheduled system upgrades to its accounts receivable system, accounts payable and general ledger system, and payroll system will remediate current Year 2000 concerns. Remediation steps and development of contingency plans will be completed in the second quarter of 1999. The Company has set a deadline for Year 2000 readiness of June 30, 1999. There can be no guarantee that the systems of other companies on which the Company's Systems rely will be timely converted and will not have an adverse effect on the Company's Systems. Through December 31, 1998, the Company's costs associated with remediation efforts have been immaterial. In 1998, the Company retained a full-time contract employee to perform Year 2000 research and documentation at an annual fee of approximately $45,000 and has budgeted to retain the employee through 1999. The cost to retain a consultant to assess the waste water treatment and cable television facilities has been budgeted at less than $50,000. The Company expects that replacement of approximately 75 computers will be required with a capital budget of approximately $200,000. The Company's total Year 2000 project costs and estimates to complete do not include the estimated costs and time associated with the impact of third-party Year 2000 issues. The total cost of the Year 2000 project is estimated to be immaterial assuming third parties remediate their own Year 2000 issues. This assumption is based on management's best estimates, which were derived utilizing numerous assumptions of future events, and there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. The Company has commenced its contingency planning for critical operational areas that might be affected by the Year 2000 issue if compliance is delayed. Aside from catastrophic failure of banks, governmental agencies, etc., the Company believes that it could continue operations. For example, rent can be collected and recorded by manual methods using hardcopy reports from previous months; payroll can be processed by issuing manual checks relying on existing payroll registers; bills can be paid as long as banks can process checks; and basic financial statements can be prepared manually. ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company's earnings are affected by changes in interest rates as a portion of the Company's outstanding indebtedness is at variable rates based on LIBOR. The Company's $175 million line of credit ($145 million outstanding at December 31, 1998) bears interest at LIBOR plus 1.125% and the Company's $100 million Term Loan bears interest at LIBOR plus 1.0%. The Company has the 1998 Swap which fixes LIBOR at 6.4% on $100 million of the Company's floating rate debt for the period 1998 through 2003. If LIBOR increased/decreased by 1.0% during 1998, interest expense would have increased/decreased by approximately $1.0 million based on the average balance outstanding under the Company's line of credit for the year ended December 31, 1998. Information relating to quantitive and qualitive disclosure about market risk as it relates to the 1998 Swap is set forth in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and in Note 9 "Long Term Borrowings" in the Notes to Consolidated Financial Statements. Such information is incorporated herein. 25 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Combined Financial Statements on page F-1 of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEMS 10, 11, 12, 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 10, Item 11, Item 12, and Item 13 will be contained in a definitive proxy statement which the Registrant anticipates will be filed no later than April 28, 1998,1999, and thus this partPart has been omitted in accordance with General Instruction G(3) to Form 10-K. 23 24 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) (1&2) See Index to Financial Statements and Schedules on page F-1 of this Form 10-K. (3) Exhibits: 2(a) Admission Agreement between Equity Financial and Management Co., Manufactured Home Communities, Inc. and MHC Operating Partnership 3.1(a) Articles of Incorporation of Manufactured Home Communities, Inc. 3.2(a) Articles of Amendment and Restatement of Manufactured Home Communities, Inc. 3.3(a) Bylaws of Manufactured Home Communities, Inc. 4 Not applicable 9 Not applicable 10.1(a) Amended and Restated Agreement of Limited Partnership of MHC Operating Limited Partnership 10.2(a) Agreement of Limited Partnership of MHC Financing Limited Partnership 10.3(a) Agreement of Limited Partnership of MHC Management Limited Partnership 10.4(a) Property Management and Leasing Agreement between MHC Financing Limited Partnership and MHC Management Limited Partnership 10.5(a) Property Management and Leasing Agreement between MHC Operating Limited Partnership and MHC Management Limited Partnership 10.6(a) Services Agreement between Realty Systems, Inc. and MHC Management Limited Partnership 10.7(a) Rate Protection Agreement 10.8(a) Revolving Credit Note made by Realty Systems, Inc. to Equity Financial and Management Co. 10.9(a) Assignment to MHC Operating Limited Partnership of Revolving Credit Note made by Realty Systems, Inc. to Equity Financial and Management Co. 10.10(a) Stock Option Plan 10.11A(a) Indenture of Mortgage, Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment of Rents 10.11B(a) Promissory Note 10.11C(a) Assignment of Loan Documents 10.11D(a) Assignment of Leases, Rents and Security Deposits 10.11E(a) Swap Agreement Pledge and Security Agreement 10.11F(a) Cash Collateral Account Security, Pledge and Assignment Agreement 10.11G(a) Assignment of Property Management and Leasing Agreement 10.11H(a) Trust Agreement 10.12(a) Form of Noncompetition Agreement 10.13(a) Form of Noncompetition Agreement 10.13A(a) Form of Noncompetition Agreement 10.14(a) General Electric Credit Corporation Commitment Letter 10.15(a) Administrative Services Agreement between Realty Systems, Inc. and Equity Group Investments, Inc. 10.16(a) Registration Rights and Lock-Up Agreement with the Company (the Original Owners, EF&M, Directors, Officers and Employees) 10.17(a) Administrative Services Agreement between Manufactured Home Communities, Inc. and MHC Operating Partnership 3.1(a) Articles of Incorporation of Manufactured Home Communities, Inc. 3.2(a) Articles of Amendment and Restatement of Manufactured Home Communities, Inc. 3.3(a) Bylaws of Manufactured Home Communities, Inc. 4 Not applicable 9 Not applicable 10.1(a) Amended and Restated Agreement of Limited Partnership of MHC Operating Limited Partnership 10.2(a) Agreement of Limited Partnership of MHC Financing Limited Partnership 10.3(a) Agreement of Limited Partnership of MHC Management Limited Partnership 10.4(a) Property Management and Leasing Agreement between MHC Financing Limited Partnership and MHC Management Limited Partnership 10.5(a) Property Management and Leasing Agreement between MHC Operating Limited Partnership and MHC Management Limited Partnership 10.6(a) Services Agreement between Realty Systems, Inc. and MHC Management Limited Partnership 10.7(a) Rate Protection Agreement 10.8(a) Revolving Credit Note made by Realty Systems, Inc. to Equity Financial and Management Co. 10.9(a) Assignment to MHC Operating Limited Partnership of Revolving Credit Note made by Realty Systems, Inc. to Equity Financial and Management Co. 10.10(a) Stock Option Plan 10.11A(a) Indenture of Mortgage, Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment of Rents 10.11B(a) Promissory Note 10.11C(a) Assignment of Loan Documents 10.11D(a) Assignment of Leases, Rents and Security Deposits 10.11E(a) Swap Agreement Pledge and Security Agreement 10.11F(a) Cash Collateral Account Security, Pledge and Assignment Agreement 10.11G(a) Assignment of Property Management and Leasing Agreement 10.11H(a) Trust Agreement 26 27 ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED) (3) Exhibits (continued): 10.12(a) Form of Noncompetition Agreement 10.13(a) Form of Noncompetition Agreement 10.13A(a) Form of Noncompetition Agreement 10.14(a) General Electric Credit Corporation Commitment Letter 10.15(a) Administrative Services Agreement between Realty Systems, Inc. and Equity Group Investments, Inc. 10.16(a) Registration Rights and Lock-Up Agreement with the Company (the Original Owners, EF&M, Directors, Officers and Employees) 10.17(a) Administrative Services Agreement between the Company and Equity Group Investments, Inc. 10.18(a) Form of Subscription Agreement between the Company and certain officers and other individuals dated March 3, 1993 10.19(a) Form of Secured Promissory Note payable to the Company by certain officers dated March 3, 1993 10.20(a) Form of Pledge Agreement between the Company and certain officers dated March 3, 1993 10.21(a) Loan and Security Agreement between Realty Systems, Inc. and MHC Operating Limited Partnership 10.22(a) Equity and Registration Rights Agreement with the Company (the GM Trusts) 10.23(b) Agreement of Limited Partnership of MHC Lending Limited Partnership 10.23(c) Agreement of Limited Partnership of MHC-Bay Indies Financing Limited Partnership 10.24(c) Agreement of Limited Partnership of MHC-De Anza Financing Limited Partnership 10.25(c) Agreement of Limited Partnership of MHC-DAG Management Limited Partnership
24 25 ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED) (3) Exhibits (continued): 10.26(d) Amendment No. 2 to MHC Operating Limited Partnership Amended and Restated Partnership Agreement dated February 15, 1996 10.27(d) Form of Subscription Agreement between the Company and certain members of management of the Company dated January 2, 1996 10.28(d) Form of Secured Promissory Note payable to the Company by certain members of management of the Company dated January 2, 1996 10.29(d) Form of Pledge Agreement between the Company and certain members of management of the Company dated January 2, 1996 10.30(e) Second Amended and Restated MHC Operating Limited Partnership Agreement of Limited Partnership, dated as of March 15, 1996 10.31(f) Agreement of Limited Partnership of MHC Financing Limited Partnership Two 11 Not applicable 12(f) Computation of Ratio of Earnings to Fixed Charges 13 Not applicable 16 Not applicable 18 Not applicable 21(f) Subsidiaries of the registrant 22 Not applicable 23(f) Consent of Independent Auditors 23.1(f) Consent of Independent Auditors 24.1(f) Power of Attorney for John F. Podjasek, Jr. dated March 11, 1998 24.2(f) Power of Attorney for Michael A. Torres dated March 11, 1998 24.3(f) Power of Attorney for Thomas E. Dobrowski dated March 6, 1998 24.4(f) Power of Attorney for Gary Waterman dated March 10, 1998 24.5(f) Power of Attorney for Donald S. Chisholm dated March 5, 1998 24.6(f) Power of Attorney for Louis H. Masotti dated March 11, 1998 27(f)10.26(d) Amendment No. 2 to MHC Operating Limited Partnership Amended and Restated Partnership Agreement dated February 15, 1996 10.27(d) Form of Subscription Agreement between the Company and certain members of management of the Company dated January 2, 1996 10.28(d) Form of Secured Promissory Note payable to the Company by certain members of management of the Company dated January 2, 1996 10.29(d) Form of Pledge Agreement between the Company and certain members of management of the Company dated January 2, 1996 10.30(e) Second Amended and Restated MHC Operating Limited Partnership Agreement of Limited Partnership, dated as of March 15, 1996 10.31(f) Agreement of Limited Partnership of MHC Financing Limited Partnership Two 11 Not applicable 12(g) Computation of Ratio of Earnings to Fixed Charges 13 Not applicable 16 Not applicable 18 Not applicable 21(g) Subsidiaries of the registrant 22 Not applicable 23(g) Consent of Independent Auditors 24.1(g) Power of Attorney for John F. Podjasek, Jr. dated February 22, 1999 24.2(g) Power of Attorney for Michael A. Torres dated February 19, 1999 24.3(g) Power of Attorney for Thomas E. Dobrowski dated February 17, 1999 24.4(g) Power of Attorney for Gary Waterman dated February 18, 1999 24.5(g) Power of Attorney for Donald S. Chisholm dated February 17, 1999 24.6(g) Power of Attorney for Louis H. Masotti dated February 19, 1999 27(g) Financial Data Schedule 28 Not applicable
___________________- ------------------- (a) Included as an exhibit to the Company's Form S-11 Registration Statement, File No. 33-55994, and incorporated herein by reference. (b) Included as an exhibit to the Company's Report on Form 10-K dated December 31, 1993, and incorporated herein by reference. 27 28 ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED) (3) Exhibits (continued): (c) Included as an exhibit to the Company's Report on Form 10-K dated December 31, 1994, and incorporated herein by reference. (d) Included as an exhibit to the Company's Report on Form 10-Q for the quarter ended March 31, 1996, and incorporated herein by reference. (e) Included as an exhibit to the Company's Report on Form 10-Q for the quarter ended June 30, 1996, and incorporated herein by reference. (f) Included as an exhibit to the Company's Report on Form 10-K dated December 31, 1997, and incorporated herein by reference. (g) Filed herewith. 25 26 ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED) (b) Reports on Form 8-K: Form 8-K/A dated August 29, 1997, filed November 11, 1997, relating to Item 2 - "Acquisition of Assets" and Item 7 "Financial Statements and Exhibits" on the acquisition of the MPW Properties. Form 8-K dated December 18, 1997, filed December 31, 1997, relating to Ite 2 - "Acquisition of Assets" and Item 7 "Financial Statements and Exhibits" on the acquisition of the Ellenburg Communities. Form 8-K/A dated December 18, 1997, filed February 24, 1998, relating to Item 2 - "Acquisition of Assets" and Item 7 "Financial Statements and Exhibits" on the acquisition of the Ellenburg Communities. Form 8-K dated June 4, 1998, filed June 18, 1998, relating to Item 2 - "Acquisition of Assets" and Item 7 "Financial Statements and Exhibits" on the acquisition of the College Heights Communities. Form 8-K/A dated June 4, 1998, filed August 11, 1998, relating to Item 2 - "Acquisition of Assets" and Item 7 "Financial Statements and Exhibits" on the acquisition of the College Heights Communities. Form 8-K dated January 22, 1999, filed February 4, 1999, relating to Item 5 - "Other Matters" on certain litigation. (c) Exhibits: See Item 14 (a)(3) above. (d) Financial Statement Schedules: See Index to Financial Statements attached hereto on page F-1 of this Form 10-K. 2628 2729 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MANUFACTURED HOME COMMUNITIES, INC., a Maryland corporation Date: March 13, 19982, 1999 By: /s/ Howard Walker - ---------------------------------- ------------------------------------- Howard Walker President and Chief Executive Officer Date: March 13, 19982, 1999 By: /s/ Thomas P. Heneghan - ---------------------------------- ------------------------------------- Thomas P. Heneghan Executive Vice President, Treasurer and Chief Financial Officer Date: March 13, 19982, 1999 By: /s/ Judy A. Pultorak - ---------------------------------- ------------------------------------- Judy A. Pultorak Principal Accounting Officer 2729 2830 MANUFACTURED HOME COMMUNITIES, INC. - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in capacities and on the dates indicated.
Name Title Date ---- ----- ---- /s/ Howard Walker March 13, 1998 - ----------------------------------------------------- Chief Executive Officer and President --------------March 2, 1999 Howard Walker *Attorney-in-Fact ---------------------- Executive Vice President, Treasurer /s/ Thomas P. Heneghan Executive Vice President, Treasurer March 13, 1998 - ------------------------- and Chief Financial Officer --------------March 2, 1999 - ------------------------------- *Attorney-in-Fact ---------------------- Thomas P. Heneghan *Attorney-in-Fact /s/ Samuel Zell Chairman of the Board - ------------------------------- March 13, 1998 - ------------------------- --------------2, 1999 Samuel Zell ---------------------- /s/ Sheli Z. Rosenberg Director March 13, 1998 - ------------------------- --------------------------------------------- Sheli Z. Rosenberg March 2, 1999 ---------------------- /s/ David A. Helfand Director March 13, 1998 - ------------------------- --------------------------------------------- David A. Helfand *March 2, 1999 ---------------------- *Donald S. Chisholm Director - ------------------------------- Donald S. Chisholm March 2, 1999 ---------------------- *Thomas E. Dobrowski Director March 13, 1998 - ------------------------- -------------- Donald S. Chisholm *------------------------------- Thomas E. Dobrowski March 2, 1999 ---------------------- *Louis H. Masotti Director March 13, 1998 - ------------------------- --------------- Thomas E. Dobrowski *------------------------------- Louis H. Masotti March 2, 1999 ---------------------- *John F. Podjasek, Jr. Director March 13, 1998 - ------------------------- -------------- Louis H. Masotti *------------------------------- John F. Podjasek, Jr. March 2, 1999 ---------------------- *Michael A. Torres Director March 13, 1998 - ------------------------- -------------- John F. Podjasek, Jr. *------------------------------- Michael A. Torres March 2, 1999 ---------------------- *Gary L. Waterman Director March 13, 1998 - ------------------------- -------------- Michael A. Torres *------------------------------- Gary L. Waterman Director March 13, 1998 - ------------------------- -------------- Gary L. Waterman2, 1999 ----------------------
2830 2931 INDEX TO FINANCIAL STATEMENTS MANUFACTURED HOME COMMUNITIES, INC.
