SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event
reported):
January 23, 2002
HOME PROPERTIES OF NEW YORK, INC.
(Exact name of Registrant as specified in its Charter)
MARYLAND 1-13136 16-1455126
(State or other jurisdiction of (Commission file number) (I.R.S. Employer
incorporation or organization Identification Number)
850 CLINTON SQUARE
ROCHESTER, NEW YORK 14604
(Address of principal executive offices)
Registrant's telephone number, including area code: (585) 546-4900
Not applicable
(Former name or former address, if changed since last report)
ITEM 5. OTHER EVENTS
During the period January 1, 2002 through June 30, 2002, Home Properties of New
York, Inc. (the "Company") disposed of ten operating apartment communities, in
separate transactions.
As a result of the above transactions, this Form 8-K is being filed to reflect
the impact of the classification as discontinued operations of apartment
communities sold on or after January 1, 2002 pursuant to the requirements of
Statement of Financial Accounting Standards ("SFAS"), 144 - "Accounting for the
Impairment or Disposal of Long Lived Assets" within the consolidated financial
statements for each of the three years ended December 31, 2001, 2000 and 1999,
including Management's Discussion and Analysis of Financial Condition and
Results of Operations, and Selected Financial Data. Note that this presentation
would also include any apartment communities classified as held for sale during
2002, however, as of June 30, 2002 there were no such properties.
Page
INDEX NUMBER
------- ------
Selected Financial Data 3
Management's Discussion and Analysis of Financial Condition 5
and Results of Operations.
Quantitative and Qualitative Disclosures about Market Risk 22
Financial Statements F-1
EXHIBIT
23.1 Consent of Independent Accountants
99.1 Section 906 Certifications of Chief Executive Officers
99.2 Section 906 Certification of Chief Financial Officer
SELECTED FINANCIAL DATA
The following table sets forth selected financial and operating data on
a historical basis for the Company and should be read in conjunction
with the financial statements appearing elsewhere in this Form 8-K
(amounts in thousands, except per share data).
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Revenues:
Rental Income $341,653 $291,778 $211,195 $132,424 $60,928
Other Income 18,374 19,960 16,712 11,565 5,632
--------- -------- -------- --------- -------
TOTAL REVENUES 360,027 311,738 227,907 143,989 66,560
-------- ------- ------- -------- ------
Expenses:
Operating and maintenance 142,281 124,861 92,375 60,773 30,068
General & administrative 18,614 13,235 10,696 6,685 2,255
Interest 65,742 56,150 39,056 23,711 11,967
Depreciation & amortization 63,379 51,037 36,139 22,242 10,608
Loss on available-for-sale securities - - 2,123 - -
Non-recurring acquisition expense - - 6,225 - -
------- ------- -------- ------- ------
TOTAL EXPENSES 290,016 245,283 186,614 113,411 54,898
------- ------- ------- ------- ------
Income before gain (loss) on
disposition of property and
business, minority interest,
discontinued operations and
extraordinary item 70,011 66,455 41,293 30,578 11,662
Gain (loss) on disposition of
property and business 26,241 (1,386) 457 - (1,283)
------- ------- ------- ------- ------
Income before minority interest,
discontinued operations and
extraordinary item 96,252 65,069 41,750 30,578 10,379
Minority interest 32,844 24,819 16,570 11,946 3,796
------- ------ ------ ------ -----
Income from continuing operations 63,408 40,250 25,180 18,632 6,583
Discontinued operations, net of
minority interest 1,166 1,206 1,198 1,016 844
----- ----- ----- ----- -------
Income before extraordinary item 64,574 41,456 26,378 19,648 7,427
Extraordinary item, prepayment
penalties, net of minority interest (68) - (96) (960) (1,037)
-------- ------- ------- ------- ------
Net Income 64,506 41,456 26,282 18,688 6,390
Preferred dividends (17,681) (12,178) (1,153) - -
-------- -------- ------- ------- ------
Net income available to common
shareholders $ 46,825 $29,278 $25,129 $18,688 $6,390
======== ======= ======= ======= ======
Basic earnings per share data:
Income from continuing operations $ 2.07 $ 1.36 $ 1.29 $ 1.34 $ .89
Discontinued operations .05 .06 .06 .07 .11
Extraordinary item - - ( .01) ( .07) ( .14)
Net income available to common -------- ----------- -------- -------- ---------
shareholders $ 2.12 $ 1.42 $ 1.34 $ 1.34 $ .86
======== ======== ======== ======== =========
Diluted earnings per share data:
Income from continuing operations $ 2.06 $ 1.35 $ 1.29 $ 1.33 $ .87
Discontinued operations .05 .06 .06 .07 .11
Extraordinary item - - ( .01) ( .07) ( .14)
----------- -------- -------- -------- ---------
Net income available to common
shareholders $ 2.11 $ 1.41 $ 1.34 $ 1.33 $ .84
======== ======== ======== ======== =========
Cash dividends declared per common
share $ 2.31 $ 2.16 $ 1.97 $ 1.83 $ 1.74
======== ======== ======== ======== ======
Balance Sheet Data:
Real estate, before accumulated
depreciation $2,135,078 $1,895,269 $1,480,753 $940,788 $525,128
Total assets 2,063,789 1,871,888 1,503,617 1,012,235 543,823
Total debt 992,858 832,783 669,701 418,942 218,846
Series B convertible cumulative
preferred stock 48,733 48,733 48,733 - -
Stockholders' equity 620,596 569,528 448,390 361,956 151,432
Other Data:
Funds from Operations (1) $136,604 $120,854 $80,784 $55,966 $24,345
Cash available for distribution (2) $120,994 $107,300 $78,707 $49,044 $21,142
Net cash provided by operating
activities $148,389 $127,197 $90,526 $60,548 $27,285
Net cash used in investing activities ($139,106) ($178,445) ($190,892) ($297,788) ($102,460)
Net cash (used in) provided by
financing activities ($9,013) $56,955 $71,662 $266,877 $77,461
Weighted average number of shares
outstanding:
Basic 22,101,027 20,639,241 18,697,731 13,898,221 7,415,888
Diluted 22,227,521 20,755,721 18,800,907 14,022,329 7,558,167
Total communities owned at end of
period 143 147 126 96 63
Total apartment units owned at end
of period 39,007 39,041 33,807 23,680 14,048
(1) Management considers funds from operations ("FFO") to be an appropriate
measure of performance of an equity REIT. FFO is generally defined as
net income (loss) before gains (losses) from the sale of property and
business and extraordinary items, before minority interest in the
Operating Partnership, plus real estate depreciation. Management
believes that in order to facilitate a clear understanding of the
combined historical operating results of the Company, FFO should be
considered in conjunction with net income as presented in the
consolidated financial statements included elsewhere herein. FFO does
not represent cash generated from operating activities in accordance
with generally accepted accounting principles and is not necessarily
indicative of cash available to fund cash needs. FFO should not be
considered as an alternative to net income as an indication of the
Company's performance or to cash flow as a measure of liquidity.
The calculation of FFO for the previous five years is presented as
follows:
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Net income available to common
shareholders $ 46,825 $ 29,278 $25,129 $18,688 $ 6,390
Preferred dividends 17,681 12,178 1,153 - -
Minority interest 32,844 24,819 16,570 11,946 3,796
Minority interest - discontinued
operations 838 896 820 657 452
Extraordinary item 68 - 96 960 1,037
Depreciation from real property(1)
64,589 52,297 37,473 23,715 11,387
(Gain) loss from sale of property
and business ( 26,241) 1,386 ( 457) - 1,283
-------- -------- -------- ------- -------
FFO $136,604 $120,854 $80,784 $55,966 $24,345
======== ======== ======= ======= =======
Weighted average common shares/units
outstanding:
Basic 37,980.0 35,998.3 31,513.8 22,871.7 11,373.9
======== ======== ======== ======== ========
Diluted 45,063.6 41,128.4 32,044.9 22,995.8 11,516.1
======== ======== ======== ======== ========
(1) Includes amounts passed through from unconsolidated investments.
All REITs may not be using the same definition for FFO. Accordingly,
the above presentation may not be comparable to other similarly titled
measures of FFO of other REITs.
Quarterly information on Funds from Operations for the two most recent
years is as follows:
2001 1ST 2ND 3RD 4TH TOTAL
---- --- --- --- --- -----
Funds from Operations $26,953 $34,698 $37,818 $37,135 $136,604
Weighted Average Shares/Units:
Basic 37,581.0 37,461.8 38,010.4 38,849.5 37,980.0
Diluted 39,311.4 44,661.2 45,281.1 45,536.6 45,063.6
2000 1ST 2ND 3RD 4TH TOTAL
---- --- --- --- --- -----
Funds from Operations
$25,407 $29,788 $33,106 $32,553 $120,854
Weighted Average Shares/Units:
Basic 34,123.2 35,846.3 36,820.1 37,261.3 35,998.3
Diluted 37,586.7 40,249.9 43,162.4 43,625.1 41,128.4
(2) Cash Available for Distribution is defined as Funds from Operations
less an annual reserve for anticipated recurring, non-revenue
generating capitalized costs of $400 ($375 for 1998-2000, $350 for
1996-1997, and $300 for 1995) per apartment unit. It is the Company's
policy to fund its investing activities and financing activities with
the proceeds of its line of credit, new debt, by the issuance of
additional Units in the Operating Partnership, or proceeds from
property dispositions.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
----------------------------------------------------------------------
OVERVIEW
The following discussion should be read in conjunction with
consolidated financial statements, the notes thereto, and the selected
financial data appearing elsewhere in this report. Historical results
and percentage relationships set forth in the consolidated financial
statements, including trends which might appear, should not be taken
as indicative of future operations. The Company considers portions of
the information to be "forward-looking statements" within the meaning
of Section 27A of the Securities Exchange Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, both as amended, with respect
to the Company's expectations for future periods. Forward-looking
statements include, without limitation, statements related to
acquisitions (including any related pro forma financial information)
future capital expenditures, financing sources and availability and
the effects of environmental and other regulations. Although the
Company believes that the expectations reflected in those
forward-looking statements are based upon reasonable assumptions, it
can give no assurance that its expectations will be achieved. Factors
that may cause actual results to differ include general economic and
local real estate conditions, the weather and other conditions that
might affect operating expenses, the timely completion of
repositioning activities within anticipated budgets, the actual pace
of future acquisitions, and continued access to capital to fund
growth. For this purpose, any statements contained herein that are not
statements of historical fact should be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes",
"anticipates", "plans", "expects", "seeks", "estimates", and similar
expressions are intended to identify forward-looking statements.
Readers should exercise caution in interpreting and relying on
forward-looking statements since they involve known and unknown risks,
uncertainties and other factors which are, in some cases, beyond the
Company's control and could materially affect the Company's actual
results, performance or achievements.
The Company is engaged primarily in the ownership, management,
acquisition, rehabilitation and development of residential apartment
communities in the Northeastern, Mid-Atlantic and Midwestern United
States. As of December 31, 2001, the Company operated 293 apartment
communities with 49,745 apartments. Of this total, the Company owned
143 communities, consisting of 39,007 apartments, managed as general
partner 132 partnerships that owned 8,035 apartments and fee managed
2,703 apartments for affiliates and third parties. The Company also
fee manages 2.2 million square feet of office and retail properties.
DISCONTINUED OPERATIONS
The Company adopted the provisions of Statement of Financial Accounting
Standard No. 144 (SFAS), "Accounting for the Impairment or Disposal of
Long-Lived Assets" effective January 1, 2002. This standard addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. It also retains the basic provisions for presenting
discontinued operations in the income statement but broadened the scope
to include a component of an entity rather than a segment of a
business. Pursuant to the definition of a component of an entity in the
SFAS, assuming no significant continuing involvement, the sale of an
apartment community is now considered a discontinued operation. In
addition, apartment communities classified as held for sale are also
considered a discontinued operation. The Company generally considers
assets to be held for sale when all significant contingencies
surrounding the closing have been resolved, which often corresponds
with the actual closing date.
Included in discontinued operations as of June 30, 2002 and for the
three and six-month periods then ended, are 10 apartment communities
which were sold in 2002. The operations of these apartment communities
were reflected on a comparative basis as discontinued operations in the
Form 10-Q for the three and six-month periods ended June 30, 2002. The
operations of such apartment communities have also been reflected as
discontinued operations in the consolidated financial statements for
each of the three years ended December 31, 2001 included herein.
RESULTS OF OPERATIONS
Comparison of year ended December 31, 2001 to year ended December 31,
2000.
Continuing Operations:
The Company owned 102 communities with 29,870 apartment units
throughout 2000 and 2001 where comparable operating results are
available for the years presented (the "2001 Core Properties"). For the
year ending December 31, 2001, the 2001 Core Properties showed an
increase in rental revenues of 6.3% and a net operating income increase
of 7.8% over the 2000 year-end period. Property level operating
expenses increased 4.3%. Average economic occupancy for the 2001 Core
Properties decreased from 94.4% to 93.7%, with average monthly rental
rates increasing 7.2% to $779.
A summary of the 2001 Core Property net operating income is as follows:
2001 2000 % CHANGE
---- ---- --------
Rent $261,359,000 $245,781,000 6.3%
Property Other Income 10,232,000 9,521,000 7.5%
------------ -------------- ----
Total Income 271,591,000 255,302,000 6.4%
Operating and Maintenance ( 109,692,000) ( 105,161,000) (4.3%)
------------- --------------- -----
Net Operating Income $161,899,000 $150,141,000 7.8%
============ ============ ====
During 2001, the Company acquired a total of 2,820 apartment units in
10 newly acquired communities (the "2001 Acquisition Communities"). In
addition, the Company experienced a full year results for the 5,384
apartment units in 22 apartment communities (the "2000 Acquisition
Communities") acquired during 2000. The inclusion of these acquired
communities generally accounted for the significant changes in
operating results for the year ended December 31, 2001.
During 2001, the Company also disposed of 14 properties with a total of
2,855 units, which had partial results for 2001 (the "2001 Disposed
Communities").
For the year ended December 31, 2001, operating income (income before
gain on disposition of property and business, minority interest,
extraordinary item and discontinued operations) increased by $3,556,000
when compared to the year ended December 31, 2000. The increase was
primarily attributable to the following factors: an increase in rental
income of $49,875,000 and a decrease in all other income of $1,586,000.
These changes were partially offset by an increase in operating and
maintenance expense of $17,420,000, an increase in general and
administrative expense of $5,379,000, an increase in interest expense
of $9,592,000, and an increase in depreciation and amortization of
$12,342,000.
Of the $49,875,000 increase in rental income, $28,989,000 is
attributable to the 2000 Acquisition Communities and $14,032,000 is
attributable to the 2001 Acquisition Communities, offset in part by a
$8,724,000 reduction attributable to the 2001 Disposed Communities. The
balance of $15,578,000 relates to a 6.3% increase from the 2001 Core
Properties due primarily to an increase of 7.2% in weighted average
rental rates, offset by a decrease in average economic occupancy from
94.4% to 93.7%.
In addition to normal rent increases, the Company was successful in
achieving above-normal increases at specific properties where rents
were below the level of the average rent charged by our direct
competition. An additional component of the 7.2% increase in weighted
average rent results from the significant upgrading and repositioning
efforts discussed under the Capital Improvements section of this
report. The Company seeks a minimum 15% internal rate of return for
these revenue-enhancing upgrades.
The decrease in average economic occupancy can be attributed to the
decline in general economic conditions during 2001. Same-store
occupancies have averaged approximately 95% for a number of years.
During the second quarter of 2001, the Detroit regional market
experienced softness that was related to a slowdown and announced
lay-offs in the auto industry. A reduction in job growth leads to fewer
household formations, which creates a reduction in demand for rental
housing. During the third and fourth quarters of 2001, it became
obvious that the recession was affecting all of our regions, as well as
our competitors. Occupancy levels dipped to a low of 91.6% for the
month of December.
In January, 2002, one of management's performance measures seemed to
suggest that the Company may have reached the bottom of the decline in
occupancy. Traffic at the communities had increased, and it was the
first month since the end of the second quarter of 2001 that occupancy
levels did not continue to decrease.
In this recessionary economic environment, it is very difficult to
project rental rate and occupancy results. The Company has provided
guidance for 2002, which, at the mid-point of the range, anticipates
same store revenue growth of 6%, including above-average rental
increases from the continued efforts to upgrade the properties.
Occupancy levels are expected to remain low during the first quarter of
2002, averaging 91.8%. Improvement in occupancy is expected each
successive quarter in 2002, producing an expected average for the year
of 93.2%.
