10-Q 1 k86668e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED JUNE 30, 2004 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004. OR [ ] Transition pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 COMMISSION FILE NUMBER 1-12616 SUN COMMUNITIES, INC. (Exact Name of Registrant as Specified in its Charter) Maryland 38-2730780 (State of Incorporation) (I.R.S. Employer Identification No.) 27777 Franklin Rd. Suite 200 Southfield, Michigan 48034 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (248) 208-2500 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 Exchange Act). Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Number of shares of Common Stock, $.01 par value per share, outstanding as of June 30, 2004: 18,989,572 SUN COMMUNITIES, INC. INDEX
PAGES PART I Item 1. Financial Statements (Unaudited): Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003 3 Consolidated Statements of Operations for the periods ended June 30, 2004 and 2003 4 Consolidated Statements of Comprehensive Income (Loss) for the periods ended June 30, 2004 and 2003 5 Consolidated Statements of Cash Flows for the periods ended June 30, 2004 and 2003 6 Notes to Consolidated Financial Statements 7-14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15-23 Item 3. Quantitative and Qualitative Disclosures about Market Risk 24 Item 4. Controls and Procedures 25 PART II Item 2.(e) Changes in Securities and Use of Proceeds 26 Item 4. Submission of Matters to a Vote of Security Holders 26 Item 6.(A) Exhibits required by Item 601 of Regulation S-K 27 Item 6.(B) Reports on Form 8-K 27 Signatures 28
2 SUN COMMUNITIES, INC. CONSOLIDATED BALANCE SHEETS JUNE 30, 2004 and DECEMBER 31, 2003 (AMOUNTS IN THOUSANDS)
(UNAUDITED) JUNE 30, 2004 DECEMBER 31, 2003 ------------- ----------------- ASSETS Investment in rental property, net $ 1,076,884 $ 1,010,484 Cash and cash equivalents 106,117 24,058 Inventory of manufactured homes 18,599 17,236 Investment in and advances to affiliate 50,160 50,667 Notes and other receivables 41,586 74,828 Other assets 51,837 44,301 ----------- ----------- Total assets $ 1,345,183 $ 1,221,574 =========== =========== LIABILITIES Line of credit $ - $ 99,000 Debt 976,816 674,328 Other liabilities 26,207 24,833 ----------- ----------- Total liabilities 1,003,023 798,161 ----------- ----------- Minority interests 86,871 96,803 ----------- ----------- STOCKHOLDERS' EQUITY Preferred stock, $.01 par value, 10,000 shares authorized, none issued - - Common stock, $.01 par value, 100,000 shares authorized, 19,461 and 19,192 issued in 2004 and 2003, respectively 195 192 Paid-in capital 454,734 446,211 Officer's notes (10,136) (10,299) Unearned compensation (13,717) (7,337) Accumulated comprehensive earnings 80 (1,294) Distributions in excess of accumulated earnings (160,196) (94,479) Treasury stock, at cost, 472 and 202 shares in 2004 and 2003, respectively (15,671) (6,384) ----------- ----------- Total stockholders' equity 255,289 326,610 ----------- ----------- Total liabilities and stockholders' equity $ 1,345,183 $ 1,221,574 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements 3 SUN COMMUNITIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE PERIODS ENDED JUNE 30, 2004 AND 2003 (AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- -------------------------- 2004 2003 2004 2003 --------- -------- --------- -------- REVENUES Income from rental property $ 40,501 $ 39,361 $ 83,369 $ 80,374 Revenue from home sales 6,082 5,601 10,056 9,715 Ancillary revenues, net 519 435 1,116 876 Interest and other income 1,685 3,164 3,807 5,562 --------- -------- --------- -------- Total revenues 48,787 48,561 98,348 96,527 --------- -------- --------- -------- COSTS AND EXPENSES Property operating and maintenance 10,068 9,447 20,296 19,549 Cost of home sales 5,137 3,543 8,262 6,186 Real estate taxes 3,353 2,932 6,519 5,869 General and administrative - rental property 2,640 2,504 5,446 4,877 General and administrative - home sales 1,631 1,598 3,061 3,011 Depreciation and amortization 10,806 10,838 22,089 21,450 Extinguishment of debt 51,643 - 51,643 - Deferred financing costs related to extinguished debt 5,557 - 5,557 - Interest 10,100 10,484 19,365 19,307 --------- -------- --------- -------- Total expenses 100,935 41,346 142,238 80,249 --------- -------- --------- -------- Income (loss) before equity income (loss) from affiliate, discontinued operations, and minority interests (52,148) 7,215 (43,890) 16,278 Equity income (loss) from affiliate 100 (251) 300 (314) --------- -------- --------- -------- Income (loss) from continuing operations before minority interests (52,048) 6,964 (43,590) 15,964 Less income (loss) allocated to minority interests: Preferred OP Units 2,184 2,133 4,363 4,261 Common OP Units (6,331) 605 (5,622) 1,468 --------- -------- --------- -------- Income (loss) from continuing operations (47,901) 4,226 (42,331) 10,235 Income from discontinued operations - 313 - 647 --------- -------- --------- -------- Net income (loss) $ (47,901) $ 4,539 $ (42,331) $ 10,882 ========= ======== ========= ======== Weighted average common shares outstanding: Basic 18,639 17,902 18,670 17,846 ========= ======== ========= ======== Diluted 18,639 18,091 18,670 18,000 ========= ======== ========= ======== Basic earnings (loss) per share: Continuing operations $ (2.57) $ 0.23 $ (2.27) $ 0.57 Discontinued operations - 0.02 - 0.04 --------- -------- --------- -------- Net income (loss) $ (2.57) $ 0.25 $ (2.27) $ 0.61 ========= ======== ========= ======== Diluted earnings (loss) per share: Continuing operations $ (2.57) $ 0.23 $ (2.27) $ 0.56 Discontinued operations - 0.02 - 0.04 --------- -------- --------- -------- Net income (loss) $ (2.57) $ 0.25 $ (2.27) $ 0.60 ========= ======== ========= ========
The accompanying notes are an integral part of the consolidated financial statements. 4 SUN COMMUNITIES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) FOR THE PERIODS ENDED JUNE 30, 2004 AND 2003 (AMOUNTS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- --------------------- 2004 2003 2004 2003 -------- ------- -------- -------- Net income (loss) $(47,901) $ 4,539 $(42,331) $ 10,882 Unrealized income (loss) on interest rate swaps 2,857 (1,942) 1,374 (2,381) -------- ------- -------- -------- Comprehensive income (loss) $(45,044) $ 2,597 $(40,957) $ 8,501 ======== ======= ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 5 SUN COMMUNITIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (AMOUNTS IN THOUSANDS) (UNAUDITED)
