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FORM 10-K
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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<Table>
<Caption>
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
TO
</Table>
COMMISSION FILE NO. 0-23381
BINGHAM FINANCIAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
<Table>
STATE OF MICHIGAN 38-3313951
State of Incorporation I.R.S. Employer I.D. No.
</Table>
260 EAST BROWN STREET
SUITE 200
BIRMINGHAM, MICHIGAN 48009
(248) 644-8838
(Address of principal executive offices and telephone number)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of March 15, 2002, the aggregate market value of the Registrant's voting
stock held by non-affiliates of the Registrant was approximately $1,466,532,
based on the closing sales price of one share of common stock on such date as
reported by the Nasdaq SmallCap Market.
As of March 15, 2002, there were 2,476,321 shares of the Registrant's
common stock issued and outstanding.
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REFERENCES AND FORWARD-LOOKING STATEMENTS
As the context requires, references made in this annual report to "we,
"us", "our", the "Company" and similar references refer to Bingham Financial
Services Corporation and its subsidiaries, including Origen Inc., Origen LLC and
their subsidiaries.
This annual report contains forward-looking statements based on our current
expectations, estimates and projections about our industry, management's beliefs
and certain assumptions made by us. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates," "may," "will" and
variations of these words or similar expressions are intended to identify
forward-looking statements. In addition, any statements that refer to
expectations, projections or other characterizations of future events or
circumstances, including any underlying assumptions, are forward-looking
statements. Such statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, our actual results could differ materially and adversely
from those anticipated in any forward-looking statements as a result of numerous
factors, many of which are described in the "Factors That May Affect Future
Results" section in Item 1 below and Management's Discussion and Analysis of
Financial Condition and results of Operations in Item 7 below. You should
carefully consider those risks, in addition to the other information in this
annual report and in our other filings with the SEC. We undertake no obligation
to revise or update publicly any forward-looking statements for any reason.
PART I
ITEM 1. BUSINESS
Bingham is a specialized financial services company that provides and
services loans used to finance manufactured homes. We provide a vast range of
financial services to the manufactured housing market, including construction
financing, retail lending, permanent financing, bridge financing, earn-out
financing and equity financing. Our operations are carried on through Origen
Financial, Inc. ("Origen Inc."), Origen Financial L.L.C. ("Origen LLC"), and
their subsidiaries. Our executive office is located at 260 East Brown Street,
Suite 200, Birmingham, Michigan 48009 and our telephone number is (248)
644-8838. Bingham, which is a Michigan corporation, employed, through its
subsidiaries approximately 214 people as of March 15, 2002.
INCORPORATION AND INITIAL PUBLIC OFFERING
Bingham was incorporated in August 1996 by Sun Communities, Inc., a
publicly held real estate investment trust. We began transacting business in
January 1997. When we completed our initial public offering in November 1997,
our business was focused primarily on providing financing for new and previously
owned manufactured homes by making conventional loans under installment loan
contracts secured by borrowers' manufactured homes, primarily to residents in
manufactured home communities owned and managed by Sun. In addition to providing
financing to residents in Sun's manufactured home communities, we have expanded
our manufactured home lending business to originate loans through manufactured
home dealers and loan originators and for a time expanded our business into the
commercial lending and commercial mortgage servicing industry. Sun does not
currently own any shares of our common stock.
Proceeds from our initial public offering were used to repay in full a
demand note payable to Sun, which we used to fund our original manufactured home
loan contracts. In connection with a subordinated debt facility provided to us
by Sun, we issued warrants to Sun to purchase up to 400,000 shares of common
stock at the initial public offering price of $10 per share. In exchange for
offering us as a preferred financing service to potential home buyers in Sun's
communities, we granted Sun options to purchase 330,000 shares of our common
stock. Sun subsequently assigned the subordinated debt facility, the warrants
and the options to its operating subsidiary, Sun Communities Operating Limited
Partnership. In connection with the restructuring of the subordinated debt
facility described below under "Recapitalization," the warrants and options were
cancelled in December 2001.
ACQUISITION OF ORIGEN, INC. AND CONSOLIDATION OF MANUFACTURED HOME BUSINESS
From our inception until December 1999, we conducted our manufactured home
lending and servicing business through our MHFC, Inc. subsidiary. In December
1999, we acquired Dynex Financial, Inc., for $4.0 million in cash. In February
2001, Dynex Financial changed its name to Origen Financial, Inc.
In March 2000, we consolidated our manufactured home loan business. As part
of our plan to conduct all of our manufactured home loan origination operations
through Origen Inc., Origen Inc. purchased $66.9 million of loans from MHFC and
we sold MHFC to Gwenuc, LLC, a limited liability company owned by Gary A.
Shiffman, the Chairman of the Board and Secretary of Bingham. Gwenuc paid us
$400,000 in cash and assumed $2.7 million of debt.
During the year ended December 31, 2001, Origen Inc. originated
approximately $192.0 million in manufactured home loans and serviced a
manufactured home loan portfolio of approximately $1.2 billion.
Recapitalization
In July 2001, we entered into an investment agreement with three
investors -- SUI TRS, Inc., Shiffman Family LLC and Woodward Holding
LLC -- under which we agreed to recapitalize our remaining operating
subsidiaries. Certain of our officers and directors are affiliated with SUI TRS
and Shiffman Family LLC. See "Certain Relationships and Related Party
Transactions."
3
Under the investment agreement and a merger agreement entered into in
December 2001, Origen Inc. and our other wholly-owned operating subsidiaries,
excluding those related to our commercial mortgage business, will be merged into
Origen LLC and its wholly-owned subsidiaries. The mergers will be completed when
Origen LLC and its subsidiaries obtain all material licenses and permits they
need to continue to operate our business. Notwithstanding the actual date of the
mergers, the parties have agreed that, as between themselves, for tax and
accounting purposes the merger will be treated as effective as of January 1,
2002. We expect the mergers to occur in the second quarter of 2002. Pending the
mergers, each of Origen Inc. and Origen LLC is conducting that portion of our
business which it is licensed to do. After the mergers, Origen LLC and its
subsidiaries, as the surviving entities of the mergers, will conduct our
business in the same manner as it has been conducted in the past. Although we
will retain only a 20% interest in the profits of our manufactured home business
after the mergers are complete, the mergers will not result in a change in
control of the management and operations of our manufactured home business for
accounting purposes. As a result, the assets liabilities and operations of our
manufactured home business will continue to be reported in our financial
statements on a consolidated basis.
After the mergers are fully completed, our primary asset will be our
remaining interest in Origen LLC. We will also retain a receivable of
approximately $2.5 million related to the sale of MHFC in March 2000. The
proceeds from the receivable will be used to fund our operating expenses, such
as expenses associated with SEC reporting compliance and legal and accounting
fees.
We retained an initial 20% ownership interest in Origen LLC and the three
investors received an initial 80% aggregate interest in Origen LLC. These
interests are subject to dilution resulting from (a) grants of up to 11.5% of
the membership interests to key employees of the recapitalized subsidiaries, and
(b) potential future issuances of additional membership interests in the
recapitalized subsidiaries in connection with the raising of additional capital.
On December 18, 2001, SUI TRS, Shiffman Family LLC and Woodward Holding
made capital contributions totaling $40 million in Origen LLC. We used the funds
from the capital contributions to repay approximately $39.9 million of our
outstanding debt to Sun Communities Operating Limited Partnership.
The remaining portion of our debt to Sun Communities Operating Limited
Partnership (approximately $11.4 million) was restructured into a new line of
credit between Sun Communities Operating Limited Partnership and Woodward
Holding, as lenders, and Origen Inc. and Origen LLC, as borrowers. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
On December 18, 2001, Credit Suisse First Boston Mortgage Capital and
Origen LLC, through its consolidated special purpose subsidiary Origen Special
Purpose, L.L.C., entered into a new loan repurchase agreement on substantially
the same terms as the prior loan repurchase agreement between Credit Suisse
First Boston and Origen Inc. Under the new repurchase agreement, Origen LLC
contributes manufactured home loans it originates or purchases to Origen Special
Purpose. Origen Special Purpose then transfers the manufactured home loans to
Credit Suisse First Boston against the transfer of funds from Credit Suisse
First Boston and Origen Special Purpose transfers the funds to Origen LLC for
operations. Bingham guarantees the obligations of Origen Special Purpose under
this agreement. The maximum financing limit on the facility is $150.0 million.
The annual interest rate on the facility is a variable rate equal to LIBOR plus
a spread. The loans are financed on the facility at varying advance rates on the
lesser of the then current face value or market value of the loans. The advance
rates depend on the characteristics of the loans financed. The facility will
terminate on May 28, 2002, but may be terminated earlier upon an event of
default under the master repurchase agreement. At March 27, 2002, the aggregate
amount advanced by Credit Suisse First Boston under the facility was $3.4
million.
COMMERCIAL MORTGAGE BUSINESS
In March 1998, we acquired Bloomfield Acceptance Company, L.L.C. and its
mortgage servicing affiliate Bloomfield Servicing Company, L.L.C., expanding our
business into commercial real estate lending and
4
servicing. In June 1999, we acquired Hartger & Willard Mortgage Associates,
Inc., a commercial mortgage lender and servicer, to complement Bloomfield's
business.
In late 2000, we decided to focus our efforts on our manufactured housing
lending and servicing business. In June 2001, we sold substantially all of the
assets of Bloomfield Acceptance, Bloomfield Servicing and Hartger & Willard to
Wells Fargo Bank, N.A. and Wells Fargo & Company for approximately $9.6 million.
We used the cash proceeds of the sale to reduce our outstanding debt to Sun
Communities Operating Limited Partnership.
MANUFACTURED HOME LENDING AND SERVICING OPERATIONS
We conducted our manufactured home loan business through MHFC until we
acquired Origen Inc. in December 1999. In March 2000, we consolidated our
manufactured home loan business into Origen Inc. We are recapitalizing our
subsidiaries. When the recapitalization is completed, our business will be
conducted solely by Origen LLC.
We originate manufactured home loans that generally range in size from
$10,000 to $100,000 and have a term of seven to 30 years. We initially focused
our marketing efforts principally through manufactured home community owners and
operators, specifically targeting Sun's manufactured home communities, where our
services were offered as the preferred source of financing. We currently
originate the majority of our manufactured home loans through retail dealers
other than Sun.
Seasonality
Our manufactured home finance business is generally subject to seasonal
trends, reflecting the general pattern of sales of manufactured homes peaking
during the spring and summer months and declining to lower levels from
mid-November through February.
Dealers
Each loan submitted to us by a dealer is subject to criteria we establish
relating to loan terms, advance amounts, down payment requirements and other
pertinent program parameters. We perform initial and periodic reviews of dealers
with which we do business to ensure that these dealers are in good corporate and
financial standing. Dealers are provided a rate and term schedule that
establishes a customer buy rate for each particular loan being submitted.
Reports are continuously generated and analyzed to track dealer
performance. Performance factors tracked include loan approval rates, booking
rates, dealer delinquency, dealer chargeoff activity and volume of loans booked.
Dealer performance goals we establish are then monitored and, if necessary,
relationships with non-performing dealers are terminated.
Underwriting
We underwrite loans based upon our review of credit applications to ensure
loans will comply with internal company guidelines as well as industry
standards. All loans collateralized by mortgages on both manufactured homes and
the underlying real estate, or "land/home" loans, are underwritten using our
Internal Credit Rating grid, a traditional underwriting method that primarily
takes into account the applicant's credit history. We underwrite retail
installment loans secured only by manufactured homes, or "home only" loans,
using Portal(TM), our internally-developed proprietary credit scoring system.
Portal(TM) was developed to predict defaults using empirical modeling techniques
and takes into account information from applicants' credit applications and
credit reports. Each applicant's credit history, stability, capacity, down
payment and security type are taken into account by the Portal(TM) model. The
Portal(TM) model is integrated into our origination system and is based on our
historical lending experience. Because the land/home and home only business
lines have different characteristics, and because we have not experienced
significant losses or defaults on land/home loans (a necessary component of a
successful predictive model), predictive modeling was only
5
possible for the home only applications, which make up approximately 95% of our
total manufactured home loan applications.
Loan Collateral
We retain a security interest in each manufactured home we finance.
Procedures for perfecting security interests vary by state.
Servicing
We service all of our manufactured home loan contracts, as well as
manufactured home contracts owned by third parties. As of December 31, 2001, our
servicing portfolio totaled approximately $1.2 billion. For each manufactured
home loan we service, we collect principal and interest payments from the
borrower and either remit them to investors as required under the relevant
servicing contract or retain them. We also process collections on delinquent
accounts.
Delinquency and Repossession
We are responsible for the servicing of each manufactured home loan
contract from the time of funding until the loan is paid in full. This servicing
includes processing payments, collecting delinquent accounts, remitting funds to
investors and repossessing and reselling the homes on defaulted contracts. The
repossession process includes issuing delinquent notices between 15 and 18 days
after a payment is past due, sending a notice of default between 30 and 90 days
after a payment is past due. We then hire a local attorney to assist with our
collection efforts after the expiration of the notice of default. Next, a demand
letter is issued, at which time full payment must be made on all arrearages,
including late fees and attorney fees. We generally repossess the manufactured
home after payments have become 60 to 90 days delinquent if we are not able to
work out a satisfactory arrangement with the borrower.
We maintain a reserve for estimated credit losses on manufactured home loan
contracts we own and a separate liability to absorb potential losses on loans
that have been periodically sold to third parties with recourse. At December 31,
2001, the aggregate principal balance of manufactured home loan contracts in our
portfolio was approximately $128.2 million and the aggregate principal balance
of manufactured home loan contracts sold to third parties with recourse was
approximately $124.2 million. The allowance for credit losses is determined at a
portfolio level and computed by applying loss rate factors to the loan portfolio
on a stratified basis using current portfolio performance and delinquency levels
(0-30 days, 31-60 days, 61-90 days and more than 90 days delinquent). Our loss
rate factors are based on historical loan loss experience and are adjusted for
economic conditions and other trends affecting borrowers' ability to repay and
estimated collateral value. The allowance for loan losses represents an
unallocated allowance; there are no elements of the allowance allocated to
specific individual loans or to impaired loans. For the year ended December 31,
2001, as a result of losses incurred due to defaults and repossessions, $4.8
million was charged to the reserve for losses on loans.
The estimated recourse liability is calculated based on historical default
rates and loss experience for pools of similar loans we originate and service.
These loss rates are applied to each pool of loans subject to recourse
provisions and the resulting estimated recourse liability represents the present
value of the expected obligations under those recourse provisions. The loss
rates are adjusted for economic conditions and other trends affecting borrowers'
ability to repay and estimated collateral value. The recourse liability is
calculated at a portfolio level and there are no elements of the estimated
recourse liability allocated to specific loans. For the year ended December 31,
2001, approximately $5.2 million had been charged to the separate liability set
up for estimated losses on loans sold with recourse.
Our inventory of repossessed homes was 169 homes at December 31, 2001 as
compared to 52 homes at December 31, 2000. The estimated net realizable value of
the repossessed homes in our inventory at December 31, 2001 was approximately
$2.5 million as compared to approximately $972,000 at December 31, 2000.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note D to our audited consolidated financial
statements for more information on the delinquency of our manufactured home loan
contracts.
6
LOAN SALES AND SECURITIZATIONS
Periodically we either broker, sell or securitize (meaning we will pool
closed loans and sell them to a trust for a cash purchase price and in some
cases retain an interest in the loans) a substantial portion of the manufactured
home loans we originate. In March 2002, and March 2001 we securitized $135.0
million and $165.0 million, respectively, of manufactured home loans through a
special purpose subsidiary.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note H to our consolidated financial statements for
more information on securitizations and loan sales.
INSURANCE
Dynex Insurance Agency, Inc., a subsidiary of Origen Inc., is a licensed
agent placing property and casualty, life and warranty insurance, primarily for
our manufactured home loans. As part of our recapitalization, Dynex Insurance
Agency will merge into a subsidiary of Origen LLC, after which the surviving
company will conduct Dynex Insurance Agency's business.
COMPETITION
The manufactured housing finance industry is very fragmented and highly
competitive. There are numerous non-traditional consumer finance sources serving
this market. Several of these financing sources are larger than us and have
greater financial resources. In addition, some of the manufactured housing
industry's larger manufacturers maintain their own finance subsidiaries to
provide financing for purchasers of their manufactured homes. Our largest
competitors in the industry are J.P. Morgan Chase & Co. and Conseco Finance
Corp. Historically, traditional financing sources (commercial banks, savings and
loans, credit unions and other consumer lenders), many of which have
significantly greater resources than us and may be able to offer more attractive
terms to potential customers, have not consistently served this market. There is
no assurance that we will be able to effectively compete against our existing
competitors or any future competitors.
REGULATION AND SUPERVISION
Our manufactured home finance business encompasses both chattel lending
(manufactured home only loans) and residential mortgage lending (land/home
loans) to consumers as well as loan servicing, typically for loans originated by
manufactured housing dealers and loan origination companies. We conduct consumer
lending and servicing in 38 states. In some states, we conduct only manufactured
home lending and not land-home lending. Most states where we operate:
- require compliance with state laws or regulations concerning qualifying
to do business, licensing, and lending and finance activities and other
consumer protection measures and fair trade practices (including
prohibiting discrimination based on race, color, national origin, gender,
age, disability, marital status, or other bases);
- limit the interest rate and other charges that may be imposed related to
the loan, or prescribe certain other terms of the loan contracts,
including requirement of specific notice provisions, loan terms, or other
items (although some of these state laws are preempted by federal laws
applicable to us);
- regulate the sale and type of insurance products that we may offer and
the insurers for which we may act as agent; and
- define our rights to collect loan payments, and foreclose and/or
repossess and sell collateral.
We are licensed to conduct consumer finance operations in most states where
we do business. In a limited number of states, we are not required to hold a
specific license to conduct our business activities. Origen LLC is in the
process of obtaining licenses and approvals to conduct business in various
states. We expect Origen LLC to obtain all the licenses it needs to operate in
the states in which we do business by the end of the second quarter of 2002.
Until certain licenses and approvals are obtained, Origen Inc. continues to
operate in certain states.
7
In addition to state laws regulating our business, our consumer lending and
servicing activities are subject to numerous federal laws and the rules and
regulations promulgated thereunder, including the Truth in Lending Act, the
Equal Credit Opportunity Act, the Fair Credit Reporting Act, and, in some
instances, the Real Estate Settlement Procedures Act and the Home Mortgage
Disclosure Act, as well as certain rules of the Federal Trade Commission. These
laws require that certain disclosures be made to applicants, prohibit misleading
advertising and protect against discriminatory financing or unfair credit or
collection practices. The Truth in Lending Act and Regulation Z promulgated
thereunder require disclosure of, among other things, the terms of repayment,
the final maturity, the amount financed, the total finance charge and the annual
percentage rate charged on each manufactured home loan contract. The Real Estate
Settlement Procedures Act requires similar disclosures in loans collateralized
in whole or in part by real property, i.e., land/home loans. The Equal Credit
Opportunity Act prohibits creditors from discriminating against loan applicants
(including retail installment contract obligors) on the basis of race, color,
national origin, gender, age, marital status, reliance upon public assistance
income or the consumer's exercise of rights under the Consumer Credit Protection
Act. Under the Equal Credit Opportunity Act and the Fair Credit Reporting Act,
creditors are required to make certain disclosures to consumers regarding their
rights, and to provide certain notices of adverse credit decisions to consumers
who have applied for credit. The rules of the Federal Trade Commission limit the
types of property a creditor may accept as collateral to secure a consumer loan
and set guidelines for the practices a creditor may use to collect its own
debts, and its "holder in due course" rules provide for the preservation of a
consumer's claims and defenses when a consumer obligation is sold or assigned to
a third party.
