UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2002 or | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 1-11718 MANUFACTURED HOME COMMUNITIES, INC. (Exact name of registrant as specified in its charter) MARYLAND 36-3857664 (State or other jurisdiction of (I.R.S. Employer 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) Securities registered pursuant to Section 12(b) of the Act: Common Stock, $.01 Par Value The New York Stock Exchange (Title of Class) (Name of exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No | | Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |X| No | | Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. | | The aggregate market value of voting stock held by nonaffiliates was approximately $571.5 million as of February 28, 2003 based upon the closing price of $29.04 on such date using beneficial ownership of stock rules adopted pursuant to Section 13 of the Securities Exchange Act of 1934 to exclude voting stock owned by Directors and Officers, some of whom may not be held to be affiliates upon judicial determination. At March 24, 2003, 22,223,647 shares of the Registrant's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Part III incorporates by reference the Registrant's Proxy Statement relating to the Annual Meeting of Stockholders to be May 7, 2003.
MANUFACTURED HOME COMMUNITIES, INC. TABLE OF CONTENTS Page ---- PART I. Item 1. Business............................................................................... 3 Item 2. Properties............................................................................. 8 Item 3. Legal Proceedings...................................................................... 13 Item 4. Submission of Matters to a Vote of Security Holders.................................... 16 PART II. Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.............. 17 Item 6. Selected Financial Data................................................................ 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 20 Item 7A. Quantitative and Qualitative Disclosure About Market Risk.............................. 31 Item 8. Financial Statements and Supplementary Data............................................ 31 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 31 PART III. Item 10. Directors and Executive Officers of the Registrant..................................... 32 Item 11. Executive Compensation................................................................. 32 Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 32 Item 13. Certain Relationships and Related Transactions......................................... 32 Item 14. Controls and Procedures................................................................ 32 PART IV. Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 33 2
PART I ITEM 1. BUSINESS THE COMPANY GENERAL Manufactured Home Communities, Inc., together with MHC Operating Limited Partnership (the "Operating Partnership") and other consolidated subsidiaries ("Subsidiaries"), are referred to herein as the "Company", "MHC", "we", "us", and "our". The Company is a fully integrated company that owns and operates manufactured home communities ("Communities") and recreational vehicle resorts ("Resorts") (collectively known as "Properties"). The Company was formed to continue the property operations, business objectives and acquisition strategies of an entity that had owned and operated Communities since 1969. As of December 31, 2002, we owned or had an ownership interest in a portfolio of 142 Communities and Resorts located throughout the United States containing 51,582 residential sites. Our Properties are located in 21 states (with the number of Properties in each state shown parenthetically) - Florida (51), California (25), Arizona (19), Colorado (10), Delaware (7), Nevada (5), Oregon (4), Indiana (3), Illinois (2), Iowa (2), New York (2), Texas (2), Utah (2), Pennsylvania (1), Maryland (1), Montana (1), New Mexico (1), Michigan (1), Virginia (1), West Virginia (1), and Washington (1). Communities are residential developments designed and improved for the placement of detached, single-family manufactured homes that are produced off-site and installed and set on residential sites ("Site Set") within the Community. The owner of each home leases the site on which it is located. Modern Communities are similar to typical residential subdivisions, containing centralized entrances, paved streets, curbs and gutters and parkways. In addition, these Communities often provide a clubhouse for social activities and recreation and other amenities, which may include swimming pools, shuffleboard courts, tennis courts, laundry facilities and cable television service. In some cases, utilities are provided or arranged for by the owner of the Community; otherwise, the resident contracts for the utility directly. Some Communities provide water and sewer service through municipal or regulated utilities, while others provide these services to residents from on-site facilities. Each Community is generally designed to attract, and is marketed to, one of two types of residents - 1) retirees and empty-nesters or 2) families and first-time homeowners. We believe both types of Communities are attractive investments and focus on owning Communities in or near large metropolitan markets and retirement destinations. Resorts are similar to Communities in their overall design and the amenities they provide. However, our Resorts include sites designed to accommodate Site Set homes, park model homes, luxury motorcoaches and a variety of recreational vehicles. Our Resorts are marketed to attract residents seeking a second home or vacation home as well as those seeking a long-term or full season recreational vehicle site. A majority of our Resort residents own homes in the Resort and/or lease the site annually or for a full season (six months or longer). We have approximately 1,000 full-time employees dedicated to carrying out our operating philosophy and strategies of value enhancement and service to residents. The operations of each Property are coordinated by an on-site team of employees that typically includes a manager or two-person management team, clerical and maintenance workers, each of whom work to provide maintenance and care of the Properties. Direct supervision of on-site management is the responsibility of our regional vice presidents and regional and district managers. These individuals have significant experience in addressing the needs of residents and in finding or creating innovative approaches to maximize value and increase cash flow from property operations. Complementing this field management staff are approximately 60 corporate employees who assist on-site management in all property functions. FORMATION OF THE COMPANY The Company, formed in March 1993, is a Maryland corporation which has elected to be taxed as a real estate investment trust ("REIT"). The Company generally will not be subject to Federal income tax to the extent it distributes 100% of its REIT taxable income to its stockholders. REITs are subject to a number of organizational and operational requirements. If the Company fails to qualify as a REIT, its income is taxable at regular corporate rates. Even if the Company qualifies for taxation as a REIT, the Company is subject to certain state and local taxes on its income and property and Federal income and excise taxes on its undistributed income. The operations of the Company are conducted primarily through the Operating Partnership. The Company contributed the proceeds from its initial public offering and subsequent offerings to the Operating Partnership for a general partnership interest. The financial results of the Operating Partnership and the Subsidiaries are consolidated in the Company's consolidated financial statements. In addition, since certain activities, if performed by the Company, may not be qualifying REIT activities under the Internal Revenue Code of 1986, as amended (the "Code"), the Company has formed taxable REIT subsidiaries as defined in the Code to engage in such activities. Realty Systems, Inc. ("RSI") is a wholly owned subsidiary of the Company that, doing business 3
as Carefree Sales, is engaged in the business of purchasing, selling and leasing manufactured homes that are located or will be located in Properties owned and managed by the Company. Carefree Sales also provides brokerage services to residents at such Properties. Typically, residents move from a Community but do not relocate their homes. Carefree Sales may provide brokerage services, in competition with other local brokers, by seeking buyers for the homes. Carefree Sales also leases homes to prospective residents with the expectation that the tenant eventually will purchase the home. Community Systems, Inc. ("CSI") leases from the Operating Partnership certain real property within or adjacent to certain Properties consisting of golf courses, pro shops, and restaurants. BUSINESS OBJECTIVES AND OPERATING STRATEGIES Our strategy seeks to maximize both current income and long-term growth in income. We focus on Properties that have strong cash flow and we expect to hold such Properties for long-term investment and capital appreciation. In determining cash flow potential, we evaluate our ability to attract and retain high quality residents in our Properties who take pride in their Property and in their home. These business objectives and their implementation are determined by our Board of Directors and may be changed at any time. Our investment and operating approach includes: - Providing consistently high levels of services and amenities in attractive surroundings to foster a strong sense of community and pride of home ownership; - Efficiently managing the Properties to increase operating margins by controlling expenses, increasing occupancy and maintaining competitive market rents; - Increasing income and property values by continuing the strategic expansion and, where appropriate, renovation of the Properties; - Utilizing management information systems to evaluate potential acquisitions, identify and track competing properties and monitor resident satisfaction; and - Selectively acquiring Properties that have potential for long-term cash flow growth and to create property concentrations in and around major metropolitan areas and retirement destinations to capitalize on operating synergies and incremental efficiencies. We are committed to enhancing our reputation as the most respected brand name in the industry. Our strategy is to own and operate the highest quality Properties in sought-after locations near both urban areas and retirement destinations across the United States. The focus is on creating an attractive residential environment for homeowners by providing a well-maintained, comfortable Property with a variety of organized recreational and social activities and superior amenities. In addition, we regularly conduct evaluations of the cost of housing in the market places in which our Properties are located as well as survey rental rates of competing Communities and Resorts. From time to time we also conduct satisfaction surveys of our residents to determine the factors they consider most important in choosing a Property. FUTURE ACQUISITIONS Over the last seven years our portfolio of Properties has grown by 73 Properties. We continually review the Properties in our portfolio to ensure they fit our business objectives. Over the last 3 years, through the acquisition or sale of 44 Properties, we have redeployed capital to markets we believe have greater long-term potential. We believe that opportunities for Property acquisitions are still available and in general consolidation within the industry will continue (see - The Industry - Industry Consolidation). However, we also believe that many transactions occurring in the private marketplace are at valuations that would prevent a reasonable return on the invested capital. When investing capital we consider all potential uses of the capital including repurchases of our stock. As a result, during 1999 and 2000 we implemented our stock repurchase program and our Board of Directors continues to review the conditions under which we will repurchase our stock. These conditions include, but are not limited to, market price, balance sheet flexibility, other opportunities and capital requirements. (For more information on the Company's stock repurchase program see Note 4 to the accompanying financial statements.) Increasing acceptability of and demand for Site Set homes and continued constraints on development of new Properties continue to add to their attractiveness as an investment. We believe we have a competitive advantage in the acquisition of new Properties due to our experienced management, significant presence in major real estate markets and substantial capital resources. We are actively seeking to acquire additional Communities and Resorts and are engaged in various stages of negotiations relating to the possible acquisition of a number of Properties. 4
We anticipate that newly acquired Properties will be located in the United States. We utilize market information systems to identify and evaluate acquisition opportunities, including a market database to review the primary economic indicators of the various locations in which we expect to expand our operations. Acquisitions will be financed from the most appropriate sources of capital, which may include undistributed funds from operations, issuance of additional equity securities, sales of investments, collateralized and uncollateralized borrowings and issuance of debt securities. In addition, the Operating Partnership may issue units of limited partnership interest ("OP Units") to finance acquisitions. We believe that an ownership structure which includes the Operating Partnership will permit us to acquire additional Communities and Resorts in transactions that may defer all or a portion of the sellers' tax consequences. When evaluating potential acquisitions, we will consider such factors as: - - the replacement cost of the Property, - - the geographic area and type of Property, - - the location, construction quality, condition and design of the Property, - - the current and projected cash flow of the Property and the ability to increase cash flow, - - the potential for capital appreciation of the Property, - - the terms of tenant leases, including the potential for rent increases, - - the potential for economic growth and the tax and regulatory environment of the community in which the Property is located, - - the potential for expansion of the physical layout of the Property and the number of sites, - - the occupancy and demand by residents for Properties of a similar type in the vicinity and the residents' profile, - - the prospects for liquidity through sale, financing or refinancing of the Property, - - the competition from existing Properties and the potential for the construction of new Properties in the area. We expect to purchase Properties with physical and market characteristics similar to the Properties in our current portfolio. PROPERTY EXPANSIONS Several of our Properties have available land for expanding the number of sites available to be leased to residents. Development of these sites ("Expansion Sites") is predicated by local market conditions and permitted by zoning and other applicable laws. When justified, development of Expansion Sites allows us to leverage existing facilities and amenities to increase the income generated from the Properties. Where appropriate, facilities and amenities may be upgraded or added to certain Properties in order to make those Properties more attractive in their markets. Our acquisition philosophy has included the desire to own Properties with potential Expansion Site development, and we have been successful in acquiring a number of such Properties. Several examples of these Properties include the 1993 acquisition of The Heritage with potential development of approximately 288 Expansion Sites, the 1994 acquisition of Bulow Village with potential development of approximately 725 Expansion Sites, the 1997 acquisition of Golf Vista Estates with potential development of approximately 88 Expansion Sites, the 1999 acquisition of Coquina Crossing with potential development of approximately 393 Expansion Sites, and the 2001 acquisitions of Grand Island and The Lakes at Countrywood with combined potential Expansion Sites of 224 sites. Of our 142 Properties, ten may be expanded consistent with existing zoning regulations. In 2003, we expect to develop an additional 130 Expansion Sites within 3 of these Properties. As of December 31, 2002, we had approximately 753 Expansion Sites available for occupancy in 25 of the Properties. We filled 154 Expansion Sites in 2002 and expect to fill an additional 150 to 200 Expansion Sites in 2003. LEASES At our Communities a typical lease entered into between the resident and the Company for the rental of a site is for a month-to-month or year-to-year term, renewable upon the consent of both parties or, in some instances, as provided by statute. These leases are cancelable, depending on applicable law, for non-payment of rent, violation of Community rules and regulations or other specified defaults. Non-cancelable long-term leases, with remaining terms ranging up to ten years, are in effect at certain sites within 25 of the Communities. Some of these leases are subject to rental rate increases based on the Consumer Price Index ("CPI"), in some instances taking into consideration certain floors and ceilings and allowing for pass-throughs of certain items such as real estate taxes, utility expenses and capital expenditures. Generally, market rate adjustments are made on an annual basis. REGULATIONS AND INSURANCE General. Our Properties are subject to various laws, ordinances and regulations, including regulations relating to recreational facilities such as swimming pools, clubhouses and other common areas. We believe that each Property has the necessary permits and approvals to operate. 5
Rent Control Legislation. At certain of our Communities, state and local rent control laws, principally in California, limit our ability to increase rents and to recover increases in operating expenses and the costs of capital improvements. Enactment of such laws has been considered from time to time in other jurisdictions. We presently expect to continue to maintain Communities, and may purchase additional Communities, in markets that are either subject to rent control or in which rent-limiting legislation exists or may be enacted. For example, Florida has enacted a law that generally provides that rental increases must be reasonable. Also, certain jurisdictions in California in which we own Communities limit rent increases to changes in the CPI or some percentage thereof. As part of our effort to realize the value of our Properties subject to restrictive regulation, we have initiated lawsuits against several municipalities imposing such regulation in an attempt to balance the interests of our shareholders with the interests of our residents Insurance. We believe that the Properties are covered by adequate fire, flood, property, earthquake and business interruption insurance (where appropriate) provided by reputable companies and with commercially reasonable deductibles and limits. Due to the lack of available commercially reasonable coverage, we are self-insured for terrorist incidents, except at certain Properties where terrorist insurance coverage is required by debt covenants. We believe our insurance coverage is adequate based on our assessment of the risks to be insured, the probability of loss and the relative cost of available coverage. We have obtained title insurance insuring title to the Properties in an aggregate amount which we believe to be adequate. INDUSTRY THE INDUSTRY We believe that modern Properties similar to ours provide an opportunity for increased cash flows and appreciation in value. These may be achieved through increases in occupancy rates and rents, as well as expense controls, expansion of existing Properties and opportunistic acquisitions, for the following industry specific reasons: - Barriers to Entry: We believe that the supply of new Properties will be constrained due to barriers to entry into the industry. The most significant barrier has been the difficulty in securing zoning from local authorities. This has been the result of (i) the public's historically poor perception of the industry, and (ii) the fact that Properties generate less tax revenue because the homes are treated as personal property (a benefit to the home owner) rather than real property. Another factor that creates substantial barriers to entry is the length of time between investment in a Community's development and the attainment of stabilized occupancy and the generation of revenues. The initial development of the infrastructure may take up to two or three years. Once the Community is ready for occupancy, it may be difficult to attract residents to an empty Community. Substantial occupancy levels may take several years to achieve. - Industry Consolidation: According to an industry analyst's industry report, there are approximately 50,000 Communities in the United States, and approximately 6.5% or 3,250 of the Communities have more than 200 sites and would be considered "investment-grade" properties. The five public REITs that own Communities own approximately 531 or about 16% of the "investment-grade" Communities. In addition, based on a report prepared by one analyst, the top 150 owners of Communities own approximately 69% of the "investment-grade" assets. We believe that this relatively high degree of fragmentation in the industry provides us, as a national organization with experienced management and substantial financial resources, the opportunity to purchase additional Communities. - Stable Tenant Base: We believe that Communities tend to achieve and maintain a stable rate of occupancy due to the following factors: (i) residents own their own homes, (ii) Communities tend to foster a sense of community as a result of amenities such as clubhouses, recreational and social activities and (iii) since moving a Site Set home from one Community to another involves substantial cost and effort, residents often sell their home in-place (similar to site-built residential housing) with no interruption of rental payments. SITE SET HOUSING Based on the current growth in the number of individuals living in Site Set homes, we believe that Site Set homes are increasingly viewed by the public as an attractive and economical form of housing. We believe that the growing popularity of Site Set housing is primarily the result of the following factors: - - Importance of Home Ownership. According to the Fannie Mae 2001 National Housing Survey ("FNMA Survey") renters' desire to own a home continues to be a top priority. 6
- - Affordability. For a significant number of people, Site Set housing represents the only means of achieving home ownership. In addition, the total cost of housing in a Property (home cost, site rent and related occupancy costs) is competitive with and often lower than the total cost of alternative housing, such as apartments and condominiums, and generally substantially lower than "stick-built" residential alternatives. - - Lifestyle Choice. As the average age of the United States population has increased, Site Set housing has become an increasingly popular housing alternative for retirement and "empty-nest" living. According to the FNMA Survey, the baby-boom generation - the 80 million people born between 1945 and 1964 - will constitute 18% of the U.S. population within the next 30 years and more than 32 million will reach age 55 within the next ten years. Among those individuals who are nearing retirement (age 40 to 54), approximately 33% plan on moving upon retirement. We believe that Site Set housing is especially attractive to such individuals when located within a Property that offers an appealing amenity package, close proximity to local services, social activities, low maintenance and a secure environment. - - Construction Quality. Since 1976, all Site Set housing has been required to meet stringent Federal standards, resulting in significant increases in the quality of the industry's product. The Department of Housing and Urban Development's standards for Site Set housing construction quality are the only Federally regulated standards governing housing quality of any type in the United States. Site Set homes produced since 1976 have received a "red and silver" government seal certifying that they were built in compliance with the Federal code. The code regulates Site Set home design and construction, strength and durability, fire resistance and energy efficiency, and the installation and performance of heating, plumbing, air conditioning, thermal and electrical systems. In newer homes, top grade lumber and dry wall materials are common. Also, manufacturers are required to follow the same fire codes as builders of site-built structures. - - Comparability to Site-Built Homes. The Site Set housing industry has experienced a trend towards multi-section homes. Many modern Site Set homes are longer (up to 80 feet compared to 50 feet in the 1960's) and wider than earlier models. Many such homes have vaulted ceilings, fireplaces and as many as four bedrooms, and closely resemble single family ranch style site-built homes. AVAILABLE INFORMATION We file reports electronically with the Securities and Exchange Commission. The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy information and statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. We maintain an Internet site with information about the Company and hyperlinks to our filings with the SEC at http://www.mhchomes.com. Requests for copies of our filings with the SEC and other investor inquiries should be directed to: Investor Relations Department Manufactured Home Communities, Inc. Two North Riverside Plaza Chicago, Illinois 60606 Phone: 1-800-247-5279 e-mail: investor_relations@mhchomes.com 7
ITEM 2. PROPERTIES Our Properties provide attractive amenities and common facilities that create a comfortable and attractive home for our residents, with most offering a clubhouse, a swimming pool, laundry facilities and cable television service. Many also offer additional amenities such as sauna/whirlpool spas, golf courses, tennis, shuffleboard and basketball courts and exercise rooms. Since residents in our Properties own their homes, it is their responsibility to maintain their homes and the surrounding area. It is our role to ensure that residents comply with our Property policies and to provide maintenance of the common areas, facilities and amenities. We hold periodic meetings with our Property management personnel for training and implementation of our strategies. The Properties historically have had, and we believe they will continue to have, low turnover and high occupancy rates. The distribution of our Properties throughout the United States reflects our belief that geographic diversification helps insulate the portfolio from regional economic influences. We intend to target new acquisitions in or near markets where our Properties are located and will also consider acquisitions of Properties outside such markets. The following table identifies our five largest markets and provides information regarding our Properties including Communities owned in joint ventures. NUMBER OF PERCENT OF PERCENT OF TOTAL MAJOR MARKET PROPERTIES TOTAL SITES TOTAL SITES REVENUES ------------ ---------- ----------- ----------- -------- Florida 51 23,038 44.66% 38.61% California 25 6,215 12.05% 19.96% Arizona 19 5,413 10.49% 8.76% Colorado 10 3,455 6.70% 8.54% Delaware 7 2,238 4.34% 4.10% Other 30 11,223 21.76% 20.03% --- ------ ------ ------ Total 142 51,582 100.00% 100.00% === ====== ====== ====== Our largest Property, Bay Indies, located in Venice, Florida, accounted for 2.7% of our total revenues for the year ended December 31, 2002. The following table lists our Resort Properties and those Communities in which we have a non-controlling joint venture interest: NUMBER OF SITES LOCATION AS OF PROPERTY CITY, STATE 12/31/02 - ---------------------------- ---------------------- --------------- RESORT PROPERTIES Mt Hood Welches OR 436 Fun & Sun San Benito TX 1,435 Southern Palms Eustis FL 950 Sherwood Forest RV Kissimmee FL 512 Bulow RV Flagler Beach FL 352 Tropic Winds Harlingen TX 531 Countryside Apache Junction AZ 560 Golden Sun Apache Junction AZ 329 Breezy Hill Pompano Beach FL 762 Highland Wood Pompano Beach FL 148 Date Palm RV Cathedral City CA 140 -------- TOTAL RESORT PROPERTY SITES 6,155 -------- COMMUNITIES OWNED IN JOINT VENTURES Trails West Tucson AZ 503 Plantation Calimesa CA 385 Manatee Bradenton FL 290 Home Hallandale FL 136 Villa del Sol Sarasota FL 207 Voyager RV Resort Tuscon AZ -- Preferred Interests in College Heights -- -------- TOTAL SITES OWNED IN JOINT VENTURES 1,521 -------- 8
The following table sets forth certain information relating to the Communities we owned as of December 31, 2002, categorized by our major markets. We define our core Community portfolio ("Core Portfolio") as Communities owned throughout both periods of comparison. Excluded from the Core Portfolio are any Communities acquired or sold during the period, any Resort Properties and any Communities owned through joint ventures which, together, are referred to as the "Non-Core" Properties. The following table excludes Resort Properties and any Communities owned through joint Ventures. NUMBER MONTHLY MONTHLY OF SITES OCCUPANCY OCCUPANCY BASE RENT BASE RENT LOCATION AS OF AS OF AS OF AS OF AS OF PROPERTY CITY, STATE 12/31/02 12/31/02 12/31/01 12/31/02 12/31/01 - --------------------------------- ------------------------ -------- --------- --------- --------- ---------- FLORIDA EAST COAST: Bulow Plantation Flagler Beach FL 276 97.5% (b) 99.4% (b) $322 $258 Carriage Cove Daytona Beach FL 418 95.7% 97.4% $426 $399 Coquina Crossing St Augustine FL 361 84.5% (b) 91.1% (b) $324 $317 Coral Cay at Vero Beach Margate FL 819 91.5% 93.4% $435 $428 Countryside North Vero Beach FL 646 96.6% (b) 95.7% (b) $324 $315 Heritage Village Vero Beach FL 436 96.1% 97.0% $354 $346 Holiday Village Vero Beach FL 128 72.7% 78.1% $307 $286 Holiday Village Ormond Beach FL (a) 301 87.4% (d) $313 (d) Indian Oaks Rockledge FL 211 98.1% (b) 96.2% (b) $260 $243 Lakewood Village Melbourne FL 349 92.8% 95.1% $387 $359 Lighthouse Pointe Port Orange FL 433 89.1% (b) 88.9% (b) $324 $308 Maralago Cay Lantana FL 602 94.5% 96.3% $437 $417 Pickwick Port Orange FL 432 98.6% 97.2% $335 $310 The Meadows Palm Beach Gardens FL 388 85.3% (b) 82.6% (b) $373 $331 CENTRAL: Grand Island Grand Island FL (a) 307 71.5% (b) 76.4% (b) $291 $282 Mid-Florida Lakes Leesburg FL 1,226 88.6% (b) 91.1% (b) $339 $325 Oak Bend Ocala FL 262 88.2% (b) 87.4% (b) $292 $250 Sherwood Forest Kissimmee FL 769 96.9% (b) 96.6% (b) $345 $334 Villas at Spanish Oaks Ocala FL 459 91.5% 93.9% $317 $301 GULF COAST (TAMPA/NAPLES): Bay Indies Venice FL 1,309 98.2% 98.9% $345 $323 Bay Lake Estates Nokomis FL 228 95.6% 96.1% $424 $370 Buccaneer N. Ft. Myers FL 971 98.5% 99.1% $348 $331 Country Place New Port Richey FL 515 99.4% (b) 97.9% (b) $272 $237 Down Yonder Largo FL 362 99.2% 99.4% $388 $375 East Bay Oaks Largo FL 328 96.0% 97.3% $391 $367 Eldorado Village Largo FL 227 94.3% 96.0% $391 $370 Glen Ellen Clearwater FL (a) 117 76.9% (d) $322 (d) Hacienda Village New Port Richey Fl (a) 519 95.0% (d) $333 (d) Harbor View New Port Richey FL (a) 471 98.9% (d) $228 (d) Hillcrest Clearwater FL 279 83.9% 84.2% $367 $345 Holiday Ranch Largo FL 150 92.7% 92.7% $353 $341 Lake Fairways N. Ft. Myers FL 896 99.2% 99.1% $376 $364 Lake Haven Dunedin FL 379 89.7% 92.9% $399 $382 Lakes at Countrywood Plant City FL (a) 423 94.8% (b) 96.5% (b) $256 $246 Meadows at Countrywood Plant City FL 737 99.1% 98.9% $299 $285 Oaks at Countrywood Plant City FL 168 70.8% (b) 67.9% (b) $256 $248 Pine Lakes N. Ft. Myers FL 584 99.3% 99.1% $458 $439 Silk Oak Clearwater FL (a) 180 93.3% (d) $358 (d) The Heritage N. Ft. Myers FL 455 87.3% (b) 83.5% (b) $319 $306 Windmill Manor Bradenton FL 292 94.9% 95.9% $370 $357 Windmill Village N. Ft. Myers FL 491 96.3% 98.6% $323 $310 Windmill Village North Sarasota FL 471 98.1% 98.5% $346 $332 Windmill Village South Sarasota FL 306 99.7% 99.3% $364 $332 ------ ---- ---- ---- ---- TOTAL FLORIDA MARKET 19,681 94.0% 98.7% $346 $307 ------ ---- ---- ---- ---- FLORIDA MARKET - CORE PORTFOLIO 17,363 94.4% 97.4% $363 $343 ------ ---- ---- ---- ---- 9
