ITEM 1. BUSINESS
GENERAL
The Registrant, The Town and Country Trust (the "Trust" and, together with its consolidated subsidiaries and other controlled entities, the "Company"), is a self administered and self managed real estate investment trust ("REIT"), organized in Maryland in 1993. The Company operates in one industry segment, the ownership and operation of multifamily apartment communities. The Trust conducts substantially all of its operations through its operating
partnership, The TC Operating Limited Partnership (the "Operating Partnership"), in which it holds an 87% general partnership interest. The remaining 13% limited partnership interest in the Operating Partnership was retained by certain of the indirect predecessor owners of the Company's original 26 properties, including Messrs. Alfred Lerner, the Trust's former Chairman, and Harvey Schulweis, the Trust's Chairman of the Board, President and Chief Executive Officer. At December 31, 2002, the Company owned 42 apartment communities (the "Properties") with 15,237apartment units located in selected markets in the Mid-Atlantic and Southeast regions of the United States.
The Company's headquarters are located at 100 South Charles Street, Suite 1700, Baltimore Maryland 21201 and its telephone number is (410) 539-7600. As of March 19, 2003, the Company had 471 employees.
The Company's objective is to continue to be a significant owner of middle-income apartment communities in select markets in the Mid-Atlantic and Southeast regions of the United States. The Company seeks to own and operate apartment communities in markets that it believes will achieve acceptable population and employment growth and in other markets it considers to have high barriers to entry. At December 31, 2002, approximately 45% of the Company's apartments were located in the greater Baltimore metropolitan area and an additional 20% were located in the greater Washington, D.C. metropolitan area. The Company seeks to acquire additional apartment communities in its operating region, particularly in the greater Washington, D.C. and Baltimore metropolitan areas, and in Florida.
While the Company pursued a number of acquisitions in its target markets during 2002, no such acquisitions were made as the low interest rate environment coupled with competition from other multifamily investors drove prices to levels that, generally, the Company found unacceptable. The Company continues to seek new investment opportunities that meet its investment criteria. While the Company prefers investments within its operating region, it also will consider acquisitions beyond its existing markets if, among other things, they are large enough to support the overhead associated with establishing and maintaining dedicated regional and/or district offices. The Company prefers acquisitions that represent value added opportunities for upgrading and repositioning in markets with long term stability, reasonably high barriers to entry and the potential for establishing a meaningful ownership position over time. (See "Recent Developments".)
The Company continues to implement the ongoing program of reinvesting significant capital in its existing portfolio. During 2002, the Company began renovations to two of its communities containing 1,686 units in the Baltimore metropolitan area. The renovations include the installation of new kitchens and baths, washers and dryers, new entranceways and windows. In addition, at one of these communities a new clubhouse is being constructed. Renovations at 243 units were completed during 2002 and more than 550 units are expected to be completed during 2003.
PROPERTY MANAGEMENT
Each of the apartment communities is managed by the Operating Partnership. The management staff for each community includes on-site management and maintenance personnel as well as off-site support staff. On-site staff performs leasing and rent collection functions and coordinates maintenance and resident services. Property management staff are supervised by district managers and regional managers.
COMPETITION
All of the Company's apartments are located in developed areas and compete with numerous other apartment communities within their respective sub-markets. In many of the Company's apartment markets, the competition for residents is intense. Some competing communities are larger or newer than the Company's apartments and many offer features that the Company's communities do not have. The competitive position of each of the Company's apartment communities varies. Certain of the Company's competitors may have greater financial resources and other competitive advantages over the Company.
FINANCING
In 1997, the Company entered into an agreement that provides a $375 million collateralized financing facility. In June 2000, the facility was increased to $382.2 million and, in April 2002, the facility was further increased to $439 million. The additional amounts available under the facility have been and are expected to be used to fund the Company's continuing program of apartment renovations and improvements, to make additional apartment acquisitions and for working capital purposes. Total outstanding borrowings under the facility as of December 31, 2002 and March 28, 2003 were $415.2 million. Of this amount, $300 million matures in 2008 and bears interest at 6.91%, fixed. The remaining $115.2 million is outstanding at a variable rate maturing in 2008 and can be converted to a fixed-rate term loan at the Company's option. As more fully discussed below, $40 million of this variable rate debt has been "swapped" to a fixed rate through March 2007.
