<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 number 0-22411
-------------
SUMMIT PROPERTIES PARTNERSHIP, L.P.
(Exact name of registrant as specified in its charter)
Delaware 56-1857809
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
212 S. Tryon Street, Suite 500, Charlotte, North Carolina 28281
(Address of principal executive offices - zip code)
(704) 334-9905
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check 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
--- ---
<PAGE> 2
SUMMIT PROPERTIES PARTNERSHIP, L.P.
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Balance Sheets as of September 30, 1997
and December 31, 1996 (Unaudited). . . . . . . . . . . 3
Statements of Earnings for the three and
nine months ended September 30, 1997 and 1996
(Unaudited). . . . . . . . . . . . . . . . . . . . . . 4
Statement of Partners' Equity (Unaudited) . . . . . . . . 5
Statements of Cash Flows for the nine
months ended September 30, 1997 and 1996
(Unaudited). . . . . . . . . . . . . . . . . . . . . . 6
Notes to Financial Statements. . . . . . . . . . . . . . . 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 11
PART II OTHER INFORMATION
Item 2 Changes in Securities. . . . . . . . . . . . . . . . . . . 29
Item 6 Exhibits Index and Reports on Form 8-K . . . . . . . . . . 29
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUMMIT PROPERTIES PARTNERSHIP, L.P.
BALANCE SHEETS
(Dollars in Thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Real estate assets:
Land and land improvements $ 120,811 $ 102,605
Buildings and improvements 576,932 472,996
Furniture, fixtures and equipment 49,405 43,021
--------- ---------
747,148 618,622
Less: accumulated depreciation (99,789) (85,651)
--------- ---------
Operating real estate assets 647,359 532,971
Construction in progress 118,108 86,157
--------- ---------
Net real estate assets 765,467 619,128
Cash and cash equivalents 3,930 3,665
Restricted cash 5,115 4,121
Deferred financing costs, net 7,294 4,675
Other assets 4,823 3,775
--------- ---------
Total assets $ 786,629 $ 635,364
========= =========
LIABILITIES AND PARTNERS' EQUITY
Liabilities:
Notes payable $ 438,094 $ 309,933
Accrued interest payable 2,597 1,318
Accounts payable and accrued expenses 17,641 7,257
Distributions payable to unitholders 10,867 10,244
Security deposits and prepaid rents 3,605 3,196
--------- ---------
Total liabilities 472,804 331,948
--------- ---------
Commitments
Partners' equity
Partnership units issued and outstanding 27,339,016
and 26,415,977
General partner - outstanding 273,390 and 264,159 3,869 3,766
Limited partners - outstanding 27,065,626 and
26,151,818 309,956 299,650
--------- ---------
Total partners' equity 313,825 303,416
--------- ---------
Total liabilities and partners' equity $ 786,629 $ 635,364
========= =========
</TABLE>
See notes to financial statements.
3
<PAGE> 4
SUMMIT PROPERTIES PARTNERSHIP, L.P.
STATEMENTS OF EARNINGS
(Dollars In Thousands Except For Per Unit Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Rental $ 28,240 $ 23,143 $ 80,348 $ 65,097
Other property income 1,660 1,293 4,558 3,461
Interest 97 240 305 395
Other income 71 95 209 310
------------ ------------ ------------ ------------
Total revenues 30,068 24,771 85,420 69,263
------------ ------------ ------------ ------------
Expenses:
Property operating and maintenance:
Personnel 2,427 2,191 6,899 6,315
Advertising and promotion 596 434 1,418 1,015
Utilities 1,312 1,056 3,623 3,036
Building repairs and maintenance 2,326 2,022 6,382 5,456
Real estate taxes and insurance 2,573 2,258 8,111 6,744
Depreciation 5,852 4,682 16,463 13,249
Property supervision 701 576 2,041 1,632
Other operating expenses 797 690 2,356 1,943
------------ ------------ ------------ ------------
16,584 13,909 47,293 39,390
Interest 5,790 4,292 15,382 13,346
General and administrative 857 764 2,099 2,045
Loss (income) in equity investments:
Summit Management Company (111) 66 (86) 161
Real estate joint venture -- -- -- (1)
------------ ------------ ------------ ------------
Total expenses 23,120 19,031 64,688 54,941
------------ ------------ ------------ ------------
Income before gain on sale of real
estate assets and extraordinary items 6,948 5,740 20,732 14,322
Gain on sale of real estate assets -- -- 4,366 --
------------ ------------ ------------ ------------
Income before extraordinary items 6,948 5,740 25,098 14,322
Extraordinary items -- (626) -- (626)
------------ ------------ ------------ ------------
Net income 6,948 5,114 25,098 13,696
Net income allocated to general partner (70) (51) (251) (137)
------------ ------------ ------------ ------------
Net income allocated to limited partners $ 6,878 $ 5,063 $ 24,847 $ 13,559
============ ============ ============ ============
Per unit data:
Income before extraordinary items $ 0.25 $ 0.24 $ 0.92 $ 0.66
============ ============ ============ ============
Net income $ 0.25 $ 0.21 $ 0.92 $ 0.63
============ ============ ============ ============
Distributions declared $ 0.40 $ 0.39 $ 1.19 $ 1.16
============ ============ ============ ============
Weighted average units 27,369,316 24,070,632 27,252,718 21,769,807
============ ============ ============ ============
</TABLE>
See notes to financial statements.
4
<PAGE> 5
SUMMIT PROPERTIES PARTNERSHIP, L.P.
STATEMENT OF PARTNERS' EQUITY
(Dollars In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
------- ---------- ---------
<S> <C> <C> <C>
Balance, December 31, 1996 $ 3,766 $ 299,650 $ 303,416
Distributions (326) (32,306) (32,632)
Contributions from Summit Properties related to:
Issuance of stock 117 11,629 11,746
Exercise of stock options 7 731 738
Amortization of restricted stock grants 3 268 271
Proceeds from Dividend Reinvestment
and Employee Stock Purchase Plans 17 1,743 1,760
Costs of shelf registrations (5) (506) (511)
Issuance of units related to property acquisitions 39 3,900 3,939
Net income 251 24,847 25,098
------- --------- ---------
Balance, September 30, 1997 $ 3,869 $ 309,956 $ 313,825
======= ========= =========
</TABLE>
See notes to financial statements.
5
<PAGE> 6
SUMMIT PROPERTIES PARTNERSHIP, L.P.
STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 25,098 $ 13,696
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary items -- 626
Gain (loss) on equity method investments (86) 160
Gain on sale of real estate assets (4,366) --
Depreciation and amortization 17,336 13,994
Increase in restricted cash (994) (610)
Increase in other assets (699) (1,747)
Increase (decrease) in accrued interest payable 1,262 (82)
Increase in accounts payable and accrued expenses 4,484 4,114
Increase (decrease) in security deposits and prepaid rents (104) 557
--------- ---------
Net cash provided by operating activities 41,931 30,708
--------- ---------
Cash flows from investing activities:
Construction of real estate assets, net of payables (68,980) (54,259)
Purchase of Communities (57,749) (6,360)
Proceeds from sale of Community 9,271 --
Capitalized interest (4,528) (2,884)
Recurring capital expenditures (2,589) (1,805)
Non-recurring capital expenditures (3,317) (2,329)
--------- ---------
Net cash used in investing activities (127,892) (67,637)
--------- ---------
Cash flows from financing activities:
Debt proceeds, net of underwriters discount, offering
and related costs 226,920 80,775
Debt repayments (117,358) (103,751)
Distributions to unitholders (32,104) (23,761)
Payments of financing costs (32) (148)
Contributions from Summit Properties related to:
Issuance of common stock, net of underwriters discount,
offering and related costs 6,813 97,619
Exercise of stock options 738 224
Proceeds from Dividend Reinvestment and Employee Stock
Purchase Plans 1,760 1,262
Shelf registrations costs (511) --
--------- ---------
Net cash provided by financing activities 86,226 52,220
--------- ---------
Net increase in cash and cash equivalents 265 15,291
Cash and cash equivalents, beginning of period 3,665 2,881
--------- ---------
Cash and cash equivalents, end of period $ 3,930 $ 18,172
========= =========
Supplemental disclosure of cash flow
information - Cash paid for interest, net of capitalized interest $ 13,359 $ 12,643
========= =========
</TABLE>
See notes to financial statements.
6
<PAGE> 7
SUMMIT PROPERTIES PARTNERSHIP, L.P.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by
the management of Summit Properties Partnership, L.P., (the "Operating
Partnership") in accordance with generally accepted accounting
principles for interim financial information and in conformity with the
rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary
for a fair presentation have been included. The results of operations
for the nine months ended September 30, 1997 are not necessarily
indicative of the results that may be expected for the full year. These
financial statements should be read in conjunction with the Operating
Partnership's December 31, 1996 audited financial statements and notes
thereto included in the Operating Partnership's Registration Statement
on Form 10, as amended.
The Operating Partnership conducts the business of developing,
acquiring and managing multi-family apartment communities for Summit
Properties Inc. ("Summit Properties"). Summit Properties is the sole
general partner and majority owner of the Operating Partnership. Summit
Properties is a self-administered and self-managed equity real estate
investment trust ("REIT").
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standard No. 128 (SFAS No. 128), "Earnings Per
Share," which will be effective for periods ending after December 15,
1997. SFAS No. 128 will change the method for calculating earnings per
Unit. Had the Operating Partnership applied SFAS No. 128 for the three
and nine months ended September 30, 1997, the effect on reported
earnings per Unit would not be significant.
2. ACQUISITIONS AND DISPOSITIONS
During 1997, the Operating Partnership completed the acquisition of
four Communities: Summit Mayfaire, Summit Portofino, Summit Sand Lake
and Summit Windsor II. The acquisitions added a total of 1,188
apartment homes to the Operating Partnership's portfolio at an
aggregate purchase price of $82.9 million. The acquisitions were
primarily financed with the assumption of $15.2 million in debt, the
issuance of 243,608 Units to Summit Properties in exchange for Summit
Properties issuing 243,608 shares of Common Stock to the seller, the
issuance of 194,495 Units directly to the seller, and payment of $57.7
million in cash.
