SEC Filing | Sun Communities

1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999. OR [_] Transition pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 COMMISSION FILE NUMBER 1-2616 SUN COMMUNITIES, INC. (Exact Name of Registrant as Specified in its Charter) Maryland 38-2730780 (State of Incorporation) (I.R.S. Employer Identification No.) 31700 Middlebelt Road Suite 145 Farmington Hills, Michigan 48334 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (248) 932-3100 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 [ ] 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: 17,433,258 shares of Common Stock, $.01 par value as of October 26, 1999 Page 1 of 19

2 SUN COMMUNITIES, INC. INDEX PAGES ----- PART I - ------ Item 1. Financial Statements: Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998 3 Consolidated Statements of Income for the Periods Ended September 30, 1999 and 1998 4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998 5 Notes to Consolidated Financial Statements 6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-17 PART II Item 2.(c) Changes in Securities and Use of Proceeds 18 Item 6.(a) Exhibits required by Item 601 of Regulation S-K 18 Item 6.(b) Reports on Form 8-K 18 Signatures 19 2

3 SUN COMMUNITIES, INC. CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 (IN THOUSANDS) ASSETS 1999 1998 --------------- ------------- Investment in rental property, net $ 770,848 $ 732,212 Cash and cash equivalents 15,974 9,646 Investment in and advances to affiliate 9,623 11,316 Notes receivable 65,914 41,459 Other assets 35,197 26,806 --------------- ------------- Total assets $ 897,556 $ 821,439 =============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Line of credit $ 38,000 $ 26,000 Debt 350,192 339,164 Accounts payable and accrued expenses 23,015 12,637 Deposits and other liabilities 8,573 12,051 --------------- ------------- Total liabilities 419,780 389,852 --------------- ------------- Minority interests 141,030 91,223 --------------- ------------- Stockholders' equity: Preferred stock, $.01 par value, 10,000 shares authorized; no shares issued and outstanding -- -- Common stock, $.01 par value, 100,000 shares authorized; 17,433 and 17,256 issued and outstanding in 1999 and 1998, respectively 174 172 Paid-in capital 390,382 389,448 Officers' notes (11,452) (11,609) Unearned compensation (4,979) (5,302) Distributions in excess of accumulated earnings (37,379) (32,345) --------------- ------------- Total stockholders' equity 336,746 340,364 --------------- ------------- Total liabilities and stockholders' equity $ 897,556 $ 821,439 =============== ============= The accompanying notes are an integral part of the consolidated financial statements. 3

4 SUN COMMUNITIES, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE PERIODS ENDED SEPTEMBER 30, 1999 AND 1998 (IN THOUSANDS EXCEPT FOR PER SHARE DATA) For the Three Months For the Nine Months Ended September 30, Ended September 30, 1999 1998 1999 1998 ------------ ----------- ----------- ----------- Revenues: Income from property $ 31,310 $ 28,294 $ 93,251 $ 85,180 Other income 2,680 2,109 6,258 4,466 ------------ ----------- ----------- ----------- Total revenues 33,990 30,403 99,509 89,646 ------------ ----------- ----------- ----------- Expenses: Property operating and maintenance 7,118 6,544 20,407 19,095 Real estate taxes 2,255 2,122 6,666 6,502 Property management 713 646 1,970 1,658 General and administrative 890 771 2,752 2,468 Depreciation and amortization 7,277 6,115 21,294 18,121 Interest 7,010 6,178 20,028 17,808 ------------ ----------- ----------- ----------- Total expenses 25,263 22,376 73,117 65,652 ------------ ----------- ----------- ----------- Income before minority interests and other 8,727 8,027 26,392 23,994 Other, net -- 2,093 -- 3,030 ------------ ----------- ----------- ----------- Income before minority interests 8,727 10,120 26,392 27,024 Less income allocated to minority interests: Preferred OP Units 627 627 1,879 1,879 Common OP Units 1,115 1,083 3,429 2,931 ------------ ----------- ----------- ----------- Net income $ 6,985 $ 8,410 $ 21,084 $ 22,214 ============ =========== =========== =========== Earnings per common share: Basic $ 0.41 $ 0.50 $ 1.23 $ 1.32 ============ =========== =========== =========== Diluted $ 0.40 $ 0.49 $ 1.21 $ 1.30 ============ =========== =========== =========== Weighted average common shares outstanding - basic 17,223 16,900 17,165 16,816 ============ =========== =========== =========== Distributions declared per common share outstanding $ 0.51 $ 0.49 $ 1.02 $ 1.47 ============ =========== =========== =========== The accompanying notes are an integral part of the consolidated financial statements. 4

