Item 1. Business - ------- --------
General Development of Business.
CP Limited Partnership (the "Company") is a Maryland Partnership. Chateau Communities, Inc. ("Chateau"), a Maryland Corporation, is a self-administered and self-managed equity real estate investment trust ("REIT") and is one of the largest owner/manager of manufactured home communities in the United States, based both on the number of communities and the number of residential homesites owned. Chateau conducts substantially all of its activities through the Company in which it owns, directly and through ROC Communities, Inc. ("ROC"), the other general partner of the Company, an approximate 89% general partner interest. The Company owns and operates 164 manufactured home community properties (the "Properties") containing 50,887 homesites and 1,359 park model/RV sites in 28 states. The Company also fee manages 36 manufactured home community properties containing 7,500 homesites. The Company is also involved in the development and expansion of manufactured home communities and through its subsidiary, Community Sales, Inc., the sale of new and pre-owned homes, brokerage of used homes and assisting residents in the arrangements of financing and insurance services.
Formation of the Company
The Company was formed by Chateau, as general partner, and Chateau Estates, as the initial limited partner, on September 16, 1993.
On February 11, 1997, the Company completed a strategic merger of equals with ROC (the "Merger"). The Merger and related transactions were accounted for using the purchase method of accounting in accordance with generally accepted accounting principles. Accordingly, the assets and liabilities of ROC were adjusted to fair value for financial accounting purposes and the results of operations of ROC are included in the results of operations of the Company beginning in February 1997.
Industry Overview
A manufactured home community is a residential subdivision designed and improved with homesites for the placement of manufactured homes including related improvements and amenities. Manufactured homes are detached, single-family homes which are produced off-site by manufacturers and installed on sites within the community. Manufactured homes are available in a variety of architectural styles and floor plans, offering a variety of amenities, custom options and on- site built additional structures.
Modern manufactured home communities are similar to typical residential subdivisions and generally contain centralized entrances, paved streets, curbs and gutters and parkways. In addition, such communities often provide a variety of amenities to residents which may include a clubhouse, swimming pools and jacuzzis, playgrounds, basketball courts, picnic areas, shuffleboard courts, tennis courts, cable television service, golf courses, marinas and laundry facilities. Utilities are provided or arranged for by the owner of the community. Some communities provide water and sewer service through public or private utilities, while others provide these services to residents from on-site facilities.
The owner of each home in a manufactured home community leases a site from the community. The manufactured home community is the owner of the underlying land, utility connections, streets, lighting, driveways, common area amenities and other capital improvements and is responsible for enforcement of community guidelines and maintenance. Each owner within the manufactured home community is responsible for the maintenance of his home and leased site. Additionally, manufactured home communities tend to have stable resident bases, with relatively few residents moving manufactured homes out of the communities. Management thus tends to be more stable, and capital expenditure needs less significant, relative to multi-family rental apartment complexes.
Operating and Investment Strategies
The Company seeks to maximize long-term growth in income and portfolio value through active management and expansion of certain of its manufactured home communities and the selective acquisition and selective development of additional communities. The Company focuses on manufactured home communities that have growth potential and expects to hold such properties for long-term investment and capital appreciation. The Company's operating and investment strategies include:
Operations
* Providing attractive and desirable manufactured home communities for existing and prospective residents;
* Maintaining and upgrading communities on a continuous basis through a program of regular and preventive maintenance and replacement;
* Offering residents accessibility to on-site managers to maximize retention, encourage home maintenance and improvements and to minimize turnover;
* Providing frequent personal contact between on-site managers and residents to foster a sense of pride in the community and to promote desirability of each property;
* Offering potential community residents the convenience of purchasing a home already in place within the community or ordering a new product;
* Increasing value to residents and Unitholders of the Company by providing additional value-added leasing programs to our residents; and
* Assisting potential residents in securing financing and insurance for their home.
Acquisitions, Development and Expansions
* Selectively acquiring well-located manufactured home communities that demonstrate the potential for increases in revenue and cash flow through professional property management, improved operating efficiencies, aggressive leasing and, where appropriate, expansion on adjacent land;
* Acquiring properties in existing markets in order to achieve economies of scale in operations, and in new markets where portfolios may be acquired with regional management in place;
* Utilizing the expertise and relationships developed by the Company's management to identify acquisition and development opportunities;
* Selectively developing new communities in strategically desirable regions where development is supported by favorable demographics and strong market demand; and
* Capitalizing on opportunities to renovate and expand properties consistent with local market demand.
Financing Strategies
The Company intends to maintain a conservative and flexible capital structure that enables it to (i) continue to access the capital markets on favorable terms; (ii) enhance potential earnings growth; (iii) minimize its level of encumbered assets; and (iv) limit its exposure to variable rate debt. The Company intends to maintain a debt-to-market capitalization ratio of approximately 50% or less. The Company, however, may from time to time re- evaluate this policy and decrease or increase such ratio accordingly in light of then current economic conditions, relative costs to the Company of debt and equity capital, market values of the properties and other factors.
Expansion and Improvement of Manufactured Home Community Properties
The Company will seek to increase the income generated from its manufactured home communities and from any additional properties acquired by expanding the number of sites available to be leased to residents if justified by local market conditions and permitted by zoning and other applicable laws, and by filling vacant sites. During 1998, the Company substantially completed the development of 407 expansion sites. As of December 31, 1998, the Company owned undeveloped land adjacent to existing communities containing approximately 4,700 expansion sites, which are zoned for manufactured housing. All necessary utilities are available at these expansion sites; however, building permits would need to be obtained prior to development. This undeveloped land will facilitate additional growth to the extent conditions warrant. In addition, where appropriate, the Company will consider upgrading or adding facilities and amenities to certain communities in order to make those communities more attractive in their markets.
The Company is currently involved in seven joint ventures to construct ground-up "greenfield communities". In the majority of the arrangements, the Company acts as the developer or co-developer, performs all accounting and property management functions and, in many of the arrangements, the Company acts as a lender to finance the development costs. As such, the Company advances amounts to the joint ventures to fund construction and recognizes the related interest income as earned. The Company primarily borrows on its line of credit to fund the advances and, accordingly, includes the related borrowing costs in interest expense. In the majority of the arrangements, the Company has the option to purchase the completed community when it reaches a pre-determined occupancy rate. The Company is also involved in two joint ventures in which the communities are being constructed by its joint venture partner. The Company has similar arrangements to lend these joint ventures funds to finance development.
1998 Property Acquisitions
During 1998, the Company completed the following acquisitions:
Community Sales, Inc.
The Company conducts its sales and brokerage activities through Community Sales, Inc. ("CSI"), which is operated as a taxable subsidiary of the Company. During 1998, CSI sold 481 new or pre-owned homes and brokered the sales of 1,067 homes. CSI added a Financial Services Division, which arranges financing and insurance services for prospective residents. During 1998, the Financial Services Division arranged financing on approximately 250 loans.
The Windsor Corporation
In September 1997, the Company completed the acquisition of The Windsor Corporation ("Windsor"), the general partner in five partnerships and advisor to one REIT, N'Tandem Trust ("N'Tandem", previously known as Windsor Real Estate Investment Trust 8). These six entities owned 30 manufactured home communities (containing 6,300 homesites), all of which have been managed by the Company or ROC on a fee basis since 1993.
In March 1998, the Company entered into an investment agreement ("Agreement") with N'Tandem. Pursuant to the Agreement, the Company purchased 19,139 common shares of N'Tandem and issued two notes; one secured and one unsecured, for an aggregate of $5,001,000 due March 1999 for the acquisition by N'Tandem of one community in Montgomery, Alabama. On November 30, 1998, N'Tandem borrowed $5,650,000 from the Company for the acquisition of three communities in Lexington Park, Maryland. The notes bear interest at the prime rate of interest plus one percent per annum and are due November 1999. The Company owns approximately 17 percent of N'Tandem's outstanding common stock and accounts for its investment on an equity basis, recognizing income from an advisory agreement and interest income on the notes as earned. As of December 31, 1998, N'Tandem owned 6 communities with 1,307 homesites and an interest in 3 communities with 419 homesites.
