SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------- FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-9360 ASSET INVESTORS CORPORATION* (Exact name of registrant as specified in its charter) Delaware 84-1500244 (State or other jurisdiction of (IRS Employer Incorporation or organization) Identification No.) 3410 South Galena Street, Suite 210 80231 Denver, Colorado (Zip Code) (Address of Principal Executive Offices) (303) 614-9400 (Registrant's telephone number, including area code) Not Applicable (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __. As of August 4, 2000, 5,679,469 shares of common stock were outstanding. *The Registrant is changing its corporate name to American Land Lease, Inc. ASSET INVESTORS CORPORATION AND SUBSIDIARIES FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 TABLE OF CONTENTS PAGE PART I. FINANCIAL INFORMATION: Item 1. Condensed Consolidated Financial Statements: Balance Sheets as of June 30, 2000 (unaudited) and December 31, 1999............................................. 1 Statements of Income for the three and six months ended June 30, 2000 and 1999 (unaudited)................................ 2 Statements of Cash Flows for the six months ended June 30, 2000 and 1999 (unaudited)................................ 3 Notes to Financial Statements (unaudited)......................... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................... 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 22 PART II. OTHER INFORMATION: Item 6. Exhibits and Reports on Form 8-K.................................. 23 (i) ASSET INVESTORS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) June 30, December 31, 2000 1999 ---- ---- (unaudited) ASSETS Real estate, net of accumulated depreciation of $9,342 and $7,248 $ 138,655 $ 108,745 Investments in participating mortgages -- 22,475 Cash and cash equivalents 1,198 570 Investment in Commercial Assets 19,053 19,486 Inventory 8,617 -- Other assets, net 6,691 7,817 ------------ ----------- Total Assets $ 174,214 $ 159,093 ============ =========== LIABILITIES Secured long-term notes payable $ 51,997 $ 53,994 Secured short-term financing 15,977 2,610 Accounts payable and accrued liabilities 6,115 3,401 ------------ ----------- 74,089 60,005 ------------ ----------- COMMITMENTS AND CONTINGENCIES -- -- MINORITY INTEREST IN OPERATING PARTNERSHIP 18,077 15,236 STOCKHOLDERS' EQUITY Preferred stock, par value $.01 per share, 15,000 shares authorized; no shares issued or outstanding -- -- Common stock, par value $.01 per share, 35,000 shares authorized; 5,679 and 5,633 shares issued; and 5,649 and 5,603 shares outstanding, respectively 57 56 Additional paid-in capital 239,897 239,381 Notes receivable on common stock purchases (984) (588) Dividends in excess of accumulated earnings (156,472) (154,547) Treasury stock, 30 and 30 shares at cost (450) (450) ------------- ----------- 82,048 83,852 ------------ ----------- Total Liabilities and Stockholders' Equity $ 174,214 $ 159,093 ============ =========== See Notes to Condensed Consolidated Financial Statements. - 1- ASSET INVESTORS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) (unaudited) Three Months Six Months Ended June 30, Ended June 30, --------------------- ----------------------- 2000 1999 2000 1999 -------- -------- --------- --------- Rental property operations Rental and other property revenues $ 4,429 $3,695 $ 8,898 $ 7,253 Income (loss ) on participating mortgages and leases (22) 836 683 1,614 Property operating expenses (1,717) (1,363) (3,426) (2,650) Depreciation (1,240) (924) (2,329) (1,844) --------- ------- --------- --------- Income from rental property operations 1,450 2,244 3,826 4,373 --------- ------- --------- --------- Sales operations Home sales revenues 3,083 -- 5,366 -- Cost of home sales (2,704) -- (4,609) -- Selling and marketing expenses (835) -- (1,623) -- Interest expense allocation (106) -- (212) -- Minority interest in sales operations 147 -- 286 -- --------- ------ --------- --------- Loss from sales operations (415) -- (792) -- ---------- ------ ---------- --------- Service operations Property management income, net 54 50 112 104 Commercial Assets management fees 145 195 286 284 Amortization of management contracts (516) (689) (1,032) (1,378) --------- ------- --------- --------- Loss from service operations (317) (444) (634) (990) --------- ------- --------- --------- Equity in earnings of Commercial Assets 286 265 494 560 General and administrative expenses (445) (446) (882) (784) Interest and other income 466 150 656 203 Interest expense (810) (957) (1,598) (1,898) --------- ------- --------- --------- Income before minority interest in Operating Partnership 215 812 1,070 1,464 Minority interest in Operating Partnership (31) (125) (166) (235) --------- ------- --------- --------- Net income $ 184 $ 687 $ 904 $ 1,229 ========= ======= ========= ========= Basic and diluted earnings per share $ 0.03 $ 0.12 $ 0.16 $ 0.22 ========= ======= ====-==== ========= Weighted average common shares outstanding 5,586 5,567 5,579 5,510 Weighted average common shares and common share equivalents outstanding 5,586 5,573 5,579 5,514 Dividends paid per share $ 0.25 $ 0.25 $ 0.50 $ 0.50 ========= ======= ========= ========= - 2- See Notes to Condensed Consolidated Financial Statements. ASSET INVESTORS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Six Months Ended June 30, ------------------------------ 2000 1999 --------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 904 $ 1,229 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 3,504 3,311 Minority interest in Operating Partnership and sales operations (224) 235 Equity in earnings of Commercial Assets (285) (456) Income from participating mortgages (600) (241) Gain on sale of real estate (109) -- Increase in inventory (199) -- Increase in other assets (510) (750) Increase (decrease) in accounts payable and accrued liabilities 151 37 ------- -------- Net cash provided by operating activities 2,632 3,365 ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of real estate 2,510 -- Purchases of real estate (765) -- Investments in participating mortgages, net -- (2,998) Capital replacements and improvements (2,863) (127) Dividends from Commercial Assets 718 718 --------- -------- Net cash used in investing activities (400) (2,407) ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Payment of Common Stock dividends (2,829) (2,786) Payment of distributions to minority interest in Operating Partnership (522) (500) Proceeds from secured long-term notes payable 103 10,925 Principal paydowns on secured long-term notes payable (6,810) (2,863) Proceeds from secured short-term financing 6,654 -- Principal paydowns on secured short-term financing -- (4,300) Contributions for minority interest in subsidiary 1,782 Collections of notes receivable 18 -- Payment of loan costs -- (386) Proceeds from the issuance of Common Stock, net -- 27 --------- -------- Net cash provided by (used in) financing activities (1,604) 117 ---------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 628 1,075 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 570 1,426 --------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,198 $ 2,501 ========= ======== See Notes to Condensed Consolidated Financial Statements. - 3- ASSET INVESTORS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) A. The Company Asset Investors Corporation ("AIC" and, together with its subsidiaries, the "Company") is a Delaware corporation that owns and operates manufactured home communities and has elected to be taxed as a real estate investment trust ("REIT"). Prior to May 25, 1999, AIC was a Maryland corporation. Effective May 25, 1999, AIC's stockholders approved its reincorporation in Delaware. AIC's common stock, par value $.01 per share ("Common Stock"), is listed on the New York Stock Exchange under the symbol "AIC." In May 1997, AIC contributed its net assets to Asset Investors Operating Partnership, L.P. (the "Operating Partnership") in exchange for the sole general partner interest in the Operating Partnership and substantially all of the Operating Partnership's initial capital. AIC owns 84% of the Operating Partnership as of June 30, 2000. The Company also owns 27% of the common stock of Commercial Assets, Inc. ("Commercial Assets), a publicly-traded REIT (American Stock Exchange, Inc.: CAX) formed by the Company in August 1993. B. Presentation of Financial Statements