[JAFFE LOGO]
JAFFE RAITT HEUER & WEISS
A Professional Corporation
27777 FRANKLIN ROAD, SUITE 2500 o SOUTHFIELD, MICHIGAN 48034-8214
PHONE 248.351.3000 o FAX 248.351.3082
www.jaffelaw.com
PSUGAR@JAFFELAW.COM
248.727.1456
JWEISS@JAFFELAW.COM
248-727-1465
November 20, 2006
Ms. Louise Dorsey
United States Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: Sun Communities, Inc. -- SEC Comment Letter regarding Form 10-Q for the
quarter ended March 31, 2006
Dear Ms. Dorsey,
By letter dated July 13, 2006, the Staff has requested that Sun
Communities, Inc. and Sun Communities Operating Limited Partnership ("SCOLP",
and both registrants together, "Sun") explain why certain disclosures regarding
findings in the Commission's Administrative Order entered on February 27, 2006
(the "Order") were not made in Sun's Quarterly Report for the Quarter Ended
March 31, 2006. In numerous telephone conversations with the Staff, and by
letter dated August 3, 2006, Sun and its advisors have been working with the
Staff to appropriately respond to the Staff's requests.
This response to the Staff's request is submitted on behalf of Sun. The
text of the comments in the Staff's July 13, 2006 letter and Sun's responses are
set forth below:
Comment: Note 12 -- Contingencies
1. You disclose that the Order does not impose any monetary penalties, nor
do the terms of the Order require the Company to restate any of its
prior financial statements. However, we note that the Company agreed to
a cease and desist order that states your financial statements are
materially misstated and lists the amounts and percentages of the
misstatements. Please tell us why you did not disclose the findings of
the Enforcement division related to the material misstatement of your
prior financial statements and provide an explanation to investors as
to why the company does not believe it should restate its financial
statements in light of those findings.
ANN ARBOR o BIRMINGHAM o DETROIT o PORT HURON o SOUTHFIELD
Louise Dorsey
November 20, 2006
Page 2
Response: Sun did not disclose the findings of the Enforcement division
related to the material misstatement of its prior financial statements because
it believed that the disclosures in the 10-Q regarding the findings in the Order
were adequate to fully inform investors in the context of the financial and
other information presented in the 10-Q. Further, Sun believed that the
disclosure in the 10-Q regarding the Order, together with the disclosures
contained in Sun's prior filings, the availability of the Order on the SEC's web
site and other public statements and announcements regarding the Order, provided
full, fair and complete disclosure of the material aspects of the Order.
In light of the Staff's comment, Sun has reevaluated the disclosures
regarding the Order contained in its 10-Q and has expanded the disclosures to
include the Enforcement division's calculations of the overstatements. Sun also
has stated that it does not believe it should restate its financial statements
because it believes the effect of the findings is not material, either
quantitatively or qualitatively, to the Company's financial statements as a
whole. These disclosures are included in Note 12 of Sun's Form 10-Q for the
quarter ended September 30, 2006, filed with the SEC on November 9, 2006.
2. Also, provide us with a draft of your disclosure that addresses the
above stated concerns that you will include in the company's upcoming
filing or in an amended March 31, 2006 10-Q. If you believe no
restatement is required, including a restatement of the Selected
Financial Data for 2002 and 2001, explain the basis for that conclusion
to us and include sufficient specificity of the nature and amount of
each error and a materiality analysis for the errors, individually and
in the aggregate.
Response: Drafts of the proposed disclosures were submitted to the
Staff and discussed in telephone conversations prior to Sun's filing of its 3rd
quarter Form 10-Q.
Sun's conclusion that no restatement is required, including a
restatement of the Selected Financial Data for 2002 and 2001, is based on the
following factors:
1. The findings in the Order state that Sun understated losses totaling
$4.7 million in 2001 and $2.7 million in 2002. These amounts (a) were
determined by the Staff, (b) were never explained to Sun, (c) to Sun's
knowledge are unsupported and unsupportable by GAAP and (d) were never
admitted by Sun. Simply stated, accounting personnel at Sun are unable
to conceive of a set of accounting assumptions that would result in the
amounts of understatements reflected in the Order. For example, the
total SunChamp losses for 2001, as computed by Sun, were $4.6 million
and interest income reported on the notes was $338 thousand. If Sun was
to take all of the SunChamp losses, it would have reported $4.6
million. However, the allocation of half of the losses to Champion was
not challenged by the Staff during the investigation or in the Order.
Consequently, the $4.7 million alleged understatement is not
reconcilable based on the facts presented.
Louise Dorsey
November 20, 2006
Page 3
2. Sun has attempted to calculate the impact of the findings of the Order
on its prior financial statements and has concluded that, as a worst
case, the amounts of understated loss for 2001 and 2002 were $2,297,000
and $2,067,000 respectively.(1)
3. No officer of Sun can provide the required certifications with respect
to the amounts contained in the Order.
4. In February of 2006, the Order was prominently disclosed in press
releases by the Commission, in disclosures by Sun and in follow up
newspaper articles. Further, the substance of the Order was discussed
in questions and answers on management conference calls and in
write-ups and reports by analysts following Sun's stock. The effect on
Sun's share price was insignificant and temporary.
5. The only current financial disclosure regarding the 2001 and 2002 years
is in the five-year summary of selected financial data included in
Sun's Form 10-K for the year ended December 31, 2005. This summary is
provided pursuant to Item 301 of Regulation S-K for the purpose of
supplying "selected financial data which highlight certain significant
trends in the registrant's financial condition and results of
operations." In viewing the summary information as filed, management
cannot discern any significant trend information related to the matters
in the Order that could be helpful to users of Sun's financial
statements. Moreover, any possible significant trends are not affected
by recognition of additional losses as computed by Sun and discussed in
point 2 above.
Materiality Analysis: The current legal standard for determining the
materiality of a misstatement or omission was established by the U.S. Supreme
Court in TSC Industries, Inc. v. Northway, Inc.(2) and Basic Inc. v.
Levinson.(3) The rule can be stated as follows: A misstatement or omission is
"material if there is a substantial likelihood that a reasonable shareholder
would consider it important in deciding how to vote" (Northway) or whether to
purchase or sell (Basic) a security.
SAB NO. 99 -- MATERIALITY informs the analysis applied to misstatements
or omissions in a financial report. SAB 99 is consistent with the holdings of
the Supreme Court. As in Northway and Basic, to find an item material, SAB 99
requires a showing of "a substantial likelihood that a reasonable person would
consider it important." This determination of importance must be made in the
context of the "total mix" of information presented to the user of the financial
statements. Citing SFAC NO. 2. SAB 99 and the FASB pronouncements emphasize that
a numerical percentage threshold or other similar objective test cannot by
itself suffice for a final determination as to materiality of an item. In the
context of a misstatement of a financial statement item, "while the 'total mix'
includes the size in numerical or percentage terms of the misstatement, it also
includes the factual context in which the user of financial statements would
view the financial statement item. The shorthand in the accounting and auditing
literature for
- -------------------------
(1) The initial draft of calculations supporting these amounts were submitted
to the Staff with Sun's August 3, 2006 letter. The final calculations
reflect minor adjustments.
(2) 426 U.S. 438 (1976).
(3) 485 U.S. 224 (1988).
Louise Dorsey
November 20, 2006
Page 4
this analysis is that financial management and the auditor must consider both
'quantitative' and 'qualitative' factors in assessing an item's materiality."
SAB NO. 99 -- Materiality.
The impact on a reasonable stockholder's voting or investment decision
is the litmus test established by the Supreme Court and should be the principal
measurement used. So, in the context of this matter, it is fair to ask whether a
reasonable Sun stockholder is substantially likely to change his or her
investment or voting decisions for Sun's shares based upon restated 2001 and
2002 financial items disclosed in the five-year summary.
The errors described in the findings in the Order would require
reversals of interest income and other miscellaneous items totaling $338,000 and
$93,000, respectively, in 2001 and 2002. These amounts would be more than offset
by adjustments to minority interest allocations of $351,000 in 2001 and $276,000
in 2002. Sun calculates allocation of losses in SunChamp in the manner suggested
by the Order would reduce net income from $33.9 million to $31.6 million in 2001
and from $13.6 million to $11.7 million in 2002. The effect of these adjustments
on evident trends in the five year Summary is insignificant and would not change
the direction of any observed trend.
A further element in considering the materiality of reported earnings
to investors' decision-making is the fact that the two factors most relied upon
by Sun's investors to gauge the Company's performance are dividends and funds
from operations ("FFO"), a non-GAAP measure. Throughout the periods in question,
trends in the Company's dividends and FFO were consistent and are unaffected by
the errors described in the findings in the Order.
Based on this analysis, Sun has concluded that the effect of the errors
cited in the Order are not quantitatively and qualitatively material to Sun's
financial statements as a whole.
Very truly yours,
JAFFE, RAITT, HEUER & WEISS
Professional Corporation
/s/ Peter Sugar
Peter Sugar
cc. Daniel L. Gordon, Branch Chief
Eric C. McPhee, Staff Accountant
PS/