PAGE ---- Reports of Independent Auditors .................................. F-2 and F-3 Consolidated Balance Sheets as of December 31, 1997 and 1996 ..... F-4 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 .............................. F-5 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 .............. F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 .............................. F-7 Notes to Consolidated Financial Statements ....................... F-8 Schedule II - Valuation and Qualifying Accounts .................. S-1 Schedule III - Real Estate and Accumulated Depreciation .......... S-2PAGE ---- Reports of Independent Auditors ........................................F-2 Consolidated Balance Sheets as of December 31, 1998 and 1997............F-3 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996.............................................F-4 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996........................F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.............................................F-6 Notes to Consolidated Financial Statements..............................F-7 Schedule II - Valuation and Qualifying Accounts.........................S-1 Schedule III - Real Estate and Accumulated Depreciation.................S-2 Certain schedules have been omitted as they are not applicable to the Company.
F-1 3032 Report of Independent Auditors To the Board of Directors of Manufactured Home Communities, Inc. We have audited the accompanying consolidated balance sheets of Manufactured Home Communities, Inc. as of December 31, 19971998 and 1996,1997, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years then ended.in the period ended December 31, 1998. We have also audited the related financial statement schedules listed in the accompanying index for the years ended December 31, 1997 and 1996.index. These financial statements and schedules are the responsibility of the management of Manufactured Home Communities, Inc. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects the consolidated financial position of Manufactured Home Communities, Inc. as of December 31, 19971998 and 19961997 and the consolidated results of its operations and its cash flows for each of the three years thenin the period ended December 31, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects the information required to be includedset forth therein. ERNST & YOUNG LLP Chicago, Illinois January 28, 1998,1999, except for Note 1517 as to which the date is February 23, 199818, 1999 F-2 31 Report of Independent Auditors To the Board of Directors of Manufactured Home Communities, Inc. We have audited the accompanying consolidated statement of operations, changes in stockholders' equity and cash flows of Manufactured Home Communities, Inc. for the year ended December 31, 1995. We have also audited the related schedules listed in the accompanying index for the year ended December 31, 1995. These financial statements are the responsibility of the management of Manufactured Home Communities, Inc. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects the consolidated results of operations and cash flows of Manufactured Home Communities, Inc. for the year ended December 31, 1995 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 required to be included therein. COOPERS & LYBRAND L.L.P. Chicago, Illinois February 16, 1996 F-3 3233 MANUFACTURED HOME COMMUNITIES, INC. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 19971998 AND 19961997 (AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
1998 1997 1996 -------- -------------------- ------------ ASSETS Investment in rental property: Land....................................................... $206,375 $138,514Land......................................................... $ 272,225 $ 206,375 Land improvements..........................................improvements............................................ 865,720 612,670 370,440 Buildings and other depreciable property...................property..................... 95,669 90,870 88,696 Advances on rental property acquisitions...................acquisitions..................... 3,817 26,403 --- -------- -------------------- ------------ 1,237,431 936,318 597,650 Accumulated depreciation...................................depreciation..................................... (118,021) (89,208) (71,481) -------- -------------------- ------------ Net investment in rental property.......................property........................ 1,119,410 847,110 526,169 Cash and cash equivalents.....................................equivalents......................................... 13,657 909 324 Short-term investments (at cost, which approximates market)... --- 1,968 Notes receivable..............................................receivable.................................................. 15,710 1,147 15,427 Investment in and advances to affiliates......................affiliates.......................... 7,797 7,126 6,836Investment in joint ventures...................................... 7,584 --- Rents receivable..............................................receivable ................................................ 671 787 723 Deferred financing costs, net.................................net..................................... 4,634 3,265 1,999 Prepaid expenses and other assets.............................assets................................. 7,325 3,968 14,279 Due from affiliates...........................................affiliates............................................... 53 149 -------- --------53 ------------ ------------ Total assets............................................... $864,365 $567,874 ======== ========assets................................................. $ 1,176,841 $ 864,365 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Mortgage notes payable, net................................ $403,656 $197,482net.................................. $ 500,573 $ 403,656 Unsecured term loan........................................loan.......................................... 100,000 60,000 --- Unsecured line of credit...................................credit..................................... 145,000 25,000 57,500 Other notes payable........................................payable.......................................... 5,276 6,516 --- Accounts payable and accrued expenses......................expenses........................ 33,341 17,197 14,364 Accrued interest payable...................................payable..................................... 4,911 1,536 1,495 Rents received in advance and security deposits............deposits.............. 6,495 2,299 1,897 Distributions payable......................................payable........................................ 294 55 8,439 Due to affiliates..........................................affiliates............................................ 42 78 105 -------- -------------------- ------------ Total liabilities.......................................liabilities........................................ 795,932 516,337 281,282 -------- -------------------- ------------ Commitments and contingencies Minority interests............................................interests................................................ 70,468 67,453 28,640 -------- -------------------- ------------ Stockholders' equity: Preferred stock, $.01 par value 10,000,000 shares authorized; none issued...............issued................ --- --- Common stock, $.01 par value 50,000,000 shares authorized; 24,771,18026,417,029 and 24,951,94824,771,180 shares issued and outstanding for 1998 and 1997, and 1996, respectively..................................respectively................................... 262 248 249 Paid-in capital............................................ 319,030 293,512capital.............................................. 364,603 321,915 Deferred compensation........................................ (7,442) (2,885) Employee notes.............................................notes............................................... (4,654) (4,967) (6,158) Distributions in excess of accumulated earnings............earnings.............. (42,328) (33,736) (29,651) -------- -------------------- ------------ Total stockholders' equity..............................equity............................... 310,441 280,575 257,952 -------- -------------------- ------------ Total liabilities and stockholders' equity................. $864,365 $567,874 ======== ========equity................... $ 1,176,841 $ 864,365 ============ ============
The accompanying notes are an integral part of the financial statements F-3 34 MANUFACTURED HOME COMMUNITIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
1998 1997 1996 ---------- ---------- ---------- REVENUES Base rental income............................................ $ 165,340 $ 108,984 $ 93,109 Utility and other income...................................... 25,372 11,785 8,821 Equity in income of affiliates................................ 1,070 800 853 Interest income............................................... 3,048 1,941 2,420 ---------- ---------- ---------- Total revenues............................................ 194,830 123,510 105,203 ---------- ---------- ---------- EXPENSES Property operating and maintenance............................ 53,064 32,343 28,399 Real estate taxes............................................. 14,470 8,352 7,947 Property management........................................... 7,108 5,079 4,338 General and administrative.................................... 4,668 4,091 3,335 General and administrative - affiliates....................... 743 468 727 Interest and related amortization............................. 49,693 21,753 17,782 Depreciation on corporate assets.............................. 995 590 488 Depreciation on real estate assets and other costs............ 28,426 17,365 15,244 ---------- ---------- ---------- Total expenses............................................ 159,167 90,041 78,260 ---------- ---------- ---------- Income before allocation to minority interests and extraordinary loss on early extinguishment of debt........ 35,663 33,469 26,943 Income allocated to minority interests........................ (6,733) (4,373) (2,671) ---------- ---------- ---------- Income before extraordinary loss on early extinguishment of debt................................................... 28,930 29,096 24,272 Extraordinary loss on early extinguishment of debt (net of $105 allocated to minority interests)..................... --- (451) --- ---------- ---------- ---------- Net income.................................................... $ 28,930 $ 28,645 $ 24,272 ========== ========== ========== Net income per common share before extraordinary item - basic.............................................. $ 1.13 $ 1.18 $ .98 ========== ========== ========== Net income per common share before extraordinary item - diluted............................................ $ 1.12 $ 1.16 $ .98 ========== ========== ========== Net income per common share - basic........................... $ 1.13 $ 1.16 $ .98 ========== ========== ========== Net income per common share - diluted......................... $ 1.12 $ 1.15 $ .98 ========== ========== ========== Weighted average common shares outstanding - basic............ 25,626 24,689 24,693 ========== ========== ========== Weighted average common shares outstanding - diluted (Note 3) 31,962 28,762 27,546 ========== ========== ========== Distributions declared per common share outstanding........... $ 1.45 $ 1.32 $ 1.22 ========== ========== ========== Tax status of distributions: Ordinary income........................................... $ 1.14 $ 1.12 $ .90 ========== ========== ========== Capital gain.............................................. $ --- $ --- $ --- ========== ========== ========== Return of capital......................................... $ .31 $ .20 $ .32 ========== ========== ==========
The accompanying notes are an integral part of the financial statements F-4 33 MANUFACTURED HOME COMMUNITIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
1997 1996 1995 -------- ------- ------- REVENUES Base rental income........................................ $108,984 $93,109 $85,242 Utility and other income.................................. 11,785 8,821 8,481 Equity in income of affiliates............................ 800 853 885 Interest income........................................... 1,941 2,420 2,296 -------- ------- ------- Total revenues......................................... 123,510 105,203 96,904 -------- ------- ------- EXPENSES Property operating and maintenance........................ 32,343 28,399 27,057 Real estate taxes......................................... 8,352 7,947 7,241 Property management....................................... 5,079 4,338 4,675 General and administrative................................ 4,091 3,335 3,151 General and administrative - affiliates................... 468 727 1,386 Interest and related amortization......................... 21,753 17,782 18,527 Depreciation on corporate assets.......................... 590 488 349 Depreciation on real estate assets and other costs........ 17,365 15,244 15,773 -------- ------- ------- Total expenses......................................... 90,041 78,260 78,159 -------- ------- ------- Income from operations.................................... 33,469 26,943 18,745 Gain on sale of rental properties......................... --- --- 1,278 -------- ------- ------- Income before allocation to minority interests and extraordinary loss on early extinguishment of debt..... 33,469 26,943 20,023 Income allocated to minority interests.................... (4,373) (2,671) (2,006) -------- ------- ------- Income before extraordinary loss on early extinguishment of debt................................................ 29,096 24,272 18,017 Extraordinary loss on early extinguishment of debt (net of $105 allocated to minority interests).................. (451) --- --- -------- ------- ------- Net income................................................ $ 28,645 $24,272 $18,017 ======== ======= ======= Net income per common share before extraordinary item - basic........................................... $ 1.18 $ .98 $ .74 ======== ======= ======= Net income per common share before extraordinary item - diluted......................................... $ 1.16 $ .98 $ .74 ======== ======= ======= Net income per common share - basic....................... $ 1.16 $ .98 $ .74 ======== ======= ======= Net income per common share - diluted..................... $ 1.15 $ .98 $ .74 ======== ======= ======= Weighted average common shares outstanding - basic........ 24,689 24,693 24,353 ======== ======= ======= Weighted average common shares outstanding - diluted (Note 2) 28,762 27,546 27,138 ======== ======= ======= Distributions declared per common share outstanding....... $ 1.32 $ 1.22 $ 1.18 ======== ======= ======= Tax status of distributions: Ordinary income........................................ $ 1.12 $ .90 $ .68 ======== ======= ======= Capital gain........................................... $ --- $ --- $ .02 ======== ======= ======= Return of capital...................................... $ .20 $ .32 $ .48 ======== ======= =======
The accompanying notes are an integral part of the financial statements F-5 3435 MANUFACTURED HOME COMMUNITIES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 1996 AND 19951996 (AMOUNTS IN THOUSANDS)
