UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 1-12616 SUN COMMUNITIES, INC. (Exact name of registrant as specified in its charter) STATE OF MARYLAND 38-2730780 State of Incorporation I.R.S. Employer I.D. No. 27777 FRANKLIN ROAD SUITE 200 SOUTHFIELD, MICHIGAN 48034 (248) 208-2500 (Address of principal executive offices and telephone number) Securities Registered Pursuant to Section 12(b) of the Act: COMMON STOCK, PAR VALUE $.01 PER SHARE Securities Registered Pursuant to Section 12(g) of the Act: NONE Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] As of June 30, 2003, the aggregate market value of the Registrant's stock held by non-affiliates was approximately $688,000,000 (computed by reference to the closing sales price of the Registrant's common stock as of June 30, 2003). For this computation, the Registrant has excluded the market value of all shares of common stock reported as beneficially owned by executive officers and directors of the Registrant; such exclusion shall not be deemed to constitute an admission that any such person is an affiliate of the Registrant. As of March 1, 2004, there were 19,009,270 shares of the Registrant's common stock issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive Proxy Statement to be filed for its 2004 Annual Meeting of Shareholders are incorporated by reference into Part III of this Report.
As used in this report, "Company", "Us", "We", "Our" and similar terms means Sun Communities, Inc., a Maryland corporation, and one or more of its subsidiaries (including the Operating Partnership (as defined below)). PART I ITEM 1. BUSINESS GENERAL We are a self-administered and self-managed real estate investment trust, or REIT. We own, operate, develop and finance manufactured housing communities concentrated in the midwestern and southeastern United States. We are a fully integrated real estate company which, together with our affiliates and predecessors, have been in the business of acquiring, operating and expanding manufactured housing communities since 1975. As of December 31, 2003, we owned and operated a portfolio of 127 properties located in seventeen states (the "Properties"), including 115 manufactured housing communities, five recreational vehicle communities, and seven properties containing both manufactured housing and recreational vehicle sites. As of December 31, 2003, the Properties contained an aggregate of 43,875 developed sites comprised of 38,797 developed manufactured home sites and 5,078 recreational vehicle sites and an additional 6,756 manufactured home sites suitable for development. In order to enhance property performance and cash flow, the Company, through Sun Home Services, Inc., a Michigan corporation ("SHS"), actively markets, sells and leases new and pre-owned manufactured homes for placement in the Properties. Our executive and principal property management office is located at 27777 Franklin Road, Suite 200, Southfield, Michigan 48034 and our telephone number is (248) 208-2500. We have regional property management offices located in Austin, Texas; Dayton, Ohio; Grand Rapids, Michigan; Elkhart, Indiana; and Orlando, Florida, and we employed an aggregate of 611 people as of December 31, 2003. Our website address is www.suncommunities.com and we make available, free of charge, on or through our website all of our periodic reports, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as soon as reasonably practicable after we file such reports with the Securities and Exchange Commission. RECENT DEVELOPMENTS Acquisitions. During 2003, we acquired one community in Michigan for approximately $4.5 million comprised of $2.2 million in cash and $2.3 million in debt. When fully developed, the property will consist of 242 manufactured housing sites. In 2004, we entered into an agreement with certain affiliates of Property Asset Management Inc. ("PAMI") to acquire all of the equity interests in partnerships that directly and indirectly own and operate 19 properties and entered into a real estate purchase agreement to acquire 7 other properties. The properties are recreational vehicle communities, some of which include manufactured home sites. The portfolio consists of 11,331 sites, including 10,586 developed sites and 745 expansion recreational vehicle sites. Completion of the purchases is subject to customary closing conditions. 2
PAMI, the seller under the purchase agreements, is the sole general partner and owns a substantial majority of the equity interests in the partnerships that own the properties subject to the purchase agreements. PAMI has exercised its rights under the relevant partnership agreements to acquire the equity interests of its minority partner. PAMI has informed us that its minority partner has disputed PAMI's rights to purchase its interests under the partnership agreements. As a result, PAMI has filed suit in the Delaware Chancery Court requesting, among other things, that the court specifically enforce PAMI's right to purchase the minority interests. The minority partner in the partnerships has filed an answer and counterclaim in the case requesting that the court find that the minority partner has the right to buy PAMI's interests under the partnership agreements. PAMI believes that it will be successful in the litigation and we expect to complete the acquisition of the partnership interests and properties. However, due to the uncertain nature of litigation and the other conditions to closing, we can provide no assurance that we will be able to successfully complete the proposed acquisitions and cannot reliably predict the timing of the resolution of these matters. Dispositions. The Company closed on the sale of four properties during 2003 realizing gross proceeds of approximately $24.8 million. The properties were located in Michigan and Illinois and comprised 731 sites of which 659, or 90 percent, were occupied. Origen. Previously, we, along with two other participants, provided financing (a line of credit and term loan) to Origen Financial, LLC ("Origen"), a financial services company that provides and services loans used by consumers to finance the purchase of manufactured homes. In October of 2003, Origen completed a $150.0 million private equity offering and repaid its line of credit and term loan in full. We have no continuing obligation to provide financing to Origen. Concurrent with this transaction, we invested $50.0 million in Origen's parent, Origen Financial, Inc. ("Origen, Inc") and agreed to sell Origen, Inc. various interests in manufactured home loans previously acquired from Origen, none of which have been sold as of December 31, 2003. As of December 31, 2003, our investment in Origen, Inc. approximated a one third ownership interest which was accounted for using the equity method of accounting for periods ending after September 30, 2003. STRUCTURE OF THE COMPANY Structured as an umbrella partnership REIT, or UPREIT, Sun Communities Operating Limited Partnership, a Michigan limited partnership (the "Operating Partnership"), is the entity through which we conduct substantially all of our operations, and which owns, either directly or indirectly through subsidiaries, all of our assets (the subsidiaries, collectively with the Operating Partnership, the "Subsidiaries"). This UPREIT structure enables us to comply with certain complex requirements under the Federal tax rules and regulations applicable to REITs, and to acquire manufactured housing communities in transactions that defer some or all of the sellers' tax consequences. We are the sole general partner of, and, as of December 31, 2003, held approximately 88.5% of the interests (not including preferred limited partnership interests) in, the Operating Partnership. The Subsidiaries also include SHS, which provides manufactured home sales and other services to current and prospective tenants of the Properties. Along with several other subsidiaries, SHS owns Sun Water Oak Golf, Inc., which was organized to own and operate 3
the golf course, restaurant and related facilities located on the Water Oak Property that was acquired in December 1993. See "Factors that May Affect Future Results -- Some of our directors and officers may have conflicts of interest with respect to certain related party transactions and other business interests." THE MANUFACTURED HOUSING COMMUNITY INDUSTRY A manufactured housing community is a residential subdivision designed and improved with sites for the placement of manufactured homes and related improvements and amenities. Manufactured homes are detached, single-family homes which are produced off-site by manufacturers and installed on sites within the community. Manufactured homes are available in a wide array of designs, providing owners with a level of customization generally unavailable in other forms of multifamily housing. Modern manufactured housing communities, such as the Properties, contain improvements similar to other garden-style residential developments, including centralized entrances, paved streets, curbs and gutters, and parkways. In addition, these communities also often provide a number of amenities, such as a clubhouse, a swimming pool, shuffleboard courts, tennis courts, laundry facilities and cable television service. The owner of each home on our Properties leases the site on which the home is located. We own the underlying land, utility connections, streets, lighting, driveways, common area amenities and other capital improvements and are responsible for enforcement of community guidelines and maintenance. Some of the Properties provide water and sewer service through public or private utilities, while others provide these services to residents from on-site facilities. Each owner within our Properties is responsible for the maintenance of the home and leased site. As a result, capital expenditure needs tend to be less significant, relative to multi-family rental apartment complexes. PROPERTY MANAGEMENT Our property management strategy emphasizes intensive, hands-on management by dedicated, on-site district and community managers. We believe that this on-site focus enables us to continually monitor and address tenant concerns, the performance of competitive properties and local market conditions. Of the 611 Company employees, 522 are located on-site as property managers, support staff, or maintenance personnel. Our community managers are overseen by Brian W. Fannon, Chief Operating Officer, who has 34 years of property management experience, three Vice Presidents of Operations and seventeen Regional Vice Presidents. In addition, the Regional Vice Presidents are responsible for semi-annual market surveys of competitive communities, interaction with local manufactured home dealers and regular property inspections. Each district or community manager performs regular inspections in order to continually monitor the Property's physical condition and provides managers with the opportunity to understand and effectively address tenant concerns. In addition to a district or community manager, each district or property has an on-site maintenance personnel and management support staff. We hold periodic training sessions for all property management personnel to ensure that management policies are implemented effectively and professionally. 4
HOME SALES AND LEASING SHS offers manufactured home sales services to tenants and prospective tenants of our Properties. Since tenants often purchase a home already on-site within a community, such services enhance occupancy and property performance. Additionally, because many of the homes on the Properties are sold through SHS, better control of home quality in our communities can be maintained than if sales services were conducted solely through third-party brokers. SHS also leases homes to prospective tenants. REGULATIONS AND INSURANCE General. Manufactured housing community properties are subject to various laws, ordinances and regulations, including regulations relating to recreational facilities such as swimming pools, clubhouses and other common areas. We believe that each Property has the necessary operating permits and approvals. Insurance. Our management believes that the Properties are covered by adequate fire, flood, property and business interruption insurance provided by reputable companies with commercially reasonable deductibles and limits. We maintain a blanket policy that covers all of our Properties. We have obtained title insurance insuring fee title to the Properties in an aggregate amount which we believe to be adequate. CORPORATE GOVERNANCE We have implemented the following corporate governance initiatives to address certain legal requirements promulgated under the Sarbanes-Oxley Act of 2002, as well as the recently adopted New York Stock Exchange corporate governance listing standards: - Our Board of Directors determined that Paul D. Lapides, the Chairman of the Audit Committee, qualifies as an "audit committee financial expert" as such term is defined under Item 401 of Regulation S-K. Mr. Lapides is "independent" as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act. - Our Audit Committee adopted our Audit and Non-Audit Services Pre-Approval Policy, which sets forth the procedures and the conditions pursuant to which permissible services to be performed by our independent public accountants may be pre-approved. - Our Board of Directors adopted a Financial Code of Ethics for Senior Financial Officers, which governs the conduct of our senior financial officers. A copy of this code is available on our website at www.suncommunities.com under the heading "Shareholder Info", "Company Info" and subheading "Governance" and is also available in print to any stockholder upon written request addressed to Investor Relations, Sun Communities, Inc., 27777 Franklin Road, Suite 200, Southfield, Michigan 48034. - Our Board of Directors established and adopted new charters for each of its Audit, Compensation and Nominating and Corporate Governance Committees. Each committee is comprised of three (3) independent directors. A copy of each of these charters is available on our website at www.suncommunities.com under the heading "Shareholder Info", "Company Info" and subheading "Governance" and is also available in print to any stockholder upon written request addressed to Investor Relations, Sun Communities, Inc., 27777 Franklin Road, Suite 200, Southfield, Michigan 48034. - Our Board of Directors adopted a Code of Business Conduct and Ethics, which governs business decisions made and actions taken by our directors, officers and employees. A copy of this code is available on our website at www.suncommunities.com under the heading "Shareholder Info", "Company Info" and subheading "Governance" and is also available in print to any 5
stockholder upon written request addressed to Investor Relations, Sun Communities, Inc., 27777 Franklin Road, Suite 200, Southfield, Michigan 48034. - Our Board of Directors adopted Corporate Governance Guidelines, a copy of which is available on our website at www.suncommunities.com under the heading "Shareholder Info", "Company Info" and subheading "Governance" and is also available in print to any stockholder upon written request addressed to Investor Relations, Sun Communities, Inc., 27777 Franklin Road, Suite 200, Southfield, Michigan 48034. FACTORS THAT MAY AFFECT FUTURE RESULTS Our prospects are subject to certain uncertainties and risks. Our future results could differ materially from current results, and our actual results could differ materially from those projected in forward-looking statements as a result of certain risk factors. These risk factors include, but are not limited to, those set forth below, other one-time events, and important factors disclosed previously and from time to time in other Company filings with the Securities and Exchange Commission. This report contains certain forward-looking statements. REAL ESTATE RISKS General economic conditions and the concentration of our properties in Michigan and Florida may affect our ability to generate sufficient revenue. The market and economic conditions in our current markets generally, and specifically in metropolitan areas of our current markets, may significantly affect manufactured home occupancy or rental rates. Occupancy and rental rates, in turn, may significantly affect our revenues, and if our communities do not generate revenues sufficient to meet our operating expenses, including debt service and capital expenditures, our cash flow and ability to pay or refinance our debt obligations could be adversely affected. We derived significant amounts of rental income for the period ended December 31, 2003 from properties located in Michigan and Florida. As of December 31, 2003, 42 of our 127 Properties, or approximately 33%, are located in Michigan, 20 or approximately 16%, are located in Florida and 18 or approximately 14% are located in Indiana. As a result of the geographic concentration of our Properties in Michigan and Florida, we are exposed to the risks of downturns in the local economy or other local real estate market conditions which could adversely affect occupancy rates, rental rates and property values of properties in these markets. The following factors, among others, may adversely affect the revenues generated by our communities: - the national and local economic climate which may be adversely impacted by, among other factors, plant closings and industry slowdowns; 6
- local real estate market conditions such as the oversupply of manufactured housing sites or a reduction in demand for manufactured housing sites in an area; - the number of repossessed homes in a particular market; - the rental market which may limit the extent to which rents may be increased to meet increased expenses without decreasing occupancy rates; - the perceptions by prospective tenants of the safety, convenience and attractiveness of the Properties and the neighborhoods where they are located; - zoning or other regulatory restrictions; - competition from other available manufactured housing sites and alternative forms of housing (such as apartment buildings and site-built single-family homes); - our ability to provide adequate management, maintenance and insurance; - increased operating costs, including insurance premiums, real estate taxes and utilities; or - the enactment of rent control laws or laws taxing the owners of manufactured homes. Our income would also be adversely affected if tenants were unable to pay rent or if sites were unable to be rented on favorable terms. If we were unable to promptly relet or renew the leases for a significant number of the sites, or if the rental rates upon such renewal or reletting were significantly lower than expected rates, then our business and results of operations could be adversely affected. In addition, certain expenditures associated with each equity investment (such as real estate taxes and maintenance costs) generally are not reduced when circumstances cause a reduction in income from the investment. Furthermore, real estate investments are relatively illiquid and, therefore, will tend to limit our ability to vary our portfolio promptly in response to changes in economic or other conditions. Competition affects occupancy levels and rents which could adversely affect our revenues. All of our Properties are located in developed areas that include other manufactured housing community properties. The number of competitive manufactured housing community properties in a particular area could have a material adverse effect on our ability to lease sites and on rents charged at our Properties or at any newly acquired properties. We may be competing with others with greater resources and whose officers and directors have more experience than our officers and directors. In addition, other forms of multi-family residential properties, such as private and federally funded or assisted multi-family housing projects and single-family housing, provide housing alternatives to potential tenants of manufactured housing communities. Our ability to sell manufactured homes may be affected by various factors, which may in turn adversely affect our profitability. Sun Home Services, Inc., a Michigan corporation ("SHS"), is in the manufactured home sales market offering manufactured home sales services to tenants and prospective tenants of our communities. The market for the sale of manufactured homes may be adversely affected by the following factors: 7
- downturns in economic conditions which adversely impact the housing market; - an oversupply of, or a reduced demand for, manufactured homes; - the difficulty facing potential purchasers in obtaining affordable financing as a result of heightened lending criteria; and - an increase in the rate of manufactured home repossessions which provide aggressively priced competition to new manufactured home sales. Any of the above listed factors could adversely impact our rate of manufactured home sales, which would result in a decrease in profitability. Increases in taxes and regulatory compliance costs may reduce our revenue. Costs resulting from changes in real estate tax laws generally may be passed through to tenants and will not affect us. Increases in income, service or other taxes, however, generally are not passed through to tenants under leases and may adversely affect our funds from operations and our ability to pay or refinance our debt. Similarly, changes in laws increasing the potential liability for environmental conditions existing on properties or increasing the restrictions on discharges or other conditions may result in significant unanticipated expenditures, which would adversely affect our business and results of operations. We may not be able to integrate or finance our development activities. We are engaged in the construction and development of new communities, and intend to continue in the development and construction business in the future. Our development and construction business may be exposed to the following risks which are in addition to those risks associated with the ownership and operation of established manufactured housing communities: - we may not be able to obtain financing with favorable terms for community development which may make us unable to proceed with the development; - we may be unable to obtain, or face delays in obtaining, necessary zoning, building and other governmental permits and authorizations, which could result in increased costs and delays, and even require us to abandon development of the community entirely if we are unable to obtain such permits or authorizations; - we may abandon development opportunities that we have already begun to explore and as a result we may not recover expenses already incurred in connection with exploring such development opportunities; - we may be unable to complete construction and lease-up of a community on schedule resulting in increased debt service expense and construction costs; - we may incur construction and development costs for a community which exceed our original estimates due to increased materials, labor or other costs, which could make completion of the community uneconomical and we may not be able to increase rents to compensate for the increase in development costs which may impact our profitability; 8
- we may be unable to secure long-term financing on completion of development resulting in increased debt service and lower profitability; and - occupancy rates and rents at a newly developed community may fluctuate depending on several factors, including market and economic conditions, which may result in the community not being profitable. If any of the above occurred, our business and results of operations could be adversely affected. We may not be able to integrate or finance our acquisitions and our acquisitions may not perform as expected. We acquire and intend to continue to acquire manufactured housing communities on a select basis. Our acquisition activities and their success are subject to the following risks: - we may be unable to acquire a desired property because of competition from other well capitalized real estate investors, including both publicly traded real estate investment trusts and institutional investment funds; - even if we enter into an acquisition agreement for a property, it is usually subject to customary conditions to closing, including completion of due diligence investigations to our satisfaction, which may not be satisfied; - even if we are able to acquire a desired property, competition from other real estate investors may significantly increase the purchase price; - we may be unable to finance acquisitions on favorable terms; - acquired properties may fail to perform as expected; - acquired properties may be located in new markets where we face risks associated with a lack of market knowledge or understanding of the local economy, lack of business relationships in the area and unfamiliarity with local governmental and permitting procedures; and - we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations. If any of the above occurred, our business and results of operations could be adversely affected. In addition, we may acquire properties subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities. As a result, if liability were asserted against us based upon ownership of those properties, we might have to pay substantial sums to settle it, which could adversely affect our cash flow. Rent control legislation may harm our ability to increase rents. State and local rent control laws in certain jurisdictions may limit our ability to increase rents and to recover increases in operating expenses and the costs of capital improvements. Enactment of such laws has been considered from time to time in other jurisdictions. Certain 9