NUMBER MONTHLY MONTHLY OF SITES OCCUPANCY OCCUPANCY BASE RENT BASE RENT LOCATION AS OF AS OF AS OF AS OF AS OF PROPERTY CITY, STATE 12/31/02 12/31/02 12/31/01 12/31/02 12/31/01 - ------------------------------------ ------------------ ---------- ----------- ----------- --------- ---------- CALIFORNIA NORTHERN CALIFORNIA: California Hawaiian San Jose CA 418 97.6% 98.1% $675 $636 Colony Park Ceres CA 178 93.8% 86.0% $375 $353 Concord Cascade Pacheco CA 283 98.9% 98.9% $560 $544 Contempo Marin San Rafael CA 396 98.7% 98.7% $674 $644 Coralwood Modesto CA 194 99.0% 97.4% $438 $413 Four Seasons Fresno CA 242 75.6% 73.6% $267 $254 Laguna Lake San Luis Obispo CA 290 99.7% 99.7% $368 $344 Monte del Lago Castroville CA 310 97.7% (b) 97.8% (b) $560 $513 Quail Meadows Riverbank CA 146 100.0% 100.0% $390 $363 Royal Oaks Visalia CA 149 81.9% 81.9% $290 $273 DeAnza Santa Cruz Santa Cruz CA 198 99.0% 99.5% $558 $526 Sea Oaks Los Osos CA 125 97.6% 100.0% $418 $349 Sunshadow San Jose CA 121 100.0% 100.0% $651 $605 Westwinds (4 Properties) San Jose CA 723 99.2% 98.9% $719 $656 SOUTHERN CALIFORNIA: Date Palm Country Club Cathedral City CA 538 94.1% 95.9% $679 $640 Lamplighter Spring Valley CA 270 99.3% 98.1% $642 $565 Meadowbrook Santee CA 332 100.0% 99.1% $627 $603 Rancho Mesa El Cajon CA 158 99.4% 99.4% $567 $535 Rancho Valley El Cajon CA 140 100.0% 98.6% $627 $550 Royal Holiday Hemet CA 179 67.0% 64.2% $285 $277 Santiago Estates Sylmar CA 300 96.3% 96.0% $646 $617 ----- ---- ---- ---- ---- TOTAL CALIFORNIA MARKET 5,690 95.8% 95.4% $568 $531 ----- ---- ---- ---- ---- CALIFORNIA MARKET - CORE PORTFOLIO 5,690 95.8% 95.4% $568 $531 ----- ---- ---- ---- ---- ARIZONA Apollo Village Phoenix AZ 236 83.9% (b) 91.6% (b) $401 $371 The Highlands at Brentwood Mesa AZ 273 88.9% 93.8% $475 $456 Carefree Manor Phoenix AZ 128 92.2% 97.7% $353 $322 Casa del Sol #1 Peoria AZ 245 81.2% 86.6% $460 $422 Casa del Sol #2 Glendale AZ 239 86.6% 94.1% $477 $455 Casa del Sol #3 Glendale AZ 236 89.8% 94.1% $477 $439 Central Park Phoenix AZ 293 92.5% 95.2% $409 $386 Desert Skies Phoenix AZ 164 93.9% 97.6% $338 $317 Fairview Manor Tucson AZ 235 85.1% 91.1% $342 $326 Hacienda de Valencia Mesa AZ 364 79.4% 85.2% $395 $377 Palm Shadows Glendale AZ 294 87.1% 90.8% $372 $355 Sedona Shadows Sedona AZ 198 93.4% 91.4% $355 $327 Sunrise Heights Phoenix AZ 199 88.4% 90.5% $386 $358 The Mark Mesa AZ 410 74.9% 91.7% $392 $383 The Meadows Tempe AZ 391 85.2% 92.3% $455 $439 Whispering Palms Phoenix AZ 116 93.1% 94.8% $295 $282 ----- ---- ---- ---- ---- TOTAL ARIZONA MARKET 4,021 85.9% 91.9% $410 $385 ----- ---- ---- ---- ---- ARIZONA MARKET - CORE PORTFOLIO 4,021 85.9% 91.9% $410 $385 ----- ---- ---- ---- ---- 10
NUMBER MONTHLY MONTHLY OF SITES OCCUPANCY OCCUPANCY BASE RENT BASE RENT LOCATION AS OF AS OF AS OF AS OF AS OF PROPERTY CITY, STATE 12/31/02 12/31/02 12/31/01 12/31/02 12/31/01 - ----------------------------------- ---------------- ----------- ---------- ----------- ------------ -------------- COLORADO Bear Creek Sheridan CO 124 97.6% 97.6% $446 $409 Cimarron Broomfield CO 327 97.6% 98.2% $445 $417 Golden Terrace Golden CO 265 96.6% 98.6% $491 $464 Golden Terrace South Golden CO 160 95.0% 96.3% $487 $441 Golden Terrace West Golden CO 316 96.5% 98.1% $498 $454 Hillcrest Village Aurora CO 601 91.7% 95.5% $491 $445 Holiday Hills Denver CO 736 92.3% 95.4% $466 $437 Holiday Village Co. Springs CO 240 92.9% 96.7% $446 $427 Pueblo Grande Pueblo CO 252 96.4% 96.8% $296 $281 Woodland Hills Denver CO 434 93.8% 97.9% $439 $418 ----- ---- ---- ---- ---- TOTAL COLORADO MARKET 3,455 94.2% 96.8% $394 $424 ----- ---- ---- ---- ---- COLORADO MARKET - CORE PORTFOLIO 3,455 94.2% 96.8% $394 $424 ----- ---- ---- ---- ---- NORTHEAST Aspen Meadows Rehoboth DE 200 100.0% 99.5% $277 $262 Camelot Meadows Rehoboth DE 302 100.0% 99.9% $272 $265 Mariners Cove Millsboro DE 374 90.0% (b) 89.3% (b) $399 $381 McNicol Rehoboth DE 93 100.0% 98.9% $278 $258 Sweetbriar Rehoboth DE 146 95.9% 98.6% $228 $199 Waterford Bear DE 731 96.4% (b) 97.4% (b) $410 $398 Whispering Pines Lewes DE 392 95.2% 95.2% $274 $269 Pheasant Ridge Mt. Airy MD 101 98.0% 97.0% $468 $453 Brook Gardens Lackawanna NY 424 93.9% 96.5% $446 $435 Greenwood Village Manorville NY 507 99.3% 99.4% $406 $389 Green Acres Breinigsville PA 595 94.8% 96.1% $438 $420 Meadows of Chantilly Chantilly VA 500 94.8% 96.6% $544 $512 Independence Hill Morgantown WV 203 87.2% 88.2% $221 $214 ----- ---- ---- ---- ---- TOTAL NORTHEAST MARKET 4,568 95.6% 96.3% $387 $372 ----- ---- ---- ---- ---- NORTHEAST MARKET - CORE PORTFOLIO 4,568 95.6% 96.3% $387 $372 ----- ---- ---- ---- ---- 11
NUMBER MONTHLY MONTHLY OF SITES OCCUPANCY OCCUPANCY BASE RENT BASE RENT LOCATION AS OF AS OF AS OF AS OF AS OF PROPERTY CITY, STATE 12/31/02 12/31/02 12/31/01 12/31/02 12/31/01 - -------------------------------------------------- ----------------- -------- --------- ---------- ---------- --------- MIDWEST Five Seasons Cedar Rapids IA 390 76.4% (b) 79.0% (b) $264 $253 Holiday Village Sioux City IA 519 73.8% 80.5% $253 $248 Golf Vista Estates Monee IL 411 88.1% (b) 88.4% (b) $393 $387 Willow Lake Estates Elgin IL 617 94.2% 96.8% $660 $624 Forest Oaks Chesterton IN 227 76.2% 83.7% $333 $305 Oak Tree Village Portage IN 361 88.9% 90.0% $332 $302 Windsong Indianapolis IN 268 72.0% 84.0% $309 $292 Creekside Wyoming MI 165 93.3% 94.5% $382 $374 ----- ---- ---- ---- ---- TOTAL MIDWEST MARKET 2,958 83.3% 87.9% $399 $380 ----- ---- ---- ---- ---- MIDWEST MARKET - CORE PORTFOLIO 2,958 83.3% 87.9% $399 $380 ----- ---- ---- ---- ---- NEVADA, UTAH, NEW MEXICO Del Rey Albuquerque NM 407 76.7% 84.5% $341 $328 Bonanza Las Vegas NV 353 72.8% 75.9% $473 $465 Boulder Cascade Las Vegas NV 299 82.1% 86.9% $436 $417 Cabana Las Vegas NV 263 95.4% 97.3% $442 $432 Flamingo West Las Vegas NV 258 88.8% (b) 84.1% (b) $449 $430 Villa Borega Las Vegas NV 293 87.0% 91.1% $433 $421 All Seasons Salt Lake City UT 121 96.7% 98.3% $352 $328 Westwood Village Farr West UT 314 95.2% (b) 96.5% (b) $259 $237 ----- ---- ---- ---- ---- TOTAL NEVADA, UTAH, NEW MEXICO MARKET 2,308 85.2% 88.1% $398 $383 ----- ---- ---- ---- ---- NEVADA, UTAH, NEW MEXICO MARKET - CORE PORTFOLIO 2,308 85.2% 88.1% $398 $380 ----- ---- ---- ---- ---- NORTHWEST Casa Village Billings MT 491 88.0% 92.3% $294 $282 Falcon Wood Village Eugene OR 183 92.9% 97.8% $364 $363 Quail Hollow Fairview OR 137 93.4% 97.8% $500 $442 Shadowbrook Clackamas OR 156 96.8% 98.7% $494 $444 Kloshe Illahee Federal Way WA 258 99.6% 99.6% $513 $478 ------ ---- ---- ---- ---- TOTAL NORTHWEST MARKET 1,225 92.9% 96.1% $397 $374 ------ ---- ---- ---- ---- NORTHWEST MARKET - CORE PORTFOLIO 1,225 92.9% 96.1% $397 $374 ------ ---- ---- ---- ---- GRAND TOTAL ALL MARKETS 43,906 92.2% 93.0% $403 $385 ====== ==== ==== ==== ==== GRAND TOTAL ALL MARKETS - CORE PORTFOLIO 41,588 92.5% (c) 94.0% (c) $409 $387 ====== ==== ==== ==== ==== (a) Represents a Property that is not part of the Core Portfolio. (b) The process of filling Expansion Sites at these Properties is ongoing. A decrease in occupancy may reflect development of additional Expansion Sites. (c) Changes in total portfolio occupancy include the impact of acquisitions and expansion programs and are therefore not comparable. (d) Property acquired in 2002. See Management's Discussion and Analysis of Financial Condition and Results of Operations. 12
ITEM 3. LEGAL PROCEEDINGS DEANZA SANTA CRUZ MOBILE ESTATES The residents of DeAnza Santa Cruz Mobile Estates, a property located in Santa Cruz, California, brought several actions opposing fees and charges in connection with water service at the property. As a result of one action, the Company rebated approximately $36,000 to the residents. The DeAnza Santa Cruz Homeowners Association then proceeded to a jury trial alleging these "overcharges" entitled them to an award of punitive damages. In January 1999, a jury awarded the HOA $6.0 million in punitive damages. On December 21, 2001 the California Court of Appeal for the Sixth District reversed the $6.0 million punitive damage award, the related award of attorneys' fees, and, as a result, all post-judgment interest thereon, on the basis that punitive damages are not available as a remedy for a statutory violation of the California Mobile Home Residency Law ("MRL"). The decision of the appellate court left the HOA, the plaintiff in this matter, with the right to seek a new trial in which it must prove its entitlement to either the statutory penalty and attorneys' fees available under the MRL or punitive damages based on causes of action for fraud, misrepresentation or other tort. In order to resolve this matter, the Company accrued for and agreed to pay $201,000 to the HOA. This payment resolves the punitive damage claim. The HOA's attorney has made a motion asking for an award of attorneys' fees and costs in the amount of approximately $1.5 million as a result of this resolution of the litigation. The Company will vigorously oppose any award of attorneys' fees and costs, and has asked the court to rule that the Company is the prevailing party. In a separate matter, in December 2000 the HOA and certain individual residents of the Property filed a complaint in the Superior Court of California, County of Santa Cruz (No. CV 139825) against the Company, certain affiliates of the Company and certain employees of the Company (the "2000 Lawsuit"). The 2000 Lawsuit sought damages, including punitive damages, for intentional infliction of emotional distress, unfair business practices, and unlawful retaliation purportedly arising from allegedly retaliatory rent increases which were noticed by the Company to certain residents in September 2000. The Company believes that the residents who received rent increase notices with respect to rent increases above those permitted by the local rent control ordinance were not covered by the ordinance either because they did not comply with the provisions of the ordinance or because they are exempted by state law. On December 29, 2000, the Superior Court of California, County of Santa Cruz enjoined such rent increases. The Company entered into a settlement agreement with the plaintiffs in the 2000 Lawsuit which settlement was approved by the court on July 22, 2002. The Company believes the settlement agreement is of significant benefit to the Company. First, pursuant to the settlement agreement all past, present and future tenants of the Property agree to alternative dispute resolution procedures which provide that during the next 25 years future disputes will be resolved through arbitration before a retired judge rather than in court, and that in such future arbitration proceedings all claims to trial by jury and for punitive damages are waived. Second, the settlement agreement provides a process for determining the rent for 15 sites not subject to rent control, including in certain circumstances, back rent owing from certain dates in 2001. The settlement agreement generally gives tenants at these sites three (3) options with respect to their tenancies. Such tenants may (1) enter into a 34-year lease providing a rent based on rent control with future escalations based on the CPI, but with the Company retaining the right to charge market rents determined by the Company upon turnover; (2) enter into a ten (10) year lease with a monthly rent to be determined by binding arbitration and effective October 1, 2001; or (3) elect to sell such tenant's home to a third party and pay back rent owing to the Company (the amount of which will be determined by arbitration if not agreed to between the tenant and the Company) since January 1, 2001. In certain circumstances the Company will purchase the tenant's home based upon a mechanism provided in the settlement agreement. In exchange for the tenants' agreement to the alternative dispute resolution procedures, the process for resolving back rent owed by tenants not subject to rent control, and to dismiss the 2000 Lawsuit, the Company accrued for and agreed to pay $730,000. OTHER CALIFORNIA RENT CONTROL LITIGATION As part of the Company's effort to realize the value of its Properties subject to rent control, the Company has initiated lawsuits against several municipalities in California. The Company's goal is to achieve a level of regulatory fairness in California's rent control jurisdictions, and in particular those jurisdictions that prohibit increasing rents to market upon turnover. This regulatory feature, called vacancy control, allows tenants to sell their homes for a premium representing the value of the future discounted rent-controlled rents. In the Company's view, such regulation results in a transfer of the value of the Company's shareholders' land, which would otherwise be reflected in market rents, to tenants upon the sales of their homes in the form of an inflated purchase price that cannot be attributed to the value of the home being sold. As a result, in the Company's view, the Company loses the value of its asset and the selling tenant leaves the community with a windfall 13
premium. The Company has discovered through the litigation process that certain municipalities considered condemning the Company's communities at values well below the value of the underlying land. In the Company's view, a failure to articulate market rents for sites governed by restrictive rent control would put the Company at risk for condemnation or eminent domain proceedings based on artificially reduced rents. Such a physical taking, should it occur, could represent substantial lost value to shareholders. The Company is cognizant of the need for affordable housing in the jurisdictions, but asserts that restrictive rent regulation with vacancy control does not promote this purpose because the benefits of such regulation are fully capitalized into the prices of the homes sold. The Company estimates that the annual rent subsidy to tenants in these jurisdictions is approximately $15 million. In a more well-balanced regulatory environment, the Company would receive market rents that would eliminate the subsidy and homes would trade at or near their intrinsic value. The Company's efforts to achieve a balanced regulatory environment incentivize tenant groups to file lawsuits against the Company seeking large damage awards. The 2000 Lawsuit described above under DeAnza Santa Cruz Mobile Estates is one example. The homeowners association at Contempo Marin ("CMHOA"), a 396 site property in San Rafael, California, sued the Company in December 2000 over a prior settlement agreement on a capital pass-through after the Company sued the City of San Rafael in October 2000 alleging its rent control ordinance is unconstitutional. In the Contempo Marin case, the CMHOA prevailed on a motion for summary judgment on an issue that permits the Company to collect only $3.72 out of a pass-through amount of $7.50 that the Company believes had been agreed to by the CMHOA in a settlement agreement. The Company intends to vigorously defend the matter. The Company believes that such lawsuits will be a consequence of the Company's efforts to change rent control since tenant groups actively desire to preserve the premium value of their homes in addition to the discounted rents provided by rent control. The Company has determined that its efforts to rebalance the regulatory environment despite the risk of litigation from tenant groups are necessary not only because of the $15 million annual subsidy to tenants, but also because of the condemnation risk. ELLENBURG COMMUNITIES The Company and certain other parties entered into a settlement agreement (the "Settlement"), which was approved by the Los Angeles County Superior Court in April 2000. The Settlement resolved substantially all of the litigation and appeals involving the Ellenburg Properties, and transactions arising out of the settlement closed on May 22, 2000. Only the appeal of one entity remains, the outcome of which is not expected to materially affect the Company (see Note 5). In connection with the Ellenburg Acquisition, on September 8, 1999, Ellenburg Fund 20 ("Fund 20") filed a cross complaint in the Ellenburg dissolution proceeding against the Company and certain of its affiliates alleging causes of action for fraud and other claims in connection with the Ellenburg acquisition. The Company subsequently successfully had the cross complaint against the Company and its affiliates dismissed with prejudice by the California Superior Court. However, Fund 20 has appealed. Although this appeal was one not resolved by the Settlement, the California Court of Appeal dismissed Fund 20's substantive appeals on March 13, 2003 as moot. In October 2001, Fund 20 sued the Company and certain of its affiliates again, this time in Alameda County, California making substantially the same allegations. The Company obtained an injunction preventing the case from proceeding until the Fund 20 appeal is decided and other related proceedings in Arizona (from which the Company has already been dismissed with prejudice) are concluded. When the March 13, 2003 Court of Appeal dismissal becomes final in May 2003, the Company will seek to have the Alameda County action dismissed if Fund 20 will not voluntarily dismiss this action. The Company believes Fund 20's allegations are without merit and will vigorously defend itself. COUNTRYSIDE AT VERO BEACH The Company has received letters dated June 17, 2002 and August 26, 2002 from Indian River County ("County"), claiming that the Company currently owes sewer impact fees in the amount of approximately $518,000 with respect to the Property known as Countryside at Vero Beach, located in Vero Beach, Florida, purportedly under the terms of an agreement between the County and a prior owner of the Property. In response, the Company has advised the County that these fees are no longer due and owing as a result of a 1996 settlement agreement between the County and the prior owner of the Property, providing for the payment of $150,000 to the County to discharge any further obligation for the payment of impact or connection fees for sewer service at the Property. The Company paid this settlement amount (with interest) to the County in connection with the Company's acquisition of the Property. Accordingly, the Company believes that the County's claims are without merit. DELAWARE DECLARATORY JUDGMENT ACTION In April 2002, the Company entered into a Stipulation and Consent Order to Cease and Desist (the "Consent Order") with the State of Delaware (the "State"). The Consent Order resolved various issues raised by the State concerning the terms of a 14
new lease form used or proposed for use by the Company at certain of its Properties in Delaware. Among other provisions, the Consent Order contemplated that the Company would work with the State to develop and implement a new lease form for use in Delaware. The Consent Order expressly provided that nothing contained therein would preclude the Company from seeking declaratory relief from a court as to the legality or enforceability of any provisions which the Company might wish to incorporate in future leases. Throughout the summer of 2002, the Company's Delaware legal counsel engaged in dialogue with representatives of the State concerning various matters, including the lease provisions to which the State had objected but which the Company wished to incorporate in future leases. Through this process, it became apparent that the parties could not reach agreement as to the legality or enforceability of the proposed lease provisions, and that the Company would need to seek declaratory relief from a court in order to resolve the matter, as contemplated by the Consent Order. Accordingly, on August 29, 2002, the Company filed a Petition for Declaratory Judgment and Other Relief (as amended, the "Petition") in Sussex County, Delaware Superior Court (the "Court"). In response to the filing of the Petition, on October 1, 2002, the State filed its Answer to Petition for Declaratory and Other Relief, and Counterclaims for Civil Enforcement and Contempt (as amended, "Answer and Counterclaim") with the Court. In the Answer and Counterclaim, the State seeks, inter alia, restitution, statutory penalties, investigative costs and attorneys' fees under the Delaware Mobile Home Lots and Leases Act, the Consumer Fraud Act, the Uniform Deceptive Trade Practices Act and the Delaware Consumer Contracts law, and separately seeks a finding of contempt and related contempt penalties for alleged violations of the Consent Order. The Company filed a Motion to Dismiss Respondents' Counterclaims with the Court on October 29, 2002, and the State filed a Motion for Summary Judgment with the Court on November 15, 2002. These motions are in the briefing stage. On December 30, 2002, the Company filed a First Amended Petition for Declaratory Judgment and Other Relief with the Court, and on January 31, 2003, the State filed an Amended Answer and Counterclaim with the Court. The State filed a Motion to Dismiss with Prejudice Petitioner's First Amended Petition for Declaratory Judgment an Other Relief for Failure to Join and Indispensable Third Party with the Court on February 25, 2003. The Company believes that it has complied, and continues to comply, with the Consent Order, and that the filing of the Petition was expressly contemplated by the Consent Order. The Company believes that the State's allegations in the Answer and Counterclaim are without merit and will vigorously defend itself. WESTWINDS The Operating Partnership is the ground lessee ("Lessee") of certain property in San Jose, California under ground leases ("Leases") from the Nicholson Family Trust ("Lessor"). On February 13, 2001, Lessor filed a petition for arbitration of disputes over whether certain items constitute "gross revenue" under the Leases, in which petition Lessor seeks damages and termination of the Leases. Lessee responded on March 12, 2001 disputing Lessor's contentions. Lessor claims that "gross revenue" for the purpose of calculating percentage rent owing to Lessor under the Leases includes certain amounts Lessee has recouped from tenants of the Property (who are protected by rent control) related to ground rent already paid to Lessor. Lessee has successfully been able to pass-through to tenants at the Property increases in ground rent under the Leases. Lessee contends that this pass-through results in reimbursement of lease expense, not "gross revenue." Lessor also contends that the "net income" of RSI from the Property should be included in the gross revenue calculation. Lessee disputes this for many reasons, including, but not limited to, the fact that RSI is not a lessee under the Leases, the sales activity is not conducted by Lessee, and RSI is a separate company from Lessee. Lessor's motion for summary judgment on the pass-through issue was denied by an arbitration panel on November 2, 2001. Lessor and Lessee agreed to mediate the dispute and the matter was settled and the lease was amended in early 2002. Pursuant to the settlement and amendment, Lessee agreed to pay $338,000 related to prior period rent which was expensed in the first quarter of 2002 and to prepay rent of $632,000 based on a recalculation of rent in the amended lease. The rent prepayment and related legal costs will be amortized into ground rent expense over the remaining life of the lease. OTHER The Company is involved in various other legal proceedings arising in the ordinary course of business. Management believes that all proceedings herein described or referred to, taken together, are not expected to have a material adverse impact on the Company. 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders of the Company, for which proxies were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934, was held on May 8, 2002. At the Annual Meeting, Samuel Zell, David A. Helfand and Michael A. Torres were each elected to serve as directors of the Company until the 2005 Annual Meeting of Stockholders. Votes Cast ----------------------------------- For Withheld ---------------- ------------- Samuel Zell 17,515,839 60,873 David A. Helfand 17,515,876 60,836 Michael A. Torres 17,523,492 53,220 There were 4,156,070 broker non-votes. 16
PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following table sets forth, for the period indicated, the high and low sales prices for the Company's common stock as reported by The New York Stock Exchange under the trading symbol MHC. Distributions Return of Capital Close High Low Made GAAP Basis (a) -------- -------- -------- ------------- ----------------- 2002 1st Quarter $33.0000 $33.6300 $30.6500 $.4750 $.15 2nd Quarter 35.1000 35.6600 32.5000 .4750 .18 3rd Quarter 31.8800 35.1400 30.0500 .4750 .17 4th Quarter 29.6300 31.9200 27.5000 .4750 .00 2001 1st Quarter $27.0000 $29.0000 $25.5400 $.4450 $.00 2nd Quarter 28.1000 28.3500 26.3100 .4450 .16 3rd Quarter 30.4200 30.4700 27.9000 .4450 .16 4th Quarter 31.2100 31.6700 29.8000 .4450 .11 (a) Represents distributions per share in excess of net income per share-basic on a GAAP basis and is not the same as return of capital on a tax basis. The number of beneficial holders of the Company's common stock at December 31, 2002 was approximately 5,065. 17
ITEM 6. SELECTED FINANCIAL AND OPERATING INFORMATION The following table sets forth selected financial and operating information on a historical basis for the Company. The following information should be read in conjunction with all of the financial statements and notes thereto included elsewhere in this Form 10-K. The historical operating data for the years ended December 31, 2002, 2001, 2000, 1999 and 1998 have been derived from the historical Financial Statements of the Company audited by Ernst & Young LLP, independent auditors. MANUFACTURED HOME COMMUNITIES, INC. CONSOLIDATED HISTORICAL FINANCIAL INFORMATION (Amounts in thousands, except for per share and property data) (1) YEARS ENDED DECEMBER 31, ------------------------------------------------------------- 2002 2001 2000 1999 1998 --------- --------- --------- --------- --------- PROPERTY OPERATIONS: Community base rental income ........................... $ 197,795 $ 194,103 $ 188,051 $ 180,348 $ 164,086 Resort base rental income .............................. 9,147 5,748 7,414 9,526 7,153 Utility and other income ............................... 19,713 20,403 19,378 19,569 17,617 --------- --------- --------- --------- --------- Property operating revenues ......................... 226,655 220,254 214,843 209,443 188,856 Property operating and maintenance ..................... 63,554 61,481 58,661 57,595 52,481 Real estate taxes ...................................... 18,212 17,296 16,766 16,309 14,346 Property management .................................... 9,292 8,984 8,690 8,337 7,108 --------- --------- --------- --------- --------- Property operating expenses ......................... 91,058 87,761 84,117 82,241 73,935 --------- --------- --------- --------- --------- Income from property operations .................. 135,597 132,493 130,726 127,202 114,921 HOME SALES OPERATIONS: Gross revenues from inventory home sales ............... 33,543 -- -- -- -- Cost of inventory home sales ........................... (27,192) -- -- -- -- --------- --------- --------- --------- --------- Gross profit from inventory home sales ........... 6,351 -- -- -- -- Brokered resale revenues, net .......................... 1,592 -- -- -- -- Home selling expenses .................................. (7,671) -- -- -- -- Ancillary services revenues, net ....................... 522 -- -- -- -- --------- --------- --------- --------- --------- Income from home sales operations ................ 794 -- -- -- -- OTHER INCOME AND EXPENSES: Interest income ........................................ 967 639 1,009 1,669 1,070 Equity in income of affiliates ......................... -- 1,811 2,408 2,065 3,048 Other corporate income ................................. 1,277 1,353 670 280 355 General and administrative ............................. (8,192) (6,687) (6,423) (6,092) (5,411) Interest and related amortization ...................... (50,729) (51,305) (53,280) (53,775) (49,693) Depreciation on corporate assets ....................... (1,277) (1,243) (1,139) (1,005) (995) Depreciation on real estate assets and other costs ..... (35,911) (34,728) (34,312) (34,393) (28,336) --------- --------- --------- --------- --------- Total other income and expenses ..................... (93,865) (90,160) (91,067) (91,251) (79,962) --------- --------- --------- --------- --------- Income from operations ................................. 42,526 42,333 39,659 35,951 34,959 Net income from discontinued operations ................ 1,083 1,043 989 884 704 Gain on sale of Properties and other ................... 13,014 8,168 12,053 -- -- --------- --------- --------- --------- --------- Income before allocation to Minority Interests ...... 56,623 51,544 52,701 36,835 35,663 (Income) allocated to Common OP Units .................. (8,926) (8,209) (8,463) (6,219) (6,733) (Income) allocated to Perpetual Preferred OP Units ..... (11,252) (11,252) (11,252) (2,844) -- --------- --------- --------- --------- --------- Net income before extraordinary loss on the early extinguishment of debt .............................. 36,445 32,083 32,986 27,772 28,930 Extraordinary loss on the extinguishment of debt (net of $264 allocated to minority interests) .............. -- -- (1,041) -- -- --------- --------- --------- --------- --------- NET INCOME ....................................... $ 36,445 $ 32,083 $ 31,945 $ 27,772 $ 28,930 ========= ========= ========= ========= ========= Income from operations per Common Share - basic .......... $ 1.57 $ 1.60 $ 1.47 $ 1.16 $ 1.11 ========= ========= ========= ========= ========= Income from operations per Common Share - diluted ........ $ 1.54 $ 1.57 $ 1.45 $ 1.15 $ 1.09 ========= ========= ========= ========= ========= Net income per Common Share before extraordinary item - basic ............................ $ 1.69 $ 1.53 $ 1.54 $ 1.10 $ 1.13 ========= ========= ========= ========= ========= Net income per Common Share before extraordinary item - diluted .......................... $ 1.64 $ 1.49 $ 1.51 $ 1.09 $ 1.12 ========= ========= ========= ========= ========= Net income per Common Share - basic ...................... $ 1.69 $ 1.53 $ 1.49 $ 1.10 $ 1.13 ========= ========= ========= ========= ========= Net income per Common Share - diluted .................... $ 1.64 $ 1.49 $ 1.46 $ 1.09 $ 1.12 ========= ========= ========= ========= ========= Dividend declared per Common Share ....................... $ 1.90 $ 1.78 $ 1.66 $ 1.55 $ 1.45 ========= ========= ========= ========= ========= Weighted average Common Shares outstanding - basic ....... 21,617 21,036 21,469 25,224 25,626 ========= ========= ========= ========= ========= Weighted average Common OP Units outstanding ............. 5,403 5,466 5,592 5,704 5,955 ========= ========= ========= ========= ========= Weighted average Common Shares outstanding - diluted ..... 27,632 27,010 27,408 31,252 31,962 ========= ========= ========= ========= ========= 18