The sale of insurance products by our insurance subsidiary is subject to
various state insurance laws (including licensure requirements) and regulations
which govern allowable charges and other practices.
The regulatory procedures discussed above are subject to changes by the
regulatory authorities. There are no assurances that future regulatory changes
will not occur. These regulatory changes could place additional burdens on us
and our subsidiaries.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Bingham's prospects are subject to certain uncertainties and risks. Any of
the following risks could materially and adversely affect our business and
quarterly and annual results of operations. Also, other one-time events and
other important factors discussed previously and from time to time in our other
filings with the SEC may affect our future results.
WE MAY NOT HAVE SUFFICIENT WORKING CAPITAL AND FUNDS TO MEET OUR ANTICIPATED
NEEDS.
We currently have the following financing arrangements:
- a loan repurchase agreement with Credit Suisse First Boston, under which
Origen LLC (through a special purpose subsidiary) is able to finance up
to $150 million in manufactured home loans, under which $3.4 million was
outstanding as of March 27, 2002;
- a $21.25 million line of credit with Sun Communities Operating Limited
Partnership (in which Woodward Holding holds a participation interest),
under which $11.7 million was outstanding as of March 27, 2002; and
- a revolving credit facility for servicing advances with Standard Federal
Bank (as successor to Michigan National Bank) with a borrowing limit of
$10 million, under which $5.4 million was outstanding as of March 27,
2002.
The Credit Suisse First Boston repurchase agreement expires on May 28,
2002. The Standard Federal Bank credit facility expires on June 30, 2002. The
Sun Communities Operating Limited Partnership line of credit expires on December
18, 2002. Based on discussions with Credit Suisse First Boston, we believe the
term of the repurchase agreement will be extended beyond its expiration date of
May 28, 2002. Based on discussions with Standard Federal Bank and other lenders,
we expect the servicing advance facility to be extended or replaced at the end
of its current term. If the term of any of these facilities is not extended and
we
8
do not enter into a replacement financing arrangement with another lender, our
ability to continue operations would be jeopardized.
Based on our business model and the nature of the capital markets, we
expect we will need to raise additional capital before the end of 2002 to meet
our long-term capital needs, even if we maintain our borrowing relationships
with Credit Suisse First Boston and Sun Communities Operating Limited
Partnership and replace or extend our Standard Federal Bank loan facility. As a
result, during that time we will need to obtain funding from sources such as
loan sales or securitizations, sales of debt or member interests by Origen LLC
or additional debt financing arrangements. Alternatively, we could enter into a
strategic business relationship that would provide access to additional capital.
While we continue to pursue these options, there can be no assurance that these
efforts will be successful. If they are not, our ability to continue operations
would be jeopardized.
In addition, if Origen LLC raises additional funds by issuing member
interests or convertible debt securities, the percentage of ownership of all of
its members, including Bingham, will be reduced, and any new securities could
have rights, preferences and privileges senior to those of Bingham's membership
interests. Furthermore, if we raise capital by incurring additional
indebtedness, we will become subject to the increased risks associated with the
additional indebtedness, including interest rate fluctuations and any financial
or other covenants that our lenders may require.
WE MAY NOT BE ABLE TO DISPOSE OF LOANS IN THE SECONDARY MARKET ON FAVORABLE
TERMS.
We either broker, sell or securitize (meaning we will pool closed loans and
sell them to a trust for a cash purchase price and in some cases retain an
interest in the loans) a substantial portion of the manufactured home loans we
originate. Any impairment in our ability to dispose of loans could have a
material adverse effect on our business. Factors affecting our ability to
dispose of loans and to do so profitably, include:
- conditions in the securities markets generally;
- conditions in the asset-backed securities markets specifically;
- the performance of the securities issued in connection with our
securitizations;
- the price and credit quality of our loans;
- our relationship with our correspondent investors;
- compliance of our loans with the eligibility requirements for a
particular securitization;
- our ability to adequately service our loans; and
- any material negative rating agency action pertaining to certificates
issued in our securitizations.
Gains from the sale of loans ("gain on sale") are a significant component
of our revenues, and retained interests in loan securitizations will be
established as balance sheet assets in connection with securitizations, based in
part upon estimates of future credit losses and prepayments. We may retain
subordinated securities issued in connection with our securitization program. If
actual credit losses or prepayment speeds on securitized loans exceed the
estimates made at the time of the securitizations, we could be required to
record losses to reduce the carrying value of the retained interests and
securities classified as available-for-sale, if any, on our balance sheet. This
could have a material impact on our earnings.
WE DO NOT DIRECTLY CONTROL ORIGEN LLC AND THEREFORE MAY NOT BE ABLE TO CONTROL
IMPORTANT DECISIONS REGARDING OUR BUSINESS.
9
The current ownership interests of Origen LLC's members are as follows:
<Table>
<Caption>
MEMBER OWNERSHIP VOTING RIGHTS
------ --------- -------------
Bingham..................................................... 20.0% Voting interest
SUI TRS..................................................... 31.6% Voting interest
Shiffman Family LLC......................................... 8.4% Voting interest
Woodward Holding............................................ 40.0% Non-voting interest
</Table>
Because Bingham does not directly control a majority of the voting
interests in Origen LLC, it may be outvoted on important matters on which it and
the other voting members of Origen LLC have the right to vote, such as certain
amendments to Origen LLC's operating agreement and the dissolution of Origen
LLC.
In addition, Origen LLC is managed by a board of managers, which has a
total of five votes, two of which Bingham directly controls and two of which are
collectively controlled by SUI TRS and Shiffman Family LLC. Upon the merger of
Origen Inc. and Origen LLC, the fifth vote will be controlled by an individual
mutually appointed by Bingham, SUI TRS and Shiffman Family LLC. The manager
holding the fifth vote must be independent from Bingham, Sun Communities, Inc.
and Sun Communities Operating Limited Partnership. As our Chairman, Gary A.
Shiffman will have considerable influence over our two votes. As a member of
Shiffman Family LLC (which in turn controls SUI TRS, Inc.), Mr. Shiffman will
have considerable influence over the two votes controlled by Shiffman Family LLC
and SUI TRS, Inc. By virtue of these relationships, Mr. Shiffman will similarly
have considerable influence over the fifth vote as well. Mr. Shiffman, then,
will have considerable influence over all five votes of the Origen LLC board of
managers. Because Bingham directly controls less than a majority of the votes of
Origen LLC's managers, Bingham does not directly control the management of
Origen LLC.
Because Bingham does not directly control the majority of the voting
membership interests or the votes of the managers of Origen LLC, to the extent
that Bingham's interests are different from those of the other members of Origen
LLC, Bingham's interests may not be served in the management and operation of
Origen LLC.
BECAUSE WE HAVE ENTERED INTO TRANSACTIONS WITH RELATED PARTIES, POTENTIAL
CONFLICTS OF INTEREST MAY ARISE, WHICH COULD ADVERSELY AFFECT OUR BUSINESS.
Two of Bingham's directors, Gary A. Shiffman and Arthur A. Weiss, are
affiliated with two of the other members of Origen LLC. In addition, they are
affiliated with Sun Communities Operating Limited Partnership, which, together
with Woodward Holding (another member of Origen LLC), has extended a $21.25
million line of credit to Origen Inc. and Origen LLC. Bingham has guaranteed the
performance of the borrowers' obligations under the line of credit. See "Certain
Relationships and Related Party Transactions." As a result of these
relationships, each of Mr. Shiffman, Mr. Weiss, Sun Communities Operating
Limited Partnership and Woodward Holding may have a conflict of interest with
respect to any transaction between or among Bingham, the other members of Origen
LLC and Origen LLC, including the line of credit and guaranty, or with respect
to the management of Origen LLC. To the extent that the interests of the other
members of Origen LLC or the lenders under the line of credit are given
priority, Bingham's interest in Origen LLC may be adversely affected or it may
have to perform on its guaranty of the line of credit.
BINGHAM'S OWNERSHIP INTEREST IN ORIGEN LLC WILL LIKELY BE DILUTED IF AND WHEN
ORIGEN LLC RAISES ADDITIONAL CAPITAL.
We expect Origen LLC will need to raise additional capital before the end
of 2002. To the extent that additional needed capital cannot be raised from
Origen LLC's members, Origen LLC will have the right, with the approval of a
majority of the votes held by the board of managers (which Bingham does not
directly control), to raise such capital from third parties, on terms and
conditions approved by the majority of the votes held by the board of managers.
Although there is no assurance Origen LLC will be able to raise additional
capital, if it raises additional funds by issuing member interests or
convertible debt securities, whether to the other members of Origen LLC or to
third parties, Bingham's percentage ownership in Origen LLC will be
10
reduced, and any new interests or securities could have rights, preferences and
privileges senior to those of Bingham's membership interests.
OTHER MEMBERS OF ORIGEN LLC HAVE THE OPTION TO BUY BINGHAM'S OWNERSHIP INTEREST
IN ORIGEN LLC.
SUI TRS, Shiffman Family LLC and Woodward Holding will have the option to
buy Bingham's ownership interest in Origen LLC between 36 and 60 months from
December 18, 2001. The purchase price of Bingham's interest would be its fair
market value as determined by an appraiser selected by Origen LLC's managers.
Bingham controls only two of the five votes of the managers and at least two of
the remaining three votes will be controlled by the parties who hold the option.
While the appraiser must be an independent investment banking firm, the
purchasers of Bingham's interest would have greater influence in selecting the
appraiser than Bingham would.
If this option is exercised, it would result in a total sale of our
interests in our business. Bingham would then hold no interests in Origen LLC,
and would hold only the cash proceeds of the sale of its interests.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH MAKING MANUFACTURED HOME LOANS.
Manufactured home loans make up substantially all of our loan portfolio.
Manufactured home loan borrowers may be relatively high credit risks due to
various factors, including, among other things, the poor manner in which they
have handled previous credit, the absence or limited extent of their prior
credit history or limited financial resources. Consequently, the manufactured
home loans we originate bear a higher rate of interest, have a higher
probability of default and may involve higher delinquency rates and greater
servicing costs relative to loans to more creditworthy borrowers. Our
profitability depends upon our ability to properly evaluate the creditworthiness
of borrowers and price each loan accordingly, limit our default rates and
foreclosure costs and to efficiently service the contracts. To the extent that
aggregate repossessions and resale of foreclosed collateral results in losses
which were not anticipated by the interest rates charged on loans, there would
be an adverse effect on profitability.
In addition, the manufactured home loan business is subject to business
cycles and to seasonality. The manufactured housing industry historically has
been cyclical and is generally subject to many of the same national and regional
economic and demographic factors that affect the housing industry generally.
These factors include consumer confidence, inflation, interest rates, regional
population and employment trends, availability of and cost of alternative
housing, weather conditions and general economic conditions. In addition, sales
typically peak during the spring and summer seasons and decline to lower levels
from mid-November through February. For these reasons, and due to some
aggressive underwriting practices that led to increased defaults, the continued
excessive inventory of repossessed homes and unfavorable volatility in the
secondary markets, companies in the manufactured home loan business have
generally not been profitable in the last 24 months. Several manufactured home
lenders, including Greenpoint Financial Corp., CIT, Bombardier and MHC, some of
the industry's largest lenders, have exited the business within the last six
months. Although we believe that our business plan will be profitable in the
long term and that the downturn of the manufactured home lending business is
temporary, there can be no assurance that we will in fact be profitable either
in the long term or the short term.
THE COMPETITION WE FACE COULD ADVERSELY AFFECT OUR PROFITABILITY.
We face competition in originating loans, primarily from non-traditional
consumer finance sources and some of the manufactured housing industry's larger
manufacturers. This competition could adversely affect our profitability. We
will compete to make loans based on interest rates, types of products, loan fees
charged and the quality of customer service that we provide to borrowers. Due to
their size, some of our competitors have significantly greater resources and
more experience and offer a broader range of products and services than we will.
11
OUR PROFITABILITY MAY BE AFFECTED IF WE ARE UNABLE TO EFFECTIVELY MANAGE
INTEREST RATE RISK.
We derive our income in part from the difference or "spread" between the
interest earned on loans, and interest paid on borrowings. In general, the wider
the spread, the more we earn. When market rates of interest change, the interest
we receive on our assets and the interest we pay on our liabilities will
fluctuate. This can cause increases or decreases in our spread and can affect
our income. In addition, interest rates affect how much money we can lend. For
example, when interest rates rise, loan originations tend to decrease. Factors
such as inflation, recession, unemployment, money supply, international
disorders, instability in domestic and foreign financial markets and other
factors beyond our control may affect interest rates.
While we have employed an interest rate management strategy to control our
risk from changes in market interest rates, an effective interest rate risk
management strategy is complex and no such strategy can completely insulate us
from interest rate changes.
In the past we have used an interest rate risk management strategy that has
included the use of interest rate swaps and U.S. Treasury rate locks but have
abandoned these financial instruments as we found them largely ineffective in
hedging our interest rate risk. In the future we may use interest rate risk
management strategies that include interest rate caps and floors, mandatory
forward sales, mandatory or optional sales of futures and other financial
futures transactions. We will determine the nature and amount of any future
hedging transactions based on various factors, including market conditions and
the expected duration and exit strategy of our loans.
The nature and timing of interest rate risk management strategies may
impact their effectiveness. Poorly designed strategies may increase rather than
mitigate risk and may adversely affect our profitability.
THE VALUE OF OUR SERVICING RIGHTS MAY BE ADVERSELY AFFECTED.
Our servicing rights are treated as an asset in accordance with accounting
principles generally accepted in the United States of America. The value of our
servicing rights may be adversely affected by factors such as:
- increases in prepayments, which tend to shorten the life of the servicing
asset;
- higher than expected rate of loan defaults; and
- the underlying loans' average custodial balances, the amount deposited by
borrowers for taxes, replacement reserves and other deposits.
We may also incur loss of revenues if any of our servicing contracts are
terminated.
WE HAVE A HISTORY OF LOSSES AND WE MAY NOT BE PROFITABLE IN THE FUTURE.
We have experienced net losses while growing our loan origination platform
and business, including net losses of $110,000 and $574,000 for the fiscal years
ended September 30, 1997 and September 30, 1998, respectively, net income of
$776,000 for the fiscal year ended September 30, 1999, a net loss of $185,000
for the three months ended December 31, 1999, a net loss of $16.3 million for
the fiscal year ended December 31, 2000 and a net loss of $19.7 million for the
fiscal year ended December 31, 2001. We may continue to incur significant
operating losses and capital expenditures. As a result, we will need to generate
significant revenues to achieve and maintain profitability. If we are unable to
achieve and maintain sufficient revenue growth, we may not be profitable in the
future. Even if we do achieve profitability, we may not sustain or increase
profitability on a quarterly or annual basis.
12
OUR STOCK PRICE HAS BEEN VOLATILE.
Historically, the market price of our common stock has fluctuated widely.
Since our initial public offering in November 1997, the market price has ranged
from a low of $0.30 per share to a high of $28.50 per share. Fluctuations may
occur, among other reasons, in response to:
- operating results;
- announcements by competitors;
- regulatory and legislative changes;
- economic changes;
- market valuation of financial service firms; and
- general market conditions.
The trading price of our common stock could continue to be subject to wide
fluctuations in response to these or other factors, many of which are beyond our
control. If the market price of our common stock decreases, stockholders may not
be able to sell their stock at a profit.
ITEM 2. PROPERTIES
Our corporate headquarters is located in approximately 11,300 square feet
of leased space in Birmingham, Michigan. The lease, which terminates on October
31, 2002 with two 1 year renewal options, currently provides for monthly rent of
$29,000, including base rent and a pro rata share of operating expenses and real
estate taxes. We have sublet approximately 4,400 square feet of this for monthly
rent of $11,300.
We also lease office space for our various offices throughout the country.
We currently have a lease expiring in July 2003 for approximately 9,700 square
feet of office space in Glen Allen, Virginia with a current monthly rent of
approximately $14,700; a lease expiring in November 2003 for approximately 6,100
square feet of office space in Duluth, Georgia with a current monthly rent of
approximately $8,300; a lease expiring in December 2002 for approximately 4,700
square feet of office space in Loveland, Ohio with a current monthly rent of
approximately $4,800; and a lease expiring in January 2005 for approximately
21,000 square feet of office space in Fort Worth, Texas with a current monthly
rent of approximately $27,000.
We are also a party to several leases for space in which we formerly
operated offices and are in the process of negotiating subleases or terminations
of these leases.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to our business and the business of our
subsidiaries, or proceedings known by us to be contemplated by governmental
authorities, to which we or our subsidiaries are a party or to which any of our
or their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
SPECIAL MEETING
We held a special meeting of shareholders on December 18, 2001 to consider
a proposal to approve a significant recapitalization of our operating
subsidiaries. The proposal was approved, with 1,398,647 votes for the proposal,
34,200 votes against the proposal and 250 shares abstaining.
ANNUAL MEETING
We held our annual meeting of shareholders on December 19, 2001. At the
meeting, our shareholders were asked to elect two directors to serve on the
board of directors until the 2004 annual meeting or until their respective
successors are elected and to ratify the appointment of our independent
auditors, Plante & Moran, LLP.
13
Mark A. Gordon and Brian M. Hermelin were elected to the board of
directors. Each of Messrs. Gordon and Hermelin received 1,619,258 votes for
election to the board and 7,750 votes against election. The terms of office of
the following directors continued after the meeting: Ronald A. Klein, Robert H.
Orley, Gary A. Shiffman and Arthur A. Weiss.
The appointment of Plante & Moran, LLP as our independent auditors was
ratified by our shareholders. Votes for the ratification were 1,483,703, votes
against were 7,000, and votes withheld were 135,305.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our common stock is traded on the Nasdaq SmallCap Market under the symbol
"BFSC." The following table presents the per share high and low bid prices of
our common stock for the periods indicated as reported by the Nasdaq SmallCap
Market. The stock prices reflect inter-dealer prices, do not include retail
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions.
<Table>
<Caption>
HIGH LOW
---- ---
FISCAL YEAR ENDED DECEMBER 31, 2000
First Quarter 2000.......................................... $10.500 $6.000
Second Quarter 2000......................................... 8.125 5.000
Third Quarter 2000.......................................... 5.500 1.313
Fourth Quarter 2000......................................... 3.688 0.688
FISCAL YEAR ENDED DECEMBER 31, 2001
First Quarter 2001.......................................... $ 3.13 $ 1.00
Second Quarter 2001......................................... 5.56 1.03
Third Quarter 2001.......................................... 4.00 1.15
Fourth Quarter 2001......................................... 3.10 0.60
</Table>
ITEM 6. SELECTED FINANCIAL DATA
<Table>
<Caption>
YEAR ENDED THREE MONTHS YEAR ENDED PERIOD
DECEMBER 31, ENDED SEPTEMBER 30, JANUARY 2 TO
------------------- DECEMBER 31, ------------------ SEPTEMBER 30,
2001 2000 1999 1999 1998 1997
---- ---- ------------ ---- ---- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations Data:
Revenue....................... $ 29,673 $ 25,486 $ 7,066 $ 16,277 $ 6,141 $ 280
Income (loss) before income
taxes...................... (18,449) (24,629) 576 1,217 (793) (110)
Income (loss) before
cumulative effect of change
in accounting principle.... (19,694) (16,255) 378 776 (574) (110)
Net income (loss)............. (19,694) (16,255) (185) 776 (574) (110)
Income (loss) per common
share, diluted............. (7.63) (6.19) (0.07) 0.36 (0.46) --
Balance Sheet Data:
Total assets.................. $167,913 $147,881 $162,873 $128,473 $94,859 $ 9,652
Total debt.................... 122,999 113,617 124,802 101,070 78,230 9,747
Stockholders' equity
(deficit).................. (9,242) 10,840 26,139 26,068 13,457 (110)
Selected Ratios:
Return on average assets...... (15.66)% (9.32)% (0.12)% 0.85% (1.23)% (2.28)%
Return on average equity...... (165.30)% (80.9)% (0.71)% 5.36% (4.13)% (100.00)%
Average equity to average
assets..................... 4.22% 11.52% 17.33% 15.87% 29.77% (1.14)%
</Table>
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We commenced operations in January 1997, for the primary purpose of
originating loans on manufactured home loan contracts located within the
communities owned by Sun Communities, Inc. Bingham was formed by Sun in response
to its growing need to provide timely and competitive financing to residents in
manufactured home communities. We provide financing for new and previously owned
manufactured homes to borrowers whose credit needs may or may not be met by
traditional financial institutions due to credit expectations or other factors.