Properties are located, and we may purchase additional properties, in markets that are either subject to rent control or in which rent-limiting legislation exists or may be enacted. We may be subject to environmental liability. Under various federal, state and local laws, ordinances and regulations, an owner or operator of real estate is liable for the costs of removal or remediation of certain hazardous substances at, on, under or in such property. Such laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous substances. The presence of such substances, or the failure to properly remediate such substances, may adversely affect the owner's ability to sell or rent such property, to borrow using such property as collateral or to develop such property. Persons who arrange for the disposal or treatment of hazardous substances also may be liable for the costs of removal or remediation of such substances at a disposal or treatment facility owned or operated by another person. In addition, certain environmental laws impose liability for the management and disposal of asbestos-containing materials and for the release of such materials into the air. These laws may provide for third parties to seek recovery from owners or operators of real properties for personal injury associated with asbestos-containing materials. In connection with the ownership, operation, management, and development of real properties, we may be considered an owner or operator of such properties and, therefore, are potentially liable for removal or remediation costs, and also may be liable for governmental fines and injuries to persons and property. When we arrange for the treatment or disposal of hazardous substances at landfills or other facilities owned by other persons, we may be liable for the removal or remediation costs at such facilities. All of the Properties have been subject to a Phase I or similar environmental audit (which involves general inspections without soil sampling or ground water analysis) completed by independent environmental consultants. These environmental audits have not revealed any significant environmental liability that would have a material adverse effect on our business. These audits cannot reflect conditions arising after the studies were completed, and no assurances can be given that existing environmental studies reveal all environmental liabilities, that any prior owner or operator of a property or neighboring owner or operator did not create any material environmental condition not known to us, or that a material environmental condition does not otherwise exist as to any one or more Properties. Losses in excess of our insurance coverage or uninsured losses could adversely affect our cash flow. We maintain comprehensive liability, fire, flood (where appropriate), extended coverage, and rental loss insurance on the Properties with policy specifications, limits, and deductibles which are customarily carried for similar properties. As a result of market conditions in the insurance industry, we recently decided to carry a large deductible on our liability insurance. Certain types of losses, however, may be either uninsurable or not economically insurable, such as losses due to earthquakes, riots, or acts of war. In the event an uninsured loss occurs, we could lose both our investment in and anticipated profits and cash flow from the affected property. Any loss would adversely affect our ability to repay our debt. 10
FINANCING AND INVESTMENT RISKS Our significant amount of debt could limit our operational flexibility or otherwise adversely affect our financial condition. We have a significant amount of debt. As of December 31, 2003, we had approximately $773.3 million of total debt outstanding, consisting of approximately $266.2 million in collateralized debt, and approximately $507.1 million in unsecured debt. Included in the collateralized debt outstanding is $256.6 million of indebtedness that is collateralized by mortgage liens on 34 of the Properties and home inventory (the "Mortgage Debt") and one $9.6 million capitalized lease obligation. If we fail to meet our obligations under the Mortgage Debt, the lender would be entitled to foreclose on all or some of the Properties securing such debt which could have a material adverse effect on us and our ability to make expected distributions, and could threaten our continued viability. We are subject to the risks normally associated with debt financing, including the following risks: - our cash flow may be insufficient to meet required payments of principal and interest, or require us to dedicate a substantial portion of our cash flow to pay our debt and the interest associated with our debt rather than to other areas of our business; - our existing indebtedness may limit our operating flexibility due to financial and other restrictive covenants, including restrictions on incurring additional debt; - it may be more difficult for us to obtain additional financing in the future for our operations, working capital requirements, capital expenditures, debt service or other general requirements; - we may be more vulnerable in the event of adverse economic and industry conditions or a downturn in our business; and - we may be placed at a competitive disadvantage compared to our competitors that have less debt. If any of the above risks occurred, our financial condition and results of operations could be materially adversely affected. We may be able to incur substantially more debt which would increase the risks associated with our substantial leverage. Despite our current indebtedness levels, we may still be able to incur substantially more debt in the future. If new debt is added to our current debt levels, an even greater portion of our cash flow will be needed to satisfy our debt service obligations. As a result, the related risks that we now face could intensify and increase the risk of a default on our indebtedness. 11
Our equity investment in Origen Financial, Inc., may subject us to certain risks. In October 2003, Origen Financial, LLC completed a $150 million recapitalization. In this transaction, we purchased 5,000,000 shares of common stock (representing approximately one-third of the issued and outstanding shares of common stock as of December 31, 2003) of Origen Financial, Inc. for $50 million. Origen is a real estate investment trust in the business of originating, acquiring and servicing manufactured home loans. Our equity investment in Origen is subject to all of the risks associated with Origen's business, including the risks associated with the manufactured housing finance industry. The failure of Origen to achieve its development and operating goals could have a material adverse effect on the value of our investment in Origen The financial condition and solvency of our borrowers and the market value of our properties may adversely affect our investments in real estate, installment and other loans. As of December 31, 2003, we had an investment of approximately $41.7 million in real estate loans to several entities and Properties, some of which are secured by a first lien on the underlying property, and others which are secured loans subordinate to the primary lender. Also, as of December 31, 2003, we had outstanding approximately $24.8 million in installment loans to owners of manufactured homes. These installment loans are collateralized by the manufactured homes. We may invest in additional mortgages and installment loans in the future. By virtue of our investment in the mortgages and the loans, we are subject to the following risks of such investment: - the borrowers may not be able to make debt service payments or pay principal when due; - the value of property securing the mortgages and loans may be less than the amounts owed; and - interest rates payable on the mortgages and loans may be lower than our cost of funds. If any of the above occurred, our business and results of operations could be adversely affected. 12
TAX RISKS We may suffer adverse tax consequences and be unable to attract capital if we fail to qualify as a REIT. We believe that since our taxable year ended December 31, 1994, we have been organized and operated, and intend to continue to operate, so as to qualify for taxation as a REIT under the Internal Revenue Code. Although we believe that we have been and will continue to be organized and have operated and will continue to operate so as to qualify for taxation as a REIT, we cannot assure you that we have been or will continue to be organized or operated in a manner to so qualify or remain so qualified. Qualification as a REIT involves the satisfaction of numerous requirements (some on an annual and quarterly basis) established under highly technical and complex Code provisions for which there are only limited judicial or administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within our control. In addition, frequent changes occur in the area of REIT taxation, which require the Company continually to monitor its tax status. If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Moreover, unless entitled to relief under certain statutory provisions, we also would be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost. This treatment would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability to us for the years involved. In addition, distributions to stockholders would no longer be required to be made. Even if we qualify for and maintain our REIT status, we will be subject to certain federal, state and local taxes on our property and certain of our operations. We intend for the Operating Partnership to qualify as a partnership, but we cannot guarantee that it will qualify. We believe that the Operating Partnership has been organized as a partnership and will qualify for treatment as such under the Code. However, if the Operating Partnership is deemed to be a "publicly traded partnership," it will be treated as a corporation instead of a partnership for federal income tax purposes unless at least 90% of its income is qualifying income as defined in the Internal Revenue Code. The income requirements applicable to REITs and the definition of "qualifying income" for purposes of this 90% test are similar in most respects. Qualifying income for the 90% test generally includes passive income, such as specified types of real property rents, dividends and interest. We believe that the Operating Partnership would meet this 90% test, but we cannot guarantee that it would. If the Operating Partnership were to be taxed as a corporation, it would incur substantial tax liabilities, we would fail to qualify as a REIT for federal income tax purposes, and our ability to raise additional capital could be significantly impaired. Our ability to accumulate cash is restricted due to certain REIT distribution requirements. In order to qualify as a REIT, we must distribute to our stockholders at least 90% of our REIT taxable income (calculated without any deduction for dividends paid and excluding net capital gain) and to avoid federal income taxation, our distributions must not be less than 100% of our REIT taxable income, including capital gains. As a result of the distribution requirements, we do not expect to accumulate significant amounts of cash. Accordingly, these distributions could significantly reduce the cash available to us in subsequent periods to fund our operations and future growth. 13
BUSINESS RISKS Some of our directors and officers may have conflicts of interest with respect to certain related party transactions and other business interests. Ownership of SHS. Gary A. Shiffman, the President, Chief Executive Officer and Chairman of the Board of Directors of the Company, and the Estate of Milton M. Shiffman (former Chairman of the Board), are the owners of all of the outstanding common stock of SHS, and as such are entitled to 5% of the cash flow from the operating activities of SHS (we own 100% of the non-voting preferred stock which entitles us to 95% of such cash flow). SHS is consolidated in our financial statements as of December 31, 2003. Arthur A. Weiss, one of our directors, is also a personal representative of the Estate. Thus, in all transactions involving SHS, Mr. Shiffman and Mr. Weiss may have a conflict of interest with respect to their respective obligations as an officer and/or director of the Company and Mr. Shiffman's right and the Estate's right to receive a portion of the cash flow from the operating activities of SHS. The following are the current transactions and agreements involving SHS which may present a conflict of interest for Mr. Shiffman and Mr. Weiss: - the agreement between SHS and Sun for sales, brokerage, and leasing services; - the intercompany loans from the Operating Partnership to SHS; and - the ownership and operation of SHS's other subsidiaries, including Sun Water Oak Golf, Inc. The failure to negotiate these and other transactions or agreements involving SHS on an arm's length basis, or to enforce the material terms of any agreement or arrangement between SHS and us, could have an adverse effect on Sun. Tax Consequences Upon Sale of Properties. Gary A. Shiffman holds limited partnership interests in the Operating Partnership which were received in connection with the contribution of 24 properties from partnerships previously affiliated with him (the "Sun Partnerships"). Prior to any redemption of these limited partnership interests for our common stock, Mr. Shiffman will have tax consequences different from those of us and our public stockholders on the sale of any of the Sun Partnerships. Four of the properties have been sold to date. Therefore, Mr. Shiffman and the Company may have different objectives regarding the appropriate pricing and timing of any sale of those properties. Lease of Executive Offices. Gary A. Shiffman, together with certain family members, indirectly owns approximately a 21% equity interest in American Center LLC, the entity from which we lease office space for our principal executive offices. This lease is for an initial term of five years and we have the right to extend the lease for an additional five year term. The annual base rent under this lease begins at $19.25 per square foot (gross) for the first lease year and increases $0.50 per square foot for each successive year of the initial term. Mr. Shiffman may have a conflict of interest with respect to his obligations as an officer and/or director of the Company and his ownership interest in American Center. 14
We rely on key management. We are dependent on the efforts of our executive officers, particularly Gary A. Shiffman, Jeffrey P. Jorissen, Brian W. Fannon and Jonathan M. Colman (together, the "Senior Officers"). The loss of services of one or more of our executive officers could have a temporary adverse effect on our operations. We do not currently maintain or contemplate obtaining any "key-man" life insurance on the Senior Officers. Certain provisions in our governing documents may make it difficult for a third-party to acquire us. 9.8% Ownership Limit. In order to qualify and maintain our qualification as a REIT, not more than 50% of the outstanding shares of our capital stock may be owned, directly or indirectly, by five or fewer individuals. Thus, ownership of more than 9.8% of our outstanding shares of common stock by any single stockholder has been restricted, with certain exceptions, for the purpose of maintaining our qualification as a REIT under the Internal Revenue Code. Such restrictions in our charter do not apply to Gary Shiffman, the Estate of Milton M. Shiffman and Robert B. Bayer, a former director and officer of the Company. The 9.8% ownership limit, as well as our ability to issue additional shares of common stock or shares of other stock (which may have rights and preferences over the common stock), may discourage a change of control of the Company and may also: (1) deter tender offers for the common stock, which offers may be advantageous to stockholders; and (2) limit the opportunity for stockholders to receive a premium for their common stock that might otherwise exist if an investor were attempting to assemble a block of common stock in excess of 9.8% of the outstanding shares of the Company or otherwise effect a change of control of the Company. Staggered Board. Our Board of Directors has been divided into three classes of directors. The term of one class will expire each year. Directors for each class will be chosen for a three-year term upon the expiration of such class's term, and the directors in the other two classes will continue in office. The staggered terms for directors may affect the stockholders' ability to change control of the Company even if a change in control were in the stockholders' interest. Preferred Stock. Our charter authorizes the Board of Directors to issue up to 10,000,000 shares of preferred stock and to establish the preferences and rights (including the right to vote and the right to convert into shares of common stock) of any shares issued. The power to issue preferred stock could have the effect of delaying or preventing a change in control of the Company even if a change in control were in the stockholders' interest. Rights Plan. We adopted a stockholders' rights plan in 1998 that provides our stockholders (other than a stockholder attempting to acquire a 15% or greater interest in the Company) with the right to purchase stock in the Company at a discount in the event any person attempts to acquire a 15% or greater interest in the Company. Because this plan could make it more expensive for a person to acquire a controlling interest in the Company, it could have the effect of delaying or preventing a change in control of the Company even if a change in control were in the stockholders' interest. Changes in our investment and financing policies may be made without stockholder approval. Our investment and financing policies, and our policies with respect to certain other activities, including our growth, debt, capitalization, distributions, REIT status, and operating policies, are determined by our Board of Directors. Although the Board of Directors has no present intention to do so, these policies may be amended or revised from time to time at the discretion of the Board of Directors without notice to or a vote of our stockholders. Accordingly, stockholders may not have control over changes in our policies and changes in our policies may not fully serve the interests of all stockholders. 15
Substantial sales of our common stock could cause our stock price to fall. Sales of a substantial number of shares of our common stock, or the perception that such sales could occur, could adversely affect prevailing market prices for shares. As of December 31, 2003, up to 3,300,000 shares of our common stock may be issued in the future to the limited partners of the Operating Partnership in exchange for their Common or Convertible Preferred OP Units. These Preferred OP Units are convertible at prices ranging from $44 to $68. The limited partners may sell such shares pursuant to registration rights or an available exemption from registration. Also, Water Oak, Ltd., a former owner of one of the Properties, will be issued Common OP Units with a value of approximately $1,000,000 annually through 2007. In 2008 and 2009, Water Oak, Ltd. will be issued Common OP Units with a value of approximately $1,200,000. In addition, as of December 31, 2003, options to purchase 810,751 shares of our common stock were outstanding under our 1993 Employee Stock Option Plan, our 1993 Non-Employee Director Stock Option Plan and our Long-Term Incentive Plan (the "Plans") and an additional 364,513 shares have been reserved for issuance pursuant to the Plans. No prediction can be made regarding the effect that future sales of shares of our common stock will have on the market price of shares. An increase in interest rates may have an adverse effect on the price of our common stock. One of the factors that may influence the price of our common stock in the public market will be the annual distributions to stockholders relative to the prevailing market price of the common stock. An increase in market interest rates may tend to make the common stock less attractive relative to other investments, which could adversely affect the market price of our common stock. 16
ITEM 2. PROPERTIES General. As of December 31, 2003, the Properties consisted of 115 manufactured housing communities, five recreational vehicle communities, and seven properties containing both manufactured housing and recreational vehicle sites located in seventeen states concentrated in the midwestern and southeastern United States. As of December 31, 2003, the Properties contained 43,875 developed sites comprised of 38,797 developed manufactured home sites and 5,078 recreational vehicle sites and an additional 6,756 manufactured home sites suitable for development. Most of the Properties include amenities oriented towards family and retirement living. Of the 127 Properties, 61 have more than 300 developed manufactured home sites, with the largest having 913 developed manufactured home sites. As of December 31, 2003, the Properties had an occupancy rate of 89.5 percent in stabilized communities and 58.7 percent in development communities and the aggregate occupancy rate was 86 percent excluding recreational vehicle sites. Since January 1, 2003, the Properties have averaged an aggregate annual turnover of homes (where the home is moved out of the community) of approximately 3.9 percent and an average annual turnover of residents (where the home is sold and remains within the community, typically without interruption of rental income) of approximately 7.4 percent. We believe that our Properties' high amenity levels contribute to low turnover and generally high occupancy rates. All of the Properties provide residents with attractive amenities with most offering a clubhouse, a swimming pool, laundry facilities and cable television service. Many Properties offer additional amenities such as sauna/whirlpool spas, tennis, shuffleboard and basketball courts and/or exercise rooms. We have tried to concentrate our communities within certain geographic areas in order to achieve economies of scale in management and operation. The Properties are principally concentrated in the midwestern and southeastern United States. We believe that geographic diversification will help insulate the portfolio from regional economic influences. The following table sets forth certain information relating to the properties owned as of December 31, 2003: DEVELOPED OCCUPANCY OCCUPANCY OCCUPANCY SITES AS OF AS OF AS OF AS OF PROPERTY AND LOCATION 12/31/2003 12/31/01(1) 12/31/02(1) 12/31/03(1) --------------------- ---------- ----------- ----------- ----------- MIDWEST MICHIGAN Academy/West Pointe 441 98% 98% 96% Canton, MI Allendale Meadows Mobile Village 352 96% 93% 88% Allendale, MI Alpine Meadows Mobile Village 403 96% 96% 94% Grand Rapids, MI Bedford Hills Mobile Village 339 98% 95% 91% Battle Creek, MI Brentwood Mobile Village 195 99% 96% 94% Kentwood, MI 17
DEVELOPED OCCUPANCY OCCUPANCY OCCUPANCY SITES AS OF AS OF AS OF AS OF PROPERTY AND LOCATION 12/31/2003 12/31/01(1) 12/31/02(1) 12/31/03(1) --------------------- ---------- ----------- ----------- ----------- Byron Center Mobile Village 143 98% 98% 95% Byron Center, MI Candlewick Court Manufactured Housing Community 211 97% 97% 93% Owosso, MI College Park Estates Manufactured Housing Community 230 95% 92% 85% Canton, MI Continental Estates Manufactured Housing Community 385 84% 79% 70% Davison, MI Continental North Manufactured Housing Community 474 89% 84% 75% Davison, MI Country Acres Mobile Village 182 96% 95% 93% Cadillac, MI Country Meadows Mobile Village 577 99% 98% 94% Flat Rock, MI Countryside Village Manufactured Housing Community 359 98% 96% 91% Perry, MI Creekwood Meadows Mobile Home Park 336 88% 85% 74% Burton, MI Cutler Estates Mobile Village 259 97% 96% 90% Grand Rapids, MI Davison East Manufactured Housing Community 190 80% 88% 81% Davison, MI Falcon Pointe (8) 62 (3) (3) 26%(8) East Lansing, MI Fisherman's Cove Manufactured Housing Community 162 95% 94% 90% Flint, MI Grand Mobile Estates 230 93% 95% 89% Grand Rapids, MI Hamlin Manufactured Housing Community (4) 170 99% 85%(4) 88%(4) Webberville, MI Kensington Meadows Mobile Home Park 290 98% 92% 84% Lansing, MI Kings Court Mobile Village 639 100% 98% 97% Traverse City, MI Knollwood Estates 161 97% 94% 89% Allendale, MI Lafayette Place 254 97% 98% 96% Metro Detroit, MI Lincoln Estates Mobile Home Park 191 96% 95% 95% Holland, MI Meadow Lake Estates Manufactured Housing Community 425 100% 97% 93% White Lake, MI Meadowbrook Estates Manufactured Housing Community 453 98% 97% 96% Monroe, MI Presidential Estates Mobile Village 364 99% 95% 89% Hudsonville, MI Richmond Place 117 97% 100% 100% Metro Detroit, MI River Haven Village 721 78% 79% 77% Grand Haven, MI Scio Farms Estates 913 99% 99% 98% Ann Arbor, MI Sherman Oaks Manufactured Housing Community 366 97% 94% 88% Jackson, MI St. Clair Place 100 100% 99% 98% Metro Detroit, MI Sunset Ridge (8) 144 13%(8) 45%(8) 71%(8) Portland Township, MI 18