The Company has a $50 million bank line of credit. Advances under the line bear interest at 120 basis points over LIBOR and are due on demand. Up to $10 million of the line may be used for working capital purposes and $40 million may be used to fund acquisitions. In October 2002, the Company renewed this line of credit through October 2003 and at the Company's option the line may be extended through October 2004. As of December 31, 2002, $16,250,000 was outstanding under the line.
The Company uses interest rate protection agreements to reduce the potential impact of increases in interest rates as required by the loan agreement covering its secured credit facility. On April 26, 2002 the Company replaced an existing $75 million interest rate protection agreement with a new $139 million interest rate protection agreement capping the Company's exposure to LIBOR at 9.35% through March 2007. Subsequently, the Company executed two $20 million floating to fixed interest rate swaps to effectively fix the interest rate on $40 million of floating rate debt under the secured facility at a blended rate of approximately 4.57%. The Company simultaneously sold two $20 million interest rate caps, capping the Company's exposure to LIBOR at 9.35%. These interest rate protection agreements hedge interest payments consistent with the Company's risk management objective and strategy to reduce exposure to variability in cash flows attributable to increases in LIBOR.
ENVIRONMENTAL MATTERS
Under various Federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real estate may be liable for costs of removal or remediation of certain hazardous or toxic substances on, under or in such property. Such enactments often impose liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of such substances, or the failure to properly remediate such substances, may affect adversely the owner's ability to sell or rent such property or to borrow using such property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances also may be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not such facility is owned or operated by such person. Certain environmental laws impose liability for release of asbestos-containing materials ("ACMs") into the air and third parties may seek recovery from owners or operators of real property for personal injury associated with ACMs. In connection with its ownership and operation of the Properties, the Trust, the Operating Partnership, or any of their respective direct or indirect subsidiaries, as the case may be, potentially may be liable for such costs.
All of the Properties have been subjected to a Phase I or similar environmental assessment which generally does not involve invasive techniques such as soil or ground water sampling. These assessments have not revealed any environmental conditions that the Company believes will have a material adverse effect on its business, assets, financial condition or results of operations, nor is the Company aware of any material environmental liability.
RECENT DEVELOPMENTS
In late March 2003, the Company contracted to acquire two contiguous apartment communities containing a total of 405 apartments in the Baltimore, Maryland metropolitan area for approximately $63 million. Closing is scheduled for April 30, 2003. The communities are being acquired in a transaction structured as a "reverse exchange" under the applicable provisions of the Federal income tax laws. It is anticipated that the Company will dispose of certain of it's properties during 2003 in order to complete the exchange. Initially, the Company expects to fund the acquisition using its existing credit facilities.
EMPLOYEES
As of December 31, 2002, the Company had 471 employees.
ITEM 2.
ITEM 2. PROPERTIES.
The Properties consist of 42 multifamily properties comprising 15,237 apartment units located in suburban Baltimore, Maryland; suburban Washington, D.C. and northern Virginia; southeastern Pennsylvania; Delaware; Charlotte, North Carolina; and Florida.
The average occupancy rate for all Properties for fiscal 2002 and fiscal 2001 was 93.4% and 94.2%, respectively. Tenant leases are generally for one-year terms, with automatic two-month
renewals after the completion of the first year, and often require security deposits. Approximately 96% of the apartments in the Properties are one-bedroom and two-bedroom apartments. The balance are three-bedroom apartments. The Properties typically consist of two- and three-story buildings in a landscaped setting, many with amenities such as swimming pools, tennis courts, playgrounds and community buildings. All apartments offer air conditioning. The majority of such buildings are of brick construction and all of the Properties are located in mature, fully-developed neighborhoods.