1998 1997 1996 1995 -------- -------- ------------------ ---------- ---------- PREFERRED STOCK, $.01 PAR VALUE...................VALUE................................. $ --- $ --- $ --- ======== ======== ================== ========== ========== COMMON STOCK, $.01 PAR VALUE Balance, beginning of year........................year...................................... $ 249248 $ 244249 $ 244 Issuance of common stock for employee notes....notes................. --- --- 3 --- Issuance of common stock through restricted stock awards................................awards........................................... 2 1 2 --- Retirement of treasury stock...................stock................................ --- --- (1) --- Exercise of options............................options......................................... 1 1 --- Repurchase1 Issuance (repurchase) of common stock.....................stock....................... 11 (3) --- --- -------- -------- ------------------ ---------- ---------- Balance, end of year..............................year............................................ $ 262 $ 248 $ 249 $ 244 ======== ======== ================== ========== ========== PAID - IN CAPITAL Balance, beginning of year........................ $293,512 $288,533 $287,397year...................................... $ 321,915 $ 296,997 $ 288,613 Issuance of common stock for employee notes....notes................. 129 --- 4,689 --- Retirement of treasury stock...................stock................................ --- --- (1,986) --- Conversion of OP Units to common stock.........stock...................... 1,100 --- 23 --- Recognition of deferred compensation expense... 1,637 951 86 Exercise of options............................options......................................... 2,372 2,070 1,013 752 Issuance of common stock through restricted stock awards................................ 1,431 289 291awards........................................... 6,118 2,468 4,645 Issuance of common stock through employee stock purchase plan...............................plan.......................................... 940 587 --- --- RepurchaseIssuance (repurchase) of common stock.....................stock....................... 24,613 (7,257) --- --- Adjustment for minority interests ownership in operating partnership....................partnership............................... 7,416 27,050 --- 7 -------- -------- ------------------ ---------- ---------- Balance, end of year.............................. $319,030 $293,512 $288,533 ======== ======== ========year............................................ $ 364,603 $ 321,915 $ 296,997 ========== ========== ========== DEFERRED COMPENSATION Balance, beginning of year $ (2,885) $ (3,485) $ (80) Issuance of common stock through restricted stock awards.... (5,692) (2,074) (4,356) Recognition of deferred compensation expense................ 1,135 2,674 951 ========== ========== ========== Balance, end of year............................................ $ (7,442) $ (2,885) $ (3,485) ========== ========== ========== TREASURY STOCK Balance, beginning of year........................ $ --- $ (1,987) $ --- Common stock retired (acquired), 109,728 shares --- 1,987 (1,987) -------- -------- -------- Balance, end of year..............................year...................................... $ --- $ --- $ (1,987) ======== ======== ========Common stock retired, 109,728 shares........................ --- --- 1,987 ---------- ---------- ---------- Balance, end of year............................................ $ --- $ --- $ --- ========== ========== ========== EMPLOYEE NOTES Balance, beginning of year........................year...................................... $ (4,967) $ (6,158) $ (1,565) $ (4,050) Notes received for issuance of common stock....stock................. (129) --- (4,692) --- Principal payments.............................payments.......................................... 442 1,191 99 2,485 -------- -------- ------------------ ---------- ---------- Balance, end of year..............................year............................................ $ (4,654) $ (4,967) $ (6,158) $ (1,565) ======== ======== ================== ========== ========== DISTRIBUTIONS IN EXCESS OF ACCUMULATED EARNINGS Balance, beginning of year........................ $(29,651) $(23,725) $(12,989)year...................................... $ (33,736) $ (29,651) $ (23,725) Net income.....................................income.................................................. 28,930 28,645 24,272 18,017 Distributions..................................Distributions............................................... (37,522) (32,730) (30,198) (28,753) -------- -------- ------------------ ---------- ---------- Balance, end of year.............................. $(33,736) $(29,651) $(23,725) ======== ======== ========year............................................ $ (42,328) $ (33,736) $ (29,651) ========== ========== ==========
The accompanying notes are an integral part of the financial statements F-6F-5 3536 MANUFACTURED HOME COMMUNITIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 1996 AND 19951996 (AMOUNTS IN THOUSANDS)
-------- ------- -------1998 1997 1996 1995 -------- ------- ---------------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income.........................................................income............................................................ $ 28,930 $ 28,645 $24,272 $18,017$ 24,272 Adjustments to reconcile net income to cash provided by operating activities: Income allocated to minority interests..........................interests............................ 6,733 4,268 2,671 2,006 Depreciation and amortization expense...........................expense............................. 29,680 19,018 16,720 17,842 (Gain) loss on sale of rental properties........................ --- --- (1,278) Equity in income of Affiliates..................................Affiliates.................................... (1,070) (800) (853) (885) Amortization of deferred compensation and other.................compensation............................. 1,563 3,068 1,242 377 Writeoff of a management contract and project costs.............costs............... --- (575) --- --- Decrease (increase) in rents receivable.........................receivable........................... 116 (64) 212 710 (Increase) in prepaid expenses and other assets.................assets................... (3,359) (2,228) (109) (664) Increase in accounts payable and accrued expenses...............expenses................. 5,188 2,847 5,400 3,833 Increase (decrease) in rents received in advance and security deposits........................................deposits....... 4,196 402 105 203 -------- ------- ---------------- --------- --------- Net cash provided by operating activities..........................activities............................. 71,977 54,581 49,660 40,161 -------- ------- ---------------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES (Purchase) redemptionRedemption (purchase) of short-term investments, net...............net.................. --- 1,968 (286) 4,799 Sale (purchase) of project related assets..........................assets............................. --- 11,147 (11,205) Collection of escrow proceeds on acquisition.......................... 14,295 --- --- Advances on rental property acquisitions...........................acquisitions.............................. --- (22,811) --- --- Distributions from Affiliates......................................Affiliates......................................... 399 388 5,004 1,399 Collections(Funding) collections on notes receivable....................................receivable............................. (14,563) 16,342 126 1,832 Net proceeds from sale of rental property..........................Investment in joint ventures.......................................... (7,584) --- --- 4,762 Acquisition of rental properties...................................properties...................................... (241,076) (240,083) (46,531) (600) Improvements: Improvements - corporate........................................corporate.......................................... (1,487) (357) (844) (808) Improvements - rental properties................................properties.................................. (8,005) (4,187) (3,402) (3,286) Site development costs..........................................costs............................................ (4,741) (1,852) (3,816) (3,716) -------- ------- ---------------- --------- --------- Net cash (used in) provided byused in investing activities................activities................................. (262,762) (239,445) (60,954) 4,382 -------- ------- ---------------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from stock options and employee stock purchase plan...plan ..... 3,313 2,658 1,014 752 Distributions to common stockholders and minority interests........interests........... (46,491) (46,886) (33,070) (31,963) RepurchaseIssuance (repurchase) of common stock.........................................stock................................. 24,623 (7,260) --- (1,987) Collection of principal payments on employee notes.................notes.................... 442 1,191 99 2,485 Proceeds from line of credit, term loan, and mortgage notes payablepayable... 266,847 510,731 52,100 --- Repayments on mortgage notes payable and line of credit............credit............... (43,298) (272,674) (9,084) (14,704) Debt issuance costs................................................costs................................................... (1,903) (2,311) (201) (290) -------- ------- ---------------- --------- --------- Net cash provided by (used in) financing activities................activities............................. 203,533 185,449 10,858 (45,707) -------- ------- ---------------- --------- --------- Net increase (decrease) in cash and cash equivalents.................equivalents....................... 12,748 585 (436) (1,164) Cash and cash equivalents, beginning of year.........................year............................... 909 324 760 1,924 -------- ------- ---------------- --------- --------- Cash and cash equivalents, end of year...............................year..................................... $ 13,657 $ 909 $ 324 $ 760 ======== ======= ================ ========= ========= SUPPLEMENTAL INFORMATION Cash paid during the year for interest...............................interest..................................... $ 45,785 $ 20,667 $16,557 $16,156 ======== ======= =======$ 16,557 ========= ========= =========
The accompanying notes are an integral part of the financial statements F-7F-6 3637 MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION OF THE COMPANY AND BASIS OF PRESENTATION Manufactured Home Communities, Inc. (together with its consolidated subsidiaries, the "Company"), formed in March 1993, is a Maryland corporation which has elected to be taxed as a real estate investment trust ("REIT"). The Company owns or has a controlling interest in 121154 manufactured home communities (the "Properties") located in 2426 states, consisting of 44,10853,391 sites. The Company generally will not be subject to Federal income tax to the extent it distributes its REIT taxable income to its stockholders. The operations of the Company are conducted through certain entities which are owned or controlled by the Company. MHC Operating Limited Partnership (the "Operating Partnership") is the entity through which the Company conducts substantially all of its operations. The Company contributed the proceeds from its initial public offering to the Operating Partnership for a general partnership interest. The limited partners of the Operating Partnership (the "Minority Interests") receive an allocation of net income which is based on their respective ownership percentage of the Operating Partnership which is shown on the Consolidated Financial Statements as Minority Interests. As of December 31, 1997,1998, the Minority Interests represented 5,733,8155,976,701 units of limited partnership interest ("OP Units") which are convertible into an equivalent number of shares of the Company's stock. The issuance of additional shares of common stock or OP Units changes the respective ownership of the Operating Partnership for both the Minority Interests and the Company. Sub-partnerships of the Operating Partnership were created to (i) facilitate mortgage financing (the "Financing Partnerships"); (ii) facilitate the Company's ability to provide financing to manufactured home communities ("Lending Partnership"); (iii) own the management operations of the Company ("Management Partnerships"); and (iv) own the assets and operations of certain utility companies which service the Company's properties ("MHC Systems"). The accompanying financial statements represent the consolidated financial information of the Company and its subsidiaries. Due to the Company's ability as general partner to control either through ownership or by contract the Operating Partnership, the Financing Partnerships, the Lending Partnerships, the Management Partnerships and MHC Systems, each such subsidiary has been consolidated with the Company for financial reporting purposes. In 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131") which was effective for fiscal years beginning after December 15, 1997. SFAS No. 131 supersed Statement of Financial Accounting Standards No. 14, "Financial Reporting for Segments of a Business Enterprise". SFAS No. 131 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 results of operations or financial position of the Company. The Company has one reportable segment which is the operation of manufactured home communities. The Company has concentrations of Properties within the following states: Florida (45 Properties), California (25 Properties), Arizona (19 Properties), Michigan (11 Properties) and Colorado (10 Properties). These concentrations of Properties accounted for 34%, 17%, 11%, 4%, and 8%, respectively, of the Company's total revenues for the year ended December 31, 1998. The Company also has Properties located in the following areas of the United States: Northeast, Northwest, Midwest, and Nevada/Utah/New Mexico. The Company's largest Property, Bay Indies, located in Venice, Florida, accounted for 3% of the Company's total revenues for the year ended December 31, 1998. The distribution of the Properties throughout the United States reflects the Company's belief that geographic diversification helps insulate the portfolio from regional economic influences. The Company intends to target new acquisitions in or near markets where the Properties are located and will also consider acquisitions of properties outside such markets. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a)Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-7 38 MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (b)Rental Property Rental property is recorded at cost less accumulated depreciation. Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets To Be Disposed Of" ("SFAS No. 121") was effective for fiscal years beginning after December 15, 1995. The Company evaluates rental properties for impairment when conditions exist which may indicate that it is probable that the sum of expected future cash flows (undiscounted) from a rental property is less than its carrying value. Upon determination that a permanent impairment has occurred, rental properties are reduced to fair value. For the year ended December 31, 19971998 and 1996,1997, permanent impairment conditions did not exist at any of the Company's properties. Depreciation is computed on the straight-line basis over the estimated useful lives of the assets. The Company uses a 30-year estimated life for buildings acquired and structural and land improvements, a ten-to-fifteen year estimated life for building upgrades and a three-to-seven year estimated life for furniture, fixtures and equipment. Expenditures for ordinary maintenance and repairs are expensed to operations as incurred and significant renovations and improvements which improve the asset and extend the useful life of the asset are capitalized over their estimated useful life. Initial direct leasing costs are expensed as incurred. F-8 37 MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (b) Rental Property(continued) The distribution of the Properties throughout the United States reflects the Company's belief that geographic diversification helps insulate the portfolio from regional economic influences. At the same time, the Company has sought to create clusters of Properties within each of its primary markets in order to achieve economies of scale in managementTotal depreciation expense was $29.1 million, $18.0 million, and operation. The Company's five largest markets are Florida, California, Colorado, Arizona and the Northeast. These markets account for 34%, 15%, 11%, 10%, and 9%, respectively, of the Company's total revenues$15.3 million for the yearyears ended December 31, 1997.1998, 1997 and 1996, respectively. (c)Cash and Cash Equivalents The Company considers all demand and money market accounts and certificates of deposit with an originala maturity when purchased of three months or less, to be cash equivalents. (d)Notes Receivable Notes receivable generally are stated at their outstanding unpaid principal balances net of any deferred fees or costs on originated loans, or unamortized discounts. Interest income is accrued on the unpaid principal balance. Discounts are amortized to income using the interest method. (e)Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" requires disclosures about the fair value of financial instruments whether or not such instruments are recognized in the balance sheet. The Company's financial instruments include short-term investments, notes receivable, accounts receivable, accounts payable, other accrued expenses, mortgage notes payable and interest rate hedge arrangements. The fair value of all financial instruments, including notes receivable, were not materially different from their carrying values at December 31, 19971998 and 