In December 1999, we acquired Origen Inc. which specializes in manufactured home
lending and loan servicing. We now conduct all of our manufactured home loan
origination and servicing activities through Origen Inc. and Origen LLC, into
which Origen Inc. will be merged as part of our recapitalization. See
"Business -- Recapitalization." Through one of our subsidiaries, we also provide
warranty and disability insurance on the manufactured home loan contracts we
finance.
On February 4, 2000 we changed our fiscal year end from a twelve-month
period ending September 30 to a twelve-month period ending December 31. The
consolidated statements of operations and cash flows are presented for the years
ended December 31, 2001 and 2000, the three months ended December 31, 1999, and
the year ended September 30, 1999.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgements that affect the reported amounts of assets,
liabilities, revenues and expenses, and the related disclosures. On an on-going
basis, we evaluate these estimates, including those related to reserve for
credit losses, recourse liabilities and retained interests in loans sold and
securitized. Estimates are based on historical experience, information received
from third parties and on various other assumptions that are believed to be
reasonable under the circumstances, which form the basis for making judgements
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
TRANSFERS OF FINANCIAL ASSETS: We engage in securitizations and whole loan
sales of our manufactured home loan receivables. Gains and losses from these
transactions are recognized in the consolidated statements of operations when we
relinquish control of the transferred financial assets in accordance with SFAS
140 "Accounting For Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". We record certain assets and income based upon
the difference between all principal and interest received from the loans sold
and the following factors (i) all principal and interest required to be passed
through to the asset-backed bond investors, (ii) all excess contractual
servicing fees, (iii) other recurring fees and (iv) an estimate of losses on
loans (collectively, the "Excess Cash Flow"). At the time of the securitization
we estimate these amounts based upon a declining principal balance of the
underlying loans, adjusted by an estimated prepayment and loss rate, and we
capitalize these amounts using a discount rate that market participants would
use for similar financial instruments. These capitalized assets are recorded as
retained interest in loans sold and securitized and capitalized servicing
rights. We assess the carrying value of the retained interests for impairment on
a monthly basis. Any subsequent changes in fair value of the retained interests
are recognized in the consolidated statements of operations. The use of
different pricing models or assumptions could produce different financial
results. There can be no assurance that our estimates used to determine the
value of retained interests and the servicing asset valuations will remain
appropriate for the life of the securitization.
ALLOWANCE FOR CREDIT LOSSES: Our loan portfolio is comprised of homogenous
manufactured home loans with an average loan balance of less than $50,000. The
allowance for credit losses is determined at a portfolio level and computed by
applying loss rate factors to the loan portfolio on a stratified basis using
current portfolio performance and delinquency levels (0-30 days, 31-60 days,
61-90 days and more than 90 days delinquent). Our loss rate factors are based on
historical loan loss experience and are adjusted for economic conditions and
other trends affecting borrowers' ability to repay and estimated collateral
value. The allowance
15
for loan losses represents an unallocated allowance; there are no elements of
the allowance allocated to specific individual loans or to impaired loans.
LIABILITY FOR LOANS SOLD WITH RECOURSE: We periodically sell manufactured
home loans on a whole-loan basis. At the time of such loan sales, we recognize
recourse liabilities pursuant to our future obligations, if any, to the
applicable loan purchasers under the provisions of the respective sale
agreements. Under existing recourse provisions, we are required to repurchase
any loan contract that goes into default, as defined in the respective loan
agreement, for the life of each loan sold, at an amount equal to the outstanding
principal balance and accrued interest, and refund any purchase premiums. The
loan purchasers have no recourse to our other assets for failure of debtors to
pay when due.
The loan pools subject to recourse provisions are comprised of homogenous
manufactured home loans with an average loan balance of less than $50,000. The
estimated recourse liability is calculated based on historical default rates and
loss experience for pools of similar loans we originate and service. These loss
rates are applied to each pool of loans subject to recourse provisions and the
resulting estimated recourse liability represents the present value of the
expected obligations under those recourse provisions. The loss rates are
adjusted for economic conditions and other trends affecting borrowers' ability
to repay and estimated collateral value. The recourse liability is calculated at
a portfolio level and there are no elements of the estimated recourse liability
allocated to specific loans.
DEFERRED TAX ASSET: Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. We
record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized. While we have considered future
taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for a valuation allowance, in the event we were able to
determine that we would be able to realize our deferred tax assets in the future
in excess of its net recorded amount, an adjustment to the deferred tax asset
would increase income in the period such determination was made. Likewise,
should we determine that we would not be able to realize all or part of our net
deferred tax asset in the future, an adjustment to the deferred tax asset would
be charged to income in the period such determination was made.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 VS. YEAR ENDED DECEMBER 31, 2000:
Results for the year ended December 31, 2001 include the following:
- In March 2001, we completed a securitization of manufactured home loans
with principal balances totaling approximately $165.0 million. The
securitization qualified as a sale of the securitized loans and we
recorded a pre-tax gain of $4.4 million on the transaction.
- On December 18, 2001, in connection with our recapitalization we received
$40.0 million in capital contributions to Origen LLC from three
investors. We retained a 20% ownership interest and the three investors
received an initial 80% aggregate ownership interest in Origen LLC.
- On June 13, 2001, we sold certain of the assets of our commercial
mortgage financing subsidiaries and other related assets to Wells Fargo
Bank and Wells Fargo & Company for cash consideration of approximately
$9.7 million. The assets sold consisted primarily of commercial loans
receivable, mortgage servicing rights, and equipment. We recorded a
pre-tax gain of approximately $1.4 million on the sale.
- Manufactured home loan originations for the year ended December 31, 2001
were $192.0 million versus $161.2 million in the year ended December 31,
2000, an increase of 19.1%.
- Charges to pre-tax earnings for the year ended December 31, 2001 include
additions to the allowance for loan losses of approximately $3.5 million
and increases to the provision for recourse liability of $5.1 million.
16
- We recognized an impairment of our retained interest in loans sold and
securitized and consequently took a pre-tax write down of approximately
$9.5 million.
- We recognized a valuation allowance of approximately $7.7 million related
to deferred tax assets.
We reported a pre-tax loss of approximately $18.4 million for the year
ended December 31, 2001, compared to a pre-tax loss of approximately $24.6
million for the year ended December 31, 2000. The loss for the current year was
due primarily to additions of approximately $3.5 million to our loan loss
reserve, $5.1 million to our liability for loans sold with recourse and
recognition of an impairment of approximately $9.5 million on our retained
interests in securitized loans. These charges to earnings are primarily the
result of the continued turmoil in the manufactured home industry and economic
downturn that began in the third quarter of 2001 and has continued into 2002.
The downturn continues to put pressure on borrowers' ability to repay and has
resulted in an increase in overall defaults in our pools of loans sold with
recourse and our securitized pool of loans. Also, the continued industry wide
glut of repossessed inventory has depressed recovery rates and added to the
increased chargeoff amounts. Additionally, these conditions resulted in
recognition of a valuation allowance of approximately $7.7 million related to
deferred tax assets.
For the year ended December 31, 2001 interest income on loans decreased
34.9% to $9.5 million, compared to $14.6 million for the year ended December 31,
2000. The decrease is primarily due to a 38.1% decrease in the average
outstanding loan receivable balance, which was $89.1 million for the year ended
December 31, 2001 versus $143.9 million for the year ended December 31, 2000.
The decrease in average outstanding balance was a result of the securitization
of approximately $165.0 million of manufactured home loans in March 2001 and the
sale of $3.5 million of commercial mortgage loans in June 2001.
For the year ended December 31, 2001 interest expense was $7.9 million
compared to $14.2 million for the year ended December 31, 2000, a decrease of
44.4%. Average outstanding interest bearing liabilities decreased approximately
30.0% to $102.3 million for the year ended December 31, 2001 versus $146.2
million in the year ended December 31, 2000. Our interest bearing liabilities
are primarily used to finance our manufactured home loan portfolio. The weighted
average borrowing rate of our interest bearing liabilities also decreased to
7.69% for the year ended December 31, 2001 compared to 9.72% for the year ended
December 31, 2000. The decrease is primarily the result of a 230 basis point
decrease in the average LIBOR rate, which positively impacts our variable rate
debt. Our primary financing source is a variable rate facility that uses the
30-day LIBOR rate as an index. The decrease in the 30-day LIBOR rate was
partially offset by the change in our secondary financing facility, a demand
line of credit for $50 million before December 18, 2001 and currently $21.25
million, from a variable rate to a fixed rate facility charging interest at the
rate of 8.0% through December 18, 2001 and a minimum of 11.0% thereafter.
The following tables set forth the extent to which our net interest income
has been affected by changes in average interest rates and average balances of
interest earning assets and interest bearing liabilities.
<Table>
<Caption>
YEARS ENDED DECEMBER 31, 2001 AND DECEMBER 31, 2000
---------------------------------------------------------------------------------------
AVERAGE BALANCE AVERAGE RATE INTEREST VARIANCE DUE TO:
------------------- ------------- ---------------- INCREASE -----------------
2001 2000 2001 2000 2001 2000 (DECREASE) VOLUME RATE
---- ---- ---- ---- ---- ---- ---------- ------ ----
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans..................... $ 89,083 $143,915 10.33% 10.14% $9,493 $14,593 $(5,100) $(5,168) $ 68
Cash and equivalents...... 1,902 6,713 3.73 5.69 71 382 (311) (278) (33)
-------- -------- ----- ----- ------ ------- ------- ------- -----
$ 90,985 $150,628 10.19% 9.94% $9,564 $14,975 $(5,411) $(5,446) $ 35
-------- -------- ----- ----- ------ ------- ------- ------- -----
Interest-bearing Liabilities
Term loan................. $ 4,000 $ 4,000 11.68% 11.68% $ 467 $ 467 $ -- $ -- $ --
Revolving line of
credit.................. 36,890 43,690 7.99 8.86 2,947 3,843 (896) (801) (95)
Loans sold repurchase..... 61,483 98,478 7.26 10.04 4,461 9,892 (5,431) (4,747) (684)
-------- -------- ----- ----- ------ ------- ------- ------- -----
$102,373 $146,168 7.69% 9.72% $7,875 $14,202 $(6,327) $(5,548) $(779)
-------- -------- ----- ----- ------ ------- ------- ------- -----
Interest rate spread........ 2.50% 0.23%
Excess average earning
assets.................... $(11,388) $ 4,460 10.19% 9.94%
======== ======== ===== =====
Net interest margin......... 1.54% 0.51% $1,689 $ 773 $ 916 $ 102 $ 814
===== ===== ====== ======= ======= ======= =====
</Table>
17
Mortgage origination fees represent fees earned on commercial mortgage
loans originated and placed with outside investors. For the year ended December
31, 2001, Bloomfield Acceptance originated $39.4 million in commercial mortgage
loans that were placed with outside investors and recorded origination and
placement fees of $772,000 compared to $441.8 million in loans originated and
placed and $2.9 million of placement and origination fees for the year ended
December 31, 2000. The decrease is due to the sale of the operations of
Bloomfield Acceptance and Bloomfield Servicing to Wells Fargo Bank and Wells
Fargo & Company in June 2001.
Loan servicing fees, which are reported net of amortization of servicing
assets, were $12.0 million for the year ended December 31, 2001 compared to
approximately $7.9 for the year ended December 31, 2000, an increase of 51.9%.
The increase was the result of an increase in the principal balance of
manufactured home loans serviced for outside investors of approximately $165.0
million related to the manufactured home loan securitization completed in March
2001. The increase in the principal balance of manufactured home loans serviced
for others was partially offset by the sale of Bloomfield Servicing's commercial
mortgage servicing rights to Wells Fargo Bank and Wells Fargo & Company in June
2001.
On March 27, 2001 we completed our first securitization of manufactured
home loans through Origen Inc. We sold manufactured home loans we originated and
purchased to a trust for cash. The trust sold asset-backed bonds secured by the
loans to investors. We record certain assets and income from securitizations
based upon the difference between all principal and interest received from the
loans sold and the following factors (i) all principal and interest required to
be passed through to the asset-backed bond investors, (ii) all excess
contractual servicing fees, (iii) other recurring fees and (iv) an estimate of
losses on loans (collectively, the "Excess Cash Flow"). At the time of our
securitization we estimated these amounts based upon a declining principal
balance of the underlying loans, adjusted by an estimated prepayment and loss
rate, and we capitalized these amounts using a discount rate based on rates for
similar financial instruments. These capitalized assets are recorded as retained
interests in loans sold and securitized and capitalized servicing rights.
The total principal balance of loans securitized was approximately $165.0
million. On March 27, 2001 we transferred approximately $140.1 million of those
loans to the trust. The balance of the loans were transferred on April 23, 2001.
Accordingly, we recorded the retained interest, servicing asset and gain on sale
of loans based on the actual principal balance of the loans delivered to the
trust. The gain recognized in income as a result of the securitization
represents the difference between the proceeds from the securitization and the
allocated carrying cost of the loans securitized. For the year ended December
31, 2001 we recorded a gain of $4.4 million on the loans securitized.
We retained the right to service the securitized loans. Fees for servicing
the loans are based on a contractual percentage of 1.00% per annum of the unpaid
principal balance of the associated loans. We have recognized a servicing asset
as a component of our gain on the sale of loans. The servicing asset is
calculated as the present value of the expected future net servicing income in
excess of adequate compensation for a substitute servicer, based on common
industry assumptions and our historical experience. These factors include
default and prepayment speeds. The servicing asset recorded on the completed
securitization represents a 25 basis point strip of cash flows from the stated
servicing percentage.
18
The following table sets forth facts and assumptions we used in arriving at
the valuation of the retained interests relating to the manufactured home loan
securitization pool we service as of December 31, 2001:
<Table>
Outstanding balance of loans securitized.................... $143,228,460
Average stated principal balance............................ 40,334
Weighted average coupon on loans............................ 11.74%
Weighted average remaining term to stated maturity
(months).................................................. 317
Weighted average LTV........................................ 87.8%
Weighted average pass through rate to bondholders........... 7.45%
Assumed annual losses (through month 200)................... .01% to 3.87%
Timing of losses:
Ramp (months)............................................. 1-4
Plateau (months).......................................... 5-27
Decline (months).......................................... 28-228
Assumed cumulative losses as a % of original principal
balance................................................... 17.28%
Annual servicing fee........................................ 1.00%
Servicing asset............................................. .25%
Discount rate applied to valuing the present value of cash
flows associated with the excess servicing and retained
interest.................................................. 15.00%
Prepayment speed (MHP)(1)................................... 150.00%
Annual trustee fee.......................................... .018%
Initial overcollateralization required...................... 1.00%
Final overcollaterization required.......................... 4.50%
</Table>
- -------------------------
(1) Manufactured Housing Prepayment is based on an assumed rate of prepayments
each month of the then unpaid principal balance of a pool of new contracts.
A prepayment assumption of 100% MHP assumes constant prepayment rates of
3.7% per annum of the then unpaid principal balance of such contracts in the
first month of the life of the contacts and an additional 0.1% per annum in
each month thereafter until the 24th month. Beginning in the 24th month and
in each month thereafter during the life of the contract, 100% MHP assumes a
constant prepayment of 6.0% per annum each month.
The structure of the securitization requires a reserve to be created within
the securitization trust which uses Excess Cash Flow to retire the
securitization bond debt until the spread between the outstanding principal
balance of the loans in the securitization trust and the securitization bond
debt equals a specified percentage of the initial securitization principal
balance (the "overcollateralization amount"). Once this overcollateralization
amount is met, Excess Cash Flows are distributed to us. We began to receive
regular monthly servicing fees in the month following securitization.
We assess the carrying value of our retained interests on a monthly basis.
During the fourth quarter of 2001 the pool of securitized loans experienced
defaults and losses in excess of our expectations and we have concluded that
such defaults are likely to be higher than expected in future periods as well.
Initially, we estimated total life-time defaults as a percentage of initial pool
balance to be 19.81% and net lifetime losses to be 10.32%. Based on the actual
performance of the loans through December 31, 2001 we now estimate lifetime
defaults to be 29.63% and net losses to be 17.28% . We believe the increased
defaults and losses are due in part to the economic downturn that began in the
third quarter of 2001, was made worse by the events of September 11 and has
continued into 2002, and to some aggressive underwriting practices at the time
the loans were originated. As a result of the changes in valuation assumptions
in our retained interests we have recognized an impairment charge of
approximately $9.5 million.
Effective June 13, 2001, we sold certain of the assets of our commercial
mortgage financing and servicing subsidiaries and other related assets to Wells
Fargo Bank, N.A. and Wells Fargo & Company. The assets sold consisted primarily
of commercial mortgage loans receivable, commercial mortgage servicing rights,
and furniture and equipment with a total carrying amount of approximately $6.0
million. We recorded a pre-tax gain of approximately $1.4 million on the sale
based on the difference between the proceeds from the sale and the allocated
carrying cost of the assets sold.
19
Upon completion of the sale, the employees of Bloomfield Acceptance were
terminated and simultaneously hired by Wells Fargo Bank. Under terms of a
transition services agreement, we continued to service the commercial mortgage
loan servicing portfolio we sold until October 31, 2001.
In May 2001 we were awarded approximately $1.1 million through arbitration
related to the purchase price of some manufactured home loans and a servicing
advance receivable acquired with the acquisition of Origen Inc. in December
1999. The arbitration award was recognized through earnings in the year ended
December 31, 2001.
We periodically sell manufactured home loans on a whole-loan basis. At the
time of such loan sales, we recognize recourse liabilities pursuant to our
future obligations, if any, to the applicable loan purchasers under the
provisions of the respective sale agreements. Under our existing recourse
obligations, we are required to repurchase any loan contract that goes into
default, as defined in the respective loan agreement, for the life of each loan
sold, at an amount equal to the outstanding principal balance and accrued
interest, and refund any purchase premiums. The loan purchasers have no recourse
to our other assets for failure of debtors to pay when due.
The loan pools subject to recourse provisions are comprised of homogenous
manufactured home loans with an average loan balance of less than $50,000. The
estimated recourse liability is calculated based on historical default rates and
loss experience for pools of similar loans we originate and service. These loss
rates are applied to each pool of loans subject to recourse provisions and the
resulting estimated recourse liability represents the present value of the
expected obligations under those recourse provisions. The loss rates are
adjusted for economic conditions and other trends affecting borrowers' ability
to repay and estimated collateral value. The recourse liability is calculated at
a portfolio level and there are no elements of the estimated recourse liability
allocated to specific loans.
