1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (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, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO 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. 31700 MIDDLEBELT ROAD SUITE 145 FARMINGTON HILLS, MICHIGAN 48334 (248) 932-3100 (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 --- As of March 2, 1998, the aggregate market value of the Registrant's voting stock held by non-affiliates of the Registrant was approximately $544,257,925 determined in accordance with the highest price at which the stock was sold on such date as reported by the New York Stock Exchange. As of March 2, 1998, there were 16,625,341 shares of the Registrant's common stock issued and outstanding.
2 PART I ITEM 1. BUSINESS GENERAL Sun Communities, Inc. (the "Company") owns, operates and finances manufactured housing communities concentrated in the midwestern and southeastern United States. The Company is a fully integrated real estate company which, together with its affiliates and predecessors, has been in the business of acquiring, operating and expanding manufactured housing communities since 1975. At December 31, 1997, the Company owned and managed a portfolio of 95 properties located in twelve states (the "Properties"), including eighty-four manufactured housing communities, five recreational vehicle communities, and six properties containing both manufactured housing and recreational vehicle sites. At December 31, 1997, the Properties contained an aggregate of 28,752 developed manufactured home sites, approximately 3,600 manufactured home sites suitable for development and 5,200 recreational vehicle sites. In order to enhance property performance and cash flow, the Company, through Sun Home Services, Inc., a Michigan corporation ("Home Services" or "SHS"), actively markets and sells new and used manufactured homes for placement in the Properties. The Company made an election to be taxed as a REIT for federal income tax purposes commencing with the calendar year beginning January 1, 1994, and is self-administered and self-managed. The Company's executive and principal property management office is located at 31700 Middlebelt Road, Suite 145, Farmington Hills, Michigan 48334 and its telephone number is (248) 932-3100. The Company has regional property management offices located in Elkhart, Indiana and Tampa, Florida. The Company, which is a Maryland corporation, employed 547 people as of December 31, 1997. HISTORY OF THE COMPANY The immediate predecessor to Sun Communities, Inc. was incorporated in January 1985 to continue and expand the business of acquiring, owning and operating manufactured housing communities that was originally started in 1975. Since its inception, the Company's strategy has been to acquire and in many cases expand or renovate existing manufactured housing communities. The Company has maintained this strategy because it believes attractive investment returns can be obtained by purchasing existing properties with expansion potential. STRUCTURE OF THE COMPANY The operations of the Company are carried on through certain subsidiaries (the "Subsidiaries"), including Sun Communities Operating Limited Partnership, a Michigan limited partnership (the "Operating Partnership") and Sun Communities Finance Limited Partnership, a Michigan limited partnership (the "Financing Partnership"), which, among other things, enables the Company to comply with certain complex requirements under the Federal tax rules and regulations applicable to REITs. The Company established the Operating Partnership to allow the Company to acquire manufactured housing communities in transactions that defer some or all of the sellers' tax consequences. Substantially all of the Company's assets are held by or through the Operating Partnership, of which the Company is the sole general partner, and wholly-owned subsidiaries of the Company. In addition to the Operating Partnership and the Financing Partnership, the Subsidiaries include Home Services, which provides manufactured home sales and other services to current and prospective tenants of the Properties. The Operating Partnership owns 100% of the non-voting preferred stock of Home Services, which entitles the Operating Partnership to 95% of the cash flow - 2 -
3 from operating activities of Home Services. The voting common stock of Home Services is owned by Milton M. Shiffman, Gary A. Shiffman and Jeffrey P. Jorissen, executive officers of the Company, entitling them to the remaining 5% of such cash flow from operating activities. Sun Water Oak Golf, Inc. ("Sun Golf") is a wholly-owned subsidiary of Home Services. Sun Golf was organized to own and operate the golf course, restaurant and related facilities located on the Water Oak Property that were acquired in November 1994. 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 multi-family 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 in the Company's communities leases the site on which the home is located. The Company owns the underlying land, utility connections, streets, lighting, driveways, common area amenities and other capital improvements and is responsible for enforcement of community guidelines and maintenance. Some communities provide water and sewer service through public or private utilities, while others provide these services to residents from on-site facilities. Each owner within the Company's communities is responsible for the maintenance of his home and leased site. As a result, capital expenditure needs tend to be less significant, relative to multi-family rental apartment complexes. PROPERTY MANAGEMENT The Company's property management strategy emphasizes intensive, hands-on management by dedicated, on-site property managers. The Company believes that this on-site focus enables it to continually monitor and address tenant concerns, the performance of competitive properties and local market conditions. Of the Company's 547 employees, 499 are located on-site as property managers, support staff, or maintenance personnel. The Company's property managers are overseen by Brian W. Fannon, Senior Vice President and Chief Operating Officer, who has 28 years of property management experience, three Vice Presidents and eleven Regional Property Managers. In addition, the Regional Property Managers are responsible for semi-annual market surveys of competitive parks, interaction with local manufactured home dealers and regular property inspections. Each property 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 property manager, each property has an on-site maintenance person and management support staff. The Company holds periodic training sessions for all property management personnel to ensure that management policies are implemented effectively and professionally. - 3 -
4 HOME SALES Home Services offers manufactured home sales services to tenants and prospective tenants in the Company's communities. Since tenants often purchase a home already on-site within a community, such services enhance occupancy and property performance. Additionally, since many of the homes in the Properties are sold through Home Services, better control of home quality in the Company's communities can be maintained than if sales services were conducted solely through third-party brokers. COMPETITION All of the 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 effect on the Company's ability to lease sites and on rents charged at the Properties or at any newly acquired properties. The Company may be competing with others that have greater resources than the Company and whose officers and directors have more experience than the Company's officers and directors. In addition, other forms of multi-family residential properties, such as private and federally funded or assisted multi-family housing and single-family housing, provide housing alternatives to potential tenants of manufactured housing communities. 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. The Company believes that each Property has the necessary operating permits and approvals. Americans with Disabilities Act ("ADA"). The Properties and any newly acquired manufactured housing communities must comply with the ADA. The ADA has separate compliance requirements for "public accommodations" and "commercial facilities," but generally requires that public facilities such as clubhouses, pools and recreation areas be made accessible to people with disabilities. Compliance with ADA requirements could require removal of access barriers and other capital improvements at the Company's properties. Noncompliance could result in imposition of fines or an award of damages to private litigants. The Company does not believe the ADA will have a material adverse impact on the Company's results of operations. If required property improvements involve a greater expenditure than the Company currently anticipates, or if the improvements must be made on a more accelerated basis than it anticipates, the Company's ability to make expected distributions could be adversely affected. The Company believes that its competitors face similar costs to comply with the requirements of the ADA. Rent Control Legislation. State and local rent control laws in certain jurisdictions limit the Company's 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. The Company presently expects to continue to operate manufactured housing community properties, and may purchase additional properties, in markets that are either subject to rent control or in which rent-limiting legislation exists or may be enacted. For example, 29 of the Properties are located in Florida, which has enacted a law which provides that a majority of tenants in a manufactured housing community may require that a proposed increase in site rental rates, reduction in services or utilities or change in the community's rules and regulations be submitted for formal mediation or arbitration if they believe that the proposal is unreasonable. Insurance. Management believes that the Properties are covered by adequate fire, flood, property and business interruption insurance provided by reputable companies and with - 4 -