MANUFACTURED HOME COMMUNITIES, INC. CONSOLIDATED HISTORICAL FINANCIAL INFORMATION (continued) (Amounts in thousands, except for per share and property data) BALANCE SHEET DATA: (1) AS OF DECEMBER 31, ----------------------------------------------------------------------- 2002 2001 2000 1999 1998 ----------- ----------- ----------- ----------- ----------- Real estate, before accumulated depreciation (2) .... $ 1,296,007 $ 1,238,138 $ 1,218,176 $ 1,264,343 $ 1,237,431 Total assets ........................................ 1,162,850 1,101,805 1,104,304 1,160,338 1,176,841 Total mortgages and loans ........................... 760,233 708,857 719,684 725,264 750,849 Minority interests .................................. 168,501 171,147 171,271 179,397 70,468 Stockholders' equity ................................ 177,619 175,150 168,095 211,401 310,441 OTHER DATA: Funds from operations (3) ........................... $ 68,393 $ 66,957 $ 63,807 $ 68,477 $ 64,089 Net cash flow: Operating activities ............................. $ 80,176 $ 80,708 $ 68,001 $ 72,580 $ 71,977 Investing activities ............................. $ (72,973) $ (23,067) $ 23,102 $ (37,868) $ (262,762) Financing activities ............................. $ (1,287) $ (59,134) $ (94,932) $ (41,693) $ 203,533 Total Properties (at end of period) (4) ............. 142 149 154 157 154 Total sites (at end of period) ...................... 51,582 50,663 51,304 53,846 53,009 Total sites (weighted average for the year) (5) ..... 42,962 46,243 46,964 46,914 43,932 (1) See the Consolidated Financial Statements of the Company included elsewhere herein. Certain 2001, 2000, 1999, and 1998 amounts have been reclassified to conform to the 2002 financial presentation. Such reclassifications have no effect on the operations or equity as originally presented. (2) We believe that the book value of the Properties, which reflects the historical costs of such real estate assets less accumulated depreciation, is less than the current market value of the Properties. (3) We generally consider Funds From Operations ("FFO") to be an appropriate measure of the non-GAAP performance of an equity Real Estate Investment Trust ("REIT"). FFO was redefined by the National Association of Real Estate Investment Trusts ("NAREIT") in April 2002, as net income (computed in accordance with generally accepted accounting principles ["GAAP"]), before allocation to minority interests, excluding gains (or losses) from sales of property, plus real estate depreciation and after adjustments for unconsolidated partnerships and joint ventures. For purposes of presenting FFO, the revised definition of FFO has been given retroactive treatment. We believe that FFO is helpful to investors as a measure of the performance of an equity REIT because, along with cash flows from operating activities, financing activities and investing activities, it provides investors an understanding of our ability to incur and service debt and to make capital expenditures. We compute FFO in accordance with the NAREIT definition which may differ from the methodology for calculating FFO utilized by other equity REITs and, accordingly, may not be comparable to such other REITs' computations. FFO in and of itself does not represent cash generated from operating activities in accordance with GAAP and therefore should not be considered an alternative to net income as an indication of our performance or to net cash flows from operating activities as determined by GAAP as a measure of liquidity and is not necessarily indicative of cash available to fund cash needs. (4) During the year ended December 31, 1998, 41 Properties were acquired; net operating income attributable to such Properties during 1998 was approximately $7.6 million, which included approximately $3.9 million of depreciation and amortization expense. During the year ended December 31, 1999, three Properties were acquired; net operating income attributable to such Properties during 1999 was approximately $87,000, which included approximately $104,000 of depreciation expense. During the year ended December 31, 2000, three Properties and a water and wastewater treatment company were sold; net operating income attributable to such Properties during 2000 was approximately $1.6 million, which included approximately $623,000 of depreciation expense. During the year ended December 31, 2001, three Properties were acquired, including one through the termination of a lease; net operating income attributable to such Properties during 2001 was approximately $1.3 million, which included approximately $396,000 of depreciation expense. Also during the year ended December 31, 2001, eight Properties were sold; net operating income attributable to such Properties during 2001 was $1.0 million, which included approximately $235,000 of depreciation expense. During the year ended December 31, 2002, eleven Properties were acquired; net operating income attributable to such Properties during 2002 was approximately $2.0 million, which included approximately $809,000 of depreciation expense. Also during the year ended December 31, 2002, eighteen Properties was sold; net operating income attributable to such Properties during 2002 was $5.4 million, which included approximately $1.2 million of depreciation expense. (5) Excludes Resort sites and sites in Properties owned through unconsolidated joint ventures. 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with "Selected Financial Data" and the historical Consolidated Financial Statements and Notes thereto appearing elsewhere in this Form 10-K. The following discussion may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which reflect management's current views with respect to future events and financial performance. Such forward-looking statements are subject to certain risks and uncertainties, including, but not limited to, the effects of future events on the Company's financial performance; the adverse impact of external factors such as inflation and consumer confidence; and the risks associated with real estate ownership. PROPERTY ACQUISITIONS, JOINT VENTURES AND DISPOSITIONS The following chart lists the Properties acquired and sold since January 1, 2000: PROPERTY TRANSACTION DATE SITES -------- ---------------- ----- TOTAL SITES AS OF JANUARY 1, 2000 ................................... 53,846 ACQUISITIONS: Grand Island (f.k.a. Golden Lakes) ............................. January 3, 2001 307 Lakes at Countrywood (f.k.a. Chain O' Lakes).................... January 3, 2001 423 Bulow Resort RV ................................................ July 1, 2001 352 Mt. Hood ....................................................... March 12, 2002 450 Harbor View Village ............................................ July 10, 2002 471 Countryside .................................................... July 31, 2002 560 Golden Sun ..................................................... July 31, 2002 329 Breezy Hill .................................................... July 31, 2002 762 Highland Woods ................................................. August 14, 2002 148 Holiday Village ................................................ July 31, 2002 301 Tropic Winds ................................................... August 7, 2002 531 Silk Oak Lodge ................................................. October 1, 2002 180 Hacienda Village ............................................... December 18, 2002 519 Glen Ellen ..................................................... December 31, 2002 117 EXPANSION SITE DEVELOPMENT AND OTHER: Sites added in 2000 ............................................ 108 Sites added in 2001 ............................................ 143 Sites added in 2002 ............................................ 90 DISPOSITIONS: FFEC-Six (water and wastewater service company) ................ February 29, 2000 -- Mesa Regal RV Resort ........................................... May 22, 2000 (2,005) Naples Estates ................................................. May 22, 2000 (484) Mon Dak ........................................................ May 22, 2000 (161) Dellwood Estates ............................................... February 13, 2001 (136) Briarwood ...................................................... February 13, 2001 (166) Bonner Springs ................................................. February 13, 2001 (211) Carriage Park .................................................. February 13, 2001 (143) North Star ..................................................... February 13, 2001 (219) Quivira Hills .................................................. February 13, 2001 (142) Rockwood ....................................................... February 13, 2001 (264) Candlelight .................................................... October 5, 2001 (585) College Heights (17 Properties) ............................... September 1, 2002 (3,220) Camelot Acres .................................................. November 13, 2002 (319) ------- TOTAL SITES AS OF DECEMBER 31, 2002 ................................. 51,582 ======= 20
TRENDS Occupancy in our Properties as well as our ability to increase rental rates directly affect revenues. In 2002, occupancy in our Core Portfolio decreased 1.3%. Also during 2002, average monthly base rental rates for the Core Portfolio increased approximately 5.3%. We project continued growth during 2003 in our Core Portfolio performance. Core Portfolio base rental-rate growth is expected to be approximately 4 percent. Assuming current economic conditions continue to impact occupancies, overall revenue growth will be approximately 2.5 to 3 percent. Core Portfolio operating expenses are expected to grow in excess of CPI due to continued increases in insurance, real estate taxes and utility expenses. These projections would result in growth of approximately 2 percent in Core Portfolio income from operations (also referred to as net operating income or "NOI"). CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures. We believe that the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. We periodically evaluate our long-lived assets, including our investments in real estate, for impairment indicators. Our judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions and legal factors. Future events could occur which would cause us to conclude that impairment indicators exist and an impairment loss is warranted. The valuation of financial instruments under Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" ("SFAS No. 107") and Statement No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities" requires us to make estimates and judgments that affect the fair value of the instruments. Where possible, we base the fair values of our financial instruments, including our derivative instruments, on listed market prices and third party quotes. Where these are not available, we base our estimates on other factors relevant to the financial instrument. Real estate is recorded at cost less accumulated depreciation. Depreciation is computed on the straight-line basis over the estimated useful lives of the assets. We use a 30-year estimated life for buildings acquired and structural and land improvements, a ten-to-fifteen-year estimated life for building upgrades and a three-to-seven-year estimated life for furniture, fixtures and equipment. Expenditures for ordinary maintenance and repairs are expensed to operations as incurred and significant renovations and improvements that improve the asset and extend the useful life of the asset are capitalized over their estimated useful life. The determination of useful lives, salvage value, and depreciation method used are in conformity with GAAP. However, the useful lives, salvage value, and customary depreciation method used for land improvements and other significant assets may significantly and materially overstate the depreciation of the underlying assets and therefore understate the Net Income of the Company. In addition, the Financial Accounting Standards Board ("FASB") is currently reviewing the methods of depreciation and cost capitalization for all industries and in June 2001 issued FASB Exposure Draft, "Accounting in Interim and Annual Financial Statements for Certain Costs and Activities Related to Property, Plant and Equipment", the implementation of which, if issued, could also have a material effect on the Company's results of operations. Certain costs, primarily legal costs, relative to our efforts to effectively change the use and operations of several Properties subject to rent control (see Note 17) are currently classified in other assets. These costs, to the extent these efforts are successful, are capitalized to the extent of the established value of the revised project and included in the net investment in real estate for the appropriate Properties (see Note 5). To the extent these efforts are not successful, these costs will be expensed. In addition, we capitalize certain costs, primarily legal costs, related to entering into lease agreements which govern the term under which we may enter into leases with individual tenants and which are expensed over the term of the lease agreement. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. The Interpretation requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The consolidation requirements of Interpretation 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. The Company will adopt FIN 46 in the third quarter of 2003. We have not yet determined the effect the adoption of the Interpretation will have on the Company. 21
We have chosen to account for our stock compensation in accordance with APB No. 25, "Accounting for Stock Issued to Employees", based upon the intrinsic value method, which results in no compensation expense for options issued with an exercise price equal to or exceeding the market value of the Common Shares on the date of grant. We will elect to account for our stock compensation in accordance with SFAS No. 123 and its amendment (SFAS No. 148), "Accounting for Stock Based Compensation", effective in the first quarter of 2003, which will result in compensation expense being recorded based on the fair value of the stock option compensation issued. We have not yet determined the effect the statement will have on the Company. 22
RESULTS OF OPERATIONS COMPARISON OF YEAR ENDED DECEMBER 31, 2002 TO YEAR ENDED DECEMBER 31, 2001 Since December 31, 2000, the gross investment in real estate increased from $1,218 million to $1,296 million as of December 31, 2002, due primarily to the aforementioned acquisitions and dispositions of Properties during the period. The total number of sites owned or controlled increased from 51,304 as of December 31, 2000 to 51,582 as of December 31, 2002. The following table summarizes certain financial and statistical data for the Property Operations for the Core Portfolio and the Total Portfolio for the years ended December 31, 2002 and 2001. CORE PORTFOLIO TOTAL PORTFOLIO -------------------------------------------- -------------------------------------------- INCREASE / INCREASE / (dollars in thousands) 2002 2001 (DECREASE) % CHANGE 2002 2001 (DECREASE) % CHANGE -------- -------- ---------- -------- -------- -------- ---------- -------- Community base rental income ...... $186,889 $179,579 $ 7,310 4.1% $197,795 $194,103 $ 3,692 1.9% Resort base rental income ......... 494 439 55 12.5% 9,147 5,748 3,399 59.1% Utility and other income .......... 18,244 18,786 (542) (2.9%) 19,713 20,403 (690) (3.4%) -------- -------- ---------- -------- -------- -------- ---------- -------- Property operating revenues .. 205,627 198,804 6,823 3.4% 226,655 220,254 6,401 2.9% Property operating and Maintenance .................. 54,240 53,024 1,216 2.3% 63,554 61,481 2,073 3.4% Real estate taxes ................. 16,443 15,271 1,172 7.7% 18,212 17,296 916 5.3% Property management ............... 8,430 8,120 310 3.8% 9,292 8,984 308 3.4% -------- -------- ---------- -------- -------- -------- ---------- -------- Property operating expenses .. 79,113 76,415 2,698 3.5% 91,058 87,761 3,297 3.8% -------- -------- ---------- -------- -------- -------- ---------- -------- Income from property operations ... $126,514 $122,389 $ 4,125 3.4% $135,597 $132,493 $ 3,104 2.3% ======== ======== ========== ======== ======== ======== ========== ======== Site and Occupancy Information (1): Average total sites ............... 41,489 41,428 61 0.1% 44,552 46,243 (1,691) (3.7%) Average occupied sites ............ 38,642 39,108 (466) (1.2%) 41,435 43,576 (2,141) (4.9%) Occupancy % ....................... 93.1% 94.4% (1.3%) (1.3%) 93.0% 94.2% (1.2%) (1.2%) Monthly base rent per site ........ $ 403.04 $ 382.65 $ 20.39 5.3% $ 397.80 $ 371.20 $ 26.61 7.1% Total sites As of December 31, ........... 41,588 41,472 116 0.3% 43,906 45,743 (1,837) (4.0%) Total occupied sites As of December 31, ........... 38,399 38,991 (592) (1.5%) 40,410 42,887 (2,477) (5.8%) (1) Site and occupancy information excludes Resort sites and Properties owned through unconsolidated joint ventures as well as the sites of Properties sold during 2002. Property Operating Revenues The 4.1% increase in Community base rental income for the Core Portfolio reflects a 5.3% increase in monthly base rent per site coupled with a 1.2% decrease in average occupied sites. The decrease in utility and other income for the Core Portfolio is due primarily to decreases in utility income, which resulted from lower expenses for these items. Property Operating Expenses The increase in property operating and maintenance expense for the Core Portfolio is due primarily to increases in property payroll, insurance and other expenses, repair and maintenance and administrative expenses, partially offset by decreased utility expense. The increase in Core Portfolio real estate taxes is generally due to higher property assessments on certain Properties. Property management expense for the Core Portfolio, which reflects costs of managing the 23
Results of Operations (continued) Properties and is estimated based on a percentage of Property operating revenues, increased by 3.8% due to increases in payroll costs and office expenses. Home Sales Operations The following table summarizes certain financial and statistical data for the Home Sales Operations for the years ended December 31, 2002 and 2001. HOME SALES OPERATIONS ------------------------------------------------- INCREASE / (dollars in thousands) 2002 2001 (DECREASE) % CHANGE ---------- ---------- ---------- ---------- (Pro forma) Gross revenues from new home sales $ 30,618 $ 32,608 (1,990) (6.1%) Cost of new home sales ............ (24,689) (25,925) 1,236 4.8% ---------- ---------- ---------- ---------- Gross profit from new home sales .. 5,929 6,683 (754) (11.3%) Gross revenues from used home sales 2,925 3,631 (706) (19.4%) Cost of used home sales ........... (2,503) (2,561) 58 2.3% ---------- ---------- ---------- ---------- Gross profit from used home sales . 422 1,070 (648) (60.6%) Brokered resale revenues, net ..... 1,592 1,723 (131) (7.6%) Home selling expenses ............. (7,671) (8,240) 569 6.9% Ancillary services revenues, net .. 522 1,092 (570) (52.2%) ---------- ---------- ---------- ---------- Income from home sales operations . $ 794 $ 2,328 (1,534) (65.9%) ========== ========== ========== ========== HOME SALES VOLUMES: New home sales .................. 420 485 (65) (13.4%) Used home sales ................. 184 250 (66) (26.4%) Brokered home resales ........... 986 1,114 (128) (11.5%) Prior to January 1, 2002, the results of operations of RSI were accounted for using the equity method and reported on a single line item called Equity in Income of Affiliates. As a result of the acquisition of RSI (see Note 7), the Company owns and controls RSI and consolidates the financial results of RSI with those of the Company. The pro forma presentation of detailed 2001 amounts is for comparison purposes and has no effect on previously reported net income. For the year ended December 31, 2001, equity in income of affiliates was approximately $1.8 million and included the $2.3 million of income from home sales operations presented above as well as $539,000 of interest income, $15,000 of corporate expenses and $1.0 million of interest expense. New home sales gross profit reflects a 13.4% decrease in sales volume coupled with a 1.1% increase in the gross margin. The average selling price of new homes increased $6,000 or 8.7% compared to 2001. Used home gross profit reflects a decrease in both volume and gross margin on used home sales. Brokered resale revenues reflects decreased resale volumes. The 6.9% decrease in home selling expenses primarily reflects reductions in payroll and advertising expenses. Other Income and Expenses The increase in interest income reflects a decrease in notes receivable offset by an increase in chattel notes receivable acquired through the acquisition of RSI. The decrease in other corporate income primarily reflects decreased income from unconsolidated joint ventures. The increase in general and administrative expense is due to increases in costs related to operating a public company, increased payroll costs and increased consulting and legal costs. Interest and related amortization decreased due to lower interest rates during the period. The weighted average outstanding debt balances for the years ended December 31, 2002 and 2001 were $731.8 million and $713.2 million, respectively. The effective interest rate was 6.8% and 7.0% per annum for the years ended December 31, 2002 and 2001, respectively. 24
RESULTS OF OPERATIONS (CONTINUED) COMPARISON OF YEAR ENDED DECEMBER 31, 2001 TO YEAR ENDED DECEMBER 31, 2000 Since December 31, 1999, the gross investment in real estate decreased from $1,264 million to $1,238 million as of December 31, 2001, due primarily to the aforementioned acquisitions and dispositions of Properties during the period. The total number of sites owned or controlled decreased from 53,846 as of December 31, 1999 to 50,663 as of December 31, 2001. The following table summarizes certain financial and statistical data for the Core Portfolio and the Total Portfolio for the years ended December 31, 2001 and 2000. CORE PORTFOLIO TOTAL PORTFOLIO -------------------------------------------- -------------------------------------------- INCREASE / INCREASE / (dollars in thousands) 2001 2000 (DECREASE) % CHANGE 2001 2000 (DECREASE) % CHANGE -------- -------- ---------- -------- -------- -------- ---------- -------- Community base rental income (1) .. $192,160 $183,615 $ 8,545 4.7% $195,644 $189,064 $ 6,580 3.5% Resort base rental income ......... 439 345 94 27.2% 5,748 7,415 (1,667) (22.5%) Utility and other income .......... 19,783 18,319 1,464 8.0% 22,014 20,782 1,232 5.9% -------- -------- ---------- -------- -------- -------- ---------- -------- Property operating revenues . 212,382 202,279 10,103 5.0% 223,406 217,261 6,145 2.8% Property operating and maintenance .................. 57,787 54,150 3,637 6.7% 62,008 59,199 2,809 4.7% Real estate taxes ................. 16,773 16,321 452 2.8% 17,420 16,888 532 3.2% Property management ............... 8,594 8,121 473 5.8% 8,984 8,690 294 3.4% -------- -------- ---------- -------- -------- -------- ---------- -------- Property operating expenses .. 83,154 78,592 4,562 5.8% 88,412 84,777 3,635 4.3% -------- -------- ---------- -------- -------- -------- ---------- -------- Income from property operations ... 129,228 123,687 5,541 4.5% 134,994 132,484 2,510 1.9% ======== ======== ========== ======== ======== ======== ========== ======== Site and Occupancy Information (2): Average total sites ............... 44,966 44,828 138 0.3% 46,243 46,964 (721) (1.5%) Average occupied sites ............ 42,384 42,320 64 0.2% 43,576 44,325 (749) (1.7%) Occupancy % ....................... 94.3% 94.4% (0.1%) (0.1%) 94.2% 94.4% (0.2%) (0.2%) Monthly base rent per site ........ $ 377.82 $ 361.47 $ 16.35 4.5% $ 374.15 $ 355.45 $ 18.70 5.3% Total sites as of December 31, ........... 45,011 44,868 143 0.3% 45,743 46,734 (991) (2.1%) Total occupied sites as of December 31, ........... 42,243 42,529 (286) (0.7%) 42,887 44,270 (1,383) (3.1%) (1) During 2001, at certain Properties the amounts charged to residents for utilities were separated ("Unbundled") from the resident's base rent charges and recorded as utility income. For comparison purposes, a reclassification was made to base rental income for 2000 on this table. This reclassification is also reflected in the monthly base rent per site amounts for 2000. (2) Site and occupancy information excludes Properties owned through unconsolidated joint ventures and Resort Properties. Property Operating Revenues The 4.7% increase in base rental income for the Core Portfolio reflects a 4.5% increase in monthly base rent per site coupled with a 0.2% increase in average occupied sites. The increase in utility and other income for the Core Portfolio is due primarily to increases in pass through items such as utilities and real estate taxes - which resulted from higher expenses for these items. For the Total Portfolio, changes in base rental income and utility and other income generally reflect those of the Core Portfolio and the effect of acquisition and disposition of the Non-Core Properties. 25
RESULTS OF OPERATIONS (CONTINUED) Property Operating Expenses The increase in property operating and maintenance expense for the Core Portfolio is due primarily to increases in utility expenses passed through and included in utility income. Expenses for the Core Portfolio also reflect increases in payroll and property insurance expenses. Core Portfolio real estate taxes increased 2.8% generally due to higher assessed values on certain Properties. The increase in Total Portfolio property operating and maintenance expense and real estate taxes is also impacted by acquisition and disposition of Non-Core Properties. Property management expense allocated to the Core Portfolio, which reflects costs of managing the Properties and is estimated based on a percentage of Property revenues, increased 5.8%. Other Income and Expenses Equity in income of affiliates decreased 24.8%, reflecting lower sales volumes. Combined home sales revenue decreased approximately $4.0 million, of which $3.3 million is attributable to a decline in new home inventory sales volume. Sales volumes for new home inventory, used home inventory and brokered home sales were 485, 250 and 1,114, respectively, for the year ended December 31, 2001, and 535, 290 and 1,271, respectively, for the year ended December 31, 2000. The decrease in interest income is primarily due to the repayment of certain notes receivable, fewer short-term investments and lower interest rates. Short-term investments had average balances for the years ended December 31, 2001 and 2000 of approximately $1.9 million and $1.5 million, respectively, which earned interest income at an effective rate of 3.8% and 6.0% per annum, respectively. General and administrative expenses ("G&A") increased 4.1% due to increased public company costs and related expenses and promotional costs. G&A for 2001 includes a charge for additional amortization of deferred compensation offset by a reversal of legal expenses previously accrued related to the Ellenburg settlement. Interest and related amortization decreased due to lower interest rates during the period. The weighted average outstanding debt balances for the years ended December 31, 2001 and 2000 were $713.2 million and $707.5 million, respectively. The effective interest rate was 7.0% and 7.4% per annum for the years ended December 31, 2001 and 2000, respectively. Depreciation on corporate assets increased due to fixed asset additions related to information and communication systems. Depreciation on real estate assets and other costs increased due primarily to the acquisition and disposition of Non-Core Properties. 26
LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY As of December 31, 2002, we had $7.3 million in cash and cash equivalents and $65.3 million available on our Line of Credit. We expect to meet our short-term liquidity requirements, including distributions, generally through our working capital, net cash provided by operating activities and availability under the existing Line of Credit. We expect to meet certain long-term liquidity requirements such as scheduled debt maturities, property acquisitions and capital improvements by long-term collateralized and uncollateralized borrowings including borrowings under our existing Line of Credit and the issuance of debt securities or additional equity securities in the Company, in addition to working capital. INFLATION Substantially all of the leases at the Properties allow for monthly or annual rent increases which provide us with the opportunity to achieve increases, where justified by the market, as each lease matures. Such types of leases generally minimize our risks to inflation. FUNDS FROM OPERATIONS FFO, a non-GAAP financial performance measure, was redefined by NAREIT in April 2002, as net income (computed in accordance with GAAP), before allocation to minority interests, excluding gains (or losses) from sales of property, plus real estate depreciation and after adjustments for unconsolidated partnerships and joint ventures. The Company computes FFO in accordance with the NAREIT definition, which may differ from the methodology for calculating FFO utilized by other equity REITs and, accordingly, may not be comparable to such other REITs' computations. Funds available for distribution ("FAD") is defined as FFO less non-revenue producing capital expenditures and amortization payments on mortgage loan principal. The Company believes that FFO and FAD are useful to investors as a measure of the performance of an equity REIT because, along with cash flows from operating activities, financing activities and investing activities, they provide investors an understanding of the ability of the Company to incur and service debt and to make capital expenditures. FFO and FAD in and of themselves do not represent cash generated from operating activities in accordance with GAAP and therefore should not be considered an alternative to net income as an indication of the Company's performance or to net cash flows from operating activities as determined by GAAP as a measure of liquidity and are not necessarily indicative of cash available to fund cash needs. The following table presents a calculation of FFO and FAD for the years ended December 31, 2002, 2001 and 2000 (amounts in thousands): 2002 2001 2000 -------- -------- -------- COMPUTATION OF FUNDS FROM OPERATIONS: Income before extraordinary loss on early extinguishment of debt .............................. $ 36,445 $ 32,083 $ 32,986 Income allocated to Common OP Units .................... 8,926 8,209 8,463 Depreciation on real estate assets and other costs ..... 35,911 34,728 34,312 Depreciation expense included in discontinued operations 125 105 99 Gain on sale of Properties and other ................... (13,014) (8,168) (12,053) -------- -------- -------- Funds from operations ............................... $ 68,393 $ 66,957 $ 63,807 ======== ======== ======== Weighted average Common Stock outstanding - diluted .... 27,632 27,010 27,408 ======== ======== ======== COMPUTATION OF FUNDS AVAILABLE FOR DISTRIBUTION: Funds from operations .................................. $ 68,393 $ 66,957 $ 63,807 Non-revenue producing improvements to real estate ...... (13,377) (12,689) (7,855) -------- -------- -------- Funds available for distribution .................... $ 55,016 $ 54,268 $ 55,952 ======== ======== ======== Weighted average Common Stock outstanding - diluted .... 27,632 27,010 27,408 ======== ======== ======== 27