In addition, the Operating Partnership acquired its joint venture
partner's interest in Summit Plantation (formerly Plantation Cove)
apartment community on April 1, 1996. The Operating Partnership paid
$6.4 million in cash for the remaining 75% interest in this joint
venture, which is now owned entirely by the Operating Partnership.
7
<PAGE> 8
The following summary of selected unaudited pro forma results of
operations presents information as if the communities acquired in 1997
and the Summit Plantation acquisition had occurred at the beginning of
each period presented. The pro forma information for the nine months
ended September 30, 1997 and 1996 is provided for informational
purposes only and is not indicative of results that would have occurred
or which may occur in the future (dollars in thousands, except per unit
amounts):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1997 1996
---------- -----------
<S> <C> <C>
Net revenues $ 87,356 $ 78,131
========== ===========
Income before gain on sale of real estate assets $ 20,613 $ 13,922
========== ===========
Net income $ 24,979 $ 13,922
========== ===========
Net income per Unit $ 0.91 $ 0.62
========== ===========
Weighted average units 27,386,667 22,522,939
========== ===========
</TABLE>
On May 14, 1997, the Operating Partnership sold a community in
Charlotte, North Carolina known as Summit Charleston for $9.5 million.
A gain on the sale of $4.4 million was recognized. Proceeds from the
sale were used to partially fund the acquisition of Summit Windsor II .
3. SENIOR UNSECURED DEBT OFFERING
On August 12, 1997, the Operating Partnership completed a $125 million
senior unsecured debt offering (the Notes). The Notes consist of: $25
million of 6.8% Notes due on August 15, 2002, $50 million of 6.95%
Notes due on August 15, 2004 and $50 million of 7.2% Notes due on
August 15, 2007. The Notes are redeemable at any time at the option of
the Operating Partnership, in whole or in part, at a redemption price
equal to the sum of the principal amount of the Notes and the
make-whole amount, if any, based upon the available reinvestment rate.
The Notes are not subject to any mandatory sinking fund and are
unsecured obligations of the Operating Partnership. The related
indenture contains various covenants including certain restrictions on
future indebtedness, limitations on encumbered assets and maintenance
of a minimum debt coverage ratio.
8
<PAGE> 9
4. RESTRICTED STOCK
In the nine months ended September 30, 1997 and 1996, Summit Properties
granted 26,528 and 56,041 shares, respectively, of restricted stock to
employees of the Operating Partnership and subsidiaries under Summit
Properties 1994 Stock Option and Incentive Plan. The market value of
the restricted stock grants in 1997 and 1996 totaled $570,000 and $1.1
million, respectively. Unearned compensation is being amortized to
expense over the vesting period which ranges from three to five years.
5. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash investing and financing activities for the nine months ended
September 30, 1997 and 1996 are as follows:
A. In the nine months ended September 30, 1997, the Operating
Partnership purchased four communities (Summit Mayfaire,
Summit Portofino, Summit Sand Lake and Summit Windsor II). The
Operating Partnership completed the purchase of the four
Communities by assuming debt, issuing 194,495 Units, issuing
243,608 Units to Summit Properties in exchange for Summit
Properties issuing 243,608 shares of Common Stock to the
seller, assuming certain liabilities and current assets, and
the payment of cash. The recording of the purchases is
summarized as follows (in thousands):
Fixed assets $ 82,898
Other assets 30
Debt assumed (15,226)
Current liabilities assumed (1,081)
Value of Operating Partnership Units issued (3,939)
Value of Common Stock issued (4,933)
--------
Cash invested $ 57,749
========
B. On April 1, 1996, the Operating Partnership acquired its joint
venture partner's interest in the Summit Plantation (formerly
Plantation Cove) apartment community. The Operating
Partnership paid $6.4 million in cash for the remaining 75%
interest in this joint venture, which is now owned entirely by
the Operating Partnership. The recording of the purchase is
summarized as follows (in thousands):
Fixed assets $ 21,913
Current assets 202
Deferred charges 95
Debt assumed (14,347)
Current liabilities assumed (288)
Equity investment (1,215)
--------
Net cash paid $ 6,360
========
C. The Operating Partnership issued 106,330 Units, (valued at
$2.1 million) for the purchase of land during the nine months
ended September 30, 1996.
9
<PAGE> 10
D. The Operating Partnership accrued a distribution payable in
the amount of $10.9 million and $10.2 million at September 30,
1997 and 1996, respectively.
E. Summit Properties issued 26,528 and 56,041 shares,
respectively, of restricted stock valued at $570,000 and $1.1
million during the nine months ended September 30, 1997 and
1996, respectively, to employees of the Operating Partnership
and subsidiaries.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Form 10-Q contains forward-looking statements including, without
limitation, statements relating to the operating performance of stabilized
communities and development activities of the Operating Partnership within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended. Although the Operating Partnership
believes that the expectations reflected in such forward-looking statements are
based on reasonable assumptions, the Operating Partnership's actual results and
performance of stabilized and development communities could differ materially
from those set forth in the forward-looking statements. Certain factors that
might cause such a difference include general economic conditions, local real
estate market conditions, construction delays due to unavailability of
materials, weather conditions or other delays and those factors discussed in the
last paragraph under the heading entitled "Operating Performance of the
Operating Partnership's Stabilized Communities" and in the section entitled
"Development Activity--Certain Factors Affecting the Performance of Development
Communities" on pages 13 and 24, respectively, of this Form 10-Q.
As of September 30, 1997, there were 27,339,016 Units outstanding of the
Operating Partnership, of which 23,306,930, or 85.3% were owned by Summit
Properties and 4,032,086, or 14.7% were owned by other partners (including
certain officers and directors of Summit Properties).
The following discussion should be read in conjunction with the Financial
Statements of Summit Properties Partnership, L.P. and the Notes thereto
appearing elsewhere herein.
11
<PAGE> 12
HISTORICAL RESULTS OF OPERATIONS
The Operating Partnership's net income is generated primarily from operations of
its apartment communities (the "Communities"). The changes in operating results
from period to period reflect changes in existing Community performance and
increases in the number of apartment homes due to development and acquisition of
new Communities. Where appropriate, comparisons are made on a "stabilized
Communities," "acquisition Communities," "stabilized development Communities"
and "Communities in lease-up" basis in order to adjust for changes in the number
of apartment homes. A Community is deemed to be "stabilized" when it has
attained either a physical occupancy level of at least 93% or when construction
has been completed for one year in each of the comparable periods presented. A
Community is deemed to be a "stabilized development" when stabilized in the
entire current period presented but was in lease-up in the prior period
presented.
Results of Operations for the Three and Nine Months Ended September 30, 1997 and
1996
For the three and nine months ended September 30, 1997, income before gain on
sale of real estate assets and extraordinary items increased $1.2 million and
$6.4 million, respectively, to $6.9 million and $20.7 million, respectively,
from the three and nine months ended September 30, 1996.
12
<PAGE> 13
OPERATING PERFORMANCE OF THE OPERATING PARTNERSHIP'S PORTFOLIO OF COMMUNITIES
The operating performance of the Communities for the three and nine months ended
September 30, 1997 and 1996 is summarized below (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ------------------------------------
1997 1996 % Change 1997 1996 % Change
----------- ---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Property revenues:
Stabilized communities (1) $21,376 $21,072 1.4% $61,115 $60,010 1.8%
Acquisition communities (2) 2,743 0 100.0% 8,985 1,467 512.5%
Stabilized development communities 3,137 2,773 13.1% 9,264 5,768 60.6%
Communities in lease-up 2,644 233 1034.8% 5,023 255 1869.8%
Community sold 0 358 -100.0% 519 1,058 -50.9%
------- ------- ------- -------
Total property revenues 29,900 24,436 22.4% 84,906 68,558 23.8%
------- ------- ------- -------
Property operating and maintenance
expense (3):
Stabilized communities 8,080 8,083 0.0% 23,057 22,902 0.7%
Acquisition communities 934 0 100.0% 3,022 515 486.8%
Stabilized development communities 933 889 4.9% 2,865 2,127 34.7%
Communities in lease-up 785 114 588.6% 1,675 161 940.4%
Community sold 0 141 -100.0% 211 436 -51.6%
------- ------- ------- -------
Total property operating and
maintenance expense 10,732 9,227 16.3% 30,830 26,141 17.9%
------- ------- ------- -------
Property operating income $19,168 $15,209 26.0% $54,076 $42,417 27.5%
======= ======= ======= =======
Apartment homes, end of period 14,734 12,140 21.4% 14,734 12,140 21.4%
======= ======= ======= =======
</TABLE>
(1) Includes Communities which were stabilized for each of the comparable
periods presented. Three month results include Summit Plantation which
was acquired April 1, 1996.
(2) Three month results include the Communities acquired in 1997. Nine month
results include the Communities acquired in 1997 and Summit Plantation
acquired April 1, 1996.
(3) Before real estate depreciation expense.
A summary of the Operating Partnership's apartment homes for the nine months
ended September 30, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Apartment homes at January 1 12,454 11,286
Acquisitions 1,188 262
Developments which began rental operations
during the period 1,306 592
Sale of apartment homes (214) --
------ ------
Apartment homes at September 30 14,734 12,140
====== ======
</TABLE>
13
<PAGE> 14
OPERATING PERFORMANCE OF THE OPERATING PARTNERSHIP'S STABILIZED COMMUNITIES
The operating performance of the 45 and 44 Communities stabilized during the
entire period in each of the three and nine months ended September 30, 1997 and
1996, respectively, are summarized below (dollars in thousands except average
monthly rental revenue):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- -----------------------------------
1997 1996 % Change 1997 1996 % Change
---------- ---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Property revenues:
Rental $20,348 $20,004 1.7% $58,209 $57,089 2.0%
Other 1,028 1,068 -3.7% 2,906 2,921 -0.5%
------- ------- ------- -------
Total property revenues 21,376 21,072 1.4% 61,115 60,010 1.8%
------- ------- ------- -------
Property operating and maintenance
expense (1):
Personnel 1,793 1,923 -6.8% 5,217 5,580 -6.5%
Advertising and promotion 315 254 24.0% 781 634 23.2%
Utilities 982 922 6.5% 2,719 2,669 1.9%
Building repairs and maintenance 1,886 1,886 0.0% 5,186 5,113 1.4%
Real estate taxes and insurance 1,983 2,015 -1.6% 5,898 5,792 1.8%
Property supervision 530 523 1.3% 1,524 1,491 2.2%
Other operating expense 591 560 5.5% 1,732 1,623 6.7%
------- ------- ------- -------
Total property operating and
maintenance expense 8,080 8,083 0.0% 23,057 22,902 0.7%
------- ------- ------- -------
Property operating income $13,296 $12,989 2.4% $38,058 $37,108 2.6%
======= ======= ======= =======
Average physical occupancy (2) 93.7% 93.7% 0.0% 93.3% 93.3% 0.0%
======= ======= ======= =======
Average monthly rental revenue (3) $ 724 $ 712 1.8% $ 734 $ 720 2.0%
======= ======= ======= =======
Number of apartment homes 10,134 10,134 9,872 9,872
======= ======= ======= =======
</TABLE>
(1) Before real estate depreciation expense.
(2) Average physical occupancy is defined as the number of apartment homes
occupied divided by the total number of apartment homes contained in
the Communities, expressed as a percentage. Average physical occupancy
has been calculated using the average of the midweek occupancy that
existed during each week of the period.
(3) Represents the average monthly net rental revenue per occupied
apartment home.
The increase in rental revenue from stabilized Communities for the third quarter
and the first nine months of 1997 compared to 1996 was primarily the result of
increases in average rental rates. Property operating and maintenance expenses
were stable with increases in advertising and promotion, and other operating
expense, offset by a decrease in personnel expense. As a percentage of total
property revenue, property operating and maintenance expenses decreased for the
three months ended September 30, 1996 and 1997 from 38.4% to 37.8% and for the
nine months ended September 30, 1996 and 1997 from 38.2% to 37.7%.
14
<PAGE> 15
The 1.4% and 1.8% rates of growth in property revenues were lower than the 3.9%
and 4.1% rates of growth in property revenues achieved from the third quarter of
1995 compared to third quarter 1996 and the first nine months of 1995 compared
to the first nine months of 1996, respectively. The growth rate was lower
primarily as a result of a new supply of competing multi-family communities and
the increase in home affordability in some of the markets in which the Operating
Partnership operates. This lower growth rate was especially noticeable in the
Tampa and Atlanta markets. The Operating Partnership expects property growth
rates for the remainder of 1997 to be similar to the first nine months of 1997
as the supply of new multi-family communities continues to increase, balanced by
the continued strength of the local economies in which the Operating Partnership
operates. The Operating Partnership believes its expectations with respect to
property revenue growth are based on reasonable assumptions as to future
economic conditions and the quantity of competitive multi-family communities in
the markets in which the Operating Partnership does business. There can be no
assurance that actual results will not differ from these assumptions.
15
<PAGE> 16
OPERATING PERFORMANCE OF THE OPERATING PARTNERSHIP'S ACQUISITION COMMUNITIES
Acquisition communities consist of Summit Mayfaire, Summit Portofino, Summit
Sand Lake and Summit Windsor II acquired in 1997 (1,188 apartment homes) and
Summit Plantation (262 apartment homes) acquired on April 1, 1996, for the nine
month periods presented and only the four Communities acquired in 1997 for the
three month periods presented. The operations of these Communities for the three
and nine months ended September 30, 1997 and 1996 are summarized as follows
(dollars in thousands except average monthly rental revenue):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -------------------
1997 1996 1997 1996
------ ---- ------ ------
<S> <C> <C> <C> <C>
Property revenues:
Rental revenues $2,539 $ 0 $8,404 $1,391
Other property revenue 204 0 581 76
------ --- ------ ------
Total property revenues 2,743 0 8,985 1,467
------ --- ------ ------
Property operating and maintenance
expense (1) 934 0 3,022 515
------ --- ------ ------
Property operating income $1,809 $ 0 $5,963 $ 952
====== === ====== ======
Average physical occupancy (2) 93.4% 0.0% 93.2% 92.8%
====== === ====== ======
Average monthly rental revenue (3) $ 800 $ 0 $ 820 $ 985
====== === ====== ======
Number of apartment homes 1,188 0 1,450 262
====== === ====== ======
</TABLE>
(1) Before real estate depreciation expense.
(2) Average physical occupancy is defined as the number of apartment homes
occupied divided by the total number of apartment homes contained in
the communities, expressed as a percentage. Average physical occupancy
has been calculated using the average of the midweek occupancy that
existed during each week of the period.
(3) Represents the average monthly net rental revenue per occupied
apartment home.
The decrease in the average monthly rental revenue for the nine months ended
September 30, 1997 as compared to the corresponding period in 1996 is
attributable to lower average monthly rental revenue on the 1997 acquisition
communities in comparison to the 1996 acquisition community. Average monthly
rental revenue for the nine months ended September 30, 1997 for the 1997
acquisitions alone was $772.
The unleveraged yield, defined as property operating income for the three and
nine months ended September 30, 1997 for the Acquisition Communities, as defined
above, on an annualized basis over total acquisition cost, was 9.08% and 9.22%,
respectively. The unleveraged yield for only the four communities acquired in
1997 for the nine months ended September 30, 1997, was 9.17%.
16
<PAGE> 17
OPERATING PERFORMANCE OF THE OPERATING PARTNERSHIP'S STABILIZED DEVELOPMENT
COMMUNITIES
The Operating Partnership had four development communities (Summit Aventura,
Summit Hill II, Summit Green, and Summit River Crossing), which were stabilized
during the entire three and nine months ended September 30, 1997 but were still
in lease-up/construction in the three and nine months ended September 30, 1996.
The operating performance of these four Communities for the three and nine
months ended September 30, 1997 and 1996 is summarized below (dollars in
thousands except average monthly rental revenue):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------- -------------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Property revenues:
Rental revenues $2,936 $2,593 $8,655 $5,377
Other property revenue 201 180 609 391
------ ------ ------ ------
Total property revenues 3,137 2,773 9,264 5,768
------ ------ ------ ------
Property operating and maintenance
expense (1) 933 889 2,865 2,127
------ ------ ------ ------
Property operating income $2,204 $1,884 $6,399 $3,641
====== ====== ====== ======
Average physical occupancy (2) 92.3% 81.5% 92.3% 56.7%
====== ====== ====== ======
Average monthly rental revenue (3) $ 883 $ 843 $ 884 $ 860
====== ====== ====== ======
Number of apartment homes 1,200 1,200 1,200 1,200
====== ====== ====== ======
</TABLE>
(1) Before real estate depreciation expense.
(2) Average physical occupancy is defined as the number of apartment homes
occupied divided by the total number of apartment homes contained in
the communities, expressed as a percentage. Average physical occupancy
has been calculated using the average of the midweek occupancy that
existed during each week of the period.
(3) Represents the average monthly net rental revenue per occupied
apartment home.
The unleveraged yield, defined as property operating income for the three and
nine months ended September 30, 1997 on an annualized basis over total
development cost, was 10.98% and 10.62%, respectively.
17
<PAGE> 18
OPERATING PERFORMANCE OF THE OPERATING PARTNERSHIP'S COMMUNITIES IN LEASE-UP
The Operating Partnership had nine Communities in lease-up in the three and nine
months ended September 30, 1997. A Community in lease-up is defined as one which
has commenced rental operations but has not reached stabilization. A summary of
the nine Communities in lease-up as of September 30, 1997 is as follows (dollars
in thousands):
<TABLE>
<CAPTION>
Total Actual/ Homes Q3 1997 % Leased
Number Of Actual/ Anticipated Actual/ Completed Average As Of
Apartment Estimated Construction Anticipated At Sept. 30, Occupancy Sept. 30,
Community Homes Cost Completion Stabilization 1997 1997 1997
- -------------------- --------- ----------- ------------ ------------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Summit Fairways 240 $17,775 Q4 1996 Q3 1997 240 93.88% 99.60%
Summit on the River 352 23,922 Q2 1997 Q4 1997 352 82.60% 93.80%
Summit Russett 314 23,055 Q3 1997 Q3 1997 314 77.78% 96.20%
Summit Stonefield 216 18,400 Q4 1997 Q1 1998 100 21.80% 62.00%
Summit Ballantyne I 246 16,800 Q4 1997 Q2 1998 148 20.70% 49.20%
Summit Sedgebrook I 248 15,600 Q4 1997 Q2 1998 128 18.70% 46.80%
Summit Plantation II 240 22,000 Q4 1997 Q2 1998 152 20.90% 55.80%
Summit Norcroft II 54 3,800 Q4 1997 Q1 1998 12 0.30% 11.10%
Summit Lake I 302 19,700 Q2 1998 Q3 1998 44 0.60% 9.60%
======= ========
2,212 $161,052
======= ========
</TABLE>
Property operating income after interest expense was $457,000 and $460,000 for
the nine communities in lease-up for the three and nine months ended September
30, 1997, respectively.
18
<PAGE> 19
OPERATING PERFORMANCE OF SUMMIT MANAGEMENT COMPANY
The operating performance of Summit Management Company (the "Management
Company") and its wholly-owned subsidiary, Summit Apartment Builders Inc. (the
"Construction Company"), for the three and nine months ended September 30, 1997
and 1996 is summarized below (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1997 1996 1997 1996
------ ------- ------ -------
<S> <C> <C> <C> <C>
Property management revenue $1,213 $ 1,228 $3,598 $ 3,526
Construction company income 366 148 824 324
Other management company income 25 27 80 86
------ ------- ------ -------
Total revenue 1,604 1,403 4,502 3,936
Property management expenses:
Operating 1,054 1,138 3,127 3,287
Depreciation 48 27 144 83
Amortization 78 70 226 208
Interest 75 75 225 225
------ ------- ------ -------
Total property management expenses 1,255 1,310 3,722 3,803
Construction company expenses 238 159 694 294
------ ------- ------ -------
Total expenses 1,493 1,469 4,416 4,097
------ ------- ------ -------
Net income (loss) of Summit
Management Company $ 111 ($ 66) $ 86 ($ 161)
====== ======= ====== =======
</TABLE>
The increase in property management revenue for the nine months ended September
30, 1997 was the result of higher revenues for managing the Operating
Partnership's Communities (which was due to an increase in the number of
Communities managed as a result of new developments and acquisitions), offset by
a reduction in the average number of communities managed for third parties
during 1997 compared to 1996. Total apartment homes managed for third parties
was 4,769 and 7,850 at September 30, 1997 and 1996, respectively. The Operating
Partnership expects third party management revenue as a percentage of total
property management revenues to continue to decline as revenues from the
Operating Partnership's communities continue to increase.
Property management revenues include $415,000 and $604,000 of fees from third
parties for the three months ended September 30, 1997 and 1996, respectively,
and $1.3 million and $1.7 million of fees from third parties for the nine months
ended September 30, 1997 and 1996, respectively.
Construction Company income and expenses increased in 1997 compared to 1996
primarily due to the increased number of construction projects. The increase in
construction projects was a result of the Operating Partnership's decision to
expand its in-house construction operations in the state of Florida to cover the
entire geographic area in which the Operating Partnership operates. All of the
Construction Company's income is from contracts with the Operating Partnership.
19
<PAGE> 20
OTHER INCOME AND EXPENSES
Interest expense increased $1.5 million and $2.0 million or 34.9% and 15.3% for
the three and nine months ended September 30, 1997, respectively, primarily due
to interest on debt related to the Communities acquired in 1997 and interest on
Communities in lease-up, offset by the Operating Partnership's repayment of debt
in connection with Summit Properties' public offering of 5.75 million shares of
Common Stock in August 1996, the proceeds of which were contributed to the
Operating Partnership.
Depreciation expense increased $1.2 million and $3.2 million or 25.0% and 24.3%
for the three and nine months ended September 30, 1997, respectively, primarily
due to Communities acquired in 1997 and 1996, increased depreciation on
Communities that were in construction in 1996, but completed by 1997 and
Communities in lease-up in 1997.
General and administrative expenses were relatively stable with an increase of
only $54,000 or 2.6% to $2.1 million for the nine months ended September 30,
1997 from $2.0 million for the same period in 1996. General and administrative
expenses were 2.5% and 3.0% of total revenues for the nine months ended
September 30, 1997 and 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Operating Partnership's working capital is primarily provided by operations
and an unsecured $150 million credit facility (the "Unsecured Credit Facility").
The Unsecured Credit Facility has a three year term and currently bears interest
at LIBOR + 110 basis points based upon the Operating Partnership's credit rating
of BBB- by Standard & Poors Rating Group. The interest rate can be reduced in
the event of an upgrade of the Operating Partnership's unsecured credit rating
as assigned by Standard & Poors Rating Group (which rating must be accompanied
by the comparable senior unsecured bond rating from one of Moody's, Duff &
Phelps or Fitch) as follows:
S & P CREDIT RATING RATE
------------------- ----
BBB-.................................... LIBOR + 110
BBB..................................... LIBOR + 95
BBB+.................................... LIBOR + 80
The Unsecured Credit Facility provides $25 million for general working capital
purposes with the remaining $125 million available to finance new development
and acquisitions.
On August 12, 1997, the Operating Partnership completed a $125 million senior
unsecured debt offering comprised of three tranches. The first tranche, $25
million of 6.80% Notes due on August 15, 2002, was priced at 99.940% to yield
6.81%, or 73 basis points over the rate on U. S. Treasury securities with a
comparable maturity. The second tranche, $50 million of 6.95% Notes due on
August 15, 2004, was priced at 99.764% to yield 6.99% or 81 basis points over
the rate on U. S. Treasury securities with a comparable maturity. The third
tranche, $50 million of 7.2% Notes due on August 15, 2007, was priced at 99.83%
to yield 7.22% or 104 basis points over the rate on U. S. Treasury securities
with a comparable maturity. The proceeds from the Notes were used to pay down
the Unsecured Credit Facility.
20
<PAGE> 21
The Operating Partnership's outstanding indebtedness at September 30, 1997
totaled $438.1 million. This amount includes approximately $205.8 million in
fixed rate conventional mortgages, $53.0 million of variable rate tax-exempt
bonds, $156.0 million of fixed rate unsecured notes, $9.3 million of tax exempt
fixed rate loans, and $14.0 million under the variable rate Unsecured Credit
Facility.
The Operating Partnership's net cash provided by operating activities increased
from $30.7 million for the nine months ended September 30, 1996 to $41.9 million
for the same period in 1997 primarily due to a $11.7 million increase in
property operating income.
Net cash used in investing activities increased from $67.6 million for the nine
months ended September 30, 1996 to $127.9 million for the same period in 1997
primarily due to an increase in the acquisition of Communities and an increase
in construction of real estate assets, partially offset by the proceeds from the
sale of a Community in 1997.
Net cash provided by financing activities increased from $52.2 million for the
nine months ended September 30, 1996 to $86.2 million for the same period in
1997, primarily due to an increase in debt proceeds partially offset by lower
Summit Properties' equity offering proceeds contributed to the Operating
Partnership, by higher debt repayments and by higher distributions to
unitholders. The increase in debt proceeds was primarily due to $125 million
senior unsecured debt issued in August, 1997. The lower equity issuance proceeds
were due to Summit Properties' public stock offering in August, 1996. The higher
debt repayments were the result of more credit facility debt being repaid in
1997 with the proceeds of the $125 million debt offering than credit facility
debt repaid in 1996 with the proceeds of Summit Properties' public stock
offering.
The Operating Partnership expects to meet its short-term liquidity requirements
(i.e., liquidity requirements arising within twelve months) generally through
its net cash provided by operations and borrowings under the Unsecured Credit
Facility. The Operating Partnership believes that its net cash provided by
operations will be adequate to meet its operating requirements and to satisfy
Summit Properties' applicable REIT dividend payment requirements in both the
short-term and in the long-term. Improvements and renovations at existing
Communities are expected to also be funded from property operations.
The Operating Partnership expects to meet its long-term liquidity requirements
(i.e., liquidity requirements arising after twelve months), such as current and
future developments, debt maturities, acquisitions, renovations and other
non-recurring capital expenditures, with borrowings under its Unsecured Credit
Facility, through the issuance of long-term secured and unsecured debt
securities and additional equity securities of Summit Properties which will be
contributed to the Operating Partnership, or in connection with the acquisition
of land or improved property, through the issuance of Units of the Operating
Partnership.
21
<PAGE> 22
On May 14, 1997, the Operating Partnership sold a community in Charlotte, North
Carolina known as Summit Charleston for $9.5 million. A gain on the sale of
approximately $4.4 million was recognized.
The Operating Partnership purchased an apartment community known as Summit
Windsor II for $17.1 million in cash on July 18, 1997. Summit Windsor II, which
was developed by the Operating Partnership in 1988, has 306 apartment homes and
is located in Frederick, Maryland. The proceeds from the sale of the Summit
Charleston community and borrowings on the Unsecured Credit Facility were used
to fund the purchase. The third quarter acquisition was in addition to the three
Communities with a total of 1,188 apartment homes acquired at a cost of $65.8
million in the first quarter of 1997.
22
<PAGE> 23
The following table sets forth certain information regarding debt financing as
of September 30, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
Principal Outstanding
Interest ------------------------------
Rate As Of Maturity September 30, December 31,
September 30, 1997 Date (1) 1997 1996
------------------------------- -------------- -------------
<S> <C> <C> <C> <C>
FIXED RATE DEBT
MORTGAGE LOAN (2) (3) 5.88% 2/15/01 $ 121,040 $ 122,950
MORTGAGE LOAN (2) (3) 7.71% 12/15/05 29,328 29,653
MORTGAGE LOAN (4) 8.00% 09/1/05 8,578 8,638
MORTGAGE NOTES
Summit Hollow I 8.00% 11/1/18 2,254 2,286
Summit Hollow II 7.75% 1/1/29 2,571 2,587
Summit Creekside 8.00% 6/1/22 2,847 2,877
Summit Old Town 8.00% 9/1/20 3,061 3,097
Summit Eastchester 8.00% 5/1/21 3,829 3,872
Summit Foxcroft 8.00% 4/1/20 2,743 2,788
Summit Oak 7.75% 12/1/23 2,561 2,585
Summit Sherwood 7.88% 3/1/29 3,310 3,329
Summit Radbourne 9.80% 3/1/02 8,621 8,683
Summit Sand Lake 7.88% 2/15/06 15,059 -
TAX EXEMPT MORTGAGE NOTES
Summit Crossing 6.95% 11/1/25 4,175 4,213
Summit East Ridge 7.25% 12/1/26 5,115 5,156
-------------- -------------
TOTAL MORTGAGE DEBT 215,092 202,714
-------------- -------------
UNSECURED NOTES
6.80% Notes due 2002 6.80% 8/15/02 25,000 -
6.95% Notes due 2004 6.95% 8/15/04 50,000 -
7.20% Notes due 2007 7.20% 8/15/07 50,000 -
Bank Note 7.85% 8/3/02 16,000 16,000
Bank Note 7.61% 8/3/00 15,000 15,000
-------------- -------------
TOTAL UNSECURED NOTES 156,000 31,000
-------------- -------------
TOTAL FIXED RATE DEBT 371,092 233,714
VARIABLE RATE DEBT
UNSECURED CREDIT FACILITY LIBOR + 110 9/30/99 14,050 22,357
TAX EXEMPT BONDS (5)
Summit Belmont 5.55% 4/1/07 11,650 11,850
Summit Hampton 5.55% 6/1/07 12,490 12,700
Summit Pike Creek 5.55% 8/15/20 13,082 13,262
Summit Gateway 5.55% 7/1/07 7,100 7,300
Summit Stony Point 5.55% 4/1/29 8,630 8,750
-------------- -------------
TOTAL TAX EXEMPT BONDS 52,952 53,862
-------------- -------------
TOTAL VARIABLE RATE DEBT 67,002 76,219
============== =============
TOTAL OUTSTANDING INDEBTEDNESS $ 438,094 $ 309,933
============== =============
</TABLE>
(1) With the exception of the Mortgage Loans referred to in Note 3 below,
all of the secured debt can be prepaid at any time. Prepayment of such
debt is generally subject to penalty or premium; however, the tax
exempt mortgage notes can be prepaid at any time without penalty or
premium.
23
<PAGE> 24
(2) Mortgage Loans are secured by the following Communities:
Summit Glen Summit Blue Ash Summit Heron's Run
Summit Springs Summit Square Summit Perico
Summit Village Summit Waterford Summit Providence
Summit Highland Summit Del Ray Summit Meadow
Summit Norcroft Summit Palm Lake Summit Windsor
(3) The Operating Partnership may elect to extend the maturity of each of these
Mortgage Loans for a period of up to two years by providing six months'
written notice. These Mortgage Loans generally may not be prepaid in whole
or in part during their original term, but may be prepaid in whole or in
part at any time during applicable extension periods, if any, without
premium or penalty.
(4) Mortgage Loan secured by Summit Simsbury and Summit Touchstone Communities.
(5) The tax exempt bonds (the "Bonds") bear interest at various rates set by a
remarketing agent at the demand note index plus 0.50%, set weekly, or the
lowest percentage of prime which allows the resale at a price of par. The
Bonds are enhanced by letters of credit from financial institutions (the
"Credit Enhancements"), each of which Credit Enhancements will terminate
prior to the maturity dates of the related Bonds. In the event such Credit
Enhancements are not renewed or replaced upon termination, the related loan
obligations will be accelerated.
The London Interbank Offered Rate (LIBOR) at September 30, 1997 was 5.66%
DEVELOPMENT ACTIVITY
The Operating Partnership's developments in process at September 30, 1997 are
summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
Total Estimated Anticipated
Apartment Estimated Cost To Cost To Construction
Community Homes Costs Date Complete Completion
- ---------------------------------------- ------------ ------------ ------------ ----------- --------------
<S> <C> <C> <C> <C> <C>
Summit Stonefield-Yardley, PA 216 $ 18,400 $ $ 16,329 $ 2,071 Q4 1997
Summit Norcroft II-Charlotte, NC 54 3,800 3,076 724 Q4 1997
Summit Sedgebrook I-Charlotte, NC 248 15,600 13,830 1,770 Q4 1997
Summit Ballantyne I-Charlotte, NC 246 16,800 14,001 2,799 Q4 1997
Summit Plantation II-Plantation, FL 240 22,000 20,445 1,555 Q4 1997
Summit Lake I-Raleigh, NC 302 19,700 13,786 5,914 Q2 1998
Summit Fair Lakes I-Fairfax, VA 370 32,900 9,529 23,371 Q1 1999
Summit New Albany-Columbus, OH 301 22,600 6,581 16,019 Q1 1999
Summit Governor's Village-Chapel Hill, NC 242 16,400 2,065 14,335 Q4 1998
Summit Ballantyne II-Charlotte, NC 154 10,100 1,626 8,474 Q1 1999
------------ ------------ ------------ -----------
2,373 178,300 101,268 77,032
Other development and construction costs - - 16,840 -
------------ ------------ ------------ -----------
2,373 $ 178,300 $ 118,108 $ 77,032
============ ============ ============ ===========
</TABLE>
In addition, the Operating Partnership has a commitment to purchase a community
(Summit St. Claire) currently under construction in Atlanta, Georgia for
approximately $27.5 million, subject to adjustment based on the percentage of
apartment homes leased as of the date of acquisition. The 336 apartment home
community is expected to be purchased, after reaching rental stabilization,
which is currently expected in the fourth quarter of 1998.
24
<PAGE> 25
Estimated costs to complete the development communities and the purchase
commitment for Summit St. Claire represent all of the Operating Partnership's
material commitments for capital expenditures.
Certain Factors Affecting the Performance of Development Communities
The Operating Partnership is optimistic about the operating prospects of the
Communities under construction even with the increased supply of newly
constructed apartment homes of comparable quality in many of its markets. As
with any development community, there are uncertainties and risks associated
with the development of the Communities described above. While the Operating
Partnership has prepared development budgets and has estimated completion and
stabilization target dates based on what it believes are reasonable assumptions
in light of current conditions, there can be no assurance that actual costs will
not exceed current budgets or that the Operating Partnership will not experience
construction delays due to the unavailability of materials, weather conditions
or other events.
Other development risks include the possibility of incurring additional cost or
liability resulting from defects in construction material and the possibility
that financing may not be available on favorable terms, or at all, to pursue or
complete development activities. Similarly, market conditions at the time these
Communities become available for leasing will affect the rental rates that may
be charged and the period of time necessary to achieve stabilization, which
could make one or more of the development communities unprofitable or result in
achieving stabilization later than currently anticipated. In addition, the
Operating Partnership is conducting feasibility and other pre-development work
for seven Communities. The Operating Partnership could abandon the development
of any one or more of these potential Communities in the event that it
determines that market conditions do not support development, financing is not
available on favorable terms or other circumstances prevent development.
Similarly, there can be no assurance that if the Operating Partnership does
pursue one or more of these potential Communities that it will be able to
complete construction within the currently estimated development budgets or that
construction can be started at the time currently anticipated.
CAPITALIZATION OF FIXED ASSETS AND PROPERTY IMPROVEMENTS
The Operating Partnership has established a policy of capitalizing those
expenditures relating to acquiring new assets, materially enhancing the value of
an existing asset, or substantially extending the useful life of an existing
asset. All expenditures necessary to maintain a Community in ordinary operating
condition (including replacement carpets) are expensed as incurred.
The Operating Partnership has a capital expenditure replacement program whereby
various physical components are replaced as necessary to maintain the
Communities in normal operating condition. Certain physical components may be
replaced other than at regular inspection intervals when extraordinary wear has
occurred. The Operating Partnership also makes capital expenditures for new
physical components if these expenditures will produce sufficient revenue
enhancements as to achieve acceptable returns on invested capital. There are
currently no material commitments with respect to renovation or improvements at
existing facilities.
25
<PAGE> 26
Capitalized expenditures for the nine months ended September 30, 1997 and 1996
are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1997 1996
-------- --------
<S> <C> <C>
Acquisition of new Communities (1) $ 82,898 $21,913
Construction of new Communities (2) 74,382 59,431
Capitalized interest 4,528 2,884
Non-recurring capital expenditures:
Construction of garages 233 720
Access gates 203 133
New signage 71 113
Water meters 19 201
Washer/dryer units 12 96
Major improvements 2,560 1,037
Other 219 29
-------- -------
Total non-recurring capital expenditures 3,317 2,329
-------- -------
Recurring capital expenditures:
Exterior painting 868 661
Other community additions and improvements 1,642 1,141
Corporate additions 79 3
-------- -------
Total recurring capital expenditures 2,589 1,805
-------- -------
$167,714 $88,362
======== =======
</TABLE>
(1) Includes the issuance of Units a value of $8.9 million and assumption of
debt of $15.2 million in 1997. In addition, includes the assumption of $14.3
million of debt and conversion of equity investment into fixed assets of $1.2
million in conjunction with the purchase of Summit Plantation in 1996.
(2) Includes issuance of $2.1 million of Units for the acquisition of land in
1996.
Construction of Communities was funded primarily by unsecured fixed rate debt,
Summit Properties' equity offering proceeds contributed to the Operating
Partnership and borrowing under the Operating Partnership's credit facilities.
Other additions and improvements were funded primarily by Community operations
and the Operating Partnership's credit facilities.
INFLATION
Substantially all of the leases at the Communities are for a term of one year or
less, which, coupled with the relatively high occupancy rates, may enable the
Operating Partnership to seek increased rents upon renewal of existing leases or
commencement of new leases. The short-term nature of these leases generally
serves to reduce the risk to the Operating Partnership of the adverse effect of
inflation.
26
<PAGE> 27
FUNDS FROM OPERATIONS
The White Paper on Funds from Operations approved by the Board of Governors of
NAREIT in March 1995 defines Funds from Operations as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of property, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. The Operating Partnership computes Funds from Operations in accordance
with the standards established by the White Paper, which may differ from the
methodology for calculating Funds from Operations utilized by other equity
REITs, and, accordingly, may not be comparable to such other REITs. Funds
Available for Distribution is defined as Funds from Operations less capital
expenditures funded by operations (recurring capital expenditures). The
Operating Partnership's methodology for calculating Funds Available for
Distribution may differ from the methodology for calculating Funds Available for
Distribution utilized by other REITs, and accordingly, may not be comparable to
other REITs. Funds from Operations and Funds Available for Distribution do not
represent amounts available for management's discretionary use because of needed
capital replacement or expansion, debt service obligations, property
acquisitions, development and distributions or other commitments and
uncertainties. Funds from Operations and Funds Available for Distribution should
not be considered as alternatives to net income (determined in accordance with
GAAP) as an indication of the Operating Partnership's financial performance or
to cash flows from operating activities (determined in accordance with GAAP) as
a measure of the Operating Partnership's liquidity, nor are they indicative of
funds available to fund the Operating Partnership's cash needs, including its
ability to make distributions. The Operating Partnership believes Funds from
Operations and Funds Available for Distribution are helpful to investors as
measures of the performance of the Operating Partnership because, along with
cash flows from operating activities, financing activities and investing
activities, they provide investors with an understanding of the ability of the
Operating Partnership to incur and service debt and make capital expenditures.
27
<PAGE> 28
Funds from Operations and Funds Available for Distribution for the three and
nine months ended September 30, 1997 and 1996 are calculated as follows (dollars
in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 6,948 $ 5,114 $ 25,098 $ 13,696
Gain on sale of real estate assets -- -- (4,366) --
Extraordinary items -- 626 -- 626
Depreciation:
Operating Communities 5,843 4,673 16,436 13,221
Summit Plantation -- -- -- 33
------------ ------------ ------------ ------------
Funds from Operations 12,791 10,413 37,168 27,576
Recurring capital expenditures (1) (1,118) (402) (2,589) (1,805)
------------ ------------ ------------ ------------
Funds Available for Distribution $ 11,673 $ 10,011 $ 34,579 $ 25,771
============ ============ ============ ============
Weighted average units 27,369,316 24,070,632 27,252,718 21,769,807
============ ============ ============ ============
</TABLE>
(1) Recurring capital expenditures are expected to be funded from operations and
consist primarily of exterior painting, new appliances, vinyl, blinds, tile, and
wallpaper. In contrast, non- recurring capital expenditures, such as major
improvements, new garages and access gates, are expected to be funded by
financing activities and are therefore not included in the calculation of Funds
Available for Distribution.
28
<PAGE> 29
PART II. OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES
During the three months ended September 30,1997 the Operating Partnership has
issued Units in private placements in reliance on the exemption from
registration under section 4(2) of the Securities Act in the amounts and for the
consideration set forth below:
A. Summit Properties has issued an aggregate of 7,016 shares of
Common Stock pursuant to its Dividend Reinvestment Plan.
Summit Properties has contributed the proceeds (approximately
$134,000) of these sales to the Operating Partnership in
consideration of an aggregate of 7,016 Units.
B. Summit Properties has issued an aggregate of 250 shares of
Common Stock in connection with restricted stock awards. Each
time a share of Common Stock is issued in connection with such
an award, the Operating Partnership issues a Unit to Summit
Properties; consequently, 250 Units have been issued to Summit
Properties to date.
C. Summit Properties has issued an aggregate of 20,623 shares of
Common Stock pursuant to its Employee Stock Purchase Plan.
Summit Properties has contributed the proceeds (approximately
$425,342) of these sales to the Operating Partnership in
consideration of an aggregate of 20,623 Units.
D. Summit Properties has issued an aggregate of 1,000 shares of
Common Stock pursuant to the exercise of stock options. Summit
Properties has contributed the proceeds (approximately
$19,000) of these options to the Operating Partnership in
consideration of an aggregate 1,000 Units.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 First Amendment to $150,000,000 Credit Agreement
10.2 Schedule of Executives with Executive Severance Agreements and
Executive Severance Agreement
27.1 Financial Data Schedule
29
<PAGE> 30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUMMIT PROPERTIES PARTNERSHIP, L.P.
November 12, 1997 /s/ William F. Paulsen
- ----------------- -----------------------
(Date) William F. Paulsen, President
and Chief Executive Officer
November 12, 1997 /s/ Michael L. Schwarz
- ----------------- ------------------------
(Date) Michael L. Schwarz, Executive
Vice President and Chief
Financial Officer
30
<PAGE> 31
EXHIBIT INDEX
10.1 First Amendment to $150,000,000 Credit Agreement
10.2 Schedule of Executives with Executive Severance Agreements and
Executive Severance Agreement
27.1 Financial Data Schedule
31
<PAGE> 1
EXHIBIT 10.1
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (the "First Amendment") is
made as of this 24th day of July, 1997 by and among SUMMIT PROPERTIES
PARTNERSHIP, L.P., a Delaware limited partnership doing business in North
Carolina as SUMMIT PROPERTIES PARTNERSHIP, LIMITED PARTNERSHIP ("Borrower"),
FIRST UNION NATIONAL BANK (formerly known as First Union National Bank of North
Carolina), a national banking association ("FUNB"), WACHOVIA BANK OF NORTH
CAROLINA, N.A., a national banking association ("Wachovia") and FIRST UNION
NATIONAL BANK (formerly known as First Union National Bank of North Carolina), a
national banking association, as agent (in such capacity, "Agent").
STATEMENT OF PURPOSE
The parties hereto have entered into that certain Credit Agreement
dated November 18, 1996 whereby FUNB and Wachovia agree to lend on the terms and
conditions set forth therein up to One Hundred Fifty Million Dollars
($150,000,000.00) on a revolving basis to Borrower (the "Credit Agreement"). The
parties have discovered that one of the provisions of the Credit Agreement
imposed obligations on the Borrower which were not intended by the parties
thereto. The parties desire to correct such provision in order to properly
reflect the intention of all parties.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree to
amend the Credit Agreement in the manner set forth below:
Section 7.12 of the Credit Agreement is hereby deleted and the
following is inserted in lieu thereof:
"SECTION 7.12. NO ADDITIONAL SECURED RECOURSE DEBT. Neither the
Borrower nor the Guarantor shall incur any secured debt pursuant
to which any creditor shall have recourse against the Borrower,
the Guarantor or any Affiliate of the Borrower or the Guarantor
other than Secured Recourse Debt permitted under SECTION 8.1.5 and
Indebtedness secured by one or more the Bond Financed
Communities."
All terms beginning with capital letters not defined herein shall
have the meanings set forth for such terms in the Credit Agreement. Except as
expressly set forth herein or as may be necessary to reflect the intention of
the parties hereto as set forth herein, all other terms and provisions of the
Credit Agreement are hereby ratified and affirmed.
<PAGE> 2
IN WITNESS WHEREOF, the Borrower, the Agent and the Banks have caused
this Amendment to be executed under seal by their respective duly authorized
officers as of the date first set forth above.
BORROWER:
SUMMIT PROPERTIES PARTNERSHIP, L.P.,
doing business in North Carolina as
Summit Properties Partnership,
Limited Partnership [SEAL]
By: SUMMIT PROPERTIES INC., doing
business in North Carolina as Summit
Properties Real Estate, Inc.,
General Partner
ATTEST: By:
-------------------------------
President
----------------------
By:
-----------------------------
Secretary
--------------------
[CORPORATE SEAL]
FUNB:
FIRST UNION NATIONAL BANK
By:
-----------------------
Thomas D. Pinchak,
Senior Vice President
ATTEST:
- -------------------
Assistant Secretary
[BANK SEAL]
WACHOVIA
WACHOVIA BANK OF NORTH
CAROLINA, N.A.
By:
-----------------------
Wayne A. Osella,
Senior Vice President
ATTEST:
- -------------------
Assistant Secretary
<PAGE> 3
AGENT:
FIRST UNION NATIONAL BANK
By:
----------------------
Thomas D. Pinchak,
Senior Vice President
ATTEST:
- -------------------
Assistant Secretary
[BANK SEAL]
The undersigned, as the Guarantor referred to in the Credit Agreement,
hereby executes this First Amendment to acknowledge its consent thereto and
hereby agrees that it will continue to be bound by the provisions of the
Guaranties executed by it pursuant to the Credit Agreement.
GUARANTOR:
SUMMIT PROPERTIES INC.,
doing business in North
Carolina as Summit
Properties Real Estate, Inc.
By:
----------------------------
President
-------------------
ATTEST:
- -------------------
Assistant Secretary
[CORPORATE SEAL]
<PAGE> 1
EXHIBIT 10.2 Schedule of Executives with Executive Severance Agreements
William F. Paulsen President, Chief Executive Officer and Director
William B. McGuire, Jr. Chairman of the Board of Directors
Michael L. Schwarz Executive Vice President and Chief Financial
Officer
Raymond V. Jones Executive Vice President/Development and
Construction
William B. Hamilton Executive Vice President/Property Management
President of Summit Management Company
<PAGE> 2
EXECUTIVE SEVERANCE AGREEMENT
AGREEMENT made as of this ____ day of _________, 1997 by and between
Summit Properties Inc., a Maryland corporation with its principal place of
business in Charlotte, North Carolina (the "Company"), and of
Charlotte, NC (the "Executive").
1. Purpose. The Company considers it essential to the best interests of
its stockholders to foster the continuous employment of key management
personnel. The Board of Directors of the Company (the "Board") recognizes,
however, that, as is the case with many publicly held corporations, the
possibility of a Change in Control (as defined in Section 2 hereof) exists and
that such possibility, and the uncertainty and questions which it may raise
among management, may result in the departure or distraction of management
personnel to the detriment of the Company and its stockholders. Therefore, the
Board has determined that appropriate steps should be taken to reinforce and
encourage the continued attention and dedication of members of the Company's
management, including the Executive, to their assigned duties without
distraction in the face of potentially disturbing circumstances arising from the
possibility of a Change in Control. Nothing in this Agreement shall be construed
as creating an express or implied contract of employment or any right to be
retained in the employ of the Company. The Company and the Executive have
entered into an Employment Agreement dated December 5, 1996 (as such agreement
may be in effect from time to time, and including any replacement employment
agreement, the "Employment Agreement") that provides for compensation to the
Executive under certain circumstances in the event that the Executive's
employment is terminated. This Agreement is intended to supplement the
Employment Agreement without duplicating payments in the event of the
termination of the Executive's employment.
2. Change in Control and Combination Transactions.
(a) A "Change in Control" shall be deemed to have occurred in any one
of the following events:
(i) any "person," as such term is used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934 (the "Act")
(other than the Company, Summit Properties Partnership, L.P.
(together with any other subsidiaries of the Company, the
"Subsidiaries"), or any trustee, fiduciary or other person or
entity holding securities under any employee benefit plan or
trust of the Company or any of its Subsidiaries), together
with all "affiliates" and "associates" (as such terms are
defined in Rule 12b-2 under the Act) of such person, shall
become the "beneficial owner" (as such term is defined in
Rule 13d-3 under the Act), directly or indirectly, of
securities of the Company representing 40% or more of either
(A) the combined voting power of the Company's then
outstanding securities having the right to vote in an election
of the Board ("Voting Securities") or (B) the then outstanding
shares of stock of the Company ("Stock"), in either such case
other than as a result of an acquisition of securities
directly from the Company; or
(ii) persons who, as of the date hereof, constitute the Board(the
"Incumbent Directors") cease for any reason, including, without
limitation, as a result of a tender
<PAGE> 3
offer, proxy contest, merger or similar transaction, to constitute at
least a majority of the Board, provided that any person becoming a
director of the Company subsequent to the date hereof whose election or
nomination for election was approved by a vote of at least a majority
of the Incumbent Directors shall, for purposes of this Agreement, be
considered an Incumbent Director; or
(iii) the stockholders of the Company shall approve (A) any
consolidation or merger of the Company or any Subsidiary where the
stockholders of the Company, immediately prior to the consolidation or
merger, would not, immediately after the consolidation or merger,
beneficially own (as such term is defined in Rule 13d-3 under the Act),
directly or indirectly, shares representing in the aggregate fifty
percent (50%) or more of the voting shares of the corporation issuing
cash or securities in the consolidation or merger (or of its ultimate
parent corporation, if any), (B) any sale, lease, exchange or other
transfer (in one transaction or a series of transactions contemplated
or arranged by any party as a single plan) of all or substantially all
of the assets of the Company or (C) any plan or proposal for the
liquidation or dissolution of the Company.
Notwithstanding the foregoing, a "Change of Control" shall not be deemed to have
occurred for purposes of the foregoing clause (i) solely as the result of an
acquisition of securities by the Company which, by reducing the number of shares
of Stock or other Voting Securities outstanding, increases (x) the proportionate
number of shares of Stock beneficially owned by any person to 40% or more of the
shares of Stock then outstanding or (y) the proportionate voting power
represented by the Voting Securities beneficially owned by any person to 40% or
more of the combined voting power of all then outstanding Voting Securities;
provided, however, that if any person referred to in clause (x) or (y) of this
sentence shall thereafter become the beneficial owner of any additional shares
of Stock or other Voting Securities (other than pursuant to a stock split, stock
dividend, or similar transaction), then a "Change of Control" shall be deemed to
have occurred for purposes of the foregoing clause (i).
(b) A "Combination Transaction" shall be deemed to have occurred if the
Company shall consummate any consolidation or merger of the company or any
Subsidiary where the stockholders of the Company, immediately prior to the
consolidation or merger, would not, immediately after the consolidation or
merger, beneficially own (as such term is defined in Rule 13d-3 under the Act),
directly or indirectly, shares representing in the aggregate 75% or more of
either (i) the combined voting power of the company's then outstanding Voting
Securities or (ii) the then outstanding shares of Stock.
(c) For purposes of determining whether a Change in Control or a
Combination Transaction has occurred, all outstanding options, warrants and
other convertible securities that are then exchangeable or convertible into
Voting Securities of the Company, including, without limitation, all partnership
units of any Subsidiary that are convertible into Voting Securities of the
Company at the option of the holder or the Company, shall be deemed to have been
converted into the applicable number of shares of Voting Securities of the
Company immediately prior to making such determination.
2
<PAGE> 4
3. Terminating Event. A "Terminating Event" shall mean any of the
following events:
(a) termination occurring subsequent to a Change of Control or a
Combination Transaction by the Company of the employment of the Executive with
the Company for any reason other than:
(i) the death of the Executive (which shall be referred to as
a "Death Termination") or total disability of the Executive
(total disability meaning the inability of the Executive to
perform his normal required services under this Agreement for
a period of six consecutive months during the term of this
agreement by reason of the Executive's mental or physical
disability, as determined by the board in good faith in its
sole discretion) (which shall be referred to as a "Disability
Termination") or the retirement of the Executive;
(ii) if the Executive is convicted of, pleads guilty to, or
confesses to any felony or any act of fraud, misappropriation
or embezzlement which has an immediate and materially adverse
effect on the Company, any Subsidiary or any affiliate of the
Company, as determined by the Board in good faith in its sole
discretion;
(iii) if the Executive engaged in a fraudulent act to the
material damage or prejudice of the Company, any Subsidiary or
any affiliate of the Company or in conduct or activities
materially damaging to the property, business or reputation of
the Company, any Subsidiary or any affiliate of the Company,
all as determined by the Board in good faith in its sole
discretion;
(iv) in the event of any material act or omission by the
Executive involving malfeasance or negligence in the
performance of the Executive's duties to the Company to the
material detriment of the Company, any Subsidiary or any
affiliate of the Company, as determined by the Board in good
faith in its sole discretion, which has not been corrected by
the Executive within thirty (30) days after written notice
from the Company of any such act or omission:
(v) failure by the Executive to comply in any material respect
with the terms of the Employment Agreement or any written
policies or directives of the Board as determined by the Board
in
3
<PAGE> 5
good faith in its sole discretion, which has not been
corrected by the Executive within thirty (30) days after
written notice from the Company of such failure; or
(vi) a material breach by the Executive of that certain
Noncompetition agreement between the Executive and the Company
dated January 13, 1994 (the "Noncompetition Agreement") as
determined by the Board in good faith in its sole discretion.
Each of the events described in the foregoing clauses (ii) through (vi) shall be
referred to individually and collectively as a "For Cause Termination."
Notwithstanding any other provision of this Section 3(a), a Terminating Event
shall not be deemed to have occurred pursuant to this Section 3(a) solely as a
result of the Executive being an employee of any direct or indirect successor to
the business or assets of the Company, rather that continuing as an employee of
the Company following a Change in Control or A Combination Transaction. For
purposes of clause (i) of this Section 3(a), "retirement" shall mean termination
of the Executive's employment in accordance with the Company's normal retirement
policy, generally applicable to its salaried employees, as in effect immediately
prior to the change in Control or Combination Transaction, or in accordance with
any retirement arrangement established with respect to the Executive with the
Executive's express written consent; or
(b) termination occurring subsequent to a Change in Control or a
Combination Transaction by the Executive of the Executive's employment with the
company for Good Reason. "Good Reason" shall mean the occurrence of any of the
following, provided that in either case the Board has not corrected such
material reduction described below within thirty (30) days after written notice
by the Executive of such material reduction: (i) there is a material reduction
in the Executive's duties, rights or responsibilities under the Employment
Agreement without his consent, or (ii) there is a material decrease in the
aggregate value of the Executive's compensation and benefits package from the
Company under the Employment Agreement without his consent, other than a
reduction in the Executive's base salary that is permitted under the Employment
Agreement and other than a reduction in compensation and/or benefits affecting a
broad group of employees of the Company as determined by the Board in good faith
in its sole discretion; (iii) there is a relocation of the Company's offices at
which the Executive is principally employed immediately prior to the date of a
Change in Control or Combination Transaction to a location more than fifty (50)
miles from such offices, or the requirement by the Company for the Executive to
be based anywhere other than the Company's offices at such location, except for
required travel on the Company's business to an extent substantially consistent
with the Executive's business travel obligations immediately prior to the Change
in Control or a Combination Transaction; or
4
<PAGE> 6
(c) termination occurring subsequent to a Change of Control by the
Executive of the Executive's employment with the Company for any reason, unless
an event that would constitute grounds for a For Cause Termination of the
Executive's employment has occurred.
4. Severance Payment. In the event that either a Terminating Event
described in Section 3(a), 3(b), or 3(c) occurs within twelve (12) months after
a Change in Control, or a Terminating Event described in Section 3(a) or 3(b)
occurs within twelve (12) months after a Combination Transaction:
(a) the Company shall pay to the Executive an amount equal to the
difference between (i) three (3) times the Executive's salary and cash bonus
paid (including amounts that were deferred by the Executive but would have been
paid in the absence of such deferral) with respect to the fiscal year
immediately preceding the year in which the Terminating Event occurred and (ii)
any amount of severance or other cash compensation paid to the Executive
pursuant to the Employment Agreement as a result of the termination of the
Executive's employment. Said amount shall be paid in one lump sum payment no
later than thirty-one (31) days following the Date of Termination (as such term
is defined in Section 8(b); and
(b) the Company shall pay to the Executive all reasonable legal and
arbitration fees and expenses incurred by the Executive in obtaining or
enforcing any right or benefit provided by this Agreement, except in cases
involving frivolous or bad faith litigation.
5. Additional Benefits.
(a) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that any payment or distribution by the Company to
or for the benefit of the Executive, whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise (the
"Severance Payments"), would be subject to the excise tax imposed by Section
4999 of the Internal Revenue Code of 1986, as amended, ("the Code"), or any
interest or penalties are incurred by the Executive with respect to such excise
tax (such excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the "Excise Tax"), then the Executive
shall be entitled to receive an additional payment (a "Gross-Up Payment") such
that the net amount retained by the Executive, after deduction of any Excise Tax
on the Severance Payments, any Federal, state and local income tax, employment
tax and Excise Tax upon the payment provided by this subsection, and any
interest and/or penalties assessed with respect to such Excise Tax, shall be
equal to the Severance Payments.
(b) Subject to the provisions of Section 5(c), all determinations
required to be made under this Section 5, including whether a Gross-Up Payment
is required and the amount of such Gross-Up Payment, shall be made by the
Company's independent certified public accounting firm (the "Accounting Firm"),
which shall provide detailed supporting calculations both to the Company and the
Executive within 15 business days of the Date of Termination, if applicable, or
at such earlier time as is reasonably requested by the Company or the Executive.
For purposes of
5
<PAGE> 7
determining the amount of the Gross-Up Payment, the Executive shall be deemed to
pay federal income taxes at the highest marginal rate of federal income taxation
applicable to individuals for the calendar year in which the Gross-Up Payment is
to be made and state and local income taxes at the highest marginal rates of
individual taxation in the state and locality of the Executive's residence on
the Date of Termination, net of the maximum reduction in federal income taxes
which could be obtained from deduction of such state and local taxes. The
initial Gross-Up Payment, if any, as determined pursuant to this Section 5(b),
shall be paid to the Executive within five days of the receipt of the Accounting
Firm's determination. If the Accounting Firm determines that no Excise Tax is
payable by the Executive, the Company shall furnish the Executive with an
opinion of counsel that failure to report the Excise Tax on the Executive's
applicable federal income tax return would not result in the imposition of a
negligence or similar penalty. Any determination by the Accounting Firm shall be
binding upon the Company and the Executive. As a result of the uncertainty in
the application of Section 4999 of the Code at the time of the initial
determination by the Accounting Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by the Company should have been made (an
"Underpayment"). In the event that the Company exhausts its remedies pursuant to
Section 5(c) and the Executive thereafter is required to make a payment of any
Excise Tax, the Accounting Firm shall determine the amount of the Underpayment
that has occurred, consistent with the calculations required to be made
hereunder, and any such Underpayment, and any interest and penalties imposed on
the Underpayment and required to be paid by the Executive in connection with the
proceedings described in Section 5(c), shall be promptly paid by the Company to
or for the benefit of the Executive.
(c) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
the Company of the Gross-up Payment. Such notification shall be given as soon as
practicable but no later than 10 business days after the Executive knows of such
claim and shall apprise the Company of the nature of such claim and the date on
which such claim is requested to be paid. The Executive shall not pay such claim
prior to the expiration of the 30-day period following the date on which he
gives such notice to the Company (or such shorter period ending on the date that
any payment of taxes with respect to such claim is due). If the Company notifies
the Executive in writing prior to the expiration of such period that it desires
to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by
the Company relating to such claim,
(ii) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by
an attorney selected by the Company,
(iii) cooperate with the Company in good faith in order
effectively to contest such claim, and
6
<PAGE> 8
(iv) permit the Company to participate in any proceedings
relating to such claim; provided, however that the Company shall bear and pay
directly all costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold the
Executive harmless, on an after-tax basis, for any Excise Tax or income tax,
including interest and penalties with respect thereto, imposed as a result of
such representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this Section 5(c), the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forego any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct the Executive to pay the tax claimed and sue for a
refund or contest the claim in any permissible manner, and the Executive agrees
to prosecute such contest to a determination before any administrative tribunal,
in a court of initial jurisdiction and in one or more appellate courts, as the
Company shall determine; provided, however, that if the Company directs the
Executive to pay such claim and sue for a refund, the Company shall advance the
amount of such payment to the Executive on an interest-free basis and shall
indemnify and hold the Executive harmless, on an after-tax basis, from any
Excise Tax or income tax, including interest or penalties with respect thereto,
imposed with respect to such advance or with respect to any imputed income with
respect to such advance; and further provided that any extension of the statute
of limitations relating to payment of taxes for the taxable year of the
Executive with respect to which such contested amount is claimed to be due is
limited solely to such contested amount. Furthermore, the Company's control of
the contest shall be limited to issues with respect to which a Gross-Up Payment
would be payable hereunder and the Executive shall be entitled to settle or
contest, as the case may be, any other issues raised by the Internal Revenue
Service or any other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 5(c), the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements of Section 5(c)) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 5(c), a determination is made that
the Executive shall not be entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to contest
such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
6. Term. This Agreement shall take effect on the date first set forth
above and shall terminate upon the earlier of (a) immediately prior to a For
Cause Termination by the Company of the employment of the Executive, (b) the
termination of employment of the Executive by the Company or the Executive for
any reason prior to a Change in Control or a Combination Transaction, (c) the
resignation of the Executive other than for Good Reason after a Combination
transaction, but prior to a Change in Control, or (d) immediately prior to the
resignation of the
7
<PAGE> 9
Executive after a Change in Control if any event that would constitute grounds
for a For Cause Termination of the Executive's employment has occurred.
7. Withholding. All payments made by the Company under this Agreement
shall be net of any tax or other amounts required to be withheld by the Company
under applicable law.
8. Notice and Date of Termination; Disputes; Etc.
(a) Notice of Termination. After a Change in Control or Combination
Transaction and during the term of this Agreement, any purported termination of
the Executive's employment (other than by reason of a Death Termination) shall
be communicated by written Notice of Termination from one party hereto to the
other party hereto in accordance with this Section 8. For purposes of this
Agreement, a "Notice of Termination" shall mean a notice which shall indicate
the specific termination provision in this Agreement relied upon and the Date of
Termination.
(b) Date of Termination. "Date of Termination", with respect to any
purported termination of the Executive's employment after a Change in Control or
Combination Transaction and during the term of this Agreement, shall mean (i) if
there is a Disability Termination, thirty (30) days after Notice of Termination
is given (provided that the Executive shall not have returned to the full-time
performance of the Executive's duties during such thirty (30) day period) and
(ii) if the Executive's employment is terminated for any other reason, the date
specified in the Notice of Termination. In the case of a termination by the
Company other than a For Cause Termination (which may be effective immediately),
the Date of Termination shall not be less than thirty (30) days after the Notice
of Termination is given. In the case of a termination by the Executive, the Date
of Termination shall not be less than fifteen (15) days from the date such
Notice of Termination is given. Notwithstanding Section 3(a) of this Agreement,
in the event that the Executive gives a Notice of Termination to the Company,
the Company may unilaterally accelerate the Date of Termination and such
acceleration shall not result in a Terminating Event for purposes of Section
3(a) of this Agreement.
(c) No Mitigation. The Company agrees that, if the Executive's
employment by the Company is terminated during the term of this Agreement, the
Executive is not required to seek other employment or to attempt in any way to
reduce any amounts payable to the Executive by the Company pursuant to Sections
4(a) and (b) hereof. Further, the amount of any payment provided for in this
Agreement shall not be reduced by any compensation earned by the Executive as
the result of employment by another employer, but shall be subject to reduction
by certain amounts received under the Employment Agreement as provided in
Section 4(a) hereof.
(d) Settlement and Arbitration of Disputes. Any controversy or claim
arising out of or relating to this Agreement or the breach thereof shall be
settled exclusively by arbitration in accordance with the laws of the State of
North Carolina by three arbitrators, one of whom shall be appointed by the
Company, one by the Executive and the third by the first two arbitrators. If
8
<PAGE> 10
the first two arbitrators cannot agree on the appointment of a third arbitrator,
then the third arbitrator shall be appointed by the American Arbitration
Association in the City of Charlotte, North Carolina. Such arbitration shall be
conducted in the City of Charlotte, North Carolina in accordance with the rules
of the American Arbitration Association for commercial arbitrations, except with
respect to the selection of arbitrators which shall be as provided in this
Section 8(d). Judgment upon the award rendered by the arbitrators may be entered
in any court having jurisdiction thereof.
9. Assignment; Prior Agreements. Neither the Company nor the Executive
may make any assignment of this Agreement or any interest herein, by operation
of law or otherwise, without the prior written consent of the other party, and
without such consent any attempted transfer shall be null and void and of no
effect. This Agreement shall inure to the benefit of and be binding upon the
Company and the Executive, their respective successors, executors,
administrators, heirs and permitted assigns. In the event of the Executive's
death after a Terminating Event but prior to the completion by the Company of
all payments due him under Section 4(a) and (b) of this Agreement, the Company
shall continue such payments to the Executive's beneficiary designated in
writing to the Company prior to his death (or to his estate, if the Executive
fails to make such designation).
10. Enforceability. If any portion or provision of this Agreement shall
to any extent be declared illegal or unenforceable by a court of competent
jurisdiction, then the remainder of this Agreement, or the application of such
portion or provision in circumstances other than those as to which it is so
declared illegal or unenforceable, shall not be affected thereby, and each
portion and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law.
11. Waiver. No waiver of any provision hereof shall be effective unless
made in writing and signed by the waiving party. The failure of any party to
require the performance of any term or obligation of this Agreement, or the
waiver by any party of any breach of this Agreement, shall not prevent any
subsequent enforcement of such term or obligation or be deemed a waiver of any
subsequent breach.
12. Notices. Any notices, requests, demands and other communications
provided for by this Agreement shall be sufficient if in writing and delivered
in person or sent by registered or certified mail, postage prepaid, to the
Executive at the last address the Executive has filed in writing with the
Company, or to the Company at its main office, attention of the Board.
13. Effect on Other Plans. An election by the Executive to resign after
a Change in Control under the provisions of this Agreement shall not be deemed a
voluntary termination of employment by the Executive for the purpose of
interpreting the provisions of any of the Company's benefit plans, programs or
policies. Nothing in this Agreement shall be construed to limit the rights of
the Executive under the Company's benefit plans, programs or policies except as
otherwise provided in Section 5 hereof, and except that the Executive shall have
no rights to
9
<PAGE> 11
any severance benefits under any severance pay plan other than cash amounts
specifically set forth in the Employment Agreement or this Agreement.
14. Amendment. This Agreement may be amended or modified only by a
written instrument signed by the Executive and by a duly authorized
representative of the Company.
15. Governing Law. This Agreement shall be construed under and be
governed in all respects by the laws of the State of North Carolina.
16. Obligations of Successors. In addition to any obligations imposed
by law upon any successor to the Company, the Company will use its best efforts
to require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business or
assets of the Company to expressly assume and agree to perform this Agreement in
the same manner and to the same extent that the Company would be required to
perform if no such succession had taken place.
17. Confidential Information. The Executive shall never use, publish or
disclose in a manner adverse to the Company's interests, any proprietary or
confidential information relating to (a) the business, operations or properties
of the Company or any Subsidiary or other affiliate of the Company, or (b) any
materials, processes, business practices, technology, know-how, research,
programs or other information used in the business of the Company or any
Subsidiary or other affiliate of the Company, provided, however, that no breach
or alleged breach of this Section 17 shall entitle the Company to fail to comply
fully and in a timely manner with any other provision hereof. Nothing in this
Agreement shall preclude the Company from seeking money damages, or equitable
relief by injunction or otherwise without the necessity of proving actual damage
to the Company, for any breach by the Executive hereunder.
IN WITNESS WHEREOF, this Agreement has been executed as a sealed
instrument by the Company by its duly authorized officer, and by the Executive,
as of the date first above written.
COMPANY:
SUMMIT PROPERTIES INC.
By:
---------------------------------
Name: Michael G. Malone
Title: Senior Vice President
Secretary & General Counsel
EXECUTIVE:
------------------------------
10
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
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0
0
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