5 SUN COMMUNITIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (IN THOUSANDS) 1999 1998 ------------- ------------ Cash flows from operating activities: Net income $ 21,084 $ 22,214 Adjustments to reconcile net income to net cash provided by operating activities: Income allocated to minority interests 3,429 2,931 Other, net -- (3,030) Depreciation and amortization 21,294 18,121 Amortization of deferred financing costs 658 491 Increase in other assets (9,713) (4,355) Increase in accounts payable and other liabilities 6,900 10,281 ------------- ------------ Net cash provided by operating activities 43,652 46,653 ------------- ------------ Cash flows from investing activities: Investment in rental properties (57,963) (80,755) Investment in and advances to affiliate 1,693 (1,755) Proceeds related to asset sales 12,534 20,773 Investments in notes receivable, net (24,298) (14,145) ------------- ------------ Net cash used in investing activities (68,034) (75,882) ------------- ------------ Cash flows from financing activities: Borrowings on line of credit, net 12,000 4,000 Repayments on notes payable and other debt (1,277) (708) Proceeds from notes payable -- 65,000 Net proceeds from issuance of common stock and operating partnership units 51,726 1,337 Distributions (30,352) (27,660) Payments for deferred financing costs (1,387) (2,770) ------------- ------------ Net cash provided by financing activities 30,710 39,199 ------------- ------------ Net increase in cash and cash equivalents 6,328 9,970 Cash and cash equivalents, beginning of period 9,646 2,198 ------------- ------------ Cash and cash equivalents, end of period $ 15,974 $ 12,168 ============= ============ Supplemental Information: Debt assumed for rental properties $ 1,700 $ 18,356 Capitalized lease obligation for rental properties $ 10,605 $ 9,479 OP units issued for rental properties $ -- $ 1,704 Common stock issued as unearned compensation $ $ 5,631 The accompanying notes are an integral part of the consolidated financial statements 5

6 SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION: These unaudited condensed consolidated financial statements of Sun Communities, Inc., a Maryland Corporation, (the "Company"), have been prepared pursuant to the Securities and Exchange Commission ("SEC") rules and regulations and should be read in conjunction with the financial statements and notes thereto of the Company as of December 31, 1998. 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 the prior period financial statements to conform with current period presentation. The Company owns 100 percent of the preferred stock of an affiliate, Sun Home Services, Inc., is entitled to 95 percent of the operating cash flow, and accounts for its investment utilizing the equity method of accounting. The common stock is owned by three officers of the Company who are entitled to receive 5 percent of the operating cash flow. 2. RENTAL PROPERTY: The following summarizes rental property (in thousands): September 30, December 31, 1999 1998 ------------- --------------- Land $ 76,888 $ 71,930 Land improvements and buildings 725,981 679,755 Furniture, fixtures, equipment 16,938 15,209 Land held for future development 19,386 26,511 Property under development 21,693 9,747 ------------- --------------- 860,886 803,152 Accumulated depreciation 90,038 70,940 ------------- --------------- Rental property, net $ 770,848 $ 732,212 ============= =============== Through September 30, 1999, the cost of acquisitions totaled approximately $29.3 million for five existing communities comprised of 1,085 developed sites and 301 development sites and $8.2 million for two development communities planned for approximately 1,238 sites. 6