ACQUISITIONS AND DISPOSITIONS During the year ended December 31, 2000, in accordance with a settlement agreement (the "Settlement") related to a previously disclosed purchase of a portfolio of Properties known as the Ellenburg Acquisition, we received $13.5 million previously held in escrow. In connection with the Settlement, we sold three communities - Mesa Regal RV Resort, Mon Dak and Naples Estates - for an aggregate sales price of $59.0 million, including cash proceeds of $40.0 million and assumption of debt by the purchaser of $19.0 million. On February 29, 2000, MHC Systems, Inc., a consolidated subsidiary of the Company, sold the water and wastewater service company and facilities known as FFEC-Six in a cash sale with net proceeds of approximately $4.2 million. During the year ended December 31, 2001, we acquired two Florida Properties for an aggregate purchase price of approximately $17.3 million and completed the sale of seven properties in Kansas, Missouri and Oklahoma, for a total sale price of approximately $17.4 million. Also during 2001, we finalized a settlement agreement whereby we received $10.8 million in proceeds related to the sale of a Property in Indiana. During the year ended December 31, 2002, we acquired the eleven Properties listed in the table below. The acquisitions were funded with borrowings on our Line of Credit and the assumption of $47.9 million of mortgage debt, which includes a $3.0 million mark-to-market adjustment. In addition, we purchased adjacent land and land improvements for several Properties for approximately $559,000. TOTAL PURCHASE DATE ACQUIRED PROPERTY LOCATION SITES PRICE DEBT ASSUMED - ---------------------- -------------------------- ----------------------- ---------- -------------- ------------ ($ millions) ($ millions) March 12, 2002 Mt. Hood Village Welches, OR 450 $ 7.2 $ -- July 10, 2002 Harbor View Village New Port Richey, FL 471 15.5 8.1 July 31, 2002 Golden Sun Apache Junction, AZ 329 6.3 3.1 July 31, 2002 Countryside RV Resort Apache Junction, AZ 560 7.5 -- July 31, 2002 Holiday Village Ormond Beach, FL 301 10.4 7.1 July 31, 2002 Breezy Hill RV Resort Pompano Beach, FL 762 20.5 10.5 August 14, 2002 Highland Woods Pompano Beach, FL 148 3.9 2.5 August 7, 2002 Tropic Winds RV Resort Harlingen, TX 531 4.9 -- October 1, 2002 Silk Oak Lodge Clearwater, FL 180 6.2 3.9 December 18, 2002 Hacienda Village New Port Richey, FL 519 16.8 10.2 December 31, 2002 Glen Ellen Clearwater, FL 117 2.4 2.5 ---------- -------------- ------------ TOTALS 4,368 $ 101.6 $ 47.9 ========== ============== ============ During the year ended 2002, we effectively sold 17 Properties as part of a restructuring of the College Heights Joint Venture discussed hereinafter. In addition, we sold Camelot Acres, a 319 site Property in Burnsville, Minnesota, for approximately $14.2 million. INVESTMENTS IN JOINT VENTURES On December 28, 2000, the Company, through its joint venture with Meadows Management Company, acquired a 50% economic interest in Voyager RV Resort, a 1,576 site RV resort in Tucson, Arizona, for total consideration of $8.0 million. The Company's investment included cash of $3.0 million, its 50% interest in land held through the joint venture valued at $2.0 million and notes receivable from the principals of Meadows Management Company totaling $3.0 million. Effective September 1, 2002, the Company restructured its investment in Wolverine Property Investment Limited Partnership (the "College Heights Joint Venture" or the "Venture"), a joint venture with Wolverine Investors, LLP. The Venture included 18 Properties with 3,581 sites. The results of operations of the College Heights Joint Venture prior to restructuring were included with the results of the Company due to the Company's voting equity interest and control over the Venture. Pursuant to the restructuring, the Company sold its general partnership interest, sold all of the Company's voting equity interest and reduced the Company's total investment in the College Heights Joint Venture. As consideration for the sale, the Company retained sole ownership of Down Yonder, a 361 site community in Clearwater, Florida, received cash of approximately $5.2 million and retained preferred limited partnership interests of approximately $10.3 million, recorded net of a $2.4 million reserve. The continuing preferred limited partnership interests are accounted for using the equity method and reported as an investment in a joint venture. 28
ACQUISITION OF REALTY SYSTEMS, INC. On January 1, 2002, the Company purchased all of the common stock of Realty Systems, Inc. ("RSI"). The Company previously owned the non-voting preferred stock of RSI and had notes receivable from RSI which were recorded as an investment in affiliate. The Company purchased the common stock of RSI from Equity Group Investments, Inc., controlled by Samuel Zell, Chairman of the Board of Directors of the Company, for approximately $675,000. As a result of this acquisition, the Company owns and controls RSI and consolidates the financial results of RSI with those of the Company including $839,000 of cash from the acquisition on January 1, 2002. CAPITAL IMPROVEMENTS Capital expenditures for improvements are identified by the Company as recurring capital expenditures ("Recurring CapEx"), site development costs and corporate costs. Recurring CapEx was approximately $13.4 million and $12.7 million for the years ended December 31, 2002 and 2001, respectively. Of these expenditures, the Company believes that approximately $7.6 million or $147 per site for 2002 and $7.1 million or $142 per site for 2001 are non-revenue producing improvements which are necessary in order to increase and/or maintain occupancy levels and maintain competitive market rents for new and renewing residents. Site development costs were approximately $10.4 million and $9.7 million for the years ended December 31, 2002 and 2001, respectively, and represent costs to develop expansion sites at certain of the Company's Properties and costs for improvements to sites when a smaller used home is replaced with a larger new home. EQUITY TRANSACTIONS In March 1997, the Company's Board of Directors approved a common stock repurchase plan whereby we were authorized to repurchase and retire shares of its common stock. No shares of Common Stock were repurchased during the years ended December 31, 2002 or 2001. In order to qualify as a REIT for federal income tax purposes, the Company must distribute 90% or more of its taxable income (excluding capital gains). The following distributions have been declared and/or paid to common stockholders and minority interests since January 1, 2000. DISTRIBUTION FOR THE QUARTER SHAREHOLDER RECORD AMOUNT PER SHARE ENDING DATE PAYMENT DATE - ------------------ ---------------------- ---------------------- ------------------------ $0.4150 March 31, 2000 March 31, 2000 April 14, 2000 $0.4150 June 30, 2000 June 30, 2000 July 14, 2000 $0.4150 September 30, 2000 September 29, 2000 October 13, 2000 $0.4150 December 31, 2000 December 29, 2000 January 12, 2001 - ------------------ ---------------------- ---------------------- ------------------------ $0.4450 March 31, 2001 March 30, 2001 April 13, 2001 $0.4450 June 30, 2001 June 29, 2001 July 13, 2001 $0.4450 September 30, 2001 September 28, 2001 October 12, 2001 $0.4450 December 31, 2001 December 28, 2001 January 11, 2002 - ------------------ ---------------------- ---------------------- ------------------------ $0.4750 March 31, 2002 March 29, 2002 April 12, 2002 $0.4750 June 30, 2002 June 28, 2002 July 12, 2002 $0.4750 September 30, 2002 September 27, 2002 October 11, 2002 $0.4750 December 31, 2002 December 27, 2002 January 10, 2003 The Operating Partnership paid distributions of 9.0% per annum on the $125 million of Series D Cumulative Redeemable Perpetual Preferred Units ("Preferred Units"). Distributions on the Preferred Units were paid annual on the last calendar day of each quarter beginning December 31, 1999. The Company expects to continue to make regular annual distributions and has set its 2003 distribution to common stockholders at $1.98 per share per annum. 29
MORTGAGES AND CREDIT FACILITIES We have an unsecured Line of Credit with a group of banks (the "Line of Credit") with a total facility of $150 million, bearing interest at a rate of LIBOR plus 1.125% that matures on August 9, 2003 with two one-year extension options with which we may extend the maturity through August 9, 2005. We pay a quarterly fee on the average unused amount of the total facility equal to 0.15% of such amount. As of December 31, 2002, $65.3 million was available under the Credit Agreement. We have a $100 million unsecured term loan (the "Term Loan") with a group of banks with interest only payable monthly at the London Interbank Offered Rate ("LIBOR") of LIBOR plus 1.375% that matures on August 9, 2003 with two one-year extension options with which we may extend the maturity through August 9, 2005 On October 29, 2001, we entered into an interest rate swap agreement (the "2001 Swap"), effectively fixing LIBOR on $100 million of our floating rate debt at approximately 3.7% per annum for the period October 2001 through August 2004. The terms of the 2001 Swap require monthly settlements on the same dates interest payments are due on the debt. In accordance with SFAS No. 133 as herein defined, the 2001 Swap will be reflected at market value. We believe the 2001 Swap is a perfectly effective cash flow hedge, under SFAS No. 133, and there will be no effect on net income as a result of the mark-to-market adjustments. During the year ended December 31, 2000, we entered into mortgage agreements collateralizing two Properties for a total of $14.6 million. The mortgage notes mature on March 1, 2010, amortize beginning March 1, 2000 over 30 years and bear interest at a rate of approximately 8.3% per annum. In addition, we obtained $110 million in debt financing consisting of two mortgage notes - one for $94.3 million and one for $15.7 million - secured by seven Properties. The proceeds of the financing were used to repay $60 million of mortgage debt secured by the seven Properties and to repay amounts outstanding under the Company's Line of Credit and for working capital purposes. The Company recorded a $1.0 million extraordinary loss (net of $264,000 allocated to Minority Interests) in connection with the early repayment of the $60 million of mortgage debt. During the year ended December 31, 2001, we repaid three maturing mortgages in the amount of $12.1 million using proceeds from our Line of Credit. In addition, we entered into a $50.0 million mortgage note (the "Stagecoach Mortgage") collateralized by 7 Properties beneficially owned by MHC Stagecoach, L.L.C. The Stagecoach Mortgage bears interest at a rate of 6.98% per annum, amortizes beginning September 1, 2001 over 10 years and matures August 31, 2011. Proceeds from the financing were used to reduce borrowings on the Line of Credit by $37.9 million. During the year ended December 31, 2002, as part of the purchase of RSI, in a non-cash transaction, we assumed a $12.5 million note payable ("Conseco Financing Note"), collateralized by manufactured home inventory. The Conseco Financing Note was repaid at a discount during the year using proceeds from our Line of Credit. In addition, we repaid a maturing mortgage note in the amount of $1.1 million and $2.1 million of other unsecured notes payable using proceeds from our Line of Credit. Aggregate payments of principal on long-term borrowings for each of the next five years and thereafter are as follows (amounts in thousands): YEAR AMOUNT -------------------------------------- ----------- 2003 $ 13,753 2004 38,758 2005 193,377 2006 19,965 2007 268,494 Thereafter 225,190 Net unamortized premiums and discounts 696 ----------- Total $ 760,233 =========== Certain of our mortgage and credit agreements contain covenants and restrictions including restrictions as to the ratio of secured or unsecured debt versus encumbered or unencumbered assets, the ratio of fixed charges-to-earnings before interest, taxes, depreciation and amortization ("EBITDA"), limitations on certain holdings and other restrictions. 30
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK Our earnings are affected by changes in interest rates, since a portion of our outstanding indebtedness is at variable rates based on LIBOR. Our Line of Credit ($84.8 million outstanding at December 31, 2002) bears interest at LIBOR plus 1.125% per annum and our $100 million Term Loan bears interest at LIBOR plus 1.0% per annum. If LIBOR increased/decreased by 1.0% during 2002, interest expense would have increased/decreased by approximately $1.6 million based on the combined average balance outstanding under the Company's Line of Credit and Term Loan for the year ended December 31, 2002. In June 1998, the FASB issued SFAS No. 133 and its amendments, Statements 137 and 138 in June of 1999 and June of 2000, respectively. The Company adopted SFAS No. 133 effective January 1, 2001. SFAS No. 133 requires the Company 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. In July 1998, we entered into an interest rate swap agreement (the "1998 Swap") effectively fixing LIBOR on $100 million of the Company's floating rate debt at 6.4% for the period 1998 through 2003. The cost of the 1998 Swap consisted only of legal costs that were deemed immaterial. The value of the 1998 Swap was impacted by changes in the market rate of interest. We accounted for the 1998 Swap as a hedge. Payments and receipts under the 1998 Swap were accounted for as an adjustment to interest expense. On January 10, 2000, we unwound the 1998 Swap and received $1.0 million of proceeds which is amortized into interest expense through March 2003. On October 29, 2001, we entered into the 2001 Swap, fixing LIBOR on $100 million of the Company's floating rate debt at approximately 3.7% for the period October 2001 through August 2004. The terms of the 2001 Swap require monthly settlements on the same dates that interest payments are due on the debt. In accordance with SFAS No. 133, the interest rate 2001 Swap is reflected at market value. We believe the 2001 Swap is a perfectly effective cash flow hedge per SFAS No. 133 and there will be no effect on net income as a result of the mark-to-market adjustment. As of December 31, 2002, the 2001 Swap represented a liability of approximately $4.5 million and is recorded in accounts payable and accrued expenses. Mark-to-market changes in the value of the 2001 Swap are included in other comprehensive income. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Combined Financial Statements on page F-1 of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 31
PART III ITEMS 10, 11, 12, 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 10, Item 11, Item 12, and Item 13 will be contained in a definitive proxy statement which the Registrant anticipates will be filed no later than April 28, 2003, and thus this Part has been omitted in accordance with General Instruction G(3) to Form 10-K. ITEM 14. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES As of December 31, 2002, an evaluation was performed under the supervision and with the participation of the Company's management, including the CEO and CFO, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of December 31, 2002. CHANGES IN INTERNAL CONTROLS There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to December 31, 2002. 32
PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) (1&2) See Index to Financial Statements and Schedules on page F-1 of this Form 10-K. (3) Exhibits: 2(a) Admission Agreement between Equity Financial and Management Co., Manufactured Home Communities, Inc. and MHC Operating Partnership 3.1(a) Articles of Incorporation of Manufactured Home Communities, Inc. 3.2(a) Articles of Amendment and Restatement of Manufactured Home Communities, Inc. 3.3(g) Amended Bylaws of Manufactured Home Communities, Inc. 4 Not applicable 9 Not applicable 10.1(a) Amended and Restated Agreement of Limited Partnership of MHC Operating Limited Partnership 10.2(a) Agreement of Limited Partnership of MHC Financing Limited Partnership 10.3(a) Agreement of Limited Partnership of MHC Management Limited Partnership 10.4(a) Property Management and Leasing Agreement between MHC Financing Limited Partnership and MHC Management Limited Partnership 10.5(a) Property Management and Leasing Agreement between MHC Operating Limited Partnership and MHC Management Limited Partnership 10.6(a) Services Agreement between Realty Systems, Inc. and MHC Management Limited Partnership 10.7(a) Rate Protection Agreement 10.8(a) Revolving Credit Note made by Realty Systems, Inc. to Equity Financial and Management Co. 10.9(a) Assignment to MHC Operating Limited Partnership of Revolving Credit Note made by Realty Systems, Inc. to Equity Financial and Management Co. 10.10(a) Stock Option Plan 10.11A(a) Indenture of Mortgage, Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment of Rents 10.11B(a) Promissory Note 10.11C(a) Assignment of Loan Documents 10.11D(a) Assignment of Leases, Rents and Security Deposits 10.11E(a) Swap Agreement Pledge and Security Agreement 10.11F(a) Cash Collateral Account Security, Pledge and Assignment Agreement 10.11G(a) Assignment of Property Management and Leasing Agreement 10.11H(a) Trust Agreement 10.12(a) Form of Noncompetition Agreement 10.13(a) Form of Noncompetition Agreement 10.13A(a) Form of Noncompetition Agreement 10.14(a) General Electric Credit Corporation Commitment Letter 10.15(a) Administrative Services Agreement between Realty Systems, Inc. and Equity Group Investments, Inc. 10.16(a) Registration Rights and Lock-Up Agreement with the Company (the Original Owners, EF&M, Directors, Officers and Employees) 10.17(a) Administrative Services Agreement between the Company and Equity Group Investments, Inc. 10.18(a) Form of Subscription Agreement between the Company and certain officers and other individuals dated March 3, 1993 10.19(a) Form of Secured Promissory Note payable to the Company by certain officers dated March 3, 1993 10.20(a) Form of Pledge Agreement between the Company and certain officers dated March 3, 1993 10.21(a) Loan and Security Agreement between Realty Systems, Inc. and MHC Operating Limited Partnership 10.22(a) Equity and Registration Rights Agreement with the Company (the GM Trusts) 10.23(b) Agreement of Limited Partnership of MHC Lending Limited Partnership 10.23(c) Agreement of Limited Partnership of MHC-Bay Indies Financing Limited Partnership 10.24(c) Agreement of Limited Partnership of MHC-De Anza Financing Limited Partnership 10.25(c) Agreement of Limited Partnership of MHC-DAG Management Limited Partnership 10.26(d) Amendment No. 2 to MHC Operating Limited Partnership Amended and Restated Partnership Agreement dated February 15, 1996 10.27(d) Form of Subscription Agreement between the Company and certain members of management of the Company dated January 2, 1996 10.28(d) Form of Secured Promissory Note payable to the Company by certain members of management of the Company dated January 2, 1996 33
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED) 10.29(d) Form of Pledge Agreement between the Company and certain members of management of the Company dated January 2, 1996 10.30(e) Second Amended and Restated MHC Operating Limited Partnership Agreement of Limited Partnership, dated as of March 15, 1996 10.31(f) Agreement of Limited Partnership of MHC Financing Limited Partnership Two 10.32(g) $265,000,000 Mortgage Note dated December 12,1997 10.33(g) Second Amended and Restated Credit Agreement (Revolving Facility) between the Company, MHC Operating Limited Partnership, and certain lenders and agents, dated April 28, 1998 10.34(g) First Amendment to Second Amended and Restated Credit Agreement (Revolving Facility) between the Company, MHC Operating Limited Partnership, and certain lenders and agents, dated December 18, 1998 10.35(h) Second Amendment to Second Amended and Restated Credit Agreement (Revolving Facility) between the Company, MHC Operating Limited Partnership, and certain lenders and agents, dated August 9, 2000 10.36(g) Amended and Restated Credit Agreement (Term Loan) between the Company, MHC Operating Limited Partnership, and certain lenders and agent, dated April 28, 1998 10.36(h) First Amendment to Amended and Restated Credit Agreement (Term Loan) between the Company, MHC Operating Limited Partnership, and certain lenders and agent, dated November 21, 2000 10.36(g) Letter Agreement between the Company and Bank of America National Trust and Savings Association confirming the $100 million swap transaction, dated July 11, 1995 10.39(h) $110,000,000 Amended, Restated and Consolidated Promissory Note dated June 28, 2000 10.40(h) $15,750,000 Promissory Note Secured by Leasehold Deed of Trust dated July 13, 2000 10.41(i) Credit Agreement (Term Loan) between the Company, MHC Operating Limited Partnership and certain lenders and agents dated February 9, 2002. 10.42(i) Third Amendment to Second Amended and Restated Credit Agreement (Revolving Facility) between the Company, MHC Operating Limited Partnership, and certain lenders and agents, dated February 9, 2002 10.43(i) $50,000,000 Promissory Note secured by Leasehold Deeds of Trust (Stagecoach Mortgage) dated December 2, 2001. 11 Not applicable 12(j) Computation of Ratio of Earnings to Fixed Charges 13 Not applicable 16 Not applicable 18 Not applicable 21(j) Subsidiaries of the registrant 22 Not applicable 23(j) Consent of Independent Auditors 24.1(j) Power of Attorney for John F. Podjasek, Jr. dated March 21, 2003 24.2(j) Power of Attorney for Michael A. Torres dated March 27, 2003 24.3(j) Power of Attorney for Thomas E. Dobrowski dated March 21, 2003 24.4(j) Power of Attorney for Gary Waterman dated March 21, 2003 24.5(j) Power of Attorney for Donald S. Chisholm dated March 21, 2003 24.6(j) Power of Attorney for Louis H. Masotti dated March 24, 2003 27 Not applicable 28 Not applicable 99.1(j) Certifications 34
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED) (a) Included as an exhibit to the Company's Form S-11 Registration Statement, File No. 33-55994, and incorporated herein by reference. (b) Included as an exhibit to the Company's Report on Form 10-K dated December 31, 1993, and incorporated herein by reference. (c) Included as an exhibit to the Company's Report on Form 10-K dated December 31, 1994, and incorporated herein by reference. (d) Included as an exhibit to the Company's Report on Form 10-Q for the quarter ended March 31, 1996, and incorporated herein by reference. (e) Included as an exhibit to the Company's Report on Form 10-Q for the quarter ended June 30, 1996, and incorporated herein by reference. (f) Included as an exhibit to the Company's Report on Form 10-K dated December 31, 1997, and incorporated herein by reference. (g) Included as an exhibit to the Company's Form S-3 Registration Statement, File No. 333-90813, and incorporated herein by reference. (h) Included as an exhibit to the Company's Report on Form 10-K dated December 31, 2000, and incorporated herein by reference. (i) Included as an exhibit to the Company's Report on Form 10-K dated December 31, 2001, and incorporated herein by reference (j) Filed herewith (b) Reports on Form 8-K: None. (c) Exhibits: See Item 14 (a)(3) above. (d) Financial Statement Schedules: See Index to Financial Statements attached hereto on page F-1 of this Form 10-K. 35
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MANUFACTURED HOME COMMUNITIES, INC., a Maryland corporation Date: March 28, 2003 By: /s/ Howard Walker -------------------- ------------------------------------ Howard Walker Chief Executive Officer Date: March 28, 2003 By: /s/ John Zoeller --------------------- ------------------------------------ John Zoeller Executive Vice President, Treasurer and Chief Financial Officer Date: March 28, 2003 By: /s/ Mark Howell --------------------- ------------------------------------ Mark Howell Principal Accounting Officer 36
MANUFACTURED HOME COMMUNITIES, INC. - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Name Title Date ---- ----- ---- /s/ Howard Walker Chief Executive Officer March 28, 2003 - ---------------------------- *Attorney-in-Fact -------------- Howard Walker /s/ John Zoeller Executive Vice President, Treasurer March 28, 2003 - ---------------------------- and Chief Financial Officer -------------- John Zoeller *Attorney-in-Fact /s/ Samuel Zell Chairman of the Board March 28, 2003 - ---------------------------- -------------- Samuel Zell /s/ Sheli Z. Rosenberg Director March 28, 2003 - ---------------------------- -------------- Sheli Z. Rosenberg /s/ David A. Helfand Director March 28, 2003 - ---------------------------- -------------- David A. Helfand *Donald S. Chisholm Director March 28, 2003 - ---------------------------- -------------- Donald S. Chisholm *Thomas E. Dobrowski Director March 28, 2003 - ---------------------------- -------------- Thomas E. Dobrowski *Louis H. Masotti Director March 28, 2003 - ---------------------------- -------------- Louis H. Masotti *John F. Podjasek, Jr. Director March 28, 2003 - ---------------------------- -------------- John F. Podjasek, Jr. *Michael A. Torres Director March 28, 2003 - ---------------------------- -------------- Michael A. Torres *Gary L. Waterman Director March 28, 2003 - ---------------------------- -------------- Gary L. Waterman 37
CERTIFICATIONS I, John M. Zoeller, certify that: 1. I have reviewed this annual report on Form 10-K of Manufactured Home Communities, Inc; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 By: /s/ John M. Zoeller --------------- ---------------------------------------------------- John M. Zoeller Executive Vice President and Chief Financial Officer 38
I, Howard Walker, certify that: 1. I have reviewed this annual report on Form 10-K of Manufactured Home Communities, Inc; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 By: /s/ Howard Walker --------------- ----------------------------------------------------- Howard Walker Chief Executive Officer 39
INDEX TO FINANCIAL STATEMENTS MANUFACTURED HOME COMMUNITIES, INC. PAGE Report of Independent Auditors ............................................................................... F-2 Consolidated Balance Sheets as of December 31, 2002 and 2001................................................... F-3 Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000..................... F-4 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2002, 2001 and 2000........................................................................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000..................... F-6 Notes to Consolidated Financial Statements..................................................................... F-7 Schedule II - Valuation and Qualifying Accounts................................................................ S-1 Schedule III - Real Estate and Accumulated Depreciation........................................................ S-2 Certain schedules have been omitted as they are not applicable to the Company. F-1
Report of Independent Auditors To the Board of Directors of Manufactured Home Communities, Inc. We have audited the accompanying consolidated balance sheets of Manufactured Home Communities, Inc. as of December 31, 2002 and 2001, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2002. We have also audited the related financial statement schedules listed in the accompanying index to financial statements and schedules at item 15(a). These financial statements and schedules are the responsibility of the management of Manufactured Home Communities, Inc. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Manufactured Home Communities, Inc. at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects the information set forth therein. As discussed in Note 2 to the consolidated financial statements, in 2002 Manufactured Home Communities, Inc. changed its method of accounting for discontinued operations. ERNST & YOUNG LLP Chicago, Illinois January 27, 2003 F-2