2004 2003 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (42,331) $ 10,882 Adjustments to reconcile net income (loss) to cash provided by operating activities: Income (loss) allocated to minority interests (5,622) 1,468 Income from discontinued operations allocated to minority interests - 92 Depreciation and amortization 22,732 21,450 Depreciation allocated to income from discontinued operations - 315 Amortization of deferred financing costs 804 699 Extinguishment of debt 51,643 - Write off of deferred financing costs related to extinguished debt 5,557 - Equity (income) loss from affiliate (300) 314 Increase in inventory and other assets (11,550) (4,347) Increase in accounts payable and other liabilities 1,374 1,016 --------- --------- Net cash provided by operating activities 22,307 31,889 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in rental properties (90,996) (14,139) Investment in and advances to affiliate 689 (21,815) Proceeds from sale of installment loans on manufactured homes 12,325 - Decrease (increase) in notes receivable and officers' notes, net 21,280 (707) --------- --------- Net cash used in investing activities (56,702) (36,661) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock and OP units, net 7,487 6,300 Borrowings (repayments) on line of credit, net (99,000) 12,000 Payments to redeem notes payable and other debt (423,081) (137,931) Proceeds from notes payable and other debt 673,580 150,000 Payments for deferred financing costs (6,895) (1,953) Treasury stock purchases (9,287) - Distributions (26,350) (24,605) --------- --------- Net cash provided by financing activities 116,454 3,811 --------- --------- Net (decrease) increase in cash and cash equivalents 82,059 (961) Cash and cash equivalents, beginning of period 24,058 2,664 --------- --------- Cash and cash equivalents, end of period $ 106,117 $ 1,703 ========= ========= SUPPLEMENTAL INFORMATION: Cash paid for interest including capitalized amounts of $294 and $1,029 for the six months ended June 30, 2004 and 2003, respectively $ 23,289 $ 16,453 Noncash investing and financing activities: Debt assumed for rental properties $ 30 $ - Issuance of partnership units to retire capitalized lease obligations $ 4,725 $ 4,170 Unrealized gains (losses) on interest rate swaps $ 1,374 $ (2,381)
The accompanying notes are an integral part of the consolidated financial statements. 6 SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION: These unaudited condensed consolidated financial statements of Sun Communities, Inc., a Maryland corporation, (the "Company") and all majority-owned and controlled subsidiaries including Sun Communities Operating Limited Partnership (the "Operating Partnership"), SunChamp LLC ("SunChamp"), and Sun Home Services, Inc. ("SHS"), have been prepared pursuant to the Securities and Exchange Commission ("SEC") rules and regulations and should be read in conjunction with the consolidated financial statements and notes thereto of the Company included in the Annual Report on Form 10-K for the year ended December 31, 2003. The following notes to consolidated financial statements present interim disclosures as required by the SEC. The accompanying consolidated financial statements reflect, in the opinion of management, all adjustments necessary for a fair presentation of the interim financial statements. All such adjustments are of a normal and recurring nature. Certain reclassifications have been made to prior periods' financial statements in order to conform with current period presentation. 2. RENTAL PROPERTY: The following summarizes rental property (amounts in thousands):
JUNE 30, DECEMBER 31, 2004 2003 ----------- ----------- Land $ 110,354 $ 104,541 Land improvements and buildings 1,125,521 1,048,576 Furniture, fixtures, and equipment 32,670 33,080 Land held for future development 34,318 31,409 Property under development 1,959 2,799 ----------- ----------- 1,304,822 1,220,405 Less accumulated depreciation (227,938) (209,921) ----------- ----------- Rental property, net $ 1,076,884 $ 1,010,484 =========== ===========
The Company acquired 5 properties for $66 million during the second quarter of 2004 consisting of 1,414 developed sites and an additional 570 sites available for development. The properties were acquired for cash and the assumption of $23 million of debt, which was immediately retired. 7 SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 3. NOTES AND OTHER RECEIVABLES: The following table sets forth certain information regarding notes and other receivables (amounts in thousands):
JUNE 30, DECEMBER 31, 2004 2003 -------- ------------ Mortgage and other notes receivable, with interest payable at a weighted average interest rate of 6.72%, maturing at various dates through August 2008, substantially collateralized by manufactured home communities $18,500 $41,736 Installment loans on manufactured homes with interest payable monthly at a weighted average interest rate and maturity of 7.28% and 10 years, respectively. 14,052 24,802 Other receivables 9,034 8,290 ------- ------- $41,586 $74,828 ======= =======
At June 30, 2004, the maturities of mortgages and other notes receivable are approximately as follows: 2006-$3.8 million; 2008-$14.7 million. In February 2004, $12.3 million of the installment loans collateralized by manufactured homes were sold at book value (which approximated fair value) to Origen Financial, Inc. ("Origen, Inc."). Mortgage and other notes receivable of $24.0 million were repaid during the second quarter of 2004. Officer's notes, presented as a reduction to stockholders' equity in the balance sheet, are 10 year, 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 with substantial personal recourse. The notes become due in three equal installments on each of December 2008, 2009 and 2010. 4. INVESTMENT IN AND ADVANCES TO AFFILIATE: 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 of Origen, Inc. for $50 million. The Company owns 19.9% of Origen, Inc. at June 30, 2004 and its investment is accounted for using the equity method of accounting. Equity earnings recorded through June 30, 2004 are an estimate of the Company's portion of the anticipated earnings of Origen, Inc. through June 30, 2004, based on publicly available information. 8 SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 5. DEBT: The following table sets forth certain information regarding debt (amounts in thousands):
JUNE 30, DECEMBER 31, 2004 2003 -------- ------------ Collateralized term loan, 7.010%, due September 9, 2007 $ 41,195 $ 41,547 Collateralized term loans - CMBS, 4.931-5.32%, due July 1, 2011-2016 496,030 - Collateralized term loans - FNMA, of which $77.4M is variable,due 2014 at the Company's option, interest at 3.22 - 5.37% and 3.244% at June 30, 2004 and December 31, 2003, respectively 329,612 152,363 Redeemable preferred OP units, average interest 7.046%, redeemable at various dates through January 2, 2014 62,873 58,148 Senior notes, 6.770%, due May 14, 2005 5,017 350,000 Capitalized lease obligation, 5.510%, matured in January, 2004 - 9,606 Mortgage notes, other 42,089 62,664 -------- -------- $976,816 $674,328 ======== ========