5 commercially reasonable deductibles and limits. The Company maintains a blanket policy that covers all of the Properties. The Company has obtained title insurance insuring fee title to the Properties in an aggregate amount which the Company believes to be adequate. ITEM 2. PROPERTIES General. At December 31, 1997, the Properties consisted of eighty-four manufactured housing communities, five recreational vehicle communities, and six properties containing both manufactured housing and recreational vehicle sites concentrated in twelve states in the midwestern and southeastern United States. At December 31, 1997, the Properties contained 28,752 developed manufactured home sites, approximately 3,600 manufactured home sites suitable for development and 5,200 recreational vehicle sites. Most of the Properties include amenities oriented towards family and retirement living. Of the 95 Properties, forty-four have more than 300 developed manufactured home sites, with the largest having 913 developed manufactured home sites. The Properties had an aggregate occupancy rate of 95% as of December 31, 1997, excluding recreational vehicle sites. Since January 1, 1997, the Properties have averaged an aggregate annual turnover of homes (where the home is moved out of the community) of approximately 2.8% 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 8.5%. The Company believes that its 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. The Company has sought to concentrate its communities within certain geographic areas in order to achieve economies of scale in management and operation. Except for five Properties located in Texas and one property located in Colorado, the Properties are located in the midwestern and southeastern United States. The Company has identified Florida as a key market in which to expand its existing operations in the southeast because of Florida's stable tenant base, relatively low cost of living and attractive acquisition opportunities. Additionally, the Company's midwestern operations serve as a source of prospective tenants for the Florida Properties, which are generally oriented towards retirement living. Because the Company believes that geographic diversification will help insulate the portfolio from regional economic influences, the Company is also interested in acquiring properties in the western United States. - 5 -
6 The following table sets forth certain information relating to the Properties owned as of December 31, 1997: <TABLE> <CAPTION> DEVELOPED OCCUPANCY OCCUPANCY OCCUPANCY SITES AS OF AS OF AS OF AS OF PROPERTY AND LOCATION 12/31/97 (1) 12/31/95 (1) 12/31/96 (1) 12/31/97(1) - --------------------- -------------------- -------------------- --------------- ----------- <S> <C> <C> <C> <C> MIDWEST MICHIGAN Allendale Allendale, MI 281 96% 97% 80%(2) Alpine Grand Rapids, MI 381 96% 99% 99% Bedford Hills Battle Creek, MI 339 94% 94% 98% Brentwood Kentwood, MI 197 97% 99% 99% Byron Center Byron Center, MI 143 92% 97% 100% Candlewick Court Owosso, MI 211 100% 99% 98% College Park Estates Canton, MI 230 98% 99% 99% Continental Estates Davison, MI 385 (4) 93% 92% Continental North Davison, MI 334 (4) 95% 96% Country Acres Cadillac, MI 182 98% 98% 96% Country Meadows Flat Rock, MI 577 99% 99% 96%(2) Countryside Village Perry, MI 359 99% 96% 96% Creekwood (3) Burton, MI 140 --- --- 98% Cutler Estates Grand Rapids, MI 281 96% 98% 98% Davison East Davison, MI 190 (5) 99% 97% Fisherman's Cove Flint, MI 162 98% 97% 97% Grand Grand Rapids, MI 311 95% 98% 99% Hamlin Webberville, MI 146 99% 100% 98% Kensington Meadows Lansing, MI 251 94% 67% (6) 77%(2) Kings Court Traverse City, MI 613 94% 92% (6) 95%(2) Lincoln Estates Holland, MI 191 98% 97% 100% Maple Grove Estates Dorr, MI 46 100% 100% 98% Meadow Lake Estates White Lake, MI 425 97% 100% 100% </TABLE> - 6 -
7 <TABLE> <CAPTION> DEVELOPED OCCUPANCY OCCUPANCY OCCUPANCY SITES AS OF AS OF AS OF AS OF PROPERTY AND LOCATION 12/31/97 (1) 12/31/95 (1) 12/31/96 (1) 12/31/97(1) - --------------------- -------------------- -------------------- --------------- ----------- <S> <C> <C> <C> <C> Meadowbrook Estates Monroe, MI 453 100% 100% 100% Meadowstream Village Sodus, MI 159 98% 99% 99% Parkwood Grand Blanc, MI 249 96% 97% 98% Presidential Hudsonville, MI 364 96% 98% 92%(2) Scio Farms Ann Arbor, MI 913 100% 99% 100% Sherman Oaks Jackson, MI 366 100% 99% 98% Timberline Estates Grand Rapids, MI 296 98% 100% 100% Town & Country Traverse City, MI 192 98% 100% 99% White Lake White Lake, Michigan 268 (5) (5) 97% White Oak Estates Mt. Morris, Michigan 376 (5) (5) 97% ------ --- --- --- Michigan Total 10,011 97% 98% 97% ====== === === === INDIANA Brookside Village Goshen, IN 430 99% 99% 84%(2) Carrington Pointe Ft. Wayne, IN 170 (5) (5) 76% Clear Water Village South Bend, IN 202 93% 97% 94%(2) Cobus Green Elkhart, IN 386 98% 98% 98% Holiday Village Elkhart, IN 326 98% 99% 98% Liberty Farms Valparaiso, IN 220 100% 92% (2) 100% Maplewood Lawrence, IN 207 97% 99% 97% Meadows Nappanee, IN 330 96% 98% 99% Meadowbrook Indianapolis, IN 444 96% 98% 81%(2) Pine Hills Middlebury, IN 126 99% 96% 94% Timberbrook Bristol, IN 567 84% 88% (2) 97% Valley Mills Indianapolis, IN 356 99% 98% 98% West Glen Village Indianapolis, IN 552 99% 99% 99% Woods Edge West Lafayette, IN 430 92% 99% 98% ------ --- --- --- </TABLE> - 7 -
8 <TABLE> <CAPTION> DEVELOPED OCCUPANCY OCCUPANCY OCCUPANCY SITES AS OF AS OF AS OF AS OF PROPERTY AND LOCATION 12/31/97 (1) 12/31/95 (1) 12/31/96 (1) 12/31/97(1) - --------------------- -------------------- -------------------- --------------- ----------- <S> <C> <C> <C> <C> Indiana Total 4,746 96% 97% 94% ===== === === === OTHER Autumn Ridge Ankeny, IA 400 100% 98% 99% Boulder Ridge Pflugerville, TX 135 -- -- 18%(6) Branch Creek Estates Austin, TX 392 98% 94% (6) 99% Candlelight Chicago Heights, IL 309 93% 95% 99% Casa del Valle (9) Alamo, TX 114 (5) (5) 96% Catalina Community Middletown, OH 462 98% 99% 97% Chisholm Point Estates Pflugerville, TX 405 98% 83% (2) 98% Douglas Atlanta, GA 203 89% 95% 96% Edwardsville Edwardsville, KS 634 90% 93% 90%(2) Flagview Atlanta, GA 198 93% 98% 100% Paradise Chicago Heights, IL 278 99% 98% 100% Pine Ridge Petersburg, VA 245 100% 98% 99% Pin Oak Parc O'Fallon, MO 400 99% 99% 96%(2) Snow to Sun (9) Weslaco, TX 176 (5) (5) 98% Southfork Belton, MO 476 (5) (5) 98% Timber Ridge Ft. Collins, CO 582 100% 100% 100% Willowbrook (8) Toledo, OH 266 (5) (5) 97% Woodside Terrace (8) Springfield, OH 439 (5) (5) 98% Worthington Arms Delaware, OH 224 99% 100% 99% ----- --- --- --- Other Total 6,338 97% 96% 96% ===== === === === SOUTHEAST FLORIDA Arbor Terrace Bradenton, FL (7) 100% 100% 100% Ariana Village Lakeland, FL 210 72% (6) 78% (6) 79% Bonita Lake Bonita Springs, FL (7) 100% 100% 100% </TABLE> - 8 -
9 <TABLE> <CAPTION> DEVELOPED OCCUPANCY OCCUPANCY OCCUPANCY SITES AS OF AS OF AS OF AS OF PROPERTY AND LOCATION 12/31/97 (1) 12/31/95 (1) 12/31/96 (1) 12/31/97(1) - --------------------- -------------------- -------------------- --------------- ----------- <S> <C> <C> <C> <C> Breezy Hills (9) Pompano Beach, FL 169 100% 99% 94% Chain O'Lakes Grand Island, FL 308 97% 95% 95% Elmwood Mobile Home Park Daytona Beach, FL 100 (5) (5) 100% Gold Coaster (9) Florida City, FL 222 (5) (5) 100% Golden Lakes Plant City, FL 426 91% 92% 94% Groves RV Resort Lee County, FL (7) (5) (5) 100% Holly Forrest Estates Holly Hill, FL 402 (5) (5) 100% Indian Creek (9) Ft. Myers Beach, FL 353 100% 100% 100% Island Lakes Merritt Island, FL 301 100% 100% 99% Kings Lake Debary, FL 245 62% (6) 66% (6) 76% Kings Pointe Winter Haven, FL 229 43% (6) 48% (6) 52% Kissimmee Gardens Kissimmee, FL 239 99% 100% 100% Lake Juliana Auburndale, FL 293 54% (6) 57% (6) 59% Lake San Marino Naples, FL (7) 100% 100% 100% Leesburg Landing Lake County, FL 96 (4) 54% (6) 50% Meadowbrook Village Tampa, FL 257 100% 97% 100% Orange Tree Orange City, FL 246 78% (6) 83% (6) 89% Plantation Manor Ft. Pierce, FL 376 95% 97% 97% Pleasure Cove Ft. Pierce, FL 209 95% 95% 94% Royal Country Miami, FL 864 100% 99% 99% Saddle Oak Club Ocala, FL 376 98% 100% 99% Siesta Bay Ft. Myers Beach, FL (7) 100% 100% 100% Silver Star Orlando, FL 426 96% 96% 95% Tallowwood Coconut Creek, FL 273 62% 63% 68% Water Oak Country Club Estates Lady Lake, FL 713 100% 100% 100% </TABLE> - 9 -
10 <TABLE> <CAPTION> DEVELOPED OCCUPANCY OCCUPANCY OCCUPANCY SITES AS OF AS OF AS OF AS OF PROPERTY AND LOCATION 12/31/97 (1) 12/31/95 (1) 12/31/96 (1) 12/31/97(1) - --------------------- -------------------- -------------------- --------------- ----------- <S> <C> <C> <C> <C> Whispering Palm (9) Sebastian, FL 324 100% 96% 92% ------ --- --- --- Florida Total 7,657 89% 93% 92% ====== === === === TOTAL/AVERAGE 28,752 93% 95% 95% ====== === === === </TABLE> (1) Excludes 5,200 recreational vehicle sites owned at December 31, 1997. (2) Occupancy in these Properties reflects the recent development of sites which are in their initial lease-up phase. (3) This Property is owned by a joint venture in which the Operating Partnership has a 50% interest. (4) Acquired in 1996. (5) Acquired in 1997. (6) Occupancy in these Properties reflects the fact that these communities are in their initial lease-up phase. (7) This Property contains only recreational vehicle sites. (8) The Company leases this Property. The Company has the option to purchase the Property upon the expiration of the lease. If the Company does not exercise its option to purchase, the lessor has the right to cause the Company to purchase the Property at the expiration of the lease at the option price. (9) This Property also contains recreational vehicle sites. Leases. The typical lease entered into between a tenant and the Company 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. See "Regulations and Insurance." ITEM 3. LEGAL PROCEEDINGS Certain partnerships which previously owned twenty-four of the Properties (the "Sun Partnerships") were involved in a variety of legal proceedings arising in the ordinary course of business prior to the transfer of the Properties to the Operating Partnership, and the Company has become a successor party-in-interest to these proceedings as a result of the contribution of the Properties to the Company, as well as other proceedings that have arose in the ordinary course of operating the Properties. All such proceedings, taken together, are not expected to have a material adverse impact on the Company's business or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year covered by this report. PART II - 10 -
11 ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock has been listed on the New York Stock Exchange ("NYSE") since December 8, 1993 under the symbol "SUI." On March 2, 1998, the closing sales price of the Common Stock was $34 7/8 and the Common Stock was held by approximately 1,671 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 paid by the Company with respect to each such period. <TABLE> <CAPTION> High Low Distribution ---- ------- ------------ <S> <C> <C> <C> FISCAL YEAR ENDED DECEMBER 31, 1996 First Quarter of 1996.............. 27 5/8 25 1/4 .455 Second Quarter of 1996............. 27 3/8 24 7/8 .455 Third Quarter of 1996.............. 29 25 5/8 .455 Fourth Quarter of 1996............. 34 3/4 28 1/8 .455 FISCAL YEAR ENDED DECEMBER 31, 1997 First Quarter of 1997.............. 33 5/8 31 1/2 .47 Second Quarter of 1997............. 34 3/4 30 1/2 .47 Third Quarter of 1997.............. 37 7/8 33 9/16 .47 Fourth Quarter of 1997............. 36 9/16 33 7/8 .47 </TABLE> - 11 -