Based on actual results through June 30, 2002, and the current economic
environment, the Company has revised its guidance for the balance of
2002. A significant improvement in apartment rental fundamentals and in
economic conditions was anticipated when guidance for the second half
of 2002 was originally provided this past February. The basis for the
previous guidance assumed same-store revenue growth of 6.6% with
occupancy averaging 93.8%. The Company now expects revenue growth of
4.7% for the second half of the year, with occupancies improving from
the average for June 30, 2002 of 92.6% to 93.1%. Same-store expense
growth originally projected to be 8.9% for the second half of the year
is now anticipated to be 10.4%. The increase is mostly attributed to
higher real estate taxes.
For the six-months ended June 30, 2002 the Company achieved same store
revenue growth of 4.4% compared to 5.5% originally anticipated.
Occupancy levels continued to remain low during the first six months
and averaged 91.6% compared to 92.3% anticipated when guidance was
first given.
Property other income, which consists primarily of income from
operation of laundry facilities, late charges, administrative fees,
garage and carport rentals, net profits from corporate apartments,
cable revenue, pet charges, and miscellaneous charges to residents,
increased in 2001 by $1,921,000. Of this increase, $980,000 is
attributable to the 2000 Acquisition Communities, $483,000 is
attributable to the 2001 Acquisition Communities and $711,000
represents a 7.5% increase from the 2001 Core Properties, offset in
part by a $253,000 reduction attributable to the 2001 Disposed
Communities.
Interest and dividend income decreased in 2001 by $4,731,000, due
primarily to the Company contributing loans due from affiliates to
HPRS, in March, 2001, described in the next paragraph. Subsequent to
the transfer, the interest income is reported in Other income.
Other income, which reflects the net contribution from management and
development activities after allocating certain overhead and interest
expense, increased by $1,224,000 due primarily to interest income on
loans from affiliated partnerships. The general and administrative
overhead represents an allocation of direct and indirect costs incurred
by the Company estimated by management to be associated with these
activities. In March, 2001, HPRS was recapitalized with a contribution
of $23.7 million of loans to affiliated partnerships by the Company.
This effectively shifted a significant amount of interest income to the
Other income category, where the Company records its share of interest
income through its equity earnings of affiliates.
Of the $17,420,000 increase in operating and maintenance expenses,
$13,256,000 is attributable to the 2000 Acquisition Communities,
$4,418,000 is attributable to the 2001 Acquisition Communities and a
reduction of $4,785,000 is attributable to the 2001 Disposed
Communities. The balance for the 2001 Core Properties, a $4,531,000
increase in operating expenses or 4.3%, is primarily a result of
increases in gas utilities, office and telephone expense, and real
estate taxes, offset in part by decreases in repairs and maintenance,
incentive compensation, and property insurance.
Natural gas costs for the Core Properties were up 43% for the twelve
months, due to extraordinary increases in natural gas prices as well as
lower temperatures in 2001 compared to above-average temperatures in
2000. Looking back the last ten years, the price of natural gas has
been relatively stable. Historically, at the beginning of each heating
season, rates experienced some pressures but start to stabilize at
lower levels in January. The 2000/2001 heating season did not follow
this same pattern. Spot prices per decatherm spiked over $10 in
December, 2000 and January, 2001. This unusual pattern made it more
difficult to execute economically feasible fixed price contracts.
During the first quarter of 2001, the Company experienced extremely
high costs for natural gas, producing a same-store increase in
operating and maintenance costs of 15.1%.
Management believed it was in the Company's best interest to take
advantage of lower natural gas prices and to negotiate fixed price
contracts starting in the Spring of 2001. As of December 31, 2001, the
Company had fixed-price contracts covering 90% of its natural gas
exposure for properties owned by the Company at December 31, 2001. For
the 2002 heating season, the average price per decatherm is
approximately $4.50. Current twelve month strip pricing is about $3.00
per decatherm. If rates do not increase, the Company stands to benefit
from lower pricing, as existing contracts mature and are extended or
renewed. The Company has fixed-price contracts covering 50% of its
natural gas exposure for the 2003 heating season. Risk is further
diversified by staggering contract term expirations.
In October, 2001, the Company resolved a legal claim with an insurance
provider and received a total settlement of $4.9 million. This refund
was allocated to insurance expense in relation to the Company's
estimate of loss spread over the corresponding policy term. The policy
term covered November 1, 2000 to October 31, 2001 and November 1, 2001
to October 31, 2002. The amount of the settlement relating to the
period from November 1, 2000 to December 31, 2001 was estimated to be
$2.2 million, and that amount reduced insurance expense in the fourth
quarter of 2001. The remaining settlement of $2.7 million relates to
the remaining policy period from January 1, 2001, through October 31,
2002, and will be amortized on a straight-line basis over that period.
The Company has provided guidance for 2002 which anticipates same store
expense growth at the mid-point of the range of 6.5%. Natural gas costs
are assumed to improve 3%, personnel expense is projected to increase
9%, real estate taxes are expected to increase 6%, and insurance costs
should almost double. Health care increases account for a large part of
the personnel cost increase.
Same store expense growth for the six-months ended June 30, 2002 was
0.8% compared to the first two quarters of 2001. This was primarily due
to a 11% increase in taxes due to new legislation in several states and
a 6% increase in personnel costs. These increased costs were
substantially offset by decreases in natural gas costs and snow removal
costs. The large savings in natural gas was a result of lower costs per
decatherm associated with fixed contracts, as well as savings due to an
unseasonably warm winter. The net expense growth of 0.8% for the
six-months ended June 30, 2002 compares to 4.5% originally anticipated
for the first six months.
Certain quarterly variations are expected for 2002. The first quarter
expense growth is expected to increase only 2.2% compared to the first
quarter of 2001. This is due to an expected favorable variance in
natural gas heating costs. The fourth quarter of 2002 is expected to
increase over 12% compared to the same period in 2001. This is due to
an expected significant negative variance for insurance expense. As
previously discussed, the fourth quarter of 2001 reflected a large
insurance settlement effectively recognizing the benefit for the
previous fourteen months in the fourth quarter, which will produce a
significant variance for comparison purposes.
The operating expense ratio (the ratio of operating and maintenance
expense compared to rental and property other income) for the 2001 Core
Properties was 40.4% and 41.1% for 2001 and 2000, respectively. This
0.7% reduction is a result of the 6.4% increase in total rental and
property other income achieved through ongoing efforts to upgrade and
reposition properties for maximum potential. In general, the Company's
operating expense ratio is higher than that experienced in other parts
of the country due to relatively high real estate taxes in its markets
and the Company's practice, typical in its markets, of including
heating expenses in base rent.
General and administrative expenses increased in 2001 by $5,379,000, or
41% from $13,235,000 in 2000 to $18,614,000 in 2001. As the Company
expands geographically, the increases reflect increased efforts in
serving residents and employees through new and expanded initiatives,
including a help desk, call center, and an education department. In
addition, the increase can be attributed to overhead costs, which had,
historically, been allocated to the Company's affordable housing
development business, which was sold in 2000 and the net results of
which were reported in other income. The percentage of general and
administrative expenses compared to total revenue was 5.2% for 2001
compared to 4.2% for 2000.
Interest expense increased in 2001 by $9,592,000 as a result of the
acquisition of the 2001 Acquisition Communities and a full year of
interest expense for the 2000 Acquisition Communities. The 2000
Acquisition Communities, costing in excess of $322,000,000, were
financed with $163,000,000 of assumed debt in addition to the use of
UPREIT Units. The 2001 Acquisition Communities, costing in excess of
$212,000,000, were financed with $68,000,000 of assumed debt, in
addition to the use of UPREIT Units. During 2001, the Company
refinanced $52,000,000 in existing mortgage debt resulting in new
borrowings in excess of $131,000,000. In addition, amortization from
deferred charges relating to the financing of properties totaling
$632,000 and $566,000 was included in interest expense for 2001 and
2000, respectively.
Depreciation and amortization expense increased $12,342,000 due to the
depreciation on the 2001 Acquisition Communities, the 2000 Acquisition
Communities, the additions to the Core Properties, net of the 2001
Disposition Communities.
During 2001, the Company reported a gain on disposition of property and
business of $26,241,000. This includes the disposition of 14 apartment
communities with 2,855 units in six separate transactions for a total
sales price of $122,000,000.
Minority interest increased $8,025,000 due to the increase in income
allocated to the OP Unitholders, which is attributable to the 2001
Acquisition Communities, the 2000 Acquisition Communities, net of the
2001 Disposition Communities, and the gain on disposition of property
and business.
Discontinued Operations:
Included in discontinued operations for the year ended December 31,
2001 are the operating results, net of minority interest, of ten
apartment communities that were sold during the period January 1, 2002
to June 30, 2002.
Net Income:
Net income increased $23,050,000 or 56% primarily attributed to the
results of the 2001 Acquisition Communities, the 2001 Acquisition
Communities, net of the 2001 Disposition Communities, as previously
discussed and the gain on disposition of property and business.
Comparison of year ended December 31, 2000 to year ended December 31,
1999.
Continuing Operations:
The Company owned 87 communities with 22,664 apartment units throughout
1999 and 2000 where comparable operating results were available for the
years presented (the "2000 Core Properties"). For the year ending
December 31, 2000, the 2000 Core Properties showed an increase in
rental revenues of 5.6% and a net operating income increase of 7.4%
over the 1999 year-end period. Property level operating expenses
increased 5.0%. Average economic occupancy for the 2000 Core Properties
increased from 94.6% to 94.7%, with average monthly rental rates
increasing 5.7% to $704.
A summary of the 2000 Core Property net operating income is as follows:
2000 1999 % CHANGE
---- ---- --------
Rent $180,409,000 $170,890,000 5.6%
Property Other Income 7,192,000 5,468,000 31.5%
------------- ------------ -----
Total Income 187,601,000 176,358,000 6.4%
Operating and Maintenance ( 80,583,000) (76,745,000) (5.0%)
-------------- ------------ ------
Net Operating Income $107,018,000 $ 99,613,000 7.4%
============ ============ =====
During 2000, the Company acquired the "2000 Acquisition Communities"
and also experienced a full year of results for the 10,127 apartment
units in 30 apartment communities (the "1999 Acquisition Communities")
acquired during 1999. The inclusion of these acquired communities
generally accounted for the significant changes in operating results
for the year ended December 31, 2000.
The Company also disposed of one property during 2000, a 150-unit
community located in Pittsburgh, Pennsylvania, which had partial
results for 2000 (the "2000 Disposed Community").
For the year ended December 31, 2000, operating income (income before
loss on disposition of property and business, minority interest,
extraordinary item and discontinued operations) increased by
$25,162,000 when compared to the year ended December 31, 1999. The
increase was primarily attributable to the following factors: an
increase in rental income of $80,583,000 and an increase in all other
income of $3,248,000. These changes were partially offset by an
increase in operating and maintenance expense of $32,486,000, an
increase in general and administrative expense of $2,539,000, an
increase in interest expense of $17,094,000, an increase in
depreciation and amortization of $14,898,000 and loss on
available-for-sale securities and non-recurring acquisition expense
totaling $8,348,000 affecting only 1999.
Of the $80,583,000 increase in rental income, $47,376,000 is
attributable to the 1999 Acquisition Communities and $24,204,000 is
attributable to the 2000 Acquisition Communities, offset in part by a
$516,000 reduction attributable to the 2000 Disposed Community. The
balance of $9,519,000 is a 5.6% increase from the 2000 Core Properties
due primarily to an increase of 5.7% in weighted average rental rates,
plus an increase in average economic occupancy from 94.6% to 94.7%.
Property other income, which consists primarily of income from
operation of laundry facilities, administrative fees, garage and
carport rentals, net profits from corporate apartments and
miscellaneous charges to residents, increased in 2000 by $4,429,000. Of
this increase, $1,847,000 is attributable to the 1999 Acquisition
Communities, $884,000 is attributable to the 2000 Acquisition
Communities and $1,724,000 represents a 31.9% increase from the 2000
Core Properties, offset in part by a $26,000 reduction attributable to
the 2000 Disposed Community. The increase for the 2000 Core Properties
included a one-time benefit from a favorable insurance settlement of
$239,000. Without the affect of the settlement, property other income
would have increased 28%.
Interest and dividend income increased in 2000 by $656,000, primarily
attributable to an increase in loans to one of the Company's Management
Companies used to acquire land held in inventory for future
development, as well as increased levels of cash reserves invested.
Dividend income of $714,000 in 1999 from investments in marketable
securities did not continue in 2000.
Other income reflects the net contribution from management and
development activities after allocating certain overhead and interest
expense. The net contribution decreased by $1,837,000, or 64% from 1999
to 2000. The decrease is due primarily to a decrease in gross
development fee revenues of $1,462,000. Effective December 31, 2000,
the Company sold its affordable housing development business to the key
personnel who ran the division for approximately $6,700,000.
Of the $32,486,000 increase in operating and maintenance expenses,
$20,354,000 is attributable to the 1999 Acquisition Communities,
$8,604,000 is attributable to the 2000 Acquisition Communities and a
reduction of $310,000 is attributable to the 2000 Disposed Community.
The balance for the 2000 Core Properties, a $3,838,000 increase in
operating expenses or 5.0%, is primarily a result of increases in gas
utilities, personnel expenses, property insurance and real estate
taxes.
Increases in utility expenses were a large contributor to operating and
maintenance expense increases for the year and, as previously
discussed, continued to unfavorably affect results in 2001. Natural gas
prices were very volatile in 2000. As previously discussed, over the
last ten years, the price of natural gas has been relatively stable
and, at the beginning of each heating season, rates experienced some
pressures but started to stabilize at lower levels around January. The
1999/2000 heating season did not follow this same pattern. This unusual
pattern made it more difficult to execute economically feasible fixed
price contracts.
The months of December, 2000 and January, 2001 yielded prices for
natural gas topping out at over $10 per decatherm. For deliveries in
March, 2001 the price was reduced to approximately $5.00 per decatherm.
As a result, the Company negotiated fixed price contracts starting in
the Spring of 2001 for close to 90% of its exposure for the 2001/2002
heating season.
Management believed at that time that these higher expenses would
eventually be absorbed by our residents. As discussed in the Comparison
of year ended December 31, 2001 to year ended December 31, 2000, rent
increases were passed on to residents as leases (which typically have a
one year term) were renewed.
The operating expense ratio (the ratio of operating and maintenance
expense compared to rental and property other income) for the 2000 Core
Properties was 43.0% and 43.5% for 2000 and 1999, respectively. This
0.5% reduction is a result of the 6.4% increase in total rental and
property other income achieved through ongoing efforts to upgrade and
reposition properties for maximum potential. In general, the Company's
operating expense ratio is higher than that experienced in other parts
of the country due to relatively high real estate taxes in its markets
and the Company's practice, typical in its markets, of including
heating expenses in base rent.
General and administrative expenses increased in 2000 by $2,539,000, or
24% from $10,696,000 in 1999 to $13,235,000 in 2000. As the Company
expands geographically, travel and lodging expenses have increased,
along with expenses associated with new and expanding regional offices.
In addition, personnel costs have increased to handle the growing owned
portfolio, which increased in size by 15% as of December 31, 2000
compared to December 31, 1999. The percentage of G&A compared to total
revenue was 4.2% for 2000 compared to 4.7% for 1999.
Interest expense increased in 2000 by $17,094,000 as a result of the
acquisition of the 2000 Acquisition Communities and a full year of
interest expense for the 1999 Acquisition Communities. The 1999
Acquisition Communities, costing in excess of $480,000,000, were
financed with $203,000,000 of assumed debt in addition to the use of
UPREIT Units. The 2000 Acquisition Communities, costing in excess of
$322,000,000, were financed with $163,000,000 of assumed debt, in
addition to the use of UPREIT Units. In addition, amortization from
deferred charges relating to the financing of properties totaling
$566,000 and $516,000 was included in interest expense for 2000 and
1999, respectively.
Depreciation and amortization expense increased $14,898,000 due to the
depreciation on the 2000 Acquisition Communities, the 1999 Acquisition
Communities, and the additions to the 2000 Core Properties.
During 2000, the Company reported a loss on disposition of property of
$1,386,000. This included $417,000 from the sale of Payne Hill in
Pittsburgh, $924,000 from the sale of the affordable housing
development business and $45,000 from the sale of a general partnership
interest.
Minority interest increased $8,249,000 due to the increase in income
allocated to the OP Unitholders, which is attributable to the 2000
Acquisition Communities, the 1999 Acquisition Communities, and the loss
on disposition of property and business.