The collateralized term loans totaling $866.8 million at June 30, 2004 are secured by 93 properties comprising approximately 34,921 sites. The mortgage notes are collateralized by 12 communities comprising approximately 3,863 sites. A capitalized lease obligation matured as of January 1, 2004 and was paid by the issuance of 47,250 Preferred OP Units, cash of approximately $1.2 and the assumption of approximately $4.2 million of debt, which was immediately retired. On April 15, 2004, the Company tendered for its $350 million of outstanding unsecured notes, of which 98.6% were tendered and extinguished. This transaction resulted in the payment of $51.6 million of debt extinguishment costs including pre-payment penalties and fees associated with the tender offer. The purchase of these notes and payment of the related costs was funded through secured financing transactions, as noted below. During the quarter, the Company completed financings totaling $733 million consisting of Collateralized Mortgaged Back Securities (CMBS) of $496 million and additional FNMA financing of $237 million. As of June 30, 2004, $60 million of the additional FNMA financing was undrawn. The $673 million of new debt has a weighted average interest rate of 4.99% and a duration slightly in excess of 10 years. The proceeds from the financings were used to redeem $345 million of unsecured debt, payoff the Company's $99 million unsecured line of credit, pay debt extinguishment costs of $51.6 million and repay approximately $20 million of mortgage notes. 9 SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. INTEREST AND OTHER INCOME: The components of other income are as follows for the periods ended June 30, 2004 and 2003 (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- ------------------- 2004 2003 2004 2003 ------- ------ ------ ------- Interest income $ 1,470 $2,938 $3,249 $ 5,191 Brokerage commissions 235 198 508 412 Other income (loss) (20) 28 50 (41) ------- ------ ------ ------- $ 1,685 $3,164 $3,807 $ 5,562 ======= ====== ====== =======
7. SEGMENT REPORTING (AMOUNTS IN THOUSANDS): The consolidated operations of the Company can be segmented into manufactured home sales and property operations segments. Following is a presentation of selected financial information:
THREE MONTHS ENDED JUNE 30, 2004 SIX MONTHS ENDED JUNE 30, 2004 ------------------------------------- ---------------------------------------- PROPERTY MANUFACTURED PROPERTY MANUFACTURED OPERATIONS HOME SALES COMBINED OPERATIONS HOME SALES COMBINED ---------- ------------ -------- ---------- ------------ -------- Revenues $ 40,501 $ 6,082 $ 46,583 $ 83,369 $ 10,056 $ 93,425 Operating expenses/Cost of sales 13,421 5,137 18,558 26,815 8,262 35,077 -------- ------- -------- -------- -------- -------- Net operating income (1)/Gross profit 27,080 945 28,025 56,554 1,794 58,348 Adjustments to arrive at net loss: Other revenues 1,682 522 2,204 3,616 1,307 4,923 Selling, general and administrative (2,640) (1,631) (4,271) (5,446) (3,061) (8,507) Depreciation and amortization (10,506) (300) (10,806) (21,449) (640) (22,089) Interest expense (10,071) (29) (10,100) (19,313) (52) (19,365) Debt extinguishment costs (51,643) - (51,643) (51,643) - (51,643) Deferred financing costs related to extinguished debt (5,557) - (5,557) (5,557) - (5,557) Equity income from affiliate 100 - 100 300 - 300 (Income) loss allocated to minority interest 4,147 - 4,147 1,259 - 1,259 -------- ------- -------- -------- -------- -------- Net loss $(47,408) $ (493) $(47,901) $(41,679) $ (652) $(42,331) ======== ======= ======== ======== ======== ========
THREE MONTHS ENDED JUNE 30, 2003 SIX MONTHS ENDED JUNE 30, 2003 ------------------------------------- ---------------------------------------- PROPERTY MANUFACTURED PROPERTY MANUFACTURED OPERATIONS HOME SALES COMBINED OPERATIONS HOME SALES COMBINED ---------- ------------ -------- ---------- ------------ -------- Revenues $ 39,361 $ 5,601 $ 44,962 $ 80,374 $ 9,715 $ 90,089 Operating expenses 12,379 3,543 15,922 25,418 6,186 31,604 -------- ------- -------- -------- ------- -------- Net operating income (1)/Gross profit 26,982 2,058 29,040 54,956 3,529 58,485 Adjustments to arrive at net loss: Other revenues 1,911 1,688 3,599 3,096 3,342 6,438 Selling, general and administrative (2,504) (1,598) (4,102) (4,877) (3,011) (7,888) Depreciation and amortization (10,613) (225) (10,838) (20,999) (451) (21,450) Interest expense (10,446) (38) (10,484) (19,206) (101) (19,307) Equity loss from affiliate (251) - (251) (314) - (314) Income allocated to minority interest (2,738) - (2,738) (5,729) - (5,729) Income from discontinued operations 313 - 313 647 - 647 -------- ------- -------- -------- ------- -------- Net income $ 2,654 $ 1,885 $ 4,539 $ 7,574 $ 3,308 $ 10,882 ======== ======= ======== ======== ======= ========
(1) 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. 10 SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7. SEGMENT REPORTING (AMOUNTS IN THOUSANDS), CONTINUED:
SELECTED BALANCE SHEET DATA JUNE 30, 2004 DECEMBER 31, 2003 ------------------------------------ ----------------------------------------- PROPERTY MANUFACTURED PROPERTY MANUFACTURED OPERATIONS HOME SALES COMBINED OPERATIONS HOME SALES COMBINED --------- ------------ ---------- ---------- ------------ ---------- Identifiable assets: Investment in rental property, net $1,038,286 $ 38,598 $1,076,884 $ 980,149 $30,335 $1,010,484 Cash and cash equivalents 106,264 (147) 106,117 24,043 15 24,058 Inventory of manufactured homes - 18,599 18,599 - 17,236 17,236 Investments in and advances to affiliate 50,160 - 50,160 50,667 - 50,667 Notes and other receivables 39,690 1,896 41,586 61,534 13,294 74,828 Other assets 49,206 2,631 51,837 41,613 2,688 44,301 ---------- -------- ---------- ---------- ------- ---------- Total assets $1,283,606 $ 61,577 $1,345,183 $1,158,006 $63,568 $1,221,574 ========== ======== ========== ========== ======= ==========