12 ITEM 6. SELECTED FINANCIAL DATA SUN COMMUNITIES, INC. AND PREDECESSOR BUSINESS <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, (2) ---------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS EXCEPT FOR PER SHARE DATA AND OTHER DATA) <S> <C> <C> <C> <C> <C> OPERATING DATA: Revenues: Income from property.................... $ 93,188 $ 71,312 $ 44,048 $ 30,461 $ 14,222 Income from SHS and BFSC................ 1,518 506 325 432 -- Other income............................ 1,535 1,381 739 1,450 199 ---------- --------- ---------- ---------- --------- Total revenues......................... 96,241 73,199 45,112 32,343 14,421 ---------- --------- ---------- ---------- --------- Expenses: Property operating and maintenance...... 21,111 15,970 9,838 7,404 3,222 Real estate taxes....................... 7,481 5,654 2,981 2,167 1,024 General and administrative.............. 4,520 3,458 2,535 2,005 893 Depreciation and amortization........... 20,668 14,887 9,747 6,949 2,611 Interest................................ 14,534 11,277 6,420 4,894 5,280 Predecessor business expenses........... - - - - 1,315 ---------- --------- ---------- ---------- --------- Total expenses......................... 68,314 51,246 31,521 23,419 14,345 ---------- --------- ---------- ---------- --------- Income before extraordinary item and minority interests.................... 27,927 21,953 13,591 8,924 76 Extraordinary item, early extinguishment of debt.................. - (6,896) - - - ---------- --------- ---------- ---------- --------- Income before minority interests........ 27,927 15,057 13,591 8,924 76 Income (loss) allocated to minority interests............................... 5,672 3,353 1,930 1,138 (212) ---------- --------- ---------- ---------- --------- Net income.............................. $ 22,255 $ 11,704 $ 11,661 $ 7,786 $ 288 ========== ========= ========== ========== ========= Net income per weighted average share: $ 1.38 $ .85 $ 1.19 $ 1.05 $ .05 Basic................................... ========== ========= ========== ========== ========= Diluted................................. $ 1.37 $ .85 $ 1.19 $ 1.04 $ .05 ========== ========= ========== ========== ========= Weighted average common shares outstanding............................. 16,081 13,733 9,792 7,416 5,326 ========== ========= ========== ========== ========= Distribution per common share(1)........ $ 1.865 $ 1.81 $ 1.335 $ 1.78 $ .077 ========== ========= ========== ========== ========= OTHER DATA: Total properties (at end of period)(3).. 99 83 54 46 31 Total sites (at end of period)(3)....... 35,936 30,026 18,145 14,318 9,036 BALANCE SHEET DATA: Rental property, before accumulated depreciation............................ $684,821 $588,813 $326,613 $257,030 $148,668 Total assets............................ $690,914 $585,056 $325,104 $267,370 $157,462 Total debt.............................. $264,264 $185,000 $107,055 $ 62,931 $ 46,413 Stockholders' equity.................... $326,780 $300,932 $177,593 $174,978 $ 92,985 </TABLE> (1) The distribution of $.445 per share for the fourth quarter of 1995 was declared and paid in January, 1996, and accordingly is not included in the $1.335. (2) See the Consolidated Financial Statements of the Company included elsewhere herein. (3) Includes communities financed by the Company. - 12 -
13 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. RESULTS OF OPERATIONS Comparison of year ended December 31, 1997 to year ended December 31, 1996 For the year ended December 31, 1997, income before extraordinary item and minority interests increased by $5.9 million from $22.0 million to $27.9 million, when compared to the year ended December 31, 1996. The increase was due to increased revenues of $23.0 million while expenses increased by $17.1 million. Income from property increased by $21.9 million from $71.3 million to $93.2 million due primarily to the acquisition of communities comprising approximately 5,200 developed sites during 1997 and 29 communities comprising in excess of 11,300 developed sites during 1996. Income from Home Services and Bingham Financial Services Corporation ("Bingham" or "BFSC") increased by $1.0 million to $1.5 million from $.5 million due to increased sales of homes and the financing operations of the Company's newly formed affiliate, Bingham. Property operating and maintenance expenses increased by $5.1 million from $16.0 million to $21.1 million due primarily to the acquired communities. Real estate taxes increased by $1.8 million from $5.7 million to $7.5 million due primarily to the acquired communities. General and administrative expenses increased by $1.0 million from $3.5 million to $4.5 million due primarily to additional staff as a result of the Company's growth. Interest expense increased by $3.2 million from $11.3 million to $14.5 million due primarily to $150 million Senior Notes which were issued May 1, 1996. Included in interest is amortization of deferred finance costs of $.2 million in 1997 and 1996. Earnings before interest, taxes, depreciation and amortization ("EBITDA") increased by $15.0 million from $48.1 million to $63.1 million. EBITDA as a percent of revenues was 65.6% compared to 65.7% in 1996. Depreciation and amortization expense increased by $5.8 million from $14.9 million to $20.7 million due primarily to the acquisition of communities in 1997 and 1996. Comparison of year ended December 31, 1996 to year ended December 31, 1995 For the year ended December 31, 1996, income before extraordinary item and minority interests increased by $8.4 million from $13.6 million to $22.0 million, when compared to the year ended December 31, 1995. The increase was due to increased revenues of $28.1 million while expenses increased by $19.7 million. - 13 -
14 Income from property increased by $27.3 million from $44.0 million to $71.3 million due primarily to the acquisition of 29 communities comprising in excess of 11,300 developed sites during 1996 and six additional communities comprising in excess of 2,200 developed sites during 1995. Other income increased by $.7 million from $.7 million to $1.4 million due to higher levels of interest income resulting primarily from investment of proceeds of financings and interest on mortgage notes receivable for a full year in 1996. Property operating and maintenance expenses increased by $6.2 million from $9.8 million to $16.0 million due primarily to the acquired communities. Real estate taxes increased by $2.7 million from $3.0 million to $5.7 million due primarily to the acquired communities. General and administrative expenses increased by $1.0 million from $2.5 million to $3.5 million due primarily to additional staff as a result of the Company's growth. Interest expense increased by $4.9 million from $6.4 million to $11.3 million due to higher levels of borrowings at a slightly higher weighted average interest rate. Included in interest is amortization of deferred finance costs of $.2 million and $.6 million in 1996 and 1995, respectively. EBITDA increased by $18.3 million from $29.8 million to $48.1 million. EBITDA as a percent of revenues was 65.7% compared to 66.0 % in 1995. Depreciation and amortization expense increased by $5.2 million from $9.7 million to $14.9 million due primarily to the acquisition of communities in 1996 and 1995. SAME PROPERTY INFORMATION The following table reflects property-level financial information as of and for the years ended December 31, 1997 and 1996. The "Same Property" data represents information regarding the operation of communities owned as of January 1, 1996. Site, occupancy, and rent data for those communities is presented as of the last day of each period presented. The table includes sites where the Company's interest is in the form of shared appreciation notes or where the Company is providing financing and managing the properties. Such amounts relate to 1,873 sites in 1997 and 1,218 sites in 1996 and were formerly classified in other income. - 14 -
15 <TABLE> <CAPTION> SAME PROPERTY TOTAL PORTFOLIO ---------------- ------------------ 1997 1996 1997 1996 ------ ------- -------- -------- (in thousands) (in thousands) <S> <C> <C> <C> <C> Property revenues, including other $52,241 $48,725 $93,188 $71,312 ------- ------- ------- ------- Property operating expenses: Property operating and maintenance 10,135 9,720 21,111 15,970 Real estate taxes 3,857 3,640 7,481 5,654 ------- ------- ------- ------- Property operating expenses 13,992 13,360 28,592 21,624 ------- ------- ------- ------- Property EBITDA $38,249 $35,365 $64,596 $49,688 ======= ======= ======= ======= Number of properties 54 54 99 83 Developed sites 18,904 18,539 35,936 30,026 Occupied sites 17,954 17,404 33,415 27,949 Occupancy % 95.0% 93.9% 95.0%(1) 94.4%(1) Weighted average monthly rent per site $ 251 $ 241 $ 255 (1) $ 250 (1) Sites available for development 1,423 1,943 3,641 (2) 3,268 Sites in development 291 509 904 779 </TABLE> - ------------------------- (1) Occupancy % and weighted average rent relates to manufactured housing sites, excluding recreational vehicle sites. (2) Includes 750 sites related to zoned land. On a same property basis, property revenues increased by $3.5 million from $48.7 million to $52.2 million, or 7.2 percent, due primarily to increases in rents and occupancy related charges including water and property tax pass throughs. Also contributing to revenue growth was the increase of 550 leased sites at December 31, 1997 compared to December 31, 1996 and the increase in weighted average monthly rent per site from $241 in 1996 to $251 in 1997. Property operating expenses increased by $.6 million from $13.4 million to $14.0 million, or 4.7 percent, due to increased occupancies and costs and increases in assessments and millage by local taxing authorities. Property EBITDA increased by $2.9 million from $35.4 million to $38.3 million, or 8.2 percent. Sites available for development in the total portfolio increased by 373 from 3,268 to 3,641. LIQUIDITY SOURCES AND REQUIREMENTS Cash and cash equivalents decreased by $7.0 million to $2.2 million at December 31, 1997 compared to $9.2 million at December 31, 1996 primarily because cash used in investing activities exceeded cash provided by operating and financing activities. - 15 -
