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 September 30, 1999 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 October 29, 1999, 5,632,569 shares of common stock were outstanding. ASSET INVESTORS CORPORATION AND SUBSIDIARIES FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 TABLE OF CONTENTS PAGE PART I. FINANCIAL INFORMATION: Item 1. Condensed Consolidated Financial Statements: Balance Sheets as of September 30, 1999 (unaudited) and December 31, 1998................................................. 1 Statements of Income for the three and nine months ended September 30, 1999 and 1998 (unaudited)............................... 2 Statements of Cash Flows for the nine months ended September 30, 1999 and 1998 (unaudited)............................... 3 Notes to Financial Statements (unaudited)............................. 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................ 12 PART II. OTHER INFORMATION: Item 6. Exhibits and Reports on Form 8-K................................. 25 (i) ASSET INVESTORS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) September 30, December 31, 1999 1998 ---- ---- (unaudited) ASSETS Real estate, net of accumulated depreciation of $6,205 and $3,378 $ 109,543 $ 98,563 Investments in participating mortgages 20,622 27,604 Cash and cash equivalents 1,604 1,426 Investment in Commercial Assets 19,741 20,706 Other assets, net 8,068 9,927 ------------ ----------- Total Assets $ 159,578 $ 158,226 ============ =========== LIABILITIES Secured long-term notes payable $ 54,456 $ 40,506 Secured short-term financing 1,000 10,500 Accounts payable and accrued liabilities 4,060 2,935 ------------ ----------- 59,516 53,941 ------------ ----------- MINORITY INTEREST IN OPERATING PARTNERSHIP 15,386 25,649 STOCKHOLDERS' EQUITY Preferred stock, par value $.01 per share, 15,000 and 0 shares authorized, respectively; no shares issued or outstanding -- -- Common stock, par value $.01 per share, 35,000 and 50,000 shares authorized; 5,633 and 5,016 shares issued; and 5,572 and 5,016 shares outstanding, respectively 56 50 Additional paid-in capital 239,381 229,948 Notes receivable on common stock purchases (588) -- Dividends in excess of accumulated earnings (153,723) (151,362) Treasury stock, 30 and 0 shares at cost (450) -- ------------ ----------- 84,676 78,636 ------------ ----------- Total Liabilities and Stockholders' Equity $ 159,578 $ 158,226 ============ =========== 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 Nine Months Ended September 30, Ended September 30, ------------------- ------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Rental property operations Rental and other property revenues $ 3,822 $ 3,280 $ 11,075 $ 7,132 Interest on participating mortgages 688 801 2,302 2,348 Property operating expenses (1,341) (1,212) (3,991) (2,812) --------- --------- --------- --------- Income from rental property operations before depreciation 3,169 2,869 9,386 6,668 Depreciation (983) (874) (2,827) (1,762) --------- --------- --------- --------- Income from rental property operations 2,186 1,995 6,559 4,906 --------- --------- --------- --------- Service operations Property management income, net 54 39 158 122 Commercial Assets management fees 134 65 418 75 Amortization of management contracts (689) (689) (2,067) (2,205) --------- --------- --------- --------- Loss from service operations (501) (585) (1,491) (2,008) --------- --------- --------- --------- Equity in earnings of Commercial Assets 154 154 714 688 General and administrative expenses (389) (373) (1,098) (1,031) Interest and other income 124 75 227 677 Interest expense (955) (914) (2,853) (1,390) --------- --------- --------- --------- Income from operations 619 352 2,058 1,842 Cost incurred to acquire management contract -- (2,092) -- (2,092) Income tax benefit 150 -- 250 -- Loss from early extinguishment of debt -- -- (75) -- Reincorporation expenses (70) -- (70) -- --------- --------- --------- --------- Income (loss) before minority interest in Operating Partnership 699 (1,740) 2,163 (250) Minority interest in Operating Partnership (106) 372 (341) 54 --------- --------- --------- --------- Net income (loss) $ 593 $ (1,368) $ 1,822 $ (196) ========= ========= ========= ========= Basic and diluted earnings per share $ 0.11 $ (0.27) $ 0.33 $ (0.04) ========= ========= ========= ========= Weighted average common shares outstanding 5,559 5,123 5,527 5,116 Weighted average common shares and common share equivalents outstanding 5,563 5,123 5,534 5,116 Dividends paid per share $ 0.25 $ 0.25 $ 0.75 $ 0.50 ========= ========= ========= ========= See Notes to Condensed Consolidated Financial Statements. - 2 - ASSET INVESTORS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Nine Months Ended September 30, ------------------- 1999 1998 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,822 $ (196) Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 5,021 3,967 Minority interest in Operating Partnership 341 (54) Equity in earnings of Commercial Assets (561) (659) Accrued interest on participating mortgages (611) (601) Cost incurred to acquire management contract -- 2,073 Increase in other assets (1,234) (941) Increase in accounts payable and accrued liabilities 311 997 ------- -------- Net cash provided by operating activities 5,089 4,586 ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of real estate (858) (58,058) Investments in participating mortgages, net (4,215) (3,042) Capital replacements (198) (207) Dividends from Commercial Assets 1,077 718 --------- -------- Net cash used in investing activities (4,194) (60,589) --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Payment of Common Stock dividends (4,183) (2,562) Payment of distributions to minority interest in Operating Partnership (750) (713) Proceeds from secured long-term notes payable 10,925 -- Principal paydowns on secured long-term notes payable (3,175) (335) Proceeds from secured short-term financing -- 39,770 Principal paydowns on secured short-term financing (3,300) -- Collections of notes receivable 133 -- Payment of loan costs (400) (1,219) Proceeds from the issuance of Common Stock 103 35 Stock issuance costs (70) -- Repurchase of Common Stock -- (597) --------- -------- Net cash provided by (used in) financing activities (717) 34,379 --------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 178 (21,624) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,426 21,802 --------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,604 $ 178 ========= ======== See Notes to Condensed Consolidated Financial Statements. - 3 - ASSET INVESTORS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) A. 