The following table presents certain additional information concerning the Properties:
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(1) Represents total square footage of apartment units at each Property.
(2) Average occupancy is defined as market rent less vacancy allowance divided by market rent for the period, expressed as a percentage.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There were no legal proceedings pending at December 31, 2002 or as of the date of this report to which the Registrant, the Operating Partnership or any of the 42 general partnerships which own the Properties is a party or to which the Properties are subject that are likely to have a material adverse impact on the Registrant's operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
The age (as of March 28, 2003), business experience during the past five years and offices presently held by Harvey Schulweis are set forth under the caption "Election of Trustees" in the Registrant's Proxy Statement dated March 28, 2003, previously filed with the Commission (Exhibit 99), which information is incorporated herein by reference. Such information in respect of each of the Registrant's Executive Officers who are not Trustees is reported below. The Registrant's Bylaws provide that officers shall hold office until their successors are elected and qualified.
Thomas Brodie: Age 40. Mr. Brodie has served as Executive Vice President--Co-Chief Operating Officer of the Registrant since February 2003. Prior thereto, he served as Senior Vice President and Chief Investment Officer of the Registrant since May 2001. Mr. Brodie also has served as Managing Director of Schulweis Realty, Inc., a private real estate investment and development firm, since 1991. Prior to 1991, Mr. Brodie was a Senior Vice President of Lazard Realty, Inc. Mr. Brodie received his masters degree in business administration from Columbia University and his undergraduate degree from the Wharton School at the University of Pennsylvania.
James Dolphin: Age 53. Mr. Dolphin has served as Executive Vice President--Co-Chief Operating Officer and Assistant Secretary of the Registrant since February 2003. Prior thereto,
he served as Senior Vice President, Chief Financial Officer of the Registrant since May 2001. During 1999 and 2000, Mr. Dolphin pursued personal business interests. Previously, he served as a director, Executive Vice President and Chief Financial Officer of United Dominion Realty Trust, Inc., Richmond, Virginia.
Gerald Haak: Age 49. Mr. Haak has served as Senior Vice President--Property Operations of the Registrant since March 2001. Prior thereto, he served as Senior Vice President/Regional Manager of the Registrant since 1991 and Vice President of the Registrant since 1982. Mr. Haak holds the CPM designation (Certified Property Manager) from the Institute of Real Estate Management, is on the Board of Directors of the National Multi-Housing Council, and is a Real Estate Associate Broker in Pennsylvania. Mr. Haak received his masters degree in business administration from Loyola College, in Baltimore, Maryland.
Alan W. Lasker: Age 56. Mr. Lasker has served as Senior Vice President--Finance, Chief Financial Officer and Assistant Secretary of the Registrant since February 2003. Prior thereto, he served as Senior Vice President--Finance of the Registrant since February 2000 and Vice President--Finance of the Registrant since July 1997. Mr. Lasker also has served as Senior Vice President of Schulweis Realty, Inc., a private real estate investment and development firm, since 1991. Prior to 1991, Mr. Lasker was a Senior Vice President of Lazard Realty, Inc. Mr. Lasker is a Certified Public Accountant.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES OF BENEFICIAL INTEREST AND RELATED SHAREHOLDER MATTERS
Information in response to this Item is set forth on the inside back cover of the Registrant's 2002 Annual Report to Shareholders (Exhibit 13), which information is incorporated herein by reference.
The Registrant makes available free of charge, through its website (www.tctrust.com), its reports on Form 10-K, 10-Q and 8-K as soon as practicable after such material is electronically filed with the Securities and Exchange Commission.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information concerning the Amended and Restated 1993 Long Term Incentive Plan and the 1997 Long Term Incentive Plan, both of which have been approved by the shareholders of the Trust. The figures shown are for the year ended December 31, 2002. The awards that were awarded in February 2003 are not included in the table below.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Information in response to this item is set forth on page 10 of the Registrant's 2002 Annual Report to Shareholders (Exhibit 13), which information is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information in response to this Item is set forth on pages 10 through 14 of the Registrant's 2002 Annual Report to Shareholders (Exhibit 13), which information is incorporated herein by reference.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information in response to this Item is set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" beginning on page 10 of the Registrant's 2002 Annual Report to Shareholders (Exhibit 13), which information is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) FINANCIAL STATEMENTS
The financial statements, together with the report thereon of Ernst & Young LLP dated January 24, 2003, appearing on page 28 of the Registrant's 2002 Annual Report to Shareholders (Exhibit 13), are incorporated herein by reference.