16 Net cash provided by operating activities increased by $4.8 million from $35.4 million to $40.2 million for the year ended December 31, 1997 as compared to the year ended December 31, 1996. This increase was due primarily to a $16.4 million increase in income before depreciation and amortization, minority interests and extraordinary item offset by a $4.3 million increase in other assets and a $7.4 million decrease in accounts payable and other liabilities. Net cash used in investing activities increased by $30.8 million from $76.9 million to $107.7 million for the year ended December 31, 1997 as compared to the year ended December 31, 1996. This was due to increased investments in mortgage notes, affiliates and officer notes. Net cash provided by financing activities increased by $9.8 million from $50.6 million to $60.5 million for the year ended December 31, 1997 as compared to the year ended December 31, 1996. This increase was due to proceeds from the sale of shares of Common Stock pursuant to the Company's Dividend Reinvestment Plan exceeding the distributions paid to stockholders and OP Unit holders by $13.7 million offset by a reduction in net borrowings, including proceeds from a 1996 Common Stock offering and deferred financing activities of $3.9 million. The Company expects to meet its short-term liquidity requirements generally through its working capital provided by operating activities. The Company expects to meet certain long-term liquidity requirements such as scheduled debt maturities and property acquisitions through the issuance of equity or debt securities, or interests in the Operating Partnership. The Company considers these sources to be adequate and anticipates they will continue to be adequate to meet operating requirements, capital improvements, investment in development, and payment of distributions by the Company in accordance with REIT requirements in both the short and long term. The Company can also meet these short-term and long-term requirements by utilizing its $75 million line of credit which bears interest at LIBOR plus .90% and is due November 1, 1999. At December 31, 1997, the Company's debt to total market capitalization approximated 28.8% (assuming conversion of all Common and Preferred OP Units to shares of Common Stock), with a weighted average maturity of approximately 5.9 years and a weighted average interest rate of 7.23%. Capital expenditures for 1997 included recurring capital expenditures of $4.6 million, including $.4 million for additional space and related costs at corporate headquarters, and revenue producing capital expenditures of $1.2 million which principally consisted of water metering programs. Development costs including land acquisitions of $0.2 million aggregated $17.5 million for the year ended December 31, 1997. RATIO OF EARNINGS TO FIXED CHARGES The Company's ratio of earnings to fixed charges for the years ended December 31, 1995, 1996, and 1997 was 3.03:1, 2.49:1, and 2.40:1, 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. - 16 -
17 OTHER The Company does not anticipate the Year 2000 compliance requirements will have a material impact on earnings. The Company has initiated replacement of the Company's most significant computer programs with new updates that are warranted to be Year 2000 compliant. Installation of these updates is anticipated to be completed prior to December 31, 1998. All other programs subject to Year 2000 concerns will be evaluated utilizing internal and external resources to re-program, replace or test each of them. A formal communication plan with significant third party vendors will be initiated during 1998 to determine their Year 2000 compliance programs. Industry analysts consider funds from operations ("FFO") to be an appropriate measure of the performance of an equity REIT. It is defined as income before minority interests plus non-cash items such as depreciation and amortization. FFO should not be considered as an alternative to net income as an indication of the Company's performance or to cash flows as a measure of liquidity. The following table presents FFO for each of the quarters during 1997, 1996 and 1995: <TABLE> <CAPTION> QUARTERS ENDED 1997 1996 1995 ----------------------- -------- -------- ------- <S> <C> <C> <C> March 31 $11,204 $6,201 $5,288 June 30 11,178 8,960 5,878 September 30 11,485 9,652 5,998 December 31 12,081 10,282 6,114 -------- -------- ------- $45,948 $35,095 $23,278 ======== ======== ======= Weighted average OP Units used for basic FFO per share: 18,444 15,646 11,420 Dilutive securities: Stock options 187 87 34 Convertible preferred OP Units 1,224 883 -- -------- -------- ------- Weighted average OP Units used for diluted FFO per share: 19,855 16,616 11,454 ======== ======== ======= </TABLE> Diluted FFO per unit reflects the potential dilution that would occur if securities were exercised or converted into OP Units. For purposes of calculating diluted FFO per OP Unit, $2,505 and $1,670 would be added to FFO in 1997 and 1996, respectively. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements and supplementary data are filed herewith under Item 14. - 17 -
18 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in the Company's independent public accountants during the past two fiscal years. PART III The information required by ITEMS 10, 11, 12 AND 13 will be included in the Company's proxy statement for its 1998 Annual Meeting of Shareholders, and is incorporated herein by reference. PART IV ITEM 14. 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 The Company filed a report on Form 8-K detailing the twelve (12) manufactured housing communities which it acquired during the 1997 calendar year. The date of the report was December 31, 1997. The following financial statements were filed as exhibits to such report: (i) Historical Summaries of Gross Income and Direct Operating Expenses for each of Southfork Mobile Home Park, White Oak Estates, Willowbrook Place and Woodside Terrace; (ii) Pro-Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1997 (unaudited); and (iii) Pro-Forma Condensed Consolidated Balance Sheet as of December 31, 1997 (unaudited). - 18 -
19 SUN COMMUNITIES, INC. INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS <TABLE> <CAPTION> PAGES <S> <C> Report of Independent Accountants F-2 Financial Statements: Consolidated Balance Sheet as of December 31, 1997 and 1996 F-3 Consolidated Statement of Income for the Years Ended December 31, 1997, 1996 and 1995 F-4 Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 F-5 Consolidated Statement of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 F-6 Notes to Consolidated Financial Statements F-7 - F-14 Schedule III - Real Estate and Accumulated Depreciation F-15 - F-18 </TABLE> F-1
20 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Sun Communities, Inc.: We have audited the accompanying consolidated balance sheet of Sun Communities, Inc. as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. We have also audited the consolidated financial statement schedule listed under 14(a)(2) of this form 10-K. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sun Communities, Inc. as of December 31, 1997 and 1996 and the consolidated results of its operations and cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information stated therein. Coopers & Lybrand L.L.P. Detroit, Michigan February 23, 1998 F-2
21 SUN COMMUNITIES, INC. CONSOLIDATED BALANCE SHEET DECEMBER 31, 1997 AND 1996 (AMOUNTS IN THOUSANDS) <TABLE> <CAPTION> ASSETS 1997 1996 ---- ---- <S> <C> <C> Investment in rental property, net $634,737 $558,278 Cash and cash equivalents 2,198 9,236 Investment in Sun Home Services, Inc. ("SHS") 11,973 5,103 Investment in Bingham Financial Services, Corp. ("BFSC") 4,586 -- Mortgage notes receivable 19,269 4,176 Other assets 18,151 8,263 -------- -------- Total assets $690,914 $585,056 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Line of credit $ 17,000 $ -- Debt 247,264 185,000 Accounts payable and accrued expenses 8,765 7,718 Deposits and other liabilities 8,853 9,123 -------- -------- 281,882 201,841 -------- -------- Minority interests 82,252 82,283 -------- -------- Stockholders' equity: Preferred stock, $.01 par value, 10,000 shares authorized, none issued Common stock, $.01 par value, 100,000 shares authorized, 16,587 and 15,389 issued and outstanding in 1997 and 1996, respectively 166 154 Paid-in capital 364,050 328,321 Officers' notes (11,773) (9,173) Distributions in excess of accumulated earnings (25,663) (18,370) -------- --------- Total stockholders' equity 326,780 300,932 -------- -------- Total liabilities and stockholders' equity $690,914 $585,056 ======== ======== </TABLE> The accompanying notes are an integral part of the consolidated financial statements. F-3
22 SUN COMMUNITIES, INC. CONSOLIDATED STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA) <TABLE> <CAPTION> 1997 1996 1995 ------ ----- ------ <S> <C> <C> <C> REVENUES Income from property ......................................... $93,188 $71,312 $44,048 Income from SHS and BFSC ..................................... 1,518 506 325 Other income, principally interest ........................... 1,535 1,381 739 ------- ------- ------- Total revenues ............................................ 96,241 73,199 45,112 ------- ------- ------- EXPENSES Property operating and maintenance ........................... 21,111 15,970 9,838 Real estate taxes ............................................ 7,481 5,654 2,981 General and administrative ................................... 4,520 3,458 2,535 Depreciation and amortization ................................ 20,668 14,887 9,747 Interest ..................................................... 14,534 11,277 6,420 ------- ------- ------- Total expenses ............................................ 68,314 51,246 31,521 ------- ------- ------- Income before extraordinary item and minority interests ....... 27,927 21,953 13,591 Extraordinary item, early extinguishment of debt .............. -- 6,896 -- ------- ------- ------- Income before minority interests .............................. 27,927 15,057 13,591 Less income allocated to minority interests: Preferred OP Units ........................................ 2,505 1,670 -- Common OP Units ........................................... 3,167 1,683 1,930 ------- ------- ------- Net income ................................................ $22,255 $11,704 $11,661 ======= ======= ======= Basic earnings per share: Income before extraordinary item .......................... $ 1.38 $ 1.35 $ 1.19 Extraordinary item ........................................ -- .50 -- ------- ------- ------- Net income ................................................ $ 1.38 $ .85 $ 1.19 ======= ======= ======= Weighted average common shares outstanding .................... 16,081 13,733 9,792 ======= ======= ======= Diluted earnings per share: Income before extraordinary item .......................... $ 1.37 $ 1.35 $ 1.19 Extraordinary item ........................................ -- .50 -- ------- ------- ------- Net income ................................................ $ 1.37 $ .85 $ 1.19 ======= ======= ======= </TABLE> The accompanying notes are an integral part of the consolidated financial statement F-4
23 SUN COMMUNITIES, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA) <TABLE> <CAPTION> DISTRIBUTIONS COMMON PAID-IN IN EXCESS STOCK CAPITAL OF EARNINGS ------ ------- -------------- <S> <C> <C> <C> Balance, January 1, 1995 ....................................... $ 95 $ 180,944 $ (6,061) Issuance of 400 shares of common stock for officer notes ....... 4 8,646 Exercise of stock options and other, net ....................... 887 Reclassification and conversion of minority interests .......... 3,098 Net income ..................................................... 11,661 Cash distributions declared of $1.335 per share ................ (13,031) ------ --------- ---------- Balance, December 31, 1995 ..................................... 99 193,575 (7,431) Issuance of 4,807 shares of common stock for officer notes ..... 48 118,245 Dividend reinvestment plan and other, net ...................... 7 15,198 Reclassification and conversion of minority interests .......... 1,303 Net income ..................................................... 11,704 Cash distributions declared of $1.81 per share ................. (22,643) ------ --------- ---------- Balance, December 31, 1996 ..................................... 154 328,321 (18,370) Dividend reinvestment plan and other, net ...................... 12 36,712 Reclassification and conversion of minority interests .......... (983) Net income...................................................... 22,255 Cash distributions declared of $1.865 per share ................ (29,548) ------ --------- ---------- Balance, December 31, 1997 ..................................... $ 166 $ 364,050 $ (25,663) ====== ========= ========== </TABLE> The accompanying notes are an integral part of the consolidated financial statements. F-5