Competition
Many of the Properties are located in developed areas that include other manufactured home community properties. The number of competitive manufactured home community properties in a particular area could have a material effect on the Company's ability to lease sites at its communities and on the rents charged. In addition, other forms of multi-family residential properties and single-family housing provide housing alternatives to residents.
Employees
As of December 31, 1998, the Company had approximately 1,200 full and part-time employees. The Company utilizes a resident administrator for the on-site administration of each of the Properties. Important duties of on-site administrators as well as the office manager include extensive contact with residents through initial introduction to community guidelines and on-going accessibility for resident assistance. Typically, clerical and maintenance workers are employed to assist these individuals in the management and care of the residents and properties. Direct supervision of on-site administrators is the responsibility of the Company's regional vice presidents and managers and four divisional presidents. These individuals have significant experience in addressing the needs of residents and in finding or creating innovative approaches to value maximization and increased cash flow from property operations. Complementing this field management staff are 53 corporate employees who assist on-site administrators in all property management functions.
Commitment to resident satisfaction is demonstrated by the ongoing training that the Company provides for on-site staff. Community administrators meet periodically at regional and divisional seminars to review Company philosophy and policy, to discuss relevant administration issues and solutions and to share ideas and experiences.
Tax Status
The Company is not liable for Federal income taxes as the partners recognize their proportionate share of income or loss in their tax returns. Therefore, no provision for income taxes is included in the Company's financial statements.
Cautionary Statements Concerning Forward-Looking Information
Certain information both included and incorporated by reference in this Annual Report on Form 10-K may contain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of our company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations are generally identifiable by use of the words "may," "will," "should," "expect," "anticipate," "estimate," "believe," "intend," or "project," or the negative thereof or other variations thereon or comparable terminology. Factors which could have a material adverse effect on the operations and future prospects of our company include, but are not limited to, changes in: economic conditions generally and the real estate market specifically legislative/regulatory changes, availability of capital, interest rates, competition, supply and demand for properties in our current and proposed market areas and general accounting principles. These risks and uncertainties should be considered in evaluating any forward-looking statements contained or incorporated by reference herein.
Item 2.
Item 2. Properties - ------- ----------
At December 31, 1998, the Properties consisted of 165 manufactured home communities containing 51,101 homesites and 1,359 park model/RV sites, in 28 states, with amenities designed for either retirement or family living. The Company also fee managed 36 manufactured home communities containing 7,500 sites in 15 states. The Company also owned land adjacent to certain existing communities containing approximately 4,700 expansion sites which, although not yet developed, was zoned for manufactured housing.
At December 31, 1998, the Properties had an occupancy rate of approximately 92.4 percent with weighted average rent for the year ended December 31, 1998 of $292 per month. This compares to an occupancy rate of 92 percent and with weighted average rent of $287 per month for the prior year. Weighted average rent is calculated as rental and utility income for the period, on a monthly basis, divided by the weighted average occupied sites. Weighted average occupancy is computed by averaging the number of revenue producing sites at the end of each month in the period.
The Company believes that the Properties provide amenities and common facilities that create a safe and attractive community for residents. All of the Properties provide residents with attractive amenities with most offering a clubhouse, a swimming pool and playgrounds. Many Properties offer additional amenities such as sauna/whirlpool spas, indoor pools, tennis courts, libraries, shuffleboard courts, basketball courts, golf courses, day care facilities, exercise rooms and marinas.
Since residents own their homes, it is their responsibility to maintain their homes and the surrounding area. The communities have extensive guidelines for maintenance. It is management's role to provide maintenance of common areas, facilities and amenities and to ensure that residents comply with community policies. The Company holds periodic meetings of its property management personnel for training and implementation of the Company's strategies, and property administrators make a daily inspection of the Properties. The Company believes that, due in part to this strategy, the Properties historically have had and will continue to have low turnover and high occupancy rates. Since 1989, the Properties have averaged an annual turnover of homes (where the home is moved out of the community) of three to four percent.
Leases
The typical lease entered into between the resident and one of the Company's manufactured home communities for the rental of a site is month-to-month or year-to-year, renewable upon the consent of both parties or, in some instances, as provided by statute.
Indebtedness
The following table sets forth certain information relating to the secured and unsecured indebtedness of the Company outstanding as of December 31, 1998.
Based on the average amount outstanding under the Credit Facilities during the year ended December 31, 1998 of approximately $20,600,000, if the interest rate under the Credit Facilities was 100 basis points higher or lower during the period, then the Company's interest expense (net of adjustments for capitilized items) would have been increased or decreased by approximately $206,000.
The following table sets forth certain information, as of December 31, 1998, regarding the Properties.
The Company classifies all of its properties in either the Stable Portfolio or the Active Expansion Portfolio. The Stable Portfolio includes the communities where we do not have, or have not recently had, expansion of the community. These communities generally have stable occupancy rates. The Active Expansion Portfolio are those properties where the Company is currently, or has recently, expanded the community by adding homesites to the available homesites for rental. Generally, these communities will have a lower occupancy rate than our stable portfolio as they are in the lease-up phase. In addition, the Company owns three park model/RV communities.
Property Information
The following table sets forth certain information, as of December 31, 1998, regarding the properties.
*Communities in the Active Expansion Portfolio.
Item 3.
Item 3. Legal Proceedings - ------- -----------------
None
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders - ------- ---------------------------------------------------
Not Applicable
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Security Holder - ------- ----------------------------------------------------------------- Matters -------
Not Applicable
Item 6.
Item 6. Selected Financial Data - ------- -----------------------
The following table sets forth summary financial information of the Company for the periods and dates indicated.
Item 6. Selected Financial Data, Continued - ------- ----------------------------------
(1) In February 1997, the Company completed the Merger with ROC. See Note 3 to the Consolidated Financial Statements for information regarding the Merger.
(2) The extraordinary item represents prepayment penalties and certain other related costs associated with the early extinguishment of debt.
(3) Does not include 1,359 park model/RV sites, purchased in 1998
(4) Funds from operations ("FFO") is defined by the National Association of Real Estate Investment Trusts ("NAREIT") as consolidated net income of the Company without giving effect to gains (or losses) from debt restructuring and sales of property, certain non-recurring items and rental property depreciation and amortization. Management believes that FFO is an important and widely used measure of the operating performance of REITs, which provides a relevant basis for comparison among REITs. For all periods presented, depreciation of rental property, amortization of intangibles and certain non-recurring items are the only non-cash adjustments. FFO (i) does not represent cash flow from operations as defined by generally accepted accounting principles; (ii) should not be considered as an alternative to net income as a measure of operating performance or to cash flows from operating, investing and financing activities; and (iii) is not an alternative to cash flows as a measure of liquidity. FFO is calculated as follows:
- -
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and Notes thereto included elsewhere in this Annual Report. Certain statements in this discussion constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements may involve the Company's plans, objectives and expectations, which are dependent upon a number of factors, including site expansions, acquisitions, development and other new business initiatives that are subject to a number of contingency factors such as the effects of national and local economic conditions, changes in interest rates, supply and demand for affordable housing and the condition of the capital markets that may prevent the Company from achieving its objectives.