At December 31, 2001 and 2000, we had recorded liabilities of approximately
$7.9 million and $9.3 million respectively, related to manufactured home loans
sold with recourse. For the year ended December 31, 2001 we increased the
liability by $5.1 million through a charge to earnings versus no increase to the
liability for the year ended December 31, 2000. The pools of loans sold with
recourse have experienced actual losses in excess of what we originally
estimated and it is likely the losses will continue into future periods. We
believe the higher than expected losses are primarily the result of the economic
downturn that began in the third quarter of 2001, was made worse by the events
of September 11 and is more than likely to continue into 2002. Accordingly, the
increase in the recorded recourse liability during the year ended December 31,
2001 was the result of adjustments to the estimated cumulative life-time losses
and the resulting impact on the calculated present value of expected future
obligations. We have increased estimated cumulative losses on the loans sold
with recourse to 11.55% compared to 9.9% at December 31, 2000.
In January 2001, we repurchased loans with principal balances of
approximately $15.0 million that had previously been sold with recourse. We
securitized those loans as part of our March 2001 securitization. As a result of
the elimination of the our recourse obligations associated with the repurchased
loans, the related previously recognized recourse obligation of approximately
$450,000 was derecognized at the time of the repurchase.
20
Changes in the recorded recourse liability are summarized as follows:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
----------------
2001 2000
---- ----
(IN THOUSANDS)
Balance at beginning of period.............................. $ 9,313 $ 376
Provision for recourse liability............................ 5,067 --
Additional recourse loan sales.............................. -- 9,014
Adjustment related to repurchase of loans to put in
securitization............................................ (450)
Transfers to allowance for credit losses.................... (6,070) (77)
------- ------
Balance at end of period.................................... $ 7,860 $9,313
======= ======
</Table>
Our loan portfolio is comprised of homogenous manufactured home loans with
an average loan balance of less than $50,000. The allowance for loan losses is
determined at a portfolio level and computed by applying loss rate factors to
the loan portfolio on a stratified basis using current portfolio performance and
delinquency levels (0-30 days, 31-60 days, 61-90 days and more than 90 days
delinquent). Our loss rate factors are based on historical loan loss experience
and are adjusted for economic conditions and other trends affecting borrowers'
ability to repay and estimated collateral value. The allowance for loan losses
represents an unallocated allowance; there are no elements of the allowance
allocated to specific individual loans or to impaired loans.
For the year ended December 31, 2001 the provision for credit losses was
approximately $3.5 million compared to $7.7 million for the year ended December
31, 2000. The decrease is primarily attributable to the decrease in the
principal balance of non-performing loans, which was $2.6 million at December
31, 2001 versus $3.4 million at December 31, 2000. We define non-performing
loans as those loans that are 90 or more days delinquent in contractual
principal payments.
The allowance for credit losses as a percentage of gross manufactured home
loans outstanding was 1.4% at December 31, 2001 compared to 2.3% at December 31,
2000, a decrease of approximately 90 basis points. The decrease is primarily the
result of the sale of the majority of loans held at December 31, 2000 in the
$165.0 million manufactured home loan securitization we completed in March 2001.
As a result, the loans held at December 31, 2001 have been outstanding for less
time and reflect substantially fewer delinquencies than the loans held at
December 31, 2000. The majority of our then-current loan portfolio was
securitized and sold in March 2001.
Changes in the allowance for loan losses are summarized as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000
---- ----
(IN THOUSANDS)
Balance at beginning of period.............................. $ 2,168 $ 274
Provision for loan losses................................... 3,528 7,671
Transfers from recourse liability........................... 6,070 77
Gross chargeoffs............................................ (17,822) (10,261)
Recoveries.................................................. 7,820 4,407
-------- --------
Balance at end of period.................................... $ 1,764 $ 2,168
======== ========
</Table>
General and administrative expenses totaled approximately $19.8 million for
the year ended December 31, 2001 compared to $23.4 million for the year ended
December 31, 2000, a decrease of 15.4%. Personnel costs, the largest component
of general and administrative expenses, decreased to $14.7 million for the year
ended December 31, 2001 versus $17.0 million for the year ended December 30,
2000, a 13.5% decrease. The decrease in personnel costs is primarily the result
of the reduction in the number of full time employees to 197 at December 31,
2001, compared to 218 at December 31, 2000. Professional service costs, another
component
21
of general and administrative expenses, were $747,000 for the year ended
December 31, 2001, compared to $1.5 million for the year ended December 30,
2000, a decrease of 50.2%.
Other operating expenses totaled approximately $1.9 million for the year
ended December 31, 2001, compared to $1.5 million for the year ended December
31, 2000, an increase of 26.7%. Marketing and advertising expense, a component
of other operating expenses, increased to $585,000 for the year ended December
31, 2001 versus $458,000 for the year ended December 30, 2000, a 27.7% increase.
The increase was primarily related to changes in our corporate advertising
strategy in changing the name of Dynex Financial, Inc. to Origen Financial, Inc.
YEAR ENDED DECEMBER 31, 2000 VS. YEAR ENDED SEPTEMBER 30, 1999:
Results for the year ended December 31, 2000 include the following:
- Manufactured home loan originations for the year ended December 31, 2000
were $161.2 million versus $65.1 million in the year ended September 30,
1999, an increase of 147.6%.
- Commercial loan originations for the year ended December 31, 2000
increased 95.7% to $514.2 million compared to $262.8 million in the year
ended September 30, 1999 and increased 97.8% over originations of $260.0
million for the year ended September 30, 1998.
- In the year ended December 31, 2000, we completed the sale of
approximately $130.2 million of fixed rate manufactured home loans and
the securitization and sale of approximately $94.3 million of commercial
mortgage loans. The proceeds from these transactions were used to pay
down our existing debt.
- Results of operations for the year ended December 31, 2000 include
additions to the allowance for loan losses of approximately $7.7 million.
The increased addition to the reserve resulted primarily from losses on
non-performing loans and charge-offs of $3.9 million on loans originated
by MHFC, Inc., our previous manufactured home loan origination
subsidiary, which was sold in March, 2000.
- Results of operations for the year ended December 31, 2000 also include
nonrecurring charges of $2.1 million related to an unsuccessful merger
attempt with Franklin Bank, $796,000 on the sale of MHFC, Inc. and
$403,000 in severance compensation related to closed offices.
We reported a net loss of $16.3 million for the year ended December 31,
2000 compared to net income of $776,000 for the year ended September 30, 1999.
The loss for the current year was due primarily to the addition of approximately
$7.7 million to our loan loss reserve, an approximately 184 basis point increase
in our average borrowing rate and a significant increase in personnel and
general and administrative costs as a result of the December 1999 acquisition
and integration of Origen Inc. Such increased costs were not offset by income
from loan originations as the turmoil in the manufactured housing industry
significantly curtailed loan origination volume.
For the year ended December 31, 2000 interest income on loans increased
53.7% to $14.6 million, compared to $9.5 million for the year ended September
30, 1999. The increase is primarily due to a 31.7% increase in the average
outstanding loan receivable balance, which was $143.9 million for the year ended
December 31, 2000 versus $111.7 million for the year ended September 30, 1999.
The larger percentage of higher yielding manufactured home loans in the
portfolio for the year ended December 31, 2000 compared to the year ended
September 30, 1999 resulted in the average yield on the loan receivables
increasing to 10.1% for the year ended December 31, 2000 versus 8.5% in the year
ended September 30, 1999.
For the year ended December 31, 2000 interest expense was $14.2 million
compared to $6.9 million for the year ended September 30, 1999, an increase of
105.8%. Average outstanding interest bearing liabilities increased 45.2% to
$146.2 million for the year ended December 31, 2000 versus $100.7 million in the
year ended September 30, 1999. The weighted average borrowing rate also
increased to 9.72% for the year ended December 31, 2000 compared to 6.81% for
the year ended September 30, 1999. The increase is primarily the result of a 125
basis point increase in the average LIBOR rate which negatively impacts our
variable rate debt and an increase in fees associated with our borrowing
facilities.
22
The following tables set forth the extent to which our net interest income
has been affected by changes in average interest rates and average balances of
interest earning assets and interest bearing liabilities.
<Table>
<Caption>
YEARS ENDED DECEMBER 31, 2000 AND SEPTEMBER 30, 1999
-----------------------------------------------------------------------------------------
AVERAGE BALANCE AVERAGE RATE INTEREST VARIANCE DUE TO:
------------------- -------------- ---------------- INCREASE -----------------
2000 1999 2000 1999 2000 1999 (DECREASE) VOLUME RATE
---- ---- ---- ---- ---- ---- ---------- ------ ----
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans....................... $143,915 $111,715 10.14% 8.48% $14,593 $9,477 $ 5,116 $ 4,652 $ 464
Cash and equivalents........ 6,713 4,283 5.69 2.33 382 100 282 246 36
-------- -------- ----- ----- ------- ------ ------- ------- -----
$150,628 $115,998 9.94% 8.80% $14,975 $9,577 $ 5,398 $ 4,898 $ 500
-------- -------- ----- ----- ------- ------ ------- ------- -----
Interest-bearing Liabilities
Term loan................... $ 4,000 $ 4,000 11.68% 11.68% $ 467 $ 467 $ -- $ -- $ --
Revolving line of credit.... 43,690 20,879 8.86 7.62 3,843 1,591 2,252 2,187 65
Loans sold under
repurchase................ 98,478 75,784 10.04 6.33 9,892 4,798 5,094 4,391 703
-------- -------- ----- ----- ------- ------ ------- ------- -----
$146,168 $100,663 9.72% 6.81% $14,202 $6,856 $ 7,346 $ 6,578 $ 768
-------- -------- ----- ----- ------- ------ ------- ------- -----
Interest rate spread.......... 0.23% 1.99%
Excess average earning
assets...................... $ 4,460 $ 15,335 9.94% 8.80%
======== ======== ===== =====
Net interest margin........... 0.51% 2.35% $ 773 $2,721 $(1,948) $(1,680) $(268)
===== ===== ======= ====== ======= ======= =====
</Table>
Mortgage origination fees represent fees earned on commercial mortgage
loans originated and placed with outside investors. For the year ended December
31, 2000, we originated $441.8 million in commercial mortgage loans that were
placed with outside investors and recorded origination and placement fees of
$2.9 million compared to $155.0 million in loans originated and placed and $1.6
million of placement and origination fees for the year ended September 30, 1999.
Servicing fees collected for the year ended December 31, 2000 were $7.9
million compared to approximately $500,000 for the year ended September 30,
1999. The large increase was the direct result of an increase in the average
principal balance of approximately $960.0 million to approximately $1.2 billion
of manufactured home loans serviced for outside investors and an increase in the
average principal balance of approximately $500.0 million to approximately $1.2
billion of commercial mortgage loans serviced for outside investors. The
increases were primarily the result of the acquisition in December 1999 of
Origen Inc., which had a servicing portfolio balance of $980.0 million, and the
acquisition in June 1999 of Hartger & Willard, an originator and servicer of
commercial mortgage loans, which had a servicing portfolio of $440.0 million. We
also sold approximately $15.8 million of manufactured home loans and sold or
placed with outside investors a total of approximately $467.2 million of
commercial mortgage loans in the year ended December 31, 2000 while retaining
the related servicing rights.
Gain on sale of loans represents the difference between the proceeds from
the sale or securitization of loans and the allocated carrying cost of the loans
sold or securitized. The gain recognized is also net of estimated recourse
obligations. For the year ended December 31, 2000, We sold or securitized
approximately $94.3 million in principal balance of commercial mortgage loans
and approximately $130.2 million in principal balance of manufactured home loans
and recorded a gain on loans sold of $27,000. In the year ended September 30,
1999, we sold approximately $20.4 million of manufactured home loans and
securitized and sold approximately $80.3 million of commercial mortgage loans
resulting in gains of $4.4 million. The gain recognized in the year ended
September 30, 1999, includes a recovery of $2.4 million related to the valuation
of the loan portfolio and related hedge positions.
Provision for credit losses is recorded in amounts sufficient to maintain
an allowance at a level considered adequate to cover losses from loans. The
provision for credit losses increased to $7.7 million for the year ended
December 31, 2000 from $653,000 for the year ended September 30, 1999. The large
increase is primarily attributable to a decline in recovery rates due to an
increased supply of new and used manufactured homes in the marketplace and
charge-offs on the loans originated by MHFC which totaled $3.9 million for the
year ended December 31, 2000 compared to $580,000 for the year ended September
30, 1999. The increase is also
23
affected by the increase in non-performing manufactured home loans, which were
$3.4 million at December 31, 2000 versus $988,000 at September 30, 1999.
As part of our plan to conduct all of our manufactured home loan
origination operations through Origen Inc., in March 2000, Origen Inc. purchased
$66.9 million of loans from MHFC and we sold MHFC to Gwenuc, LLC a limited
liability company owned by Gary A. Shiffman, Chairman of Bingham. Gwenuc paid us
$400,000 in cash and assumed $2.7 million of debt to Origen Inc. We now conduct
all of our manufactured home loan origination activities through Origen Inc. and
Origen LLC, into which Origen Inc. will be merged as part of our
recapitalization of our operating subsidiaries.
As a result of the sale of MHFC, for the year ended December 31, 2000 we
incurred approximately $396,000 in non-recurring costs to shut down the
operations of MHFC. These costs include approximately $322,000 in salaries and
severance pay to terminated employees and $74,000 of general and administrative
costs. We also recognized a $400,000 loss on the ultimate disposition of MHFC.
General and administrative and other operating expenses totaled
approximately $24.9 million for the year ended December 31, 2000. This was an
increase of approximately 227.6% over general and administrative expenses of
$7.6 million in the year ended September 30, 1999. The largest part of the
increase is directly attributable to personnel costs related to the acquisition
of Origen Inc. in December 1999. The acquisition increased the number of our
full-time employees to 218 at December 31, 2000 from 90 at September 30, 1999
and resulted in personnel costs of $17.0 million for the year ended December 31,
2000, compared to $3.9 million for the year ended September 30, 1999, an
increase in personnel costs of 335.9%. The acquisition also increased the number
of leased office locations for the origination and servicing of manufactured
home loans to five at December 31, 2000 as compared to two at September 30,
1999.
THREE MONTHS ENDED DECEMBER 31, 1999 VS. THREE MONTHS ENDED DECEMBER 31, 1998:
We reported a net loss of $185,000 for the three months ended December 31,
1999, compared to net income of $764,000 in the three months ended December 31,
1998. The decrease in net income was due primarily to the cumulative effect of a
change in accounting principle of $563,000, net of tax, and an increase in
general and administrative expenses of approximately $1.8 million. The change in
accounting principle relates to start up costs that were previously capitalized
and amortized over five years but are now required to be expensed as incurred.
The change was retroactive and we were required to expense currently all
previously capitalized start up costs. The significant increase in general and
administrative expenses was the result of the continued growth in the size of
our operations including the acquisition Origen Inc.
Interest income on loans increased to $4.0 million for the period, or
approximately 92% over interest income of $2.1 million in the comparable period
in 1998. The large increase was primarily due to an increase in the average
outstanding loan receivable balance of $153.8 million for the three months ended
December 31, 1999, versus $97.6 million for the three months ended December 31,
1998, an increase of 57.6%. The increase in interest income was also the result
of an increase in the average yield on the loan receivable portfolio of 10.6%
for the period in 1999 versus 8.7% in 1998. This was due to a larger percentage
of the loan portfolio being made up of higher yielding manufactured home loans
versus commercial mortgage loans.
Interest expense for the three months ended December 31, 1999 was $2.8
million as compared to $1.7 million for the comparable period ended December 31,
1998, an increase of 65.0%. The increase in interest expense was driven by the
increase in the average outstanding balance of debt used to finance the loan
receivables and fund operations. Average outstanding debt increased to $136.9
million, or 47.2% for the period in 1999 versus $93.0 million in the comparable
period in 1998. Adding to the increase in interest expense was an increase in
the cost of borrowings to 8.3% for the quarter ended December 31, 1999 compared
to 7.3% in the comparable period in 1998.
24
The following table sets forth the extent to which our net interest income
has been affected by changes in average interest rates and average balances of
interest earning assets and interest bearing liabilities.
<Table>
<Caption>
THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
---------------------------------------------------------------------------------------
AVERAGE BALANCE AVERAGE RATE INTEREST VARIANCE DUE TO:
------------------- --------------- --------------- INCREASE ----------------
1999 1998 1999 1998 1999 1998 (DECREASE) VOLUME RATE
---- ---- ---- ---- ---- ---- ---------- ------ ----
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans..................... $153,758 $ 97,550 10.59% 8.68% $4,069 $2,118 $1,951 $1,485 $466
Cash and equivalents...... 3,923 4,331 2.44% 3.42% 24 37 (13) (2) (11)
-------- -------- ------ ------ ------ ------ ------ ------ ----
157,681 101,881 10.38% 8.46% 4,093 2,155 1,938 1,483 455
-------- -------- ------ ------ ------ ------ ------ ------ ----
Interest-bearing
Liabilities
Term loan................. 4,000 4,000 11.68% 11.68% 117 117 -- -- --
Revolving line of
credit.................. 41,881 20,262 7.88% 8.13% 825 412 413 426 (13)
Loans sold under
repurchase.............. 91,066 68,797 8.30% 6.81% 1,890 1,170 720 464 256
-------- -------- ------ ------ ------ ------ ------ ------ ----
136,947 93,059 8.27% 7.30% 2,832 1,699 1,133 890 243
-------- -------- ------ ------ ------ ------ ------ ------ ----
Interest rate spread........ 2.11% 1.16%
Excess average earning
assets.................... $ 20,734 $ 8,822 10.38% 8.46%
======== ======== ====== ======
Net interest margin......... 3.20% 1.79% $1,261 $ 456 $ 805 $ 593 $212
====== ====== ====== ====== ====== ====== ====
</Table>
Mortgage origination fees are related to commercial mortgage loans
originated and placed with outside investors. Placement fees increased 173% to
$762,000 on placed commercial mortgage loans of $105.9 million for three months
ended December 31, 1999, compared to $279,000 in fees on placed commercial
mortgage loans of $24.5 million in the comparable period in 1998.
Gain on sale of loans represents the difference between the proceeds from
sale and the allocated carrying cost of the loans sold. The gain is also net of
required reserves for the potential loss due to repossession and ultimate
charge-off of loans sold with recourse that we are required to repurchase. For
the quarter ended December 31, 1999, we sold approximately $100.0 million of
manufactured home loan receivables resulting in a net gain of $1.6 million as
compared to sales of $5.0 million of manufactured home loan receivables
resulting in gains of $289,000 for the comparable period in 1998. The three
months ended December 31, 1998 also included a recovery of $1.25 million related
to the valuation of the loan portfolio and related hedge positions.
Provision for credit losses is recorded in amounts sufficient to maintain
an allowance at a level considered adequate to cover losses from liquidating
manufactured home loans and loans sold with recourse. Provision for credit
losses increased approximately 273% to $362,000 for the three months ended
December 31, 1999 compared to $97,000 for the comparable period in 1998. The
large increase was primarily related to a 274% increase in average outstanding
principal balance of manufactured home loans which was $95.7 million for the
period ended December 31, 1999 as compared to $25.6 million for the period ended
December 31, 1998. The provision increase was also affected by the increase in
non-performing manufactured home loans which were 2.95% of the manufactured home
loan outstanding principal balance at December 31, 1999 versus .25% of the
outstanding principal balance for the comparable period in 1998.