The Condensed Consolidated Financial Statements of the Company presented herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. These financial statements reflect all adjustments, consisting of only normal recurring accruals, which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of the Company as of June 30, 2000, for the three and six month periods then ended and for all prior periods presented. These statements are condensed and do not include all the information required by generally accepted accounting principles ("GAAP") in a full set of financial statements. These financial statements should be read in conjunction with the Company's Consolidated Financial Statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. Certain reclassifications have been made in the 1999 Condensed Consolidated Financial Statements to conform to the classifications used in the current year. Such reclassifications have no material effect on amounts previously reported. C. Summary of Significant Accounting Policies Principles of Consolidation The Condensed Consolidated Financial Statements include the accounts of the Company, the Operating Partnership and all controlled subsidiaries. The minority interest in the Operating Partnership represents the OP Units which are convertible, at the option of the holder. When a holder elects to convert OP Units, the Company determines whether such OP Units will be converted into cash or shares of Common Stock. The holders of OP Units receive the same amount per OP Unit in distributions as the holders of Common Stock at the time of dividend distributions. As of June 30, 2000, 1,045,000 OP Units were outstanding. All significant intercompany balances and transactions have been eliminated in consolidation. The Company's investment in Commercial Assets is recorded under the equity method. - 4- Rental Properties and Depreciation Rental properties are recorded at cost less accumulated depreciation, unless considered impaired. If events or circumstances indicate that the carrying amount of a property may be impaired, the Company will make an assessment of its recoverability by estimating the future undiscounted cash flows, excluding interest charges, of the property. If the carrying amount exceeds the aggregate future cash flows, the Company would recognize an impairment loss to the extent the carrying amount exceeds the fair value of the property. As of June 30, 2000, management believes that no impairments exist based on periodic reviews. No impairment losses were recognized for the three and six months ended June 30, 2000 and 1999. Depreciation is computed using the straight line method over an estimated useful life of 25 years for land improvements and buildings and five years for furniture and other equipment. Significant renovations and improvements, which improve or extend the useful life of the asset, are capitalized and depreciated over the remaining estimated life. In addition, the Company capitalizes direct and indirect costs (including interest, taxes and other costs) in connection with the development of additional homesites within its manufactured home communities. Maintenance, repairs and minor improvements are expensed as incurred. Investments in Participating Mortgages The Company has loans secured by real estate which provide for an interest rate return plus up to 50% of net profits, cash flows and sales proceeds from the secured real estate. The Company accounts for these investments as loans when (a) the Company does not have an interest in the borrower and either (b) the borrower has a substantial equity investment in the real estate collateral or (c) the Company has recourse to other substantial tangible assets of the borrower. As such, the Company records interest income based on the rate provided for in the loan and records its share of any net profits or gains from the sale of the underlying real estate when realized. If the above requirements are not met, then the loan is accounted for as an equity investment in real estate under the equity method of accounting. Inventory Inventories are recorded at the lesser of cost or market. At June 30, 2000, there was no reserve for inventory. Amortization Included in other assets is the cost related to the acquisition of management contracts, which is being amortized over a period of three years. Revenue Recognition The Company derives its income from the rental of homesites. The leases entered into by residents for the rental of the site are generally for terms not longer than one year and the rental revenues associated with the leases are recognized when earned and due from residents. Property management income for services provided to communities not owned by the Company are also recognized when earned. Interest on participating mortgages is recorded based upon outstanding balances and interest rates per the terms of the mortgages. In addition, the Company evaluates the collectibility of any unpaid interest and provides reserves as necessary. - 5- Deferred Financing Costs Fees and costs incurred in obtaining financing are capitalized. Such costs are amortized over the terms of the related loan agreements and are charged to interest expense. Interest Rate Lock Agreements Interest rate lock agreements related to planned refinancings of identified variable rate indebtedness are accounted for as anticipatory hedges. Upon the refinancing of such indebtedness, any gain or loss associated with the termination of the interest rate lock agreement is deferred and recognized over the life of the refinanced indebtedness. Income Taxes AIC has elected to be taxed as a REIT as defined under the Internal Revenue Code of 1986, as amended (the "Code"). In order for AIC to qualify as a REIT, at least 95% of its gross income in any year must be derived from qualifying sources. The activities of consolidated subsidiaries that (a) own interests in property management contracts, (b) manage Commercial Assets and (c) sell homes are not qualifying sources. As a REIT, AIC generally will not be subject to federal income taxes at the corporate level if it distributes at least 95% of its REIT taxable income to its stockholders. REITs are also subject to a number of other organizational and operational requirements. If AIC fails to qualify as a REIT in any taxable year, its taxable income will be subject to federal income tax at regular corporate rates (including any applicable alternative minimum tax). Even if AIC qualifies as a REIT, it may be subject to certain state and local income taxes and to federal income and excise taxes on its undistributed income. At June 30, 2000, AIC's net operating loss ("NOL") carryover was approximately $95,000,000 and its capital loss carryover was approximately $20,000,000. The NOL carryover may be used to offset all or a portion of AIC's REIT income, and as a result, to reduce the amount that AIC must distribute to stockholders to maintain its status as a REIT. The NOL carryover is scheduled to expire between 2007 and 2009, and the capital loss carryover is scheduled to expire in 2000 and 2001. Earnings Per Share Basic earnings per share for the three months ended June 30, 2000 and 1999 are based upon the weighted-average number of shares of Common Stock outstanding during each such period. Diluted earnings per share for the three and six months ended June 30, 1999 reflect the effect of dilutive, unexercised stock options of 6,000 and 4,000, respectively. There were no dilutive, unexercised stock options for the three and six months ended June 30, 2000. Capitalized Interest Interest is capitalized on development projects during periods of construction or development. Capitalized interest was $482,000 and $18,000 for the three months ended June 30, 2000 and 1999, respectively, and $901,000 and $35,000 for the six months ended June 30, 2000 and 1999, respectively. - 6- Treasury Stock The Company owns 27% of Commercial Assets' common stock. During 1999, Commercial Assets purchased 114,000 shares of the Company's Common Stock. Consequently, the Company has an interest in 30,000 shares of its Common Stock and has recorded this as treasury stock. Statements of Cash Flows For purposes of reporting cash flows, cash maintained in bank accounts, money market funds and highly-liquid investments with an initial maturity of three months or less are considered to be cash and cash equivalents. The Company made interest payments of $2,412,000 and $1,749,000 for the six