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 85% of the Operating Partnership as of September 30, 1999. The Company also owns 27% of the common stock of Commercial Assets, Inc. ("Commercial Assets") and substantially all of the common stock of both AIC Manufactured Housing Corp. ("AICMHC") and Asset Investors Equity, Inc. ("AIE"). Commercial Assets is a publicly-traded REIT (American Stock Exchange, Inc.: CAX) formed by the Company in August 1993. AICMHC owns interests in manufactured home community management contracts and AIE manages Commercial Assets. Prior to 1997, the Company owned debt interests in residential mortgage loan securitizations collateralized by pools of non-conforming (non-agency guaranteed) single-family mortgage loans ("non-agency MBS bonds"). In February 1997, the Company decided to restructure the Company's asset base and redeploy its assets in an attempt to both reduce risks associated with the Company's non-agency MBS bonds and maximize long-term, risk-adjusted returns to stockholders. In 1997, the Company received $67,671,000 cash proceeds from the restructuring of the non-agency MBS bonds and has invested these proceeds in manufactured home communities. Prior to November 1997, the Company and Commercial Assets were managed by Financial Asset Management LLC ("FAM"). An investor group led by Terry Considine, Thomas L. Rhodes and Bruce D. Benson acquired FAM in September 1996. Mr. Considine is the Chairman and Chief Executive Officer of both the Company and Commercial Assets. Mr. Rhodes is Vice Chairman and Mr. Benson is a director of both the Company and Commercial Assets. In November 1997, the Company's stockholders approved the acquisition of the assets and operations of FAM in order to become a self-managed and self-administered REIT. The $11,692,000 purchase price was paid by issuing 676,700 limited partnership units of the Operating Partnership ("OP Units") plus up to 240,000 additional OP Units if certain performance goals, including investment and share price targets, were achieved by the Company within a specified time period. During the third quarter of 1998, the Company achieved the first set of performance goals by realizing annualized returns before depreciation in excess of 9% on its real estate investments for a period of six months. As a result of achieving these goals, the Company issued 120,000 OP Units and expensed $2,092,000 as additional cost of acquiring the management contract. The issuance of the remaining 120,000 OP Units was contingent upon the Company having a 90-day average per share price in excess of $20.00 by June 1999. The Company's average share price did not meet this requirement and the Company's commitment to issue these additional OP Units has expired. - 4 - B. Merger with Commercial Assets The Company and Commercial Assets have agreed to merge, subject to approval by a majority of the outstanding shares of both companies. The Company will issue 0.4075 shares of its Common Stock for each outstanding share of Commercial Assets' common stock. C. 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 September 30, 1999, for the three and nine 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, 1998. Certain reclassifications have been made in the 1998 Condensed Consolidated Financial Statements to conform to the classifications used in the current year. The effect of such reclassifications on amounts previously reported is immaterial. D. 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 September 30, 1999, 1,000,000 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. Rental Properties and Depreciation Rental properties are recorded at cost less accumulated depreciation. 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. When conditions exist which indicate that the carrying amount of a property may be impaired, the Company will evaluate the recoverability of its net investment in the property by assessing current and future levels of income and cash flows. - 5 - As of September 30, 1999, there has been no impairment of the Company's investment in rental properties. 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. As of September 30, 1999, there is a $149,000 reserve for uncollected interest on the participating mortgages. 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 AICMHC and AIE 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 September 30, 1999, 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 - 6 - 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 and nine months ended September 30, 1999 and 1998 are based upon the weighted-average number of shares of Common Stock outstanding during each such period. Diluted earnings per share reflect the effect of any dilutive, unexercised stock options in each such period. Capitalized Interest Interest is capitalized on development projects during periods of construction or development. Treasury Stock The Company owns 27% of Commercial Assets' common stock. During 1999, Commercial Assets has 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 $2,696,000 and $1,262,000 for the nine months ended September 30, 1999 and 1998, respectively. Non-cash operating, investing and financing activities for the nine months ended September 30, 1999 and 1998 were (in thousands): 1999 1998 ---- ---- Issuance of Common Stock for: Conversion of OP Units $ 9,536 $ -- Services 150 120 Notes receivable 588 278 Investments in participating mortgages: For other assets 165 -- By issuance