24 SUN COMMUNITIES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (AMOUNTS IN THOUSANDS) <TABLE> <CAPTION> 1997 1996 1995 --------- --------- -------- <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income ................................................................ $ 22,255 $ 11,704 $ 11,661 Adjustments to reconcile net income to cash provided by operating activities: Income allocated to minority interests .................................. 3,167 1,683 1,930 Extraordinary item, net of prepayment penalties ......................... -- 1,390 -- Depreciation and amortization costs ..................................... 20,668 14,887 9,747 Deferred financing costs ................................................ 235 236 598 Increase in other assets ................................................ (6,919) (2,659) (3,474) Increase in accounts payable and other liabilities ..................................................... 796 8,173 4,521 --------- --------- -------- Net cash provided by operating activities ............................... 40,202 35,414 24,983 --------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Investment in rental properties ........................................... (78,552) (78,722) (38,214) Investment in mortgage notes receivable ................................... (15,093) -- (4,143) Investment in SHS. ........................................................ (6,870) 1,804 1,872 Investment in BFSC ........................................................ (4,586) -- -- Officer note .............................................................. (2,600) -- -- --------- --------- -------- Net cash used in investing activities ................................... (107,701) (76,918) (40,485) --------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from sales of common stock ................................... -- 117,770 -- Proceeds from borrowings .................................................. 62,000 185,000 41,257 Repayments on borrowings .................................................. (189) (241,114) (10,077) Payments for deferred financing costs ..................................... (4,326) (277) (990) Distributions ............................................................. (33,748) (25,965) (19,832) Retirement of common operating partnership units .......................... -- -- (1,001) Dividend reinvestment plan and other, net ................................. 36,724 15,205 887 --------- --------- -------- Net cash provided by financing activities .............................. 60,461 50,619 10,244 --------- --------- -------- Net increase (decrease) in cash and cash equivalents ...................... (7,038) 9,115 (5,258) Cash and cash equivalents, beginning of year .............................. 9,236 121 5,379 --------- --------- -------- Cash and cash equivalents, end of year .................................... $ 2,198 $ 9,236 $ 121 ========= ========= ======== SUPPLEMENTAL INFORMATION Cash paid for interest including capitalized amounts of $645, $380 and $192 in 1997, 1996 and 1995, respectively .................. $ 14,742 $ 9,958 $ 5,499 Noncash investing and financing activities: Increase in minority interests for rental properties and other assets .. -- 53,437 15,444 Debt assumed for rental properties and other ........................... -- 134,059 12,944 Capitalized lease obligations for rental properties and other .......... 17,453 -- -- Transfer of rental homes with SHS ...................................... -- (3,720) 4,018 Issuance of common stock for officers' notes ........................... -- 523 8,650 </TABLE> The accompanying notes are an integral part of the consolidated financial statements. F-6
25 SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: A. BUSINESS: Sun Communities, Inc. and its subsidiaries (the "Company") is a real estate investment trust ("REIT") which owns and operates or finances 99 manufactured housing communities located in 13 states concentrated principally in the Midwest and Southeast comprising approximately 36,000 developed sites and approximately 3,600 sites suitable for development. The Company generally will not be subject to federal or state income taxes to the extent it distributes its REIT taxable income to its stockholders. 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 subsidiaries. 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 18.9 million OP Units outstanding, the Company owns 16.6 million or 87.5 percent. The minority interests are adjusted to their relative ownership interest annually by reclassification to/from paid-in capital. Also included in minority interest are 1.3 million Preferred OP Units ("POP Units") issued at $27 per unit bearing an annual dividend of $1.89 and redeemable at par or convertible in June, 2002. The POP Units are convertible one-for-one into OP Units at prices up to $31.50 per share. At prices above $31.50 per share, the POP Units are convertible into OP Units based on a formula the numerator of which is $31.50 plus 25 percent of stock price appreciation above $36 per share. The denominator is the then stock price. Had conversion occurred at the December 31, 1997 stock price of $35.94, the 1.325 million POP Units would have converted into 1.161 million OP Units. SHS provides home sales and other services to current and prospective tenants. The Company owns 100 percent of the outstanding preferred stock of SHS, is entitled to 95 percent of the operating cash flow, and accounts for its investment utilizing the equity method of accounting. The common stock is owned by three officers of the Company who are entitled to receive 5 percent of the operating cash flow. BFSC provides financing to current and prospective tenants. The Company owns 25,000 common shares or 2% of BFSC. The Company has 730,000 warrants exercisable at prices ranging from $10 to $14 per share from 2001 through 2018. The market price of BFSC stock at December 31, 1997 was $10 . C. RENTAL PROPERTY: Rental property is recorded at the lower of cost, less accumulated depreciation or fair value. 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. 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. F-7
26 SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 1997, 1996 AND 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: 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. REVENUE RECOGNITION: Rental income attributable to leases is recorded on a straight-line basis when earned from tenants. Leases entered into by tenants range from month-to-month to twelve years and are renewable by mutual agreement of the Company and resident or, in some cases, as provided by statute. F. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying value of financial instruments which includes cash and cash investments, mortgages and notes receivable and debt approximates fair value. G. TAX STATUS OF DIVIDENDS: Approximately 31.2, 56.6, and 47.8 percent of the distributions paid in 1997, 1996, and 1995, respectively, represent a return of capital. H. CASH FLOW HEDGES: The company periodically enters into hedge transactions utilizing Treasury securities to lock-in the basic interest cost of financing acquisitions. The gain or loss on such hedges is amortized as an adjustment to interest expense over the term of the related financing. I. RECLASSIFICATIONS: Certain 1995 and 1996 amounts have been reclassified to conform with the 1997 financial statement presentation. Such reclassifications have no effect on operations as originally presented. 2. ACQUISITIONS: During 1997, the Company acquired 12 manufactured housing communities comprising 4,258 developed sites and 425 sites suitable for development. The cost of acquisitions aggregated $69.8 million excluding $4.5 million of future payments contingent upon certain events. Consideration consisted of $51.3 million in cash and $18.5 million in capitalized lease obligations. During 1996, the Company acquired 29 manufactured housing communities comprising in excess of 11,350 developed sites and 500 sites suitable for development for $247.9 million. Consideration consisted of $134.1 million in the assumption or issuance of debt, $53.4 million in issuance of Common and Preferred OP Units and $60.4 million of cash. 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. In conjunction with an acquisition, the Company is obligated to issue $12.1 million of OP Units over the expected lease-up of the community through 2009 based on the per unit price of the OP Units on each annual date. F-8
27 SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 1997, 1996 AND 1995 2. ACQUISITIONS, CONTINUED: The following unaudited table of pro forma information has been prepared as if the Company's acquisition of 29 manufactured housing communities in 1996 and 12 manufactured housing communities in 1997 had occurred as of January 1, 1996. In management's opinion, the pro forma information is not necessarily indicative of consolidated results of operations that may have occurred had the above transactions taken place on January 1 1996. In the following table, the amounts are in thousands except per share amounts: <TABLE> <CAPTION> PRO FORMA FOR THE YEAR ENDED DECEMBER 31 ----------------- (UNAUDITED) ----------------- 1997 1996 ------- ------ <S> <C> <C> Revenues ............................... $103,401 $ 95,126 Operating income ....................... $ 67,697 $ 61,980 Net income ............................. $ 24,762 $ 20,981 Net income per share ................... $ 1.34 $ 1.21 </TABLE> Net income has not been reduced for minority interests and net income per share assumes that all OP Units have been converted to shares of the Company's common stock. Operating income is defined as total revenues less property operating and maintenance expense, real estate tax expense and general and administrative expense. Operating income is not necessarily an indication of the performance of the Company or a measure of liquidity. 3. RENTAL PROPERTY: <TABLE> <CAPTION> AT DECEMBER 31 ------------------ 1997 1996 -------- -------- <S> <C> <C> Land ........................................... $ 67,677 $ 58,943 Land improvements and buildings ................ 598,699 510,726 Furniture, fixtures, and equipment ............. 12,676 9,826 Property under development ..................... 5,769 9,318 -------- -------- 684,821 588,813 Less accumulated depreciation ............... (50,084) (30,535) -------- -------- $634,737 $558,278 ======== ======== </TABLE> Land improvements and buildings consist primarily of infrastructure, roads, landscaping, clubhouses, maintenance buildings and amenities. Included in rental property at December 31, 1997 are net carrying amounts related to capitalized leases of $18.4 million. F-9
28 SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 1997, 1996 AND 1995 4. NOTES RECEIVABLE: Mortgage notes receivable consisted of the following (amounts in thousands): <TABLE> <CAPTION> AT DECEMBER 31 ---------------------- 1997 1996 -------- --------- <S> <C> <C> Mortgage notes receivable with minimum monthly interest payments at 7%, maturing June 30, 2012, collateralized by manufactured housing/recreational vehicle communities located in Dover, DE (a) $15,093 $ -- Second mortgage and third shared appreciation mortgage notes with monthly interest payments at an average rate of 17 % and excess interest as defined, maturing May 1, 2001, collateralized by manufactured housing communities located in Alberta, Canada 4,176 4,176 ------- ------- $19,269 $ 4,176 ======= ======= </TABLE> (a) The stated interest rate is 12%. The excess of the interest earned at the stated rate over the pay rate is added to the principal balance and will also accrue interest at the stated rate. The officers' notes are 10 year, LIBOR + 1.75% notes,with a minimum and maximum interest rate of 6% and 9%, respectively, collateralized by 372,206 shares of the Company's common stock and 127,794 OP Units with personal liability up to approximately $7.2 million. Interest income of $.8 million and $.6 million has been recognized in 1997 and 1996, respectively. Accrued interest of $.2 million and $.3 million has been recorded at December 31, 1997 and 1996, respectively of which $.2 million was paid in both February, 1998 and January, 1997. F-10
29 SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 1997, 1996 AND 1995 5. DEBT: <TABLE> <CAPTION> AT DECEMBER 31 ---------------------- 1997 1996 ---------- --------- <S> <C> <C> Collateralized term loan, interest at 7.01%, due September 9, 2007 ......................................... $ 44,889 -- Collateralized term loan, interest at LIBOR plus 1.50% due November 1, 1997 ...................................... -- $ 35,000 Senior notes, interest at 7.375%, due May 1, 2001 .............. 65,000 65,000 Senior notes, interest at 7.625%, due May 1, 2003 .............. 85,000 85,000 Senior notes, interest at 6.97%, due December 3, 2007 .......... 35,000 -- Collateralized lease obligations, interest at 6.1%, due December 1, 2002 .......................................... 17,375 -- --------- ---------- $ 247,264 $ 185,000 ========= ========== </TABLE> The Company has a $75 million unsecured line of credit at LIBOR plus .90% maturing in November, 1999, of which $58 million was available at December 31, 1997. The interest rate at December 31, 1997 was 6.89%. The term loan is collateralized by 7 communities comprising approximately 3,400 sites. Annual payments under capitalized lease obligations range from $1.3 million to $1.4 million during their terms. The extraordinary item of $6.9 million in 1996 results from the early extinguishment of debt and includes prepayment penalties and related deferred financing costs. At December 31, 1997, the Company has Treasury Rate Locks for a total notional amount of $88.7 million and an unrealized loss of $1.5 million for the purpose of hedging against the potential for increased interest expense on anticipated future fixed rate financings. At the present time, the Company anticipates issuing fixed rate securities in 1998 with a maturity of at least five to ten years. Should medium term interest rates increase, the value of the Treasury Rate Locks will increase offsetting a portion of the additional interest expense incurred. Alternatively, should medium term interest rates decrease, the Company will incur costs which would be offset by lower interest expense. At December 31, 1997, the maturities of debt during the next five years were approximately as follows: 1998 - $.8 million; 1999 - $.8 million; 2000 - $.9 million; 2001 $66.0 million; and 2002 - $16.6 million. F-11
30 SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 6. STOCK OPTIONS: Data pertaining to stock option plans are as follows: <TABLE> <CAPTION> 1997 1996 1995 ----------- --------------- --------------- <S> <C> <C> <C> Options outstanding, January 1 ...................... 767,434 301,167 300,000 Options granted ..................................... 262,000 482,950 375,430 Option price ...................................... $27-$35.39 $26.625-$28.637 $21.625-$24.875 Options exercised ................................... 61,033 16,683 356,763 Option price ...................................... $20-$28.64 $20-$23.125 $20-$21,625 Options forfeited ................................... 2,501 -- 17,500 Option price ...................................... $24.88-$28.64 -- $22-$23.125 Options outstanding, December 31 .................... 965,900 (a) 767,434 301,167 Option price ...................................... $20-$35.39 $20-$28.637 $20-$24.875 Options exercisable, December 31 .................... 482,651 (a) 392,949 232,833 </TABLE> (a) There are 337,700 and 300,031 options outstanding and exercisable, respectively, which range from $20.00 - $27.99. The weighted average exercise price for these outstanding and exercisable options is $22.78 and $22.28, respectively. There are 628,200 and 182,620 options outstanding and exercisable, respectively, which range from $28.00 - $35.99. The weighted average exercise price for these outstanding and exercisable options is $30.26 and $28.70, respectively. The weighted average contractual life of outstanding options is 6.9 years. At December 31, 1997, 432,000 shares of common stock were available for the granting of options. Options are granted at fair market value and generally vest over a two-year period and may be exercised for 10 years after date of grant. The stock option plans provide for the grant of up to 1,593,000 options. In addition, the Company established a Long-Term Incentive Plan for its nonexecutive officer employees permitting a grant of up to 240,000 options which were granted in 1997, and become exercisable in equal installments in 2002-2004 based on corporate profit performance. 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 <TABLE> <CAPTION> 1997 1996 ------ -------- <S> <C> <C> Estimated fair value value per share of options granted during year .................. $2.82 $1.94 Assumptions: Annualized dividend yield ......................................................... 7.1% 6.9% Common stock price volatility ................................................. 15.6% 15.1% Risk-free rate of return ...................................................... 6.7% 6.2% Expected option term (in years) ............................................... 7 8 </TABLE> If compensation cost for stock option grants had been recognized based on the fair value at the grant date, this would have resulted in net income of $21.9 million and $11.5 million and basic net income per share of $1.36 and $.84 in 1997 and 1996, respectively. F-12
31 SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 7. EARNINGS PER SHARE: <TABLE> <CAPTION> 1997 1996 1995 ------- ------- ------- <S> <C> <C> <C> Earnings used for basic and diluted earnings per share computation $22,255 $11,704 $11,661 ======= ======= ======= Total shares used for basic earnings per share 16,081 13,733 9,792 Dilutive securities: Stock options 187 87 34 ------- ------- ------- Total shares used for diluted earnings per share computation 16,268 13,820 9,826 ======= ======= ======= </TABLE> Diluted earnings per share reflect the potential dilution that would occur if securities were exercised or converted into common stock. Convertible POP Units are excluded from the computations as their inclusion would have an anti-dilutive effect on earnings per share in 1997 and 1996. 8. QUARTERLY FINANCIAL DATA (UNAUDITED): The following unaudited quarterly amounts are in thousands, except for per share amounts: <TABLE> <CAPTION> FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER MARCH 31 JUNE 30 SEPT. 30 DEC. 31 -------- ---------- -------- ------- <S> <C> <C> <C> <C> 1997 Total revenues .................................. $23,393 $23,233 $24,117 $25,498 Operating income (a) ............................ $15,305 $15,188 $15,740 $16,896 Income before allocation to minority interests .. $ 7,039 $ 6,878 $ 6,992 $ 7,018 Net income ...................................... $ 5,568 $ 5,447 $ 5,573 $ 5,667 Weighted average common shares outstanding ...... 15,632 15,924 16,243 16,527 Earnings per common share ....................... $ .36 $ .34 $ .34 $ .34 </TABLE> F-13
32 SUN COMMUNITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 8. QUARTERLY FINANCIAL DATA (UNAUDITED)CONTINUED: <TABLE> <CAPTION> FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER MARCH 31 JUNE 30(b) SEPT. 30 DEC. 31 -------- ---------- -------- ------- <S> <C> <C> <C> <C> 1996 Total revenues .................................. $12,442 $18,149 $20,862 $21,746 Operating income (a) ............................ $ 8,254 $12,063 $13,538 $14,262 Income before allocation to minority interests .. $ 3,456 $ 5,647 $ 6,278 $ 6,572 Net income ...................................... $ 2,937 $ 4,631 $ 5,012 $ 5,230 Weighted average common shares outstanding ...... 10,013 14,489 15,092 15,337 Earnings per common share ....................... $ .29 $ .32 $ .33 $ .34 </TABLE> (a) Operating income is defined as total revenues less property operating and maintenance expense, real estate tax expense, and general and administrative expenses. Operating income is a measure of the performance of the operations of the properties before the effects of depreciation, amortization and interest expense. Operating income is not necessarily an indication of the performance of the Company or a measure of liquidity. (b) Net income and earnings per share are presented before an extraordinary item arising from debt extinguishment of which $6,106 or $.42 per share is attributable to common stockholders. F-14