months ended June 30, 2000 and 1999, respectively. Non-cash operating, investing and financing activities for the six months ended June 30, 2000 and 1999 were (in thousands): 2000 1999 -------- -------- Conversion of OP Units into Common Stock $ -- $ 8,668 Real estate acquired: By cancellation of participating mortgages 22,591 -- By assumption of notes payable 4,711 -- By assumption of accounts payable and accrued liabilities, net of other assets received 1,848 -- For issuance of note payable 1,740 -- For issuance of OP Units 496 -- Inventory acquired: By assumption of secured short-term financing 4,594 -- By cancellation of participating mortgages and notes receivable 1,805 -- By assumption of accounts payable and accrued liabilities, net of other assets received 649 -- By minority interest in subsidiary 1,404 -- Receivables from minority interest in subsidiaries 4 346 Purchase of property management contracts for note payable 380 -- Other assets, net of assumed liabilities, for minority interest in subsidiary 97 -- Issuance of Common Stock: For services 77 150 For notes receivable 440 -- Cancellation of notes receivable for services 52 -- Reclassification of investment in Commercial Assets to treasury stock -- 450 D. Proposed Merger with Commercial Assets The Company and Commercial Assets have agreed to merge, subject to the approval by both (a) a majority of the Company's outstanding shares and (b) two-thirds of Commercial Assets' outstanding shares. The Company owns approximately 27% of the Commercial Assets' outstanding shares and has agreed to vote these shares in favor of the merger. The Company will issue 0.4075 shares of its common stock for each outstanding share of the Commercial Assets common stock. Alternatively, Commercial Assets' stockholders may elect to receive $5.75 per share in cash for up to 3,549,868 shares of Commercial Assets common stock with any remaining shares receiving 0.4075 shares of the Company's Common Stock. The officers and directors of the Company and of Commercial Assets have agreed to elect to - 7- receive shares of the Company's Common Stock for all shares of Commercial Assets common stock that they own. In August 2000, stockholders approved the merger. E. Real Estate Real estate at June 30, 2000 and December 31, 1999, was (in thousands): June 30, December 31, 2000 1999 ---- ---- Land $ 25,771 $ 13,260 Land improvements and buildings 122,226 102,733 ---------- ------- 147,997 115,993 Less accumulated depreciation (9,342) (7,248) ---------- --------- Real estate, net $ 138,655 $ 108,745 ========== ========= In January 2000, the Company purchased four manufactured home communities, undeveloped homesites at three additional manufactured home communities, inventory and other assets for $36,816,000. The purchase price was allocated as follows (in thousands): Real estate $ 29,618 Cash and cash equivalents 205 Other assets 6,993 ---------- $ 36,816 Land improvements and buildings consist primarily of infrastructure, roads, landscaping, clubhouses, maintenance buildings and common amenities. F. Investments in Participating Mortgages During 1999, the Company had non-recourse mortgage loans secured by two manufactured home communities and one recreational vehicle park in Arizona. The loans had interest rates ranging from 10% to 15% and were scheduled to mature in April 2001. The Company received additional interest of 3% of gross revenues, increasing to 11% of gross revenues in the event of a refinancing of the debt on the communities, and 50% of net proceeds from a sale or refinancing of the communities. In August 1999, the Company purchased the two manufactured home communities and the recreational vehicle park in exchange for the payment of $858,000, the cancellation of the three loans with a carrying amount of $11,973,000 and $761,000 of assumed liabilities and other costs. during 1999, the Company had a non-recourse participating mortgage that bears 10% interest and matures in 2018. The Company receives additional interest up to 50% of the borrower's profit and net cash flows from the properties securing the participating mortgage. In January 2000, the Company purchased for $36,816,000 the four manufactured home communities and the undeveloped homesites at three additional manufactured home communities which secured the Company's participating mortgage. The purchase price was paid as follows: (in thousands) Cancellation of participating mortgages and loans $ 24,851 Assumption of debt 10,704 Issuance of 44,572 OP Units 496 Cash 765 --------- $ 36,816 - 8- G. Investment in Commercial Assets The Company owns 2,761,126 shares (approximately 27%) of the common stock of Commercial Assets. In November 1997, Commercial Assets sold or resecuritized its entire portfolio of commercial mortgage loan securitizations of multi-family real estate ("CMBS bonds") and temporarily invested the proceeds until it determined which type of real estate assets to invest in. During the third quarter of 1998, Commercial Assets began acquiring manufactured home communities, and from August 1998 to June 2000, it has invested approximately $70 million for interests in 12 communities. Summarized financial information of Commercial Assets as reported by Commercial Assets is (in thousands): Balance Sheets June 30, December 31, 2000 1999 ---- ---- Cash and short-term investments $ 20,353 $ 17,166 Real estate, net (including participating mortgages and joint ventures) 70,840 68,353 Other assets 13,600 11,564 ----------- ----------- Total assets $ 104,793 $ 97,083 =========== =========== Secured long-term notes payable $ 29,436 $ 20,442 Other liabilities 2,128 1,945 Minority interest in subsidiaries 615 615 Stockholders' equity 72,614 74,081 ----------- ----------- Total liabilities and stockholders' equity $ 104,793 $ 97,083 =========== =========== Statements of Income Three Months Six Months Ended June 30, Ended June 30, ------------- --------------- 2000 1999 2000 1999 ---- ---- ---- ---- Rental and other property revenues $ 1,748 $ 437 $ 3,531 $437 Income (loss) from participating mortgages and leases (2) 603 75 1,190 Property operating expenses (764) (174) (1,425) (174) Depreciation (488) (232) (981) (321) --------- --------- --------- -------- Income from rental property operations 494 634 1,200 1,132 --------- --------- --------- -------- Interest and other income 1,119 564 1,627 1,303 Interest expense (333) (58) (697) (58) Equity in loss from home sales operations (198) -- (389) -- General and administrative expenses (143) (140) (264) (273) Related-party management fees (198) (114) (391) (194) Related-party acquisition fees -- (152) -- (194) --------- ---------- --------- -------- Net income $ 741 $ 734 $ 1,086 $ 1,716 ========= ========= ========= ======== H. Investment in Home Sales Company Effective January 1, 2000, a consolidated subsidiary ("Sales Corp.") of the Company acquired all of the manufactured home inventory located at communities owned by the Company or Commercial Assets for $8,452,000. The Company owns 65% of the nonvoting common stock of Sales Corp., Commercial Assets owns the remaining 35% of the nonvoting common stock and certain of the Company's - 9- officers own all of Sales Corp.'s voting common stock. The nonvoting common stock represents 99% of all outstanding shares of Sales Corp.'s capital stock. The inventory purchase price was paid as follows: Assumption of secured short-term financing $ 4,594 Cancellation of participating mortgages and notes receivable 1,805 Assumption of notes payable 403 Assumption of accounts payable and accrued liabilities, net of other assets received 649 Contribution by Commercial Assets 1,001 -------- $ 8,452 I. Secured Short-Term Financing In April 2000, the Company entered into a $15,000,000 revolving line of credit with a bank. The line of credit bears interest at the bank's prime rate (9.75% at June 30, 2000) and matures in May 2001. The line of credit is secured by three manufactured home communities and one recreational vehicle park which have a combined net book value of $26,016,000 at June 30, 2000. The line of credit replaced the Company's two prior lines of credit and a $5,993,000 recourse note payable due in April 2001. The Company previously had a revolving line of credit with a bank that bore interest at the 30-day London Interbank Offered Rate ("LIBOR") plus 1.75% per annum. The line of credit was secured by 1,015,674 shares of the common stock of Commercial Assets held by the