Discontinued Operations:
Included in discontinued operations for the year ended December 31,
2000 are the operating results, net of minority interest, of ten
apartment communities that were sold during the period January 1, 2002
to June 30, 2002. The operations of these ten properties have been
reflected on a comparative basis for the year ended December 31, 1999.
Net Income:
Net income increased $15,174,000 or 58% primarily attributed to the
results of the 2000 Acquisition Communities, the 1999 Acquisition
Communities, as previously discussed, net of the loss on disposition of
property and business.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity demands are expected to be
distributions to the common and preferred stockholders and Operating
Partnership Unitholders, capital improvements and repairs and
maintenance for the properties, acquisition of additional properties,
stock repurchases and debt repayments. The Company may also engage in
transactions whereby it acquires equity ownership in other public or
private companies that own and manage portfolios of apartment
communities. Management anticipates the acquisition of properties in
the range of $200 to $300 million in 2002.
The Company intends to meet its short-term liquidity requirements
through net cash flows provided by operating activities and the line of
credit, as described below. The Company considers its ability to
generate cash to be adequate to meet all operating requirements and
make distributions to its stockholders in accordance with the
provisions of the Internal Revenue Code, as amended, applicable to
REITs.
To the extent that the Company does not satisfy its long-term liquidity
requirements through net cash flows provided by operating activities
and the line of credit described below, it intends to satisfy such
requirements through the issuance of UPREIT Units, proceeds from the
Dividend Reinvestment Plan ("DRIP"), proceeds from the sale of
properties, property debt financing, or issuing additional common
shares, shares of the Company's preferred stock, or other securities.
As of December 31, 2001, the Company owned 27 properties, with 4,948
apartment units, which were unencumbered by debt.
In addition, an increase in a source of liquidity will be from the sale
of properties. Since its IPO through 2000, the Company had sold only a
few small properties. During 2001, the Company sold 14 communities for
a total sales price of $122 million. The Company was able to sell these
properties at an average capitalization rate of 9.2% and reinvest in
the acquisition of properties with more growth potential at an expected
first year cap rate of 9.3%. Management believes that the Company will
strategically dispose of assets aggregating between $50 and $100
million in 2002.
In May, 1998, the Company's Form S-3 Registration Statement was
declared effective relating to the issuance of up to $400 million of
common stock, preferred stock or other securities. The available
balance on the shelf registration statement at December 31, 2001 was
$227,390,000.
In December, 1999, the Class A limited partnership interests held by
the State of Michigan Retirement Systems (originally issued in
December, 1996 for $35 million) were converted to Series A Convertible
Cumulative Preferred shares ("Series A Preferred Shares") which
retained the same material rights and preferences that were associated
with the limited partnership interests. On November 28, 2001, the
Series A Preferred Shares were converted to common shares. The
conversion had no effect on reported results of operations.
In September, 1999, the Company completed the sale of $50 million of
Series B Preferred Stock in a private transaction with GE Capital. The
Series B Preferred stock carries an annual dividend rate equal to the
greater of 8.36% or the actual dividend paid on the Company's common
shares into which the preferred shares can be converted. The stock has
a liquidation preference of $25.00 per share, a conversion price of
$29.77 per share, and a five-year, non-call provision. On February 14,
2002, 1,000,000 shares of the Series B Preferred stock were converted
to 839,771 common shares. The conversion will have no effect on the
reported results of operations.
In May and June, 2000, the Company completed the sale of $60 million of
Series C Preferred Stock in a private transaction with affiliates of
Prudential Real Estate Investors ("Prudential"), Teachers Insurance and
Annuity Association of America ("Teachers"), affiliates of AEW Capital
Management and Pacific Life Insurance Company. The Series C Preferred
Stock carries an annual dividend rate equal to the greater of 8.75% or
the actual dividend paid on the Company's common shares into which the
preferred shares can be converted. The stock has a conversion price of
$30.25 per share and a five-year, non-call provision. As part of the
Series C Preferred Stock transaction, the Company also issued 240,000
warrants to purchase common shares at a price of $30.25 per share,
expiring in five years.
In June, 2000, the Company completed the sale of $25 million of Series
D Preferred Stock in a private transaction with The Equitable Life
Assurance Society of the United States. The Series D Preferred Stock
carries an annual dividend rate equal to the greater of 8.775% or the
actual dividend paid on the Company's common shares into which the
preferred shares can be converted. The stock has a conversion price of
$30 per share and a five-year, non-call provision.
In December, 2000, the Company completed the sale of $30 million of
Series E Preferred Stock in a private transaction, again with
affiliates of Prudential and Teachers. The Series E Preferred Stock
carries an annual dividend rate equal to the greater of 8.55% or the
actual dividend paid on the Company's common shares into which the
preferred shares can be converted. The stock has a conversion price of
$31.60 per share and a five-year, non-call provision. In addition, as
part of the Series E Preferred Stock transaction, the Company issued
warrants to purchase 285,000 common shares at a price of $31.60 per
share, expiring in five years.
In 2000, the Company obtained an investment grade rating from Fitch,
Inc. The Company was assigned an initial corporate credit rating of
"BBB" (Triple-B), with a rating of "BBB-" (Triple-B Minus) for Series C
through E convertible Preferred Stock.
The issuance of UPREIT Units for property acquisitions continues to be
a significant source of capital for the Company. During 2001, 520
apartment units in two separate transactions were acquired for a total
cost of $33,000,000, using UPREIT Units valued at approximately
$19,000,000 with the balance paid in cash or assumed debt. During 2000,
3,583 apartment units in eight separate transactions were acquired for
a total cost of $203,000,000, using UPREIT Units valued at
approximately $59,000,000 with the balance paid in cash or assumed
debt.
In 1997, the Company's Board of Directors approved a stock repurchase
program under which the Company may repurchase up to one million shares
of its outstanding common stock and UPREIT Units. The Board's action
did not establish a target price or a specific timetable for
repurchase. At December 31, 1999, there was approval remaining to
purchase 795,100 shares. In 2000, the Board of Directors approved a
1,000,000-share increase in the stock repurchase program. During 2000,
the Company repurchased 468,600 shares at a cost of $12,664,000. In
2001, the Board of Directors approved a 1,000,000-share increase in the
stock repurchase program. During 2001, the Company repurchased 754,000
shares and 436,700 UPREIT Units at a cost of $20,600,000 and
$11,900,000, respectively. Approval to repurchase 1,135,800 shares of
common stock and UPREIT Units remains at December 31, 2001.
In November, 1995, the Company established a Dividend Reinvestment
Plan. The Plan provides the stockholders of the Company an opportunity
to automatically invest their cash dividends at a discount of 3% from
the market price. In addition, eligible participants may make monthly
payments or other voluntary cash investments in shares of common stock,
typically purchased at discounts, which have varied between 2% and 3%.
During 2000, $57,000,000 of common stock was issued under this plan,
with an additional $32,000,000 of common stock issued in 2001.
The DRIP was amended, effective April 10, 2001, in order to reduce
management's perceived dilution from issuing new shares at or below the
underlying net asset value. The discount on reinvested dividends and
optional cash purchases was reduced from 3% to 2%. The maximum monthly
investment (without receiving approval from the Company) was reduced
from $5,000 to $1,000. As expected, these changes significantly reduced
participation in the Plan. Management will continue to monitor the
relationship between the Company's stock price and estimated net asset
value. During times when this difference is small, management has the
flexibility to issue waivers to DRIP participants to provide for
investments in excess of the $1,000 maximum monthly investment. In
connection with the announcement of the February, 2002 dividend, the
Company announced such waivers will be considered beginning with the
March 2002 optional cash purchase, since management believes the stock
is trading at or above its estimate of net asset value.
As of December 31, 2001, the Company had an unsecured line of credit
from M&T Bank with a borrowing capacity of $100,000,000 and $32,500,000
outstanding. Borrowings under the facility bear interest at 1.25% over
the one-month LIBOR rate. The line of credit expires on September 1,
2002. The Company is evaluating alternatives to replace or extend the
line of credit after September 1, 2002.
As of December 31, 2001, the weighted average rate of interest on the
Company's mortgage debt was 7.2% and the weighted average maturity of
such indebtedness was approximately ten years. Mortgage debt of $960
million was outstanding with 99% at fixed rates of interest with
staggered maturities. This limits the exposure to changes in interest
rates, minimizing the effect of interest rate fluctuations on the
Company's results of operations and cash flows.
The Company's net cash provided by operating activities increased from
$127,217,000 for the year ended December 31, 2000 to $148,389,000 for
the year ended December 31, 2001. The increase was principally due to
the acquisition of the 2000 and 2001 Acquisition Communities, net of
2001 Disposition Communities.
Net cash used in investing activities decreased from $178,465,000 in
2000 to $139,106,000 in 2001. The level of properties purchased
decreased in 2001 to $212 million from $328 million, the amount of
mortgages assumed and UPREIT units issued decreased by $135 million,
additions to properties increase $38 million, while proceeds from the
sale of properties increased $103 million, such that the net cash used
in investing activities decreased, accounting for most of the year over
year decrease.
The Company's net cash provided by (used in) financing activities
decreased from providing $56,955,000 in 2000 to using $9,013,000 in
2001. The major source of financing in 2001 was $8,423,000 of proceeds
from sales of common stock, net of the purchase of treasury stock and
UPREIT Units and $92,268,000 in net debt proceeds, used to fund
property acquisitions and improvements. In 2000, proceeds from the sale
of preferred stock and common stock totaling $168,462,000 were used to
fund property acquisitions and additions. Due to the lower number of
acquisitions in 2001, such funding was not needed in 2001.
On February 4, 2002, the Board of Directors approved a dividend of $.60
per share for the period from October 1, 2001 to December 31, 2001.
This is the equivalent of an annual distribution of $2.40 per share.
The dividend is payable February 26, 2002 to shareholders of record on
February 15, 2002.
OFF-BALANCE SHEET INVESTMENTS
The Company has investments in and advances to approximately 132
limited partnerships where the Company acts as the managing general
partner. The Company accounts for these investments on the equity
method of accounting, recording its share of the net income or loss
based upon the terms of the partnership agreement. To the extent that
it is determined that the limited partners cannot absorb their share of
the losses, if any, the general partner will record the limited
partners share of such losses.
The Company has guaranteed the low income housing tax credits to the
limited partners for a period of five years in 42 partnerships totaling
approximately $48,500,000. Such guarantee requires the Company to
operate the properties in compliance with Internal Revenue Code Section
42 for 15 years. In addition, acting as the general partner in certain
partnerships, the Company is obligated to advance funds to meet
partnership operating deficits. However, such funding requirements
cease after a five year period. Should operating deficits continue to
occur, the Company would determine on an individual partnership basis
if it is in the best interest of the Company to continue to fund these
deficits.
These partnerships are funded with non-recourse financing. The
Company's proportionate share of non-recourse financing was $6,800,000
at December 31, 2001. The Company has guaranteed a total of $606,000 of
debt associated with two of these partnerships. In addition, the
Company, including the Management Companies, has provided loans and
advances to certain of the partnerships aggregating $25,245,000 at
December 31, 2001. The Company assesses the financial status and cash
flow of each of the partnerships at each balance sheet date in order to
assess recoverability of its investment in and advances to these
affiliates.
The Company believes the properties operations conform to the
applicable requirements as set forth above and do not anticipate any
payment on the guarantees described above.
2001 2000
---- ----
Balance Sheets:
Real estate, net $280,864 $293,616
Other assets 36,579 34,023
-------- ----------
Total assets $317,443 $327,639
======== ========
Mortgage notes payable $253,798 $257,834
Advances from affiliates 25,245 21,957
Other liabilities 18,140 18,558
Partners' equity 20,260 29,290
------ ---------
Total liabilities and partners' equity $317,443 $327,639
======== ========
Summarized balance sheet information relating to these partnerships is
as follows (amounts are in thousands):
ACQUISITIONS AND DISPOSITIONS
In 2001, the Company acquired a total of 10 communities with a total of
2,820 units for total consideration of $212,000,000, or an average of
approximately $75,200 per unit. For the same time period, the Company
sold 14 properties with a total of 2,855 units for total consideration
of $122,400,000, or an average of $42,900 per unit. The weighted
average expected first year cap rate of the 2001 Acquisition
Communities was 9.3% and of the 2001 Disposed Communities was 9.2%. The
weighted average unleveraged internal rate of return (IRR) during the
Company's ownership for the properties sold was 15.8%.
Although the Company has acquired properties every year since its
initial public offering in 1994, 2001 was the first year of its asset
disposition program. The Company's management was very pleased with the
success of its strategy to recycle assets by disposing of properties
that have reached their potential or are less efficient to operate due
to size or remote location, while acquiring properties in targeted
geographic regions with higher future growth characteristics. The
Company indicated that the timing of sales and acquisitions worked well
to avoid dilution and a negative spread in initial cap rates.
In January, 2002, the Company sold six communities with a total of 339
units in Eastern Pennsylvania and Baltimore, Maryland for total
consideration of $13,600,000, or an average of $41,100 per unit. The
expected weighted average first year cap rate on these sales is 10.5%
(before a reserve for capital expenditures). A gain on sale of
approximately $500,000 is expected to be reported in the first quarter
of 2002 from these sales.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
The primary obligations of the Company relate to its borrowings under
the line of credit and mortgage notes payable. The $32,500,000
outstanding under the line of credit matures in September, 2002. The
$960,000,000 in mortgage notes payable have varying maturities ranging
from 1 to 11 years. The principal payments on the mortgage notes
payable for the years subsequent to December 31, 2001 are as follows:
$53,378,000 - 2002, $26,359,000 - 2003, $36,675,000 - 2004, $41,870,000
- 2005, $68,485,000 - 2006 and $733,591,000 - thereafter. The Company
has a non-cancelable operating ground lease for one of its properties.
The lease expires May 1, 2020, with options to extend the term of the
lease for two successive terms of twenty-five years each. The lease
provides for contingent rental payments based on certain variable
factors. At December 31, 2001, future minimum rental payments required
under the lease are $70,000 per year until the lease expires.
As discussed in the section entitled "Off-Balance Sheet Investments,"
the Company has the following guarantees or commitments relating to its
equity method partnership investments: a) guarantee for a total of
$606,000 of debt associated with two of partnerships, b) guarantee of
the low income housing tax credits to the limited partners for a period
of five years in 42 partnerships totaling approximately $48,500,000,
and c) the Company is obligated to advance funds to meet partnership
operating deficits for a five year period for certain partnerships. The
Company believes the properties operations conform to the applicable
requirements as set forth above and do not anticipate any payment on
the guarantees described above.
CAPITAL IMPROVEMENTS
Total capital improvement expenditures increased from $92,603,000 in
2000 to $130,468,000 in 2001. Of the $130,468,000 in total 2001
expenditures, $37,140,000 is attributable to the 2000 Acquisition
Communities, $3,111,000 is attributable to the 2001 Acquisition
Communities, and $2,969,000 is attributable to the 2001 Disposition
Communities. Of the remaining $87,248,000, $85,001,000 relates to the
2001 Core Properties and $2,247,000 relates to corporate office
expenditures.
Costs related to the acquisition, development, construction and
improvement of properties are capitalized. Recurring, capital
replacements typically include carpeting and tile, appliances, HVAC
equipment, new roofs, site improvements and various exterior building
improvements. Non-recurring upgrades include, among other items,
community centers, new appliances, new windows, kitchens and bathrooms.
Interest costs are capitalized until construction is substantially
complete. Ordinary repairs and maintenance that do not extend the life
of the asset are expensed as incurred. The Company's financial
statements are impacted by its capitalization policies. Other companies
may have different policies.
Funding for the above described capital replacements are provided by
cash flows from operating activities. The Company estimates that during
2001, approximately $400 per unit was spent on capital replacements to
maintain the condition of its properties.
The schedule below summarizes the breakdown of capital improvements:
Non-recurring
Recurring Capital Revenue Enhancing Combined Capital
REPLACEMENTS UPGRADES IMPROVEMENTS
2001 Core Properties $12,321,000 $72,680,000 $85,001,000
2000 Acquisition Communities 2,154,000 34,986,000 37,140,000
2001 Acquisition Communities 515,000 2,596,000 3,111,000
2001 Disposition Communities 566,000 2,403,000 2,969,000
Corporate office expenditures* N/A N/A 2,247,000
----------------- ------------------- ---------------
$15,556,000 $112,665,000 $130,468,000
=========== ============ ============
*No distinction is made between recurring or non-recurring expenditures
for the corporate office.
The $112,665,000 incurred to fund non-recurring, revenue enhancing
upgrades included, among other items, the following: construction of
seven new community centers; nearly 21,000 new windows; and the
modernization of approximately 4,300 kitchens and 5,100 bathrooms.