General and administrative and other operating expenses totaled
approximately $3.3 million for the three months ended December 31, 1999. This
was an increase of $2.1 million or 175% over general and administrative expenses
of $1.2 million in the comparable three months in 1998. The largest part of the
increase was directly related to personnel costs. We increased the number of
existing full time employees to 95 and also added approximately 200 full time
employees with our acquisition Origen Inc. in mid-December 1999, resulting in
personnel costs of $2.2 million for the three months ended December 31, 1999, an
increase of 277%. This is compared to 40 full time employees with personnel
costs of $583,000 for the three months ended December 31, 1998. These increases
reflect the costs of the Company's expansion of our manufactured home lending
operations to communities outside those owned and operated by Sun and the
expansion of our commercial mortgage lending business through the acquisition of
Hartger & Willard. The increase in
25
personnel resulted in an increase in occupancy and office expenses to $470,000
for the period ended December 31, 1999 or a 123% increase over the comparable
period in 1998 of $211,000.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the measurement of our ability to have adequate cash or access
to cash at all times in order to meet financial obligations when due, as well as
to fund corporate expansion or other activities. We expect to meet our liquidity
requirements through a combination of working capital provided by operating
activities, draws on our lines of credit, advances under our master repurchase
agreement, whole loan sales and periodic securitizations of our loan portfolio.
We may also issue additional shares of capital stock when and if we believe
existing shareholders are likely to benefit from such offerings.
During the year ended December 31, 2001 total borrowings increased to
$123.0 million from $113.6 million at December 31, 2000, an increase of 8.3%.
The increase in total borrowings resulted primarily from the increase in loans
receivable balance which was $127.4 million at December 31, 2001 compared to
$98.6 million at December 31, 2000.
The increased borrowings are also affected by cash flows from operations.
We originate loans and warehouse them until a sufficient amount of loans has
been accumulated for a whole loan sale or securitization. The timing of whole
loan sales or securitizations significantly impact cash flows from operations.
We securitized and sold approximately $165.0 million of manufactured home loans
in March 2001, resulting in proceeds of $161.3 million, which we used to pay
down our existing debt. This compares to a whole loan sale of manufactured home
loans with principal balances totaling approximately $115.3 million in August
2000, resulting in proceeds of $113.7 million. The increased liquidity provided
by the securitization and sale of portions of our loan portfolio was offset by
an increase in the origination of manufactured home loans which were $192.0
million for the year ended December 31, 2001, compared to $161.2 million for the
year ended December 31, 2000, an increase of 19.1%. We also securitized and sold
approximately $135.0 million of manufactured home loans in March 2002, resulting
in proceeds of approximately $128.5 million, which we used to pay down our
existing debt.
The decrease in liquidity resulting from the increased origination of
manufactured home loans in the year ended December 31, 2001 compared to the year
ended December 31, 2000, was partially offset by the sale of certain of the
assets of our commercial mortgage financing and servicing subsidiaries and other
related assets to Wells Fargo Bank and Wells Fargo & Company for cash
consideration of approximately $9.6 million. We used the proceeds from the sale
to pay down our existing debt.
Through December 18, 2001, we had three separate financing facilities with
Sun Communities Operating Limited Partnership: a $4.0 million subordinated term
loan, a $10.0 million subordinated demand line of credit and a $50.0 million
subordinated demand line of credit. As of December 18, 2001 there was $51.3
million outstanding in the aggregate under these loans.
On December 18, 2001, in connection with our recapitalization, we received
capital contributions totaling $40 million in Origen LLC from three
investors -- SUI TRS, Shiffman Family LLC and Woodward Holding. The funds from
the capital contributions were used to repay a substantial portion of our debt
to Sun Communities Operating Limited Partnership. The remaining balance of our
debt to Sun Communities Operating Limited Partnership (approximately $11.4
million) was restructured into a $21.25 million line of credit extended by Sun
Communities Operating Limited Partnership to Origen Inc. and Origen LLC, as co-
borrowers. The line of credit will terminate on December 18, 2002 and the
outstanding balance bears interest at a rate of LIBOR plus 700 basis points,
with a minimum interest rate of 11% and a maximum interest rate of 15%. The line
of credit is secured by a security interest in substantially all of each
borrower's assets. Sun Communities Operating Limited Partnership and Woodward
Holding, a member of Origen LLC, have entered into a participation agreement
under which Sun Communities Operating Limited Partnership will loan up to
approximately 59% of the borrowing limit (or $12.5 million) and Woodward Holding
will loan up to approximately 41% of the borrowing limit (or $8.75 million)
under the line of credit. Sun Communities Operating Limited Partnership and
Woodward Holding jointly administer the line of credit. Bingham has
26
guaranteed the obligations of the borrowers under the line of credit and has
granted the lenders a security interest in substantially all of its assets as
security for the guaranty.
Gary A. Shiffman, Bingham's Chairman of the Board, and Arthur A. Weiss, a
director of Bingham, are affiliated with SUI TRS, Shiffman Family LLC and Sun
Communities Operating Limited Partnership. See "Certain Relationships and
Related Party Transactions." Although SUI TRS and Shiffman Family LLC are
related parties with respect to Bingham, their investment in Origen LLC is in
the aggregate equal to the investment of Woodward Holding, which at the time of
the recapitalization was not related to Bingham and which was actively involved
in negotiating the terms of the recapitalization. A special committee of
Bingham's board of directors comprised of non-interested directors approved the
recapitalization. In addition, an independent investment banking firm delivered
an opinion to the special committee of the board that, subject to certain
qualifications, from a financial point of view, the consideration received by
Bingham in the recapitalization was fair to Bingham. In negotiating and deciding
to enter into the recapitalization, the Bingham board considered that we had an
immediate need for funding to operate our business and to repay our
then-existing debt to Sun Communities Operating Limited Partnership, and that,
after several months of searching for strategic business partners, there were no
other viable strategic or financial alternatives immediately available to us,
such as other equity funding proposals. Similarly, after a diligent search for
other mezzanine lenders, we were unable to obtain financing from another lender
on terms as favorable as those offered by Sun Communities Operating Limited
Partnership and Woodward Holding under our line of credit with them.
In accordance with the original subordinated debt facility provided by Sun
Communities Operating Limited Partnership, we issued detachable warrants to Sun
covering 400,000 shares of common stock at a price of $10.00 per warrant share.
The detachable warrants had a term of seven years and could have been exercised
at any time after the fourth anniversary of the issuance. Upon the restructuring
of the subordinated loan agreement, the detachable warrants were canceled. None
of the detachable warrants had been exercised prior to the time they were
canceled.
Bingham and Origen Inc. are borrowers under a revolving credit facility
with Standard Federal Bank (as successor to Michigan National Bank). Under this
facility, Bingham and Origen Inc. may borrow up to $10.0 million. Interest at a
rate of 30-day LIBOR plus a spread is payable on the outstanding balance. The
outstanding principal balance on this credit facility as of December 31, 2001
was approximately $6.3 million. In December 2001, the financial covenants for
this facility were amended to provide for an increased tangible net worth
requirement. To secure the loan from Standard Federal Bank, Origen Inc. and
Bingham have granted Standard Federal Bank a security interest in our rights
under three servicing agreements under which Origen Inc. services manufactured
home loans. This facility will terminate on June 30, 2002. Based on discussions
with Standard Federal Bank and other lenders, we expect this facility to be
extended or replaced at the end of its current term.
In December 2001, Credit Suisse First Boston and Origen LLC, through its
special purpose subsidiary Origen Special Holdings, LLC entered into a master
repurchase agreement to replace the prior master repurchase agreement between
Credit Suisse First Boston Mortgage Capital and Origen Special Holdings
Corporation, a special purpose subsidiary of Origen Inc. The aggregate amount
advanced under the prior facility was transferred to the new facility. In
December 2001, the financial covenants for this facility were amended to provide
for an increased tangible net worth requirement. Under the new agreement, Origen
LLC contributes manufactured home loans it originates or purchases to Origen
Special Holdings, LLC. Origen Special Holdings, LLC then transfers the
manufactured home loans to Credit Suisse First Boston against the transfer of
funds from Credit Suisse First Boston and Origen Special Holdings, LLC transfers
the funds to Origen LLC for operations. Bingham guarantees the obligations of
Origen Special Holdings, LLC under this agreement. The maximum financing limit
on the facility is $150.0 million. The annual interest rate on the facility is a
variable rate equal to LIBOR plus a spread. The loans are financed on the
facility at varying advance rates on the lesser of the then current face value
or market value of the loans. The advance rates depend on the characteristics of
the loans financed. The facility will terminate on May 28, 2002, but may be
terminated earlier upon an event of default under the master repurchase
agreement. Based on discussions with Credit Suisse First Boston, we expect the
term of this agreement will be extended.
27
In addition to these borrowings, we have fixed contractual obligations
under various lease agreements. Our contractual obligations were comprised of
the following as of December 31, 2001:
<Table>
<Caption>
PAYMENTS DUE BY PERIOD
------------------------------------------
TOTAL LESS THAN 1 YEAR 1-3 YEARS 4-5 YEARS
----- ---------------- --------- ---------
(IN THOUSANDS)
Repurchase obligations(1).................. $105,564 $105,564 $ -- $--
Lines of credit(2)......................... 17,435 17,435 -- --
Operating leases........................... 2,585 1,167 1,383 35
-------- -------- ------ ---
Total contractual obligations............ $125,584 $124,166 $1,383 $35
======== ======== ====== ===
Guarantees(3).............................. $116,749 $116,749 -- --
</Table>
- -------------------------
(1) These repurchase obligations are owed by Origen LLC to Credit Suisse First
Boston. Upon our recent securitization, Origen LLC repurchased $119.4
million in loans and as of March 27, 2002, repurchase obligations were $3.4
million.
(2) Origen Inc. and Origen LLC are co-borrowers under the Sun Communities
Operating Limited Partnership line of credit and Origen Inc. and Bingham are
co-borrowers under the Standard Federal Bank line of credit. Upon our recent
securitization, the borrowers repaid $9.1 million under the Sun Communities
Operating Limited Partnership line of credit and as of March 27, 2002, there
was $11.7 million outstanding under these lines of credit.
(3) Bingham is the guarantor of the obligations of Origen LLC under the Credit
Suisse First Boston repurchase agreement and the obligations of Origen Inc.
and Origen LLC under the Sun Communities Operating Limited Partnership line
of credit. As of March 27, 2002, there was $15.1 million outstanding under
these arrangements.
Our future liquidity and capital requirements depend on numerous factors,
many of which are outside of our control. Based on our business model and the
nature of the capital markets, we expect we will need to raise additional
capital before the end of 2002, even if we maintain our borrowing relationships
with Credit Suisse First Boston Mortgage Capital and Sun Communities Operating
Limited Partnership and replace or extend our Standard Federal Bank loan
facility. As a result, during that time we will need to obtain funding from
sources such as operating activities, loan sales or securitizations, sales of
debt or member interests by Origen LLC or additional debt financing
arrangements. Our ability to obtain funding from operations may be adversely
impacted by, among other things, market and economic conditions in the
manufactured home financing markets generally, including decreased sales of
manufactured homes. Our ability to obtain funding from loan sales and
securitizations may be adversely impacted by, among other things, the price and
credit quality of our loans, conditions in the securities markets generally (and
specifically in the asset-backed securities market), compliance of our loans
with the eligibility requirements for a particular securitization and any
material negative rating agency action pertaining to certificates issued in our
securitizations. Our ability to obtain funding from sales of securities or debt
financing arrangements may be adversely impacted by, among other things, market
and economic conditions in the manufactured home financing markets generally and
our financial condition and prospects. See "Business -- Factors that May Affect
Future Results."
We will also need additional funds to meet our long-term capital needs. In
order to meet these capital needs, in addition to the sources of capital
referenced above, we believe we must raise additional capital or merge or enter
into a joint venture or otherwise enter into a strategic business relationship
that would provide access to low-cost funds. We may not be able to enter into
such a relationship on favorable terms, or at all, if our business is adversely
affected by any of the factors described in the preceding paragraph. While we
continue to pursue these options with respect to meeting our long-term capital
needs, there can be no assurance that these efforts will be successful. If these
efforts are not successful our ability to continue operations would be
jeopardized.
28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
Market risk is the risk of loss arising from adverse changes in market
prices and interest rates. Our market risk arises from interest rate risk
inherent in our financial instruments. We are not currently subject to foreign
currency exchange rate risk or commodity price risk.
In the normal course of business, we also face risks that are either
nonfinancial or nonquantifiable. Such risks principally include credit risk and
legal risk and are not included in the following table.
The following table shows the contractual maturity dates of our assets and
liabilities. For each maturity category in the table the difference between
interest-earning assets and interest-bearing liabilities reflects an imbalance
between repricing opportunities for the two sides of the balance sheet. The
consequences of a negative cumulative gap at the end of one year suggests that,
if interest rates were to rise, liability costs would increase more quickly than
asset yields, placing negative pressure on earnings.
<Table>
<Caption>
MATURITY
----------------------------------------------------------------
0 TO 3 4 TO 12 1 TO 5 OVER 5
MONTHS MONTHS YEARS YEARS TOTAL
------ ------- ------ ------ -----
(IN THOUSANDS)
ASSETS
Cash and equivalents................. $ 440 $ -- $ -- $ -- $ 440
Restricted cash...................... 1,739 -- -- -- 1,739
Loans receivable..................... 301 847 8,778 117,486 127,412
Servicing rights..................... 282 652 5,329 592 6,855
Servicing advances................... 7,952 1,988 -- -- 9,940
Furniture, fixtures and equipment,
net................................ 198 594 1,009 -- 1,801
Deferred federal income taxes........ -- 1,181 5,819 -- 7,000
Loan sale proceeds receivable........ 372 973 2,747 1,631 5,723
Other assets......................... 3,350 494 2,029 1,130 7,003
------- --------- -------- -------- --------
Total assets....................... $14,634 $ 6,729 $ 25,711 $120,839 $167,913
======= ========= ======== ======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable and accrued
expenses........................... $ 3,279 $ 2,342 $ 88 $ -- $ 5,709
Recourse liability................... 868 3,038 4,341 434 8,681
Advances under repurchase
agreements......................... -- 105,564 -- -- 105,564
Notes payable........................ 17,435 -- -- -- 17,435
------- --------- -------- -------- --------
Total liabilities.................. 21,582 110,944 4,429 434 137,389
Non-controlling members' interests in
subsidiary......................... -- -- -- 39,766 39,766
Common stock, no par value,
10,000,000 shares authorized;
2,542,988 shares issued and
Outstanding........................ -- -- -- 26,478 26,478
Paid-in capital...................... -- -- -- 322 322
Accumulated deficit.................. -- -- -- (36,042) (36,042)
------- --------- -------- -------- --------
Total stockholders' equity
(deficiency).................... -- -- (9,242) (9,242)
------- --------- -------- -------- --------
Total liabilities and stockholders'
equity (deficiency)............. $21,582 $ 110,944 $ 4,429 $ 30,958 $167,913
======= ========= ======== ======== ========
Reprice difference................... $(6,948) $(104,215) $ 21,282 $ 89,881
Cumulative gap....................... $(6,948) $(111,163) $(89,881) --
Percent of total assets.............. (8.98)% (143.61)% (116.11)%
</Table>
Our operations may be directly affected by fluctuations in interest rates.
While we monitor interest rates and have in the past employed strategies
designed to hedge some of the risks associated with changes in interest rates,
such as the use of forward interest rate swaps and Treasury rate locks, no
assurance can be given that our results of operations and financial condition
will not be adversely affected during periods of
29
fluctuations in interest rates. We currently have no open hedge positions on our
loans held for sale. Our present strategy is to securitize or sell all new
production within three to nine months of origination. Because the interest
rates on our lines of credit used to fund and acquire loans are variable and the
rates charged on loans we originate are fixed, increases in the interest rates
after the loans are originated but before they are sold may reduce the gain on
loan sales.
The following table shows the Company's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity, and
the instruments' fair values at December 31, 2001.
<Table>
<Caption>
CONTRACTUAL MATURITY
----------------------------------------------------------------------------
TOTAL
2002 2003 2004 2005 2006 THEREAFTER FAIR VALUE
---- ---- ---- ---- ---- ---------- ----------
(DOLLARS IN THOUSANDS)
Interest sensitive assets:
Loans receivable............ $ 1,148 $1,373 $1,500 $1,719 $1,835 $121,723 $129,298
Average interest rate....... 10.85% 10.85% 10.85% 10.85% 10.85% 10.85% 10.85%
Interest bearing deposits... 1,902 -- -- -- -- -- 1,902
Average interest rates...... 5.73% -- -- -- -- -- 5.73%
-------- ------ ------ ------ ------ -------- --------
Total interest
sensitive assets.... $ 3,050 $1,373 $1,500 $1,719 $1,835 $121,723 $131,200
======== ====== ====== ====== ====== ======== ========
Interest sensitive
liabilities:
Borrowings:
Advances under repurchase
agreements............. $105,564 $ -- $ -- $ -- $ -- $ -- $105,564
Average interest rate.... 3.63% -- -- -- -- -- 3.63%
Note payable............. 17,435 -- -- -- -- -- 17,435
Average interest rate.... 8.45% -- -- -- -- -- 8.45%
-------- ------ ------ ------ ------ -------- --------
Total interest
sensitive
liabilities......... $122,999 $ -- $ -- $ -- $ -- $ -- $122,999
======== ====== ====== ====== ====== ======== ========
</Table>
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BINGHAM FINANCIAL SERVICES CORPORATION
FINANCIAL STATEMENTS FURNISHED PURSUANT TO
THE REQUIREMENTS OF FORM 10-K
AND
REPORTS OF INDEPENDENT ACCOUNTANTS
FOR THE YEARS AND PERIOD ENDED DECEMBER 31, 2001, 2000 AND 1999, AND THE
YEAR ENDED SEPTEMBER 30, 1999
31
BINGHAM FINANCIAL SERVICES CORPORATION
INDEX TO FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
Independent Auditor's Report................................ 33
Financial Statements:
Consolidated Balance Sheets -- December 31, 2001, and
December 31, 2000...................................... 34
Consolidated Statements of Operations for the years and
period ended December 31, 2001, 2000 and 1999, and the
year ended September 30, 1999.......................... 35
Consolidated Statement of Changes in Stockholders' Equity
(Deficit) for the years and period ended December 31,
2001, 2000 and 1999 and the year ended September 30,
1999................................................... 36
Consolidated Statement of Cashflows for the years and
period ended December 31, 2001, 2000 and 1999 and the
year ended September 30, 1999.......................... 37
Notes to Consolidated Financial Statements................ 38
</Table>
32
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Bingham Financial Services Corporation
We have audited the accompanying consolidated balance sheets of Bingham
Financial Services Corporation as of December 31, 2001 and December 31, 2000 and
the related consolidated statements of changes in stockholders' equity
(deficit), operations and cash flows for the periods ended December 31, 2001,
December 31, 2000, December 31, 1999 and September 30, 1999. These consolidated
financial statements are the responsibility of the corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Bingham Financial Services Corporation as of December 31, 2001 and, December 31,
2000 and the consolidated results of their operations and their cash flows for
the periods ended December 31, 2001, December 31, 2000, December 31, 1999 and
September 30, 1999, in conformity with accounting principles generally accepted
in the United States of America.
As more fully discussed in Note A, during the three months ended December
31, 1999, the Company changed its method of accounting for organizational costs.