7 SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. NOTES RECEIVABLE: Notes receivable consisted of the following (amounts in thousands): September 30, December 31, 1999 1998 ------------ ------------ Mortgage notes receivable with minimum monthly interest payments at 7%, maturing June 30, 2012, collateralized by manufactured housing/ recreational vehicle communities located in Dover, DE. (a) $ 15,093 $ 15,093 Note receivable, bears interest at LIBOR + 2.35% and payable on demand 25,148 10,774 Note receivable, bears interest at 9.75% and matures September 2005 4,000 4,000 Installment loans on manufactured homes with interest payable monthly at a weighted average interest rate and maturity of 11% and 21 years, respectively. 19,861 5,339 Notes receivable, other, various interest rates ranging from 6% to 9.5% or prime + 1.5%, various maturity dates through December 31, 2003. 1,812 1,853 Mortgage note receivable, bears interest at 13% payable on demand. -- 4,400 ------------ ----------- $ 65,914 $ 41,459 ============ =========== (a) The stated interest rate is 12%. The excess of the interest earned at the stated rate over the pay rate is recognized upon receipt of payment. Officers' notes which are presented in stockholders' equity are 10 year, LIBOR + 1.75% notes, with a minimum and maximum interest rate of 6% and 9%, respectively, collateralized by 366,206 shares of the Company's common stock and 127,794 OP Units with substantial personal recourse. 7

8 SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. DEBT: The following table sets forth certain information regarding debt (in thousands): September 30, December 31, 1999 1998 ------------ ----------- Collateralized term loan, interest at 7.01%, due September 9, 2007 $ 44,054 $ 44,425 Senior notes, interest at 7.375%, due May 1, 2001 65,000 65,000 Senior notes, interest at 7.625%, due May 1, 2003 85,000 85,000 Senior notes, interest at 6.97%, due December 3, 2007 35,000 35,000 Callable/redeemable notes, interest at 6.77%, due May 14, 2015, callable/redeemable May 16, 2005 65,000 65,000 Capitalized lease obligations, interest ranging from 5.5% to 6.3%, due March 2001 through January 2004 36,746 26,542 Mortgage notes, other 19,392 18,197 ----------- ----------- $ 350,192 $ 339,164 =========== =========== The Company had $87 million available to borrow under its line of credit at September 30, 1999. Effective July 1, 1999, the Company increased its line of credit facility from $100 million to $125 million and extended the maturity date to January 1, 2003. Borrowings under the line of credit bear interest at the rate of LIBOR plus 1.05%. 5. MINORITY INTERESTS: Minority interests include 2,703,340 and 2,815,440 Common OP Units in Sun Communities Operating Limited Parnership (the "Operating Parnership") at September 30, 1999 and December 31, 1998, respectively, and 1,325,275 Convertible Preferred Operating Partnership Units ("POP Units") at September 30, 1999 and December 31, 1998. Additionally, through the Operating Partnership, the Company issued 2,000,000 Series A Preferred Operating Partnership Units for $50 million on September 29, 1999. 6. OTHER INCOME: The components of other income are as follows for the periods ended September 30, 1999 and 1998 (in thousands): For the Three Months For the Nine Months Ended September 30, Ended September 30, 1999 1998 1999 1998 ---------- --------- ---------- ---------- Interest and other $ 1,912 $ 1,323 $ 4,640 $ 2,986 Income from affiliate 768 786 1,618 1,480 ---------- ---------- ---------- ---------- $ 2,680 $ 2,109 $ 6,258 $ 4,466 ========== ========== ========== ========== 8

9 SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. EARNINGS PER SHARE: For the Three Months For the Nine Months Ended September 30, Ended September 30, 1999 1998 1999 1998 ---- ---- ---- ---- Earnings used for basic and diluted earnings per share computation $ 6,985 $ 8,410 $ 21,084 $ 22,214 ========== ========== ========== ========== Total shares used for basic earnings per share 17,223 16,900 17,165 16,816 Dilutive securities, principally stock options 177 140 161 167 ---------- ---------- ---------- ---------- Total shares used for diluted earnings per share computation 17,400 17,040 17,326 16,983 ========== ========== ========== ========== Diluted earnings per share reflect the potential dilution that would occur if securities were exercised or converted into common stock. Convertible POP Units are excluded from the computations as their inclusion would have an antidilutive effect on earnings per share in 1999 and 1998. 9