1996,1997, except the fair market value of certain derivatives related to the Mortgage Debtmortgage debt (see Note 8)10). (f)Deferred Financing Costs Deferred financing costs include fees and costs incurred to obtain long-term financing and costs to obtain the interest rate cap for the Mortgage Debt.financing. The costs are being amortized over the terms of the respective loans on a level yield basis. Unamortized deferred financing fees are written-off when debt is retired before the maturity date. Accumulated amortization for such costs was $717,112$1,199,221 and $6,211,736$717,112 at December 31, 1998 and 1997, respectively. (g) Revenue Recognition Rental income attributable to leases is recorded when earned from tenants. F-8 39 MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (h)Minority Interests Net income is allocated to Minority Interests based on their respective ownership percentage of the Operating Partnership. An ownership percentage is represented by dividing the number of OP Units held by the Minority Interests (5,976,701 and 5,733,815 at December 31, 1998 and 1997, respectively) by OP Units and common stock outstanding. Issuance of additional shares of common stock or OP Units changes the percentage ownership of both the Minority Interests and the Company. Due in part to the exchange rights, such transactions and the proceeds therefrom are treated as capital transactions and result in an allocation between stockholders' equity and Minority Interests to account for the change in the respective percentage ownership of the underlying equity of the Operating Partnership. (i)Income Taxes Due to the structure of the Company as a REIT, the results of operations contain no provision for Federal income taxes. However, the Company may be subject to certain state and local income, excise or franchise taxes. The Company paid state and local taxes of approximately $78,000 and $40,000 during the years ended December 31, 1998 and 1997. As of December 31, 1998, net investment in rental property and notes receivable had a federal tax basis of approximately $747 million and $70 million, respectively. (j)Reclassifications Certain 1997 and 1996 respectively. (g) Earnings Per Common Shareamounts have been reclassified to conform to the 1998 financial presentation. Such reclassifications have no effect on the operations or equity as originally presented. NOTE 3 - EARNINGS PER COMMON SHARE Earnings per common share are based on the weighted average number of common shares outstanding during each year. In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share" ("SFAS No. 128"). 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. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the SFAS No. 128 requirements. The conversion of OP Units has been excluded from the basic earnings per share calculation because of certain restrictions on conversion.calculation. The conversion of an OP Unit to common stock will have no material effect on earnings per common share since the allocation of earnings to an OP Unit is equivalent to earnings allocated to a share of common stock. F-9 38 MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (g) Earnings Per Common Share (continued) The following table sets forth the computation of basic and diluted earnings per share:share (amounts in thousands):
1998 1997 1996 1995 ------- ------- ---------------- --------- -------- Numerator: Net income $28,645 $24,272 $18,017income.................................... $ 28,930 $ 28,645 $ 24,272 Income allocated to minority interestsinterests........ 6,733 4,373 2,671 2,006 ------- ------- ---------------- --------- -------- Numerator for diluted earnings per share- income available to common shareholders after assumed conversions $33,018 $26,943 $20,023 ======= ======= =======conversions.................. $ 35,663 $ 33,018 $ 26,943 ========= ========= ======== Denominator: Weighted average shares outstandingoutstanding........... 25,626 24,689 24,693 24,353 Weighted average OP Unitsshares outstanding assuming conversion of OP Units............ 5,955 3,749 2,715 2,717 Employee stock optionsoptions........................ 381 324 138 68 ------- ------- ---------------- --------- -------- Denominator for diluted earnings per share- adjusted weighted average shares and assumed conversionsconversions........................ 31,962 28,762 27,546 27,138 ======= ======= ================ ========= ========
(h) Revenue Recognition Rental income attributable to leases is recorded when earned from tenants. (i) Minority Interests Net income is allocated to Minority Interests based on their respective ownership percentage of the Operating Partnership. An ownership percentage is represented by dividing the number of OP Units held by the Minority Interests (5,733,815 and 2,714,889 at December 31, 1997 and 1996, respectively) by total OP Units and common stock outstanding. Issuance of additional shares of common stock or OP Units changes the percentage ownership of both the Minority Interests and the Company. Due in part to the exchange rights, such transactions and the proceeds therefrom are treated as capital transactions and result in an allocation between stockholders' equity and Minority Interests to account for the change in the respective percentage ownership of the underlying equity of the Operating Partnership. (j) Income Taxes Due to the structure of the Company as a REIT, the results of operations contain no provision for Federal income taxes. However, the Company may be subject to certain state and local income, excise or franchise taxes. The Company paid state and local taxes of approximately $40,000 and $73,000 during the years ended December 31, 1997 and 1996. As of December 31, 1997, net investment in rental property and notes receivable had a federal tax basis of approximately $605 million and $20 million, respectively. (k) Reclassifications Certain 1996 and 1995 amounts have been reclassified to conform to the 1997 financial presentation. Such reclassifications have no effect on the operations or equity as originally presented. F-10F-9 3940 MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 34 - COMMON STOCK AND OTHER EQUITY RELATED TRANSACTIONS The following table presents the changes in the Company's outstanding common stock for the years ended December 31, 1998, 1997 1996 and 19951996 (excluding OP Units of 5,976,701, 5,733,815 2,714,889 and 2,717,0482,714,889 outstanding at December 31, 1998, 1997 1996 and 1995,1996, respectively):
1998 1997 1996 1995 ---------- ---------- ---------- Shares outstanding at January 1,................................................................. 24,771,180 24,951,948 24,393,149 24,426,887 Common stock purchased by key employees of the Company...Company........ 5,000 --- 270,000 --- Common stock issued through conversion of OP Units.......Units............ 99,552 --- 2,159 --- Common stock issued through exercise of Options..........Options............... 141,403 107,147 75,497 58,500 Common stock issued through stock awards.................awards...................... 328,831 14,777 211,143 17,490 Common stock issued through ESPP.........................ESPP.............................. 44,804 27,608 --- Common stock issued through Unit Trust Offering .............. 1,048,059 --- --- Common stock repurchased and retired.....................retired.......................... (21,800) (330,300) --- (109,728) ---------- ---------- ---------- Shares outstanding at December 31,............................................................. 26,417,029 24,771,180 24,951,948 24,393,149 ========== ========== ==========
In September 1996, the Company retired 109,728 shares of common stock which were repurchased in 1995 and being held in treasury. As of December 31, 1997,1998, the Company's percentage ownership of the Operating Partnership was 81.2%81%. The remaining 18.8%19% is owned by the Minority Interests. The Company paid a $.33$.3625 per share distribution on April 11, 1997,10, 1998, July 11, 1997,10, 1998, October 10, 19979, 1998 and December 30, 1997,1998, for the quarters ended March 31, 1997,1998, June 30, 1997,1998, September 30, 19971998 and December 31, 1997,1998, respectively, to stockholders of record on March 28, 1997,27, 1998, June 27, 1997,26, 1998, September 26, 199725, 1998 and December 16, 1997,1998, respectively. In March 1997, the Company's Board of Directors approved a common stock repurchase plan whereby the Company is authorized to repurchase and retire up to 1,000,000 shares of its common stock. AsShares of common stock repurchased and retired under the plan for the years ended December 31, 1998 and 1997 the Company had repurchasedwere 21,800 and 330,300 shares of common stock.respectively. The Company adopted, effective July 1, 1997, the 1997 Non Qualified Employee Stock Purchase Plan ("ESPP"). Pursuant to the ESPP, certain employees and directors of the Company may each annually acquire up to $100,000 of common stock of the Company. The aggregate number of shares of common stock available under the ESPP shall not exceed 1,000,000, subject to adjustment by the Board of Directors. The common stock may be purchased quarterly at a price equal to 85% of the lesser of: (a) the closing price for a share on the last day of such quarter; and (b) the greater of: (i) the closing price for a share on the first day of such quarter, and (ii) the average closing price for a share for all the business days in the quarter. AsShares of December 31, 1997, 27,608 shares have beencommon stock issued through the ESPP.ESPP for the years ended December 31, 1998 and 1997 were 44,804 and 27,608 respectively. On August 29, 1997, the Company, as general partner of the Operating Partnership, approved the addition of new limited partners (the "MPW Limited Partners") to the Operating Partnership in connection with the acquisition of properties from limited partners and joint ventures affiliated with Mobileparks West, a California limited partnership ("MPW").partnership. The MPW Limited Partners received 3,018,926 OP Units which are exchangeable on a one-for-one basis for shares of the Company's common stock. During 1998, the Company, as general partner of the Operating Partnership, approved the admission of new limited partners (the "1998 Acquisition Partners") to the Operating Partnership in connection with certain acquisitions of rental property and investments in joint ventures (see Notes 5 and 6). The 1998 Acquisition Partners received 342,438 OP Units which are exchangeable on a one-for-one basis for shares of the Company's common stock. On April 23, 1998, the Company completed an offering of 1,048,059 shares of common stock (the "Unit Trust Offering") and sold the shares to Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter"). The offering price per share was $25.4375, the closing price for shares of the Company's common stock on April 23, 1998, resulting in gross offering proceeds of approximately $26.7 million. Net of the Underwriter's discount and offering expenses, the Company received approximately $25 million. The Underwriter deposited the shares of common stock with the trustee of the Equity Investor Fund Cohen & Steers Realty Majors Portfolio, a unit investment trust (the "Trust"), in exchange for units in the Trust. F-10 41 MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 45 - RENTAL PROPERTY Land improvements consist primarily of improvements made to land such as landscaping and infrastructure. Depreciable property consists of permanent buildings in the communities such as clubhouses, laundry facilities, maintenance storage facilities, and furniture, fixtures and equipment. F-11 40 MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - RENTAL PROPERTY (CONTINUED) During the year ended December 31, 1995, the Company sold two communities for cash of approximately $5.0 million and a purchase money note receivable of $1.45 million, net of a fair value discount of $450,000. The Company recorded gains in connection with these two sales in the amount of approximately $1.3 million. During the year ended December 31, 1996, the Company acquired three communities for an aggregate purchase price of approximately $38 million and funded a recourse first mortgage real estate loan for approximately $6 million to the partnership which owned one community. For financial accounting purposes, the Company accounts for the loan as an investment in real estate. These four communities consist of 1,618 sites and 183 expansion sites. The acquisitions and loan funding were funded with approximately $41.6 million in borrowings under the Company's line of credit and $2.4 million in existing available cash. On March 14,During the year ended December 31, 1997, the Company acquired California Hawaiian Mobile Estates ("California Hawaiian"), located in San Jose, California,twenty-two communities for aan aggregate purchase price of approximately $23.3$156.4 million. The acquisition wasThese acquisitions were funded with a borrowing under the Company's line of credit. California Hawaiian consists of approximately 412 developed sites. On March 27, 1997, the Company acquired Golf Vista Estates ("Golf Vista"), located$60.6 million in Monee, Illinois. The purchase price of approximately $7.4 million, including deferred payments of $150,000 per year for the next five years, was funded with existing available cash. Golf Vista consists of approximately 200 developed sites and 319 expansion sites. On May 29, 1997, the Company entered into a capital lease with East Tincup Village, Inc., a Colorado corporation, for Golden Terrace South (formerly known as East Tincup Village). The lease term is 110 months commencing on May 29, 1997, with monthly rental payments of approximately $18,000. The lease contains an option for the Company to purchase Golden Terrace South at the termination of the lease for $2.4 million. For financial accounting purposes, the Company accounts for the lease as a capital lease; and, accordingly, the Company has recorded an investment in real estate and a note payable of $2.4 million. Golden Terrace South consists of 80 developed sites and 86 recreational vehicle sites. On August 29, 1997, the Company acquired seventeen manufactured home communities, a 50% general partnership interest in one manufactured home community, and two commercial properties (collectively, the "MPW Properties") from limited partnerships and joint ventures affiliated with MPW. The aggregrate purchase price was approximately $103 million. Approximately $64 million of the purchase price was in the form of OP Units, approximately $6 million was in the form of installment notes payable, approximately $17 million was in the form of cash funded from a borrowingborrowings under the Company's line of credit, and the Company assumed debtissuance of approximately $64 million of OP Units, assumption of approximately $13 million in debt, approximately $7.4 million of existing available cash, issuance of installment notes totaling approximately $6 million and entry into a lease, accounted for as a capital lease, valued at approximately $2.4 million. The MPW Properties, which consistIn connection with the acquisition of approximately 3,500 sites, are located in California, Oregon, Utah, Arizona, Nevada and Washington. On September 16, 1997,one of the communities the Company acquired Arrowhead Village, locatedissued an additional $1.1 million of OP units in Lantana, Florida, for a purchase price of approximately $20.3 million. The acquisition was funded with a borrowing under the Company's line of credit. Arrowhead Village consists of approximately 603 developed sites.1998. On September 4, 1997, the Company entered into a portfolio purchase agreement (as amended by a supplemental agreement on December 17, 1997) to acquire 38 manufactured home communities (the "Ellenburg Communities") from partnerships having Ellenburg Capital Corporation ("ECC") as athe general partner for a purchase price in excess of $300 million. The agreement immediately transferred property managementDuring 1997 and 1998, the Company closed on the acquisition of thirty-one of the 38 communitiesEllenburg Communities for an aggregate purchase price of approximately $278 million and gained control of an additional five Ellenburg Communities with acquisition advances of approximately $57 million to the Company.partnerships which own such Ellenburg Communities. The Company funded the acquisition advances with borrowings under the Company's line of credit and term bank facilities. In addition, the Company assumed debt of approximately $32 million and issued OP Units of approximately $4.9 million in connection with this transaction. In connection with the supplemental agreement entered into in December 1997, on February 12, 1998, the Company exercised its right of first refusal to purchase five of the Ellenburg Communities are