DEVELOPED OCCUPANCY OCCUPANCY OCCUPANCY SITES AS OF AS OF AS OF AS OF PROPERTY AND LOCATION 12/31/2003 12/31/01(1) 12/31/02(1) 12/31/03(1) --------------------- ---------- ----------- ----------- ----------- Timberline Estates Manufactured Housing Community 296 96% 94% 90% Grand Rapids, MI Town & Country Mobile Village 192 99% 99% 99% Traverse City, MI Village Trails 100 77% 80% 71% Howard City, MI White Lake Mobile Home Village (4) 315 85%(4) 96% 96% White Lake, MI White Oak Estates 480 88% 86% 84% Mt. Morris, MI Windham Hills Estates (4) 402 91% 82%(4) 73%(4) Jackson, MI Woodhaven Place 220 100% 98% 98% ------ ------ ------ ------ Metro Detroit, MI MICHIGAN TOTAL 12,843 94% 92% 88% ====== ====== ====== ====== Indiana Brookside Mobile Home Village 570 93% 88% 81% Goshen, IN Carrington Pointe 320 81% 81% 78% Ft. Wayne, IN Clear Water Mobile Village 227 90% 86% 78% South Bend, IN Cobus Green Mobile Home Park 386 87% 81% 75% Elkhart, IN Deerfield Run Manufactured Home Community (4) 175 60%(4) 73%(4) 73%(4) Anderson, IN Four Seasons Mobile Home Park 218 98% 95% 94% Elkhart, IN Holiday Mobile Home Village 326 97% 95% 93% Elkhart, IN Liberty Farms Communities 220 98% 99% 98% Valparaiso, IN Maplewood Mobile Home Park 207 91% 97% 88% Lawrence, IN Meadows Mobile Home Park 330 89% 85% 79% Nappanee, IN Pebble Creek(8) (9) 258 (9) 76%(8) 79%(8) Greenwood, IN Pine Hills Mobile Home Subdivision 129 96% 95% 84% Middlebury, IN Roxbury Park 398 92% 94% 94% Goshen, IN Timberbrook Mobile Home Park 567 90% 84% 75% Bristol, IN Valley Brook Mobile Home Park 799 95% 88% 85% Indianapolis, IN West Glen Village Mobile Home Park 552 98% 96% 88% Indianapolis, IN Woodlake Estates (4) 338 69%(4) 72%(4) 62%(4) Ft. Wayne, IN Woods Edge Mobile Village (4) 598 84%(4) 74%(4) 71%(4) ------ ------ ------ ------ West Lafayette, IN INDIANA TOTAL 6,618 90% 86% 81% ====== ====== ====== ====== 19
DEVELOPED OCCUPANCY OCCUPANCY OCCUPANCY SITES AS OF AS OF AS OF AS OF PROPERTY AND LOCATION 12/31/2003 12/31/01(1) 12/31/02(1) 12/31/03(1) --------------------- ---------- ----------- ----------- ----------- OTHER Apple Creek Manufactured Home Community and Self Storage 176 91% 94% 93% Cincinnati, OH Autumn Ridge Mobile Home Park 413 99% 98% 98% Ankeny, IA Bell Crossing Manufactured Home Community (4) 239 53%(4) 41%(4) 33%(4) Clarksville, TN Boulder Ridge (4) 527 98% 85%(4) 69%(4) Pflugerville, TX Branch Creek Estates 392 100% 98% 95% Austin, TX Byrne Hill Village Manufactured Home Community 236 97% 96% 100% Toledo, OH Candlelight Village Mobile Home Park 309 98% 95% 93% Chicago Heights, IL Casa del Valle (1) 112/408 100% 100% 100% Alamo, TX Catalina Mobile Home Park 462 83% 83% 73% Middletown, OH Chisholm Point Estates 416 98% 94% 89% Pflugerville, TX Comal Farms(8) (9) 349 (9) 43%(8) 48%(8) New Braunfels, TX Creekside(8) (9) 47 (9) 66%(8) 72%(8) Reidsville, NC Desert View Village (8) 93 25%(8) 40%(8) 48%(8) West Wendover, NV Eagle Crest (8) 318 84%(8) 97%(8) 62%(8) Firestone, CO East Fork(8) (9) 197 (9) 88%(8) 79%(8) Batavia, OH Edwardsville Mobile Home Park 634 97% 92% 84% Edwardsville, KS Forest Meadows 76 83% 92% 91% Philomath, OR Glen Laurel(8) (9) 261 (9) 18%(8) 25%(8) Concord, NC High Pointe 411 93% 95% 93% Frederica, DE Kenwood RV and Mobile Home Plaza (7)(1) 36/289 100% 100% 100% LaFeria, TX Meadowbrook(8) (9) 177 (9) 80%(8) 76%(8) Charlotte, NC North Point Estates (8) 108 38%(8) 50%(8) 35%(8) Pueblo, CO Oak Crest (8) 335 (2) 84%(8) 63%(8) Austin, TX Oakwood Village (4) 511 73%(4) 74%(4) 77%(4) Dayton, OH Orchard Lake Manufactured Home Community 147 97% 97% 97% Cincinnati, OH 20
DEVELOPED OCCUPANCY OCCUPANCY OCCUPANCY SITES AS OF AS OF AS OF AS OF PROPERTY AND LOCATION 12/31/2003 12/31/01(1) 12/31/02(1) 12/31/03(1) --------------------- ---------- ----------- ----------- ----------- Pecan Branch (8) 69 67%(8) 74%(8) 83%(8) Williamson County, TX Pheasant Ridge 553 (2) 99% 100% Manor Township, PA Pin Oak Parc Mobile Home Park 502 99% 97% 95% O'Fallon, MO Pine Ridge Mobile Home Park 245 98% 95% 94% Petersburg, VA River Ranch (8) (9) 121 (9) (8) 15%(8) Austin, TX River Ridge (8) 337 (2) 89%(8) 85%(8) Austin, TX Saddle Brook (8) 258 (2) 39%(8) 40%(8) Austin, TX Sea Air (7)(1) 370/527 99% 100% 99% Rehoboth Beach, DE Snow to Sun (7)(1) 177/492 100% 99% 100% Weslaco, TX Southfork Mobile Home Park 477 95% 90% 84% Belton, MO Stonebridge(8) (9) 340 (9) 83%(8) 59%(8) San Antonio, TX Summit Ridge(8) (9) 252 (9) 91%(8) 56%(8) Converse, TX Sunset Ridge(8) (9) 173 (9) 71%(8) 69%(8) Kyle TX Sun Villa Estates 324 100% 99% 99% Reno, NV Timber Ridge Mobile Home Park 585 99% 98% 97% Ft. Collins, CO Westbrook Village (6) 344 99% 97% 93% Toledo, OH Westbrook Senior Village 112 94% 99% 99% Toledo, OH Willowbrook Place 266 98% 98% 96% Toledo, OH Woodlake Trails(8) (9) 133 (9) 44%(8) 79%(8) San Antonio, TX Woodland Park Estates 399 98% 94% 92% Eugene, OR Woodside Terrace Manufactured Home Community 439 98% 96% 95% Holland, OH Worthington Arms Mobile Home Park 224 99% 96% 96% ------ ------- ------- ------- Delaware, OH OTHER TOTAL 14,703 93% 86% 81% ====== ======= ======= ======= SOUTHEAST FLORIDA Arbor Terrace RV Park 402 (5) (5) (5) Bradenton, FL Ariana Village Mobile Home Park 208 86% 88% 88% Lakeland, FL Bonita Lake Resort 167 (5) (5) (5) Bonita Springs, FL 21
DEVELOPED OCCUPANCY OCCUPANCY OCCUPANCY SITES AS OF AS OF AS OF AS OF PROPERTY AND LOCATION 12/31/2003 12/31/01(1) 12/31/02(1) 12/31/03(1) --------------------- ---------- ----------- ----------- ----------- Buttonwood Bay (7)(1) 407/942 100% 100% 100% Sebring, FL Gold Coaster Manufactured Home Community (7) (1) 323/546 100% 98% 100% Florida City, FL Groves RV Resort 298 (5) (5) (5) Lee County, FL Holly Forest Estates 402 100% 100% 100% Holly Hill, FL Indian Creek Park (7) (1) 353/1534 100% 100% 100% Ft. Myers Beach, FL Island Lakes Mobile Home Park 301 100% 100% 100% Merritt Island, FL Kings Lake Mobile Home Park 245 99% 100% 100% Debary, FL Lake Juliana Landings Mobile Home Park 285 74% 77% 81% Auburndale, FL Lake San Marino RV Park 412 (5) (5) (5) Naples, FL Leesburg Landing 95 68% 69% 73% Lake County, FL Meadowbrook Village Mobile Home Park 257 99% 99% 98% Tampa, FL Orange Tree Village Mobile Home Park 246 100% 100% 100% Orange City, FL Royal Country Mobile Home Park 864 99% 100% 100% Miami, FL Saddle Oak Club Mobile Home Park 376 100% 100% 100% Ocala, FL Siesta Bay RV Park 839 (5) (5) (5) Ft. Myers Beach, FL Silver Star Mobile Village 408 98% 99% 98% Orlando, FL Water Oak Country Club Estates 884 100% 100% 100% Lade Lake, FL ------ ---- ---- ---- Florida Total 9,711 96% 97% 98% ====== ==== ==== ==== TOTAL/AVERAGE 43,875 93% 90% 86% ====== ==== ==== ==== TOTAL STABILIZED COMMUNITIES 39,678 94% 92% 89% ====== ==== ==== ==== TOTAL DEVELOPMENT COMMUNITIES 4,197 45% 65% 59% ====== ==== ==== ==== (1) Occupancy percentage relates to manufactured housing sites, excluding recreational vehicle sites. Data presented MH Sites/Total Sites. (2) Acquired in 2002. (3) Acquired in 2003. (4) Occupancy in these properties reflects the fact that these communities are in their initial lease-up phase following an expansion. (5) This Property contains only recreational vehicle sites. (6) The Company formerly leased this Property and the Company purchased this Property in January 2004. (7) This Property contains recreational vehicle sites. (8) Occupancy in these properties reflects the fact that these communities are newly developed from the ground up. (9) This Property is owned by an affiliate of Sunchamp LLC, an entity in which the Company owns approximately a 66 percent equity interest as of December 31, 2003. Prior to 2002, the Company held a minority interest in Sunchamp LLC and, therefore, did not treat this Property as a Property owned by the Company. As a result, the Company did not report any information in respect of this Property for such periods. 22
Leases. The typical lease we enter into with a tenant for the rental of a site is month-to-month or year-to-year, renewable upon the consent of both parties, or, in some instances, as provided by statute. In some cases, leases are for one-year terms, with up to ten renewal options exercisable by the tenant, with rent adjusted for increases in the consumer price index. These leases are cancelable for non-payment of rent, violation of community rules and regulations or other specified defaults. During the past five years, on average 3.3 percent of the homes in our communities have been removed by their owners and 7.8 percent of the homes have been sold by their owners to a new owner who then assumes rental obligations as a community resident. The small percentage of homes removed from our communities is impacted by the $3,000 to $8,000 cost to move a home. The above experience can be summarized as follows: the average resident remains in our communities for approximately nine years, while the average home, which gives rise to the rental stream, remains in our communities for approximately thirty years. See "Regulations and Insurance." ITEM 3. LEGAL PROCEEDINGS On April 9, 2003, T.J. Holdings, LLC ("TJ Holdings"), a member of Sun/Forest, LLC ("Sun/Forest") (which, in turn, owns an equity interest in SunChamp LLC), filed a complaint against the Company, SunChamp LLC, certain other affiliates of the Company and two directors of Sun Communities, Inc. in the Superior Court of Guilford County, North Carolina. The complaint alleges that the defendants wrongfully deprived the plaintiff of economic opportunities that they took for themselves in contravention of duties allegedly owed to the plaintiff and purports to claim damages of $13.0 million plus an unspecified amount for punitive damages. The Company believes the complaint and the claims threatened therein have no merit and will defend it vigorously. The Company is involved in various other legal proceedings arising in the ordinary course of business. All such proceedings, taken together, are not expected to have a material adverse impact on our results of operations or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable 23
PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION Our common stock has been listed on the New York Stock Exchange ("NYSE") since December 8, 1993 under the symbol "SUI." On March 1, 2004, the closing sales price of the common stock was $40.97 and the common stock was held by approximately 608 holders of record. The following table sets forth the high and low closing sales prices per share for the common stock for the periods indicated as reported by the NYSE and the distributions per share paid by the Company with respect to each such period. High Low Distribution ---- --- ------------ FISCAL YEAR ENDED DECEMBER 31, 2002 First Quarter of 2002 40.19 36.73 0.55 Second Quarter of 2002 42.60 39.00 0.58 Third Quarter of 2002 41.93 33.50 0.58 Fourth Quarter of 2002 37.00 32.25 0.58 FISCAL YEAR ENDED DECEMBER 31, 2003 First Quarter of 2003 37.92 32.87 0.58 Second Quarter of 2003 40.46 35.75 0.61 Third Quarter of 2003 41.00 37.56 0.61 Fourth Quarter of 2003 40.65 35.78 0.61 RECENT SALES OF UNREGISTERED SECURITIES On January 2, 2003, the Operating Partnership issued 41,700 Series B-3 Preferred Units to the members of Willowbrook Co., Ltd, paid approximately $0.9 million in cash and assumed approximately $1.6 million of debt, which was immediately retired, in exchange for property with a net agreed upon value of $6.6 million. On January 5, 2004 the Operating Partnership issued 47,250 Series B-3 Preferred Units to the members of Westbrook Co., Ltd, paid approximately $1.2 million in cash and assumed approximately $4.2 million of debt, which was immediately retired, in exchange for property with a net agreed upon value of $10.1 million. Holders of the Series B-3 Units may redeem the Series B-3 Units (a) within the ninety (90) day period following each of the fifth, sixth, seventh, eighth, ninth and tenth anniversaries of the issuance date, (b) in the event of the death of a holder, and (c) at any time after the tenth anniversary. The redemption price is $100 per Series B-3 Unit. The Operating Partnership has the right to redeem the Series B-3 Units at any time after the tenth anniversary. In 2003, the Company issued an aggregate of 97,416 shares of its common stock upon conversion of an aggregate of 97,416 partnership units. All of the above partnership units and shares of common stock were issued in private placements in reliance on Section 4(2) of the Securities Act of 1933, as amended, including Regulation D promulgated thereunder. No underwriters were used in connection with any of such issuances. 24
EQUITY COMPENSATION PLAN INFORMATION The following table reflects information about the securities authorized for issuance under the Company's equity compensation plans as of December 31, 2003. (a) (b) (c) - ---------------------------------------------------------------------------------------------------------------------- NUMBER OF SECURITIES NUMBER OF REMAINING AVAILABLE FOR SECURITIES TO BE WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER ISSUED UPON EXERCISE EXERCISE PRICE OF EQUITY COMPENSATION OF OUTSTANDING OUTSTANDING PLANS (EXCLUDING OPTIONS, WARRANTS OPTIONS, WARRANTS SECURITIES REFLECTED IN PLAN CATEGORY AND RIGHTS AND RIGHTS COLUMN A) - ---------------------------------------------------------------------------------------------------------------------- Equity compensation plans approved by 723,094 $29.04 364,513 shareholders - ---------------------------------------------------------------------------------------------------------------------- Equity compensation plans not approved by shareholders (1) 87,657 $32.75 0 - ---------------------------------------------------------------------------------------------------------------------- TOTAL 810,751 $29.44 364,513 - ---------------------------------------------------------------------------------------------------------------------- (1) On May 29, 1997, the Company established a Long Term Incentive Plan (the "LTIP") pursuant to which all full-time salaried and full-time commission only employees of the Company, excluding the Company's officers, were entitled to receive options to purchase shares of the Company's common stock at $32.75 per share (i.e., the average of the highest and lowest selling prices for the common stock on May 29, 1997), on January 31, 2002. In accordance with the terms of the LTIP, (a) the Company granted the eligible participants options to purchase 167,918 shares of common stock; and (b) each eligible participant received an option to purchase a number of shares of common stock equal to the product of 167,918 and the quotient derived by dividing such participant's total compensation during the period beginning on January 1, 1997 and ending on December 31, 2001 (the "Award Period") by the aggregate compensation of all of the eligible participants during the Award Period. 25
ITEM 6. SELECTED FINANCIAL DATA YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------ 2003 (c) 2002 (b) 2001 (b) 2000 (b) 1999 (b) ------------ --------- --------- -------- ---------- In thousands except for per share and other data) REVENUES Income from rental property $ 159,115 $ 149,875 $136,969 $129,279 $122,385 Revenues from home sales 19,516 - - - - Ancillary service revenues, net 3,409 - - - - Interest 11,354 7,990 10,305 9,386 6,101 Other income (loss) (4,256) 2,304 3,695 4,112 1,703 --------- --------- -------- -------- -------- Total revenues 189,138 160,169 150,969 142,777 130,189 COSTS AND EXPENSES Property operating and maintenance 39,837 33,751 29,258 27,832 26,574 Cost of home sales 13,879 - - - - Real estate taxes 11,746 10,217 9,162 8,768 8,579 Selling, general, and administrative 18,181 7,722 7,373 7,013 6,320 Depreciation and amortization 44,120 37,900 32,716 29,900 27,829 Interest 36,680 32,375 31,016 29,651 27,289 --------- --------- -------- -------- -------- Total expenses 164,443 121,965 109,525 103,164 96,591 Equity income (loss) from affiliates 667 (16,627)(a) 131 607 1,726 --------- --------- -------- -------- -------- Income from operations 25,362 21,577 41,575 40,220 35,324 Less income allocated to minority interest: 11,620 9,605 13,150 12,837 8,168 Income from continuing operations 13,742 11,972 28,425 27,383 27,156 Income from discontinued operations 9,972 1,620 5,485 5,911 1,933 --------- --------- -------- -------- -------- Net income $ 23,714 $ 13,592 $ 33,910 $ 33,294 $ 29,089 ========= ========= ======== ======== ======== Weighted average common shares outstanding: Basic 18,206 17,595 17,258 17,304 17,191 ========= ========= ======== ======== ======== Diluted 18,345 17,781 17,440 17,390 17,343 ========= ========= ======== ======== ======== Basic earnings per share: Continuing operations $ 0.75 $ 0.68 $ 1.64 $ 1.58 $ 1.58 Discontinued operations 0.55 0.09 0.32 0.34 0.11 --------- --------- -------- -------- -------- Net income $ 1.30 $ 0.77 $ 1.96 $ 1.92 $ 1.69 ========= ========= ======== ======== ======== Diluted earnings per share: Continuing operations $ 0.75 $ 0.67 $ 1.63 $ 1.57 $ 1.57 Discontinued operations 0.54 0.09 0.31 0.34 0.11 --------- --------- -------- -------- -------- Net income $ 1.29 $ 0.76 $ 1.94 $ 1.91 $ 1.68 ========= ========= ======== ======== ======== Distributions per common share $ 2.41 $ 2.29 $ 2.18 $ 2.10 $ 2.02 ========= ========= ======== ======== ======== 26
ITEM 6. SELECTED FINANCIAL DATA YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ---------- -------------- -------- -------- -------- (In thousands except for per share and other data) BALANCE SHEET DATA: Rental property, before accumulated depreciation $1,220,405 $1,174,837 $969,936 $867,377 $847,696 Total assets $1,221,574 $1,163,976 $994,449 $966,628 $904,032 Total debt $ 773,328 $ 667,373 $495,198 $464,508 $401,564 Stockholders' equity $ 326,610 $ 319,532 $329,641 $336,034 $338,358 OTHER DATA (AT END OF PERIOD): Total properties 127 129 116 109 110 Total Sites 43,875 43,959 40,544 38,282 38,217 (a) Included in equity income (loss) from affiliates in 2002 is a $13.6 million valuation adjustment of the Company's investment in Origen. (b) Revenues and expenses for the years ended December 31, 2002, 2001, 2000 and 1999 have been restated to reflect the reclassifications required under SFAS No. 144 for the four properties sold in 2003. (c) Selected financial data for 2003 includes amounts from SHS which was consolidated during 2003. 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following discussion and analysis of the consolidated financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and notes thereto elsewhere herein. The Company is a fully integrated, self-administered and self-managed REIT which owns, operates, develops and finances manufactured housing communities concentrated in the midwestern and southeastern United States. As of December 31, 2003, the Company owned and operated a portfolio of 127 developed properties located in seventeen states, including 115 manufactured housing communities, five recreational vehicle communities, and seven properties containing both manufactured housing and recreational vehicle sites. During 2003, the Company acquired one manufactured housing community located in East Lansing, Michigan, comprising 62 developed sites and 182 sites suitable for development for $4.5 million, and the Company sold four manufactured housing communities located in Michigan and Illinois which comprised 731 sites for $24.8 million. The Company has been experiencing increased vacancies due primarily to the glut of repossessed homes caused by lax credit standards in the mid to late 1990's. As lenders recognize their problems and repossess homes, the Company's vacancies rise. Industry estimates are that such conditions are abating and the number of repossessed homes in 2004 will approximate 60,000, roughly one-half of the number in recent years. This abatement should have positive effects on new home sales which fill sites in the Company's communities. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. In preparing these financial statements, management has made its best estimates and judgment of certain amounts included in the financial statements. Nevertheless, actual results may differ from these estimates under different assumptions or conditions. Management believes the following significant accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements: Impairment of Long-Lived Assets. Rental property is recorded at cost, less accumulated depreciation. Management evaluates the recoverability of its investment in rental property whenever events or changes in circumstances, such as recent operating results, expected net operating cash flow and plans for future operations, indicate that full asset recoverability is questionable. If such assets were deemed to be impaired as a result of this measurement, the impairment that would be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset as determined on a discounted net cash flow basis. 28
Notes Receivable. The Company evaluates the recoverability of its notes receivable whenever events occur or there are changes in circumstances such that management believes it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan agreement. The loan is then measured based on the present value of the expected future cash flow discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent. Depreciation. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets. The Company uses a thirty year useful life for land improvements and buildings and a seven to fifteen year useful life for furniture, fixtures and equipment. Revenue Recognition. Rental income attributable to leases is recorded on a straight-line basis when earned from tenants. Leases entered into by tenants generally range from month-to-month to one year and are renewable by mutual agreement of the Company and the resident. Capitalized Costs. The Company capitalizes certain costs (including interest and other costs) incurred in connection with the development, redevelopment, capital enhancement and leasing of its properties. Management is required to use professional judgment in determining whether such costs meet the criteria for immediate expense or capitalization. The amounts are dependent on the volume and timing of such activities and the costs associated with such activities. Maintenance, repairs and minor improvements to properties are expensed when incurred. Renovations and improvements to properties are capitalized and depreciated over their estimated useful lives and construction costs related to the development of new community or expansion sites are capitalized until the property is substantially complete. Certain expenditures to dealers and residents related to obtaining lessees in our communities are capitalized and amortized over a seven year period; shorter than the average resident's occupancy in the home and the average term that the home is in our community. Costs associated with implementing the Company's new computer systems are capitalized and amortized over the estimated useful lives of the related software and hardware. Derivative Instruments and Hedging Activities. The Company has entered into three interest rate swap agreements to offset interest rate risk. The Company does not enter into derivative transactions for speculative purposes. The Company adjusts its balance sheet on an ongoing quarterly basis to reflect current fair market value of its derivatives. Changes in the fair value of derivatives are recorded each period in earnings or comprehensive income, as appropriate. The ineffective portion of the hedge is immediately recognized in earnings to the extent that the change in value of a derivative does not perfectly offset the change in value of the instrument being hedged. The unrealized gains and losses held in accumulated other comprehensive income will be reclassified to earnings over time and occurs when the hedged items are also recognized in earnings. The Company uses standard market conventions to determine the fair values of derivative instruments, including the quoted market prices or quotes from brokers or dealers for the same or similar instruments. All methods of assessing fair value result in a general approximation of value and such value may never actually be realized. Deferred Tax Assets. SHS currently has significant deferred tax assets, which are subject to periodic recoverability assessments. SHS has recognized deferred tax assets of $2.0 million, net of a valuation reserve of $3.0 million. Realization of these deferred tax assets is principally dependent upon SHS's achievement of expected future taxable income. Judgments regarding future profitability may change due to future market conditions, SHS's ability to continue to successfully execute its business plan, and other factors. 29