10 SUN COMMUNITIES, INC. 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. RESULTS OF OPERATIONS Comparison of the nine months ended September 30, 1999 and 1998 For the nine months ended September 30, 1999, income before minority interests and other, net, increased by 10.0 percent from $24.0 million to $26.4 million, when compared to the nine months ended September 30, 1998. The increase was due to increased revenues of $9.9 million while expenses increased by $7.5 million. Income from property increased by $8.1 million from $85.2 million to $93.3 million, or 9.5 percent, due to acquisitions ($3.0 million), rent increases ($3.2 million), lease up of manufactured home sites ($1.2 million) and other community revenues ($0.7 million). Other income increased by $1.8 million from $4.5 million to $6.3 million due primarily to a $1.7 million increase in interest and other income. Property operating and maintenance expenses increased by $1.3 million from $19.1 million to $20.4 million, or 6.9 percent, due primarily to acquisitions and timing. Real estate taxes increased by $0.2 million from $6.5 million to $6.7 million, or 2.5 percent, due to acquisitions. Property management expenses increased by $0.3 million from $1.7 million to $2.0 million representing 2.1 percent and 1.9 percent of income from property in 1999 and 1998, respectively. General and administrative expenses increased by $0.3 million from $2.5 million to $2.8 million, or 11.5 percent, due primarily to increased staffing to manage the growth of the Company. General and administrative expenses as a percentage of income from property remained constant at 2.9 percent in both periods. Earnings before interest, taxes, depreciation and amortization ("EBITDA") increased by $7.8 million from $59.9 million to $67.7 million. EBITDA as a percent of revenues increased to 68.1 percent in 1999 compared to 66.8 percent in 1998. Depreciation and amortization increased by $3.2 million from $18.1 million to $21.3 million or 17.5 percent due primarily to acquisitions of communities in 1999 and 1998. 10

11 SUN COMMUNITIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS CONTINUED Interest expense increased by $2.2 million from $17.8 million to $20.0 million, or 12.5 percent, primarily due to increased average debt outstanding. Other, net of $3.0 million in 1998 represents a gain from the disposition of certain assets. Comparison of the three months ended September 30, 1999 and 1998 For the three months ended September 30, 1999, income before minority interests and other, net, increased by 8.7 percent from $8.0 million to $8.7 million, when compared to the three months ended September 30, 1998. The increase was due to increased revenues of $3.6 million while expenses increased by $2.9 million. Income from property increased by $3.0 million from $28.3 million to $31.3 million, or 10.7 percent, due to acquisitions ($0.8 million), rent increases ($1.1 million), lease up of manufactured home sites ($0.5 million) and increases in rents and other community revenues ($0.6 million). Other income increased by $0.6 million from $2.1 million to $2.7 million due primarily to an increase in interest and other income. Property operating and maintenance expenses increased by $0.6 million from $6.5 million to $7.1 million, or 8.8 percent, primarily due to acquisitions and timing. Real estate taxes increased by $0.1 million from $2.1 million to $2.2 million due to acquisitions. Property management expenses increased by $0.1 million from $0.6 million to $0.7 million, representing 2.3 percent of income from property in both 1999 and 1998. General and administrative expenses increased by $0.1 million from $0.8 million to $0.9 million, or 15.4 percent, due primarily to increased staffing to manage the growth of the Company. General and administrative expenses as a percentage of income from property increased slightly from 2.7 percent in 1998 to 2.8 percent in 1999. Earnings before interest, taxes, depreciation and amortization ("EBITDA") increased by $2.7 million from $20.3 million to $23.0 million. EBITDA as a percent of revenues increased to 67.7 percent in 1999 compared to 66.8 percent in 1998. Depreciation and amortization increased by $1.2 million from $6.1 million to $7.3 million, or 19.0 percent, due primarily to acquisitions of communities in 1999 and 1998. 11