8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (IN THOUSANDS): 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 have the effect of fixing interest rates relative to a portion of 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. 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 six month period ended June 30, 2004 totals a negative $0.5 million. SFAS No. 133, the "Accounting for Derivative Instruments and Hedging Activities," requires all derivative instruments to be carried at fair value on the balance sheet. The fair value of the instruments approximates zero at June 30, 2004 and a liability of $0.9 million as of December 31, 2003. These valuation adjustments will only be realized if the Company terminates the swaps prior to maturity. If held to maturity, the valuation adjustments will approximate zero. 11 SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 9. STOCK OPTIONS (IN THOUSANDS): 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 options using the methods contained in FASB Statement No. 123, "Accounting for Stock-Based Compensation", net income (loss) and earnings (loss) per share would have been presented as follows for the periods ended June 30, 2004 and 2003:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- -------------------------- 2004 2003 2004 2003 --------- ------- --------- ---------- Net income (loss), as reported $ (47,901) $ 4,539 $ (42,331) $ 10,882 Stock-based compensation expense under fair value method (10) (59) (29) (180) --------- ------- --------- ---------- Pro forma net income (loss) $ (47,911) $ 4,480 $ (42,360) $ 10,702 ========= ======= ========= ========== Earnings (loss) per share (Basic), as reported $ (2.57) $ 0.25 $ (2.27) $ 0.61 ========= ======= ========= ========== Earnings (loss) per share (Basic), pro forma $ (2.57) $ 0.25 $ (2.27) $ 0.60 ========= ======= ========= ========== Earnings (loss) per share (Diluted), as reported $ (2.57) $ 0.25 $ (2.27) $ 0.60 ========= ======= ========= ========== Earnings (loss) per share (Diluted), pro forma $ (2.57) $ 0.25 $ (2.27) $ 0.59 ========= ======= ========= ==========
Stock options issued during the second quarter of 2004 were valued using the Binomial model rather than the Black-Scholes-Merton formula. The difference in valuation between the two methods was not material . 10. EARNINGS (LOSS) PER SHARE (IN THOUSANDS): For the periods ended June 30, 2004 and 2003:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- ---------------------- 2004 2003 2004 2003 -------- ------- -------- ------- Earnings (loss) used for basic and diluted earnings (loss) per share: Continuing operations $(47,901) $ 4,226 $(42,331) $10,235 ======== ======= ======== ======= Discontinued operations $ - $ 313 $ - $ 647 ======== ======= ======== ======= Weighted average shares used for basic earnings (loss) per share 18,639 17,902 18,670 17,846 Dilutive securities: Stock options and other - 189 - 154 -------- ------- -------- ------- Diluted weighted average shares 18,639 18,091 18,670 18,000 ======== ======= ======== =======
12 SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 10. EARNINGS PER SHARE (IN THOUSANDS), CONTINUED: Diluted earnings per share reflect the potential dilution that would occur if dilutive securities were exercised or converted into common stock. The calculation of both basic and diluted earnings per share for the three and six month periods ending June 30, 2004 is based upon weighted average shares prior to dilution, as the effect of including potentially dilutive securities in the calculation during these periods would be anti-dilutive. The Company also has the following potentially convertible securities which, if converted, may impact dilution:
------------------------------------------------------------------------------------------------------------- CONVERTIBLE SECURITIES NUMBER OF UNITS ISSUED CONVERSION FEATURES ------------------------------------------------------------------------------------------------------------- Series A Preferred OP Units 1,325,275 Convertible to common stock at $68 per share/unit. Mandatorily redeemable on 01/02/2014 ------------------------------------------------------------------------------------------------------------- Series B Preferred OP Units 35,637 On each of May 1, 2003, 2004, 2005, and 2006, holder may exchange Units for shares of common stock at exchange rate of 2.272727 ($44 per share) shares of common stock for each Series B Preferred Unit. ------------------------------------------------------------------------------------------------------------- Series B-2 Preferred OP Units 100,000 Convertible into Common OP Units after 01/31/2005 at $45 per share/unit. -------------------------------------------------------------------------------------------------------------
11. RECENT ACCOUNTING PRONOUNCEMENTS: On March 31, 2004, the Financial Accounting Standards Board (FASB) issued a proposed Statement, Share-Based Payment an Amendment of FASB Statements No. 123 and APB No. 95, that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. Under the FASB's proposal, all forms of share-based payments to employees, including employee stock options, would be treated the same as other forms of compensation by recognizing the related cost in the income statement. The expense of the award would generally be measured at fair value at the grant date. Current accounting guidance requires that the expense relating to so-called fixed plan employee stock options only be disclosed in the footnotes to the financial statements. The proposed Statement would eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25, Accounting for Stock Issued to Employees. The Company has not assessed the impact of the proposed statement on its financial statements. 13 SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 12. 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 its results of operations or financial condition. 14 SUN COMMUNITIES, INC. ITEM 2. 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 the notes thereto. Capitalized terms are used as defined elsewhere in this Form 10-Q. SIGNIFICANT ACCOUNTING POLICIES The Company had identified significant accounting policies that, as a result of the judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operations involved, could result in material changes to its financial condition or result of operations under different conditions or using different assumptions. Details regarding the Company's significant accounting policies are described fully in the Company's 2003 Annual Report filed with the Securities and Exchange Commission on Form 10-K. During the six months ended June 30, 2004, there have been no material changes to the Company's significant accounting policies that impacted the Company's financial condition or results of operations. RESULTS OF OPERATIONS Comparison of the three months ended June 30, 2004 and 2003 For the three months ended June 30, 2004, income from continuing operations before minority interest decreased by $59.0 million from $7.0 million to a loss of $52.0 million, when compared to the three months ended June 30, 2003. The decrease was due to increased expenses of $2.4 million, debt extinguishment costs of $51.6 million, and deferred financing costs related to the extinguished debt of $5.6 million, offset by increased revenues of $0.2 million and increased equity income from affiliates of $0.4 million as described in more detail below. Income from rental property increased by $1.1 million from $39.4 million to $40.5 million, or 2.8 percent, due primarily to rent increases and other community revenues. Interest and other income decreased by $1.5 million from $3.2 million to $1.7 million, or 46.8 percent, due primarily to a decrease in interest earning notes and receivables. The increase in revenue from home sales and increase in ancillary revenues relate to operations of the manufactured home sales segment which is discussed in detail below. Property operating and maintenance expenses increased by $0.7 million from $9.4 million to $10.1 million, or 7.4 percent. The increase was due to increases in utility costs ($0.1 million), repair and maintenance expense ($0.2 million), payroll expense ($0.2 million), property and casualty insurance ($0.1 million), and other miscellaneous expenses ($0.1 million). Real estate taxes increased by $0.5 million from $2.9 million to $3.4 million, or 17.2 percent, due primarily to increases in assessments and tax rates. 