33 SUN COMMUNITIES, INC. SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997 (AMOUNTS IN THOUSANDS) <TABLE> <CAPTION> INITIAL COST TO COMPANY ------------------------ BUILDING AND PROPERTY NAME LOCATION ENCUMBRANCE LAND FIXTURES - ------------------------- ----------------- ------------- ------- -------- <S> <C> <C> <C> <C> Allendale Allendale, MI - $ 393 $ 3,684 Alpine Grand Rapids, MI - 729 6,692 Arbor Terrace Bradenton, FL - 481 4,410 Ariana Village Lakeland, FL - 240 2,195 Autumn Ridge Ankeny, IO - 890 8,054 Bedford Hills Battle Creek, MI - (1) 1,265 11,562 Bonita Lake Bonita Springs, FL - 285 2,641 Boulder Creek Pflugerville, TX - 1,000 500 Branch Creek Austin, TX - 796 3,716 Breezy Hill Pompano Beach, FL - 1,778 16,085 Brentwood Kentwood, MI - 385 3,592 Brookside Village Goshen, IN - 260 1,080 Byron Center Byron Center, MI - 257 2,402 Candlelight Village Chicago Heights, IL - 600 5,623 Candlewick Court Owosso, MI - 125 1,900 Carrington Pointe Ft. Wayne, IN - 1,076 3,632 Casa Del Valle Alamo, TX - 246 2,316 Catalina Middletown, OH - 653 5,858 Chain O'Lakes Grand Island, FL - 551 5,003 Chisholm Point Pflugerville, TX - 609 5,286 Clearwater Village South Bend, IN - 80 1,270 Cobus Green Elkhart, IN - 762 7,037 College Park Estates Canton, MI - 75 800 Continental Estates Davison, MI - 1,625 16,581 Country Acres Cadillac, MI - 380 3,495 Country Meadows Flat Rock, MI - 924 7,583 Countryside Village Perry, MI - (1) 275 3,920 Creekwood Meadows Burton, MI - 808 2,043 <CAPTION> COST CAPITALIZED SUBSEQUENT TO ACQUISITION GROSS AMOUNT ------------------------ CARRIED AT IMPROVEMENTS DECEMBER 31, 1997 ------------------------- -------------------------- BUILDING BUILDING AND AND PROPERTY NAME LOCATION LAND FIXTURES LAND FIXTURES - ------------------------- ----------------- ------------ --------- --------- ----------- <S> <C> <C> <C> <C> <C> Allendale Allendale, MI - $ 1,154 $ 393 $ 4,838 Alpine Grand Rapids, MI - 517 729 7,209 Arbor Terrace Bradenton, FL - 46 481 4,456 Ariana Village Lakeland, FL - 222 240 2,417 Autumn Ridge Ankeny, IO - 142 890 8,196 Bedford Hills Battle Creek, MI - 116 1,265 11,678 Bonita Lake Bonita Springs, FL - 37 285 2,678 Boulder Creek Pflugerville, TX $ 493 1,564 1,493 2,064 Branch Creek Austin, TX - 3,837 796 7,553 Breezy Hill Pompano Beach, FL - 53 1,778 16,138 Brentwood Kentwood, MI - 64 385 3,656 Brookside Village Goshen, IN 386 3,919 646 4,999 Byron Center Byron Center, MI - 63 257 2,465 Candlelight Village Chicago Heights, IL - 120 600 5,743 Candlewick Court Owosso, MI 132 769 257 2,669 Carrington Pointe Ft. Wayne, IN - - 1,076 3,632 Casa Del Valle Alamo, TX - - 246 2,316 Catalina Middletown, OH - 207 653 6,065 Chain O'Lakes Grand Island, FL - 55 551 5,058 Chisholm Point Pflugerville, TX - 1,206 609 6,492 Clearwater Village South Bend, IN 61 1,119 141 2,389 Cobus Green Elkhart, IN - 279 762 7,316 College Park Estates Canton, MI 174 4,309 249 5,109 Continental Estates Davison, MI 150 63 1,775 16,644 Country Acres Cadillac, MI - 46 380 3,541 Country Meadows Flat Rock, MI 296 7,409 1,220 14,992 Countryside Village Perry, MI 185 1,411 460 5,331 Creekwood Meadows Burton, MI 404 1,588 1,212 3,631 <CAPTION> ACCUMULATED DATE OF PROPERTY NAME LOCATION TOTAL DEPRECIATION ACQUISITION - ------------------------- ----------------- --------- ------------ ------------ <S> <C> <C> <C> <C> Allendale Allendale, MI $ 5,231 $ 222 1996 Alpine Grand Rapids, MI 7,938 360 1996 Arbor Terrace Bradenton, FL 4,937 233 1996 Ariana Village Lakeland, FL 2,657 287 1994 Autumn Ridge Ankeny, IO 9,086 415 1996 Bedford Hills Battle Creek, MI 12,943 599 1996 Bonita Lake Bonita Springs, FL 2,963 138 1996 Boulder Creek Pflugerville, TX 3,557 36 1996 Branch Creek Austin, TX 8,349 339 1995 Breezy Hill Pompano Beach, FL 17,916 840 1996 Brentwood Kentwood, MI 4,041 192 1996 Brookside Village Goshen, IN 5,645 547 1985 Byron Center Byron Center, MI 2,722 132 1996 Candlelight Village Chicago Heights, IL 6,343 298 1996 Candlewick Court Owosso, MI 2,926 363 1985 Carrington Pointe Ft. Wayne, IN 4,708 64 1997 Casa Del Valle Alamo, TX 2,562 42 1997 Catalina Middletown, OH 6,718 856 1993 Chain O'Lakes Grand Island, FL 5,609 319 1996 Chisholm Point Pflugerville, TX 7,101 460 1995 Clearwater Village South Bend, IN 2,530 253 1986 Cobus Green Elkhart, IN 8,078 999 1993 College Park Estates Canton, MI 5,358 591 1978 Continental Estates Davison, MI 18,419 840 1996 Country Acres Cadillac, MI 3,921 183 1996 Country Meadows Flat Rock, MI 16,212 1,243 1994 Countryside Village Perry, MI 5,791 664 1987 Creekwood Meadows Burton, MI 4,843 52 1996 </TABLE> F-14
34 SUN COMMUNITIES, INC. SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION, CONTINUED (AMOUNTS IN THOUSANDS) <TABLE> <CAPTION> INITIAL COST TO COMPANY ---------------------------------- BUILDING AND PROPERTY NAME LOCATION ENCUMBRANCE LAND FIXTURES - ------------------------- ----------------- ------------- ----------- ------------------ <S> <C> <C> <C> <C> Cutler Estates Grand Rapids, MI - (1) 822 7,604 Douglas Estates Austell, GA - 508 2,125 Edwardsville Edwardsville, KS - (1) 425 8,805 Elmwood Holly Hill, FL - 230 2,076 Fisherman's Cove Flint, MI - 380 3,438 Flagview Village Douglasville, GA - 508 2,125 Goldcoaster Homestead, FL - 446 4,234 Golden Lakes Plant City, FL - 1,092 7,161 Grand Grand Rapids, MI - 578 5,396 Groves Ft. Myers, FL - 249 2,396 Hamlin Webberville, MI - 125 1,675 Holly Forest Holly Hill, FL - 920 8,376 Holiday Village Elkhart, IN - 100 3,207 Indian Creek Ft. Myers Beach, FL - 3,832 34,660 Island Lake Merritt Island, FL - 700 6,431 Kensington Meadows Lansing, MI - 250 2,699 King's Court Traverse City, MI - 1,473 13,782 King's Lake Debary, FL - 280 2,542 King's Pointe Winter Haven, FL - 262 2,359 Kissimmee Gardens Kissimmee, FL - 594 5,522 Lake Juliana Auburndale, FL - 335 2,848 Lake San Marino Naples, FL - 650 5,760 Leesburg Landing Leesburg, FL - 50 429 Liberty Farms Valparaiso, IN - 66 1,201 Lincoln Estates Holland, MI - 455 4,201 Maple Grove Estates Dorr, MI - 15 210 Maplewood Lawrence, IN - 280 2,122 Meadow Lake Estates White Lake, MI - 1,188 11,498 Meadowbrook Indianapolis, IN - 927 3,833 Meadowbrook Estates Monroe, MI - 431 3,320 Meadowbrook Village Tampa, FL - 519 4,728 <CAPTION> COST CAPITALIZED SUBSEQUENT TO ACQUISITION GROSS AMOUNT ----------------------- CARRIED AT IMPROVEMENTS DECEMBER 31, 1997 ----------------------- ------------------------- BUILDING BUILDING AND AND PROPERTY NAME LOCATION LAND FIXTURES LAND FIXTURES - ------------------------- ----------------- --------- ---------- ----------- ---------- <S> <C> <C> <C> <C> <C> Cutler Estates Grand Rapids, MI - 47 822 7,651 Douglas Estates Austell, GA - 521 508 2,646 Edwardsville Edwardsville, KS 541 1,350 966 10,155 Elmwood Holly Hill, FL - - 230 2,076 Fisherman's Cove Flint, MI - 313 380 3,751 Flagview Village Douglasville, GA - 391 508 2,516 Goldcoaster Homestead, FL - - 446 4,234 Golden Lakes Plant City, FL 1 393 1,093 7,554 Grand Grand Rapids, MI - 49 578 5,445 Groves Ft. Myers, FL - - 249 2,396 Hamlin Webberville, MI 77 638 202 2,313 Holly Forest Holly Hill, FL - - 920 8,376 Holiday Village Elkhart, IN 143 819 243 4,026 Indian Creek Ft. Myers Beach, FL - 119 3,832 34,779 Island Lake Merritt Island, FL - 61 700 6,492 Kensington Meadows Lansing, MI - 1,612 250 4,311 King's Court Traverse City, MI - 220 1,473 14,002 King's Lake Debary, FL - 870 280 3,412 King's Pointe Winter Haven, FL - 142 262 2,501 Kissimmee Gardens Kissimmee, FL - 147 594 5,669 Lake Juliana Auburndale, FL - 247 335 3,095 Lake San Marino Naples, FL - 41 650 5,801 Leesburg Landing Leesburg, FL - 70 50 499 Liberty Farms Valparaiso, IN 116 1,606 182 2,807 Lincoln Estates Holland, MI - 82 455 4,283 Maple Grove Estates Dorr, MI 19 222 34 432 Maplewood Lawrence, IN - 484 280 2,606 Meadow Lake Estates White Lake, MI 127 1,146 1,315 12,644 Meadowbrook Indianapolis, IN 350 2,164 1,277 5,997 Meadowbrook Estates Monroe, MI 379 5,370 810 8,690 Meadowbrook Village Tampa, FL - 130 519 4,858 <CAPTION> ACCUMULATED DATE OF PROPERTY NAME LOCATION TOTAL DEPRECIATION ACQUISITION - ------------------------- ----------------- ----------- -------------- ------------- <S> <C> <C> <C> <C> Cutler Estates Grand Rapids, MI 8,473 395 1996 Douglas Estates Austell, GA 3,154 331 1988 Edwardsville Edwardsville, KS 11,121 1,342 1987 Elmwood Holly Hill, FL 2,306 35 1997 Fisherman's Cove Flint, MI 4,131 501 1993 Flagview Village Douglasville, GA 3,024 330 1988 Goldcoaster Homestead, FL 4,680 77 1997 Golden Lakes Plant City, FL 8,647 1,044 1993 Grand Grand Rapids, MI 6,023 284 1996 Groves Ft. Myers, FL 2,645 96 1997 Hamlin Webberville, MI 2,515 303 1984 Holly Forest Holly Hill, FL 9,296 142 1997 Holiday Village Elkhart, IN 4,269 564 1986 Indian Creek Ft. Myers Beach, FL 38,611 1,813 1996 Island Lake Merritt Island, FL 7,192 542 1995 Kensington Meadows Lansing, MI 4,561 270 1995 King's Court Traverse City, MI 15,475 712 1996 King's Lake Debary, FL 3,692 355 1994 King's Pointe Winter Haven, FL 2,763 300 1994 Kissimmee Gardens Kissimmee, FL 6,263 821 1993 Lake Juliana Auburndale, FL 3,430 373 1994 Lake San Marino Naples, FL 6,451 303 1996 Leesburg Landing Leesburg, FL 549 25 1996 Liberty Farms Valparaiso, IN 2,989 341 1985 Lincoln Estates Holland, MI 4,738 221 1996 Maple Grove Estates Dorr, MI 466 61 1979 Maplewood Lawrence, IN 2,886 351 1989 Meadow Lake Estates White Lake, MI 13,959 1,493 1994 Meadowbrook Indianapolis, IN 7,274 660 1989 Meadowbrook Estates Monroe, MI 9,500 1,181 1986 Meadowbrook Village Tampa, FL 5,377 654 1994 </TABLE> F-15
35 SCHEDULE III SUN COMMUNITIES, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION, CONTINUED (AMOUNTS IN THOUSANDS) <TABLE> <CAPTION> INITIAL COST TO COMPANY --------------------------------- BUILDING AND PROPERTY NAME LOCATION ENCUMBRANCE LAND FIXTURES - ------------------------- ----------------- ------------- ---------- ------------------ <S> <C> <C> <C> <C> Meadows Nappanee, IN - 300 2,300 Meadowstream Village Sodus, MI - 100 1,175 Orange Tree Orange City, FL - 283 2,530 Paradise Chicago Heights, IL - 723 6,638 Parkwood Grand Blanc, MI - 477 4,279 Pin Oak Parc St. Louis, MO - 1,038 3,250 Pine Hills Middlebury, IN - 72 544 Pine Ridge Petersburg, VA - 405 2,397 Plantation Manor Ft. Pierce, FL - 950 8,891 Pleasure Cove Ft. Pierce, FL - 550 5,005 Presidential Hudsonville, MI - 680 6,314 Royal Country Miami, FL - (1) 2,290 20,758 Saddle Oak Club Ocala, FL - 730 6,743 Scio Farms Ann Arbor, MI - 2,300 22,659 Sherman Oaks Jackson, MI - (1) 200 2,400 Siesta Bay Ft. Myers Beach, FL - 2,051 18,549 Silver Star Orlando, FL - 1,067 9,685 Southfork Belton, MO - 1,000 9,011 Snow to Sun Weslaco, TX - 190 2,143 Tallowwood Coconut Creek, FL - 510 5,099 Timber Ridge Ft. Collins, CO - 990 9,231 Timberbrook Bristol, IN - (1) 490 3,400 Timberline Estates Grand Rapids, MI - 536 4,867 Town and Country Traverse City, MI - 406 3,736 Valley Mills Indianapolis, IN - 150 3,500 Water Oak Country Club Est. Lady Lake, FL - 2,503 17,478 West Glen Village Indianapolis, IN - 1,100 10,028 Whispering Palm Sebastian, FL - 975 8,754 White Lake White Lake, MI - 673 6,179 <CAPTION> COST CAPITALIZED SUBSEQUENT TO ACQUISITION GROSS AMOUNT ------------------------------- CARRIED AT IMPROVEMENTS DECEMBER 31, 1997 ------------------------------- ------------------------------ BUILDING BUILDING AND AND PROPERTY NAME LOCATION LAND FIXTURES LAND FIXTURES - ------------------------- ----------------- ----------------- --------- --------- ----------- <S> <C> <C> <C> <C> <C> Meadows Nappanee, IN -1 1,732 299 4,032 Meadowstream Village Sodus, MI 109 1,044 209 2,219 Orange Tree Orange City, FL 15 235 298 2,765 Paradise Chicago Heights, IL - 41 723 6,679 Parkwood Grand Blanc, MI - 338 477 4,617 Pin Oak Parc St. Louis, MO 44 1,423 1,082 4,673 Pine Hills Middlebury, IN 52 1,348 124 1,892 Pine Ridge Petersburg, VA - 889 405 3,286 Plantation Manor Ft. Pierce, FL - 68 950 8,959 Pleasure Cove Ft. Pierce, FL - - 550 5,005 Presidential Hudsonville, MI - 535 680 6,849 Royal Country Miami, FL - 275 2,290 21,033 Saddle Oak Club Ocala, FL - 196 730 6,939 Scio Farms Ann Arbor, MI - 2,178 2,300 24,837 Sherman Oaks Jackson, MI 240 2,974 440 5,374 Siesta Bay Ft. Myers Beach, FL - 72 2,051 18,621 Silver Star Orlando, FL - 57 1,067 9,742 Southfork Belton, MO - - 1,000 9,011 Snow to Sun Weslaco, TX - - 190 2,143 Tallowwood Coconut Creek, FL - 437 510 5,536 Timber Ridge Ft. Collins, CO - 148 990 9,379 Timberbrook Bristol, IN 101 4,151 591 7,551 Timberline Estates Grand Rapids, MI - 252 536 5,119 Town and Country Traverse City, MI - 38 406 3,774 Valley Mills Indianapolis, IN - 533 150 4,033 Water Oak Country Club Est. Lady Lake, FL - 1,364 2,503 18,842 West Glen Village Indianapolis, IN - 385 1,100 10,413 Whispering Palm Sebastian, FL - 26 975 8,780 White Lake White Lake, MI - - 673 6,179 <CAPTION> ACCUMULATED DATE OF PROPERTY NAME LOCATION TOTAL DEPRECIATION ACQUISITION - ------------------------- ----------------- ---------- ------------ ------------ <S> <C> <C> <C> <C> Meadows Nappanee, IN 4,331 512 1987 Meadowstream Village Sodus, MI 2,428 319 1984 Orange Tree Orange City, FL 3,063 321 1994 Paradise Chicago Heights, IL 7,402 347 1996 Parkwood Grand Blanc, MI 5,094 619 1993 Pin Oak Parc St. Louis, MO 5,755 467 1994 Pine Hills Middlebury, IN 2,016 255 1980 Pine Ridge Petersburg, VA 3,691 441 1986 Plantation Manor Ft. Pierce, FL 9,909 1,073 1994 Pleasure Cove Ft. Pierce, FL 5,555 606 1994 Presidential Hudsonville, MI 7,529 339 1996 Royal Country Miami, FL 23,323 2,839 1994 Saddle Oak Club Ocala, FL 7,669 732 1995 Scio Farms Ann Arbor, MI 27,137 1,993 1995 Sherman Oaks Jackson, MI 5,814 730 1986 Siesta Bay Ft. Myers Beach, FL 20,672 970 1996 Silver Star Orlando, FL 10,809 508 1996 Southfork Belton, MO 10,011 - 1997 Snow to Sun Weslaco, TX 2,333 40 1997 Tallowwood Coconut Creek, FL 6,046 647 1994 Timber Ridge Ft. Collins, CO 10,369 484 1996 Timberbrook Bristol, IN 8,142 891 1987 Timberline Estates Grand Rapids, MI 5,655 618 1994 Town and Country Traverse City, MI 4,180 195 1996 Valley Mills Indianapolis, IN 4,183 548 1989 Water Oak Country Club Est. Lady Lake, FL 21,345 2,606 1993 West Glen Village Indianapolis, IN 11,513 1,224 1994 Whispering Palm Sebastian, FL 9,755 456 1996 White Lake White Lake, MI 6,852 104 1997 </TABLE> F-16
36 SCHEDULE III SUN COMMUNITIES, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION, CONTINUED (AMOUNTS IN THOUSANDS) <TABLE> <CAPTION> INITIAL COST TO COMPANY --------------------------------- BUILDING AND PROPERTY NAME LOCATION ENCUMBRANCE LAND FIXTURES - ------------------------- ----------------- ------------- --------------- ------------- <S> <C> <C> <C> <C> White Oak Mt. Morris, MI - 782 7,245 Willowbrook Toledo, OH - 781 7,054 Woods Edge West Lafayette, IN - 100 2,600 Woodside Terrace Holland, OH - 1,064 9,625 Worthington Arms Delaware, OH - 376 2,624 Corporate Headquarters Farmington Hills, MI - - - Property Under Development - - 190 --------- ---------- $ 63,080 $ 542,604 ========= ========== <CAPTION> COST CAPITALIZED SUBSEQUENT TO ACQUISITION GROSS AMOUNT --------------------------- CARRIED AT IMPROVEMENTS DECEMBER 31, 1997 --------------------------- --------------------------- BUILDING BUILDING AND AND PROPERTY NAME LOCATION LAND FIXTURES LAND FIXTURES - ------------------------- ----------------- -------------- --------- --------- ----------- <S> <C> <C> <C> <C> <C> White Oak Mt. Morris, MI - - 782 7,245 Willowbrook Toledo, OH - - 781 7,054 Woods Edge West Lafayette, IN 3 1,581 103 4,181 Woodside Terrace Holland, OH - - 1,064 9,625 Worthington Arms Delaware, OH - 800 376 3,424 Corporate Headquarters Farmington Hills, MI - 1,851 - 1,851 Property Under Development - - - 190 ------- --------- --------- ----------- $ 4,597 $ 74,540 $ 67,677 $ 617,144 ======= ========= ========= =========== <CAPTION> ACCUMULATED DATE OF PROPERTY NAME LOCATION TOTAL DEPRECIATION ACQUISITION - ------------------------- ----------------- ----------- ------------ ----------- <S> <C> <C> <C> <C> <C> White Oak Mt. Morris, MI 8,027 124 1997 Willowbrook Toledo, OH 7,835 - 1997 Woods Edge West Lafayette, IN 4,284 512 1985 Woodside Terrace Holland, OH 10,689 162 1997 Worthington Arms Delaware, OH 3,800 467 1990 Corporate Headquarters Farmington Hills, MI 1,851 448 Various Property Under Development 190 - 1997 --------- ----------- $ 684,821 $ 50,084 ========= =========== </TABLE> (1) These communities collateralize $45 million of secured debt. F-17
37 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 20, 1998 SUN COMMUNITIES, INC. By /s/ Gary A. Shiffman ------------------------------ Gary A. Shiffman, President 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/ Milton M. Shiffman - ----------------------- Milton M. Shiffman Chairman of the Board of Directors March 20, 1998 /s/ Gary A. Shiffman Chief Executive Officer, President and - ----------------------- Director March 20, 1998 Gary A. Shiffman Senior Vice President, Chief Financial Officer, Treasurer, /s/ Jeffrey P. Jorissen Secretary - ----------------------- and Principal Accounting Officer March 20, 1998 Jeffrey P. Jorissen /s/ Paul D. Lapides - ----------------------- Director March 20, 1998 Paul D. Lapides /s/ Ted J. Simon - ----------------------- Director March 20, 1998 Ted J. Simon /s/ Clunet R. Lewis - ----------------------- Director March 20, 1998 Clunet R. Lewis
38 NAME TITLE DATE - ---- ----- ---- - ----------------------- Ronald L. Piasecki Director March , 1998 -- /s/ Arthur A. Weiss - ----------------------- Director March 20, 1998 Arthur A. Weiss
39 EXHIBIT INDEX <TABLE> <CAPTION> SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ------ ----------- ------------ <S> <C> <C> 2.1 Form of Common Stock Certificate (1) 2.2 Agreement of Sale pertaining to White Oak Estates 2.3 Agreement of Sale pertaining to Southfork 2.4 Agreement of Sale pertaining to Holly Forest Estates and Elmwood Mobile Home Park 3.1 Amended and Restated Articles of Incorporation of Sun Communities, Inc. (1) 3.2 Bylaws of Sun Communities, Inc. (3) 4.1 Indenture, dated as of April 24, 1996, among the Operating (4) Partnership, the Company and Bankers Trust Company, as Trustee 4.2 Form of Note for the 2001 Notes (4) 4.3 Form of Note for the 2003 Notes (4) 4.4 First Supplemental Indenture, dated as of August 20, 1997, by and between the Operating Partnership and Bankers Trust Company, as Trustee 4.5 Form of Medium-Term Note (Floating Rate) 4.6 Form of Medium-Term Note (Fixed Rate) 10.1 Second Amended and Restated Agreement of Limited Partnership of Sun (8) Communities Operating Limited Partnership 10.2 Amended and Restated 1993 Stock Option Plan# (8) 10.3 Amended and Restated 1993 Non-Employee Director Stock Option Plan# (8) 10.4 Form of Stock Option Agreement between the Company and certain (1) directors, officers and other individuals# 10.5 Form of Non-Employee Director Stock Option Agreement between the (5) Company and certain directors# 10.6 Employment Agreement between the Company and Gary A. Shiffman# (8) 10.7 Agreement regarding termination of Robert B. Bayer's Employment (6) Agreement# 10.8 Registration Rights and Lock-Up Agreement with the Company (5) 10.9 Senior Unsecured Line of Credit Agreement with Lehman Brothers Holdings Inc. 10.10 Amended and Restated Loan Agreement between Sun Communities Funding Limited Partnership and Lehman Brothers Holdings Inc. 10.11 Amended and Restated Loan Agreement among Miami Lakes Venture Associates, Sun Communities Funding Limited Partnership and Lehman Brothers Holdings Inc. </TABLE>
40 <TABLE> <CAPTION> SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ------ ----------- ------------ <S> <C> <C> 10.12 Form of Indemnification Agreement between each officer and director of the Company and the Company 10.13 Loan Agreement among the Operating Partnership, Sea Breeze Limited Partnership and High Point Associates, LP. 10.14 Option Agreement by and between the Operating Partnership and Sea Breeze Limited Partnership 10.15 Option Agreement by and between the Operating Partnership and High Point Associates, LP 10.16 Purchase Agreement with respect to Mortgage Debt (1) 10.17 Credit Agreement between Fort McMurray Housing Inc. and Sun (3) Communities Alberta Limited Partnership 10.18 First Amending Agreement to Credit Agreement between Fort McMurray (3) Housing Inc. and Sun Communities Alberta Limited Partnership 10.19 Demand Note Agreement from Sun Communities Operating Limited (3) Partnership to NBD Bank, Canada 10.20 Fee and Commission Agreement between Sun Communities Operating Limited (3) Partnership and Fort McMurray Housing Inc. 10.21 $1,022,538.12 Promissory Note from Gary A. Shiffman to the Company (7) 10.22 $1,022,538.13 Promissory Note from Gary A. Shiffman to the Company (7) 10.23 $6,604,923.75 Promissory Note from Gary A. Shiffman to the Company (7) 10.24 Stock Pledge Agreement between Gary A. Shiffman and the Company for (7) 94,570 shares of Common Stock 10.25 Stock Pledge Agreement between Gary A. Shiffman and the Company for (7) 305,430 shares of Common Stock 10.26 $ 1,300,195.40 Promissory Note from Gary A. Shiffman to the Operating Partnership 10.27 $ 1,300,195.40 Promissory Note from Gary A. Shiffman to the Operating Partnership 10.28 Stock Pledge Agreement between Gary A. Shiffman and the Operating Partnership with respect to 80,000 shares of Common Stock 10.29 Registration Rights Agreement between Gary A. Shiffman and the Company (3) 10.30 Registration Rights and Lock Up Agreement among the Company and the (3) partners of Miami Lakes Venture Associates, as amended 10.31 Registration Rights and Lock Up Agreement among the Company and the (3) partners of Scio Farms Estates Limited Partnership 10.32 Registration Rights and Lock Up Agreement among the Company and the (3) partners of Kensington Meadows Associates </TABLE>
41 <TABLE> <CAPTION> SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ------ ----------- ------------ <S> <C> <C> 10.33 Registration Rights and Lock Up Agreement among the Company and (8) certain affiliates of Aspen Enterprises, Ltd. (Preferred OP Units) 10.34 Registration Rights and Lock Up Agreement among the Company and (8) certain affiliates of Aspen Enterprises, Ltd. (Common OP Units) 10.35 Registration Rights Agreement among the Company and the partners of (8) S&K Smith Co. 10.36 Employment Agreement between the Company and Jeffrey P. Jorissen# (8) 10.37 Long Term Incentive Plan 12.1 Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Dividends 21 List of Subsidiaries 23 Consent of Coopers & Lybrand L.L.P., independent accountants 27 Financial Data Schedule </TABLE> - --------------- (1) Incorporated by reference to the Company's Registration Statement No. 33-69340. (2) Incorporated by reference to the Company's Current Report on Form 8-K dated March 20, 1996. (3) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (4) Incorporated by reference to the Company's Current Report on Form 8-K dated April 24, 1996. (5) Incorporated by reference to the Company's Registration Statement No. 33-80972. (6) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. (7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995. (8) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. # Management contract or compensatory plan or arrangement required to be identified by Form 10-K Item 14.