(b) SUPPLEMENTARY DATA
Information in response to this Item is set forth in the financial statement schedules appearing on pages through of this Form 10-K.
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Registrant's Trustees is set forth under the captions "Election of Trustees" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Registrant's Proxy Statement dated March 28, 2003, previously filed with the Commission (Exhibit 99), which information is incorporated herein by reference. The information required by this Item in respect of the Registrant's Executive Officers who are not Trustees is set forth in Item 4 of this Form 10-K and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this Item is set forth under the caption "Compensation of Executive Officers" in the Registrant's Proxy Statement dated March 28, 2003, previously filed with the Commission (Exhibit 99), which information is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to this Item is set forth under the caption "Ownership of Common Shares of Beneficial Interest" in the Registrant's Proxy Statement dated March 28, 2003, previously filed with the Commission (Exhibit 99), which information is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this Item is set forth under the caption "Election of Trustees-Certain Related Transactions; Compensation Committee Interlocks and Insider Participation" in the Registrant's Proxy Statement dated March 28, 2003, previously filed with the Commission (Exhibit 99), which information is incorporated herein by reference.
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES
As of December 31, 2002, an evaluation was performed under the supervision and with the participation of the Company's management, including the CEO and CFO, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of December 31, 2002. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to December 31, 2002.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
PAGE ---- (1) Financial Statements:
Report of Independent Auditors 28*
Consolidated Balance Sheets of the Registrant at December 31, 2002 and at December 31, 2001 15*
Consolidated Statements of Operations of the Registrant for the years ended December 31, 2002, December 31, 2001 and December 31, 2000 16*
Consolidated Statements of Shareholders' (Deficit) Equity of the Registrant for the years ended December 31, 2002, December 31, 2001 and December 31, 2000 17*
Consolidated Statements of Cash Flows of the Registrant for the years ended December 31, 2002, December 31, 2001 and December 31, 2000 18*
Notes to Consolidated Financial Statements of the Registrant 19*
* Incorporated by reference from the indicated page of the Registrant's 2002 Annual Report to Shareholders. With the exception of this information and the information incorporated in Items 5, 6, 7 and 8, the 2002 Annual Report to Shareholders is not deemed filed as part of this report.
(2) Financial Statement Schedules:
Schedule III--Real Estate and Accumulated Depreciation
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
(3) Exhibits
* Compensation plan or arrangement required to be filed as an exhibit hereto.
(b) Report on Form 8-K
No report on Form 8-K has been filed during the last quarter of the Registrant's fiscal year ended December 31, 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
THE TOWN AND COUNTRY TRUST
By: /s/ Harvey Schulweis ------------------------------------ Harvey Schulweis President
Dated: March 28, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
- ---------------- * Powers of attorney authorizing Harvey Schulweis to sign this annual report on Form 10-K on behalf of certain Trustees of the Registrant are being filed with the Securities and Exchange Commission herewith (Exhibit 24).
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, Harvey Schulweis, certify that:
1. I have reviewed this annual report on Form 10-K of The Town and Country Trust;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and 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 functions):
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 there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ Harvey Schulweis ------------------------------------ Harvey Schulweis Chairman of the Board, President and Chief Executive Officer
CHIEF FINANCIAL OFFICER CERTIFICATION
I, Alan W. Lasker, certify that:
1. I have reviewed this annual report on Form 10-K of The Town and Country Trust;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and 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 functions):
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 there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ Alan W. Lasker ------------------------------------ Alan W. Lasker Senior Vice President - Finance, Chief Financial Officer and Assistant Secretary