15 SUN COMMUNITIES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS, CONTINUED: General and administrative expenses for rental property increased by $0.1 million from $2.5 million to $2.6 million, or 4.0 percent, primarily due to an increase in systems training costs. Debt extinguishment costs of $51.6 million includes prepayment penalties, fees and other costs associated with redeeming $345.0 million of unsecured notes. Deferred financing costs related to these notes and other debt repaid with the proceeds from $733.0 million of new secured financing were expensed. Interest expense decreased by $0.4 million from $10.5 million to $10.1 million, or 3.8 percent, primarily due to a change in valuation of derivative contracts. Equity income from affiliates of $0.1 million represents an estimate of the Company's prorata interest in the operations of Origen, Inc. for the three months ended June 30, 2004. The cost of home sales increase of $1.6 million is discussed in detail below. Sun Home Services The following table summarizes certain financial and statistical data for Sun Home Services for the three months ended June 30, 2004 and 2003:
THREE MONTHS ENDED JUNE 30, INCREASE/ 2004 2003 (DECREASE) PERCENT CHANGE ------ ------ ---------- -------------- New home sales revenues $3,174 $4,733 $(1,559) -32.9% Cost of sales 2,611 2,976 (365) -12.3% ------ ------ ------- ----- Gross profit 563 1,757 (1,194) -68.0% ====== ====== ======= ===== Pre-owned home sales revenues $2,908 $ 868 $ 2,040 235.0% Cost of sales 2,526 567 1,959 345.5% ------ ------ ------- ----- Gross profit 382 301 81 26.9% ====== ====== ======= ===== Ancillary revenue, net $ 519 $ 435 $ 84 19.3% ====== ====== ======= ===== Home sales volumes: New homes 52 85 (33) -38.8% Pre-owned homes 126 50 76 152.0%
16 SUN COMMUNITIES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS, CONTINUED: Sun Home Services The margin on new home sales has declined due to consumer demand shifting to pre-owned homes which are available in substantial quantities. This shift in demand was more than offset by the supply of pre-owned homes, thereby reducing margins. The margin on pre-owned home sales has declined as a result of a management strategy to reduce the inventory of pre-owned homes and increase revenue producing sites. The increase in ancillary revenue, net, is primarily due to increased activity in the Company's rental home program. Comparison of the six months ended June 30, 2004 and 2003 For the six months ended June 30, 2004, income from continuing operations before minority interest decreased by $59.6 million from $16.0 million to a loss of $43.6 million, when compared to the six months ended June 30, 2003. The decrease was due to increased expenses of $4.8 million, debt extinguishment costs of $51.6 million, and deferred financing costs related to the extinguished debt of $5.6 million, offset by increased revenues of $1.8 million and increased equity income from affiliates of $0.6 million as described in more detail below. Income from rental property increased by $3.0 million from $80.4 million to $83.4 million, or 3.7 percent, due to rent increases and other community revenues, and an increase in seasonal recreational vehicle revenue during the first quarter of 2004. Interest and other income decreased by $1.8 million from $5.6 million to $3.8 million, or 32.1 percent, due primarily to a decrease in interest earning notes and receivables. The increase in revenue from home sales and increase in ancillary revenues relate to operations of the manufactured home sales segment which is discussed in detail below. Property operating and maintenance expenses increased by $0.8 million from $19.5 million to $20.3 million, or 4.1 percent. The increase was due to increases in utility costs ($0.2 million), repair and maintenance expense ($0.2 million), payroll expense ($0.2 million), and miscellaneous other expenses ($0.2 million). Real estate taxes increased by $0.6 million from $5.9 million to $6.5 million, or 10.2 percent, due primarily to increases in assessments and tax rates. 17 SUN COMMUNITIES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS, CONTINUED: General and administrative expenses for rental property increased by $0.5 million from $4.9 million to $5.4 million, primarily due to training costs related to the Company's systems conversion and costs related to compliance with the Sarbanes-Oxley Act. Depreciation and amortization increased by $0.6 million from $21.5 million to $22.1 million, or 2.8 percent, due to additional investment in rental property. Debt extinguishment costs of $51.6 million includes prepayment penalties, fees and other costs associated with extinguishing $345.0 million of unsecured notes. Deferred financing costs related to these notes and other debt repaid with the proceeds from $733.0 million of new secured financing were expensed. Equity income from affiliates of $0.3 million represents an estimate of the Company's prorata interest in the operations of Origen, Inc. for the six months ended June 30, 2004. The remaining cost of home sales increase of $2.1 million is discussed in detail below. Sun Home Services The following table summarizes certain financial and statistical data for Sun Home Services for the six months ended June 30, 2004 and 2003:
SIX MONTHS ENDED JUNE 30, INCREASE/ 2004 2003 (DECREASE) PERCENT CHANGE ------ ------ ---------- -------------- New home sales revenues $5,537 $8,213 $(2,676) -32.6% Cost of sales 4,420 5,282 (862) -16.3% ------ ------ ------- ----- Gross profit 1,117 2,931 (1,814) -61.9% ====== ====== ======= ===== Pre-owned home sales revenues $4,519 $1,502 $ 3,017 200.9% Cost of sales 3,842 904 2,938 325.0% ------ ------ ------- ----- Gross profit 677 598 79 13.2% ====== ====== ======= ===== Ancillary revenue, net $1,116 $ 876 $ 240 27.4% ====== ====== ======= ===== Home sales volumes: New homes 97 157 (60) -38.2% Pre-owned homes 208 91 117 128.6%