Company and matures in September 2000. This line of credit was cancelled and replaced in April 2000 by the Company's $15,000,000 line of credit. In connection with the Company's January 2000 purchase of manufactured home communities, undeveloped homesites, inventory and other assets, the Company assumed a line of credit secured by the inventory. In April 2000, this line of credit was cancelled and replaced by the $15,000,000 line of credit. As of June 30, 2000, the Company had a $2,120,000 promissory note payable to Community Management Investors Corporation ("CMIC") that matures in January 2001 and bears interest at 8.5%. The Company purchased CMIC's 50% interest in two property management companies as of January 1, 2000 in exchange for the note payable. This resulted in the Company owning 100% of the property management companies. The Company's President and Chief Operating Officer owns 35% of CMIC, and the Company's Vice President of Development owns 20% of CMIC. J. Commitments and Contingencies In connection with the purchase of a manufactured home community, the Company has an earn-out agreement with respect to unoccupied homesites. The Company pays $17,000 for each newly occupied homesite either in the form of cash or 946 OP Units, as determined by the former owner. During the three months ended June 30, 2000 and 1999, the Company paid $33,000 and $99,000 in cash, respectively. The Company paid $116,000 and $182,000 in cash during the six months ended June 30, 2000 and 1999, respectively. At June 30, 2000, there were 106 unoccupied homesites subject to the earnout. In September 1999, four Commercial Assets stockholders, individually and as purported representatives of all Commercial Assets stockholders, except the Company and its affiliates, filed three purported class action lawsuits in Delaware against Commercial Assets, the members of the board of directors and certain officers of the Company and Commercial Assets. These lawsuits alleged that the defendants breached their fiduciary duties to the Commercial Assets stockholders in connection with the proposed merger of the Company and Commercial Assets and Commercial Assets' recent reincorporation in Delaware. In - 10- November 1999, these lawsuits were consolidated into a single lawsuit. In March 2000, the parties entered into a settlement agreement, subject to the court's approval, which amended the merger agreement as follows: o Commercial Assets stockholders, other than the Company and the officers and directors of the Company and Commercial Assets, may elect to receive $5.75 per share in cash for up to 3,549,868 shares of Commercial Assets common stock with any remaining shares receiving 0.4075 shares of the Company's Common Stock; and o the percentage of votes of Commercial Assets common stock needed to approve the merger was increased from a simple majority to two-thirds. In August 2000, the court approved the settlement agreement. K. Operating Segments Investments in manufactured home communities constitute substantially all of the Company's portfolio of real estate, and as such, management of the Company assesses the performance of the Company as one operating segment. L. Common Stock and Dividends During 1999, certain directors and executive officers (or entities affiliated with them) exercised options to purchase 46,000 shares of Common Stock by issuing notes receivable totaling $588,000. In April 2000, the Company's Vice President of Development exercised options to purchase 40,000 shares of Common Stock by issuing a $440,000 note receivable, of which 75% was nonrecourse. The notes accrue interest at 7.5% and mature at various times in 2009 and 2010. At June 30, 2000, $733,000 of the notes were nonrecourse and $251,000 were recourse to the respective directors or executive officers. During each of the three month periods ended June 30, 2000 and 1999, the Company paid quarterly dividends of $0.25 per share on Common Stock and OP Units. During each of the six month periods ended June 30, 2000 and 1999, the Company paid dividends of $0.50 per share on Common Stock and OP Units. M. Other Matters The Commercial Assets Management Agreement has been extended through December 31, 2000; however, the agreement will terminate upon the merger of the Company and Commercial Assets. The Company earned management fees under the Commercial Assets Management Agreement (net of elimination for the Company's 27% ownership of Commercial Assets) as follows: Three Months Six Months Ended June 30, Ended June 30, ------------------------------ ----------------------- 2000 1999 2000 1999 ------------ ------------ ------------ -------- Management fees $145,000 $195,000 $ 286,000 $ 284,000 As of June 30, 2000, the net book value of the Commercial Assets Management Agreement was $775,000 and is included in other assets. In connection with the Company's merger with Commercial Assets in August 2000, the Company will expense the net book value of the Commercial Assets Management Agreement. - 11- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Introduction The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements in certain circumstances. Certain information included in this report and our other filings with the Securities and Exchange Commission under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as well as information communicated orally or in writing between the dates of these SEC filings, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include projections of our cash flow, dividends and anticipated returns on real estate investments. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. These factors include: general economic and business conditions; interest rate changes; financing and refinancing risks; risks inherent in owning real estate or debt secured by real estate; future development rate of homesites; competition; the availability of real estate assets at prices which meet our investment criteria; our ability to reduce expense levels, implement rent increases, use leverage, sell homes and other risks set forth in our SEC filings. In this report, the words "the Company," "we," "our" and "us" refer to Asset Investors Corporation, a Delaware corporation, our predecessor, Asset Investors Corporation, a Maryland corporation and, where appropriate, our subsidiaries. Business Company Background We have been a Delaware corporation since May 25, 1999. Prior to this, we were a Maryland corporation that was formed in 1986. We have elected to be treated for United States federal income tax purposes as a real estate investment trust or "REIT." We are a self-administered and self-managed company in the business of owning, acquiring, developing and managing manufactured home communities. As of June 30, 2000, we held interests as owner or ground lessee in 21 manufactured home communities and two recreational vehicle parks with a total of: o 4,410 developed homesites (sites with homes in place); o 2,490 undeveloped homesites; and o 180 recreational vehicle sites. In addition, we manage 14 communities for affiliates. Our shares of common stock are listed on the New York Stock Exchange under the symbol "AIC." We primarily conduct our business through our subsidiary Asset Investors Operating Partnership and where appropriate, its other subsidiary companies, which we collectively refer to as the Operating Partnership. As of June 30, 2000, we owned 84% of the Operating Partnership. Prior to our merger in August 2000 with Commercial Assets, Inc., a publicly-traded REIT, the Operating Partnership also owned 27% of Commercial Assets common stock. Commercial Assets was also engaged in the ownership, acquisition and development of manufactured - 12- home communities. In addition to acquiring and managing manufactured home communities for our own account, we also performed these services for Commercial Assets, for which Commercial Assets paid us a management fee. Proposed Merger with Commercial Assets In August 1999, we agreed to merge with Commercial Assets. We agreed to issue 0.4075 shares of our common stock for each share of Commercial Assets common stock. Alternatively, Commercial Assets stockholders may elect to receive $5.75 per share in cash for up to 3,549,868 shares of Commercial Assets common stock with any remaining shares of Commercial Assets common stock receiving 0.4075 shares of our common stock. The merger requires the approval by a majority of our outstanding shares of common stock and