of OP Units -- 17 Real estate acquired: By cancellation of participating mortgages 12,780 -- From earn-out agreements -- 52 For issuance of OP Units -- 2,145 Receivables from minority interest in subsidiaries -- 319 Purchase of minority interest in subsidiaries by cancellation of receivables 346 -- Transfer of stock issue costs to additional paid in capital 868 -- Reclassification of investment in Commercial Assets to treasury stock 450 -- Short-term financing extended to long-term debt 6,200 -- - 7 - E. Real Estate Real estate at September 30, 1999 and December 31, 1998, was (in thousands): September 30, December 31, 1999 1998 ---- ---- Land $ 13,260 $ 11,226 Land improvements and buildings 102,056 90,268 Furniture and other equipment 432 447 ---------- --------- 115,748 101,941 Less accumulated depreciation (6,205) (3,378) ---------- --------- Real estate, net $ 109,543 $ 98,563 ========== ========= Land improvements and buildings consist primarily of infrastructure, roads, landscaping, clubhouses, maintenance buildings and common amenities. F. Investments in Participating Mortgages The Company had mortgage loans totaling $11,326,000 secured by two contiguous 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 cancellation of the three loans plus the payment of $858,000. The Company also has a participating mortgage which bears 10% interest, matures in 2018 and is secured by a number of manufactured home communities. In addition, the Company receives additional interest up to 50% of the borrower's profits and net sales proceeds from such communities. As of September 30, 1999, the Company had investments in participating mortgages of $20,622,000 and income of $688,000 and $2,302,000 from these participating mortgages for the three and nine months ended September 30, 1999. G. Investment in Commercial Assets On September 30, 1999 and December 31, 1998, the Company owned 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 announced that it plans to acquire manufactured home communities, and from August 1998 to September 1999, it has invested approximately $65,000,000 for interests in 11 communities. - 8 - Summarized financial information of Commercial Assets as reported by Commercial Assets is (in thousands): Balance Sheets September 30, December 31, 1999 1998 ---- ---- Cash and cash equivalents $ 5,076 $ 3,292 Short-term investments 13,334 45,066 Real estate, net (including joint ventures) 64,557 13,908 Investments in participating mortgages 1,951 9,328 Other assets 11,035 6,640 ----------- ----------- Total assets 95,953 78,234 Secured long-term notes payable 18,128 -- Secured short-term financing 212 -- Other liabilities 1,966 980 Minority interest in subsidiaries 615 -- ----------- ----------- Stockholders' equity $ 75,032 $ 77,254 =========== =========== Statements of Income (unaudited) Three Months Ended Nine Months Ended September 30, September 30, -------------------------------- --------------------------- 1999 1998 1999 1998 ------------ ------------ ----------- ------- Income from rental property operations before depreciation $ 972 $ 151 $ 2,425 $ 151 Depreciation (465) (4) (786) (4) --------- --------- -------- -------- Income from rental property operations 507 147 1,639 147 Interest and other income 397 1,052 1,700 3,231 Interest expense (61) -- (119) -- General and administrative (131) (129) (404) (303) Management fees (181) (23) (375) (40) --------- --------- -------- -------- Income from operations 531 1,047 2,441 3,035 Acquisition fees (3) (61) (197) (61) Nonrecurring expenses (120) (500) (120) (500) --------- --------- -------- -------- Net income $ 408 $ 486 $ 2,124 $ 2,474 ========= ========= ======== ======== H. Secured Short-Term Financing The Company has a revolving line of credit with a bank that bears interest at the 30-day London Interbank Offered Rate ("LIBOR") plus 1.75% per annum (7.15% at September 30, 1999). The line of credit is secured by 1,015,674 shares of the common stock of Commercial Assets held by the Company and matures in September 2000. The line of credit is limited to the lesser of (1) $5,000,000, (2) 65% of the product of the trading price of Commercial Assets common stock times 1,015,674 or (3) 65% of the purchase price of certain unpledged real estate. As of September 30, 1999, the limit was $3,425,000 and $1,000,000 was outstanding on this line of credit. - 9 - I. Secured Long-Term Notes Payable The following table summarizes the Company's secured long-term notes payable (in thousands): September 30, December 31, 1999 1998 ------------- ------------ Fixed rate, ranging from 6.50% to 7.04%, fully amortizing, non-recourse notes maturing at various dates from December 2018 through June 2019 $ 38,023 $ 30,280 Fixed rate, ranging from 7.37% to 8.25%, non-amortizing notes maturing at various dates from October 2000 through April 2009 10,233 10,226 Floating rate equal to LIBOR plus 2.5% (7.88% at September 30, 1999), non-amortizing, recourse note maturing in April 2001 6,200 -- --------- --------- $ 54,456 $ 40,506 ========= ========= In 1998, the Company entered into an interest rate lock agreement which was settled in September 1998. The Company realized a loss on the hedge of $802,000 which was deferred and is being amortized over the terms of the related notes payable as a charge to interest expense. In June 1999, the Company repaid a $2,230,000 note payable and paid a prepayment penalty of $75,000. The penalty is recorded as a loss from early extinguishment of debt. Real estate assets which secure the long-term notes payable had a net book value of $96,844,000 at September 30, 1999. The Company has $226,000 in escrow for real estate taxes on secured long-term notes payable at September 30, 1999. J. Commitments and Contingencies In connection with a participating mortgage on a manufactured home community, the Company entered into an earn-out agreement with respect to unoccupied homesites. The Company advances an additional $17,000 pursuant to the participating mortgage for each newly occupied homesite either in the form of cash or 946 OP Units, as determined