MANUFACTURED HOME COMMUNITIES INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 1-11718

MANUFACTURED HOME COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)

MARYLAND 36-3857664
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

TWO NORTH RIVERSIDE PLAZA SUITE 60606
800, CHICAGO, ILLINOIS (Zip Code)
(Address of principal executive offices)

(312) 279-1400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Common Stock, $.01 Par Value The New York Stock Exchange
(Title of Class) (Name of exchange on which registered)

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

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 [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

The aggregate market value of voting stock held by nonaffiliates was
approximately $640.1 million as of February 11, 2002 based upon the closing
price of $32.55 on such date using beneficial ownership of stock rules adopted
pursuant to Section 13 of the Securities Exchange Act of 1934 to exclude voting
stock owned by Directors and Officers, some of whom may not be held to be
affiliates upon judicial determination.

At March 15, 2002, 21,740,248 shares of the Registrant's Common Stock were
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Part III incorporates by reference the Registrant's Proxy Statement relating to
the Annual Meeting of Stockholders to be May 8, 2002.

MANUFACTURED HOME COMMUNITIES, INC.
TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS

THE COMPANY

GENERAL

Manufactured Home Communities, Inc. (together with its consolidated
subsidiaries, the "Company") is a fully integrated company which owns and
operates manufactured home communities ("Communities"). Communities are
residential developments designed and improved for the placement of detached,
single-family manufactured homes which are produced off-site and installed and
set on residential sites ("Site Set") within the Community. The owner of each
home leases the site on which it is located. Modern Communities are similar to
typical residential subdivisions, containing centralized entrances, paved
streets, curbs and gutters and parkways. In addition, these Communities often
provide a clubhouse for social activities and recreation and other amenities,
which may include swimming pools, shuffleboard courts, tennis courts, laundry
facilities and cable television service. In some cases, utilities are provided
or arranged for by the owner of the Community, otherwise, the resident contracts
the utility directly. Some Communities provide water and sewer service through
municipal or regulated utilities, while others provide these services to
residents from on-site facilities.

Each Community is generally designed to attract, and is marketed to one of
two types of residents -- (1) retirees and empty nesters or (2) families and
first-time homeowners. The Company believes both types of Communities are
attractive investments and focuses on owning Communities in or near large
metropolitan markets and retirement destinations.

The Company was formed to continue the property operations, business
objectives and acquisition strategies of an entity that had owned and operated
Communities since 1969. As of December 31, 2001, the Company owned or had an
ownership interest in a portfolio of 148 Communities and recreational vehicle
("RV") resorts (the "Properties") located throughout the United States
containing 50,761 residential sites. The Properties are located in 23 states
(with the number of Properties in each state shown parenthetically) -- Florida
(49), California (25), Arizona (17), Michigan (11), Colorado (10), Delaware (7),
Nevada (5), Indiana (3), Oregon (3), Illinois (2), Iowa (2), New York (2), Utah
(2), Pennsylvania (1), Maryland (1), Minnesota (1), Montana (1), New Mexico (1),
Ohio (1), Texas (1), Virginia (1), West Virginia (1), and Washington (1). As of
December 31, 2001, the Company also owned a commercial building located in
California.

The Company has approximately 800 full-time employees dedicated to carrying
out the Company's operating philosophy and strategies of value enhancement and
service to residents. The Company typically utilizes a one or two-person
management team for the on-site management of each of the Properties. Typically,
clerical and maintenance workers are employed to assist these individuals in the
management and care of the Properties. Direct supervision of on-site management
is the responsibility of the Company's regional vice presidents and regional and
district managers. These individuals have significant experience in addressing
the needs of residents and in finding or creating innovative approaches to
maximize value and increase cash flow from property operations. Complementing
this field management staff are approximately 60 corporate employees who assist
on-site management in all property functions.

FORMATION OF THE COMPANY

The Company, formed in March 1993, is a Maryland corporation which has
elected to be taxed as a real estate investment trust ("REIT"). The Company
generally will not be subject to Federal income tax to the extent it distributes
its REIT taxable income to its stockholders. REITs are subject to a number of
organizational and operational requirements. If the Company fails to qualify as
a REIT, its income is taxable at regular corporate rates. Even if the Company
qualifies for taxation as a REIT, the Company is subject to certain state and
local taxes on its income and property and Federal income and excise taxes on
its undistributed income.

The operations of the Company are conducted through certain entities which
are owned or controlled by the Company. MHC Operating Limited Partnership (the
"Operating Partnership") is the entity through which the Company conducts
substantially all of its operations. Subsidiaries of the Operating Partnership
have been created to: (i) facilitate mortgage financing (the "Financing
Partnerships"); (ii) facilitate the Company's ability to provide financing to
the owners of Communities ("Lending Partnership"); and (iii) own the assets and
operations of certain utility companies which service the Properties ("MHC
Systems"). The financial results of the Operating Partnership and subsidiaries
(together, the "Subsidiaries") are consolidated in the Company's consolidated
financial statements. The operations of the Company are managed on a
property-by-property basis therefor the results of our financing, lending and
property management and utility operations are not reviewed separately by
management to make decisions regarding allocation of resources or to assess
performance.

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In addition, since certain activities, if performed by the Company, may not
have been qualifying REIT activities under the Internal Revenue Code of 1986, as
amended (the "Code"), the Company has invested in the non-voting preferred stock
of various corporations which engage in such activities. Realty Systems, Inc.
("RSI") is a preferred stock subsidiary of the Company that, doing business as
Carefree Sales, is engaged in the business of purchasing, selling, leasing and
financing manufactured homes that are located or will be located in Properties
owned and managed by the Company. Carefree Sales also provides brokerage
services to residents at such Properties. Typically, residents move from a
Community but do not relocate their homes. Carefree Sales may provide brokerage
services, in competition with other local brokers, by seeking buyers for the
homes. Carefree Sales also leases homes to prospective residents with the
expectation that the tenant eventually will purchase the home. LP Management
Corp. leases from the Operating Partnership certain real property within or
adjacent to certain of the Properties consisting of golf courses, pro shops,
restaurants and RV areas. The Company believes that the activities of RSI and LP
Management Corp. (collectively, "Affiliates") benefit the Company by maintaining
and enhancing occupancy at the Properties. The Company accounts for its
investment in and advances to Affiliates using the equity method of accounting.

BUSINESS OBJECTIVES AND OPERATING STRATEGIES

The Company seeks to maximize both current income and long-term growth in
income. The Company focuses on Communities that have strong cash flow and
expects to hold such Properties for long-term investment and capital
appreciation. In determining cash flow potential, the Company evaluates the
Community's ability to attract and retain high quality residents who take pride
in their Community and in their home. These business objectives and their
implementation are determined by the Company's Board of Directors and may be
changed at any time. The Company's investment and operating approach includes:

- Providing consistently high levels of services and amenities in
attractive surroundings to foster a strong sense of community and
pride of home ownership;

- Efficiently managing the Properties to increase operating margins by
controlling expenses, increasing occupancy and maintaining
competitive market rents;

- Increasing income and property values by continuing the strategic
expansion and, where appropriate, renovation of the Properties;

- Utilizing management information systems to evaluate potential
acquisitions, identify and track competing properties and monitor
resident satisfaction; and

- Selectively acquiring Communities that have potential for long-term
cash flow growth and to create property concentrations in and around
major metropolitan areas and retirement destinations to capitalize
on operating synergies and incremental efficiencies.

The Company is committed to enhancing its reputation as the most respected
brand name in the industry. Its strategy is to own and operate the highest
quality Communities in major metropolitan areas and retirement destinations
across the United States. The focus is on creating an attractive residential
environment for homeowners by providing a well-maintained, comfortable Community
with a variety of organized recreational and social activities and superior
amenities. In addition, the Company regularly surveys rental rates of
competing properties and conducts satisfaction surveys of residents to determine
the factors residents consider most important in choosing a manufactured home
community.

FUTURE ACQUISITIONS

The Company acquired or gained a controlling interest in eighty-eight
Properties during 1997 through 1999, more than doubling its portfolio. The
Company believes that opportunities for property acquisitions are still
available and in general consolidation within the industry will continue
(see -- The Industry -- Industry Consolidation). However, the Company believes
that transactions occurring during 1999 and 2000 in the private marketplace are
at valuations significantly in excess of the Company's current public market
valuation. As a result, during 1999 and 2000 the Company accelerated its stock
repurchase program. The Company's Board of Directors continues to review the
conditions under which the Company will repurchase its stock. These conditions
include, but are not limited to, market price, balance sheet flexibility, other
opportunities and capital requirements. (For more information on the Company's
stock repurchase program see Note 4 to the accompanying financial

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statements.) Increasing acceptability of and demand for Site Set homes and
continued constraints on development of new Communities continue to add to their
attractiveness as an investment. The Company believes it has a competitive
advantage in the acquisition of new Communities due to its experienced
management, significant presence in major real estate markets and substantial
capital resources. The Company is actively seeking to acquire additional
Communities and currently is engaged in various stages of negotiations relating
to the possible acquisition of a number of Communities.

The Company anticipates that newly acquired properties will be located in
the United States. The Company utilizes market information systems to identify
and evaluate acquisition opportunities, including a market database to review
the primary economic indicators of the various locations in which the Company
expects to expand its operations. Acquisitions will be financed from the most
appropriate sources of capital, which may include undistributed funds from
operations, issuance of additional equity securities, sales of investments,
collateralized and uncollateralized borrowings and issuance of debt securities.
In addition, the Company may cause the Operating Partnership to issue units of
limited partnership interest ("OP Units") to finance acquisitions. The Company
believes that an ownership structure which includes the Operating Partnership
will permit the Company to acquire additional Communities in transactions that
may defer all or a portion of the sellers' tax consequences.

When evaluating potential acquisitions, the Company will consider such
factors as: (i) the replacement cost of the property; (ii) the geographic area
and type of property; (iii) the location, construction quality, condition and
design of the property; (iv) the current and projected cash flow of the property
and the ability to increase cash flow; (v) the potential for capital
appreciation of the property; (vi) the terms of tenant leases, including the
potential for rent increases; (vii) the potential for economic growth and the
tax and regulatory environment of the community in which the property is
located; (viii) the potential for expansion of the physical layout of the
property and the number of sites; (ix) the occupancy and demand by residents for
properties of a similar type in the vicinity and the residents profile; (x) the
prospects for liquidity through sale, financing or refinancing of the property;
and (xi) competition from existing Communities and the potential for the
construction of new Communities in the area. The Company expects to purchase
Communities with physical and market characteristics similar to the Properties
in its current portfolio.

PROPERTY EXPANSIONS

Several of the Company's Properties have available land for expanding the
number of sites available to be leased to residents. Development of these sites
("Expansion Sites") is predicated by local market conditions and permitted by
zoning and other applicable laws. When justified, development of Expansion Sites
allows the Company to leverage existing facilities and amenities to increase the
income generated from the Properties. Where appropriate, facilities and
amenities may be upgraded or added to certain Properties in order to make those
Properties more attractive in their markets. The Company's acquisition
philosophy has included the desire to own Properties with potential Expansion
Site development, and the Company has been successful in acquiring a number of
such Properties. Several examples of these Properties include the 1994
acquisition of Bulow Village with potential development of approximately 725
Expansion Sites, the 1997 acquisition of Golf Vista Estates with potential
development of approximately 128 Expansion Sites and the acquisition in 1999
of Coquina Crossing with potential development of approximately 393 Expansion
Sites, and the acquisition in 2001 of Grand Island and The Lakes at
Countrywood with combined potential Expansion Sites of 224 sites.

Of the Company's 148 Properties, ten may be expanded consistent with
existing zoning regulations. In 2002, the Company expects to develop an
additional 141 Expansion Sites within three of these Properties. As of December
31, 2001, the Company had approximately 817 Expansion Sites available for
occupancy in 24 of the Properties. The Company filled 205 Expansion Sites in
2001 and expects to fill an additional 200 to 250 Expansion Sites in 2002.

LEASES

The typical lease entered into between the resident and the Company for the
rental of a site is for a month-to-month or year-to-year term, renewable upon
the consent of both parties or, in some instances, as provided by statute. These
leases are cancelable, depending on applicable law, for non-payment of rent,
violation of community rules and regulations or other specified defaults.
Non-cancelable long-term leases, with remaining terms ranging up to ten years,
are in effect at certain sites within 22 of the Properties. These leases are
subject to rental rate increases based on the Consumer Price Index ("CPI"), in
some instances taking into consideration certain floors and ceilings and
allowing for pass-throughs of certain items such as real estate taxes, utility
expenses and capital expenditures. Generally, market rate adjustments are made
on an annual basis.

5

REGULATIONS AND INSURANCE

General. Communities are subject to various laws, ordinances and
regulations, including regulations relating to recreational facilities such as
swimming pools, clubhouses and other common areas. The Company believes that
each Property has the necessary permits and approvals to operate.

Rent Control Legislation. State and local rent control laws, principally
in California and Florida, limit the Company's ability to increase rents and to
recover increases in operating expenses and the costs of capital improvements at
certain Properties. Enactment of such laws has been considered from time to time
in other jurisdictions. The Company presently expects to continue to maintain
Communities, and may purchase additional properties, in markets that are either
subject to rent control or in which rent-limiting legislation exists or may be
enacted. For example, Florida has enacted a law that generally provides that
rental increases must be reasonable. Also, certain jurisdictions in California
in which the Company owns Properties limit rent increases to changes in the CPI
or some percentage thereof.

Insurance. Management believes that the Properties are covered by adequate
fire, flood, property, earthquake and business interruption insurance (where
appropriate) provided by reputable companies and with commercially reasonable
deductibles and limits. Due to the lack of available commercially reasonable
coverage, the company is self-insured for terrorist incidents. The Company
believes its insurance coverage is adequate based on the Company's assessment of
the risks to be insured, the probability of loss and the relative cost of
available coverage. The Company has obtained title insurance insuring fee title
to the Properties in an aggregate amount which the Company believes to be
adequate.

INDUSTRY

THE INDUSTRY

The Company believes that modern Communities, such as the Properties,
provide an opportunity for increased cash flows and appreciation in value. These
may be achieved through increases in occupancy rates and rents, as well as
expense controls, expansion of existing Properties and opportunistic
acquisitions, for the following industry specific reasons:

- Barriers to Entry: The Company believes that the supply of new
Communities will be constrained due to barriers to entry into the
industry. The most significant barrier has been the difficulty in
securing zoning from local authorities. This has been the result of
(i) the public's historically poor perception of the industry, and
(ii) the fact that Communities generate less tax revenue because the
homes are treated as personal property (a benefit to the home owner)
rather than real property. Another factor that creates substantial
barriers to entry is the length of time between investment in the
Community's development and the attainment of stabilized occupancy
and the generation of revenues. The initial development of the
infrastructure may take up to two or three years. Once the Community
is ready for occupancy, it may be difficult to attract residents to
an empty Community. Substantial occupancy levels may take several years
to achieve.

- Industry Consolidation: According to an industry analyst's industry
report, there are approximately 50,000 Communities in the United States,
and approximately 6.5% or 3,250 of the Communities have more than 200
sites and would be considered "investment-grade" properties. The five
public REITs that own Communities own approximately 532 or about 16% of
the "investment-grade" Communities. In addition, based on a report
prepared by one analyst, the top 150 owners of Communities own
approximately 69% of the "investment-grade" assets. The Company believes
that this relatively high degree of fragmentation in the industry
provides the Company, as a national organization with experienced
management and substantial financial resources, the opportunity to
purchase additional Communities.

- Stable Tenant Base: The Company believes that Communities tend to
achieve and maintain a stable rate of occupancy due to the following
factors: (i) residents own their own homes, (ii) Communities tend to
foster a sense of community as a result of amenities such as clubhouses,
recreational and social activities and (iii) since moving a Site Set home
from one Community to another involves substantial cost and effort,
residents often sell their home in-place (similar to site-built
residential housing) with no interruption of rental payments.