Management believes that these upgrades contributed significantly
towards achieving 7.7% average growth in net operating income at the
2001 Core Properties. For the combined 2001 and 2000 Acquisition
Communities, substantial rehabilitations were incurred as part of
management's acquisition and repositioning strategies. The pace of
capital replacements was accelerated to improve the overall competitive
condition of the properties as quickly as possible. Funding for these
capital improvements was provided by the line of credit and equity
proceeds.
During 2002, management expects that the communities' revenue growth
will benefit further from improvements completed in 2001 and plans to
continue to fund similar non-recurring, revenue enhancing upgrades.
Management anticipates expenditures of $96 million in 2002, in addition
to normal capital replacements. The Company selected J.D. Edwards as a
platform for the new back office accounting system. The capital outlay
during 2002 is estimated to be $1.5 million. The system will be fully
implemented around mid-year and should streamline the reporting process
as well as provide improved management information.
ENVIRONMENTAL ISSUES
Phase I environmental audits have been completed on substantially all
of the Owned Properties. There are no recorded amounts resulting from
environmental liabilities as there are no known contingencies with
respect thereto. Furthermore, no condition is known to exist that would
give rise to a material liability for site restoration or other costs
that may be incurred with respect to the sale or disposal of a
property.
New Accounting Pronouncements
NEW ACCOUNTING PRONOUNCEMENTS
On June 29, 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 141 (SFAS 141),
Business Combinations, and No. 142 (SFAS 142), Goodwill and Other
Intangible Assets. The provisions of SFAS 141 require the use of
purchase accounting for all business combinations and the separate
allocation of purchase price to intangible assets if specific criteria
are met. The provisions of SFAS 142 state that goodwill and intangible
assets with indefinite useful lives should not be amortized but rather
tested at least annually for impairment. Intangible assets that have
finite useful lives should continue to be amortized over their
estimated useful lives. SFAS 142 also provides specific guidance for
testing goodwill and intangible assets for impairment. The Company does
not anticipate that these standards will have a material impact on the
Company's financial position, results of operations, or cash flows. The
provisions of SFAS No. 141 apply to all business combinations initiated
after June 30, 2001. The Company will adopt FAS 142 effective January
1, 2002.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. This standard harmonizes the accounting for impaired assets and
resolves some of the implementation issues as originally described in
SFAS 121. It retains the fundamental provisions of Statement 121 for
(a) recognition and measurement of the impairment of long-lived assets
to be held and used and (b) measurement of long-lived assets to be
disposed of by sale. It also retains the basic provisions for
presenting discontinued operations in the income statement but broadens
the scope to include a component of an entity rather than a segment of
a business. The Company will adopt this standard effective January 1,
2002. The Company does not expect this pronouncement to have a material
impact on the Company's financial position, results of operations, or
cash flows. See 2002 update in "Discontinued Operations" section.
ECONOMIC CONDITIONS
Substantially all of the leases at the communities are for a term of
one year or less, which enables the Company to seek increased rents
upon renewal of existing leases or commencement of new leases. These
short-term leases minimize the potential adverse effect of inflation on
rental income, although residents may leave without penalty at the end
of their lease terms and may do so if rents are increased
significantly.
Historically, real estate has been subject to a wide range of cyclical
economic conditions, which affect various real estate sectors and
geographic regions with differing intensities and at different times.
In 2001, many regions of the United States have experienced varying
degrees of economic recession; and the tragic events of September 11,
2001 accelerated certain recessionary trends, such as the cost of
obtaining sufficient property and liability insurance coverage, short
term interest rates, and a temporary reduction in occupancy. The
Company believes, however, that these tragic events did not have a
material effect on the Company's portfolio, given our property type and
the geographic regions in which we are located. We will continue to
review our business strategy and do not anticipate any changes in
strategy or material effects in financial performance.
CONTINGENCY
The Company has recently undergone a state tax audit. The state has
assessed taxes of $469,000 for the 1998 and 1999 tax years under audit.
If the state's position is applied to all tax years through December
31, 2001, the assessment would be $1.8 million. The Company believes
the assessment and the state's underlying position is not supportable
by the law nor consistent with previously provided interpretative
guidance from the office of the State Secretary of Revenue. The Company
has been advised that it has meritorious positions for its previous tax
filings. As a result, no amounts were accrued by the Company as of
December 31, 2001.
SUBSEQUENT EVENT
In relation to the state tax contingency discussed above, the Company
filed an appeal during the second quarter of 2002 to the State for the
1998 and 1999 tax years. If the state's position is applied to all tax
years through June 30, 2002, the assessment would be $1.4 million. The
Company believes that the assessment and the state's underlying
position for the tax periods 1998 through 2000 are neither supportable
by the law nor consistent with previously filed interpretative guidance
from the office of the State Secretary of Revenue. There have been no
further proceedings to date and the Company intends to vigorously
contest the assessments. The Company has been advised that it has
meritorious positions for its previous tax filings for the years 1998,
1999, and 2000. However, the Company has accrued approximately $590,000
as of June 30, 2002 for estimated costs associated with this matter.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is interest rate risk. At
December 31, 2001 and 2000, approximately 96% and 99%, respectively, of
the Company's debt bore interest at fixed rates with a weighted average
maturity of approximately 10 and 11 years, respectively, and a weighted
average interest rate of approximately 7.27% and 7.41%, respectively,
including the $35 million of debt swapped to a fixed rate. The
remainder of the Company's debt bears interest at variable rates with a
weighted average maturity of approximately 1 year and 6 years,
respectively, and a weighted average interest rate of 3.27% and 6.54%,
respectively, at December 31, 2001 and 2000. The Company does not
intend to utilize permanent variable rate debt to acquire properties in
the future. On occasion, the Company may assume variable rate debt or
use its line of credit in connection with a property acquisition with
the intention to swap to or refinance with fixed rate debt. The Company
believes, however, that in no event would increases in interest expense
as a result of inflation significantly impact the Company's
distributable cash flow.
At December 31, 2001 and 2000, the interest rate risk on $35 million of
such variable rate debt has been mitigated through the use of interest
rate swap agreements (the "Swaps") with major financial institutions.
The Company is exposed to credit risk in the event of non-performance
by the counter-parties to the Swaps. The Company believes it mitigates
its credit risk by entering into these Swaps with major financial
institutions. The Swaps effectively convert an aggregate of $35 million
in variable rate mortgages to fixed rates of 5.91%, 7.66%, 8.40% and
8.22%.
At December 31, 2001 and 2000, the fair value of the Company's fixed
rate debt, including the $35 million which was swapped to a fixed rate,
amounted to a liability of $958 million and $859 million compared to
its carrying amount of $960 million and $833 million, respectively. The
Company estimates that a 100 basis point decrease in market interest
rates at December 31, 2001 would have changed the fair value of the
Company's fixed rate debt to a liability of $1,016 million.
The Company intends to continuously monitor and actively manage
interest costs on its variable rate debt portfolio and may enter into
swap positions based upon market fluctuations. In addition, the Company
believes that it has the ability to obtain funds through additional
equity offerings or the issuance of UPREIT Units. Accordingly, the cost
of obtaining such interest rate protection agreements in relation to
the Company's access to capital markets will continue to be evaluated.
The Company has not, and does not plan to, enter into any derivative
financial instruments for trading or speculative purposes. As of
December 31, 2001, the Company had no other material exposure to market
risk.
F-5
FINANCIAL STATEMENTS
HOME PROPERTIES OF NEW YORK, INC.
INDEX TO FINANCIAL STATEMENTS
Page
--------------
Financial Statements:
Report of Independent Accountants F-2
Consolidated Balance Sheets at December 31, 2001 and 2000 F-3
Consolidated Statement of Operations for the three years ended December 31, 2001 F-4
Consolidated Statements of Stockholders' Equity for the three years ended December 31, F-5
2001
Consolidated Statements of Comprehensive Income for the three years ended December 31, F-6
2001
Consolidated Statements of Cash Flows for the three years ended December, 31, 2002 F-7
Notes to the Consolidated Financial Statements F-8
Report of Independent Accountants
To the Board of Directors and Shareholders of
Home Properties of New York, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity, of comprehensive
income and of cash flows present fairly, in all material respects, the financial
position of Home Properties of New York, Inc. and its subsidiaries at December
31, 2001 and 2000, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America. 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
auditing standards generally accepted in the United States of America, 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 our opinion.
As discussed in Note 15 to the consolidated financial statements, in 2002 the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
/s/PricewaterhouseCoopers LLP
Cleveland, Ohio
January 30, 2002, except for Note 15, as to which the date is October 22, 2002
HOME PROPERTIES OF NEW YORK, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 and 2000
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2001 2000
---- ----
ASSETS
Real estate:
Land $ 287,473 $ 247,483
Buildings, improvements and equipment 1,847,605 1,647,786
----------- -----------
2,135,078 1,895,269
Less: accumulated depreciation ( 201,564) ( 153,324)
------------ ------------
Real estate, net 1,933,514 1,741,945
Cash and cash equivalents 10,719 10,449
Cash in escrows 39,230 36,676
Accounts receivable 8,423 11,510
Prepaid expenses 17,640 13,505
Investment in and advances to affiliates 42,870 45,048
Deferred charges, net 5,279 3,825
Other assets, net 6,114 8,930
-------------- --------------
Total assets $2,063,789 $1,871,888
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage notes payable $ 960,358 $832,783
Line of credit 32,500 -
Accounts payable 21,838 18,577
Accrued interest payable 5,782 5,236
Accrued expenses and other liabilities 13,180 7,197
Security deposits 18,948 18,290
------------ ------------
Total liabilities 1,052,606 882,083
---------- -----------
Commitments and contingencies
Minority interest 341,854 371,544
----------- ------------
8.36% Series B convertible cumulative preferred stock, liquidation
preference of $25.00 per share; 2,000,000 shares issued and
outstanding, net of issuance costs 48,733 48,733
------------ -------------
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized; 1,150,000 and
2,816,667 shares issued and outstanding
at December 31, 2001 and 2000, respectively 114,000 149,000
Common stock, $.01 par value; 80,000,000 shares authorized;
24,010,855 and 21,565,681 shares issued and
outstanding at December 31, 2001 and 2000, respectively 240 216
Excess stock, $.01 par value; 10,000,000
shares authorized; no shares issued - -
Additional paid-in capital 572,273 483,453
Distributions in excess of accumulated earnings ( 57,768) ( 53,517)
Accumulated other comprehensive loss ( 532) -
Officer and director notes for stock purchases ( 7,617) ( 9,624)
--------------- ---------------
Total stockholders' equity 620,596 569,528
------------ ------------
Total liabilities and stockholders' equity $2,063,789 $1,871,888
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
HOME PROPERTIES OF NEW YORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2001 2000 1999
---- ---- ----
Revenues:
Rental income $341,653 $291,778 $211,195
Property other income 13,090 11,169 6,740
Interest and dividend income 3,011 7,742 7,086
Other income 2,273 1,049 2,886
---------- ---------- ----------
Total Revenues 360,027 311,738 227,907
-------- -------- --------
Expenses:
Operating and maintenance 142,281 124,861 92,375
General and administrative 18,614 13,235 10,696
Interest 65,742 56,150 39,056
Depreciation and amortization 63,379 51,037 36,139
Loss on available-for-sale securities - - 2,123
Non-recurring acquisition expense - - 6,225
--------------- -------------- ----------
Total Expenses 290,016 245,283 186,614
--------- -------- --------
Income before gain (loss) on disposition of property and
business, minority interest, discontinued operations and
extraordinary item 70,011 66,455 41,293
Gain (loss) on disposition of property and business 26,241 (1,386) 457
---------- ----------- -----------
Income before minority interest, discontinued operations and
extraordinary item 96,252 65,069 41,750
Minority interest 32,844 24,819 16,570
---------- --------- ---------
Income from continuing operations 63,408 40,250 25,180
Discontinued operations, net of $838, $876 and $820 in 2001,
2000 and 1999 allocated to minority interest, respectively 1,166 1,206 1,198
--------- --------- ---------
Income before extraordinary item 64,574 41,456 26,378
Extraordinary item, prepayment penalties, net of $48 in 2001
and $78 in 1999 allocated to minority interest ( 68) - ( 96)
------------ -------------- -------------
Net income 64,506 41,456 26,282
Preferred dividends ( 17,681) ( 12,178) ( 1,153)
---------- ---------- ----------
Net income available to common shareholders $ 46,825 $29,278 $25,129
======== ======= =======
Basic earnings per share data:
Income continuing operations $ 2.07 $ 1.36 $ 1.29
Discontinued operations .05 .06 .06
Extraordinary item - - ( .01)
-------------- ------------ ------------
Net income available to common shareholders $ 2.12 $ 1.42 $ 1.34
========== ========= =========
Diluted earnings per share data:
Income from continuing operations $ 2.06 $ 1.35 $ 1.29
Discontinued operations .05 .06 .06
Extraordinary item - - ( .01)
-------------- ------------ ------------
Net income available to common shareholders $ 2.11 $ 1.41 $ 1.34
========== ========= =========
Weighted average number of shares outstanding:
Basic 22,101,027 20,639,241 18,697,731
========== ========== ==========
Diluted 22,227,521 20,755,721 18,800,907
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
HOME PROPERTIES OF NEW YORK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Officer/
Preferred DistributionAccumulated Director
Stock at Additional in Excess Other Notes for
Liquidation COMMON STOCK Paid-In of ComprehensivTreasury Stock
------------
Accumulated
PREFERENCE SHARE AMOUNT CAPITAL EARNINGS INCOME STOCK PURCHASE
Balance, January 1, 1999 $ - 17,635,000 $177 $401,814 ($ 26,622) ($1,607) ($1,863) ($9,943)
Issuance of common stock, net 2,025,288 20 50,290
Conversion of partnership
interest for 1,666,667 shares
of Series A Preferred stock 35,000 448
Payments on notes for stock 226
purchase
Interest receivable on notes for ( 140)
stock purchase
Net income 26,282
Change in unrealized loss on
available-for-sale securities 1,607
Conversion of UPREIT Units for 63,476 1 1,322
stock
Purchase and retirement of ( 125,300) ( 2) ( 4,835) 1,863
treasury stock
Adjustment of minority interest 12,306
Preferred dividends ( 1,057)
Dividends paid ($1.97 per share) ( 36,897)
------- ----------- ---- ------- ---------- --------- ----- --------
Balance, December 31, 1999 35,000 19,598,464 196 461,345 ( 38,294) - - ( 9,857)
Issuance of common stock, net 2,108,275 21 55,914
Issuance of preferred stock, net 114,000 ( 1,706)
Payments on notes for stock 375
purchase
Interest receivable on notes for
stock purchase ( 142)
Net income 41,456
Conversion of UPREIT Units for 327,542 3 7,385
stock
Purchase and retirement of ( 468,600) ( 4) (12,660)
treasury stock
Adjustment of minority interest (26,825)
Preferred dividends ( 12,179)
Dividends paid ($2.16 per share) ( 44,500)
------- ---------- --- ------- --------- ----------
Balance, December 31, 2000 149,000 21,565,681 216 483,453 ( 53,517) - - (9,624)
Issuance of common stock, net 1,448,815 14 38,920
Conversion of preferred stock
for common stock (35,000) 1,666,667 17 34,983
Payments on notes for stock 1,812
purchase
Interest receivable on notes for
stock purchase 195
Net income 64,506
Change in fair value of hedge
instruments, net of minority
interest (532)
Conversion of UPREIT Units for 83,692 1 1,909
stock
Purchase and retirement of ( 754,000) ( 8) (20,613)
treasury stock
Adjustment of minority interest 33,621
Preferred dividends ( 17,681)
Dividends paid ($2.31 per share) ( 51,076)
-------- ---------- ---- -------- ---------- ------ ------ -------
Balance, December 31, 2001 $114,000 24,010,855 $240 $572,273 ($ 57,768) ($532) $ - ($7,617)
======== ========== ==== ======== ========= ====== ====== =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-34
HOME PROPERTIES OF NEW YORK, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS)
2001 2000 1999
---- ---- ----
Net income $64,506 $41,456 $26,282
------- ------- -------
Other comprehensive income (loss):
Cumulative effect of accounting change (Note 11) (339) - -
Change in fair value of hedged instruments (193) - -
Change in unrealized loss on available-for-sale
securities - - 1,607
------------- ------------- ---------
Other comprehensive income (loss), net of minority interest
(532) - 1,607
---------- ------------- ----------
Net comprehensive income $63,974 $41,456 $27,889
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
HOME PROPERTIES OF NEW YORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS)
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net income $64,506 $ 41,456 $26,282
------- -------- -------
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in (income) loss of affiliates ( 123) 1,746 ( 201)
Income allocated to minority interest 33,682 25,715 17,390
Extraordinary item allocated to minority interest ( 48) - ( 78)
Depreciation and amortization 65,521 52,995 38,066
Loss on available-for-sale securities - - 2,123
(Gain) loss on disposition of property and business (26,241) 1,386 ( 457)
Changes in assets and liabilities:
Other assets 1,564 ( 8,468) (3,606)
Accounts payable and accrued liabilities 9,528 12,387 10,285
---------- --------- ------
Total adjustments 83,883 85,761 63,522
--------- --------- ------
Net cash provided by operating activities 148,389 127,217 89,804
-------- -------- ------
Cash flows used in investing activities:
Purchase of properties and other assets, net of mortgage
notes assumed and UPREIT Units issued (126,385) (106,438) (130,789)
Additions to properties (130,468) ( 92,603) ( 61,034)
Advances to affiliates ( 15,257) ( 33,481) ( 48,888)
Payments on advances to affiliates 17,558 42,311 39,916
Proceeds from sale of properties and business, net 115,446 11,746 1,099
Sale of available-for-sale securities - - 9,526
-------------- ------------- ---------
Net cash used in investing activities (139,106) (178,465) (190,170)
-------- -------- ---------
Cash flows from financing activities:
Proceeds from sale of preferred stock, net - 112,294 48,733
Proceeds from sale of common stock, net 40,943 56,168 50,397
Purchase of treasury stock ( 20,621) ( 12,664) ( 2,974)
Purchase of UPREIT Units ( 11,899) - -
Proceeds from mortgage notes payable 132,397 84,432 32,978
Payments of mortgage notes payable ( 72,629) ( 33,517) ( 36,345)
Proceeds from line of credit 171,500 97,000 104,700
Payments on line of credit (139,000) (147,800) ( 53,900)
Payments of deferred loan costs ( 2,086) ( 1,781) ( 576)
Additions to cash escrows, net ( 2,554) ( 8,395) ( 10,850)
Dividends and distributions paid (105,064) ( 88,782) ( 60,501)
--------- ---------- ---------
Net cash (used in) provided by financing activities ( 9,013) 56,955 71,662
----------- --------- --------
Net increase (decrease) in cash and cash equivalents 270 5,707 ( 28,704)
Cash and cash equivalents:
Beginning of year 10,449 4,742 33,446
-------- ---------- ---------
End of year $10,719 $ 10,449 $ 4,742
======= ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1 ORGANIZATION AND BASIS OF PRESENTATION
Organization
Home Properties of New York, Inc. (the " Company " ) was formed in
November 1993, as a Maryland corporation and is engaged primarily in
the ownership, management, acquisition, rehabilitation and development
of residential apartment communities in the Northeastern, Mid-Atlantic
and Midwestern United States. The Company conducts its business through
Home Properties of New York, L.P. (the "Operating Partnership"), a New
York limited partnership. As of December 31, 2001, the Company operated
293 apartment communities with 49,745 apartments. Of this total, the
Company owned 143 communities, consisting of 39,007 apartments, managed
as general partner 132 partnerships that owned 8,035 apartments and fee
managed 2,703 apartments for affiliates and third parties. The Company
also fee managed 2.2 million square feet of office and retail
properties.