12 SUN COMMUNITIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS CONTINUED Interest expense increased by $0.8 million from $6.2 million to $7.0 million, or 13.5 percent, primarily due to increased average debt outstanding. Other, net of $2.1 million in 1998 represents a gain from the disposition of certain assets. SAME PROPERTY INFORMATION The following table reflects property-level financial information as of and for the nine months ended September 30, 1999 and 1998. The "Same Property" data represents information regarding the operation of communities owned as of January 1, 1998 and September 30, 1999. Site, occupancy, and rent data for those communities is presented as of the last day of each period presented. The table includes sites where the Company is providing financing and managing the properties. Such amounts relate to the total portfolio data and include 923 sites in 1999 and 1998. SAME PROPERTY TOTAL PORTFOLIO --------------------------- --------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Income from property $ 65,834 $ 61,903 $ 93,251 $ 85,180 ---------- ---------- ---------- ---------- Property operating expenses: Property operating and maintenance 12,031 11,832 20,407 19,095 Real estate taxes 5,081 5,199 6,666 6,502 ---------- ---------- ---------- ---------- Property operating expenses 17,112 17,031 27,073 25,597 ---------- ---------- ---------- ---------- Property EBITDA $ 48,722 $ 44,872 $ 66,178 $ 59,583 ========== ========== ========== ========== Number of operating properties 79 79 110 104 Developed sites 27,458 26,965 39,336 36,956 Occupied sites 26,280 25,633 36,325 33,484 Occupancy % 95.7%(1) 95.1%(1) 94.7%(1) 95.2%(1) Weighted average monthly rent per site $ 275 (1) $ 264 (1) $ 276 (1) $ 267 (1) Sites available for development 1,228 1,789 6,500 5,854 Sites planned for development in current year 136 374 550 1,220 (1) Occupancy % and weighted average rent relates to manufactured housing sites, excluding recreational vehicle sites. On a same property basis, property revenues increased by $3.9 million from $61.9 million to $65.8 million, or 6.4 percent, due primarily to increases in rents and occupancy related charges including water and property tax pass through. Also contributing to revenue growth was the increase of 647 leased sites at September 30, 1999 compared to September 30, 1998. Property operating expenses increased by $0.1 million from $17.0 million to $17.1 million or 0.5 percent, due to increased occupancies and costs. Property EBITDA increased by $3.8 million from $44.9 million to $48.7 million, or 8.6 percent. 12

13 SUN COMMUNITIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents increased by $6.3 million to $16.0 million at September 30, 1999 compared to $9.7 million at December 31, 1998 because cash provided by operating and financing activities exceeded cash used in investing activities. Net cash provided by operating activities decreased by $3.0 million to $43.7 million for the nine months ended September 30, 1999 compared to $46.7 million for the same period in 1998. This decrease was primarily due to other assets increasing by $5.4 million and accounts payable and other liabilities, including distributions, decreasing by $3.4 million offset by a $5.6 million increase in income before minority interests, depreciation and amortization and other. Net cash used in investing activities decreased by $7.9 million to $68.0 million from $75.9 million due to a $14.6 million decrease in rental property acquisition activities, net of proceeds from asset sales, and a $3.5 million decrease in investments in and advances to affiliates, offset by an increase of $10.2 million used to finance notes receivable. Net cash provided by financing activities decreased by $8.5 million to $30.7 million for the nine months ended September 30, 1999 compared to $39.2 million for the same period in 1998. This decrease was primarily because $63.6 million of notes payable, net of deferred financing costs, were issued in 1998 and none issued in 1999, and distributions increasing by $2.7 million offset by $50.4 million of additional proceeds from common stock and operating partnership units and increased borrowings on the line of credit of $8.0 million. The Company expects to meet its short-term liquidity requirements generally through its working capital provided by operating activities. The Company expects to meet certain long-term liquidity requirements such as scheduled debt maturities and property acquisitions through the issuance of equity or debt securities, or interests in the Operating Partnership. The Company considers these sources to be adequate and anticipates they will continue to be adequate to meet operating requirements, capital improvements, investment in development, and payment of distributions by the Company in accordance with REIT requirements in both the short and long term. The Company may also meet these short-term and long-term requirements by utilizing its $125 million line of credit which bears interest at LIBOR plus 1.05% and is due January 1, 2003. See "Special Note Regarding Forward-Looking Statements." On September 29, 1999, through the Operating Partnership, the Company completed a private placement of 2,000,000 Series A Preferred Units to institutional investors in exchange for a capital contribution of $50 million. Series A Preferred Units, which may be called by the Company at par on or after September 29, 2004, have no stated maturity or mandatory redemption and pay a cumulative, quarterly dividend at an annualized rate of 9.125%. The Series A Preferred Units are convertible into preferred stock under certain circumstances. The Company used the proceeds from such private placement to reduce outstanding indebtedness under its revolving credit facility. At September 30, 1999, the Company's debt to total market capitalization approximated 33% (assuming conversion of all Common and Preferred OP Units to shares of common stock), with a weighted average maturity of approximately 5.5 years and a weighted average interest rate of 7.0%. 13

14 SUN COMMUNITIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES CONTINUED Recurring capital expenditures approximated $4.6 million for the nine months ended September 30, 1999, including $0.4 million for additional space and related costs at corporate headquarters. 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 debt restructuring and sales of property, plus 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 calculates FFO for the periods ended September 30, 1999 and 1998 (in thousands): For the Three Months For the Nine Months Ended September 30, Ended September 30, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Income before allocation to minority interest $ 8,727 $ 8,027 $ 26,392 $ 23,994 Add depreciation and amortization, net of corporate office depreciation 7,217 6,073 21,114 17,995 Deduct distribution to Preferred OP Units (627) (627) (1,879) (1,879) --------- ---------- ----------- ---------- Funds from operations $ 15,317 $ 13,473 $ 45,627 $ 40,110 ========= ========== =========== ========== Weighted average OP Units outstanding used for basic FFO per share/unit 19,971 19,075 19,957 19,048 Dilutive securities: Stock options and awards 177 140 161 167 Convertible preferred OP Units 1,202 1,268 1,220 1,230 --------- ---------- ----------- ---------- Weighted average OP Units used for diluted FFO per share/unit 21,350 20,483 21,338 20,445 ========= ========== =========== ========== FFO, per share/unit: Basic $ 0.77 $ 0.71 $ 2.29 $ 2.11 ========= ========== =========== ========== Diluted $ 0.75 $ 0.69 $ 2.23 $ 2.05 ========= ========== =========== ========== 14

15 SUN COMMUNITIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OTHER CONTINUED: Year 2000 Update The Year 2000 ("Y2K") issue concerns the inability of computerized information systems and non-information systems to accurately calculate, store or use a date after 1999. This could result in computer system failures or miscalculations causing disruptions of operations. In 1997, the Company implemented a corporate-wide Y2K program to minimize any such disruption caused by the failures of its own internal systems or those of its business supply chain. In the first phase of the project, the Company reviewed its inventory of computer hardware and software, and other devices with embedded microprocessors. The Company also discussed its software applications and internal operational programs with its current information systems' vendors. Finally, in this assessment phase, key members of the business supply chain were contacted and interviewed regarding their awareness of the Y2K problem and the status of their own Y2K project. The first phase was completed on schedule and all key members of the Company's business supply chain reported that they were aware of the Y2K problem and were in the process of readying for the Y2K issue. In the second phase of the project, all systems found to be Y2K non-compliant were upgraded, fixed, replaced and tested. The second phase was also completed on schedule in December 1998. The Company believes that as a result of this Implementation/Testing phase, its applications and programs will properly recognize calendar dates beginning in the year 2000. The Company plans to continue monitoring Y2K communications from its software vendors and anticipates that some vendors will recommend further patches/upgrades and testing. In the third and final phase of the Y2K program, the Company surveyed its material third-party service providers, such as its banks, payroll processor, stock transfer agent and telecommunications provider. The purpose of the survey is to follow-up on the status of their Y2K compliance efforts and assess what effect their possible non-compliance might have on the Company. In addition, the Company discussed with its material vendors the possibility of any interface difficulties and/or electrical or mechanical problems relating to the Y2K issue which may affect properties owned or operated by the Company. The third phase was completed on schedule in April 1999. While all surveyed vendors reported that they were aware of the Y2K issue and were scheduled to have all systems remedied before December 31, 1999, most vendors were reluctant to guarantee that their Y2K issues would not adversely affect the operations of the Company. The Company has therefore developed contingency plans for all important business functions dependent on members of its business supply chain. The Company believes that its expenditures for assessing its Y2K issues, though difficult to quantify, to date have not been material because the Company's Y2K evaluation has been conducted by its own personnel or by its vendors in connection with their servicing operations. The Company received a third-party assessment of its Y2K program methodology and has addressed the recommendations that were deemed appropriate by the Company. The Company is not aware of any other Y2K related conditions that it believes would likely require material expenditures in the future. See "Special Note Regarding Forward-Looking Statements. 15

16 SUN COMMUNITIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OTHER CONTINUED: Year 2000 Update, Continued Based on its current information, the Company believes that the risk posed by any foreseeable Y2K related problem with its internal systems and the systems at its properties (including both information and non-information systems) or with its vendors is minimal. Y2K related problems with the Company's software applications and internal operational programs or with the electrical or mechanical systems at its properties are unlikely to cause more than minor disruptions in the Company's operations. The Company believes that the risk posed by Y2K related problems for certain third-party service providers is marginally greater, though, based on its current information, the Company does not believe any such problems would have a material effect on its operations. Any Y2K related problems at these third-party service providers could delay the processing of financial transactions or payroll and could disrupt the Company's internal and external communications. While the Company believes that it will be Y2K capable by December 31, 1999, there can be no assurance that the Company has been or will be successful in identifying and assessing Y2K issues, or that, to the extent identified, the Company's efforts to resolve such issues will be effective such that Y2K issues will not have a material adverse effect on the Company's business, financial condition, or results of operation. Special Note Regarding Forward-Looking Statements 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 be subject to the safe harbors created thereby. The words "may", "will", "expect", "believe", "anticipate", "should", "estimate", and similar expressions identify forward-looking statements. These forward-looking statements reflect the Company's current views with respect to future events and financial performance, but are based upon current assumptions regarding the Company's operations, future results and prospects, and are subject to many uncertainties and factors relating to the Company's operations and business environment which may cause the actual results of the Company to be materially different from any future results expressed or implied by such forward-looking statements. Please see the section entitled "Risk Factors" of the Company's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on August 31, 1999 for a list of uncertainties and factors. Such factors include, but are not limited to, the following: (i) changes in the general economic climate; (ii) increased competition in the geographic areas in which the Company owns and operates manufactured housing communities; (iii) changes in government laws and regulations affecting manufactured housing communities; and (iv) the ability of the Company to continue to identify, negotiate and acquire manufactured housing communities and/or vacant land which may be developed into manufactured housing communities on terms favorable to the Company. The Company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise. 16

17 SUN COMMUNITIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OTHER CONTINUED: Recent Accounting Pronouncements In June 1998, FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This statement establishes accounting and reporting standards for derivative instruments including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. This statement is effective for the fiscal quarters after June 15, 2000. The Company has no derivative instruments at September 30, 1999. 17

18 SUN COMMUNITIES, INC. PART II ITEM 2.(C) - CHANGES IN SECURITIES AND USE OF PROCEEDS On September 29, 1999, through the Operating Partnership, the Company completed a private placement of 2 million Series A Preferred Units to institutional investors in exchange for a capital contribution of $50 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." ITEM 6.(A) - EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K EXHIBIT NO. DESCRIPTION ----------- ----------- 27 Financial Data Schedule ITEM 6.(B) - REPORTS ON FORM 8-K The Company did not file any reports on Form 8-K during the period covered by this Form 10-Q. 18

19 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: November 5, 1999 SUN COMMUNITIES, INC. BY: /s/ Jeffrey P. Jorissen -------------------------------------------------- Jeffrey P. Jorissen, Chief Financial Officer and Secretary 19

20 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION - ----------- ----------- 27 Financial Data Schedule

5 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 9,623 0 0 0 0 0 860,886 90,038 897,556 38,000 350,192 0 0 174 336,572 897,556 0 99,509 0 29,043 0 0 20,028 26,392 0 26,392 0 0 0 21,084 1.23 1.21