Income Taxes. The Company has elected to be taxed as a REIT as defined under Section 856(c) of the Internal Revenue Code of 1986, as amended. In order for the Company to qualify as a REIT, at least ninety-five percent (95%) of the Company's gross income in any year must be derived from qualifying sources. As a REIT, the Company generally will not be subject to U.S. Federal income taxes at the corporate level if it distributes at least ninety percent (90%) of its REIT ordinary taxable income to its stockholders, which it fully intends to do. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to Federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. The Company remains subject to certain state and local taxes on its income and property as well as Federal income and excise taxes on its undistributed income. RESULTS OF OPERATIONS Comparison of year ended December 31, 2003 to year ended December 31, 2002 For the year ended December 31, 2003, income from operations increased by $3.8 million from $21.6 million to $25.4 million, when compared to the year ended December 31, 2002. The increase was due to increased revenues of $29.0 million and increased results from affiliates of $17.3 million partially offset by increased expenses of $42.5 million. The year 2003 included SHS on a consolidated basis as discussed below. Income from rental property increased by $9.2 million from $149.9 million to $159.1 million, or 6.2 percent, due to rent increases and other community revenues ($3.4 million) and acquisitions ($5.8 million). Interest income increased by $3.4 million from $8.0 million to $11.4 million, or 42.1 percent, due principally to larger outstanding balances of notes and investments at higher rates of interest. Other operating income decreased by $6.6 million from $2.3 million to ($4.3) million, due primarily to reduced development fee income and a $4.9 million write down of an impaired asset. The remaining revenue increases of $22.9 million relate to the consolidation of Sun Home Services which is discussed in detail below. Property operating and maintenance expenses increased by $6.1 million from $33.7 million to $39.8 million, or 18.0 percent. The increase was primarily due to increases in utility costs ($1.8 million) and increases in repair and maintenance expenses ($1.3 million). Acquisitions during 2002 and the consolidation of SunChamp properties accounted for the remaining increase of $3.0 million. Real estate taxes increased by $1.5 million from $10.2 million to $11.7 million, or 15.0 percent due to acquisitions made in 2002 ($0.7 million) and increases in assessments and tax rate ($0.8 million). Selling, general, and administrative expenses increased by $10.4 million from $7.7 million to $18.1 million, due to the consolidation of Sun Home Services ($7.6 million), professional fees ($0.4 million), expenses related to office relocation ($0.2 million), Michigan Single Business tax ($0.2 million), compensation expenses, including benefits, primarily related 30
to the SunChamp acquisition and a systems conversion ($1.7 million), and assorted other minor increases ($0.3 million). Depreciation and amortization increased by $6.2 million from $37.9 million to $44.1 million, or 16.4 percent, due primarily to the consolidation of Sun Home Services ($1.0 million) and additional investment in rental property. Interest expense increased by $4.3 million from $32.4 million to $36.7 million, or 13.3 percent, due to increased debt levels partially offset by lower interest rates ($1.5 million), decreased capitalized interest ($0.8 million), an increase in financing costs ($0.6 million), and an increase in interest rates related to fixing rates on $75.0 million of debt ($2.7 million). These increases were partially offset by $1.3 million of income related primarily to the change in market value of an interest rate swap contract that does not qualify for hedge accounting. Equity income from affiliates of $0.7 million represents the Company's one-third interest in the operations of Origen for its initial operating period after a recapitalization in October, 2003. The remaining expense increase of $13.9 million relates to the consolidation of Sun Home Services which is discussed in detail below. Sun Home Services Prior to January 1, 2003, the results of operations of Sun Home Services were accounted for using the equity method and reported as a single line item called equity in income from affiliates. As the Company is the primary beneficiary of the results of operations of Sun Home Services, it is appropriate to consolidate Sun Home Services at December 31, 2003. This has no effect on previously reported net income. The following table summarizes certain financial and statistical data for Sun Home Services for the years ended December 31, 2003 and 2002: INCREASE/ 2003 2002 (DECREASE) PERCENT CHANGE --------- ---------- --------- -------------- (Pro Forma) New home sales revenues $13,169 $15,890 $(2,721) (17.1%) Cost of sales 9,159 12,907 (3,748) (29.0%) ------- ------- ------- ----- Gross profit 4,010 2,983 1,027 34.4% ======= ======= ======= ===== Pre-owned home sales revenues $ 6,347 $ 3,214 $ 3,133 97.5% Cost of sales 4,720 2,586 2,134 82.5% ------- ------- ------- ----- Gross profit 1,627 628 999 159.1% ======= ======= ======= ===== Ancillary revenue, net $ 3,409 $ 1,519 $ 1,890 124.4% ======= ======= ======= ===== Home sales volumes: New homes 257 286 (29) (10.1%) Pre-owned homes 283 174 109 62.6% New home sales declined by 10.1 percent, while revenues and costs of sales declined by 31
17.1 and 29.0 percent, respectively. Gross profit increased by 34.4 percent as cost of sales declined by more than revenues due to the purchase of new homes at a substantial discount. Pre-owned home unit sales increased by 62.6 percent while revenues and cost of sales increased by 97.5 percent and 82.5 percent, respectively. Gross profit increased by 159.1 percent as revenues grew more than cost of sales due to strong demand for the value in pre-owned homes. The increase in ancillary revenue, net, is primarily due to increased activity in the Company's rental home program. Comparison of year ended December 31, 2002 to year ended December 31, 2001 For the year ended December 31, 2002, income from operations decreased by $20.0 million from $41.6 million to $21.6 million, when compared to the year ended December 31, 2001. The decrease was due to increased expenses of $12.5 million, increased revenues of $9.2 million and increased loss from affiliates of $16.7 million as described in more detail below. Income from rental property increased by $12.9 million from $137.0 million to $149.9 million, or 9.4 percent, due to rent increases and other community revenues ($5.9 million) and acquisitions ($7.0 million). Interest income decreased by $2.3 million from $10.3 million to $8.0 million, or 22.5 percent, due primarily to a decrease in interest earning notes and receivables. Other income decreased by $1.4 million from $3.7 million to $2.3 million, or 37.8 percent, due primarily to reduced development fee income. Property operating and maintenance expenses increased by $4.4 million from $29.3 million to $33.7 million, or 15.0 percent, due to acquired communities ($1.9 million) and increases in costs including payroll ($1.2 million), workers' compensation ($0.5 million), and cable television ($0.3 million), and other expenses ($0.5 million). Real estate taxes increased by $1.0 million from $9.2 million to $10.2 million, or 11.5 percent due to acquired communities ($0.5 million) and changes in certain assessments. General and administrative expenses increased by $0.3 million from $7.4 million to $7.7 million, representing 4.8 percent and 4.9 percent of total revenues in 2002 and 2001, respectively. Depreciation and amortization increased by $5.2 million from $32.7 million to $37.9 million, due primarily to the net additional investments in rental properties. Interest expense increased by $1.4 million from $31.0 million to $32.4 million due primarily to financing additional investments in rental property ($6.0 million), offset by decreasing rates on variable rate debt ($4.9 million). Equity loss from affiliates increased by $16.7 million from income of $0.1 million to a loss of $16.6 million primarily due to equity losses at SHS ($0.7 million), SunChamp ($0.4 million) and Origen ($1.7 million) and the valuation adjustment of the Company's investment in Origen ($13.6 million) and a technology investment ($0.3 million). 32
SAME PROPERTY INFORMATION The following table reflects property-level financial information as of and for the years ended December 31, 2003 and 2002. The "Same Property" data represents information regarding the operation of communities owned as of January 1, 2002 and December 31, 2003. Site, occupancy, and rent data for those communities is presented as of the last day of each period presented. The "Total Portfolio" column differentiates from the "Same Property" column by including financial information for properties acquired after January 1, 2002 and new development communities. SAME PROPERTY (3) TOTAL PORTFOLIO --------------------------------- ----------------------------- 2003 2002 2003 2002 ----------------- ------------ --------- --------- (in thousands) (in thousands) Income from property $135,220 $132,100 $159,115 $149,875 -------- -------- -------- -------- Property operating expenses Property operating and maintenance 26,663 24,865 39,837 33,751 Real estate taxes 10,578 9,892 11,746 10,217 -------- -------- -------- -------- Property operating expenses 37,241 34,757 51,583 43,968 -------- -------- -------- -------- Property net operating income (2) $ 97,979 $ 97,343 $107,532 $105,907 ======== ======== ======== ======== Number of properties 105 105 127 129 Developed sites 38,255 38,253 43,875 43,959 Occupied sites 33,533 34,514 36,361 38,940 Occupancy % 89.1% 92.0% 86.1% 89.9% Weighted Average monthly rent per site $ 328 (1) $ 315 (1) $ 328 (1) $ 315 (1) Sites available for development 1,545 2,018 6,756 7,642 Sites planned for development in next year 30 99 258 175 (1) Occupancy % and weighted average rent relates to manufactured housing sites, excluding recreational vehicle sites. (2) Investors in and analysts following the real estate industry utilize net operating income ("NOI") as a supplemental performance measure. The Company considers NOI, given its wide use by and relevance to investors and analysts, an appropriate supplemental measure to net income because NOI provides a measure of rental operations and does not factor in depreciation/amortization and non-property specific expenses such as general and administrative expenses. (3) Same property information does not include properties sold during the year ended December 31, 2003. On a same property basis, property net operating income increased by $0.6 million from $97.3 million to $97.9 million, or 0.6 percent. Income from property increased by $3.1 million from $132.1 million to $135.2 million, or 2.3 percent, due primarily to increases in rents including water and property tax pass through. Property operating expenses increased by $1.8 million from $24.9 million to $26.7 million, or 7.2 percent, due to increases in real estate taxes ($0.7 million), repair and maintenance ($0.9 million), and payroll ($0.2 million). 33
LIQUIDITY AND CAPITAL RESOURCES The Company's principal liquidity demands have historically been, and are expected to continue to be, distributions to the Company's stockholders and the Operating Partnership's unitholders, property acquisitions, development and expansion of properties, capital improvements of properties and debt repayment. The Company expects to meet its short-term liquidity requirements through its working capital provided by operating activities and its line of credit, as described below. The Company considers its ability to generate cash from operations (anticipated to be approximately $70 million) to be adequate to meet all operating requirements, including recurring capital improvements, routinely amortizing debt and other normally recurring expenditures of a capital nature, pay dividends to its stockholders to maintain qualification as a REIT in accordance with the Internal Revenue Code and make distributions to the Operating Partnership's unitholders. The Company plans to invest approximately $5.0 million in developments consisting of expansions to existing communities and the continuing development of new communities. The Company expects to finance these investments by using net cash flows provided by operating activities and by drawing upon its line of credit. Furthermore, the Company expects to invest in the range of $20.0 to $40.0 million in the acquisition of individual properties in 2004, depending upon market conditions. The Company plans to finance these investments by using net cash flows provided by operating activities and by drawing upon its line of credit. Cash and cash equivalents increased by $21.4 million to $24.1 million at December 31, 2003 compared to $2.7 million at December 31, 2002 due to the net proceeds received from the sale of four properties. Net cash provided by operating activities increased by $12.3 million to $63.3 million for the year ended December 31, 2003 compared to $51.0 million for the year ended December 31, 2002. The increase resulted primarily from increased net income, higher depreciation, the effect of consolidating SHS, and changes in other miscellaneous asset and liabilities accounts. The Company's net cash flows provided by operating activities may be adversely impacted by, among other things: (a) the market and economic conditions in the Company's markets; (b) lower occupancy rates of the Properties; (c) increased operating costs, including insurance premiums, real estate taxes and utilities, that cannot be passed on to the Company's tenants; and (d) decreased sales of manufactured homes. See "Factors that May Affect Future Results." In October 2003, the Company acquired a community in East Lansing, MI and financed the acquisition with a mortgage for $2.3 million and the remainder in cash. The Company entered into a $25 million loan facility in September of 2003, of which $25 million was available to be borrowed at December 31, 2003. Borrowings bear an interest rate of Federal Funds Effective Rate plus .85% and mature on March 24, 2004. In April 2003 the Company issued $150 million of 5.75 percent senior notes, due April 15, 2010, and used the proceeds from the offering to retire the bridge loan of $48 million and senior notes of $85 million which matured on April 30 and May 1, 2003, respectively. The remaining proceeds paid down the Company's line of credit. 34
The Company has a $105 million unsecured line of credit facility, which matures in July 2005, with a one-year optional extension. At December 31, 2003, the average interest rate of outstanding borrowings under the line of credit was 2.05%, $99 million was outstanding and $6 million was available to be drawn under the facility. The line of credit facility contains various leverage, debt service coverage, net worth maintenance and other customary covenants all of which the Company was in compliance with at December 31, 2003. The Company's primary long-term liquidity needs are principal payments on outstanding indebtedness. At December 31, 2003, the Company's outstanding contractual obligations were as follows: PAYMENTS DUE BY PERIOD (IN THOUSANDS) -------------------------------------------------------------- CONTRACTUAL CASH OBLIGATIONS TOTAL DUE 1 YEAR 2-3 YEARS 4-5 YEARS AFTER 5 YEARS ---------- --------- --------------- --------- ------------- Line of credit $ 99,000 $ - $ 99,000 $ - $ - Collateralized term loan 41,547 706 1,569 39,272 - Collateralized term loan - FNMA 152,363 - - - 152,363 Senior notes (1) 350,000 - 65,000 135,000 150,000 Mortgage notes, other 62,664 24,823 12,276 8,008 17,557 Capitalized lease obligations 9,606 9,606 - - - Redeemable Preferred OP Units 58,148 - 8,176 4,500 45,472 -------- -------- -------- -------- -------- $773,328 $ 35,135 $186,021 $186,780 $365,392 ======== ======== ======== ======== ======== (1) The provisions of the callable/redeemable $65 million notes are such that the maturity date will likely be 2005 if the 10-year treasury rate is greater than 5.7% on May 16, 2005. The maturity is reflected in the above table based on that assumption. The Company anticipates meeting its long-term liquidity requirements, such as scheduled debt maturities, large property acquisitions and Operating Partnership unit redemptions, through the issuance of debt or equity securities, including equity units in the Operating Partnership, or from selective asset sales. Since 1993, the Company has raised, in the aggregate, nearly $1 billion from the sale of shares of its common stock, from the sale of OP units in the Operating Partnership, and the issuance of secured and unsecured debt securities. In addition, at December 31, 2003, 92 of the Properties were unencumbered by debt, therefore, providing substantial financial flexibility. The ability of the Company to finance its long-term liquidity requirements in such manner will be affected by numerous economic factors affecting the manufactured housing community industry at the time, including the availability and cost of mortgage debt, the financial condition of the Company, the operating history of the Properties, the state of the debt and equity markets, and the general national, regional and local economic conditions. See "Factors that May Affect Future Results". If the Company is unable to obtain additional equity or debt financing on acceptable terms, the Company's business, results of operations and financial condition will be harmed. 35
Included in debt are $35.8 million of Preferred OP Units which would require collateralization were the Company to no longer be classified as investment grade by the rating agencies. At December 31, 2003, the Company's debt to total market capitalization approximated 46.0 percent (assuming conversion of all Common OP Units to shares of common stock). The debt has a weighted average maturity of approximately 5.2 years and a weighted average interest rate of 5.4 percent. Capital expenditures for the years ended December 31, 2003 and 2002 included recurring capital expenditures of $6.5 million (excluding $1.7 million related to a main office relocation and $3.4 million related to a software conversion) and $7.1 million, respectively. Net cash used in investing activities was $58.9 million for the year ended December 31, 2003 compared to $168.9 million in the prior year. The differences are due to: decreased investment in rental properties of $37.0 million; increased proceeds from property disposition of $19.3 million; increased repayments of notes receivables of $49.5 million; and decreased investment in and advances to affiliates of $4.2 million. Included in proceeds from property dispositions is $22.5 million of proceeds deposited with an intermediary for Section 1031 exchange purposes. These sales proceeds will be disbursed as the Company exchanges properties under Section 1031 of the Internal Revenue Code. Net cash provided by financing activities was $17.0 million for the year ended December 31, 2003, compared to $116.0 million in the prior year. The differences were primarily due to changes in net proceeds from notes payable, inclusive of borrowings on line of credit, of $109.6 million, increased distributions of $2.4 million, offset by changes in net proceeds from common stock issuance of $12.4 million and changes in payments of deferred financing costs of $0.6 million. RATIO OF EARNINGS TO FIXED CHARGES The Company's ratio of earnings to fixed charges for the years ended December 31, 2003, 2002, and 2001 was 1.29:1, 1.68:1 and 1.73:1 respectively. INFLATION Most of the leases allow for periodic rent increases which provide the Company with the opportunity to achieve increases in rental income as each lease expires. Such types of leases generally minimize the risk of inflation to the Company. 36
SAFE HARBOR STATEMENT This Form 10-K contains various "forward-looking statements" within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, and the Company intends that such forward-looking statements will be subject to the safe harbors created thereby. For this purpose, any statements contained in this press release that relate to prospective events or developments are deemed to be forward-looking statements. Words such as "believes," "forecasts," "anticipates," "intends," "plans," "expects," "will" and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect the Company's current views with respect to future events and financial performance, but involve known and unknown risks and uncertainties, both general and specific to the matters discussed in this press release. These risks and uncertainties may cause the actual results of the Company to be materially different from any future results expressed or implied by such forward looking statements. Such risks and uncertainties include the national, regional and local economic climates, the ability to maintain rental rates and occupancy levels, competitive market forces, changes in market rates of interest, the ability of manufactured home buyers to obtain financing, the level of repossessions by manufactured home lenders and those referenced under the headings entitled "Factors That May Affect Future Results" or "Risk Factors" contained in this Form 10-K and the Company's filings with the Securities and Exchange Commission. The forward-looking statements contained in this Form 10-K speak only as of the date hereof and the Company expressly disclaims any obligation to provide public updates, revisions or amendments to any forward-looking statements made herein to reflect changes in the Company's expectations of future events. RECENT ACCOUNTING PRONOUNCEMENTS In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" which establishes standards for how financial instruments that have characteristics of both liabilities and equity instruments should be classified on the balance sheet. The requirements of SFAS 150 generally outline that financial instruments that give the issuer a choice of settling an obligation with a variable number of securities or settling an obligation with a transfer of assets or any mandatorily redeemable security should be classified as a liability on the balance sheet. The Company has reclassified mandatorily redeemable preferred operating partnership units of $58.1 million into debt as of December 31, 2003. The reclassification had no effect on the Company's compliance with the covenant requirements of its credit agreements. In April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." The statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statements No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. In addition, all provisions of this Statement should be applied prospectively. The provisions of this Statement that relate to Statement 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. The adoption of this Statement did not have a significant impact on the financial position or results of the operations of the Company. 37
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." The objective of this interpretation is to provide guidance on how to identify a variable interest entity ("VIE") and determine when the assets, liabilities, non-controlling interests and results of operations of a VIE need to be included in a company's consolidated financial statements. A company that holds variable interests in an entity will need to consolidate the entity if the company's interest in the VIE is such that the company will absorb a majority of the VIE's expected losses and/or receive a majority of the VIE's expected residual returns, if they occur. FIN 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders. The provisions of this interpretation apply to the end of the first interim period or annual period ending after December 15, 2003 (i.e., December 31, 2003) to VIEs in which a company holds a variable interest that it acquired before February 1, 2003. The Company has consolidated SHS in its financial reporting beginning December 31, 2003. OTHER Funds from operations ("FFO") is defined by the National Association of Real Estate Investment Trusts ("NAREIT") as "net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from sales of 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 and calculates FFO data for both basic and diluted purposes for the years ended December 31, 2003, 2002, 2001 (in thousands): 38
SUN COMMUNITIES, INC. RECONCILIATION OF NET INCOME TO FUNDS FROM OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE/OP UNIT AMOUNTS) 2003 2002 2001 --------- ---------- --------- Net income $ 23,714 $ 13,592 $ 33,910 Adjustments Depreciation and amortization 43,458 38,262 33,050 Valuation adjustment (1) (879) 449 0 Allocation of SunChamp losses (2) 4,548 1,315 0 (Gain) loss on dispositions and impairments, net (3,658) 13,612 (4,275) Income allocated to common minority interests 3,274 2,003 5,401 -------- -------- -------- Funds from Operations (FFO) $ 70,457 $ 69,233 $ 68,086 ======== ======== ======== FFO - Continuing Operations $ 68,537 $ 67,055 $ 65,889 ======== ======== ======== FFO - Discontinued Operations $ 1,920 $ 2,178 $ 2,197 ======== ======== ======== Weighted average common shares/OP Units outstanding: Basic 20,717 20,177 19,907 ======== ======== ======== Diluted 20,856 20,363 20,089 ======== ======== ======== Continuing Operations: FFO per weighted average Common Share/OP Unit - Basic $ 3.31 $ 3.32 $ 3.31 ======== ======== ======== FFO per weighted average Common Share/OP Unit - Diluted $ 3.29 $ 3.29 $ 3.28 ======== ======== ======== Discontinued Operations: FFO per weighted average Common Share/OP Unit - Basic $ 0.09 $ 0.11 $ 0.11 ======== ======== ======== FFO per weighted average Common Share/OP Unit - Diluted $ 0.09 $ 0.11 $ 0.11 ======== ======== ======== Total Operations: FFO per weighted average Common Share/OP Unit - Basic $ 3.40 $ 3.43 $ 3.42 ======== ======== ======== FFO per weighted average Common Share/OP Unit - Diluted $ 3.38 $ 3.40 $ 3.39 ======== ======== ======== (1) The Company entered into three interest rate swaps and an interest rate cap agreement. The valuation adjustment reflects the theoretical noncash profit and loss were those hedging transactions terminated at the balance sheet date. As the Company has no expectation of terminating the transactions prior to maturity, the net of these noncash valuation adjustments will be zero at the various maturities. As any imperfection related to hedging correlation in these swaps is reflected currently in cash as interest, the valuation adjustments are excluded from Funds from Operations. The valuation adjustment is included in interest expense. (2) The Company acquired the equity interest of another investor in SunChamp in December 2002. Consideration consisted of a long-term note payable at net book value. Although the adjustment for the allocation of the SunChamp losses (based on SunChamp as a stand-alone entity) is not reflected in the accompanying financial statements, management believes that it is appropriate to provide for this adjustment because the Company's payment obligations with respect to the note are subordinate in all respects to the return of the members' equity (including the gross book value of the acquired equity) plus a preferred return. As a result, the losses that are allocated to the Company from SunChamp as a stand-alone entity under generally accepted accounting principles are effectively reallocated to the note for purposes of calculating Funds from Operations. At December 31, 2003, the remaining balance on the SunChamp note is approximately $0.3 million. 39
ITEM 7A. 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 has entered into three separate interest rate swap agreements and an interest rate cap agreement. One of the swap agreements fixes $25 million of variable rate borrowings at 4.93 percent for the period April 2003 through July 2009, another of the 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. The Company's remaining variable rate debt totals $196.6 million as of December 31, 2003 which bears interest at various LIBOR or FNMA Discounted Mortgage Backed Securities ("DMBS") rates. If LIBOR or DMBS increased or decreased by 1.0 percent during the years ended December 31, 2003 and 2002, the Company believes its interest expense would have increased or decreased by approximately $2.2 million and $1.7 million, respectively, based on the $215.3 million and $171.3 million average balance outstanding under the Company's variable rate debt facilities for the year ended December 31, 2003 and 2002, respectively. Additionally, the Company had $32.1 million and $27.3 million LIBOR based variable rate mortgage and other notes receivable as of December 31, 2003 and 2002. If LIBOR increased or decreased by 1.0 percent during the years ended December 31, 2003 and 2002, the Company believes interest income would have increased or decreased by approximately $0.30 million and $0.37 million, respectively, based on the $30.2 million and $36.7 million average balance outstanding on all variable rate notes receivable for the year ended December 31, 2003 and 2002, respectively. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements and supplementary data are filed herewith under Item 15. 40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE We have previously reported the information required by this item in a current report on Form 8-K initially filed with the SEC on July 14, 2003, as amended by Form 8-K/A filed with the SEC on July 15, 2003. ITEM 9A. CONTROLS AND PROCEDURES (a) Under the supervision and with the participation of the Company's management, including the Company's 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 Form 10-K, 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 December 31, 2003 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART III The information required by ITEMS 10, 11, 12, 13, AND 14 will be included in the Company's proxy statement for its 2004 Annual Meeting of Shareholders, and is incorporated herein by reference. 41
PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed herewith as part of this Form 10-K: (1) A list of the financial statements required to be filed as a part of this Form 10-K is shown in the "Index to the Consolidated Financial Statements and Financial Statement Schedule" filed herewith. (2) A list of the financial statement schedules required to be filed as a part of this Form 10-K is shown in the "Index to the Consolidated Financial Statements and Financial Statement Schedule" filed herewith. (3) A list of the exhibits required by Item 601 of Regulation S-K to be filed as a part of this Form 10-K is shown on the "Exhibit Index" filed herewith. (b) Reports on Form 8-K: (1) Form 8-K, dated October 2, 2003, filed for the purpose of reporting, under Item 5 - Other Events, the Company's investment in Origen Financial, Inc. (2) Form 8-K, dated October 29, 2003, furnished for the purpose of reporting, under Item 12 - Results of Operations and Financial Condition, the Company's 2003 third quarter earnings and results of operations. 42
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 15, 2004 SUN COMMUNITIES, INC., a Maryland corporation By:/s/ Gary A. Shiffman ------------------------------------- Gary A. Shiffman, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. NAME TITLE DATE - ---- ----- ---- /s/ Gary A. Shiffman - --------------------------- Chief Executive Officer, President and March 15, 2004 Gary A. Shiffman Chairman of the Board of Directors /s/ Jeffrey P. Jorissen - --------------------------- Executive Vice President, Chief Financial March 15, 2004 Jeffrey P. Jorissen Officer, Treasurer, Secretary and Principal Accounting Officer /s/ Paul D. Lapides - --------------------------- Director March 15, 2004 Paul D. Lapides /s/ Ted J. Simon - --------------------------- Director March 15, 2004 Ted J. Simon /s/ Clunet R. Lewis - --------------------------- Director March 15, 2004 Clunet R. Lewis /s/ Ronald L. Piasecki - --------------------------- Director March 15, 2004 Ronald L. Piasecki /s/ Arthur A. Weiss - --------------------------- Director March 15, 2004 Arthur A. Weiss 43
EXHIBIT INDEX EXHIBIT METHOD OF NUMBER DESCRIPTION FILING - ------ ----------- ------ 2.1 Form of Sun Communities, Inc.'s Common Stock Certificate (1) 3.1 Amended and Restated Articles of Incorporation of Sun Communities, Inc (1) 3.2 Bylaws of Sun Communities, Inc. (2) 4.1 Indenture, dated as of April 24, 1996, among Sun Communities, Inc., Sun (3) Communities Operating Limited Partnership (the "Operating Partnership") and Bankers Trust Company, as Trustee 4.2 Form of Note for the 2001 Notes (3) 4.3 Form of Note for the 2003 Notes (3) 4.4 First Supplemental Indenture, dated as of August 20, 1997, by and between the (7) Operating Partnership and Bankers Trust Company, as Trustee 4.5 Form of Medium-Term Note (Floating Rate) (7) 4.6 Form of Medium-Term Note (Fixed Rate) (7) 4.7 Articles Supplementary of Board of Directors of Sun Communities, Inc. (9) Designating a Series of Preferred Stock and Fixing Distribution and other Rights in such Series 4.8 Articles Supplementary of Board of Directors of Sun Communities, Inc. (11) Designating a Series of Preferred Stock 10.1 Second Amended and Restated Agreement of Limited Partnership of Sun Communities (6) Operating Limited Partnership 10.2 Second Amended and Restated 1993 Stock Option Plan (10) 10.3 Amended and Restated 1993 Non-Employee Director Stock Option Plan (6) 10.4 Form of Stock Option Agreement between Sun Communities, Inc. and certain (1) directors, officers and other individuals# 10.5 Form of Non-Employee Director Stock Option Agreement between Sun Communities, (4) Inc. and certain directors# 10.6 Employment Agreement between Sun Communities, Inc. and Gary A. Shiffman# (6) 10.7 Amended and Restated Loan Agreement between Sun Communities Funding Limited (7) Partnership and Lehman Brothers Holdings Inc. 10.8 Amended and Restated Loan Agreement among Miami Lakes Venture Associates, Sun (7) Communities Funding Limited Partnership and Lehman Brothers Holdings Inc. 10.9 Form of Indemnification Agreement between each officer and director of Sun (7) Communities, Inc. and Sun Communities, Inc. 10.10 Loan Agreement among the Operating Partnership, Sea Breeze Limited Partnership (7) and High Point Associates, LP. 10.11 Option Agreement by and between the Operating Partnership and Sea Breeze (7) Limited Partnership 10.12 Option Agreement by and between the Operating Partnership and High Point (7) Associates, LP 10.13 Stock Pledge Agreement between Gary A. Shiffman and the Operating Partnership (5) for 94,570 shares of Common Stock 10.14 Stock Pledge Agreement between Gary A. Shiffman and the Operating Partnership (5) for 305,430 shares of Common Stock 10.15 Stock Pledge Agreement between Gary A. Shiffman and the Operating Partnership (7) with respect to 80,000 shares of Common Stock 10.16 Employment Agreement between Sun Communities, Inc. and Jeffrey P. Jorissen# (9) 10.17 Long Term Incentive Plan (7) 44
EXHIBIT METHOD OF NUMBER DESCRIPTION FILING - ------ ----------- ------ 10.18 Restricted Stock Award Agreement between Sun Communities, Inc. and Gary A. (9) Shiffman, dated June 5, 1998# 10.19 Restricted Stock Award Agreement between Sun Communities, Inc. and Jeffrey P. (9) Jorissen, dated June 5, 1998# 10.20 Restricted Stock Award Agreement between Sun. Communities, Inc. and Jonathan M. (9) Colman, dated June 5, 1998# 10.21 Restricted Stock Award Agreement between Sun Communities, Inc. and Brian W. (9) Fannon, dated June 5, 1998# 10.22 Sun Communities, Inc. 1998 Stock Purchase Plan# (9) 10.23 Facility and Guaranty Agreement among Sun Communities, Inc., the Operating (9) Partnership, Certain Subsidiary Guarantors and First National Bank of Chicago, dated December 10, 1998 10.24 Rights Agreement between Sun Communities, Inc. and State Street Bank and Trust (8) Company, dated April 24, 1998 10.25 Contribution Agreement, dated as of September 29, 1999, by and among the Sun (11) Communities, Inc., the Operating Partnership, Belcrest Realty Corporation and Belair Real Estate Corporation 10.26 One Hundred Third Amendment to Second Amended and Restated Limited Partnership (11) Agreement of the Operating Partnership 10.27 One Hundred Eleventh Amendment to Second Amended and Restated Limited (12) Partnership Agreement of the Operating Partnership 10.28 One Hundred Thirty-Sixth Amendment to Second Amended and Restated Limited (12) Partnership Agreement of the Operating Partnership 10.29 One Hundred Forty-Fifth Amendment to Second Amended and Restated Limited (12) Partnership Agreement of the Operating Partnership 10.30 Restricted Stock Award Agreement between Sun Communities, Inc. and Gary A. (12) Shiffman, dated March 30, 2001# 10.31 Restricted Stock Award Agreement between Sun Communities, Inc. and Jeffrey P. (12) Jorissen, dated March 30, 2001# 10.32 Restricted Stock Award Agreement between Sun Communities, Inc. and Jonathan M. (12) Colman, dated March 30, 2001# 10.33 Restricted Stock Award Agreement between Sun Communities, Inc. and Brian W. (12) Fannon, dated March 30, 2001# 10.34 Second Amended and Restated Subordinated Loan Agreement, dated December 4, (15) 2002, by and between Origen Financial L.L.C. and the Operating Partnership 10.35 Subordinated Term Loan Agreement, dated December 4, 2002, by and between Origen (15) Financial L.L.C. and the Operating Partnership 10.36 First Amendment to Second Amended and Restated Subordinated Loan Agreement, (15) dated December 30, 2002, by and between Origen Financial L.L.C. and Sun Home Services 10.37 First Amendment to Subordinated Term Loan Agreement, dated December 30, 2002, (15) by and between Origen Financial L.L.C. and Sun Home Services 10.38 Seventh Amended and Restated Promissory Note, dated December 30, 2002, made by (15) Origen Financial L.L.C. in favor of Sun Home Services 10.39 First Amended and Restated Subordinated Term Promissory Note, dated December (15) 30, 2002, made by Origen Financial L.L.C. in favor of Sun Home Services 10.40 First Amended and Restated Security Agreement, dated December 30, 2002, by and (15) between Origen Financial L.L.C. and Sun Home Services 45
EXHIBIT METHOD OF NUMBER DESCRIPTION FILING - ------ ----------- ------ 10.41 Second Amended and Restated Stock Pledge Agreement, dated December 30, 2002, by (15) and between Origen Financial L.L.C. and Sun Home Services 10.42 First Amended and Restated Limited Liability Company Interest Security and (15) Pledge Agreement, dated December 30, 2002, by and between Origen Financial L.L.C. and Sun Home Services 10.43 Second Amended and Restated Guaranty, dated December 30, 2002, by Bingham in (15) favor of the Operating Partnership 10.44 Second Amended and Restated Security Agreement, dated December 30, 2002, by and (15) between Bingham and Sun Home Services. 10.45 Amended and Restated Stock Pledge Agreement, dated December 30, 2002, by and (15) between Bingham and Sun Home Services 10.46 Amended and Restated Membership Pledge Agreement, dated December 30, 2002, by (15) and between Bingham and Sun Home Services. 10.47 Second Amended and Restated Participation Agreement, dated December 30, 2002, (15) by and among Sun Home Services, the Milton M. Shiffman Spouse's Marital Trust and Woodward Holding LLC 10.48 Master Credit Facility Agreement, dated as of May 29, 2002, by and between Sun Secured Financing LLC, Aspen-Ft. Collins Limited Partnership, Sun Secured (13) Financing Houston Limited Partnership and ARCS Commercial Mortgage Co., L.P. 10.49 Credit Agreement, dated as of July 3, 2002, by and between the Operating Partnership, Sun Communities, Inc., Banc One Capital Markets, Inc., Bank One, (13) N.A. and other lenders which are signatories thereto 10.50 First Amendment to Master Credit Facility Agreement, dated as of August 29, 2002, by and between Sun Secured Financing LLC, Aspen-Ft. Collins Limited (14) Partnership, Sun Secured Financing Houston Limited Partnership and ARCS Commercial Mortgage Co., L.P. 10.51 First Amendment to Employment Agreement, dated as of July 15, 2002, by and (14) between Sun Communities, Inc. and Gary A. Shiffman# 10.52 Second Amended and Restated Promissory Note (Secured), dated as of July 15, 2002, made by Gary A. Shiffman in favor of the Operating Partnership (14) 10.53 First Amended and Restated Promissory Note (Unsecured), dated as of July 15, 2002, made by Gary A. Shiffman in favor of the Operating Partnership (14) 10.54 First Amended and Restated Promissory Note (Secured), dated as of July 15, 2002, made by Gary A. Shiffman in favor of the Operating Partnership (14) 10.55 Second Amended and Restated Promissory Note (Unsecured), dated as of July 15, 2002, made by Gary A. Shiffman in favor of the Operating Partnership (14) 10.56 Second Amended and Restated Promissory Note (Secured), dated as of July 15, 2002, made by Gary A. Shiffman in favor of the Operating Partnership (14) 10.57 Employment Agreement, dated as of January 1, 2003, by and between Brian W. (15) Fannon and Sun Home Services, Inc.# 10.58 Employment Agreement, dated as of January 1, 2003, by and between Brian W. (15) Fannon and Sun Communities, Inc.# 10.59 Lease, dated November 1, 2002, by and between the Operating Partnership as (15) Tenant and American Center LLC as Landlord 10.60 Term Loan Agreement, dated as of October 10, 2002, among Sun Financial, LLC, (15) Sun Financial Texas Limited Partnership, the Operating Partnership, Sun Communities, Inc. and Lehman Commercial Paper, Inc. 46
EXHIBIT METHOD OF NUMBER DESCRIPTION FILING - ------ ----------- ------ 10.61 Concurrent Private Placement Agreement dated October 8, 2003 among Sun OFI, (16) Inc., Origen Financial, Inc., and the Purchasers (as defined therein) 10.62 Registration Rights Agreement dated as of October 8, 2003 among Sun OFI, Inc., (16) Origen Financial, Inc., Lehman Brothers Inc., on behalf of itself and as agent for the investors listed on Schedule A thereto and those persons listed on Schedule B thereto 12.1 Computation of Ratio of Earnings to Fixed Charges and Ratio Earnings to (17) Combined Fixed Charges and Preferred Dividends 21.1 List of Subsidiaries of Sun Communities, Inc. (17) 23.1 Consent of PriceWaterhouseCoopers (17) 23.2 Consent of Grant Thornton, LLP (17) 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the (17) Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the (17) Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant (17) to Section 906 of the Sarbanes-Oxley Act of 2002 99.1 Audited financial statements of Origen Financial L.L.C. (16) 99.2 Audited Financial Statements of Origen Financial, Inc. (16) - --------------------------------- (1) Incorporated by reference to Sun Communities, Inc.'s Registration Statement No. 33-69340. (2) Incorporated by reference to Sun Communities, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995. (3) Incorporated by reference to Sun Communities, Inc.'s Current Report on Form 8-K dated April 24, 1996. (4) Incorporated by reference to Sun Communities, Inc.'s Registration Statement No. 33-80972. (5) Incorporated by reference to Sun Communities, Inc.'s Quarterly Report on Form 10-K for the quarter ended September 30, 1995. (6) Incorporated by reference to Sun Communities, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996. (7) Incorporated by reference to Sun Communities, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997. (8) Incorporated by reference to Sun Communities, Inc.'s Current Report on Form 8-A dated May 27, 1998. (9) Incorporated by reference to Sun Communities, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1998. (10) Incorporated by reference to Sun Communities, Inc.'s Proxy Statement, dated April 20, 1999 (11) Incorporated by reference to Sun Communities, Inc.'s Current Report on Form 8-K dated October 14, 1999. (12) Incorporated by reference to Sun Communities, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2001. 47
(13) Incorporated by reference to Sun Communities, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002. (14) Incorporated by reference to Sun Communities, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002. (15) Incorporated by reference to Sun Communities, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2002, as amended. (16) Incorporated by reference to pages F-1 through F-48 of Origen Financial, Inc.'s Registration Statement on Form S-11, No. 333-112516 (17) Filed herewith. # Management contract or compensatory plan or arrangement required to be identified by Form 10-K Item 14. 48
SUN COMMUNITIES, INC. INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE PAGE Report of Independent Certified Public Accountants - Grant Thornton LLP F-2 Report of Independent Auditors - PricewaterhouseCoopers LLP F-3 Financial Statements: Consolidated Balance Sheets as of December 31, 2003 and 2002 F-4 Consolidated Statements of Income for the Years Ended December 31, 2003, 2002 and 2001 F-5 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2003, 2002 and 2001 F-6 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2003, 2002 and 2001 F-7 Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001 F-8 Notes to Consolidated Financial Statements F-9 - F-27 Schedule III - Real Estate and Accumulated Depreciation F-28 - F-30 F - 1
Report of Independent Certified Public Accountants Board of Directors and Stockholders Sun Communities, Inc. We have audited the accompanying consolidated balance sheet of Sun Communities, Inc. and subsidiaries as of December 31, 2003, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sun Communities, Inc. and subsidiaries as of December 31, 2003, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 13 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board Interpretation No. 46, "Consolidation of Variable Interest Entities" and Statement of Financial Accounting Standards No. 150 "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" during 2003. We have also audited Schedule III for the year ended December 31, 2003. In our opinion, this schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information therein. GRANT THORNTON LLP Southfield, Michigan February 19, 2004 F - 2
REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Sun Communities, Inc.: In our opinion, based upon our audits and the report of other auditors, the consolidated financial statements listed in the index appearing in Item 15 on page F-1 present fairly, in all material respects, the financial position of Sun Communities, Inc. and its subsidiaries (the "Company") at December 31, 2002, and the results of their operations and their cash flows for the two years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Origen Financial, L.L.C., an investee of the Company, which statements reflect total assets of $227,748,000 at December 31, 2002 and total revenues of $20,835,000 for the year ended December 31, 2002. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for Origen Financial, L.L.C, is based solely on the report of the other auditors. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. As discussed in Note 1 to the consolidated financial statements, on January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No.144, "Accounting for the Impairment on Disposal of Long-Lived Assets". Pricewaterhouse Coopers LLP Detroit, Michigan March 12, 2003 except for Note 3 as to which the date is March 12, 2004 F-3
SUN COMMUNITIES, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2003 AND 2002 (amounts in thousands) 2003 2002 ----------- ----------- ASSETS Investment in rental property, net $ 1,010,484 $ 999,360 Cash and cash equivalents 24,058 2,664 Inventory of manufactured homes 17,236 - Investment in and advances to affiliates 50,667 67,719 Notes and other receivables 74,828 56,329 Other assets 44,301 37,904 ----------- ----------- Total assets $ 1,221,574 $ 1,163,976 =========== =========== LIABILITIES Line of credit $ 99,000 $ 63,000 Debt 674,328 604,373 Other liabilities 24,833 24,581 ----------- ----------- Total liabilities 798,161 691,954 ----------- ----------- Minority interests 96,803 152,490 ----------- ----------- STOCKHOLDERS' EQUITY Preferred stock, $.01 per value, 10,000 shares - - authorized, none issued Common stock, $.01 per value, 100,000 shares 192 183 authorized, 19,192 and 18,311 issued and outstanding in 2003 and 2002, respectively Paid-in capital 446,211 420,683 Officers' notes (10,299) (10,703) Unearned compensation (7,337) (8,622) Accumulated comprehensive earnings (1,294) (1,851) Distributions in excess of accumulated earnings (94,479) (73,774) Treasury stock, at cost, 202 shares (6,384) (6,384) ----------- ----------- Total stockholders' equity 326,610 319,532 ----------- ----------- Total liabilities and stockholders' equity $ 1,221,574 $ 1,163,976 =========== =========== The accompanying notes are an integral part of the consolidated financial statements F-4
SUN COMMUNITIES, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA) 2003 2002 2001 --------- --------- --------- REVENUES Income from rental property $ 159,115 $ 149,875 $ 136,969 Revenues from home sales 19,516 -- -- Ancillary service revenues, net 3,409 -- -- Interest 11,354 7,990 10,305 Other income (loss) (4,256) 2,304 3,695 --------- --------- --------- Total revenues 189,138 160,169 150,969 COSTS AND EXPENSES Property operating and maintenance 39,837 33,751 29,258 Cost of home sales 13,879 -- -- Real estate taxes 11,746 10,217 9,162 Selling, general and administrative 18,181 7,722 7,373 Depreciation and amortization 44,120 37,900 32,716 Interest 36,680 32,375 31,016 --------- --------- --------- Total expenses 164,443 121,965 109,525 Equity income (loss) from affiliates 667 (16,627) 131 --------- --------- --------- Income from operations 25,362 21,577 41,575 Less income allocated to minority interest: Preferred OP Units 8,537 7,803 8,131 Common OP Units 3,083 1,802 5,019 --------- --------- --------- Income from continuing operations 13,742 11,972 28,425 Income from discontinued operations 9,972 1,620 5,485 --------- --------- --------- Net income $ 23,714 $ 13,592 $ 33,910 ========= ========= ========= Weighted average common shares outstanding: Basic 18,206 17,595 17,258 ========= ========= ========= Diluted 18,345 17,781 17,440 ========= ========= ========= Basic earnings per share: Continuing operations $ 0.75 $ 0.68 $ 1.64 Discontinued operations 0.55 0.09 0.32 --------- --------- --------- Net Income $ 1.30 $ 0.77 $ 1.96 ========= ========= ========= Diluted earnings per share: Continuing operations $ 0.75 $ 0.67 $ 1.63 Discontinued operations 0.54 0.09 0.31 --------- --------- --------- Net Income $ 1.29 $ 0.76 $ 1.94 ========= ========= ========= The accompanying notes are an integral part of the consolidated financial statements F - 5