Basis of Presentation
The accompanying consolidated financial statements include the accounts
of the Company and its 60.0% (57.6% at December 31, 2000) partnership
interest in the Operating Partnership. Such interest has been
calculated as the percentage of outstanding common shares divided by
the total outstanding common shares and Operating Partnership Units
("UPREIT Units") outstanding. The remaining 40.0% (42.4% at December
31, 2000) is reflected as Minority Interest in these consolidated
financial statements. For financing purposes, the Company has formed a
limited liability company (the "LLC") and a partnership (the "Financing
Partnership") which beneficially own certain apartment communities
encumbered by mortgage indebtedness. The LLC is wholly owned by the
Operating Partnership. The Financing Partnership is owned 99.9% by the
Operating Partnership and .1% by Home Properties Trust, a wholly owned
qualified REIT subsidiary ("QRS") of the Company.
Investments in entities where the Company has the ability to exercise
significant influence over but does not have financial and operating
control are accounted for using the equity method. All significant
intercompany balances and transactions have been eliminated in these
consolidated financial statements.
The Company accounts for its investment as managing general partner
("GP") in unconsolidated limited partnerships ("LP") using the equity
method of accounting. As managing GP of the LP, the Company has the
ability to exercise significant influence over operating and financial
policies. This influence is evident in the terms of the respective
partnership agreements, participation in policy-making processes, and
the employment of its management personnel. However, the Company does
not have a controlling interest in the respective LPs. The limited
partners have significant rights, such as the right to replace the
general partner (for cause) and the right to approve the sale or
refinancing of the assets of the respective partnership in accordance
with the partnership agreement.
The Company records its allocable share of the respective partnership's
income or loss based on the terms of the agreement. To the extent it is
determined that the LPs cannot absorb their share of the losses, if
any, the GP will record the LPs share of such losses.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Real Estate
Real estate is recorded at cost. Costs related to the acquisition,
development, construction and improvement of properties are
capitalized. Recurring capital replacements typically include carpeting
and tile, appliances, HVAC equipment, new roofs, site improvements and
various exterior building improvements. Non-recurring upgrades include,
among other items, community centers, new appliances, new windows,
kitchens and bathrooms. Interest costs are capitalized until
construction is substantially complete. There was $520, $260, and $263
of interest capitalized in 2001, 2000 and 1999, respectively. When
retired or otherwise disposed of, the related asset cost and
accumulated depreciation are cleared from the respective accounts and
the net difference, less any amount realized from disposition, is
reflected in income. Ordinary repairs and maintenance that do not
extend the life of the asset are expensed as incurred.
Management reviews its long-lived assets used in operations for
impairment when there is an event or change in circumstances that
indicates an impairment in value. An asset is considered impaired when
the undiscounted future cash flows are not sufficient to recover the
asset's carrying value. If such impairment is present, an impairment
loss is recognized based on the excess of the carrying amount of the
asset over its fair value. No such losses have been recognized to date.
The Company records impairment losses and reduces the carrying amounts
of assets held for sale when the carrying amounts exceed the estimated
selling proceeds less the costs to sell.
Depreciation
Properties are depreciated using a straight-line method over the
estimated useful lives of the assets as follows: buildings,
improvements and equipment - 5-40 years; and tenant improvements - life
of related lease. Depreciation expense charged to operations was
$63,173, $50,828, and $35,965 from continuing operations and $1,511,
$1,393, and $1,211 from discontinued operations for the years ended
December 31, 2001, 2000 and 1999, respectively.
Cash and Cash Equivalents
Cash and cash equivalents include all cash and highly liquid
investments purchased with original maturities of three months or less.
The Company estimates that the fair value of cash equivalents
approximates the carrying value due to the relatively short maturity of
these instruments.
Cash in Escrows
Cash in escrows consists of cash restricted under the terms of various
loan agreements to be used for the payment of property taxes and
insurance as well as required replacement reserves and tenant security
deposits for residential properties.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Deferred Charges
Costs relating to the financing of properties are deferred and
amortized over the life of the related financing agreement. The
straight-line method, which approximates the effective interest method,
is used to amortize all financing costs; such amortization is reflected
as interest expense in the consolidated statement of operations. The
range of the terms of the agreements are from 1-23 years. Accumulated
amortization was $1,548 and $1,270, as of December 31, 2001 and 2000,
respectively.
Intangible Assets
Intangible assets of $4,942 and $7,501 at December 31, 2001 and 2000,
respectively, included in Other Assets, consist primarily of property
management contracts obtained through the acquisition of real estate
management businesses, which are amortized on the straight-line basis
over their estimated useful lives of 40 years. The carrying value of
intangible assets is periodically reviewed by the Company and
impairments are recognized when the expected future operating cash
flows derived from such intangible assets is less than their carrying
value. Accumulated amortization was $888 and $684 as of December 31,
2001 and 2000, respectively.
Revenue Recognition
The Operating Partnership leases its residential properties under
leases with terms generally one year or less. Rental income is
recognized when earned. Property other income, which consists primarily
of income from operation of laundry facilities, administrative fees,
garage and carport rentals and miscellaneous charges to residents, is
recognized when earned.
Property management fees are recognized when earned based on a
contractual percentage of net monthly cash collected on rental income.
Prior to 2001, the Operating Partnership earned development and other
fee income from properties in the development phase. This fee income is
recognized on the percentage of completion method.
Gains on Real Estate Sales
Gains from sales of operating properties are recognized using the full
accrual method in accordance with the provisions of Statement of
Financial Accounting Standards No. 66, Accounting for Real Estate
Sales, provided that various criteria relating to the terms of sale and
any subsequent involvement by the Company with the properties sold are
met.
Advertising
Advertising expenses are charged to operations during the year in which
they were incurred. Advertising expenses incurred and charged to
operations were approximately $5,364, $5,216, and $3,849 from
continuing operations and $122, $150, and $117 from discontinued
operations for the years ended December 31, 2001, 2000 and 1999,
respectively.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Insurance Settlement
In October, 2001, the Company resolved a legal claim with an insurance
provider and received a total settlement of $4.9 million. This refund
was allocated to insurance expense in relation to the Company's
estimate of loss spread over the corresponding policy term. The policy
term covered November 1, 2000 to October 31, 2001 and November 1, 2001
to October 31, 2002. The amount of the settlement relating to the
period from November 1, 2000 to December 31, 2001 was estimated to be
$2.2 million, and that amount reduced insurance expense in the fourth
quarter of 2001. The remaining settlement of $2.7 million relates to
the remaining policy period from January 1, 2001, through October 31,
2002, and will be amortized on a straight-line basis over that period.
Federal Income Taxes
The Company has elected to be taxed as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended,
commencing with the taxable year ended December 31, 1994. As a result,
the Company generally will not be subject to Federal or State income
taxation at the corporate level to the extent it distributes annually
at least 90% (95% in years prior to 2001) of its REIT taxable income to
its shareholders and satisfies certain other requirements. For the
years ended December 31, 2001, 2000 and 1999, the Company distributed
100% of its taxable income; accordingly, no provision has been made for
federal income taxes in the accompanying consolidated financial
statements. Stockholders are taxed on dividends and must report such
dividends as either ordinary income, capital gains, or as return of
capital.
The tax basis of assets is less than the amounts reported in the
accompanying consolidated financial statements by approximately $202
million and $188 million at December 31, 2001 and 2000, respectively.
The following table reconciles net income to taxable income for the
years ended December 31, 2001, 2000 and 1999:
2001 2000 1999
---- ---- ----
Net income $64,506 $41,456 $26,282
Less: Net income of Taxable REIT Subsidiaries included
above ( 62) 1,791 ( 156)
----------- -------- ----------
Net income from REIT operations 64,444 43,247 26,126
Add: Book depreciation and amortization 64,888 52,430 37,349
Less: Tax depreciation and amortization (66,915) (57,128) (42,271)
Book/tax difference on gains/losses from capital
transactions ( 7,514) - 6,226
Other book/tax differences, net ( 2,303) ( 1,873) 825
--------- --------- ---------
Taxable income before adjustments 52,600 36,676 28,255
Less: Capital gains ( 26,241) 1,386 ( 457)
--------- -------- ----------
Adjusted taxable income subject to 90% (95% in 2000 and
1999) dividend requirement $26,359 $38,062 $27,798
======= ======= =======
The Company made actual distributions in excess of 100% of the taxable
income before capital gains. All adjustments to net income from REIT
operations are net of amounts attributable to minority interest and
taxable REIT subsidiaries.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share
Basic Earnings Per Share ("EPS") is computed as net income available to
common shareholders divided by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur from common shares issuable through
stock-based compensation including stock options and the conversion of
any cumulative convertible preferred stock. The exchange of an
Operating Partnership Unit for common stock will have no effect on
diluted EPS as unitholders and stockholders effectively share equally
in the net income of the Operating Partnership.
Income before extraordinary item, extraordinary item, discontinued
operations and net income available to common shareholders are the same
for both the basic and diluted calculation. The reconciliation of the
basic and diluted earnings per share for the years ended December 31,
2001, 2000 and 1999, is as follows:
2001 2000 1999
---- ---- ----
Income from continuing operations $63,408 $40,250 $25,180
Less: Preferred dividends ( 17,681) (12,178) (1,153)
--------- -------- --------
Basic and Diluted - Income from continuing operations $45,727 $28,072 $24,027
======= ======= =======
applicable to common shareholders
Basic weighted average number of shares
Outstanding 22,101,027 20,639,241 18,697,731
Effect of dilutive stock options 126,494 116,480 103,176
----------- ---------- -----------
Diluted weighted average number of shares
Outstanding 22,227,521 20,755,721 18,800,907
========== ========== ==========
Basic earnings per share data:
Income from continuing operations $ 2.07 $ 1.36 $ 1.29
Discontinued operations .05 .06 .06
Extraordinary item - - ( .01)
----------- --------- ----------
Net Income available to common shareholders $ 2.12 $ 1.42 $ 1.34
======= ======= =======
Diluted earnings per share data:
Income from continuing operations $ 2.06 $ 1.35 $ 1.29
Discontinued operations .05 .06 .06
Extraordinary item - - ( .01)
----------- --------- ----------
Net Income available to common shareholders $ 2.11 $ 1.41 $ 1.34
======= ======= =======
Unexercised stock options to purchase 1,732,656, 1,270,300, and 713,600
(including warrants of 525,000 issued with the Series C and E Preferred
Stock issuance for 2001 and 2000) shares of the Company's common stock
were not included in the computations of diluted EPS because the
options' exercise prices were greater than the average market price of
the Company's stock during the years ended December 31, 2001, 2000 and
1999, respectively. For the year ended December 31, 2001, the 4,816,667
shares of the Series A (prior to the November 27, 2001 conversion), B,
C, D and E Convertible Cumulative Preferred Stock (7,112,381 common
stock equivalents) on an as-converted basis has an antidilutive effect
and is not included in the computation of diluted EPS.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclassification
Certain reclassifications have been made to the 2000 and 1999
consolidated financial statements to conform to the 2001 presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities and disclosures 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.
New Accounting Pronouncements
On June 29, 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 141 (SFAS 141),
Business Combinations, and No. 142 (SFAS 142), Goodwill and Other
Intangible Assets. The provisions of SFAS 141 require the use of
purchase accounting for all business combinations and the separate
allocation of purchase price to intangible assets if specific criteria
are met. The provisions of SFAS 142 provide that goodwill and
intangible assets with indefinite useful lives should not be amortized
but rather tested at least annually for impairment. Intangible assets
that have finite useful lives should continue to be amortized over
their estimated useful lives. SFAS 142 also provides specific guidance
for testing goodwill and intangible assets for impairment. The Company
does not anticipate that these standards will have a material impact on
the Company's financial position, results of operations, or cash flows.
The provisions of SFAS No. 141 apply to all business combinations
initiated after June 30, 2001. The Company will adopt FAS 142 effective
January 1, 2002.
In October 2001, the FASB issued Statement of Financial Accounting
Standard No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", which addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. This standard
harmonizes the accounting for impaired assets and resolves some of the
implementation issues of SFAS 121. It retains the fundamental
provisions of Statement 121 for (a) recognition and measurement of the
impairment of long-lived assets to be held and used and (b) measurement
of long-lived assets to be disposed of by sale. It also retains the
basic provisions for presenting discontinued operations in the income
statement but broadens the scope to include a component of an entity
rather than a segment of a business. The Company will adopt this
standard effective January 1, 2002. The Company does not expect this
pronouncement to have a material impact on the Company's financial
position, results of operations, or cash flows (see Note 15).
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3 INVESTMENT IN AND ADVANCES TO AFFILIATES
The Company has investments in and advances to approximately 132
limited partnerships where the Company acts as the managing general
partner. In addition, there are investments in other affiliated
entities (see Note 4). The following is summarized financial
information for the investment in and advances to affiliates carried
under the equity method of accounting, excluding the Management
Companies discussed in Note 4, as of December 31, 2001 and 2000 and for
each of the three years ended December 31, 2001.
2001 2000
---- ----
Balance Sheets:
Real estate, net $280,864 $293,616
Other assets 36,579 34,023
-------- ----------
Total assets $317,443 $327,639
======== ========
Mortgage notes payable $253,798 $257,834
Advances from affiliates 25,245 21,957
Other liabilities 18,140 18,558
Partners' equity 20,260 29,290
-------- ---------
Total liabilities and partners' equity $317,443 $327,639
======== ========
The Company's proportionate share of mortgage notes payable was $6,800
at December 31, 2001. The mortgage notes payable are all non-recourse
to the affiliated partnership and the Company.
2001 2000 1999
---- ---- ----
Operations:
Gross revenues $46,972 $44,053 $42,059
Operating expenses ( 29,704) ( 26,627) ( 26,683)
Mortgage interest expense ( 11,529) ( 12,198) ( 10,398)
Depreciation and amortization ( 13,606) ( 12,964) ( 11,257)
-------- -------- --------
Net loss ($ 7,867) ($ 7,736) ($ 6,279)
======== ======== ========
Company's share (included in property other income) $ 62 $ 45 $ 45
======== ========== ========
Reconciliation of interests in the underlying net assets to the
Company's carrying value of investments in and advances to affiliates:
2001 2000
---- ----
Partners' equity, as above $20,260 $29,290
Equity of other partners 15,821 24,217
------- --------
Company's share of investments in limited partnerships 4,439 5,073
Advances to limited partnerships, as above - 21,957
-------- --------
Company's investment in and advances to limited partnerships 4,439 27,030
Company's investment in Management Companies (see Note 4) 22,477 ( 1,516)
Company's advances to Management Companies 15,954 19,534
------- --------
Carrying value of investments in and advances to affiliates $42,870 $45,048
======= =======
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4 MANAGEMENT COMPANIES
Certain property management, leasing and development activities are
performed by Home Properties Management, Inc. and Home Properties
Resident Services, Inc. (formerly Conifer Realty Corp.) (together the
"Management Companies"). Both are Maryland corporations and, effective
January 1, 2001, elected to convert to taxable REIT subsidiaries under
the Tax Relief Extension Act of 1999. The Operating Partnership owns
non-voting common stock in the Management Companies which entitles it
to receive 95% and 99% of the economic interest in Home Properties
Management, Inc. and Home Properties Resident Services, respectively.
Effective March 1, 2001, the Company recapitalized Home Properties
Resident Services, Inc. by contributing to capital $23.7 million of
loans due from affiliated partnerships. Simultaneous with the
recapitalization, the Company increased its effective economic interest
from 95% to 99% diluting the economic interest held by certain of the
Company's officers and inside directors. The Company's share of income
from the Management Companies, included in Other Income in the
consolidated statement of operations, for the twelve months ended
December 31, 2001, 2000 and 1999, is summarized as follows:
2001 2000 1999
---- ---- ----
Management fees $ 3,397 $ 3,716 $ 3,778
Development and construction management fees - 3,991 5,567
Interest income 1,627 - -
General and administrative (3,244) ( 7,364) (7,449)
Interest expense (1,390) ( 1,937) (1,242)
Other expenses ( 330) ( 292) ( 490)
------- -------- ----------
Net income (loss) $ 60 ($1,886) $ 164
======= ======= =========
Company's share $ 61 ($1,791) $ 156
======= ======= =========
Total assets $38,602 $21,965 $21,699
======= ======= =======
Total liabilities $16,296 $23,526 $21,375
======= ======= =======
The general and administrative expenses reflected above represent an
allocation of direct and indirect costs incurred by the Company
estimated by management to be associated with the operations of the
Management Companies.
Included in assets of the Management Companies are notes and other
receivables due from affiliated partnerships (Note 3) of approximately
$25,000 and $0 at December 31, 2001 and 2000, respectively. The
interest rates of the notes receivable include both fixed and variable
rate terms. The variable rate loans are at one percent over the Prime
rate of interest. The fixed rate agreements range from 8.47% to 8.75%
per annum. The maturity dates for these notes receivable range from
2002 to 2032.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5 MORTGAGE NOTES PAYABLE
The Company's mortgage notes payable are summarized as follows:
2001 2000
---- ----
Fixed rate mortgage notes payable $954,203 $823,488
Variable rate mortgage notes payable 6,155 9,295
-------- -----------
Total mortgage notes payable $960,358 $832,783
======== ========
Mortgage notes payable are collateralized by certain apartment
communities and mature at various dates from August, 2002, through
June, 2036. The weighted average interest rate of the Company's
variable rate notes and credit facility was 3.27% and 6.54% at December
31, 2001 and 2000, respectively. The weighted average interest rate of
the Company's fixed rate notes was 7.27% and 7.41% at December 31, 2001
and 2000, respectively.
Principal payments on the mortgage notes payable for years subsequent
to December 31, 2001 are as follows:
2002 $53,378
2003 26,359
2004 36,675
2005 41,870
2006 68,485
Thereafter 733,591
-------
$960,358
The Company determines the fair value of the mortgage notes payable
based on the discounted future cash flows at a discount rate that
approximates the Company's current effective borrowing rate for
comparable loans. Based on this analysis, the Company has determined
that the fair value of the mortgage notes payable approximates $958,452
and $858,743, at December 31, 2001 and 2000, respectively.
The Company has incurred prepayment penalties on debt restructurings
which are accounted for as extraordinary items in the statement of
operations. Prepayment penalties were approximately $116, $0, and $174
for the years ended December 31, 2001, 2000 and 1999, respectively. The
2001 repayments on eight debt instruments totaled $51,969 and were
refinanced by eleven new borrowings in excess of $131,370. The 2000
repayments on two debt instruments totaled $25,067 and were refinanced
by two new borrowings in excess of $39,000.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6 LINE OF CREDIT
As of December 31, 2001, the Company had an unsecured line of credit
from M & T Bank of $100 million with $32.5 million outstanding.
Borrowings under the line of credit bear interest at 1.25% over the
one-month LIBOR rate. Accordingly, increases in interest rates will
increase the Company's interest expense and as a result will effect the
Company's results of operations and financial condition. The line of
credit expires on September 1, 2002. The Company is evaluating
alternatives to replace or extend the line of credit after September 1,
2002. The LIBOR interest rate was 1.93% at December 31, 2001.
7 MINORITY INTEREST
Minority interest in the Company relates to the interest in the
Operating Partnership not owned by Home Properties of New York, Inc.
Holders of UPREIT Units may redeem a Unit for one share of the
Company's common stock or cash equal to the fair market value at the
time of the redemption, at the option of the Company.
The changes in minority interest for the three years ended December 31
are as follows:
2001 2000 1999
---- ---- ----
Balance, beginning of year $371,544 $299,880 $204,709
Issuance of UPREIT Units associated with
property acquisitions 19,133 58,616 149,483
Adjustment between minority interest and
stockholders' equity ( 33,621) 26,825 ( 12,306)
Exchange of UPREIT Units for Common Shares ( 1,910) ( 7,387) ( 1,323)
Repurchase of UPREIT Units ( 10,233) - -
Exchange of partnership interests for Series A
Preferred Stock - - ( 35,448)
Net income 33,634 25,714 17,312
Accumulated other comprehensive loss ( 388) - -
Distributions ( 36,305) ( 32,104) ( 22,547)
--------- --------- ----------
Balance, end of year $341,854 $371,544 $299,880
======== ======== ========
8 PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Common Stock
In 1997, the Company's Board of Directors approved a stock repurchase
program under which the Company may repurchase up to one million shares
of its outstanding common stock and UPREIT Units. The Board's action
did not establish a target price or a specific timetable for
repurchase. At December 31, 1999, there was approval remaining to
purchase 795,100 shares. In 2000, the Board of Directors approved a
1,000,000-share increase in the stock repurchase program. During 2000,
the Company repurchased 468,600 shares at a cost of $12,664,000. In
2001, the Board of Directors approved a 1,000,000-share increase in the
stock repurchase program. During 2001, the Company repurchased 754,000
shares and 436,700 UPREIT Units at a cost of $20,600,000 and
$11,900,000, respectively. Approval to repurchase 1,135,800 shares of
common stock and UPREIT Units remains at December 31, 2001.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8 PREFERRED STOCK AND STOCKHOLDERS' EQUITY (Continued)
Preferred Stock
On December 22, 1999, the holder of the Class A limited partnership
interests converted its ownership to 9% Series A convertible cumulative
preferred stock ("Series A Preferred Shares"), liquidation preference
of $21.00 per Common Share, total shares outstanding of 1,666,667. The
conversion to preferred stock occurred at the Company's request and
permits the Operating Partnership to continue to use favorable tax
depreciation methods. The Series A Preferred Shares were convertible at
any time by the holder on a one-for-one basis into Common Shares. On
November 28, 2001, the Series A Preferred Shares were converted to
common shares. The conversion had no effect on reported results of
operations.
On September 30, 1999, the Company privately placed 2,000,000 of its
8.36% Series B convertible cumulative preferred stock ("Series B
Preferred Shares"), $25 liquidation preference per share. This offering
generated net proceeds of approximately $48.7 million after offering
costs of $1.3 million. The net proceeds were used to pay down Company
borrowings. The Series B Preferred Shares are convertible at any time
by the holder into Common Shares at a conversion price of $29.77 per
Common Share, equivalent to a conversion ratio of .8398 Common Shares
for each Series B Preferred Share (equivalent to 1,679,543 Common
Shares assuming 100% converted). The Series B Preferred Shares are
non-callable for five years. Each Series B Preferred Share will receive
the greater of a quarterly distribution of $0.5225 per share or the
dividend paid on a share of common stock on an as converted basis. The
Company has determined that the Series B Preferred Shares contain
certain contingent provisions that could cause such shares to be
redeemable at the option of the holder and has presented this class of
preferred stock outside of stockholders' equity.
In May and June of 2000, the Company privately placed 600,000 of its
8.75% Series C convertible cumulative preferred stock ("Series C
Preferred Shares"), $100 liquidation preference per share. This
offering generated net proceeds of approximately $60 million. The net
proceeds were used to fund acquisitions and property upgrades. The
Series C Preferred shares are convertible at any time by the holder
into Common Shares at a conversion price of $30.25 per Common Share,
equivalent to a conversion ratio of 3.3058 Common Shares for each
Series C Preferred share (equivalent to 1,983,471 Common shares
assuming 100% converted). The Series C Preferred shares are
non-callable for five years. Each Series C Preferred share will receive
the greater of a quarterly distribution of $2.1875 per share or the
dividend paid on a share of common stock on an as-converted basis. The
Company also issued 240,000 additional warrants to purchase common
shares at a price of $30.25 per share, expiring in 2005.
In June, 2000, the Company privately placed 250,000 of its 8.78% Series
D convertible cumulative preferred stock ("Series D Preferred Shares"),
$100 liquidation preference per share. This offering generated net
proceeds of approximately $25 million. The net proceeds were used to
fund Company acquisitions and property upgrades. The Series D Preferred
Shares are convertible at any time by the holder into Common Shares at
a conversion price of $30.00 per Common Share, equivalent to a
conversion ratio of 3.333 Common Shares for each Series D Preferred
share (equivalent to 833,333 Common Shares assuming 100% converted).
The Series D Preferred shares are non-callable for five years. Each
Series D Preferred share will receive the greater of a quarterly
distribution of $2.195 per share or the dividend paid on a share of
common stock on an as-converted basis.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8 PREFERRED STOCK AND STOCKHOLDERS' EQUITY (Continued)
Preferred Stock (Continued)
In December, 2000, the Company privately placed 300,000 of its 8.55%
Series E convertible cumulative preferred stock ("Series E Preferred
Shares"), $100 liquidation preference per share. This offering
generated net proceeds of approximately $30 million. The net proceeds
were used to pay down Company borrowings. The Series E Preferred Shares
are convertible at any time by the holder into Common Shares at a
conversion price of $31.60 per Common Share, equivalent to a conversion
ratio of 3.1646 Common Shares for each Series E Preferred Share
(equivalent to 949,367 Common Shares assuming 100% converted). The
Series E Preferred Shares are non-callable for five years. Each Series
E Preferred Share will receive the greater of a quarterly distribution
of $2.1375 per share or the dividend paid on a share of common stock on
an as-converted basis. In addition, the Company issued warrants to
purchase 285,000 common shares at a price of $31.60 per share, expiring
in 2005.
Dividend Reinvestment Plan
The Company has a Dividend Reinvestment, Stock Purchase, Resident Stock
Purchase and Employee Stock Purchase Plan (the "DRIP" ). The DRIP
provides the stockholders, employees and residents of the Company an
opportunity to automatically invest their cash dividends at a discount
of 3% from the market price. In addition, eligible participants may
make monthly or other voluntary cash investments, also typically at a
discount, which has varied between 2% and 3% from the market price, in
shares of common stock. In response to a perceived dilution from
issuing new shares at or below the underlying net asset value,
effective April 10, 2001, the DRIP was amended to reduce the share
purchase discount from the current market price from 3% to 2%. The
maximum amount that can be invested without the Company's prior
permission was also reduced from $5,000 to $1,000. A total of $32
million, $57 million, and $49 million was raised through this program
during 2001, 2000 and 1999, respectively.
Officer and Director Notes for Stock Purchases
On August 12, 1996, eighteen officers and the six independent directors
purchased an aggregate of 208,543 shares of Common Stock through the
DRIP at the price of $19.79. The purchases were financed 50% from a
bank loan and 50% by a recourse loan from the Company. The Company
loans bear interest at 7% per annum and mature in August, 2016. The
Company loans are subordinate to the above-referenced bank loans, and
are collateralized by pledges of the 208,543 Common Shares. The loans
are paid from the regular quarterly dividends paid on the shares of
common stock pledged, after the corresponding bank loans are paid in
full.
On November 10, 1997, twenty-one officers and five of the independent
directors purchased an aggregate of 169,682 shares of common stock
through the DRIP at the price of $26.66. The purchases were financed
50% from a bank loan and 50% by a recourse loan from the Company. The
Company loans bear interest at 6.7% per annum and mature in November,
2017. The Company loans are subordinate to the above-referenced bank
loans, and are collateralized by pledges of the 169,682 common shares.
The loans are expected to be repaid from the regular quarterly
dividends paid on the shares of common stock pledged, after the
corresponding bank loans are paid in full.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8 PREFERRED STOCK AND STOCKHOLDERS' EQUITY (Continued)
Stock Purchase and Loan Plan
In May, 1998, the Company adopted the Director, Officer and Employee
Stock Purchase and Loan Plan (the "Stock Purchase Plan"). The program
provides for the sale and issuance, from time to time as determined by
the Board of Directors, of up to 500,000 shares of the Company's Common
Stock to the directors, officers and key employees of the Company for
consideration of not less than 97% of the market price of the Common
Stock. The Stock Purchase Plan also allows the Company to loan, on a
recourse basis, the participants up to 100% of the purchase price (50%
for non-employee directors).
On August 12, 1998, thirty officers/key employees and the six
independent directors purchased an aggregate of 238,239 shares of
common stock through the Stock Purchase Plan at the price of $24.11.
The purchases for the officers/key employees were financed 100% by a
recourse loan from the Company (50% for non-employee directors). The
loans bear interest at 7.13% per annum and mature on the earlier of the
maturity of the 1996 and 1997 phases of the loan program or August,
2018. The loans are collateralized by pledges of the common stock and
are expected to be repaid from the regular quarterly dividends paid on
the shares.
On February 1, 2001, one officer purchased an aggregate of 75,000
shares of common stock through the Stock Purchase Plan at the price of
$26.20. The purchases were financed by a recourse loan from the
Company. The loan is collateralized by pledges of the common stock,
bears interest at 8% per annum and matures on February 15, 2021. The
loan was repaid in full on January 25, 2002.
Dividends
Stockholders are taxed on dividends and must report such dividends as
either ordinary income, capital gains, or as return of capital. The
Company has declared a $2.31 distribution per common share during its
most recent fiscal year (Cusip 437306103). Pursuant to Internal Revenue
Code Section 857 (b) (3) (C), for the year ended December 31, 2001, the
Company designates the following cash distributions to holders of
common shares as capital gain dividends, in the amounts set forth in
the table following on the next page:
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8 PREFERRED STOCK AND STOCKHOLDERS' EQUITY (Continued)
Dividends (Continued)
Distribution Type
--------------------------------------------------
------------ ----------- ------------ ------------
Declaration Record Payable Distri- Ordinary Return of 20% Unrecap-
Long-Term tured
butions Taxable Capital Sec. 1250
Dates Dates Dates Per Share Dividend Capital Gain Gain
------------ ------------ ----------- ------------ ------------ ----------- ------------ ------------
2/7/2001 2/19/2001 2/27/2001 $0.57 78.5% 6.8% 5.3% 9.4%
5/1/2001 5/14/2001 5/24/2001 $0.57 78.5% 6.8% 5.3% 9.4%
7/31/2001 8/16/2001 8/28/2001 $0.57 78.5% 6.8% 5.3% 9.4%
10/30/2001 11/15/2001 11/27/2001 $0.60 78.5% 6.8% 5.3% 9.4%
----- ----- ---- ---- ----
TOTALS $2.31 78.5% 6.8% 5.3% 9.4%
===== ===== ==== ==== ====
The appropriate amount of each common share for 1999 and 2000 is as
follows:
ORDINARY INCOME RETURN OF CAPITAL
1999 85.6% 14.4%
2000 91.0% 9.0%
Total Shares/Units Outstanding
At December 31, 2001, 24,010,855 common shares, 5,445,714 convertible
preferred shares (assuming a conversion of the Preferred Shares) and
16,002,076 UPREIT Units were outstanding for a total of 45,458,645
common share equivalents.
9 STOCK BENEFIT PLAN
The Company has adopted the 1994 Stock Benefit Plan, as amended (the
"Plan"). Plan participants include officers, non-employee directors,
and key employees of the Company. The Company has reserved 1,596,000
shares for issuance to officers and employees and 154,000 shares for
issuance to non-employee directors. Options granted to officers and
employees of the Company vest 20% for each year of service until 100%
vested on the fifth anniversary. Certain officers' options (264,000)
and directors' options (149,100) vest immediately upon grant. The
exercise price per share for stock options may not be less than 100% of
the fair market value of a share of common stock on the date the stock
option is granted (110% of the fair market value in the case of
incentive stock options granted to employees who hold more than 10% of
the voting power of the Company's common stock). Options granted to
directors and employees who hold more than 10% of the voting power of
the Company expire after five years from the date of grant. All other
options expire after ten years from the date of grant. The Plan also
allows for the grant of stock appreciation rights and restricted stock
awards. At December 31, 2001, 335,397 and 346 common shares were
available for future grant of options or awards under the Plan for
officers and employees and non-employee directors, respectively.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9 STOCK BENEFIT PLAN (Continued)
On February 1, 2000, the Company adopted the 2000 Stock Benefit Plan
(the "2000 Plan"). Plan participants have been expanded to include
directors, officers, regional managers and on-site property managers.
It is expected that all future awards of stock options and restricted
stock will be granted under the 2000 Plan. The 2000 Plan limits the
number of shares issuable under the plan to 2.2 million, of which
200,000 are to be available for issuance to the non-employee directors.
At December 31, 2001, 703,484 and 99,240 common shares were available
for future grant of options or awards under the 2000 plan for officers
and employees and non-employee directors, respectively.
Details of stock option activity during 2001, 2000 and 1999 are as
follows:
Weighted Average
Number Exercise Price
OF OPTIONS PER OPTION
Options outstanding at January 1, 1999 800,863 $21.94
(395,441 shares exercisable)
Granted, 1999 610,400 $27.06
Exercised, 1999 ( 96,643) $19.06
Cancelled, 1999 ( 49,187) $25.41
------------
Options outstanding at December 31, 1999 1,265,433 $24.50
(448,820 shares exercisable)
Granted, 2000 752,720 $31.27
Exercised, 2000 ( 150,008) $19.38
Cancelled, 2000 ( 71,480) $28.32
-----------
Options outstanding at December 31, 2000 1,796,665 $26.34
(519,434 shares exercisable)
Granted, 2001 857,430 $29.60
Exercised, 2001 ( 187,698) $22.59
Cancelled, 2001 ( 361,295) $28.78
-----------
Options outstanding at December 31, 2001 2,105,102 $28.69
=========
(764,819 shares exercisable)
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9 STOCK BENEFIT PLAN (Continued)
The following table summarizes information about options outstanding at
December 31, 2001:
Weighted
Average Weighted Weighted
Remaining Average Average Exercise
Year Number Contractual Fair Value Exercise Number Price Range
GRANTED OUTSTANDING LIFE OF OPTIONS PRICE EXERCISABLE PER OPTION
------- ----------- ---- ---------- ----- ----------- ----------
1994 75,015 3 N/A $19.000 75,015 $19.00
1996 27,309 4 $1.02 19.959 27,309 $19.00-$20.50
1997 89,002 5 $1.56 25.687 74,137 $22.75-$26.50
1998 115,760 6 $1.37 25.785 71,820 $25.125-$27.06
1999 398,260 7 $1.57 26.947 169,840 $25.688-$27.25
2000 567,046 8 $1.88 30.969 161,998 $28.313-$31.375
2001 832,710 9 $1.64 27.566 165,000 $27.01-$31.60
------- - ------- ------- -------------
Totals 2,105,102 7 $26.662 745,119 $19.00-$31.60
========= = ======= ======= =============
The Company has adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, the Company
does not recognize compensation cost for stock options when the option
exercise price equals or exceeds the market value on the date of grant.
The compensation cost that would have been recorded had the Company
adopted the accounting provisions of SFAS 123, relative to the
above-mentioned awards was $834, $489 and $217 for 2001, 2000 and 1999,
respectively. The Company's proforma net income before preferred
dividends and proforma basic earnings per common share would have been
$63,672, $40,956, and $26,063 and $2.08, $1.39, and $1.33,
respectively. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the
following assumptions used for grants in 2001, 2000 and 1999: dividend
yield of 9.40%; expected volatility of 19.03%; forfeiture rate of 5%;
and expected lives of 7.5 years for options with a lifetime of ten
years, and five years for options with a lifetime of five years. The
interest rate used in the option-pricing model is based on a risk free
interest rate ranging from 5.43% to 6.87%.
In 2001, the Company granted 20,600 shares of restricted stock. The
restricted stock was granted to key employees of the Company and vests
100% on the fifth anniversary of the date of grant. The restricted
shares were granted at price ranges of $27.01 to $30.15 per share.
Total compensation cost recorded for the year ended December 31, 2001
for the restricted share grants was $95,600.
10 SEGMENT REPORTING
The Company is engaged in the ownership and management of market rate
apartment communities. Each apartment community is considered a
separate operating segment. Each segment on a stand alone basis is less
than 10% of the revenues, profit or loss, and assets of the combined
reported operating segments. The operating segments are aggregated and
segregated as Core and Non-core properties.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10 SEGMENT REPORTING (Continued)
Non-segment revenue to reconcile total revenue consists of
unconsolidated management and development fees and interest income.
Non-segment assets to reconcile to total assets include cash and cash
equivalents, cash in escrows, accounts receivable, prepaid expenses,
investments in and advances to affiliates, deferred charges and other
assets.
Core properties consist of all apartment communities which have been
owned more than one full calendar year. Therefore, the Core Properties
represent communities owned as of January 1, 2000. Non-core properties
consist of apartment communities acquired during 2000 and 2001, such
that full year comparable operating results are not available.
The accounting policies of the segments are the same as those described
in Notes 1 and 2.
The Company assesses and measures segment operating results based on a
performance measure referred to as Funds from Operations ("FFO"). FFO
is generally defined as net income (loss), before gains (losses) from
the sale of property and business, extraordinary items, plus real
estate depreciation including adjustments for unconsolidated
partnerships and joint ventures. For the year ended December 31, 1999,
the Company's previously reported FFO excluded a non-recurring loss on
available-for-sale securities of $2,123 and a non-recurring acquisition
expense of $6,225. FFO is not a measure of operating results or cash
flows from operating activities as measured by generally accepted
accounting principles and it is not indicative of cash available to
fund cash needs and should not be considered an alternative to cash
flows as a measure of liquidity. Other companies may calculate
similarly titled performance measures in a different manner.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10 SEGMENT REPORTING (Continued)
The revenues, profit (loss), and assets for each of the reportable
segments are summarized as follows for the years ended December 31,
2001, 2000 and 1999.
2001 2000 1999
---- ---- ----
REVENUES
Apartments owned
Core properties $ 271,585 $ 255,294 $ 217,913
Non-core properties 83,152 47,645 -
Reconciling items 5,290 8,799 9,994
------------ ------------ ------------
Total Revenue $ 360,027 $ 311,738 $ 227,907
========= ========= =========
PROFIT (LOSS)
Funds from operations:
Apartments owned
Core properties $ 161,899 $ 150,141 $ 125,538
Non-core properties 50,563 27,945 -
Reconciling items 5,284 8,791 9,994
-------- ------------- --------
Segment contribution to FFO 217,746 186,877 135,532
General & administrative expenses ( 18,614) ( 13,235) ( 10,696)
Interest expense ( 65,742) ( 56,150) ( 39,056)
Depreciation of unconsolidated affiliates 338 383 458
Non-real estate depreciation/amortization ( 639) ( 516) ( 335)
Income from discontinued operations before
minority interest and depreciation 3,515 3,495 3,229
--------- --------- -------
Funds from Operations 136,604 120,854 89,132
Depreciation - apartments owned ( 64,251) ( 51,914) ( 37,015)
Depreciation of unconsolidated affiliates ( 338) ( 383) ( 458)
Non-recurring acquisition expense - - ( 6,225)
Loss on available-for-sale securities - - ( 2,123)
Gain (loss) on disposition of properties and
business 26,241 ( 1,386) 457
Minority interest in earnings ( 32,844) ( 24,819) ( 16,570)
Income from discontinued operations before
minority interest ( 2,004) ( 2,102) ( 2,018)
----------- ----------- -----------
Income from continuing operations $ 63,408 $ 40,250 $ 25,180
======== ======== ========
ASSETS
Apartments owned
Core properties $1,351,724 $1,316,695
Non-core properties 581,790 425,250
Reconciling items 130,275 129,943
------------ ------------
Total Assets $2,063,789 $1,871,888
========== ==========
REAL ESTATE CAPITAL EXPENDITURES
New property acquisitions $213,325 $ 328,021
Additions to properties
Core properties 85,001 54,041
Non-core properties 45,467 38,562
Increase in real estate associated with the
purchase of UPREIT Units 1,666 -
---------- -------------
Total Real Estate Capital Expenditures $345,459 $ 420,624
======== ==========
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11 DERIVATIVE FINANCIAL INSTRUMENTS
The Company has entered into interest rate swaps to minimize
significant unplanned fluctuations in earnings that are caused by
interest rate volatility. The Company does not utilize these
arrangements for trading or speculative purposes. The principal risk to
the Company through its interest rate hedging strategy is the potential
inability of the financial institutions from which the interest rate
protection was purchased to cover all of their obligations. To mitigate
this exposure, the Company purchases its interest rate swaps from
either the institution that holds the debt or from institutions with a
minimum A- credit rating.
All derivatives, which have historically been limited to interest rates
swaps designated as cash flow hedges, are recognized on the balance
sheet at their fair value. On the date that the Company enters into an
interest rate swap, it designates the derivative as a hedge of the
variability of cash flows that are to be received or paid in connection
with a recognized liability. To the extent effective, subsequent
changes in the fair value of a derivative designated as a cash flow
hedge are recorded in other comprehensive income, until earnings are
affected by the variability of cash flows of the hedged transaction.
Any hedge ineffectiveness will be reported in interest expense in the
consolidated statement of operations.
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective
and strategy for undertaking various hedge transactions. The Company
formally assesses (both at the hedge's inception and on an ongoing
basis) whether the derivatives that are used in hedging transactions
have been highly effective in offsetting changes in the cash flows of
the hedged items and whether those derivatives may be expected to
remain highly effective in future periods. Should it be determined that
a derivative is not (or has ceased to be) highly effective as a hedge,
the Company will discontinue hedge accounting prospectively.
The Company has four interest rate swaps that effectively convert
variable rate debt to fixed rate debt. The notional amount amortizes in
conjunction with the principal payments of the hedged items. The terms
as follows:
Original
NOTIONAL AMOUNT FIXED INTEREST RATE VARIABLE INTEREST RATE MATURITY DATE
--------------- ------------------- ---------------------- -------------
$17,600,000 5.91% LIBOR + 1.60% June 24, 2004
$12,000,000 7.66% LIBOR + 1.25% August 1, 2002
$3,000,000 8.22% LIBOR + 1.40% June 25, 2007
$4,625,000 8.40% LIBOR + 1.40% June 25, 2007
On January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 (SFAS 133), Accounting for Derivative
Instruments and Hedging Activities. At that time, the Company
designated all of its interest rate swaps as cash flow hedges in
accordance with the requirements of SFAS 133. The aggregate fair value
of the derivatives on January 1, 2001 was $583, prior to the allocation
of minority interest, and was recorded as a liability on the
consolidated balance sheet with an offset to other comprehensive income
representing the cumulative effect of the transition adjustment
pursuant to the provisions of Accounting Principles Board Opinion No.
20, Accounting Changes.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11 DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
As of December 31, 2001, the aggregate fair value of the Company's
interest rate swaps was $920, prior to the allocation of minority
interest, and is included in accrued expenses and other liabilities in
the consolidated balance sheets. For the twelve months ending December
31, 2001, as the critical terms of the interest rate swaps and the
hedged items are the same, no ineffectiveness was recorded in the
consolidated statements of operations. All components of the interest
rate swaps were included in the assessment of hedge effectiveness. The
Company expects that within the next twelve months it will reclassify
as a charge to earnings $838, prior to the allocation of minority
interest, of the amount recorded in accumulated other comprehensive
loss. The fair value of the interest rate swaps is based upon the
estimate of amounts the Company would receive or pay to terminate the
contract at the reporting date and is estimated using interest rate
market pricing models.
12 TRANSACTIONS WITH AFFILIATES
The Company and the Management Companies recognized management and
development fee revenue, interest income and other miscellaneous income
from affiliated entities of $8,174, $15,088, and $15,199 for the years
ended December 31, 2001, 2000 and 1999, respectively. The Company had
accounts receivable outstanding due from affiliated entities of $2,629
and $3,279 at December 31, 2001 and 2000, respectively.
A director and former officer of the Company provided consulting
services to the Company during 2001 for fees approximating $271.
In 1997, certain officers and inside directors of the Company entered
into a lease termination agreement with the Company. The agreement
provided for a contingent termination fee based on the performance of
the underlying property. In 2001, amounts of $350 became payable to the
Company under the terms of the agreement. This amount was classified in
Other Property Income in the Consolidated Statement of Operations.
The Company leases its corporate office space from an affiliate. The
lease requires an annual base rent of $663 through December, 2002, $802
for the year ended 2003, and $872 for the year ended 2004. The lease
also requires the Company to pay a pro rata portion of property
improvements, real estate taxes and common area maintenance. Rental
expense was $956, $712, and $698 for the years ended December 31, 2001,
2000 and 1999, respectively.
From time to time, the Company advances funds as needed to the
Management Companies which totaled $15,954 and $19,534 at December 31,
2001 and 2000, respectively, and bear interest at 1% over prime.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13 COMMITMENTS AND CONTINGENCIES
Ground Lease
The Company has a non-cancelable operating ground lease for one of its
properties. The lease expires May 1, 2020, with options to extend the
term of the lease for two successive terms of twenty-five years each.
The lease provides for contingent rental payments based on certain
variable factors. The lease also requires the lessee to pay real estate
taxes, insurance and certain other operating expenses applicable to the
leased property. Ground lease expense was $211, $201, and $194
including contingent rents of $141, $131, and $124 for the years ended
December 31, 2001, 2000 and 1999, respectively. At December 31, 2001,
future minimum rental payments required under the lease are $70 per
year until the lease expires.
401(K) Savings Plan
The Company sponsors a contributory savings plan. Under the plan, the
Company will match 75% of the first 4% of participant contributions.
The matching expense under this plan was $893, $512, and $398 for the
years ended December 31, 2001, 2000 and 1999, respectively.
Incentive Compensation Plan
The Incentive Compensation Plan provides that eligible officers and key
employees may earn a cash bonus based on increases in FFO per
share/unit (computed based on the diluted shares/units outstanding). No
cash bonuses are payable under the Incentive Compensation Plan unless
the increase in FFO per share, after giving effect to the bonuses, was
equal to or greater than 5%. The Board of Directors used its
discretionary authority to approve a bonus for 2001 even though FFO
growth per share was less than 5%. The bonus expense charged to
operations (including that portion allocated to the Management
Companies) was $725, $103, and $2,190 for the years ended December 31,
2001, 2000 and 1999, respectively.
Contingencies
The Company is party to certain legal proceedings. All such
proceedings, taken together, are not expected to have a material
adverse effect on the Company. The Company is also subject to a variety
of legal actions for personal injury or property damage arising in the
ordinary course of its business, most of which are covered by liability
insurance. While the resolution of these matters cannot be predicted
with certainty, management believes that the final outcome of such
legal proceedings and claims will not have a material adverse effect on
the Company's liquidity, financial position or results of operations.
The Company has recently undergone a state tax audit. The state has
assessed taxes of $469 for the 1998 and 1999 tax years under audit. If
the state's position is applied to all tax years through December 31,
2001, the assessment would be $1,800 . The Company believes the
assessment and the state's underlying position is not supportable by
the law nor consistent with previously provided interpretative guidance
from the office of the State Secretary of Revenue. The Company has been
advised that it has meritorious positions for its previous tax filings.
As a result, no amounts were accrued by the Company as of December 31,
2001.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13 COMMITMENTS AND CONTINGENCIES (Continued)
Contingencies
In connection with various UPREIT transactions, the Company has agreed
to maintain certain levels of nonrecourse debt associated with the
contributed properties acquired. In addition, the Company is restricted
in its ability to sell certain contributed properties (59% of the owned
portfolio) for a period of time except through a tax deferred Internal
Revenue Code Section 1031 like-kind exchange.
Debt Covenants
The line of credit loan agreement contain restrictions which, among
other things, require maintenance of certain financial ratios and limit
the payment of dividends.
Guarantees
The Company has guaranteed a total of $606 of debt associated with two
entities where the Company is the general partner. All other mortgage
notes payable of affiliates are non-recourse debt to the limited
partnerships and the Company. In addition, the Company has guaranteed
the Low Income Housing Tax Credits to limited partners in 42
partnerships totaling approximately $48,500. As of December 31, 2001,
there were no known conditions that would make such payments necessary.
In addition, the Company, acting as general partner in certain
partnerships, is obligated to advance funds to meet partnership
operating deficits.
Executive Retention Plan
Effective February 2, 1999, the Executive Retention Plan provides for
severance benefits and other compensation to be received by certain
employees in the event of a change in control of the Company and a
subsequent termination of their employment without cause or voluntarily
with good cause.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
14 PROPERTY ACQUISITIONS
For the years ended December 31, 2001, 2000 and 1999, the Company has
acquired the communities listed below:
Cost of
Market Date Year Number Cost of Acquisition
COMMUNITY AREA ACQUIRED CONSTRUCTED OF UNITS ACQUIS. PER UNIT
--------- ---- -------- ----------- -------- ------- --------
The Manor Northern VA 02/19/99 1973 198 $ 7,119 $ 36
Ridgeway Court Philadelphia 02/26/99 1972 66 $ 2,156 $ 33
Springwells Park Detroit 04/08/99 1940-66 303 $ 18,355 $ 61
Sherwood Gardens Philadelphia 05/27/99 1968 103 $ 4,198 $ 41
7 Property Portfolio Various 07/01/99 1959-82 3,722 $176,607 $ 47
Maple Lane South Bend 07/09/99 1982-89 396 $ 17,542 $ 44
12 Property Portfolio Mid-Atlantic 07/15/99 1964-96 3,297 $154,168 $ 47
4 Property Portfolio Philadelphia 07/28/99 1962-68 825 $ 32,534 $ 39
The Colony Chicago 09/01/99 1972-78 783 $ 41,887 $ 53
The Lakes Detroit 11/05/99 1986 434 $ 25,907 $ 60
Old Friends Baltimore 02/01/00 1887 51 $ 2,138 $ 39
6 Property Portfolio Philadelphia 03/15/00 1940-75 2,113 $141,195 $ 64
2 Property Portfolio Detroit 03/22/00 1969-74 360 $ 14,394 $ 40
Elmwood Terrace Baltimore 06/30/00 1972 504 $ 20,605 $ 41
East Meadow Northern VA 08/01/00 1971 150 $ 13,053 $ 87
Southbay Manor Long Island 09/11/00 1959 61 $ 3,054 $ 49
Hampton Court Detroit 09/29/00 1972 182 $ 5,889 $ 33
Bayberry Detroit 09/29/00 1967 120 $ 5,840 $ 47
Blackhawk Chicago 10/20/00 1971 371 $ 17,542 $ 47
5 Property Portfolio Long Island 11/01/00 1955-75 429 $ 26,968 $ 62
Orleans Village Northern VA 11/16/00 1967 851 $ 67,404 $ 79
Cypress Place Chicago 12/27/00 1969 192 $ 10,075 $ 53
Woodholme Manor Baltimore 03/30/01 1969 176 $ 5,805 $ 33
Virginia Village Northern VA 05/31/01 1967 344 $ 27,044 $ 79
Mill Towne Village Baltimore 05/31/01 1973 384 $ 17,558 $ 46
Southern Meadows Long Island 06/29/01 1971 452 $ 40,866 $ 90
Devonshire Hills Long Island 07/16/01 1968 297 $ 47,049 $158
Fenland Field Baltimore 08/01/01 1970 234 $ 14,540 $ 62
Courtyard Village Chicago 08/29/01 1971 224 $ 12,887 $ 58
Manor Baltimore 08/31/01 1969 435 $ 36,384 $ 84
2 Property Portfolio Northern VA 10/24/01 1971-72 274 $ 11,076 $ 40
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
15 DISCONTINUED OPERATIONS
The Company adopted the provisions of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" effective January 1, 2002.
This standard addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. It also retains the basic
provisions for presenting discontinued operations in the income
statement but broadened the scope to include a component of an entity
rather than a segment of a business. Pursuant to the definition of a
component of an entity in the SFAS, assuming no significant continuing
involvement, the sale of an apartment community is now considered a
discontinued operation. In addition, apartment communities classified
as held for sale are also considered a discontinued operation. The
Company generally considers assets to be held for sale when all
significant contingencies surrounding the closing have been resolved,
which often corresponds with the actual closing date. Properties
classified in this manner through June 30, 2002, as discussed below,
were reclassified as such in the accompanying Consolidated Statements
of Operations for each of the three years ended December 31, 2001.
Included in discontinued operations for the year ended December 31,
2001, 2000 and 1999 are the operating results, net of minority
interest, of ten apartment communities that were sold during 2002. For
purposes of the discontinued operations presentation, the Company only
includes interest expense associated with specific mortgage
indebtedness of the properties that are sold or classified as held for
sale.
The operating results of discontinued operations are summarized as
follows for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999
----- ------ -----
Revenues:
Rental Income $7,261 $7,082 $6,396
Property other income 235 228 160
------ ------- ------
Total Revenues 7,496 7,310 6,556
Operating and Maintenance 3,277 3,173 2,825
Interest expense 704 642 502
Depreciation and amortization 1,511 1,393 1,211
----- ------- ------
Total Expenses 5,492 5,208 4,538
Income from discontinued operations before
minority interest 2,004 2,102 2,018
Minority interest 838 896 820
----- ------- ------
Income from discontinued operations $1,166 $1,206 $1,198
===== ======= ======
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
16 PROFORMA CONDENSED FINANCIAL INFORMATION
The Company acquired ten apartment communities ("2001 Acquired
Communities") with 2,820 units in nine unrelated transactions during
the twelve-month period ended December 31, 2001. The total purchase
price (including closing costs) of $212 million equates to
approximately $76,000 per unit. Consideration for the communities
included $68 million of assumed debt, $19 million of UPREIT Units, and
$126 million of cash.
In addition, the Company disposed of fourteen apartment communities
("2001 Disposed Properties") with 2,855 units in six unrelated
transactions during the twelve-month period ended December 31, 2001.
The total selling price (including closing costs) of $122 million
resulted in $26 million of gain on sale of real estate.
The following unaudited proforma information was prepared as if (i) the
2001 transactions related to the acquisition of the "2001 Acquired
Communities" had occurred on January 1, 2000, (ii) the 2000
transactions related to the acquisitions of 22 apartment communities in
twelve separate transactions had occurred on January 1, 1999, (iii) the
1999 transactions related to the acquisition of 30 apartment
communities in ten transactions had occurred on January 1, 1999, (iv)
the disposition of the "2001 Disposed Properties" had occurred on
January 1, 2000, and (v) the $115 million Series B, C, D and E
Preferred stock offerings had occurred on January 1, 1999. The proforma
financial information is presented for informational purposes only and
may not be indicative of what actual results of operations would have
been had if the transactions been consummated as indicated, nor does it
purport to represent the results of operations for future periods.
Adjustments to the proforma condensed combined statement of operations
for the twelve months ended December 31, 2001 and 2000, consist
principally of providing for the net operating activity and recording
interest, depreciation and amortization from January 1, 1999 to the
acquisition date.
For the years ended
December 31,
(unaudited)
2001 2000 1999
---- ---- ----
Pro forma revenues ............................................ $ 370,900 $ 351,868 $ 283,036
Pro forma income from continuing operations ................... 62,081 61,084 31,717
Pro forma income from discontinued operations ................. 1,166 1,206 1,198
Pro forma income from extraordinary item ...................... ( 67) -- ( 101)
Pro forma net income available to common shareholders ......... 45,566 44,301 31,662
Basic earnings per share data:
Income from continuing operations .......................... $ 2.01 $ 2.09 $ 1.64
Discontinued operations .................................... .05 .06 .06
Extraordinary item ......................................... -- -- ( .01)
---------- --------- -----------
Net income available to common shareholders ................... $ 2.06 $ 2.15 $ 1.69
=========== ========= ===========
Diluted earnings per share data:
Income from continuing operations .......................... $ 2.00 $ 2.07 $ 1.63
Discontinued operations .................................... .05 .06 .06
Extraordinary item ......................................... -- -- ( .01)
--------- ----------- -----------
Net income available to common shareholders ................... $ 2.05 $ 2.13 $ 1.68
========= =========== ===========
Weighted average numbers of shares outstanding:
Basic ....................................................... 22,101,027 20,639,241 18,697,731
Diluted ..................................................... 22,227,521 20,755,721 18,800,907
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
17 SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental cash flow information including non cash financing and
investing activities for the years ended December 31, 2001, 2000 and
1999 are as follows:
2001 2000 1999
---- ---- ----
Cash paid for interest $65,268 $54,829 $36,967
Mortgage loans assumed associated with property acquisitions 67,807 162,967 203,326
Issuance of UPREIT Units associated with property and other
acquisitions 19,133 58,616 149,488
Notes issued in exchange for officer and director stock
purchases 1,965 - -
Exchange of UPREIT Units for common/preferred shares 1,910 7,388 36,771
Fair value of hedge instruments 920 - -
Transfer of notes receivable due from affiliates in exchange
for additional equity in affiliates 23,699 - -
18 GAIN (LOSS) ON DISPOSITION OF PROPERTY AND BUSINESS
During 2001, the Company disposed of fourteen apartment communities
with 2,855 units in six unrelated transactions and two general
partnership interests. The total sales price of $122 million equates to
$43,000 per unit. The total gain on sale of these transactions amounted
to approximately $26 million.
During 2000, the Company disposed of one apartment community with 150
units and one general partnership interest, in two separate
transactions for a total loss on disposition of $462. In addition,
effective December 31, 2000, the Company sold its affordable housing
development business to the management of that business. The selling
price was approximately $6.7 million and a loss on sale of $924 was
recorded.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
19 QUARTERLY FINANCIAL STATEMENT INFORMATION (UNAUDITED)
Quarterly financial information for the years ended December 31, 2001
and 2000 are as follows:
2001
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
Revenues .............................................................. $ 86,391 $ 88,285 $ 92,544 $ 92,807
Income before minority interest, discontinued
operations and extraordinary item .................................. 11,597 31,712 29,588 23,355
Minority interest ..................................................... 2,978 11,397 10,593 7,876
-------- -------- -------- --------
Income from continuing operations ..................................... 8,619 20,315 18,995 15,479
Discontinued operations, net of minority .............................. 213 303 300 350
-------- -------- -------- --------
interest
Income before extraordinary item ...................................... 8,832 20,618 19,295 15,829
Extraordinary item, net of minority interest .......................... -- -- -- (68)
Net income available to common
shareholders ........................................................ 4,335 16,121 14,797 11,572
Basic earnings per common share:
Income from continuing operations ................................... .19 .73 .66 .49
Discontinued operations ............................................. .01 .01 .01 .02
Extraordinary item .................................................. N/A N/A N/A N/A
Net income .......................................................... .20 .74 .67 .51
Diluted earnings per common share:
Income from continuing operations ................................... .19 .70 .65 .48
Discontinued operations ............................................. .01 .01 .01 .02
Extraordinary item .................................................. N/A N/A N/A N/A
Net income .......................................................... .20 .71 .66 .50
2000
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
Revenues .............................................................. $ 70,587 $ 76,319 $ 80,176 $ 84,656
Income before minority interest, discontinued
operations and extraordinary item ................................... 13,111 16,291 19,402 17,696
Minority interest ..................................................... 4,939 6,115 7,399 6,366
-------- -------- -------- --------
Income from continuing operations ..................................... 8,172 10,176 12,003 11,330
Discontinued operations, net of minority .............................. 310 379 342 175
-------- -------- -------- --------
interest
Income before extraordinary item ...................................... 8,482 10,555 12,345 11,505
Extraordinary item, net of minority interest .......................... -- -- -- --
Net income available to common
shareholders ........................................................ 6,554 7,559 8,555 6,610
Basic earnings per common share:
Income from continuing operations ................................... .31 .35 .39 .30
Discontinued operations ............................................. .02 .02 .02 .01
Extraordinary item .................................................. N/A N/A N/A N/A
Net income .......................................................... .33 .37 .41 .31
Diluted earnings per common share:
Income from continuing operations ................................... .31 .35 .39 .30
Discontinued operations ............................................. .02 .02 .01 .01
Extraordinary item .................................................. N/A N/A N/A N/A
Net income .......................................................... .33 .37 .40 .31
Full year per share data does not equal the sum of the quarterly data
due to the impact of the convertible securities on the quarterly
results and not the year to date amounts.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
20 SUBSEQUENT EVENT
On January 24, 2002, the Company sold six apartment communities with
339 units in two unrelated transactions. The total sales price of $13.6
million equates to $41,000 per unit. Total gain on sale of this
transaction is expected to be approximately $0.5 million and will be
recorded in the first quarter of 2002.
21 EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT ACCOUNTANTS
REPORT
In relation to the state tax contingency discussed in Note 13, the
Company filed an appeal during the second quarter of 2002 to the State
for the 1998 and 1999 tax years. If the state's position is applied to
all tax years through June 30, 2002, the assessment would be $1.4
million. The Company believes that the assessment and the state's
underlying position for the tax periods 1998 through 2000 are neither
supportable by the law nor consistent with previously filed
interpretative guidance from the office of the State Secretary of
Revenue. There have been no further proceedings to date and the Company
intends to vigorously contest the assessments. The Company has been
advised that it has meritorious positions for its previous tax filings
for the years 1998, 1999, and 2000. However, the Company has accrued
approximately $590,000 as of June 30, 2002 for estimated costs
associated with this matter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: October 22, 2002 HOME PROPERTIES OF NEW YORK, INC.
(Registrant)
By: /s/ David P. Gardner
---------------------------------------
David P. Gardner, Senior Vice President
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14 PROMULGATED BY
THE SECURITIES AND EXCHANGE COMMISSION
(Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)
I, Norman Leenhouts, certify that:
1. I have reviewed the certain amended sections of the annual report for the
year ended December 31, 2001 of Home Properties of New York, Inc. on this
Form 8-K of Home Properties of New York, 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 quarterly 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 quarterly
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 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.
By: /s/ Norman Leenhouts
-------------------------------
Norman Leenhouts
Chairman of the Board of Directors and
Co-Chief Executive Officer
October 22, 2002
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14 PROMULGATED BY
THE SECURITIES AND EXCHANGE COMMISSION
(Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)
I, Nelson Leenhouts, certify that:
1. I have reviewed the certain amended sections of the annual report for the
year ended December 31, 2001 of Home Properties of New York, Inc. on this
Form 8-K of Home Properties of New York, 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 quarterly 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 quarterly
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 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.
By: /s/ Nelson Leenhouts
---------------------------
Nelson Leenhouts
Chairman of the Board of Directors and
Co-Chief Executive Officer
October 22, 2002
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14 PROMULGATED BY
THE SECURITIES AND EXCHANGE COMMISSION
(Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)
I, David P. Gardner, certify that:
1. I have reviewed the certain amended sections of the annual report for the
year ended December 31, 2001 of Home Properties of New York, Inc. on this
Form 8-K of Home Properties of New York, 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 quarterly 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 quarterly
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 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.
By: /s/ David P. Gardner
---------------------------
David P. Gardner
Senior Vice President and
Chief Financial Officer
October 22, 2002