Overview
The Company is one of the largest owner/managers of manufactured home communities in the United States, based both on the number of communities and the number of residential homesites owned. The Company added 121 manufactured home communities to its portfolio over the three-year period ended December 31, 1998. At the end of this period, the Company's portfolio was comprised of 165 manufactured home communities containing 51,101 manufactured homesites and 1,359 park model/RV sites, located in 28 states.
A substantial portion of the Company's growth since the beginning of 1996 can be attributed to the Company's merger with ROC on February 11, 1997. The historical results of the Company include the results of operations of ROC since February 1, 1997. In addition, as a result of the Merger, the Company acquired ROC's third-party property management operations and its taxable sales and brokerage subsidiary, CSI. During 1998, the Company acquired 34 communities (the "Acquisition Properties") in four separate portfolio acquisitions, containing an aggregate of 7,045 manufactured homesites and 1,359 park model/RV sites.
Company growth since the beginning of 1996 can also be attributed to increased operating performance at existing communities, community expansions, new community development and additional acquisition activities.
Historical Results of Operations
Comparison of the year ended December 31, 1998 to the year ended December 31,
The following table summarizes certain information relative to the Company's properties, as of and for the years ended December 31, 1998 and 1997. The Company considers all communities owned by the Company or ROC as of January 1, 1997 as the "Core 1997 Portfolio".
For the year ended December 31, 1998, net income was $34,486,000, an increase of $9,798,000 from the year ended December 31, 1997. The increase was due primarily to acquisitions and the Merger, as well as increased net operating income from the Core 1997 Portfolio. The increase in net operating income from the Company's Core 1997 Portfolio was due to increased occupancy and rental increases partially offset by general operating expense increases. Rental revenue for the year ended December 31, 1998 was $167,206,000, an increase of $32,405,000 from 1997. Approximately 57 percent was due to acquisitions and 18 percent was due to the Merger. The remaining 25 percent increase was due to rental increases and occupancy gains in the Company's Core 1997 Portfolio.
Weighted average occupancy for the year ended December 31, 1998 was 45,882 sites compared with 38,053 sites for the same period in 1997. During 1998, the Company increased occupancy by 627 sites, of which 344 were in its active expansion communities. The Company also added 407 sites to its portfolio through the expansion of its communities. The occupancy rate for the total portfolio was 92.4 percent on 51,101 sites as of December 31, 1998, compared to 92.0 percent on sites as of December 31, 1997. The occupancy rate on the stabilized portfolio was 94.0 percent as of December 31, 1998. On a per site basis, weighted average monthly rental revenue for the year ended December 31, 1998 was $292 compared with $287 for the same period in 1997. For the Company's Core 1997 Portfolio, on a per site basis, weighted average monthly rental revenue for the year ended December 31, 1998 was $299 compared with $286 for the same period in 1997, an increase of 4.5 percent.
Management fee, interest and other income primarily include management fee income for the management of 36 manufactured home communities, equity earnings from the Company's sales subsidiary, CSI, and interest income on notes receivable and advances to affiliates. The increase in 1998 from 1997 is due primarily to increased development activities in which the Company funds the development costs and recognizes interest income and expense.
Property operating and maintenance expense for the year ended December 31, 1998 increased by $7,948,000 or 20.3 percent from the same period a year ago. The majority of the increase was due to the acquisitions and the Merger. The remaining increase was due to increases in the Company's Core 1997 Portfolio. On a per site basis, monthly weighted average property operating and maintenance expense remained constant at $86.
Real estate taxes for the year ended December 31, 1998 increased by $2,305,000 or 23.2 percent from the year ended December 31, 1997. The increase is due primarily to acquisitions and expansions of communities, the Merger and general increases. On a per site basis, monthly weighted average real estate taxes were $22.25 in 1998 compared to $21.78 in 1997, an increase of 2.2 percent. Real estate taxes may increase or decrease due to inflation, expansions and improvements of communities, as well as changes in taxation in the tax jurisdictions in which the Company operates.
Administrative expense for the year ended December 31, 1998 increased due to acquisitions and the Merger. Administrative expense in 1998 was 4.8 percent of total revenues as compared to 5.0 percent in 1997.
Interest and related amortization costs increased for the year ended December 31, 1998 by $5,369,000, as compared with the year ended December 31, 1997. The increase is attributable primarily to the indebtedness incurred to finance the acquisitions. Interest expense as a percentage of average debt outstanding remained relatively constant at approximately 7.7 percent.
Depreciation expense for the year ended December 31, 1998, increased $8,148,000 from the same period a year ago. The increase is directly attributable to acquisitions and the Merger. Depreciation expense as a percentage of average depreciable rental property in 1998 remained relatively unchanged from 1997.
Comparison of the year ended December 31, 1997 to the year ended December 31,
For the year ended December 31, 1997, net income was $24,688,000, an increase of $8,588,000 from the year ended December 31, 1996. The increase was due primarily to the Merger, as well as acquisitions that were consummated in 1997 and 1996 by the Company or ROC, and increased net operating income from communities owned by the Company and ROC at the beginning of the period (the "Core 1996 Portfolio"). The increase in net operating income from the Company's Core 1996 Portfolio was due to increased occupancy and rental increases partially offset by general operating expense increases.
Rental revenue for the year ended December 31, 1997 was $134,801,000, an increase of $67,568,000 from 1996. Approximately 80 percent of the increase was due to the Merger, and 9 percent was due to 1997 and 1996 acquisitions made by the Company or ROC. The remaining 11 percent increase was due to rental increases and occupancy gains in the Company's Core 1996 Portfolio.
Weighted average occupancy for the year ended December 31, 1997 was 38,053 sites compared with 18,889 sites for the same period in 1996. During 1997, the Company increased occupancy by nearly 400 sites, primarily in its active expansion communities. The occupancy rate for the total portfolio was 92.0 percent on approximately 43,800 sites as of December 31, 1997, compared to 94.4 percent on approximately 20,279 sites as of December 31, 1996. The decrease in the occupancy rate is due to the increase in available sites added through expansions of existing communities. The occupancy rate on the stabilized portfolio was 93.6 percent as of December 31, 1997. On a per site basis, weighted average monthly rental revenue for the year ended December 31, 1997 was $287, which is consistent with the same period of 1996. For the Company's Core 1996 Portfolio, on a per site basis, weighted average monthly rental revenue for the year ended December 31, 1997 was $289 compared with $278 for the same period in 1996, an increase of 4.1 percent.
Management fee, interest and other income primarily include management fee income for the management of 32 manufactured home communities, equity earnings from the Company's sales subsidiary, CSI, and interest income on notes receivable. The increase in 1997 from 1996 is due primarily to business activities acquired in conjunction with the Merger.
Property operating and maintenance expense for the year ended December 31, 1997 increased by $20,945,000 or 115 percent from the same period a year ago. The majority of the increase was due to the Merger and 1997 and 1996 acquisitions. The remaining increase was due to increases in the Company's Core 1996 Portfolio. On a per site basis, monthly weighted average property operating and maintenance expense increased 6.8 percent from approximately $80 in 1996 to approximately $86 in 1997. A portion of this increase is due to the operating expenses related to the properties managed by the Company for a management fee beginning in 1997.
Real estate taxes for the year ended December 31, 1997 increased by $5,090,000 or 105 percent from the year ended December 31, 1996. The increase is due primarily to the Merger, acquisitions and expansions of communities and general increases. On a per site basis, monthly weighted average real estate taxes were $21.78 in 1997 compared to $21.42 in 1996, an increase of 1.7 percent. Real estate taxes may increase or decrease due to inflation, expansions and improvements of communities, as well as changes in taxation in the tax jurisdictions in which the Company operates.
Administrative expense for the year ended December 31, 1997 increased due to the Merger. Administrative expense in 1997 was 5.0 percent of total revenues as compared to 5.7 percent in 1996.