MANUFACTURED HOME COMMUNITIES, INC. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2002 AND 2001 (AMOUNTS IN THOUSANDS EXCEPT SHARE DATA) DECEMBER 31, DECEMBER 31, 2002 2001 ------------ ------------ ASSETS Investment in real estate: Land .......................................................... $ 284,219 $ 271,871 Land improvements ............................................. 893,839 855,296 Buildings and other depreciable property ...................... 117,949 110,971 ------------ ------------ 1,296,007 1,238,138 Accumulated depreciation ...................................... (238,098) (211,878) ------------ ------------ Net investment in real estate ............................... 1,057,909 1,026,260 Cash and cash equivalents ........................................ 7,270 1,354 Notes receivable ................................................. 10,044 1,506 Investment in and advances to affiliates ......................... -- 34,387 Investment in joint ventures ..................................... 19,634 11,853 Rents receivable, net ............................................ 1,735 1,966 Deferred financing costs, net .................................... 5,030 5,867 Inventory ........................................................ 33,638 -- Prepaid expenses and other assets ................................ 27,590 18,612 ------------ ------------ Total assets .................................................. $ 1,162,850 $ 1,101,805 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Mortgage notes payable ........................................ $ 575,370 $ 590,371 Unsecured term loan ........................................... 100,000 100,000 Unsecured line of credit ...................................... 84,750 16,250 Other notes payable ........................................... 113 2,236 Accounts payable and accrued expenses ......................... 31,010 24,874 Accrued interest payable ...................................... 6,415 4,582 Rents received in advance and security deposits ............... 5,966 5,133 Distributions payable ......................................... 13,106 12,062 ------------ ------------ Total liabilities ........................................... 816,730 755,508 Commitments and contingencies Minority interest - Common OP Units and other .................... 43,501 46,147 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; 22,093,240 and 21,562,343 shares issued and outstanding for 2002 and 2001, respectively 218 215 Paid-in capital ............................................... 256,394 245,827 Deferred compensation ......................................... (3,069) (4,062) Employee notes ................................................ (2,713) (3,841) Distributions in excess of accumulated earnings ............... (68,713) (63,478) Accumulated other comprehensive (loss) income ................. (4,498) 489 ------------ ------------ Total stockholders' equity .................................. 177,619 175,150 ------------ ------------ Total liabilities and stockholders' equity .................... $ 1,162,850 $ 1,101,805 ============ ============ The accompanying notes are an integral part of the financial statements F-3
MANUFACTURED HOME COMMUNITIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) ---------- ---------- ---------- 2002 2001 2000 ---------- ---------- ---------- PROPERTY OPERATIONS: Community base rental income .................................... $ 197,795 $ 194,103 $ 188,051 Resort base rental income ....................................... 9,147 5,748 7,414 Utility and other income ........................................ 19,713 20,403 19,378 ---------- ---------- ---------- Property operating revenues ............................. 226,655 220,254 214,843 Property operating and maintenance .............................. 63,554 61,481 58,661 Real estate taxes ............................................... 18,212 17,296 16,766 Property management ............................................. 9,292 8,984 8,690 ---------- ---------- ---------- Property operating expenses ..................................... 91,058 87,761 84,117 ---------- ---------- ---------- Income from property operations .......................... 135,597 132,493 130,726 HOME SALES OPERATIONS: Gross revenues from inventory home sales ........................ 33,543 -- -- Cost of inventory home sales .................................... (27,192) -- -- ---------- ---------- ---------- Gross profit from inventory home sales ................... 6,351 -- -- Brokered resale revenues, net ................................... 1,592 -- -- Home selling expenses ........................................... (7,671) -- -- Ancillary services revenues, net ................................ 522 -- -- ---------- ---------- ---------- Income from home sales operations ........................... 794 -- -- OTHER INCOME AND EXPENSES: Interest income ................................................. 967 639 1,009 Equity in income of affiliates .................................. -- 1,811 2,408 Equity in income of unconsolidated joint ventures ............... 1,277 1,353 670 General and administrative ...................................... (8,192) (6,687) (6,423) Interest and related amortization ............................... (50,729) (51,305) (53,280) Depreciation on corporate assets ................................ (1,277) (1,243) (1,139) Depreciation on real estate assets and other costs .............. (35,911) (34,728) (34,312) ---------- ---------- ---------- Total other income and expenses ............................. (93,865) (90,160) (91,067) Income from operations .......................................... 42,526 42,333 39,659 Net income from discontinued operations ......................... 1,083 1,043 989 Gain on sale of Properties and other ............................ 13,014 8,168 12,053 ---------- ---------- ---------- Income before allocation to Minority Interests .............. 56,623 51,544 52,701 (Income) allocated to Common OP Units ........................... (8,926) (8,209) (8,463) (Income) allocated to Perpetual Preferred OP Units .............. (11,252) (11,252) (11,252) ---------- ---------- ---------- Net income before extraordinary loss on early extinguishment of debt ...................................... 36,445 32,083 32,986 Extraordinary loss on the extinguishment of debt (net of $264 allocated to minority interests) ............................ -- -- (1,041) ---------- ---------- ---------- NET INCOME ................................................ $ 36,445 $ 32,083 $ 31,945 ========== ========== ========== Net income from operations per Common Share - basic ............. $ 1.57 $ 1.60 $ 1.47 ========== ========== ========== Net income from operations per Common Share - diluted ........... $ 1.54 $ 1.57 $ 1.45 ========== ========== ========== Net income per Common Share - basic ............................. $ 1.69 $ 1.53 $ 1.49 ========== ========== ========== Net income per Common Share - diluted ........................... $ 1.64 $ 1.49 $ 1.46 ========== ========== ========== Weighted average Common Shares outstanding - basic .............. 21,617 21,036 21,469 ========== ========== ========== Weighted average Common Shares outstanding - diluted (see Note 2) 27,632 27,010 27,408 ========== ========== ========== Distributions declared per Common Share ......................... $ 1.90 $ 1.78 $ 1.66 ========== ========== ========== Tax status of Common Shares distributions paid during the year: Ordinary income ................................................. $ 1.50 $ 1.31 $ 1.32 ========== ========== ========== Capital gain .................................................... $ -- $ -- $ -- ========== ========== ========== Return of capital ............................................... $ 0.37 $ 0.44 $ 0.31 ========== ========== ========== The accompanying notes are an integral part of the financial statements F-4
MANUFACTURED HOME COMMUNITIES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (AMOUNTS IN THOUSANDS) 2002 2001 2000 ---------- ---------- ---------- PREFERRED STOCK, $.01 PAR VALUE .................................. $ -- $ -- $ -- ========== ========== ========== COMMON STOCK, $.01 PAR VALUE Balance, beginning of year ....................................... $ 215 $ 210 $ 229 Issuance of Common Stock through restricted stock grants ..... 1 1 1 Exercise of options .......................................... 2 4 1 (Repurchase) issuance of Common Stock ........................ -- -- (21) ---------- ---------- ---------- Balance, end of year ............................................. $ 218 $ 215 $ 210 ========== ========== ========== PAID - IN CAPITAL Balance, beginning of year ....................................... $ 245,827 $ 235,681 $ 275,664 Issuance of Common Stock for employee notes .................. -- -- -- Conversion of OP Units to Common Stock ....................... 227 599 494 Issuance of Common Stock through exercise of options ......... 5,782 7,743 2,719 Issuance of Common Stock through restricted stock grants ..... 2,709 1,627 3,310 Issuance of Common Stock through employee stock purchase plan 2,512 2,365 1,435 Repurchase of Common Stock ................................... -- -- (53,112) Adjustment for Common OP Unitholders in the Operating Partnership ............................... (663) (2,188) 5,171 ---------- ---------- ---------- Balance, end of year ............................................. $ 256,394 $ 245,827 $ 235,681 ========== ========== ========== DEFERRED COMPENSATION Balance, beginning of year ....................................... $ (4,062) $ (5,969) $ (6,326) Issuance of Common Stock through restricted stock grants ..... (2,709) (1,628) (3,311) Recognition of deferred compensation expense ................. 3,702 3,535 3,668 ---------- ---------- ---------- Balance, end of year ............................................. $ (3,069) $ (4,062) $ (5,969) ========== ========== ========== EMPLOYEE NOTES Balance, beginning of year ....................................... $ (3,841) $ (4,205) $ (4,540) Notes received for issuance of Common Stock .................. -- -- -- Principal payments ........................................... 1,128 364 335 ---------- ---------- ---------- Balance, end of year ............................................. $ (2,713) $ (3,841) $ (4,205) ========== ========== ========== DISTRIBUTIONS IN EXCESS OF ACCUMULATED COMPREHENSIVE EARNINGS Balance, beginning of year ....................................... $ (62,989) $ (57,622) $ (53,626) Net income ................................................... 36,445 32,083 31,945 Other comprehensive income: Unrealized holding (losses) gains on derivative instruments (4,987) 489 -- ---------- ---------- ---------- Comprehensive income ...................................... 31,458 32,572 31,945 ---------- ---------- ---------- Distributions ................................................ (41,680) (37,939) (35,941) ---------- ---------- ---------- Balance, end of year ............................................. $ (73,211) $ (62,989) $ (57,622) ========== ========== ========== The accompanying notes are an integral part of the financial statements F-5
MANUFACTURED HOME COMMUNITIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (AMOUNTS IN THOUSANDS) 2002 2001 2000 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income .............................................................. $ 36,445 $ 32,083 $ 31,945 Adjustments to reconcile net income to cash provided by operating activities: Income allocated to minority interests ............................... 20,178 19,461 19,451 Gain on sale of Properties and other ................................. (13,014) (8,168) (12,053) Depreciation and amortization expense ................................ 38,057 37,184 36,511 Equity in income of affiliates and joint ventures .................... (1,158) (2,782) (2,928) Amortization of deferred compensation and other ...................... 3,930 3,535 3,668 Increase in provision for uncollectable rents receivable ............. 941 427 323 Changes in assets and liabilities: Increase in rents receivable ......................................... (1,186) (953) (425) Decrease in inventory ................................................ 1,887 -- -- (Increase) decrease in prepaid expenses and other assets ............. (7,610) 1,330 (9,389) Increase (decrease) in accounts payable and accrued expenses ......... 1,471 (1,358) 2,545 Increase (decrease) in rents received in advance and security deposits 235 (51) (1,647) ---------- ---------- ---------- Net cash provided by operating activities ............................... 80,176 80,708 68,001 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of rental properties ........................................ (56,531) (17,770) 4,581 Proceeds from dispositions of assets .................................... 14,171 24,209 46,490 Distributions from (investment in) joint ventures ....................... (7,149) 1,697 (3,758) Proceeds from restructuring of College Heights joint venture, net ....... 4,647 -- -- Contributions to and distributions from Affiliates, net ................. -- (11,493) (7,250) Purchase of RSI ......................................................... (675) -- -- Cash received in acquisition of RSI ..................................... 839 -- -- Collections (funding) of notes receivable ............................... (3,784) 3,478 (700) Improvements: Improvements - corporate ............................................. (681) (840) (498) Improvements - rental properties ..................................... (13,377) (12,689) (7,855) Site development costs ............................................... (10,433) (9,659) (7,908) ---------- ---------- ---------- Net cash (used in) provided by investing activities ..................... (72,973) (23,067) 23,102 ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from stock options and employee stock purchase plan ........ 8,296 10,112 4,142 Distributions to Common Stockholders, Common OP Unitholders and Perpetual Preferred OP Unitholders ............................... (58,314) (58,111) (56,298) Repurchase of Common Stock and OP Units ................................. -- (41) (54,595) Collection of principal payments on employee notes ...................... 1,128 364 335 Line of credit: Proceeds ............................................................. 82,000 46,000 103,900 Repayments ........................................................... (13,500) (89,650) (151,900) Refinancing - net proceeds (repayments) ................................. (16,096) 37,870 65,998 Principal payments ...................................................... (4,217) (5,047) (4,249) Debt issuance costs ..................................................... (584) (631) (2,265) ---------- ---------- ---------- Net cash used in financing activities ................................... (1,287) (59,134) (94,932) ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents ........................ 5,916 (1,493) (3,829) Cash and cash equivalents, beginning of year ................................ 1,354 2,847 6,676 ---------- ---------- ---------- Cash and cash equivalents, end of year ...................................... $ 7,270 $ 1,354 $ 2,847 ========== ========== ========== SUPPLEMENTAL INFORMATION Cash paid during the year for interest ...................................... $ 46,097 $ 50,781 $ 52,947 ========== ========== ========== The accompanying notes are an integral part of the financial statements F-6
MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION OF THE COMPANY AND BASIS OF PRESENTATION Manufactured Home Communities, Inc., together with MHC Operating Limited Partnership (the "Operating Partnership") and other consolidated subsidiaries ("Subsidiaries"), are referred to herein as the "Company", "MHC", "we", "us", and "our". The Company, formed in March 1993, is a Maryland corporation which has elected to be taxed as a real estate investment trust ("REIT"). The Company generally will not be subject to Federal income tax to the extent it distributes 90% of its REIT taxable income to its stockholders. REITs are subject to a number of organizational and operational requirements. If the Company fails to qualify as a REIT, its income is taxable at regular corporate rates. Even if the Company qualifies for taxation as a REIT, the Company is subject to certain state and local taxes on its income and property and Federal income and excise taxes on its undistributed income. We are a fully integrated company that owns and operates manufactured home communities ("Communities") and recreational vehicle resorts ("Resorts"). The Company was formed to continue the property operations, business objectives and acquisition strategies of an entity that had owned and operated Communities since 1969. As of December 31, 2002, we owned or had an ownership interest in a portfolio of 142 Communities and Resorts (the "Properties") located throughout the United States containing 51,582 residential sites. The operations of the Company are conducted primarily through the Operating Partnership. The Company contributed the proceeds from its initial public offering to the Operating Partnership for a general partnership interest. The financial results of the Operating Partnership and the Subsidiaries are consolidated in the Company's consolidated financial statements. In addition, since certain activities, if performed by the Company, may not have been qualifying REIT activities under the Internal Revenue Code of 1986, as amended (the "Code"), the Company has formed a taxable REIT subsidiaries as defined in the Code to engage in such activities. Realty Systems, Inc. ("RSI") is a wholly owned subsidiary of the Company that, doing business as Carefree Sales, is engaged in the business of purchasing, selling and leasing manufactured homes that are located or will be located in Properties owned and managed by the Company. Carefree Sales also provides brokerage services to residents at such Properties. Typically, residents move from a Community but do not relocate their homes. Carefree Sales may provide brokerage services, in competition with other local brokers, by seeking buyers for the homes. Carefree Sales also leases homes to prospective residents with the expectation that the tenant eventually will purchase the home. Community Systems, Inc. ("CSI"), a wholly owned subsidiary, leases from the Operating Partnership certain real property within or adjacent to certain of the Properties consisting of golf courses, pro shops, and restaurants. The limited partners of the Operating Partnership (the "Common OP Unitholders") receive an allocation of net income which is based on their respective ownership percentage of the Operating Partnership which is shown on the Consolidated Financial Statements as Minority Interests - Common OP Units. As of December 31, 2002, the Minority Interests - Common OP Units represented 5,359,927 units of limited partnership interest ("OP Units") which are convertible into an equivalent number of shares of the Company's Common stock. The issuance of additional shares of common stock or common OP Units changes the respective ownership of the Operating Partnership for both the Minority Interests and the Company. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Consolidation The Company consolidates its majority owed subsidiaries in which it has the ability to control the operations of the subsidiaries. The Company does not consolidate entities it does not have sole control of the major decisions. All inter-company transactions have been eliminated in consolidation. The Company's acquisitions were all accounted for as purchases in accordance with Accounting Principles Board Opinion No. 16 "Business Combinations" for those transactions initiated before June 30, 2001 and in accordance with Statement of Financial Accounting Standards No. 141 "Business Combinations" for those transactions completed after June 30, 2001. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. The Interpretation requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The consolidation requirements of Interpretation 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. The Company will adopt FIN 46 in the third quarter of 2003. We have not yet determined the effect the adoption of the Interpretation will have on the Company. F-7
MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (b) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (c) Segments We manage all our operations on a property by property basis. Since each property has similar economic and operational characteristics, the Company has one reportable segment, which is the operation of manufactured home communities. The following table identifies our five largest markets and provides information regarding our Communities and Resorts including Communities owned in joint ventures. NUMBER OF PERCENT OF PERCENT OF MAJOR MARKET PROPERTIES TOTAL SITES TOTAL SITES TOTAL REVENUES - --------------- -------------- ------------- ------------- -------------- Florida 51 23,038 44.66% 38.61% California 25 6,215 12.05% 19.96% Arizona 19 5,413 10.49% 8.76% Colorado 10 3,455 6.70% 8.54% Delaware 7 2,238 4.34% 4.10% Other 30 11,223 21.76% 20.03% - --------------- -------------- ------------- ------------- -------------- Total 142 51,582 100.00% 100.00% =============== ============== ============= ============= ============== Our largest Property, Bay Indies, located in Venice, Florida, accounted for 2.7% of our total revenues for the year ended December 31, 2002. The operation of manufactured home communities segment comprises approximately 97.8%, 97.2% and 97.0% of total revenues for the years ended December 31, 2002, 2001 and 2000, respectively. The operation of manufactured home communities segment comprises approximately 92.2% and 94.0% of total assets at December 31, 2002 and 2001, respectively. The distribution of the Properties throughout the United States reflects our belief that geographic diversification helps insulate the portfolio from regional economic influences. We intend to target new acquisitions in or near markets where the Properties are located and will also consider acquisitions of properties outside such markets. (d) Inventory Inventory consists of new and used manufactured homes, is stated at the lower of cost or market and is net of a valuation allowance calculated after consideration of the N.A.D.A. (National Automobile Dealers Association) Manufactured Housing Appraisal Guide and the current market value of each home included in the manufactured home inventory. Inventory sales revenues and resale revenues are recognized when the home sale is closed. Resale revenues are stated net of commissions paid to employees of $677,000 for the year ended December 31, 2002. (e) Real Estate Real estate is recorded at cost less accumulated depreciation. Depreciation is computed on the straight-line basis over the estimated useful lives of the assets. We use a 30-year estimated life for buildings acquired and structural and land improvements, a ten-to-fifteen-year estimated life for building upgrades and a three-to-seven-year estimated life for furniture, fixtures and equipment. Expenditures for ordinary maintenance and repairs are expensed to operations as incurred and significant renovations and improvements that improve the asset and extend the useful life of the asset are capitalized and then expensed over their estimated useful life. Our estimates of useful lives, salvage value, and depreciation method used are proscribed by various generally accepted accounting principles ("GAAP") literature. In addition, the Financial Accounting Standards Board ("FASB") is currently reviewing the methods of depreciation and cost capitalization for all industries and in June 2001 issued FASB Exposure Draft, "Accounting in Interim and Annual Financial Statements for Certain Costs and Activities Related to Property, Plant and Equipment", the implementation of which, if issued, could also have a material effect on the Company's results of operations. Total depreciation expense was $37.3 million, $36.0 million and $35.5 million for the years ended December 31, 2002, 2001 and 2000, respectively. F-8
MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) We evaluate our Properties for impairment when conditions exist which may indicate that it is probable that the sum of expected future cash flows (undiscounted) from a Property is less than its carrying value. Upon determination that a permanent impairment has occurred, our Properties are reduced to fair value. For the year ended December 31, 2002, permanent impairment conditions did not exist at any of our Properties. During the year ended December 31, 2000, a consolidated subsidiary of the Company, recorded an impairment loss on the DeAnza Santa Cruz water and wastewater service company business (see Note 5). In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets" which is effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 144 during 2001 and we have presented separately as discontinued operations in all periods the results of operations for all assets sold during 2002 or assets classified as real estate held for disposition as of December 31, 2002. The gain on sale of discontinued operations for 2002 is included in the gain on sale of properties and other. Certain costs, primarily legal costs, relative to our efforts to effectively change the use and operations of several Properties subject to rent control (see Note 17) are currently classified in other assets. These costs, to the extent these efforts are successful, are capitalized to the extent of the established value of the revised project and included in the net investment in real estate for the appropriate Properties (see Note 5). To the extent these efforts are not successful, these costs will be expensed. In addition, we capitalize certain costs, primarily legal costs, related to entering into lease agreements which govern the term under which we may enter into leases with individual tenants and which are expensed over the term of the lease agreement. (f) Cash and Cash Equivalents We consider all demand and money market accounts and certificates of deposit with a maturity, when purchased, of three months or less to be cash equivalents. (g) Notes Receivable Notes receivable generally are stated at their outstanding unpaid principal balances net of any deferred fees or costs on originated loans, or unamortized discounts or premiums net of a valuation allowance. Interest income is accrued on the unpaid principal balance. Discounts or premiums are amortized to income using the interest method. In certain cases we finance the sale of homes to our residents (referred to as "Chattel Loans") which are secured by the homes. The valuation allowance for the Chattel Loans is calculated based a comparison of the outstanding principal balance of each note compared to the N.A.D.A. value and the current market value of the underlying manufactured home collateral. (h) Fair Value of Financial Instruments The Company's financial instruments include short-term investments, notes receivable, accounts receivable, accounts payable, other accrued expenses, mortgage notes payable and interest rate hedge arrangements. The fair values of all financial instruments, including notes receivable, were not materially different from their carrying values at December 31, 2002 and 2001. (i) Deferred Financing Costs Deferred financing costs include fees and costs incurred to obtain long-term financing. The costs are being amortized over the terms of the respective loans on a level yield basis. Unamortized deferred financing fees are written-off when debt is retired before the maturity date. Accumulated amortization for such costs was $2.4 million and $3.0 million at December 31, 2002 and 2001, respectively. (j) Revenue Recognition Rental income attributable to leases is recorded when earned from tenants. We will reserve for receivables when we believe the ultimate collection is less than probable. Our provision for uncollectable rents receivable was $700,000 as of December 31, 2002 and $300,000 as of December 31, 2001. Income from home sales is recognized when the F-9
MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) home title is transferred. (k) Minority Interests Net income is allocated to Common OP Unitholders based on their respective ownership percentage of the Operating Partnership. An ownership percentage is represented by dividing the number of Common OP Units held by the Common OP Unitholders (5,359,927 and 5,426,374 at December 31, 2002 and 2001, respectively) by OP Units and shares of Common Stock outstanding. Issuance of additional shares of Common Stock or Common OP Units changes the percentage ownership of both the Minority Interests and the Company. Due in part to the exchange rights (which provide for the conversion of Common OP Units into shares of Common Stock on a one-for-one basis), such transactions and the proceeds therefrom are treated as capital transactions and result in an allocation between stockholders' equity and Minority Interests to account for the change in the respective percentage ownership of the underlying equity of the Operating Partnership. On September 30, 1999, the Operating Partnership completed a $125 million private placement of 9.0% Series D Cumulative Perpetual Preferred Units ("POP Units") with two institutional investors. The POP Units, which are callable by the Company after five years, have no stated maturity or mandatory redemption, have no voting rights and are not convertible into OP Units or Common Stock. Income is allocated to the POP Units at a preferred rate per annum of 9.0% on the original capital contribution of $125 million. Costs related to the placement of $3.1 million were recorded as a reduction to additional paid-in capital. (l) Income Taxes Due to the structure of the Company as a REIT, the results of operations contain no provision for Federal income taxes. However, the Company may be subject to certain state and local income, excise or franchise taxes. We paid state and local taxes of approximately $20,000, $50,000 and $78,000 during the years ended December 31, 2002, 2001 and 2000, respectively. As of December 31, 2002, net investment in real estate and notes receivable had a Federal tax basis of approximately $697 million and $13 million, respectively. (m) Derivative Instruments and Hedging Activities We recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. On October 29, 2001, the Company entered into a swap agreement (see Note 10). The purpose for the hedge is to effectively fix the interest rate on $100 million of the Company's floating rate unsecured debt. The objective of entering into this hedge was to limit the Company's exposure to variable interest rates. (n) Reclassifications Certain 2001 and 2000 amounts have been reclassified to conform to the 2002 financial presentation. Such reclassifications have no effect on the operations or equity as originally presented. (o) Stock Compensation We have chosen to account for our stock compensation in accordance with APB No. 25, "Accounting for Stock Issued to Employees", based upon the intrinsic value method, which results in no compensation expense for options issued with an exercise price equal to or exceeding the market value of the Common Shares on the date of grant. We will elect to account for our stock compensation in accordance with SFAS No. 123 and its amendment (SFAS No. 148), "Accounting for Stock Based Compensation", effective in the first quarter of 2003, which will result in compensation expense being recorded based on the fair value of the stock option compensation issued. We have not yet determined the effect the statement will have on the Company. F-10
MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - EARNINGS PER COMMON SHARE Earnings per common share are based on the weighted average number of common shares outstanding during each year. Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128") defines the calculation of basic and fully diluted earnings per share. Basic and fully diluted earnings per share are based on the weighted average shares outstanding during each year and basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. The conversion of OP Units has been excluded from the basic earnings per share calculation. The conversion of an OP Unit to a share of common stock has no material effect on earnings per common share. Income from discontinued operations on a basic and fully diluted basis was $0.04 per share for the years ended December 31, 2002, December 31, 2001 and December 31, 2000, respectively. Extraordinary loss on the extinguishment of debt on a basic and fully diluted basis was $0.04 per share for the year ended December 31, 2000. The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31, 2002, 2001, 2000 (amounts in thousands): 2002 2001 2000 -------- -------- -------- NUMERATOR: Numerator for basic earnings per share - Net income ....................................... $ 36,445 $ 32,083 $ 31,945 Effect of dilutive securities: Income allocated to Common OP Units (net of extraordinary loss on early extinguishment of debt) .......................... 8,926 8,209 8,199 -------- -------- -------- Numerator for diluted earnings per share - Income available to Common Stockholders after assumed conversions .............................. $ 45,371 $ 40,292 $ 40,144 ======== ======== ======== DENOMINATOR: Denominator for basic earnings per share - Weighted average Common Stock outstanding ........ 21,617 21,036 21,469 Effect of dilutive securities: Weighted average Common OP Units ................. 5,403 5,466 5,592 Employee stock options ........................... 612 508 347 -------- -------- -------- Denominator for diluted earnings per share - Adjusted weighted average Common Stock outstanding after assumed conversions ........................ 27,632 27,010 27,408 ======== ======== ======== NOTE 4 - COMMON STOCK AND OTHER EQUITY RELATED TRANSACTIONS The following table presents the changes in the Company's outstanding Common Stock for the years ended December 31, 2002, 2001 and 2000 (excluding OP Units of 5,359,927, 5,426,374 and 5,514,330 outstanding at December 31, 2002, 2001 and 2000, respectively): 2002 2001 2000 ------------ ------------ ------------ Shares outstanding at January 1, ............................ 21,562,343 21,064,785 22,813,357 Common Stock issued through conversion of OP Units ..... 66,447 87,956 59,190 Common Stock issued through exercise of options ........ 282,959 387,115 138,029 Common Stock issued through stock grants ............... 108,341 57,000 92,070 Common Stock issued through Employee Stock Purchase Plan 73,150 98,987 68,739 Common Stock repurchased and retired ................... -- (133,500) (2,106,600) ------------ ------------ ------------ Shares outstanding at December 31, .......................... 22,093,240 21,562,343 21,064,785 ============ ============ ============ As of December 31, 2002 and 2001, the Company's percentage ownership of the Operating Partnership was approximately 80%. The remaining approximately 20% is owned by the Common OP Unitholders. F-11
MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - COMMON STOCK AND OTHER EQUITY RELATED TRANSACTIONS (CONTINUED) In March 1997, the Company's Board of Directors approved a Common Stock repurchase plan whereby the Company was authorized to repurchase and retire up to 1.0 million shares of its Common Stock. No shares of Common Stock were repurchased during the years ended December 31, 2002 or 2001. However, under the plan, the Company repurchased approximately 2.1 million shares of Common Stock at an average price of $24.06 per share during the year ended December 31, 2000, using proceeds from borrowings on the Line of Credit. During the year ended December 31, 2000, the Operating Partnership repurchased and cancelled approximately 60,000 OP Units from various holders. On September 30, 1999, the Operating Partnership completed a $125 million private placement of 9.0% Series D Cumulative Perpetual Preferred Units ("POP Units") with two institutional investors. The POP Units, which are callable by the Company after five years, have no stated maturity or mandatory redemption. The Operating Partnership pays distributions of 9.0% per annum on the $125 million of POP Units. Distributions on the POP Units were paid quarterly on the last calendar day of each quarter beginning December 31, 1999. The following distributions have been declared and/or paid to common stockholders and Minority Interests since January 1, 2000. DISTRIBUTION FOR THE QUARTER SHAREHOLDER RECORD AMOUNT PER SHARE ENDING DATE PAYMENT DATE - ---------------- ------------------ -------------------- ------------------ $0.4150 March 31, 2000 March 31, 2000 April 14, 2000 $0.4150 June 30, 2000 June 30, 2000 July 14, 2000 $0.4150 September 30, 2000 September 29, 2000 October 13, 2000 $0.4150 December 31, 2000 December 29, 2000 January 12, 2001 - ---------------- ------------------ -------------------- ------------------ $0.4450 March 31, 2001 March 30, 2001 April 13, 2001 $0.4450 June 30, 2001 June 29, 2001 July 13, 2001 $0.4450 September 30, 2001 September 28, 2001 October 12, 2001 $0.4450 December 31, 2001 December 28, 2001 January 11, 2002 - ---------------- ------------------ -------------------- ------------------ $0.4750 March 31, 2002 March 29, 2002 April 12, 2002 $0.4750 June 30, 2002 June 28, 2002 July 12, 2002 $0.4750 September 30, 2002 September 27, 2002 October 11, 2002 $0.4750 December 31, 2002 December 27, 2002 January 10, 2003 - ---------------- ------------------ -------------------- ------------------ The Company adopted, effective July 1, 1997, the 1997 Non-Qualified Employee Stock Purchase Plan ("ESPP"). Pursuant to the ESPP, certain employees and directors of the Company may each annually acquire up to $250,000 of Common Stock of the Company. The aggregate number of shares of Common Stock available under the ESPP shall not exceed 1,000,000, subject to adjustment by the Board of Directors. The Common Stock may be purchased monthly at a price equal to 85% of the lesser of: (a) the closing price for a share of Common Stock on the last day of the offering period; and (b) the closing price for a share of Common Stock on the first day of the offering period. Shares of Common Stock issued through the ESPP for the years ended December 31, 2002, 2001 and 2000 were 71,107, 96,485 and 68,739, respectively. F-12
MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 - INVESTMENT IN REAL ESTATE Land improvements consist primarily of improvements such as grading, landscaping and infrastructure items such as streets, sidewalks or water mains. Depreciable property consists of permanent buildings in the Properties such as clubhouses, laundry facilities, maintenance storage facilities, and furniture, fixtures and equipment. During the year ended December 31, 2000, in accordance with a settlement agreement (the "Settlement") related to our purchase of a portfolio of Properties known as the Ellenburg Acquisition, we received $13.5 million previously held in escrow of which $3.0 million was recorded as interest income related to these funds. In connection with the Settlement, we sold three communities - Mesa Regal RV Resort, Mon Dak and Naples Estates - for an aggregate sales price of $59.0 million, including cash proceeds of $40.0 million and assumption of debt by the purchaser of $19.0 million. On February 29, 2000, a consolidated subsidiary of the Company, sold the water and wastewater service company and facilities known as FFEC-Six in a cash sale with net proceeds of approximately $4.2 million and a gain on the sale of $719,000 (or $0.03 per fully diluted share) was recorded in other income on the accompanying statement of operations for the year ended December 31, 2000. In March 2000, in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of", a consolidated subsidiary of the Company, recorded an impairment loss on the DeAnza Santa Cruz water and wastewater service company business. Our 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. We recorded an asset impairment loss of $701,000 (or $0.03 per fully diluted share) which is included as a reduction of other income in the accompanying statement of operations for the year ended December 31, 2000. This loss represents the difference between the carrying value of the DeAnza Santa Cruz water and wastewater service company business and its related assets and their estimated fair market value. During the year ended December 31, 2001, we acquired two Florida Properties, totaling 730 sites, for an aggregate purchase price of approximately $17.3 million and completed the sale of seven properties, totaling 1,281 sites, in Kansas, Missouri and Oklahoma, for a total sale price of approximately $17.4 million. A gain of $8.1 million was recorded on the sale. In addition, we terminated a lease to a third-party operator for the campground and RV resort facilities at the Property known as Bulow Plantation in Flagler Beach, Florida, and assumed operation of these facilities directly. Also during 2001, we finalized a settlement agreement whereby we received $10.8 million in proceeds related to the sale of a Property in Indiana. During the year ended December 31, 2002, we acquired the eleven Properties listed in the table below. The acquisitions were funded with borrowings on our Line of Credit and the assumption of $47.9 million of mortgage debt, which includes a $3.0 million discount mark-to-market adjustment. In addition, we purchased adjacent land and land improvements for several Properties for approximately $559,000. TOTAL PURCHASE DATE ACQUIRED PROPERTY LOCATION SITES PRICE DEBT ASSUMED - ----------------- ----------------------- ------------------- ----- ------------ ------------ ($ millions) ($ millions) March 12, 2002 Mt. Hood Village Welches, OR 450 $ 7.2 $ --- July 10, 2002 Harbor View Village New Port Richey, FL 471 15.5 8.1 July 31, 2002 Golden Sun Apache Junction, AZ 329 6.3 3.1 July 31, 2002 Countryside RV Resort Apache Junction, AZ 560 7.5 --- July 31, 2002 Holiday Village Ormond Beach, FL 301 10.4 7.1 July 31, 2002 Breezy Hill RV Resort Pompano Beach, FL 762 20.5 10.5 August 14, 2002 Highland Woods Pompano Beach, FL 148 3.9 2.5 August 7, 2002 Tropic Winds RV Resort Harlingen, TX 531 4.9 --- October 1, 2002 Silk Oak Lodge Clearwater, FL 180 6.2 3.9 December 18, 2002 Hacienda Village New Port Richey, FL 519 16.8 10.2 December 31, 2002 Glen Ellen Clearwater, FL 117 2.4 2.5 ----- ------------ ------------ TOTALS 4,368 $ 101.6 $ 47.9 ===== ============ ============ F-13
MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 - INVESTMENT IN REAL ESTATE (CONTINUED) Also during 2002, we effectively sold 17 Properties as part of a restructuring of the College Heights Joint Venture discussed hereinafter. In addition, we sold Camelot Acres, a 319 site Property in Burnsville, Minnesota, for approximately $14.2 million. All acquisitions have been accounted for utilizing the purchase method of accounting and, accordingly, the results of operations of acquired assets are included in the statements of operations from the dates of acquisition. We acquired all of the Properties from unaffiliated third parties. During the years ended December 31, 2002 and 2001, we capitalized approximately $5.7 million and $2.4 million of costs, respectively, primarily legal costs, relative to our efforts to effectively change the use and operations of several Properties which are currently recorded in other assets. These costs will be expensed if management determines these efforts will not be successful. We actively seek to acquire additional Properties and currently are engaged in negotiations relating to the possible acquisition of a number of Properties. 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 our due diligence review. NOTE 6 - INVESTMENT IN JOINT VENTURE The Company recorded approximately $1.3 million, $283,000 and $8,000 of net income from joint ventures in the years ended December 31, 2002, 2001 and 2000, respectively; and received approximately $607,000 and $1.6 million in distributions in the years ended December 31, 2002 and 2001, respectively. Due to the Company's inability to control the joint ventures, the Company accounts for its investment in the joint ventures using the equity method of accounting. The following is a summary of the Company's investments on unconsolidated joint ventures: NUMBER OF ECONOMIC INVESTMENT AS OF INVESTMENT AS OF PROPERTY LOCATION SITES INTEREST (A) DEC. 31, 2002 DEC. 31, 2001 - -------------------------------------- -------------- --------- ------------ ---------------- ---------------- (in thousands) (in thousands) Trails West Tucson, AZ 503 50% $ 1,917 $ 1,908 Plantation Calimesa, CA 385 50% 2,861 2,763 Manatee Bradenton, FL 290 90% 631 723 Home Hallandale, FL 136 90% 1,092 1,106 Villa del Sol Sarasota, FL 207 90% 726 808 Voyager RV Resort Tucson, AZ -- 25% 4,463 4,545 Preferred Interests in College Heights -- 17% 7,944 -- --------- ---------------- ---------------- 1,521 $ 19,634 $ 11,853 ========= ================ ================ (a) The percentages shown approximate the Company's economic interest. The Company's legal interest may differ. Effective September 1, 2002, the Company restructured its investment in Wolverine Property Investment Limited Partnership (the "College Heights Joint Venture" or the "Venture"), a joint venture with Wolverine Investors, LLP. The Venture included 18 Properties with 3,581 sites. The results of operations of the College Heights Joint Venture prior to restructuring were included with the results of the Company due to the Company's voting equity interest and control over the Venture. Pursuant to the restructuring, the Company sold its general partnership interest, sold all of the Company's voting equity interest and reduced the Company's total investment in the College Heights Joint Venture. As consideration for the sale, the Company retained sole ownership of Down Yonder, a 361 site Community in Clearwater, Florida, received cash of approximately $5.2 million and retained preferred limited partnership interests of approximately $10.3 million, recorded net of a $2.4 million reserve. The continuing preferred limited partnership interests will be accounted for using the equity method and reported as an investment in a joint venture. F-14
MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 - ACQUISITION OF REALTY SYSTEMS, INC. On January 1, 2002, the Company purchased all of the common stock of Realty Systems, Inc. ("RSI"). The Company previously owned the non-voting preferred stock of RSI and had notes receivable from RSI which were recorded as an investment in affiliate. The Company purchased the common stock of RSI from Equity Group Investments, Inc., controlled by Samuel Zell, Chairman of the Board of Directors of the Company, for approximately $675,000. As a result of this acquisition, the Company owns and controls RSI and consolidates the financial results of RSI with those of the Company. Prior to the purchase of the common stock of RSI, we accounted for our investment in RSI on the equity method and classified the investment as investment in and advances to affiliates. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition: (amounts in thousands) ASSETS Buildings and other depreciable property $ 6,656 Cash and cash equivalents .............. 839 Notes receivable ....................... 4,772 Investment in joint ventures ........... 200 Inventory .............................. 35,524 Prepaid expenses and other assets ...... 2,724 ---------------------- Total assets acquired ............... 50,715 LIABILITIES Other notes payable .................... (12,862) Accounts payable and accrued expenses .. (2,718) Accrued interest payable ............... (73) ---------------------- Total liabilities assumed ........... (15,653) Conversion of previous investment ...... (34,387) ---------------------- Cash paid for common equity interest ... $ (675) ====================== NOTE 8 - NOTES RECEIVABLE At December 31, 2002 and 2001, the Company had approximately $10.0 million and $1.5 million in notes receivable, respectively. On December 28, 2000, the Company, in connection with the Voyager Joint Venture, entered into an agreement to loan $3.0 million to certain principals of Meadows Management Company. The notes are collateralized with a combination of Common OP Units and partnership interests in this and other joint ventures. The notes bear interest at prime plus 0.5% per annum, require quarterly interest only payments and mature on December 31, 2011. The outstanding balance on these notes as of December 31, 2002 is $1.5 million. The Company has approximately $8.5 million in Chattel Loans receivable, which yield interest at a per annum average rate of approximately 9.4%, have an average term and amortization of 5 to 15 years, require monthly principal and interest payments and are collateralized by manufactured homes at certain of the Properties. NOTE 9 - EMPLOYEE NOTES RECEIVABLE As of December 31, 2002 and 2001, the Company had employee notes receivable of approximately $2.7 million and $3.8 million respectively, collateralized by shares of the Company's Common Stock. These notes are presented as a reduction of Stockholder's Equity. In December 1992, certain directors, officers and other individuals each entered into subscription agreements with the Company to acquire a total of 440,000 shares of the Company's Common Stock at $7.25 per share. The Company received from these individuals notes (the "1993 Employee Notes") in exchange for their shares. The 1993 Employee Notes accrued interest at 6.77% per annum, matured on March 2, 2003 and were repaid before the maturity date. F-15
MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - EMPLOYEE NOTES RECEIVABLE (CONTINUED) On January 2, 1996, certain members of management of the Company entered into subscription agreements with the Company to acquire a total of 270,000 shares of the Company's Common Stock at $17.375 per share, the market price on that date. The Company received from these individuals notes (the "1996 Employee Notes") in exchange for their shares. The 1996 Employee Notes accrue interest at 5.91% per annum, mature on January 2, 2005, and are recourse against the employees in the event the pledged shares are insufficient to repay the obligations. NOTE 10 - LONG-TERM BORROWINGS As of December 31, 2002 and December 31, 2001, the Company had outstanding mortgage indebtedness of approximately $575.4 million and $590.4 million, respectively, encumbering 66 and 77 of the Company's Properties, respectively. As of December 31, 2002 and December 31, 2001, the carrying value of such Properties was approximately $720 million and $693 million, respectively. The outstanding mortgage indebtedness as of December 31, 2002 consists of: - - A $265.0 million mortgage note (the "$265 Million Mortgage") collateralized by 28 Properties beneficially owned by MHC Financing Limited Partnership. The $265 Million Mortgage has a maturity date of January 2, 2028 and pays interest at 7.015% per annum. There is no principal amortization until February 1, 2008, after which principal and interest are to be paid from available cash flow and the interest rate will be reset at a rate equal to the then 10-year U.S. Treasury obligations plus 2.0%. The $265 Million Mortgage is presented net of a settled hedge of $3.0 million (net of accumulated amortization of $247,000) which is being amortized into interest expense over the life of the loan. - - A $92.3 million mortgage note (the "DeAnza Mortgage") collateralized by 6 Properties beneficially owned by MHC-DeAnza Financing Limited Partnership. The DeAnza Mortgage bears interest at a rate of 7.82% per annum, amortizes beginning August 1, 2000 over 30 years and matures July 1, 2010. - - A $49.4 million mortgage note (the "Stagecoach Mortgage") collateralized by 7 Properties beneficially owed by MHC Stagecoach L.L.C. The Stagecoach Mortgage bears interest at a rate of 6.98% per annum, amortizes beginning September 1, 2001 over 10 years and matures September 1, 2011. - - A $22.0 million mortgage note (the "Bay Indies Mortgage") collateralized by one Property beneficially owned by MHC-Bay Indies Financing Limited Partnership. The Bay Indies Mortgage bears interest at a rate of 7.48% per annum, amortizes beginning August 1, 1994 over 27.5 years and matures July 1, 2004. - - A $15.5 million mortgage note (the "Date Palm Mortgage") collateralized by one Property beneficially owned by MHC Date Palm, L.L.C. The Date Palm Mortgage bears interest at a rate of 7.96% per annum, amortizes beginning August 1, 2000 over 30 years and matures July 1, 2010. - - Approximately $131.6 million of mortgage debt on 24 other various Properties, which was recorded at fair market value with the related discount or premium being amortized over the life of the loan using the effective interest rate. Scheduled maturities for the outstanding indebtedness are at various dates through November 30, 2020, and fixed interest rates range from 6.5% to 9.3% per annum. Included in this debt, the Company has a $2.4 million loan recorded to account for a direct financing lease entered into in May 1997. We have an unsecured Line of Credit with a group of banks (the "Line of Credit") with a total facility of $150 million, bearing interest at a rate of LIBOR plus 1.125% that matures on August 9, 2003 with two one-year extension options with which we may extend the maturity through August 9, 2005. We pay a quarterly fee on the average unused amount of the total facility equal to 0.15% of such amount. As of December 31, 2002, $65.3 million was available under the Credit Agreement. We have a $100 million unsecured term loan (the "Term Loan") with a group of banks with interest only payable monthly at the London Interbank Offered Rate ("LIBOR") of LIBOR plus 1.0% that matures on August 9, 2003 with two one-year extension options with which we may extend the maturity through August 9, 2005 F-16
MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - LONG-TERM BORROWINGS (CONTINUED) On October 29, 2001, we entered into the 2001 Swap effectively fixing the LIBOR rate on $100 million of our floating rate debt at approximately 3.7% per annum for the period October 2001 through August 2004. The terms of the 2001 Swap require monthly settlements on the same dates interest payments are due on the debt. In accordance with SFAS No. 133 as herein defined, the 2001 Swap will be reflected at market value. We believe the 2001 Swap is a perfectly effective cash flow hedge, under SFAS No. 133, and there will be no effect on net income as a result of the mark-to-market adjustments. As of December 31, 2002, the hedge represented a liability of approximately $4.5 million and is recorded in accounts payable and accrued expenses. Mark-to-market changes in the value of the swap are included in other comprehensive income. In July 1998, we entered into an interest rate swap agreement (the "1998 Swap") effectively fixing LIBOR on $100 million of the Company's floating rate debt at 6.4% for the period 1998 through 2003. The cost of the 1998 Swap consisted only of legal costs that were deemed immaterial. The value of the 1998 Swap was impacted by changes in the market rate of interest. We accounted for the 1998 Swap as a hedge. Payments and receipts under the 1998 Swap were accounted for as an adjustment to interest expense. On January 10, 2000, we unwound the 1998 Swap and received $1.0 million of proceeds which is being amortized into interest expense through March 2003. Aggregate payments of principal on long-term borrowings for each of the next five years and thereafter are as follows (amounts in thousands): YEAR AMOUNT -------------------------------------- ----------- 2003 $ 13,753 2004 38,758 2005 193,377 2006 19,965 2007 268,494 Thereafter 225,190 Net unamortized premiums and discounts 696 ----------- Total $ 760,233 =========== NOTE 11 - LEASE AGREEMENTS The leases entered into between the tenant and the Company for the rental of a site are month-to-month or for a period of one to ten years, renewable upon the consent of the parties or, in some instances, as provided by statute. Noncancelable long-term leases are in effect at certain sites within 25 of the Properties. Rental rate increases at these Properties are primarily a function of increases in the Consumer Price Index, taking into consideration certain floors and ceilings. Additionally, periodic market rate adjustments are made as deemed necessary. Future minimum rents are scheduled to be received under noncancelable tenant leases at December 31, 2002 as follows (amounts in thousands): YEAR AMOUNT ----------- ------------- 2003 $ 44,211 2004 45,999 2005 43,378 2006 32,432 2007 29,443 Thereafter 38,528 ------------- Total $ 233,991 ============= F-17
MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 - GROUND LEASES The Company leases land under noncancellable operating leases at certain of the Properties expiring in various years from 2022 to 2031 with terms which require twelve equal payments per year plus additional rents calculated as a percent of gross revenues. For the years ended December 31, 2002, 2001 and 2000, ground lease rent was $1.6 million. Minimum future rental payments under the ground leases are $1.6 million for each of the next five years and $26.3 million thereafter. NOTE 13 - TRANSACTIONS WITH RELATED PARTIES Equity Group Investments, Inc. ("EGI"), an entity controlled by Mr. Samuel Zell, Chairman of the Board of Directors, and certain of its affiliates have provided services such as administrative support, investor relations, corporate secretarial, real estate tax evaluation services, market consulting and research services. Fees paid to EGI and its affiliates amounted to approximately $1,000, $2,000 and $26,000 for the years ended December 31, 2002, 2001 and 2000, respectively. There were no significant amounts due to these affiliates as of December 31, 2002 and 2001, respectively. Certain related entities, owned by persons affiliated with Mr. Zell, have provided services to the Company. These entities include, but are not limited to, The Riverside Agency, Inc. which provided insurance brokerage services and Equity Office Properties Trust, of which Mr. Zell is the Chairman of the Board, which provides office space to the Company. Fees paid to these entities amounted to approximately $645,000, $454,000 and $442,000 for the years December 31, 2002, 2001 and 2000, respectively. Amounts due to these affiliates were approximately $52,000 and $32,000 as of December 31, 2002 and 2001, respectively. Related party agreements or fee arrangements are generally for a term of one year and approved by independent members of the Board of Directors. NOTE 14 - STOCK OPTION PLAN AND STOCK GRANTS A Stock Option Plan (the "Plan") was adopted by the Company in December 1992. Pursuant to the Plan, certain officers, directors, employees and consultants of the Company may be offered the opportunity to acquire shares of Common Stock through the grant of stock options ("Options"), including non-qualified stock options and, for key employees, incentive stock options within the meaning of Section 422 of the Internal Revenue Code. The Compensation Committee will determine the vesting schedule, if any, of each Option and the term, which term shall not exceed ten years from the date of grant. As to the Options that have been granted through December 31, 2002, generally, one-third are exercisable one year after the initial grant, one-third are exercisable two years following the date such Options were granted and the remaining one-third are exercisable three years following the date such Options were granted. The Plan allows for 10,000 Options to be granted annually to each director. The Common Stock with respect to which the Options may be granted during any calendar year to any grantee shall not exceed 250,000 shares. In addition, the Plan provides for the granting of stock appreciation rights ("SARs") and restricted stock grants ("Stock Grants"). A maximum of 4,000,000 shares of Common Stock were available for grant under the Plan as of December 31, 2002. In 1998, the Company awarded 233,500 Stock Grants to certain members of senior management of the Company. These Stock Grants vest over five years, but may be restricted for a period of up to ten years depending upon certain performance benchmarks tied to increases in funds from operations being met. The fair market value of these Stock Grants of approximately $5.7 million as of the date of grant was treated in 1998 as deferred compensation and amortized in accordance with their vesting. The Company amortized approximately $1.1 million, $2.0 million, and $593,000 related to these Stock Grants in 2002, 2001, and 2000, respectively. The balance of unamortized deferred compensation related to these Stock Grants is $1.1 million as of December 31, 2002. In 1999, the Company awarded 65,000 Stock Grants to certain members of senior management of the Company. These Stock Grants vest over three years with one-half vesting in 1999. The fair market value of these Stock Grants of approximately $1.5 million as of the date of grant was treated in 1999 as deferred compensation and amortized in accordance with their vesting. The Company amortized approximately $0, $386,000, and $385,000 related to these Stock Grants in 2002, 2001, and 2000, respectively. The balance of unamortized deferred compensation related to these Stock Grants is $0 as of December 31, 2002. F-18
MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 - STOCK OPTION PLAN AND STOCK GRANTS (CONTINUED) In 2000, the Company awarded 69,750 Stock Grants to certain members of senior management of the Company. These Stock Grants vest over three years with one-half vesting in 2000. The fair market value of these Stock Grants of approximately $1.9 million as of the date of grant was treated in 2000 as deferred compensation and amortized in accordance with their vesting. The Company amortized approximately $478,000, $478,000, and $955,000 related to these Stock Grants in 2002, 2001, and 2000, respectively. The balance of unamortized deferred compensation related to these Stock Grants is $0 as of December 31, 2002. In 2001, the Company awarded 43,000 Stock Grants to certain members of senior management of the Company. These Stock Grants vest over five years, but may be restricted for a period of up to ten years depending upon certain performance benchmarks tied to increases in funds from operations being met. The fair market value of these Stock Grants of approximately $1.2 million as of the date of grant was treated in 2001 as deferred compensation and amortized in accordance with their vesting. The Company amortized approximately $239,000 and $239,000 related to these Stock Grants in 2002 and 2001, respectively. The balance of unamortized deferred compensation related to these Stock Grants is approximately $718,000 as of December 31, 2002. In 2002, the Company awarded 69,750 Stock Grants to certain members of senior management of the Company. These Stock Grants vest over three years, but may be restricted for a period of up to ten years depending upon certain performance benchmarks tied to increases in funds from operations being met. The fair market value of these Stock Grants of approximately $2.2 million as of the date of grant was treated in 2002 as deferred compensation and amortized in accordance with their vesting. The Company amortized approximately $1.4 million related to these Stock Grants in 2002. The balance of unamortized deferred compensation related to these Stock Grants is approximately $724,000 as of December 31, 2002. In 1999, the Plan was amended to provide a Stock Grant of 2,000 shares vesting over three years in lieu of the 10,000 Options granted after the amendment to each director, if the director so elects. The fair market value of Stock Grants awarded to directors of approximately $537,000, $432,000 and $401,000 in 2002, 2001 and 2000 respectively, were treated as deferred compensation and amortized in accordance with their vesting. The Company amortized approximately $457,000 related to these Stock Grants in 2002. The balance of unamortized deferred compensation related to the 2002, 2001 and 2000 Stock Grants is $358,000, $144,000 and $0, respectively, as of December 31, 2002. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for its Options and Stock Grants because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's Options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Additionally, the amount recognized as expense for the Stock Grants during any given year of the performance period is dependent on certain performance benchmarks being met. Effective in the first quarter of 2003, we will adopt the fair value method as proscribed in SFAS No. 123. We have not yet determined which of the proposed methodologies we will utilize. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its Options and Stock Grants under the fair value method of that Statement. The fair value for the Options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2002, 2001 and 2000, respectively: risk-free interest rates of 3.5%, 3.5% and 5.5%; dividend yields of 5.6%, 6.3% and 6.3%; volatility factors of the expected market price of the Company's Common Stock of .14, .19 and .20; and a weighted-average expected life of the Options of 5 years. The fair value of the Stock Grants granted in 2001, 2001 and 2000 has been estimated at approximately 30% below the calculated fair market value on the date of grant because these Stock Grants may remain restricted even after they become fully vested. F-19
MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 - STOCK OPTION PLAN AND STOCK GRANTS (CONTINUED) The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's Options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company's Options. In addition, the existing models are not representative of the effects on reported net income for future years. For purposes of pro forma disclosures, the estimated fair value of the Options is amortized to expense over the Options' vesting period and the estimated fair value of the Stock Grants is amortized to expense over the same period. The pro forma effect of SFAS No. 123 on the Company's net income for the years ended December 31, 2002, 2001 and 2000 was $296,000 ($0.01 per share), $725,000 ($0.02 per share) and $479,000 ($0.1 per share), respectively. A summary of the Company's stock option activity, and related information for the years ended December 31, 2002, 2001 and 2000 follows: WEIGHTED AVERAGE SHARES SUBJECT EXERCISE PRICE PER TO OPTIONS SHARE -------------- ------------------- Balance at December 31, 1999 2,019,447 $ 21.72 Options granted 440,077 25.94 Options exercised (250,092) 23.17 Options canceled (101,227) 24.33 -------------- Balance at December 31, 2000 2,108,205 22.30 Options granted 234,150 29.44 Options exercised (387,115) 19.98 Options canceled (69,891) 25.05 -------------- Balance at December 31, 2001 1,885,349 23.57 Options granted 105,750 31.97 Options exercised (283,159) 20.48 Options canceled (49,493) 24.94 -------------- Balance at December 31, 2002 1,658,447 24.59 ============== On March 23, 2001, the Company's Board of Directors approved resolutions amending and restating the Plan effective March 23, 2001 (the "Amended Plan") to increase the number of Common Shares issuable thereunder by 2,000,000 shares of Common Stock to an aggregate of 6,000,000 shares. On May 8, 2001, the Company's shareholders approved the Amended Plan. As of December 31, 2002, 2001 and 2000, 1,252,344 shares, 1,252,344 shares and 416,603 shares remained available for grant, respectively, and 1,328,617, shares, 1,422,211 shares and 1,562,074 shares were exercisable, respectively. Exercise prices for Options outstanding as of December 31, 2002 ranged from $12.88 to $33.55, with the substantial majority of the exercise prices exceeding $19.28. The remaining weighted-average contractual life of those Options was 5.6 years. The weighted average exercise price of outstanding and exercisable Options was $27.03 as of December 31, 2002. NOTE 15 - PREFERRED STOCK The Company's Board of Directors is authorized under the Company's charter, without further stockholder approval, to issue, from time to time, in one or more series, 10,000,000 shares of $.01 par value preferred stock (the "Preferred Stock"), with specific rights, preferences and other attributes as the Board may determine, which may include preferences, powers and rights that are senior to the rights of holders of the Company's Common Stock. However, under certain circumstances, the issuance of preferred stock may require stockholder approval pursuant to the rules and regulations of The New York Stock Exchange. As of December 31, 2002 and 2001, no Preferred Stock was issued by the Company. F-20
MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16 - SAVINGS PLAN The Company has a qualified retirement plan, with a salary deferral feature designed to qualify under Section 401 of the Code (the "401(k) Plan"), to cover its employees and those of its Subsidiaries, if any. The 401(k) Plan permits eligible employees of the Company and those of any Subsidiary to defer up to 19% of their eligible compensation on a pre-tax basis subject to certain maximum amounts. In addition, the Company will match dollar-for-dollar the participant's contribution up to 4% of the participant's eligible compensation. In addition, amounts contributed by the Company will vest, on a prorated basis, according to the participant's vesting schedule. After five years of employment with the Company, the participants will be 100% vested for all amounts contributed by the Company. Additionally, a discretionary profit sharing component of the 401(k) Plan provides for a contribution to be made annually for each participant in an amount, if any, as determined by the Company. All employee contributions are 100% vested. The Company's contribution to the 401(k) Plan was approximately $248,000, $353,000 and $315,000, for the years ended December 31, 2002, 2001 and 2000, respectively. The Company's plan contribution for the profit sharing component of the 401(k) Plan is $142,000 for the year ended December 31, 2002. The Company has established a supplemental executive retirement plan (the "SERP") to provide certain officers and directors an opportunity to defer a portion of their eligible compensation in order to save for retirement and for the education of their children. The SERP is restricted to investments in Company common shares, certain marketable securities that have been specifically approved, or cash equivalents. In accordance with EITF 97-14 "Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested", the deferred compensation liability represented in the SERP and the securities issued to fund such deferred compensation liability are consolidated by the Company on the balance sheet. Assets held in the SERP are included in other assets and are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. Company shares held in the SERP are classified in shareholders equity due to the inability of the Company to repurchase these shares. NOTE 17 - COMMITMENTS AND CONTINGENCIES DEANZA SANTA CRUZ MOBILE ESTATES The residents of DeAnza Santa Cruz Mobile Estates, a property located in Santa Cruz, California, brought several actions opposing fees and charges in connection with water service at the property. As a result of one action, the Company rebated approximately $36,000 to the residents. The DeAnza Santa Cruz Homeowners Association then proceeded to a jury trial alleging these "overcharges" entitled them to an award of punitive damages. In January 1999, a jury awarded the HOA $6.0 million in punitive damages. On December 21, 2001 the California Court of Appeal for the Sixth District reversed the $6.0 million punitive damage award, the related award of attorneys' fees, and, as a result, all post-judgment interest thereon, on the basis that punitive damages are not available as a remedy for a statutory violation of the California Mobile Home Residency Law ("MRL"). The decision of the appellate court left the HOA, the plaintiff in this matter, with the right to seek a new trial in which it must prove its entitlement to either the statutory penalty and attorneys' fees available under the MRL or punitive damages based on causes of action for fraud, misrepresentation or other tort. In order to resolve this matter, the Company accrued for and agreed to pay $201,000 to the HOA. This payment resolves the punitive damage claim. The HOA's attorney has made a motion asking for an award of attorneys' fees and costs in the amount of approximately $1.5 million as a result of this resolution of the litigation. The Company will vigorously oppose any award of attorneys' fees and costs and has asked the court to rule that the Company is the prevailing party. In a separate matter, in December 2000 the HOA and certain individual residents of the Property filed a complaint in the Superior Court of California, County of Santa Cruz (No. CV 139825) against the Company, certain affiliates of the Company and certain employees of the Company (the "2000 Lawsuit"). The 2000 Lawsuit sought damages, including punitive damages, for intentional infliction of emotional distress, unfair business practices, and unlawful retaliation purportedly arising from allegedly retaliatory rent increases which were noticed by the Company to certain residents in September 2000. The Company believes that the residents who received rent increase notices with respect to rent increases above those permitted by the local rent control ordinance were not covered by the ordinance either because they did not comply with the provisions of the ordinance or because they are exempted by state law. On December 29, 2000, the Superior Court of California, County of Santa Cruz enjoined such rent increases. F-21
MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17 - COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company entered into a settlement agreement with the plaintiffs in the 2000 Lawsuit which settlement was approved by the court on July 22, 2002. The Company believes the settlement agreement is of significant benefit to the Company. First, pursuant to the settlement agreement all past, present and future tenants of the Property agree to alternative dispute resolution procedures which provide that during the next 25 years future disputes will be resolved through arbitration before a retired judge rather than in court, and that in such future arbitration proceedings all claims to trial by jury and for punitive damages are waived. Second, the settlement agreement provides a process for determining the rent for 15 sites not subject to rent control, including in certain circumstances, back rent owing from certain dates in 2001. The settlement agreement generally gives tenants at these sites three (3) options with respect to their tenancies. Such tenants may (1) enter into a 34-year lease providing a rent based on rent control with future escalations based on the CPI, but with the Company retaining the right to charge market rents determined by the Company upon turnover; (2) enter into a ten (10) year lease with a monthly rent to be determined by binding arbitration and effective October 1, 2001; or (3) elect to sell such tenant's home to a third party and pay back rent owing to the Company (the amount of which will be determined by arbitration if not agreed to between the tenant and the Company) since January 1, 2001. In certain circumstances the Company will purchase the tenant's home based upon a mechanism provided in the settlement agreement. In exchange for the tenants' agreement to the alternative dispute resolution procedures, the process for resolving back rent owed by tenants not subject to rent control, and to dismiss the 2000 Lawsuit, the Company accrued for and agreed to pay $730,000 in 2002. OTHER CALIFORNIA RENT CONTROL LITIGATION As part of the Company's effort to realize the value of its Properties subject to rent control, the Company has initiated lawsuits against several municipalities in California. The Company's goal is to achieve a level of regulatory fairness in California's rent control jurisdictions, and in particular those jurisdictions that prohibit increasing rents to market upon turnover. This regulatory feature, called vacancy control, allows tenants to sell their homes for a premium representing the value of the future discounted rent-controlled rents. In the Company's view, such regulation results in a transfer of the value of the Company's shareholders' land, which would otherwise be reflected in market rents, to tenants upon the sales of their homes in the form of an inflated purchase price that cannot be attributed to the value of the home being sold. As a result, in the Company's view, the Company loses the value of its asset and the selling tenant leaves the community with a windfall premium. The Company has discovered through the litigation process that certain municipalities considered condemning the Company's communities at values well below the value of the underlying land. In the Company's view, a failure to articulate market rents for sites governed by restrictive rent control would put the Company at risk for condemnation or eminent domain proceedings based on artificially reduced rents. Such a physical taking, should it occur, could represent substantial lost value to shareholders. The Company is cognizant of the need for affordable housing in the jurisdictions, but asserts that restrictive rent regulation with vacancy control does not promote this purpose because the benefits of such regulation are fully capitalized into the prices of the homes sold. The Company estimates that the annual rent subsidy to tenants in these jurisdictions is approximately $15 million. In a more well-balanced regulatory environment, the Company would receive market rents that would eliminate the subsidy and homes would trade at or near their intrinsic value. The Company's efforts to achieve a balanced regulatory environment incentivize tenant groups to file lawsuits against the Company seeking large damage awards. The 2000 Lawsuit described above under DeAnza Santa Cruz Mobile Estates is one example. The homeowners association at Contempo Marin ("CMHOA"), a 396 site property in San Rafael, California, sued the Company in December 2000 over a prior settlement agreement on a capital pass-through after the Company sued the City of San Rafael in October 2000 alleging its rent control ordinance is unconstitutional. In the Contempo Marin case, the CMHOA prevailed on a motion for summary judgment on an issue that permits the Company to collect only $3.72 out of a pass-through amount of $7.50 that the Company believes had been agreed to by the CMHOA in a settlement agreement. The Company intends to vigorously defend the matter. The Company believes that such lawsuits will be a consequence of the Company's efforts to change rent control since tenant groups actively desire to preserve the premium value of their homes in addition to the discounted rents provided by rent control. The Company has determined that its efforts to rebalance the regulatory environment despite the risk of litigation from tenant groups are necessary not only because of the $15 million annual subsidy to tenants, but also because of the condemnation risk. F-22
MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17 - COMMITMENTS AND CONTINGENCIES (CONTINUED) ELLENBURG COMMUNITIES The Company and certain other parties entered into a settlement agreement (the "Settlement"), which was approved by the Los Angeles County Superior Court in April 2000. The Settlement resolved substantially all of the litigation and appeals involving the Ellenburg Properties, and transactions arising out of the settlement closed on May 22, 2000. Only the appeal of one entity remains, the outcome of which is not expected to materially affect the Company (see Note 5). In connection with the Ellenburg Acquisition, on September 8, 1999, Ellenburg Fund 20 ("Fund 20") filed a cross complaint in the Ellenburg dissolution proceeding against the Company and certain of its affiliates alleging causes of action for fraud and other claims in connection with the Ellenburg acquisition. The Company subsequently successfully had the cross complaint against the Company and its affiliates dismissed with prejudice by the California Superior Court. However, Fund 20 has appealed. Although, this appeal was one not resolved by the Settlement, the California Court of Appeal dismissed Fund 20's substantive appeals on March 13, 2003 as moot. In October 2001, Fund 20 sued the Company and certain of its affiliates again, this time in Alameda County, California making substantially the same allegations. The Company obtained an injunction preventing the case from proceeding until the Fund 20 appeal is decided and other related proceedings in Arizona (from which the Company has already been dismissed with prejudice) are concluded. When the March 13, 2003 Court of Appeal dismissal becomes final in May 2003, the Company will seek to have the Alameda County action dismissed if Fund 20 will not voluntarily dismiss this action. The Company believes Fund 20's allegations are without merit and will vigorously defend itself. COUNTRYSIDE AT VERO BEACH The Company has received letters dated June 17, 2002 and August 26, 2002 from Indian River County ("County"), claiming that the Company currently owes sewer impact fees in the amount of approximately $518,000 with respect to the Property known as Countryside at Vero Beach, located in Vero Beach, Florida, purportedly under the terms of an agreement between the County and a prior owner of the Property. In response, the Company has advised the County that these fees are no longer due and owing as a result of a 1996 settlement agreement between the County and the prior owner of the Property, providing for the payment of $150,000 to the County to discharge any further obligation for the payment of impact or connection fees for sewer service at the Property. The Company paid this settlement amount (with interest) to the County in connection with the Company's acquisition of the Property. Accordingly, the Company believes that the County's claims are without merit. DELAWARE DECLARATORY JUDGMENT ACTION In April 2002, the Company entered into a Stipulation and Consent Order to Cease and Desist (the "Consent Order") with the State of Delaware (the "State"). The Consent Order resolved various issues raised by the State concerning the terms of a new lease form used or proposed for use by the Company at certain of its Properties in Delaware. Among other provisions, the Consent Order contemplated that the Company would work with the State to develop and implement a new lease form for use in Delaware. The Consent Order expressly provided that nothing contained therein would preclude the Company from seeking declaratory relief from a court as to the legality or enforceability of any provisions which the Company might wish to incorporate in future leases. Throughout the summer of 2002, the Company's Delaware legal counsel engaged in dialogue with representatives of the State concerning various matters, including the lease provisions to which the State had objected but which the Company wished to incorporate in future leases. Through this process, it became apparent that the parties could not reach agreement as to the legality or enforceability of the proposed lease provisions, and that the Company would need to seek declaratory relief from a court in order to resolve the matter, as contemplated by the Consent Order. Accordingly, on August 29, 2002, the Company filed a Petition for Declaratory Judgment and Other Relief (as amended, the "Petition") in Sussex County, Delaware Superior Court (the "Court"). F-23
MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17 - COMMITMENTS AND CONTINGENCIES (CONTINUED) In response to the filing of the Petition, on October 1, 2002, the State filed its Answer to Petition for Declaratory and Other Relief, and Counterclaims for Civil Enforcement and Contempt (as amended, "Answer and Counterclaim") with the Court. In the Answer and Counterclaim, the State seeks, inter alia, restitution, statutory penalties, investigative costs and attorneys' fees under the Delaware Mobile Home Lots and Leases Act, the Consumer Fraud Act, the Uniform Deceptive Trade Practices Act and the Delaware Consumer Contracts law, and separately seeks a finding of contempt and related contempt penalties for alleged violations of the Consent Order. The Company filed a Motion to Dismiss Respondents' Counterclaims with the Court on October 29, 2002, and the State filed a Motion for Summary Judgment with the Court on November 15, 2002. These motions are in the briefing stage. On December 30, 2002, the Company filed a First Amended Petition for Declaratory Judgment and Other Relief with the Court, and on January 31, 2003, the State filed an Amended Answer and Counterclaim with the Court. The State filed a Motion to Dismiss with Prejudice Petitioner's First Amended Petition for Declaratory Judgment an Other Relief for Failure to Join and Indispensable Third Party with the Court on February 25, 2003. The Company believes that it has complied, and continues to comply, with the Consent Order, and that the filing of the Petition was expressly contemplated by the Consent Order. The Company believes that the State's allegations in the Answer and Counterclaim are without merit and will vigorously defend itself. WESTWINDS The Operating Partnership is the ground lessee ("Lessee") of certain property in San Jose, California under ground leases ("Leases") from the Nicholson Family Trust ("Lessor"). On February 13, 2001, Lessor filed a petition for arbitration of disputes over whether certain items constitute "gross revenue" under the Leases, in which petition Lessor sought damages and termination of the Leases. Lessee responded on March 12, 2001 disputing Lessor's contentions. Lessor claimed that "gross revenue" for the purpose of calculating percentage rent owing to Lessor under the Leases included certain amounts Lessee had recouped from tenants of the Property (who are protected by rent control) related to ground rent already paid to Lessor. Lessee had successfully been able to pass-through to tenants at the Property increases in ground rent under the Leases. Lessee contended that this pass-through resulted in reimbursement of lease expense, not "gross revenue." Lessor also contended that the "net income" of RSI from the Property should be included in the gross revenue calculation. Lessee disputed this for many reasons, including, but not limited to, the fact that RSI is not a lessee under the Leases, the sales activity is not conducted by Lessee, and RSI is a separate company from Lessee. Lessor's motion for summary judgment on the pass-through issue was denied by an arbitration panel on November 2, 2001. Lessor and Lessee agreed to mediate the dispute and the matter was settled and the lease was amended in early 2002. Pursuant to the settlement and amendment, Lessee agreed to pay $338,000 related to prior period rent which was expensed in the first quarter of 2002 and to prepay rent of $632,000 based on a recalculation of rent in the amended lease. The rent prepayment and related legal costs will be amortized into ground rent expense over the remaining life of the lease. OTHER The Company is involved in various other legal proceedings arising in the ordinary course of business. Management believes that all proceedings herein described or referred to, taken together, are not expected to have a material adverse impact on the Company. F-24
MANUFACTURED HOME COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 19 - QUARTERLY FINANCIAL DATA (UNAUDITED) The following is unaudited quarterly data for 2002, 2001 and 2000 (amounts in thousands, except for per share amounts): FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER 2002 3/31 6/30 9/30 12/31 - ------------------------------------------------------ ------- ------- ------- ------- Total revenues (a) ................................... $64,019 $65,214 $66,020 $69,303 Income from discontinued operations (a) .............. $ 298 $ 287 $ 241 $ 257 Income before allocation to Minority Interests and extraordinary loss on early extinguishment of debt $11,695 $10,841 $11,170 $22,917 Net income available to common shareholders .......... $ 7,115 $ 6,438 $ 6,712 $16,180 Weighted average Common Shares outstanding - Basic ... 21,433 21,563 21,676 21,794 Weighted average Common Shares outstanding - Diluted . 27,508 27,664 27,693 27,678 Net income per Common Share outstanding - Basic ...... $ 0.33 $ 0.30 $ 0.31 $ 0.74 Net income per Common Share outstanding - Diluted .... $ 0.32 $ 0.29 $ 0.30 $ 0.73 (a) Amounts may differ from previously disclosed amounts due to reclassification of discontinued operations. FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER 2001 3/31 6/30 9/30 12/31 - ------------------------------------------------------ ------- ------- ------- ------- Total revenues (a) ................................... $57,088 $55,785 $55,076 $56,108 Income from discontinued operations (a) .............. $ 280 $ 229 $ 280 $ 254 Income before allocation to Minority Interests and extraordinary loss on early extinguishment of debt $18,739 $10,512 $10,468 $11,825 Net income available to common shareholders .......... $12,644 $ 6,135 $ 6,097 $ 7,207 Weighted average Common Shares outstanding - Basic ... 20,793 20,969 21,108 21,266 Weighted average Common Shares outstanding - Diluted . 26,771 26,898 27,071 27,293 Net income per Common Share outstanding - Basic ...... $ 0.61 $ 0.29 $ 0.29 $ 0.34 Net income per Common Share outstanding - Diluted .... $ 0.59 $ 0.29 $ 0.28 $ 0.33 (a) Amounts may differ from previously disclosed amounts due to reclassification of discontinued operations. F-25
SCHEDULE II MANUFACTURED HOME COMMUNITIES, INC. VALUATION AND QUALIFYING ACCOUNTS DECEMBER 31, 2002 ADDITIONS ------------------------ BALANCE AT CHARGED TO CHARGED BALANCE AT BEGINNING INCOME TO OTHER DEDUCTIONS(1) END OF OF PERIOD ACCOUNTS PERIOD ---------- ---------- ---------- ------------- ---------- For the year ended December 31, 2000: Allowance for doubtful accounts......... $300,000 $322,574 $ -- ($322,574) $300,000 For the year ended December 31, 2001: Allowance for doubtful accounts......... $300,000 $426,579 $ -- ($426,579) $300,000 For the year ended December 31, 2002: Allowance for doubtful accounts......... $300,000 $940,565 $ -- ($540,565) $700,000 (1) Deductions represent tenant receivables deemed uncollectible. S-1
SCHEDULE III MANUFACTURED HOME COMMUNITIES, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2002 (AMOUNTS IN THOUSANDS) Costs Capitalized Subsequent to Initial Cost to Acquisition Company (Improvements) ---------------------- --------------------- Depreciable Depreciable Real Estate Location Encumbrances Land Property Land Property - ------------------------------ --------------- -- ------------ -------- ----------- ------ ------------ Apollo Village Phoenix AZ 4,074 932 3,219 0 515 Brentwood Manor Mesa AZ 4,439 1,997 6,024 0 432 Carefree Manor Phoenix AZ 0 706 3,040 0 155 Casa del Sol #1 Peoria AZ 10,460 2,215 6,467 0 692 Casa del Sol #2 Glendale AZ 9,758 2,103 6,283 0 359 Casa del Sol #3 Glendale AZ 11,337 2,450 7,452 0 258 Central Park Phoenix AZ 5,161 1,612 3,784 0 515 Countryside RV Phoenix AZ 0 2,056 6,241 0 0 Desert Skies Phoenix AZ 0 792 3,126 0 136 Fairview Manor Tucson AZ 0 1,674 4,708 0 1,042 Golden Sun RV Resort Scottsdale AZ 3,077 1,678 5,049 0 0 Hacienda De Valencia Mesa AZ 5,248 833 2,701 0 1,169 Palm Shadows Glendale AZ 3,028 1,400 4,218 0 367 Sedona Shadows Sedona AZ 2,573 1,096 3,431 0 352 Sunrise Heights Phoenix AZ 0 1,000 3,016 0 358 The Mark Mesa AZ 0 1,354 4,660 6 781 The Meadows Tempe AZ 12,298 2,613 7,887 0 521 Whispering Palms Phoenix AZ 0 670 2,141 0 154 California Hawaiian San Jose CA 27,823 5,825 17,755 0 1,354 Colony Park Ceres CA 0 890 2,837 0 200 Concord Cascade Pacheco CA 5,312 985 3,016 0 759 Contempo Marin San Rafael CA 26,095 4,787 16,379 0 2,219 Coralwood Modesto CA 0 0 5,047 0 207 Date Palm Country Club Cathedral City CA 15,470 4,138 14,064 (21) 2,185 Date Palm RV Cathedral City CA 0 0 216 0 0 Four Seasons Fresno CA 0 756 2,348 0 182 Laguna Lake San Luis Obispo CA 5,378 2,845 6,520 1 228 Lamplighter Spring Valley CA 3,821 633 2,201 0 590 Meadowbrook Santee CA 0 4,345 12,528 0 1,040 Monte del Lago Castroville CA 8,003 3,150 9,469 0 859 Quail Meadows Riverbank CA 0 1,155 3,469 0 202 Nicholson Plaza San Jose CA 0 0 4,512 0 48 Rancho Mesa El Cajon CA 0 2,130 6,389 0 63 Rancho Valley El Cajon CA 3,544 685 1,902 0 589 Royal Holiday Hemet CA 0 778 2,643 0 205 Royal Oaks Visalia CA 0 602 1,921 0 225 Gross Amount Carried at Close of Period 12/31/02 ------------------------------------ Depreciable Accumulated Date of Land Property Total Depreciation Acquisition - ------------------------------ -------- ----------- ----------- ------------- ------------ Apollo Village 932 3,734 4,666 (1,023) 1994 Brentwood Manor 1,997 6,456 8,453 (2,073) 1993 Carefree Manor 706 3,195 3,901 (562) 1998 Casa del Sol #1 2,215 7,159 9,374 (1,142) 1996 Casa del Sol #2 2,103 6,642 8,745 (1,060) 1996 Casa del Sol #3 2,450 7,710 10,160 (1,177) 1998 Central Park 1,612 4,299 5,911 (2,610) 1983 Countryside RV 2,056 6,241 8,297 (65) 2002 Desert Skies 792 3,262 4,054 (578) 1998 Fairview Manor 1,674 5,750 7,424 (894) 1998 Golden Sun RV Resort 1,678 5,049 6,727 (54) 2002 Hacienda De Valencia 833 3,870 4,703 (2,075) 1984 Palm Shadows 1,400 4,585 5,985 (1,497) 1993 Sedona Shadows 1,096 3,783 4,879 (693) 1997 Sunrise Heights 1,000 3,374 4,374 (981) 1994 The Mark 1,360 5,441 6,801 (1,489) 1994 The Meadows 2,613 8,408 11,021 (2,501) 1994 Whispering Palms 670 2,295 2,965 (405) 1998 California Hawaiian 5,825 19,109 24,934 (3,536) 1997 Colony Park 890 3,037 3,927 (657) 1998 Concord Cascade 985 3,775 4,760 (2,169) 1983 Contempo Marin 4,787 18,598 23,385 (5,007) 1994 Coralwood 0 5,254 5,254 (948) 1997 Date Palm Country Club 4,117 16,249 20,366 (4,393) 1994 Date Palm RV 0 216 216 (72) 1994 Four Seasons 756 2,530 3,286 (468) 1997 Laguna Lake 2,846 6,748 9,594 (1,229) 1998 Lamplighter 633 2,791 3,424 (1,623) 1983 Meadowbrook 4,345 13,568 17,913 (2,107) 1998 Monte del Lago 3,150 10,328 13,478 (1,838) 1997 Quail Meadows 1,155 3,671 4,826 (582) 1998 Nicholson Plaza 0 4,560 4,560 (814) 1997 Rancho Mesa 2,130 6,452 8,582 (994) 1998 Rancho Valley 685 2,491 3,176 (1,416) 1983 Royal Holiday 778 2,848 3,626 (391) 1998 Royal Oaks 602 2,146 2,748 (385) 1997 S-2