The margin on new home sales has declined due to consumer demand shifting to pre-owned homes which are available in substantial quantities. This shift in demand was more than offset by the supply of pre-owned homes, thereby reducing margins. The margin on pre-owned home sales has declined as a result of a management strategy to reduce the inventory of pre-owned homes and increase revenue producing sites. The increase in ancillary revenue, net, is primarily due to increased activity in the Company's rental home program. 18 SUN COMMUNITIES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SAME PROPERTY INFORMATION The following table reflects property-level financial information as of and for the six months ended June 30, 2004 and 2003. The "Same Property" data represents information regarding the operation of communities owned as of January 1, 2003 and June 30, 2004. Site, occupancy, and rent data for those communities is presented as of the last day of each period presented. The "Total Portfolio" column differs from the "Same Property" column by including financial and statistical information for new development and acquisition communities.
SAME PROPERTY TOTAL PORTFOLIO ------------------------ ------------------------ 2004 2003 2004 2003 ------- ------- ------- ------- (in thousands) (in thousands) Income from rental property $74,008 $71,475 $83,369 $80,374 ------- ------- ------- ------- Property operating expenses: Property operating and maintenance 14,227 14,059 20,296 19,549 Real estate taxes 5,727 5,422 6,519 5,869 ------- ------- ------- ------- Property operating expenses 19,954 19,481 26,815 25,418 ------- ------- ------- ------- Property net operating income (2) $54,054 $51,994 $56,554 $54,956 ======= ======= ======= ======= Number of properties 108 108 132 130 Developed sites 39,719 39,740 45,302 44,520 Occupied sites 34,873 35,613 38,371 38,714 Occupancy % 89.1%(3) 91.3% (3) 85.5% (3) 88.1% (3) Weighted Average monthly rent per site $ 339 (3) $ 324 (3) $ 339 (3) $ 324 (3) Sites available for development 1,529 2,001 7,409 7,050 Sites planned for development in next year 61 8 61 8
(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) Occupancy % and weighted average rent relates to manufactured housing sites, excluding recreational vehicle sites. On a same property basis, property net operating income increased by $2.1 million from $52.0 million to $54.1 million, or 4.0 percent. Income from property increased by $2.5 million from $71.5 million to $74.0 million, or 3.5 percent, due primarily to increases in rents including water and property tax pass through. Property operating expenses increased by $0.5 million from $19.5 million to $20.0 million, or 2.6 percent, due primarily to increases in real estate taxes and utility expenses. 19 SUN COMMUNITIES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 unitholders of the Operating Partnership, 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 through a line of credit expected to close in the third quarter of 2004. The Company considers its ability to generate cash from operations (anticipated to be approximately $50 to $60 million annually) 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 to $10 million in developments consisting of expansions to existing communities and the development of new communities during 2004. 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 may invest substantial amounts in the acquisition of properties during the remainder of 2004, depending upon a number of factors. The Company will finance these investments using the proceeds from its secured financing transactions and through the assumption of existing debt on the properties. Cash and cash equivalents increased by $82.0 million to $106.1 million at June 30, 2004 compared to $24.1 million at December 31, 2003. Net cash provided by operating activities decreased by $9.6 million to $22.3 million for the six months ended June 30, 2004 compared to $31.9 million for the six months ended June 30, 2003. 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 current markets generally, and specifically in metropolitan areas of the Company's current markets; (b) lower occupancy and rental rates of the Company's properties (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 the Company's Annual Report on Form 10-K for the year ended December 31, 2003. 20 SUN COMMUNITIES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES CONTINUED: The Company anticipates meeting its long-term liquidity requirements, such as scheduled debt maturities, large property acquisitions, and Operating Partnership unit redemptions through the collateralization of a significant portion of its Properties. From time to time, the Company may also issue shares of its capital stock, issue equity units in the Operating Partnership or sell selected assets. During the quarter the Company closed on $733 million of secured financing, in two separate transactions, of which $60.0 million remains undrawn. Proceeds from these transactions were used to retire $345.0 million of unsecured notes, pay the related costs of the debt retirement, repay the Company's existing line of credit, acquire additional properties, and repurchase the Company's outstanding equity securities. 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" in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. If the Company is unable obtain additional debt or equity financing on acceptable terms, the Company's business, results of operations and financial condition will be adversely impacted. At June 30, 2004, the Company's debt to total market capitalization approximated 53.2 percent (assuming conversion of all Common OP Units to shares of common stock). The debt has a weighted average maturity of approximately 9.2 years and a weighted average interest rate of 5.0 percent. Capital expenditures for the six months ended June 30, 2004 and 2003 included recurring capital expenditures of $3.0 million and $2.7 million, respectively. Net cash used in investing activities increased by $20.0 million to $56.7 million for the six months ended June 30, 2004 compared to $36.7 million used in investing activities for the six months ended June 30, 2003. This increase was due to a $12.3 million sale of notes receivable to Origen, Inc., a $22.5 million decrease in investment in and advances to an affiliate, and a $22.0 million decrease in notes receivable and officers' notes, net, offset by a $76.8 million increase in rental property investment activities. Net cash provided by financing activities increased by $112.6 million to $116.4 million for the six months ended June 30, 2004 from $3.8 million for the six months ended June 30, 2003. This increase was primarily due to a $238.4 million increase in proceeds from notes payable and other debt, net, a $1.2 million increase of proceeds from issuance of common stock, offset by a $111.0 million increase in repayments on the line of credit, a $1.8 million increase in distributions, a $4.9 million increase in payments for deferred financing costs, and a $9.3 million increase in treasury stock purchase activities, representing 270,200 shares under a one million share buy back authorization. 