being sold pursuant to an orderCommunities. A third party, backed by one of the Company's competitors upon denial of a stay of the sale, has appealed certain orders of the Superior Court for the State of California, (the "California Court"), byCounty of Los Angeles related to the Company's acquisition of the Ellenburg Communities, including the order approving the supplemental agreement. The Company does not expect the appeals to be successful, or if successful, to have a material impact on the Company's acquisition of the Ellenburg Communities. During 1998, the Company received approximately $14.3 million, including approximately $365,000 of interest income, which ECC was involuntarily dissolved.being held subject to the completion of due diligence procedures on the Ellenburg Communities. The California Court haspersons appointed the winding-up agents to liquidate and wind-upwindup the affairs of ECC have released the funds and its interests in the partnerships. In December 1997, the Company entered intohave presented a supplemental agreement (the "Supplemental Agreement") with respectstatus report to the court. The $14.3 million has been recorded as a liability until certain related issues are finalized at which point the final liability will be relieved and the purchase price of the Ellenburg Communities whichadjusted accordingly. On January 8, 1998, the Company acquired Quail Meadows, located in Riverbank, California, for a purchase price of approximately $4.7 million. The acquisition was approved byfunded with a borrowing under the California Court. F-12Company's line of credit. Quail Meadows consists of approximately 146 developed sites. On April 30, 1998, the Company acquired Sherwood Forest RV Resort, located adjacent to one of the Ellenburg Communities in Kissimmee, Florida, for a purchase price of approximately $7.0 million. The acquisition was funded with a borrowing under the Company's line of credit. Sherwood Forest RV Resort consists of approximately 512 developed sites and a 33 acre expansion parcel. F-11 4142 MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 45 - RENTAL PROPERTY (CONTINUED) On December 18, 1997,May 14, 1998, the Company acquired seventeenCasa Del Sol Resort III, located adjacent to one of the 38 Ellenburg Communities from court appointed agents winding upCompany's communities in Peoria, Arizona, for a purchase price of approximately $9.8 million. The acquisition was funded with a borrowing under the affairsCompany's line of ECC.credit. Casa Del Sol Resort III consists of 238 developed sites. On June 4, 1998, the Company entered into a joint venture agreement with Wolverine Investors L.L.C. to acquire eighteen manufactured home communities (the "College Heights Communities"). The aggregate purchase price of these communitiesfor the College Heights Communities was approximately $143$89 million. Approximately $59The Company contributed approximately $19 million to the joint venture, Wolverine Investors L.L.C. contributed approximately $2.0 million to the joint venture and the remainder of the acquisition was funded with a borrowing from a financial institution of approximately $68 million. The Company's $19 million contribution to the joint venture was funded with a borrowing under the Company's line of credit. Due to the Company's ability to control the joint venture through its approximate 95% interest, the joint venture properties and related operations have been consolidated for financial reporting purposes. On August 13, 1998, the Company acquired Sunset Oaks, located in Plant City, Florida, adjacent to one of the Company's existing properties, for a purchase price of approximately $3.6 million. The acquisition was in the form of cash funded from an additional borrowing with a bank andborrowing under the Company also assumed debtCompany's line of approximately $34 million and repaid existing debt in the amountcredit. Sunset Oaks consists of approximately $50 million. These seventeen communities consist of 4,159 manufactured home sites and 2,005 recreational vehicle168 developed sites. The Company has 120 days to complete certain post-closing due diligence procedures and adjust the purchase price to the extent that (i) the net operating income of the communities is less than the amount used to determine the purchase price; (ii) the community requires environmental, structural engineering, deferred maintenance and other physical or legal costs which may be in excess of anticipated amounts for such items, and (iii) the community has negative working capital. The maximum amount for such adjustments will be an amount equal to 25% of the net equity value of the community which will be held in escrow for 120 days from closing. In connection with the remaining Ellenburg Communities not yet acquired as of December 31, 1997, the Company had made acquisition advances in the amount of approximately $22.0 million to various partnerships which own certain of the Ellenburg Communities. In addition, the Company purchased certain limited partnership interests of approximately $4.4 million in various partnerships which own certain of the Ellenburg Communities through a tender offer which expired on October 2, 1997. Approximately $3.6 million of the investment represents limited partners who received payment either in the form of preferred limited partnership interests with structured payments over periods ranging from six to eight years, or who will receive a cash payment representing the market value of the preferred limited partnership interests. The Company subsequently closed on the acquisition of certain of the Ellenburg Communities (see Note 15). The acquisitions have been accounted for utilizing the purchase method of accounting and, accordingly, the results of operations of acquired assets are included in the statement of operations from the dates of acquisitions. The Company acquired all of the communities from unaffiliated third parties. The Company is actively seeking to acquire additional communities and currently is engaged in negotiations relating to the possible acquisition of a number of 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. The following unaudited summarized pro forma financial information presents the effect of all material transactions which transpired from January 1, 19961997 to December 31, 1997.1998. In management's opinion, the summarized pro forma financial information does not purport to present what actual results would have been had the above transactions occurred on January 1, 1996,1997, or to project results for any future period. The amounts presented in the following table are in thousands, except for per share amounts:
For the Years Ended 1998 1997 1996 -------- ------------------ ---------- Total revenues $179,546 $169,985$ 205,358 $ 196,996 Pro Forma net income $ 22,44235,450 $ 16,83223,024 Pro Forma net income per common share - basic $ .911.12 $ .68.89 Pro Forma net income per share - fully diluted $ 1.11 $ .88
F-13NOTE 6 - INVESTMENT IN JOINT VENTURE On March 18, 1998, the Company joined Plantation Company, LLC and Trails Associates, LLC, two 49% joint venture investments with Meadows Management Company to own two manufactured home communities known as "Plantation on the Lake" and "Trails West", for approximately $6.5 million. Plantation on the Lake is located in Riverside, California and consists of 385 developed sites and 122 expansion sites. Trails West is located in Tucson, Arizona and consists of 488 developed sites and 294 expansion sites. The Company's investments were funded with a $3.9 million borrowing under the Company's line of credit and with the issuance of approximately $2.6 million in OP Units. Due to the Company's inability to control over the joint ventures, the Company accounts for its investment in the joint ventures on the equity method. F-12 4243 MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 57 - INVESTMENT IN AND ADVANCES TO AFFILIATES Investment in and advances to affiliates consists principally of preferred stock of Realty Systems, Inc. ("RSI") and LP Management Corp. (collectively "Affiliates") and advances under a line of credit between the Company and RSI. The Company accounts for the investment in and advances to Affiliates using the equity method of accounting. Following is unaudited financial information for the Affiliates for the year ended December 31, 19971998 and 19961997 (amounts in thousands):
1997 1996 -------- -------- Assets $ 14,466 $ 12,772 Liabilities, net of amounts due to the Company (7,340) (5,936) -------- -------- Net investment in Affiliates $ 7,126 $ 6,836 ======== ======== Home sales $ 20,994 $ 20,645 Cost of sales (17,352) (17,539) Other revenues and expenses, net (2,842) (2,253) -------- -------- Equity in income of Affiliates $ 800 $ 853 ======== ========
1998 1997 ------------ ------------ Assets $ 16,906 $ 14,466 Liabilities, net of amounts due to the Company (9,109) (7,340) ------------ ------------ Net investment in Affiliates $ 7,797 $ 7,126 ============ ============ Home sales $ 24,662 $ 20,994 Cost of sales (18,999) (17,352) Other revenues and expenses, net (4,593) (2,842) ------------ ------------ Equity in income of Affiliates $ 1,070 $ 800 ============ ============ NOTE 68 - NOTES RECEIVABLE At December 31, 1998 and 1997, the Company had approximately $15.7 million and 1996,$1.1 million in notes receivable, consistedrespectively. The Company has $1.1 million in purchase money notes with monthly principal and interest payments at 7.0%, maturing on July 31, 2001. On January 6, 1998, the Company funded a $12.3 million loan (the "Meadows Loan") to Meadows Preservation, Inc. The Meadows Loan is collateralized by The Meadows manufactured home community located in Palm Beach Gardens, Florida, bears interest at the lesser of 9% or the cash flow of the following (amounts in thousands):
1997 1996 ------- ------- $1.2 million purchase money notes with monthly principal and interest payments at 7%, maturing on 7/31/2001....................... $ 1,147 $ 1,160 $2.0 million note receivable with monthly principal and interest payments at 9.0%, maturing on 6/10/2003 (a)................................... --- 1,596 $10 million leasehold mortgage loan with interest accruing at a stated rate of 12.5% with a pay rate of 8.75%, maturing on 9/1/2013 (b)......... --- 11,071 $1.9 million note receivable with monthly interest payments at prime plus 1.6%, maturing on 4/15/2000 (c)................................ --- 1,600 ------- ------- Total notes receivable............................. $ 1,147 $15,427 ======= =======
(a)property which for the year ended December 31, 1998 approximated 7%, and matures on April 30, 1999, as amended. On August 1, 1997, the $2.0 million note receivable was repaid. (b) On August 13, 1997, the $10.0 million leasehold mortgage loan was repaid andMay 12, 1998, the Company recognized a one-time gainentered into an agreement to loan $5.9 million to Trails Associates, LLC (the "Trails West Loan") for development of $315,000 representing the collectionproperty known as Trails West. On May 12, 1998, the Company funded $1,750,000 under the Trails West Loan. This $1,750,000 portion of a $1.4 million prepayment penalty on the note, partially offsetTrails West Loan is collateralized by the write-offproperty known as Trails West, bears interest at the rate of 8.5% and matures on June 1, 2003. The Meadows Loan and Trails West Loan were funded with a borrowing under the apportioned purchase price originally allocated to the management contract for the property collateralizing the note. (c) On December 23, 1997, the $1.9 million note receivable was repaid and the Company recognized a one-time gainCompany's line of $210,000.credit. NOTE 79 - EMPLOYEE NOTES RECEIVABLE In December 1992, certain directors, officers and other individuals each entered into subscription agreements with the Company to acquire 440,000 shares of the Company's common stock at $7.25 per share. The Company received from these individuals notes (the "1993 Employee Notes") in exchange for their shares. The 1993 Employee Notes accrue interest at 6.77%, mature on March 2, 2003, and are recourse against the employees in the event the pledged shares are insufficient to repay the obligations. F-14 43 MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 - EMPLOYEE NOTES RECEIVABLE (CONTINUED) On January 2, 1996, certain members of management of the Company each entered into subscription agreements with the Company to acquire a total of 270,000 shares of the Company's common stock at $17.375 per share, the market price on that date. The Company received from these individuals notes (the "1996 Employee Notes") in exchange for their shares. The 1996 Employee Notes accrue interest at 5.91%, mature on January 2, 2005, and are recourse against the employees in the event the pledged shares are insufficient to repay the obligations. In December 1997, the then Chief Executive Officer of the Company resigned and paid off his 1993 Employee Note and 1996 Employee Note in the aggregate amount of approximately $1 million. F-13 44 MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 89 - EMPLOYEE NOTES RECEIVABLE (CONTINUED) On March 23, 1998, a member of management of the Company entered into a subscription agreement with the Company to acquire a total of 5,000 shares of the Company's common stock at $25.75 per share, the market price on that date. The Company received from this individual a note in exchange for his shares. The note accrues interest at 5.97%, matures on March 23, 2008, and is recourse against the employee in the event the pledged shares are insufficient to repay the obligation. In June 1998, a member of management of the Company resigned and paid off his 1993 Employee Note and 1996 Employee Note in the aggregate amount of approximately $310,000. NOTE 10 - LONG-TERM BORROWINGS As of December 31, 19971998 and 1996,1997, the Company had outstanding mortgage indebtedness of approximately $403.7$500.6 million and $197.5$403.7 million, respectively, encumbering 4372 and 3743 of the Company's properties, respectively. As of December 31, 19971998 and 1996,1997, the carrying value of such properties was approximately $634 million and $493 million, and $331 million, respectively. On December 12, 1997, the Company refinanced $100.0 millionThe outstanding mortgage indebtedness consists in part of the mortgage debt (the "Original Mortgage Debt") with a $265.0 million mortgage note (the "New Mortgage"Mortgage Debt") collateralized by 29 properties beneficially owned by MHC Financing Limited Partnership. The New Mortgage Debt 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 paid from available cash flow and the interest rate is reset at a rate equal to the then 10-year U.S. Treasury obligations plus 2.0%. In connection with the refinancing,acquisition of the College Heights Communities, the joint venture formed by the Company recognized an extraordinary loss on early extinguishment of debt in the amount of $556,000. In October 1996, the Company entered intoand Wolverine Investors L.L.C. borrowed approximately $68 million (the "College Heights Debt") at an interest rate swap agreement (the "1997 Swap") fixing the London Interbank Offered Rate ("LIBOR") on the Original Mortgage Debt at 5.57% effective January 10, 1997 through March 3, 1998.of 7.19%, maturing July 1, 2008. The Company sold the 1997 Swap effective December 31, 1997 for approximately $26,000 in connection with the refinancing. During 1997, in connection with the acquisition of the MPW Properties and Ellenburg Communities, the Company assumed thealso has outstanding mortgage balancesdebt on eight23 properties in the aggregate amount of approximately $41.6 million. The obligations were$169 million, 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. In addition, the Company recorded a $2.4 million loan in connection with a direct financing lease entered into in May 1997 (see Note 4 for additional discussion).1997. Scheduled maturities for the outstanding indebtedness, excluding the New Mortgage Debt and College Heights Debt, are at various dates through November 30, 2020, and fixed interest rates range from 7.25% to 9.05%. The Company has a $100.0 millionan unsecured line of credit with a bank (the "Credit Agreement") bearing interest at the London Interbank Offered Rate ("LIBOR") plus 1.125%. On March 1, 1997,April 28, 1998, the Company amended the Credit Agreement, reducingincreasing the interest rateline of credit from LIBOR plus 1.375%$100 million to LIBOR plus 1.125%. In addition,$150 million. On December 18, 1998, the Company amended the Credit Agreement, increasing the line of credit from $150 million to $175 million. 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 fee on the average unused amount was reduced to 0.125% of such amount fromcredit equal to 0.15%. The Company did not pay any fees in connection with this amendment. of such amount. As of December 31, 1997, $25.01998, $145 million was outstanding under the line of credit. On April 3, 1997,Credit Agreement. The Company paid fees related to the amendments which were immaterial. The Company entered intohas a $60.0 million term loan (the "Loan""Term Loan") with a group of banks with interest only payable monthly at a rate of LIBOR plus 1.0%. On June 2, 1997,April 28, 1998, the Company electedamended the Term Loan to setincrease the LIBOR rate on the Loan at 6.05% through January 2, 1998.borrowing from $60 million to $100 million. The Term Loan matures on April 3, 2000 and may be extended to April 3, 2002. In connection withThe Company used the Loan,$40 million in proceeds to repay a portion of the outstanding balance$50 million previously borrowed on April 7, 1998 under the $100.0 million line of credit was reduced by $60.0 million. In connection with the acquisition of the MPW Properties, theTerm Loan. The Company issuedpaid fees related to this amendment which were immaterial. The Company has approximately $6.6$5.3 million of installment notes payable, secured by a letter of credit with interest rates of 7.5%, maturing September 1, 2002. Approximately $5.3$4 million of the notes pay principal annually and interest quarterly and the remaining $1.3 million of the notes pay interest 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 cost of the 1998 Swap consisted only of legal costs which were deemed immaterial. The value of the 1998 Swap is impacted by changes in the market rate of interest. Had the 1998 Swap been entered into on December 31, 1997,1998, the applicable LIBOR swap rate would have been 5.97%4.56%. Each 0.01% increase or decrease in the applicable swap rate for the 1998 Swap increases or decreases the value of the 1998 Swap entered into by the Company versus its current value by approximately $43,245. F-15$39,000. The Company accounts for the 1998 Swap as a hedge. Payments and receipts under the 1998 Swap are accounted for as an adjustment to interest expense. F-14 4445 MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 810 - LONG-TERM BORROWINGS (CONTINUED) Aggregate payments of principal on long-term borrowings for each of the next five years and thereafter are as follows (amounts in thousands):
Year Amount ---------- -------- 1998 $3,555 1999 3,422 2000 3,608 2001 71,377 2002 63,474 Thereafter 351,003 -------- Total $496,439 ========
Year Amount ---------- ----------- 1999 $ 11,103 2000 4,074 2001 81,501 2002 252,813 2003 20,051 Thereafter 381,307 ----------- Total $ 750,849 =========== NOTE 911 - LEASE AGREEMENTS The leases entered into between the tenant and the Company for the rental of a site are month-to-month or for a period of one to ten years, renewable upon the consent of the parties or, in some instances as provided by statute. Non-cancelable long-term leases, ranging from onewith remaining terms up to fifteeneleven years, are in effect at certain sites within sixeight of the properties.Properties. Rental rate increases at these properties are primarily a function of increases in the Consumer Price Index taking into consideration certain floors and ceilings. Additionally, periodic market rate adjustments are made as deemed necessary. Future minimum rents scheduled to be received under noncancelable tenant leases at December 31, 19971998 are as follows (amounts in thousands):
Year Amount ---------- ------- 1998 $16,136 1999 12,528 2000 6,087 2001 6,267 2002 6,452 Thereafter 20,535 ------- Total $68,005 =======
Year Amount ---------- ------------ 1999 $ 16,211 2000 6,122 2001 6,245 2002 6,369 2003 6,497 Thereafter 17,863 ----------- Total $ 59,307 =========== NOTE 1012 - GROUND LEASES Certain properties leaseThe Company leases land under noncancellable operating leases at certain of the properties expiring in various years from 2022 to 2031 with terms which require twelve equal payments per year plus additional rents calculated as a percent of gross revenues. For the year ended December 31, 1997,1998, ground lease rent was $1.2$1.6 million. Minimum future rental payments under the ground lease are $1.6 million for each of the next five years and $34.0$32.7 million thereafter. NOTE 1113 - TRANSACTIONS WITH RELATED PARTIES Equity Group Investments, Inc. ("EGI"), an entity controlled by Mr. Samuel Zell, Chairman of the Board of Directors, and certain of its affiliates have provided services such as administrative support, investor relations, corporate secretarial, real estate tax evaluation services, market consulting and research services, and computer and support services. Fees paid to EGI and its affiliates amounted to approximately $104,000, $140,000 $708,000 and $1,047,000$708,000 for the years ended December 31, 1998, 1997 1996 and 1995,1996, respectively. Amounts due to these affiliates were approximately $7,000, $15,000 and $31,000 as of December 31, 1998, 1997 and 1996, respectively. F-16F-15 4546 MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1113 - TRANSACTIONS WITH RELATED PARTIES (CONTINUED) Certain related entities, owned by persons affiliated with Mr. Zell, have provided services to the Company. These entities include, but are not limited to, Rosenberg & Liebentritt, P.C. which provided legal services, including property acquisition services; The Riverside Agency, Inc. which provided insurance brokerage services; Equity Office Properties Trust which provided office space to the Company; and Equity Properties & Development, LP which provided accounting services. Fees paid to these entities amounted to approximately $850,000, $459,000 $527,000 and $250,000$527,000 for the years ended December 31, 1998, 1997 1996 and 1995,1996, respectively. Amounts due to these affiliates were approximately $35,000, $63,000 and $74,000 as of December 31, 1998, 1997 and 1996, respectively. Of the amounts due to these affiliates as of December 31, 1998, 1997 and 1996, approximately $175,000, $105,000 and $67,000, respectively, were capitalized. Related party agreements or fee arrangements are generally for a term of one year and approved by independent members of the Board of Directors. NOTE 1214 - STOCK OPTION PLAN A Stock Option Plan (the "Plan") was adopted by the Company in December 1992. Pursuant to the Plan, certain officers, directors, employees and consultants of the Company may be offered the opportunity to acquire shares of common stock through the grant of stock options ("Options"), including non-qualified stock options and, for key employees, incentive stock options within the meaning of Section 422 of the Code. The Compensation Committee will determine the vesting schedule, if any, of each Option and the term, which term shall not exceed ten years from the date of grant. As to the Options that have been granted through December 31, 1997,1998, generally, one-third are exercisable one year after the initial grant, one-third are exercisable two years following the date such Options were granted and the remaining one-third are exercisable three years following the date such Options were granted. The Plan allows for 10,000 Options to be granted annually to each director. The common stock with respect to which the Options may be granted during any calendar year to any grantee shall not exceed 250,000 shares. In addition, the Plan provides for the granting of stock appreciation rights ("SARs") and restricted stock awards ("Stock Awards"). A maximum of 2,000,0004,000,000 shares of common stock were available for grant under the Plan as of December 31, 1998. In 1998, 1997 and an additional 2,000,000 shares will become available upon approval by the Company's shareholders. In 1997, 1996, and 1995, the Company issued 18,238, 14,777 13,144 and 17,49013,144 shares related to Stock Awards, respectively.respectively, which represented a portion of certain employees bonuses. The shares related to the Stock Awards shall be restricted for a period of two years from the date of grant. The fair market value of these Stock Awards of approximately $445,000 $394,361 $289,000 and $291,000$289,000 at the date of grant was recorded as compensation expense by the Company in 1998, 1997 1996 and 1995,1996, respectively. In 1996, the Company awarded 198,000 Stock Awards to certain members of senior management of the Company. These Stock Awards vest over five years, but may be restricted for a period of up to fifteen years depending upon certain performance benchmarks tied to increases in funds from operations being met. The fair market value of these Stock Awards of approximately $4.4 million as of the date of grant was treated in 1996 as deferred compensation. The Company amortized approximately $616,000, $1.6 million and $871,000 related to these Stock Awards in 1998, 1997 and 1996, respectively. In 1997, the Company awarded 77,750 performance unitsStock Awards to certain members of senior management of the Company, which upon approval by the Company's shareholders will be converted toCompany. These Stock Awards. These performance unitsAwards vest over three years and are dependent upon certain performance benchmarks tied to total returns to shareholders being met. The fair market value of these performance unitsStock Awards of approximately $2.1 million as of the date of grant was treated in 1997 as deferred compensation. The Company amortized approximately $519,000 and $1.0 million related to these performance units in 1997. F-171998 and 1997 respectively. In 1998, the Company awarded 233,500 Stock Awards to certain members of senior management of the Company. These Stock Awards vest over five years and are dependent upon certain performance benchmarks tied to total returns to shareholders being met. The fair market value of these Stock Awards of approximately $5.7 million as of the date of grant was treated in 1998 as deferred compensation. F-16 4647 MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1214 - STOCK OPTION PLAN (CONTINUED) The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for its Options and Stock Awards because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123") requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's Options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Additionally, the amount recognized as expense for the Stock Awards during any given year of the performance period is dependent on certain performance benchmarks being met. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its Options and Restricted Stock Awards under the fair value method of that Statement. The fair value for the Options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1998, 1997 1996 and 1995,1996, respectively: risk-free interest rates of 6.3%5.7%, 6.6%6.3% and 6.5%6.6%; dividend yields of 5.5%5.8%, 6.4%5.5% and 7.2%6.4%; volatility factors of the expected market price of the Company's common stock of .23, .24 .27 and .27; and a weighted-average expected life of the optionsOptions of 5 years. The fair value of the Stock Awards granted in 1996, 1997 and 19971998 has been estimated as approximately 30% below the fair market value on the date of grant because these Stock Awards may remain restricted even after they become fully vested. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's Options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its Options. For purposes of pro forma disclosures, the estimated fair value of the Options is amortized to expense over the Options' vesting period and the estimated fair value of the Restricted Stock Awards is amortized to expense over the same period. The pro forma effect of SFAS No. 123 on the Company's net income for the years ended December 31, 1998, 1997 and 1996 was $225,000 ($0.01 per share), $0 ($0 per share), and 1995 was immaterial.$66,000 ($0 per share), respectively. A summary of the Company's stock option activity, and related information for the years ended December 31, 1998, 1997 1996 and 19951996 follows:
Weighted Average Shares Subject Exercise Price Per to Option Share -------------- -------------------------------------- Balance at December 31, 1994 1,092,084 $ 17.81 Options granted 437,250 16.92 Options exercised (58,500) 12.88 Options canceled (130,200) 18.96 -------------- -------------------- Balance at December 31, 1995 1,340,634 $ 17.62 Options granted 307,350 21.01 Options exercised (75,497) 14.14 Options canceled (121,835) 20.19 -------------- ----------------------------- ----------- Balance at December 31, 1996 1,450,652 18.31 Options granted 404,450 25.37 Options exercised (107,147) 18.82 Options canceled (57,462) 19.75 -------------- ----------------------------- ----------- Balance at December 31, 1997 1,690,493 19.91 Options granted 378,986 22.04 Options exercised (141,403) 18.07 Options canceled (28,697) 24.09 --------- ----------- Balance at December 31, 1998 1,899,379 $ 19.91 ============== ====================21.08 ========= ===========
F-18F-17 4748 MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1214 - STOCK OPTION PLAN (CONTINUED) As of December 31, 1998, 1997 and 1996, and 1995,1,075,091 shares, 1,755,532 shares 116,957 shares and 513,615116,957 shares remained available for grant, respectively, and 1,626,3331,269,982 shares 874,3531,071,890 shares and 759,193874,353 shares were exercisable, respectively. Exercise prices for Options outstanding as of December 31, 19971998 ranged from $12.875 to $26.6875,$26.750, with the substantial majority of the exercise prices exceeding $17.25. The remaining weighted-average contractual life of those Options was 8.17.4 years. NOTE 1315 - PREFERRED STOCK The Company's Board of Directors is authorized under the Company's charter, without further stockholder approval, to issue, from time to time, in one or more series, 10,000,000 shares of $.01 par value preferred stock (the "Preferred Stock"), with specific rights, preferences and other attributes as the Board may determine, which may include preferences, powers and rights that are senior to the rights of holders of the Company's common stock. However, under certain circumstances, the issuance of preferred stock may require stockholder approval pursuant to the rules and regulations of the New York Stock Exchange. As of December 31, 1998 and 1997, no Preferred Stock was issued by the Company. NOTE 1416 - SAVINGS PLAN The Company has a qualified retirement plan, with a salary deferral feature designed to qualify under Section 401 of the Code (the "401(k) Plan"), to cover its employees and those of its Subsidiaries, if any. The 401(k) Plan permits eligible employees of the Company and those of any Subsidiary to defer a portion of their compensation up to 16% of their eligible compensation on a pre-tax basis subject to certain maximum amounts. In addition, the Company will match dollar-for-dollar the participant's contribution up to 4% of the participant's eligible compensation. In addition, amounts contributed by the Company will vest, on a prorated basis, according to the participant's vesting schedule. After five years of employment with the Company, the participants will be 100% vested for all amounts contributed by the Company. Additionally, a discretionary profit sharing component of the 401(k) Plan provides for a contribution to be made annually for each participant in an amount, if any, as determined by the Company. All employee contributions are 100% vested. The Company's contribution to the 401(k) Plan was approximately $256,000, $262,000, and $201,000 and $171,000 for the years ended December 31, 1998, 1997 1996 and 1995,1996, respectively. The Company's anticipated plan contribution for the profit sharing component of the 401(k) Plan was approximately $183,000$204,000 for the year ended December 31, 1997.1998. NOTE 1517 - SUBSEQUENT EVENTSCOMMITMENTS AND CONTINGENCIES The residents of DeAnza Santa Cruz, 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, specifically opposing a monthly "readiness to serve" charge and tax thereon. One group of residents, who have elected to be covered under the City's rent control ordinance ("Ordinance"), had their case heard before the City's rent control board. On January 6,June 29, 1995, the City's hearing officer found that the Company may charge only its actual costs. In connection with the hearing officer's decision, in 1997 the residents were awarded costs of approximately $100,000 and the Company rebated amounts overcharged since its acquisition of the Property in August, 1994 of approximately $36,400. The Company believed its actual costs exceeded the amount of the monthly readiness to serve charge and appealed the hearing officer's decision. Also, in March 1997 the Company filed an application with the California Public Utilities Commission ("PUC") requesting the PUC to set cost based rates for water at this Property. In March 1997, the court of appeals issued a writ of mandate requested by the Company ruling