two-thirds of the outstanding shares of Commercial Assets common stock. We owned 27% of the outstanding shares of Commercial Assets common stock and agreed to vote these shares in favor of the merger. Commercial Assets' officers and directors and our officers and directors agreed to elect to receive Asset Investors common stock for all shares of Commercial Assets common stock that they own. In August 2000, the merger was approved. Industry Background A manufactured home community is a residential subdivision designed and improved with sites for the placement of manufactured homes and related improvements and amenities. Manufactured homes are detached, single-family homes which are produced off-site by manufacturers and installed on sites within the community. Manufactured homes are available in a variety of designs and floor plans, offering many amenities and custom options. Modern manufactured home communities are similar to typical residential subdivisions containing centralized entrances, paved streets, curbs and gutters and parkways. The communities frequently provide a clubhouse for social activities and recreation and other amenities, which may include golf courses, swimming pools, shuffleboard courts and laundry facilities. Utilities are provided by or arranged for by the owner of the community. Community lifestyles, primarily promoted by resident managers, include a wide variety of social activities that promote a sense of neighborhood. The communities provide an attractive and affordable housing alternative for retirees, empty nesters and start-up or single-parent families. Manufactured home communities are primarily characterized as "all age" communities and "adult" communities. Adult communities typically require that at least 80% of the tenants be at least 55 years old, and in all age communities there is no age restriction on tenants. The owner of a home in our communities leases from us the site on which the home is located. Typically, the leases are on a month-to-month or year-to-year basis, renewable upon the consent of both parties or, in some instances, as provided by statute. In some circumstances, we offer a 99-year lease to tenants in order to enable the tenant to have some benefits of an owner of real property, including creditor protection laws in some states. These leases can be cancelled, depending on state law, for non-payment of rent, violation of community rules and regulations or other specified defaults. Generally, rental rate increases are made on an annual basis. The size of these rental rate increases depends upon the policies that are in place at each community. Rental increases may be based on fixed dollar amounts, percentage amounts, inflation indexes, or they may depend entirely on local market conditions. We own interests in the underlying land, utility connections, streets, lighting, driveways, common area amenities and other capital improvements and are responsible for enforcement of community guidelines and maintenance. Each homeowner within the manufactured home communities is responsible for the maintenance of his or her home and leased site, including lawn care in some communities. - 13- The ownership of manufactured home communities, once fully occupied, tends to be a stable, predictable asset class. The cost and effort involved in relocating a home to another manufactured home community generally encourages the owner of the home to resell it within the community. Growth and Operating Strategies We measure our economic profitability based on Funds From Operations or "FFO", less an annual capital replacement reserve of at least $50 per developed homesite. This reserve is management's estimate based on its experience in owning, operating and managing manufactured home communities. We believe that the presentation of FFO, when considered with the financial data determined in accordance with generally accepted accounting principles, provides a useful measure of our performance. However, FFO does not represent cash flow and is not necessarily indicative of cash flow or liquidity available to us, nor should it be considered as an alternative to net income as an indicator of operating performance. The Board of Governors of the National Association of Real Estate Investment Trusts, also known as NAREIT, defines FFO as net income or loss, computed in accordance with generally accepted accounting principles, excluding gains and losses from debt restructuring and sales of property, plus real estate related depreciation and amortization, excluding amortization of financing costs, and after adjustments for unconsolidated partnerships and joint ventures. We calculate FFO beginning with the NAREIT definition and include adjustments for: o the minority interest in the Operating Partnership owned by persons other than us; and o amortization of property and investment management contracts. We believe that the presentation of FFO provides investors with measurements which help facilitate an understanding of our ability to make required dividend payments, capital expenditures and principal payments on our debt. Since FFO excludes depreciation and other real estate related expenses, FFO may be materially different from net income. Therefore, FFO should not be considered as an alternative to net income or net cash flows from operating activities, as calculated in accordance with generally accepted accounting principles, as an indication of our operating performance or liquidity. FFO is not necessarily indicative of cash available to fund our cash needs, including our ability to make distributions. We use FFO in measuring our operating performance because we believe that the items that result in a difference between FFO and net income do not impact the ongoing operating performance of a real estate company. Also, we believe that other real estate companies, analysts and investors utilize FFO in analyzing the results of real estate companies. Our basis of computing FFO is not necessarily comparable with that of other REITs. Our primary objective is to maximize stockholder value by increasing the amount and predictability of FFO on a per share basis, less a reserve for capital replacements. We seek to achieve this objective primarily by: o improving net operating income from our existing portfolio of manufactured home communities; and o acquiring additional communities at values that are accretive on a per share basis. - 14- Company Policies Management has adopted specific policies to accomplish our objective of increasing the amount and predictability of our FFO on a per share basis, less a reserve for capital replacements. These policies include: o selectively acquiring manufactured home communities that have potential long-term appreciation of value through, among other things, rent increases, expense efficiencies and in-park homesite development; o developing and maintaining resident satisfaction and a reputation for quality communities through maintenance of the physical condition of our communities and providing activities that improve the community lifestyle; o improving the profitability of our communities through aggressive management of occupancy, community development and maintenance and expense controls; o using debt leverage to increase our financial returns; o reducing our exposure to interest rate fluctuations by utilizing long-term, fixed-rate, fully-amortizing debt to pay off higher cost, short-term debt; o ensuring the continued maintenance of our communities by providing a minimum $50 per homesite per year for capital replacements; o seeking to reduce our exposure to downturns in regional real estate markets by diversifying our portfolio of communities since currently 70% of our properties are in Florida and 17% are in Arizona; and o recruiting and retaining capable community management personnel. Future Acquisitions Our acquisition of interests in manufactured home communities takes many forms. In many cases we acquire fee title to the community. When a community has a significant number of unleased homesites, we seek a stable return from the community during the development and lease-up phase while also seeking to participate in future increased earnings after development is completed and the sites are leased. We seek to accomplish this goal by making loans to development companies in return for participating mortgages that are non-recourse to the borrowers and secured by the property. In general, our participating