Interest and related amortization costs increased for the year ended December 31, 1997 by $12,956,000, as compared with the year ended December 31, 1996. The increase is attributable to the indebtedness incurred in connection with the Merger and to finance the 1997 and 1996 acquisitions. Interest expense as a percentage of average debt outstanding decreased to approximately 7.7 percent in 1997 from approximately 8.1 percent in 1996. The decrease is due primarily to the ROC debt assumed in the Merger having a lower average interest rate as well as much of the financing in connection with the Merger and the 1997 and 1996 acquisitions being done with the Company's lines of credit which had a lower average interest rate. In addition, in July 1997, the Company renegotiated its lines of credit into a new line with a lower borrowing rate of 110 basis points over LIBOR versus 150 basis points over LIBOR on the old lines.
Depreciation expense for the year ended December 31, 1997, increased $20.1 million from the same period a year ago. The increase is directly attributable to the Merger and acquisitions. Depreciation expense as a percentage of average depreciable rental property in 1997 remained relatively unchanged from 1996.
Liquidity and Capital Resources
Net cash provided by operating activities was $76,809,000 for the year ended December 31, 1998, compared to $54,545,000 for the same period in 1997. The increase in cash provided by operating activities was due primarily to the increase in net operating income.
Net cash provided by financing activities for the year ended December 31, 1998 was $75,820,000. This consisted primarily of $53,678,000 of net cash contribution from Chateau from the proceeds it received from the issuance in February 1998 of 1,850,000 shares of common stock, $73,002,000 in net proceeds received by the Company from the issuance in April 1998 of Series A Preferred OP Units to an institutional investor, and net borrowings on the Company's line of credit of $11,736,000. These proceeds were offset partially by $57,878,000 in distributions paid to OP Unitholders in 1998.
Net cash used in investing activities for the year ended December 31, 1998 was $167,089,000. This amount represents acquisitions, joint venture investments and advances, capital expenditures and development costs. During 1998, the Company acquired, through four separate portfolio acquisitions, 31 manufactured home communities and three park model/RV communities with a total of 7,045 homesites and 1,359 park model/RV sites. The Company's total investment of approximately $170 million was financed primarily by the assumption of $31.7 million of mortgage and other notes, the issuance of 943,075 OP Units, borrowing under the Company's lines of credit and the proceeds received from the issuance of common stock. The lines of credit were subsequently repaid with the proceeds of $73 million from the issuance of Series A Preferred OP Units.
During 1998, the Company invested approximately $6.5 million in the expansion of its existing communities. During 1998, the Company added 407 available sites to its portfolio. In addition, during 1998, the Company invested or advanced $33.2 million to certain affiliates of the Company. This consisted primarily of approximately $10.2 million to seven joint ventures, through which the Company is developing manufactured home communities, $11.1 million to N'Tandem Trust, an entity in which the Company owns approximately 17 percent of its outstanding common stock and $10 million in other investments in entities owning manufactured home communities. For the year ended December 31, 1998, recurring property capital expenditures, other than development costs, were approximately $5.2 million. Capital expenditures have historically been financed out of funds from operations and it is the Company's intention that such future expenditures will be financed with funds from operations.
In August 1998, the Company renegotiated its line of credit with Bank One, N.A., acting as lead agent, (the "Bank One Credit Facility") increasing the line from $75 million to $100 million. The interest rate was reduced from LIBOR plus 110 basis points to a maximum of LIBOR plus 80 basis points and its maturity date was extended to 2001.
As of December 31, 1998, in addition to the Bank One Credit Facility, the Company had a $7.5 million revolving line of credit from US Bank which bears interest at a rate of LIBOR plus 125 basis points (the "USB Facility" and, together with the Bank One Credit Facility, the "Credit Facilities"). As of December 31, 1998, approximately $36.7 million was outstanding under the Credit Facilities and the Company had available $70.8 million in additional borrowing capacity.
In December 1997, the Company issued 6.92% MandatOry Par Put Remarketed Securities/SM /("MOPPRS/SM/") due December 10, 2014. The net proceeds to the Company from the issuance before deducting offering expenses, were approximately $102.0 million. The net proceeds from the MOPPRS/SM/ were utilized primarily to reduce outstanding balances under the Credit Facilities and to finance acquisitions. The MOPPRS/SM/ are rated as "BBB" by Standard & Poor's Rating Service and "Baa3" by Moody's Investors Service.
In connection with the issuance of the MOPPRS/SM/, the Company and Chateau entered into a Remarketing Agreement, dated as of December 23, 1997 (the "Remarketing Agreement"), with the remarketing dealer named therein (the "Remarketing Dealer"), pursuant to which the MOPPRS/SM/ are subject to mandatory tender in favor of the Remarketing Dealer on December 10, 2004 (the "Remarketing Date"), for a purchase price equal to 100% of the principal amount of the outstanding MOPPRS/SM/. Upon the Remarketing Dealer's election to remarket the MOPPRS/SM/, the interest rate to the December 10, 2014 maturity date of the MOPPRS/SM/ will be adjusted to equal the sum of 5.75% plus the Applicable Spread (as defined in the Remarketing Agreement). In the event the Remarketing Dealer does not elect to remarket the MOPPRS/SM/, the MOPPRS/SM/ will mature on the Remarketing Date.
As of December 31, 1998, the Company had outstanding, in addition to the Credit Facilities, $245 million of unsecured senior debt with a weighted average interest rate and maturity of 7.5 percent and 4.2 years, respectively, and $129 million of secured mortgage debt with a weighted average interest rate and maturity of 7.9 percent and 2.5 years, respectively. As of December 31, 1998, the Company had approximately $428 million of total debt outstanding, representing 29 percent of the Company's total market capitalization. All of the debt is fixed rate debt, other than the Company's Credit Facilities and has a weighted average interest rate of 7.6 percent.
Repayment of long-term borrowings and amounts outstanding under the Credit Facilities, future acquisitions of communities and land for development and new community development activities represent the principal long-term liquidity needs of the Company. The Company does not expect to generate sufficient funds from operations to finance these long-term liquidity needs and instead intends to meet its long-term liquidity requirements through additional borrowing under the Credit Facilities or other lines of credit, the assumption of existing secured or unsecured indebtedness and depending on market conditions and capital availability factors, the issuance of additional equity or debt securities.
The Company expects to meet its short-term liquidity requirements, including expansion activities and capital expenditure requirements, through cash flows from operations and, if necessary, borrowings under the Credit Facilities and other lines of credit.
Inflation
All of the leases or terms of tenants' occupancies at the communities allow for at least annual rental adjustments. In addition, all leases are short-term (generally one year or less) and enable the Company to seek market rentals upon reletting the sites. Such leases generally minimize the risk to the Company of any adverse effect of inflation.
Year 2000 Compliance
Management has assessed the impact of the year 2000 issue on its reporting systems and operations. The year 2000 issue exists because many computer systems and applications abbreviate dates by eliminating the first two digits of the year, assuming that these two digits are always "19". As a result, date- sensitive computer programs may recognize a date using "00" as the year 1900 rather than the year 2000. Unless corrected, the potential exists for computer system failures or incorrect processing of financial and operational information, which could disrupt operations.
To help facilitate the Company's continued growth, substantially all of the computer systems and applications and other operating systems in use in its home office and properties have been, or are in the process of being upgraded and modified. The Company is of the opinion that, in connection with those upgrades and modifications, it has addressed applicable year 2000 issues as they might affect the computer systems and applications located in the Company's offices and properties. The Company anticipates that implementation of solutions to any year 2000 issue which it may discover will require the expenditure of sums which the Company does not expect to be material.