6

SITE SET HOUSING

Based on the current growth in the number of individuals living in Site Set
homes, the Company believes that Site Set homes are increasingly viewed by the
public as an attractive and economical form of housing. According to the
industry's trade association, nearly one in four new single family homes sold in
the United States today is Site set.

The Company believes that the growing popularity of Site Set housing is
primarily the result of the following factors:

- Importance of Home Ownership. According to the Fannie Mae ("FNMA") 2000
National Housing Survey renters' desire to own a home continues to be a
top priority. According to the report, "A home is more than merely
shelter. Owning a home provides a sense of financial security...Americans
view owning a home as the second most important action a person can take
to achieve financial security, behind stating an IRA [401(k)] or other
type of retirement account.

- Affordability. For a significant number of persons, Site Set housing
represents the only means of achieving home ownership. In addition, the
total cost of housing in a Community (home cost, site rent and related
occupancy costs) is competitive with and often lower than the total cost
of alternative housing, such as apartments and condominiums, and
generally substantially lower than "stick-built" residential
alternatives.

- Lifestyle Choice. As the average age of the United States population has
increased, Site Set housing has become an increasingly popular housing
alternative for retirement and "empty-nest" living. According to FNMA,
the surviving baby-boom generation -- the 80 million people born between
1945 and 1964 -- will constitute 18% of the U.S. population within the
next 30 years and more than 32 million will reach age 55 within the next
ten years. Among those people who are nearing retirement (age 40 to 54),
approximately 33% plan on moving upon retirement. The Company believes
that Site Set housing is especially attractive to such individuals when
located within a Community that offers an appealing amenity package,
close proximity to local services, social activities, low maintenance
and a secure environment.

- Construction Quality. Since 1976, all Site Set housing has been required
to meet stringent Federal standards, resulting in significant increases
in the quality of the industry's product. The Department of Housing and
Urban Development's standards for Site Set housing construction quality
are the only Federally regulated standards governing housing quality of
any type in the United States. Site Set homes produced since 1976 have
received a "red and silver" government seal certifying that they were
built in compliance with the Federal code. The code regulates Site Set
home design and construction, strength and durability, fire resistance
and energy efficiency, and the installation and performance of heating,
plumbing, air conditioning, thermal and electrical systems. In newer
homes, top grade lumber and dry wall materials are common. Also,
manufacturers are required to follow the same fire codes as builders of
site-built structures.

- Comparability to Site-Built Homes. The Site Set housing industry has
experienced a recent trend towards multi-section homes. Many modern Site
Set homes are longer (up to 80 feet compared to 50 feet in the 1960's)
and wider than earlier models. Many homes have vaulted ceilings,
fireplaces and as many as four bedrooms, and closely resemble single
family ranch style site-built homes.

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ITEM 2. PROPERTIES

The Company believes that the Properties provide attractive amenities and
common facilities that create a comfortable and attractive Community for the
residents, with most offering a clubhouse, a swimming pool, laundry facilities
and cable television service. Many also offer additional amenities such as
sauna/whirlpool spas, golf courses, tennis, shuffleboard and basketball courts
and exercise rooms. Since residents own their homes, it is their responsibility
to maintain their homes and the surrounding area. It is management's role to
ensure that residents comply with Community policies and to provide maintenance
of the common areas, facilities and amenities. The Company holds periodic
meetings of its property management personnel for training and implementation of
the Company's strategies. The Properties historically have had, and the Company
believes they will continue to have, low turnover and high occupancy rates.

The distribution of the Properties throughout the United States reflects
the Company's belief that geographic diversification helps insulate the
portfolio from regional economic influences. The Company intends to target new
acquisitions in or near markets where the Properties are located and will also
consider acquisitions of properties outside such markets. The Company's five
largest markets of Properties owned are Florida (49 Properties), California (25
Properties), Arizona (17 Properties), Michigan (11 Properties) and Colorado (10
Properties). These markets accounted for 36%, 17%, 9%, 3%, and 10%,
respectively, of the Company's total revenues for the year ended December 31,
2001. The Company also has Properties located in the following markets:
Northeast, Northwest, Midwest, and Nevada/Utah/New Mexico. The Company's largest
Property, Bay Indies, located in Venice, Florida, accounted for 3% of the
Company's total revenues for the year ended December 31, 2001.

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The following tables set forth certain information relating to the
Properties owned by the Company as of December 31, 2001, categorized by the
Company's major markets. "Core Portfolio" represents an analysis of Properties
owned throughout both years of comparison. The table excludes the following RV
resort Properties (2,687 sites) at which rents and occupancy vary based on
seasonality: Sherwood Forest RV (Kissimmee, Florida); Southern Palms (Eustis,
Florida); and Fun & Sun (San Benito, Texas). The table excludes five Properties
(1,521 sites) in which the Company has a non-controlling joint venture interest
and accounts for using the equity method of accounting.

- ---------------

(a) Represents a Property that is not part of the Core Portfolio.

(b) The process of filling Expansion Sites at these Properties is ongoing. A
decrease in occupancy may reflect development of additional Expansion Sites.

(c) Changes in total portfolio occupancy include the impact of acquisitions and
expansion programs and are therefore not comparable.

(d) During 2001, at certain Properties the amounts charged to residents for
utilities were separated ("Unbundled") from their rent charges and recorded
as utility income. For comparison purposes an adjustment was made to base
rental income for 2000. This adjustment is reflected on this table in the
monthly base rent per site amounts for 2000.

See Management's Discussion and Analysis of Financial Condition and Results of
Operations.

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ITEM 3. LEGAL PROCEEDINGS

DEANZA SANTA CRUZ MOBILE ESTATES

The residents of DeAnza Santa Cruz Mobile Estates, a property located in
Santa Cruz, California (the "City") previously brought several actions opposing
certain fees and charges in connection with water service at the Property. This
summary provides the history and reasoning underlying the Company's defense of
the residents' claims and explains the Company's decision to continue to defend
its position, which the Company believes is fair and accurate.

DeAnza Santa Cruz Mobile Estates is a 198-site Community overlooking the
Pacific Ocean. It is subject to the City's rent control ordinance which limits
annual rent increases to 75% of CPI. The Company purchased this Property in
August 1994 from certain unaffiliated DeAnza entities ("DeAnza"). Prior to the
Company's purchase in 1994, DeAnza made the decision to submeter and separately
bill tenants at the Property for both water and sewer in 1993 in the face of the
City's rapidly rising utility costs.

Under California Civil Code Section 798.41, DeAnza was required to reduce
rent by an amount equal to the average cost of usage over the preceding 12
months. This was done. With respect to water charges, because DeAnza did not
want to be regulated by the California Public Utility Commission ("CPUC"),
DeAnza relied on California Public Utilities Code Section 2705.5 ("CPUC Section
2705.5") to determine what rates would be charged for water on an ongoing basis
without becoming a public utility. DeAnza and the Company interpreted the
statute as providing that in a submetered mobile home park, the property owner
is not subject to regulation and control of the CPUC so long as the users are
charged what they would be charged by the utility company if users received
their water directly from the utility company. In Santa Cruz, customers
receiving their water directly from the City's water utility were charged a
certain lifeline rate for the first 400 ccfs of water and a greater rate for
usage over 400 ccfs of water, a readiness to serve charge of $7.80 per month and
tax on the total. In reliance on CPUC Section 2705.5, DeAnza implemented its
billings on this schedule notwithstanding that it did not receive the discount
for the first 400 ccfs of water because it was a commercial and not a
residential customer.

A dispute with the residents ensued over the readiness to serve charge and
tax thereon. The residents argued that California Civil Code Section 798.41
required that the Property owner could only pass through its actual costs of
water (and that the excess charges over the amount of the rent rollback were an
improper rent increase) and that CPUC Section 2705.5 was not applicable. DeAnza
unbundled the utility charges from rent consistent with California Civil Code
Section 798.41 and it has generally been undisputed that the rent rollback was
accurately calculated.

In August 1994, when the Company acquired the Property, the Company
reviewed the respective legal positions of the Santa Cruz Homeowners Association
("HOA") and DeAnza and concurred with DeAnza. DeAnza's reliance on CPUC Section
2705.5 made both legal and practical sense in that residents paid only what they
would pay if they lived in a residential neighborhood within the City and
permitted DeAnza to recoup part of the expenses of operating a submetered system
through the readiness to serve charge.

Over a period of 18 months from 1993 into May of 1995, a series of
complaints were filed by the HOA and Herbert Rossman, a resident, against
DeAnza, and later, the Company. DeAnza and the Company demurred to each of these
complaints on the grounds that the CPUC had exclusive jurisdiction over the
setting of water rates and that residents under rent control had to first
exhaust their administrative remedies before proceeding in a civil action. At
one point, the case was dismissed (with leave to amend) on the basis that
jurisdiction was with the CPUC and, at another point, Mr. Rossman was dismissed
from the case because he had not exhausted his administrative remedies.

On June 29, 1995, a hearing was held before a City rent control officer on
billing and submetering issues related to both water and sewer. The Company and
DeAnza prevailed on all issues related to sewer and the rent rollback related to
water, but the hearing officer determined that the Company could only pass
through its actual cost of water, i.e., a prorated readiness to serve charge and
tax thereon. The hearing officer did not deal with the subsidy being given to
residents through the quantity charge and ordered a rebate in a fixed amount per
resident. The Company and DeAnza requested reconsideration on this issue, among
others, which reconsideration was denied by the hearing officer.

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The Company then took a writ of mandate (an appeal from an administrative
order) to the Superior Court and, pending this appeal, the residents, the
Company and the City agreed to stay the effect of the hearing officer's decision
until the Court rendered judgment.

In July 1996, the Superior Court affirmed the hearing officer's decision
without addressing concerns about the failure to take the subsidy on the
quantity charge into account.

The Company requested that the City and the HOA agree to a further stay
pending appeal to the court of appeal, but they refused and the appeal court
denied the Company's request for a stay in late November 1996. Therefore, on
January 1, 1997, the Company reduced its water charges at this Property to
reflect a pass-through of only the readiness to serve charge and tax at the
master meter (approximately $0.73) and to eliminate the subsidy on the water
charges. On their March 1, 1997 rent billings, residents were credited for
amounts previously "overcharged" for readiness to serve charge and tax. The
amount of the rebate given by the Company and DeAnza was $36,400. In calculating
the rebate, the Company and DeAnza took into account the previous subsidy on
water usage although this issue had not yet been decided by the court of appeal.
The Company and DeAnza felt legally safe in so doing based on language in the
hearing officer's decision that actual costs could be passed through.

On March 12, 1997, the Company also filed an application with the CPUC to
dedicate the water system at this Property to public use and have the CPUC set
cost-based rates for water usage. The Company believed it was obligated to take
this action because of its consistent reliance on CPUC Section 2705.5 as a safe
harbor from CPUC jurisdiction. That is, when the Company could no longer charge
for water as the local serving utility would charge, it was no longer exempt
from the CPUC's jurisdiction and control under CPUC Section 2705.5.

On March 20, 1998, the court of appeal issued the writ of mandate requested
by the Company on the grounds that the hearing officer had improperly calculated
the amount of the rebate (meaning the Company had correctly calculated the rent
credits), but also ruling that the hearing officer was correct when he found
that the readiness to serve charge and tax thereon as charged by DeAnza and the
Company were an inappropriate rent increase. The decision primarily reflected
the court of appeal's view that CPUC Section 2705.5 operated as a ceiling and
that California Civil Code Section 798.41 allowed for a charge based on actual
costs, including costs of administration, operation and maintenance of the
system, but that the Company had not to provide evidence of such costs. The
court of appeal further agreed with the Company that the City's hearing officer
did not have the authority under California Civil Code Section 798.41 to
establish rates that could be charged in the future.

Following this decision, the CPUC granted the Company its certificate of
convenience and necessity on December 17, 1998 and approved cost-based rates and
charges for water that exceed what residents were paying under the Company's
reliance on CPUC Section 2705.5. Concurrently, the CPUC also issued an Order
Instituting Investigation ("OII") confirming its exclusive jurisdiction over the
issue of water rates in a submetered system and commencing an investigation into
the confusion and turmoil over billings in submetered properties. Specifically,
the OII states: "The Commission has exclusive and primary jurisdiction over the
establishment of rates for water and sewer services provided by private
entities."

Specifically, the CPUC ruling regarding the Company's application stated:
"The ultimate question of what fees and charges may or may not be assessed,
beyond external supplier pass-through charges, for in-park facilities when a
mobile home park does not adhere to the provisions of CPUC Section 2705.5, must
be decided by the Commission."

After the court of appeal decision, the HOA brought all of its members back
into the underlying civil action for the purpose of determining damages,
including punitive damages, against the Company. The trial was continued from
July 1998 to January 1999 to give the CPUC time to act on the Company's
application. Notwithstanding the action taken by the CPUC in issuing the OII in
December 1998, the trial court denied the Company's motion to dismiss on
jurisdictional grounds and trial commenced before a jury on January 11, 1999.

Not only did the trial court not consider the Company's motion to dismiss,
the trial court refused to allow evidence of the OII or the Company's CPUC
approval to go before the jury. Notwithstanding the Company's strenuous
objections, the judge also allowed evidence of the Company's and DeAnza's
litigation tactics to be used as evidence of bad faith and oppressive actions
(including evidence of the application to the CPUC requesting a $22.00 readiness
to serve charge). The Company's motion for a mistrial based upon these
evidentiary rulings was denied. On January 22, 1999, the jury returned a verdict
awarding $6.0 million of punitive damages against the Company and DeAnza. The
Company had previously agreed to indemnify DeAnza on the matter.

14

On April 19, 1999, the trial court denied all of the Company's and DeAnza's
post-trial motions for judgement notwithstanding the verdict, new trial and
remittur. The trial court also awarded $700,000 of attorneys' fees to
plaintiffs. The Company appealed the jury verdict and attorneys' fees award
(which also accrues interest at the statutory rate of 10.0% per annum). The
Company bonded the judgment pending appeal in accordance with California
procedural rules, which require a bond equal to 150% of the amount of the
judgment. Post-judgment interest will accrue at the statutory rate of 10.0% per
annum.

On December 21, 2001 the California Court of Appeal for the Sixth District
reversed the $6.0 million punitive damage award, the related award of attorneys'
fees, and, as a result, all post-judgement interest thereon, on the basis that
punitive damages are not available as a remedy for a statutory violation of the
MRL. The decision of the appellate court left the HOA with the right to seek a
new trial in which it must prove its entitlement to either the statutory penalty
and attorneys' fees available under the MRL or punitive damages based on causes
of action for fraud, misrepresentation or other tort. The HOA has filed in
Superior Court, seeking statutory penalties and attorneys' fees, which may be
heard in late March, 2002. The Company intends to vigorously defend itself
against these claims.

In two related appeals, the Company had argued that the trial court's
ability to enter an award of attorneys' fees in favor of the HOA and to take
certain other actions was preempted by the exercise of exclusive jurisdiction by
the CPUC over the issue of how to set rates for water in a submetered mobile
home park. During 2000, the California court of appeal rejected the Company's
preemption argument with respect to these prior rulings in favor of plaintiffs,
one of which had awarded plaintiffs approximately $100,000 of attorneys' fees.
The California Supreme Court declined to accept the case for review and the
Company paid the judgment, including post-judgment interest thereon, and settled
the matter for approximately $200,000 late in 2000.

In a separate matter, in December 2000 the HOA and certain individual
residents of the Property filed a complaint in the Superior Court of California,
County of Santa Cruz (No. CV 139825) against the Company, certain affiliates of
the Company and certain employees of the Company. The new lawsuit seeks damages,
including punitive damages, for intentional infliction of emotional distress,
unfair business practices, and unlawful retaliation purportedly arising from
allegedly retaliatory rent increases which were noticed by the Company to
certain residents in September 2000. The Company believes that the residents who
received rent increase notices with respect to rent increases above those
permitted by the local rent control ordinance were not covered by the ordinance
either because they did not comply with the provisions of the ordinance or
because they are exempted by state law. On December 29, 2000, the Superior Court
of California, County of Santa Cruz enjoined such rent increases. The Company
intends to vigorously defend the matter, which may go to trial in the summer of
2002.

ELLENBURG COMMUNITIES

The Company and certain other parties entered into a settlement agreement
("the Settlement"), which was approved by the Los Angeles County Superior Court
in April 2000. The Settlement resolved substantially all of the litigation and
appeals involving the Ellenburg Properties, and transactions arising out of the
settlement closed on May 22, 2000 (see Note 5). Only the appeals of the two
entities remain, neither of which is expected to materially affect the Company.

In connection with the Ellenburg Acquisition, on September 8, 1999,
Ellenburg Fund 20 ("Fund 20") filed a cross complaint in the Ellenburg
dissolution proceeding against the Company and certain of its affiliates
alleging causes of action for fraud and other claims in connection with the
Ellenburg acquisition. The Company subsequently successfully had the cross
complaint against the Company and its affiliates dismissed with prejudice by the
California Superior Court. However, Fund 20 has appealed. This appeal was one
not resolved by the Settlement. The Company believes Fund 20's allegations are
without merit and will vigorously defend itself.

In October 2001, Fund 20 sued the Company and certain of its affiliates
again, this time in Almeda County, California making substantially the same
allegations. The Company obtained an injunction preventing the case from
proceeding until the Fund 20 appeal is decided and other related proceedings in
Arizona (from which the Company has already been dismissed with prejudice) are
concluded.

15

CANDLELIGHT PROPERTIES, L.L.C

In 1996, 1997 and 1998, the Lending Partnership made loans to Candlelight
Properties, L.L.C. ("Borrower") in the aggregate principal amount of $8,050,000
(collectively, the "Loan". The Loan was secured by a mortgage on Candlelight
Village ("Candlelight"), a Property in Columbus, Indiana, and was guaranteed by
Ronald E. Farren, the 99% owner of Borrower. The Company accounted for the Loan
as an investment in real estate and, accordingly, Candlelight's rental revenues
and operating costs were included with the Company's rental revenues and
operating costs for financial reporting purposes. Concurrently with the funding
of the Loan, Borrower granted the Operating Partnership the option to acquire
Candlelight upon the maturity of the Loan. The Operating Partnership notified
Borrower that it was exercising its option to acquire Candlelight in March 1999,
and the Loan subsequently matured on May 3, 1999. However, Borrower failed to
repay the Loan and refused to convey Candlelight to the Operating Partnership.

Borrower filed suit in the Circuit Court of Bartholomew County, Indiana
("Court") on May 5, 1999, seeking declaratory judgment on the validity of the
exercise of the option. The Lending Partnership filed suit in the Court the next
day, seeking to foreclose its mortgage, and the suits were consolidated by the
Court.

On September 20, 2001, the parties entered into a settlement agreement
providing for a cash payment of $10.8 million to the Lending Partnership and
dismissal with prejudice of all litigation among the parties and their
affiliates, among other terms. The closing under the Settlement Agreement
occurred on October 5, 2001. The Company accounted for the Settlement as a
disposition of the property.

WESTWINDS

The Operating Partnership is the ground lessee ("Lessee") of certain
property in San Jose, California under ground leases ("Leases") from the
Nicholson Family Trust ("Lessor"). On February 13, 2001, Lessor filed a petition
for arbitration of disputes over whether certain items constitute "gross
revenue" under the Leases in which petition Lessor seeks damages and termination
of the Leases. Lessee responded on March 12, 2001 disputing Lessor's
contentions. Lessor claims that "gross revenue" for the purpose of calculating
percentage rent owing to Lessor under the ground leases includes certain amounts
Lessee has recouped from tenants of the Property (who are protected by rent
control) related to ground rent already paid to Lessor. Lessee has successfully
been able to pass-through to tenants at the property increases in ground rent
under the Leases. Lessee contends that this pass-through results in
reimbursement of lease expense, not "gross revenue." Lessor also contends that
the "net income" of RSI. from the Property should be included in the gross
revenue calculation. Lessee disputes this for many reasons, including, but not
limited to, the fact that RSI is not a lessee under the Leases, the sales
activity is not conducted by Lessee, and RSI is a separate company from Lessee.

Lessor's motion for summary judgment on the pass-through issue was denied
by an arbitration panel on November 2, 2001. Lessor and Lessee have agreed to
mediate the dispute prior to arbitration. The Company does not believe that the
amounts in question are material even if resolved against the Lessee and, based
upon advice of counsel, does not believe that the Lessor will be successful in
terminating the Leases.

OTHER

The Company is involved in various other legal proceedings arising in the
ordinary course of business. Management believes that all proceedings herein
described or referred to, taken together, are not expected to have a material
adverse impact on the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

16

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The following table sets forth for the period indicated, the high and low
sales prices for the Company's common stock as reported by The New York Stock
Exchange under the trading symbol MHC.

(a) Represents distributions per share in excess of net income per share-basic
on a GAAP basis and is not the same as return of capital on a tax basis.

The number of beneficial holders of the Company's common stock at December
31, 2001 was approximately 4,400.

17

MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED HISTORICAL FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AND PROPERTY DATA)

ITEM 6. SELECTED FINANCIAL AND OPERATING INFORMATION

The following table sets forth selected financial and operating information
on a historical basis for the Company. The following information should be read
in conjunction with all of the financial statements and notes thereto included
elsewhere in this Form 10-K. The historical operating data for the years ended
December 31, 2001, 2000, 1999, 1998 and 1997 have been derived from the
historical Financial Statements of the Company audited by Ernst & Young LLP,
independent auditors.

18

MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED HISTORICAL FINANCIAL INFORMATION
(CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AND PROPERTY DATA)

- ---------------

(1) See the Consolidated Financial Statements of the Company included elsewhere
herein.

(2) The Company believes that the book value of the Properties, which reflects
the historical costs of such real estate assets less accumulated
depreciation, is less than the current market value of the Properties.

(3) The Company generally considers Funds From Operations ("FFO") to be an
appropriate measure of the performance of an equity Real Estate Investment
Trust ("REIT"). FFO was redefined by the National Association of Real Estate
Investment Trusts ("NAREIT") in October 1999, effective January 1, 2000, as
net income (computed in accordance with generally accepted accounting
principles ["GAAP"]), before allocation to minority interests, excluding
gains (or losses) from sales of property, plus real estate depreciation and
after adjustments for unconsolidated partnerships and joint ventures. For
purposes of presenting FFO, the revised definition of FFO has been given
retroactive treatment. The Company believes that FFO is helpful to investors
as a measure of the performance of an equity REIT because, along with cash
flows from operating activities, financing activities and investing
activities, it provides investors an understanding of the ability of the
Company to incur and service debt and to make capital expenditures. The
Company computes FFO in accordance with the NAREIT definition which may
differ from the methodology for calculating FFO utilized by other equity
REITs and, accordingly, may not be comparable to such other REITs
computations. FFO in and of itself does not represent cash generated from
operating activities in accordance with GAAP and therefore should not be
considered an alternative to net income as an indication of the Company's
performance or to net cash flows from operating activities as determined by
GAAP as a measure of liquidity and is not necessarily indicative of cash
available to fund cash needs.

(4) During the year ended December 31, 1997, 39 Properties were acquired; net
operating income attributable to such Properties during 1997 was
approximately $3.8 million, which included approximately $1.7 million of
depreciation and amortization expense. During the year ended December 31,
1998, 41 Properties were acquired; net operating income attributable to such
Properties during 1998 was approximately $7.6 million, which included
approximately $3.9 million of depreciation and amortization expense. During
the year ended December 31, 1999, two Properties were acquired; net
operating income attributable to such Properties during 1999 was
approximately $87,000, which included approximately $104,000 of depreciation
expense. During the year ended December 31, 2000, three Properties and a
water and wastewater treatment company were sold; net operating income
attributable to such Properties during 2000 was approximately $1.6 million,
which included approximately $623,000 of depreciation expense. During the
year ended December 31, 2001, two Properties were purchased; net operating
income attributable to such Properties during 2001 was approximately $1.3
million, which included approximately $396,000 of depreciation expense. Also
during the year ended December 31, 2001, eight Properties were sold; net
operating income attributable to such Properties during 2001 was $1.0
million, which included approximately $235,000 of depreciation expense.

(5) Excludes recreational vehicle sites and sites held through unconsolidated
joint ventures.

19

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion should be read in conjunction with "Selected
Financial Data" and the historical Consolidated Financial Statements and Notes
thereto appearing elsewhere in this Form 10-K. The following discussion may
contain certain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 which reflect management's current
views with respect to future events and financial performance. Such
forward-looking statements are subject to certain risks and uncertainties,
including, but not limited to, the effects of future events on the Company's
financial performance; the adverse impact of external factors such as inflation
and consumer confidence; and the risks associated with real estate ownership.

RESULTS OF OPERATIONS

PROPERTY ACQUISITIONS, JOINT VENTURES AND DISPOSITIONS

The following chart lists the Properties acquired or sold since January 1,
1999. The Company defines its core Community portfolio ("Core Portfolio") as
Properties owned throughout both periods of comparison. Excluded from the Core
Portfolio are any Properties acquired or sold during the period and also any
recreational vehicle ("RV") Properties which, together, are referred to as the
"Non-Core" Properties.

20

TRENDS

Occupancy in the Company's Properties as well as the ability to increase
rental rates directly affects revenues. In 2001, occupancy in the Company's Core
Portfolio has remained relatively stable. Also during 2001, average monthly base
rental rates for the Core Portfolio increased approximately 4.5%. The Company
believes these trends will continue through 2002.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company's consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States,
which require the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and the related
disclosures. The Company believes that the following critical accounting
policies, among others, affect its more significant judgments and estimates used
in the preparation of its consolidated financial statements.

The Company periodically evaluates its long-lived assets, including its
investments in real estate for impairment indicators. The judgments regarding
the existence of impairment indicators, are based on factors such as operational
performance, market conditions and legal factors. Future events could occur
which would cause us to conclude that impairment indicators exist and an
impairment loss is warranted.

The valuation of financial instruments under SFAS No. 107 and SFAS No. 133
requires the Company to make estimates and judgments that affect the fair value
of the instruments. The Company, where possible, bases the fair values of its
financial instruments, including its derivative instrument, on listed market
prices and third party quotes. Where these are not available, the Company bases
its estimates on other factors relevant to the financial instrument.

21

COMPARISON OF YEAR ENDED DECEMBER 31, 2001 TO YEAR ENDED DECEMBER 31, 2000

Since December 31, 1999, the gross investment in real estate increased from
$1,264 million to $1,238 million as of December 31, 2001, due primarily to the
aforementioned acquisitions and dispositions of Properties during the period.
The total number of sites owned or controlled decreased from 54,002 as of
December 31, 1999 to 50,761 as of December 31, 2001.

The following table summarizes certain financial and statistical data for
the Core Portfolio and the Total Portfolio for the years ended December 31, 2001
and 2000.

- ---------------

(1) During 2001, at certain Properties the amounts charged to residents for
utilities were separated ("Unbundled") from their base rent charges and
recorded as utility income. For comparison purposes, a reclassification was
made to base rental income for 2000 on this table. This reclassification is
also reflected in the monthly base rent per site amounts for 2000.

(2) Income from operations for the Core Portfolio does not include an allocation
of income from affiliates, interest income, corporate general and
administrative expense, interest expense and related amortization or
depreciation on corporate assets.

(3) Site and occupancy information does not include the Properties owned through
unconsolidated joint ventures or the RV Properties.

22

Revenues

The 4.7% increase in base rental income for the Core Portfolio reflects a
4.5% increase in monthly base rent per site coupled with a 0.2% increase in
average occupied sites. The increase in utility and other income for the Core
Portfolio is due primarily to increases in pass through items such as utilities
and real estate taxes -- which resulted from higher expenses for these items.
For the Total Portfolio, changes in base rental income and utility and other
income generally reflect those of the Core Portfolio and the effect of
acquisition and disposition of the Non-Core Properties.

Equity in income of affiliates decreased 24.8%, reflecting lower sales
volumes. Combined home sales revenue decreased approximately $4.0 million, of
which $3.3 million is attributable to a decline in new home inventory sales
volume. Sales volumes for new home inventory, used home inventory and brokered
home sales were 485, 250 and 1,114, respectively, for the year ended December
31, 2001, and 535, 290 and 1,271, respectively, for the year ended December 31,
2000.

The decrease in interest income is primarily due to the repayment of
certain notes receivable, fewer short-term investments and lower interest rates.
Short-term investments had average balances for the years ended December 31,
2001 and 2000 of approximately $1.9 million and $1.5 million, respectively,
which earned interest income at an effective rate of 3.8% and 6.0% per annum,
respectively.

Operating Expenses

The increase in property operating and maintenance expense for the Core
Portfolio is due primarily to increases in utility expenses passed through and
included in utility income. Expenses for the Core Portfolio also reflect
increases in payroll and property insurance expenses. Core Portfolio real estate
taxes increased 2.8% generally due to higher assessed values on certain
Properties. The increase in Total Portfolio property operating and maintenance
expense and real estate taxes is also impacted by acquisition and disposition of
Non-Core Properties. Property management expense allocated to the Core
Portfolio, which reflects costs of managing the Properties and is estimated
based on a percentage of Property revenues, increased 5.8%.

General and administrative expenses ("G&A") increased 4.1% due to increased
public company costs and related expenses and promotional costs. G&A for 2001
includes a charge for additional amortization of deferred compensation offset by
a reversal of legal expenses previously accrued related to the Ellenburg
settlement.

Interest and related amortization decreased due to lower interest rates
during the period. The weighted average outstanding debt balances for the years
ended December 31, 2001 and 2000 were $713.2 million and $707.5 million,
respectively. The effective interest rate was 7.0% and 7.4% per annum for the
years ended December 31, 2001 and 2000, respectively.

Depreciation on corporate assets increased due to fixed asset additions
related to information and communication systems. Depreciation on real estate
assets and other costs increased due primarily to the acquisition and
disposition of Non-Core Properties.

23

COMPARISON OF YEAR ENDED DECEMBER 31, 2000 TO YEAR ENDED DECEMBER 31, 1999

Since December 31, 1998, the gross investment in real estate decreased from
$1,237 million to $1,218 million as of December 31, 2000, due primarily to the
aforementioned acquisitions and dispositions of Properties during the period.
The total number of sites owned or controlled decreased from 53,009 as of
December 31, 1998 to 51,452 as of December 31, 2000.

The following table summarizes certain financial and statistical data for
the Core Portfolio and the Total Portfolio for the years ended December 31, 2000
and 1999.

- ---------------

(1) Income from operations for the Core Portfolio does not include an allocation
of income from affiliates, interest income, corporate general and
administrative expense, interest expense and related amortization or
depreciation on corporate assets.

(2) Site and occupancy information does not include the five Properties owned
through joint ventures or the three RV properties.

24

Revenues

The 4.5% increase in base rental income for the Core Portfolio reflects a
3.9% increase in monthly base rent per site coupled with a 0.6% increase in
average occupied sites. The 4.3% increase in base rental income for the Total
Portfolio reflects a 3.8% increase in monthly base rent per site coupled with a
0.5% increase in average occupied sites and also reflects the acquisition and
disposition of Non-Core Properties. The increase in utility and other income for
the Core Portfolio is due primarily to increases in pass through items such as
utilities and real estate taxes -- which resulted from higher expenses for these
items. The decrease in Total Portfolio utility and other income is due primarily
to the sale of Mesa Regal RV resort and other changes in the Non-Core
Properties. Also included in other income is a gain on the sale of the FFEC-Six
water and wastewater treatment company of $719,000, partially offset by an
impairment loss on the DeAnza Santa Cruz water and wastewater service company of
$701,000.

The decrease in interest income is primarily due to the repayment of
certain notes receivable and fewer short-term investments. Short-term
investments had average balances for the years ended December 31, 2000
and 1999 of approximately $1.5 million and $2.8 million, respectively, which
earned interest income at an effective rate of 6.0% and 6.3% per annum,
respectively.

Operating Expenses

The increase in property operating and maintenance expense for the Core
Portfolio is due primarily to increases in utility expenses passed through and
included in utility income. Expenses for the Core Portfolio also reflect
increases in repairs and maintenance expense, payroll and property general and
administrative expenses partially offset by decreased insurance and other
expenses. Core Portfolio real estate taxes increased 2.4% generally due to
higher property assessments on certain Properties. The increase in Total
Portfolio property operating and maintenance expense and real estate taxes is
also impacted by acquisition and disposition of Non-Core Properties. Property
management expense for the Core Portfolio, which reflects costs of managing the
Properties and is estimated based on a percentage of Property revenues,
increased 6.1%.

General and administrative expenses increased primarily due to increased
payroll resulting from salary increases and increased public company related
expenses.

Interest and related amortization decreased due to lower weighted average
outstanding debt balances during the period. The weighted average outstanding
debt balances for the years ended December 31, 2000 and 1999 were $707.5 million
and $738.1 million, respectively. The effective interest rate was 7.4% and 7.2%
per annum for the years ended December 31, 2000 and 1999, respectively.

Depreciation on corporate assets increased due to fixed asset additions
related to information and communication systems. Depreciation on real estate
assets and other costs decreased due primarily to the acquisition and
disposition of Non-Core Properties.

25

LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY

As of December 31, 2001, the Company had $1.4 million in cash and cash
equivalents and $133.8 million available on its line of credit. The Company
expects to meet its short-term liquidity requirements, including its
distributions, generally through its working capital, net cash provided by
operating activities and availability under the existing line of credit. The
Company expects to meet certain long-term liquidity requirements such as
scheduled debt maturities, property acquisitions and capital improvements by
long-term collateralized and uncollateralized borrowings including borrowings
under its existing line of credit and the issuance of debt securities or
additional equity securities in the Company, in addition to working capital.

In order to qualify as a REIT for federal income tax purposes, the Company
must distribute 95% or more of its taxable income (excluding capital gains). The
following distributions have been declared and/or paid to common stockholders
and minority interests since January 1, 1999.

The Operating Partnership paid distributions of 9.0% per annum on the $125
million of Series D Cumulative Redeemable Perpetual Preferred Units ("Preferred
Units"). Distributions on the Preferred Units were paid quarterly on the last
calendar day of each quarter beginning December 31, 1999. The Company expects to
continue to make regular quarterly distributions and has set its 2002
distribution to common stockholders at $1.90 per share per annum.

MORTGAGES AND CREDIT FACILITIES

On October 29, 2001, the Company entered into an interest rate swap
agreement, fixing the London Interbank Offered Rate ("LIBOR") on $100 million of
the Company's floating rate debt at approximately 3.7% per annum for the period
October 2001 through August 2004. The terms of the swap require monthly
settlements on the same dates interest payments are due on the debt. In
accordance with SFAS No. 133 as herein defined, the interest rate swap will be
reflected at market value. The Company believes the swap is a perfectly
effective cash flow hedge, under SFAS No. 133 and there will be no effect on net
income as a result of the mark-to-market adjustments.

During the year ended December 31, 2001, the Company borrowed $46.0 million
on its line of credit and paid down $89.7 million on the line of credit. The
line of credit bears interest at a per annum rate of LIBOR plus 1.125%.

In July of 2001, the Company paid off three maturing mortgages in the
amount of $12.1 million. The payoffs were funded with borrowings on the line of
credit.
26

On August 3, 2001, the Company entered into a $50.0 million mortgage note
(the "Stagecoach Mortgage") collateralized by 7 Properties beneficially owned by
MHC Stagecoach, L.L.C. The Stagecoach Mortgage bears interest at a rate of 6.98%
per annum, amortizes beginning September 1, 2001 over 10 years and matures
August 31, 2011. Proceeds from the financing were used to reduce borrowings on
the line of credit by $37.9 million.

On February 24, 2000, the Company entered into mortgage agreements
collateralizing two Properties for a total of $14.6 million. The mortgage notes
mature on March 1, 2010, amortize beginning March 1, 2000 over 30 years and bear
interest at a rate of approximately 8.3% per annum.

On April 3, 2000, the Company extended to April 3, 2002 the maturity of its
$100 million unsecured term loan (the "Term Loan") with a group of banks with
interest only payable monthly at a per annum rate of LIBOR plus 1.0%. On
February 8, 2002, the Company entered into a term loan credit agreement with the
same group of banks, which extended the Term Loan to August 9, 2005.

On June 30, 2000, the Company obtained $110 million in debt financing
consisting of two mortgage notes -- one for $94.3 million and one for $15.7
million -- secured by seven Properties. The proceeds of the financing were used
to repay $60 million of mortgage debt secured by the seven Properties, to repay
amounts outstanding under the Company's line of credit and for working capital
purposes. The Company recorded a $1.0 million extraordinary loss (net of
$264,000 allocated to Minority Interests) in connection with the early repayment
of the $60 million of mortgage debt.

On August 9, 2000, the Company amended its unsecured line of credit with a
bank (the "Credit Agreement") bearing interest at a per annum rate of LIBOR plus
1.125%. Among other things, the amendment lowered the total facility under the
Credit Agreement to $150 million and extended the maturity to August 9, 2003.
The Company pays a quarterly fee on the average unused amount of such credit
equal to 0.15% of such amount. As of December 31, 2001, $133.8 million was
available under the Credit Agreement.

Certain of the Company's mortgage and credit agreements contain covenants
and restrictions including restrictions as to the ratio of secured or unsecured
debt versus encumbered or unencumbered assets, the ratio of fixed
charges-to-earnings before interest, taxes, depreciation and amortization
("EBITDA"), limitations on certain holdings and other restrictions.

ACQUISITIONS, DISPOSITIONS AND INVESTMENTS

On September 4, 1997, the Company entered into a portfolio purchase
agreement (as amended by a supplemental agreement on December 17, 1997) to
acquire 37 manufactured home communities (the "Ellenburg Communities") from
partnerships having Ellenburg Capital Corporation ("ECC") as the general
partner, for a purchase price in excess of $300 million. During 1997 and 1998,
the Company closed on the acquisition of 31 of the Ellenburg Communities for an
aggregate purchase price of approximately $278 million and gained control of an
additional five Ellenburg Communities with acquisition advances of approximately
$57 million to the partnerships which owned such Ellenburg Communities. All
fundings related to the acquisition were funded by the Company with borrowings
under the Company's line of credit, term bank facilities, assumed debt and the
issuance of Common OP Units.

During 1998, the Company received approximately $14.3 million, including
approximately $365,000 of interest income, which was being held subject to the
completion of due diligence procedures on the Ellenburg Communities. The $14.3
million was initially recorded as a liability until 1999 when a settlement of
certain related issues was substantially complete and accordingly, in a non-cash
transaction, relieved the liability and adjusted the purchase price of the
Ellenburg Communities.

In April 2000, the California Superior Court approved a settlement
agreement (the "Settlement") in connection with the dissolution proceeding of
ECC and its affiliated partnerships. As part of the Settlement, the Company
received $13.5 million previously held in escrow in connection with the purchase
of the Ellenburg Communities and recorded $3.0 million of interest income
related to these funds. In connection with the Settlement, the Company sold
three communities -- Mesa Regal RV Resort, Mon Dak and Naples Estates -- for an
aggregate sales price of $59.0 million, including cash proceeds of $40.0 million
and assumption of debt by the purchaser of $19.0 million. The Company recorded a
$9.1 million gain on the sale of these Properties. Proceeds from the Settlement
and property sales were used to pay down the Company's line of credit.

27

On January 6, 1998, the Company funded a $12.3 million loan (the "Meadows
Loan") to Meadows Preservation, Inc. The Meadows Loan was collateralized by The
Meadows manufactured home community located in Palm Beach Gardens, Florida. On
April 1, 1999, the Company effectively exchanged the Meadows Loan for an equity
and debt interest in the partnership that owns The Meadows. The Company includes
The Meadows in investment in real estate and the related results of operations
in the Statement of Operations.

On July 23, 1999, the Company acquired Coquina Crossing, located in St.
Augustine, Florida, for a purchase price of approximately $10.4 million. The
acquisition was funded with a borrowing under the Company's line of credit.
Coquina Crossing is a 748-site senior community with 274 developed sites and
zoned expansion potential for 479 sites. In addition, Realty Systems, Inc.
("RSI"), an affiliate of the Company, purchased the model home inventory at the
community for approximately $1.1 million.

On February 29, 2000, MHC Systems, Inc., a consolidated subsidiary of the
Company, disposed of the water and wastewater service company and facilities
known as FFEC-Six in a cash sale. Net proceeds from the sale of approximately
$4.2 million were used to pay down the Company's line of credit .

On December 28, 2000, the Company, through its joint venture with Meadows
Management Company, acquired a 50% economic interest in Voyager RV Resort, a
1,576 site RV resort in Tucson, Arizona, for total consideration of $8.0
million. The Company's investment included cash of $3.0 million, its 50%
interest in land held through the joint venture valued at $2.0 million and notes
receivable from the principals of Meadows Management Company totaling $3.0
million.

On January 3, 2001, the Company acquired two Florida Properties, totaling
730 sites, for an aggregate purchase price of approximately $16.3 million. The
Lakes at Countrywood is a 421-site community in Plant City, near Tampa, Florida,
and includes approximately 23 acres for expansion. Grand Island is a 309-site
community in Grand Island, near Orlando, Florida, and includes a marina with 50
boat docks. The acquisition was funded with a borrowing under the Company's line
of credit.

On February 13, 2001, the Company completed the disposition of seven
Properties, totaling 1,281 sites, in Kansas, Missouri and Oklahoma, for a total
sale price of approximately $17.4 million. A gain of $8.1 million was recorded
on the accompanying consolidated statements of operations. Proceeds from the
sale were used to reduce the amount outstanding on the Company's line of credit.

On October 5, 2001, the Company finalized a settlement agreement between
the Lending Partnership, the Operating Partnership and the limited liability
partnership which owns Candlelight Village in Columbus, Indiana. In 1996, the
Company funded a recourse loan to the owner of Candlelight Village and accounted
for the loan as an investment in real estate. The Company received $10.8 million
in proceeds from the settlement, which was accounted for as a sale of real
estate and recorded a $75,000 gain on the sale. Proceeds from the sale were used
as working capital.

CAPITAL IMPROVEMENTS

Capital expenditures for improvements are identified by the Company as
recurring capital expenditures ("Recurring CapEx"), site development costs and
corporate headquarters costs. Recurring CapEx was approximately $12.7 million
and $7.9 million for the years ended December 31, 2001 and 2000, respectively.
Of these expenditures, the Company believes that approximately $7.1 million or
$142 per site for 2001 and $6.5 million or $130 per site for 2000 are
non-revenue producing improvements which are necessary in order to increase
and/or maintain occupancy levels and maintain competitive market rents for new
and renewing residents. Site development costs were approximately $9.7 million
and $7.9 million for the years ended December 31, 2001 and 2000, respectively,
and represent costs to develop expansion sites at certain of the Company's
Properties.

EQUITY TRANSACTIONS

On March 26, 1999, the Operating Partnership repurchased and cancelled
200,000 OP Units from a limited partner of the Operating Partnership.

28

On September 30, 1999, the Operating Partnership completed a $125 million
private placement of 9.0% Series D Cumulative Perpetual Preferred Units ("POP
Units") to two institutional investors. The POP Units, which are callable by the
Company after five years, have no stated maturity or mandatory redemption. Net
proceeds from the offering of $121 million were used to repay amounts
outstanding under the Company's line of credit facility and for other corporate
purposes.

In March 1997, the Company's Board of Directors approved a common stock
repurchase plan whereby the Company was authorized to repurchase and retire
shares of its common stock. No shares of Common Stock were repurchased during
the year ended December 31, 2001. However, under the plan, the Company
repurchased approximately 2.2 million shares of Common Stock at an average price
of $24.06 per share during the year ended December 31, 2000 and 4.1 million
shares of Common Stock at an average price of $23.40 per share during the year
ended December 31, 1999, using proceeds from borrowings on the line of credit.

INFLATION

Substantially all of the leases at the Properties allow for monthly or
annual rent increases which provide the Company with the opportunity to achieve
increases, where justified by the market, as each lease matures. Such types of
leases generally minimize the risk of inflation to the Company.

FUNDS FROM OPERATIONS

FFO was redefined by NAREIT in October 1999, effective January 1, 2000, as
net income (computed in accordance with GAAP), before allocation to minority
interests, excluding gains (or losses) from sales of property, plus real estate
depreciation and after adjustments for unconsolidated partnerships and joint
ventures. The Company computes FFO in accordance with the NAREIT definition,
which may differ from the methodology for calculating FFO utilized by other
equity REITs and, accordingly, may not be comparable to such other REIT's
computations. Funds available for distribution ("FAD") is defined as FFO less
non-revenue producing capital expenditures and amortization payments on mortgage
loan principal. The Company believes that FFO and FAD are useful to investors as
a measure of the performance of an equity REIT because, along with cash flows
from operating activities, financing activities and investing activities, they
provide investors an understanding of the ability of the Company to incur and
service debt and to make capital expenditures. FFO and FAD in and of themselves
do not represent cash generated from operating activities in accordance with
GAAP and therefore should not be considered an alternative to net income as an
indication of the Company's performance or to net cash flows from operating
activities as determined by GAAP as a measure of liquidity and are not
necessarily indicative of cash available to fund cash needs.

The following table presents a calculation of FFO and FAD for the years
ended December 31, 2001, 2000 and 1999 (amounts in thousands):

29

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK

The Company's earnings are affected by changes in interest rates, as a
portion of the Company's outstanding indebtedness is at variable rates based on
LIBOR. The Company's $150 million line of credit ($16.3 million outstanding at
December 31, 2001) bears interest at LIBOR plus 1.125% per annum and the
Company's $100 million Term Loan bears interest at LIBOR plus 1.0% per annum. If
LIBOR increased/decreased by 1.0% during 2001, interest expense would have
increased/decreased by approximately $1.4 million based on the combined average
balance outstanding under the Company's line of credit and Term Loan for the
year ended December 31, 2001.

In July 1998, the Company entered into an interest rate swap agreement (the
"1998 Swap") fixing LIBOR on $100 million of the Company's floating rate debt at
6.4% for the period 1998 through 2003. The cost of the 1998 Swap consisted only
of legal costs that were deemed immaterial. The value of the 1998 Swap was
impacted by changes in the market rate of interest. Had the 1998 Swap been
entered into on December 31, 1999, the applicable LIBOR swap rate would have
been approximately 6.57%. Each 0.01% increase or decrease in the applicable swap
rate for the 1998 Swap increases or decreases the value of the 1998 Swap versus
its current value by approximately $28,000. The Company accounted for the 1998
Swap as a hedge. Payments and receipts under the 1998 Swap were accounted for as
an adjustment to interest expense. On January 10, 2000, the Company unwound the
1998 Swap and received $1.0 million of proceeds which is amortized into interest
expense through March 2003.

On October 29, 2001, the Company entered into an interest rate swap
agreement, fixing LIBOR on $100 million of the Company's floating rate debt at
approximately 3.7% for the period October 2001 through August 2004. The terms of
the swap require monthly settlements on the same dates that interest payments
are due on the debt. In accordance with SFAS No. 133, the interest rate swap is
reflected at market value. The Company believes the swap is a perfectly
effective cash flow hedge per SFAS No. 133 and there will be no effect on net
income as a result of the mark-to-market adjustment. The value of the hedge as
of December 31, 2001 was approximately $489,000 and is recorded as an asset and
included in other assets. Mark-to-market change in the value of the swap are
included in other comprehensive income.

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and
Hedging Activities" and its amendments, Statements 137 and 138 in June 1999 and
June 2000, respectively. SFAS No. 133 permits early adoption as of the beginning
of any fiscal quarter after its issuance. In June 1999, the FASB issued
Statement No. 137 which deferred the effective date of SFAS No. 133 to all
fiscal quarters for fiscal years beginning after June 15, 2000. The Company
adopted SFAS No. 133 effective January 1, 2001. SFAS No. 133 requires the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Index to Combined Financial Statements on page F-1 of this Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEMS 10, 11, 12, 13.

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, EXECUTIVE COMPENSATION,
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 10, Item 11, Item 12, and Item 13 will be
contained in a definitive proxy statement which the Registrant anticipates
will be filed no later than April 28, 2002, and thus this Part has been
omitted in accordance with General Instruction G(3) to Form 10-K.

30

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K

(a)
(1&2) See Index to Financial Statements and Schedules on page F-1 of this
Form 10-K.

(3) Exhibits:

31

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)

10.28(d) Form of Secured Promissory Note payable to the Company by
certain members of management of the Company dated January 2,
1996
10.29(d) Form of Pledge Agreement between the Company and certain members
of management of the Company dated January 2, 1996
10.30(e) Second Amended and Restated MHC Operating Limited Partnership
Agreement of Limited Partnership, dated as of March 15, 1996
10.31(f) Agreement of Limited Partnership of MHC Financing Limited
Partnership Two
10.32(g) $265,000,000 Mortgage Note dated December 12,1997
10.33(g) Second Amended and Restated Credit Agreement (Revolving
Facility) between the Company, MHC Operating Limited
Partnership, and certain lenders and agents, dated April 28,
1998
10.34(g) First Amendment to Second Amended and Restated Credit Agreement
(Revolving Facility) between the Company, MHC Operating Limited
Partnership, and certain lenders and agents, dated December 18,
1998
10.35(h) Second Amendment to Second Amended and Restated Credit Agreement
(Revolving Facility) between the Company, MHC Operating Limited
Partnership, and certain lenders and agents, dated August 9,
2000
10.36(g) Amended and Restated Credit Agreement (Term Loan) between the
Company, MHC Operating Limited Partnership, and certain lenders
and agent, dated April 28, 1998
10.36(h) First Amendment to Amended and Restated Credit Agreement (Term
Loan) between the Company, MHC Operating Limited Partnership,
and certain lenders and agent, dated November 21, 2000
10.36(g) Letter Agreement between the Company and Bank of America
National Trust and Savings Association confirming the $100
million swap transaction, dated July 11, 1995
10.39(h) $110,000,000 Amended, Restated and Consolidated Promissory Note
dated June 28, 2000
10.40(h) $15,750,000 Promissory Note Secured by Leasehold Deed of Trust
dated July 13, 2000
10.41(i) Credit Agreement (Term Loan) between the Company, MHC Operating
Limited Partnership and certain lenders and agents dated
February 9, 2002.
10.42(i) Third Amendment to Second Amended and Restated Credit Agreement
(Revolving Facility) between the Company, MHC Operating Limited
Partnership, and certain lenders and agents, dated February 9,
2002
10.43(i) $50,000,000 Promissory Note secured by Leasehold Deeds of Trust
(Stagecoach Mortgage) dated December 2, 2001.
11 Not applicable
12(i) Computation of Ratio of Earnings to Fixed Charges
13 Not applicable
16 Not applicable
18 Not applicable
21(i) Subsidiaries of the registrant
22 Not applicable
23(i) Consent of Independent Auditors
24.1(i) Power of Attorney for John F. Podjasek, Jr. dated March 27, 2002
24.2(i) Power of Attorney for Michael A. Torres dated March 19, 2002
24.3(i) Power of Attorney for Thomas E. Dobrowski dated March 15, 2002
24.4(i) Power of Attorney for Gary Waterman dated March 27, 2002
24.5(i) Power of Attorney for Donald S. Chisholm dated March 19, 2002
24.6(i) Power of Attorney for Louis H. Masotti dated March 15, 2002
27 Not applicable
28 Not applicable

(a) Included as an exhibit to the Company's Form S-11 Registration
Statement, File No. 33-55994, and incorporated herein by reference.

(b) Included as an exhibit to the Company's Report on Form 10-K dated
December 31, 1993, and incorporated herein by reference.

(c) Included as an exhibit to the Company's Report on Form 10-K dated
December 31, 1994, and incorporated herein by reference.

(d) Included as an exhibit to the Company's Report on Form 10-Q for the
quarter ended March 31, 1996, and incorporated herein by reference.

32

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)

(e) Included as an exhibit to the Company's Report on Form 10-Q for the
quarter ended June 30, 1996, and incorporated herein by reference.

(f) Included as an exhibit to the Company's Report on Form 10-K dated
December 31, 1997, and incorporated herein by reference.

(g) Included as an exhibit to the Company's Form S-3 Registration
Statement, File No. 333-90813, and incorporated herein by reference.

(h) Included as an exhibit to the Company's Report on Form 10-K dated
December 31, 2000, and incorporated herein by reference.

(i) Filed herewith.

(b) Reports on Form 8-K:

None.

(c) Exhibits:

See Item 14(a)(3) above.

(d) Financial Statement Schedules:

See Index to Financial Statements attached hereto on page F-1 of this Form
10-K.

33

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

MANUFACTURED HOME COMMUNITIES, INC.,
a Maryland corporation

Date: March 29, 2002 By: /s/ HOWARD WALKER
-------------- ------------------------------------
Howard Walker
Chief Executive Officer

Date: March 29, 2002 By: /s/ JOHN ZOELLER
-------------- ------------------------------------
John Zoeller
Executive Vice President, Treasurer
and Chief Financial Officer

Date: March 29, 2002 By: /s/ MARK HOWELL
-------------- ------------------------------------
Mark Howell
Principal Accounting Officer

34

Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.

35

INDEX TO FINANCIAL STATEMENTS

MANUFACTURED HOME COMMUNITIES, INC.

Certain schedules have been omitted as they are not applicable to the
Company.

F-1

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors of Manufactured Home Communities, Inc.

We have audited the accompanying consolidated balance sheets of
Manufactured Home Communities, Inc. as of December 31, 2001 and 2000, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
2001. We have also audited the related financial statement schedules listed in
the accompanying index. These financial statements and schedules are the
responsibility of the management of Manufactured Home Communities, Inc. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Manufactured
Home Communities, Inc. at December 31, 2001 and 2000, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects the information set forth therein.

ERNST & YOUNG LLP

Chicago, Illinois
January 29, 2002, except for Note 10
as to which the date is February 8, 2002 and
except for Note 18
as to which the date is February 22, 2002

F-2

MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2001 and 2000
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)

The accompanying notes are an integral part of the financial statements
F-3

MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)

The accompanying notes are an integral part of the financial statements
F-4

MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(AMOUNTS IN THOUSANDS)

The accompanying notes are an integral part of the financial statements

F-5

MANUFACTURED HOME COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(AMOUNTS IN THOUSANDS)

The accompanying notes are an integral part of the financial statements

F-6

MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- ORGANIZATION OF THE COMPANY AND BASIS OF PRESENTATION

Manufactured Home Communities, Inc. (together with its consolidated
subsidiaries, the "Company"), formed in March 1993, is a Maryland corporation
which has elected to be taxed as a real estate investment trust ("REIT"). The
Company owns or has a controlling interest in 148 manufactured home communities
(the "Properties") located in 23 states, consisting of 50,761 sites. The Company
generally will not be subject to Federal income tax to the extent it distributes
its REIT taxable income to its stockholders.

The operations of the Company are conducted through certain entities that
are owned or controlled by the Company. MHC Operating Limited Partnership (the
"Operating Partnership") is the entity through which the Company conducts
substantially all of its operations. The Company contributed the proceeds from
its initial public offering to the Operating Partnership for a general
partnership interest. The limited partners of the Operating Partnership (the
"Common OP Unitholders") receive an allocation of net income which is based on
their respective ownership percentage of the Operating Partnership which is
shown on the Consolidated Financial Statements as Minority Interests -- Common
OP Units. As of December 31, 2001, the Minority Interests -- Common OP Units
represented 5,426,374 units of limited partnership interest ("OP Units") which
are convertible into an equivalent number of shares of the Company's Common
stock. The issuance of additional shares of common stock or common OP Units
changes the respective ownership of the Operating Partnership for both the
Minority Interests and the Company.

Subsidiaries of the Operating Partnership have been created to (i)
facilitate mortgage financing (the "Financing Partnerships"); (ii) facilitate
the Company's ability to provide financing to owners of manufactured home
communities ("Lending Partnership"); (iii) own the management operations of the
Company ("Management Partnership"); and (iv) own the assets and operations of
certain utility companies which service the Company's Properties ("MHC
Systems").

The accompanying financial statements represent the consolidated financial
information of the Company and its subsidiaries. Due to the Company's ability as
general partner to control either through ownership or by contract the Operating
Partnership, the Financing Partnerships, the Lending Partnership, the Management
Partnership and MHC Systems, each such subsidiary has been consolidated with the
Company for financial reporting purposes.

Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131") requires
certain disclosures of selected information about operating segments in the
annual financial statements and related disclosures about products and services,
geographic areas, and major customers. The adoption of SFAS No. 131, in June
1998, did not affect the results of operations or financial position of the
Company. The Company manages operations on a property by property basis. Since
each property has similar economic and operational characteristics, the Company
has one reportable segment, which is the operation of manufactured home
communities. The Company has concentrations of Properties within the following
states: Florida (49 Properties), California (25 Properties), Arizona (17
Properties), Michigan (11 Properties) and Colorado (10 Properties). These
concentrations of Properties accounted for 36%, 19%, 8%, 4% and 8%,
respectively, of the Company's total revenues for the year ended December 31,
2001. The Company also has Properties located in the following areas of the
United States: Northeast, Northwest, Midwest, and Nevada/Utah/New Mexico. The
Company's largest Property, Bay Indies, located in Venice, Florida, accounted
for 3% of the Company's total revenues for the year ended December 31, 2001. The
distribution of the Properties throughout the United States reflects the
Company's belief that geographic diversification helps insulate the portfolio
from regional economic influences. The Company intends to target new
acquisitions in or near markets where the Properties are located and will also
consider acquisitions of properties outside such markets.

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Consolidation

The Company consolidates all majority owed subsidiaries due to its ability
to control the operations of the subsidiaries. All inter-company transactions
have been eliminated in consolidation.

F-7

MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(b) Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

(c) Real Estate

Real estate is recorded at cost less accumulated depreciation. The Company
evaluates rental Properties for impairment when conditions exist which may
indicate that it is probable that the sum of expected future cash flows
(undiscounted) from a Property is less than its carrying value. Upon
determination that a permanent impairment has occurred, rental Properties are
reduced to fair value. For the year ended December 31, 2001, permanent
impairment conditions did not exist at any of the Company's Properties. During
the year ended December 31, 2000, MHC Acquisition One L.L.C., a consolidated
subsidiary of the Company, recorded an impairment loss on the DeAnza Santa Cruz
water and wastewater service company business (see Notes 5 and 17). In August
2001, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment of Long-Lived
Assets" which is effective for fiscal years beginning after December 15, 2001.
The application of the provisions of this Statement is not expected to affect
the earnings and financial position of the Company.

Certain costs, including legal costs, relative to efforts by the Company to
effectively change the use and operations of several Properties are currently
recorded in other assets. These costs, to the extent these efforts are
successful, are capitalized to the extent of the established value of the
revised project and included in the net investment in real estate for the
appropriate Properties. To the extent these efforts are not successful, these
costs will be expensed.

Depreciation is computed on the straight-line basis over the estimated
useful lives of the assets. The Company uses a 30-year estimated life for
buildings acquired and structural and land improvements, a ten-to-fifteen-year
estimated life for building upgrades and a three-to-seven-year estimated life
for furniture, fixtures and equipment. Expenditures for ordinary maintenance
and repairs are expensed to operations as incurred and significant renovations
and improvements that improve the asset and extend the useful life of the asset
are capitalized over their estimated useful life. Initial direct leasing costs
are expensed as incurred. Total depreciation expense was $36.1 million, $35.6
million and $35.5 million for the years ended December 31, 2001, 2000 and 1999,
respectively.

(d) Cash and Cash Equivalents

The Company considers all demand and money market accounts and certificates
of deposit with a maturity when purchased of three months or less to be cash
equivalents.

(e) Notes Receivable

Notes receivable generally are stated at their outstanding unpaid principal
balances net of any deferred fees or costs on originated loans, or unamortized
discounts or premiums. Interest income is accrued on the unpaid principal
balance. Discounts or premiums are amortized to income using the interest
method.

(f) Fair Value of Financial Instruments

Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" requires disclosures about the fair value
of financial instruments whether or not such instruments are recognized in the
balance sheet. The Company's financial instruments include short-term
investments, notes receivable, accounts receivable, accounts payable, other
accrued expenses, mortgage notes payable and interest rate hedge arrangements.
The fair values of all financial instruments, including notes receivable, were
not materially different from their carrying values at December 31, 2001 and
2000.

F-8

MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(g) Deferred Financing Costs

Deferred financing costs include fees and costs incurred to obtain
long-term financing. The costs are being amortized over the terms of the
respective loans on a level yield basis. Unamortized deferred financing fees
are written-off when debt is retired before the maturity date. Accumulated
amortization for such costs was $3.0 million and $1.9 million at December 31,
2001 and 2000, respectively.

(h) Revenue Recognition

Rental income attributable to leases is recorded when earned from tenants.
The Company will reserve for receivables when the Company believes the ultimate
collection is less than probable.

(i) Minority Interests

Net income is allocated to Common OP Unitholders based on their respective
ownership percentage of the Operating Partnership. An ownership percentage is
represented by dividing the number of Common OP Units held by the Common OP
Unitholders (5,426,374 and 5,514,330 at December 31, 2001 and 2000,
respectively) by OP Units and Common Stock outstanding. Issuance of additional
shares of Common Stock or common OP Units changes the percentage ownership of
both the Minority Interests and the Company. Due in part to the exchange rights
(which provide for the conversion of Common OP Units into Common Stock on a
one-for-one basis), such transactions and the proceeds therefrom are treated as
capital transactions and result in an allocation between stockholders' equity
and Minority Interests to account for the change in the respective percentage
ownership of the underlying equity of the Operating Partnership.

On September 30, 1999, the Operating Partnership completed a $125 million
private placement of 9.0% Series D Cumulative Perpetual Preferred Units ("POP
Units") with two institutional investors. The POP Units, which are callable by
the Company after five years, have no stated maturity or mandatory redemption,
have no voting rights and are not convertible into OP Units or Common Stock.
Income is allocated to the POP Units at a preferred rate per annum of 9.0% on
the original capital contribution of $125 million. Costs related to the
placement of $3.1 million were recorded as a reduction to additional paid-in
capital.

(j) Income Taxes

Due to the structure of the Company as a REIT, the results of operations
contain no provision for Federal income taxes. However, the Company may be
subject to certain state and local income, excise or franchise taxes. The
Company paid state and local taxes of approximately $50,000, $78,000 and
$85,000 during the years ended December 31, 2001, 2000 and 1999, respectively.
As of December 31, 2001, net investment in real estate and notes receivable had
a Federal tax basis of approximately $710 million and $20 million,
respectively.

(k) Derivative Instruments and Hedging Activities

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and
Hedging Activities" and its amendments, Statements 137 and 138 in June of 1999
and June of 2000, respectively. The Company adopted SFAS No. 133 effective
January 1, 2001. SFAS No. 133 requires the Company to recognize all derivatives
on the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, changes in the fair value of derivatives will
either be offset against the change in fair value of the hedged assets,
liabilities or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. On
October 29, 2001, the Company entered into a swap agreement. (see Note 10)

F-9

MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 -- EARNINGS PER COMMON SHARE

Earnings per common share are based on the weighted average number of
common shares outstanding during each year. Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS No. 128") defines the
calculation of basic and fully diluted earnings per share. Basic and fully
diluted earnings per share are based on the weighted average shares outstanding
during each year and basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. The conversion of OP Units has
been excluded from the basic earnings per share calculation. The conversion of
an OP Unit to a share of common stock has no material effect on earnings per
common share.

The following table sets forth the computation of basic and diluted
earnings per share for the years ended December 31, 2001, 2000, 1999 (amounts
in thousands):

NOTE 4 -- COMMON STOCK AND OTHER EQUITY RELATED TRANSACTIONS

The following table presents the changes in the Company's outstanding
Common Stock for the years ended December 31, 2001, 2000 and 1999 (excluding OP
Units of 5,426,374, 5,514,330 and 5,633,183 outstanding at December 31, 2001,
2000 and 1999, respectively):

As of December 31, 2001, the Company's percentage ownership of the
Operating Partnership was approximately 80%. The remaining 20% is owned by the
Common OP Unitholders.

F-10

MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 -- COMMON STOCK AND OTHER EQUITY RELATED TRANSACTIONS (CONTINUED)

In March 1997, the Company's Board of Directors approved a Common Stock
repurchase plan whereby the Company was authorized to repurchase and retire
shares of its Common Stock. No shares of Common Stock were repurchased during
the year ended December 31, 2001. However, under the plan, the Company
repurchased approximately 2.1 million shares of Common Stock at an average price
of $24.06 per share during the year ended December 31, 2000 and approximately
4.0 million shares of Common Stock at an average price of $23.40 per share
during the year ended December 31, 1999, using proceeds from borrowings on the
line of credit.

During the year ended December 31, 2000, the Operating Partnership
repurchased and cancelled approximately 60,000 OP Units from various holders. On
March 26, 1999, the Operating Partnership repurchased and cancelled 200,000 OP
Units from a limited partner of the Operating Partnership.

On September 30, 1999, the Operating Partnership completed a $125 million
private placement of 9.0% Series D Cumulative Perpetual Preferred Units ("POP
Units") with two institutional investors. The POP Units, which are callable by
the Company after five years, have no stated maturity or mandatory redemption.
Net proceeds from the offering of $121 million were used to repay amounts
outstanding under the Company's line of credit facility and for other corporate
purposes.

The following distributions have been declared and/or paid to common
stockholders and Minority Interests since January 1, 1999.

The Operating Partnership pays distributions of 9.0% per annum on the $125
million of POP Units. Distributions on the POP Units were paid quarterly on the
last calendar day of each quarter beginning December 31, 1999.

The Company adopted, effective July 1, 1997, the 1997 Non-Qualified
Employee Stock Purchase Plan ("ESPP"). Pursuant to the ESPP, certain employees
and directors of the Company may each annually acquire up to $250,000 of Common
Stock of the Company. The aggregate number of shares of Common Stock available
under the ESPP shall not exceed 1,000,000, subject to adjustment by the Board of
Directors. The Common Stock may be purchased monthly at a price equal to 85% of
the lesser of: (a) the closing price for a share of Common Stock on the last day
of such month; and (b) the greater of: (i) the closing price for a share of
Common Stock on the first day of such month, and (ii) the average closing price
for a share of Common Stock for all the business days in the month. Shares of
Common Stock issued through the ESPP for the years ended December 31, 2001, 2000
and 1999 were 96,485, 68,739 and 59,060, respectively.

F-11

MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 -- INVESTMENT IN REAL ESTATE

Land improvements consist primarily of improvements such as grading,
landscaping and infrastructure items such as streets, sidewalks or water mains.
Depreciable property consists of permanent buildings in the Properties such as
clubhouses, laundry facilities, maintenance storage facilities, and furniture,
fixtures and equipment.

On September 4, 1997, the Company entered into a portfolio purchase
agreement (as amended by a supplemental agreement on December 17, 1997) to
acquire 37 manufactured home communities (the "Ellenburg Communities") from
partnerships having Ellenburg Capital Corporation ("ECC") as the general
partner, for a purchase price in excess of $300 million. During 1997 and 1998,
the Company closed on the acquisition of 31 of the Ellenburg Communities for an
aggregate purchase price of approximately $278 million and gained control of an
additional five Ellenburg Communities with acquisition advances of approximately
$57 million to the partnerships which owned such Ellenburg Communities. All
fundings related to the acquisition were funded by the Company with borrowings
under the Company's line of credit, term bank facilities, assumed debt and the
issuance of Common OP Units.

During 1998, the Company received approximately $14.3 million, including
approximately $365,000 of interest income, which was being held subject to the
completion of due diligence procedures on the Ellenburg Communities. The $14.3
million was initially recorded as a liability until 1999 when a settlement of
certain related issues was substantially complete and accordingly, in a non-cash
transaction, relieved the liability and adjusted the purchase price of the
Ellenburg Communities.

In April 2000, the California Superior Court approved a settlement
agreement (the "Settlement") in connection with the dissolution proceeding of
ECC and its affiliated partnerships. As part of the Settlement, the Company
received $13.5 million previously held in escrow in connection with the purchase
of the Ellenburg Communities and recorded $3.0 million of interest income
related to these funds. In connection with the Settlement, the Company sold
three communities -- Mesa Regal RV Resort, Mon Dak and Naples Estates -- for an
aggregate sales price of $59.0 million, including cash proceeds of $40.0 million
and assumption of debt by the purchaser of $19.0 million. The Company recorded a
$9.1 million gain on the sale of these Properties. Proceeds from the Settlement
and property sales were used to pay down the Company's line of credit. See Note
17 for further discussion of the Settlement.

On January 6, 1998, the Company funded a $12.3 million loan (the "Meadows
Loan") to Meadows Preservation, Inc. The Meadows Loan was collateralized by The
Meadows manufactured home community located in Palm Beach Gardens, Florida. On
April 1, 1999, the Company effectively exchanged the Meadows Loan for an equity
and debt interest in the partnership that owns The Meadows. The Company includes
The Meadows in investment in real estate and the related results of operations
in the statement of operations.

On July 23, 1999, the Company acquired Coquina Crossing, located in St.
Augustine, Florida, for a purchase price of approximately $10.4 million. The
acquisition was funded with a borrowing under the Company's line of credit.
Coquina Crossing is a 748-site senior community with 269 developed sites and
zoned expansion potential for 479 sites. In addition, Realty Systems, Inc.
purchased the model home inventory at the community for approximately $1.1
million.

In March 2000, in accordance with SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of ",
MHC Acquisition One L.L.C., a consolidated subsidiary of the Company, recorded
an impairment loss on the DeAnza Santa Cruz water and wastewater service company
business. Management's estimates indicated that the undiscounted future cash
flows from the business would be less than the carrying value of the business
and its related assets. The Company recorded an asset impairment loss of
$701,000 (or $0.03 per fully diluted share) which is included as a reduction of
other income in the accompanying statement of operations for the year ended
December 31, 2000. This loss represents the difference between the carrying
value of the DeAnza Santa Cruz water and wastewater service company business and
its related assets and their estimated fair market value.

On February 29, 2000, MHC Systems, Inc., a consolidated subsidiary of the
Company, disposed of the water and wastewater service company known as FFEC-Six
in a cash sale. Net proceeds from the sale of approximately $4.2 million were
used to pay down the Company's line of credit and a gain on the sale of $719,000
(or $0.03 per fully diluted share) was recorded in other income on the
accompanying statement of operations for the year ended December 31, 2000.

F-12

MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 -- INVESTMENT IN REAL ESTATE (CONTINUED)

On January 3, 2001, the Company acquired two Florida communities, totaling
730 sites, for an aggregate purchase price of approximately $17.3 million. The
Lakes at Countrywood is a 422-site community in Plant City, near Tampa, Florida
and includes approximately 23 acres for expansion. Grand Island is a 308-site
community in Grand Island, near Orlando, Florida, and includes a marina with 50
boat docks. The acquisition was funded with a borrowing under the Company's line
of credit.

On February 13, 2001, the Company completed the disposition of the
following seven communities, totaling 1,281 sites, in Kansas, Missouri and
Oklahoma, for a total sale price of approximately $17.4 million:

Dellwood Estates........ 136 sites
Briarwood............... 166 sites
Bonner Springs.......... 211 sites
Carriage Park........... 143 sites
North Star.............. 219 sites
Quivira Hills........... 142 sites
Rockwood................ 264 sites

A gain of $8.1 million was recorded on the sale. Proceeds from the sale were
used to reduce the amount outstanding on the Company's line of credit.

Effective June 30, 2001, the Company terminated its lease to a third-party
operator for the campground and RV resort facilities at the Property known as
Bulow Plantation in Flagler Beach, Florida, and assumed operation of these
facilities directly. Beginning July 1, 2001 the Company no longer records lease
income from Bulow RV Resort, however, the results of operations for Bulow RV
Resort are included in the Company's results of operations.

On October 5, 2001, the Company finalized a settlement agreement between
MHC Lending Partnership, the Operating Partnership and the limited liability
company which owns Candlelight in Columbus, Indiana. In 1996, the Company funded
a recourse loan to the owner of Candlelight Village and accounted for the loan
as an investment in real estate. The Company received $10.8 million in proceeds
from the settlement, which was accounted for as a sale of real estate and
recorded a $75,000 gain on the sale. Proceeds from the sale were used as working
capital.

The acquisitions have been accounted for utilizing the purchase method of
accounting and, accordingly, the results of operations of acquired assets are
included in the statements of operations from the dates of acquisition. The
Company acquired all of the Properties from unaffiliated third parties.

During the year ended December 31, 2001, the Company capitalized
approximately $2.4 million of costs, including legal costs, relative to efforts
by the Company to effectively change the use and operations of several
Properties which are currently recorded in other assets. These costs will be
expensed if management determines these efforts will not be successful.

The Company is actively seeking to acquire additional manufactured home
communities and currently is engaged in negotiations relating to the possible
acquisition of a number of communities. At any time these negotiations are at
varying stages which may include contracts outstanding to acquire certain
manufactured home communities which are subject to satisfactory completion of
the Company's due diligence review.

F-13

MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 -- INVESTMENT IN JOINT VENTURE

On March 18, 1998, the Company joined Plantation Company, L.L.C. and Trails
Associates, L.L.C., two 50% joint venture investments with the principals of
Meadows Management Company, to own two manufactured home communities known as
"Plantation on the Lake" and "Trails West", for approximately $6.5 million.
Plantation on the Lake is located in Riverside, California and consists of 385
developed sites and 122 expansion sites. Trails West is located in Tucson,
Arizona and consists of 488 developed sites. The Company's investments were
funded with a $3.9 million borrowing under the Company's line of credit and with
the issuance of approximately $2.6 million in OP Units.

On December 28, 2000, the Company, through a joint venture with the
principals of Meadows Management Company (the "Voyager Joint Venture"), acquired
a 25% interest in Voyager RV Resort, a 1,576 site RV resort in Tucson, Arizona,
for total consideration of $4.0 million. Voyager RV Resort is adjacent to Trails
West. The Company's investment included cash of $3.0 million and its 50%
interest in land held through the Trails West joint venture valued at $2.0
million.

Due to the Company's inability to control the joint ventures, the Company
accounts for its investment in the joint ventures using the equity method of
accounting. The Company recorded approximately $283,000 and $8,000 of net income
from joint ventures in the years ended December 31, 2001 and 2000, respectively;
and received approximately $1.6 million and $400,000 in distributions.

NOTE 7 -- INVESTMENT IN AND ADVANCES TO AFFILIATES

Investment in and advances to affiliates consists principally of preferred
stock of Realty Systems, Inc. ("RSI") and its subsidiaries (collectively
"Affiliates") and advances under a line of credit between the Company and RSI.
The Company accounts for the investment in and advances to Affiliates using the
equity method of accounting.

Following is unaudited financial information for the Affiliates for the
years ended December 31, 2001 and 2000 (amounts in thousands):

F-14

MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 -- NOTES RECEIVABLE

At December 31, 2001 and 2000, the Company had approximately $1.5 million
and $5.0 million in notes receivable, respectively.

On May 12, 1998, the Company entered into an agreement to loan $5.9 million
to Trails Associates, L.L.C. (the "Trails West Loan") for development of the
Property known as Trails West. Subsequently, the Company funded $3.2 million
under the Trails West Loan. In December 2000, $1.2 million of the Trails West
Loan was repaid and during 2001, the remaining balance on the Trails West Loan
was repaid.

On December 28, 2000, the Company, in connection with the Voyager Joint
Venture, entered into an agreement to loan $3.0 million to certain principals of
Meadows Management Company. The notes are collateralized with a combination of
Common OP Units and partnership interests in this and other joint ventures. The
notes bear interest at prime plus 0.5% per annum, require quarterly interest
payments and mature on December 31, 2011. The outstanding balance on these notes
as of December 31, 2001 is $1.5 million.

NOTE 9 -- EMPLOYEE NOTES RECEIVABLE

As of December 31, 2001 and 2000, the Company had employee notes receivable
of approximately $3.8 million and $4.2 million respectively, collateralized by
the Company's Common Stock. These notes are presented as a reduction of
Stockholder's Equity.

In December 1992, certain directors, officers and other individuals each
entered into subscription agreements with the Company to acquire a total of
440,000 shares of the Company's common stock at $7.25 per share. The Company
received from these individuals notes (the "1993 Employee Notes") in exchange
for their shares. The 1993 Employee Notes accrue interest at 6.77% per annum,
mature on March 2, 2003, and are recourse against the employees in the event the
pledged shares are insufficient to repay the obligations.

On January 2, 1996, certain members of management of the Company entered
into subscription agreements with the Company to acquire a total of 270,000
shares of the Company's Common Stock at $17.375 per share, the market price on
that date. The Company received from these individuals notes (the "1996 Employee
Notes") in exchange for their shares. The 1996 Employee Notes accrue interest at
5.91% per annum, mature on January 2, 2005, and are recourse against the
employees in the event the pledged shares are insufficient to repay the
obligations.

F-15

MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 -- LONG-TERM BORROWINGS

As of December 31, 2001 and December 31, 2000, the Company had outstanding
mortgage indebtedness of approximately $590.4 million and $556.6 million,
respectively, encumbering 77 and 73 of the Company's Properties, respectively.
As of December 31, 2001 and December 31, 2000, the carrying value of such
Properties was approximately $693 million and $631 million, respectively.

On August 3, 2001, the Company entered into a $50.0 million mortgage note
(the "Stagecoach Mortgage") collateralized by 7 Properties. The proceeds were
used to repay amounts under the Company's line of credit and for working capital
purposes.

The outstanding mortgage indebtedness as of December 31, 2001 consists of:

- A $265.0 million mortgage note (the "$265 Million Mortgage")
collateralized by 29 Properties beneficially owned by MHC Financing
Limited Partnership. The $265 Million Mortgage has a maturity date of
January 2, 2028 and pays interest at 7.015%. There is no principal
amortization until February 1, 2008, after which principal and interest
are to be paid from available cash flow and the interest rate will be
reset at a rate equal to the then 10-year U.S. Treasury obligations plus
2.0%. The $265 Million Mortgage is presented net of a settled hedge of
$3.0 million (net of accumulated amortization of $137,000) which is being
amortized into interest expense over the life of the loan.

- A $65.9 million mortgage note (the "College Heights Mortgage")
collateralized by 18 Properties. The College Heights Mortgage bears
interest at a rate of 7.19%, amortizes beginning July 1, 1999 over 30
years and matures July 1, 2008.

- A $93.0 million mortgage note (the "DeAnza Mortgage") collateralized by 6
Properties beneficially owned by MHC-DeAnza Financing Limited
Partnership. The DeAnza Mortgage bears interest at a rate of 7.82%,
amortizes beginning August 1, 2000 over 30 years and matures July 1,
2010.

- A $49.9 million mortgage note (the "Stagecoach Mortgage") collateralized
by 7 Properties beneficially owed by MHC Stagecoach L.L.C. The Stagecoach
Mortgage bears interest at a rate of 6.98%, amortizes beginning September
1, 2001 over 10 years and matures September 1, 2011.

- A $22.5 million mortgage note (the "Bay Indies Mortgage") collateralized
by one Property beneficially owned by MHC-Bay Indies Financing Limited
Partnership. The Bay Indies Mortgage bears interest at a rate of 7.48%,
amortizes beginning August 1, 1994 over 27.5 years and matures July 1,
2004.

- A $15.6 million mortgage note (the "Date Palm Mortgage") collateralized
by one Property beneficially owned by MHC Date Palm, L.L.C. The Date Palm
Mortgage bears interest at a rate of 7.96%, amortizes beginning August 1,
2000 over 30 years and matures July 1, 2010.

- Approximately $78.5 million of mortgage debt on 15 other various
Properties, which was recorded at fair market value with the related
discount or premium being amortized over the life of the loan using the
effective interest rate. Scheduled maturities for the outstanding
indebtedness are at various dates through November 30, 2020, and fixed
interest rates range from 7.15% to 8.75%. Included in this debt, the
Company has a $2.4 million loan recorded to account for a direct
financing lease entered into in May 1997.

On August 9, 2000, the Company amended its unsecured line of credit with a
group of banks (the "Credit Agreement") bearing interest at the London Interbank
Offered Rate ("LIBOR") plus 1.125%. Among other things, the amendment lowered
the total facility under the Credit Agreement to $150 million and extended the
maturity to August 9, 2003. The Company pays a quarterly fee on the average
unused amount of such credit equal to 0.15% of such amount. As of December 31,
2001, $133.8 million was available under the Credit Agreement.

F-16

MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 -- LONG-TERM BORROWINGS (CONTINUED)

The Company has a $100 million unsecured term loan (the "Term Loan") with a
group of banks with interest only payable monthly at a rate of LIBOR plus 1.0%.
The Term Loan maturity has been extended to April 3, 2002. On February 8, 2002,
the Company entered into a term loan credit agreement with the same group of
banks, which extended the Term Loan to August 9, 2005.

On October 29, 2001, the Company entered into an interest rate swap
agreement, fixing at LIBOR on $100 million of the Company's floating rate debt
at approximately 3.7% for the period October 2001 through August 2004. The terms
of the swap require monthly settlements on the same dates interest payments are
due on the debt. In accordance with SFAS No. 133, the interest rate swap will be
reflected at market value. The Company believes the swap is a perfectly
effective cash flow hedge under SFAS No. 133 and there will be no effect on net
income as a result of the mark-to-market adjustment. As of December 31, 2001 the
swap had a market value of $489,000 which is included in other assets. The
effect of the mark-to-market adjustment, is reflected in other comprehensive
income.

In July 1998, the Company entered into an interest rate swap agreement (the
"1998 Swap") fixing LIBOR on $100 million of the Company's floating rate debt at
6.4% for the period 1998 through 2003. The value of the 1998 Swap was impacted
by changes in the market rate of interest. The Company accounted for the 1998
Swap as a hedge. Payments and receipts under the 1998 Swap were accounted for as
an adjustment to interest expense. On January 10, 2000, the Company terminated
the 1998 Swap and received $1.0 million of proceeds which is being amortized as
an adjustment to interest expense through March 2003.

The Company has approximately $2.2 million of installment notes payable,
secured by a letter of credit, each with an interest rate of 6.5%, maturing
September 1, 2002. Approximately $900,000 of the notes pay principal annually
and interest quarterly and the remaining $1.3 million of the notes pay interest
only quarterly.

Aggregate payments of principal on long-term borrowings for each of the
next five years and thereafter are as follows (amounts in thousands):

F-17

MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 -- LEASE AGREEMENTS

The leases entered into between the tenant and the Company for the rental
of a site are month-to-month or for a period of one to ten years, renewable upon
the consent of the parties or, in some instances, as provided by statute.
Noncancelable long-term leases are in effect at certain sites within 22 of the
Properties. Rental rate increases at these Properties are primarily a function
of increases in the Consumer Price Index, taking into consideration certain
floors and ceilings. Additionally, periodic market rate adjustments are made as
deemed necessary. Future minimum rents are scheduled to be received under
noncancelable tenant leases at December 31, 2001 as follows (amounts in
thousands):

NOTE 12 -- GROUND LEASES

The Company leases land under noncancellable operating leases at certain of
the Properties expiring in various years from 2022 to 2031 with terms which
require twelve equal payments per year plus additional rents calculated as a
percent of gross revenues. For the years ended December 31, 2001, 2000 and 1999,
ground lease rent was $1.6 million. Minimum future rental payments under the
ground leases are $1.6 million for each of the next five years and $27.9 million
thereafter.

NOTE 13 -- TRANSACTIONS WITH RELATED PARTIES

Equity Group Investments, Inc. ("EGI"), an entity controlled by Mr. Samuel
Zell, Chairman of the Board of Directors, and certain of its affiliates have
provided services such as administrative support, investor relations, corporate
secretarial, real estate tax evaluation services, market consulting and research
services. Fees paid to EGI and its affiliates amounted to approximately $2,000,
$26,000 and $74,000 for the years ended December 31, 2001, 2000 and 1999,
respectively. There were no significant amounts due to these affiliates as of
December 31, 2001 and 2000, respectively.

Certain related entities, owned by persons affiliated with Mr. Zell, have
provided services to the Company. These entities include, but are not limited
to, Rosenberg & Liebentritt, P.C. which provided legal services including
property acquisition services in 1999; The Riverside Agency, Inc. which provided
insurance brokerage services. In addition, Equity Office Properties Trust, of
which Mr. Zell is the Chairman of the Board, provides office space to the
Company. Fees paid to these entities amounted to approximately $454,000,
$442,000 and $473,000 for the years December 31, 2001, 2000 and 1999,
respectively. Amounts due to these affiliates were approximately $32,000 as of
both December 31, 2001 and 2000, respectively.

Related party agreements or fee arrangements are generally for a term of
one year and approved by independent members of the Board of Directors.

F-18

MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14 -- STOCK OPTION PLAN AND STOCK GRANTS

A Stock Option Plan (the "Plan") was adopted by the Company in December
1992. Pursuant to the Plan, certain officers, directors, employees and
consultants of the Company may be offered the opportunity to acquire shares of
Common Stock through the grant of stock options ("Options"), including
non-qualified stock options and, for key employees, incentive stock options
within the meaning of Section 422 of the Internal Revenue Code. The Compensation
Committee will determine the vesting schedule, if any, of each Option and the
term, which term shall not exceed ten years from the date of grant. As to the
Options that have been granted through December 31, 2001, generally, one-third
are exercisable one year after the initial grant, one-third are exercisable two
years following the date such Options were granted and the remaining one-third
are exercisable three years following the date such Options were granted. The
Plan allows for 10,000 Options to be granted annually to each director. The
Common Stock with respect to which the Options may be granted during any
calendar year to any grantee shall not exceed 250,000 shares. In addition, the
Plan provides for the granting of stock appreciation rights ("SARs") and
restricted stock grants ("Stock Grants"). A maximum of 4,000,000 shares of
Common Stock were available for grant under the Plan as of December 31, 2001.

In 2001, 2000 and 1999, the Company issued 0, 19,181 and 14,666 shares
related to Stock Grants, respectively, which represented a portion of certain
employee bonuses. The fair market value of these Stock Grants of approximately
$0, $525,000 and $352,000 at the date of grant was recorded as compensation
expense by the Company in 2001, 2000 and 1999, respectively.

In 1998, the Company awarded 233,500 Stock Grants to certain members of
senior management of the Company. These Stock Grants vest over five years, but
may be restricted for a period of up to ten years depending upon certain
performance benchmarks tied to increases in funds from operations being met. The
fair market value of these Stock Grants of approximately $5.7 million as of the
date of grant was treated in 1998 as deferred compensation. The Company
amortized approximately $2.0 million and $593,000 related to these Stock Grants
in 2001 and 2000, respectively. The balance of unamortized deferred compensation
related to these Stock Grants is $2,206,000 as of December 31, 2001.

In 1999, the Company awarded 65,000 Stock Grants to certain members of
senior management of the Company. These Stock Grants vest over three years with
one-half vesting in 1999. The fair market value of these Stock Grants of
approximately $1.5 million as of the date of grant was treated in 1999 as
deferred compensation. The Company amortized approximately $386,000 and $385,000
related to these Stock Grants in 2001 and 2000, respectively.

In 2000, the Company awarded 69,750 Stock Grants to certain members of
senior management of the Company. These Stock Grants vest over three years with
one-half vesting in 2000. The fair market value of these Stock Grants of
approximately $1.9 million as of the date of grant was treated in 2000 as
deferred compensation. The Company amortized approximately $478,000 and $955,000
related to these Stock Grants in 2001 and 2000 respectively. The balance of
unamortized deferred compensation related to these Stock Grants is $478,000 as
of December 31, 2001.

In 2001, the Company awarded 43,000 Stock Grants to certain members of
senior management of the Company. These Stock Grants vest over five years, but
may be restricted for a period of up to ten years depending upon certain
performance benchmarks tied to increases in funds from operations being met. The
fair market value of these Stock Grants of approximately $1.2 million as of the
date of grant was treated in 2001 as deferred compensation. The Company
amortized approximately $239,000 related to these Stock Grants in 2001. The
balance of unamortized deferred compensation related to these Stock Grants is
approximately $957,000 as of December 31, 2001.

In 1999, the Plan was amended to provide a Stock Grant of 2,000 shares
vesting over three years in lieu of the 10,000 Options granted after the
amendment to each director, if the director so elects. The fair market value of
Stock Grants awarded to directors of approximately $386,000, $401,000 and
$432,000 in 1999, 2000 and 2001 respectively, were treated as deferred
compensation. The Company amortized approximately $406,280 related to these
Stock Grants in 2001. The balance of unamortized deferred compensation
related to the 1999, 2000, and 2001 Stock Grants is $0, $134,000 and $288,000
respectively as of December 31, 2001.

F-19

MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14 -- STOCK OPTION PLAN AND STOCK GRANTS (CONTINUED)

The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its Options and Stock Grants because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123")
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's Options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized. Additionally, the amount
recognized as expense for the Stock Grants during any given year of the
performance period is dependent on certain performance benchmarks being met.

Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its Options and Stock Grants under the fair value method of that
Statement. The fair value for the Options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 2001, 2000 and 1999, respectively: risk-free interest rates of
3.5%, 5.5% and 6.3%; dividend yields of 6.3%, 6.3% and 6.3%; volatility factors
of the expected market price of the Company's common Stock of .19, .20 and .21;
and a weighted-average expected life of the Options of 5 years. The fair value
of the Stock Grants granted in 2001, 2000 and 1999 has been estimated at
approximately 30% below the calculated fair market value on the date of grant
because these Stock Grants may remain restricted even after they become fully
vested.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's Options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of the Company's Options. In addition, the existing
models are not representative of the effects on reported net income for future
years.

For purposes of pro forma disclosures, the estimated fair value of the
Options is amortized to expense over the Options' vesting period and the
estimated fair value of the Stock Grants is amortized to expense over the same
period. The pro forma effect of SFAS No. 123 on the Company's net income for the
years ended December 31, 2001, 2000 and 1999 was $648,000 ($0.02 per share),
$134,000 ($0.0 per share) and $138,000 ($0.0 per share), respectively.

A summary of the Company's stock option activity, and related information
for the years ended December 31, 2001, 2000 and 1999 follows:

F-20

MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14 -- STOCK OPTION PLAN AND STOCK GRANTS (CONTINUED)

On March 23, 2001, the Company's Board of Directors approved resolutions
amending and restating the Plan effective March 23, 2001 (the "Amended Plan") to
increase the number of Common Shares issuable thereunder by 2,000,000 shares of
Common Stock to an aggregate of 6,000,000 shares. On May 8, 2001, the Company's
shareholder's approved the Amended Plan.

As of December 31, 2001, 2000 and 1999, 1,252,344 shares, 416,603 shares
and 747,258 shares remained available for grant, respectively, and 1,422,211
shares, 1,562,074 shares and 1,426,072 shares were exercisable, respectively.
Exercise prices for Options outstanding as of December 31, 2001 ranged from
$12.88 to $30.65, with the substantial majority of the exercise prices exceeding
$17.25. The remaining weighted-average contractual life of those Options was 6.2
years. The weighted average exercise price of outstanding and exercisable
options was $22.39 as of December 31, 2001.

NOTE 15 -- PREFERRED STOCK

The Company's Board of Directors is authorized under the Company's charter,
without further stockholder approval, to issue, from time to time, in one or
more series, 10,000,000 shares of $.01 par value preferred stock (the "Preferred
Stock"), with specific rights, preferences and other attributes as the Board may
determine, which may include preferences, powers and rights that are senior to
the rights of holders of the Company's Common Stock. However, under certain
circumstances, the issuance of preferred stock may require stockholder approval
pursuant to the rules and regulations of The New York Stock Exchange. As of
December 31, 2001 and 2000, no Preferred Stock was issued by the Company.

NOTE 16 -- SAVINGS PLAN

The Company has a qualified retirement plan, with a salary deferral feature
designed to qualify under Section 401 of the Code (the "401(k) Plan"), to cover
its employees and those of its Subsidiaries, if any. The 401(k) Plan permits
eligible employees of the Company and those of any Subsidiary to defer up to 19%
of their eligible compensation on a pre-tax basis subject to certain maximum
amounts. In addition, the Company will match dollar-for-dollar the participant's
contribution up to 4% of the participant's eligible compensation.

In addition, amounts contributed by the Company will vest, on a prorated
basis, according to the participant's vesting schedule. After five years of
employment with the Company, the participants will be 100% vested for all
amounts contributed by the Company. Additionally, a discretionary profit sharing
component of the 401(k) Plan provides for a contribution to be made annually for
each participant in an amount, if any, as determined by the Company. All
employee contributions are 100% vested. The Company's contribution to the 401(k)
Plan was approximately $353,000, $315,000 and $385,000, for the years ended
December 31, 2001, 2000 and 1999, respectively. The Company's plan contribution
for the profit sharing component of the 401(k) Plan is $139,000 for the year
ended December 31, 2001.

NOTE 17 -- COMMITMENTS AND CONTINGENCIES

DEANZA SANTA CRUZ MOBILE ESTATES

The residents of DeAnza Santa Cruz Mobile Estates, a property located in
Santa Cruz, California (the "City") previously brought several actions opposing
certain fees and charges in connection with water service at the Property. This
summary provides the history and reasoning underlying the Company's defense of
the residents' claims and explains the Company's decision to continue to defend
its position, which the Company believes is fair and accurate.

DeAnza Santa Cruz Mobile Estates is a 198-site Community overlooking the
Pacific Ocean. It is subject to the City's rent control ordinance which limits
annual rent increases to 75% of CPI. The Company purchased this Property in
August 1994 from certain unaffiliated DeAnza entities ("DeAnza"). Prior to the
Company's purchase in 1994, DeAnza made the decision to submeter and separately
bill tenants at the Property for both water and sewer in 1993 in the face of the
City's rapidly rising utility costs.

F-21

MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)

Under California Civil Code Section 798.41, DeAnza was required to reduce
rent by an amount equal to the average cost of usage over the preceding 12
months. This was done. With respect to water charges, because DeAnza did not
want to be regulated by the California Public Utility Commission ("CPUC"),
DeAnza relied on California Public Utilities Code Section 2705.5 ("CPUC Section
2705.5") to determine what rates would be charged for water on an ongoing basis
without becoming a public utility. DeAnza and the Company interpreted the
statute as providing that in a submetered mobile home park, the property owner
is not subject to regulation and control of the CPUC so long as the users are
charged what they would be charged by the utility company if users received
their water directly from the utility company. In Santa Cruz, customers
receiving their water directly from the City's water utility were charged a
certain lifeline rate for the first 400 ccfs of water and a greater rate for
usage over 400 ccfs of water, a readiness to serve charge of $7.80 per month and
tax on the total. In reliance on CPUC Section 2705.5, DeAnza implemented its
billings on this schedule notwithstanding that it did not receive the discount
for the first 400 ccfs of water because it was a commercial and not a
residential customer.

A dispute with the residents ensued over the readiness to serve charge and
tax thereon. The residents argued that California Civil Code Section 798.41
required that the Property owner could only pass through its actual costs of
water (and that the excess charges over the amount of the rent rollback were an
improper rent increase) and that CPUC Section 2705.5 was not applicable. DeAnza
unbundled the utility charges from rent consistent with California Civil Code
Section 798.41 and it has generally been undisputed that the rent rollback was
accurately calculated.

In August 1994, when the Company acquired the Property, the Company
reviewed the respective legal positions of the Santa Cruz Homeowners Association
("HOA") and DeAnza and concurred with DeAnza. DeAnza's reliance on CPUC Section
2705.5 made both legal and practical sense in that residents paid only what they
would pay if they lived in a residential neighborhood within the City and
permitted DeAnza to recoup part of the expenses of operating a submetered system
through the readiness to serve charge.

Over a period of 18 months from 1993 into May of 1995, a series of
complaints were filed by the HOA and Herbert Rossman, a resident, against
DeAnza, and later, the Company. DeAnza and the Company demurred to each of these
complaints on the grounds that the CPUC had exclusive jurisdiction over the
setting of water rates and that residents under rent control had to first
exhaust their administrative remedies before proceeding in a civil action. At
one point, the case was dismissed (with leave to amend) on the basis that
jurisdiction was with the CPUC and, at another point, Mr. Rossman was dismissed
from the case because he had not exhausted his administrative remedies.

On June 29, 1995, a hearing was held before a City rent control officer on
billing and submetering issues related to both water and sewer. The Company and
DeAnza prevailed on all issues related to sewer and the rent rollback related to
water, but the hearing officer determined that the Company could only pass
through its actual cost of water, i.e., a prorated readiness to serve charge and
tax thereon. The hearing officer did not deal with the subsidy being given to
residents through the quantity charge and ordered a rebate in a fixed amount per
resident. The Company and DeAnza requested reconsideration on this issue, among
others, which reconsideration was denied by the hearing officer.

The Company then took a writ of mandate (an appeal from an administrative
order) to the Superior Court and, pending this appeal, the residents, the
Company and the City agreed to stay the effect of the hearing officer's decision
until the Court rendered judgment.

In July 1996, the Superior Court affirmed the hearing officer's decision
without addressing concerns about the failure to take the subsidy on the
quantity charge into account.

F-22

MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)

The Company requested that the City and the HOA agree to a further stay
pending appeal to the court of appeal, but they refused and the appeal court
denied the Company's request for a stay in late November 1996. Therefore, on
January 1, 1997, the Company reduced its water charges at this Property to
reflect a pass-through of only the readiness to serve charge and tax at the
master meter (approximately $0.73) and to eliminate the subsidy on the water
charges. On their March 1, 1997 rent billings, residents were credited for
amounts previously "overcharged" for readiness to serve charge and tax. The
amount of the rebate given by the Company and DeAnza was $36,400. In calculating
the rebate, the Company and DeAnza took into account the previous subsidy on
water usage although this issue had not yet been decided by the court of appeal.
The Company and DeAnza felt legally safe in so doing based on language in the
hearing officer's decision that actual costs could be passed through.

On March 12, 1997, the Company also filed an application with the CPUC to
dedicate the water system at this Property to public use and have the CPUC set
cost-based rates for water usage. The Company believed it was obligated to take
this action because of its consistent reliance on CPUC Section 2705.5 as a safe
harbor from CPUC jurisdiction. That is, when the Company could no longer charge
for water as the local serving utility would charge, it was no longer exempt
from the CPUC's jurisdiction and control under CPUC Section 2705.5.

On March 20, 1998, the court of appeal issued the writ of mandate requested
by the Company on the grounds that the hearing officer had improperly calculated
the amount of the rebate (meaning the Company had correctly calculated the rent
credits), but also ruling that the hearing officer was correct when he found
that the readiness to serve charge and tax thereon as charged by DeAnza and the
Company were an inappropriate rent increase. The decision primarily reflected
the court of appeal's view that CPUC Section 2705.5 operated as a ceiling and
that California Civil Code Section 798.41 allowed for a charge based on actual
costs, including costs of administration, operation and maintenance of the
system, but that the Company had not to provide evidence of such costs. The
court of appeal further agreed with the Company that the City's hearing officer
did not have the authority under California Civil Code Section 798.41 to
establish rates that could be charged in the future.

Following this decision, the CPUC granted the Company its certificate of
convenience and necessity on December 17, 1998 and approved cost-based rates and
charges for water that exceed what residents were paying under the Company's
reliance on CPUC Section 2705.5. Concurrently, the CPUC also issued an Order
Instituting Investigation ("OII") confirming its exclusive jurisdiction over the
issue of water rates in a submetered system and commencing an investigation into
the confusion and turmoil over billings in submetered properties. Specifically,
the OII states: "The Commission has exclusive and primary jurisdiction over the
establishment of rates for water and sewer services provided by private
entities."

Specifically, the CPUC ruling regarding the Company's application stated:
"The ultimate question of what fees and charges may or may not be assessed,
beyond external supplier pass-through charges, for in-park facilities when a
mobile home park does not adhere to the provisions of CPUC Section 2705.5, must
be decided by the Commission."

After the court of appeal decision, the HOA brought all of its members back
into the underlying civil action for the purpose of determining damages,
including punitive damages, against the Company. The trial was continued from
July 1998 to January 1999 to give the CPUC time to act on the Company's
application. Notwithstanding the action taken by the CPUC in issuing the OII in
December 1998, the trial court denied the Company's motion to dismiss on
jurisdictional grounds and trial commenced before a jury on January 11, 1999.

Not only did the trial court not consider the Company's motion to dismiss,
the trial court refused to allow evidence of the OII or the Company's CPUC
approval to go before the jury. Notwithstanding the Company's strenuous
objections, the judge also allowed evidence of the Company's and DeAnza's
litigation tactics to be used as evidence of bad faith and oppressive actions
(including evidence of the application to the CPUC requesting a $22.00 readiness
to serve charge). The Company's motion for a mistrial based upon these
evidentiary rulings was denied. On January 22, 1999, the jury returned a verdict
awarding $6.0 million of punitive damages against the Company and DeAnza. The
Company had previously agreed to indemnify DeAnza on the matter.

F-23

MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)

The Company bonded the judgment pending appeal in accordance with
California procedural rules, which require a bond equal to 150% of the amount of
the judgment. Post-judgment interest will accrue at the statutory rate of 10.0%
per annum.

On April 19, 1999, the trial court denied all of the Company's and DeAnza's
post-trial motions for judgement notwithstanding the verdict, new trial and
remittur. The trial court also awarded $700,000 of attorneys' fees to
plaintiffs. The Company appealed the jury verdict and attorneys' fees award
(which also accrues interest at the statutory rate of 10.0% per annum).

On December 21, 2001 the California Court of Appeal for the Sixth District
reversed the $6.0 million punitive damage award and the related award of
attorneys' fees on the basis that punitive damages are not available as a remedy
for a statutory violation of the MRL. The decision of the appellate court left
the HOA with the right to seek a new trial in which it must prove its
entitlement to either the statutory penalty and attorneys' fees available under
the MRL or punitive damages based on causes of action for fraud,
misrepresentation or other tort. The Company expects the HOA to seek a new trial
during 2002. The Company intends to vigorously defend itself.

In two related appeals, the Company had argued that the trial court's
ability to enter an award of attorneys' fees in favor of the HOA and to take
certain other actions was preempted by the exercise of exclusive jurisdiction by
the CPUC over the issue of how to set rates for water in a submetered mobile
home park. During 2000, the California court of appeal rejected the Company's
preemption argument with respect to these prior rulings in favor of plaintiffs,
one of which had awarded plaintiffs approximately $100,000 of attorneys' fees.
The California Supreme Court declined to accept the case for review and the
Company paid the judgment, including post-judgment interest thereon, and
settled the matter for approximately $200,000 late in 2000.

In a separate matter, in December 2000 the HOA and certain individual
residents of the Property filed a complaint in the Superior Court of California,
County of Santa Cruz (No. CV 139825) against the Company, certain affiliates of
the Company and certain employees of the Company. The new lawsuit seeks damages,
including punitive damages, for intentional infliction of emotional distress,
unfair business practices, and unlawful retaliation purportedly arising from
allegedly retaliatory rent increases which were noticed by the Company to
certain residents in September 2000. The Company believes that the residents who
received rent increase notices with respect to rent increases above those
permitted by the local rent control ordinance were not covered by the ordinance
either because they did not comply with the provisions of the ordinance or
because they are exempted by state law. On December 29, 2000, the Superior Court
of California, County of Santa Cruz enjoined such rent increases. The Company
intends to vigorously defend the matter, which may go to trial in the summer of
2002.

ELLENBURG COMMUNITIES

The Company and certain other parties entered into a settlement agreement
("the Settlement"), which was approved by the Los Angeles County Superior Court
in April 2000. The Settlement resolved substantially all of the litigation and
appeals involving the Ellenburg Properties, and transactions arising out of the
settlement closed on May 22, 2000 (see Note 5). Only the appeals of the two
entities remain, neither of which is expected to materially affect the Company.

In connection with the Ellenburg Acquisition, on September 8, 1999,
Ellenburg Fund 20 ("Fund 20") filed a cross complaint in the Ellenburg
dissolution proceeding against the Company and certain of its affiliates
alleging causes of action for fraud and other claims in connection with the
Ellenburg acquisition. The Company subsequently successfully had the cross
complaint against the Company and its affiliates dismissed with prejudice by the
California Superior Court. However, Fund 20 has appealed. This appeal was one
not resolved by the Settlement. The Company believes Fund 20's allegations are
without merit and will vigorously defend itself.

F-24

MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)

In October 2001, Fund 20 sued the Company and certain of its affiliates
again, this time in Almeda County, California making substantially the same
allegations. The Company obtained an injunction preventing the case from
proceeding until the Fund 20 appeal is decided and other related proceedings in
Arizona (from which the Company has already been dismissed with prejudice) are
concluded.

CANDLELIGHT PROPERTIES, L.L.C

In 1996, 1997 and 1998, the Lending Partnership made loans to Candlelight
Properties, L.L.C. ("Borrower") in the aggregate principal amount of $8,050,000
(collectively, the "Loan". The Loan was secured by a mortgage on Candlelight
Village ("Candlelight"), a Property in Columbus, Indiana, and was guaranteed by
Ronald E. Farren, the 99% owner of Borrower. The Company accounted for the Loan
as an investment in real estate and, accordingly, Candlelight's rental revenues
and operating costs were included with the Company's rental revenues and
operating costs for financial reporting purposes. Concurrently with the funding
of the Loan, Borrower granted the Operating Partnership the option to acquire
Candlelight upon the maturity of the Loan. The Operating Partnership notified
Borrower that it was exercising its option to acquire Candlelight in March 1999,
and the Loan subsequently matured on May 3, 1999. However, Borrower failed to
repay the Loan and refused to convey Candlelight to the Operating Partnership.

Borrower filed suit in the Circuit Court of Bartholomew County, Indiana
("Court") on May 5, 1999, seeking declaratory judgment on the validity of the
exercise of the option. The Lending Partnership filed suit in the Court the next
day, seeking to foreclose its mortgage, and the suits were consolidated by the
Court.

On September 20, 2001, the parties entered into a settlement agreement
providing for a cash payment of $10.8 million to the Lending Partnership and
dismissal with prejudice of all litigation among the parties and their
affiliates, among other terms. The closing under the Settlement Agreement
occurred on October 5, 2001. The Company accounted for the Settlement as a
disposition of the property.

WESTWINDS

The Operating Partnership is the ground lessee ("Lessee") of certain
property in San Jose, California under ground leases ("Leases") from the
Nicholson Family Trust ("Lessor"). On February 13, 2001, Lessor filed a petition
for arbitration of disputes over whether certain items constitute "gross
revenue" under the Leases in which petition Lessor seeks damages and termination
of the Leases. Lessee responded on March 12, 2001 disputing Lessor's
contentions. Lessor claims that "gross revenue" for the purpose of calculating
percentage rent owing to Lessor under the ground leases includes certain amounts
Lessee has recouped from tenants of the Property (who are protected by rent
control) related to ground rent already paid to Lessor. Lessee has successfully
been able to pass-through to tenants at the property increases in ground rent
under the Leases. Lessee contends that this pass-through results in
reimbursement of lease expense, not "gross revenue." Lessor also contends that
the "net income" of RSI from the Property should be included in the gross
revenue calculation. Lessee disputes this for many reasons, including, but not
limited to, the fact that RSI is not a lessee under the Leases, the sales
activity is not conducted by Lessee, and RSI is a separate company from Lessee.

Lessor's motion for summary judgment on the pass-through issue was denied
by an arbitration panel on November 2, 2001. Lessor and Lessee have agreed to
mediate the dispute prior to arbitration. The Company does not believe that the
amounts in question are material even if resolved against the Lessee and, based
upon advice of counsel, does not believe that the Lessor will be successful in
terminating the Leases.

OTHER

The Company is involved in various other legal proceedings arising in the
ordinary course of business. Management believes that all proceedings herein
described or referred to, taken together, are not expected to have a material
adverse impact on the Company.

F-25

MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 18 -- SUBSEQUENT EVENTS

Effective January 1, 2002, the Company purchased all of the outstanding
Common Stock of RSI from affiliated and non-affiliated owners for approximately
$675,000. As a result, the Company owns and controls RSI and will consolidate
RSI as of January 1, 2002.

F-26

MANUFACTURED HOME COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19 -- QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is unaudited quarterly data for 2001, 2000 and 1999 (amounts
in thousands, except for per share amounts):

F-27

SCHEDULE II
MANUFACTURED HOME COMMUNITIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 21, 2001

- ---------------

(1) Deductions represent tenant receivables deemed uncollectible.

S-1

SCHEDULE III
MANUFACTURED HOME COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001
(AMOUNTS IN THOUSANDS)

S-2

SCHEDULE III
MANUFACTURED HOME COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001
(AMOUNTS IN THOUSANDS)

S-3

SCHEDULE III
MANUFACTURED HOME COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001
(AMOUNTS IN THOUSANDS)

S-4

SCHEDULE III
MANUFACTURED HOME COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001
(AMOUNTS IN THOUSANDS)

- ---------------

NOTES:

(1) For depreciable property, the Company uses a 30-year estimated life for
buildings acquired and structural and land improvements, a ten-to-fifteen
year estimated life for building upgrades and a three-to-seven year
estimated life for furniture and fixtures.

(2) The schedule excludes five Properties in which the Company has a
non-controlling joint venture interest and accounts for using the equity
method of accounting.

(3) The balance of furniture and fixtures included in the total amounts was
approximately $12.2 million as of December 31, 2001.

(4) The aggregate cost of land and depreciable property for Federal income tax
purposes was approximately $1.1 billion, as of December 31, 2001.

(5) All Properties were acquired, except for Country Place Village, which was
constructed.

S-5

SCHEDULE III
MANUFACTURED HOME COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001
(AMOUNTS IN THOUSANDS)

The changes in total real estate for the years ended December 31, 2001,
2000 and 1999 were as follows:

- ---------------

(1) Acquisitions for the year ended December 31, 2000 include return of escrow
proceeds.

(2) Dispositions for 2000 include the non-cash assumption of $19.0 million of
debt by the purchaser of a Property.

The changes in accumulated depreciation for the years ended December 31,
2001, 2000 and 1999 were as follows:

S-6