<PAGE>
- --------------------------------------------------------------------------------
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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 March 31, 1999
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 1-12792
SUMMIT PROPERTIES INC.
(Exact name of registrant as specified in its charter)
---------------
<TABLE>
<CAPTION>
MARYLAND 56-1857807
<S> <C>
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
212 S. TRYON STREET,
SUITE 500,
CHARLOTTE, NORTH CAROLINA 28281
(Address of principal executive offices) (Zip code)
</TABLE>
(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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
28,456,774 shares outstanding as of May 3, 1999.
- --------------------------------------------------------------------------------
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<PAGE>
SUMMIT PROPERTIES INC.
INDEX
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998 (Unaudited) ........ 3
Consolidated Statements of Earnings for the three months ended March 31, 1999 and
1998 (Unaudited) .......................................................................... 4
Consolidated Statement of Stockholders' Equity for the three months ended March 31,
1999 (Unaudited) .......................................................................... 5
Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and
1998 (Unaudited) .......................................................................... 6
Notes to Consolidated Financial Statements ................................................ 7
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 14
Item 3 Quantitative and Qualitative Disclosure about Market Risk ................................. 27
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K .......................................................... 28
Signatures ................................................................................ 29
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUMMIT PROPERTIES INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
-------------- -------------
<S> <C> <C>
ASSETS
Real estate assets:
Land and land improvements ........................................................ $ 177,712 $ 169,374
Buildings and improvements ........................................................ 876,589 836,054
Furniture, fixtures and equipment ................................................. 67,485 63,963
---------- ----------
1,121,786 1,069,391
Less: accumulated depreciation .................................................... (123,354) (115,128)
---------- ----------
Operating real estate assets .................................................... 998,432 954,263
Construction in progress .......................................................... 120,778 137,145
---------- ----------
Net real estate assets .......................................................... 1,119,210 1,091,408
Cash and cash equivalents .......................................................... 3,473 2,837
Restricted cash .................................................................... 68,898 91,981
Deferred financing costs, net ...................................................... 7,494 7,538
Other assets ....................................................................... 3,979 4,900
---------- ----------
Total assets ....................................................................... $1,203,054 $1,198,664
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable ..................................................................... $ 741,966 $ 726,103
Accrued interest payable .......................................................... 4,943 6,806
Accounts payable and accrued expenses ............................................. 18,886 32,745
Dividends and distributions payable ............................................... 13,728 12,713
Security deposits and prepaid rents ............................................... 4,467 4,188
---------- ----------
Total liabilities ............................................................... 783,990 782,555
---------- ----------
Commitments and contingencies ......................................................
Minority interest .................................................................. 56,403 57,184
Stockholders' equity:
Common stock, $.01 par value--100,000,000 authorized, 28,445,191 and 27,805,836
shares issued and outstanding in 1999 and 1998, respectively .................... 284 278
Preferred stock, $.01 par value--25,000,000 shares authorized, no shares issued and
outstanding ..................................................................... -- --
Additional paid-in capital ........................................................ 452,404 442,132
Accumulated deficit ............................................................... (84,562) (80,281)
Unamortized restricted stock compensation ......................................... (831) (728)
---------- ----------
367,295 361,401
Less employee notes receivable .................................................... (4,634) (2,476)
---------- ----------
Total stockholders' equity ...................................................... 362,661 358,925
---------- ----------
Total liabilities and stockholders' equity ......................................... $1,203,054 $1,198,664
========== ==========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
SUMMIT PROPERTIES INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Revenues:
Rental .................................................................................. $ 39,813 $ 31,450
Other property income ................................................................... 2,242 1,616
Interest ................................................................................ 1,035 98
Other income ............................................................................ 59 73
----------- -----------
Total revenues ....................................................................... 43,149 33,237
----------- -----------
Expenses:
Property operating and maintenance:
Personnel ............................................................................. 3,074 2,429
Advertising and promotion ............................................................. 607 511
Utilities ............................................................................. 2,066 1,722
Building repairs and maintenance ...................................................... 1,964 2,073
Real estate taxes and insurance ....................................................... 4,478 3,469
Depreciation .......................................................................... 8,253 6,540
Property supervision .................................................................. 988 799
Other operating expenses .............................................................. 819 631
----------- -----------
22,249 18,174
Interest ................................................................................ 10,497 7,298
General and administrative .............................................................. 1,080 801
Loss in equity investments:
Summit Management Company ............................................................. 316 72
Real estate joint venture ............................................................. 8 --
----------- -----------
Total expenses ....................................................................... 34,150 26,345
----------- -----------
Income before minority interest of unitholders in Operating Partnership and extraordinary
items ................................................................................... 8,999 6,892
Minority interest of unitholders in Operating Partnership ................................ (1,218) (995)
----------- -----------
Income before extraordinary items ........................................................ 7,781 5,897
Extraordinary items, net of minority interest of unitholders in Operating Partnership .... -- (158)
----------- -----------
Net income ............................................................................... $ 7,781 $ 5,739
=========== ===========
Per share data:
Income before extraordinary items -- basic .............................................. $ 0.27 $ 0.25
=========== ===========
Income before extraordinary items -- diluted ............................................ $ 0.27 $ 0.24
=========== ===========
Extraordinary items -- basic and diluted ................................................ -- $ (0.01)
=========== ===========
Net income -- basic and diluted ......................................................... $ 0.27 $ 0.24
=========== ===========
Dividends declared ...................................................................... $ 0.42 $ 0.41
=========== ===========
Weighted average common shares -- basic ................................................. 28,327,194 24,059,066
=========== ===========
Weighted average common shares -- diluted ............................................... 28,332,772 24,088,333
=========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
SUMMIT PROPERTIES INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL RESTRICTED EMPLOYEE
COMMON PAID IN ACCUMULATED STOCK NOTES
STOCK CAPITAL DEFICIT COMPENSATION RECEIVABLE TOTAL
-------- ------------ ------------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 ................... $278 $442,132 $ (80,281) $ (728) $ (2,476) $ 358,925
Dividends ................................... -- -- (12,063) -- -- (12,062)
Exercise of stock options ................... -- 1 -- -- -- 1
Issuance of restricted stock grants ......... -- 239 -- (239) -- --
Amortization of restricted stock grants ..... -- -- -- 136 -- 136
Proceeds from dividend and stock purchase
plans ..................................... 6 9,882 -- -- -- 9,888
Adjustment for minority interest in
Operating Partnership ..................... -- 150 -- -- -- 150
Issuance of employee notes receivable ....... -- -- -- -- (2,158) (2,158)
Net income .................................. -- -- 7,781 -- -- 7,781
---- -------- --------- ------ -------- ---------
Balance, March 31, 1999 ...................... $284 $452,404 $ (84,562) $ (831) $ (4,634) $ 362,661
==== ======== ========= ====== ======== =========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
SUMMIT PROPERTIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income .......................................................................... $ 7,781 $ 5,739
Adjustments to reconcile net income to net cash provided by operating activities:
Extraordinary items ............................................................... -- 158
Loss on equity method investments ................................................. 324 72
Depreciation and amortization ..................................................... 8,720 6,930
Decrease (increase) in restricted cash ............................................ 625 (127)
Decrease in other assets .......................................................... 534 137
Decrease in accrued interest payable .............................................. (1,863) (1,912)
(Decrease) increase in accounts payable and accrued expenses ...................... (3,217) 1,732
Increase in security deposits and prepaid rents ................................... 279 436
Minority interest of unitholders in Operating Partnership ......................... 1,218 995
--------- ---------
Net cash provided by operating activities ........................................ 14,401 14,160
--------- ---------
Cash flows from investing activities:
Construction of real estate assets, net of payables ................................. (33,483) (26,595)
Proceeds from disposal of Communities ............................................... 22,458 --
Purchase of Communities ............................................................. -- (24,494)
Capitalized interest ................................................................ (1,768) (1,134)
Recurring capital expenditures ...................................................... (1,039) (843)
Non-recurring capital expenditures, net of payables ................................. (891) (1,245)
--------- ---------
Net cash used in investing activities ............................................ (14,723) (54,311)
--------- ---------
Cash flows from financing activities:
Net (repayments) borrowings on line of credit ....................................... (7,500) 51,359
Net borrowings on unsecured bonds ................................................... 24,749 --
Repayments of mortgage debt ......................................................... (1,277) (12,941)
Repayments of tax exempt bonds ...................................................... (360) (305)
Dividends and distributions to unitholders .......................................... (12,911) (11,097)
Exercise of stock options ........................................................... 1 499
Decrease in advance proceeds from direct stock purchase plan ........................ (9,474) (1,500)
Proceeds from dividend and stock purchase plans ..................................... 9,888 15,808
Increase in employee notes receivable ............................................... (2,158) (902)
--------- ---------
Net cash provided by financing activities ........................................ 958 40,921
--------- ---------
Net increase in cash and cash equivalents ............................................ 636 770
Cash and cash equivalents, beginning of period ....................................... 2,837 3,563
--------- ---------
Cash and cash equivalents, end of period ............................................. $ 3,473 $ 4,333
========= =========
Supplemental disclosure of cash flow information -- Cash paid for interest, net of
capitalized
interest ............................................................................ $ 12,117 $ 8,900
========= =========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
SUMMIT PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by the
management of Summit Properties Inc. (the "Company") 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 three months
ended March 31, 1999 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 Company's December 31, 1998 audited financial statements
and notes thereto included in the Company's Annual Report on Form 10-K.
The Company conducts significantly all of its business through Summit
Properties Partnership, L.P. (the "Operating Partnership"). The Company is sole
general partner and majority owner of the Operating Partnership.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standard No. 130 "Reporting
Comprehensive Income" (FAS 130), presents standards for the reporting and
display of comprehensive income and its components. Besides net income, FAS 130
requires the reporting of other comprehensive income, defined as revenues,
expenses, gains and losses that are not included in net income under generally
accepted accounting principles. The Company has no items of other comprehensive
income in the periods presented.
DERIVATIVE INSTRUMENT AND HEDGING ACTIVITIES
Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133), presents standards
for accounting for derivative instruments. FAS 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company currently
holds no derivative instruments and, accordingly, does not expect FAS 133 to
have an effect on the Company's financial position and results of operations.
CHANGE IN ACCOUNTING POLICY
Effective January 1, 1999, the Company implemented prospectively a new
accounting policy whereby expenditures for carpet are capitalized and
depreciated over their estimated useful lives. Previously, carpets had been
expensed. The Company believes that the newly adopted accounting policy is
preferable as it is consistent with the standards and practices utilized by the
majority of the Company's peers and provides a better matching of expenses with
the related benefit of the expenditure. The change in accounting policy is
being treated as a change in accounting estimate. The effect of the change in
the accounting policy for carpet for the three months ended March 31, 1999 was
an increase to net income by $293,000 or $0.01 per basic and diluted share.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 financial statements
to conform to the 1999 presentation.
2. REAL ESTATE JOINT VENTURES
The Company obtained a 25% interest in a joint venture named Station Hill,
LLC, a North Carolina limited liability company ("Station Hill"), in exchange
for the contribution of two communities in December, 1998. Station Hill also
owns five apartment communities previously owned by the Company which were sold
to Hollow Creek, LLC on December 16, 1998 and were concurrently contributed to
Station Hill for a 75% joint venture interest. The Company's initial investment
in Station Hill was reduced to zero when the Company eliminated the portion of
the gain on disposal related to the percentage of joint venture ownership
interest retained. Station Hill is accounted for on the equity method of
accounting.
The Company owns a 49% interest in each of two joint ventures
("Construction Projects"). Each joint venture is developing an apartment
community which will be accounted for under the equity method of accounting.
The projects are both under construction and had no operations as of March 31,
1999. The construction costs are being funded primarily through
7
<PAGE>
2. REAL ESTATE JOINT VENTURES -- (Continued)
separate loans to each joint venture from unrelated third parties equal to 100%
of the construction costs. During the construction period, in lieu of equity
contribution to each of the respective joint ventures, the Company has under
certain circumstances, subsequent to demand by the third party lenders, agreed
to make contributions which would reduce the respective construction loan by an
amount not to exceed 25% of the total construction loan amount. Any such
contribution would be deemed to be all or a portion of the equity required to
be contributed by the Company to the respective joint venture at the end of the
construction and lease up period. The Company has the right to purchase its
joint venture partner's interest after the projects are complete.
The following is a condensed balance sheet for each of the real estate
joint ventures at March 31, 1999 and an income statement for the three months
ended March 31, 1999 for the Station Hill joint venture only as the
Construction Projects had no operations during the period (in thousands):
<TABLE>
<CAPTION>
STATION CONSTRUCTION
HILL PROJECTS
----------- -------------
<S> <C> <C>
Cash and cash equivalents .................................. $ 2,172 $ 18
Real estate assets other than construction in progress ..... 90,914 --
Construction in progress ................................... -- 18,686
Other assets ............................................... 406 --
------- -------
Total assets .............................................. $93,492 $18,704
======= =======
Mortgage payable ........................................... $70,028 $ --
Construction loan payable .................................. -- 15,146
Construction liabilities payable ........................... -- 3,543
Other liabilities .......................................... 1,060 --
Partners' capital .......................................... 22,404 15
------- -------
Total liabilities and partners' capital ................... $93,492 $18,704
======= =======
Revenues ................................................... $ 2,915
Expenses:
Property operating ........................................ 1,009
Depreciation and amortization ............................. 744
Interest .................................................. 1,174
-------
Total expenses .......................................... 2,927
-------
Net loss ................................................... $ (12)
=======
</TABLE>
3. NOTES PAYABLE
The Company has established a program for the sale of up to $95 million
aggregate principal amount of Medium-Term Notes due nine months or more from
the date of issuance (the "MTN Program"). On March 18, 1999, the Company sold
$25 million of notes under the MTN Program. Such notes are due on March 16,
2009 and bear interest at 7.59% per year. Proceeds from the notes issued were
used to reduce the Company's unsecured line of credit. The Company has issued
$80 million aggregated principal amount of Medium-Term Notes ($55 million of
which was issued during 1998) of the $95 million aggregate principal amount of
Medium-Term Notes registered in connection with the MTN Program.
4. RESTRICTED STOCK
During the three months ended March 31, 1999 and 1998, the Company granted
14,181 and 4,842 shares, respectively, of restricted stock to employees under
the Company's 1994 Stock Option and Incentive Plan. The market value of the
restricted stock grants awarded in 1999 and 1998 totaled $239,000 and $101,000,
respectively, which has been recorded as unamortized restricted stock
compensation and is shown as a separate component of stockholders' equity.
Unearned compensation is being amortized to expense over the vesting period
which ranges from three to five years.
8
<PAGE>
5. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash investing and financing activities for the three months ended
March 31, 1999 and 1998 are as follows:
A. The Company purchased Summit St. Clair on March 6, 1998 by issuing
119,000 common units of limited partnership interest in the Operating
Partnership ("Units"), assuming certain liabilities and paying cash. The
recording of the purchase is summarized as follows (in thousands):
<TABLE>
<S> <C>
Fixed assets ........................ $ 27,002
Current liabilities assumed ......... (94)
Value of Units issued ............... (2,414)
--------
Cash invested ....................... $ 24,494
========
</TABLE>
B. The Company accrued a dividend and distribution payable in the amounts
of $13.7 million and $11.7 million at March 31, 1999 and 1998,
respectively.
C. The Company issued 14,181 and 4,842 shares of restricted stock valued at
$239,000 and $101,000 during the three months ended March 31, 1999 and
1998, respectively.
6. MINORITY INTEREST
Minority interest consists of the following at March 31, 1999 and December
31, 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Minority interest of unitholders in Operating Partnership .. $56,802 $57,587
Minority interest in one operating community ............... (399) (403)
------- -------
$56,403 $57,184
======= =======
</TABLE>
As of March 31, 1999, there were 32,881,933 Units outstanding of the
Operating Partnership of which 28,445,191 or 86.5% were owned by the Company
and 4,436,742, or 13.5%, were owned by other partners (including certain
officers and directors of the Company).
Proceeds from Common Stock issued by the Company are contributed to the
Operating Partnership for an equivalent number of Units. Total Common Stock
issued by the Company and contributed to the Operating Partnership for an
equivalent number of Units was 639,000 and 823,000 shares valued at $10.9
million ($17.01 per share average) and $16.4 million ($19.95 per share average)
for the three months ended March 31 1999 and 1998, respectively. No individual
transaction significantly changed the Company's ownership percentage in the
Operating Partnership. The Company's ownership percentage in the Operating
Partnership was 86.5% and 85.4% as of March 31, 1999 and 1998, respectively.
Under certain circumstances, the Company can issue shares of Common Stock
in exchange for Units owned by other partners on a one-for-one basis. Shares
exchanged are valued based upon the Company's market price per share at the
date of the exchange. No units were exchanged for shares during the three month
periods ended March 31, 1999 and 1998.
Units issued for the purchase of the apartment community in 1998 were
valued based upon the Company's market value price per share of Common Stock as
the Units can be exchanged for shares on a one-for-one basis.
7. EXTRAORDINARY ITEMS
The extraordinary items in the three months ended March 31, 1998 resulted
from the write-off of deferred financing costs in conjunction with the
replacement by the Company of its prior credit facility with a new credit
facility as well as prepayment penalties on four mortgage notes which were
repaid during the period. The extraordinary items are net of $27,000 which was
allocated to the minority interest of unitholders in the Operating Partnership,
calculated on the weighted average number of Units outstanding.
9
<PAGE>
8. EARNINGS PER SHARE
The only difference between "basic" and "diluted" weighted average shares
is the dilutive effect of the Company's stock options outstanding (5,578 and
29,267 shares added to weighted shares outstanding for the three months ended
March 31, 1999 and 1998, respectively).
9. COMMITMENTS
The Company has ten development projects currently under construction
representing a total estimated cost of $193.5 million. The estimated cost to
complete the projects is $104.4 million at March 31, 1999.
10. BUSINESS SEGMENTS
Effective December 31, 1998, the Company adopted Financial Accounting
Standards Board (FASB) Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (FAS 131). FAS 131 establishes standards
for the manner in which public enterprises report information about operating
segments in financial statements. FAS 131 also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The adoption of FAS 131 did not affect the Company's results of
operations or financial position.
The Company reports as a single business segment with activities related
to the ownership, development, acquisition and management of "Class A" luxury
garden apartments primarily in the southeastern, southwestern and mid-atlantic
United States. The Company uses Funds from Operations ("FFO") as a performance
measure. The Company computes FFO in accordance with the definition approved by
the National Association of Real Estate Investment Trusts. Information for the
apartment communities for the three months ended March 31, 1999 and 1998 is
summarized below (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------------------------------ -------------------------------------
APARTMENT CORPORATE/ APARTMENT CORPORATE/
OPERATIONS OTHER TOTAL OPERATIONS OTHER TOTAL
-------------- ------------ -------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and other ................... $ 42,055 $ 42,055 $ 33,066 $ 33,066
property income ....................
Interest and other income .......... -- $ 1,094 1,094 -- $ 171 171
---------- --------- ---------- -------- -------- --------
Total income ....................... 42,055 1,094 43,149 33,066 171 33,237
Operating expenses:
Property operating expenses ...... 13,996 -- 13,996 11,634 -- 11,634
Interest ......................... -- 10,497 10,497 7,298 7,298
General and administrative ....... -- 1,080 1,080 -- 801 801
Depreciation -- other ............ -- 27 27 -- 19 19
Loss on equity investments ....... 8 316 324 -- 72 72
---------- --------- ---------- -------- -------- --------
Total operating expenses ......... 14,004 11,920 25,924 11,634 8,190 19,824
Depreciation -- joint venture ...... 183 -- 183 -- -- --
---------- --------- ---------- -------- -------- --------
Funds from Operations .............. 28,234 (10,826) 17,408 21,432 (8,019) 13,413
Depreciation -- apartments ......... (8,226) -- (8,226) (6,521) -- (6,521)
Depreciation--joint venture ........ (183) -- (183) -- -- --
Extraordinary items ................ -- -- -- -- (158) (158)
Minority interest of unitholders
in Operating Partnership ......... -- (1,218) (1,218) -- (995) (995)
---------- --------- ---------- -------- -------- --------
Net income ......................... $ 19,825 $ (12,044) $ 7,781 $ 14,911 $ (9,172) $ 5,739
========== ========= ========== ======== ======== ========
Capital investments (1) ............ $ 36,003 $ 25 $ 36,028 $ 55,861 $ 13 $ 55,874
========== ========= ========== ======== ======== ========
Assets ............................. $1,200,301 $ 2,753 $1,203,054 $871,865 $ 3,614 $875,479
========== ========= ========== ======== ======== ========
</TABLE>
- ---------
(1) Capital investments includes cost during the year of the Company's
developments and acquisitions as well as capital expenditures on existing
properties.
10
<PAGE>
11. SUBSEQUENT EVENTS
PRIVATE PLACEMENT OF PREFERRED UNITS
On April 29, 1999, the Operating Partnership completed a private placement
of 3,400,000 of its 8.95% Series B Cumulative Redeemable Perpetual Preferred
Units (the "Series B Preferred Units") to two institutional investors at a
price of $25.00 per unit. The net proceeds of approximately $83 million were
used to repay amounts outstanding under the Company's unsecured line of credit.
In connection with such placement, the partnership agreement of the Operating
Partnership was amended to provide for and to describe the rights of the
holders of the Series B Preferred Units.
Distributions on the Series B Preferred Units will be cumulative from the
date of original issuance and payable quarterly on the last business day of
each of March, June, September and December of each year commencing June 30,
1999, at an annual rate of 8.95% on the $25.00 original capital contribution
per unit. Upon any voluntary or involuntary liquidation, dissolution or winding
up of the Operating Partnership, the Series B Preferred Units will be entitled
to a preferential distribution equal to the capital account attributable to
such unit (initially $25.00 per unit), plus an amount equal to all accumulated,
accrued and unpaid distributions. With respect to payment of distributions and
amounts upon liquidation, the Series B Preferred Units will rank senior to any
junior units, including the Operating Partnership's common units of limited
partnership interest.
On and after April 29, 2004, the Operating Partnership may redeem the
Series B Preferred Units at its option, for cash at a redemption price equal to
the redeemed holder's capital account (initially $25.00 per unit), plus an
amount equal to all accumulated, accrued and unpaid distributions thereon to
the date of redemption which such redemption may be in whole, at any time, or
in part, at any time that all accumulated and unpaid distributions have been
paid on all Series B Preferred Units for all periods up to and including such
date of redemption. In lieu of cash, the Operating Partnership may elect to
deliver, for any Series B Preferred Unit being redeemed, one share of 8.95%
Series B Cumulative Redeemable Perpetual Preferred Shares of the Company (a
"Series B Preferred Share"), which share shall have, as of the date of its
issuance, a preference in an amount equal to all accumulated, accrued and
unpaid distributions on the redeemed unit to the date of its redemption. The
Series B Preferred Units are not subject to any mandatory redemption
provisions. No sinking fund will be established for the retirement or
redemption of the Series B Preferred Units.
Holders of the Series B Preferred Units have the right to exchange Series
B Preferred Units, in whole or in part (subject to certain exceptions and
limitations), for shares of Series B Preferred Shares on a one-for-one basis.
The exchange right is exercisable, in minimum amounts of 850,000 units, at the
option of the holders of the Series B Preferred Units (i) at any time on or
after April 29, 2009, (ii) at any time if full quarterly distributions shall
not have been timely made for six quarters, whether or not consecutive, or
(iii) upon the occurrence of certain specified events related to the federal
income tax treatment of the Operating Partnership or the Series B Preferred
Units for federal income tax purposes.
On April 29, 1999, the Company filed Articles Supplementary to its charter
classifying and establishing the class of 3,400,000 Series B Preferred Shares
and describing such Series B Preferred Shares and the rights of the holders
thereof. The Company's Board of Directors has reserved such Series B Preferred
Shares for issuance upon exchange of Series B Preferred Units. In general, the
distribution and liquidation preferences and other rights of holders of Series
B Preferred Shares and the Company's right to redeem Series B Preferred Shares
are substantially similar to the related distribution and liquidation
preferences and other rights of holders of Series B Preferred Units and the
Operating Partnership's right to redeem Series B Preferred Units, except as set
forth below.
Neither the Series B Preferred Units nor the Series B Preferred Shares are
convertible into or exchangeable for any other securities, except that (i)
Series B Preferred Units may be exchanged for Series B Preferred Shares as
described above and (ii) Series B Preferred Shares may be converted
automatically into shares of Excess Stock (a separate class of stock into which
shares in excess of the Company's stock ownership limit are automatically
convertible) in order to ensure that the Company remains a qualified REIT for
federal income tax purposes.
Except as otherwise required by law, holders of the Series B Preferred
Units have only the following voting rights: so long as any Series B Preferred
Units remain outstanding, the Operating Partnership may not, without the
affirmative vote of the holders of at least two-thirds of the Series B
Preferred Units outstanding, (i) authorize or create, or increase the
authorized or issued amount of, any class or series of Operating Partnership
units ranking senior to the Series B Preferred Units, (ii) issue any class or
series of Operating Partnership units ranking on parity with the Series B
Preferred Units to an affiliate of the Operating Partnership ("Partnership
Affiliate"), reclassify any Operating Partnership unit held by a Partnership
Affiliate into any such parity unit, or issue any security or obligation with
the right to purchase any such parity unit to a Partnership Affiliate unless
such units are issued either (x) under terms no more favorable to such
Partnership Affiliate
11
<PAGE>
11. SUBSEQUENT EVENTS -- (Continued)
than those that would be offered in an arm's length transaction to an unrelated
party in the good faith determination of the Board of Directors of the Company
or (y) in connection with the issuance of a corresponding class or series of
preferred stock by the Company to parties who are not Partnership Affiliates or
(iii) either (a) consolidate, merge with or into, or transfer all or
substantially all of its assets to another party, or (b) amend, alter or repeal
provisions of the Operating Partnership's partnership agreement, in each case
in a transaction or manner that would materially and adversely affect any
power, special right, preference, privilege or voting power of the Series B
Preferred Units or holders thereof.
Holders of the Series B Preferred Shares will have substantially similar
voting rights with respect to Series B Preferred Shares and the Company as
holders of Series B Preferred Units have with respect to Series B Preferred
Units, and the Operating Partnership as well as the following voting right:
whenever (i) quarterly dividends in arrears (whether or not consecutive) on any
Series B Preferred Shares and (ii) unpaid quarterly distributions attributable
to Series B Preferred Units for which such Series B Preferred Shares were
exchanged equals or exceeds six, the holders of the Series B Preferred Shares
(voting separately as a class with all other series of stock which rank on a
parity with the Series B Preferred Shares as to distributions and rights and
upon which like voting rights have been conferred and are exercisable) will be
entitled to vote for the election of a total of two additional directors of the
Company until all dividends accumulated on such Series B Shares have been fully
paid or declared and a sum sufficient for the payment thereof set aside for
payment.
The Company has entered into a registration rights agreement for the
benefit of any holders of the Series B Preferred Shares pursuant to which such
holders will have certain registration rights (the "Registration Rights
Agreement"). Under the Registration Rights Agreement, following the earlier of
April 29, 2009 or such date as all Series B Preferred Units are exchanged for
Series B Preferred Shares (the "Registration Date"), upon request of a
majority-in-interest of the holders of Series B Preferred Shares, the Company
agreed (i) to file with the Securities and Exchange Commission (the "SEC") a
Registration Statement (the "Two-year Shelf Registration Statement") providing
for the resale of all of the Series B Preferred Shares (the "Registrable
Securities") held by such holders, (ii) to use all commercially reasonable
efforts to have such Two-year Shelf Registration Statement declared effective
by the SEC as soon as practical thereafter and (iii) to use all commercially
reasonable efforts to keep the Two-year Shelf Registration Statement
continuously effective for a period of two years or such shorter period
expiring when such Registrable Securities have been sold pursuant to such
registration statement or are to be sold in compliance with Rule 144 (as
promulgated by the SEC) without volume limitations. If, at any time, a shelf
registration statement is not effective, upon receipt of a written request
("Registration Request") from holders holding Registrable Securities having an
aggregate expected offering price of at least $10 million (or holders holding
all remaining Registrable Securities), the Company agreed to use all
commercially reasonable efforts to file with the SEC, within 45 days after
receipt of such Registration Request, a registration statement ("Demand
Registration Statement") for the sale of all Registrable Securities held by the
requesting holders and keep such Demand Registration Statement continuously
effective for one year following the date such Demand Registration Statement is
declared effective or such shorter period expiring when such Registrable
Securities have been sold pursuant to such registration statement or are to be
sold in compliance with Rule 144 (as promulgated by the SEC) without volume
limitations. The Company is required to file up to three Demand Registration
Statements unless, under certain circumstances it delivers Series B Preferred
Shares in lieu of cash in redemption of Series B Preferred Units, in which case
it may be required to file additional Demand Registration Statements. Anytime
the Company proposes to file a registration statement with respect to an
offering solely for cash for the account of any of its security holders of any
class of equity security and a Two-year Shelf Registration Statement has been
requested but is not otherwise effective, then the Company may be required,
under certain circumstances, to offer the holders of the Registrable Securities
the opportunity to include such number of shares of Registrable Securities as
each such holder may have otherwise required in connection with a Two-year
Shelf Registration Statement.
Pursuant to the Registration Rights Agreement, the Company has agreed to
pay all expenses of effecting the registration of the Series B Preferred Shares
(other than brokerage and underwriting commissions and taxes of any kind,
certain legal fees and other expenses incurred by the holders of the Registrable
Securities). The Company also has agreed to indemnify each holder of
Registrable Securities and its officers, directors and any person who controls
any holder of Registrable Securities against certain losses, claims, damages,
liabilities and expenses arising under the securities laws in connection with
any registration statement effected pursuant to the Registration Rights
Agreement (a "Registration Statement"), subject to certain limitations. In
addition, each holder of Registrable Securities has agreed to indemnify the
Company, its directors and its officers who sign the Registration Statement,
any underwriter and any person who controls the Company or such underwriter
against all losses, claims, damages, liabilities and expenses, subject to
certain limitations, arising under the securities laws insofar as such loss,
claim, damage,
12
<PAGE>
11. SUBSEQUENT EVENTS -- (Continued)
liability or expense relates to written information furnished to the Company by
such holder for use in the Registration Statement or prospectus or an amendment
or supplement thereto.
COMMON STOCK REPURCHASE PROGRAM
One May 11, 1999, the Board of Directors of the Company authorized a
common stock repurchase program pursuant to which the Company would be
authorized to purchase up to $50 million of currently issued and outstanding
common stock of the Company, par value $0.01 per share ("Common Stock"). Any
repurchases will be made on the open market at prevailing prices. This
authority may be exercised from time to time and in such amounts as market
conditions warrant. The Company currently has approximately 28.5 million shares
of Common Stock outstanding. Any purchases are intended to make appropriate
adjustments to the Company's capital structure.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), including without limitation statements relating
to development activities of the Company and the implementation of the
Company's plan to address Year 2000 issues. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of complying with these safe
harbor provisions. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies and expectations of the
Company, are generally identifiable by use of the words "believe," "expect,"
"intend," "anticipate," "estimate," "project" or similar expressions. The
Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Although the Company believes that the
expectations reflected in such forward-looking statements are based on
reasonable assumptions, the Company's actual results and performance of
development communities and the actual costs, progress and expenses with
respect to its plan to address Year 2000 issues could differ materially from
those set forth in the forward-looking statements. Factors which could have a
material adverse effect on the operations and future prospects of the Company
include, but are not limited to, changes in: economic conditions generally and
the real estate market specifically, legislative/regulatory changes (including
changes to laws governing the taxation of real estate investment trusts
("REITs"), availability of capital, interest rates, construction delays due to
unavailability of materials, weather conditions or other delays, competition,
supply and demand for apartment communities in the Company's current and
proposed market areas, expenses of or delays in the identification and upgrade
or replacement by the Company of its non-Year 2000 compliant computer
information systems and computer systems that do not relate to information
technology, but include embedded technology, the Year 2000 compliance of
vendors (including vendors of the Company's computer information systems and
such as local and regional electricity, natural gas and telecommunications
providers) or third party service providers (including the Company's primary
bank and payroll processor), generally accepted accounting principles, policies
and guidelines applicable to REITs, and those factors discussed in the section
entitled "Development Activity -- Certain Factors Affecting the Performance of
Development Communities" and in the section entitled "Year 2000" on page 23 of
this Form 10-Q. These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed
on such statements.
The following discussion should be read in conjunction with the
Consolidated Financial Statements of Summit Properties Inc. and the Notes
thereto appearing elsewhere herein.
HISTORICAL RESULTS OF OPERATIONS
The Company'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 "fully
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 a physical occupancy level of at least 93%. A Community which
the Company has acquired is deemed fully stabilized when owned by the Company
for one year or more as of the beginning of the year. A Community which the
Company has developed is deemed "fully stabilized" when stabilized for the two
prior years as of the beginning of the current year. A Community is deemed to
be a "stabilized development" when stabilized as of the beginning of the
current year but not the entire two prior years. All Communities information
presented is before real estate depreciation and amortization expense.
Communities' average physical occupancy presented 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 occupancy that existed
on Sunday during each week of the period. Average monthly rental revenue
presented represents the average monthly net rental revenue per occupied
apartment home. The Company's methodology for calculating average physical
occupancy and average monthly rental revenue may differ from the methodology
used by other equity REITs and, accordingly, may not be comparable to such
other REITs.
Effective January 1, 1999, the Company implemented prospectively a new
accounting policy whereby expenditures for carpet are capitalized and
depreciated over their estimated useful lives. Previously, carpets had been
expensed. The Company believes that the newly adopted accounting policy is
preferable as it is consistent with standards and practices utilized
14
<PAGE>
by the majority of the Company's peers and provides a better matching of
expenses with the related benefit of the expenditure. The change in accounting
policy is being treated as a change in accounting estimate. The effect of the
change in the accounting policy for carpet for the three months ended March 31,
1999 was an increase to net income by $293,000 (income before minority interest
of unitholders increased by $339,000). Comparative property operating
information for the three months ended March 31, 1998 has been adjusted to
reflect the 1999 change in accounting policy.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
For the three months ended March 31, 1999, income before minority interest
and extraordinary items increased $2.1 million to approximately $9.0 million
from the three months ended March 31, 1998.
OPERATING PERFORMANCE OF THE COMPANY'S PORTFOLIO OF COMMUNITIES
The operating performance of the Communities for the three months ended
March 31, 1999 and 1998 is summarized below (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------
1999 1998 % CHANGE
---------- ---------- -----------
<S> <C> <C> <C>
Property revenues:
Fully stabilized communities ......................... $23,958 $22,877 4.7%
Acquisition communities .............................. 9,031 335 2595.8%
Stabilized development communities ................... 5,981 4,872 22.8%
Communities in lease-up .............................. 3,085 303 918.2%
Communities sold ..................................... -- 4,679 -100.0%
------- -------
Total property revenues ............................... 42,055 33,066 27.2%
------- -------
Property operating and maintenance expense:
Fully stabilized communities ......................... 8,105 7,859 3.1%
Acquisition communities .............................. 3,075 90 3316.7%
Stabilized development communities ................... 1,894 1,531 23.7%
Communities in lease-up .............................. 922 114 708.8%
Communities sold ..................................... -- 1,702 -100.0%
Effect of change in accounting policy ................ -- 338 -100.0%
------- -------
Total property operating and maintenance expense ...... 13,996 11,634 20.3%
------- -------
Property operating income ............................. $28,059 $21,432 30.9%
======= =======
Apartment homes, end of period ........................ 18,281 15,316 19.4%
======= =======
</TABLE>
A summary of the Company's apartment homes for the three months ended March 31,
1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
-------- ---------
<S> <C> <C>
Apartment homes at January 1 ................................ 18,001 14,980
Developments which began rental operations during the period 280 --
Acquisitions ................................................ -- 336
------ ------
Apartment homes at March 31 ................................. 18,281 15,316
====== ======
</TABLE>
15
<PAGE>
OPERATING PERFORMANCE OF THE COMPANY'S FULLY STABILIZED COMMUNITIES
The operating performance of the 43 Communities stabilized since January
1, 1997 in each of the three months ended March 31, 1999 and 1998,
respectively, are summarized below (dollars in thousands except average monthly
rental revenue):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
1999 1998 % CHANGE
------------ ------------ ---------
<S> <C> <C> <C>
Property revenues:
Rental ............................................... $ 22,609 $ 21,761 3.9%
Other ................................................ 1,349 1,116 20.9%
-------- --------
Total property revenues ............................... 23,958 22,877 4.7%
-------- --------
Property operating and maintenance expense:
Personnel ............................................ 1,701 1,647 3.3%
Advertising and promotion ............................ 316 313 1.0%
Utilities ............................................ 1,194 1,181 1.1%
Building repairs and maintenance (1) ................. 1,394 1,283 8.7%
Real estate taxes and insurance ...................... 2,413 2,411 0.1%
Property supervision ................................. 591 567 4.2%
Other operating expense .............................. 496 457 8.5%
-------- --------
Total property operating and maintenance expense ...... 8,105 7,859 3.1%
-------- --------
Property operating income ............................. $ 15,853 $ 15,018 5.6%
======== ========
Average physical occupancy ............................ 93.9% 92.4% 1.5%
======== ========
Average monthly rental revenue ........................ $ 798 $ 779 2.5%
======== ========
Number of apartment homes ............................. 10,272 10,272
======== ========
</TABLE>
- ---------
(1) Effective January 1, 1999, the Company implemented prospectively a new
accounting policy whereby expenditures for carpets are capitalized.
Previously, carpets had been expensed. The change in accounting policy has
been treated as a change in accounting estimate and, accordingly, 1998 has
not been restated to reflect the change. However, for comparative purposes
only, building repairs and maintenance cost for the three months ended
March 31, 1998 has been adjusted in the table to reflect the new policy.
Carpet replacement costs were $300,000 and $257,000 for the three months
ended March 31, 1999 and 1998, respectively.
The increase in rental revenue from fully stabilized Communities was
primarily the result of increases in average rental rates and increased
occupancy. The higher revenues were primarily in the Company's Sarasota,
Florida, Washington, DC and Midwest markets. The increase in property operating
and maintenance was due primarily to an increase in building repairs and
maintenance costs. As a percentage of total property revenue, property
operating and maintenance expenses decreased for the three months March 31,
1998 and 1999 from 34.4% to 33.8%, respectively.
16
<PAGE>
OPERATING PERFORMANCE OF THE COMPANY'S ACQUISITION COMMUNITIES
Acquisition Communities consist of Summit St. Clair (acquired effective
March 1, 1998), Summit Club at Dunwoody (acquired May 22, 1998), Summit Lenox
(acquired July 8, 1998) and a portfolio of seven Communities acquired from
Ewing Industries, Inc. and its affiliates (acquired November 3, 1998). The
operations of these Communities for the three months ended March 31, 1999 and
1998 are summarized as follows (dollars in thousands except average monthly
rental revenue):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
----------- ----------
<S> <C> <C>
Property revenues:
Rental revenues ................................... $ 8,660 $ 322
Other property revenue ............................ 371 13
------- -------
Total property revenues ............................ 9,031 335
------- -------
Property operating and maintenance expense ......... 3,075 90
------- -------
Property operating income .......................... $ 5,956 $ 245
======= =======
Average physical occupancy ......................... 93.0% 97.1%
======= =======
Average monthly rental revenue (1) ................. $ 876 $ 946
======= =======
Number of apartment homes .......................... 3,557 336
======= =======
</TABLE>
- ---------
(1) Average 1999 monthly rental revenue for Summit St. Clair (the only
Community owned as of March 31, 1998) was $985, representing a 4.1%
increase from 1998.
The unleveraged yield on investment for the acquisition Communities,
defined as property operating income for the three months ended March 31, 1999
on an annualized basis over total acquisition cost, was 8.97%.
OPERATING PERFORMANCE OF THE COMPANY'S STABILIZED DEVELOPMENT COMMUNITIES
The Company had nine development Communities (Summit Ballantyne I, Summit
Sedgebrook I, Summit on the River, Summit Lake I, Summit Norcroft II, Summit
Stonefield, Summit Russett, Summit Fairways and Summit Plantation II) which
were stabilized during the entire three months ended March 31, 1999 but were
stabilized subsequent to January 1, 1997. The operating performance of these
nine Communities for the three months ended March 31, 1999 and 1998 is
summarized below (dollars in thousands except average monthly rental revenue):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
Property revenues:
Rental revenues ................................... $ 5,639 $ 4,593
Other property revenue ............................ 342 279
------- -------
Total property revenues ............................ 5,981 4,872
------- -------
Property operating and maintenance expense ......... 1,894 1,531
------- -------
Property operating income .......................... $ 4,087 $ 3,341
======= =======
Average physical occupancy ......................... 94.1% 79.4%
======= =======
Average monthly rental revenue ..................... $ 919 $ 889
======= =======
Number of apartment homes .......................... 2,212 2,212
======= =======
</TABLE>
The unleveraged yield on investment for the stabilized development
Communities, defined as property operating income for the three months ended
March 31, 1999 on an annualized basis over total development cost, was 10.16%.
17
<PAGE>
OPERATING PERFORMANCE OF THE COMPANY'S COMMUNITIES IN LEASE-UP
The Company had nine Communities in lease-up during the three months ended
March 31, 1999. A Community in lease-up is defined as one which has commenced
rental operations but was not stabilized as of the beginning of the current
year. A summary of the nine Communities in lease-up as of March 31, 1999 is as
follows (dollars in thousands):
<TABLE>
<CAPTION>
TOTAL ACTUAL/ % LEASED
NUMBER OF ACTUAL/ ANTICIPATED ACTUAL/ Q1 1999 AS OF
APARTMENT ESTIMATED CONSTRUCTION ANTICIPATED AVERAGE MARCH 31,
COMMUNITY HOMES COST COMPLETION STABILIZATION OCCUPANCY 1999
- ----------------------------------------------- ----------- ----------- -------------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Summit Ballantyne II -- Charlotte, NC ......... 154 $ 10,200 Q4 1998 Q1 1999 89.98% 94.50%
Summit New Albany I -- Fairfax, VA ............ 301 23,900 Q4 1998 Q3 1999 62.60% 68.40%
Summit Fair Lakes I -- Fairfax, VA ............ 370 33,200 Q1 1999 Q2 1999 70.49% 83.80%
Summit Governor's Village -- Chapel Hill, NC .. 242 16,800 Q1 1999 Q2 1999 64.53% 71.50%
Summit Lake II -- Raleigh, NC (1) ............. 144 10,200 Q2 1999 Q3 1999 14.08% 26.40%
Summit Doral -- Miami, FL (1) ................. 260 22,800 Q2 1999 Q3 1999 36.12% 50.40%
Summit Westwood -- Raleigh, NC (1) ............ 354 24,400 Q3 1999 Q4 1999 31.36% 39.00%
Summit Sedgebrook II -- Charlotte, NC (1) ..... 120 7,800 Q3 1999 Q1 2000 3.39% 9.20%
Summit Fair Lakes II -- Fairfax, VA (1) (2) ... 160 14,200 Q3 1999 Q1 2000 N/A N/A
--- --------
2,105 $163,500
===== ========
</TABLE>
- ---------
(1) The related assets of such properties are included in the Construction in
Progress category at March 31, 1999.
(2) Summit Fair Lakes II had begun leasing apartments for April, 1999 move-ins
as of March 31, 1999.
Summit Fairview (135 apartment homes) is an existing property which is
undergoing a major renovation. The renovation includes upgrades of the interior
of the apartment units (new cabinets, fixtures and other interior upgrades) as
well as exterior painting and upgrades to the parking lots and landscaping. The
renovation will require certain apartment homes to be unavailable for rent over
the course of the renovation. The operations of Summit Fairview are included in
lease-up Communities results due to the renovation work.
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 months ended March 31, 1999 and 1998 is
summarized below (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenue ....................................... $1,832 $1,458
Expenses:
Operating .................................... 1,927 1,324
Depreciation ................................. 73 59
Amortization ................................. 73 72
Interest ..................................... 75 75
------ ------
Total expenses ............................... 2,148 1,530
------ ------
Net loss of Summit Management Company ......... $ (316) $ (72)
====== ======
</TABLE>
The increase in revenue for the three month period was primarily a result
of higher revenues from managing the Company's Communities and higher revenues
from construction activity. The increase in operating expenses was a result of
increased construction activities and increased cost at the Management Company.
The increase in Management Company costs were primarily due to increased
personnel in order to better support the Company's growth objectives including
improving the operating performance of its stabilized Communities. In addition,
personnel dedicated to information systems increased.
Property management fees include $324,000 and $300,000 of fees from third
parties for the three months ended March 31, 1999 and 1998, respectively.
Property management fees from third parties as a percentage of total property
management revenues were 22.2% and 26.2% for the three months ended March 31,
1999 and 1998, respectively. The Company
18
<PAGE>
expects third party management revenue as a percentage of total property
management revenues to continue to decline as revenues from the Company's
Communities continue to increase.
All of the Construction Company's revenues are from contracts with the
Company.
OTHER INCOME AND EXPENSES
Interest income increased by $937,000 to $1.0 million in 1999 compared to
1998, primarily due to interest earned on proceeds from property sales placed
in escrow in accordance with like-kind exchange income tax regulations.
Interest expense, including amortization of deferred financing costs,
increased by $3.2 million for the three months ended March 31, 1999 compared
with the similar period in 1998. This increase was primarily the result of an
increase of $255.7 million in the Company's average indebtedness outstanding.
Effective interest cost decreased by .25% (6.75% to 6.50%) for the three months
ended March 31, 1999.
Depreciation expense increased $1.7 million or 26.2% for the three months
ended March 31, 1999 compared with the similar period in 1998, primarily due to
depreciation on recently acquired or developed Communities, offset by reduction
in depreciation related to Communities sold.
General and administrative expenses increased $279,000 or 34.8% for the
three months ended March 31, 1999, primarily due to increased compensation
costs and expenses related to the Company's overall growth. As a percentage of
revenues, general and administrative expenses were 2.5% and 2.4% for the three
months ended March 31, 1999 and 1998.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The Company's net cash provided by operating activities increased from
$14.2 million for the three months ended March 31, 1998 to $14.4 million for
the same period in 1999, primarily due to a $6.6 million increase in property
operating income and a $937,000 increase in interest income offset by a $3.2
million increase in interest paid and a decrease in the change in accounts
payable and accrued expenses. The increase in interest income was due to
interest earned on property sales placed in escrow in accordance with like-kind
exchange income tax regulations. The increase in interest paid was primarily
due to an increase in the average indebtedness outstanding. The decrease in
accounts payable and accrued expenses was primarily due to timing of property
tax payments and the payment of certain liabilities assumed in conjunction with
the Company's Community acquisitions during the fourth quarter of 1998.
Net cash used in investing activities decreased from $54.3 million for the
three months ended March 31, 1998 to $14.7 million for the same period in 1999
due to a decrease in the acquisition of Communities and higher proceeds from
sale of Communities, partially offset by an increase in the construction of
Communities. Property sale proceeds in 1998 were placed in escrow in accordance
with like-kind exchange income tax regulations. Proceeds from the sale of
Communities in 1999 represents funds expended from these like-kind exchange
escrows. In the event the proceeds from these property sales are not fully
invested in qualified like-kind property during the required time period, a
special distribution may be made or company level tax may be incurred.
Net cash provided by financing activities decreased from $40.9 million for
the three months ended March 31, 1998 to $1.0 million for the same period in
1999, primarily due to a decrease in borrowings from the Company's credit
facility, a decrease in repayment of mortgage debt, higher dividend and
distributions to unitholders, a decrease in equity proceeds from the Company's
dividend reinvestment and stock purchase plans and an increase in issuances of
notes receivable from employees offset by higher borrowings from unsecured
bonds. Financing activities during 1999 included $7.5 million in net repayment
on the Company's Unsecured Credit Facility (as hereinafter defined) and $24.8
million in net proceeds from the borrowings on unsecured bonds.
The ratio of earnings to fixed charges was 1.58 for the three months ended
March 31, 1999 compared to 1.68 for the three months ended March 31, 1998. The
decrease is primarily due to increased interest charges as discussed in
"Historical Results of Operations -- Other Income and Expenses" above.
The Company has elected to be taxed as a Real Estate Investment Trust
("REIT") under Sections 856 and 860 of the Internal Revenue Code of 1986, as
amended. REITs are subject to a number of organizational and operational
requirements, including a requirement that they currently distribute 95% of
their ordinary taxable income. As a REIT, the Company generally will not be
subject to federal income tax on net income.
19
<PAGE>
The Company's outstanding indebtedness at March 31, 1999 totaled $742.0
million. This amount includes approximately $269.5 million in fixed rate
conventional mortgages, $51.4 million of variable rate tax-exempt bonds, $266.0
million of unsecured notes, $9.1 million of tax-exempt fixed rate loans, and
$146.0 million under the Unsecured Credit Facility (as hereinafter defined).
The Company repaid four mortgage notes with a balance of $11.9 million
during the first quarter of 1998. The mortgage notes had an 8% interest rate
and were repaid from the borrowings under the Company's credit facility.
The Company expects to meet its short-term liquidity requirements (i.e.,
liquidity requirements arising within 12 months) including recurring capital
expenditures relating to maintaining its existing properties, generally through
its working capital, net cash provided by operating activities and borrowings
under its line of credit. The Company considers its cash provided by operating
activities to be adequate to meet operating requirements and payments of
dividends and distributions. The Company expects to meet its long-term
liquidity requirements (i.e., liquidity requirements arising after 12 months),
such as scheduled mortgage debt maturities, property acquisitions, financing of
construction and development activities and other non-recurring capital
improvements, through the issuance of unsecured notes and equity securities,
from undistributed Funds from Operations (see page 26), from proceeds received
from the disposition of certain properties and in connection with the
acquisition of land or improved property, and through the issuance of Units.
LINE OF CREDIT
The Company has a syndicated unsecured line of credit (the "Unsecured
Credit Facility") in the amount of $200 million. The Unsecured Credit Facility
provides funds for new development, acquisitions and general working capital
purposes. The Unsecured Credit Facility has a three year term with two one-year
extension options and will initially bear interest at LIBOR+90 basis points
based upon the Company's current credit rating of BBB- by Standard & Poor's
Rating Services and Baa3 by Moody's Investors Service. The interest rate will
be reduced in the event an upgrade of the Company's unsecured credit rating is
obtained. The Unsecured Credit Facility also provides a bid option sub-facility
equal to a maximum of fifty percent of the total facility ($100.0 million).
This sub-facility provides the Company with the option to place borrowings in a
fixed LIBOR contract up to 180 days.
MEDIUM-TERM NOTES
The Company has established a program for the sale of up to $95 million
aggregate principal amount of Medium-Term Notes due nine months or more from
the date of issuance (the "MTN Program"). On March 18, 1999, the Company sold
$25 million of notes under the MTN Program. Such notes are due on March 16,
2009 and bear interest at 7.59% per year. Proceeds from the notes issued were
used to reduce the Unsecured Credit Facility. The Company has issued $80
million aggregate principal amount of Medium-Term Notes ($55 million of which
was issued during 1998) of the $95 million aggregate principal amount of
Medium-Term Notes registered in connection with the MTN Program.
PRIVATE PLACEMENT OF PREFERRED UNITS
On April 29, 1999, the Operating Partnership completed a private placement
of 3,400,000 of its 8.95% Series B Cumulative Redeemable Perpetual Preferred
Units (the "Series B Preferred Units") to two institutional investors at a
price of $25.00 per unit. The net proceeds of approximately $83 million were
used to repay amounts outstanding under the Unsecured Credit Facility. In
connection with such placement, the partnership agreement of the Operating
Partnership was amended to provide for and to describe the rights of the
holders of the Series B Preferred Units.
Distributions on the Series B Preferred Units will be cumulative from the
date of original issuance and payable quarterly on the last business day of
each of March, June, September and December of each year commencing June 30,
1999, at an annual rate of 8.95% on the $25.00 original capital contribution
per unit. Upon any voluntary or involuntary liquidation, dissolution or winding
up of the Operating Partnership, the Series B Preferred Units will be entitled
to a preferential distribution equal to the capital account attributable to
such unit (initially $25.00 per unit), plus an amount equal to all accumulated,
accrued and unpaid distributions. With respect to payment of distributions and
amounts upon liquidation, the Series B Preferred Units will rank senior to any
junior units, including the Operating Partnership's common units of limited
partnership interest.
On and after April 29, 2004, the Operating Partnership may redeem the
Series B Preferred Units at its option, for cash at a redemption price equal to
the redeemed holder's capital account (initially $25.00 per unit), plus an
amount equal to all accumulated, accrued and unpaid distributions thereon to
the date of redemption which such redemption may be in whole, at any time, or
in part, at any time that all accumulated and unpaid distributions have been
paid on all Series B Preferred Units for all periods up to and including such
date of redemption. In lieu of cash, the Operating Partnership may elect to
20
<PAGE>
deliver, for any Series B Preferred Unit being redeemed, one share of 8.95%
Series B Cumulative Redeemable Perpetual Preferred Shares of the Company (a
"Series B Preferred Share"), which share shall have, as of the date of its
issuance, a preference in an amount equal to all accumulated, accrued and
unpaid distributions on the redeemed unit to the date of its redemption. The
Series B Preferred Units are not subject to any mandatory redemption
provisions. No sinking fund will be established for the retirement or
redemption of the Series B Preferred Units.
Holders of the Series B Preferred Units have the right to exchange Series
B Preferred Units, in whole or in part (subject to certain exceptions and
limitations), for shares of Series B Preferred Shares on a one-for-one basis.
The exchange right is exercisable, in minimum amounts of 850,000 units, at the
option of the holders of the Series B Preferred Units (i) at any time on or
after April 29, 2009, (ii) at any time if full quarterly distributions shall
not have been timely made for six quarters, whether or not consecutive, or
(iii) upon the occurrence of certain specified events related to the federal
income tax treatment of the Operating Partnership or the Series B Preferred
Units for federal income tax purposes.
On April 29, 1999, the Company filed Articles Supplementary to its charter
classifying and establishing the class of 3,400,000 Series B Preferred Shares
and describing such Series B Preferred Shares and the rights of the holders
thereof. The Company's Board of Directors has reserved such Series B Preferred
Shares for issuance upon exchange of Series B Preferred Units. In general, the
distribution and liquidation preferences and other rights of holders of Series
B Preferred Shares and the Company's right to redeem Series B Preferred Shares
are substantially similar to the related distribution and liquidation
preferences and other rights of holders of Series B Preferred Units and the
Operating Partnership's right to redeem Series B Preferred Units, except as set
forth below.
Neither the Series B Preferred Units nor the Series B Preferred Shares are
convertible into or exchangeable for any other securities, except that (i)
Series B Preferred Units may be exchanged for Series B Preferred Shares as
described above and (ii) Series B Preferred Shares may be converted
automatically into shares of Excess Stock (a separate class of stock into which
shares in excess of the Company's stock ownership limit are automatically
convertible) in order to ensure that the Company remains a qualified REIT for
federal income tax purposes.
Except as otherwise required by law, holders of the Series B Preferred
Units have only the following voting rights: so long as any Series B Preferred
Units remain outstanding, the Operating Partnership may not, without the
affirmative vote of the holders of at least two-thirds of the Series B
Preferred Units outstanding, (i) authorize or create, or increase the
authorized or issued amount of, any class or series of Operating Partnership
units ranking senior to the Series B Preferred Units, (ii) issue any class or
series of Operating Partnership units ranking on parity with the Series B
Preferred Units to an affiliate of the Operating Partnership ("Partnership
Affiliate"), reclassify any Operating Partnership unit held by a Partnership
Affiliate into any such parity unit, or issue any security or obligation with
the right to purchase any such parity unit to a Partnership Affiliate unless
such units are issued either (x) under terms no more favorable to such
Partnership Affiliate than those that would be offered in an arm's length
transaction to an unrelated party in the good faith determination of the Board
of Directors of the Company or (y) in connection with the issuance of a
corresponding class or series of preferred stock by the Company to parties who
are not Partnership Affiliates or (iii) either (a) consolidate, merge with or
into, or transfer all or substantially all of its assets to another party, or
(b) amend, alter or repeal provisions of the Operating Partnership's
partnership agreement, in each case in a transaction or manner that would
materially and adversely affect any power, special right, preference, privilege
or voting power of the Series B Preferred Units or holders thereof.
Holders of the Series B Preferred Shares will have substantially similar
voting rights with respect to Series B Preferred Shares and the Company as
holders of Series B Preferred Units have with respect to Series B Preferred
Units, and the Operating Partnership as well as the following voting right:
whenever (i) quarterly dividends in arrears (whether or not consecutive) on any
Series B Preferred Shares and (ii) unpaid quarterly distributions attributable
to Series B Preferred Units for which such Series B Preferred Shares were
exchanged equals or exceeds six, the holders of the Series B Preferred Shares
(voting separately as a class with all other series of stock which rank on a
parity with the Series B Preferred Shares as to distributions and rights and
upon which like voting rights have been conferred and are exercisable) will be
entitled to vote for the election of a total of two additional directors of the
Company until all dividends accumulated on such Series B Shares have been fully
paid or declared and a sum sufficient for the payment thereof set aside for
payment.
The Company has entered into a registration rights agreement for the
benefit of any holders of the Series B Preferred Shares pursuant to which such
holders will have certain registration rights (the "Registration Rights
Agreement"). Under the Registration Rights Agreement, following the earlier of
April 29, 2009 or such date as all Series B Preferred Units are exchanged for
Series B Preferred Shares (the "Registration Date"), upon request of a
majority-in-interest of the holders of Series B Preferred Shares, the Company
agreed (i) to file with the Securities and Exchange Commission (the "SEC") a
Registration Statement (the "Two-year Shelf Registration Statement") providing
for the resale of all of the Series B Preferred
21
<PAGE>
Shares (the "Registrable Securities") held by such holders, (ii) to use all
commercially reasonable efforts to have such Two-year Shelf Registration
Statement declared effective by the SEC as soon as practical thereafter and
(iii) to use all commercially reasonable efforts to keep the Two-year Shelf
Registration Statement continuously effective for a period of two years or such
shorter period expiring when such Registrable Securities have been sold
pursuant to such registration statement or are to be sold in compliance with
Rule 144 (as promulgated by the SEC) without volume limitations. If, at any
time, a shelf registration statement is not effective, upon receipt of a
written request ("Registration Request") from holders holding Registrable
Securities having an aggregate expected offering price of at least $10 million
(or holders holding all remaining Registrable Securities), the Company agreed
to use all commercially reasonable efforts to file with the SEC, within 45 days
after receipt of such Registration Request, a registration statement ("Demand
Registration Statement") for the sale of all Registrable Securities held by the
requesting holders and keep such Demand Registration Statement continuously
effective for one year following the date such Demand Registration Statement is
declared effective or such shorter period expiring when such Registrable
Securities have been sold pursuant to such registration statement or are to be
sold in compliance with Rule 144 (as promulgated by the SEC) without volume
limitations. The Company is required to file up to three Demand Registration
Statements unless, under certain circumstances it delivers Series B Preferred
Shares in lieu of cash in redemption of Series B Preferred Units, in which case
it may be required to file additional Demand Registration Statements. Anytime
the Company proposes to file a registration statement with respect to an
offering solely for cash for the account of any of its security holders of any
class of equity security and a Two-year Shelf Registration Statement has been
requested but is not otherwise effective, then the Company may be required,
under certain circumstances, to offer the holders of the Registrable Securities
the opportunity to include such number of shares of Registrable Securities as
each such holder may have otherwise required in connection with a Two-year
Shelf Registration Statement.
Pursuant to the Registration Rights Agreement, the Company has agreed to
pay all expenses of effecting the registration of the Series B Preferred Shares
(other than brokerage and underwriting commissions and taxes of any kind,
certain legal fees and other expenses incurred by the holders of the Registrable
Securities). The Company also has agreed to indemnify each holder of Registrable
Securities and its officers, directors and any person who controls any holder of
Registrable Securities against certain losses, claims, damages, liabilities and
expenses arising under the securities laws in connection with any registration
statement effected pursuant to the Registration Rights Agreement (a
"Registration Statement"), subject to certain limitations. In addition, each
holder of Registrable Securities has agreed to indemnify the Company, its
directors and its officers who sign the Registration Statement, any underwriter
and any person who controls the Company or such underwriter against all losses,
claims, damages, liabilities and expenses, subject to certain limitations,
arising under the securities laws insofar as such loss, claim, damage, liability
or expense relates to written information furnished to the Company by such
holder for use in the Registration Statement or prospectus or an amendment or
supplement thereto.
COMMON STOCK REPURCHASE PROGRAM
One May 11, 1999, the Board of Directors of the Company authorized a
common stock repurchase program pursuant to which the Company would be
authorized to purchase up to $50 million of currently issued and outstanding
common stock of the Company, par value $0.01 per share ("Common Stock"). Any
repurchases will be made on the open market at prevailing prices. This
authority may be exercised from time to time and in such amounts as market
conditions warrant. The Company currently has approximately 28.5 million shares
of Common Stock outstanding. Any purchases are intended to make appropriate
adjustments to the Company's capital structure.
PROPERTIES BEING MARKETED FOR SALE
At March 31, 1999, the Company had six apartment Communities for sale with
a net book value of approximately $52.2 million. The Company does not
anticipate incurring a loss on any individual apartment Community sale.
Proceeds from the sale of the Communities will be used to fund future
development. The six apartment Communities held for sale represented
approximately 5.7% of property operating income for the Company for the three
ended March 31, 1999.
22
<PAGE>
DEVELOPMENT ACTIVITY
The Company's construction in progress at March 31, 1999 is 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 Lake II -- Raleigh, NC (1) ................ 144 $ 10,200 $ 9,006 $ 1,194 Q2 1999
Summit Doral -- Miami, FL (1) .................... 260 22,800 18,894 3,906 Q2 1999
Summit Westwood -- Raleigh, NC (1) ............... 354 24,400 22,089 2,311 Q3 1999
Summit Fair Lakes II -- Fairfax, VA (1) .......... 160 14,200 9,649 4,551 Q3 1999
Summit Sedgebrook II -- Charlotte, NC (1) ........ 120 7,800 5,861 1,939 Q3 1999
Summit New Albany II -- Columbus, Ohio ........... 127 9,800 1,923 7,877 Q4 1999
Summit Largo -- Largo, MD ........................ 217 18,000 6,598 11,402 Q1 2000
Summit Hunter's Creek -- Orlando, FL ............. 270 18,600 4,257 14,343 Q1 2000
Summit Grandview -- Charlotte, NC ................ 266 45,500 6,059 39,441 Q2 2000
Summit Devin -- Atlanta, GA ...................... 292 22,200 4,804 17,396 Q2 2000
--- -------- -------- --------
2,210 193,500 89,140 104,360
Other development and construction costs (2) ..... -- -- 31,638 --
----- -------- -------- --------
2,210 $193,500 $120,778 $104,360
===== ======== ======== ========
</TABLE>
- ---------
(1) These communities were in lease-up at March 31, 1999.
(2) Consists primarily of land held for development and other predevelopment
costs.
Estimated costs to complete the development Communities represent
substantially all of the Company's material commitments for capital
expenditures.
CERTAIN FACTORS AFFECTING THE PERFORMANCE OF DEVELOPMENT COMMUNITIES
The Company 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 Company 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 Company 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
costs or liabilities 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 Company is conducting feasibility and other
pre-development work for eight Communities. The Company 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 Company 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.
YEAR 2000
YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT
The Company supports the exchange of information relating to the Year 2000
issue and designates the following information as the Year 2000 Readiness
Disclosure within the meaning of the Year 2000 Information and Readiness
Disclosure Act. Information set forth herein regarding the Year 2000 compliance
of non-Company products and services are "republications" under the Year 2000
Information and Readiness Disclosure Act and are based on information supplied
by other companies about the products and services they offer. The Company has
not independently verified the contents of these republications and takes no
responsibility for the accuracy or completeness of information contained in
such republications.
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<PAGE>
INTRODUCTION
The Securities and Exchange Commission has asked all public companies to
provide disclosure regarding their Year 2000 readiness. The term "Year 2000
issue" is a general term used to describe various problems that may result from
the improper processing by computer systems of dates after 1999. These problems
arise from the inability of some hardware and software to distinguish dates
before the year 2000 from dates in and after the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations. The
Year 2000 issue affects virtually all companies and all organizations.
The Company's efforts to address its Year 2000 issues are focused in the
following three areas: (i) reviewing and taking any necessary steps to attempt
to correct the Company's computer information systems (i.e., software
applications and hardware platforms), (ii) evaluating and making any necessary
modifications to other computer systems that do not relate to information
technology but include embedded technology, such as telecommunications,
security, HVAC, elevator, fire and safety systems, and (iii) communicating with
certain significant third-party service providers to determine whether there
will be any interruption in their systems that could affect the Company.
THE COMPANY'S STATE OF READINESS
The Company has developed a four phase plan to address its Year 2000
issues (the "Year 2000 Plan"). The four phases are (i) Awareness, (ii)
Assessment, (iii) Remediation and Implementation and (iv) Testing.
AWARENESS
The Company has made the relevant employees, including its property
managers, aware of the Year 2000 issue and collected information from such
employees regarding systems that the Company anticipates may be affected.
Management will oversee the Company's progress with respect to the
implementation of the Year 2000 Plan. In addition, the Year 2000 Plan has been
subject to review of the Audit Committee of the Board of Directors.
ASSESSMENT
The Company has substantially completed an assessment of its standard
computer information systems and is now taking the further necessary steps to
make its core computer information systems, in those situations in which the
Company is required to do so, Year 2000 compliant. See "Remediation and
Implementation" below. As of April 30, 1999, the Company is 80% complete with
its assessment of the Year 2000 compliance in regard to the Company's other
(i.e., non-core) standard computer information systems. Year 2000 analysis
software is being used to perform this assessment and to determine the steps
needed for remediation. See "Remediation and Implementation" below. The Company
expects this process to be completed by June 30, 1999.
In addition, the Company is currently evaluating and assessing its other
computer systems that do not relate to information technology but include
embedded technology, such as telecommunications, security, HVAC, elevator, fire
and safety systems, and expects that its assessment will be completed by the
second quarter of 1999. As of April 30, 1999, the assessment is 60% complete
with no major deficiencies noted. The Company is aware that such systems
contain embedded chips that are difficult to identify and test and may require
complete replacement because they cannot be repaired. Failure of the Company to
identify or remediate any embedded chips (either on an individual or aggregate
basis) on which significant business operations depend, such as phone systems,
could have a material adverse impact on the Company's business, financial
condition and results of operations.
The Company rents apartments in its Communities to individuals and does
not have a single customer or group of customers who rents a significant number
of apartments. The Company's primary purchases, except utilities (e.g.
electricity, natural gas and telecommunications services), are building-related
products (e.g., carpets, paint and blinds) and services (e.g., lawn care
services), all of which are available from numerous suppliers. The Company is
in the process of attempting to obtain written verification from utility
providers that they will be Year 2000 complaint. The Company's primary
financial service providers are its primary bank and payroll processor. The
primary bank has provided written verification to the Company that it will be
Year 2000 compliant. The Company implemented the payroll processor Year 2000
upgrade in the fourth quarter of 1998. For the foregoing reasons, the Company
does not believe that there is a significant risk related to the failure of
residents, vendors or third-party goods or service providers to prepare for the
Year 2000; however, the costs and timing of third-party Year 2000 compliance is
not within the Company's control and no assurances can be given with respect to
the cost or timing of such efforts or the potential effects of any failure to
comply.
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<PAGE>
REMEDIATION AND IMPLEMENTATION
The Company's primary uses of software systems are its corporate
accounting and property management software. The Company's corporate accounting
system is widely used in the real estate industry. A version upgrade, installed
in the second quarter of 1998, is designed to be Year 2000 compliant. The
Company completed the replacement of its current property management software
in October 1998 with a new software system that is also designed to be Year
2000 compliant. This new software is also widely used in the real estate
industry. The Company has received written verification from the vendors of
each of the corporate accounting and property management systems that the
relevant software is Year 2000 compliant. The Company had previously planned
both the upgrade of the corporate accounting system and implementation of the
new property management system, and such changes would have been undertaken
without regard to Year 2000 remediation issues. Accordingly, the Company has
not deferred any planned information or software projects due to such Year 2000
projects, and the Company is not treating the costs of the above-referenced
changes as Year 2000-related expenses.
The remediation of non-core standard computer information systems will be
accomplished through a series of minor hardware upgrades and software patches.
The Company expects that the implementation of these upgrades will be completed
on or before July 31, 1999.
TESTING
To attempt to confirm that its computer systems are Year 2000 compliant,
the Company expects to perform limited testing of its computer information
systems and its other computer systems that do not relate to information
technology but include embedded technology; however, unless Year 2000 issues
arise in the course of its limited testing, the Company will rely on the
written verification received from each vendor of its computer systems that the
relevant system is Year 2000 compliant. Nevertheless, there can be no assurance
that the computer systems on which the Company's business relies will correctly
distinguish dates before the year 2000 from dates in and after the year 2000.
Any such failures could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company began
testing during the fourth quarter of 1998 and expects that its testing of
accounting and property management systems will be complete by June 30, 1999.
These tests will be supplemented with additional written representations from
these key vendors.
COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
Based on current information from its review to date, the Company budgeted
$500,000 for the cost of repairing, updating and replacing its standard
computer information systems. Because the Company's Year 2000 assessment is
ongoing and additional funds may be required as a result of future findings,
the Company's current budget amounts may increase as a result of unanticipated
delays or preparedness issues. While the Company's efforts to address its Year
2000 issues will involve additional costs, the Company believes, based on
available information, that these costs will not have a material adverse effect
on its business, financial condition or results of operations. The Company
expects to fund the costs of addressing the Year 2000 issue from cash flows
resulting from operations. While the Company believes that it will be Year 2000
compliant by December 31, 1999, if these efforts are not completed on time, or
if the costs associated with updating or replacing the Company's computer
systems exceeds the Company's estimates, the Year 2000 issue could have a
material adverse effect on the Company's business, financial condition and
results of operations.
RISKS PRESENTED BY YEAR 2000 ISSUES
The Company is still in the process of evaluating potential disruptions or
complications that might result from Year 2000-related problems; however, at
this time the Company has not identified any specific business functions that
are likely to suffer material disruption as a result of Year-2000 related
events. It is possible, however, that the Company may identify business
functions in the future that are specifically at risk of Year 2000 disruption.
The absence of any such determination as of the date of this report represents
only the Company's current status of evaluating potential Year-2000 related
problems and facts presently known to the Company, and should not be construed
to mean that there is no risk of Year-2000 related disruption. Moreover, due to
the unique and pervasive nature of the Year 2000 issue, it is not possible to
anticipate each of the wide variety of Year 2000 events, particularly outside
of the Company, that might arise in a worst case scenario which might have a
material adverse impact on the Company's business, financial condition and
results of operations. Risks involved with not solving the Year 2000 issue
include, but are not limited to, the following: loss of local or regional
electric power, loss of telecommunications services, delays or cancellations of
shipping or transportation, general deterioration of economic conditions
resulting from Year 2000 issues, and inability of banks, vendors and other
third parties with whom the Company does business to resolve their own Year
2000 problems.
25
<PAGE>
THE COMPANY'S CONTINGENCY PLANS
The Company intends to develop contingency plans for significant business
risks identified by the Company that might result from Year-2000 related
events. Because the Company has not yet identified any specific business
function that will be materially at risk of significant Year-2000 related
disruptions, and because a full assessment of the Company's risk from potential
Year 2000 failures is still in process, the Company has not yet developed
detailed contingency plans specific to Year 2000 problems. In the event that
the Company concludes that one or more contingency plans are required,
development of such contingency plans is currently scheduled to occur no later
than June 30, 1999 or as otherwise appropriate.
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 sale of property, plus real estate related depreciation
and amortization and after adjustments for unconsolidated partnerships and
joint ventures. The Company 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
Company'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, dividends 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 Company's financial performance
or to cash flows from operating activities (determined in accordance with GAAP)
as a measure of the Company's liquidity, nor are they indicative of funds
available to fund the Company's cash needs, including its ability to make
dividends/distributions. The Company believes Funds from Operations and Funds
Available for Distribution are helpful to investors as measures of the
performance of the Company because, along with cash flows from operating
activities, financing activities and investing activities, they provide
investors with an understanding of the ability of the Company to incur and
service debt and make capital expenditures. Funds from Operations and Funds
Available for Distribution for the three months ended March 31, 1999 and 1998
are calculated as follows (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Net income ................................................... $ 7,781 $ 5,739
Extraordinary items, net of minority interest ................ -- 158
Minority interest of Unitholders in Operating Partnership .... 1,218 995
----------- -----------
Adjusted net income ......................................... 8,999 6,892
Depreciation:
Real estate assets .......................................... 8,226 6,521
Real estate joint venture ................................... 183 --
----------- -----------
Funds from Operations ........................................ 17,408 13,413
Recurring capital expenditures (1) .......................... (1,039) (843)
----------- -----------
Funds Available for Distribution ............................. $ 16,369 $ 12,570
=========== ===========
Non-recurring capital expenditures (1)(2) .................... $ 891 $ 763
=========== ===========
Cash Flow Provided By (Used In):
Operating Activities ........................................ $ 14,401 $ 14,160
Investing Activities ........................................ (14,723) (54,311)
Financing Activities ........................................ 958 40,921
=========== ===========
Weighted average shares and units outstanding-diluted ........ 32,769,514 28,147,380
=========== ===========
</TABLE>
- ---------
(1) Recurring capital expenditures are expected to be funded from operations
and consist primarily of exterior painting, carpets, 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
26
<PAGE>
included in the calculation of Funds Available for Distribution. The
increase in recurring capital expenditures for the three months ended March
31, 1999 compared to 1998 was primarily due to the Company's change in
accounting policy to capitalize carpets starting January 1, 1999. Without
carpet expenditures, recurring capital expenditures for the three months
ended March 31, 1999 would have been $700,000.
(2) Non-recurring capital expenditures include renovations in the amount of
$422,000 in 1999 and $261,000 in 1998; $166,000 and $51,000 for access
gates and security fences in 1999 and 1998, respectively; $140,000 and
$265,000 for other revenue enhancement expenditures in 1999 and 1998,
respectively and $186,000 for improvements at Summit Norcroft I completed
in conjunction with the development of Summit Norcroft II in 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There has been no material change in the Company's market risk since the filing
of the Company's Annual Report on Form 10-K for the year ended December 31,
1998.
27
<PAGE>
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C>
3.1 Articles Supplementary to the Articles of Amendment and Restatement of Summit Properties Inc.
designating 8.95% Series B Cumulative Redeemable Perpetual Preferred Stock of the Company dated
April 29, 1999 (filed herewith).
10.1 7.59% Medium-Term Note due on March 16, 2009 in principal amount of $25,000,000 issued by
Summit Properties Partnership, L.P. on March 18, 1999 (Incorporated by reference to Exhibit 4.1 of
Summit Properties Partnership, L.P.'s Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1999 File No. 000-22411).
10.2 Amendment No. 14 to the Limited Partnership Agreement of the Operating Partnership (Incorporated
by reference to Exhibit 3.1 of Summit Properties Partnership, L.P.'s Quarterly Report on Form 10Q for
the quarterly period ended March 31, 1999, File No. 000-22411).
10.3 Amendment No. 15 to the Limmited Partnership Agreement of the Operating Partnership (Incorporated
by reference to Exhibit 3.2 of Summit Properties Partnership, L.P.'s Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1999, File No. 000-22411).
10.4 Amendment No. 16 to the Limited Partnership Agreement of the Operating Partnership (Incorporated
by reference to Exhibit 3.3 of Summit Properties Partnership, L.P.'s Quarterly Report on Form 10Q for
the quarterly period ended March 31, 1999, File No. 000-22411).
12.1 Statement Regarding Calculation of Ratio of Earnings to Fixed Charges for the Three Months ended
March 31, 1999 (filed herewith).
27.1 Financial Data Schedule--Three Months ended March 31, 1999 (for SEC use only) (filed herewith).
</TABLE>
(b) Reports on Form 8-K
None
28
<PAGE>
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 INC.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------------ ---------------------------------------------- -------------
<S> <C> <C>
/S/ WILLIAM F. PAULSEN President and Chief Executive Officer May 17, 1999
----------------------------------
WILLIAM F. PAULSEN
/S/ MICHAEL L. SCHWARZ Executive Vice President and Chief Financial May 17, 1999
----------------------------------
MICHAEL L. SCHWARZ Officer
</TABLE>
29
<PAGE>
EXHIBIT INDEX
(a) Exhibits
<TABLE>
<S> <C>
3.1 Articles Supplementary to the Articles of Amendment and Restatement of Summit Properties Inc.
designating 8.95% Series B Cumulative Redeemable Perpetual Preferred Stock of the Company dated
April 29, 1999 (filed herewith).
10.1 7.59% Medium-Term Note due on March 16, 2009 in principal amount of $25,000,000 issued by
Summit Properties Partnership, L.P. on March 18, 1999 (Incorporated by reference to Exhibit 4.1 of
Summit Properties Partnership, L.P.'s Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1999 File No. 000-22411).
10.2 Amendment No. 14 to the Limited Partnership Agreement of the Operating Partnership (Incorporated
by reference to Exhibit 3.1 of Summit Properties Partnership, L.P.'s Quarterly Report on Form 10Q for
the quarterly period ended March 31, 1999, File No. 000-22411).
10.3 Amendment No. 15 to the Limmited Partnership Agreement of the Operating Partnership (Incorporated
by reference to Exhibit 3.2 of Summit Properties Partnership, L.P.'s Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1999, File No. 000-22411).
10.4 Amendment No. 16 to the Limited Partnership Agreement of the Operating Partnership (Incorporated
by reference to Exhibit 3.3 of Summit Properties Partnership, L.P.'s Quarterly Report on Form 10Q for
the quarterly period ended March 31, 1999, File No. 000-22411).
12.1 Statement Regarding Calculation of Ratio of Earnings to Fixed Charges for the Three Months ended
March 31, 1999 (filed herewith).
27.1 Financial Data Schedule--Three Months ended March 31, 1999 (for SEC use only) (filed herewith).
</TABLE>
30
Exhibit 3.1
SUMMIT PROPERTIES INC.
ARTICLES SUPPLEMENTARY
3,400,000 SHARES
8.95% SERIES B CUMULATIVE REDEEMABLE PERPETUAL PREFERRED STOCK
Summit Properties Inc., a Maryland corporation (the "Company"),
hereby certifies to the State Department of Assessments and Taxation of Maryland
(the "Department") that:
FIRST: Pursuant to Article III of the Articles of Amendment and
Restatement of the Company heretofore filed with the Department, as amended (the
"Charter"), 25,000,000 shares of preferred stock par value $.01 per share
("Preferred Stock") have been authorized as a separate class of stock.
SECOND: Pursuant to authority expressly vested in the Board of
Directors of the Company (the "Board of Directors") pursuant to Article III of
the Charter and by Section 2-208(a) of the Maryland General Corporation Law (the
"MGCL"), the Board of Directors by resolutions duly adopted on April 26, 1999
designated and authorized the issuance of a maximum of 3,400,000 shares of 8.95%
Series B Cumulative Redeemable Perpetual Preferred Stock, set all of the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, terms and conditions of redemption
and other terms and conditions of such series of Preferred Stock, and designated
the same as the "8.95% Series B Cumulative Redeemable Perpetual Preferred
Stock".
THIRD: The 8.95% Series B Cumulative Redeemable Perpetual
Preferred Stock of the Company created by the resolutions duly adopted by the
Board of Directors of the Company and referred to in Article SECOND of these
Articles Supplementary shall have the following designation, number of shares,
preferences and other rights, voting powers, restrictions and limitation as to
dividends, qualifications, terms and conditions of redemption and other terms
and conditions:
SECTION 1. Designation and Number. A series of Preferred Stock,
designated the "8.95% Series B Cumulative Redeemable Perpetual Preferred Stock"
(the "Series B Preferred Stock") is hereby established. The number of shares of
Series B Preferred Stock shall be 3,400,000.
SECTION 2. Rank. The Series B Preferred Stock will, with respect
to distributions and rights upon voluntary or involuntary liquidation,
winding-up or dissolution of the Company, rank senior to all classes or series
of Common Stock (as defined in the Charter) and to all classes or series of
equity securities of the Company now or hereafter authorized, issued or
outstanding (including, without limitation, the Series A Junior Preferred Stock
(as hereinafter defined) and any equity securities ranking on parity with such
Series A Junior
<PAGE>
Preferred Stock), other than any class or series of equity securities of the
Company expressly designated as ranking on a parity with or senior to the Series
B Preferred Stock as to distributions and rights upon voluntary or involuntary
liquidation, winding-up or dissolution of the Company. For purposes of these
Articles Supplementary, the term "Parity Stock" shall be used to refer to any
class or series of equity securities of the Company now or hereafter authorized,
issued or outstanding expressly designated by the Company to rank on a parity
with Series B Preferred Stock with respect to distributions and rights upon
voluntary or involuntary liquidation, winding-up or dissolution of the Company.
The term "equity securities" does not include convertible debt securities, which
will rank senior to the Series B Preferred Stock.
SECTION 3. Distributions. (a) Payment of Distributions. Subject
to the rights of holders of Parity Stock and holders of equity securities
ranking senior to the Series B Preferred Stock, holders of Series B Preferred
Stock shall be entitled to receive, when, as and if declared by the Board of
Directors of the Company, out of funds legally available for the payment of
distributions, cumulative preferential cash distributions at the rate per annum
of 8.95% of the $25.00 liquidation preference per share of Series B Preferred
Stock; provided, however, that in addition to the foregoing, each holder of a
share of Series B Preferred Stock shall, as of the date of its issuance, be
entitled to receive, when, as and if declared by the Board of Directors of the
Company, out of funds legally available for the payment of distributions, a
preferential cash distribution in an amount equal to any accrued and unpaid
quarterly distributions attributable to the applicable Series B Preferred Unit
(as defined in the Amended and Restated Agreement of Limited Partnership of
Summit Property Partnership, L.P., as amended through the date hereof (the
"Partnership Agreement")), whether or not declared, up to the date such Series B
Preferred Unit was validly exchanged into such share of Series B Preferred Stock
in accordance with the provisions of such Partnership Agreement. Such
distributions shall be cumulative, shall accrue from the original date of
issuance and will be payable: (i) quarterly in arrears, on the last day (or, if
not a Business Day (as hereinafter defined), the next succeeding Business Day)
of each of March, June, September and December of each year commencing on the
first of such dates to occur after the original date of issuance; and (ii) in
the event of a redemption, on the redemption date (each a "Preferred Stock
Distribution Payment Date"). The amount of the distribution payable for any
period will be computed on the basis of a 360-day year of twelve (12) 30-day
months and for any period shorter than a full quarterly period for which
distributions are computed, the amount of the distribution payable will be
computed on the basis of the actual number of days elapsed in such period. If
any date on which distributions are to be made on the Series B Preferred Stock
is not a Business Day, then payment of the distribution to be made on such date
will be made on the next succeeding day that is a Business Day (and without any
interest or other payment in respect of any such delay) except that, if such
Business Day is in the next succeeding calendar year, such payment shall be made
on the immediately preceding Business Day, in each case with the same force and
effect as if made on such date. Distributions on the Series B Preferred Stock
will be made to the holders of record of the Series B Preferred Stock on the
relevant record dates to be fixed by the Board of Directors of the Company,
which record dates shall be the same day as the record date for any dividend
payable on the Common Stock (as defined in
2
<PAGE>
the Charter) with respect to the same period or, if no such Common Stock
dividend is payable, then such record date shall be the twentieth (20th) day of
the calendar month in which the applicable Preferred Stock Distribution Payment
Date falls or on such earlier date designated on at least ten (10) days' notice
by the Board of Directors as the record date for such distribution that is not
more than thirty (30) nor less than ten (10) days prior to such Preferred Stock
Distribution Payment Date (each a "Distribution Record Date").
The term "Business Day" shall mean each day, other than a
Saturday or Sunday, which is not a day on which banking institutions in New
York, New York are authorized or required by law, regulation or executive order
to close.
(b) No dividends on shares of Series B Preferred Stock shall be
authorized by the Board of Directors of the Company or paid or set apart for
payment by the Company at any such time as the terms and provisions of any
agreement of the Company, including any agreement relating to its indebtedness,
prohibits such authorization, payment or setting apart for payment or provides
that such authorization, payment or setting apart for payment would constitute a
breach thereof or a default thereunder, or to the extent that such authorization
or payment shall be restricted or prohibited by law. In determining whether a
distribution (other than upon voluntary liquidation), by dividend, redemption or
other acquisition of shares of stock of the Company or otherwise, is permitted
under the MGCL, amounts that would be needed, if the Company were to be
dissolved at the time of the distribution, to satisfy the preferential rights
upon dissolution of holder of shares of Series B Preferred Stock will not be
added to the Company's total liabilities.
(c) Distributions Cumulative. Notwithstanding the foregoing,
distributions on the Series B Preferred Stock will accrue whether or not the
terms and provisions of any agreement of the Company, including any agreement
relating to its indebtedness at any time prohibit the current payment of
distributions, whether or not the Company has earnings, whether or not there are
funds legally available for the payment of such distributions and whether or not
such distributions are authorized or declared. Accrued but unpaid distributions
on the Series B Preferred Stock will accumulate as of the Preferred Stock
Distribution Payment Date on which they first become payable. Distributions on
account of arrears for any past distribution periods may be declared and paid at
any time, without reference to a regular Preferred Stock Distribution Payment
Date to holders of record of the Series B Preferred Stock on the record date
fixed by the Board of Directors, which date shall not exceed thirty (30) days
prior to the payment date. Accumulated and unpaid distributions will not bear
interest.
(d) Priority as to Distributions. (i) So long as any Series B
Preferred Stock is outstanding, no distribution of cash or other property shall
be authorized, declared, paid or set apart for payment on or with respect to any
class or series of Common Stock or any class or series of other stock of the
Company ranking junior as to the payment of distributions or rights upon
voluntary or involuntary dissolution, liquidation or winding up of the
Partnership to the Series B Preferred Stock (such Common Stock or other junior
stock, including the Series A Junior Participating Cumulative Preferred Stock
classified and designated pursuant to those
3
<PAGE>
certain Articles Supplementary relating thereto and approved for recording by
the Department on December 15, 1998 (the "Series A Junior Preferred Stock"),
collectively, "Junior Stock"), nor shall any cash or other property be set aside
for or applied to the purchase, redemption or other acquisition for
consideration of any Series B Preferred Stock, any Parity Stock or any Junior
Stock, unless, in each case, all distributions accumulated on all Series B
Preferred Stock and all classes and series of outstanding Parity Stock have been
paid in full. The foregoing sentence will not prohibit: (A) distributions
payable solely in Junior Stock; (B) the conversion of Junior Stock or Parity
Stock into Junior Stock; and (C) purchase by the Company of such Series B
Preferred Stock, Parity Stock or Junior Stock pursuant to Section 4.5.7 of the
Charter.
(ii) So long as distributions have not been paid in full
(or a sum sufficient for such full payment is not irrevocably deposited in trust
for payment) upon the Series B Preferred Stock, all distributions authorized and
declared on the Series B Preferred Stock and all classes or series of
outstanding Parity Stock with respect to distributions shall be authorized and
declared so that the amount of distributions authorized and declared per share
of Series B Preferred Stock and such other classes or series of Parity Stock
shall in all cases bear to each other the same ratio that accrued distributions
per share on the Series B Preferred Stock and such other classes or series of
Parity Stock (which shall not include any accumulation in respect of unpaid
distributions for prior distribution periods if such class or series of Parity
Stock does not have cumulative distribution rights) bear to each other. Any
distribution payment made on the Series B Preferred Stock shall be credited
against the earliest accrued but unpaid distribution due with respect to such
Series B Preferred Stock which remains payable.
(e) No Further Rights. Holders of Series B Preferred Stock shall
not be entitled to any distributions, whether payable in cash, other property or
otherwise, in excess of the full cumulative distributions described herein.
SECTION 4. Liquidation Preference. (a) Payment of Liquidating
Distributions. Subject to the rights of holders of Parity Stock with respect to
rights upon any voluntary or involuntary liquidation, dissolution or winding-up
of the Company and subject to equity securities ranking senior to the Series B
Preferred Stock with respect to rights upon any voluntary or involuntary
liquidation, dissolution or winding-up of the Company, the holders of Series B
Preferred Stock shall be entitled to receive out of the assets of the Company
legally available for distribution or the proceeds thereof, after payment or
provision for debts and other liabilities of the Company, but before any payment
or distributions of the assets shall be made to holders of Common Stock or any
other class or series of shares of the Company that ranks junior to the Series B
Preferred Stock as to rights upon liquidation, dissolution or winding-up of the
Company, an amount equal to the sum of: (i) a liquidation preference of $25.00
per share of Series B Preferred Stock; and (ii) an amount equal to any
accumulated and unpaid distributions thereon, whether or not declared, to the
date of payment. In the event that, upon such voluntary or involuntary
liquidation, dissolution or winding-up, there are insufficient assets to permit
full payment of liquidating distributions to the holders of Series B
4
<PAGE>
Preferred Stock and any Parity Stock as to rights upon liquidation, dissolution
or winding-up of the Company, all payments of liquidating distributions on the
Series B Preferred Stock and such Parity Stock shall be made so that the
payments on the Series B Preferred Stock and such Parity Stock shall in all
cases bear to each other the same ratio that the aggregate amounts to which such
holder of the Series B Preferred Stock and such other Parity Stock (which shall
not include any accumulation in respect of unpaid distributions for prior
distribution periods if such Parity Stock does not have cumulative distribution
rights) would otherwise be respectively entitled upon liquidation, dissolution
or winding-up of the Company bear to each other.
(b) Notice. Written notice of any such voluntary or involuntary
liquidation, dissolution or winding-up of the Company, stating the payment date
or dates when, and the place or places where, the amounts distributable in such
circumstances shall be payable, shall be given by (i) fax and (ii) by first
class mail, postage pre-paid, not less than thirty (30) and not more than sixty
(60) days prior to the payment date stated therein, to each record holder of the
Series B Preferred Stock at the respective addresses of such holders as the same
shall appear on the share transfer records of the Company.
(c) No Further Rights. After payment of the full amount of the
liquidating distributions to which they are entitled, the holders of Series B
Preferred Stock will have no right or claim to any of the remaining assets of
the Company.
(d) Consolidation, Merger or Certain Other Transactions. The
voluntary sale, conveyance, lease, exchange or transfer (for cash, shares of
stock, securities or other consideration) of all or substantially all of the
property or assets of the Company to, or the consolidation or merger or other
business combination of the Company with or into, any other corporation, trust
or other entity (or of any corporation, trust or other entity with or into the
Company) or a statutory share exchange shall not be deemed to constitute a
liquidation, dissolution or winding-up of the Company.
SECTION 5. Optional Redemption. (a) Right of Optional Redemption.
Subject to Article IV of the Charter as supplemented by Section 7 hereof, which
shall apply in its entirety to the Series B Preferred Stock, the Series B
Preferred Stock may not be redeemed prior to April 28, 2004. On or after such
date, the Company shall have the right to redeem the Series B Preferred Stock,
in whole or in part, at any time or from time to time, upon not less than thirty
(30) nor more than sixty (60) days' written notice, at a redemption price,
payable in cash, equal to $25.00 per share of Series B Preferred Stock plus
accumulated and unpaid distributions, whether or not declared, to the date of
redemption. If fewer than all of the outstanding shares of Series B Preferred
Stock are to be redeemed pursuant to this Section 5(a), the shares of Series B
Preferred Stock to be redeemed shall be selected pro rata (as nearly as
practicable without creating fractional shares).
(b) Limitation on Redemption. (i) The redemption price of the
Series B Preferred Stock (other than the portion thereof consisting of
accumulated but unpaid distributions and other than for redemptions pursuant to
Article IV of the Charter as
5
<PAGE>
supplemented by Section 7 hereof) will be payable solely out of the sale
proceeds of capital stock of the Company and from no other source. For purposes
of the preceding sentence, "capital stock" means any equity securities
(including Common Stock and Preferred Stock), shares, depositary receipts,
participation or other ownership interests (however designated) and any rights
(other than debt securities convertible into or exchangeable for equity
securities) or options to purchase any of the foregoing.
(ii) Subject to Article IV of the Charter as supplemented
by Section 7 hereof, which shall apply in its entirety to Series B Preferred
Stock, the Company may not redeem fewer than all of the outstanding shares of
Series B Preferred Stock unless all accumulated and unpaid distributions have
been paid on all outstanding Series B Preferred Stock for all quarterly
distribution periods terminating on or prior to the date of redemption.
(c) Procedures for Redemption. (i) Notice of redemption will be
(y) faxed, and (z) mailed by the Company, postage prepaid, not less than thirty
(30) nor more than sixty (60) days prior to the redemption date, addressed to
the respective holders of record of the Series B Preferred Stock to be redeemed
at their respective addresses as they appear on the transfer records of the
Company. No failure to give or defect in such notice shall affect the validity
of the proceedings for the redemption of any Series B Preferred Stock except as
to the holder to whom such notice was defective or not given. In addition to any
information required by law or by the applicable rules of any exchange upon
which the Series B Preferred Stock may be listed or admitted to trading, each
such notice shall state: (A) the redemption date; (B) the redemption price; (C)
the number of shares of Series B Preferred Stock to be redeemed; (D) the place
or places where such shares of Series B Preferred Stock are to be surrendered
for payment of the redemption price; (E) that distributions on the Series B
Preferred Stock to be redeemed will cease to accumulate on such redemption date;
and (F) that payment of the redemption price and any accumulated and unpaid
distributions will be made upon presentation and surrender of such Series B
Preferred Stock. If fewer than all of the shares of Series B Preferred Stock
held by any holder are to be redeemed, the notice mailed to such holder shall
also specify the number of shares of Series B Preferred Stock held by such
holder to be redeemed.
(ii) If the Company gives a notice of redemption in
respect of Series B Preferred Stock (which notice will be irrevocable) then, by
12:00 noon, New York City time, on the redemption date, the Company will deposit
irrevocably in trust for the benefit of the Series B Preferred Stock being
redeemed funds sufficient to pay the applicable redemption price, plus any
accumulated and unpaid distributions, whether or not declared, if any, on such
shares to the date fixed for redemption, without interest, and will give
irrevocable instructions and authority to pay such redemption price and any
accumulated and unpaid distributions, if any, on such shares to the holders of
the Series B Preferred Stock upon surrender of the certificate evidencing the
Series B Preferred Stock by such holders at the place designated in the notice
of redemption. If fewer than all Series B Preferred Stock evidenced by any
certificate is being redeemed, a new certificate shall be issued upon surrender
of the certificate evidencing all Series B Preferred Stock, evidencing the
unredeemed Series B Preferred Stock
6
<PAGE>
without cost to the holder thereof. On and after the date of redemption,
distributions will cease to accumulate on the Series B Preferred Stock or
portions thereof called for redemption, unless the Company defaults in the
payment or deposit, in accordance with the foregoing, of the redemption price.
If any date fixed for redemption of Series B Preferred Stock is not a Business
Day, then payment of the redemption price payable on such date will be made on
the next succeeding day that is a Business Day (and without any interest or
other payment in respect of any such delay) except that, if such Business Day
falls in the next calendar year, such payment will be made on the immediately
preceding Business Day, in each case with the same force and effect as if made
on such date fixed for redemption. If payment of the redemption price or any
accumulated or unpaid distributions in respect of the Series B Preferred Stock
is improperly withheld or refused and not paid by the Company, distributions on
such Series B Preferred Stock will continue to accumulate from the original
redemption date to the date of payment, in which case the actual payment date
will be considered the date fixed for redemption for purposes of calculating the
applicable redemption price and any accumulated and unpaid distributions.
(iii) The deposit of funds in trust for the purpose of
redeeming Series B Preferred shall be irrevocable except that:
(A) the Company shall be entitled to receive from
such bank or trust corporation the interest or other earnings, if any,
earned on any money so deposited in trust, and the holders of any shares
redeemed shall have no claim to such interest or other earnings; and
(B) any balance of monies so deposited by the
Company and unclaimed by the holders of the Series B Preferred entitled
thereto at the expiration of two years from the applicable redemption
dates shall be repaid, together with any interest or other earnings
thereon, to the Company, and after any such repayment, the holders of
the shares entitled to the funds so repaid to the Company shall look
only to the Company for payment without interest or other earnings.
(d) Status of Redeemed Stock. Any Series B Preferred Stock that
shall at any time have been redeemed shall after such redemption, have the
status of authorized but unissued Preferred Stock, without designation as to
class or series until such shares are once more designated as part of a
particular class or series by the Board of Directors.
SECTION 6. Voting Rights. (a) General. Holders of the Series B
Preferred Stock will not have any voting rights, except as set forth below.
(b) Right to Elect Directors. If the sum of (i) the number of
quarterly dividends (whether or not consecutive) payable on shares of Series B
Preferred Stock that are in arrears and (ii) the number of unpaid quarterly
distributions attributable to the applicable Series B Preferred Units for which
such shares of Series B Preferred Stock were exchanged and for which the holder
of such shares is hereunder entitled to distributions equals or exceeds
7
<PAGE>
six (a "Preferred Distribution Default"), the number of directors then
constituting the Board of Directors will be automatically increased by two (2),
and the holders of the shares of Series B Preferred Stock, voting together as a
single class with the holders of shares of any other class or series of Parity
Stock upon which like voting rights have been conferred and are exercisable (the
Series B Preferred Stock and any such other class or series, the "Voting
Preferred Stock"), will have the right to elect at any annual meeting of
stockholders or a properly called special meeting of the holders of record of at
least 20% of Voting Preferred Stock two (2) additional directors who are
nominees of any holder of Voting Preferred Stock to serve on the Board of
Directors, which right shall continue until all such accrued but unpaid
dividends have been authorized and paid or irrevocably set aside in trust for
payment. At any such special meeting, all of the holders of the Voting Preferred
Stock, by plurality vote, voting together as a single class without regard to
series, will be entitled to elect two (2) directors on the basis of one vote per
$25.00 of liquidation preference to which such Voting Preferred Stock are
entitled by their terms (excluding amounts in respect of accumulated and unpaid
dividends) and not cumulatively. At such time as all such accrued but unpaid
dividends have been authorized and paid or irrevocably set aside in trust for
payment, the right of the holders of the Voting Preferred Stock to elect such
additional two (2) directors shall cease (but subject to revesting in the event
of each and every Preferred Distribution Default), and the terms of office of
all persons elected as directors by the holders of the Voting Preferred Stock
shall forthwith terminate and the number of the Board of Directors shall
automatically be reduced accordingly. At any time after the voting power
described in this Section 6(b) shall have been so vested in the holders of
shares of Voting Preferred Stock and prior to the termination of such voting
power, the Secretary of the Company may, and upon the written request of the
holders of at least 20% of the Series B Preferred Stock (addressed to the
Secretary at the principal office of the Company) shall, call a special meeting
of the holders of the Voting Preferred Stock for the election of the two (2)
directors to be elected by them as herein provided; such call to be made by
notice similar to that provided in the Bylaws of the Company for a special
meeting of the stockholders or as required by law. If any such special meeting
required to be called as provided in the immediately preceding sentence shall
not be called by the Secretary within twenty (20) days after receipt of any such
request, then the holders of at least 20% of shares of Voting Preferred Stock
may call such meeting, upon the notice above provided, and for that purpose
shall have access to the stock books of the Company. The directors elected at
any such special meeting shall serve until the next annual meeting of the
stockholders or special meeting held in lieu thereof and until their respective
successors are duly elected and qualified, if such directorship shall not have
previously terminated as above provided. Any Preferred Stock Director may be
removed at any time with or without cause by the vote of, and shall not be
removed otherwise than by the vote of, the holders of record of two-thirds of
the outstanding shares of the Series B Preferred Stock when they have the voting
rights set forth in Section 6(b) (voting separately as a class with all other
series of Parity Stock upon which like voting rights have been conferred and are
exercisable). So long as a Preferred Dividend Default shall continue, any
vacancy in the office of a Preferred Stock Director may be filled by written
consent of the Preferred Stock Director remaining in office, or if none remains
in office, by a vote of the holders of record of a majority of the outstanding
shares of Series B Preferred Stock when they have the voting rights set forth in
Section 6(b) (voting separately as
8
<PAGE>
a class with all other series of Parity Stock upon which like voting rights have
been conferred and are exercisable). If any vacancy shall occur among the
directors elected by the holders of the Voting Preferred Stock, a successor
shall be elected by the Board of Directors upon the nomination of the
then-remaining director elected by the holders of the Voting Preferred Stock or
(if there is no such remaining director or successor thereto, by the holders of
the Voting Preferred Stock) the successor of such remaining director, to serve
until the next annual meeting of the stockholders or special meeting held in
lieu thereof and until their successor is duly elected and qualified if such
directorship shall not have previously terminated as provided above.
(c) Certain Voting Rights. So long as any Series B Preferred
Stock remains outstanding, the Company shall not, without the affirmative vote
of the holders of at least two-thirds of the Series B Preferred Stock
outstanding at the time: (i) designate or create, or increase the authorized or
issued amount of, any class or series of shares ranking senior to the Series B
Preferred Stock with respect to payment of distributions or rights upon
liquidation, dissolution or winding-up or reclassify any authorized shares of
the Company into any such shares, or create, authorize or issue any obligations
or security convertible into or evidencing the right to purchase any such
shares; (ii) issue any shares of Parity Stock to a Company Affiliate (as
hereinbelow defined), reclassify any authorized shares of the Company held by a
Company Affiliate into any such shares of Parity Stock or issue any obligation
or security convertible into or evidencing the right to purchase any such shares
of Parity Stock to a Company Affiliate (any such issuance or reclassification,
referred to as an "Affiliate Parity Placement"); provided, however, that
notwithstanding the foregoing provisions of this clause (ii) the Company may
effect any Affiliate Parity Placement to the extent such placement is upon terms
no more favorable to such Company Affiliate than those that Company, in the good
faith determination of its Board of Directors, would be willing to offer to an
unrelated party in an arm's length transaction (such placement, an "Exempt
Affiliate Parity Placement"); or (iii) either (A) consolidate, merge into or
with, or convey, transfer or lease its assets substantially as an entirety, to
any corporation or other entity, or (B) amend, alter or repeal the provisions of
the Charter (including these Articles Supplementary) or Bylaws, whether by
merger, consolidation or otherwise, in each case that would materially and
adversely affect the powers, special rights, preferences, privileges or voting
powers of the Series B Preferred Stock or the holders thereof as set forth in
these Articles Supplementary; provided, however, that with respect to the
occurrence of a merger, consolidation or a sale or lease of all of the Company's
assets as an entirety, so long as (1) the Company is the surviving entity and
the Series B Preferred Stock remains outstanding with the terms thereof
unchanged, or (2) the resulting, surviving or transferee entity is organized
under the laws of any state and substitutes the Series B Preferred Stock for
other preferred stock having substantially the same terms and same rights as the
Series B Preferred Stock, including with respect to distributions, voting rights
and rights upon liquidation, dissolution or winding-up, then the occurrence of
any such event shall be deemed not to materially and adversely to affect such
powers, special rights, preferences, privileges or voting powers of the Series B
Preferred Stock or the holders thereof and provided further that any increase in
the amount of authorized Preferred Stock or the creation or issuance of any
other class or series of Preferred Stock or obligation or security
9
<PAGE>
convertible into or evidencing the right to purchase any such Preferred Stock,
or any increase in an amount of authorized shares of each class or series, in
each case ranking either (y) junior to the Series B Preferred Stock with respect
to payment of distributions and the distribution of assets upon liquidation,
dissolution or winding-up, or (z) on a parity with the Series B Preferred Stock
with respect to payment of distributions or the distribution of assets upon
liquidation, dissolution or winding-up (other than for Affiliate Parity
Placements that are not Exempt Affiliate Parity Placements), shall be deemed not
to materially and adversely affect such powers, special rights, preferences,
privileges or voting powers of the Series B Preferred Stock or the holders
thereof. For purposes hereof (i) "Company Affiliate" shall mean any Person
controlled by, controlling or under common control with the Company; (ii)
"control" means the power to direct the actions of a Person, regardless of
whether the same shall involve an ownership interest in such Person and (iii)
"Person" means a natural person, partnership (whether general or limited),
trust, estate, association, corporation, limited liability company,
unincorporated organization, custodian, nominee or any other individual entity
in its own or representative capacity.
SECTION 7. Excess Share Provisions. (a) The Series B Preferred
Stock is subject to the provisions of Article IV of the Charter, including,
without limitation, the provision therein for the redemption of Excess Stock as
supplemented by the provisions of this Section 7(a).
(b) For purposes of applying the Ownership Limit contained
in Section 4.2 of the Charter to holders of any class or series of Preferred
Stock, (i) shares of Common Stock and all other classes and series of Preferred
Stock shall be deemed to have no value, the effect of this provision being that
the Ownership Limit with respect to each class or series of Preferred Stock
shall be 9.8% of the number of outstanding shares of such class or series of
Preferred Stock and (ii) a person shall be deemed to own any shares beneficially
owned by such person pursuant to Rule 13d-3 under the Securities Exchange Act of
1934, as amended.
SECTION 8. No Conversion Rights. The holders of the Series B
Preferred Stock shall not have any rights to convert such shares into shares of
any other class or series of stock or into any other securities of, or interest
in, the Company.
SECTION 9. No Sinking Fund. No sinking fund shall be established
for the retirement or redemption of Series B Preferred Stock.
SECTION 10. No Preemptive Rights. No holder of the Series B
Preferred Stock shall, as such holder, have any preemptive rights to purchase or
subscribe for additional shares of stock of the Company or any other security of
the Company which it may issue or sell.
FOURTH: The Series B Preferred Stock have been classified and
designated by the Board of Directors under the authority contained in the
Charter.
10
<PAGE>
FIFTH: These Articles Supplementary have been approved by the
Board of Directors in the manner and by the vote required by law.
SIXTH: The undersigned President of the Company acknowledges
these Articles Supplementary to be the corporate act of the Company and, as to
all matters or facts required to be verified under oath, the undersigned
President acknowledges that to the best of his knowledge, information and
belief, these matters and facts are true in all material respects and that this
statement is made under the penalties for perjury.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
11
<PAGE>
IN WITNESS WHEREOF, the Company has caused Articles Supplementary
to be executed under seal in its name and on its behalf by its President and
attested to by its Secretary on this 28th day of April, 1999.
SUMMIT PROPERTIES INC.
By: /s/ Steven R. LeBlanc
---------------------------------
Name: Steven R. LeBlanc
Title: President
[SEAL]
ATTEST:
/s/ Michael G. Malone
------------------------------
Name: Michael G. Malone
Title: Secretary
12
EXHIBIT 12.1
SUMMIT PROPERTIES INC.
CALCULATION OF RATIOS OF EARNINGS TO FIXED CHARGES
THREE MONTHS ENDED MARCH 31, 1999
(Dollars In Thousands)
Funds from operations before fixed charges:
Income (loss) before minority interest of
unitholders in Operating Partnership $8,999
Interest:
Expense incurred 10,254
Amortization of deferred financing costs 243
--------------
Total $19,496
==============
Fixed charges:
Interest expense $10,254
Interest capitalized 1,768
Rental fixed charges 41
Amortization of deferred financing costs 243
--------------
Total $12,306
==============
Ratio of earnings to fixed charges $1.58
==============
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0000915773
<NAME> SUMMIT PROPERTIES INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,473
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,242,564
<DEPRECIATION> 123,354
<TOTAL-ASSETS> 1,203,054
<CURRENT-LIABILITIES> 0
<BONDS> 741,966
0
0
<COMMON> 284
<OTHER-SE> 418,780
<TOTAL-LIABILITY-AND-EQUITY> 1,203,054
<SALES> 42,055
<TOTAL-REVENUES> 43,149
<CGS> 0
<TOTAL-COSTS> 14,320
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,497
<INCOME-PRETAX> 8,999
<INCOME-TAX> 0
<INCOME-CONTINUING> 8,999
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,781
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
</TABLE>