21 SUN COMMUNITIES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUPPLEMENTAL MEASURE: Investors in and analysts following the real estate industry utilize funds from operations ("FFO") as a supplemental performance measure. While the Company believes net income (as defined by generally accepted accounting principles) is the most appropriate measure, it considers FFO, given its wide use by and relevance to investors and analysts, an appropriate supplemental measure. 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 property, plus rental property depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Industry analysts consider FFO to be an appropriate supplemental measure of the operating performance of an equity REIT primarily because the computation of FFO excludes historical cost depreciation as an expense and thereby facilitates the comparison of REITs which have different cost bases in their assets. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time, whereas real estate values have instead historically risen or fallen based upon market conditions. FFO does not represent cash flow from operations as defined by generally accepted accounting principles 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. The following table reconciles net income to FFO for the periods ended June 30, 2004 and 2003 (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- ---------------------- 2004 2003 2004 2003 -------- ------- -------- ------- Net income (loss) $(47,901) $ 4,539 $(42,331) $10,882 Adjustments: Depreciation and amortization 11,073 10,600 21,914 21,109 Valuation adjustment(4) 889 461 482 675 Allocation of SunChamp losses(5) - 1,087 300 1,937 Income allocated to minority interest (6,331) 650 (5,622) 1,560 -------- ------- -------- ------- Funds from operations $(42,270) $17,337 $(25,257) $36,163 ======== ======= ======== ======= Weighted average common shares/OP Units outstanding: Basic 21,112 20,427 21,144 20,384 ======== ======= ======== ======= Diluted 21,112 20,616 21,144 20,538 ======== ======= ======== ======= FFO per weighted average Common Share/OP Unit - Basic $ (2.00) $ 0.85 $ (1.19) $ 1.77 ======== ======= ======== ======= FFO per weighted average Common Share/OP Unit - Diluted $ (2.00) $ 0.84 $ (1.19) $ 1.76 ======== ======= ======== =======
(4) 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 any imperfections related to hedging correlation in these swaps is reflected currently in cash as interest, the valuation adjustments are excluded from funds from operations. The valuation adjustment is included in interest expense. (5) 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 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 under generally accepted accounting principles are effectively reallocated to the note for purposes of calculating funds from operations. 22 SUN COMMUNITIES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SAFE HARBOR STATEMENT This Form 10-Q 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 filing that relate to prospective events or developments are deemed to be forward-looking statements. Words such as "believes," "forecasts," "anticipates," "intends," "plans," "expects," "may", "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 filing. 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 the Company's Annual Report on Form 10-K for the year ended December 31, 2003 and the Company's filings with the Securities and Exchange Commission. The forward-looking statements contained in this Form 10-Q 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. 23 SUN COMMUNITIES, INC. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company's principal market risk exposure is interest rate risk. The Company mitigates this risk by maintaining prudent amounts of leverage, minimizing capital costs and interest expense while continuously evaluating all available debt and equity resources and following established risk management policies and procedures, which include the periodic use of derivatives. 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. The Company does not enter into derivative instruments for speculative purposes. The Company's variable rate debt totals $81.2 million and $176.1 million as of June 30, 2004 and 2003, respectively, which bears interest at various LIBOR/DMBS rates. If LIBOR/DMBS increased or decreased by 1.00 percent during the six months ended June 30, 2004 and 2003, the Company believes its interest expense would have increased or decreased by approximately $2.5 million and $2.5 million based on the $245.9 million and $246.7 million average balance outstanding under the Company's variable rate debt facilities for the six months ended June 30, 2004 and 2003, respectively. Additionally, the Company had $14.7 million and $30.6 million LIBOR based variable rate mortgage and other notes receivables as of June 30, 2004 and 2003, respectively. If LIBOR increased or decreased by 1.0 percent during the six months ended June 30, 2004 and 2003, the Company believes interest income would have increased or decreased by approximately $0.2 million and $0.3 million based on the $24.0 million and $28.8 million average balance outstanding on all variable rate notes receivable for the six months ended June 30, 2004 and 2003, respectively. The Company has entered into three separate interest rate swap agreements and an interest rate cap agreement. One of these swap agreements fixes $25 million of variable rate borrowings at 4.93 percent for the period April 2003 through July 2009, another of these swap agreements fixes $25 million of variable rate borrowings at 5.37 percent for the period April 2003 through July 2012 and the third swap agreement, which is only effective for so long as 90-day LIBOR is 7 percent or less, fixes $25 million of variable rate borrowings at 3.97 percent for the period April 2003 through July 2007. 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 13, 2006. Each of the Company's derivative contracts is based upon 90-day LIBOR. 24 SUN COMMUNITIES, INC. ITEM 4. CONTROLS AND PROCEDURES (a) Under the supervision and with the participation of the Company's management, including the Chief Executive Officer, Gary A. Shiffman, and Chief Financial Officer, Jeffrey P. Jorissen, the Company evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this quarterly report, pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective to ensure that information the Company is required to disclose in its filings with the Securities and Exchange Commission under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms, and to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. (b) There have been no significant changes in the Company's internal control over financial reporting during the quarterly period ended June 30, 2004, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 25 SUN COMMUNITIES, INC. PART II ITEM 2. (e) - CHANGES IN SECURITIES AND USE OF PROCEEDS The Company announced a program to purchase up to 1,000,000 shares of its common stock on January 2, 2003. The results of this stock repurchase program for the three months ended June 30, 2004 are as follows:
TOTAL NUMBER OF SHARES PURCHASED AS MAXIMUM NUMBER OF AVERAGE PART OF PUBLICLY SHARES THAT MAY YET BE TOTAL NUMBER OF PRICE PAID ANNOUNCED PLANS OR PURCHASED UNDER THE PERIOD SHARES PURCHASED PER SHARE PROGRAMS PLANS OR PROGRAMS ----------------------------------------------------------------------------------------------------- 04/01/04 to 04/30/04 - - - 1,000,000 ----------------------------------------------------------------------------------------------------- 05/01/04 to 05/31/04 264,100 $ 35.20 264,100 735,900 ----------------------------------------------------------------------------------------------------- 06/01/04 to 06/30/04 6,100 $ 37.04 6,100 729,800 ----------------------------------------------------------------------------------------------------- Total 270,200 $ 35.25 270,200 729,800 -----------------------------------------------------------------------------------------------------
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 20, 2004, the Company held its Annual Meeting of Shareholders. The following matters were voted upon at the meeting: (a) The election of two directors to serve until the 2007 Annual Meeting of Shareholders or until their respective successors shall be elected and shall qualify. The results of the election appear below:
% OF SHARES % OF SHARES NOMINEES FOR VOTING AGAINST VOTING WITHHELD -------- --- ------ ------- ------ -------- Clunet R. Lewis 17,023,541 95.5 -0- -0- 796,730 Arthur A. Weiss 17,127,286 96.1 -0- -0- 692,985
(b) The approval of the Sun Communities, Inc., 2004 Non-Employee Director Option Plan. The results of the vote appear below:
% OF SHARES % OF SHARES FOR VOTING AGAINST VOTING NO VOTE ABSTAIN --- ------ ------- ------ --------- ------- 14,568,456 94.2 901,440 5.8 2,232,668 117,706
26 SUN COMMUNITIES, INC. PART II, CONTINUED ITEM 6.(A) - EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K See the attached Exhibit Index. ITEM 6.(B) - REPORTS ON FORM 8-K Form 8-K, dated April 15, 2004, filed to report that the Company launched a tender offer to purchase any or all of the $350 million principal amount of its outstanding unsecured notes. Form 8-K, dated July 28, 2004, furnished for the purpose of reporting, under Item-12-Results of Operations and Financial Condition, the Company's 2004 second quarter earnings and results of operations. 27 SIGNATURES Pursuant to the requirements 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. Dated: August 6, 2004 SUN COMMUNITIES, INC. BY: /s/ Jeffrey P. Jorissen ------------------------------------------------ Jeffrey P. Jorissen, Chief Financial Officer and Secretary (Duly authorized officer and principal financial officer) 28 SUN COMMUNITIES, INC. EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.1 Form of Loan Agreement dated June 9, 2004 by and among Sun Candlewick LLC, Sun Silver Star LLC and Aspen-Holland Estates, LLC, as Borrowers, and Bank of America, N.A., as Lender. 10.2 Schedule identifying substantially identical agreements to Exhibit 10.1. 10.3 Form of Loan Agreement dated June 9, 2004 by and between Sun Pool 8 LLC, as Borrower, and Bank of America, N.A., as Lender. 10.4 Schedule identifying substantially identical agreements to Exhibit 10.3. 10.5 Form of Loan Agreement dated June 9, 2004 by and between Sun Continental Estates LLC as Borrower, and Bank of America, N.A., as Lender. 10.6 Schedule identifying substantially identical agreements to Exhibit 10.5. 10.7 Form of Loan Agreement dated June 9, 2004 by and between Sun Indian Creek LLC, as Borrower, and Bank of America, N.A., as Lender. 10.8 Schedule identifying substantially identical agreements to Exhibit 10.8. 10.9 Amended And Restated Master Credit Facility Agreement dated April 28, 2004 by and among Sun Secured Financing LLC, Aspen Ft. Collins Limited Partnership, Sun Secured Financing Houston Limited Partnership, Sun Communities Finance, LLC, Sun Holly Forest LLC, Sun Saddle Oak LLC, as Borrowers, and Arcs Commercial Mortgage Co., L.P., as Lender. 10.9.1 Appendix I (definitions) to Amended And Restated Master Credit Facility Agreement dated April 28, 2004 by and among Sun Secured Financing LLC, Aspen Ft. Collins Limited Partnership, Sun Secured Financing Houston Limited Partnership, Sun Communities Finance, LLC, Sun Holly Forest LLC, Sun Saddle Oak LLC, as Borrowers, and Arcs Commercial Mortgage Co., L.P., as Lender. 10.10 Fixed Facility Note dated April 5, 2004 made by Sun Secured Financing LLC, Aspen - Ft. Collins Limited Partnership and Sun Secured Financing Houston Limited Partnership, in favor of Arcs Commercial Mortgage Co., L.P., in the original principal amount of $77,362,500. 10.11 Fixed Facility Note dated April 28, 2004 made by Sun Secured Financing LLC, Sun Secured Financing Houston Limited Partnership, Aspen - Ft. Collins Limited Partnership, Sun Communities Finance LLC, Sun Holly Forest LLC and Sun Saddle Oak LLC, in favor of Arcs Commercial Mortgage Co., L.P., in the original principal amount of $100,000,000.
29 SUN COMMUNITIES, INC. EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.12 Variable Facility Note dated April 28, 2004 made by Sun Secured Financing LLC, Sun Secured Financing Houston Limited Partnership, Aspen - Ft. Collins Limited Partnership, Sun Communities Finance LLC, Sun Holly Forest LLC and Sun Saddle Oak LLC, in favor of Arcs Commercial Mortgage Co., L.P., in the original principal amount of $60,275,000. 10.13 Fourth Amended and Restated Variable Facility Note dated April 28, 2004 made by Sun Secured Financing LLC, Sun Secured Financing Houston Limited Partnership, Aspen - Ft. Collins Limited Partnership, Sun Communities Finance LLC, Sun Holly Forest LLC and Sun Saddle Oak LLC, in favor of Arcs Commercial Mortgage Co., L.P., in the original principal amount of $152,362,500. 31.1 Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
30