/s/ PLANTE & MORAN, LLP
March 28, 2002
Auburn Hills, MI
33
BINGHAM FINANCIAL SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARES)
<Table>
<Caption>
DECEMBER 31,
------------
2001 2000
---- ----
ASSETS
Cash and equivalents........................................ $ 440 $ 3,521
Restricted cash............................................. 1,739 1,628
Loans receivable............................................ 127,412 98,633
Servicing rights............................................ 6,855 9,143
Servicing advances.......................................... 9,940 9,103
Furniture, fixtures and equipment, net...................... 1,801 2,554
Deferred federal income taxes............................... 7,000 8,446
Loan sale proceeds receivable............................... 5,723 6,603
Other assets................................................ 7,003 8,250
-------- --------
Total assets........................................... $167,913 $147,881
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities:
Accounts payable and accrued expenses..................... $ 5,709 $ 14,111
Recourse liability........................................ 8,681 9,313
Advances under repurchase agreements...................... 105,564 67,256
Subordinated debt, net of debt discount of $-- and $336,
respectively........................................... -- 3,664
Notes payable............................................. 17,435 42,697
-------- --------
Total liabilities...................................... 137,389 137,041
-------- --------
Non-controlling members' interest in subsidiary............. 39,766 --
-------- --------
Stockholders' equity (deficit)
Preferred stock, no stated value, 10,000,000 shares
authorized; no shares issued and outstanding........... -- --
Common Stock, no stated value, 10,000,000 shares
authorized; 2,542,988 and 2,631,681, shares issued and
outstanding at December 31, 2001 and 2000,
respectively........................................... 26,478 27,488
Paid-in capital........................................... 322 727
Accumulated other comprehensive income.................... -- 115
Unearned stock compensation............................... -- (1,142)
Accumulated deficit....................................... (36,042) (16,348)
-------- --------
Total stockholders' equity (deficit)................... (9,242) 10,840
-------- --------
Total liabilities and stockholders' equity (deficit)... $167,913 $147,881
======== ========
</Table>
The accompanying notes are an integral part of these financial statements.
34
BINGHAM FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARES)
<Table>
<Caption>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED YEAR ENDED
----------------------- DECEMBER 31, SEPTEMBER 30,
2001 2000 1999 1999
---- ---- ------------ -------------
REVENUES
Interest income on loans..................... $ 9,493 $ 14,593 $ 4,069 $ 9,477
Mortgage origination and servicing fees...... 12,001 10,800 1,319 2,069
Gain on sale and securitization of loans..... 5,186 27 1,603 4,399
Gain on sale of assets....................... 1,600 -- -- --
Arbitration settlements...................... 1,126 -- -- --
Other income................................. 267 66 75 332
---------- ---------- ---------- ----------
Total revenues............................ 29,673 25,486 7,066 16,277
---------- ---------- ---------- ----------
COSTS AND EXPENSES
Interest expense............................. 7,875 14,202 2,832 6,856
Provision for credit losses and recourse
liability................................. 8,595 7,671 362 653
Write down of residual interest.............. 9,523 -- -- --
General and administrative................... 19,408 23,353 2,352 5,215
Unrealized loss on interest rate swap........ -- 1,300 -- --
Loss on interest rate swap................... 510 -- -- --
Acquisition costs............................ -- 2,071 -- --
Other operating expenses..................... 1,903 1,518 944 2,336
---------- ---------- ---------- ----------
Total costs and expenses.................. 47,814 50,115 6,490 15,060
---------- ---------- ---------- ----------
Income (loss) before income tax expense
(benefit) and allocation of subsidiary net
income in non-controlling members'
interests................................. (18,141) (24,629) 576 1,217
Allocation of subsidiary net income in non-
controlling members' interests............ (308) -- -- --
---------- ---------- ---------- ----------
Income (loss) before income tax expense
(benefit)................................. (18,449) (24,629) 576 1,217
Federal income tax expense (benefit)...... 1,245 (8,374) 198 441
---------- ---------- ---------- ----------
Income (loss) before cumulative effect of
change in accounting principle............ (19,694) (16,255) 378 776
Cumulative effect of change in accounting
principle, net of tax..................... -- -- (563) --
---------- ---------- ---------- ----------
Net income (loss)............................ $ (19,694) $ (16,255) $ (185) $ 776
========== ========== ========== ==========
Weighted average common shares outstanding... 2,579,844 2,625,765 2,539,716 1,966,288
========== ========== ========== ==========
Weighted average common shares outstanding,
diluted................................... 2,579,844 2,625,765 2,539,716 2,145,939
========== ========== ========== ==========
Earnings (loss) per share before cumulative
effect of change in accounting principle:
Basic..................................... $ (7.63) $ (6.19) $ 0.15 $ 0.39
========== ========== ========== ==========
Diluted................................... $ (7.63) $ (6.19) $ 0.15 $ 0.36
========== ========== ========== ==========
Cumulative effect of change in accounting
principle:
Basic..................................... $ -- $ -- $ (0.22) $ --
========== ========== ========== ==========
Diluted................................... $ -- $ -- $ (0.22) $ --
========== ========== ========== ==========
Earnings (loss) per share:
Basic..................................... $ (7.63) $ (6.19) $ (0.07) $ 0.39
========== ========== ========== ==========
Diluted................................... $ (7.63) $ (6.19) $ (0.07) $ 0.36
========== ========== ========== ==========
</Table>
The accompanying notes are an integral part of these financial statements.
35
BINGHAM FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT FOR SHARES)
<Table>
<Caption>
ACCUMULATED TOTAL
OTHER UNEARNED RETAINED STOCKHOLDER'S
COMMON PAID-IN COMPREHENSIVE STOCK EARNINGS EQUITY
STOCK CAPITAL INCOME (LOSS) COMPENSATION (DEFICIT) (DEFICIT)
------ ------- ------------- ------------ --------- -------------
Balance, September 30, 1998...... $13,608 $ 533 $ -- $ -- $ (684) $ 13,457
Issuance of 867,001 shares common
stock.......................... 11,968 -- -- -- -- 11,968
Issuance of 84,658 stock
awards......................... 1,120 -- -- (1,120) -- --
Stock award amortization......... -- -- -- 85 -- 85
Option amortization.............. -- 86 -- -- -- 86
Net income....................... -- -- -- -- 776 776
Comprehensive income:
Unrealized loss on securities
available for sale, net of
tax............................ -- -- (304) -- -- (304)
--------
Total comprehensive
income.................... 472
------- ----- ----- ------- -------- --------
Balance, September 30, 1999...... $26,696 $ 619 $(304) $(1,035) $ 92 $ 26,068
Issuance of 11,243 stock
awards......................... 103 -- -- (103) -- --
Stock award amortization......... 36 36
Option amortization.............. -- 22 -- -- -- 22
Net loss......................... -- -- -- -- (185) (185)
Comprehensive income:
Unrealized gain on securities
Available for sale, net of
tax......................... -- -- 198 -- -- 198
--------
Total comprehensive
income.................... 13
------- ----- ----- ------- -------- --------
Balance, December 31, 1999....... $26,799 $ 641 $(106) $(1,102) $ (93) $ 26,139
Issuance of 44,138 stock
awards......................... 336 -- -- (336) -- --
Issuance of 66,005 shares of
Common stock for BAC earnout... 503 -- -- -- -- 503
Cancellation of 10,178 stock
awards......................... (150) -- -- 150 -- --
Stock award amortization......... -- -- -- 146 -- 146
Option amortization.............. -- 86 -- -- -- 86
Net loss......................... -- -- -- -- (16,255) (16,255)
Comprehensive income:
Unrealized gain on securities
available for sale, net of
tax......................... -- -- 221 -- -- 221
--------
Total comprehensive loss.... (16,034)
------- ----- ----- ------- -------- --------
Balance, December 31, 2000....... $27,488 $ 727 $ 115 $(1,142) $(16,348) $ 10,840
Cancellation of 96,693 stock
awards......................... (1,010) -- -- 1010 -- --
Stock award amortization......... -- -- -- 132 -- 132
Cancellation of stock options.... -- (270) -- -- -- (270)
Recapitalization costs........... -- (135) -- -- -- (135)
Net loss......................... -- -- -- -- (19,694) (19,694)
Comprehensive income:
Reclassification adjustment.... -- -- (115) -- -- (115)
--------
Total comprehensive loss.... (20,082)
------- ----- ----- ------- -------- --------
Balance, December 31, 2001....... $26,478 $ 322 $ -- $ -- $(36,042) $ (9,242)
======= ===== ===== ======= ======== ========
</Table>
The accompanying notes are an integral part of these financial statements.
36
BINGHAM FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENT OF CASHFLOWS
(IN THOUSANDS)
<Table>
<Caption>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED YEAR ENDED
--------------------- DECEMBER 31, SEPTEMBER 30,
2001 2000 1999 1999
---- ---- ------------ -------------
Cash flows from operating activities:
Net income (loss).............................. $ (19,694) $ (16,255) $ (185) $ 776
Adjustments to reconcile net income (loss) to
net Cash provided by operating activities:
Provision for unrealized hedge loss......... -- -- -- (2,400)
Unrealized loss on interest rate swaps...... -- 1,300 -- --
Provision for credit losses and recourse
liability................................. 8,595 7,671 362 653
Impairment of residual interest............. 9,523 -- -- --
Depreciation and amortization............... 2,103 3,600 1,637 1,135
Provision for deferred taxes................ 1,245 (8,374) (84) 914
Originations of loans held for sale......... (222,410) (207,171) (126,789) (144,344)
Principal collections on loans held for
sale...................................... 16,339 19,363 1,709 3,256
Proceeds from sale of loans held for sale... 166,730 223,128 100,888 113,494
Loss (gain) on sale of investment
securities................................ (254) -- 35 (3)
Gain on sale and securitization of loans.... (5,186) (27) (1,603) (1,999)
Increase in retained interest............... (9,523) -- -- --
Increase in other assets.................... (2,330) (13,374) (3,366) (6,234)
Increase (decrease) in other liabilities.... (8,402) 5,835 7,028 3,860
--------- --------- --------- ---------
Net cash provided by (used in) operating
activities............................. (63,264) 15,696 (20,368) (30,892)
--------- --------- --------- ---------
Cash flows from investing activities:
Purchase of Hartger & Willard............... -- -- -- (1,900)
Purchase of Origen Inc...................... -- -- (4,001) --
Purchase of investment securities........... -- -- -- (1,529)
Proceeds from the sale of investment
securities................................ 1,782 -- 24 369
Proceeds from the sale of the assets of
Bloomfield Acceptance and Bloomfield
Servicing................................. 9,609 -- -- --
Capital expenditures........................ (520) (911) (98) (485)
--------- --------- --------- ---------
Net cash provided by (used in) investing
activities............................. 10,871 (911) (4,075) (3,545)
--------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock...... -- -- -- 11,968
Proceeds from recapitalization of Origen
Inc. ..................................... 40,000 -- -- --
Proceeds from advances under repurchase
agreements................................ 158,926 154,041 102,876 98,990
Repayment of advances under repurchase
agreements................................ (120,617) (167,254) (91,434) (86,855)
Proceeds from advances on note payable...... 321,009 252,664 100,364 109,164
Repayment of note payable................... (350,006) (250,715) (88,093) (100,079)
--------- --------- --------- ---------
Net cash provided by (used in) financing
activities............................. 49,312 (11,264) 23,713 33,188
--------- --------- --------- ---------
Net change in cash and cash equivalents.......... (3,081) 3,521 (730) (1,249)
Cash and cash equivalents, beginning of period... 3,521 -- 730 1,979
--------- --------- --------- ---------
Cash and cash equivalents, end of period......... $ 440 $ 3,521 $ -- $ 730
========= ========= ========= =========
Supplemental disclosures of cash flow
information:
Interest paid.................................. $ 8,086 $ 13,875 $ 2,828 $ 6,785
Federal income taxes paid...................... $ -- $ -- $ -- $ 420
</Table>
The accompanying notes are an integral part of these financial statements.
37
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: The Company's principal operations involve
origination, underwriting, securitization or sale, and servicing of manufactured
home loans.
The Company's manufactured home loans are made through its subsidiaries,
Origen Inc. and Origen LLC, primarily to finance the purchase of manufactured
homes. These loans are generally conventionally amortizing loans that range in
amount from $10,000 to $100,000 and have terms of seven to 30 years. The Company
also provides warranty and disability insurance through one of its subsidiaries.
Manufactured home loan servicing is also performed by Origen Inc. and Origen
LLC.
The Company's commercial real estate mortgage loans were made through its
subsidiary, Bloomfield Acceptance Company, L.L.C. ("Bloomfield Acceptance").
Commercial real estate loan servicing was performed by Bloomfield Servicing
Company, L.L.C. ("Bloomfield Servicing"), a subsidiary of the Company. On June
13, 2001 the Company sold certain of the assets of both Bloomfield Acceptance
and Bloomfield Servicing to Wells Fargo Bank, National Association and Wells
Fargo & Company and ceased originating and servicing commercial mortgage loans.
The Company generally sells, securitizes or places the manufactured home
loans it originates with institutional investors and retains the rights to
service loans sold on behalf of those investors.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts and transactions of the Company and its subsidiaries. Significant
intercompany accounts and transactions have been eliminated in consolidation.
Although the Company retains only a 20% interest in Origen LLC, as
disclosed in Note B, no change in control of the management and operations of
the Company's manufactured home loan operations has occurred for accounting
purposes and the financial position and results of operations of Origen LLC are
presented on a consolidated basis in the accompanying financial statements.
REVENUE RECOGNITION: Interest and origination fee revenue from loans
receivable is recognized using the interest method. Certain loan origination
costs on loans receivable are deferred and amortized using the interest method
over the term of the related loans as a reduction of interest income on loans.
The accrual of interest on loans receivable is discontinued at the time a loan
is determined to be impaired. Servicing fees are recognized when earned.
The Company periodically sells loans either as whole loans or through
securitizations. Estimated gains or losses from such sales or securitizations
are recognized in the period in which the sale or securitization occurs. In
determining the gain or loss on each qualifying sale of loans receivable, the
Company's investment in each loan pool is allocated between the portion sold and
any retained interests based on their relative fair values at the date of sale.
The retained interests include interest-only strips, restricted cash held by
securitization trusts, recourse liabilities and servicing rights.
CHANGE IN FISCAL YEAR END: On February 4, 2000 the Company changed its
fiscal year end from a twelve month period ending September 30 to a twelve month
period ending December 31. The consolidated statements of operations and cash
flows are presented for the years ended December 31, 2001 and December 31, 2000,
the three months ended December 31, 1999, and the year ended September 30, 1999.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period,
including significant estimates regarding allowances for loan losses, recourse
liabilities and deferred tax asset realization. Actual results could differ from
those estimates.
38
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND CASH EQUIVALENTS: Cash and cash equivalents represent short-term
highly liquid investments with original maturities of three months or less and
include cash and interest bearing deposits at banks. The Company has restricted
cash related to loans serviced for others which is held in trust for subsequent
payment to the owners of those loans.
LOANS RECEIVABLE: Loans receivable consist of manufactured home loans and
floor plan loans. Manufactured home loans are primarily conventional fixed rate
loans under contracts collateralized by the borrowers' manufactured homes. All
loans receivable are held for sale and are carried at the lower of aggregate
cost or fair value. Loans receivable include accrued interest and are presented
net of deferred loan origination costs and an allowance for estimated loan
losses.
DERIVATIVE FINANCIAL INSTRUMENTS: The Company has periodically used
derivative instruments, including forward sales of U.S. Treasury securities,
U.S. Treasury rate locks and forward interest rate swaps to mitigate interest
rate risk related to its loans receivable and anticipated sales or
securitizations. Prior to January 1, 2001 deferral (hedge) accounting was
applied if a derivative financial instrument reduced the risk of the underlying
hedged item, was designated at inception as a hedge and was expected to be
effective as a hedge. Effective January 1, 2001 the Company adopted the
provisions of Statement of Financial Accounting No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). Under SFAS 133, all
derivative instruments are recorded on the balance sheet at fair value and
changes in fair value will be recorded in current earnings or other
comprehensive income, depending on whether a derivative instrument qualifies for
hedge accounting and, if so, whether the hedge transaction represents a fair
value or cash flow hedge.
Hedges are measured for effectiveness both at inception and on an ongoing
basis, and hedge accounting is terminated if a derivative instrument ceases to
be effective as a hedge or its designation as a hedge is terminated. In the
event of termination of a hedge, any gains or losses during the period that a
derivative instrument qualified as a hedge are recognized as a component of the
hedged item and subsequent gains or losses are recognized in earnings.
Derivative financial instruments that do not qualify for hedge accounting are
carried at fair value and changes in fair value are recognized currently in
earnings.
There were no derivative instruments designated as hedges at January 1,
2001 and the adoption of SFAS 133 had no effect on the Company's financial
position or results of operations.
ALLOWANCE FOR CREDIT LOSSES: The allowance for possible credit losses is
maintained at a level believed adequate by management to absorb potential losses
in the Company's loan portfolio. The Company's loan portfolio is comprised of
homogenous manufactured home loans with average loan balances of less than
$50,000. The allowance for credit losses is determined at a portfolio level and
computed by applying loss rate factors to the loan portfolio on a stratified
basis using current portfolio performance and delinquency levels (0-30 days,
31-60 days, 61-90 days and more than 90 days delinquent). The Company's loss
rate factors are based on the Company's historical loan loss experience and are
adjusted for economic conditions and other trends affecting borrowers' ability
to repay and estimated collateral value. The allowance for credit losses
represents an unallocated allowance. There are no elements of the allowance
allocated to specific individual loans or to impaired loans.
SERVICING RIGHTS: The Company accounts for loan servicing rights related to
originated and sold loans by recognizing a separate servicing asset or
liability. These servicing assets or liabilities are determined by allocating
the carrying amount of the loans sold between the loan and the servicing rights
based on the relative fair values of each at the date of sale. The fair value of
servicing rights is based on discounted cash flows incorporating estimated
servicing fees and costs as well as ancillary servicing revenue and projected
prepayment rates. The Company capitalized approximately $1.4 million, $1.5
million, $7.6 million and $2.0 million, respectively, of loan servicing rights
for the years ended December 31, 2001 and 2000, the three months ended December
31, 1999, and the year ended September 30, 1999, respectively.
39
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amount of loan servicing rights is assessed for impairment
each quarter by comparison to fair value and a valuation allowance is
established in the event the carrying amount exceeds the fair value. Fair value
is estimated based on the present value of expected future cash flows and
periodically by independent appraisal. There was no valuation allowance
recognized at December 31, 2001 or 2000. The estimated fair value of loan
servicing rights was approximately $9.7 million at December 31, 2001.
INTEREST ON LOANS: Interest on loans is credited to income when earned. An
allowance for interest on loans is provided when a loan becomes more than 90
days past due as the collection of these loans is considered doubtful.
LOAN FEES: Loan origination fees and certain direct loan origination costs
are deferred and recognized over the lives of the related loans as an adjustment
of the yields using a level-yield method.
REPOSSESSED HOMES: Manufactured homes acquired through foreclosure or
similar proceedings are recorded at the lesser of the related loan balance plus
any operating expenses of such homes or the estimated fair value of the home.
OTHER ASSETS: Other assets is comprised of prepaid expenses, deferred
financing costs, goodwill and other miscellaneous receivables. Prepaid expenses
are amortized over the expected service period. Deferred financing costs are
capitalized and amortized over the life of the corresponding obligation.
LOAN SALE PROCEEDS RECEIVABLE: The loan sale proceeds receivable relates to
the sale of approximately $114.4 million principal balance of manufactured home
loans. The loans were sold with recourse and with a deferred proceeds component
equal to 1.5% of the outstanding principal balance at the time of sale. Bingham
receives on a monthly basis .125% (an annual rate of 1.5% divided by 12) of the
outstanding principal balance of eligible loans (loans on which a payment was
received from the obligor during the month). The deferred loan sale proceeds
receivable is assessed for impairment on a periodic basis based on the fair
value of the receivable calculated on a discounted basis.