The Company is exposed to the risk that one or more of its vendors or service providers may experience year 2000 problems which impact the ability of such vendor or service provider to provide goods and services. Due to the availability of alternative suppliers, this is not considered as significant a risk with respect to the suppliers of goods. The disruption of certain services, however, such as utilities, could, depending upon the extent of the disruption, have a material adverse impact on the Company's operations. To date, the Company is not aware of any vendor or service provider year 2000 issue that management believes would have a material adverse impact on the Company's operations.
The Company, however, has no means of ensuring that its vendors or service providers will be year 2000 ready. The inability of vendors or service providers to complete the year 2000 resolution process in a timely fashion could have an adverse impact on the Company and the effect of non-compliance by vendors or service providers is not determinable at this time. Residents do not pose year 2000 problems for the Company in view of the nature of the Company's properties.
Widespread disruptions in the national or international economy, including disruptions affecting the financial markets, resulting from year 2000 issues, or in certain industries, such as commercial or investment banks, could also have an adverse impact on the Company. The likelihood and effect of such disruptions is not determinable at this time.
Management expects to have all systems appropriately modified before any significant processing malfunctions could occur and does not expect the year 2000 issue will materially impact the financial condition or operations of the Company.
Recently Issued Accounting Standard
In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which is effective for the Company in the year 2000. The only derivative instrument the Company currently utilizes is an interest rate hedge agreement for $75 million of its senior notes. SFAS 133 requires that all derivative instruments be measured on the balance sheet at fair value. The Company anticipates that the adoption of SFAS 133 will not have a significant effect on its 2000 financial statements.
Other
Funds from operations ("FFO") is defined by the National Association of Real Estate Investment Trusts ("NAREIT") as consolidated net income of the Company without giving effect to gains (or losses) from debt restructuring and sales of property, certain non-recurring items and rental property depreciation and amortization. Management believes that FFO is an important and widely used measure of the operating performance of REITs, which provides a relevant basis for comparison among REITs. For all periods presented, depreciation of rental property, amortization of intangibles and certain non-recurring items are the only non-cash adjustments. FFO (i) does not represent cash flow from operations as defined by generally accepted accounting principles; (ii) should not be considered as an alternative to net income as a measure of operating performance or to cash flows from operating, investing and financing activities; and (iii) is not an alternative to cash flows as a measure of liquidity. FFO is calculated as follows:
For the ------------------- year ended December 31, - --------------------------------
Item 8.
Item 8. Financial Statements and Supplementary Data - ------- -------------------------------------------
Report of Independent Accountants
To the Partners of CP Limited Partnership:
In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) and (2) present fairly, in all material respects, the financial position of CP Limited Partnership (the "Company") at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP Denver, Colorado February 8, 1999
CP LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes are an integral part of the financial statements.
CP LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the financial statements.
CP LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
The accompanying notes are an integral part of the financial statements.
CP LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the financial statements.
CP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS _______
1. Organization and Formation of Company: -------------------------------------
CP Limited Partnership (the "Company") is a limited partnership and was formed by Chateau Communities, Inc. ("Chateau"), a real estate investment trust, as general partner and Chateau Estates, as the initial limited partner, on September 16, 1993. In 1997, the Company merged with ROC Communities, Inc. ("ROC").
The Company is engaged in the business of owning and operating manufactured housing community properties primarily through the Company. As of December 31, 1998, the Company owned 165 properties containing an aggregate of 51,101 homesites and 1,359 park model/RV sites, located in 28 states. Approximately 29 percent of these homesites were in Florida and 27 percent were in Michigan. The Company also fee managed 36 properties containing an aggregate of 7,500 homesites. A manufactured housing community is real estate designed and improved with sites for placement of manufactured homes. The owner of the home leases the site from the Company generally for a term of one year or less.
2. Summary of Significant Accounting Policies: ------------------------------------------
Basis of Presentation
The accompanying consolidated financial statements of the Company include all accounts of the Company and its subsidiaries. Chateau and ROC are the general partners. As of December 31, 1998, Chateau owned on a combined basis, a 89 percent general partner interest. Pursuant to the terms of the operating partnership agreement, the Company is required to reimburse Chateau for the net expenses incurred by Chateau. Amounts paid on behalf of Chateau by the Company are reflected in the statement of income as general and administrative expenses. The balance sheet of Chateau as of December 31, 1998 is identical to the accompanying balance sheet of the Company, except as follows:
All significant inter-entity balances and transactions have been eliminated in consolidation.
The Company conducts manufactured home sales and brokerage activities through its taxable subsidiary Community Sales, Inc. ("CSI"). The Company owns 100% of the preferred stock of CSI and is entitled to 100% of its cash flow. The Company accounts for its investment in CSI utilizing the equity method of accounting.
CP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued _______
2. Summary of Significant Accounting Policies Continued: ----------------------------------------------------
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles involves the use of certain management estimates and assumptions that affect the reported amount 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.
Revenue Recognition
Rental income is recognized when earned and due from residents. The leases entered into by residents for the rental of a site are generally for terms not longer than one year and are renewable upon the consent of both parties or, in some instances, as provided by statute.
CP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued _______
2. Summary of Significant Accounting Policies Continued: -----------------------------------------------------
Rental Property
Rental property is carried at cost less accumulated depreciation. Management evaluates the recoverability of its investment in rental property whenever events or changes in circumstances indicate that full asset recoverability is questionable. Management's assessment of the recoverability of its rental property includes, but is not limited to, recent operating results, expected net operating cash flow and management's plans for future operations. If a rental property is determined to be significantly impaired, the asset is written down to its estimated fair value.
Depreciation
Depreciation on manufactured home communities is computed primarily on the straight-line method over the estimated useful lives of the assets. The estimated useful lives of the various classes of rental property assets are primarily as follows:
Maintenance, repairs and minor improvements to rental properties are expensed when incurred. Major improvements and renewals are capitalized. When rental property assets are sold or otherwise retired, the cost of such assets, net of accumulated depreciation compared to the sale proceeds, are recognized in income as gains or losses on disposition.
Capitalized Interest
Interest is capitalized on development projects during periods of construction through obtainment of a certificate of occupancy. Interest capitalized by the Company during 1998 and 1997 was $579,000 and $708,000, respectively.
Income Taxes
The Company is not liable for Federal income taxes as the partners recognize their proportionate share of income or loss in their tax returns. Therefore, no provision for income taxes is included in the Company's financial statements.
CP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued _______
2. Summary of Significant Accounting Policies Continued: ----------------------------------------------------
Earnings Per OP Unit
Basic earnings per OP Unit are computed based upon the weighted average number of OP Units outstanding during the period. Diluted earnings per OP Unit are computed assuming the exercise of all outstanding stock options of Chateau, which would have a dilutive effect.
Cash Equivalents
All highly liquid investments with an initial maturity of three months or less are considered to be cash equivalents.
Reclassifications
Certain reclassifications have been made to the prior year information to conform to the current year presentation. These reclassifications have no impact on net operating results previously reported.
Fair Value of Financial Instruments
The fair value of the Company's financial instruments approximate their carrying values at December 31, 1998 and 1997.
Debt Issuance Costs
Costs incurred to obtain financing and costs of interest rate protection are deferred and amortized on a straight line basis, which approximates the effective interest method, over the term of the related loans or agreements. These costs, net of accumulated amortization, are included in prepaid expenses and other assets in the accompanying consolidated balance sheets.
Recently Issued Accounting Standard
In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which is effective for the Company in the year 2000. The only derivative instrument the Company currently utilizes is an interest rate hedge agreement for $75 million of its senior notes. SFAS 133 requires that all derivative instruments be measured on the balance sheet at fair value. The Company anticipates that the adoption of SFAS 133 will not have a significant effect on its 2000 financial statements.