SUN COMMUNITIES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (AMOUNTS IN THOUSANDS) 2003 2002 2001 -------- -------- -------- Net income $ 23,714 $ 13,592 $ 33,910 Unrealized income (loss) on interest rate swaps 557 (1,851) - -------- -------- -------- Comprehensive income $ 24,271 $ 11,741 $ 33,910 ======== ======== ======== The accompanying notes are an integral part of the consolidated financial statements F - 6
SUN COMMUNITIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA) ACCUMULATED DISTRIBUTIONS OTHER IN EXCESS OF COMMON PAID-IN UNEARNED COMPREHENSIVE ACCUMULATED STOCK CAPITAL COMPENSATION LOSS EARNINGS --------- --------- ------------ -------- --------- Balance, January 1, 2001 $ 175 $ 393,771 $ (4,746) $ - $ (41,688) Issuance of common stock, net 3 4,077 (3,188) Amortization 935 Repayment of officers' notes Treasury stock purchased, 194 shares Reclassification and conversion of minority interest 1,941 Net income 33,910 Cash distributions declared of $2.18 per share (38,161) --------- --------- -------- -------- --------- Balance, December 31, 2001 178 399,789 (6,999) (45,939) Issuance of common stock, net 5 17,406 (2,767) Amortization 1,144 Repayment of officers' notes Reclassification and conversion of minority interest 3,488 Net income 13,592 Unrealized loss on interest rate swaps (1,851) Cash distributions declared of $2.29 per share (41,427) --------- --------- -------- -------- --------- Balance, December 31, 2002 183 420,683 (8,622) (1,851) (73,774) Issuance of common stock, net 9 27,640 Amortization 1,285 Repayment of officers' notes Reclassification and conversion of minority interest (2,112) Net income 23,714 Unrealized loss on interest rate swaps 557 Cash distributions declared of $2.41 per share (44,419) --------- --------- -------- -------- --------- Balance, December 31, 2003 $ 192 $ 446,211 $ (7,337) $ (1,294) $ (94,479) ========= ========= ======== ======== ========= TREASURY OFFICERS' STOCK NOTES TOTAL EQUITY -------- --------- ------------ Balance, January 1, 2001 $ (221) $ (11,257) $ 336,034 Issuance of common stock, net Amortization Repayment of officers' notes 253 Treasury stock purchased, 194 shares (6,163) Reclassification and conversion of minority interest Net income Cash distributions declared of $2.18 per share -------- --------- --------- Balance, December 31, 2001 (6,384) (11,004) $ 329,641 Issuance of common stock, net Amortization Repayment of officers' notes 301 Reclassification and conversion of minority interest Net income Unrealized loss on interest rate swaps Cash distributions declared of $2.29 per share -------- --------- --------- Balance, December 31, 2002 (6,384) (10,703) $ 319,532 Issuance of common stock, net Amortization Repayment of officers' notes 404 Reclassification and conversion of minority interest Net income Unrealized loss on interest rate swaps Cash distributions declared of $2.41 per share -------- --------- --------- Balance, December 31, 2003 $ (6,384) $ (10,299) $ 326,610 ======== ========= ========= The accompanying notes are an integral part of the consolidated financial statements F - 7
SUN COMMUNITIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (AMOUNTS IN THOUSANDS) 2003 2002 2001 -------- --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 23,714 $ 13,592 $ 33,910 Adjustments to reconcile income to cash provided by operating activities: Income allocated to minority interests 3,083 1,802 5,019 Income from discontinued operations allocated to minority interests 191 243 186 Gain from property dispositions, net (3,658) (361) (4,275) Depreciation and amortization 44,120 37,900 32,716 Depreciation allocated to income from discontinued operations 347 675 800 Amortization of deferred financing costs 1,835 1,231 1,065 Reduction in book value of investments - 13,881 - Decrease in inventory 1,970 - - Increase in other assets (7,520) (15,973) (4,879) Increase (decrease) in accounts payable and other liabilities (814) (2,031) 1,329 -------- --------- -------- Net cash provided by operating activities 63,268 50,959 65,871 -------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in rental properties (50,310) (87,283) (70,331) Proceeds related to property dispositions 22,499 3,288 17,331 Investment in and advances to affiliates (47,612) (51,782) (20,056) Repayments of (increase in) notes receivable, net 16,131 (33,397) 37,968 Officers' notes 404 301 253 -------- --------- -------- Net cash used in investing activities (58,888) (168,873) (34,835) -------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock and OP units, net 26,222 13,801 809 Treasury stock purchases - - (6,163) Borrowings (repayments) on line of credit, net 36,000 (30,000) 81,000 Proceeds from (repayments on) notes payable and other debt, net 6,226 181,875 (76,599) Payments for deferred financing costs (2,281) (2,914) - Distributions (49,153) (46,771) (43,962) -------- --------- -------- Net cash provided by/(used) in financing activities 17,014 115,991 (44,915) -------- --------- -------- Net increase (decrease) in cash and cash equivalents 21,394 (1,923) (13,879) Cash and cash equivalents, beginning of period 2,664 4,587 18,466 -------- --------- -------- Cash and cash equivalents, end of period $ 24,058 $ 2,664 $ 4,587 ======== ========= ======== SUPPLEMENTAL INFORMATION: Cash paid for interest including capitalized amounts of $2,082, $2,915 and $3,704 in 2003, 2002 and 2001, respectively $ 35,744 $ 34,830 $ 34,048 Noncash investing and financing activities: Debt assumed for rental properties $ 2,288 $ 20,653 $ 26,289 Issuance of partnership units for rental properties $ - $ 4,500 $ 4,612 Issuance of partnership units to retire capitalized lease obligations $ 4,170 $ 5,520 $ - Restricted common stock issued as unearned compensation, net $ - $ 2,767 $ 3,188 Issuance of common stock pursuant to dividend reinvestment plan $ 1,334 $ - $ - Unrealized gains (losses) on interest rate swaps $ 557 $ (1,851) $ - The accompanying notes are an integral part of the consolidated financial statements F - 8
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: a. BUSINESS: Sun Communities, Inc. (the "Company") is a real estate investment trust ("REIT") which owns and operates 127 manufactured housing communities at December 31, 2003 located in seventeen states concentrated principally in the Midwest and Southeast comprising approximately 43,875 developed sites and approximately 6,756 sites suitable for development. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. b. PRINCIPLES OF CONSOLIDATION: The accompanying financial statements include the accounts of the Company and all majority-owned and controlled subsidiaries including Sun Communities Operating Limited Partnership (the "Operating Partnership") SunChamp LLC ("SunChamp"), and effective December 31, 2003, Sun Home Services, Inc. ("SHS"). SHS is consolidated beginning in 2003 in accordance with Financial Interpretation No. 46, "Consolidation of Variable Interest Entities" as further described in Note 13. The minority interests include Common Operating Partnership Units ("OP Units") which are convertible into an equivalent number of shares of the Company's common stock. Such conversion would have no effect on earnings per share since the allocation of earnings to an OP Unit is equivalent to earnings allocated to a share of common stock. Of the 21.5 million OP Units outstanding at December 31, 2003, the Company owns 19.0 million or 88.5 percent. The minority interests are adjusted to their relative ownership interest whenever OP Units or common stock are issued, converted or retired by reclassification to/from paid-in capital. Included in minority interests at December 31, 2003 and 2002 are 2 million Series A Perpetual Preferred OP Units ("PPOP Units") issued at $25 per unit in September 1999 bearing an annual coupon rate of 8.875 percent. The PPOP Units may be called under certain conditions by the Company at par on or after September 29, 2004, have no stated maturity or mandatory redemption and are convertible into preferred stock under certain circumstances. $58.1 million of Preferred OP Units ("POP Units") are included in debt at December 31, 2003 with dividends at rates ranging from 6.0 percent to 7.6 percent and maturing between 2006 and 2014. Of these POP Units, $43.8 million have conversion prices ranging from $44 to $68 per unit. Of the $58.1 million POP Units included in debt, $4.2 million were issued during 2003 in connection with property acquisitions. These POP Units pay dividends at 7.625% and mature on May 15, 2010. F-9
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: c. RENTAL PROPERTY: Rental property is recorded at cost, less accumulated depreciation. Management evaluates the recoverability of its investment in rental property whenever events or changes in circumstances such as recent operating results, expected net operating cash flow and plans for future operations indicate that full asset recoverability is questionable. The Company measures the recoverability of its assets in accordance with the Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long Lived Assets." If such assets were deemed to be impaired as a result of this measurement, the impairment that would be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset as determined on a discounted net cash flow basis. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets. Useful lives are 30 years for land improvements and buildings and 7 to 15 years for furniture, fixtures and equipment. Expenditures for ordinary maintenance and repairs are charged to operations as incurred and significant renovations and improvements, which improve and/or extend the useful life of the asset, are capitalized and depreciated over their estimated useful lives. Construction costs related to development of new communities or expansion sites, including interest, are capitalized until the property is substantially complete. The Company capitalizes certain costs (including interest and other costs) incurred in connection with the development, redevelopment, capital enhancement and leasing of its properties. Management is required to use professional judgment in determining whether such costs meet the criteria for immediate expense or capitalization. The amounts are dependent on the volume and timing of such activities and the costs associated with such activities. d. CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments with an initial maturity of three months or less to be cash and cash equivalents. e. NOTES AND ACCOUNTS RECEIVABLE: The Company evaluates the recoverability of its receivables whenever events occur or there are changes in circumstances such that management believes it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan and lease agreements. The collectibility of loans is measured based on the present value of the expected future cash flow discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent. The reserve for uncollectible accounts receivable from residents was $0.15 million at December 31, 2003 and 2002. F-10
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: f. INVESTMENTS IN AND ADVANCES TO AFFILIATES: Origen Financial, Inc. ("Origen, Inc") is a real estate investment trust in the business of originating, acquiring and servicing manufactured home loans. In October 2003, the Company purchased 5,000,000 shares of common stock (representing approximately 33% of the issued and outstanding shares of common stock as of December 31, 2003) of Origen, Inc. for $50 million and agreed to sell Origen, Inc. various interests in manufactured home loans. The Company's investment in Origen, Inc. was accounted for using the equity method of accounting for periods ending after September 30, 2003. During 2002 and through October 7, 2003, the Company, through SHS, and two other participants (one unaffiliated and one affiliated with Gary Shiffman, the Company's Chief Executive Officer and President) provided financing to Origen Financial, L.L.C. ("Origen"), the predecessor to Origen Inc. The financing consisted of a $48 million line of credit and a $10 million term loan of which $35 million was outstanding at September 30, 2003. This amount was repaid in full in October 2003 upon the formation and capitalization of Origen, Inc. Summarized combined financial information of the Company's equity investment in Origen, Inc. at December 31, 2003 and Origen and SHS at December 31, 2002 is presented below before elimination of intercompany transactions. SHS and SunChamp are consolidated in the Company's financial statements as of December 31, 2003. The 2003 results of operations below do not include results of operation for Origen prior to October 8, 2003. ORIGEN, INC. ORIGEN SHS 2003 2002 2002 ---- ---- ---- Loans receivable, net $ 368,509 $ 173,764 $ 33,560 Other assets 76,033 53,984 41,220 ----------- ---------- ---------- Total assets $ 444,542 $ 227,748 $ 74,780 =========== ========== ========== Notes payable $ 277,441 $ 54,946 $ 85,361 Advances under repurchase agreements - 141,085 - Other liabilities 24,312 21,413 8,634 ----------- ---------- ---------- Total liabilities 301,753 217,444 93,995 ----------- ---------- ---------- Equity (deficit) 142,789 10,304 (19,215) ----------- ---------- ---------- Total liabilities and equity $ 444,542 $ 227,748 $ 74,780 =========== ========== ========== Revenues $ 10,657 $ 20,385 $ 22,516 Expenses 8,691 49,572 24,704 Loss from equity investee - - (15,295)(a) ----------- ---------- ---------- Net income (loss) $ 1,966 $ (29,187) $ (17,483) =========== ========== ========== Sun's equity income (loss) $ 667 $ - $ (15,925) =========== ========== ========== (a) SHS determined at December 31, 2002 that its investment in Origen was impaired and wrote off its remaining investment of $13.6 million. F-11
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: g. REVENUE RECOGNITION: Rental income attributable to leases is recorded on a straight-line basis when earned from tenants. Leases entered into by tenants generally range from month-to-month to one year and are renewable by mutual agreement of the Company and resident or, in some cases, as provided by state statute. Revenue from the sale of manufactured homes is recognized upon transfer of title at the closing of the sales transaction. h. OTHER CAPITALIZED COSTS: Certain expenditures to dealers and residents related to obtaining lessees in our communities are capitalized and amortized over a seven year period; shorter than average resident's occupancy and the average term that the home is in the community. Costs associated with implementing the Company's new computer systems are capitalized and amortized over the estimated useful lives of the related software and hardware. i. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying values of cash and cash equivalents, escrows, receivables, accounts payable, accrued expenses and other assets and liabilities are reasonable estimates of their fair values because of the shorter maturities of these instruments. The fair value of the Company's long-term indebtedness, which is based on the estimates of management and on rates currently quoted and rates currently prevailing for comparable loans and instruments of comparable maturities, exceeds the aggregate carrying value by approximately $28.0 million at December 31, 2003. Potential expenses that would be incurred in an actual sale or settlement are not taken into consideration. j. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: The Company has entered into four derivative contracts consisting of three interest rate swap agreements and an interest rate cap agreement. The Company's primary strategy in entering into derivative contracts is to minimize the variability that changes in interest rates could have on its future cash flows. The Company generally employs derivative instruments that effectively convert a portion of its variable rate debt to fixed rate debt and to cap the maximum interest rate on its variable rate borrowings. The Company does not enter into derivative instruments for speculative purposes. The swap agreements were effective April 2003, and have the effect of fixing interest rates relative to a collateralized term loan due to FNMA. One swap matures in July 2009, with an effective fixed rate of 4.93 percent. A second swap matures in July 2012, with an effective fixed rate of 5.37 percent. The third swap matures in July 2007, with an effective fixed rate of 3.97 percent. The third swap is effective as long as 90-day LIBOR is 7 percent or lower. The three swaps have an aggregate notional amount of $75.0 million. The interest rate cap agreement has a cap rate of 9.49 percent, a notional amount of $152.4 million and a termination date of April 03, 2006. Each of the Company's derivative contracts is based upon 90-day LIBOR. The Company has designated the first two swaps and the interest rate cap as cash flow hedges for accounting purposes. The changes in the value of these hedges are reflected in other comprehensive income/loss on the balance sheet. These three hedges were highly effective and had minimal effect on income. The third swap does not qualify as a hedge for accounting purposes and, accordingly, the entire change in valuation, whether positive or negative, is reflected as a component of interest expense. The valuation adjustment for the twelve month period ended December 31, 2003 totals a positive $0.9 million. F-12
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: j. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, CONTINUED: In accordance with SFAS No. 133, the "Accounting for Derivative Instruments and Hedging Activities," which requires all derivative instruments to be carried at fair value on the balance sheet, the Company has recorded a liability of $0.9 and $2.3 million as of December 31, 2003 and December 31, 2002, respectively. These valuation adjustments will only be realized if the Company terminates the swaps prior to maturity. This is not the intent of the Company and, therefore, the net of valuation adjustments through the various maturity dates will approximate zero. k. DEFERRED TAX ASSETS: The Company has certain subsidiaries that are taxed as regular corporations. Deferred tax assets or liabilities are recognized for temporary differences between the tax bases of non-REIT assets and liabilities and their carrying amounts in the financial statements and net operating loss carryforwards. Deferred tax assets and liabilities are measured using currently enacted tax rates. A valuation allowance is established if based on the insight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. l. STOCK OPTIONS: The Company accounts for its stock options using the intrinsic value method contained in APB Opinion No. 25. "Accounting for Stock Issued to Employees." If the Company had accounted for awards using the methods contained in FASB Statement No. 123, "Accounting for Stock-Based Compensation", net income and earnings per share would have been presented as follows for the years ended December 31, 2003, 2002 and 2001 (amounts in thousands, except for per share data): 2003 2002 2001 ---- ---- ---- Net income, as reported $ 23,714 $ 13,592 $ 33,910 Stock-based compensation expense under fair value method (274) (478) (321) -------- -------- -------- Pro forma net income $ 23,440 $ 13,114 $ 33,589 ======== ======== ======== EPS (Basic), as reported $ 1.30 $ 0.77 $ 1.96 ======== ======== ======== EPS (Basic), pro forma $ 1.29 $ 0.75 $ 1.95 ======== ======== ======== EPS (Diluted), as reported $ 1.29 $ 0.76 $ 1.94 ======== ======== ======== EPS (Diluted), pro forma $ 1.28 $ 0.74 $ 1.93 ======== ======== ======== m. INVENTORY: Inventory of manufactured homes is stated at lower of specific cost or market. n. RECLASSIFICATIONS: Certain 2002 and 2001 amounts have been reclassified to conform to the 2003 financial statement presentation. Such reclassifications had no effect on results of operations as originally presented. F-13
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 2. RENTAL PROPERTY (AMOUNTS IN THOUSANDS): AT DECEMBER 31 --------------------------- 2003 2002 ---- ---- Land $ 104,541 $ 101,926 Land improvements and buildings 1,048,576 999,540 Furniture, fixtures, and equipment 33,080 26,277 Land held for future development 31,409 34,573 Property under development 2,799 12,521 ---------- ---------- 1,220,405 1,174,837 Less accumulated depreciation (209,921) (175,477) ---------- ---------- $1,010,484 $ 999,360 ========== ========== Land improvements and buildings consist primarily of infrastructure, roads, landscaping, clubhouses, rental homes, maintenance buildings and amenities. Included in rental property at December 31, 2003 and 2002 are net carrying amounts related to capitalized leases of $9.6 million and $17.9 million, respectively. During 2003, the Company acquired one development community comprised of 62 developed sites and 180 sites available for development for $4.5 million. During 2002, the Company acquired one stabilized community, comprising 552 developed sites, for $21.3 million and three development communities, comprising 930 developed sites and 538 sites available for development, for $48.6 million consisting of cash of approximately $23.1 million, POP Units of approximately $4.5 million and assumption of debt of approximately $21.0 million. These transactions have been accounted for as purchases, and the statements of income include the operations of the acquired communities from the dates of their respective acquisitions. As of December 31, 2003, in conjunction with a 1993 acquisition, the Company is obligated to issue $6.4 million of OP Units through 2009 based on the per share market value of the Company's stock on the issuance date. This obligation was accounted for as part of the purchase price of the original acquisition. F-14
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 3. DISPOSITION OF PROPERTIES: In November 2003 the Company sold four manufactured home communities of which three were in Michigan and one in Illinois aggregating 731 sites for gross proceeds of approximately $24.8 million. In February 2002, the Company sold a manufactured home community in Florida consisting of 227 sites of which 131 were occupied, for cash of approximately $3.3 million. Net gain on sale of $8.6 million and $0.4 million on these transactions was recorded in income from discontinued operations in 2003 and 2002, respectively. In accordance with FAS 144, effective for financial statements issued for all fiscal years beginning after December 15, 2001, results of operations and gain/(loss) in sales of real estate for properties with identifiable cash flows sold subsequent to December 31, 2001 are reflected in the Consolidated Statements of Income as income from discontinued operations for all periods presented. For presentation purposes, income from discontinued operations also includes a gain on sale of properties sold prior to December 31, 2001 of $4.3 million, which was reported in the Consolidated Statements of Income in prior periods as a gain from property dispositions, net. Below is a summary of the results of operations of these properties through their respective disposition dates (in thousands): SUMMARY STATEMENT OF OPERATIONS DISPOSED PROPERTIES 2003 2002 2001 ---- ---- ---- Income from rental property $ 2,763 $ 3,034 $ 3,289 Property operating and maintenance expenses (533) (495) (713) Real estate taxes (310) (361) (380) Depreciation and amortization (347) (674) (800) --------- -------- -------- Income from operations 1,573 1,504 1,396 Income allocated to common OP units (191) (243) (186) Gain on sale of discontinued operations 8,590 359 4,275 --------- -------- -------- Income from discontinued operations $ 9,972 $ 1,620 $ 5,485 ========= ======== ======== F-15
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 4. NOTES AND OTHER RECEIVABLES (AMOUNTS IN THOUSANDS): AT DECEMBER 31, ------------------------- 2003 2002 --------- --------- Mortgage and other notes receivable, primarily with minimum monthly payments at LIBOR based floating rates of approximately LIBOR + 3.0 %, maturing at various dates through August 2008, substantially collateralized by manufactured home communities $ 41,736 $ 38,420 Installment loans collateralized by manufactured homes with interest payable monthly at an effective weighted average interest rate and maturity of 8.2% and 20 years, respectively 24,802 11,633 Other receivables 8,290 6,276 --------- --------- $ 74,828 $ 56,329 ========= ========= At December 31, 2003, the maturities of mortgage notes and other receivables are approximately as follows: 2004 - $23.2 million; 2006- $3.8, and 2008 - $14.7 million. Of the $24.8 million of installment loans collateralized by manufactured homes, $12.3 million were sold at book value in February of 2004. Officers' notes, presented as a reduction to stockholders' equity in the balance sheet, bear interest at LIBOR + 1.75% notes, with a minimum and maximum interest rate of 6% and 9%, respectively, collateralized by 352,206 shares of the Company's common stock and 127,794 OP Units at December 31, 2003 with substantial personal recourse. The notes become due in three equal installments on each of December 31, 2008, 2009 and 2010. Reductions in the principal balance of these notes were $0.5 million and $0.3 million for the years 2003 and 2002, respectively. F-16