mortgages earn interest at fixed rates and, in addition, participate in the profits or revenues from the community. This profit participation right generally entitles us to 50% of the net income and cash flow generated by the community. We believe that acquisition opportunities for manufactured home communities are attractive at this time because of: o the increasing acceptability of and demand for manufactured homes, as shown by the growth in the number of individuals living in manufactured homes; and o the continued constraints on development of new manufactured home communities. We are actively seeking to acquire additional communities on our own behalf and we are currently engaged in various stages of negotiations relating to the possible acquisition of a number of communities. The acquisition of interests in additional communities could also result in our becoming increasingly leveraged as we incur debt in connection with these transactions. - 15- When evaluating potential acquisitions, we consider such factors as: o the location and type of property; o the value of the homes located on the leased land; o the improvements, such as golf courses and swimming pools, at the property; o the current and projected cash flow of the property and our ability to increase cash flow; o the potential for capital appreciation of the property; o the terms of tenant leases, including the potential for rent increases; o the tax and regulatory environment of the community in which the property is located; o the potential for expansion of the physical layout of the property and the number of sites; o the occupancy and demand by residents for properties of a similar type in the vicinity; o the credit of the residents in a community; o the prospects for liquidity through sale, financing or refinancing of the property; o the competition from existing manufactured home communities; o the potential for the construction of new communities in the area; and o the replacement cost of the property. Fees and Earnings from Commercial Assets Prior to our August 2000 merger with Commercial Assets, we managed Commercial Assets and owned 27% of Commercial Assets common stock. Under the terms of our management agreement with Commercial Assets, we received the following fees: o Acquisition Fees equal to 0.5% of the cost of each real estate-related asset acquired by Commercial Assets; o Base Fees equal to 1% per year of the net book value of Commercial Assets' real estate-related assets; o Incentive Fees equal to 20% of the amount by which Commercial Assets' FFO, less an annual capital replacement reserve of at least $50 per developed homesite, exceeds (a) its average net worth, multiplied by (b) 1% over the ten year United States Treasury rate. In the third quarter of 1998, Commercial Assets entered the manufactured home community business and began acquiring interests in manufactured home communities identified by us. As of June 30, 2000, Commercial Assets had acquired interests in 12 communities at a cost of approximately $70 million. Commercial Assets paid us Base Fees, Acquisition Fees and Incentive Fees primarily due to Commercial Assets' investment in communities as follows: Three Months Six Months Ended June 30, Ended June 30, ------------------------------- ------------------------------ 2000 1999 2000 1999 ------------ ------------ ------------ ---------- Base Fees $ 198,000 $ 119,000 $ 391,000 $ 194,000 Acquisition Fees -- 152,000 -- 194,000 Incentive Fees -- (5,000) -- -- ------------ ------------ ------------ ---------- $ 198,000 $ 266,000 $ 391,000 $ 388,000 ============ ============ ============ ========== As a result of the merger, the management agreement terminated in August, 2000. - 16- Expansion of Existing Communities We seek to increase the number of homesites and the amount of earnings generated from our existing portfolio of manufactured home communities through marketing campaigns aimed at increasing occupancy. We also seek expansion through future acquisitions and expansion of the number of sites available to be leased to residents if justified by local market conditions and permitted by zoning and other applicable laws. Taxation of the Company We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, and we intend to operate in a manner which will allow us to avail ourselves of the beneficial tax provisions applicable to REITs. Our qualification as a REIT depends on our ability to meet the various requirements imposed by the Internal Revenue Code, such as specifications relating to actual operating results, distribution levels and diversity of stock ownership. In addition, our ability to qualify as a REIT depends in part upon the actions of third parties over which we have no control, or only limited influence. For instance, our qualification depends upon the conduct of certain entities with which we have a direct or indirect relationship, in our capacity as a lender, lessor, or holder of non-controlling equity interests. Our qualification also depends upon Commercial Assets' continued qualification as a REIT. If we qualify for taxation as a REIT, we will generally not be subject to Federal corporate income tax on our net income that is currently distributed to stockholders. This treatment substantially eliminates the "double taxation" which would otherwise occur at the corporate and stockholder levels that generally results from investment in a corporation. If we fail to qualify as a REIT in any taxable year, we will be subject to Federal income tax at regular corporate rates on our taxable income, including any applicable alternative minimum tax. We have a net operating loss or "NOL" carryover of approximately $95 million which may, subject to some restrictions and limitations, be used to offset taxable income in the event that we fail to qualify as a REIT. Additionally, even if we qualify as a REIT, we may be subject to certain state and local income and other taxes and to Federal income and excise taxes on our undistributed income. RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 Comparison of Three Months Ended June 30, 2000 to Three Months Ended June 30, 1999 Rental Property Operations Rental and other property revenues from our owned properties totaled $4,429,000 for the three months ended June 30, 2000 compared to $3,695,000 for the three months ended June 30, 1999, an increase of $734,000 or 20%. The increase was primarily a result of rent increases at our communities and our purchase of communities in January 2000. Property operating expenses from our owned properties totaled $1,717,000 for the three months ended June 30, 2000 compared to $1,363,000 for the same period in 1999, an increase of $354,000 or 26%. The increase was primarily due to higher expenses at our communities and our purchase of communities in January 2000. Loss on participating mortgages and leases was $22,000 for the three months ended June 30, 2000 compared to income of $836,000 for the three months ended - 17- June 30, 1999. We ceased to have participating mortgages in the first quarter of 2000. Income from participating mortgages and leases is expected to be significantly less than prior years as we no longer hold any investments in participating mortgages. Depreciation expense was $1,240,000 during the three months ended June 30, 2000 compared to $924,000 during the same period in 1999. The increase was due to acquisitions of manufactured home communities during 1999 and 2000. Sales Operations Beginning in January 2000, we commenced home sales activities to sell manufactured homes to be placed on our undeveloped homesites. The homeowner will then pay rent to us for locating his or her home on our land. During the three months ended June 30, 2000, we had a loss of $415,000 from sales operations, after Commercial Assets minority interest in the loss. Service Operations Property management income was comparable for the three months ended June 30, 2000 and 1999. Fee revenue from managing Commercial Assets was $145,000 and $195,000 for the three months ended June 30, 2000 and 1999, respectively. The decrease is because Commercial Assets acquired no communities during the 2000 period but acquired $30 million of communities during the 1999 period for which we received acquisition fees from Commercial Assets. Amortization of management contracts was $516,000 and $689,000 for the three months ended June 30, 2000 and 1999, respectively. The decrease is due to property