CP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued _______
3. Merger with ROC Communities, Inc.: ----------------------------------
On February 11, 1997, the Company completed its merger with ROC Communities, Inc. (the "Merger"). The Merger and related transactions was accounted for using the purchase method of accounting in accordance with generally accepted accounting principles. Accordingly, the assets and liabilities of ROC were adjusted to fair value for financial accounting purposes and the results of operations of ROC were included in the results of operations of the Company beginning in February 1997.
In connection with the Merger, the related transactions occurred
- - The Company repurchased and retired 1,200,000 OP Units from Chateau, of which 750,000, and 450,000 were repurchased in 1997 and 1996, respectively
- - ROC purchased 350,000 shares of common stock of Chateau, in 1996, which was retired, along with an equivalent number of units, at the time of the Merger
- - The Company issued 1.042 OP Units to Chateau, to reflect an equivalent number of shares issued by Chateau, for each share of ROC stock outstanding
- - The Company paid a distribution equal to .0326 OP Units per OP Unit outstanding, to reflect an equivalent stock dividend by Chateau
CP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued _______
3. Merger with ROC Communities, Inc. Continued: --------------------------------------------
- - Certain limited partners converted 6,170,908 OP Units into common shares, which results in those units being held by Chateau. These limited partners waived their right to receive the above distribution with respect to those OP Units exchanged and as a result it was re-allocated, resulting in a distribution to the general partners of .068 units.
- - These exchanging limited partners purchased 984,423 additional shares of common stock from Chateau at $25.88 per share and Chateau purchased the same number of units from the Company with these proceeds.
The total price of $351 million was allocated as follows:
The following unaudited pro forma income statement information has been prepared as if the Merger and related transactions had occurred on January 1, 1996. In addition, the pro forma information is presented as if the acquisitions of 14 properties made in 1996 by the Company and ROC had occurred on January 1, 1996. No adjustments were made for the 1997 acquisitions made by the Company. The pro forma income statement information is not necessarily indicative of the results which actually would have occurred if the Merger had been consummated on January 1, 1996.
CP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued _______
4. Capital Transactions: ---------------------
The following table presents the changes in the Company's outstanding common OP Units for the years ended December 31, 1998, 1997, and 1996.
The Company paid a distribution of $.455 per OP Unit on April 14, 1998, July 15, 1998, October 15, 1998 and January 15, 1999 to OP Unitholders of record as of March 31, 1998, June 30, 1998, September 30, 1998 and December 28, 1998, respectively. The distribution paid on January 15, 1999 was included in distributions payable in the accompanying consolidated balance sheet as of December 31, 1998.
In February 1998, the Company received a net cash contribution from Chateau from the proceeds of approximately $53.7 million from the issuance of 1,850,000 shares of Chateau's common stock. The contribution from the proceeds were used to finance acquisitions made in March 1998 and to reduce outstanding balances under the Company's line of credit, which was used to finance acquisitions made in January.
Included in partners' capital is $73,002,000, which represents 1.5 million 8.125% Series A Cumulative Redeemable Preferred Units ("Preferred Units"). The Preferred Units are exchangeable on or after April 20, 2008 for authorized but unissued shares of 8.125% Series A Cumulative Redeemable Preferred Stock of Chateau.
CP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued _______
Basic and diluted earnings per OP Unit are summarized in the table below:
CP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued _______
5. Acquisitions of Rental Property: --------------------------------
(Dollars in thousands)
(1) The cash used to finance the Company's acquisitions was provided by borrowings on the line of credit, the contribution of 1.85 million common shares from Chateau in February 1998 and the issuance of $75 million of Preferred Units (see Note 4). (2) Does not include park model/RV sites. (3) Represents a 50 percent interest in a joint venture with ROC. After the Merger in February 1997, the Company owns 100 percent of these properties. (4) Includes $12 million for a capital lease obligation.
The following unaudited pro forma income statement information has been prepared as if the significant acquisitions made in 1998 had occurred on January 1, 1997. No pro forma adjustments were made for the 1997 acquisitions as the effects on reported results were not material. The pro forma income statement information is not necessarily indicative of the results which actually would have occurred if these acquisitions had been consummated on January 1, 1997.
CP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued _______
6. Investments in and Advances to Affiliates: ------------------------------------------
Investments in and advances to affiliates as of December 31, consisted primarily of the following:
CSI - ---
Advances to CSI are primarily used to finance inventory purchases. The Company accounts for its investment in CSI using the equity method of accounting.
Development Joint Ventures - --------------------------
The Company is currently involved in seven joint ventures to construct ground-up "greenfield communities". In the majority of the arrangements, the Company acts as the developer or co-developer, performs all accounting and property management functions and, in many of the arrangements, the Company acts as a lender to finance the development costs. As such, the Company advances amounts to the joint ventures to fund construction and recognizes the related interest income as earned. The Company primarily borrows on its line of credit to fund the advances and, accordingly, includes the related borrowing costs in interest expense. In the majority of the arrangements, the Company has the option to purchase the completed community when it reaches a pre-determined occupancy rate. The Company is also involved in two joint ventures in which the communities are being constructed by its joint venture partner. The Company has similar arrangements to lend these joint ventures funds to finance development.
N'Tandem - --------
In September 1997, the Company completed the acquisition of The Windsor Corporation ("Windsor"), the general partner in five partnerships and advisor to one REIT, N'Tandem Trust ("N'Tandem", previously known as Windsor Real Estate Investment Trust 8). These six entities owned 30 manufactured home communities (containing 6,300 homesites), all of which have been managed by the Company or ROC on a fee basis since 1993.
In March 1998, the Company entered into an investment agreement ("Agreement") with N'Tandem. Pursuant to the Agreement, the Company purchased 19,139 common shares of N'Tandem and issued two notes; one secured and one unsecured, for an aggregate of $5,001,000 due March 1999 for the acquisition by N'Tandem of one community in Montgomery, Alabama. On November 30, 1998, N'Tandem borrowed $5,650,000 from the Company for the acquisition of three communities in Lexington Park, Maryland. The notes bear interest at the prime rate of interest plus one percent per annum and are due November 1999. The Company owns approximately 17 percent of N'Tandem's outstanding common stock and accounts for its investment on an equity basis, recognizing income from an advisory agreement and interest income on the notes as earned. As of December 31, 1998, N'Tandem owned 6 communities with 1,307 homesites and an interest in 3 communities with 419 homesites.
CP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued _______
7. Financing: ---------
The following table sets forth certain information regarding debt at December 31:
At December 31, 1998, the Company had a $100 million line of credit arrangement with Bank One, NA acting as lead agent for a bank group to provide financing for future construction, acquisitions and general business obligations. The line of credit arrangement is unsecured, bears interest at the prime rate of interest or, at the Company's option, LIBOR plus 80 basis points. The line matures in 2001. In addition, the Company has a $7.5 million unsecured line of credit from US Bank which bears interest at a rate of LIBOR plus 125 basis points. As of December 31, 1998, approximately $36.7 million was outstanding under the Company's lines of credit and the Company had available $70.8 million in additional borrowing capacity. The financing arrangements contain customary covenants, including a debt service coverage ratio and a restriction on the incurrence of additional collateralized indebtedness without a corresponding increase in rental property.
During 1998, the Company assumed $19.4 million in fixed rate mortgages related to 6 properties, in connection with the acquisitions of the properties, with a weighted average interest rate of 7.54 percent.
In connection with the acquisitions made in 1998, the Company acquired nine communities, containing 900 homesites and 1,100 park model/RV sites, subject to long-term capital leases. The leases were convertible, at the lessor's option, into common OP Units. That option was exercised in January 1999.