LOANS SOLD UNDER AGREEMENTS TO REPURCHASE: The Company enters into loan
sales under agreements to repurchase the loans. The agreements are short-term
and are accounted for as secured borrowings. The obligations to repurchase the
loans sold are reflected as a liability and the loans that collateralize the
agreements are reflected as assets in the balance sheet.
RECOURSE LIABILITY: The Company periodically sells manufactured home loans
on a whole-loan basis. At the time of such loan sales, recourse liabilities are
recognized pursuant to future obligations based on the underlying provisions of
the respective sale agreements. The liability is computed based on estimated
obligations under recourse provisions on a discounted basis. The obligations are
provided for in the recourse liability and transferred to the allowance for
credit losses at the time of repurchase. The loan purchasers have no recourse to
our other assets for failure of debtors to pay when due.
DEPRECIATION: Provisions for depreciation are computed using the
straight-line method over the estimated useful lives of office properties and
equipment, as follows: leasehold improvements -- life of the lease; furniture
and fixtures -- seven years; capitalized software -- five years;
computers -- five years.
INCOME TAXES: The Company uses the liability method in accounting for
income taxes. Deferred tax assets or liabilities are recognized for temporary
differences between the tax bases of assets and liabilities and their carrying
amounts in the consolidated financial statements and net operating loss
carryforwards. Deferred tax assets and liabilities are measured using currently
enacted tax rates. A valuation allowance is established if, based on the insight
of available evidence, it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
PER SHARE DATA: Basic earnings per share are computed by dividing net
income (loss) available to common shareholders by the weighted average common
shares outstanding. At December 31, 2001, 2000,
40
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1999 and September 30, 1999 there were approximately 0, 911,000, 921,000 and
868,000 potential shares of common stock from stock options and warrants
outstanding.
The following table presents a reconciliation of the numerator (income
applicable to common shareholders) and denominator (weighted average common
shares outstanding) for the basic loss per share calculation:
<Table>
<Caption>
YEAR ENDED DECEMBER 31, THREE MONTHS
------------------------------------------ ENDED YEAR ENDED
2001 2000 DECEMBER 31, 1999 SEPTEMBER 30, 1999
------------------- ------------------- ------------------- -------------------
EARNINGS EARNINGS EARNINGS EARNINGS
(LOSS) (LOSS) (LOSS) (LOSS)
SHARES PER SHARE SHARES PER SHARE SHARES PER SHARE SHARES PER SHARE
------ --------- ------ --------- ------ --------- ------ ---------
(SHARES IN THOUSANDS)
Basic earnings (loss) per share
before
Cumulative effect of change in
accounting principle........... 2,580 $(7.63) 2,626 $(6.19) 2,540 $ 0.15 1,966 $ 0.39
Cumulative effect of change in
accounting principle........... -- -- -- -- -- (0.22) -- --
Net dilutive effect of:
Options.......................... -- -- -- -- -- -- 22 --
Warrants......................... -- -- -- -- -- -- 158 (0.03)
----- ------ ----- ------ ----- ------ ----- ------
Diluted loss per share............. 2,580 $(7.63) 2,626 $(6.19) 2,540 $(0.07) 2,146 $ 0.36
===== ====== ===== ====== ===== ====== ===== ======
</Table>
SECURITIES: Marketable securities are classified as available for sale.
Securities classified as available for sale are carried at market value with a
corresponding market value adjustment carried as a separate component of
stockholders' on a net of tax basis. At December 31, 2001 and 2000 securities
consisted of a single equity security with a carrying amount of $1,300 and $1.7
million, respectively which are included in other assets. The adjusted cost of
the securities would be used to compute realized gains or losses if the
securities are sold.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE: In April 1998 the
Financial Accounting Standards Board issued Statement of Position Number 98-5
(SOP 98-5) "Reporting on the Cost of Start-Up Activities". This statement, which
is required to be adopted for fiscal years beginning after December 15, 1998
establishes guidance for the accounting of start-up activities. It states that
the cost of start-up activities, including organizational costs, should be
expensed as incurred. The Company had deferred organizational costs related to
the formation of its manufactured home lending subsidiary and the filing of its
application to become a unitary thrift holding company and for the formation of
a federally charted savings bank. In the period ended December 31, 1999 the
Company expensed approximately $563,000 net of federal income tax benefit of
previously capitalized organizational costs.
RECENT ACCOUNTING PRONOUNCEMENTS: During July 2001, Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142") was issued. The statement provides the accounting and reporting standards
for goodwill. SFAS 142 will not impact the Company's financial position or
results of operations because the Company had no goodwill on its balance sheet
at December 31, 2001.
B. RECAPITALIZATION
In July 2001, the Company entered into an investment agreement with three
investors -- SUI TRS, Inc., Shiffman Family LLC and Woodward Holding
LLC -- under which the Company agreed to recapitalize its remaining operating
subsidiaries. Certain of the Company's officers and directors are affiliated
with SUI TRS and Shiffman Family LLC.
41
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the investment agreement and a merger agreement entered into on
December 18, 2001, SUI TRS, Shiffman Family LLC and Woodward Holding made
capital contributions totaling $40 million in Origen LLC. The Company will merge
Origen Inc. and its other wholly-owned operating subsidiaries into Origen LLC.
The mergers will be completed when Origen LLC and its subsidiaries obtain all
material licenses and permits they need to continue to operate the Company's
business. Notwithstanding the actual date of the mergers, the parties have
agreed that the merger will be treated as effective as of January 1, 2002. It is
expected that the mergers will occur in the second quarter of 2002. Pending the
mergers, each of Origen Inc. and Origen LLC is conducting that portion of its
business which it is licensed to do. After the mergers, Origen LLC and its
subsidiaries, as the surviving entities of the mergers, will conduct all of the
Company's business in the same manner as it has been conducted in the past.
The Company obtained an initial 20% ownership interest in the net assets
and profits of Origen LLC and the three investors received an initial 80%
aggregate interest in Origen LLC. These interests are subject to dilution
resulting from (a) grants of up to 11.5% of the membership interests to key
employees of the recapitalized subsidiaries, and (b) potential future issuance
of additional membership interests in the recapitalized subsidiaries in
connection with the raising of additional capital.
After the mergers, the Company's primary asset will be its interest in
Origen LLC. The company will also retain a loan receivable of approximately $2.5
million related to the sale of MHFC in March 2000. The proceeds from the
receivable will be used to fund the Company's operating expenses, such as
expenses associated with SEC reporting compliance and legal and accounting fees.
The above transactions have been accounted for as a recapitalization of the
Company's operating subsidiaries and, accordingly, there is no adjustment to the
historical cost basis carrying amounts of the assets and liabilities transferred
to Origen LLC by the Company. Although the Company retains only a 20% interest
(33.33% voting interest) in Origen LLC, the recapitalization has not resulted in
a change in control of Origen LLC for accounting purposes and the financial
position and results of operations of Origen LLC continue to be presented on a
consolidated basis in the accompanying financial statements. An allocation of
income or losses attributable to the non-controlling members under the
provisions of the Origen LLC operating agreement is accounted for in a manner
similar to the minority interest.
C. ACQUISITIONS
On July 1, 1999 pursuant to a Reorganization Agreement dated as of June 30,
1999 the Company acquired all of the issued and outstanding stock of Hartger and
Willard from DMR Financial Services, Inc. ("DMRFS"), an affiliate of Detroit
Mortgage and Realty Company ("DMR"). Pursuant to the terms of the agreement,
66,667 shares of Bingham common stock, without par value, were issued to DMRFS.
In connection with the acquisition of Hartger & Willard the Company loaned
$1.5 million to DMRFS pursuant to a Promissory Note dated July 31, 1999. The
loan was guaranteed by DMR and secured by the pledge of the 66,667 shares of
Bingham common stock DMRFS received in the acquisition. The Company foreclosed
on the pledged shares in full payment of the principal amount of the loan. The
effect of this transaction is that the Company acquired the Hartger & Willard
shares for $1.5 million in cash.
The Hartger & Willard acquisition was accounted for as a purchase. The
results of operations for the year ended September 30, 1999 include the results
of operations for the acquired company since the date of the acquisition.
The aggregate purchase price for the acquisition of $1.9 million, including
expenses of the acquisition, was allocated to the assets acquired and
liabilities assumed based on the related fair values at the date of acquisition.
The excess of the aggregate purchase price over the fair values of the assets
acquired and liabilities assumed has been allocated to goodwill and was being
amortized on a straight-line method over 20 years. Hartger & Willard was sold in
2001 (see Note N).
42
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In conjunction with the acquisition in July 1999, liabilities assumed and
other non-cash consideration were as follows (in thousands, unaudited):
<Table>
Fair value of assets acquired............................... $ 1,642
Goodwill.................................................... 262
Cash paid in consideration and expenses of company
acquired.................................................. (1,900)
-------
Liabilities assumed......................................... $ 4
=======
</Table>
The following table summarizes pro forma unaudited results of operations as
if the acquisition completed during 1999 had occurred at the beginning of each
year presented:
<Table>
<Caption>
SEPTEMBER 30, 1999
------------------
(IN THOUSANDS, EXCEPT
EARNINGS PER SHARE)
Revenues.................................................... $16,933
Income (loss) before income taxes........................... 1,158
Net income (loss)........................................... 733
Basic earnings (loss) per share............................. 0.37
Diluted earnings (loss) per share........................... 0.34
</Table>
In December 1999, the Company completed the acquisition of Origen Inc. from
Dynex Holding, Inc., a subsidiary of Dynex Capital, Inc. ("DCI"). The Company
acquired certain manufactured home loans from Origen Inc. all of the issued and
outstanding stock of Origen Inc. and all of the rights to DCI's manufactured
home lending business for approximately $4.0 million in cash funded by
borrowings on the Company's demand lines of credit. Origen Inc. specializes in
lending to buyers of manufactured homes and has corporate and regional offices
in four states. In addition Origen Inc. provides servicing for manufactured home
and land/home loans.
The Origen Inc. acquisition was accounted for using the purchase method.
The consideration and acquisition costs for the Origen Inc. acquisition were
allocated to the acquired assets and assumed liabilities, resulting in an excess
of fair value of the acquired net assets over the purchase price of
approximately $3.2 million, which was recognized as a reduction in the amount
allocated to purchased loan servicing rights. During the quarter ended March 31,
2000, Bingham revised its initial estimates of the fair value of the assets
acquired, specifically the manufactured home loan portfolio associated with the
transaction, effectively reducing the excess of fair value of acquired net
assets by $2.0 million. Accordingly, the Company recognized the revised estimate
by retroactively adjusting the purchase price allocation with an increase to the
amount previously allocated to purchased loan servicing rights.
In connection with the Origen Inc. acquisition, Bingham recognized accrued
liabilities of $5.0 million related to its plans to close certain of Origen
Inc.'s regional and district offices and terminate or relocate certain of its
employees.
During the year ended December 31, 2000, there were approximately $2.5
million of costs paid related to the accrued acquisition liabilities. Such costs
consisted of $1.4 million for severance payments and personnel costs and $1.1 in
costs connected with closed locations incurred subsequent to the cessation of
operations.
As of December 31, 2000, Bingham revised its estimate of the costs to
implement its plan and as a result, made an adjustment to the purchase price
allocation. The change in estimate resulted in an increase of $2.3 million in
the fair value of the net assets acquired. Bingham recognized this increase as
an adjustment to the amount previously allocated to purchased loan servicing
rights.
43
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes pro forma unaudited results of operations
for the Origen Inc. acquisition as if it had occurred at the beginning of each
period presented:
<Table>
<Caption>
THREE MONTHS
ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
1999 1999
------------ -------------
(IN THOUSANDS, EXCEPT
EARNINGS PER SHARE)
Revenues.................................................... $ 9,114 $36,047
Income (loss) before cumulative effect of change in
accounting principle...................................... (2,141) 1,236
Cumulative effect of change in accounting principle, net of
tax....................................................... (563) --
Net income (loss)........................................... (2,704) 1,236
Basic earnings (loss) per share............................. $ (1.06) $ 0.63
Diluted earnings (loss) per share........................... (1.06) 0.58
</Table>
In the year ended December 31, 2000 the Company attempted a merger with
Franklin Bank, N.A. which was unsuccessful. Costs incurred totaled $2.1 million
all of which were charged to operations in the fourth quarter of 2000 when the
merger attempt was terminated.
D. LOANS RECEIVABLE
The carrying amounts and fair value of loans receivable consisted of the
following:
<Table>
<Caption>
DECEMBER 31,
-------------------
2001 2000
---- ----
(IN THOUSANDS)
Manufactured home loans..................................... $128,208 $95,234
Commercial loans............................................ -- 3,547
Floor plan loans............................................ 1,094 1,731
Accrued interest receivable................................. 903 794
Deferred fees............................................... (1,850) (869)
Deferred hedge loss......................................... -- 364
Allowance for loan loss..................................... (943) (2,168)
-------- -------
$127,412 $98,633
======== =======
</Table>
The following table sets forth the average loan balance, weighted average
loan yield and weighted average initial term:
<Table>
<Caption>
MANUFACTURED HOME
---------------------------------------------------------
YEAR ENDED DECEMBER THREE MONTHS
31, ENDED YEAR ENDED
---------------------- DECEMBER 31, SEPTEMBER 30,
2001 2000 1999 1999
---- ---- ------------ -------------
(DOLLARS IN THOUSANDS)
Principal balance loans receivable, net........ $128,208 $ 95,234 $ 75,321 $ 64,501
Number of loans receivable..................... 3,117 2,304 1,907 2,190
Average loan balance........................... $ 41 $ 41 $ 38 $ 29
Weighted average loan yield.................... 10.85% 11.75% 10.90% 11.33%
Weighted average initial term.................. 26 years 26 years 25 years 22 years
</Table>
44
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
COMMERCIAL MORTGAGE
---------------------------------------------------------
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED YEAR ENDED
------------------------ DECEMBER 31, SEPTEMBER 30,
2001 2000 1999 1999
---- ---- ------------ -------------
(DOLLARS IN THOUSANDS)
Principal balance loans receivable, net....... $ -- $ 3,547 $ 65,930 $ 53,157
Number of loans receivable.................... -- 2 27 20
Average loan balance.......................... $ -- $ 1,773 $ 2,442 $ 2,645
Weighted average loan yield................... -- 8.7% 9.8% 8.5%
Weighted average initial term................. -- 6.9 years 6.5 years 5.8 years
</Table>
The following table sets forth the concentration by state of the loan
portfolio:
<Table>
<Caption>
MANUFACTURED HOME
------------------------------------------
DECEMBER 31,
------------------------------------------
2001 2000
------------------- -------------------
PRINCIPAL % PRINCIPAL %
--------- - --------- -
(DOLLARS IN THOUSANDS)
Texas................................................... $ 30,581 23.9% $23,338 24.5%
Georgia................................................. 11,322 8.8% 7,587 8.0%
Alabama................................................. 9,900 7.7% 4,768 5.0%
Mississippi............................................. 7,980 6.2% 4,052 4.3%
Florida................................................. 7,356 5.8% 4,013 4.2%
Michigan................................................ 7,093 5.5% 6,446 6.7%
South Carolina.......................................... 5,530 4.3% 4,084 4.3%
Other................................................... 48,446 37.8% 40,946 43.0%
-------- ------ ------- ------
Total............................................ $128,208 100.0% $95,234 100.0%
======== ====== ======= ======
</Table>
<Table>
<Caption>
COMMERCIAL MORTGAGE DECEMBER 31,
----------------------------------------
DECEMBER 31,
----------------------------------------
2001 2000
------------------ ------------------
PRINCIPAL % PRINCIPAL %
--------- - --------- -
(DOLLARS IN THOUSANDS)
Michigan................................................... $ -- -- $ -- --
Indiana.................................................... -- -- -- --
Arizona.................................................... -- -- 2,466 69.5%
Texas...................................................... -- -- -- --
Florida.................................................... -- -- 1,081 30.5%
California................................................. -- -- -- --
Other...................................................... -- -- -- --
-------- ----- ------ -----
Total............................................... $ -- --% $3,547 100.0%
======== ===== ====== =====
</Table>
The manufactured home contracts are collateralized by manufactured homes
which range in age from 1973 to 2002, with approximately 90.1% of the
manufactured homes built since 1999.
45
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the number and value of loans for various
terms for the manufactured home loan portfolio:
<Table>
<Caption>
DECEMBER 31,
------------------------------------------------
2001 2000
---------------------- ----------------------
TERM NUMBER OF PRINCIPAL NUMBER OF PRINCIPAL
(YEARS) LOANS BALANCE LOANS BALANCE
------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
5 or less............................................ 2 $ 22 3 $ 24
6-10................................................. 142 2,683 90 1,727
11-12................................................ 15 410 8 155
13-15................................................ 243 7,211 144 3,853
16-20................................................ 811 27,711 265 7,908
21-25................................................ 269 9,747 345 11,720
26-30................................................ 1635 80,424 1449 69,847
----- -------- ----- -------
Total......................................... 3,117 $128,208 2,304 $95,234
===== ======== ===== =======
</Table>
Delinquency statistics for the manufactured home loan portfolio are as
follows:
<Table>
<Caption>
DECEMBER 31,
---------------------------------------------------------------
2001 2000
------------------------------ ------------------------------
NO. OF PRINCIPAL % OF NO. OF PRINCIPAL % OF
LOANS BALANCE PORTFOLIO LOANS BALANCE PORTFOLIO
------ --------- --------- ------ --------- ---------
(DOLLARS IN THOUSANDS)
Days delinquent
31-60....................................... 71 $3,346 2.6% 24 $ 944 1.0%
61-90....................................... 18 791 0.6% 19 811 0.9%
Greater than 90............................. 57 2,608 2.0% 83 3,352 3.5%
</Table>
E. ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses and related additions and deductions to the
allowance for the years ended December 31, 2001 and 2000, the period ended
December 31, 1999 and the year ended September 30, 1999 were as follows:
<Table>
<Caption>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED YEAR ENDED
------------------- DECEMBER 31, SEPTEMBER 30,
2001 2000 1999 1999
---- ---- ------------ -------------
(IN THOUSANDS)
Balance at beginning of period.................. $ 2,168 $ 274 $ 258 $ 185
Provision for loan losses....................... 3,528 7,671 362 653
Transfers from recourse liability............... 6,070 77 -- --
Gross chargeoffs................................ (17,822) (10,261) (698) (1,060)
Recoveries...................................... 7,820 4,407 352 480
-------- -------- ----- -------
Balance at end of year........................ $ 1,764 $ 2,168 $ 274 $ 258
======== ======== ===== =======
</Table>
46
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
F. MORTGAGE SERVICING RIGHTS
Changes in servicing rights are summarized as follows:
<Table>
<Caption>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED YEAR ENDED
----------------- DECEMBER 31, SEPTEMBER 30,
2001 2000 1999 1999
---- ---- ------------ -------------
(IN THOUSANDS)
Balance at beginning of period.................... $ 9,143 $ 9,736 $2,120 $ 156
Purchased servicing rights........................ -- -- 6,846 1,376
Purchase price adjustments........................ -- 424 -- --
Loans sold and securitized........................ 1,132 1,112 825 735
Amortization...................................... (1,279) (2,129) (55) (94)
Sale of servicing rights.......................... (2,141) -- -- (53)
------- ------- ------ ------
Balance at end of period........................ $ 6,855 $ 9,143 $9,736 $2,120
======= ======= ====== ======
</Table>
Bloomfield Servicing serviced commercial real estate loans that Bloomfield
Acceptance originated as well as commercial real estate loans on behalf of 29
institutional investors. The principal balance of commercial real estate loans
serviced totaled approximately $1.2 billion. In June 2001 the Company sold the
servicing rights to its commercial loan portfolio serviced for others with a
carrying amount of approximately $2.1 million, to Wells Fargo Bank and Wells
Fargo & Company as part of the sale of certain of the assets of its commercial
loan origination and servicing operations.