management contracts becoming fully amortized during 1999. Equity in Earnings of Commercial Assets Income from our 27% interest in Commercial Assets was comparable for the three months ended June 30, 2000 and 1999, respectively. General and Administrative Expenses Our general and administrative expenses were comparable for the three months ended June 30, 2000 and 1999, respectively. Interest and Other Income During the three months ended June 30, 2000 and 1999, interest and other income was $466,000 and $150,000, respectively. The increase occurred because of nonrecurring income during the 2000 period comprised primarily of $265,000 of income due to a change in estimate of accrued liabilities and $50,000 of income resulting from a forfeited deposit by a potential purchaser of one of our communities. Interest Expense During the three months ended June 30, 2000, interest expense was $916,000, of which $106,000 is allocated to the sales operations. Interest expense for the three months ended June 30, 1999 was $957,000. The decrease was primarily due to - 18- capitalized interest on our undeveloped homesites during the 2000 period; partially offset by the increased interest expense related to the sales operations. Comparison of Six Months Ended June 30, 2000 to Six Months Ended June 30, 1999 Rental Property Operations Rental and other property revenues from our owned properties totaled $8,898,000 for the six months ended June 30, 2000 compared to $7,253,000 for the six months ended June 30, 1999, an increase of $1,645,000 or 23%. The increase was primarily a result of rent increases at our communities and our purchase of communities in January 2000. Property operating expenses from our owned properties totaled $3,426,000 for the six months ended June 30, 2000 compared to $2,650,000 for the same period in 1999, an increase of $776,000 or 29%. The increase was primarily due to higher expenses at our communities and our purchase of communities in January 2000. Income on participating mortgages and leases was $683,000 for the six months ended June 30, 2000 compared to income of $1,614,000 for the six months ended June 30, 1999. We ceased to have participating mortgages in the first quarter of 2000. Income from participating mortgages and leases is expected to be significantly less than prior years as we no longer hold any investments in participating mortgages. Depreciation expense was $2,329,000 during the six months ended June 30, 2000 compared to $1,844,000 during the same period in 1999. The increase was due to acquisitions of manufactured home communities during 1999 and 2000. Sales Operations Beginning in January 2000, we commenced home sales activities to sell manufactured homes to be placed on our undeveloped homesites. The homeowner will then pay rent to us for locating his or her home on our land. During the six months ended June 30, 2000, we had a loss of $792,000 from sales operations, after Commercial Assets minority interest in the loss. Service Operations Property management income was comparable for the six months ended June 30, 2000 and 1999. Fee revenue from managing Commercial Assets was comparable for the six months ended June 30, 2000 and 1999. Amortization of management contracts was $1,032,000 and $1,378,000 for the six months ended June 30, 2000 and 1999, respectively. The decrease is due to property management contracts becoming fully amortized during 1999. - 19- Equity in Earnings of Commercial Assets Income from our 27% interest in Commercial Assets was $494,000 for the six months ended June 30, 2000 compared to $560,000 for the same period in 1999. Commercial Assets reported to us that its income decreased by $630,000 primarily due to: o a $660,000 increase in depreciation on acquired manufactured home communities, o a $389,000 loss from home sales operations, o a $308,000 decrease in interest and other income, and o a $639,000 increase in interest expense; partially off set by o $620,000 of nonrecurring income from its commercial mortgage backed securities bonds, and o a $700,000 increase in income from rental property operations before depreciation. General and Administrative Expenses Our general and administrative expenses were $882,000 for the six months ended June 30, 2000 compared to $784,000 for the same period in 1999. The increase is primarily due to increases in the number of personnel and related expenses. Interest and Other Income During the six months ended June 30, 2000 and 1999, interest and other income was $656,000 and $203,000, respectively. The increase occurred because of nonrecurring income during the 2000 period comprised primarily of: o $265,000 of income due to a change in estimate of accrued liabilities, o $50,000 of income resulting from a forfeited deposit by a potential purchaser of one of our communities, and o a $109,000 gain on the sale of real estate. Interest Expense During the six months ended June 30, 2000, interest expense was $1,810,000, of which $212,000 is allocated to the sales operations. Interest expense for the six months ended June 30, 1999 was $1,898,000. The decrease was primarily due to capitalized interest on our undeveloped homesites during the 2000 period; partially offset by the increased interest expense related to the sales operations. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2000, we had cash and cash equivalents of $1,198,000. Our principal activities that demand liquidity include our normal operating activities, payments of principal and interest on outstanding debt, acquisitions of or additional investments in properties, payments of dividends to stockholders and distributions made to limited partners in the Operating Partnership. Our net cash provided by operating activities was $2.6 million during the six months ended June 30, 2000, compared to $3.4 million during the same period in 1999. The decrease was primarily a result of a $0.8 million loss from home sales operations. - 20- During the six months ended June 30, 2000, the net cash used in investing activities was $0.4 million compared with a net use of $2.4 million for the same period in 1999. The decrease in net cash used is primarily due to proceeds from the sale of real estate in the 2000 period. During the six months ended June 30, 2000, net cash used in financing activities was $1.6 million compared with net cash provided of $0.1 million for the same period in 1999. The decrease is primarily because of proceeds received by the Company from secured long-term notes payable in the 1999 period. We had a line of credit with a bank that was secured by 1,015,674 shares of our Commercial Assets common stock. Advances under this line of credit bear interest at the 30-day London Interbank Offered Rate plus 1.75% per annum . The line of credit was limited to the lesser of: o $5,000,000; o 65% of the product of the trading price of Commercial Assets common stock times 1,015,674; or o 65% of the purchase price of certain unpledged real estate. In April 2000, this line of credit was replaced by a $15,000,000 line of credit with a bank due in May 2001. This new line of credit bears interest at the bank's prime rate (9.75% at June 30, 2000) and is secured by three manufactured home communities and one recreational vehicle park. In addition to replacing the prior bank line of credit, the new line of credit also replaced (a) a $3.4 million line of credit assumed by us when we purchased inventory in January 2000 and (b) a $6.0 million recourse note payable due in April 2001. We expect to meet our long-term liquidity requirements through long-term, secured borrowings, the issuance of OP Units and other equity securities and cash generated by operations. FUNDS FROM OPERATIONS We measure our economic profitability based on FFO, less an annual capital replacement reserve of at least $50 per developed homesite. We believe that the presentation of FFO when considered with the financial data determined in accordance with generally accepted accounting principles, provides a useful measure of our performance. However, FFO does not represent cash flow and is not necessarily indicative of cash flow or liquidity available to us, nor should it be considered as an alternative to net income as an indicator of operating performance. The Board of Governors of NAREIT defines FFO as net income or loss, computed in accordance with generally accepted accounting principles, excluding gains and losses from debt restructuring and sales of property, plus real estate related depreciation and amortization, excluding amortization of financing costs, and after adjustments for unconsolidated partnerships and joint ventures. We calculate FFO beginning with the NAREIT definition and include adjustments for: o the minority interest in the Operating Partnership owned by persons other than us, and o amortization of property and investment management contracts. We believe that the presentation of FFO provides investors with measurements which help facilitate an understanding of our ability to make required dividend payments, capital expenditures and principal payments on our debt. Since FFO excludes depreciation and other real estate related expenses, FFO may be materially different from net income. Therefore, FFO should not be considered as an alternative to net income or net cash flows from operating activities, as calculated in accordance with generally accepted accounting principles, as an indication of our operating performance or liquidity. - 21- FFO is not necessarily indicative of cash available to fund our cash needs, including our ability to make distributions. We use FFO in measuring our operating performance because we believe that the items that result in a difference between FFO and net income do not impact the ongoing operating performance of a real estate company, Also, we believe that other real estate companies, analysts and investors utilize FFO in analyzing the results of real estate companies. Our basis of computing FFO is not necessarily comparable with that of other REITs. For the three and six months ended June 30, 2000 and 1999, our FFO was (in thousands): Three Months Six Months Ended June 30 Ended June 30 ------------------------- ------------------------ 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Income before minority interest in Operating Partnership $ 215 $ 812 $ 1,070 $ 1,464 Real estate depreciation 1,240 924 2,329 1,844 Amortization of management contracts 516 689 1,032 1,378 Gain on sale of real estate -- -- (109) -- Equity in Commercial Assets' adjustments for FFO 130 66 261 106 --------- --------- --------- -------- Funds From Operations (FFO) $ 2,101 $ 2,491 $ 4,583 $ 4,792 ========= ========= ========= ======== Weighted average common shares and OP Units outstanding 6,631 6,567 6,624 6,565 ========= ========= ========= ======== For the six months ended June 30, 2000 and 1999, net cash flows were as follows (in thousands): Six Months Ended June 30, ---------------------- 2000 1999 ---- ---- Cash provided by operating activities $ 2,632 $ 3,365 Cash used in investing activities (400) (2,407) Cash provided by (used in) financing activities (1,604) 117 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our principal exposure to market risk is through our various debt instruments and borrowings. The following is a list of these debt instruments and borrowing arrangements. We have a $15.0 million recourse, secured line of credit that bears interest at the bank's prime rate. If the prime rate increased immediately by 1% then our annual net income and cash flows would decrease by $150,000 due to an increase in interest expense on this line of credit, based on the maximum balance of the line of credit. We have $42.1 million of fixed rate, fully amortizing, non-recourse, secured long-term notes payable. We do not have significant exposure to changing interest rates on these notes as the rates are fixed and the notes are fully amortizing. We have $7.4 million of fixed rate, non-recourse, secured long-term notes payable that mature in October 2000. The rates on these notes range from 7.5% to 8.25% with a weighted average rate of 7.7%. We intend to refinance the notes - 22- during 2000 with long-term, partially amortizing, variable rate debt. Therefore, changes in interest rates would affect the cost of funds borrowed in the future to refinance the existing debt. If the interest rate on the refinanced debt was 1.0% greater than the weighted average rate on the existing debt, our annual net income and cash flows would decrease by $74,000 due to an increase in interest expense on these notes, based on the outstanding balances at June 30, 2000. We have a $2.5 million fixed rate, partially amortizing, non-recourse, secured long-term note payable that matures in April 2009. We do not have significant exposure to changes in interest rates since the interest rate is fixed and the balance due at maturity is $2 million. PART II OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: Exhibit No. Description 2.1 Agreement and Plan of Merger, dated as of March 15, 1999, between Asset Investors Corporation, a Maryland corporation and Asset Investors Corporation, a Delaware corporation (incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K, dated May 26, 1999, Commission File No. 1-9360, filed on May 26, 1999). 2.2 Second Amended and Restated Agreement and Plan of Merger dated as of June 2, 2000 by and between Asset Investors Corporation and Commercial Assets, Inc. (incorporated by reference to Annex A to the Registrant's Joint Proxy Statement/Prospectus dated June 13, 2000, Commission File No. 1-9360, filed on June 13, 2000). 3.1 Amended and Restated Certificate of Incorporation of Asset Investors Corporation (incorporated herein by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K, dated May 26, 1999, Commission File No. 1-9360, filed on May 26, 1999). 3.2 Amended and Restated By-laws of Asset Investors Corporation (incorporated herein by reference to Exhibit 3.2 to the Registrant's Current Report on Form 8-K, dated May 26, 1999, Commission File No. 1-9360, filed on May 26, 1999). 10.13 Revolving Promissory Note dated April 7, 2000, between Asset Investors Operating Partnership, L.P., Community Savanna Club Joint Venture, AIOP Lost Dutchman Notes, LLC and U. S. Bank National Association (incorporated herein by reference to Exhibit 10.13 to the Registrant's Quarterly Report on Form 10-Q, dated March 31, 2000, Commission File No. 1-9360, filed on May 12, 2000). 10.13(a) Line of Credit Agreement dated April 7, 2000, between Asset Investors Operating Partnership, L.P., AIOP Florida Properties I, L.L.C., AIOP Florida Properties II, L.L.C., Community Savanna Club Joint Venture, AIOP Lost Dutchman Notes, LLC and U. S. Bank National Association (incorporated herein by reference to Exhibit 10.13(a) to the Registrant's Quarterly Report on Form 10-Q, dated March 31, 2000, Commission File No. 1-9360, filed on May 12, 2000). - 23- 10.13(b) Deed of Trust, Security Agreement, Financing Statement and Assignment of Rents and Revenues dated April 7, 2000, between AIOP Lost Dutchman Notes, LLC and U. S. Bank National Association (incorporated herein by reference to Exhibit 10.13(b) to the Registrant's Quarterly Report on Form 10-Q, dated March 31, 2000, Commission File No. 1-9360, filed on May 12, 2000). 10.13(c) Mortgage, Security Agreement, Financing Statement and Absolute Assignment of Rents and Revenues dated April 7, 2000, between Community Savanna Club Joint Venture and U. S. Bank National Association (incorporated herein by reference to Exhibit 10.13(c) to the Registrant's Quarterly Report on Form 10-Q, dated March 31, 2000, Commission File No. 1-9360, filed on May 12, 2000). 10.13(d) Security Agreement dated April 7, 2000, between Asset Investors Operating Partnership, L.P., AIOP Lost Dutchman Notes, LLC and U. S. Bank National Association (incorporated herein by reference to Exhibit 10.13(d) to the Registrant's Quarterly Report on Form 10-Q, dated March 31, 2000, Commission File No. 1-9360, filed on May 12, 2000). 10.13(e) Security Agreement dated April 7, 2000, between Asset Investors Operating Partnership, L.P., Community Savanna Club Joint Venture and U. S. Bank national Association (incorporated herein by reference to Exhibit 10.13(e) to the Registrant's Quarterly Report on Form 10-Q, dated March 31, 2000, Commission File No. 1-9360, filed on May 12, 2000). 27 Financial Data Schedule (b) Reports on Form 8-K: The following Current Reports on Form 8-K were filed by the Registrant during the period covered by this Quarterly Report on Form 10-Q: No Current Reports on Form 8-K were filed by the Registrant during the period covered by this Quarterly Report on Form 10-Q. 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. ASSET INVESTORS CORPORATION (Registrant) Date: August 14, 2000 By /s/David M. Becker -------------------------- David M. Becker Chief Financial Officer - 24-