On December 23, 1997, the Company issued 6.92% MandatOry Par Put Remarketed Securities/SM /("MOPPRS/SM/") due December 10, 2014. The net proceeds to the Company from the issuance before deducting offering expenses, was approximately $102 million. The additional $2 million, included in prepaid expenses and other assets in the accompanying balance sheets, represents a payment made by a remarketing dealer for the right to remarket the securities in 2004. The remarketing fee is being amortized over the life of the related debt.
CP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued _______
7. Financing Continued: -------------------
In connection with the issuance of the MOPPRS/SM/, the Company and Chateau entered into a remarketing agreement, dated as of December 23, 1997 (the "Remarketing Agreement"), with the remarketing dealer named therein (the "Remarketing Dealer"), pursuant to which the MOPPRS/SM/ are subject to mandatory tender in favor of the Remarketing Dealer on December 10, 2004 (the "Remarketing Date"), for a purchase price equal to 100% of the principal amount of the outstanding MOPPRS/SM/. Upon the Remarketing Dealer's election to remarket the MOPPRS/SM/, the interest rate to the December 10, 2014 maturity date of the MOPPRS/SM/ will be adjusted to equal the sum of 5.75% plus the Applicable Spread (as defined in the Remarketing Agreement). In the event the Remarketing Dealer does not elect to remarket the MOPPRS/SM/, the MOPPRS/SM/ will mature on the Remarketing Date.
The aggregate amount of principal maturities on the fixed rate mortgages and Senior Notes payable subsequent to December 31, 1998 (in thousands) is as follows:
The Company has entered into an interest rate hedge agreement in order to hedge the interest rate on $75 million of senior notes.
CP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued _______
8. Stock Option Plan: -----------------
The Company measures compensation cost using the intrinsic value method, in accordance with Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees."
Chateau's 1997 Equity Compensation Plan and 1993 Long Term Incentive Stock Plan (collectively, the "Plans") provide for up to 2.2 million shares of common stock that may be granted to directors, executive officers and other key employees. The Plans provide for the grant of options, restricted stock awards and stock appreciation rights. The Plans provide for the grant of options at "fair market value" which represents the quoted market price of Chateau's common stock on the date of grant. The Compensation Committee of the Board of Directors determines the vesting schedule of each option and the term, which term shall not exceed ten years from the date of grant.
Information concerning stock options is as follows:
(1) The options granted do not include the grant of 80,000 shares of restricted stock in 1997 to executive officers of Chateau.
(2) These represent options issued in exchange for existing ROC options at the time of the Merger and the adjustments for a 6.8 percent stock dividend paid on Chateau's common stock, also in connection with the Merger.
* Ranging in price from $18.18-$29.94 and $19.50 - $24.25 at December 31, 1997 and 1996, respectively. See table below for information as of December 31, 1998.
The following table summarizes information concerning outstanding and exercisable options at December 31, 1998.
CP LIMITED PARNTERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued _______
8. Stock Option Plan Continued: ---------------------------
The fair value of each option was estimated as of date of grant using an option- pricing model with the following assumptions used:
If compensation cost for stock option grants had been recognized based on the fair value at the grant dates for 1998, 1997 and 1996 consistent with the method allowed by SFAS No. 123 "Accounting for Stock-Based Compensation", net income and net income per OP Unit would have been:
9. Savings Plan: ------------
The Company has a qualified retirement plan designed to qualify under Section 401 of the Internal Revenue Code (the "Plan"). The Plan allows employees of the Company and its subsidiaries to defer a portion of their eligible compensation on a pre-tax basis subject to certain maximum amounts. Contributions by the Company are discretionary and determined by the Company's management. Company contributions are allocated to each participant based on the relative compensation of the participant to the compensation of all participants. The Company contributed approximately $550,000, $421,000 and $300,000 to the Plan for the years ended December 31, 1998, 1997 and 1996, respectively.
CP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued _______
10. Related Party Transactions: --------------------------
Rental expense of approximately $100,000 annually has been incurred for leasing space in an office building owned by certain officers and equity owners. The office lease expires November 2001.
The Company, through CSI, purchases manufactured home inventory for resale from Clayton Homes, Inc., which is affiliated with one of Chateau's directors. During 1998 and 1997, CSI purchased approximately 22 homes for a cost of approximately $540,000 and 94 homes for a cost of approximately $2.2 million, respectively, from Clayton Homes, Inc. In certain instances, the Company finances the purchase of these homes with Vanderbilt Mortgage and Finance, Inc. ("Vanderbilt"), which is also affiliated with the same director. As of December 31, 1998 and 1997, the Company had a payable to Vanderbilt for $122,000 and $656,000, respectively.
In addition, when CSI sells homes, the purchaser often obtains financing from Vanderbilt. In certain cases, Vanderbilt has recourse to the Company if these loans are not repaid for homes sold through June 1998. As of December 31, 1998 there is a total of approximately $16.5 million of such amounts that are recourse to the Company.
Included in management, interest and other income is $581,800 and $28,500 of management and other fee income received from N'Tandem for the years ended December 31, 1998 and 1997, respectively.
As of December 31, 1998 the Company had a receivable of $3.3 million from a partnership with which several officers of the Company are affiliated. The partnership owns a manufactured home community that the Company has the option to purchase. The receivable is collateralized by the property and was approved by Chateau's directors who have no interest in the partnership.
Contingencies: -------------
Several claims and legal actions arising from the normal course of business have been asserted against the Company, and are pending final resolution. In the opinion of management, none of these matters will have a material adverse affect upon the results of operations, financial condition or cash flows of the Company.
The Company, through its joint venture arrangements, has guaranteed approximately $20 million of debt.
CP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued _______
12. Quarterly Financial Information (Unaudited): --------------------------------------------
The following is quarterly financial information for the years ended December 31, 1998 and 1997 (amounts in thousands, except per unit data.)
(a) Operating income represents total revenues less property operating and maintenance expense, real estate taxes and administrative expense. Operating income is a measure of the performance of the properties before the effects of depreciation and interest and related amortization costs.
(b) Quarterly earnings per OP Unit amounts may not total to the full year amounts due to rounding and to the change in the number of OP Units outstanding.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and - ------- --------------------------------------------------------------- Financial Disclosures - ---------------------
None
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant - -------- --------------------------------------------------
Not Applicable
Item 11.
Item 11. Executive Compensation - -------- ----------------------
Not Applicable
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management - -------- --------------------------------------------------------------
Not Applicable
Item 13.
Item 13. Certain Relationships and Related Transactions - -------- ----------------------------------------------
Not Applicable
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - -------- ----------------------------------------------------------------
(a) 1. Financial Statements
Report of Independent Accountants
Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Partners' Capital for the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedule ----------------------------
III - Real Estate and Accumulated Depreciation
3. Exhibits
Exhibit Number (Referenced to Item 601 of Regulation S-K) Exhibit Description -------------------
4.1 (a) Form of Stock Certificate 4.2(i) (d)Indenture dated as of December 19, 1997 between CP Limited Partnership and The First National Bank of Chicago, as supplemented 4.2(ii) (d)First Supplemental Indenture dated as of December 19, 1997 between CP Limited Partnership and The First National Bank of Chicago related to the $100,000,000 MadatOry Par Put Remarketed Securities/SM/ ("MOPPRS/SM/") due December 10, 2014. 4.2(iii) (d) Remarketing Agreement dated as of December 23, 1997 among Chateau Communities, Inc., CP Limited Partnership and the "Remarketing Dealer" named therein. 4.3* (i) $75,000,000 8 3/4% Indenture, dated March 2, 1995, of CP Limited Partnership. 4.4* (e) Note Purchase Agreement dated as of November 4, 1996, between Pacific Mutual and ROC Communities, Inc. for $70,000,000 in Senior Notes due November 4, 2003
* Other instruments defining long-term debt not exceeding 10 percent of total assets have been omitted in reliance on Item 601(b)(4)(iii)(A) of Regulation S-K but will be filed upon the request of the Commission. (a) Incorporated by reference to the Exhibits filed with Chateau's Registration Statement on Form S-11 filed with the Securities and Exchange Commission on November 10, 1993 (Commission File No. 33-69150).