SCHEDULE III MANUFACTURED HOME COMMUNITIES, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2002 (AMOUNTS IN THOUSANDS) Costs Capitalized Subsequent to Initial Cost to Acquisition Company (Improvements) ---------------------- --------------------- Depreciable Depreciable Real Estate Location Encumbrances Land Property Land Property - ------------------------------ --------------- -- ------------ -------- ----------- ------ ------------ DeAnza Santa Cruz Santa Cruz CA 8,643 2,103 7,201 0 (16) Santiago Estates Sylmar CA 0 3,562 10,767 0 455 Sea Oaks Los Osos CA 0 871 2,703 0 242 Sunshadow San Jose CA 0 0 5,707 0 104 Westwinds (4 properties) San Jose CA 0 0 17,616 0 4,816 Bear Creek Sheridan CO 0 1,100 3,359 0 173 Cimarron Broomfield CO 4,707 863 2,790 0 565 Golden Terrace Golden CO 4,239 826 2,415 0 558 Golden Terrace South Golden CO 2,400 750 2,265 0 503 Golden Terrace West Golden CO 8,522 1,694 5,065 0 878 Hillcrest Village Aurora CO 10,692 1,912 5,202 290 2,178 Holiday Hills Denver CO 15,016 2,159 7,780 1 3,517 Holiday Village CO Co. Springs CO 3,574 567 1,759 0 877 Pueblo Grande Pueblo CO 1,897 241 1,069 0 390 Woodland Hills Denver CO 7,547 1,928 4,408 0 2,308 Aspen Meadows Rehoboth Beach DE 0 1,148 3,460 0 172 Camelot Meadows Rehoboth Beach DE 0 527 2,058 1,251 3,611 Mariners Cove Millsboro DE 0 990 2,971 0 3,203 McNicol Rehoboth Beach DE 0 563 1,710 0 58 Sweetbriar Rehoboth Beach DE 0 498 1,527 1 243 Waterford Estates Bear DE 0 5,250 16,202 0 409 Whispering Pines Lewes DE 0 1,536 4,609 0 777 Maralago Cay Lantana FL 0 5,325 15,420 0 1,767 Bay Indies Venice FL 22,020 10,483 31,559 10 2,300 Bay Lake Estates Nokomis FL 3,761 990 3,390 0 696 Breezy Hill RV Pompano Beach FL 10,493 5,510 16,555 0 0 Buccaneer N. Ft. Myers FL 14,508 4,207 14,410 0 966 Bulow Village RV Flagler Beach FL 0 0 228 0 0 Bulow Village Flagler Beach FL 0 3,637 949 0 4,836 Carriage Cove Daytona Beach FL 8,156 2,914 8,682 0 603 Coral Cay Margate FL 20,954 5,890 20,211 0 2,183 Coquina St Augustine FL 0 5,286 5,545 0 4,090 Meadows at Countrywood Plant City FL 0 4,514 13,175 0 1,915 Country Place New Port Richey FL 8,530 663 0 18 6,963 Country Side North Vero Beach FL 0 3,711 11,133 0 1,438 Down Yonder Largo FL 7,887 2,652 7,981 0 0 East Bay Oaks Largo FL 5,578 1,240 3,322 0 437 Gross Amount Carried at Close of Period 12/31/02 ------------------------------------ Depreciable Accumulated Date of Land Property Total Depreciation Acquisition - ------------------------------ -------- ----------- ----------- ------------- ------------ DeAnza Santa Cruz 2,103 7,185 9,288 (2,073) 1994 Santiago Estates 3,562 11,222 14,784 (1,929) 1998 Sea Oaks 871 2,945 3,816 (512) 1997 Sunshadow 0 5,811 5,811 (1,053) 1997 Westwinds (4 properties) 0 22,432 22,432 (4,061) 1997 Bear Creek 1,100 3,532 4,632 (575) 1998 Cimarron 863 3,355 4,218 (1,995) 1983 Golden Terrace 826 2,973 3,799 (1,632) 1983 Golden Terrace South 750 2,768 3,518 (504) 1997 Golden Terrace West 1,694 5,943 7,637 (2,968) 1986 Hillcrest Village 2,202 7,380 9,582 (4,217) 1983 Holiday Hills 2,160 11,297 13,457 (6,186) 1983 Holiday Village CO 567 2,636 3,203 (1,341) 1983 Pueblo Grande 241 1,459 1,700 (841) 1983 Woodland Hills 1,928 6,716 8,644 (2,020) 1994 Aspen Meadows 1,148 3,632 4,780 (632) 1998 Camelot Meadows 1,778 5,669 7,447 (921) 1998 Mariners Cove 990 6,174 7,164 (2,330) 1987 McNicol 563 1,768 2,331 (289) 1998 Sweetbriar 499 1,770 2,269 (362) 1998 Waterford Estates 5,250 16,611 21,861 (2,325) 1996 Whispering Pines 1,536 5,386 6,922 (2,435) 1998 Maralago Cay 5,325 17,187 22,512 (2,919) 1997 Bay Indies 10,493 33,859 44,352 (9,754) 1994 Bay Lake Estates 990 4,086 5,076 (1,121) 1994 Breezy Hill RV 5,510 16,555 22,065 (180) 2002 Buccaneer 4,207 15,376 19,583 (4,244) 1994 Bulow Village RV 0 228 228 (14) 2001 Bulow Village 3,637 5,785 9,422 (945) 1994 Carriage Cove 2,914 9,285 12,199 (1,618) 1998 Coral Cay 5,890 22,394 28,284 (5,935) 1994 Coquina 5,286 9,635 14,921 (801) 1999 Meadows at Countrywood 4,514 15,090 19,604 (2,389) 1998 Country Place 681 6,963 7,644 (2,242) 1986 Country Side North 3,711 12,571 16,282 (2,254) 1998 Down Yonder 2,652 7,981 10,633 (89) 1998 East Bay Oaks 1,240 3,759 4,999 (2,296) 1983 S-3
SCHEDULE III MANUFACTURED HOME COMMUNITIES, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2002 (AMOUNTS IN THOUSANDS) Costs Capitalized Subsequent to Initial Cost to Acquisition Company (Improvements) ---------------------- --------------------- Depreciable Depreciable Real Estate Location Encumbrances Land Property Land Property - ------------------------------ --------------- -- ------------ -------- ----------- ------ ------------ Eldorado Village Largo FL 3,954 778 2,341 0 424 Glen Ellen Clearwater FL 2,480 627 1,882 0 0 Grand Island Grand Island FL 0 1,723 5,208 125 1,462 Hacienda Village New Port Richey FL 10,198 4,362 13,088 0 0 Harbor View New Port Richey FL 8,140 4,045 12,146 0 0 Heritage Village Vero Beach FL 0 2,403 7,259 0 549 Highland Wood RV Pompano Beach FL 2,453 1,043 3,130 0 0 Hillcrest Clearwater FL 0 1,278 3,928 0 469 Holiday Ranch Largo FL 0 925 2,866 0 157 Holiday Village FL Vero Beach FL 0 350 1,374 0 130 Holiday Village Ormond Beach FL 7,122 2,610 7,837 0 0 Indian Oaks Rockledge FL 4,511 1,089 3,376 0 702 Lake Fairways N. Ft. Myers FL 0 6,075 18,134 35 1,263 Lake Haven Dunedin FL 7,418 1,135 4,047 0 1,466 Lakewood Village Melbourne FL 0 1,862 5,627 0 489 Lighthouse Pointe Port Orange FL 0 2,446 7,483 23 759 Mid-Florida Lakes Leesburg FL 22,421 5,997 20,635 0 3,632 Oak Bend Ocala FL 0 850 2,572 0 802 Pickwick Port Orange FL 10,587 2,803 8,870 0 454 Pine Lakes N. Ft. Myers FL 0 6,306 14,579 21 5,214 Sherwood Forest Kissimmee FL 9,250 4,852 14,596 0 3,172 Sherwood Forest RV Park Kissimmee FL 0 2,870 3,621 568 750 Silk Oak Clearwater FL 3,926 1,670 5,028 0 0 Southern Palms Eustis FL 0 2,169 5,884 0 1,422 Spanish Oaks Ocala FL 7,309 2,250 6,922 0 708 Oaks at Countrywood Plant City FL 0 1,111 2,513 (340) 395 The Heritage N. Ft. Myers FL 0 1,438 4,371 249 2,659 The Lakes at Countrywood Plant City FL 0 2,377 7,085 75 1,210 The Meadows, FL Palm Beach FL 6,155 3,229 9,870 0 939 Windmill Manor Bradenton FL 8,047 2,153 6,125 0 939 Windmill Village - Ft. Myers N. Ft. Myers FL 8,818 1,417 5,440 0 1,045 Windmill Village North Sarasota FL 8,273 1,523 5,063 0 828 Windmill Village South Sarasota FL 5,377 1,106 3,162 0 551 Five Seasons Cedar Rapids IA 0 1,053 3,436 0 515 Holiday Village, IA Sioux City IA 0 313 3,744 0 401 Golf Vistas Monee IL 0 2,843 4,719 0 4,737 Willow Lake Estates Elgin IL 22,011 6,138 21,033 0 2,540 Gross Amount Carried at Close of Period 12/31/02 ------------------------------------ Depreciable Accumulated Date of Land Property Total Depreciation Acquisition - ------------------------------ -------- ----------- ----------- ------------- ------------ Eldorado Village 778 2,765 3,543 (1,643) 1983 Glen Ellen 627 1,882 2,509 (5) 2002 Grand Island 1,848 6,670 8,518 (389) 2001 Hacienda Village 4,362 13,088 17,450 (36) 2002 Harbor View 4,045 12,146 16,191 (133) 2002 Heritage Village 2,403 7,808 10,211 (2,216) 1994 Highland Wood RV 1,043 3,130 4,173 (34) 2002 Hillcrest 1,278 4,397 5,675 (862) 1998 Holiday Ranch 925 3,023 3,948 (527) 1998 Holiday Village FL 350 1,504 1,854 (281) 1998 Holiday Village 2,610 7,837 10,447 (90) 2002 Indian Oaks 1,089 4,078 5,167 (760) 1998 Lake Fairways 6,110 19,397 25,507 (5,166) 1994 Lake Haven 1,135 5,513 6,648 (2,841) 1983 Lakewood Village 1,862 6,116 7,978 (1,760) 1994 Lighthouse Pointe 2,469 8,242 10,711 (1,426) 1998 Mid-Florida Lakes 5,997 24,267 30,264 (6,327) 1994 Oak Bend 850 3,374 4,224 (977) 1993 Pickwick 2,803 9,324 12,127 (1,501) 1998 Pine Lakes 6,327 19,793 26,120 (5,194) 1994 Sherwood Forest 4,852 17,768 22,620 (2,752) 1998 Sherwood Forest RV Park 3,438 4,371 7,809 (686) 1998 Silk Oak 1,670 5,028 6,698 (14) 2002 Southern Palms 2,169 7,306 9,475 (1,071) 1998 Spanish Oaks 2,250 7,630 9,880 (2,273) 1993 Oaks at Countrywood 771 2,908 3,679 (387) 1998 The Heritage 1,687 7,030 8,717 (1,921) 1993 The Lakes at Countrywood 2,452 8,295 10,747 (513) 2001 The Meadows, FL 3,229 10,809 14,038 (1,303) 1999 Windmill Manor 2,153 7,064 9,217 (1,098) 1998 Windmill Village - Ft. Myers 1,417 6,485 7,902 (3,840) 1983 Windmill Village North 1,523 5,891 7,414 (3,443) 1983 Windmill Village South 1,106 3,713 4,819 (2,154) 1983 Five Seasons 1,053 3,951 5,004 (898) 1998 Holiday Village, IA 313 4,145 4,458 (2,238) 1986 Golf Vistas 2,843 9,456 12,299 (1,384) 1997 Willow Lake Estates 6,138 23,573 29,711 (6,287) 1994 S-4
SCHEDULE III MANUFACTURED HOME COMMUNITIES, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2002 (AMOUNTS IN THOUSANDS) Costs Capitalized Subsequent to Initial Cost to Acquisition Company (Improvements) ---------------------- --------------------- Depreciable Depreciable Real Estate Location Encumbrances Land Property Land Property - ------------------------------ --------------- -- ------------ -------- ----------- ------ ------------ Forest Oaks (fka Burns Harbor) Chesterton IN 0 916 2,909 0 1,537 Oak Tree Village Portage IN 4,538 0 0 569 3,498 Windsong Indianapolis IN 0 1,482 4,480 0 140 Pheasant Ridge Mt. Airy MD 0 376 1,779 0 376 Creekside Wyoming MI 0 1,109 3,646 0 19 Casa Village Billings MT 0 1,011 3,109 181 2,104 Del Rey Albuquerque NM 0 1,926 5,800 0 703 Bonanza Las Vegas NV 4,722 908 2,643 0 681 Boulder Cascade Las Vegas NV 7,691 2,995 9,020 0 693 Cabana Las Vegas NV 9,487 2,648 7,989 0 230 Flamingo West Las Vegas NV 0 1,730 5,266 0 957 Villa Borega Las Vegas NV 7,333 2,896 8,774 0 218 Brook Gardens Lackawanna NY 0 3,828 10,310 0 1,167 Greenwood Village Manorville NY 0 3,667 9,414 485 3,075 Falcon Wood Village Eugene OR 2 1,112 3,426 0 148 Quail Hollow Fairview OR 0 0 3,249 0 137 Shadowbrook Clackamas OR 0 1,197 3,693 0 113 Mt. Hood Welches OR 0 1,817 5,733 0 0 Green Acres Breinigsville PA 13,924 2,680 7,479 0 2,319 Fun n Sun RV Park San Benito TX 0 2,533 0 412 9,379 Tropic Winds Harlingen TX 0 1,221 3,809 0 0 All Seasons Salt Lake City UT 0 510 1,623 0 199 Westwood Village Farr West UT 0 1,346 4,179 0 1,132 Meadows of Chantilly Chantilly VA 26,769 5,430 16,440 0 2,119 Kloshe Illahee Federal Way WA 6,350 2,408 7,286 0 111 Independence Hill Morgantown WV 0 299 898 0 297 Realty Systems, Inc. 0 0 0 0 2,052 Community Systems, Inc. 0 0 0 0 1,164 Management Business 0 0 436 0 9,011 -------- -------- -------- ------ -------- $575,289 $280,259 $854,250 $3,960 $157,538 ======== ======== ======== ====== ======== Gross Amount Carried at Close of Period 12/31/02 ------------------------------------ Depreciable Accumulated Date of Land Property Total Depreciation Acquisition - ------------------------------ -------- ----------- ----------- ------------- ------------ Forest Oaks (fka Burns Harbor) 916 4,446 5,362 (1,466) 1993 Oak Tree Village 569 3,498 4,067 (1,442) 1987 Windsong 1,482 4,620 6,102 (954) 1998 Pheasant Ridge 376 2,155 2,531 (1,253) 1988 Creekside 1,109 3,665 4,774 (628) 1998 Casa Village 1,192 5,213 6,405 (2,622) 1983 Del Rey 1,926 6,503 8,429 (2,125) 1993 Bonanza 908 3,324 4,232 (1,945) 1983 Boulder Cascade 2,995 9,713 12,708 (1,610) 1998 Cabana 2,648 8,219 10,867 (2,362) 1994 Flamingo West 1,730 6,223 7,953 (1,634) 1994 Villa Borega 2,896 8,992 11,888 (1,629) 1997 Brook Gardens 3,828 11,477 15,305 (1,830) 1998 Greenwood Village 4,152 12,489 16,641 (1,699) 1998 Falcon Wood Village 1,112 3,574 4,686 (642) 1997 Quail Hollow 0 3,386 3,386 (612) 1997 Shadowbrook 1,197 3,806 5,003 (720) 1997 Mt. Hood 1,817 5,733 7,550 (172) 2002 Green Acres 2,680 9,798 12,478 (4,365) 1988 Fun n Sun RV Park 2,945 9,379 12,324 (1,298) 1998 Tropic Winds 1,221 3,809 5,030 (25) 2002 All Seasons 510 1,822 2,332 (348) 1997 Westwood Village 1,346 5,311 6,657 (960) 1997 Meadows of Chantilly 5,430 18,559 23,989 (5,366) 1994 Kloshe Illahee 2,408 7,397 9,805 (1,327) 1997 Independence Hill 299 1,195 1,494 (500) 1990 Realty Systems, Inc. 0 2,052 2,052 -- 2002 Community Systems, Inc. 0 1,164 1,164 -- 2002 Management Business 0 9,447 9,447 (6,624) 1990 -------- ---------- ---------- --------- $284,219 $1,011,788 $1,296,007 ($238,098) ======== ========== ========== ========= NOTES: (1) For depreciable property, the Company uses a 30-year estimated life for buildings acquired and structural and land improvements, a ten-to-fifteen year estimated life for building upgrades and a three-to-seven year estimated life for furniture and fixtures. (2) The schedule excludes Properties in which the Company has a non-controlling joint venture interest and accounts for using the equity method of accounting. (3) The balance of furniture and fixtures included in the total amounts was approximately $20.3 million as of December 31, 2002. (4) The aggregate cost of land and depreciable property for Federal income tax purposes was approximately $1.1 billion, as of December 31, 2002. (5) All Properties were acquired, except for Country Place Village, which was constructed. S-5
SCHEDULE III MANUFACTURED HOME COMMUNITIES, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2002 (AMOUNTS IN THOUSANDS) The changes in total real estate for the years ended December 31, 2002, 2001 and 2000 were as follows: 2002 2001 2000 ------------ ------------ ------------ Balance, beginning of year ... $ 1,238,138 $ 1,218,176 $ 1,264,343 Acquisitions (1) ......... 107,138 17,770 (4,581) Improvements ............. 24,491 23,188 16,261 Dispositions (2) and other (73,760) (20,996) (57,847) ------------ ------------ ------------ Balance, end of year ......... $ 1,296,007 $ 1,238,138 $ 1,218,176 ============ ============ ============ (1) Acquisitions for the year ended December 31, 2000 include return of escrow proceeds. Acquisitions for the year ended December 31, 2002 include the non-cash assumption by the Company of $47.9 million of mortgage debt. (2) Dispositions for 2000 include the non-cash assumption of $19.0 million of debt by the purchaser of a Property. The changes in accumulated depreciation for the years ended December 31, 2002, 2001 and 2000 were as follows: 2002 2001 2000 ---------- ---------- ---------- Balance, beginning of year $ 211,878 $ 181,580 $ 150,757 Depreciation expense . 37,188 35,205 35,548 Dispositions and other (10,968) (4,907) (4,725) ---------- ---------- ---------- Balance, end of year ..... $ 238,098 $ 211,878 $ 181,580 ========== ========== ========== S-6
. . . EXHIBIT 12 MANUFACTURED HOME COMMUNITIES, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollar amounts in thousands) For the Years Ended December 31, 2002 2001 2000 1999 1998 --------------------------------------------------------------------- Income before allocation to Minority Interests and extraordinary loss on early extinguishment of debt $ 56,623 $ 51,544 $ 52,701 $ 36,835 $ 35,663 Fixed Charges 61,981 62,557 64,532 56,619 49,693 --------------------------------------------------------------------- Earnings $ 118,604 $ 114,101 $ 117,233 $ 93,454 $ 85,356 ===================================================================== Interest incurred $ 49,718 $ 50,197 $ 52,317 $ 53,134 $ 49,160 Amortization of deferred financing costs 1,011 1,108 963 641 533 Perpetual Preferred OP Unit Distributions 11,252 11,252 11,252 2,844 --- --------------------------------------------------------------------- Fixed Charges $ 61,981 $ 62,557 $ 64,532 $ 56,619 $ 49,693 ===================================================================== Earnings/Fixed Charges 1.91 1.82 1.82 1.65 1.72 =====================================================================
EXHIBIT 21 MANUFACTURED HOME COMMUNITIES, INC. SUBSIDIARIES OF THE REGISTRANT State of Incorporation or Organization MHC Operating Limited Partnership Illinois MHC Financing Limited Partnership Illinois MHC Financing Limited Partnership Two Delaware Blue Ribbon Communities Limited Partnership Delaware MHC Lending Limited Partnership Illinois MHC-DeAnza Financing Limited Partnership Illinois MHC-Bay Indies Financing Limited Partnership Illinois MHC Stagecoach, L.L.C. Delaware
EXHIBIT 23 MANUFACTURED HOME COMMUNITIES, INC. CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-68473, No. 333-28469, No. 333-25295, and No. 33-76486, and Form S-3 No. 333-66550, No. 333-90813, No. 333-65515, No. 333-25297, No. 333-1710, No. 33-82902 and No. 33-97288) of Manufactured Home Communities, Inc., and in the related Prospectuses, of our report dated January 27, 2003 with respect to the consolidated financial statements and schedules of Manufactured Home Communities, Inc., and to the reference to our firm under the caption "Selected Financial and Operating Information" included in this Annual Report (Form 10-K) for the year ended December 31, 2002. ERNST & YOUNG LLP Chicago, Illinois March 27, 2003
POWER OF ATTORNEY EXHIBIT 24.1 STATE OF ILLINOIS ) ) SS COUNTY OF COOK ) ------------- KNOW ALL MEN BY THESE PRESENTS that John F. Podjasek, Jr., having an address at Barrington, Illinois, has made, constituted and appointed and BY THESE PRESENTS, does make, constitute and appoint John M. Zoeller and Howard Walker, or either of them, having an address at Two North Riverside Plaza, Chicago, Illinois 60606, his true and lawful Attorney-in-Fact for him and in his name, place and stead to sign and execute in any and all capacities this Annual Report on Form 10-K and any or all amendments to this Annual Report on Form 10-K, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, giving and granting unto each of such, Attorney-in-Fact, full power and authority to do and perform each and every act and thing, requisite and necessary to be done in and about the premises, as fully, to all intents and purposes as he might or could do if personally present at the doing thereof, with full power of substitution and revocation, hereby ratifying and confirming all that each of such Attorney-in-Fact or his substitutes shall lawfully do or cause to be done by virtue hereof. This power of Attorney shall remain in full force and effect until terminated by the undersigned through the instrumentality of a signed writing. IN WITNESS WHEREOF, John F. Podjasek, Jr., has hereunto, set his hand this 24th day of March, 2003. /s/ John F. Podjasek, Jr. -------------------------------- John F. Podjasek, Jr. I, Jennifer L. Usher, a Notary Public in and for said County in the State aforesaid, do hereby certify that John F. Podjasek, Jr., personally know to me to be the same person whose name is subscribed to the foregoing instrument appeared before me this day in person and acknowledged that he signed and delivered said instrument as his own free voluntary act for the uses and purposes therein set forth. Given under my hand and notarial seal this 24th day of March, 2003. /s/ Jennifer L. Usher -------------------------------- (Notary Public) My Commission Expires: January 6, 2006 - ---------------
POWER OF ATTORNEY EXHIBIT 24.2 STATE OF CALIFORNIA ) ) SS COUNTY OF ALAMEDA ) ---------------- KNOW ALL MEN BY THESE PRESENTS that Michael A. Torres, having an address at 1250 Bay St., Alameda, California, has made, constituted and appointed and BY THESE PRESENTS, does make, constitute and appoint John M. Zoeller and Howard Walker, or either of them, having an address at Two North Riverside Plaza, Chicago, Illinois 60606, his true and lawful Attorney-in-Fact for him and in his name, place and stead to sign and execute in any and all capacities this Annual Report on Form 10-K and any or all amendments to this Annual Report on Form 10-K, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, giving and granting unto each of such, Attorney-in-Fact, full power and authority to do and perform each and every act and thing, requisite and necessary to be done in and about the premises, as fully, to all intents and purposes as he might or could do if personally present at the doing thereof, with full power of substitution and revocation, hereby ratifying and confirming all that each of such Attorney-in-Fact or his substitutes shall lawfully do or cause to be done by virtue hereof. This power of Attorney shall remain in full force and effect until terminated by the undersigned through the instrumentality of a signed writing. IN WITNESS WHEREOF, Michael A. Torres, has hereunto, set his hand this 27th day of March, 2003. /s/ Michael A. Torres ------------------------------- Michael A. Torres I, Nancy K. Hagel, a Notary Public in and for said County in the State aforesaid, do hereby certify that Michael A. Torres, personally know to me to be the same person whose name is subscribed to the foregoing instrument appeared before me this day in person and acknowledged that he signed and delivered said instrument as his own free voluntary act for the uses and purposes therein set forth. Given under my hand and notarial seal this 27th day of March, 2003. /s/ Nancy K. Hagel ------------------------------- (Notary Public) My Commission Expires: March 16, 2006 - --------------
POWER OF ATTORNEY EXHIBIT 24.3 STATE OF NEW YORK ) ) SS COUNTY OF NEW YORK ) ------------- KNOW ALL MEN BY THESE PRESENTS that Thomas E. Dobrowski, having an address at 767 5th Ave., New York, New York, has made, constituted and appointed and BY THESE PRESENTS, does make, constitute and appoint John M. Zoeller and Howard Walker, or either of them, having an address at Two North Riverside Plaza, Chicago, Illinois 60606, his true and lawful Attorney-in-Fact for him and in his name, place and stead to sign and execute in any and all capacities this Annual Report on Form 10-K and any or all amendments to this Annual Report on Form 10-K, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, giving and granting unto each of such, Attorney-in-Fact, full power and authority to do and perform each and every act and thing, requisite and necessary to be done in and about the premises, as fully, to all intents and purposes as he might or could do if personally present at the doing thereof, with full power of substitution and revocation, hereby ratifying and confirming all that each of such Attorney-in-Fact or his substitutes shall lawfully do or cause to be done by virtue hereof. This power of Attorney shall remain in full force and effect until terminated by the undersigned through the instrumentality of a signed writing. IN WITNESS WHEREOF, Thomas E. Dobrowski, has hereunto, set his hand this 21st day of March, 2003. /s/ Thomas E. Dobrowski ------------------------------- Thomas E. Dobrowski I, Bernadette Armstrong, a Notary Public in and for said County in the State aforesaid, do hereby certify that Thomas E. Dobrowski, personally know to me to be the same person whose name is subscribed to the foregoing instrument appeared before me this day in person and acknowledged that he signed and delivered said instrument as his own free voluntary act for the uses and purposes therein set forth. Given under my hand and notarial seal this 21st day of March, 2003. /s/ Bernadette Armstrong ------------------------------- (Notary Public) My Commission Expires: February 25, 2006 - -----------------
POWER OF ATTORNEY EXHIBIT 24.4 STATE OF WASHINGTON ) ) SS COUNTY OF KITSAP ) ------------- KNOW ALL MEN BY THESE PRESENTS that Gary L. Waterman, having an address at Bainbridge, Washington, has made, constituted and appointed and BY THESE PRESENTS, does make, constitute and appoint John M. Zoeller and Howard Walker, or either of them, having an address at Two North Riverside Plaza, Chicago, Illinois 60606, his true and lawful Attorney-in-Fact for him and in his name, place and stead to sign and execute in any and all capacities this Annual Report on Form 10-K and any or all amendments to this Annual Report on Form 10-K, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, giving and granting unto each of such, Attorney-in-Fact, full power and authority to do and perform each and every act and thing, requisite and necessary to be done in and about the premises, as fully, to all intents and purposes as he might or could do if personally present at the doing thereof, with full power of substitution and revocation, hereby ratifying and confirming all that each of such Attorney-in-Fact or his substitutes shall lawfully do or cause to be done by virtue hereof. This power of Attorney shall remain in full force and effect until terminated by the undersigned through the instrumentality of a signed writing. IN WITNESS WHEREOF, Gary L. Waterman, has hereunto, set his hand this 21st day of March, 2003. /s/ Gary L. Waterman ------------------------------- Gary L. Waterman I, Vicki A Raugh, a Notary Public in and for said County in the State aforesaid, do hereby certify that Gary L. Waterman, personally know to me to be the same person whose name is subscribed to the foregoing instrument appeared before me this day in person and acknowledged that he signed and delivered said instrument as his own free voluntary act for the uses and purposes therein set forth. Given under my hand and notarial seal this 21st day of March, 2003. /s/ Vicki A Raugh ------------------------------- (Notary Public) My Commission Expires: February 7, 2005 - ----------------
POWER OF ATTORNEY EXHIBIT 24.5 STATE OF FLORIDA ) ) SS COUNTY OF PALM BEACH ) ---------------- KNOW ALL MEN BY THESE PRESENTS that Donald S. Chisholm, having an address at Pam Beach, FLorida, has made, constituted and appointed and BY THESE PRESENTS, does make, constitute and appoint John M. Zoeller and Howard Walker, or either of them, having an address at Two North Riverside Plaza, Chicago, Illinois 60606, his true and lawful Attorney-in-Fact for him and in his name, place and stead to sign and execute in any and all capacities this Annual Report on Form 10-K and any or all amendments to this Annual Report on Form 10-K, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, giving and granting unto each of such, Attorney-in-Fact, full power and authority to do and perform each and every act and thing, requisite and necessary to be done in and about the premises, as fully, to all intents and purposes as he might or could do if personally present at the doing thereof, with full power of substitution and revocation, hereby ratifying and confirming all that each of such Attorney-in-Fact or his substitutes shall lawfully do or cause to be done by virtue hereof. This power of Attorney shall remain in full force and effect until terminated by the undersigned through the instrumentality of a signed writing. IN WITNESS WHEREOF, Donald S. Chisholm, has hereunto, set his hand this 21st day of March, 2003. /s/ Donald S. Chisholm ------------------------------- Donald S. Chisholm I, Audrey Hoffman, a Notary Public in and for said County in the State aforesaid, do hereby certify that Donald S. Chisholm, personally know to me to be the same person whose name is subscribed to the foregoing instrument appeared before me this day in person and acknowledged that he signed and delivered said instrument as his own free voluntary act for the uses and purposes therein set forth. Given under my hand and notarial seal this 21st day of March, 2003. /s/ Audrey Hoffman ------------------------------- (Notary Public) My Commission Expires: September 14, 2006 - ------------------
POWER OF ATTORNEY EXHIBIT 24.6 STATE OF CALIFORNIA ) ) SS COUNTY OF RIVERSAS ) ------------- KNOW ALL MEN BY THESE PRESENTS that Louis H. Masotti, having an address at 210 Kenenish Dr, Rancho Mirage, California, has made, constituted and appointed and BY THESE PRESENTS, does make, constitute and appoint John M. Zoeller and Howard Walker, or either of them, having an address at Two North Riverside Plaza, Chicago, Illinois 60606, his true and lawful Attorney-in-Fact for him and in his name, place and stead to sign and execute in any and all capacities this Annual Report on Form 10-K and any or all amendments to this Annual Report on Form 10-K, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, giving and granting unto each of such, Attorney-in-Fact, full power and authority to do and perform each and every act and thing, requisite and necessary to be done in and about the premises, as fully, to all intents and purposes as he might or could do if personally present at the doing thereof, with full power of substitution and revocation, hereby ratifying and confirming all that each of such Attorney-in-Fact or his substitutes shall lawfully do or cause to be done by virtue hereof. This power of Attorney shall remain in full force and effect until terminated by the undersigned through the instrumentality of a signed writing. IN WITNESS WHEREOF, Louis H. Masotti, has hereunto, set his hand this 24th day of March, 2003. /s/ Louis H. Masotti ------------------------------- Louis H. Masotti I, Ann Randel Masotti, a Notary Public in and for said County in the State aforesaid, do hereby certify that Louis H. Masotti, personally know to me to be the same person whose name is subscribed to the foregoing instrument appeared before me this day in person and acknowledged that he signed and delivered said instrument as his own free voluntary act for the uses and purposes therein set forth. Given under my hand and notarial seal this 24th day of March, 2003. /s/ Ann Randel Masotti ------------------------------- (Notary Public) My Commission Expires: July 21, 2006 - -------------
EXHIBIT 99.1 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the accompanying Annual Report on Form 10-K of Manufactured Home Communities, Inc. for the year ended December 31, 2002 (the "Annual Report"), I, John M. Zoeller, Executive Vice President and Chief Financial Officer of Manufactured Home Communities, Inc., hereby certify pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge: 1. such Annual Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. the information contained in such Annual Report fairly presents, in all material respects, the financial condition and results of operations of Manufactured Home Communities, Inc. Date: March 28, 2003 By: /s/ John M. Zoeller --------------- ---------------------------------- John M. Zoeller Executive Vice President and Chief Financial Officer A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN PROVIDED TO MANUFACTURED HOME COMMUNITIES, INC. AND WILL BE RETAINED BY MANUFACTURED HOME COMMUNITIES, INC. AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST.
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the accompanying Annual Report on Form 10-K of Manufactured Home Communities, Inc. for the year ended December 31, 2002 (the "Annual Report"), I, Howard Walker, Chief Executive Officer of Manufactured Home Communities, Inc., hereby certify pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge: 1. such Annual Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. the information contained in such Annual Report fairly presents, in all material respects, the financial condition and results of operations of Manufactured Home Communities, Inc. Date: March 28, 2002 By: /s/ Howard Walker ---------------- ------------------------------- Howard Walker Chief Executive Officer A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN PROVIDED TO MANUFACTURED HOME COMMUNITIES, INC. AND WILL BE RETAINED BY MANUFACTURED HOME COMMUNITIES, INC. AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST.