UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 1-12616
SUN COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)
STATE OF MARYLAND 38-2730780
State of Incorporation I.R.S. Employer I.D. No.
27777 FRANKLIN ROAD
SUITE 200
SOUTHFIELD, MICHIGAN 48034
(248) 208-2500
(Address of principal executive offices and telephone number)
Securities Registered Pursuant to Section 12(b) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Securities Registered Pursuant to Section 12(g) of the Act:
NONE
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 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.
[X]
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 whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [X] No [ ]
As of June 30, 2003, the aggregate market value of the Registrant's stock
held by non-affiliates was approximately $688,000,000 (computed by reference to
the closing sales price of the Registrant's common stock as of June 30, 2003).
For this computation, the Registrant has excluded the market value of all shares
of common stock reported as beneficially owned by executive officers and
directors of the Registrant; such exclusion shall not be deemed to constitute an
admission that any such person is an affiliate of the Registrant.
As of March 1, 2004, there were 19,009,270 shares of the Registrant's
common stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive Proxy Statement to be filed for
its 2004 Annual Meeting of Shareholders are incorporated by reference into Part
III of this Report.
As used in this Form 10-K/A, "Company," "us," "we," "our" and similar
terms means Sun Communities, Inc., a Maryland corporation, and one or more of
its subsidiaries (including Sun Communities Operating Limited Partnership).
EXPLANATORY NOTE
The Company is filing this Form 10-K/A to make the following changes to
its Form 10-K for the year ended December 31, 2003:
- Part 1, Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations
- Overview - Revised to include additional discussion of the recent
industry trends and their potential impact on future results of
operations and our investment in Origen Financial, Inc.
- Other - Revised to include additional discussion of the use of Funds
from Operations (FFO) and the Company's adjustments from net income
to FFO and revised 2003 FFO to not add-back an impairment loss on a
property in strict accordance with the NAREIT definition of FFO. The
impairment was due to the impracticality of further development of
the property.
- Part IV, Item 15 -- Exhibits, Financial Statement Schedules and Reports on
Form 8-K
- Consolidated Statements of Income - Revised to separately reflect an
impairment charge on a property and income from Origen, net,
principally interest.
- Consolidated Statements of Cash Flows - Revised to separately state
mortgage loans purchased from and sold to Origen.
- Note 1 -- Summary of Significant Accounting Policies - Revised to
add additional clarification to 1. b. Principles of Consolidation,
1.c. Rental Property, 1. f. Investments in and Advances to
Affiliates, 1.g. Revenue Recognition, 1.h. Other Capitalized Costs,
and to add 1.o. Use of Estimates.
- Note 3 -- Disposition of Properties - Revised to note our policy
with respect to properties "held for sale".
- Note 8 Other Income - Revised to remove the property impairment
charge.
- Note 15 Related Party Transactions - Revised to include additional
information regarding certain related party transactions with Origen
Financial, LLC and Origen Financial, Inc.
With the exception of the foregoing, no other changes have been made to
the Company's Consolidated Financial Statements or Financial Statement Schedule
and the Company's Form 10-K for the year ended December 31, 2003 has not
otherwise been updated to reflect events that occurred subsequent to the
original filing date.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion and analysis of the consolidated financial
condition and results of operations should be read in conjunction with the
Consolidated Financial Statements and notes thereto elsewhere herein.
The Company is a fully integrated, self-administered and self-managed REIT
which owns, operates, develops and finances manufactured housing communities
concentrated in the midwestern and southeastern United States. As of December
31, 2003, the Company owned and operated a portfolio of 127 developed properties
located in seventeen states, including 115 manufactured housing communities,
five recreational vehicle communities, and seven properties containing both
manufactured housing and recreational vehicle sites.
During 2003, the Company acquired one manufactured housing community
located in East Lansing, Michigan, comprising 62 developed sites and 182 sites
suitable for development for $4.5 million, and the Company sold four
manufactured housing communities located in Michigan and Illinois which
comprised 731 sites for $24.8 million.
The Company invested $50 million as common equity in Origen, Inc. in
October, 2003. An additional $100 million was similarly invested by other
investors thus capitalizing Origen, Inc. at $150 million. The Company determined
that this investment was reasonable and prudent because it resulted in a
stabilized and well-financed Origen, Inc., which allowed Origen, Inc. to finance
its operations from traditional sources of warehouse financing and access to the
securitization marketplace. This investment occurred at the time that the
manufactured home finance industry was beginning to rebound as interest rates
stabilized, two lenders were emerging from bankruptcy and new entrants dedicated
to financing manufactured homes buoyed the industry. The Company had written off
its $13.6 million investment in Origen Financial, L.L.C., a predecessor to
Origen, Inc., at December 31, 2002 because of severely deteriorated industry
conditions marked by the above-mentioned bankruptcies, the closure of the
securitization marketplace, and the resultant liquidity squeeze impacting the
Origen, Inc. predecessor. Origen, Inc. has raised approximately an additional
$80 million since October, 2003 and is now a public company with demonstrated
access to a broad range of capital markets.
In recent years the operations of manufactured homebuilders, dealers, and
the companies that finance the purchase of the homes have experienced severe
losses and substantial volatility. New home shipments have declined from 373,000
in 1998 to 131,000 in 2003. The decline was largely due to the turmoil in the
financing side of the industry as lenders experienced substantial losses arising
from defaults on poorly underwritten loans in the mid to late 1990s. As a result
of the losses, the lenders experienced liquidity constraints and significantly
tightened underwriting standards thus reducing the demand for new homes. Two
large lenders entered bankruptcy in the Fall of 2002.
These trends appear to be abating as several large home manufacturers are
reporting operating income and the volume of repossessed homes in the market
place appears to be declining. Newly repossessed homes are also declining as the
reinforcing effects of tightened underwriting standards and reduced new home
financing volumes impact the industry.
The effect of these trends on the Company has been to reduce occupancies
in our portfolio as the demand of tenants for sites in our communities has
declined for the above-stated reasons. The leasing tempo in our new community
developments has likewise slowed. Despite these trends, the Company's same
property portfolio has consistently reflected growth in net operating income
evidencing the revenue and operating stability long associated with the business
of owning and operating manufactured housing communities.
While the problems which directly impacted the manufacturers, dealers, and
lenders appear to be bottoming, the Company does not expect a rapid or strong
recovery in their operations. The Company expects that their improving
operations as the problems noted above are overcome will result in a gradually
improving leasing environment in the Company's portfolio.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with generally accepted accounting principles. The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. In preparing these financial statements, management has
made its best estimates and judgment of certain amounts included in the
financial statements. Nevertheless, actual results may differ from these
estimates under different assumptions or conditions.
Management believes the following significant accounting policies, among
others, affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements:
Impairment of Long-Lived Assets. Rental property is recorded at cost, less
accumulated depreciation. Management evaluates the recoverability of its
investment in rental property whenever events or changes in circumstances, such
as recent operating results, expected net operating cash flow and plans for
future operations, indicate that full asset recoverability is questionable. If
such assets were deemed to be impaired as a result of this measurement, the
impairment that would be recognized is measured by the amount by which the
carrying amount of the asset exceeds the fair value of the asset as determined
on a discounted net cash flow basis.
Notes Receivable. The Company evaluates the recoverability of its notes
receivable whenever events occur or there are changes in circumstances such that
management believes it is probable that it will be unable to collect all amounts
due according to the contractual terms of the loan agreement. The loan is then
measured based on the present value of the expected future cash flow discounted
at the loan's effective interest rate or the fair value of the collateral if the
loan is collateral dependent.
Depreciation. Depreciation is computed on a straight-line basis over the
estimated useful lives of the assets. The Company uses a thirty year useful life
for land improvements and buildings and a seven to fifteen year useful life for
furniture, fixtures and equipment.
Revenue Recognition. Rental income attributable to leases is recorded on a
straight-line basis when earned from tenants. Leases entered into by tenants
generally range from month-to-month to one year and are renewable by mutual
agreement of the Company and the resident.
Capitalized Costs. The Company capitalizes certain costs (including
interest and other costs) incurred in connection with the development,
redevelopment, capital enhancement and leasing of its properties. Management is
required to use professional judgment in determining whether such costs meet the
criteria for immediate expense or capitalization. The amounts are dependent on
the volume and timing of such activities and the costs associated with such
activities. Maintenance, repairs and minor improvements to properties are
expensed when incurred. Renovations and improvements to properties are
capitalized and depreciated over their estimated useful lives and construction
costs related to the development of new community or expansion sites are
capitalized until the property is substantially complete. Certain expenditures
to dealers and residents related to obtaining lessees in our communities are
capitalized and amortized over a seven year period; shorter than the average
resident's occupancy in the home and the average term that the home is in our
community. Costs associated with implementing the Company's new computer systems
are capitalized and amortized over the estimated useful lives of the related
software and hardware.
Derivative Instruments and Hedging Activities. The Company has entered
into three interest rate swap agreements to offset interest rate risk. The
Company does not enter into derivative transactions for speculative purposes.
The Company adjusts its balance sheet on an ongoing quarterly basis to reflect
current fair market value of its derivatives. Changes in the fair value of
derivatives are recorded each period in earnings or comprehensive income, as
appropriate. The ineffective portion of the hedge is immediately recognized in
earnings to the extent that the change in value of a derivative does not
perfectly offset the change in value of the instrument being hedged. The
unrealized gains and losses held in accumulated other comprehensive income will
be reclassified to earnings over time and occurs when the hedged items are also
recognized in earnings. The Company uses standard market conventions to
determine the fair values of derivative instruments, including the quoted market
prices or quotes from brokers or dealers for the same or similar instruments.
All methods of assessing fair value result in a general approximation of value
and such value may never actually be realized.
Deferred Tax Assets. SHS currently has significant deferred tax assets,
which are subject to periodic recoverability assessments. SHS has recognized
deferred tax assets of $2.0 million, net of a valuation reserve of $3.0 million.
Realization of these deferred tax assets is principally dependent upon SHS's
achievement of expected future taxable income. Judgments regarding future
profitability may change due to future market conditions, SHS's ability to
continue to successfully execute its business plan, and other factors.
Income Taxes. The Company has elected to be taxed as a REIT as defined
under Section 856(c) of the Internal Revenue Code of 1986, as amended. In order
for the Company to qualify as a REIT, at least ninety-five percent (95%) of the
Company's gross income in any year must be derived from qualifying sources. As a
REIT, the Company generally will not be subject to U.S. Federal income taxes at
the corporate level if it distributes at least ninety percent (90%) of its
REIT ordinary taxable income to its stockholders, which it fully intends to do.
If the Company fails to qualify as a REIT in any taxable year, the Company will
be subject to Federal income tax (including any applicable alternative minimum
tax) on its taxable income at regular corporate rates. The Company remains
subject to certain state and local taxes on its income and property as well as
Federal income and excise taxes on its undistributed income.
RESULTS OF OPERATIONS
Comparison of year ended December 31, 2003 to year ended December 31, 2002
For the year ended December 31, 2003, income from operations increased by
$3.8 million from $21.6 million to $25.4 million, when compared to the year
ended December 31, 2002. The increase was due to increased revenues of $33.9
million and increased results from affiliates of $17.3 million partially offset
by increased expenses of $47.4 million. The year 2003 included SHS on a
consolidated basis as discussed below.
Income from rental property increased by $9.2 million from $149.9 million
to $159.1 million, or 6.2 percent, due to rent increases and other community
revenues ($3.4 million) and acquisitions ($5.8 million).
Interest income, including income from Origen, increased by $3.4 million
from $8.0 million to $11.4 million, or 42.1 percent, due principally to larger
outstanding balances of notes and investments at higher rates of interest.
Other operating income decreased by $1.6 million from $2.3 million to $0.7
million, due primarily to reduced development fee income.
The remaining revenue increases of $22.9 million relate to the
consolidation of Sun Home Services which is discussed in detail below.
Property operating and maintenance expenses increased by $6.1 million from
$33.7 million to $39.8 million, or 18.0 percent. The increase was primarily due
to increases in utility costs ($1.8 million) and increases in repair and
maintenance expenses ($1.3 million). Acquisitions during 2002 and the
consolidation of SunChamp properties accounted for the remaining increase of
$3.0 million.
Real estate taxes increased by $1.5 million from $10.2 million to $11.7
million, or 15.0 percent due to acquisitions made in 2002 ($0.7 million) and
increases in assessments and tax rate ($0.8 million).
Selling, general, and administrative expenses increased by $10.4 million
from $7.7 million to $18.1 million, due to the consolidation of Sun Home
Services ($7.6 million), professional fees ($0.4 million), expenses related to
office relocation ($0.2 million), Michigan Single Business tax ($0.2 million),
compensation expenses, including benefits, primarily related to the SunChamp
acquisition and a systems conversion ($1.7 million), and assorted other minor
increases ($0.3 million).
Depreciation and amortization increased by $6.2 million from $37.9 million
to $44.1 million, or 16.4 percent, due primarily to the consolidation of Sun
Home Services ($1.0 million) and additional investment in rental property.
Interest expense increased by $4.3 million from $32.4 million to $36.7
million, or 13.3 percent, due to increased debt levels partially offset by lower
interest rates ($1.5 million), decreased capitalized interest ($0.8 million), an
increase in financing costs ($0.6 million), and an increase in interest rates
related to fixing rates on $75.0 million of debt ($2.7 million). These increases
were partially offset by $1.3 million of income related primarily to the change
in market value of an interest rate swap contract that does not qualify for
hedge accounting.
Equity income from affiliates of $0.7 million represents the Company's
one-third interest in the operations of Origen for its initial operating period
after a recapitalization in October, 2003.
The $4.9 million impairment charge relates to a reduction in the book
value of a new community development due to the impracticality of future phase
construction.
The remaining expense increase of $13.9 million relates to the
consolidation of Sun Home Services which is discussed in detail below.
Sun Home Services
Prior to January 1, 2003, the results of operations of Sun Home Services
were accounted for using the equity method and reported as a single line item
called equity in income from affiliates. As the Company is the primary
beneficiary of the results of operations of Sun Home Services, it is appropriate
to consolidate Sun Home Services at December 31, 2003. This has no effect on
previously reported net income.
The following table summarizes certain financial and statistical data for
Sun Home Services for the years ended December 31, 2003 and 2002:
INCREASE/
2003 2002 (DECREASE) PERCENT CHANGE
-------- -------- ---------- --------------
(Pro Forma)
New home sales revenues $ 13,169 $ 15,890 $ (2,721) (17.1%)
Cost of sales 9,159 12,907 (3,748) (29.0%)
-------- -------- ---------- -----
Gross profit 4,010 2,983 1,027 34.4%
======== ======== ========== =====
Pre-owned home sales revenues $ 6,347 $ 3,214 $ 3,133 97.5%
Cost of sales 4,720 2,586 2,134 82.5%
-------- -------- ---------- -----
Gross profit 1,627 628 999 159.1%
======== ======== ========== =====
Ancillary revenue, net $ 3,409 $ 1,519 $ 1,890 124.4%
======== ======== ========== =====
Home sales volumes:
New homes 257 286 (29) (10.1%)
Pre-owned homes 283 174 109 62.6%
New home sales declined by 10.1 percent, while revenues and costs of sales
declined by 17.1 and 29.0 percent, respectively. Gross profit increased by 34.4
percent as cost of sales declined by more than revenues due to the purchase of
new homes at a substantial discount. Pre-owned home unit sales increased by 62.6
percent while revenues and cost of sales increased by 97.5 percent and 82.5
percent, respectively. Gross profit increased by 159.1 percent as revenues grew
more than cost of sales due to strong demand for the value in pre-owned homes.
The increase in ancillary revenue, net, is primarily due to increased
activity in the Company's rental home program.
Comparison of year ended December 31, 2002 to year ended December 31, 2001
For the year ended December 31, 2002, income from operations decreased by
$20.0 million from $41.6 million to $21.6 million, when compared to the year
ended December 31, 2001. The decrease was due to increased expenses of $12.5
million, increased revenues of $9.2 million and increased loss from affiliates
of $16.7 million as described in more detail below.
Income from rental property increased by $12.9 million from $137.0 million
to $149.9 million, or 9.4 percent, due to rent increases and other community
revenues ($5.9 million) and acquisitions ($7.0 million).
Interest income, including income from Origen, decreased by $2.3 million
from $10.3 million to $8.0 million, or 22.5 percent, due primarily to a decrease
in interest earning notes and receivables.
Other income decreased by $1.4 million from $3.7 million to $2.3 million,
or 37.8 percent, due primarily to reduced development fee income.
Property operating and maintenance expenses increased by $4.4 million from
$29.3 million to $33.7 million, or 15.0 percent, due to acquired communities
($1.9 million) and increases in costs including payroll ($1.2 million), workers'
compensation ($0.5 million), and cable television ($0.3 million), and other
expenses ($0.5 million).
Real estate taxes increased by $1.0 million from $9.2 million to $10.2
million, or 11.5 percent due to acquired communities ($0.5 million) and changes
in certain assessments.
General and administrative expenses increased by $0.3 million from $7.4
million to $7.7 million, representing 4.8 percent and 4.9 percent of total
revenues in 2002 and 2001, respectively.
Depreciation and amortization increased by $5.2 million from $32.7 million
to $37.9 million, due primarily to the net additional investments in rental
properties.
Interest expense increased by $1.4 million from $31.0 million to $32.4
million due primarily to financing additional investments in rental property
($6.0 million), offset by decreasing rates on variable rate debt ($4.9 million).
Equity loss from affiliates increased by $16.7 million from income of $0.1
million to a loss of $16.6 million primarily due to equity losses at SHS ($0.7
million), SunChamp ($0.4 million) and Origen ($1.7 million) and the valuation
adjustment of the Company's investment in Origen ($13.6 million) and a
technology investment ($0.3 million).
SAME PROPERTY INFORMATION
The following table reflects property-level financial information as of
and for the years ended December 31, 2003 and 2002. The "Same Property" data
represents information regarding the operation of communities owned as of
January 1, 2002 and December 31, 2003. Site, occupancy, and rent data for those
communities is presented as of the last day of each period presented. The "Total
Portfolio" column differentiates from the "Same Property" column by including
financial information for properties acquired after January 1, 2002 and new
development communities.
SAME PROPERTY (3) TOTAL PORTFOLIO
------------------------- -------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(in thousands) (in thousands)
Income from property $ 135,220 $ 132,100 $ 159,115 $ 149,875
--------- --------- --------- ---------
Property operating expenses
Property operating and maintenance 26,663 24,865 39,837 33,751
Real estate taxes 10,578 9,892 11,746 10,217
--------- --------- --------- ---------
Property operating expenses 37,241 34,757 51,583 43,968
--------- --------- --------- ---------
Property net operating income (2) $ 97,979 $ 97,343 $ 107,532 $ 105,907
========= ========= ========= =========
Number of properties 105 105 127 129
Developed sites 38,255 38,253 43,875 43,959
Occupied sites 33,533 34,514 36,361 38,940
Occupancy % 89.1%(1) 92.0%(1) 86.1%(1) 89.9%
Weighted Average monthly rent per site $ 328(1) $ 315(1) $ 328(1) $ 315
Sites available for development 1,545 2,018 6,756 7,642
Sites planned for development in next year 30 99 258 175
(1) Occupancy % and weighted average rent relates to manufactured housing
sites, excluding recreational vehicle sites.
(2) Investors in and analysts following the real estate industry utilize net
operating income ("NOI") as a supplemental performance measure. The
Company considers NOI, given its wide use by and relevance to investors
and analysts, an appropriate supplemental measure to net income because
NOI provides a measure of rental operations and does not factor in
depreciation/amortization and non-property specific expenses such as
general and administrative expenses. (3) Same property information does
not include properties sold during the year ended December 31, 2003.
(3) Same property information does not include properties sold during the year
ended December 31, 2003.
On a same property basis, property net operating income increased by $0.6
million from $97.3 million to $97.9 million, or 0.6 percent. Income from
property increased by $3.1 million from $132.1 million to $135.2 million, or 2.3
percent, due primarily to increases in rents including water and property tax
pass through.
Property operating expenses increased by $1.8 million from $24.9 million to$26.7
million, or 7.2 percent, due to increases in real estate taxes ($0.7 million),
repair and maintenance ($0.9 million), and payroll ($0.2 million).
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity demands have historically been, and are
expected to continue to be, distributions to the Company's stockholders and the
Operating Partnership's unitholders, property acquisitions, development and
expansion of properties, capital improvements of properties and debt repayment.
The Company expects to meet its short-term liquidity requirements through
its working capital provided by operating activities and its line of credit, as
described below. The Company considers its ability to generate cash from
operations (anticipated to be approximately $70 million) to be adequate to meet
all operating requirements, including recurring capital improvements, routinely
amortizing debt and other normally recurring expenditures of a capital nature,
pay dividends to its stockholders to maintain qualification as a REIT in
accordance with the Internal Revenue Code and make distributions to the
Operating Partnership's unitholders.
The Company plans to invest approximately $5.0 million in developments
consisting of expansions to existing communities and the continuing development
of new communities. The Company expects to finance these investments by using
net cash flows provided by operating activities and by drawing upon its line of
credit.
Furthermore, the Company expects to invest in the range of $20.0 to $40.0
million in the acquisition of individual properties in 2004, depending upon
market conditions. The Company plans to finance these investments by using net
cash flows provided by operating activities and by drawing upon its line of
credit.
Cash and cash equivalents increased by $21.4 million to $24.1 million at
December 31, 2003 compared to $2.7 million at December 31, 2002 due to the net
proceeds received from the sale of four properties. Net cash provided by
operating activities increased by $12.3 million to $63.3 million for the year
ended December 31, 2003 compared to $51.0 million for the year ended December
31, 2002. The increase resulted primarily from increased net income, higher
depreciation, the effect of consolidating SHS, and changes in other
miscellaneous asset and liabilities accounts.
The Company's net cash flows provided by operating activities may be
adversely impacted by, among other things: (a) the market and economic
conditions in the Company's markets; (b) lower occupancy rates of the
Properties; (c) increased operating costs, including insurance premiums, real
estate taxes and utilities, that cannot be passed on to the Company's tenants;
and (d) decreased sales of manufactured homes. See "Factors that May Affect
Future Results."
In October 2003, the Company acquired a community in East Lansing, MI and
financed the acquisition with a mortgage for $2.3 million and the remainder in
cash.
The Company entered into a $25 million loan facility in September of 2003,
of which $25 million was available to be borrowed at December 31, 2003.
Borrowings bear an interest rate of Federal Funds Effective Rate plus .85% and
mature on March 24, 2004.
In April 2003 the Company issued $150 million of 5.75 percent senior
notes, due April 15, 2010, and used the proceeds from the offering to retire the
bridge loan of $48 million and
senior notes of $85 million which matured on April 30 and May 1, 2003,
respectively. The remaining proceeds paid down the Company's line of credit.
The Company has a $105 million unsecured line of credit facility, which
matures in July 2005, with a one-year optional extension. At December 31, 2003,
the average interest rate of outstanding borrowings under the line of credit was
2.05%, $99 million was outstanding and $6 million was available to be drawn
under the facility. The line of credit facility contains various leverage, debt
service coverage, net worth maintenance and other customary covenants all of
which the Company was in compliance with at December 31, 2003.
The Company's primary long-term liquidity needs are principal payments on
outstanding indebtedness. At December 31, 2003, the Company's outstanding
contractual obligations were as follows:
PAYMENTS DUE BY PERIOD
(IN THOUSANDS)
-----------------------------------------------------------
CONTRACTUAL CASH OBLIGATIONS TOTAL DUE 1 YEAR 2-3 YEARS 4-5 YEARS AFTER 5 YEARS
------------- ------------ ------------- ------------ -------------
Line of credit $ 99,000 $ - $ 99,000 $ - $ -
Collateralized term loan 41,547 706 1,569 39,272 -
Collateralized term loan - FNMA 152,363 - - - 152,363
Senior notes (1) 350,000 - 65,000 135,000 150,000
Mortgage notes, other 62,664 24,823 12,276 8,008 17,557
Capitalized lease obligations 9,606 9,606 - - -
Redeemable Preferred OP Units 58,148 - 8,176 4,500 45,472
------------- ------------ ------------- ------------ -------------
$ 773,328 $ 35,135 $ 186,021 $ 186,780 $ 365,392
============= ============ ============= ============ =============
(1) The provisions of the callable/redeemable $65 million notes are such that
the maturity date will likely be 2005 if the 10-year treasury rate is
greater than 5.7% on May 16, 2005. The maturity is reflected in the above
table based on that assumption.
The Company anticipates meeting its long-term liquidity requirements, such
as scheduled debt maturities, large property acquisitions and Operating
Partnership unit redemptions, through the issuance of debt or equity securities,
including equity units in the Operating Partnership, or from selective asset
sales. Since 1993, the Company has raised, in the aggregate, nearly $1 billion
from the sale of shares of its common stock, from the sale of OP units in the
Operating Partnership, and the issuance of secured and unsecured debt
securities. In addition, at December 31, 2003, 92 of the Properties were
unencumbered by debt, therefore, providing substantial financial flexibility.
The ability of the Company to finance its long-term liquidity requirements in
such manner will be affected by numerous economic factors affecting the
manufactured housing community industry at the time, including the availability
and cost of mortgage debt, the financial condition of the Company, the operating
history of the Properties, the state of the debt and equity markets, and the
general national, regional and local economic conditions. See "Factors that May
Affect Future Results". If the Company is unable to obtain additional equity or
debt financing on acceptable terms, the Company's business, results of
operations and financial condition will be harmed.
Included in debt are $35.8 million of Preferred OP Units which would
require collateralization were the Company to no longer be classified as
investment grade by the rating agencies.
At December 31, 2003, the Company's debt to total market capitalization
approximated 46.0 percent (assuming conversion of all Common OP Units to shares
of common stock). The debt has a weighted average maturity of approximately 5.2
years and a weighted average interest rate of 5.4 percent.
Capital expenditures for the years ended December 31, 2003 and 2002
included recurring capital expenditures of $6.5 million (excluding $1.7 million
related to a main office relocation and $3.4 million related to a software
conversion) and $7.1 million, respectively.
Net cash used in investing activities was $58.9 million for the year ended
December 31, 2003 compared to $168.9 million in the prior year. The differences
are due to: decreased investment in rental properties of $37.0 million;
increased proceeds from property disposition of $19.3 million; increased
repayments of notes receivables of $61.7 million; decreased investment in and
advances to affiliates of $4.2 million; offset by net payments for loans
purchased from and sold to Origen of $12.2 million. Included in proceeds from
property dispositions is $22.5 million of proceeds deposited with an
intermediary for Section 1031 exchange purposes. These sales proceeds will be
disbursed as the Company exchanges properties under Section 1031 of the Internal
Revenue Code.
Net cash provided by financing activities was $17.0 million for the year
ended December 31, 2003, compared to $116.0 million in the prior year. The
differences were primarily due to changes in net proceeds from notes payable,
inclusive of borrowings on line of credit, of $109.6 million, increased
distributions of $2.4 million, offset by changes in net proceeds from common
stock issuance of $12.4 million and changes in payments of deferred financing
costs of $0.6 million.
RATIO OF EARNINGS TO FIXED CHARGES
The Company's ratio of earnings to fixed charges for the years ended
December 31, 2003, 2002, and 2001 was 1.29:1, 1.68:1 and 1.73:1 respectively.
INFLATION
Most of the leases allow for periodic rent increases which provide the
Company with the opportunity to achieve increases in rental income as each lease
expires. Such types of leases generally minimize the risk of inflation to the
Company.
SAFE HARBOR STATEMENT
This Form 10-K/A contains various "forward-looking statements" within the
meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934,
and the Company intends that such forward-looking statements will be subject to
the safe harbors created thereby. For this purpose, any statements contained in
this press release that relate to prospective events or developments are deemed
to be forward-looking statements. Words such as "believes," "forecasts,"
"anticipates," "intends," "plans," "expects," "will" and similar expressions are
intended to identify forward-looking statements. These forward-looking
statements reflect the Company's current views with respect to future events and
financial performance, but involve known and unknown risks and uncertainties,
both general and specific to the matters discussed in this press release. These
risks and uncertainties may cause the actual results of the Company to be
materially different from any future results expressed or implied by such
forward looking statements. Such risks and uncertainties include the national,
regional and local economic climates, the ability to maintain rental rates and
occupancy levels, competitive market forces, changes in market rates of
interest, the ability of manufactured home buyers to obtain financing, the level
of repossessions by manufactured home lenders and those referenced under the
headings entitled "Factors That May Affect Future Results" or "Risk Factors"
contained in this Form 10-K and the Company's filings with the Securities and
Exchange Commission. The forward-looking statements contained in this Form 10-K
speak only as of the date hereof and the Company expressly disclaims any
obligation to provide public updates, revisions or amendments to any
forward-looking statements made herein to reflect changes in the Company's
expectations of future events.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity" which establishes standards for how financial instruments that have
characteristics of both liabilities and equity instruments should be classified
on the balance sheet. The requirements of SFAS 150 generally outline that
financial instruments that give the issuer a choice of settling an obligation
with a variable number of securities or settling an obligation with a transfer
of assets or any mandatorily redeemable security should be classified as a
liability on the balance sheet. The Company has reclassified mandatorily
redeemable preferred operating partnership units of $58.1 million into debt as
of December 31, 2003. The reclassification had no effect on the Company's
compliance with the covenant requirements of its credit agreements.
In April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statements No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This Statement is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. In addition, all provisions of this Statement should be applied
prospectively. The provisions of this Statement that relate to Statement 133
Implementation Issues that have been effective for fiscal quarters that began
prior to June 15, 2003, should continue to be applied in accordance with their
respective effective dates. The adoption of this Statement did not have a
significant impact on the financial position or results of the operations of the
Company.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." The objective of this
interpretation is to provide guidance on how to identify a variable interest
entity ("VIE") and determine when the assets, liabilities, non-controlling
interests and results of operations of a VIE need to be included in a company's
consolidated financial statements. A company that holds variable interests in an
entity will need to consolidate the entity if the company's interest in the VIE
is such that the company will absorb a majority of the VIE's expected losses
and/or receive a majority of the VIE's expected residual returns, if they occur.
FIN 46 also requires additional disclosures by primary beneficiaries and other
significant variable interest holders. The provisions of this interpretation
apply to the end of the first interim period or annual period ending after
December 15, 2003 (i.e., December 31, 2003) to VIEs in which a company holds a
variable interest that it acquired before February 1, 2003. The Company has
consolidated SHS in its financial reporting beginning December 31, 2003.
OTHER
Funds from operations ("FFO") is defined by the National Association of
Real Estate Investment Trusts ("NAREIT") as net income (computed in accordance
with generally accepted accounting principles), excluding gains (or losses) from
sales of depreciable operating property, plus real estate-related depreciation
and amortization, and after adjustments for unconsolidated partnerships and
joint ventures. FFO is a non-GAAP financial measure that management believes is
a useful supplemental measure of the Company's operating performance. Management
generally considers FFO to be a useful measure for reviewing comparative
operating and financial performance because, by excluding gains and losses
related to sales of previously depreciated operating real estate assets and
excluding real estate asset depreciation and amortization (which can vary among
owners of identical assets in similar condition based on historical cost
accounting and useful life estimates), FFO provides a performance measure that,
when compared year over year, reflects the impact to operations from trends in
occupancy rates, rental rates and operating costs, providing perspective not
readily apparent from net income. Management believes that the use of FFO has
been beneficial in improving the understanding of operating results of REITs
among the investing public and making comparisons of REIT operating results more
meaningful.
Because FFO excludes significant economic components of net income
including depreciation and amortization, FFO should be used as an adjunct to net
income and not as an alternative to net income. The principal limitation of FFO
is that it does not represent cash flow from operations as defined by GAAP and
is a supplemental measure of performance that does not replace net income as a
measure of performance or net cash provided by operating activities as a measure
of liquidity. In addition, FFO is not intended as a measure of a REIT's ability
to meet debt principal repayments and other cash requirements, nor as a measure
of working capital. FFO only provides investors with an additional performance
measure. Other REITS may use different methods for calculating FFO and,
accordingly, the Company's FFO may not be comparable to other REITs.
The following table reconciles net income to FFO and calculates FFO data
for both basic and diluted purposes for the years ended December 31, 2003, 2002,
2001 (in thousands):
SUN COMMUNITIES, INC.
RECONCILIATION OF NET INCOME TO FUND FROM OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE/OP UNIT AMOUNTS)
2003 2002 2001
--------- --------- ---------
Net Income $ 23,714 $ 13,592 $ 33,910
Adjustments:
Depreciation and amortization 43,458 38,262 33,050
Valuation adjustment (1) (879) 449 -
Allocation of SunChamp losses (2) 4,548 1,315 -
(Gain) loss on dispositions, net (8,590) 13,612 (4,275)
Income allocated to common minority interests 3,274 2,003 5,401
--------- --------- ---------
Funds from Operations (FFO) (3) $ 65,525 $ 69,233 $ 68,086
========= ========= =========
FFO - Continuing Operations $ 63,605 $ 67,055 $ 65,889
========= ========= =========
FFO - Discontinued Operations $ 1,920 $ 2,178 $ 2,197
========= ========= =========
Weighted average common shares/OP Units outstanding:
Basic 20,717 20,177 19,907
========= ========= =========
Diluted 20,856 20,363 20,089
========= ========= =========
Continuing Operations:
FFO per weighted average Common Share/OP Unit - Basic(3) $ 3.07 $ 3.32 $ 3.31
========= ========= =========
FFO per weighted average Common Share/OP Unit - Diluted(3) $ 3.05 $ 3.29 $ 3.28
========= ========= =========
Discontinued Operations:
FFO per weighted average Common Share/OP Unit - Basic $ 0.09 $ 0.11 $ 0.11
========= ========= =========
FFO per weighted average Common Share/OP Unit - Diluted $ 0.09 $ 0.11 $ 0.11
========= ========= =========
Total Operations:
FFO per weighted average Common Share/OP Unit - Basic(3) $ 3.16 $ 3.43 $ 3.42
========= ========= =========
FFO per weighted average Common Share/OP Unit - Diluted(3) $ 3.14 $ 3.40 $ 3.39
========= ========= =========
(1) The Company entered into three interest rate swaps and an interest rate
cap agreement. The valuation adjustment reflects the theoretical noncash
profit and loss were those hedging transactions terminated at the balance
sheet date. As the Company has no expectation of terminating the
transactions prior to maturity, the net of these noncash valuation
adjustments will be zero at the various maturities. As any imperfection
related to hedging correlation in these swaps is reflected currently in
cash as interest, the valuation adjustments reflect volatility that would
distort the comparative measurement of FFO and on a net basis approximate
zero. Accordingly, the valuation adjustments are excluded from Funds from
Operations. The valuation adjustment is included in interest expense.
(2) The Company acquired the equity interest of another investor in SunChamp
in December 2002. Consideration consisted of a long-term note payable at
net book value. Although the adjustment for the allocation of the SunChamp
losses (based on SunChamp as a stand-alone entity) is not reflected in the
accompanying financial statements, management believes that it is
appropriate to provide for this adjustment because the Company's payment
obligations with respect to the note are subordinate in all respects to
the return of the members' equity (including the gross book value of the
acquired equity) plus a preferred return. As a result, the losses that are
allocated to the Company from SunChamp as a stand-alone entity under
generally accepted accounting principles are effectively reallocated to
the note for purposes of calculating Funds from Operations. At December
31, 2003, the remaining balance on the SunChamp note is approximately $0.3
million and, accordingly, the financial impact of excluding the SunChamp
losses from FFO is immaterial and will cease during the first quarter of
2004. A situation such as this is not contemplated in the NAREIT
definition of FFO due to the unique circumstances of the transaction.
Although not comparable to the precise NAREIT definition, the Company
believes the inclusion of this item in its calculation of FFO to be
appropriate as noted above.
(3) 2003 Funds from Operations was previously reported as $70,457 and is now
$65,525. The difference is $4,932. This amount represents $0.24 of FFO per
weighted average share (both basic and diluted) and is related to an
impairment of a property due to the impracticality of its development .
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed herewith as part of this Form
10-K/A:
(1) A list of the financial statements required to be filed as a
part of this Form 10-K/A is shown in the "Index to the Consolidated Financial
Statements and Financial Statement Schedule" filed herewith.
(2) A list of the financial statement schedules required to be
filed as a part of this Form 10-K/A is shown in the "Index to the Consolidated
Financial Statements and Financial Statement Schedule" filed herewith.
(3) A list of the exhibits required by Item 601 of Regulation S-K
to be filed as a part of this Form 10-K/A is shown on the "Exhibit Index" filed
herewith.
(b) Reports on Form 8-K:
(1) Form 8-K, dated October 2, 2003, filed for the purpose of
reporting, under Item 5 - Other Events, the Company's investment in Origen
Financial, Inc.
(2) Form 8-K, dated October 29, 2003, furnished for the purpose of
reporting, under Item 12 - Results of Operations and Financial Condition, the
Company's 2003 third quarter earnings and results of operations.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: February 21, 2005
SUN COMMUNITIES, INC., a
Maryland corporation
By: /s/ Jeffrey P. Jorissen
----------------------------------------
Jeffrey P. Jorissen, Chief Financial Officer
EXHIBIT INDEX
EXHIBIT METHOD OF
NUMBER DESCRIPTION FILING
------- ----------- ---------
2.1 Form of Sun Communities, Inc.'s Common Stock Certificate (1)
3.1 Amended and Restated Articles of Incorporation of Sun Communities, Inc (1)
3.2 Bylaws of Sun Communities, Inc. (2)
4.1 Indenture, dated as of April 24, 1996, among Sun Communities, Inc., Sun (3)
Communities Operating Limited Partnership (the "Operating Partnership") and
Bankers Trust Company, as Trustee
4.2 Form of Note for the 2001 Notes (3)
4.3 Form of Note for the 2003 Notes (3)
4.4 First Supplemental Indenture, dated as of August 20, 1997, by and between the (7)
Operating Partnership and Bankers Trust Company, as Trustee
4.5 Form of Medium-Term Note (Floating Rate) (7)
4.6 Form of Medium-Term Note (Fixed Rate) (7)
4.7 Articles Supplementary of Board of Directors of Sun Communities, Inc. (9)
Designating a Series of Preferred Stock and Fixing Distribution and other
Rights in such Series
4.8 Articles Supplementary of Board of Directors of Sun Communities, Inc. (11)
Designating a Series of Preferred Stock
10.1 Second Amended and Restated Agreement of Limited Partnership of Sun Communities (6)
Operating Limited Partnership
10.2 Second Amended and Restated 1993 Stock Option Plan (10)
10.3 Amended and Restated 1993 Non-Employee Director Stock Option Plan (6)
10.4 Form of Stock Option Agreement between Sun Communities, Inc. and certain (1)
directors, officers and other individuals#
10.5 Form of Non-Employee Director Stock Option Agreement between Sun Communities, (4)
Inc. and certain directors#
10.6 Employment Agreement between Sun Communities, Inc. and Gary A. Shiffman # (6)
10.7 Amended and Restated Loan Agreement between Sun Communities Funding Limited (7)
Partnership and Lehman Brothers Holdings Inc.
10.8 Amended and Restated Loan Agreement among Miami Lakes Venture Associates, Sun (7)
Communities Funding Limited Partnership and Lehman Brothers Holdings Inc.
10.9 Form of Indemnification Agreement between each officer and director of Sun (7)
Communities, Inc. and Sun Communities, Inc.
10.10 Loan Agreement among the Operating Partnership, Sea Breeze Limited Partnership (7)
and High Point Associates, LP.
10.11 Option Agreement by and between the Operating Partnership and Sea Breeze (7)
Limited Partnership
10.12 Option Agreement by and between the Operating Partnership and High Point (7)
Associates, LP
10.13 Stock Pledge Agreement between Gary A. Shiffman and the Operating Partnership (5)
for 94,570 shares of Common Stock
10.14 Stock Pledge Agreement between Gary A. Shiffman and the Operating Partnership (5)
for 305,430 shares of Common Stock
10.15 Stock Pledge Agreement between Gary A. Shiffman and the Operating Partnership (7)
with respect to 80,000 shares of Common Stock
10.16 Employment Agreement between Sun Communities, Inc. and Jeffrey P. Jorissen# (9)
10.17 Long Term Incentive Plan (7)
EXHIBIT METHOD OF
NUMBER DESCRIPTION FILING
------- ----------- ---------
10.18 Restricted Stock Award Agreement between Sun Communities, Inc. and Gary A. (9)
Shiffman, dated June 5, 1998#
10.19 Restricted Stock Award Agreement between Sun Communities, Inc. and Jeffrey P. (9)
Jorissen, dated June 5, 1998#
10.20 Restricted Stock Award Agreement between Sun. Communities, Inc. and Jonathan M. (9)
Colman, dated June 5, 1998#
10.21 Restricted Stock Award Agreement between Sun Communities, Inc. and Brian W. (9)
Fannon, dated June 5, 1998#
10.22 Sun Communities, Inc. 1998 Stock Purchase Plan# (9)
10.23 Facility and Guaranty Agreement among Sun Communities, Inc., the Operating (9)
Partnership, Certain Subsidiary Guarantors and First National Bank of Chicago,
dated December 10, 1998
10.24 Rights Agreement between Sun Communities, Inc. and State Street Bank and Trust (8)
Company, dated April 24, 1998
10.25 Contribution Agreement, dated as of September 29, 1999, by and among the Sun (11)
Communities, Inc., the Operating Partnership, Belcrest Realty Corporation and
Belair Real Estate Corporation
10.26 One Hundred Third Amendment to Second Amended and Restated Limited Partnership (11)
Agreement of the Operating Partnership
10.27 One Hundred Eleventh Amendment to Second Amended and Restated Limited (12)
Partnership Agreement of the Operating Partnership
10.28 One Hundred Thirty-Sixth Amendment to Second Amended and Restated Limited (12)
Partnership Agreement of the Operating Partnership
10.29 One Hundred Forty-Fifth Amendment to Second Amended and Restated Limited (12)
Partnership Agreement of the Operating Partnership
10.30 Restricted Stock Award Agreement between Sun Communities, Inc. and Gary A. (12)
Shiffman, dated March 30, 2001#
10.31 Restricted Stock Award Agreement between Sun Communities, Inc. and Jeffrey P. (12)
Jorissen, dated March 30, 2001#
10.32 Restricted Stock Award Agreement between Sun Communities, Inc. and Jonathan M. (12)
Colman, dated March 30, 2001#
10.33 Restricted Stock Award Agreement between Sun Communities, Inc. and Brian W. (12)
Fannon, dated March 30, 2001#
10.34 Second Amended and Restated Subordinated Loan Agreement, dated December 4, (15)
2002, by and between Origen Financial L.L.C. and the Operating Partnership
10.35 Subordinated Term Loan Agreement, dated December 4, 2002, by and between Origen (15)
Financial L.L.C. and the Operating Partnership
10.36 First Amendment to Second Amended and Restated Subordinated Loan Agreement, (15)
dated December 30, 2002, by and between Origen Financial L.L.C. and Sun Home
Services
10.37 First Amendment to Subordinated Term Loan Agreement, dated December 30, 2002, (15)
by and between Origen Financial L.L.C. and Sun Home Services
10.38 Seventh Amended and Restated Promissory Note, dated December 30, 2002, made by (15)
Origen Financial L.L.C. in favor of Sun Home Services
10.39 First Amended and Restated Subordinated Term Promissory Note, dated December (15)
30, 2002, made by Origen Financial L.L.C. in favor of Sun Home Services
10.40 First Amended and Restated Security Agreement, dated December 30, 2002, by and (15)
between Origen Financial L.L.C. and Sun Home Services
10.41 Second Amended and Restated Stock Pledge Agreement, dated December 30, 2002, (15)
by and between Origen Financial L.L.C. and Sun Home Services
EXHIBIT METHOD OF
NUMBER DESCRIPTION FILING
------- ----------- ---------
10.42 First Amended and Restated Limited Liability Company Interest Security and (15)
Pledge Agreement, dated December 30, 2002, by and between Origen Financial
L.L.C. and Sun Home Services
10.43 Second Amended and Restated Guaranty, dated December 30, 2002, by Bingham in (15)
favor of the Operating Partnership
10.44 Second Amended and Restated Security Agreement, dated December 30, 2002, by and (15)
between Bingham and Sun Home Services.
10.45 Amended and Restated Stock Pledge Agreement, dated December 30, 2002, by and (15)
between Bingham and Sun Home Services
10.46 Amended and Restated Membership Pledge Agreement, dated December 30, 2002, by (15)
and between Bingham and Sun Home Services.
10.47 Second Amended and Restated Participation Agreement, dated December 30, 2002, (15)
by and among Sun Home Services, the Milton M. Shiffman Spouse's Marital Trust
and Woodward Holding LLC
10.48 Master Credit Facility Agreement, dated as of May 29, 2002, by and between Sun (13)
Secured Financing LLC, Aspen-Ft. Collins Limited Partnership, Sun Secured
Financing Houston Limited Partnership and ARCS Commercial Mortgage Co., L.P.
10.49 Credit Agreement, dated as of July 3, 2002, by and between the Operating (13)
Partnership, Sun Communities, Inc., Banc One Capital Markets, Inc., Bank One,
N.A. and other lenders which are signatories thereto
10.50 First Amendment to Master Credit Facility Agreement, dated as of August 29, (14)
2002, by and between Sun Secured Financing LLC, Aspen-Ft. Collins Limited
Partnership, Sun Secured Financing Houston Limited Partnership and ARCS
Commercial Mortgage Co., L.P.
10.51 First Amendment to Employment Agreement, dated as of July 15, 2002, by and (14)
between Sun Communities, Inc. and Gary A. Shiffman#
10.52 Second Amended and Restated Promissory Note (Secured), dated as of July 15, (14)
2002, made by Gary A. Shiffman in favor of the Operating Partnership
10.53 First Amended and Restated Promissory Note (Unsecured), dated as of July 15, (14)
2002, made by Gary A. Shiffman in favor of the Operating Partnership
10.54 First Amended and Restated Promissory Note (Secured), dated as of July 15, (14)
2002, made by Gary A. Shiffman in favor of the Operating Partnership
10.55 Second Amended and Restated Promissory Note (Unsecured), dated as of July 15, (14)
2002, made by Gary A. Shiffman in favor of the Operating Partnership
10.56 Second Amended and Restated Promissory Note (Secured), dated as of July 15, (14)
2002, made by Gary A. Shiffman in favor of the Operating Partnership
10.57 Employment Agreement, dated as of January 1, 2003, by and between Brian W. (15)
Fannon and Sun Home Services, Inc.#
10.58 Employment Agreement, dated as of January 1, 2003, by and between Brian W. (15)
Fannon and Sun Communities, Inc.#
10.59 Lease, dated November 1, 2002, by and between the Operating Partnership as (15)
Tenant and American Center LLC as Landlord
10.60 Term Loan Agreement, dated as of October 10, 2002, among Sun Financial, LLC, (15)
Sun Financial Texas Limited Partnership, the Operating Partnership, Sun
Communities, Inc. and Lehman Commercial Paper, Inc.
EXHIBIT METHOD OF
NUMBER DESCRIPTION FILING
------ ----------- ------
10.61 Concurrent Private Placement Agreement dated October 8, 2003 among (16)
Sun OFI, Inc., Origen Financial, Inc., and the Purchasers(as defined
therein)
10.62 Registration Rights Agreement dated as of October 8, 2003 among Sun (16)
OFI, Inc., Origen Financial, Inc., Lehman Brothers Inc., on behalf
of itself and as agent for the investors listed on Schedule A
thereto and those persons listed on Schedule B thereto
12.1 Computation of Ratio of Earnings to Fixed Charges and Ratio Earnings (17)
to Combined Fixed Charges and Preferred Dividends
21.1 List of Subsidiaries of Sun Communities, Inc. (17)
23.1 Consent of PricewaterhouseCoopers LLP (18)
23.2 Consent of Grant Thornton LLP (18)
31.1 Certification of Chief Executive Officer pursuant to Section 302 of (18)
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of (18)
the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial Officer (18)
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1 Audited financial statements of Origen Financial L.L.C. (16)
99.2 Audited Financial Statements of Origen Financial, Inc. (16)
-----------------
(1) Incorporated by reference to Sun Communities, Inc.'s Registration
Statement No. 33-69340.
(2) Incorporated by reference to Sun Communities, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1995.
(3) Incorporated by reference to Sun Communities, Inc.'s Current Report on
Form 8-K dated April 24, 1996.
(4) Incorporated by reference to Sun Communities, Inc.'s Registration
Statement No. 33-80972.
(5) Incorporated by reference to Sun Communities, Inc.'s Quarterly Report on
Form 10-K for the quarter ended September 30, 1995.
(6) Incorporated by reference to Sun Communities, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1996.
(7) Incorporated by reference to Sun Communities, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1997.
(8) Incorporated by reference to Sun Communities, Inc.'s Current Report on
Form 8-A dated May 27, 1998.
(9) Incorporated by reference to Sun Communities, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1998.
(10) Incorporated by reference to Sun Communities, Inc.'s Proxy Statement,
dated April 20, 1999
(11) Incorporated by reference to Sun Communities, Inc.'s Current Report on
Form 8-K dated October 14, 1999.
(12) Incorporated by reference to Sun Communities, Inc.'s Annual Report on Form
10-K for the year ended December 31, 2001.
(13) Incorporated by reference to Sun Communities, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002.
(14) Incorporated by reference to Sun Communities, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002.
(15) Incorporated by reference to Sun Communities, Inc.'s Annual Report on Form
10-K for the year ended December 31, 2002, as amended.
(16) Incorporated by reference to pages F-1 through F-48 of Origen Financial,
Inc.'s Registration Statement on Form S-11, No. 333-112516
(17) Incorporated by reference to Sun Communities, Inc.'s Annual Report on Form
10-K for the year ended December 31, 2003.
(18) Filed herewith.
# Management contract or compensatory plan or arrangement required to be
identified by Form 10-K Item 14.
SUN COMMUNITIES, INC.
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE
PAGE
Report of Independent Registered Public Accounting Firm - Grant Thornton LLP F-2
Report of Independent Registered Public Accounting Firm - PricewaterhouseCoopers LLP F-3
Financial Statements:
Consolidated Balance Sheets as of December 31, 2003 and 2002 F-4
Consolidated Statements of Income
for the Years Ended December 31, 2003, 2002 and 2001 F-5
Consolidated Statements of Comprehensive Income
for the Years Ended December 31, 2003, 2002 and 2001 F-6
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 2003, 2002 and 2001 F-7
Consolidated Statements of Cash Flows
for the Years Ended December 31, 2003, 2002 and 2001 F-8
Notes to Consolidated Financial Statements F-9 - F-30
F-1
[GRANT THORNTON LOGO]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Sun Communities, Inc.
We have audited the accompanying consolidated balance sheet of Sun Communities,
Inc. and subsidiaries as of December 31, 2003, and the related consolidated
statements of income, comprehensive income, changes in stockholders' equity, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sun Communities,
Inc. and subsidiaries as of December 31, 2003, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 13 to the consolidated financial statements, the Company
adopted Financial Accounting Standards Board Interpretation No. 46,
"Consolidation of Variable Interest Entities" and Statement of Financial
Accounting Standards No. 150 "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity" during 2003.
We have also audited Schedule III for the year ended December 31, 2003. In our
opinion, this schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information therein.
/S/ GRANT THORNTON LLP
Southfield, Michigan
February 19, 2004
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Sun Communities, Inc.:
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheet and the related consolidated statements
of income, comprehensive income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of Sun Communities,
Inc. and its subsidiaries (the "Company") at December 31, 2002, and the results
of their operations and their cash flows for each of the two years in the period
ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of Origen Financial, L.L.C., an investee of the Company,
which statements reflect total assets of $227,748,000 as of December 31, 2002
and total revenues of $20,385,000 for the period ended December 31, 2002. Those
statements were audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for Origen Financial. L.L.C., is based solely on the report of
the other auditors. We conducted our audits of these statements in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.
As discussed in Note 1 to the consolidated financial statements, on January 1,
2002, the Company adopted the provisions of Statement of Accounting Standards
No. 144, "Accounting for the Impairment on Disposal of Long-Lived Assets."
/S/ PRICEWATERHOUSECOOPERS LLP
Detroit, Michigan
March 12, 2003 except for Note 3 as to
which the date is March 12, 2004
F-3
SUN COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
(AMOUNTS IN THOUSANDS)
2003 2002
------------ ------------
ASSETS
Investment in rental property, net $ 1,010,484 $ 999,360
Cash and cash equivalents 24,058 2,664
Inventory of manufactured homes 17,236 -
Investment in and advances to affiliates 50,667 67,719
Notes and other receivables 74,828 56,329
Other assets 44,301 37,904
------------ ------------
Total assets $ 1,221,574 $ 1,163,976
============ ============
LIABILITIES
Line of credit $ 99,000 $ 63,000
Debt 674,328 604,373
Other liabilities 24,833 24,581
------------ ------------
Total liabilities 798,161 691,954
------------ ------------
Minority interests 96,803 152,490
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 per value, 10,000 shares
authorized, none issued - -
Common stock, $.01 per value, 100,000 shares
authorized, 19,192 and 18,311 issued and
outstanding in 2003 and 2002, respectively 192 183
Paid-in capital 446,211 420,683
Officers' notes (10,299) (10,703)
Unearned compensation (7,337) (8,622)
Accumulated comprehensive earnings (1,294) (1,851)
Distributions in excess of accumulated earnings (94,479) (73,774)
Treasury stock, at cost, 202 shares (6,384) (6,384)
------------ ------------
Total stockholders' equity 326,610 319,532
------------ ------------
Total liabilities and stockholders' equity $ 1,221,574 $ 1,163,976
============ ============
The accompanying notes are an integral part of the consolidated financial
statements
F-4
SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
2003 2002 2001
--------- --------- ---------
REVENUES
Income from rental property $ 159,115 $ 149,875 $ 136,969
Revenues from home sales 19,516 - -
Ancillary service revenues, net 3,409 - -
Interest 7,434 6,169 6,505
Income from Origen, net, principally interest 3,920 1,821 3,800
Other income 676 2,304 3,695
--------- --------- ---------
Total revenues 194,070 160,169 150,969
COSTS AND EXPENSES
Property operating and maintenance 39,837 33,751 29,258
Cost of home sales 13,879 - -
Real estate taxes 11,746 10,217 9,162
Selling, general and administrative 18,181 7,722 7,373
Depreciation and amortization 44,120 37,900 32,716
Interest 36,680 32,375 31,016
Impairment charge 4,932 - -
--------- --------- ---------
Total expenses 169,375 121,965 109,525
Equity income (loss) from affiliates 667 (16,627) 131
--------- --------- ---------
Income from operations 25,362 21,577 41,575
Less income allocated to minority interest:
Preferred OP Units 8,537 7,803 8,131
Common OP Units 3,083 1,802 5,019
--------- --------- ---------
Income from continuing operations 13,742 11,972 28,425
Income from discontinued operations 9,972 1,620 5,485
--------- --------- ---------
Net income $ 23,714 $ 13,592 $ 33,910
========= ========= =========
Weighted average common shares outstanding:
Basic 18,206 17,595 17,258
========= ========= =========
Diluted 18,345 17,781 17,440
========= ========= =========
Basic earnings per share:
Continuing operations $ 0.75 $ 0.68 $ 1.64
Discontinued operations 0.55 0.09 0.32
--------- --------- ---------
Net Income $ 1.30 $ 0.77 $ 1.96
========= ========= =========
Diluted earnings per share:
Continuing operations $ 0.75 $ 0.67 $ 1.63
Discontinued operations 0.54 0.09 0.31
--------- --------- ---------
Net Income $ 1.29 $ 0.76 $ 1.94
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements
F-5
SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
2003 2002 2001
-------- -------- --------
Net income $ 23,714 $ 13,592 $ 33,910
Unrealized income (loss) on interest rate swaps 557 (1,851) -
-------- -------- --------
Comprehensive income $ 24,271 $ 11,741 $ 33,910
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements
F-6
SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
ACCUMULATED DISTRIBUTIONS
OTHER IN EXCESS OF
COMMON PAID-IN UNEARNED COMPREHENSIVE ACCUMULATED TREASURY OFFICERS' TOTAL
STOCK CAPITAL COMPENSATION LOSS EARNINGS STOCK NOTES EQUITY
------ --------- ------------ ------------- ------------- -------- --------- ---------
Balance, January 1, 2001 $ 175 $ 393,771 $ (4,746) $ - $ (41,688) $ (221) $ (11,257) $ 336,034
Issuance of common stock, net 3 4,077 (3,188)
Amortization 935
Repayment of officers' notes 253
Treasury stock purchased, 194
shares (6,163)
Reclassification and conversion
of minority interest 1,941
Net income 33,910
Cash distributions declared of
$2.18 per share (38,161)
------ --------- ------------ ------------- ------------- -------- --------- ---------
Balance, December 31, 2001 178 399,789 (6,999) (45,939) (6,384) (11,004) $ 329,641
Issuance of common stock, net 5 17,406 (2,767)
Amortization 1,144
Repayment of officers' notes 301
Reclassification and conversion
of minority interest 3,488
Net income 13,592
Unrealized loss on interest
rate swaps (1,851)
Cash distributions declared of
$2.29 per share (41,427)
------ --------- ------------ ------------- ------------- -------- --------- ---------
Balance, December 31, 2002 183 420,683 (8,622) (1,851) (73,774) (6,384) (10,703) $ 319,532
Issuance of common stock, net 9 27,640
Amortization 1,285
Repayment of officers' notes 404
Reclassification and conversion
of minority interest (2,112)
Net income 23,714
Unrealized loss on interest
rate swaps 557
Cash distributions declared of
$2.41 per share (44,419)
------ --------- ------------ ------------- ------------- -------- --------- ---------
Balance, December 31, 2003 $ 192 $ 446,211 $ (7,337) $ (1,294) $ (94,479) $ (6,384) $ (10,299) $ 326,610
====== ========= ============ ============= ============= ======== ========= =========
The accompanying notes are an integral part of the consolidated financial
statements
F-7
SUN COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(AMOUNTS IN THOUSANDS)
2003 2002 2001
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 23,714 $ 13,592 $ 33,910
Adjustments to reconcile NI to cash provided by operating activities:
Income allocated to minority interests 3,083 1,802 5,019
Income from discontinued operations allocated to minority interests 191 243 186
Gain from property dispositions, net (3,658) (361) (4,275)
Depreciation and amortization 44,120 37,900 32,716
Depreciation allocated to income from discontinued operations 347 675 800
Amortization of deferred financing costs 1,835 1,231 1,065
Reduction in book value of investments - 13,881 -
Decrease in inventory 1,970 - -
Increase in other assets (7,520) (15,973) (4,879)
Increase (decrease) in accounts payable and other liabilities (814) (2,031) 1,329
--------- --------- ---------
Net cash provided by operating activities 63,268 50,959 65,871
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in rental properties (50,310) (87,283) (70,331)
Proceeds related to property dispositions 22,499 3,288 17,331
Investment in and advances to affiliates (47,612) (51,782) (20,056)
Repayments of (increase in) notes receivable, net 28,343 (33,397) 37,968
Sale of installment loans on manufactured homes to Origen 61,994 - -
Purchase of installment loans on manufactured homes from Origen (74,206) - -
Officers' notes 404 301 253
--------- --------- ---------
Net cash used in investing activities (58,888) (168,873) (34,835)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock and OP units, net 26,222 13,801 809
Treasury stock purchases - - 6,163)
Borrowings (repayments) on line of credit, net 36,000 (30,000) 81,000
Proceeds from (repayments on) notes payable and other debt, net 6,226 181,875 (76,599)
Payments for deferred financing costs (2,281) (2,914) -
Distributions (49,153) (46,771) (43,962)
--------- --------- ---------
Net cash provided by (used in) financing activities 17,014 115,991 (44,915)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 21,394 (1,923) (13,879)
Cash and cash equivalents, beginning of period 2,664 4,587 18,466
--------- --------- ---------
Cash and cash equivalents, end of period $ 24,058 $ 2,664 4,587
========= ========= =========
SUPPLEMENTAL INFORMATION:
Cash paid for interest including capitalized amounts of $2,082, $2,915
and $3,704 in 2003, 2002 and 2001, respectively $ 35,744 $ 34,830 $ 34,048
Noncash investing and financing activities:
Debt assumed for rental properties $ 2,288 $ 20,653 $ 26,289
Issuance of partnership units for rental properties $ - $ 4,500 $ 4,612
Issuance of partnership units to retire capitalized lease obligations $ 4,170 $ 5,520 $ -
Restricted common stock issued as unearned compensation, net $ - $ 2,767 $ 3,188
Issuance of common stock pursuant to dividend reinvestment plan $ 1,334 $ - $ -
Unrealized gains (losses) on interest rate swaps $ 557 $ (1,851) $ -
The accompanying notes are an integral part of the consolidated financial
statements
F-8
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A. BUSINESS: Sun Communities, Inc. (the "Company") is a real estate
investment trust ("REIT") which owns and operates 127 manufactured
housing communities at December 31, 2003 located in seventeen states
concentrated principally in the Midwest and Southeast comprising
approximately 43,875 developed sites and approximately 6,756 sites
suitable for development.
The preparation of financial statements in conformity with generally
accepted accounting principles 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 dates of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
B. PRINCIPLES OF CONSOLIDATION: The accompanying financial statements
include the accounts of the Company and all majority-owned and
controlled subsidiaries including Sun Communities Operating Limited
Partnership (the "Operating Partnership") SunChamp LLC ("SunChamp"),
and effective December 31, 2003, Sun Home Services, Inc. ("SHS").
SHS is consolidated beginning in 2003 in accordance with Financial
Interpretation No. 46, "Consolidation of Variable Interest Entities"
as further described in Note 13. With total assets of approximately
$63 million, SHS actively markets, sells and leases new and
pre-owned manufactured homes for placement in the Company's
properties. SHS has a floorplan line of credit of approximately $2.7
million which is collateralized by $2.7 million of new homes held in
inventory and which is guaranteed by the Company.
The minority interests include Common Operating Partnership Units
("OP Units") which are convertible into an equivalent number of
shares of the Company's common stock. Such conversion would have no
effect on earnings per share since the allocation of earnings to an
OP Unit is equivalent to earnings allocated to a share of common
stock. Of the 21.5 million OP Units outstanding at December 31,
2003, the Company owns 19.0 million or 88.5 percent. The minority
interests are adjusted to their relative ownership interest whenever
OP Units or common stock are issued, converted or retired by
reclassification to/from paid-in capital.
Included in minority interests at December 31, 2003 and 2002 are 2
million Series A Perpetual Preferred OP Units ("PPOP Units") issued
at $25 per unit in September 1999 bearing an annual coupon rate of
8.875 percent. The PPOP Units may be called under certain conditions
by the Company at par on or after September 29, 2004, have no stated
maturity or mandatory redemption and are convertible into preferred
stock under certain circumstances.
$58.1 million of Preferred OP Units ("POP Units") are included in
debt at December 31, 2003 with dividends at rates ranging from 6.0
percent to 7.6 percent and maturing between 2006 and 2014. Of these
POP Units, $43.8 million are convertible into shares of
F-9
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
b. PRINCIPLES OF CONSOLIDATION, CONTINUED:
the Company's common stock or OP units at conversion prices ranging
from $44 to $68 per unit. The maximum amount that the Company is
required to pay to redeem its POP units is $58.1 million and, if
converted, approximately 693,000 shares of the Company's common
stock or OP units would be issued.
Of the $58.1 million POP Units included in debt, $4.2 million were
issued during 2003 in connection with property acquisitions. These
POP Units pay dividends at 7.625% and mature on May 15, 2010.
c. RENTAL PROPERTY: Rental property is recorded at cost, less
accumulated depreciation. Management evaluates the recoverability of
its investment in rental property whenever events or changes in
circumstances such as recent operating results, expected net
operating cash flow and plans for future operations indicate that
full asset recoverability is questionable.
The Company measures the recoverability of its assets in accordance
with the Statement of Financial Accounting Standards No. 144 ("SFAS
144"), "Accounting for the Impairment or Disposal of Long Lived
Assets." If such assets were deemed to be impaired as a result of
this measurement, the impairment that would be recognized is
measured by the amount by which the carrying amount of the asset
exceeds the fair value of the asset as determined on a discounted
net cash flow basis. Assets are tested for impairment whenever
events or changes in circumstances indicate that its carrying amount
may not be recoverable. Circumstances that may prompt a test of
recoverability may include a significant decrease in anticipated
market price, an adverse change to the extent or manner in which an
asset may be used or in its physical condition or other such events
that may significantly change the value of the long-lived asset.
The Company, periodically, receives offers for the sale of one of
its properties. These offers may be the result of an active program
initiated by the Company to sell the property, or from an
unsolicited offer to purchase the property. The typical sale process
involves a significant negotiation and due diligence period between
the Company and the potential purchaser. As the intent of this
process is to determine if there are items that would cause the
purchaser to be unwilling to purchase or the Company unwilling to
sell, it is not unusual for such potential offers of sale/purchase
to be withdrawn as such issues arise. The Company classifies assets
as "held for sale" when it is probable, in its opinion, that a sale
transaction will be completed within one year.
Depreciation is computed on a straight-line basis over the estimated
useful lives of the assets. Useful lives are 30 years for land
improvements and buildings and 7 to 15 years for furniture, fixtures
and equipment.
F-10
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
c. RENTAL PROPERTY, CONTINUED: Expenditures for ordinary maintenance
and repairs are charged to operations as incurred and significant
renovations and improvements, which improve and/or extend the useful
life of the asset, are capitalized and depreciated over their
estimated useful lives. Construction costs related to development of
new communities or expansion sites, including interest, are
capitalized until the property is substantially complete. The
Company capitalizes certain costs (including interest and other
costs) incurred in connection with the development, redevelopment,
capital enhancement and leasing of its properties. Management is
required to use professional judgment in determining whether such
costs meet the criteria for immediate expense or capitalization. The
amounts are dependent on the volume and timing of such activities
and the costs associated with such activities.
d. CASH AND CASH EQUIVALENTS: The Company considers all highly liquid
investments with an initial maturity of three months or less to be
cash and cash equivalents.
e. NOTES AND ACCOUNTS RECEIVABLE: The Company evaluates the
recoverability of its receivables whenever events occur or there are
changes in circumstances such that management believes it is
probable that it will be unable to collect all amounts due according
to the contractual terms of the loan and lease agreements. The
collectibility of loans is measured based on the present value of
the expected future cash flow discounted at the loan's effective
interest rate or the fair value of the collateral if the loan is
collateral dependent. The reserve for uncollectible accounts
receivable from residents was $0.15 million at December 31, 2003 and
2002.
f. INVESTMENTS IN AND ADVANCES TO AFFILIATES: Origen Financial, Inc.
("Origen, Inc") is a real estate investment trust in the business of
originating, acquiring and servicing manufactured home loans. In
October 2003, the Company purchased 5,000,000 shares of common stock
(representing approximately 33% of the issued and outstanding shares
of common stock as of December 31, 2003) of Origen, Inc. for $50
million and agreed to sell Origen, Inc. various interests in
manufactured home loans. Prior to the formation and capitalization
of Origen, Inc., the Company owned membership interests in Origen
Financial, L.L.C., representing approximately a thirty percent (30%)
equity interest therein. In connection with the formation and
capitalization of Origen, Inc., all of the members of Origen
Financial, L.L.C., including the Company, contributed all of their
respective membership interests and warrants to purchase membership
interests in Origen Financial, L.L.C. to Origen, Inc. None of the
members of Origen Financial, L.L.C. (including the Company) received
any monetary consideration or shares of common stock in Origen, Inc.
in exchange for their contributed membership interests and warrants
in Origen Financial, L.L.C. The Company's investment in Origen, Inc.
was accounted for using the equity method of accounting for periods
ending after September 30, 2003.
F-11
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
f. INVESTMENTS IN AND ADVANCES TO AFFILIATES, CONTINUED:
As noted above, the Company invested $50 million as common equity in
Origen, Inc. in October, 2003. An additional $100 million was
similarly invested by other investors thus capitalizing Origen, Inc.
at $150 million. The Company determined that this investment was
reasonable and prudent because it resulted in a stabilized and
well-financed Origen, Inc., which allowed Origen, Inc. to finance
its operations from traditional sources of warehouse financing and
access to the securitization marketplace. This investment occurred
at the time that the manufactured home finance industry was
beginning to rebound as interest rates stabilized, two lenders were
emerging from bankruptcy and new entrants dedicated to financing
manufactured homes buoyed the industry. The Company had written off
its $13.6 million investment in Origen Financial, L.L.C., a
predecessor to Origen, Inc., at December 31, 2002 because of
severely deteriorated industry conditions marked by the
above-mentioned bankruptcies, the closure of the securitization
marketplace, and the resultant liquidity squeeze impacting the
Origen, Inc. predecessor. Origen, Inc. has raised approximately an
additional $80 million since October, 2003 and is now a public
company with demonstrated access to a broad range of capital
markets.
During 2002 and through October 7, 2003, the Company, through SHS,
and two other participants (one unaffiliated and one affiliated with
Gary Shiffman, the Company's Chief Executive Officer and President)
provided financing to Origen Financial, L.L.C. The financing
consisted of a $48 million line of credit and a $10 million term
loan of which $35 million was outstanding at September 30, 2003.
This amount was repaid in full in October 2003 upon the formation
and capitalization of Origen, Inc.
Summarized combined financial information of Origen, Inc. at
December 31, 2003 and Origen LLC and SHS at December 31, 2002 is
presented below before elimination of intercompany transactions.
Also presented is summarized financial information for Origen
Financial, LLC for the period of January 1, 2003 to October 7, 2003.
This is presented for informational purposes as the Company wrote
off its investment in Origen Financial, LLC in December of 2002, as
previously discussed. SHS and SunChamp are consolidated in the
Company's financial statements as of December 31, 2003.
F-12
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
ORIGEN FINANCIAL, LLC ORIGEN, INC. ORIGEN FINANCIAL, LLC SHS
01/01/03-10/07/03 10/08/03-12/31/03 2002 2002
--------------------- ----------------- --------------------- --------
Loans receivable, net $ 279,300 $ 368,509 $ 173,764 $ 33,560
Other assets 47,903 76,033 53,984 41,220
--------- ---------- --------- --------
Total assets $ 327,203 $ 444,542 $ 227,748 $ 74,780
========= ========== ========= ========
Notes payable $ 273,186 $ 277,441 $ 54,946 $ 85,361
Advances under repurchase agreements - - 141,085 -
Other liabilities 22,345 24,312 21,413 8,634
--------- ---------- --------- --------
Total liabilities 295,531 301,753 217,444 93,995
--------- ---------- --------- --------
Preferred interests in subsidiary 45,617 - - -
Equity (deficit) (13,945) 142,789 10,304 (19,215)
--------- ---------- --------- --------
Total liabilities and equity $ 327,203 $ 444,542 $ 227,748 $ 74,780
========= ========== ========= ========
Revenues $ 23,755 $ 10,657 $ 20,385 $ 22,516
Expenses 47,683 8,691 49,572 24,704
Loss from equity investee - - - (15,295)
--------- ---------- --------- --------
Net income (loss) $ (23,928) $ 1,966 $ (29,187) $(17,483)
========= ========== ========= ========
Sun's equity income (loss) $ - $ 667 $ - $(16,627)
========= ========== ========= ========
g. REVENUE RECOGNITION: Rental income attributable to leases is
recorded on a straight-line basis when earned from tenants. Leases
entered into by tenants generally range from month-to-month to one
year and are renewable by mutual agreement of the Company and
resident or, in some cases, as provided by state statute. Revenue
from the sale of manufactured homes is recognized upon transfer of
title at the closing of the sales transaction. In 2003, the Company
announced its Home Buying Made Easy program which provides interest
rates of 4.99 to 5.99 percent to qualified buyers of homes within
its communities. During 2003, 67 loans were closed under this
program totaling $2.4 million. The Company amortizes the interest
discount from current market rates related to this program into
income over the term of the note. The Company also bifurcates the
discounted present value of the interest differential between the
home sale and the anticipated rental revenue as required by
EITF00-21. The differential allocated to the home sale is recognized
as a reduction of revenue from the sale of the home and the
differential allocated to future rental revenue is amortized as
rental discount over the term of the loan.
h. OTHER CAPITALIZED COSTS: Certain expenditures to dealers and
residents related to obtaining lessees in our communities are
capitalized, as intangible assets, and are amortized over a seven
year period based on the anticipated term of occupancy of a
resident. Costs associated with implementing the Company's new
computer systems are capitalized and amortized over the estimated
useful lives of the related software and hardware.
F-13
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
i. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying values of cash and
cash equivalents, escrows, receivables, accounts payable, accrued
expenses and other assets and liabilities are reasonable estimates
of their fair values because of the shorter maturities of these
instruments. The fair value of the Company's long-term indebtedness,
which is based on the estimates of management and on rates currently
quoted and rates currently prevailing for comparable loans and
instruments of comparable maturities, exceeds the aggregate carrying
value by approximately $28.0 million at December 31, 2003. Potential
expenses that would be incurred in an actual sale or settlement are
not taken into consideration.
j. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: The Company has
entered into four derivative contracts consisting of three interest
rate swap agreements and an interest rate cap agreement. The
Company's primary strategy in entering into derivative contracts is
to minimize the variability that changes in interest rates could
have on its future cash flows. The Company generally employs
derivative instruments that effectively convert a portion of its
variable rate debt to fixed rate debt and to cap the maximum
interest rate on its variable rate borrowings. The Company does not
enter into derivative instruments for speculative purposes.
The swap agreements were effective April 2003, and have the effect
of fixing interest rates relative to a collateralized term loan due
to FNMA. One swap matures in July 2009, with an effective fixed rate
of 4.93 percent. A second swap matures in July 2012, with an
effective fixed rate of 5.37 percent. The third swap matures in July
2007, with an effective fixed rate of 3.97 percent. The third swap
is effective as long as 90-day LIBOR is 7 percent or lower. The
three swaps have an aggregate notional amount of $75.0 million. The
interest rate cap agreement has a cap rate of 9.49 percent, a
notional amount of $152.4 million and a termination date of April
03, 2006. Each of the Company's derivative contracts is based upon
90-day LIBOR.
The Company has designated the first two swaps and the interest rate
cap as cash flow hedges for accounting purposes. The changes in the
value of these hedges are reflected in other comprehensive
income/loss on the balance sheet. These three hedges were highly
effective and had minimal effect on income. The third swap does not
qualify as a hedge for accounting purposes and, accordingly, the
entire change in valuation, whether positive or negative, is
reflected as a component of interest expense. The valuation
adjustment for the twelve month period ended December 31, 2003
totals a positive $0.9 million.
In accordance with SFAS No. 133, the "Accounting for Derivative
Instruments and Hedging Activities," which requires all derivative
instruments to be carried at fair value on the balance sheet, the
Company has recorded a liability of $0.9 and $2.3 million as of
December 31, 2003 and December 31, 2002, respectively.
These valuation adjustments will only be realized if the Company
terminates the swaps prior to maturity. This is not the intent of
the Company and, therefore, the net of valuation adjustments through
the various maturity dates will approximate zero.
F-14
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
k. DEFERRED TAX ASSETS: The Company has certain subsidiaries that are
taxed as regular corporations. Deferred tax assets or liabilities
are recognized for temporary differences between the tax bases of
non-REIT assets and liabilities and their carrying amounts in the
financial statements and net operating loss carryforwards. Deferred
tax assets and liabilities are measured using currently enacted tax
rates. A valuation allowance is established if based on the insight
of available evidence, it is more likely than not that some portion
or all of the deferred tax assets will not be realized
l. STOCK OPTIONS: The Company accounts for its stock options using the
intrinsic value method contained in APB Opinion No. 25. "Accounting
for Stock Issued to Employees." If the Company had accounted for
awards using the methods contained in FASB Statement No. 123,
"Accounting for Stock-Based Compensation", net income and earnings
per share would have been presented as follows for the years ended
December 31, 2003, 2002 and 2001 (amounts in thousands, except for
per share data):
2003 2002 2001
------- ------- -------
Net income, as reported $23,714 $13,592 $33,910
Stock-based compensation expense under fair value method (274) (478) (321)
------- ------- -------
Pro forma net income $23,440 $13,114 $33,589
======= ======= =======
EPS (Basic), as reported $ 1.30 $ 0.77 $ 1.96
======= ======= =======
EPS (Basic), pro forma $ 1.29 $ 0.75 $ 1.95
======= ======= =======
EPS (Diluted), as reported $ 1.29 $ 0.76 $ 1.94
======= ======= =======
EPS (Diluted), pro forma $ 1.28 $ 0.74 $ 1.93
======= ======= =======
m. INVENTORY: Inventory of manufactured homes is stated at lower of
specific cost or market.
n. RECLASSIFICATIONS: Certain 2002 and 2001 amounts have been
reclassified to conform to the 2003 financial statement
presentation. Such reclassifications had no effect on results of
operations as originally presented.
o. USE OF ESTIMATES: The preparation of consolidated financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts in the financial statements and
accompanying notes including the depreciable lives and
recoverability of real estate assets and the assumption of interest
rates for present value calculations. These estimates involve
judgments with respect to, among other things, future economic
factors that are difficult to predict and are often beyond
management's control. As a result, actual amounts could differ from
these estimates.
F-15
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
2. RENTAL PROPERTY (AMOUNTS IN THOUSANDS):
AT DECEMBER 31
-------------------------
2003 2002
---------- ----------
Land $ 104,541 $ 101,926
Land improvements and buildings 1,048,576 999,540
Furniture, fixtures, and equipment 33,080 26,277
Land held for future development 31,409 34,573
Property under development 2,799 12,521
---------- ---------
1,220,405 1,174,837
Less accumulated depreciation (209,921) (175,477)
---------- ---------
$1,010,484 $ 999,360
========== =========
Land improvements and buildings consist primarily of infrastructure, roads,
landscaping, clubhouses, rental homes, maintenance buildings and amenities.
Included in rental property at December 31, 2003 and 2002 are net carrying
amounts related to capitalized leases of $9.6 million and $17.9 million,
respectively.
During 2003, the Company acquired one development community comprised of 62
developed sites and 180 sites available for development for $4.5 million. During
2002, the Company acquired one stabilized community, comprising 552 developed
sites, for $21.3 million and three development communities, comprising 930
developed sites and 538 sites available for development, for $48.6 million
consisting of cash of approximately $23.1 million, POP Units of approximately
$4.5 million and assumption of debt of approximately $21.0 million.
These transactions have been accounted for as purchases, and the statements of
income include the operations of the acquired communities from the dates of
their respective acquisitions. As of December 31, 2003, in conjunction with a
1993 acquisition, the Company is obligated to issue $6.4 million of OP Units
through 2009 based on the per share market value of the Company's stock on the
issuance date. This obligation was accounted for as part of the purchase price
of the original acquisition.
F-16
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
3. DISPOSITION OF PROPERTIES:
In November 2003 the Company sold four manufactured home communities of
which three were in Michigan and one in Illinois aggregating 731 sites for
gross proceeds of approximately $24.8 million. In February 2002, the
Company sold a manufactured home community in Florida consisting of 227
sites of which 131 were occupied, for cash of approximately $3.3 million.
Net gain on sale of $8.6 million and $0.4 million on these transactions
was recorded in income from discontinued operations in 2003 and 2002,
respectively.
In accordance with FAS 144, effective for financial statements issued for
all fiscal years beginning after December 15, 2001, results of operations
and gain/(loss) in sales of real estate for properties with identifiable
cash flows sold, and held for sale, subsequent to December 31, 2001 are
reflected in the Consolidated Statements of Income as income from
discontinued operations for all periods presented. For presentation
purposes, income from discontinued operations also includes a gain on sale
of properties sold prior to December 31, 2001 of $4.3 million, which was
reported in the Consolidated Statements of Income in prior periods as a
gain from property dispositions, net. Below is a summary of the results of
operations of these properties through their respective disposition dates
(in thousands):
SUMMARY STATEMENT OF OPERATIONS
DISPOSED PROPERTIES
2003 2002 2001
---------- ---------- ----------
Income from rental property $ 2,763 $ 3,034 $ 3,289
Property operating and maintenance expenses (533) (495) (713)
Real estate taxes (310) (361) (380)
Depreciation and amortization (347) (674) (800)
---------- ---------- ----------
Income from operations 1,573 1,504 1,396
Income allocated to common OP units (191) (243) (186)
Gain on sale of discontinued operations 8,590 359 4,275
---------- ---------- ----------
Income from discontinued operations $ 9,972 $ 1,620 $ 5,485
========== ========== ==========
F-17
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
4. NOTES AND OTHER RECEIVABLES (AMOUNTS IN THOUSANDS):
AT DECEMBER 31,
---------------
2003 2002
---------- ----------
Mortgage and other notes receivable, primarily
with minimum monthly payments at LIBOR
based floating rates of approximately LIBOR
+ 3.0 %, maturing at various dates through
August 2008, substantially collateralized by
manufactured home communities $ 41,736 $ 38,420
Installment loans collateralized by manufactured
homes with interest payable monthly at an
effective weighted average interest rate and
maturity of 8.2% and 20 years, respectively 24,802 11,633
Other receivables 8,290 6,276
---------- ----------
$ 74,828 $ 56,329
========== ==========
At December 31, 2003, the maturities of mortgage notes and other
receivables are approximately as follows: 2004 - $23.2 million; 2006-
$3.8, and 2008 - $14.7 million. Of the $24.8 million of installment loans
collateralized by manufactured homes, $12.3 million were sold at book
value in February of 2004.
Officers' notes, presented as a reduction to stockholders' equity in the
balance sheet, bear interest at LIBOR + 1.75% notes, with a minimum and
maximum interest rate of 6% and 9%, respectively, collateralized by
352,206 shares of the Company's common stock and 127,794 OP Units at
December 31, 2003 with substantial personal recourse. The notes become due
in three equal installments on each of December 31, 2008, 2009 and 2010.
Reductions in the principal balance of these notes were $0.5 million and
$0.3 million for the years 2003 and 2002, respectively.
F-18
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
5. DEBT AND LINE OF CREDIT (AMOUNTS IN THOUSANDS):
The following table sets forth certain information regarding debt:
DECEMBER 31, DECEMBER 31,
2003 2002
----------- -----------
Callable/redeemable notes, interest at 6.770%, due May 14,
2015, callable/redeemable May 16, 2005 $ 65,000 $ 65,000
Senior notes, interest at 6.970%, due December 3, 2007 35,000 35,000
Senior notes, interest at 8.200%, due August 15, 2008 100,000 100,000
Senior notes, interest at 5.750%, due April 15, 2010 150,000 -
Bridge loan, at variable interest rate (2.617% at December
31, 2002), matured April 30, 2003 - 48,000
Senior notes, interest at 7.625%, matured May 1, 2003 - 85,000
Collateralized term loan, due to FNMA, due May 2007, with a
weighted average interest rate of 3.244% and 2.17% at
December 31, 2003 and December 31, 2002, respectively,
convertible to a 5 to 10 year fixed rate loan 152,363 152,363
Collateralized term loan, interest at 7.010%, due September 9,
2007 41,547 42,206
Redeemable preferred OP units, average interest at 7.046%,
redeemable at various dates through May 2010 58,148 -
Capitalized lease obligations, interest at 5.510%, due
January 10, 2004 9,606 16,438
Mortgage notes, other 62,664 60,366
---------- ----------
Total debt $ 674,328 $ 604,373
========== ==========
The Company entered into a $25 million loan facility in September of 2003,
of which $25 million was available to be borrowed at December 31, 2003.
Borrowings bear an interest rate of Federal Funds Effective rate plus
0.85% and mature on March 24, 2004.
In April 2003 the Company issued $150 million of 5.75 percent senior
notes, due April 15, 2010, and used the proceeds from the offering to
retire the bridge loan of $48 million and senior notes of $85 million
which matured on April 30 and May 1, 2003, respectively. The remainder of
the net proceeds was used to pay down the Company's line of credit.
The collateralized term loans totaling $193.9 at December 31, 2003 are
secured by 22 properties comprising approximately 10,600 sites. The
capitalized lease obligation and mortgage notes are collateralized by 14
communities comprising approximately 4,000 sites. At the lease expiration
date, January 2004, the capitalized lease reflected in December 31, 2003,
was paid off by the issuance of 47,250 Preferred OP Units, cash of
approximately $1.2 million and the assumption of approximately $4.2
million of debt, which was immediately retired. A capitalized lease
obligation matured on January 1, 2003 and was paid by the issuance of
41,700 Preferred OP Units, cash of approximately $0.9 million and the
assumption of approximately $1.6 million of debt, which was immediately
retired.
F-19
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
5. DEBT AND LINE OF CREDIT (AMOUNTS IN THOUSANDS), CONTINUED:
The initial term of the variable rate collateralized term loan due to FNMA
is five years. The Company has the option to extend such variable rate
borrowings for an additional five years and/or convert them to fixed rate
borrowings with a term of five or ten years, provided that in no event can
the term of the borrowings exceed fifteen years.
The Company has a $105 million unsecured line of credit, of which $6 and
$22 million was available to borrow at December 31, 2003 and 2002,
respectively. Borrowings under the line of credit bear interest at the
rate of LIBOR plus 0.85% and mature July 2, 2005 with a one-year extension
at the Company's option. The average interest rate of outstanding
borrowings under the line of credit was 2.05 and 2.27 percent at December
31, 2003 and 2002 respectively.
At December 31, 2003, the maturities of debt, excluding the line of
credit, during the next five years are approximately as follows: 2004 -
$35.1 million; 2005 - $66.6 million; 2006 - $20.4 million; 2007 - $81.1
million; 2008 - $106.7 million and $364.4 million thereafter.
At December 31, 2003, the Company was the guarantor of $22.6 million in
personal bank loans, made to directors, employees and consultants to
purchase Company common stock and OP units pursuant to the Company's Stock
Purchase Plan. The borrowers repaid the loans in January of 2004 and the
guaranty was extinguished.
F-20
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
6. STOCK OPTIONS:
Data pertaining to stock option plans are as follows:
2003 2002 2001
-------------------- ------------------- ----------------
Options outstanding, January 1 975,767 1,090,794 1,109,250
Options granted - 7,500 137,900
Option price N/A $ 34.92 $ 27.03-$32.81
Options exercised 154,179 97,665 59,773
Option price $ 20.13-$35.39 $ 20.13-$35.39 $ 22.75-$33.75
Options forfeited 10,837 24,862 96,583
Option price $ 27.03-$32.75 $ 27.03-$32.75 $ 27.03-$33.82
Option outstanding, December 31 810,751 (a) 975,767 1,090,794
Option price $ 20-$35.39 $ 20-$35.39 $20-$35.39
Option exercisable, December 31 765,168 (a) 834,249 823,227
(a) There are 190,394 options outstanding and exercisable with exercise
prices ranging from $20.00 - $27.99 with an exercisable average life of
3.7 years related to the outstanding options. The weighted average
exercise price for these outstanding and exercisable options is $25.53.
There are 620,357 and 574,774 options outstanding and exercisable,
respectively, with exercise prices ranging from $28.00 - $35.39 with a
weighted average life of 4.2 years related to the outstanding options.
The weighted average exercise price for these outstanding and
exercisable options is $30.64 and $30.46, respectively.
At December 31, 2003, 364,513 shares of common stock were available for
the granting of options. Stock option plans originally provided for the
grant of up to 2,117,000 options. Options are granted at fair value of the
common stock and generally vest over a two-year period and may be
exercised for 10 years after date of grant. In addition, the Company
established a Long-Term Incentive Plan in 1997 for certain employees
granting 167,918 options (of which 87,657 remain outstanding), which
become exercisable in equal installments in 2002-2004.
The Company has opted to measure compensation cost utilizing the intrinsic
value method. The fair value of each option grant was estimated as of the
date of grant using the Black-Scholes option-pricing model with the
following assumptions for options granted:
2003 2002 2001
---- ---- ----
Estimated fair value per share of
options granted during year: N/A $ 4.42 (1) $ 6.19
Assumptions:
Annualized dividend yield N/A 5.9%(1) 5.9%
Common stock price volatility N/A 16.4%(1) 16.4%
Risk-free rate of return N/A 5.3%(1) 5.3%
Expected option term (in year) N/A 7 4
(1) 2002 based on valuation as of April 2001, due to insignificant
option issuance in 2002.
F-21
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
7. STOCKHOLDERS' EQUITY:
In April 1998, the Company declared a dividend of one Preferred Stock
Purchase Right ("Right") for each outstanding share of common stock. The
Rights are not presently exercisable. Each Right entitles the holder, upon
the occurrence of certain specified events, including a material change in
the ownership of the Company, to purchase preferred stock and common
stock, from the Company and/or from another person into which the Company
is merged or which acquires control of the Company.
The Rights may be generally redeemed by the Company at a price of $0.01
per Right or $0.2 million in total. The Rights expire on June 8, 2008.
The Company is authorized to repurchase up to 1,000,000 shares of its
common stock.
No restricted stock awards were issued during the year ended December 31,
2003. Compensation cost recognized in income for all prior restricted
stock awards was $1.3 million, $1.1 million and $0.9 million in 2003, 2002
and 2001, respectively.
8. OTHER INCOME (AMOUNTS IN THOUSANDS):
The components of other income are as follows for the years ended December
31, 2003, 2002 and 2001.
2003 2002 2001
------ ------- -------
Brokerage commissions $ 754 $ 834 $ 731
Development fee - 1,425 2,707
Other income (loss) (78) 45 257
------ ------- -------
$ 676 $ 2,304 $ 3,695
====== ======= =======
F-22
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
9. SEGMENT REPORTING (AMOUNTS IN THOUSANDS):
With the consolidation of the operations of Sun Home Services for the year
ended December 31, 2003, the consolidated operations of the Company can be
segmented into manufactured home sales and property operations segments.
Following is a presentation of financial information for the year ended
December 31, 2003.
PROPERTY MANUFACTURED COMBINED
OPERATIONS HOME SALES
Revenues $ 159,115 $ 19,516 $ 178,631
Operating expenses 51,583 13,879 65,462
----------- ----------- ------------
Net operating income 107,532 5,637 113,169
Adjustments to arrive at net income:
Other revenues 2,243 8,264 10,507
General and administrative (10,536) (7,645) (18,181)
Depreciation and amortization (43,165) (955) (44,120)
Interest expense (36,530) (150) (36,680)
Equity income from affiliate 667 - 667
Income allocated to minority interest (11,620) - (11,620)
Income from discontinued operations 9,972 - 9,972
----------- ----------- ------------
Net income $ 18,563 $ 5,151 $ 23,714
=========== =========== ============
Capital expenditures $ 12,829 (1) $ 12,353 (2) $ 25,182
Identifiable assets:
Investment in rental property, net $ 980,149 $ 30,335 $ 1,010,484
Cash and cash equivalents 24,043 15 24,058
Inventory of manufactured homes - 17,236 17,236
Investments in and advances to affiliates 50,667 - 50,667
Notes and other receivables 61,534 13,294 74,828
Other assets 41,613 2,688 44,301
----------- ----------- ------------
Total assets $ 1,158,006 $ 63,568 $ 1,221,574
=========== =========== ============
(1) Capital expenditures of Property Operations segment consist of lot
modifications, recurring projects, revenue producing projects, and
expenditures for acquisitions and expansions, net of asset
disposals.
(2) Capital expenditures of Manufactured Home Sales segment consist
primarily of acquisitions of rental homes.
10. INCOME TAXES (AMOUNTS IN THOUSANDS):
The Company has elected to be taxed as a real estate investment trust
("REIT") as defined under Section 856(c) of the Internal Revenue Code of
1986, as amended. In order for the Company to qualify as a REIT, at least
ninety-five percent (95%) of the Company's gross income in any year must
be derived from qualifying sources. In addition, a REIT must distribute at
least ninety percent (90%) of its REIT ordinary taxable income to its
stockholders.
Qualification as a REIT involves the satisfaction of numerous requirements
(some on an annual and quarterly basis) established under highly technical
and complex Code provisions for which there are only limited judicial or
administrative interpretations, and involves the determination of various
factual matters and circumstances not entirely within the Company's
control.
F-23
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
10. INCOME TAXES (AMOUNTS IN THOUSANDS), CONTINUED:
In addition, frequent changes occur in the area of REIT taxation, which
require the Company continually to monitor its tax status.
As a REIT, the Company generally will not be subject to U.S. Federal
income taxes at the corporate level on the ordinary taxable income it
distributes to its stockholders as dividends. If the Company fails to
qualify as a REIT in any taxable year, its taxable income will be subject
to U.S. Federal income tax at regular corporate rates (including any
applicable alternative minimum tax). Even if the Company qualifies as a
REIT, it may be subject to certain state and local income taxes and to
U.S. Federal income and excise taxes on its undistributed income.
Dividend payout on taxable income available to common stockholders for the
years ended December 31, 2003, 2002 and 2001:
2003 2002 2001
-------- --------- ---------
Taxable income available to common
stockholders $ 0 $ 6,046 $ 13,149
Less tax gain on disposition of
properties 0 0 (175)
-------- --------- ---------
Taxable operating income available
to common stockholders $ 0 $ 6,046 $ 12,974
======== ========= =========
Total distributions paid to common
stockholders $ 44,419 $ 41,427 $ 38,161
======== ========= =========
For income tax purposes, distributions paid to common stockholders consist
of ordinary income, capital gains, and return of capital. For the years
ended December 31, 2003, 2002 and 2001, distributions paid per share were
taxable as follows:
2003 2002 2001
--------------------- --------------------- ---------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
-------- ---------- -------- ---------- -------- ----------
Ordinary income $ 0.65 27.1% $ 1.54 67.1% $ 1.38 63.1%
Return of capital 1.76 72.9% 0.75 32.9% 0.80 36.9%
-------- ----- -------- ----- -------- -----
$ 2.41 100.0% $ 2.29 100.0% $ 2.18 100.0%
======== ===== ======== ===== ======== =====
SHS is subject to U.S Federal income taxes. Deferred taxes reflect the
estimated future tax effect of temporary differences between carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. SHS has net operating loss
carryforwards of approximately $14.7 million at December 31, 2003. A
deferred asset of approximately $2.0 million, principally related to the
net operating loss carryforwards, exclusive of losses related to SHS's
investment in Origen, is included in other assets in the consolidated
balance sheet as of December 31, 2003. The deferred tax asset at December
31, 2003 is net of a valuation allowance of $3.0 million related to SHS's
net operating losses on its investment in Origen. SHS's losses will begin
to expire in 2011 through 2022 if not offset by future taxable income.
Management believes its deferred tax asset will be realized but realization
is continuously subject to an assessment as to recoverability in the
future.
F-24
SUN COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
11. EARNINGS PER SHARE (AMOUNTS IN THOUSANDS):
2003 2002 2001
-------- -------- --------
Earnings used for basic and diluted earnings
per share computation:
Continuing operations $ 13,742 $ 11,972 $ 28,425
======== ======== ========
Discontinued operations $ 9,972 $ 1,620 $ 5,485
======== ======== ========
Total shares used for basic earnings per share 18,206 17,595 17,258
Dilutive securities:
Stock options and other 139 186 182
-------- -------- --------
Total weighted average shares used for diluted
earnings per share computation 18,345 17,781 17,440
======== ======== ========
Diluted earnings per share reflect the potential dilution that would occur
if dilutive securities were exercised or converted into common stock.
F-25
SUN COMMUNITIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
12. QUARTERLY FINANCIAL DATA (UNAUDITED):
The following unaudited quarterly amounts are in thousands, except for per
share amounts:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
--------- ---------- ---------- ----------
2003
Total revenues (a) $ 48,251 $ 48,911 $ 48,074 $ 48,834
Total expenses (a) $ 39,188 $ 41,696 $ 39,172 $ 49,319
Net income $ 6,343 $ 4,539 $ 6,421 $ 6,411
Weighted average common shares outstanding 17,789 17,902 18,504 18,628
Earnings per common share-basic $ 0.36 $ 0.25 $ 0.35 $ 0.34
2002
Total revenues (c) $ 40,347 $ 39,493 $ 40,327 $ 40,002
Total expenses (c) $ 29,603 $ 28,947 $ 30,629 $ 32,786
Net income (loss) (b) $ 8,114 $ 7,002 $ 5,802 $ (7,326)
Weighted average common shares outstanding 17,322 17,544 17,739 17,777
Earnings (loss) per common share-basic $ 0.47 $ 0.40 $ 0.33 $ (0.41)
(a) The Company's investment in Sun Home Services was accounted for
using the equity method of accounting for the quarters ended March
31, June 30, and September 30, 2003. The total revenues and total
expenses for these periods have been restated to include Sun Home
Services' operating revenues and expenses.
(b) Included in net income for the fourth quarter of 2002 is the
write-off of $13.6 million pertaining to the Company's investment in
Origen.
(c) Revenues and expenses have been restated to conform to SFAS 144
which requires operations of properties sold or held for sale to be
reclassified as discontinued operations.
F-26
SUN COMMUNITIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
13. RECENT ACCOUNTING PRONOUNCEMENTS:
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting
for Certain Financial Instruments with Characteristics of both Liabilities
and Equity" which establishes standards for how financial instruments that
have characteristics of both liabilities and equity instruments should be
classified on the balance sheet. The requirements of SFAS 150 generally
outline that financial instruments that give the issuer a choice of
settling an obligation with a variable number of securities or settling an
obligation with a transfer of assets or any mandatorily redeemable security
should be classified as a liability on the balance sheet. The Company has
reclassified mandatorily redeemable preferred operating partnership units
of $58.1 million into debt as of December 31, 2003. The reclassification
had no effect on the Company's compliance with the covenant requirements of
its credit agreements.
In April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under
FASB Statements No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This Statement is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. In addition, all provisions of this Statement should be
applied prospectively. The provisions of this Statement that relate to
Statement 133 Implementation Issues that have been effective for fiscal
quarters that began prior to June 15, 2003, should continue to be applied
in accordance with their respective effective dates. The adoption of this
Statement did not have a significant impact on the financial position or
results of the operations of the Company.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." The objective of this
interpretation is to provide guidance on how to identify a variable
interest entity ("VIE") and determine when the assets, liabilities,
non-controlling interests and results of operations of a VIE need to be
included in a company's consolidated financial statements. A company that
holds variable interests in an entity will need to consolidate the entity
if the company's interest in the VIE is such that the company will absorb a
majority of the VIE's expected losses and/or receive a majority of the
VIE's expected residual returns, if they occur. FIN 46 also requires
additional disclosures by primary beneficiaries and other significant
variable interest holders. The provisions of this interpretation apply to
the end of the first interim period or annual period ending after December
15, 2003 (i.e., December 31, 2003) to VIEs in which a company holds a
variable interest that it acquired before February 1, 2003. The Company
consolidated SHS in its financial reporting beginning December 31, 2003.
The consolidation did not have a significant impact on the financial
condition or results of operations of the Company.
F-27
SUN COMMUNITIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
14. CONTINGENCIES:
On April 9, 2003, T.J. Holdings, LLC ("TJ Holdings"), a member of
Sun/Forest, LLC ("Sun/Forest") (which, in turn, owns an equity interest in
SunChamp LLC), filed a complaint against the Company, SunChamp LLC,
certain other affiliates of the Company and two directors of Sun
Communities, Inc. in the Superior Court of Guilford County, North
Carolina. The complaint alleges that the defendants wrongfully deprived
the plaintiff of economic opportunities that they took for themselves in
contravention of duties allegedly owed to the plaintiff and purports to
claim damages of $13.0 million plus an unspecified amount for punitive
damages. The Company believes the complaint and the claims threatened
therein have no merit and will defend it vigorously.
The Company is involved in various other legal proceedings arising in the
ordinary course of business. All such proceedings, taken together, are not
expected to have a material adverse impact on our results of operations or
financial condition.
15. RELATED PARTY TRANSACTIONS:
The Company and its affiliates have entered into the following
transactions with Origen Inc. and its predecessor, Origen Financial,
L.L.C., during 2002 and 2003:
- Capital Investment in Origen, Inc. As described in Note 1, the
Company acquired 5,000,000 shares of common stock in Origen
Inc. in a private placement transaction at $10 per share. In
addition, Shiffman Origen LLC (100 percent of which is owned
by the Estate of Milton M. Shiffman, Gary A. Shiffman and
members of his family), acquired 1,025,000 shares of common
stock of Origen Inc. at $10 per share.
- Loan Servicing Agreement. Origen Servicing, Inc., a
wholly-owned subsidiary of Origen, services approximately
$23.0 million in manufactured home loans for SHS as of
December 31, 2003. Sun Home Services pays Origen Servicing,
Inc. an annual servicing fee of 1.25 percent of the
outstanding principal balance of the loans.
- Board Membership. Gary A. Shiffman, the Chairman and Chief
Executive Officer of the Company, is a board member of Origen
Inc.
- Remarketing Alliance Program. The Company had agreed to
provide Origen, Inc. certain concessions on manufactured homes
that Origen, Inc repossesses in it communities. These
concessions may include rent abatement for the first 12 months
that a repossessed home, owned by Origen, Inc., is held for
sale and abatement of the commission that the Company would
earn if it brokers such sale. The Company also abates rent for
other major lenders who own repossessed homes in our
communities. The Company may also assist with coordinating the
refurbishment and marketing of the home. The fair value of
these abatements amounted to less than $65,000 during 2003.
F-28
SUN COMMUNITIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
15. RELATED PARTY TRANSACTIONS, CONTINUED:
- Home Buying Made Easy Program. Certain loans under the Company's
Home Buying Made Easy (HBME) program are originated and serviced by
Origen, Inc. Loans under this program may, from time to time, be
sold to Origen, Inc. As these loans are made below published rates,
the Company will pay Origen, Inc. the interest differential between
market rates and the rate paid by the borrower for any such loans
sold to Origen, Inc. No HBME loans were sold to Origen in 2003 and,
accordingly, no interest differential was paid in 2003.
- Preferred Membership Interests. During 2003, the Company purchased
$20.5 million in preferred membership interests of Origen
Securitization Company, LLC as an interim financing measure until
Origen's securitization financing arrangement with Citigroup could
be finalized. The investment was recorded at cost which approximated
market value, earned an 11% distribution preference and was redeemed
on October 8, 2003. No gain or loss was recorded on the transaction.
- Master Loan Purchase Agreement. In June 2003, the Company and Origen
Financial, L.L.C. entered into a master loan purchase agreement
under which the Company from time to time could purchase from Origen
Financial L.L.C. manufactured home loans at a purchase price equal
to the book value of the loans (the "Sun Purchase Price"), plus
accrued and unpaid interest. During 2003, the Company purchased
approximately $74.2 million of manufactured home loans from Origen
Financial, L.L.C. under the master loan purchase agreement. The
loans were subsequently sold back to Origen Financial, L.L.C. at
100.10% of the Sun Purchase Price plus accrued and unpaid interest
on the loans. Both the purchase and the sale were made at book
value, which approximated fair market value, and no gain or loss was
recorded on the transactions. These transactions were merely interim
financing transactions and the master loan purchase agreement was
terminated in October of 2003.
In addition to the transactions with Origen Inc. described above, Mr. Shiffman
and his affiliates have entered into the following transactions with the
Company:
- Related Party Lease. The Company leases its executive offices in
Southfield, Michigan from an entity in which Mr. Shiffman and
certain of his affiliates beneficially own approximately a 21
percent interest.
- Capital Investment in Origen Financial, Inc. Ownership of SHS. Gary
Shiffman, and the Estate of Milton M. Shiffman (former Chairman of
the Board), are the owners of all of the outstanding common stock of
SHS, and as such are entitled to 5% of the cash flow from the
operating activities of SHS.
- Tax Consequences Upon Sale of Properties. Gary Shiffman holds
limited partnership interests in the Operating Partnership which
were received in connection with the contribution of 24 properties
from partnerships previously affiliated with him (the "Sun
Partnerships"). Prior to any redemption of these limited partnership
interests for the Company's common stock, Mr. Shiffman will have tax
consequences different from those of the Company and the Company's
public stockholders on the sale of any of the Sun Partnerships. Four
of the properties have been sold to date.
F-29
SUN COMMUNITIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
16. SUBSEQUENT EVENTS:
In February, 2004, the Company entered into an agreement with certain
affiliates of Property Asset Management Inc. ("PAMI") to acquire all of
the equity interests in partnerships that directly and indirectly own and
operate 19 properties and entered into a real estate purchase agreement to
acquire 7 other properties. The properties are recreational vehicle
communities, some of which include manufactured home sites. The portfolio
consists of 11,331 sites, including 10,586 developed sites and 745
expansion recreational vehicle sites. Completion of the purchases is
subject to customary closing conditions.
PAMI, the seller under the purchase agreements, is the sole general
partner and owns a substantial majority of the equity interests in the
partnerships that own the properties subject to the purchase agreements.
PAMI has exercised its rights under the relevant partnership agreements to
acquire the equity interests of its minority partner. PAMI has informed us
that its minority partner has disputed PAMI's rights to purchase its
interests under the partnership agreements. As a result, PAMI has filed
suit in the Delaware Chancery Court requesting, among other things, that
the court specifically enforce PAMI's right to purchase the minority
interests. The minority partner in the partnerships has filed an answer
and counterclaim in the case requesting that the court find that the
minority partner has the right to buy PAMI's interests under the
partnership agreements.
PAMI believes that it will be successful in the litigation and we expect
to complete the acquisition of the partnership interests and properties.
However, due to the uncertain nature of litigation and the other
conditions to closing, we can provide no assurance that we will be able to
successfully complete the proposed acquisitions and cannot reliably
predict the timing of the resolution of these matters.
F-30
Exhibit Index
Number Description
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Grant Thornton LLP
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002