by the borrower. During the three and nine months ended September 30, 1999 and 1998, the Company advanced cash and OP Units as follows (in thousands): Three Months Ended Nine Months Ended September 30, September 30, -------------------------------- ------------------------------ 1999 1998 1999 1998 ------------ ------------ ----------- ---------- Cash advances $ 50 $ 17 $ 232 $ 33 OP Unit advances -- -- -- 17 --------- --------- -------- -------- Total $ 50 $ 17 $ 232 $ 50 ========= ========= ======== ======== At September 30, 1999, there were 2,540 undeveloped homesites in properties in which the Company has an interest. In connection with efforts to lease such sites, a sales corporation markets an inventory of homes located in the various properties to potential tenants. The Company's President owns 50% of the sales corporation. A portion of the cost of this home inventory was financed by the sales corporation with a line of credit guaranteed by the Company. As of September 30, 1999, $5,132,000 was outstanding under the line of credit. The terms of the line of credit require monthly payments of interest and payment of principal upon sale of the inventory. If the inventory is not sold within one year, monthly payments of principal are also required. - 10 - K. Operating Segments Investments in adult communities constitute substantially all of the Company's portfolio of manufactured home communities, and as such, management of the Company assesses the performance of the Company as one operating segment. L. Common Stock and Dividends During the three and nine months ended September 30, 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. The notes accrue interest at 7.5% and mature in 2009. At September 30, 1999, $403,000 of the notes were nonrecourse and $185,000 were recourse to the respective directors or executive officers. During the three and nine months ended September 30, 1999, the Company paid $0.25 and $0.75 per share dividends on Common Stock and OP Units totaling $1,647,000 and $4,933,000, respectively. Dividends and distributions paid during the same periods in 1998 were $0.25 and $0.50 per share on Common Stock and OP Units totaling $1,640,000 and $3,276,000, respectively. M. Income Tax Benefit In connection with the Company's restructuring of its former bond portfolio in 1997, a consolidated subsidiary incurred income taxes from such restructuring. These taxes were netted against the gain from the restructuring in 1997. The subsidiary recorded a loss for tax purposes during the three and nine months ended September 30, 1999 and can carryback $250,000 of such tax loss for a refund of taxes incurred in 1997. Accordingly, the Company has recorded an income tax benefit of $250,000. N. Other Matters Prior to November 1997, a former manager provided all personnel and related overhead necessary to conduct the Company's activities in exchange for various fees provided for in a management agreement (the "AIC Management Agreement"). In November 1997, the Company's stockholders approved the purchase of the manager's assets and operations for $11,692,000 in connection with the Company becoming a self-managed and self-administered REIT. The initial purchase price and related costs were allocated $6,553,000 to the AIC Management Agreement and $5,936,000 to a management agreement pursuant to which the Company manages Commercial Assets (the "Commercial Assets Management Agreement"). The Company expensed the amount allocated to the AIC Management Agreement in 1997 and is amortizing the cost of the Commercial Assets Management Agreement over three years. In addition to the initial purchase price, FAM received 120,000 additional OP Units in August 1998 because the Company had annualized returns before depreciation in excess of 9% on certain of its real estate investments. These OP Units were valued at $2,073,000 and expensed in August 1998. The Commercial Assets Management Agreement has been extended through December 31, 1999. 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 Ended Nine Months Ended September 30, September 30, -------------------------------- ----------------------------- 1999 1998 1999 1998 ------------ ------------ ----------- --------- Management fees $ 134,000 $ 65,000 $ 418,000 $ 75,000 - 11 - As of September 30, 1999, the net book value of the Commercial Assets Management Agreement was $2,259,000 and is included in other assets. 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 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 September 30, 1999, we held interests as owner, ground lessee or mortgage lender, including participating mortgages, in 22 manufactured home communities and two recreational vehicle parks with a total of: o 4,490 developed homesites (sites with homes in place); o 2,540 undeveloped homesites; and o 180 recreational vehicle sites. In addition, we manage 15 communities for affiliates and third-party owners. 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 September 30, 1999, we owned 85% of the Operating Partnership. The Operating Partnership also - 12 - owns 27% of the common stock of Commercial Assets, Inc., a publicly-traded REIT that is listed on the American Stock Exchange under the symbol "CAX." Commercial Assets is also engaged in the ownership, acquisition and development of manufactured home communities. In addition to acquiring and managing manufactured home communities for our own account, we also perform these services for Commercial Assets, for which Commercial Assets pays us a management fee. 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. 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. We believe that FFO, less a capital replacement reserve, provides investors with an understanding of our ability to incur and service debt and to make capital expenditures. The Board of Governors of the National Association of Real Estate Investment Trusts, also known as NAREIT, defines FFO as net income - 13 - 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 in a manner consistent with NAREIT's definition. In our calculation we include adjustments for: o the minority interest in the Operating Partnership owned by persons other than us; o costs we incurred in order to become self-managed; o amortization of management contracts; and o nonrecurring income, net. FFO should not be considered 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 performance or as a measure of liquidity. FFO is not necessarily indicative of cash available to fund future cash needs. 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; o acquiring additional communities at values that are accretive on a per share basis; o earning increased management fees as Commercial Assets invests in more manufactured home communities; and o as Commercial Assets' FFO increases, our share of their FFO similarly increases. 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 seeking to reduce our exposure to downturns in regional real estate markets by obtaining a geographically diverse portfolio of communities; o ensuring the continued maintenance of our communities by providing a minimum $50 per homesite per year for capital replacements; 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 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 improving the profitability of our communities through aggressive management of occupancy, community development and maintenance and expense controls; 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; and o recruiting and retaining capable community management personnel. - 14 - Future Acquisitions In 1997, when we decided to enter the manufactured home community business, we began to implement a business plan which called for the investment of our capital in the acquisition of manufactured home communities. Since the second half of 1997, we have focused on identifying acquisition opportunities that we believe provide returns that are accretive to our stockholders. 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 the increasing acceptability of and demand for manufactured homes and the continued constraints on development of new manufactured home communities. We are actively seeking to acquire additional communities on our own behalf and on behalf of Commercial Assets, 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. 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. In order to allocate investments between us and Commercial Assets, the companies have agreed that Commercial Assets will invest at least $50 million of its cash resources in the acquisition of communities before we invest any further cash in the acquisition of communities. Thereafter, the companies will coordinate their investments. As of September 30, 1999, Commercial Assets had invested approximately $65 million in communities. Accordingly, we now coordinate our acquisitions with Commercial Assets on a case-by-case basis. - 15 - Fees and Earnings from Commercial Assets We manage Commercial Assets and own 27% of Commercial Assets' common stock. Under the terms of our management agreement with Commercial Assets, we receive 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 September 30, 1999, Commercial Assets had acquired interests in 11 communities at a cost of approximately $65 million. Commercial Assets paid us Base Fees, Acquisition Fees and Incentive Fees primarily due to Commercial Assets' investment in communities as follows: Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 1999 1998 1999 1998 ------------ ------------ ----------- ---------- Base Fees $ 181,000 $ 23,000 $ 375,000 $ 40,000 Acquisition Fees 3,000 61,000 197,000 61,000 Incentive Fees -- -- -- -- ----------- --------- ----------- --------- $ 184,000 $ 84,000 $ 572,000 $ 101,000 =========== ========= =========== ========= The management agreement expires December 31, 1999 and is subject to annual renewal. During 1998, Incentive Fees were based upon Commercial Assets' REIT income instead of its FFO, less an annual capital replacement reserve. It was changed for 1999 in order to cause our Incentive Fees to be tied more closely to Commercial Assets' measure of economic profitability of its manufactured home community business. Although there can be no assurance of such, we expect Commercial Assets to continue to acquire interests in communities during 1999. Expansion of Existing Communities We will 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 will 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. As of September 30, 1999, we held interests in 24 communities with 2,540 undeveloped homesites. Properties The manufactured home communities in which we have interests are primarily located in Florida and Arizona and are concentrated in or around four metropolitan areas. We hold interests in these communities as owner, ground - 16 - lessee or mortgage lender, including participating mortgages. The following table sets forth the states in which the communities in which we held an interest on September 30, 1999 are located: Number of Sites -------------------------------------------------------------- Number of Recreational Communities Developed Undeveloped Vehicles ----------------- ----------------- ----------------- ---------------- Florida 17 3,579 2,428 -- Arizona 4 794 108 122 New Jersey 1 90 -- -- Pennsylvania 1 28 -- -- California 1 -- -- 65 --- ------ ------- ---- Total 24 4,491 2,536 187 === ====== ======= ==== The following table sets forth information regarding each manufactured home community in which we held an interest and those manufactured home communities which we manage for others: Average Developed Monthly Undeveloped Community Location Homesites Occupancy (1) Rent RV Sites Sites - ----------------------------------------------------------------------------------------------------------------- Owned Communities Blue Star Apache Junction, AZ 29 100% $227 122 -- Brentwood West Mesa, AZ 350 100 306 -- -- Cardinal Court Largo, FL 138 96 268 -- -- Caribbean Cove Orlando, FL 255 99 280 -- 31 Forest View Homosassa, FL 191 100 235 -- 120 (3) Gulfstream Harbor Orlando, FL 381 99 323 -- 172 Gulfstream Harbor II Orlando, FL 287 100 310 -- 21 Lost Dutchman Apache Junction, AZ 151 100 246 -- 108 Marina Dunes Marina, CA -- -- -- 65 -- Mullica Woods Egg Harbor City, NJ 90 100 459 -- -- Park Royale Pinellas Park, FL 258 95 351 -- 51 (3) Pinewood St. Petersburg, FL 220 96 289 -- -- Pleasant Living Riverview, FL 245 100 278 -- -- Salem Farm Bensalem, PA 28 100 412 -- -- Serendipity Ft. Myers, FL 338 99 277 -- -- Stonebrook Homosassa, FL 123 99 249 -- 95 (3) Sun Valley Apache Junction, AZ 264 100 247 -- -- Sun Valley Tarpon Springs, FL 261 100 340 -- -- Westwind I (2) Dunedin, FL 195 98 336 -- -- Westwind II (2) Dunedin, FL 189 100 346 -- -- --------------------------------------------------------------- Subtotal 3,993 99 301 187 598 --------------------------------------------------------------- Participating Mortgage Communities (3) Blue Heron Pines Punta Gorda, FL 129 98 249 -- 315 Brentwood Hudson, FL 75 89 202 -- 148 Savanna Club Port St. Lucie, FL 49 100 158 -- 1,297 Sun Lake Grand Island, FL 245 94 257 -- 178 --------------------------------------------------------------- Subtotal 498 98 237 -- 1,938 --------------------------------------------------------------- Total Communities 4,491 98% $294 187 2,536 =============================================================== <FN> 1 Excludes recreational vehicle sites, which are leased on a seasonal basis. 2 We are the ground lessee of these communities. 3 We hold notes receivable secured by mortgages on these sites. The notes earn interest and participate in profits or revenues from the sites. </FN> - 17 - Average Developed Monthly Undeveloped Community Location Homesites Occupancy (1) Rent RV Sites Sites --------------------------------------------------------------------------------------------------------------- Cannery Village Newport Beach, CA -- --% $ -- -- 30 Casa Encanta Mesa, AZ 106 96 345 -- -- Cypress Greens Lakeland, FL 86 100 190 -- 21 Desert Harbor Apache Junction, AZ 103 100 202 -- 104 Fiesta Village Mesa, AZ 170 95 272 -- 206 La Casa Blanca Apache Junction, AZ 198 100 151 -- -- Lakeshore Villas Tampa, FL 290 96 323 -- -- Rancho Mirage Apache Junction, AZ 312 100 175 -- -- Riverside Ruskin, FL 221 99 403 -- 769 Royal Palm Haines City, FL 233 98 216 -- 217 Savanna Club Port St. Lucie, FL 12 100 163 -- 25 Southern Palms Mesa, AZ 36 97 208 26 -- Sun Lake Grand Island, FL -- -- -- -- 5 -------------------------------------------------------------- Subtotal 1,755 98 252 26 1,377 -------------------------------------------------------------- Communities Managed for Others 588 99 223 -- 83 -------------------------------------------------------------- Total Managed Communities 2,355 98% $245 26 1,460 ============================================================== 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 NINE MONTHS ENDED SEPTEMBER 30, 1999 Comparison of Nine Months Ended September 30, 1999 to Nine Months Ended September 30, 1998 Rental Property Operations Income from rental property operations totaled $6,559,000 and $4,906,000 for the nine months ended September 30, 1999 and 1998, respectively, an increase of 33.7%. The increase is primarily due to our acquisition of communities in 1998, increases in rents at our communities and additional investments in participating mortgages. - 18 - Service Operations During the nine months ended September 30, 1999 and 1998, we earned $158,000 and $122,000, respectively, in property management income. The increase is primarily due to an increase in the number of properties that we manage for Commercial Assets. Fee revenue from managing Commercial Assets was $418,000 and $75,000 for the nine months ended September 30, 1999 and 1998, respectively. The increase is due to Commercial Assets' investments in communities beginning in August 1998. We do not earn fees on cash and short-term investments held by Commercial Assets which is what Commercial Assets primarily held in the 1998 period. Amortization of management contracts decreased from $2,205,000 for the first nine months of 1998 to $2,067,000 for the same period in 1999 due to our acquisition in February 1998 of two communities which we previously managed. Equity in Earnings of Commercial Assets Income from our 27% interest in Commercial Assets for the nine months ended September 30, 1999 and 1998 was $714,000 and $688,000, respectively. Commercial Assets reported to us that its income decreased primarily due to depreciation on acquired manufactured home communities and management fees paid to us partially offset by lower nonrecurring expenses. Due to our 27% interest in Commercial Assets, however, during the nine months ended September 30, 1999 and 1998, $153,000 and $28,000, respectively, of these management fees have been reported as equity in earnings of Commercial Assets in accordance with generally accepted accounting principles. General and Administrative Expenses Our general and administrative expenses were $1,098,000 and $1,031,000 for the nine months ended September 30, 1999 and 1998, respectively, primarily due to increases in the number of personnel. Interest and Other Income During the nine months ended September 30, 1999 and 1998, interest and other income was $227,000 and $677,000, respectively. The decrease occurred because prior to September 30, 1998, we had invested substantially all of our cash resources in manufactured home communities. Interest Expense During the nine months ended September 30, 1999 and 1998, interest expense was $2,853,000 and $1,390,000, respectively. The increase was primarily due to borrowings used to acquire manufactured home communities after June 1998. Income Tax Benefit A subsidiary recorded a loss for tax purposes during the nine months ended September 30, 1999. As a result, it can carry back such tax loss for a $250,000 refund of income taxes incurred by the subsidiary during 1997. - 19 - Loss from Early Extinguishment of Debt During the nine months ended September 30, 1999, we prepaid a $2.2 million note payable and paid a $75,000 prepayment penalty. Reincorporation Expenses During the nine months ended September 30, 1999, we incurred $70,000 of nonrecurring expenses related to our reincorporation to Delaware. Comparison of Three Months Ended September 30, 1999 to Three Months Ended September 30, 1998 Rental Property Operations Income from rental property operations totaled $2,186,000 and $1,995,000 for the three months ended September 30, 1999 and 1998, respectively, an increase of 9.6%. The increase is primarily due to increases in rents at our communities and additional investments in participating mortgages. Service Operations During the three months ended September 30, 1999 and 1998, we earned $54,000 and $39,000, respectively, in property management income. The increase is primarily due to an increase in the number of properties that we manage for Commercial Assets. Fee revenue from managing Commercial Assets was $134,000 and $65,000 for the three months ended September 30, 1999 and 1998, respectively, due to Commercial Assets' investments in communities beginning in August 1998. Amortization of management contracts was $689,000 for each of the three months ended September 30, 1999 and 1998. Equity in Earnings of Commercial Assets Income from our 27% interest in Commercial Assets was $154,000 for each of the three months ended September 30, 1999 and 1998. Commercial Assets reported to us that its income decreased primarily due to depreciation on acquired manufactured home communities and management fees paid to us partially offset by lower nonrecurring expenses. However, due to our 27% interest in Commercial Assets, for the three months ended September 30, 1999 and 1998, $49,000 and $24,000, respectively, of these management fees have been reported as equity in earnings of Commercial Assets in accordance with generally accepted accounting principles. General and Administrative Expenses Our general and administrative expenses were $389,000 and $373,000 for the three months ended September 30, 1999 and 1998, respectively. The increase is primarily due to increases in the number of personnel. - 20 - Interest and Other Income During the three months ended September 30, 1999 and 1998, interest and other income was $124,000 and $75,000, respectively. The increase occurred primarily because of income from non-agency MBS bonds during the 1999 period. Interest Expense During the three months ended September 30, 1999 and 1998, interest expense was $955,000 and $914,000, respectively, primarily due to borrowings used to make additional investments in participating mortgages after September 1998. Income Tax Benefit A subsidiary recorded a loss for tax purposes during the three months ended September 30, 1999. As a result, it can carry back such tax loss for a $150,000 refund of income taxes incurred by the subsidiary during 1997. Reincorporation Expenses During the three months ended September 30, 1999, we incurred $70,000 of nonrecurring expenses related to our reincorporation in Delaware. NOL and Capital Loss Carryovers At September 30, 1999, our NOL carryover was approximately $95,000,000 and our capital loss carryover was approximately $20,000,000. Subject to some limitations, the NOL carryover may be used to offset all or a portion of our REIT income, and as a result, to reduce the amount of income that we must distribute to stockholders to maintain our 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. Dividend Distributions During the three and nine months ended September 30, 1999, we distributed $1,647,000 or $0.25 per share, and $4,933,000 or $0.75 per share, to holders of common stock and OP Units. During the same periods in 1998, $1,640,000 or $0.25 per share, and $3,276,000 or $0.50 per share, was distributed as we made no distributions during the first quarter of 1998. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1999, we had cash and cash equivalents of $1.6 million. 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. - 21 - Our net cash provided by operating activities was $5.1 million during the nine months ended September 30, 1999 compared to $4.6 million during the same period in 1998. The increase was primarily a result of: o increased earnings before depreciation from manufactured home communities acquired in 1998, o increases in net operating income from communities acquired in 1997, and o increased management fees from Commercial Assets due to its investments in manufactured home communities since August 1998. During the nine months ended September 30, 1999, the net cash used in investing activities was $4.2 million compared with $60.6 million for the same period in 1998. The decrease is primarily due to our investment of $58.1 million to acquire manufactured home communities during the 1998 period. During the nine months ended September 30, 1999, net cash used in financing activities was $0.7 million compared with $34.4 million provided by financing activities for the same period in 1998. The decrease is primarily due to borrowings incurred during the 1998 period to fund acquisitions of manufactured home communities while borrowings during the 1999 period in excess of the repayment of short-term financing was offset by increased dividends and distributions to stockholders and OP Unit holders in the Operating Partnership. We have a line of credit with a bank which matures in September 2000. The line of credit is 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 (7.15% at September 30, 1999). The line of credit is 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. As of September 30, 1999, the borrowing limit was $3,425,000 and $1,000,000 was outstanding on this line of credit. At September 30, 1998, the weighted-average interest rate on our secured, long-term notes payable was 6.9% with a weighted-average maturity of 10 years. 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 FFO, less a capital replacement reserve, provides investors with an understanding of our ability to incur and service debt and to make capital expenditures. 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 in a manner consistent with NAREIT's definition. In our calculation we include adjustments for: o the minority interest in the Operating Partnership owned by persons other than us, o costs we incurred in order to become self-managed, - 22 - o amortization of management contracts, and o nonrecurring income, net. FFO should not be considered 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 performance or as a measure of liquidity. FFO is not necessarily indicative of cash available to fund future cash needs. For the three and nine months ended September 30, 1999 and 1998, our FFO was (in thousands): Three Months Ended Nine Months Ended September 30, September 30, -------------------------------- ----------------------- 1999 1998 1999 1998 ------------ ------------ ----------- ------- Income (loss) before minority interest in Operating Partnership $ 699 $ (1,740) $ 2,163 $ (250) Real estate depreciation 983 874 2,827 1,762 Amortization of management contracts 689 689 2,067 2,205 Nonrecurring income, net (8) -- (33) -- Equity in Commercial Assets' adjustments for FFO 124 185 230 185 Cost incurred to acquire management contract -- 2,092 -- 2,092 --------- --------- -------- -------- Funds From Operations (FFO) $ 2,487 $ 2,100 $ 7,254 $ 5,994 ========= ========= ======== ======== Weighted average common shares and OP Units outstanding 6,559 6,587 6,563 6,528 ========= ========= ======== ======== For the nine months ended September 30, 1999 and 1998, net cash flows were as follows (in thousands): Nine Months Ended September 30, ------------- 1999 1998 ---- ---- Cash provided by operating activities $ 5,089 $ 4,586 Cash used in investing activities (4,194) (60,589) Cash (used in) provided by financing activities (717) 34,379 YEAR 2000 COMPLIANCE Year 2000 issues have arisen because many existing computer programs and chip-based embedded technology systems use only the last two digits to refer to a year, and therefore do not properly recognize a year that begins with "20" instead of the familiar "19". If not corrected, many computer applications could fail or create erroneous results. The following disclosure provides information regarding the current status of our Year 2000 compliance program. Our critical hardware and software systems are currently Year 2000 compliant. Upon failure of any system, data included in critical software, such as rent-rolls and certain record-keeping systems, could be transferred to alternative commercially available software at a reasonable cost and within a reasonable time period. Consequently, we would be able to continue our business - 23 - operations without any material interruption or material effect on our business, results of operations or financial condition. In addition, we anticipate that any hardware or software that we acquire, including upgrades to existing systems, between now and December 31, 1999 will be Year 2000 compliant. Disruptions in the economy generally resulting from Year 2000 issues could also materially adversely affect us. Moreover, because a large number of our tenants may be dependent on social security payments to pay their rents, a failure of the Social Security Administration to cause their systems to be Year 2000 compliant may result in a material adverse effect on our operations. The Social Security Administration has announced that they will have their systems Year 2000 compliant before January 1, 2000. We believe that the cost of modification or replacement of our less essential accounting and reporting software and hardware that is not currently compliant with Year 2000 requirements, if any, will not be material to our financial position or results of operations. 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 $38.0 million of fixed rate, non-recourse, secured long-term notes payable that mature in 2018 and 2019. The rates on these notes range from 6.5% to 7.04%. 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 a $2.5 million, 7.37%, non-recourse, partially amortizing, secured long-term note payable that matures in 2009. We do not have significant exposure to changing interest rates on this note as the rate is fixed and the balance due at maturity is only $2 million. We have $7.8 million of non-recourse, secured long-term notes payable that mature in October 2000 with a principal payment at maturity of $7.3 million. The rates on these notes range from 7.5% to 8.25% and are fixed. We intend to refinance these notes during 1999 or 2000 with long-term, fully amortizing, fixed rate debt. While changes in interest rates would affect the cost of funds borrowed in the future to refinance the existing debt, we believe that the effect, if any, of near-term changes in interest rates on our financial position, results of operations or cash flows would not be material as the existing debt is fixed rate until October 2000. We have $6.2 million of recourse, secured long-term financing that bears interest at the London Interbank Offered Rate or "LIBOR" plus 2.5% and matures in April 2001. We expect to refinance this debt with non-recourse, secured, fixed rate, long-term debt during 2000. If the loan is not refinanced with fixed rate, fully amortized debt, then changes in LIBOR would affect the cost of funds borrowed in the future. We have a $5.0 million recourse, secured line of credit that bears interest at LIBOR plus 1.75%. As of September 30, 1999, the outstanding balance was $1,000,000. Changes in LIBOR would affect the cost of funds borrowed in the future; however, its affect would not be material to our financial position, results of operations or cash flows. - 24 - 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). 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). 27 Financial Data Schedule (b) Reports on Form 8-K: The following Current Report on Form 8-K was filed by the Registrant during the period covered by this Quarterly Report on Form 10-Q: Current Report on Form 8-K, dated August 31, 1999 reporting the proposed merger between the Company and Commercial Assets, Inc. 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: November 10, 1999 By /s/David M. Becker --------------------------------- David M. Becker Chief Financial Officer - 25 -