(b) Incorporated by reference to the exhibits filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1995 filed with the commission on March 29, 1996 (Commission File No. 1-12496).
(c) Incorporated by reference to Chateau's Quarterly Report on Form 10-Q filed with the Commission on May 14, 1997.
(d) Incorporated by reference to Chateau's Form 8-K filed with the Commission on December 9, 1997.
(e) Incorporated by reference to Chateau's Form S-4 filed with the Commission on September 24, 1996.
(f) Incorporated by reference to Chateau's Annual Report on Form 10-K for the year ended December 31, 1997
(g) Incorporated by reference to the Company's Form 8-K filed with the Commission on May 1, 1998.
(h) Incorporated by reference to Chateau's Form 8-K filed with the Commission on May 1, 1998.
(i) Incorporated by reference to the Exhibits filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1994 filed with the Commission on March 30, 1995 (Commission File No. 1-12496).
b. Reports on Form 8-K -------------------
No reports on Form 8-K were filed in the fourth quarter of the year ended December 31, 1998.
Exhibit Index
Exhibit Number (Referenced to Item 601 of Regulation S-K)
4.1 (a) Form of Stock Certificate 4.2(i) (d)Indenture dated as of December 19, 1997 between CP Limited Partnership and The First National Bank of Chicago, as supplemented 4.2(ii) (d)First Supplemental Indenture dated as of December 19, 1997 between CP Limited Partnership and The First National Bank of Chicago related to the $100,000,000 MadatOry Par Put Remarketed Securities/SM/ ("MOPPRS/SM/") due December 10, 2014. 4.2(iii) (d) Remarketing Agreement dated as of December 23, 1997 among Chateau Communities, Inc., CP Limited Partnership and the "Remarketing Dealer" named therein. 4.3* (i)$75,000,000 8 3/4% Indenture, dated March 2, 1995, of CP Limited Partnership. 4.4* (e)Note Purchase Agreement dated as of November 4, 1996, between Pacific Mutual and ROC Communities, Inc. for $70,000,000 in Senior Notes due November 4, 2003 4.5* (e)Deed to secure Debt and Security Agreement from ROCF, Inc. to Pacific Mutual, dated as of August 25, 1993 10.1 (f) Amended and Restated Agreement of Limited Partnership of CP Limited Partnership dated January 22, 1997. 10.2 (a) Lease of 19500 Hall Road 10.3 (a) Form of Noncompetition Agreement (Boll and Allen) 10.4(i) (c) Employment Agreement (McDaniel) 10.4(ii) (c) Employment Agreement (Kellogg) 10.4(iii) (c) Employment Agreement (Fischer) 10.4(iv) (c) Employment Agreement (Davis) 10.5 (f)1997 Equity Compensation Plan 10.6 (b) Long-Term Incentive Stock Plan 10.7 (g) Amended and Restated Agreement of Limited Partnership of CP Limited Partnership dated April 20, 1998. 10.8 (h) Articles supplementary dated April 20, 1998 21 (b)List of Subsidiaries of Chateau Communities, Inc. 23 Consent of PricewaterhouseCoopers LLP 27 Financial Data Schedule
Exhibit Index
* Other instruments defining long-term debt not exceeding 10 percent of total assets have been omitted in reliance on Item 601(b)(4)(iii)(A) of Regulation S-K but will be filed upon the request of the Commission. (a) Incorporated by reference to the Exhibits filed with the Chateau's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995 filed with the Commission on August 10, 1995 (Commission File No. 1-12496).
(b) Incorporated by reference to the exhibits filed with the Company's Annual Report in Form 10-K for the year ended December 31, 1995 filed with the commission on March 29, 1996 (Commission File No. 1-12496).
(c) Incorporated by reference to Chateau's Quarterly Report on Form 10-Q filed with the Commission on May 14, 1997.
Incorporated by reference to Chateau's Form 8-K filed with the Commission on December 9, 1997.
Incorporated by reference to Chateau's Form S-4 filed with the Commission on September 24, 1996.
Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997
Incorporated by reference to the Company's Form 8-K filed with the Commission on May 1, 1998.
Incorporated by reference to Chateau's Form 8-K filed with the Commission on May 1, 1998.
Incorporated by reference to the Exhibits filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1994 filed with the Commission on March 30, 1995 (Commission File No. 1-12496).
b. Reports on Form 8-K -------------------
No reports on Form 8-K were filed in the fourth quarter of the year ended December 31, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, and in the capacities indicated, on the 24/th/ day of March, 1999.
CP LIMITED PARTNERSHIP BY: CHATEAU COMMUNITIES, INC.
By:/s/ Gary P. McDaniel ------------------------------------ Gary P. McDaniel Director and Chief Executive Officer (Principal Executive Officer)
By:/s/ Tamara D. Fischer ------------------------------------ Tamara D. Fischer Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 24, 1999.
Signature Title --------- -----
/s/ John Boll Chairman of the Board of Directors - ---------------------------- John A. Boll
/s/C.G. Kellogg Director and President - ---------------------------- C.G. Kellogg
/s/Gary P. McDaniel Director and Chief Executive Officer - ---------------------------- Gary P. McDaniel
/s/Edward R. Allen Director - ---------------------------- Edward R. Allen
/s/Gebran S. Anton, Jr. Director - ---------------------------- Gebran S. Anton, Jr.
/s/James L. Clayton Director - ---------------------------- James L. Clayton
/s/Steven G. Davis Director - ---------------------------- Steven G. Davis
/s/James M. Hankins Director - ---------------------------- James M. Hankins
/s/Rhonda Hogan Director - ---------------------------- Rhonda Hogan
/s/James M. Lane Director - ---------------------------- James M. Lane
/s/Donald E. Miller Director - ---------------------------- Donald E. Miller
CP LIMITED PARTNERSHIP
FINANCIAL STATEMENT SCHEDULES PURSUANT TO ITEM 14(a)(2) OF FORM 10-K ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
for the year ended December 31, 1998
CP LIMITED PARTNERSHIP
FINANCIAL STATEMENT SCHEDULE
Pages -----
III. Real Estate and Accumulated Depreciation..............................
No other financial statement schedules are required as the amounts are not significant, or not applicable, or reported in the Company's consolidated financial statements or notes thereto.
CP LIMITED PARTNERSHIP SCHEDULE III, REAL ESTATE AND ACCUMULATED DEPRECIATION For the year ended December 31, 1998 (in thousands)
CP LIMITED PARTNERSHIP SCHEDULE III, REAL ESTATE AND ACCUMULATED DEPRECIATION for the year ended December 31, 1998 (in thousands)
CP LIMITED PARTNERSHIP SCHEDULE III, REAL ESTATE AND ACCUMULATED DEPRECIATION for the year ended December 31, 1998 (in thousands)
CP LIMITED PARTNERSHIP SCHEDULE III, REAL ESTATE AND ACCUMULATED DEPRECIATION for the year ended December 31, 1998 (in thousands)
CP LIMITED PARTNERSHIP SCHEDULE III, REAL ESTATE AND ACCUMULATED DEPRECIATION for the year ended December 31, 1998 (in thousands)
CP LIMITED PARTNERSHIP SCHEDULE III, REAL ESTATE AND ACCUMULATED DEPRECIATION for the year ended December 31, 1998 (in thousands)
SCHEDULE III Continued
CP LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION, Continued _______
The changes in total real estate for the years ended December 31, 1998, 1997 and 1996 are as follows: