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                                    FORM 10-Q

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



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


                  FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999MARCH 31, 2000


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


                         COMMISSION FILE NUMBER: 1-11718


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


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

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

                                 (312) 279-1400
              (Registrant's telephone number, including area code)


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


                      APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:

             24,062,12822,103,065 shares of Common Stock as of October 29, 1999.April 30, 2000.


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                       MANUFACTURED HOME COMMUNITIES, INC.

                                TABLE OF CONTENTS



                          PART I - FINANCIAL STATEMENTS

ITEM 1. FINANCIAL STATEMENTS


(UNAUDITED)


INDEX TO FINANCIAL STATEMENTS
                                                                         
Page Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998.................................. 3 Consolidated Statements of Operations for the nine months and quarters ended September 30, 1999 and 1998................................................................................. 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 1998................. 5 Notes to Consolidated Financial Statements.................................................................. 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................................... 11 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.......................................... 18 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings...................................................................................Page ---- Consolidated Balance Sheets as of March 31, 2000 (unaudited) and December 31, 1999.................................. 3 Consolidated Statements of Operations for the quarters ended March 31, 2000 and 1999 (unaudited)................................ 4 Consolidated Statements of Cash Flows for the quarters ended March 31, 2000 and 1999 (unaudited)................................ 5 Notes to Consolidated Financial Statements........................... 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................... 15 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings................................................ 19 ITEM 6. Exhibits and Reports on Form 8-K................................. 19 ITEM 6. Exhibits and Reports on Form 8-K.................................................................... 19
2 3 MANUFACTURED HOME COMMUNITIES, INC. CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1999MARCH 31, 2000 AND DECEMBER 31, 1998 AMOUNTS1999 (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) UNAUDITED)
September 30, December 31, 1999 1998 ------------ ------------ ASSETS Investment in rental property: Land ...................................................................... $ 292,363 $ 272,225 Land improvements ......................................................... 881,389 865,720 Buildings and other depreciable property .................................. 100,967 95,669 Advances on rental property acquisitions .................................. --- 3,817 ----------- ----------- 1,274,719 1,237,431 Accumulated depreciation .................................................. (143,567) (118,021) ----------- ----------- Net investment in rental property ....................................... 1,131,152 1,119,410 Cash and cash equivalents .................................................... 25,085 13,657 Notes receivable ............................................................. 4,186 15,710 Investment in and advances to affiliates ..................................... 10,873 7,797 Investment in joint ventures ................................................. 9,581 7,584 Rents receivable ............................................................. 1,223 671 Deferred financing costs, net ................................................ 5,013 4,634 Prepaid expenses and other assets ............................................ 5,765 7,325 Due from affiliates .......................................................... --- 53 ----------- ----------- Total assets .............................................................. $ 1,192,878 $ 1,176,841MARCH 31, DECEMBER 31, 2000 1999 (UNAUDITED) ----------- ----------- ASSETS Investment in real estate: Land $ 285,542 $ 285,337 Land improvements........................... 874,336 876,923 Buildings and other depreciable property.... 103,773 102,083 1,263,651 1,264,343 Accumulated depreciation.................... (158,937) (150,757) Net investment in real estate............. 1,104,714 1,113,586 Cash and cash equivalents...................... 10,626 6,676 Notes receivable............................... 3,224 4,284 Investment in and advances to affiliates....... 14,478 11,689 Investment in joint ventures................... 9,457 9,501 Rents receivable ............................. 1,471 1,338 Deferred financing costs, net.................. 5,255 5,042 Prepaid expenses and other assets.............. 11,169 8,222 ----------- ----------- Total assets................................ $ 1,160,394 $ 1,160,338 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Mortgage notes payable...................... $ 527,830 $ 513,172 Unsecured term loan......................... 100,000 100,000 Unsecured line of credit.................... 98,400 107,900 Other notes payable......................... 4,192 4,192 Accounts payable and accrued expenses....... 23,554 20,780 Accrued interest payable.................... 5,499 5,612 Rents received in advance and security deposits......................... 10,421 6,831 Distributions payable....................... 11,607 11,020 Due to affiliates........................... 21 33 ----------- ----------- Total liabilities......................... 781,524 769,540 ----------- ----------- Commitments and contingencies Minority interest - Common OP Units and other................................... 52,906 54,397 Minority interest - Perpetual Preferred OP Units.................................... 125,000 125,000 Stockholders' equity: Preferred stock, $.01 par value 10,000,000 shares authorized; none issued --- --- Common stock, $.01 par value 50,000,000 shares authorized; 22,292,165 and 22,813,357 shares issued and outstanding for 2000 and 1999, respectively........................ 224 229 Paid-in capital............................. 265,937 275,664 Deferred compensation....................... (5,826) (6,326) Employee notes (4,502) (4,540) Distributions in excess of accumulated earnings...................... (54,869) (53,626) ----------- ----------- Total stockholders' equity................ 200,964 211,401 ----------- ----------- Total liabilities and stockholders' equity.. $ 1,160,394 $ 1,160,338 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Mortgage notes payable .................................................... $ 514,345 $ 500,573 Unsecured term loan ....................................................... 100,000 100,000 Unsecured line of credit .................................................. 40,000 145,000 Other notes payable ....................................................... 4,192 5,276 Accounts payable and accrued expenses ..................................... 40,023 33,341 Accrued interest payable .................................................. 5,259 4,911 Rents received in advance and security deposits ........................... 8,072 6,495 Distributions payable ..................................................... 12,222 294 Due to affiliates ......................................................... --- 42 ----------- ----------- Total liabilities ....................................................... 724,113 795,932 ----------- ----------- Commitments and contingencies Minority interest - Perpetual Preferred OP Units ............................. 125,000 --- Minority interest - Common OP Units .......................................... 61,762 70,468 Stockholders' equity: Preferred stock, $.01 par value 10,000,000 shares authorized; none issued ............................... --- --- Common stock, $.01 par value 50,000,000 shares authorized; 25,782,651 and 26,417,029 shares issued and outstanding for 1999 and 1998, respectively ........... 254 262 Paid-in capital ........................................................... 343,012 364,603 Deferred compensation ..................................................... (6,204) (7,442) Employee notes ............................................................ (4,575) (4,654) Distributions in excess of accumulated earnings ........................... (50,484) (42,328) ----------- ----------- Total stockholders' equity .............................................. 282,003 310,441 ----------- ----------- Total liabilities and stockholders' equity ................................ $ 1,192,878 $ 1,176,841 =========== ===========
The accompanying notes are an integral part of the financial statements. 3 4 MANUFACTURED HOME COMMUNITIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS AND QUARTERS ENDED SEPTEMBER 30,MARCH 31, 2000 AND 1999 AND 1998 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
For the Nine Months Ended For the Quarters Ended September 30, September 30, ------------------------- ---------------------- 1999 1998 1999 1998 --------- --------- --------- --------- REVENUES Base rental income ..................................... $ 135,646 $ 121,625 $ 45,601 $ 43,466 RV base rental income .................................. 6,841 4,867 1,728 1,511 Utility and other income ............................... 15,595 13,700 4,747 4,391 Equity in income of affiliates ......................... 1,165 650 909 326 Interest income ........................................ 1,127 2,734 552 1,115 --------- --------- --------- --------- Total revenues ..................................... 160,374 143,576 53,537 50,809 --------- --------- --------- --------- EXPENSES Property operating and maintenance ..................... 43,173 39,145 14,424 13,894 Real estate taxes ...................................... 12,560 10,863 4,186 3,761 Property management .................................... 6,194 5,293 2,078 1,828 General and administrative ............................. 4,567 4,240 1,408 1,302 Interest and related amortization ...................... 40,830 36,178 13,965 13,659 Depreciation on corporate assets ....................... 732 695 252 235 Depreciation on real estate assets and other costs ..... 25,351 20,072 8,807 7,690 --------- --------- --------- --------- Total expenses ..................................... 133,407 116,486 45,120 42,369 --------- --------- --------- --------- Income before allocation to minority interests ......... 26,967 27,090 8,417 8,440 (Income) allocated to Common OP Units .................. (4,862) (5,147) (1,509) (1,603) (Income) allocated to Preferred OP Units ............... (31) --- (31) --- --------- --------- --------- --------- Net income ............................................. $ 22,074 $ 21,943 $ 6,877 $ 6,837 ========= ========= ========= ========= Net income per common share - basic .................... $ .85 $ .86 $ .27 $ .26 ========= ========= ========= ========= Net income per common share - diluted .................. $ .84 $ .85 $ .27 $ .26 ========= ========= ========= ========= Distributions declared per common share outstanding ........................................ $ 1.1625 $ 1.0875 $ .3875 $ .3625 ========= ========= ========= ========= Weighted average common shares outstanding - basic ................................ 25,846 25,488 25,613 25,988 ========= ========= ========= ========= Weighted average common shares outstanding - diluted (Note 2) ..................... 31,915 31,801 31,586 32,339 ========= ========= ========= =========
MARCH 31, MARCH 31, 2000 1999 ----------- ----------- REVENUES Base rental income........................ $ 47,309 $ 44,821 RV base rental income..................... 3,699 3,528 Utility and other income.................. 5,698 5,511 Equity in income of affiliates............ 150 143 Interest income........................... 292 387 ----------- ----------- Total revenues..................... 57,148 54,390 ----------- ----------- EXPENSES Property operating and maintenance........ 15,407 14,473 Real estate taxes......................... 4,325 4,226 Property management....................... 2,388 2,083 General and administrative................ 1,826 1,692 Interest and related amortization......... 13,332 13,349 Depreciation on corporate assets.......... 271 246 Depreciation on real estate assets and other costs......................... 8,856 8,243 ----------- ----------- Total expenses..................... 46,405 44,312 ----------- ----------- Income before allocation to Minority Interests...................... 10,743 10,078 (Income) allocated to Common OP Units..... (1,599) (1,844) (Income) allocated to Perpetual Preferred OP Units...................... (2,813) --- ----------- ----------- NET INCOME......................... $ 6,331 $ 8,234 =========== =========== Net income per Common Share - basic....... $ .28 $ .31 =========== =========== Net income per Common Share - diluted..... $ .28 $ .31 =========== =========== Distributions declared per Common Share outstanding....................... $ .415 $ .3875 =========== =========== Weighted average Common Shares outstanding - basic..................... 22,297 26,157 =========== =========== Weighted average Common Shares outstanding - diluted (see Note 2)...... 28,242 32,340 =========== =========== The accompanying notes are an integral part of the financial statements. 4 5 MANUFACTURED HOME COMMUNITIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHSQUARTERS ENDED SEPTEMBER 30,MARCH 31, 2000 AND 1999 AND 1998 (AMOUNTS IN THOUSANDS) (UNAUDITED)
September 30, September 30, 1999 1998 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ........................................................... $ 22,074 $ 21,943 Adjustments to reconcile net income to cash provided by operating activities: Income allocated to minority interests ........................... 4,893 5,147 Depreciation and amortization expense ............................ 26,556 20,919 Equity in income of affiliates ................................... (1,165) (650) Amortization of deferred compensation and other .................. 1,238 852 Increase in rents receivable ..................................... (552) (346) Decrease (increase) in prepaid expenses and other assets ......... 1,613 (2,543) Increase in accounts payable and accrued expenses ................ 6,988 21,951 Increase in rents received in advance and security deposits....... 1,577 4,601 --------- --------- Net cash provided by operating activities ............................ 63,222 71,874 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of short-term investments, net .............................. --- (2,366) (Contributions to) distributions from affiliates ..................... (1,911) 1,826 Collection (funding) of notes receivable ............................. 11,524 (14,492) Investment in joint ventures ......................................... (1,997) (7,527) Acquisition of rental properties ..................................... (29,305) (173,088) Improvements: Improvements - corporate ......................................... (471) (367) Improvements - rental properties ................................. (6,520) (5,325) Site development costs ........................................... (2,665) (3,477) --------- --------- Net cash used in investing activities ................................ (31,345) (204,816) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from exercise of stock options .......................... 2,866 1,836 Net proceeds from issuance of perpetual preferred OP units ........... 121,890 -- Distributions to common stockholders, common OP unitholders and perpetual preferred OP unitholders ............................. (25,354) (23,151) (Repurchase) issuance of common stock ................................ (26,772) 25,536 Collection of principal payments on employee notes ................... 79 401 Proceeds from line of credit ......................................... 41,584 175,679 Repayments on mortgage notes payable and line of credit .............. (133,896) (42,601) Debt issuance costs .................................................. (846) (1,578) --------- --------- Net cash (used in) provided by financing activities .................. (20,449) 136,122 --------- --------- Net increase in cash and cash equivalents ................................. 11,428 3,180 Cash and cash equivalents, beginning of period ............................ 13,657 909 --------- --------- Cash and cash equivalents, end of period .................................. $ 25,085 $ 4,089 ========= ========= SUPPLEMENTAL INFORMATION: Cash paid during the period for interest .................................. $ 39,932 $ 32,371 ========= =========
MARCH 31, MARCH 31, 2000 1999 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................ $ 6,331 $ 8,234 Adjustments to reconcile net income to cash provided by operating activities: Income allocated to Minority Interests.......................... 4,412 1,844 Depreciation and amortization expense............................ 8,500 8,616 Equity in income of affiliates........ (150) (143) Amortization of deferred compensation and other............. 500 413 (Increase) in rents receivable........ (133) (180) (Increase) in prepaid expenses and other assets................... (1,217) (122) Increase in accounts payable and accrued expenses................... 2,649 3,403 Increase in rents received in advance and security deposits...... 3,590 3,218 ----------- ----------- Net cash provided by operating activities.................... 24,482 25,283 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: (Contributions to) distributions from affiliates......................... (2,672) 381 Collection (funding) of notes receivable.. 1,060 (102) Investment in joint ventures.............. (72) (1,266) Proceeds from disposition of assets....... 4,133 --- Acquisition of rental properties.......... (2,524) (1,184) Improvements: Improvements - corporate.............. (16) (184) Improvements - rental properties...... (864) (1,605) Site development costs................ (70) (208) ----------- ----------- Net cash used in investing activities..... (1,025) (4,168) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from stock options and employee stock purchase plan........ 769 1,451 Distributions to Common Stockholders, Common OP Unitholders and Perpetual Preferred OP Unitholders...... (13,792) (289) Repurchase of Common Stock and OP Units... (11,296) (11,795) Collection of principal payments on employee notes.......................... 38 13 Proceeds from line of credit, term loan, and mortgage notes payable.............. 28,123 6,000 Repayments on mortgage notes payable and line of credit...................... (22,965) (23,179) Debt issuance costs....................... (384) (334) ----------- ----------- Net cash used in financing activities..... (19,507) (28,133) ----------- ----------- Net increase (decrease) in cash and cash equivalents............................ 3,950 (7,018) Cash and cash equivalents, beginning of period................................... 6,676 13,657 ----------- ----------- Cash and cash equivalents, end of period....... $ 10,626 $ 6,639 =========== =========== SUPPLEMENTAL INFORMATION: Cash paid during the period for interest....... $ 13,245 $ 13,198 =========== =========== The accompanying notes are an integral part of the financial statements. 5 6 MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DEFINITION OF TERMS: Capitalized terms used but not defined herein are as defined in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. PRESENTATION: These unaudited Consolidated Financial Statements of Manufactured Home Communities, Inc., a Maryland corporation, and its subsidiaries (collectively, the "Company"), have been prepared pursuant to the Securities and Exchange Commission ("SEC") rules and regulations and should be read in conjunction with the financial statements and notes thereto included in the Company's 19981999 Annual Report on Form 10-K (the "1998"1999 Form 10-K"). The following Notes to Consolidated Financial Statements highlight significant changes to the Notes included in the 19981999 Form 10-K and present interim disclosures as required by the SEC. The accompanying Consolidated Financial Statements reflect, in the opinion of management, all adjustments necessary for a fair presentation of the interim financial statements. All such adjustments are of a normal and recurring nature. Certain reclassifications have been made to the prior periods' financial statements in order to conform with current period presentation. NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted accounting principlesin the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") 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 superseded Statement of Financial Accounting Standards No. 14, "Financial Reporting for Segments of a Business Enterprise". SFAS No. 131 establishes standards for the manner in whichway that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The adoption of SFAS No. 131 did not affect the results of operations or financial position of the Company. The Company has one reportable segment, which is the operation of manufactured home communities. NOTE 2 - EARNINGS PER COMMON SHARE Earnings per common share areis based on the weighted average number of common shares outstanding during each period. In 1997, the Financial Accounting Standards Board issued StatementCompany adopted SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 replacedreplaces 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 Operating Partnership Units ("OP Units") has been excluded from the basic earnings per share calculation. The conversion of an OP Unit to a share of common stock will have no material effect on basic earnings per common share since the allocation of earnings to an OP Unit is equivalent to the allocation of earnings to a share of common stock. 6 7 MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - EARNINGS PER COMMON SHARE (CONTINUED) The following table sets forth the computation of basic and diluted earnings per share for the nine months and quarters ended September 30,March 31, 2000 and 1999 (amounts in thousands): MARCH 31, MARCH 31, 2000 1999 ----------- ----------- NUMERATOR: Numerator for basic earnings per share - Net income........................ $ 6,331 $ 8,234 Effect of dilutive securities: Income allocated to Common OP Units.. 1,599 1,844 ----------- ----------- Numerator for diluted earnings per share-income available to common shareholders after assumed conversions............... $ 7,930 $ 10,078 =========== =========== DENOMINATOR: Denominator for basic earnings per share - Weighted average Common Stock outstanding.......... 22,297 26,157 Effect of dilutive securities: Weighted average Common OP Units.. 5,637 5,881 Employee stock options............ 308 302 ----------- ----------- Denominator for diluted earnings per share-adjusted weighted average shares and 1998:
For the For the Nine Months Ended Quarters Ended September 30, September 30, --------------------- -------------------- 1999 1998 1999 1998 -------- -------- -------- ------- Numerator: Net income ..................................................... $22,074 $21,943 $ 6,877 $ 6,837 Income allocated to common OP units ............................ 4,862 5,147 1,509 1,603 ------- ------- ------- ------- Numerator for diluted earnings per share -- income available to common shareholders after assumed conversions ................................... 26,936 $27,090 $ 8,386 $ 8,440 ======= ======= ======= ======= Denominator: Weighted average shares outstanding ............................ 25,846 25,488 25,613 25,988 Weighted average common OP Units outstanding assuming conversion ............................. 5,725 5,946 5,647 5,985 Employee stock options ......................................... 344 367 326 366 ======= ======= ======= ======= Denominator for diluted earnings per share -- adjusted weighted average shares and assumed conversions ......................................... 31,915 31,801 31,586 32,339 ======= ======= ======= =======
assumed conversions....................... 28,242 32,340 =========== =========== NOTE 3 - COMMON STOCK AND OTHER EQUITY RELATED TRANSACTIONS On April 9, 1999, July 9, 1999 and October 8, 1999,14, 2000, the Company paid a $.3875$.415 per share distribution for the quartersquarter ended March 31, 1999, June 30, 1999 and September 30 1999, respectively,2000 to stockholders of record on March 26, 1999, June 25, 1999 and September 24, 1999 respectively.31, 2000. On March 26, 1999, the Company, as general partner of MHC Operating Limited Partnership ("Operating Partnership"), repurchased and cancelled 200,000 OP Units from a limited partner of the Operating Partnership. On September 30, 1999, the Operating Partnership completed a $125 million private placement of 9.0% Series D Cumulative Perpetual Preferred Units ("POP Units") to two institutional investors. The POP Units, which are callable by the Company after five years, have no stated maturity or mandatory redemption. Net proceeds from the offering of $121 million were used to repay amounts outstanding under15, 2000, the Company's credit facility and for other corporate purposes. DuringBoard of Directors approved the nine months ended September 30, 1999, the Company repurchased 930,700repurchase of an additional 1 million shares of common stock, in increments of 250,000 shares per calendar quarter, in accordance with the common stock repurchase plan approved by the Company's Board of Directors, whereby the Company is authorized to repurchase up to 1,000,000 shares of its common stock. The Company's Board of Directors authorized the repurchase of additional shares on May 11, 1999 of 1,000,000 shares and on September 30, 1999 of 1,000,000 shares for a total authorized repurchase of up to 3,000,000 shares.plan. As of September 30, 1999,March 31, 2000, the Company had repurchased, 1,282,8004,998,800 shares of common stock pursuantthe 6 million shares authorized under the plan. NOTE 4 - REAL ESTATE In March 2000, in accordance with SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of", MHC Acquisition One LLC, a consolidated subsidiary of the repurchase plan.Company, recorded an impairment loss on the DeAnza Santa Cruz water and wastewater service company business. Recent negotiations for the sale of the business as well as management's estimates indicated that the undiscounted future cash flows from the business would be less than the carrying value of the business and its related assets. The Company recorded an asset impairment loss of $701,000 (or $.02 per fully diluted share) which is included in other income on the accompanying statements of operations. This loss represents the difference between the carrying value of the DeAnza Santa Cruz water and wastewater service company business and its related assets and their estimated fair value. On February 29, 2000, MHC Systems, Inc., a consolidated subsidiary of the Company, disposed of in a cash sale the water and wastewater service company and facilities known as FFEC-Six. Net proceeds from the sale of approximately $4.2 million were used to pay down the Company's line of credit and a gain on the sale of $719,000 (or $.02 per fully diluted share) was recorded in other income on the accompanying statements of operations. 7 8 MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - RENTAL PROPERTY On July 23, 1999, the Company acquired Coquina Crossing, located in St. Augustine, Florida, for a purchase price of approximately $10.4 million. The acquisition was funded with a borrowing under the Company's line of credit. Coquina Crossing is a 748-site senior community with 269 developed sites and zoned expansion potential of 479 sites. In addition, Realty Systems, Inc., an affiliate of the Company, purchased the model home inventory at the community for approximately $1.1 million.REAL ESTATE (CONTINUED) The Company is actively seeking to acquire additional manufactured home communities and currently is engaged in negotiations relating to the possible acquisition of a number of manufactured home communities. At any time these negotiations are at varying stages which may include contracts outstanding to acquire certain manufactured home communities which are subject to satisfactory completion of the Company's due diligence review. NOTE 5 - NOTES RECEIVABLE At September 30, 1999March 31, 2000 and December 31, 1998,1999, the Company had approximately $4.2$3.2 million and $15.7$4.3 million in notes receivable, respectively. The Company hasOn January 10, 2000, $1.1 million in purchase money notes receivable with monthly principal and interest payments at 7.0%, maturing on July 31, 2001.were repaid to the Company. The Company also has outstanding a $3.1$3.2 million loan outstanding, which bears interest at the rate of approximately 8.5%, is collateralized by the property known as Trails West and matures on June 1, 2003. On April 1, 1999, the Company effectively exchanged a $12.3 million loan ("The Meadows Loan") secured by a first mortgage lien on The Meadows Mobile Home Park in Palm Beach Gardens, Florida ("The Meadows") for an equity interest in the partnership that owns The Meadows. The Company accounts for The Meadows as an acquisition and consolidates the property and related results of operations. NOTE 6 - LONG-TERM BORROWINGS As of September 30, 1999March 31, 2000 and December 31, 1998,1999, the Company had outstanding mortgage indebtedness of approximately $514.3$527.8 million and $500.6$513.2 million, respectively, encumbering 7374 and 72 of the Company's properties, respectively. As of September 30, 1999March 31, 2000 and December 31, 1998,1999, the carrying value of such properties was approximately $635$665 million and $634$638 million, respectively. The outstanding mortgage indebtedness consists in part of 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 at 7.015%. There is no principal amortization until February 1, 2008, after which principal and interest are to be paid from available cash flow and the interest rate iswill be reset at a rate equal to the then 10-year U.S. Treasury obligations plus 2.0%. In 1998, a consolidated (95% owned) joint venture formed by the Company and Wolverine Investors L.L.C. borrowed approximately $67.3$68 million (the "College Heights Debt") at an interest rate of 7.18%7.19%, maturing July 1, 2008. The College Heights Debt is collateralized by 18 properties owned by the joint venture. The Company also has outstanding debt on 2426 properties in the aggregate amount of approximately $182.7$195.5 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. Included in this debt are two mortgages which were entered into on February 24, 2000, with combined principal of $14.6 million at an interest rate of approximately 8.3%, maturing on March 24, 2010. In addition, the Company recordedhas a $2.4 million loan in connection withrecorded to account for a direct financing lease entered into in May 1997. Scheduled maturities for the outstanding indebtedness, excluding the Mortgage Debt and the College Heights Debt, are at various dates through November 30, 2020, and fixed interest rates rangeranging from 7.25% to 9.05%. 8 9 MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - LONG-TERM BORROWINGS (CONTINUED) The Company has a $175 million unsecured line of credit with a group of banksbank (the "Credit Agreement") bearing interest at the London Interbank Offered Rate ("LIBOR") plus 1.125%. The Credit Agreement matures on August 17, 2000, at which time the Company may extend the maturity date to August 17, 2002 and the Credit Agreement would be converted to a term loan. The Company pays a fee on the average unused amount of such credit equal to 0.15% of such amount. As of September 30, 1999, $40.0March 31, 2000, $98.4 million was outstanding under the Credit Agreement. The Company has a $100 million unsecured term loan (the "Term Loan") with a group of banks with interest only payable monthly at a rate of LIBOR plus 1.0%. The Term Loan matures on April 3, 2000 and may bematurity has been extended to April 3, 2002. 8 9 MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - LONG-TERM BORROWINGS (CONTINUED) The Company has approximately $4.2 million of installment notes payable, secured by a letter of credit, each with an interest rate of 6.5%, maturing September 1, 2002. Approximately $2.9$4 million of the notes pay principal annually and interest quarterly and the remaining $1.3 million of the notes pay interest only quarterly. In July 1995, the Company entered into an interest rate swap agreement (the "1998 Swap") fixing LIBOR on $100 million of the Company's floating rate debt at 6.4% for the period 1998 through 2003. The value of the 1998 Swap iswas impacted by changes in the market rate of interest. Had the 1998 Swap been entered into on September 30, 1999, the applicable LIBOR swap rate would have been 6.2%. 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 $29,102. The Company accountsaccounted for the 1998 Swap as a hedge. Payments and receipts under the 1998 Swap arewere accounted for as an adjustment to interest expense. On January 10, 2000, the Company terminated the 1998 Swap and received $1.0 million of proceeds which will be amortized as an adjustment to interest expense through March 2003. NOTE 7 - STOCK OPTIONS Pursuant to the Amended and Restated 1992 Stock Option and Stock Award Plan as discussed in Note 14 to the 19981999 Form 10-K, certain officers, directors, employees and consultants have been offered the opportunity to acquire shares of common stock of the Company through stock options ("Options"). During the nine monthsquarter ended September 30, 1999,March 31, 2000, Options for 113,06619,318 shares of common stock were exercised. NOTE 8 - COMMITMENTS AND CONTINGENCIES DEANZA SANTA CRUZ MOBILE ESTATES The Company has previously disclosed the outcomeresidents of the jury trial in the litigation involving DeAnza Santa Cruz Mobile Estates, a property located in Santa Cruz, California. SubsequentCalifornia (the "City") previously brought several actions opposing certain fees and charges in connection with water service at the Property. The trial of the ongoing utility charge dispute with the residents of this Property concluded on January 22, 1999. This summary provides the history and reasoning underlying the Company's defense of the residents' claims and explains the Company's decision to such disclosure,continue to defend its position, which the Company believes is fair and accurate. DeAnza Santa Cruz Mobile Estates is a 198 site community overlooking the Pacific Ocean. It is subject to the City's rent control ordinance which limits annual rent increases to 75% of CPI. The Company purchased this Property in August 1994 from certain unaffiliated DeAnza entities ("DeAnza"). Prior to the Company's purchase in 1994, DeAnza made the decision to submeter the Property for both water and sewer in 1993 in the face of the City's rapidly rising utility costs. Under California Civil Code Section 798.41, DeAnza was required to reduce rent by an amount equal to the average cost of usage over the preceding 12 months. This was done. With respect to water, not looking to submit to jurisdiction of the California Public Utility Commission ("CPUC"), DeAnza relied on California Public Utilities Code Section 2705.5 ("CPUC Section 2705.5") to determine what rates would be charged for water on an ongoing basis without becoming a public utility. This statute provides that in a submetered mobilehome park, the property owner is not subject to regulation and control of the CPUC so long as the users are charged what they would be charged by the utility company if users received their water directly from the utility company. In Santa Cruz, customers receiving their water directly from the city's water utility were charged a certain lifeline rate for the first 400 ccfs of water and a greater rate for usage over 400 ccfs of water, a readiness to serve charge of $7.80 per month and tax on the total. In reliance on CPUC Section 2705.5, DeAnza implemented its billings on this schedule notwithstanding that it did not receive the discount for the first 400 ccfs of water because it was a commercial and not a residential customer. 9 10 MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED) A dispute with the residents ensued over the readiness to serve charge and tax thereon. The residents argued that California Civil Code Section 798.41 required that the park owner could only pass through its actual costs of water (and that the excess charges over the amount of the rent rollback were an improper rent increase) and that CPUC Section 2705.5 was not applicable. DeAnza unbundled the utility charges from rent consistent with California Civil Code Section 798.41 and it has generally been undisputed that the rent rollback was accurately calculated. In August 1994, when the Company acquired the Property, the Company reviewed the respective legal positions of the Santa Cruz Homeowners Association ("HOA") and DeAnza and concurred with DeAnza. Their reliance on CPUC Section 2705.5 made both legal and practical sense in that residents paid only what they would pay if they lived in a residential neighborhood within the city of Santa Cruz and permitted DeAnza to recoup part of the expenses of operating a submetered system through the readiness to serve charge. Over a period of 18 months from 1993 into May of 1995, a series of complaints were filed by the HOA and Herbert Rossman, a resident, against DeAnza, and later, the Company. DeAnza and the Company demurred to each of these complaints on the grounds that the CPUC had exclusive jurisdiction over the setting of water rates and that residents under rent control had to first exhaust their administrative remedies before proceeding in a civil action. At one point, the case was dismissed (with leave to amend) on the basis that jurisdiction was with the CPUC and, at another point, Mr. Rossman was dismissed from the case because he had not exhausted his administrative remedies. On June 29, 1995, a hearing was held before a Santa Cruz rent control officer on the submetering of both water and sewer. The Company and DeAnza prevailed on all issues related to sewer and the rent rollback related to water, but the hearing officer determined that the Company could only pass through its actual cost of water, i.e., a prorated readiness to serve charge and tax thereon. The hearing officer did not deal with the subsidy being given to residents through the quantity charge and ordered a rebate in a fixed amount per resident. The Company and DeAnza requested reconsideration on this issue, among others, which reconsideration was denied by the hearing officer. The Company then took a writ of mandate (an appeal from an administrative order) to the Superior Court and, pending this appeal, the residents, the Company and the City agreed to stay the effect of the hearing officer's decision until the Court rendered judgment. In July 1996, the Superior Court affirmed the hearing officer's decision without addressing concerns about the failure to take the subsidy on the quantity charge into account. The Company requested that the City and the HOA agree to a further stay pending appeal to the court of appeals, but they refused and the appeals court denied the Company's request for a stay in late November 1996. Therefore, on January 1, 1997, the Company reduced its water charges at this Property to reflect a pass-through of only the readiness to serve charge and tax at the master meter (approximately $0.73) and to eliminate the subsidy on the water charges. On their March 1, 1997 rent billings, residents were credited for amounts previously "overcharged" for readiness to serve charge and tax. The amount of the rebate given by the Company was $36,400. In calculating the rebate, the Company and DeAnza took into account the previous subsidy on water usage although this issue had not yet been decided by the court of appeals. The Company and DeAnza felt legally safe in so doing based on language in the hearing officer's decision that actual costs could be passed through. 10 11 MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED) On March 12, 1997, the Company also filed an application with the CPUC to dedicate the water system at this Property to public use and have the CPUC set cost based rates for water usage. The Company believed it was obligated to take this action because of its consistent reliance on CPUC Section 2705.5 as a safe harbor from CPUC jurisdiction. That is, when the Company could no longer charge for water as the local serving utility would charge, it was no longer exempt from the CPUC's jurisdiction and control under CPUC Section 2705.5. On March 20, 1997, the court of appeals issued the writ of mandate requested by the Company on the grounds that the hearing officer had improperly calculated the amount of the rebate (meaning the Company had correctly calculated the rent credits), but also ruling that the hearing officer was correct when he found that the readiness to serve charge and tax thereon as charged by DeAnza and the Company were an inappropriate rent increase. The court of appeals further agreed with the Company that the city's hearing officer did not have the authority under California Civil Code Section 798.41 to establish rates that could be charged in the future. Following this decision, the CPUC granted the Company its certificate of convenience and necessity on December 17, 1998 and approved cost based rates and charges for water that exceed what residents were paying under the Company's reliance on CPUC Section 2705.5. Concurrently, the CPUC also issued an Order Instituting Investigation ("OII") confirming its exclusive jurisdiction over the issue of water rates in a submetered system and commencing an investigation into the confusion and turmoil over billings in submetered properties. Specifically, the OII states: "The Commission has exclusive and primary jurisdiction over the establishment of rates for water and sewer services provided by private entities." Specifically, the CPUC ruling regarding the Company's application stated: "The ultimate question of what fees and charges may or may not be assessed, beyond external supplier pass-through charges, for in-park facilities when a mobile home park does not adhere to the provisions of CPUC Section 2705.5, must be decided by the Commission." After the court of appeals decision, the HOA brought all of its members back into the underlying civil action for the purpose of determining damages, including punitive damages, against the Company. The trial was continued from July 1998 to January 1999 to give the CPUC time to act on the Company's application. Notwithstanding the action taken by the CPUC in issuing the OII in December 1998, the trial court denied the Company's motion to dismiss on jurisdictional grounds and trial commenced before a jury on January 11, 1999. Not only did the trial court not consider the Company's motion to dismiss, the trial court refused to allow evidence of the OII or the Company's CPUC approval to go before the jury. Notwithstanding the Company's strenuous objections, the judge also allowed evidence of the Company's and DeAnza's litigation tactics to be used as evidence of bad faith and oppressive actions (including evidence of the application to the CPUC requesting a $22.00 readiness to serve charge). The Company's motion for a mistrial based upon these evidentiary rulings was denied. On January 22, 1999, the jury returned a verdict awarding $6.0 million of punitive damages against the Company and DeAnza. The Company had previously agreed to indemnify DeAnza on the matter. The Company has bonded the judgment pending appeal in accordance with California procedural rules, which require a bond equal to 150% of the amount of the judgment. Post-judgment interest will accrue at the statutory rate of 10.0% per annum. 11 12 MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED) On April 19, 1999, the trial court denied all of the Company's and DeAnza's post-trial motions for judgmentjudgement notwithstanding the verdict, new trial and remittitur. The trial court also awarded $700,000 of attorneys' fees to plaintiffs. The Company has appealed the jury verdict and attorneys' fees award and the Company has filed its opening brief in the jury verdict case. The Company also has filed two related appeals challenging the result of related litigation and a resulting attorneys' fee award. The two related appeals are based on a preemption argument. The Company asserts the superior courts' ability to enter an attorneys' fee award in an earlier case and believestake certain other actions which were preempted by the exercise of exclusive jurisdiction by the CPUC over the issue of how to set rates for water in a submetered mobilehome park. The Company is awaiting notice from the court of appeal setting oral argument in these two appeals. The jury verdict appeal also raises the jurisdictional argument as well as several other arguments for reversal of the punitive damage award or for a new trial. One of the arguments raised by the Company in the jury verdict appeal is that whilepunitive damages are not available in a case brought under Section 798.41 of the California Mobilehome Residency Law ("MRL") since the MRL contains its own penalty provisions. The court of appeal granted the Company's request for judicial notice of the legislative history of the applicable MRL sections, which indicates to the Company that the court of appeal is receptive to this argument. Although no assuranceassurances can be given, suchthe Company believes the appeals will be successful. Subsequently, in June 1999 the DeAnza Santa Cruz Homeowners Association filed a complaint in the Superior Court of California, County of Santa Cruz (No. 135991) against the Company, MHC Acquisition One, L.L.C. and Starland Vistas, Inc. The new lawsuit seeks damages, including punitive damages, for alleged violations of California Civil Code Sections 798.31 and 798.41 arising from implementation of utility rates previously approved by the California Public Utilities Commission ("CPUC").CPUC. The Company and the other defendants have demurred to (filed a motion to dismiss) the complaint on the grounds that the Court lacks jurisdiction to hear the subject matter of the complaint given that the CPUC has exclusive jurisdiction over utility rates and charges at the property.Property. The California Superior Court denied the motion to dismiss and the company has appealedcourt of appeal denied the denial. ShouldCompany's request to review the appeal ondenial of the demurrer. The Company and the plaintiffs in this issuematter entered a settlement into the record before a judge in the California Superior Court in March 2000 the terms of which are being incorporated into a definitive settlement agreement. The Company does not expect the outcome of the settlement to be successful,material. UNITED STATES ENVIRONMENTAL PROTECTION AGENCY On September 29, 1995, the United States Environmental Protection Agency ("USEPA") issued its Findings of Violations and Order for Compliance with respect to the National Pollution Discharge Elimination System ("NPDES") Permit governing the operation of the onsite waste water treatment plant at one of the Properties. On October 6, 1995, the USEPA issued its Findings of Violation and Order for Compliance with respect to NPDES Permit governing the operation of the onsite wastewater treatment plant at another of the Properties. The Company and the 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 intendswould pay a fine. The tentative agreement has not yet been reduced to vigorously defendwriting and therefore remains subject to change. The Company does not believe the matter which is expected to go to trial late inimpact of the first quarter of 2000. 9settlement will be material and the Company believes it has established adequate reserves for any amounts that may be paid. 12 1013 MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED) ELLENBURG COMMUNITIES In connection with the acquisition of the Ellenburg Communities (as hereinafter defined) and pursuant to orders of the California Superior Court ("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 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 received notice of a lawsuit filed against the Company and certain executive officers of the Company in the Los Angeles County Superior Court alleging, among other causes of action, that the Company breached certain agreements in connection with the Ellenburg acquisition and claiming damages in excess of $50 million plus punitive damages. 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 believe the impact of this matter will be material. In connection with the acquisition of the Ellenburg Communities, Mr. Karno and others have appealed various court orders on which the Company has relied. Mr. Karno has also sought before both the California Superior Court and Court of Appeals to take control of ECC (as hereinafter defined), but to date none of his attempts have been successful. On September 8, 1999, Ellenburg Fund 20 ("Fund 20") filed a cross complaint in the dissolution proceeding against the Company and certain of its affiliates alleging causes of action for fraud and other claims in connection with the Ellenburg acquisition. By stipulation, the Company has not yet had to respond to the complaint, which the Company believes to be completely without merit. The Company's defense to the claims include documents and letters signed by the court-appointed Winding Up Agents supporting the Company's position. Mr. Karno, the Company and certain other parties have entered into a global settlement agreement which was filed with the Court in February 2000. In April 2000, the Court approved the settlement agreement and therefore it is anticipated that substantially all of the litigation and appeals involving the Ellenburg acquisition will be settled and dismissed pursuant to the global settlement agreement. However, the Company can provide no assurances that the settlement will close. The global settlement agreement does not dispose of the Fund 20 lawsuit against the Company. However, the Company believes that there is a substantial likelihood that settlement with Fund 20 will be reached or, if not, that the Company will ultimately successfully defend itself against the lawsuit. CANDLELIGHT PROPERTIES, L.L.C In 1996, 1997 and 1998, the Lending Partnership made a loan to Candlelight Properties, L.L.C. ("Borrower") in the principal amount of $8,050,000. The loan is secured by a mortgage on Candlelight Village ("Candlelight"), a property in Columbus, Indiana. The Company accounts for the loan as an investment in real estate and, accordingly, Candlelight's results of operations are consolidated with the Company's for financial reporting purposes. Concurrently with the funding of the loan, Borrower granted the Operating Partnership the option to acquire Candlelight upon the maturity of the loan. The Operating Partnership notified Borrower that it was exercising its option to acquire Candlelight in March 1999, and the loan subsequently matured on May 3, 1999. However, Borrower failed to repay the loan and refused to convey Candlelight to the Operating Partnership. 13 14 MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED) Borrower filed suit in the Circuit Court of Bartholomew County, Indiana ("Court") on May 5, 1999, seeking declaratory judgment on the validity of the exercise of the option. The Lending Partnership filed suit in the Court the next day, seeking to foreclose its mortgage, and the suits were consolidated (collectively, the "State Court Litigation") by the Court. The Court issued an Order on December 1, 1999, finding, among other things, that the Operating Partnership had validly exercised the option. Both parties have filed motions to correct errors in the Order, which motions are currently pending before the Court. The Court has not yet ruled on the foreclosure complaint; however, given the Court's finding in the Order, the Lending Partnership believes that Borrower has no valid defense in the foreclosure action. The Operating Partnership and the Lending Partnership intend to continue vigorously pursuing this matter and believe that, while no assurance can be given, such efforts will be successful. On May 3, 2000, Hanover Group, Inc. and Ronald E. Farren filed suit against the Company and certain executive and senior officers of the Company in the United States District Court for the Southern District of Indiana, Indianapolis Division. The complaint alleges violations of securities laws and fraud arising from the loan transaction being litigated in the State Court Litigation and seeks damages, including treble damages. The Company believes that the complaint is related to rulings made by the Court and is without merit. The Company will vigorously defend itself and the officers of the Company. The Company is involved in a variety ofvarious 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 condition or results of operations of the Company. NOTE 9 - SUBSEQUENT EVENTS On October 4, 1999, the Company's Board of Directors authorized the repurchase of an additional 1,000,000 shares under the repurchase plan as described in Note 3. From October 1, 1999 through October 29, 1999, the Company repurchased 1,730,523 shares of common stock pursuant to the repurchase plan. 1014 1115 MANUFACTURED HOME COMMUNITIES, INC. ITEM 2. MANAGEMENT'sMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following is a discussion of the interim results of operations, financial condition and liquidity and capital resources of the Company for the quarter and ninethree months ended September 30, 1999March 31, 2000 compared to the corresponding periodsperiod in 1998.1999. It should be read in conjunction with the Consolidated Financial Statements and Notes thereto included herein and the 19981999 Form 10-K. The following discussion may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which reflect management's current views with respect to future events and financial performance. Such forward-looking statements are subject to certain risks and uncertainties, including, but not limited to, the effects of future events on the Company's financial performance, the adverse impact of external factors such as inflation and consumer confidence, and the risks associated with real estate ownership. RESULTS OF OPERATIONS COMPARISON OF THE QUARTER ENDED SEPTEMBER 30, 1999MARCH 31, 2000 TO THE QUARTER ENDED SEPTEMBER 30, 1998MARCH 31, 1999 Since December 31, 1997,1998, the gross investment in rental propertyreal estate has increased from $936$1,237 million to $1.3 billion as of September 30, 1999, due to the following acquisitions (collectively, the "Acquisition Properties"): (i) The Ellenburg Communities acquired throughout 1998 (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) The College Heights Communities (a portfolio of eighteen properties) on June 4, 1998 (vi) Sunset Oaks on August 13, 1998 (vii) The Meadows on April 1, 1999 (viii) Coquina Crossing on July 23, 1999$1,264 million. The total number of sites owned or controlled has increased from 44,10853,391 as of December 31, 19971998 to 54,00654,022 as of September 30, 1999.March 31, 2000. These changes reflect the following property acquisitions and dispositions (the sale of FFEC-Six had no effect on the number of sites owned): (i) The Meadows - Acquired on April 1, 1999 (ii) Coquina Crossing - Acquired on July 23, 1999 (iii) FFEC-six (water and wastewater service company) - Sold on February 29, 2000 The Company defines its core manufactured home community portfolio ("Core Portfolio") as manufactured home properties owned as of the beginning of both periods of comparison. Excluded from the Core Portfolio are the aforementioned acquisitions and dispositions and also the Recreational Vehicle ("RV") properties which, together, are referred to as the "Non-Core" Properties. The following table summarizes certain weighted average statistics for the quarters ended September 30,March 31, 2000 and 1999. CORE PORTFOLIO TOTAL PORTFOLIO --------------------- --------------------- MARCH 31, MARCH 31, MARCH 31, MARCH 31, 2000 1999 and 1998. The "Core Portfolio" represents an analysis of properties owned as of the beginning of both years of comparison.
Core Portfolio Total Portfolio ----------------------------- --------------------------- 1999 1998 1999 1998 ----------- ---------- ----------- ----------- Total sites 32,393 32,382 47,073 46,392 Occupied sites 30,700 30,634 44,251 43,610 Occupancy % 94.8% 94.6% 94.0% 94.0% Monthly base rent per site $356.74 $343.75 $343.50 $332.23
2000 1999 --------- --------- --------- --------- Total sites 46,459 46,463 47,289 46,463 Occupied sites 43,958 43,720 44,595 43,720 Occupancy % 94.6% 94.1% 94.3% 94.1% Monthly base rent per site $ 354 $ 342 $ 354 $ 342 Base rental income ($45.647.3 million) increased $2.1$2.5 million or 4.9%5.6%. For the Core Portfolio, base rental income increased approximately $1.3$1.9 million or 4.3%, due to a 3.8% increase inincreased base rental rates. The remaining $884,000$572,000 increase in base rental income was attributed to the Acquisition Properties. 11 12 MANUFACTURED HOME COMMUNITIES, INC. RESULTS OF OPERATIONS (CONTINUED)Properties acquired in 1999. Monthly base rent per site for the total portfolio increased 3.4%3.5%, reflecting a 3.8% increase in monthly base rent per site for the Core Portfolio, partially offset by the acquisition of properties with averagelower monthly base rents lower than the Core Portfolio. Average monthly base rent per site for the Acquisition Properties was $313.63 for the quarter ended September 30,acquired in 1999. 15 16 MANUFACTURED HOME COMMUNITIES, INC. RESULTS OF OPERATIONS (CONTINUED) Weighted average occupied sites for the total portfolio increased by 641875 sites and occupancy percentage remained stable. Occupied sites at thecreating a .20% increase in occupancy. Core Portfolio occupancy increased by 66.50% reflecting an increase in weighted average occupied sites with increased occupancy percentage of 0.2%. Recreational Vehicle ("RV")238 sites. RV base rental income ($1.73.7 million), which is higher in the first quarter due to seasonality, increased $217,000 or 14.4%$171,000 primarily due to increased rental rate increases and the seasonality of RV income.rates. Utility and other income ($4.75.7 million) increased $356,000$187,000 or 8.1%3.4%, with $330,000 of the increase attributed to the Acquisition Properties and $131,000 of the increaseprimarily due to increasedan increase in utility income and real estate tax pass-ons atpass-ons. Additionally, other income includes a gain on the Core Portfolio,sale of FFEC-Six of $719,000 partially offset by lower other corporate income.an impairment loss on the DeAnza Santa Cruz water and wastewater service company of $701,000 as discussed in Note 4. Interest income ($552,000)292,000) decreased $563,000$95,000 or 50.5%24.5%, primarily due to the conversionrepayment of somecertain notes receivable to fee simple interestsand a decrease in The Meadows and certain Ellenburg Communities.interest earned on short-term investments. Short-term investments had average balances for the quarters ended September 30,March 31, 2000 and 1999 and 1998 of approximately $1.6$2.5 million and $5.7$3.7 million, respectively, which earned interest income at an effective rate of 5.3%5.6% and 5.2%4.8% per annum, respectively. As of September 30, 1999,March 31, 2000, the Company had cash and cash equivalents and short-term investments of $25.1$10.6 million. Property operating and maintenance expenses ($14.415.4 million) increased $530,000$934,000 or 3.8%6.5%. Expenses at the Acquisition Properties increased approximately $498,000. Expenses at the Core Portfolio increased slightly as$753,000 primarily due to increases in repairs and maintenance, payroll and insurance and other expenses were partially offset by decreased utility expenses and property general and administrative expenses.legal costs associated with the DeAnza Santa Cruz litigation. Property operating and maintenance expenses represented 26.9%27.0% of total revenues in 19992000 and 27.3%26.6% in 1998.1999. Real estate taxes ($4.24.3 million) increased $425,000$99,000 or 11.3%2.3%, of which $154,000 was primarily attributed to the Acquisition Properties and $271,000 relates to slightly increased rates at the Core Portfolio.acquired in 1999. Real estate taxes represented 7.8%7.6% of total revenues in 19992000 and 7.4%7.8% in 1998.1999. Property management expenses ($2.12.4 million) increased $250,000$305,000 or 13.7%14.6%. The increase was primarily due to management staffing changes and incremental management costs related to the addition of the Acquisition Properties.Properties acquired in 1999 and 1998. Property management expenses represented 3.9%4.2% of total revenues in 19992000 and 3.6%3.8% in 1998.1999. General and administrative expense ("G&A") ($1.41.8 million) increased $106,000$134,000 or 8.1%7.9%. The increase was primarily due to increased payroll resulting from salary increases and increased public company related expenses.costs. G&A represented 2.6%3.2% of total revenues in both 19992000 and 1998.3.1% in 1999. Interest and related amortization ($14.013.3 million) increased $306,000 or 2.2%.decreased $17,000. The increasedecrease was due to higher weighted average outstanding debt balances during the period. The weighted average outstanding debt balances for the quarters ended September 30, 1999 and 1998 were $761.3 million and $736.0 million, respectively. The effective interest rates were 7.3% per annum, in both periods. Interest and related amortization represented 26.1% of total revenues in 1999 and 26.9% in 1998. 12 13 MANUFACTURED HOME COMMUNITIES, INC. RESULTS OF OPERATIONS (CONTINUED) In July 1995, the Company entered into an interest rate swap agreement (the "1998 Swap") fixing LIBOR on $100 million of the Company's floating rate debt at 6.4% for the period 1998 through 2003. The value of the 1998 Swap is impacted by changes in the market rate of interest. Had the 1998 Swap been entered into on September 30, 1999, the applicable LIBOR swap rate would have been 6.2%. 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 $29,102. 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 ($252,000) increased $17,000 or 7.2% due to fixed asset additions related to information and communication systems. Depreciation on corporate assets represented 0.5% of total revenues in 1999 and 1998. Depreciation on real estate assets and other costs ($8.8 million) increased $1.1 million or 14.5% primarily as a result of the addition of the Acquisition Properties. Depreciation on real estate assets and other costs represented 16.5% of total revenues in 1999 and 15.1% in 1998. COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 TO NINE MONTHS ENDED SEPTEMBER 30, 1998 The following table summarizes certain weighted average statistics for the nine months ended September 30, 1999 and 1998. "Core Portfolio" represents an analysis of properties owned as of the beginning of both years of comparison.
Core Portfolio Total Portfolio ----------------------------- --------------------------- 1999 1998 1999 1998 ----------- ---------- ----------- ----------- Total sites 32,392 32,350 46,789 43,075 Occupied sites 30,687 30,649 43,992 40,669 Occupancy % 94.7% 94.7% 94.0% 94.4% Monthly base rent per site $354.98 $342.45 $342.60 $332.30
Base rental income ($135.6 million) increased $14.0 million or 11.5%. For the Core Portfolio, base rental income increased approximately $3.5 million or 3.8%, due to increased base rental rates. The remaining $10.5 million increase in base rental income was attributed to the Acquisition Properties. Monthly base rent per site for the total portfolio increased 3.1%, reflecting a 3.8% increase in monthly base rent per site for the Core Portfolio, partially offset by the acquisition of properties with average base rents lower than the Core Portfolio. Average monthly base rent per site for the Acquisition Properties was $314.27 for the nine months ended September 30, 1999. Weighted average occupied sites increased by 3,323 sites while occupancy percentage decreased 0.4% due to the addition of the Acquisition Properties to the portfolio with lower occupancy percentages. Occupied sites at the Core Portfolio remained stable. RV base rental income ($6.8 million) increased $1.9 million or 40.6% primarily due to the addition of four RV communities in 1998. Utility and other income ($15.6 million) increased $1.9 million or 13.8% attributed to the Acquisition Properties. 13 14 MANUFACTURED HOME COMMUNITIES, INC. RESULTS OF OPERATIONS (CONTINUED) Interest income ($1.1 million) decreased $1.6 million or 58.8%, primarily due to the conversion of some notes receivable to fee simple interests in The Meadows and certain Ellenburg Communities. Short-term investments had average balances for the nine months ended September 30, 1999 and 1998 of approximately $3.1 million and $8.0 million, respectively, which earned interest income at an effective rate of 4.6% and 5.4% per annum, respectively. Property operating and maintenance expenses ($43.2 million) increased $4.0 million or 10.3%. Expenses at the Acquisition Properties increased approximately $3.9 million. Expenses at the Core Portfolio increased slightly as increases in repairs and maintenance, payroll and utility expenses were partially offset by decreased property general and administrative expenses and insurance and other expenses. Property operating and maintenance expenses represented 26.9% of total revenues in 1999 and 27.3% in 1998. Real estate taxes ($12.6 million) increased $1.7 million or 15.6%, of which approximately $1.1 million was attributed to the Acquisition Properties and $570,000 relates to slightly increased rates at the Core Portfolio. Real estate taxes represented 7.8% of total revenues in 1999 and 7.6% in 1998. Property management expenses ($6.2 million) increased $901,000 or 17.0%. The increase was primarily due to incremental management costs related to the addition of the Acquisition Properties. Property management expenses represented 3.9% of total revenues in 1999 and 3.7% in 1998. G&A expense ($4.6 million) increased $327,000 or 7.7%. The increase was primarily due to increased payroll resulting from salary increases and increased public company related expenses. G&A represented 2.8% of total revenues in 1999 and 3.0% in 1998. Interest and related amortization ($40.8 million) increased $4.6 million or 12.9%. The increase was due to higher weighted average outstanding debt balances during the period, partially offset by a slightly decreasedincreased effective interest rate. The weighted average outstanding debt balances for the nine monthsquarters ended September 30,March 31, 2000 and 1999 and 1998 were $750.6$727.0 million and $648.6$738.0. million, respectively. The effective interest rates were 7.2%7.4% and 7.4% per annum,7.2%, respectively. Interest and related amortization represented 25.5%23.3% of total revenues in 19992000 and 25.2%24.5% in 1998.1999. Depreciation on corporate assets ($732,000)271,000) increased $37,000$25,000 or 5.3%10.2%. The increase was due to fixed asset additionspurchases related to information and communication systems.computer software upgrades. Depreciation on corporate assets represented 0.5% of total revenues in 1999both 2000 and 1998.1999. Depreciation on real estate assets and other costs ($25.48.9 million) increased $5.3 million$613,000 or 26.3%7.4% as a result of the addition of the Acquisition Properties.Properties purchased in 1999. Depreciation on real estate assets and other costs represented 15.8%15.5% of total revenues in 19992000 and 14.0%15.2% in 1998.1999. 16 17 MANUFACTURED HOME COMMUNITIES, INC. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents increased by $11.4$4.0 million when compared to December 31, 1998.1999. The major components of this increase were cash provided by operating activitiesthe timing of distributions to Common Stockholders and net proceeds fromCommon OP Unitholders and the POP Unit offering, partially offset by repaymentstiming of borrowings on the line of credit repurchases of commonfor the distributions and stock and improvements to rental properties. 14 15 MANUFACTURED HOME COMMUNITIES, INC. LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)repurchases. Net cash provided by operating activities decreased by $8.7 million to approximately $63.2$801,000 from $25.3 million for the nine monthsquarter ended September 30,March 31, 1999 and 1998. Net cash provided by operating activitiesto $24.5 million for the quarter ended March 31, 2000. This increase reflected a $5.1$1.5 million increasedecrease in funds from operations ("FFO"), as discussed below, partially offset by slower growth in accounts payable due to the Acquisition properties.increased prepaid expenses. FFO was definedredefined by the National Association of Real Estate Investment Trusts ("NAREIT") in March 1995October 1999, effective January 1, 2000, as net income (computed in accordance with generally accepted accounting principles ["GAAP"]), before allocation to minority interests, excluding gains (or losses) from sales of property, plus real estate depreciation and after adjustments for significant non-recurring items, if any.unconsolidated partnerships and joint ventures. The Company computes FFO in accordance with the NAREIT definition, which may differ from the methodology for calculating FFO utilized by other equity REITs and, accordingly, may not be comparable to such other REITs. Funds available for distribution ("FAD") is defined as FFO less non-revenue producing capital expenditures and amortization payments on mortgage loan principal. The Company believes that FFO and FAD are useful to investors as a measure of the performance of an equity REIT because, along with cash flows from operating activities, financing activities and investing activities, they provide investors an understanding of the ability of the Company to incur and service debt and to make capital expenditures. FFO and FAD in and of themselves do not represent cash generated from operating activities in accordance with GAAP and therefore should not be considered an alternative to net income as an indication of the Company's performance or to net cash flows from operating activities as determined by GAAP as a measure of liquidity and are not necessarily indicative of cash available to fund cash needs. The following table presents a calculation of FFO and FAD for the nine months and quarters ended September 30,March 31, 2000 and 1999 (amounts in thousands): MARCH 31, MARCH 31, 2000 1999 ----------- ----------- COMPUTATION OF FUNDS FROM OPERATIONS: Net Income................................ $ 6,331 $ 8,234 Income allocated to Common OP Units....... 1,599 1,844 Depreciation on real estate assets and 1998:
For the For the Nine Months Ended Quarters Ended September 30, September 30, 1999 1998 1999 1998 -------- -------- -------- -------- Computation of funds from operations: Net Income .............................................. $ 22,074 $ 21,943 $ 6,877 $ 6,837 Income allocated to common OP units .............................................. 4,862 5,147 1,509 1,603 Depreciation on real estate assets and other costs ........................................... 25,351 20,072 8,807 7,690 ======== ======== ========= ======== Funds from operations .................................... $ 52,287 $ 47,162 $ 17,193 $ 16,130 ======== ======== ========= ======== Computation of funds available for distribution: Funds from operations .................................... $ 52,287 $ 47,162 $ 17,193 $ 16,130 Non-revenue producing improvements- rental properties ..................................... (6,519) (5,327) (2,901) (2,014) ======== ======== ========= ========other costs......................... 8,856 8,243 ----------- ----------- Funds from operations..................... $ 16,786 $ 18,321 =========== =========== Weighted average Common Shares outstanding - diluted................... 28,242 32,340 =========== =========== COMPUTATION OF FUNDS AVAILABLE FOR DISTRIBUTION: Funds from operations..................... $ 16,786 $ 18,321 Non-revenue producing improvements - rental properties.................... (864) (1,605) ----------- ----------- Funds available for distribution ......................... $ 45,768 $ 41,835 $ 14,292 $ 14,116 ======== ======== ========= ========
Net cash used in investing activities decreased $173.4 million to $31.3 million for the nine months ended September 30, 1999 from $204.8 million for the nine months ended September 30, 1998, primarily due to the acquisition of Quail Meadows, Sherwood Forest RV Resort, Casa Del Sol Resort III, the College Heights Communities, acquisition advances related to the Ellenberg Communities, the purchase of short-term investments, the funding of The Meadows Loan, and the investment in Plantation on the Lake and Trails West in 1998, partially offset by the acquisition of Coquina Crossing in 1999. 15distribution.......... $ 15,922 $ 16,716 =========== =========== Weighted average Common Shares outstanding - diluted................... 28,242 32,340 =========== =========== 17 1618 MANUFACTURED HOME COMMUNITIES, INC. LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) Net cash used in investing activities decreased $3.1 million from $4.2 million for the quarter ended March 31, 1999 to $1.0 million for the quarter ended March 31, 2000 primarily due to the sale of the FFEC-Six water and wastewater service company and the repayment of the purchase money note receivable, partially offset by increased contributions to affiliates. Capital expenditures for improvements were approximately $9.7$950,000 for the quarter ended March 31, 2000 compared to $2.0 million for the nine monthsquarter ended September 30, 1999 compared to $9.2 million for the nine months ended September 30, 1998.March 31, 1999. Of the $9.7 million,$950,000, approximately $6.5 million$864,000 represented improvements to existing sites. The Company anticipates spending approximately $2.0$7.0 million on improvements to existing sites during the remainder of 1999.2000. The Company believes these improvements are necessary in order to increase and/or maintain occupancy levels and maintain competitive market rents for new and renewing residents. The remaining $3.2 million$86,000 represented costs to develop expansion sites at certain of the Company's propertiesProperties and other corporate headquarterheadquarters costs. The Company is currently developing an additional 58100 sites which should be available for occupancy in 1999.2000. Net cash (used in) provided byused in financing activities decreased $156.6$8.6 million to ($20.4 million) for the nine months ended September 30, 1999 from $136.1$28.1 million for the nine monthsquarter ended September 30, 1998. This isMarch 31, 1999 to $19.5 million for the quarter ended March 31, 2000, primarily due to lower netthe timing of distributions to Common Stockholders and Common OP Unitholders and the timing of borrowings on the line of credit comparedfor the distributions and for Common Stock repurchases. Distributions to Common Stockholders and Common OP Unitholders increased approximately $22.1 million due to the same period in 1998 and proceeds from issuancetiming of common stock in the nine months ended September 30, 1998 compared to repurchases of common stock in the nine months ended September 30, 1999. On September 30,4th quarter 1999 the Operating Partnership completed a $125 million private placement of 9.0% Series D Cumulative Redeemable Perpetual Preferred Units. The net proceeds from this placement were used to pay down the line of credit. Excluding these proceeds, net borrowings on the line of credit decreased $103.0 million to $30.0 million in the nine months ended September 30, 1999 from $133.0 million for the nine months ended September 30, 1998. Distributions to common stockholders and minority interests increased approximately $2.2 million.dividend payment. On April 9, 1999, July 9, 1999 and October 8, 1999,14, 2000, the Company paid a $.3875$.415 per share distribution for the quartersquarter ended March 31, 1999, June 30, 1999 and September 30, 1999, respectively,2000 to stockholders of record on March 26, 1999, June 25, 1999 and September 24, 1999, respectively.31, 2000. Return of capital on a GAAP basis was $.08 per share, $.12 per share and $.12$.135 per share for the quarters ended March 31, 1999, June 30, 1999 and September 30, 1999, respectively.first quarter of 2000. The Company expects to meet its short-term liquidity requirements, including its distributions, generally through its working capital, net cash provided by operating activities and availability under the existing line of credit. The Company expects to meet certain long-term liquidity requirements such as scheduled debt maturities, property acquisitions and capital improvements by long-term collateralized and uncollateralized borrowings including borrowings under its existing line of credit and the issuance of debt securities or additional equity securities in the Company, in addition to working capital. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities", which is required to be adopted in years beginning after June 15, 1999. SFAS No. 133 permits early adoption as of the beginning of any fiscal quarter after its issuance. In June 1999, the FASB issued Statement No. 137 which deferred the effective date of SFAS No. 133 untilto all fiscal quarters for fiscal years beginning after June 15, 2000. The Company has not yet determined the date at which it will adopt SFAS No. 133. SFAS No. 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The Company has not yet determined what the effect of SFAS No. 133 will be on the earnings and financial position of the Company, when implemented. 16 17 MANUFACTURED HOME COMMUNITIES, INC. 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 two 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. 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 has identified all of its information technology ("IT") and non-IT Systems and assessed 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), lift stations, drinking water and waste water treatment plants. The Company, with the assistance of outside consultants, has completed the inventory, research and assessment phases of its preparations for the year 2000. The scope of remediation efforts consisted essentially of an upgrade of office productivity software which necessitated replacement of a number of personal computers, and upgrades to Year 2000 versions of certain systems listed above. Remediation efforts are substantially complete, and all remediation will be complete by the end of November 1999. The Company, with its consultants, developed contingency plans for its critical systems. Additionally, department managers are keeping appropriate records in the unlikely event systems would become unavailable due to oversight or for reasons beyond the Company's control. 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 September 30, 1999, 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 the Company will retain the employee through 1999. The cost to retain the consultant to assess the drinking water and wastewater treatment facilities was approximately $50,000. The Company expects that final costs for replacement and upgrade of approximately 125 computers will be approximately $200,000. The Company's total Year 2000 project costs and estimates to complete the same 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 continues 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; basic financial statements can be prepared manually and wastewater treatment plants can be controlled manually. 17 18 MANUFACTURED HOME COMMUNITIES, INC. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 ($40.0 million outstanding at September 30, 1999) 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 the nine months ended September 30, 1999, interest expense would have increased/decreased by approximately $1.1 million for the nine months ended September 30, 1999 based on the average balance outstanding under the Company's line of credit for the nine months ended September 30, 1999. Information relating to quantitative and qualitative disclosure about market risk as it relates to the 1998 Swap is set forth in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, and in Note 6 "Long Term Borrowings" in the Notes to Consolidated Financial Statements. Such information is incorporated herein. 18 19 MANUFACTURED HOME COMMUNITIES, INC. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company has previously disclosed the outcome(see Note 8 of the jury trial inConsolidated Financial Statements contained herein) ITEM 5. OTHER INFORMATION On May 9, the litigation involving DeAnza Santa Cruz Mobile Estates, a property located in Santa Cruz, California. Subsequent to such disclosure, on April 19, 1999, the trial court denied allBoard of Directors of the Company'sCompany appointed Thomas P. Heneghan as MHC's President and DeAnza's post-trial motionsChief Operating Officer. Mr. Heneghan, 36, has served for judgment notwithstanding the verdict, new triallast five years as MHC's Chief Financial Officer. Gary Powell, MHC's Executive Vice President of Property Operations will become President and remittitur. The trial court also awarded $700,000CEO of attorneys' fees to plaintiffs. The Company has appealedMHC's sales and marketing affiliate, RSI. In addition, the jury verdict and attorneys' fee award and believes that, while no assurance can be given, such appeals will be successful. Subsequently, in June 1999 the DeAnza Santa Cruz Homeowners Association filed a complaint in the Superior CourtBoard of California, CountyDirectors of Santa Cruz (No. 135991) against the Company MHC Acquisition One, L.L.C.appointed John M. Zoeller as Vice President and Starland Vistas, Inc. The new lawsuit seeks damages,Chief Financial Officer. Mr. Zoeller, 39, has over 18 years of accounting experience including punitive damages, for alleged violationstwelve years with the various affiliates of California Civil Code Sections 798.31 and 798.41 arisingEquity Group Investments. Mr. Zoeller, a CPA, holds a BS in Accounting from implementationthe University of utility rates previously approved by the California Public Utilities Commission ("CPUC"). The Company and the other defendants have demurred to (filed a motion to dismiss) the complaint on the grounds that the Court lacks jurisdiction to hear the subject matter of the complaint given that the CPUC has exclusive jurisdiction over utility rates and charges at the property. The California Superior Court denied the motion to dismiss and the company has appealed the denial. Should the appeal on this issue not be successful, the Company intends to vigorously defend the matter which is expected to go to trial late in the first quarter of 2000. The Company is involved in a variety of legal proceedings arising in the ordinary course of business. All such proceedings, taken together, are not expected to have a material adverse impact on the financial condition or results of operations of the Company.Illinois, Champaign - Urbana. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: 27 Financial Data Schedule (b) Reports on Form 8-K: Form 8-K dated October 15, 1999, filed October 15, 1999, relating to item 5 - "Other Events".None. 19 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. MANUFACTURED HOME COMMUNITIES, INC. BY: /s/ Thomas P. HeneghanJohn M. Zoeller --------------------------------------- Thomas P. Heneghan ExecutiveJohn M. Zoeller Vice President, Treasurer and Chief Financial Officer BY: /s/ Mark Howell --------------------------------------- Mark Howell Principal Accounting Officer and Assistant Treasurer DATE: November 10, 1999May 11, 2000 20