that the hearing officer had improperly calculated the amount of the rebate, but was correct when he found that the readiness to serve charge and tax thereon were an inappropriate rent increase. The court of appeals further agreed with the Company that the hearing officer did not have the authority to establish rates that could be charged in the future. In December 1998, the Company funded a $12.3 million loan (the "Meadows Loan") to the Meadows Preservation, Inc. The Meadows Loan is collateralized by The Meadows manufactured home community located in Palm Beach Gardens, Florida, bears interest at a nominal rate of 9%, subject to adjustment based on cash flow of the property, and matures on July 31, 1998. The loan was funded with a borrowing under the Company's line of credit. On January 8, 1998,PUC granted the Company acquired Quail Meadows, locatedits certificate of convenience and necessity and approved cost based rates and charges for water that exceed what residents were paying. The PUC also issued an Order Instituting Investigation confirming its exclusive jurisdiction over the issue of water rates in Riverbank, California, for a purchase price of approximately $4.7 million. The acquisition was funded with a borrowing undersubmetered system and commencing an investigation into the Company's line of credit. Quail Meadows consists of approximately 146 developed sites. F-19confusion and turmoil over billings in submetered properties. F-18 4849 MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1517 - SUBSEQUENT EVENTSCOMMITMENTS AND CONTINGENCIES (CONTINUED) By February 23, 1998,The Santa Cruz Homeowners Association ("HOA"), representing approximately fifteen residents not covered by the Ordinance, separately filed suit in the Superior Court of the State of California (Case Number 128001) opposing the same fees and charges in connection with water service and seeking damages, including punitive damages, arising out of the imposition of the readiness to serve charge. After the court of appeals decision discussed above, 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. A trial was held before a jury in the Santa Cruz Superior Court commencing on January 11, 1999. On January 22, 1999, the jury returned a verdict awarding $6 million of punitive damages against the Company. The Company is preparing to bond the judgment pending appeal in accordance with California procedural rules which require a bond equal to 150% of the amount of the judgment which will accrue interest at the statutory rate of 10.0% per annum. The Company will appeal this decision and due to the uncertainty of the ultimate outcome because of the competing legal theories, the Company closedis unable to estimate the amount of loss, if any, and therefore no adjustments have been made to the accompanying financial statements. The HOA is also seeking to recover attorneys fees in connection with the trial, including a multiplier of such fees which may result in an attorneys fee award in the range of $700,000 to $900,000. This is in addition to the $100,000 award referred to above. The Company will vigorously oppose such award of attorney fees. The Company expects to incur $300,000 to $500,000 in costs and expenses over the next 15 months in connection with this appeal. In a separate matter, on September 29, 1995, the acquisitionUnited States Environmental Protection Agency ("USEPA") issued its Findings of threeViolations and Order for Compliance with respect to the National Pollution Discharge Elimination System ("NPDES") Permit governing the operation of the Ellenburg Communities (see Note 4)on-site waste water treatment plant at one of the Company's properties. On October 6, 1995, the USEPA issued its Findings of Violation and Order for an aggregate purchase price of $25.4 million, made additional acquisition advances of approximately $33 millionCompliance with respect to the partnershipsNPDES Permit governing the operation of the on-site waste water treatment plant at another of the Company's properties. The Company and USEPA have reached a tentative agreement to resolve the matter in which own seventhe operation of the remaining waste water treatment plant would be subject to a consent decree that would provide for fines and penalties in the event of future violations and the Company would contribute monies to a supplemental environmental project and pay a fine. The tentative agreement has not yet been reduced to writing and therefore remains subject to change. 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. In another matter, in connection with the acquisition of the Ellenburg Communities and acquiredpursuant to orders of the California Superior Court, approximately $30 million of the amounts paid by the Company have been deposited with the court appointed winding up agents (the "Winding Up Agents"). The deposited amounts relate 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 other undivided interests in certain of the entities related to the Ellenburg Communities. The Winding Up Agents have disputed the claims and have filed a complaint against Mr. Karno (and related entities) requesting that the court determine that the claims be reduced or eliminated. On October 30, 1998, the Company fundedreceived notice of a lawsuit filed against the acquisition advances with borrowings underCompany and certain Executive Officers of the Company's lineCompany in the Los Angeles Superior Court alleging, among other causes of credit. Inaction, that the Company breached certain agreements in connection with the Supplemental Agreement, on February 12, 1998, the Company exercised its right of first refusal on five of the Ellenburg Communities. A third party, backed by one of the Company's competitors, has appealed certain orders of the California Court related to the Company's acquisition of the Ellenburg Communities. The third party originally requested the California Court to stay all of its proceedings and the Company's acquisition of the Ellenburg Communities pending such appeal. The California Court denied this motion. The third party then filed a writand claiming damages in excess of supersedeas with$50 million plus punitive damages. Based upon jurisdictional issues, in February 1999 the California appellate court seeking a stayclaims against the Executive Officers of the California Court's orders and related transactions pending appeal. The appellate court also refused to issue a stay and denied the writ of supersedeas.Company were dismissed. The Company believes most of the claim relates to the disputed Karno Claims discussed above. The Company believes the claims are without merit, intends to vigorously defend the defendants in this matter and does not expectbelieve the appeals toimpact of this matter will be successful, or if successful, to have a material impact onmaterial. In connection with the Company's acquisition of the Ellenburg Communities. NOTE 16 - COMMITMENTS AND CONTINGENCIESCommunities, Mr. Karno and others have appealed various court orders on which the Comany has relied. The court of appeals has recently requested briefing on the issue of whether certain appeals are moot. Mr. Karno has also sought before both the California Superior Court and Court of Appeals to take control of ECC, but to date none of his attempts have been successful. The Company is involved in various other legal proceedings arising in the ordinary course of business. All such proceedings herein described or referred to, taken together, are not expected to have a material adverse impact on the financial position, results of operations or cash flows of Company. NOTE 17 - PROPOSED MERGER During 1996, the Company offered a merger proposal to Chateau Communities, Inc. ("Chateau") in opposition to Chateau's proposed merger with ROC Communities, Inc. ("ROC") and incurred approximately $1.3 million in related costs and invested in certain related saleable assets with a book value of approximately $9.9 million. These expenditures were included in prepaid expenses and other assets as of December 31, 1996. On February 11, 1997, Chateau's shareholders approved Chateau's merger with ROC. In 1997, the Company sold the related assets it had acquired for approximately $11.1 million and recorded a net gain of approximately $259,000. F-20F-19 4950 MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED) The following is unaudited quarterly data for 19971998 and 19961997 (amounts in thousands, except for per share amounts):
First Second Third Fourth Quarter Quarter Quarter Quarter 3/31 6/30 9/30 12/31 ------- ------- ------- ------- 1997 - ------------------------------------------------------ ----------- ----------- ----------- 1998 - -------------------------------------------- Total revenues ............................ $28,529 $29,385 $31,153 $34,443 ======= ======= ======= =======revenues.............................. $ 44,872 $ 47,894 $ 50,809 $ 51,254 =========== ============ =========== =========== Income before allocation to minority interests ....................interests..................... $ 7,7119,586 $ 8,0519,066 $ 8,7838,440 $ 8,368 ======= ======= ======= =======8,570 =========== ============ =========== =========== Net income ................................income.................................. $ 6,9557,765 $ 7,2537,343 $ 7,6426,837 $ 6,795 ======= ======= ======= =======6,984 =========== ============ =========== =========== Weighted average common shares outstanding-basic (excluding OP Units) ... 24,840 24,715 24,575 24,628 ======= ======= ======= =======.... 24,805 25,659 25,988 26,033 =========== ============ =========== =========== Weighted average common shares outstanding - diluted (including OP Units) (a) ................. 27,840 27,660 28,735 30,781 ======= ======= ======= =======................... 31,095 32,095 32,339 32,382 =========== ============ =========== =========== Weighted average OP Units ................. 2,715 2,715 3,798 5,734 ======= ======= ======= =======Units................... 5,886 6,020 5,985 5,981 =========== ============ =========== =========== Net income per common share outstanding - basic ......................basic....................... $ .28.31 $ .29 $ .31.26 $ .28 ======= ======= ======= =======.27 =========== ============ =========== =========== Net income per common share outstanding - diluted (a) ................diluted..................... $ .31 $ .28 $ .29.26 $ .31.26 =========== ============ =========== =========== 1997 - -------------------------------------------- Total revenues.............................. $ .27 ======= ======= ======= ======= 1996 - ------------------------------------------- Total revenues ............................ $25,469 $26,128 $26,408 $27,198 ======= ======= ======= =======28,529 $ 29,385 $ 31,153 $ 34,443 =========== ============ =========== =========== Income before allocation to minority interests ....................interests..................... $ 6,5577,711 $ 6,6668,051 $ 7,1458,783 $ 6,575 ======= ======= ======= =======8,368 =========== ============ =========== =========== Net income ................................income.................................. $ 5,9076,955 $ 6,0057,253 $ 6,4377,642 $ 5,923 ======= ======= ======= =======6,795 =========== ============ =========== =========== Weighted average common shares outstandingoutstanding-basic (excluding OP Units) .. 24,664 24,687 24,697 24,714 ======= ======= ======= =======.... 24,840 24,715 24,575 24,628 =========== ============ =========== =========== Weighted average common shares outstanding - diluted (including OP Units) (a) ................. 27,502 27,525 27,542 27,559 ======= ======= ======= =======................... 27,840 27,660 28,735 30,781 =========== ============ =========== =========== Weighted average OP Units .................Units................... 2,715 2,715 2,715 2,715 ======= ======= ======= ======= Net income per common share outstanding $ .24 $ .24 $ .26 $ .24 ======= ======= ======= =======3,798 5,734 =========== ============ =========== =========== Net income per common share outstanding - diluted (a) ................basic....................... $ .24.28 $ .24.29 $ .26.31 $ .24 ======= ======= ======= =======.28 =========== ============ =========== =========== Net income per common share outstanding - diluted..................... $ .28 $ .29 $ .31 $ .27 =========== ============ =========== ===========
(a) The 1996 and first three quarters of 1997 earnings per share amounts have been restated to comply with SFAS No. 128. F-21 5051 SCHEDULE II MANUFACTURED HOME COMMUNITIES, INC. VALUATION AND QUALIFYING ACCOUNTS DECEMBER 31, 19971998
ADDITIONS ------------------------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING OF TO TOINCOME OTHER END OF OF PERIOD INCOME ACCOUNTS DEDUCTIONS(1) PERIOD ------------- --------- --------- ------------------------- ----------- ---------- --------------- ------------ For the year ended December 31, 1995: Allowance for doubtful accounts...... $160,000 $380,854 $--- ($340,854) $200,000 For the year ended December 31, 1996: Allowance for doubtful accounts......accounts......... $200,000 $198,797 $---$ --- ($148,797) $250,000 For the year ended December 31, 1997: Allowance for doubtful accounts......accounts......... $250,000 $150,985 $---$ --- ($150,985) $250,000 For the year ended December 31, 1998: Allowance for doubtful accounts......... $250,000 $167,774 $ --- ($167,774) $250,000
(1) Deductions represent tenant receivables deemed uncollectible. S-1 5152 SCHEDULE III MANUFACTURED HOME COMMUNITIES, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 19971998 (IN THOUSANDS)
Costs Capitalized Subsequent to Initial Cost to Acquisition Company (Improvements) ----------------------- -------------------- MANUFACTURED--------------------- Manufactured Home Depreciable Depreciable HOME COMMUNITIES LOCATIONCommunities Location Encumbrances Land Property Land Property - --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- APOLLO VILLAGE Apollo AZ 0 932 3,219 0 257 BRENTWOOD MANOR Mesa AZ 5,0304,928 1,998 6,024 CASA DEL SOL NO. 3 Glendale AZ 0 1622,450 7,452 CASA DEL SOL RESORT NO. 1 Phoenix AZ 6,1466,778 2,215 6,467 0 71 CASA DEL SOL RESORT NO. 2 Phoenix AZ 6,8016,911 2,104 6,283 0 56 CENTRAL PARK Phoenix AZ 6,8997,175 1,612 3,784 0 287 HACIENDA DE VALENCIA Mesa AZ 8,5018,410 833 2,701 0 614 PALM SHADOWS Glendale AZ 3,4323,362 1,400 4,218 0 169 SEDONA SHADOWS Sedona AZ 1,5821,542 1,096 3,431 0 18 SUNRISE HEIGHTS Phoenix AZ 0 999 3,016 0 127 THE MARK Mesa AZ 0 1,354 4,660 5 201 THE MEADOWS Tempe AZ 8,8419,394 2,614 7,887 0 198 CALIFORNIA HAWAIIAN San Jose CA 16,39117,953 5,825 17,755 0 31 CONCORD CASCADE Pacheco CA 10,48610,369 985 3,016 0 360 CONTEMPO MARIN San Rafael CA 17,34016,128 4,779 16,379 8 765 CORALWOOD Modesto CA 0 0 5,047 0 9 DATE PALM Cathedral City CA 9,7969,621 4,138 14,064 (23) 526 DE ANZA SANTA CRUZ ESTATES Santa Cruz CA 4,4754,396 2,103 7,204 0 85 FOUR SEASONS Fresno CA 0 756 2,348 0 22 GARDEN WEST OFFICE PLAZA Monterey CA 0 535 1,702 0 0 LAMPLIGHTER VILLAGE Spring Valley CA 10,1689,382 633 2,201 0 422 MONTE DEL LAGO Castroville CA 2,6522,626 3,150 9,469 0 78 NICHOLSON PLAZA San Jose CA 0 0 4,512 QUAIL MEADOWS Riverbank CA 0 21,155 3,469 RANCHO VALLEY El Cajon CA 4,6074,640 685 1,902 0 261 ROYAL OAKS Visalia CA 0 602 1,921 0 9 SAN JOSE I, II, III AND IV San Jose CA 0 0 17,616 0 188 SEA OAKS Los Osos CA 0 871 2,703 0 8 SUNSHADOW San Jose CA 0 0 5,707 0 8 CIMARRON Broomfield CO 8,0698,077 863 2,790 0 306 GOLDEN TERRACE SOUTH Golden CO 2,400 750 2,265 0 84 GOLDEN TERRACE VILLAGE Golden CO 8,1938,031 826 2,415 0 376 GOLDEN TERRACE WEST Golden CO 9,8249,724 1,694 5,065 0 539 HILLCREST VILLAGE Aurora CO 14,94315,458 1,912 5,202 289 1,365 HOLIDAY HILLS VILLAGE Denver CO 19,48719,412 2,159 7,780 0 1,542 HOLIDAY VILLAGE, CO Colorado Springs, CO 6,0116,256 567 1,759 0 339Springs PUEBLO GRANDE VILLAGE Pueblo CO 3,7483,471 241 1,069 0 269 WOODLAND HILLS Thornton CO 0 1,928 4,408 0 1,804 MARINER'S COVE Millsboro DE 0 990 2,971 0 2,190 NASSAU PARK Lewes DE 0 1,536 4,609 0 427 WATERFORD Wilmington DE 0 5,250 16,202 ARROWHEAD VILLAGE Lantana FL 0 83 5,325 15,420 BAY INDIES Venice FL 23,830 10,483 31,559 BAY LAKE ESTATES Nokomis FL 2,078 990 3,390 Costs Capitalized Subsequent to Gross Amount Carried Acquisition at Close of (Improvements) Period 12/31/9798 --------------------- MANUFACTURED------------------------------- Manufactured Home Depreciable Depreciable Accumulated Date of HOME COMMUNITIESCommunities Land Property Land Property Total Depreciation Acquisition - -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- APOLLO VILLAGE 0 268 932 3,476 4,408 3783,487 4,419 500 1994 BRENTWOOD MANOR 0 172 1,998 6,186 8,184 9766,196 8,194 1,192 1993 CASA DEL SOL NO. 3 0 0 2,450 7,452 9,902 124 1998 CASA DEL SOL RESORT NO. 1 0 85 2,215 6,538 8,753 2016,552 8,767 378 1996 CASA DEL SOL RESORT NO. 2 0 72 2,104 6,339 8,443 1896,355 8,459 355 1996 CENTRAL PARK 0 329 1,612 4,071 5,683 1,8774,113 5,725 2,023 1983 HACIENDA DE VALENCIA 0 733 833 3,315 4,148 1,4483,434 4,267 1,579 1984 PALM SHADOWS 0 203 1,400 4,387 5,787 6934,421 5,821 847 1993 SEDONA SHADOWS 0 267 1,096 3,449 4,545 383,698 4,794 156 1997 SUNRISE HEIGHTS 0 147 999 3,143 4,142 4063,163 4,162 517 1994 THE MARK 5 277 1,359 4,861 6,220 5434,937 6,296 716 1994 THE MEADOWS 0 257 2,614 8,085 10,699 1,0608,144 10,758 1,337 1994 CALIFORNIA HAWAIIAN 0 63 5,825 17,786 23,611 44417,818 23,643 1,042 1997 CONCORD CASCADE 0 538 985 3,376 4,361 1,5453,554 4,539 1,663 1983 CONTEMPO MARIN 8 801 4,787 17,144 21,931 1,86917,180 21,967 2,453 1994 CORALWOOD 0 5,056 5,056 5649 0 5,096 5,096 226 1997 DATE PALM -23 628 4,115 14,590 18,705 1,62914,692 18,807 2,144 1994 DE ANZA SANTA CRUZ ESTATES 0 116 2,103 7,289 9,392 8177,320 9,423 1,066 1994 FOUR SEASONS 0 27 756 2,370 3,126 262,375 3,131 106 1997 GARDEN WEST OFFICE PLAZA 0 5 535 1,702 2,237 191,707 2,242 75 1997 LAMPLIGHTER VILLAGE 0 479 633 2,623 3,256 1,1762,680 3,313 1,274 1983 MONTE DEL LAGO 0 123 3,150 9,547 12,697 1069,592 12,742 429 1997 NICHOLSON PLAZA 0 4,514 4,514 501 0 4,513 4,513 200 1997 QUAIL MEADOWS 0 0 1,155 3,469 4,624 88 1998 RANCHO VALLEY 0 308 685 2,163 2,848 9842,210 2,895 1,064 1983 ROYAL OAKS 0 14 602 1,930 2,532 211,935 2,537 87 1997 SAN JOSE I, II, III AND IV 0 17,804 17,804 1942229 0 19,845 19,845 842 1997 SEA OAKS 0 14 871 2,711 3,582 302,717 3,588 122 1997 SUNSHADOW 0 5,715 5,715 6331 0 5,738 5,738 255 1997 CIMARRON 0 340 863 3,096 3,959 1,4273,130 3,993 1,535 1983 GOLDEN TERRACE SOUTH 0 175 750 2,349 3,099 382,440 3,190 119 1997 GOLDEN TERRACE VILLAGE 0 163 826 2,791 3,617 1,2572,578 3,404 1,221 1983 GOLDEN TERRACE WEST 0 571 1,694 5,604 7,298 1,9815,636 7,330 2,172 1986 HILLCREST VILLAGE 289 1,494 2,201 6,567 8,768 2,7746,696 8,897 3,035 1983 HOLIDAY HILLS VILLAGE 0 1,847 2,159 9,322 11,481 4,0699,627 11,786 4,422 1983 HOLIDAY VILLAGE, CO 0 365 567 2,098 2,665 9352,124 2,691 1,011 1983 PUEBLO GRANDE VILLAGE 0 293 241 1,338 1,579 6161,362 1,603 668 1983 WOODLAND HILLS 0 1,863 1,928 6,212 8,140 8056,271 8,199 1,034 1994 MARINER'S COVE 0 2,326 990 5,161 6,151 1,1705,297 6,287 1,378 1987 NASSAU PARK 0 525 1,536 5,036 6,572 1,5425,134 6,670 1,720 1988 WATERFORD 0 188 5,250 16,285 21,535 58316,390 21,640 921 1996
S-2 52 SCHEDULE III MANUFACTURED HOME COMMUNITIES, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED DECEMBER 31, 1997 (IN THOUSANDS)
Costs Capitalized Subsequent to Initial Cost to Acquisition Company (Improvements) --------------------- ---------------------- MANUFACTURED Depreciable Depreciable HOME COMMUNITIES LOCATION Encumbrances Land Property Land Property - ------------------------------------------------------------------------------------------------------------------------ ARROWHEAD VILLAGE Lantana, FL 0 63 5,325 15,420 0 32 BAY INDIES Venice, FL 24,206 10,483 31,559 0 299 BAY LAKE ESTATES Nokomis, FL 2,116 990 3,390 0 181 BUCCANEER ESTATES N. Ft. Myers, FL 7,704 4,207 14,410 0 342 BULOW VILLAGE Flagler Beach, FL 1,334 3,633 949 4 1,848 COLONIES OF MARGATE Margate, FL 12,702 5,890 20,211 0 340 COUNTRY PLACE VILLAGE New Port Richey, FL 4,001 663 0 18 5,309 EAST BAY OAKS Largo, FL 6,695 1,240 3,322 0 272 ELDORADO VILLAGE Largo, FL 4,882 778 2,341 0 231 FFEC-SIX N. Ft. Myers, FL 0 401 3,608 0 57 HERITAGE VILLAGE Vero Beach, FL 0 2,403 7,259 0 121 LAKE FAIRWAYS N. Ft. Myers, FL 0 6,075 18,134 0 251 LAKE HAVEN Dunedin, FL 8,132 1,135 4,047 0 347 LAKEWOOD VILLAGE Melbourne, FL 0 1,863 5,627 0 132 MID-FLORIDA LAKES Leesburg, FL 12,807 5,997 20,635 0 684 OAK BEND Ocala, FL 0 850 2,572 0 234 PINE LAKES N. Ft. Myers, FL 0 6,306 14,579 0 4,389 SPANISH OAKS Ocala, FL 0 2,250 6,922 0 120 THE HERITAGE N. Ft. Myers, FL 0 1,438 4,371 0 1,146 WINDMILL VILLAGE N. Ft. Myers, FL 9,773 1,417 5,440 0 631 WINDMILL VILLAGE NORTH Sarasota, FL 9,208 1,523 5,063 0 347 WINDMILL VILLAGE SOUTH Sarasota, FL 5,822 1,106 3,162 0 248 HOLIDAY VILLAGE, IA Sioux City, IA 0 313 3,744 0 364 GOLF VISTA ESTATES Monee IL 0 2,843 4,719 0 758 WILLOW LAKE ESTATES Elgin, IL 12,366 6,136 21,033 2 336 BURNS HARBOR ESTATES Chesterton, IN 0 916 2,909 0 336 CANDLELIGHT VILLAGE Columbus, IN 0 1,513 4,538 250 774 OAKTREE VILLAGE Portage, IN 6,957 0 0 569 3,154 BONNER SPRINGS Bonner Springs, KS 0 343 1,041 0 104 CARRIAGE PARK Kansas City, KS 0 309 938 0 357 QUIVIRA HILLS Kansas City, KS 0 376 1,139 0 98 PHEASANT RIDGE Mount Airy, MD 0 376 1,779 0 102 CAMELOT ACRES Burnsville, MN 6,826 527 2,058 0 308 BRIARWOOD Brookline, MO 0 423 1,282 0 138 DELLWOOD ESTATES Warrensburg, MO 0 300 912 0 79 NORTH STAR VILLAGE Kansas City, MO 0 451 1,365 0 177 CASA VILLAGE Billings, MT 7,143 1,011 3,109 181 1,051 DEL REY Albuquerque, NM 0 1,926 5,800 0 343 BONANZA VILLAGE Las Vegas, NV 10,288 908 2,643 0 272 CABANA Las Vegas, NV 0 2,648 7,989 0 57 FLAMINGO WEST Las Vegas, NV 0 1,732 5,266 0 96 VILLA BOREGA Las Vegas NV 2,447 2,896 8,774 0 28
Gross Amount Carried at Close of Period 12/31/97 --------------------- MANUFACTURED Depreciable Accumulated Date of HOME COMMUNITIES Land Property Total Depreciation Acquisition - --------------------------------------------------------------------------------------------------- ARROWHEAD VILLAGE 5,325 15,452 20,777 12915,483 20,808 645 1997 BAY INDIES 0 403 10,483 31,858 42,341 4,18631,962 42,445 5,277 1994 BAY LAKE ESTATES 0 205 990 3,571 4,561 4103,595 4,585 543 1994 BUCCANEER ESTATES 4,207 14,752 18,959 1,651 1994 BULOW VILLAGE 3,637 2,797 6,434 193 1994 COLONIES OF MARGATE 5,890 20,551 26,441 2,296 1994 COUNTRY PLACE VILLAGE 681 5,309 5,990 1,219 1986 EAST BAY OAKS 1,240 3,594 4,834 1,685 1983 ELDORADO VILLAGE 778 2,572 3,350 1,194 1983 FFEC-SIX 401 3,665 4,066 386 1994 HERITAGE VILLAGE 2,403 7,380 9,783 890 1994 LAKE FAIRWAYS 6,075 18,385 24,460 1,945 1994 LAKE HAVEN 1,135 4,394 5,529 2,027 1983 LAKEWOOD VILLAGE 1,863 5,759 7,622 691 1994 MID-FLORIDA LAKES 5,997 21,319 27,316 2,375 1994 OAK BEND 850 2,806 3,656 399 1993 PINE LAKES 6,306 18,968 25,274 1,813 1994 SPANISH OAKS 2,250 7,042 9,292 979 1993 THE HERITAGE 1,438 5,517 6,955 733 1993 WINDMILL VILLAGE 1,417 6,071 7,488 2,719 1983 WINDMILL VILLAGE NORTH 1,523 5,410 6,933 2,520 1983 WINDMILL VILLAGE SOUTH 1,106 3,410 4,516 1,600 1983 HOLIDAY VILLAGE, IA 313 4,108 4,421 1,649 1986 GOLF VISTA ESTATES 2,843 5,477 8,320 122 1997 WILLOW LAKE ESTATES 6,138 21,369 27,507 2,379 1994 BURNS HARBOR ESTATES 916 3,245 4,161 553 1993 CANDLELIGHT VILLAGE 1,763 5,312 7,075 186 1996 OAKTREE VILLAGE 569 3,154 3,723 616 1987 BONNER SPRINGS 343 1,145 1,488 319 1989 CARRIAGE PARK 309 1,295 1,604 336 1989 QUIVIRA HILLS 376 1,237 1,613 341 1989 PHEASANT RIDGE 376 1,881 2,257 1,015 1988 CAMELOT ACRES 527 2,366 2,893 1,096 1983 BRIARWOOD 423 1,420 1,843 385 1989 DELLWOOD ESTATES 300 991 1,291 275 1989 NORTH STAR VILLAGE 451 1,542 1,993 422 1989 CASA VILLAGE 1,192 4,160 5,352 1,660 1983 DEL REY 1,926 6,143 8,069 965 1993 BONANZA VILLAGE 908 2,915 3,823 1,319 1983 CABANA 2,648 8,046 10,694 955 1994 FLAMINGO WEST 1,732 5,362 7,094 633 1994 VILLA BOREGA 2,896 8,802 11,698 97 1997
S-3S-2 53 SCHEDULE III MANUFACTURED HOME COMMUNITIES, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED DECEMBER 31, 19971998 (IN THOUSANDS)
Initial Cost to Company ---------------------- Manufactured Home Depreciable Communities Location Encumbrances Land Property - ---------------------------------------------------------------------------------------- BUCCANEER ESTATES N. Ft. Myers FL 7,567 4,207 14,410 BULOW VILLAGE Flagler Beach FL 1,220 3,633 949 COLONIES OF MARGATE Margate FL 12,476 5,890 20,211 COUNTRY PLACE VILLAGE New Port FL 4,002 663 0 Richey EAST BAY OAKS Largo FL 6,666 1,240 3,322 ELDORADO VILLAGE Largo FL 4,570 778 2,341 FFEC-SIX N. Ft. Myers FL 0 401 3,608 HERITAGE VILLAGE Vero Beach FL 0 2,403 7,259 LAKE FAIRWAYS N. Ft. Myers FL 0 6,075 18,134 LAKE HAVEN Dunedin FL 8,062 1,135 4,047 LAKEWOOD VILLAGE Melbourne FL 0 1,863 5,627 MID-FLORIDA LAKES Leesburg FL 12,580 5,997 20,635 OAK BEND Ocala FL 0 850 2,572 PINE LAKES N. Ft. Myers FL 0 6,306 14,579 SHERWOOD FOREST RV Kissimmee FL 0 3,437 3,621 SPANISH OAKS Ocala FL 0 2,250 6,922 SUNSET OAKS Plant City FL 0 1,111 2,513 THE HERITAGE N. Ft. Myers FL 0 1,438 4,371 WINDMILL VILLAGE N. Ft. Myers FL 9,057 1,417 5,440 WINDMILL VILLAGE NORTH Sarasota FL 9,248 1,523 5,063 WINDMILL VILLAGE SOUTH Sarasota FL 5,556 1,106 3,162 HOLIDAY VILLAGE, IA Sioux City IA 0 313 3,744 GOLF VISTA ESTATES Monee IL 0 2,843 4,719 WILLOW LAKE ESTATES Elgin IL 12,146 6,136 21,033 BURNS HARBOR ESTATES Chesterton IN 0 916 2,909 CANDLELIGHT VILLAGE Columbus IN 0 1,513 4,538 OAKTREE VILLAGE Portage IN 6,084 0 0 BONNER SPRINGS Bonner Springs KS 0 343 1,041 CARRIAGE PARK Kansas City KS 0 309 938 QUIVIRA HILLS Kansas City KS 0 376 1,139 PHEASANT RIDGE Mount Airy MD 0 376 1,779 CAMELOT ACRES Burnsville MN 6,994 527 2,058 BRIARWOOD Brookline MO 0 423 1,282 DELLWOOD ESTATES Warrensburg MO 0 300 912 NORTH STAR VILLAGE Kansas City MO 0 451 1,365 CASA VILLAGE Billings MT 8,029 1,011 3,109 DEL REY Albuquerque NM 0 1,926 5,800 BONANZA VILLAGE Las Vegas NV 9,975 908 2,643 CABANA Las Vegas NV 0 2,648 7,989 FLAMINGO WEST Las Vegas NV 0 1,732 5,266 VILLA BOREGA Las Vegas NV 2,401 2,896 8,774 ROCKWOOD VILLAGE Tulsa OK 12 645 1,622 FALCON WOOD Eugene OR 0 1,112 3,426 QUAIL HOLLOW Fairview OR 0 0 3,249 SHADOWBROOK Clackamas OR 0 1,197 3,693 Costs Capitalized Subsequent to Initial Cost toGross Amount Carried Acquisition Companyat Close of (Improvements) ---------------------- ---------------------- MANUFACTUREDPeriod 12/31/98 --------------------- ------------------------------- Manufactured Home Depreciable Depreciable HOME COMMUNITIES LOCATION EncumbrancesAccumulated Date of Communities Land Property Land Property Total Depreciation Acquisition - ------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- BUCCANEER ESTATES 0 423 4,207 14,833 19,040 2,164 1994 BULOW VILLAGE 4 2,264 3,637 3,213 6,850 311 1994 COLONIES OF MARGATE 0 397 5,890 20,608 26,498 3,003 1994 COUNTRY PLACE VILLAGE 18 5,496 681 5,496 6,177 1,411 1986 EAST BAY OAKS 0 312 1,240 3,634 4,874 1,812 1983 ELDORADO VILLAGE 0 255 778 2,596 3,374 1,285 1983 FFEC-SIX 0 111 401 3,719 4,120 509 1994 HERITAGE VILLAGE 0 139 2,403 7,398 9,801 1,150 1994 LAKE FAIRWAYS 0 322 6,075 18,456 24,531 2,575 1994 LAKE HAVEN 0 402 1,135 4,449 5,584 2,185 1983 LAKEWOOD VILLAGE 0 176 1,863 5,803 7,666 897 1994 MID-FLORIDA LAKES 0 914 5,997 21,549 27,546 3,117 1994 OAK BEND 0 303 850 2,875 3,725 505 1993 PINE LAKES 0 4,447 6,306 19,026 25,332 2,482 1994 SHERWOOD FOREST RV 0 0 3,437 3,621 7,058 71 1998 SPANISH OAKS 0 168 2,250 7,090 9,340 1,223 1993 SUNSET OAKS 0 0 1,111 2,513 3,624 21 1998 THE HERITAGE 0 1,470 1,438 5,841 7,279 949 1993 WINDMILL VILLAGE 0 684 1,417 6,124 7,541 2,926 1983 WINDMILL VILLAGE NORTH 0 444 1,523 5,507 7,030 2,707 1983 WINDMILL VILLAGE SOUTH 0 277 1,106 3,439 4,545 1,721 1983 HOLIDAY VILLAGE, IA 0 421 313 4,165 4,478 1,797 1986 GOLF VISTA ESTATES 0 1,132 2,843 5,851 8,694 321 1997 WILLOW LAKE ESTATES 2 457 6,138 21,490 27,628 3,107 1994 BURNS HARBOR ESTATES 0 788 916 3,697 4,613 684 1993 CANDLELIGHT VILLAGE 250 1,776 1,763 6,314 8,077 331 1996 OAKTREE VILLAGE 569 3,315 569 3,315 3,884 761 1987 BONNER SPRINGS 0 165 343 1,206 1,549 357 1989 CARRIAGE PARK 0 364 309 1,302 1,611 391 1989 QUIVIRA HILLS 0 110 376 1,249 1,625 386 1989 PHEASANT RIDGE 0 113 376 1,892 2,268 1,061 1988 CAMELOT ACRES 0 366 527 2,424 2,951 1,186 1983 BRIARWOOD 0 147 423 1,429 1,852 439 1989 DELLWOOD ESTATES 0 77 300 989 1,289 307 1989 NORTH STAR VILLAGE 0 191 451 1,556 2,007 480 1989 CASA VILLAGE 181 1,210 1,192 4,319 5,511 1,827 1983 DEL REY 0 429 1,926 6,229 8,155 1,191 1993 BONANZA VILLAGE 0 430 908 3,073 3,981 1,434 1983 CABANA 0 79 2,648 8,068 10,716 1,232 1994 FLAMINGO WEST 0 109 1,732 5,375 7,107 823 1994 VILLA BOREGA 0 77 2,896 8,851 11,747 395 1997 ROCKWOOD VILLAGE Tulsa, OK 0 237 645 1,622 0 2051,859 2,504 909 1983 FALCON WOOD Eugene OR 0 10 1,112 3,426 0 63,436 4,548 154 1997 QUAIL HOLLOW Fairview OR 0 27 0 3,2493,276 3,276 146 1997 SHADOWBROOK 0 13 SHADOWBROOK Clackamas OR 095 1,197 3,693 0 913,788 4,985 167 1997
S-3 54 SCHEDULE III MANUFACTURED HOME COMMUNITIES, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED DECEMBER 31, 1998 (IN THOUSANDS)
Initial Cost to Company --------------------- Manufactured Home Depreciable Communities Location Encumbrances Land Property - ----------------------------------------------------------------------------------------- GREEN ACRES LAND Breinigsville PA 0 273 0 0 947 GREEN ACRES PARK Breinigsville PA 15,41815,994 2,407 7,479 0 760 ALL SEASONS Salt Lake City UT 0 510 1,623 0 41 WESTWOOD Farr West UT 0 1,346 4,179 0 133 MEADOWS OF CHANTILLY Chantilly VA 0 5,430 16,440 0 760 KLOSHE ILLAHEE Federal Way WA 3,3843,293 2,408 7,286 0 9 INDEPENDENCE HILL Morgantown WV 0 299 898 0 135 ELLENBURG COMMUNITIES Various 33,623 36,590 136,172 0 064,649 73,150 278,306 COLLEGE HEIGHTS Various 67,640 21,137 64,753 MANAGEMENT BUSINESS Chicago IL 0 0 436 0 3,759 ------------------------------------------------------------------------- $ 403,656 $ 205,072 $ 682,333 $1,303 $ 47,610 ========================================================================= ----------------------------------------- $500,573 $270,922 $906,275 ========================================= Costs Capitalized Subsequent to Gross Amount Carried Acquisition at Close of (Improvements) Period 12/31/97 ---------------------- MANUFACTURED98 -------------------- ------------------------------- Manufactured Home Depreciable Depreciable Accumulated Date of HOME COMMUNITIESCommunities Land Property Land Property Total Depreciation Acquisition - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ ROCKWOOD VILLAGE 645 1,827 2,472 843 1983 FALCON WOOD 1,112 3,432 4,544 38 1997 QUAIL HOLLOW 0 3,262 3,262 36 1997 SHADOWBROOK 1,197 3,784 4,981 41 1997 GREEN ACRES LAND 0 947 273 947 1,220 5890 1994 GREEN ACRES PARK 0 906 2,407 8,239 10,646 2,6468,385 10,792 2,938 1988 ALL SEASONS 0 57 510 1,664 2,174 181,680 2,190 76 1997 WESTWOOD 0 396 1,346 4,312 5,658 464,575 5,921 201 1997 MEADOWS OF CHANTILLY 0 1,008 5,430 17,200 22,630 2,10017,448 22,878 2,733 1994 KLOSHE ILLAHEE 0 33 2,408 7,295 9,703 817,319 9,727 326 1997 INDEPENDENCE HILL 0 153 299 1,033 1,332 2771,051 1,350 317 1990 ELLENBURG COMMUNITIES 36,590 136,172 172,762 0 19970 73,150 278,306 351,456 6,585 1998 COLLEGE HEIGHTS 0 0 21,137 64,753 85,890 893 1998 MANAGEMENT BUSINESS 0 4,195 4,195 1,626 ------------------------------------------------------------------- $ 206,375 $ 729,943 $ 936,318 $ 89,208 ===================================================================5,245 0 5,681 5,681 2,391 -------------------------------------------------------------------------------- $1,303 $58,931 $272,225 $965,206 $1,237,431 $118,021 ======================================================================
NOTES: (1) For depreciable property, the Company uses a 30-year estimated life for buildings acquired and structural and land improvements, a ten-to-fifteen year estimated life for building upgrades and a three-to-seven year estimated life for furniture and fixtures. (2) The balance of furniture and fixtures included in the total amounts was approximately $7.5$9.9 million as of December 31, 1997.1998. (3) The aggregate cost of land and depreciable property for Federal income tax purposes was approximately $812 million,$1.1 billion, as of December 31, 1997.1998. (4) All properties were acquired, except for Country Place Village which was constructed. S-4 5455 SCHEDULE III MANUFACTURED HOME COMMUNITIES, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED DECEMBER 31, 19971998 (IN THOUSANDS) The changes in total real estate for the years ended December 31, 1998, 1997 1996 and 19951996 were as follows:
1998 1997 1996 1995 ---- ---- ---- Balance, beginning of yearyear.... $ 936,318 $597,650 $543,229 $541,775 Acquisitions.............. 286,880 332,272 46,531 600 Improvements.............. 14,566 6,643 8,062 7,810 Dispositions and other.... (333) (247) (172) (6,956) ------------------ -------- -------- Balance, end of year........year.......... $1,237,431 $936,318 $597,650 $543,229 ================== ======== ========
The changes in accumulated depreciation for the years ended December 31, 1998, 1997 1996 and 19951996 were as follows:
1998 1997 1996 1995 ---- ---- ---- Balance, beginning of year.. $ 71,481 $ 56,403 $ 43,377 Depreciation expense...... 17,974 15,250 15,087 Dispositions and other.... (247) (172) (2,061) -------- -------- -------- Balance, end of year........year.... $ 89,208 $ 71,481 $ 56,403 ========Depreciation expense...... 29,146 17,974 15,250 Dispositions and other.... (333) (247) (172) ---------- -------- -------- Balance, end of year.......... $ 118,021 $ 89,208 $ 71,481 ========== ======== ========
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