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 5. DEBT AND LINE OF CREDIT (AMOUNTS IN THOUSANDS): The following table sets forth certain information regarding debt: DECEMBER 31, DECEMBER 31, 2003 2002 --------------------- -------------------- Callable/redeemable notes, interest at 6.770%, due May 14, 2015, callable/redeemable May 16, 2005 $ 65,000 $ 65,000 Senior notes, interest at 6.970%, due December 3, 2007 35,000 35,000 Senior notes, interest at 8.200%, due August 15, 2008 100,000 100,000 Senior notes, interest at 5.750%, due April 15, 2010 150,000 - Bridge loan, at variable interest rate (2.617% at December 31, 2002), matured April 30, 2003 - 48,000 Senior notes, interest at 7.625%, matured May 1, 2003 - 85,000 Collateralized term loan, due to FNMA, due May 2007, with a weighted average interest rate of 3.244% and 2.17% at December 31, 2003 and December 31, 2002, respectively, convertible to a 5 to 10 year fixed rate loan 152,363 152,363 Collateralized term loan, interest at 7.010%, due September 9, 2007 41,547 42,206 Redeemable preferred OP units, average interest at 7.046%, redeemable at various dates through May 2010 58,148 - Capitalized lease obligations, interest at 5.510%, due January 10, 2004 9,606 16,438 Mortgage notes, other 62,664 60,366 --------------------- -------------------- Total debt $ 674,328 $ 604,373 ===================== ==================== The Company entered into a $25 million loan facility in September of 2003, of which $25 million was available to be borrowed at December 31, 2003. Borrowings bear an interest rate of Federal Funds Effective rate plus 0.85% and mature on March 24, 2004. In April 2003 the Company issued $150 million of 5.75 percent senior notes, due April 15, 2010, and used the proceeds from the offering to retire the bridge loan of $48 million and senior notes of $85 million which matured on April 30 and May 1, 2003, respectively. The remainder of the net proceeds was used to pay down the Company's line of credit. The collateralized term loans totaling $193.9 at December 31, 2003 are secured by 22 properties comprising approximately 10,600 sites. The capitalized lease obligation and mortgage notes are collateralized by 14 communities comprising approximately 4,000 sites. At the lease expiration date, January 2004, the capitalized lease reflected in December 31, 2003, was paid off by the issuance of 47,250 Preferred OP Units, cash of approximately $1.2 million and the assumption of approximately $4.2 million of debt, which was immediately retired. A capitalized lease obligation matured on January 1, 2003 and was paid by the issuance of 41,700 Preferred OP Units, cash of approximately $0.9 million and the assumption of approximately $1.6 million of debt, which was immediately retired. F-17
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 5. DEBT AND LINE OF CREDIT (AMOUNTS IN THOUSANDS), CONTINUED: The initial term of the variable rate collateralized term loan due to FNMA is five years. The Company has the option to extend such variable rate borrowings for an additional five years and/or convert them to fixed rate borrowings with a term of five or ten years, provided that in no event can the term of the borrowings exceed fifteen years. The Company has a $105 million unsecured line of credit, of which $6 and $22 million was available to borrow at December 31, 2003 and 2002, respectively. Borrowings under the line of credit bear interest at the rate of LIBOR plus 0.85% and mature July 2, 2005 with a one-year extension at the Company's option. The average interest rate of outstanding borrowings under the line of credit was 2.05 and 2.27 percent at December 31, 2003 and 2002 respectively. At December 31, 2003, the maturities of debt, excluding the line of credit, during the next five years are approximately as follows: 2004 - $35.1 million; 2005 - $66.6 million; 2006 - $20.4 million; 2007 - $81.1 million; 2008 - $106.7 million and $364.4 million thereafter. At December 31, 2003, the Company was the guarantor of $22.6 million in personal bank loans, made to directors, employees and consultants to purchase Company common stock and OP units pursuant to the Company's Stock Purchase Plan. The borrowers repaid the loans in January of 2004 and the guaranty was extinguished. F-18
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 6. STOCK OPTIONS: Data pertaining to stock option plans are as follows: 2003 2002 2001 ------------- ------------- ------------- Options outstanding, January 1 975,767 1,090,794 1,109,250 Options granted - 7,500 137,900 Option price N/A $34.92 $27.03-$32.81 Options exercised 154,179 97,665 59,773 Option price $20.13-$35.39 $20.13-$35.39 $22.75-$33.75 Options forfeited 10,837 24,862 96,583 Option price $27.03-$32.75 $27.03-$32.75 $27.03-$33.82 Option outstanding, December 31 810,751 (a) 975,767 1,090,794 Option price $20-$35.39 $20-$35.39 $20-$35.39 Option exercisable, December 31 765,168 (a) 834,249 823,227 (a) There are 190,394 options outstanding and exercisable with exercise prices ranging from $20.00 - $27.99 with an exercisable average life of 3.7 years related to the outstanding options. The weighted average exercise price for these outstanding and exercisable options is $25.53. There are 620,357 and 574,774 options outstanding and exercisable, respectively, with exercise prices ranging from $28.00 - $35.39 with a weighted average life of 4.2 years related to the outstanding options. The weighted average exercise price for these outstanding and exercisable options is $30.64 and $30.46, respectively. At December 31, 2003, 364,513 shares of common stock were available for the granting of options. Stock option plans originally provided for the grant of up to 2,117,000 options. Options are granted at fair value of the common stock and generally vest over a two-year period and may be exercised for 10 years after date of grant. In addition, the Company established a Long-Term Incentive Plan in 1997 for certain employees granting 167,918 options (of which 87,657 remain outstanding), which become exercisable in equal installments in 2002-2004. The Company has opted to measure compensation cost utilizing the intrinsic value method. The fair value of each option grant was estimated as of the date of grant using the Black-Scholes option-pricing model with the following assumptions for options granted: 2003 2002 2001 ---- ------ ------- Estimated fair value per share of options granted during year: N/A $ 4.42 (1) $ 6.19 Assumptions: Annualized dividend yield N/A 5.9% (1) 5.9% Common stock price volatility N/A 16.4% (1) 16.4% Risk-free rate of return N/A 5.3% (1) 5.3% Expected option term (in year) N/A 7 4 (1) 2002 based on valuation as of April 2001, due to insignificant option issuance in 2002. F-19
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 7. STOCKHOLDERS' EQUITY: In April 1998, the Company declared a dividend of one Preferred Stock Purchase Right ("Right") for each outstanding share of common stock. The Rights are not presently exercisable. Each Right entitles the holder, upon the occurrence of certain specified events, including a material change in the ownership of the Company, to purchase preferred stock and common stock, from the Company and/or from another person into which the Company is merged or which acquires control of the Company. The Rights may be generally redeemed by the Company at a price of $0.01 per Right or $0.2 million in total. The Rights expire on June 8, 2008. The Company is authorized to repurchase up to 1,000,000 shares of its common stock. No restricted stock awards were issued during the year ended December 31, 2003. Compensation cost recognized in income for all prior restricted stock awards was $1.3 million, $1.1 million and $0.9 million in 2003, 2002 and 2001, respectively. 8. OTHER INCOME (AMOUNTS IN THOUSANDS): The components of other income are as follows for the years ended December 31, 2003, 2002 and 2001. The ($4,932) relates to a reduction in the book value of a new community development due to the impracticality of future phase construction. 2003 2002 2001 -------- ------- ------- Brokerage commissions $ 754 $ 834 $ 731 Development fee - 1,425 2,707 Other income (loss) (78) 45 257 Asset write down (4,932) - - -------- ------- ------- $ (4,256) $ 2,304 $ 3,695 ======== ======= ======= F-20
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 9. SEGMENT REPORTING: With the consolidation of the operations of Sun Home Services for the year ended December 31, 2003, the consolidated operations of the Company can be segmented into manufactured home sales and property operations segments. Following is a presentation of financial information for the year ended December 31, 2003. PROPERTY MANUFACTURED OPERATIONS HOME SALES COMBINED Revenues $ 159,115 $ 19,516 $ 178,631 Operating expenses 51,583 13,879 65,462 ----------- -------- ----------- Net operating income 107,532 5,637 113,169 Adjustments to arrive at Net Income: Other revenues 2,243 8,264 10,507 General and administrative (10,536) (7,645) (18,181) Depreciation and amortization (43,165) (955) (44,120) Interest expense (36,530) (150) (36,680) Equity income from affiliate 667 - 667 Income allocated to minority interest (11,620) - (11,620) Income from discontinued operations 9,972 - 9,972 ----------- -------- ----------- Net income $ 18,563 $ 5,151 $ 23,714 =========== ======== =========== Capital expenditures $ 12,829 (1) $ 12,353 (2) $ 25,182 Identifiable assets: Investment in rental property, net $ 980,149 $ 30,335 $ 1,010,484 Cash and cash equivalents 24,043 15 24,058 Inventory of manufactured homes - 17,236 17,236 Investments in and advances to affiliates 50,667 - 50,667 Notes and other receivables 61,534 13,294 74,828 Other assets 41,613 2,688 44,301 ----------- -------- ----------- Total assets $ 1,158,006 $ 63,568 $ 1,221,574 =========== ======== =========== (1) Capital expenditures of Property Operations segment consist of lot modifications, recurring projects, revenue producing projects, and expenditures for acquisitions and expansions, net of asset disposals. (2) Capital expenditures of Manufactured Home Sales segment consist primarily of acquisitions of rental homes. 10. INCOME TAXES (AMOUNTS IN THOUSANDS): The Company has elected to be taxed as a real estate investment trust ("REIT") as defined under Section 856(c) of the Internal Revenue Code of 1986, as amended. In order for the Company to qualify as a REIT, at least ninety-five percent (95%) of the Company's gross income in any year must be derived from qualifying sources. In addition, a REIT must distribute at least ninety percent (90%) of its REIT ordinary taxable income to its stockholders. Qualification as a REIT involves the satisfaction of numerous requirements (some on an annual and quarterly basis) established under highly technical and complex Code provisions for which there are only limited judicial or administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within the F-21
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 10. INCOME TAXES (AMOUNTS IN THOUSANDS), CONTINUED: Company's control. In addition, frequent changes occur in the area of REIT taxation, which require the Company continually to monitor its tax status. As a REIT, the Company generally will not be subject to U.S. Federal income taxes at the corporate level on the ordinary taxable income it distributes to its stockholders as dividends. If the Company fails to qualify as a REIT in any taxable year, its taxable income will be subject to U.S. Federal income tax at regular corporate rates (including any applicable alternative minimum tax). Even if the Company qualifies as a REIT, it may be subject to certain state and local income taxes and to U.S. Federal income and excise taxes on its undistributed income. Dividend payout on taxable income available to common stockholders for the years ended December 31, 2003, 2002 and 2001: 2003 2002 2001 -------- -------- -------- Taxable income available to common stockholders $ 0 $ 6,046 $ 13,149 Less tax gain on disposition of properties 0 0 (175) -------- -------- -------- Taxable operating income available to common stockholders $ 0 $ 6,046 $ 12,974 -------- -------- -------- Total distributions paid to common stockholders $ 44,419 $ 41,427 $ 38,161 ======== ======== ======== For income tax purposes, distributions paid to common stockholders consist of ordinary income, capital gains, and return of capital. For the years ended December 31, 2003, 2002 and 2001, distributions paid per share were taxable as follows: 2003 2002 2001 --------------------- ---------------------- --------------------- AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE -------- ---------- --------- ---------- -------- ---------- Ordinary income $ 0.65 27.1% $ 1.54 67.1% $ 1.38 63.1% Return of capital 1.76 72.9% 0.75 32.9% 0.80 36.9% -------- ---------- --------- ---------- -------- ---------- $ 2.41 100.0% $ 2.29 100.0% $ 2.18 100.0% ======== ========== ========= ========== ======== ========== SHS is subject to U.S Federal income taxes. Deferred taxes reflect the estimated future tax effect of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. SHS has net operating loss carryforwards of approximately $14.7 million at December 31, 2003. A deferred asset of approximately $2.0 million, principally related to the net operating loss carryforwards, exclusive of losses related to SHS's investment in Origen, is included in other assets in the consolidated balance sheet as of December 31, 2003. The deferred tax asset at December 31, 2003 is net of a valuation allowance of $3.0 million related to SHS's net operating losses on its investment in Origen. SHS's losses will begin to expire in 2011 through 2022 if not offset by future taxable income. Management believes its deferred tax asset will be realized but realization is continuously subject to an assessment as to recoverability in the future. F-22
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 11. EARNINGS PER SHARE (AMOUNTS IN THOUSANDS): 2003 2002 2001 ------- ------- -------- Earnings used for basic and diluted earnings per share computation: Continuing operations $13,742 $11,972 $28,425 ======= ======= ======= Discontinued operations $ 9,972 $ 1,620 $ 5,485 ======= ======= ======= Total shares used for basic earnings per share 18,206 17,595 17,258 Dilutive securities: Stock options and other 139 186 182 ------- ------- ------- Total weighted average shares used for diluted earnings per share computation 18,345 17,781 17,440 ======= ======= ======= Diluted earnings per share reflect the potential dilution that would occur if dilutive securities were exercised or converted into common stock. F-23
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 12. QUARTERLY FINANCIAL DATA (UNAUDITED): The following unaudited quarterly amounts are in thousands, except for per share amounts: FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER MARCH 31 JUNE 30 SEPT.30 DEC. 31 ----------- ----------- -------- --------- 2003 Total revenues (a) $48,251 $48,911 $48,074 $ 43,902 Total expenses (a) $39,188 $41,696 $39,172 $ 44,387 Net income $ 6,343 $ 4,539 $ 6,421 $ 6,411 Weighted average common shares outstanding 17,789 17,902 18,504 18,628 Earnings per common share-basic $ 0.36 $ 0.25 $ 0.35 $ 0.34 2002 Total revenues (c) $40,347 $39,493 $40,327 $ 40,002 Total expenses (c) $29,603 $28,947 $30,629 $ 32,786 Net income (loss) (b) $ 8,114 $ 7,002 $ 5,802 $ (7,326) Weighted average common shares outstanding 17,322 17,544 17,739 17,777 Earnings (loss) per common share-basic $ 0.47 $ 0.40 $ 0.33 $ (0.41) (a) The Company's investment in Sun Home Services was accounted for using the equity method of accounting for the quarters ended March 31, June 30, and September 30, 2003. The total revenues and total expenses for these periods have been restated to include Sun Home Services' operating revenues and expenses. (b) Included in net income for the fourth quarter of 2002 is the write-off of $13.6 million pertaining to the Company's investment in Origen. (c) Revenues and expenses have been restated to conform to SFAS 144 which requires operations of properties sold or held for sale to be reclassified as discontinued operations. F-24
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 13. RECENT ACCOUNTING PRONOUNCEMENTS: In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" which establishes standards for how financial instruments that have characteristics of both liabilities and equity instruments should be classified on the balance sheet. The requirements of SFAS 150 generally outline that financial instruments that give the issuer a choice of settling an obligation with a variable number of securities or settling an obligation with a transfer of assets or any mandatorily redeemable security should be classified as a liability on the balance sheet. The Company has reclassified mandatorily redeemable preferred operating partnership units of $58.1 million into debt as of December 31, 2003. The reclassification had no effect on the Company's compliance with the covenant requirements of its credit agreements. In April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." The statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statements No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. In addition, all provisions of this Statement should be applied prospectively. The provisions of this Statement that relate to Statement 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. The adoption of this Statement did not have a significant impact on the financial position or results of the operations of the Company. In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." The objective of this interpretation is to provide guidance on how to identify a variable interest entity ("VIE") and determine when the assets, liabilities, non-controlling interests and results of operations of a VIE need to be included in a company's consolidated financial statements. A company that holds variable interests in an entity will need to consolidate the entity if the company's interest in the VIE is such that the company will absorb a majority of the VIE's expected losses and/or receive a majority of the VIE's expected residual returns, if they occur. FIN 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders. The provisions of this interpretation apply to the end of the first interim period or annual period ending after December 15, 2003 (i.e., December 31, 2003) to VIEs in which a company holds a variable interest that it acquired before February 1, 2003. The Company consolidated SHS in its financial reporting beginning December 31, 2003. The consolidation did not have a significant impact on the financial condition or results of operations of the Company. F-25
SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 14. CONTINGENCIES: On April 9, 2003, T.J. Holdings, LLC ("TJ Holdings"), a member of Sun/Forest, LLC ("Sun/Forest") (which, in turn, owns an equity interest in SunChamp LLC), filed a complaint against the Company, SunChamp LLC, certain other affiliates of the Company and two directors of Sun Communities, Inc. in the Superior Court of Guilford County, North Carolina. The complaint alleges that the defendants wrongfully deprived the plaintiff of economic opportunities that they took for themselves in contravention of duties allegedly owed to the plaintiff and purports to claim damages of $13.0 million plus an unspecified amount for punitive damages. The Company believes the complaint and the claims threatened therein have no merit and will defend it vigorously. The Company is involved in various other legal proceedings arising in the ordinary course of business. All such proceedings, taken together, are not expected to have a material adverse impact on our results of operations or financial condition. 15. RELATED PARTY TRANSACTIONS: The Company and its affiliates have entered into the following transactions with Origen Inc. and its predecessor, Origen during 2002 and 2003: - Capital Investment in Origen, Inc. As described in Note 1, the Company acquired 5,000,000 shares of common stock in Origen Inc. in a private placement transaction at $10 per share. - Loan Servicing Agreement. Origen Servicing, Inc., a wholly-owned subsidiary of Origen, services approximately $23.0 million in manufactured home loans for SHS as of December 31, 2003. Sun Home Services pays Origen Servicing, Inc. an annual servicing fee of 1.25 percent of the outstanding principal balance of the loans. - Guaranty of Licensing Bonds. The Company has guaranteed Origen Inc.'s obligations to an insurance company in connection with the issuance of bonds and undertakings required by various state licensing authorities as a condition to the issuance of Origen Inc. licenses. The Company's aggregate potential obligations under these bonds is approximately $5.0 million. In addition to the transactions with Origen Inc. described above, Mr. Shiffman and his affiliates have entered into the following transactions with the Company: - Related Party Lease. The Company leases its executive offices in Southfield, Michigan from an entity in which Mr. Shiffman and certain of his affiliates beneficially own approximately a 21 percent interest. - Capital Investment in Origen Financial, Inc. As part of the Origen Inc. private placement, Shiffman Origen LLC (100 percent of which is owned by the Estate of Milton M. Shiffman, Mr. Shiffman and members of his family), acquired 1,025,000 shares of common stock of Origen Inc. at $10 per share. F-26
15. RELATED PARTY TRANSACTIONS, CONTINUED: - Ownership of SHS. Gary Shiffman, and the Estate of Milton M. Shiffman (former Chairman of the Board), are the owners of all of the outstanding common stock of SHS, and as such are entitled to 5% of the cash flow from the operating activities of SHS. - Tax Consequences Upon Sale of Properties. Gary Shiffman holds limited partnership interests in the Operating Partnership which were received in connection with the contribution of 24 properties from partnerships previously affiliated with him (the "Sun Partnerships"). Prior to any redemption of these limited partnership interests for the Company's common stock, Mr. Shiffman will have tax consequences different from those of the Company and the Company's public stockholders on the sale of any of the Sun Partnerships. Four of the properties have been sold to date. 16. SUBSEQUENT EVENTS: In February, 2004, the Company entered into an agreement with certain affiliates of Property Asset Management Inc. ("PAMI") to acquire all of the equity interests in partnerships that directly and indirectly own and operate 19 properties and entered into a real estate purchase agreement to acquire 7 other properties. The properties are recreational vehicle communities, some of which include manufactured home sites. The portfolio consists of 11,331 sites, including 10,586 developed sites and 745 expansion recreational vehicle sites. Completion of the purchases is subject to customary closing conditions. PAMI, the seller under the purchase agreements, is the sole general partner and owns a substantial majority of the equity interests in the partnerships that own the properties subject to the purchase agreements. PAMI has exercised its rights under the relevant partnership agreements to acquire the equity interests of its minority partner. PAMI has informed us that its minority partner has disputed PAMI's rights to purchase its interests under the partnership agreements. As a result, PAMI has filed suit in the Delaware Chancery Court requesting, among other things, that the court specifically enforce PAMI's right to purchase the minority interests. The minority partner in the partnerships has filed an answer and counterclaim in the case requesting that the court find that the minority partner has the right to buy PAMI's interests under the partnership agreements. PAMI believes that it will be successful in the litigation and we expect to complete the acquisition of the partnership interests and properties. However, due to the uncertain nature of litigation and the other conditions to closing, we can provide no assurance that we will be able to successfully complete the proposed acquisitions and cannot reliably predict the timing of the resolution of these matters. F-27
SUN COMMUNITIES, INC. SCHEDULE III REAL ESTATE AND ACCUMLATED DEPRECIATION DECEMBER 31. 2003 (amount in thousands) COST CAPITALIZED SUBSEQUENT TO ACQUISITION INITIAL COST TO COMPANY IMPROVEMENTS ----------------------- --------------------------- PROPERTY NAME LOCATION ENCUMBRANCE LAND B & F & LAND B & F - --------------------------------- --------------------- ------------ ---------- ---------- ------------- --------- Academy/Westpoint Canton, MI A 1,485 $ 14,278 $ - $ 212 Allendale Allendale, MI A 366 3,684 - 3,815 Alpine Grand Rapids, MI - 729 6,692 - 3,646 Apple Creek Amelia, OH C 543 5,480 - 97 Arbor Terrace Brandenton, FL - 456 4,410 - 378 Ariana Village Lakeland, FL 240 2,195 - 525 Autumn Ridge Ankeny, IO A 890 8,054 - 903 Bedford Hills Battle Creek, MI B 1,265 11,562 - 482 Bell Crossing Clarksville, TN - 717 1,916 - 3,641 Bonita Lake Bonita Springs, FL - 285 2,641 - 267 Boulder Ridge Pflugerville, TX - 1,000 500 3,324 16,916 Branch Creek Austin, TX A 796 3,716 - 5,248 Brentwood Kentwood, MI - 385 3,592 - 294 Brookside Village Goshen, IN A 260 1,080 386 7,497 Buttonwood Bay Sebring, IN - 1,952 18,294 - 1,773 Byrne Hill Village Toledo, OH - 383 3,903 - 371 Byron Center Byron Center, MI - 253 2,402 - 162 Candlelight Village Chicago Heights, IL - 600 5,623 - 730 Candlewick Court Owosso, MI - 125 1,900 132 1,139 Carrington Pointe Ft. Wayne, IN - 1,076 3,632 - 4,332 Casa Del Valle Alamo, TX - 246 2,316 - 497 Catalina Middletown, OH - 653 5,858 - 1,313 Chisholm Point Pflugerville, TX A 609 5,286 - 2,934 Clearwater Village South Bend, IN - 80 1,270 61 1,931 Cobus Green Elkhart, IN - 762 7,037 - 719 College Park Estates Canton, MI - 75 800 174 4,796 Comal Farms New Braunfels, TX - 1,455 1,732 - 4,486 Continental Estates Davison, MI - 1,625 16,581 150 1,726 Continental North (1) Davison, MI - - 3,814 Country Acres Cadillac, MI - 380 3,495 - 282 Country Meadows Flat Rock, MI A 924 7,583 296 9,865 Countryside Village Perry, MI B 275 3,920 185 2,169 Creekside Reidsville, NC - 350 1,423 - 3,129 Creekwood Meadows Burton, MI - 808 2,043 404 6,629 Cutler Estates Grand Rapids, MI B 749 6,941 - 408 Davison East (1) Davison, MI - 22 Deerfield Run Anderson, MI 1700 990 1,607 - 3,289 Desert View Village West Wendover, NV - 1,119 - - 1,586 Eagle Crest Firestone, CO - 2,017 150 2,362 24,503 East Fork Batavia, OH - 1,280 6,302 - 4,199 Edwardsville Edwardsville, KS B 425 8,805 541 2,776 Falcon Pointe East Lansing, MI 2288 450 4,049 - 174 Fisherman's Cove Flint, MI - 380 3,438 - 578 Forest Meadows Philomath, OR - 1,031 2,050 - 67 Four Seasons Elkhart, IN - 500 4,811 - 14 Glen Laurel Concord, NC - 1,641 453 - 6,519 Goldcoaster Homestead, FL - 446 4,234 172 1,987 Grand Grand Rapids, MI - 374 3,587 - 229 Groves Ft. Myers, FL - 249 2,396 - 736 Hamlin Webberville, MI - 125 1,675 536 4,004 GROSS AMOUNT CARRIED AT DECEMBER 31, 2003 ------------------------- DATE OF ACCUMULATED CONSTRUCTION (C) PROPERTY NAME LAND B & F TOTAL DEPRECIATION ACQUISION (A) - --------------------------------- ------------ -------------- -------------- ------------- ------------- Academy/Westpoint $ 1,485 $ 14,490 $ 15,975 $ 1,694 2000(A) Allendale 366 7,499 7,865 1,665 1996(A) Alpine 729 10,338 11,067 2,252 1996(A) Apple Creek 543 5,577 6,120 813 1999(A) Arbor Terrace 456 4,788 5,244 1,213 1996(A) Ariana Village 240 2,720 2,960 838 1994(A) Autumn Ridge 890 8,957 9,847 2,151 1996(A) Bedford Hills 1,265 12,044 13,309 3,053 1996(A) Bell Crossing 717 5,557 6,274 618 1999(A) Bonita Lake 285 2,908 3,193 726 1996(A) Boulder Ridge 4,324 17,416 21,740 2,212 1998(C) Branch Creek 796 8,964 9,760 2,034 1995(A) Brentwood 385 3,886 4,271 1,003 1996(A) Brookside Village 646 8,577 9,223 2,123 1985(A) Buttonwood Bay 1,952 20,067 22,019 1,616 2001(A) Byrne Hill Village 383 4,274 4,657 649 1999(A) Byron Center 253 2,564 2,817 657 1996(A) Candlelight Village 600 6,353 6,953 1,590 1996(A) Candlewick Court 257 3,039 3,296 988 1985(A) Carrington Pointe 1,076 7,964 9,040 1,432 1997(A) Casa Del Valle 246 2,813 3,059 654 1997(A) Catalina 653 7,171 7,824 2,238 1993(A) Chisholm Point 609 8,220 8,829 1,964 1995(A) Clearwater Village 141 3,201 3,342 912 1986(A) Cobus Green 762 7,756 8,518 2,574 1993(A) College Park Estates 249 5,596 5,845 1,684 1978(A) Comal Farms 1,455 6,218 7,673 456 2000(A&C) Continental Estates 1,775 18,307 20,082 4,152 1996(A) Continental North (1) - 3,814 3,814 997 1996(A) Country Acres 380 3,777 4,157 945 1996(A) Country Meadows 1,220 17,448 18,668 4,484 1994(A) Countryside Village 460 6,089 6,549 1,847 1987(A) Creekside 350 4,552 4,902 375 2000(A&C) Creekwood Meadows 1,212 8,672 9,884 1,523 1997(C) Cutler Estates 749 7,349 8,098 1,843 1996(A) Davison East (1) - 22 22 - 1996(A) Deerfield Run 990 4,896 5,886 565 1999(A) Desert View Village 1,119 1,586 2,705 613 1998(C) Eagle Crest 4,379 24,653 29,032 1,317 1998(C) East Fork 1,280 10,501 11,781 905 2000(A&C) Edwardsville 966 11,581 12,547 3,587 1987(A) Falcon Pointe 450 4,223 4,673 64 2003(A) Fisherman's Cove 380 4,016 4,396 1,313 1993(A) Forest Meadows 1,031 2,117 3,148 314 1999(A) Four Seasons 500 4,825 5,325 585 2000(A) Glen Laurel 1,641 6,972 8,613 323 2001(A&C) Goldcoaster 618 6,221 6,839 1,284 1997(A) Grand 374 3,816 4,190 856 1996(A) Groves 249 3,132 3,381 723 1997(A) Hamlin 661 5,679 6,340 866 1984(A) F-28
COST CAPITALIZED SUBSEQUENT TO ACQUISITION INITIAL COST TO COMPANY IMPROVEMENTS ----------------------- --------------------------- PROPERTY NAME LOCATION ENCUMBRANCE LAND B & F & LAND B & F - --------------------------------- --------------------- ------------ ---------- ---------- ------------- --------- High Point Frederika, DE - 898 7,031 - 1,137 Holiday Village Elkhart, IN - 100 3,207 143 1,287 Holly Forest Holly Hill, FL - 920 8,376 - 399 Indian Creek Ft. Myers Beach, FL - 3,832 34,660 - 1,741 Island Lake Merritt Island, FL - 700 6,431 - 349 Kensington Meadows Lansing, MI - 250 2,699 - 3,632 Kenwood La Feria, TX - 145 1,842 - 41 King's Court Traverse City, MI A 1,473 13,782 - 1,630 King's Lake Debary, FL - 280 2,542 - 2,257 Knollwood Estates Allendale, MI 2642 400 4,061 - 12 Lafayette Place Warren, MI - 669 5,979 - 868 Lake Juliana Auburndale, FL - 335 2,848 - 999 Lake San Marino Naples, FL - 650 5,760 - 564 Leesburg Landing Leesburg, FL - 50 429 921 431 Liberty Farms Valparaiso, IN - 66 1,201 116 2,062 Lincoln Estates Holland, MI - 455 4,201 - 453 Maplewood Mobile Lawrence, IN - 275 2,122 - 974 Meadow Lake Estates White Lake, MI - 1,188 11,498 127 1,953 Meadowbrook Charlotte, NC - 1,310 6,570 - 2,778 Meadowbrook Estates Monroe, MI - 431 3,320 379 6,048 Meadowbrook Village Tampa, FL - 519 4,728 - 498 Meadows Nappanee, IN - 287 2,300 - 2,523 North Point Estates Pueblo, CO - 1,582 3,027 1 2,628 Oak Crest Austin, TX 8088 4,311 12,611 - 355 Oakwood Village Miamisburg, OH - 1,964 6,401 - 6,575 Orange Tree Orange City, FL - 283 2,530 15 795 Orchard Lake Milford, OH C 395 4,025 - 44 Pebble Creek Greenwood, IN - 1,030 5,074 - 3,418 Pecan Branch Georgetown, TX - 1,379 - 331 4,286 Pheasant Ridge Lancaster, PA 2,044 19,279 - 38 Pin Oak Parc St. Louis, MO A 1,038 3,250 467 4,949 Pine Hills Middlebury, IN - 72 544 60 1,784 Pine Ridge Petersburg, VA - 405 2,397 - 1,359 Presidential Hudsonville, MI A 680 6,314 - 1,286 Richmond Richmond, MI - 501 2,040 - 461 River Haven Grand Haven, MI 9512 1,800 16,967 - 179 River Ranch Austin, TX - 4,690 843 - 6,590 River Ridge Austin, TX 6813 3,201 15,090 - 225 Roxbury Goshen, IN - 1,057 9,870 1 99 Royal Country Miami, FL B 2,290 20,758 - 933 Saddle Oak Club Ocala, FL - 730 6,743 - 805 Saddlebrook San Marcos, TX 5321 1,703 11,843 - 311 Scio Farms Ann Arbor, MI - 2,300 22,659 - 4,010 Sea Air Rehoboth Beach, DE 4345 1,207 10,179 - 853 Sherman Oaks Jackson, FL B 200 2,400 240 4,132 Siesta Bay Ft. Myers Beach, FL - 2,051 18,549 - 901 Silver Star Orlando, FL - 1,022 9,306 - 452 Snow to Sun Weslaco, TX - 190 2,143 15 926 Southfork Belton, MO - 1,000 9,011 - 1,521 St. Clair Place St. Clair, MI - 501 2,029 - 361 Stonebridge Richfield Twp., MI 1119 2,044 - 180 1,918 GROSS AMOUNT CARRIED AT DECEMBER 31, 2003 ------------------------- DATE OF ACCUMULATED CONSTRUCTION (C) PROPERTY NAME LAND B & F TOTAL DEPRECIATION ACQUISION (A) - --------------------------------- ------------ -------------- -------------- ------------- ------------- High Point 898 8,168 9,066 740 1997(A) Holiday Village 243 4,494 4,737 1,476 1986(A) Holly Forest 920 8,775 9,695 1,915 1997(A) Indian Creek 3,832 36,401 40,233 9,266 1996(A) Island Lake 700 6,780 7,480 1,930 1995(A) Kensington Meadows 250 6,331 6,581 1,478 1995(A) Kenwood 145 1,883 2,028 299 1999(A) King's Court 1,473 15,412 16,885 3,821 1996(A) King's Lake 280 4,799 5,079 1,280 1994(A) Knollwood Estates 400 4,073 4,473 343 2001(A) Lafayette Place 669 6,847 7,516 1,267 1998(A) Lake Juliana 335 3,847 4,182 1,116 1994(A) Lake San Marino 650 6,324 6,974 1,606 1996(A) Leesburg Landing 971 860 1,831 215 1996(A) Liberty Farms 182 3,263 3,445 987 1985(A) Lincoln Estates 455 4,654 5,109 1,162 1996(A) Maplewood Mobile 275 3,096 3,371 957 1989(A) Meadow Lake Estates 1,315 13,451 14,766 4,406 1994(A) Meadowbrook 1,310 9,348 10,658 980 2000(A&C) Meadowbrook Estates 810 9,368 10,178 3,007 1986(A) Meadowbrook Village 519 5,226 5,745 1,687 1994(A) Meadows 287 4,823 5,110 1,434 1987(A) North Point Estates 1,583 5,655 7,238 408 2001(C) Oak Crest 4,311 12,966 17,277 670 2002(A) Oakwood Village 1,964 12,976 14,940 2,006 1998(A) Orange Tree 298 3,325 3,623 977 1994(A) Orchard Lake 395 4,069 4,464 670 1999(A) Pebble Creek 1,030 8,492 9,522 934 2000(A&C) Pecan Branch 1,710 4,286 5,996 284 1999(C) Pheasant Ridge 2,044 19,317 21,361 990 2002(A) Pin Oak Parc 1,505 8,199 9,704 1,887 1994(A) Pine Hills 132 2,328 2,460 709 1980(A) Pine Ridge 405 3,756 4,161 1,174 1986(A) Presidential 680 7,600 8,280 1,889 1996(A) Richmond 501 2,501 3,002 468 1998(A) River Haven 1,800 17,146 18,946 1,506 2001(A) River Ranch 4,690 7,433 12,123 133 2000(A&C) River Ridge 3,201 15,315 18,516 910 2002(A) Roxbury 1,058 9,969 11,027 837 2001(A) Royal Country 2,290 21,691 23,981 7,230 1994(A) Saddle Oak Club 730 7,548 8,278 2,290 1995(A) Saddlebrook 1,703 12,154 13,857 623 2002(A) Scio Farms 2,300 26,669 28,969 7,217 1995(A) Sea Air 1,207 11,032 12,239 996 1997(A) Sherman Oaks 440 6,532 6,972 1,978 1986(A) Siesta Bay 2,051 19,450 21,501 4,950 1996(A) Silver Star 1,022 9,758 10,780 2,492 1996(A) Snow to Sun 205 3,069 3,274 669 1997(A) Southfork 1,000 10,532 11,532 1,902 1997(A) St. Clair Place 501 2,390 2,891 548 1998(A) Stonebridge 2,224 1,918 4,142 - 1998(C) F-29
COST CAPITALIZED SUBSEQUENT TO ACQUISITION INITIAL COST TO COMPANY IMPROVEMENTS ----------------------- --------------------------- PROPERTY NAME LOCATION ENCUMBRANCE LAND B & F & LAND B & F - --------------------------------- --------------------- ------------ ---------- ---------- ------------- --------- Stonebridge San Antonio, TX - 2,552 2,096 1,881 3,011 Summit Ridge Converse, TX - 2,615 2,092 - 5,263 Sun Villa Reno, NV 6567 2,385 11,773 - 403 Sunset Ridge Portland, MI - 2,044 - - 11,532 Sunset Ridge Kyle, TX - 2,190 2,775 - 5,002 Timber Ridge Ft. Collins, CO A 990 9,231 - 1,227 Timberbrook Bristol, IN B 490 3,400 101 5,281 Timberline Estates Grand Rapids, MI A 535 4,867 - 742 Town and Country Traverse City, MI - 406 3,736 - 277 Valley Brook Indianapolis, IN A 150 3,500 1,277 9,171 Village Trails Howard City, MI - 988 1,472 - 735 Water Oak Lady Lake, FL - 2,503 17,478 - 6,357 West Glen Village Indianapolis, IN - 1,100 10,028 - 1,014 Westbrook Toledo, OH 9606 1,110 10,462 - 890 Westbrook Senior Toledo, OH - 355 3,295 - 346 White Lake White Lake, MI - 672 6,179 - 4,732 White Oak Mt. Morris, MI A 782 7,245 112 3,704 Willowbrook Toledo, OH 781 7,054 - 703 Windham Hills Jackson, MI - 2,673 2,364 - 7,789 Woodhaven Place Woodhaven, MI - 501 4,541 - 883 Woodlake Estates Yoder, IN - 632 3,674 - 2,683 Woodlake Trails San Antonio, TX - 1,186 287 160 3,279 Woodland Park Estates Eugene, OR 7006 1,592 14,398 - 392 Woods Edge West Lafayette, IN - 100 2,600 3 7,837 Woodside Terrace Holland, OH - 1,064 9,625 - 1,467 Worthington Arms Lewis Center, OH - 376 2,624 - 1,267 Corporate Headquarters Farmington Hills, MI - - - - 8,628 Sun Homes Various 703 32,035 (3) --------- ---------- -------- --------- $ 121,499 $723,661 $ 15,956 $ 359,289 ========= ========== ======== ========= GROSS AMOUNT CARRIED AT DECEMBER 31, 2003 ------------------------- DATE OF ACCUMULATED CONSTRUCTION (C) PROPERTY NAME LAND B & F TOTAL DEPRECIATION ACQUISION (A) - --------------------------------- ------------ -------------- -------------- ------------- ------------- Stonebridge 4,433 5,107 9,540 590 2000(A&C) Summit Ridge 2,615 7,355 9,970 640 2000(A&C) Sun Villa 2,385 12,176 14,561 2,254 1998(A) Sunset Ridge 2,044 11,532 13,576 826 1998(C) Sunset Ridge 2,190 7,777 9,967 772 2000(A&C) Timber Ridge 990 10,458 11,448 2,592 1996(A) Timberbrook 591 8,681 9,272 2,618 1987(A) Timberline Estates 535 5,609 6,144 1,728 1994(A) Town and Country 406 4,013 4,419 1,040 1996(A) Valley Brook 1,427 12,671 14,098 3,712 1989(A) Village Trails 988 2,207 3,195 386 1998(A) Water Oak 2,503 23,835 26,338 6,986 1993(A) West Glen Village 1,100 11,042 12,142 3,407 1994(A) Westbrook 1,110 11,352 12,462 1,733 1999(A) Westbrook Senior 355 3,641 3,996 300 2001(A) White Lake 672 10,911 11,583 1,904 1997(A) White Oak 894 10,949 11,843 2,156 1997(A) Willowbrook 781 7,757 8,538 1,398 1997(A) Windham Hills 2,673 10,153 12,826 1,443 1998(A) Woodhaven Place 501 5,424 5,925 990 1998(A) Woodlake Estates 632 6,357 6,989 1,001 1998(A) Woodlake Trails 1,346 3,566 4,912 308 2000(A&C) Woodland Park Estates 1,592 14,790 16,382 2,745 1998(A) Woods Edge 103 10,437 10,540 2,270 1985(A) Woodside Terrace 1,064 11,092 12,156 2,371 1997(A) Worthington Arms 376 3,891 4,267 1,250 1990(A) Corporate Headquarters 8,628 8,628 2,089 Various Sun Homes 703 32,035 32,738 2,403 Various -------- ------------ ----------- ---------- $137,455 (2) $ 1,082,950 $ 1,220,405 $ 209,921 ======== ============ =========== ========== A These communities collateralize $152.36 million of secured debt. B These communities collateralize $41.6 million of secured debt. C These communities collateralize $4.61 million of secured debt. (1) The initial cost for this property is included in the initial cost reported for Continental Estates. (2) Includes $1.50 million of land classified in Property under development (3) Includes $29.26 million of manufactured homes leased to residents in various communities F-30
EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------ ----------- 12.1 Computation of Ratio of Earnings to Fixed Charges and Ratio Earnings to Combined Fixed Charges and Preferred Dividends 21.1 List of Subsidiaries of Sun Communities, Inc. 23.1 Consent of PriceWaterhouseCoopers LLP 23.2 Consent of Grant Thornton LLP 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DISTRIBUTIONS The ratio of earnings to fixed charges for the Company (including its subsidiaries and majority-owned partnerships) presents the relationship of the Company's earnings to its fixed charges. "Earnings" as used in the computation, is based on the Company's income from continuing operations before minority interests and income or loss from equity investees plus fixed charges. "Fixed charges" is comprised of (i) interest charges, whether expensed or capitalized, (ii) amortization of loan costs and discounts or premiums relating to indebtedness of the Company and its subsidiaries and majority-owned partnerships, excluding in all cases items which would be or are eliminated in consolidation, and (iii) preferred stock or OP Unit distributions. The Company's ratio of earnings to combined fixed charges presents the relationship of the Company's earnings (as defined above) to fixed charges (as defined above). 2003 2002 (a) 2001 (a) 2000 (a) 1999 (a) ---------------------------------------------------------------------- (unaudited, in thousands) Earnings: Income from continuing operations $ 24,695 $39,745 $ 42,915 $40,985 $ 37,435 before minority interest and income (loss) from equity investee Add: Fixed charges 48,178 42,644 42,851 40,625 33,182 Less: Distributions to preferred OP unitholders (8,537) (7,803) (8,131) (7,826) (3,663) Capitalized Interest (2,082) (2,915) (3,704) (3,148) (2,230) ---------------------------------------------------------------------- $ 62,254 $ 71,671 $ 73,931 $70,636 $ 64,724 ====================================================================== Fixed Charges: Interest Expense $ 36,680 $32,375 $ 31,016 $ 29,651 $ 27,289 Hedging Valuation Adjustment 879 (449) - - - Distributions to preferred OP unitholders 8,537 7,803 8,131 7,826 3,663 Capitalized Interest 2,082 2,915 3,704 3,148 2,230 ---------------------------------------------------------------------- $ 48,178 $42,644 $ 42,851 $40,625 $ 33,182 ====================================================================== Ratio of earnings to fixed charges 1.29 1.68 1.73 1.74 1.95 (a) Amounts are presented prior to restatement for FAS 144 related to discontinued operations.
SUN COMMUNITIES, INC. EXHIBIT 21.1 - LIST OF SUBSIDIARIES Main operating subsidiary: Sun Communities Operating Limited Partnership, a Michigan limited partnership Other subsidiaries (wholly-owned): SCF Manager, Inc., a Michigan corporation SCN Manager, Inc., a Michigan corporation Sun Florida QRS, Inc., a Michigan corporation Sun Secured Financing GP, Inc., a Michigan corporation Sun QRS, Inc., a Michigan corporation Sun Texas QRS, Inc., a Michigan corporation Subsidiaries of Sun Communities Operating Limited Partnership 8920 Associates, a Florida general partnership Apple Orchard, LLC, a Michigan limited liability company Arizona Finance L.L.C., a Michigan limited liability company Aspen-Alpine Project, L.L.C., a Michigan limited liability company Aspen-Arbor Terrace, L.P., a Delaware limited partnership Aspen-Bonita Lake Resort Limited Partnership, a Michigan limited partnership Aspen-Brentwood Project, L.L.C., a Michigan limited liability company Aspen-Byron Project, L.L.C., a Michigan limited liability company Aspen-Country Project, L.L.C., a Michigan limited liability company Aspen-Ft. Collins Limited Partnership, a Michigan limited partnership Aspen-Grand Project, L.L.C., a Michigan limited liability company Aspen-Holland Estates, L.L.C., a Michigan limited liability company Aspen-Indian Project Limited Partnership, a Michigan limited partnership Aspen-Paradise Park II Limited Partnership, a Michigan limited partnership Aspen-Siesta Bay Limited Partnership, a Michigan limited partnership Aspen-Silver Star II Limited Partnership, a Michigan limited partnership Aspen-Town & Country Associates II, L.L.C., a Michigan limited liability company Bright Insurance Agency, Inc., a Michigan corporation
SUN COMMUNITIES, INC. EXHIBIT 21.1 - LIST OF SUBSIDIARIES, CONTINUED Comal Farms Manager LLC, a Michigan limited liability company CP Comal Farms Limited Partnership, a Michigan limited partnership CP Creekside LLC, a Michigan limited liability company CP Woodlake Limited Partnership, a Michigan limited partnership Creekside Manager LLC, a Michigan limited liability company East Fork Crossing Manager LLC, a Michigan limited liability company Family Retreat, Inc., a Michigan corporation FC East Fork Crossing LLC, a Michigan limited liability company FC Glen Laurel LLC, a Michigan limited liability company FC Meadowbrook LLC, a Michigan limited liability company FC Pebble Creek LLC, a Michigan limited liability company FC River Ranch Limited Partnership, a Michigan limited partnership FC Stonebridge Limited Partnership, a Michigan limited partnership FC Summit Ridge Limited Partnership, a Michigan limited partnership FC Sunset Ridge Limited Partnership, a Michigan limited partnership Glen Laurel Manager LLC, a Michigan limited liability company Knollwood Estates Operating Company L.L.C., a Michigan limited liability company Meadowbrook Manager LLC, a Michigan limited liability company Meadow Lakes Development Company LLC, a Michigan limited liability company Miami Lakes Venture Associates, a Florida general partnership Origen Financial, L.L.C., a Delaware limited liability company Pebble Creek Manager LLC, a Michigan limited liability company Priority Entertainment L.L.C., a Michigan limited liability company River Haven Operating Company L.L.C., a Michigan limited liability company River Ranch Manager LLC, a Michigan limited liability company River Ridge Equities, LLC, a Michigan limited liability company River Ridge Investments, LLC, a Michigan limited liability company SCA2, LLC, a Michigan limited liability company Snowbird Concessions, Inc., a Texas corporation Stonebridge Manager LLC, a Michigan limited liability company
SUN COMMUNITIES, INC. EXHIBIT 21.1 - LIST OF SUBSIDIARIES, CONTINUED Summit Ridge Manager LLC, a Michigan limited liability company Sun Cave Creek L.L.C., a Michigan limited liability company SunChamp, LLC, a Michigan limited liability company Sunchamp Holdings, LLC, a Michigan limited liability company Sun Communities Acquisitions, LLC, a Michigan limited liability company Sun Communities Finance, LLC, a Michigan limited liability company Sun Communities Financial, LLC, a Michigan limited liability company Sun Communities Funding Limited Partnership, a Michigan limited partnership Sun Communities Secured Financing Houston Limited Partnership, a Michigan limited partnership Sun Communities Mezzanine Lender, LLC, a Michigan limited liability company Sun Communities Nevada GP L.L.C., a Michigan limited liability company Sun Communities Nevada Limited Partnership, a Michigan limited partnership Sun Communities Texas Limited Partnership, a Michigan limited partnership Sun Communities Texas Mezzanine Lender Limited Partnership., a Michigan limited partnership Sun Communities Funding GP L.L.C., a Michigan limited liability company Sun Financial, LLC, a Michigan limited liability company Sun Financial Texas Limited Partnership, a Michigan limited partnership Sun/Forest LLC, a Michigan limited liability company Sun/Forest Holdings LLC, a Michigan limited liability company Sun GP L.L.C., a Michigan limited liability company Sun Home Services, Inc., a Michigan corporation Sun Hunters Glen L.L.C., a Michigan limited liability company Sun Life Associates Limited Partnership, an Arizona limited partnership Sun Life Trailer Resort Limited Partnership, an Arizona limited partnership Sun MHC Development LLC, a Michigan limited liability company Sun Oakcrest Limited Partnership, a Michigan limited partnership Sun OFI, LLC, a Michigan limited liability company Sun Pheasant Ridge, LLC, a Michigan limited liability company Sun Pine Trace Limited Partnership, a Michigan limited partnership
SUN COMMUNITIES, INC. EXHIBIT 21.1 - LIST OF SUBSIDIARIES, CONTINUED Sun River Ridge Limited Partnership, a Michigan limited partnership Sun Saddle Brook Limited Partnership, a Michigan limited partnership Sun Secured Financing, LLC, a Michigan limited liability company Sunset Ridge Manager LLC, a Michigan limited liability company SUI TRS, Inc., a Michigan corporation Sun TRS, Inc., a Michigan corporation Sun Water Oak Golf, Inc., a Michigan corporation Sun/York L.L.C., a Michigan limited liability company Woodlake Manager LLC, a Michigan limited liability company Woodside Terrace, Ltd., an Ohio limited liability company
EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (Nos. 333-54718, 333-86237, 333-64271, 333-14595, 333-45273, 333-72461, 333-30462, 333-72668, 333-82392, 333-19855, 333-36541, 333-1822, 333-96769 and 333-104737) and Form S-8 (Nos.333-11923, 333-82479, 333-76400, 333-76398) of Sun Communities, Inc. of our report dated March 12, 2003 except for Note 3 as to which the date is March 12, 2004 relating to the 2002 and 2001 financial statements which is incorporated in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Detroit, Michigan March 15, 2004
Exhibit 23.2 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT We consent to the incorporation by reference in the registration statements on Form S-3 (File No. 333-54718, File No. 333-86237, File No. 333-64271, File No. 333-14595, File No. 333-45273, File No. 333-72461, File No. 333-30462, File No. 333-72668, File No. 333-82392, File No. 333-19855, File No. 333-36541, File No. 333-1822, File No. 333-96769, and File No, 333-104737) and on Form S-8 (File No. 333-11923, File No. 333-82479, File No. 333-76400, and File No. 333-76398) of Sun Communities, Inc. of our reports dated February 19, 2004 relating to the 2003 consolidated financial statements which appear in this Annual Report on Form 10-K. We also consent to the incorporation by reference in the aforementioned registration statements of our reports dated February 3, 2004 relating to the consolidated financial statements of Origen Financial Inc. and Origen Financial, L.L.C. which appear in this Annual Report on Form 10-K. /S/ GRANT THORNTON LLP Southfield, MI March 15, 2004
Exhibit 31.1 CERTIFICATIONS (As Adopted Under Section 302 of the Sarbanes-Oxley Act of 2002) I, Gary A. Shiffman, certify that: 1. I have reviewed this annual report on Form 10-K of Sun Communities, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: March 15, 2004 /s/ Gary A. Shiffman ----------------------------------------- Gary A. Shiffman, Chief Executive Officer
Exhibit 31.2 CERTIFICATIONS (As Adopted Under Section 302 of the Sarbanes-Oxley Act of 2002) I, Jeffrey P. Jorissen, certify that: 1. I have reviewed this annual report on Form 10-K of Sun Communities, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: March 15, 2004 /s/ Jeffrey P. Jorissen --------------------------------------------- Jeffrey P. Jorissen, Chief Financial Officer
Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 (Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) In connection with the Annual Report of Sun Communities, Inc. (the "Corporation") on Form 10-K for the period ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned officers, Gary A. Shiffman and Jeffrey P. Jorissen, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to their knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Corporation. /s/ Gary A. Shiffman Dated: March 15, 2004 - -------------------------------------------- Gary A. Shiffman, Chief Executive Officer /s/ Jeffrey P. Jorissen Dated: March 15, 2004 - -------------------------------------------- Jeffrey P. Jorissen, Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to Sun Communities, Inc. and will be retained by Sun Communities, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.