Origen Inc. and Origen LLC service the manufactured home loans originated
by the Company and held in its loan portfolio as well as manufactured home loans
originated by the Company and securitized or sold with the servicing rights
retained. The principal balances of manufactured home loans serviced totaled
approximately $1.2 billion at December 31, 2001, $1.1 billion at December 31,
2000 and $1.0 billion at December 31, 1999.
G. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<Table>
<Caption>
DECEMBER 31,
--------------------------
2001 2000 1999
---- ---- ----
(IN THOUSANDS)
Cost:
Furniture and fixtures.................................... $1,694 $2,191 $2,197
Leasehold improvements.................................... 179 213 46
Capitalized Software...................................... 255 493 322
Computer equipment........................................ 3,137 3,071 643
------ ------ ------
5,265 5,968 3,208
Less accumulated depreciation............................... 3,464 3,414 179
------ ------ ------
Total.................................................. $1,801 $2,554 $3,029
====== ====== ======
</Table>
Depreciation expense was approximately $910,000 for the year ended December
31, 2001, $987,000 for the year ended December 31, 2000, $288,000 for the three
months ended December 31, 1999 and $105,970 for the year ended September 30,
1999.
47
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
H. RESIDUAL INTEREST IN LOANS SOLD AND SECURITIZED
On March 27, 2001 Bingham completed its first securitization of
manufactured home loans through a consolidated special purpose subsidiary of
Origen Inc. The Company sold manufactured home loans it originated and purchased
to a trust for cash and the trust sold asset-backed bonds secured by the loans
to investors. The Company records certain assets and income based upon the
difference between all principal and interest received from the loans sold and
the following factors (i) all principal and interest required to be passed
through to the asset-backed bond investors, (ii) all excess contractual
servicing fees, (iii) other recurring fees and (iv) an estimate of losses on
loans. At the time of the securitization the Company estimates these amounts
based upon a declining principal balance of the underlying loans, adjusted by an
estimated prepayment and loss rate, and capitalizes these amounts using a
discount rate that market participants would use for similar financial
instruments. These capitalized assets are recorded as retained interests. The
Company believes the assumptions it has used are appropriate and reasonable.
The Company retained the right to service the loans it securitized. Fees
for servicing the loans are based on a contractual percentage of 1.00% per annum
of the unpaid principal balance of the associated loans. The Company has
recognized a servicing asset in addition to its gain on sale of loans. The
servicing asset is calculated as the present value of the expected future net
servicing income in excess of adequate compensation for a substitute servicer,
based on common industry assumptions and the Company's historical experience.
These factors include default and prepayment speeds. The servicing asset
recorded on the completed securitization represents a 25 basis point strip of
net servicing cash flows.
Key assumptions used in measuring the retained interest at December 31,
2001 are as follows:
<Table>
Prepayment Speed 150.00% MHP
Weighted average life (months) 317
Discount rate 15.00%
Expected credit losses 17.28%
</Table>
The Company assesses the carrying value of its retained interest on a
monthly basis. During the fourth quarter of 2001 the pool of securitized loans
has experienced defaults and losses in excess of the Company's expectations and
it has been concluded that such defaults are likely to be higher than expected
in future periods as well. Initially the Company estimated total life time
defaults as a percentage of initial pool balance to be 19.81% and net lifetime
losses to be 10.32%. Based on the actual performance of the loans through
December 31, 2001 it is now estimated that lifetime defaults will be 29.63% and
estimated net losses will be 17.28%. The increased defaults and losses are due
in part to the economic downturn that began in the third quarter of 2001, was
made worse by the events of September 11 and has continued into 2002, and to
some aggressive underwriting practices and credit decisions at the time the
loans were originated. As a result of the changes in valuation assumptions in
the retained interest, the Company has recognized an impairment of approximately
$9.5 million.
I. DEBT
Through December 18, 2001, the Company had three separate financing
facilities with Sun Communities Operating Limited Partnership: a $4.0 million
subordinated term loan, a $10.0 million subordinated demand line of credit a
$50.0 million subordinated demand line of credit. As of December 18, 2001 there
was $51.3 million outstanding in the aggregate under these loans.
On December 18, 2001, in connection with the recapitalization, the Company
received capital contributions totaling $40 million which was used to repay a
substantial portion of the Company's debt to Sun Communities Operating Limited
Partnership.
48
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The remaining balance of the debt to Sun Communities Operating Limited
Partnership (approximately $11.4 million) was restructured into a $21.25 million
line of credit extended by Sun Communities Operating Limited Partnership to
Origen Inc. and Origen LLC, as co-borrowers. The line of credit will terminate
on December 18, 2002 and the outstanding balance bears interest at a rate of
LIBOR plus 700 basis points, with a minimum interest rate of 11% and a maximum
interest rate of 15%. The line of credit is collateralized by a security
interest in substantially all of each borrower's assets. Sun Communities
Operating Limited Partnership and Woodward Holding, a member of Origen LLC, have
entered into a participation agreement under which Sun Communities Operating
Limited Partnership will loan up to approximately 59% of the borrowing limit (or
$12.5 million) and Woodward Holding will loan up to approximately 41% of the
borrowing limit (or $8.75 million) under the line of credit. Sun Communities
Operating Limited Partnership and Woodward Holding jointly administer the line
of credit. Bingham has guaranteed the obligations of the borrowers under the
line of credit and has granted the lenders a security interest in substantially
all of its assets as security for the guaranty.
In accordance with the original subordinated debt facility provided by Sun
Communities Operating Limited Partnership, we issued detachable warrants to Sun
covering 400,000 shares of common stock at a price of $10.00 per warrant share.
The detachable warrants had a term of seven years and could have been exercised
at any time after the fourth anniversary of the issuance. Upon the restructuring
of the subordinated loan agreement, the detachable warrants were canceled. None
of the detachable warrants had been exercised prior to the time they were
canceled.
In March 2000, Origen Inc. and Bloomfield Acceptance entered into an
amended and restated repurchase arrangement with Lehman Commercial Paper, Inc.
Under this agreement, Origen Inc. was able to transfer loans from time to time
to Lehman against the transfer of funds from Lehman. In June 2001 this agreement
was terminated and the aggregate amount advanced by Lehman was repaid in full.
At December 31, 2000, the amounts advanced by Lehman was $67.3 million.
In April 2000, Bloomfield Acceptance and Bloomfield Servicing entered into
a warehousing credit agreement with Residential Funding Corporation. Under the
credit agreement, Bloomfield Acceptance and Bloomfield Servicing could borrow up
to $25.0 million to fund the acquisition and origination of FNMA loans, FHLMC
loans, bridge mortgage loans and similar mortgage loans. In June 2001, the
agreement was terminated. At the time the agreement was terminated Bloomfield
Acceptance and Bloomfield Servicing had no advances outstanding under the
agreement. At December 31, 2000, there were no advances outstanding under this
agreement.
Bingham and Origen Inc. are borrowers under a revolving credit facility
with Standard Federal Bank (as successor to Michigan National Bank). Under this
facility, Bingham and Origen Inc. may borrow up to $10.0 million. Interest at a
rate of 30-day LIBOR plus a spread is payable on the outstanding balance. The
outstanding principal balance on this credit facility as of December 31, 2001
and 2000 was approximately $6.3 million and $6.8 million, respectively. To
secure the loan from Standard Federal Bank, Origen Inc. and Bingham have granted
Standard Federal Bank a security interest in their rights under three servicing
agreements under which Origen Inc. services manufactured home loans. This
facility will terminate on June 30, 2002. Based on discussions with Standard
Federal Bank and other lenders, the Company expects this facility to be extended
or replaced at the end of its current term.
In December 2001, Credit Suisse First Boston Mortgage Capital and Origen
LLC, through its special purpose subsidiary Origen Special Holdings, LLC entered
into a master repurchase agreement to replace the prior master repurchase
agreement between Credit Suisse First Boston and Origen Special Holdings
Corporation, a special purpose subsidiary of Origen Inc. The aggregate amount
advanced under the prior facility was transferred to the new facility. Under the
new agreement, Origen LLC contributes manufactured home loans it originates or
purchases to Origen Special Holdings, LLC. Origen Special Holdings, LLC then
transfers the manufactured home loans to Credit Suisse First Boston against the
transfer of funds from Credit
49
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Suisse First Boston and Origen Special Holdings, LLC transfers the funds to
Origen LLC for operations. Bingham guaranteed the obligations of Origen Special
Holdings, LLC under this agreement. The maximum financing limit on the facility
is $150.0 million. The annual interest rate on the facility is a variable rate
equal to LIBOR plus a spread. The loans are financed on the facility at varying
advance rates on the lesser of the then current face value or market value of
the loans. The advance rates depend on the characteristics of the loans
financed. The facility will terminate on May 28, 2002, but may be terminated
earlier upon an event of default under the master repurchase agreement. At
December 31, 2001, the aggregate amount advanced by Credit Suisse First Boston
under the facility was $105.6 million.
At December 31, 2001 and December 31, 2000 debt outstanding was as follows:
<Table>
<Caption>
DECEMBER 31,
--------------------
2001 2000
---- ----
(IN THOUSANDS)
Loans sold under agreements to repurchase................... $105,564 $ 67,256
Revolving credit facility................................... 6,250 6,848
Demand loans................................................ -- 35,849
Term loan, net of discount.................................. 11,185 3,664
-------- --------
$122,999 $113,617
======== ========
</Table>
J. DEALER AGREEMENT
As of September 30, 1997 the Company entered into a preferred dealer
agreement with Sun Communities. Pursuant to the agreement, stock options were
granted to Sun that would have vested if, and only if, Sun was a party to and in
compliance with the terms of the agreement on the vesting date and on December
31 of the immediately preceding year. The options would have vested in eight
equal annual amounts, each consisting of 41,250 options, on January 31, 2001
through 2008. The options could have been exercised at any time after vesting
until expiration ten years after the date of vesting. Each option vesting
January 31, 2001 to 2003 would have entitled the holder to purchase one share of
common stock for a purchase price of $10. Each option vesting on January 31,
2004, 2005 and 2006 would have entitled the holder to purchase one share of
common stock for $12. Each option vesting on January 31, 2007 and 2008 would
have entitled the holder to purchase one share of common stock for $14. The
preferred dealer agreement was terminated as of December 18, 2001 in connection
with the Company's recapitalization. Accordingly all options related to the
preferred dealer agreement were canceled. None of the options vested under the
agreement had been exercised.
The Company had recognized service costs related to the options based on
the fair value method as prescribed by Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation".
Service costs were amortized based on the vesting periods of the options. All
previously recognized service costs, approximately $270,000, were derecognized
in the year ended December 31, 2001.
K. STOCK OPTION PLAN
The Company's stock option plan has 247,632 shares of common stock reserved
for issuance. Under the plan, the exercise price of the options will not be less
than the fair market value of the common stock on the date of grant. The date on
which the options are first exercisable is determined by the administrator of
the Company's stock option plan, the Compensation Committee of the Board of
Directors or the entire Board of Directors, and options generally have vested
over a three-year period from the date of grant. The term of an option may not
exceed ten years from the date of grant. As of December 31, 2001 all options
that had been issued under the plan were terminated.
50
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has adopted the disclosure requirements of SFAS 123.
Accordingly, the fair value of each option granted in 2000 and 1999 was
estimated using the Black-Scholes option pricing model based on the assumptions
stated below:
<Table>
<Caption>
DECEMBER 31,
-----------------
2000 1999
---- ----
Estimated weighted average fair value per share of options
granted................................................... $4.21 $4.40
Assumptions:
Annualized dividend yield................................. --% --%
Common stock price volatility............................. 55.84% 55.62%
Weighted average risk free rate of return................. 6.82% 6.53%
Weighted average expected option term (in years).......... 6.0 6.0
</Table>
The Company has elected to measure compensation cost using the intrinsic
value method, in accordance with APB Opinion No. 25, "Accounting for Stock
Issued to Employees." Accordingly since all options were granted at a fixed
price not less than the fair market value of the Company's common stock on the
date of grant, no compensation cost has been recognized for its stock option
plan. Had stock option costs of the plan been determined based on the fair value
at the grant dates for awards under those plans consistent with the methodology
of SFAS 123, the pro forma effects on the Company's net income and earnings per
share would be as follows. No options were granted in the year ended December
31, 2001.
<Table>
<Caption>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED YEAR ENDED
-------------------------- DECEMBER 31, SEPTEMBER 30,
2001 2000 1999 1999
---------- ---------- ------------- -------------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Net income (loss) as reported.................. $(19,694) $(16,255) $ (185) $ 776
Stock option compensation cost................. (606) 185 50 228
-------- -------- ------ -----
Pro forma net income (loss).................. $(19,088) $(16,440) $ (235) $ 548
======== ======== ====== =====
Basic income (loss) per share as reported...... $ (7.63) $ (6.19) $(0.07) $0.39
Stock option compensation cost................. (0.23) 0.07 0.02 0.12
-------- -------- ------ -----
Pro forma earnings (loss) per share.......... $ (7.40) $ (6.26) $(0.09) $0.27
======== ======== ====== =====
Diluted earnings (loss) per share as
reported..................................... $ (7.63) $ (6.19) $(0.07) $0.36
Stock option compensation cost................. (0.23) 0.07 0.02 0.11
-------- -------- ------ -----
Pro forma fully diluted earnings (loss) per
share..................................... $ (7.40) $ (6.26) $(0.09) $0.25
======== ======== ====== =====
</Table>
51
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables set forth changes in options outstanding:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------------------
2001 2000
--------------------- --------------------
WEIGHTED WEIGHTED
AMOUNT AVG. PRICE AMOUNT AVG. PRICE
------ ---------- ------ ----------
Shares under option:
Outstanding at beginning of year.................... 181,350 $9.34 191,068 $10.14
Granted............................................. -- -- 35,000 7.00
Forfeited/canceled.................................. (181,350) 9.34 (44,718) 11.04
Exercised........................................... -- -- -- --
-------- ----- ------- ------
Outstanding at end of year.......................... -- $ -- 181,350 $ 9.34
======== ===== ======= ======
Exercisable at end of year.......................... -- -- 90,359 $10.03
======== ===== ======= ======
</Table>
<Table>
<Caption>
THREE MONTHS ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- --------------------
1999 1999
-------------------- --------------------
WEIGHTED WEIGHTED
AMOUNT AVG. PRICE AMOUNT AVG. PRICE
------ ---------- ------ ----------
Shares under option:
Outstanding at beginning of year..................... 137,818 $11.15 109,900 $10.65
Granted.............................................. 53,250 7.54 29,250 13.19
Forfeited/canceled................................... -- -- (1,832) 12.25
Exercised............................................ -- -- -- --
------- ------ ------- ------
Outstanding at end of year........................... 191,068 $10.14 187,818 $10.14
======= ====== ======= ======
Exercisable at end of year........................... 98,309 $10.36 65,917 $10.36
======= ====== ======= ======
</Table>
The following table sets forth details of options outstanding at December
31, 2000.
<Table>
<Caption>
DECEMBER 31, 2000
- ------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------- -------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RANGE OF REMAINING RANGE OF REMAINING
EXERCISE PRICES NUMBER CONTRACTUAL LIFE EXERCISE PRICES NUMBER CONTRACTUAL LIFE
- --------------- ------ ---------------- --------------- ------ ----------------
$ 7.00 35,000 9.35 Years $ -- -- --
7.25 40,000 8.97 Years 7.25 13,333 8.97 Years
7.75 8,250 8.96 Years 7.75 2,749 8.96 Years
9.75 1,500 8.67 Years 9.75 500 8.67 Years
10.00 60,500 6.94 Years 10.00 58,833 6.89 Years
11.00 3,250 8.61 Years 11.00 1,083 8.61 Years
12.50 1,250 7.81 Years 12.50 1,250 7.81 Years
13.00 18,750 7.09 Years 13.00 8,331 6.99 Years
13.50 7,100 8.48 Years 13.50 2,364 8.48 Years
14.50 5,750 8.28 Years 14.50 1,916 8.28 Years
------------- ------- ---------- ------------- ------ ----------
$7.00 - 14.50 181,350 8.69 Years $7.25 - 14.50 90,359 7.38 Years
============= ======= ========== ============= ====== ==========
</Table>
There were no options outstanding at December 31, 2001.
52
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
L. FEDERAL INCOME TAXES
Federal income tax expense consisted of the following:
<Table>
<Caption>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED YEAR ENDED
------------ DECEMBER 31, SEPTEMBER 30,
2001 2000 1999 1999
---- ---- ------------ -------------
(IN THOUSANDS)
Current tax provision.............................. $ -- $ -- $ (8) $(473)
Deferred tax provision (benefit)................... 1,245 (8,374) (84) 914
------ ------- ---- -----
Federal income tax expense (benefit)............. $1,245 $(8,374) $(92) $ 441
====== ======= ==== =====
</Table>
A reconciliation of the statutory federal income tax rate to the effective
income tax rate follows:
<Table>
<Caption>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED YEAR ENDED
---------------- DECEMBER 31, SEPTEMBER 30,
2001 2000 1999 1999
---- ---- ------------ -------------
Statutory tax rate................................ 34.00% 34.00% 34.00% 34.00%
Effect of:
Nondeductible expenses.......................... -- -- -- 2.22
Other........................................... (1.96) -- -- --
Change in valuation allowance................... (38.9) -- -- --
----- ----- ----- -----
Effective tax rate................................ (6.86)% 34.00% 34.00% 36.22%
===== ===== ===== =====
</Table>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Company's net
deferred tax asset has increased to $14.8 million at December 31, 2001, compared
to $8.4 million at December 31, 2000. The Company recognized a valuation
allowance on its net deferred tax asset at December 31, 2001, taking into
consideration changes in economic conditions, the recapitalization and
restructuring that occurred in December 2001, projections of future taxable
income and available tax planning strategies. Significant components of the
Company's deferred tax assets and liabilities are as follows:
<Table>
<Caption>
YEAR ENDED THREE
DECEMBER 31, MONTHS ENDED YEAR ENDED
------------------ DECEMBER 31, SEPTEMBER 30,
2001 2000 1999 1999
---- ---- ------------ -------------
(IN THOUSANDS)
Deferred Tax Assets:
Option amortization............................ $ 121 $ 91 $ 62 $ 55
Reserve for loan losses........................ 1,278 1,081 285 230
Recourse liability............................. 3,620 3,294 128 --
Net operating loss carryforward................ 12,782 7,210 -- --
Other items, net............................... 1,124 1,170 591 273
------- ------- ------ ----
Total deferred tax assets................... 18,925 12,846 1,066 558
Less: valuation allowance...................... (7,665) -- -- --
Deferred Tax Liabilities:
Net deferral required by SFAS 91............... 584 403 281 169
Deferred closing costs......................... 79 59 167 148
Restructuring charges.......................... 915 844 -- --
</Table>
53
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
YEAR ENDED THREE
DECEMBER 31, MONTHS ENDED YEAR ENDED
------------------ DECEMBER 31, SEPTEMBER 30,
2001 2000 1999 1999
---- ---- ------------ -------------
(IN THOUSANDS)
Loan sale proceeds receivable.................. 1,946 2,245 -- --
Gain on sale of MSR required by SFAS 125....... 736 849 546 253
------- ------- ------ ----
Total deferred tax liabilities.............. 4,260 4,400 994 570
------- ------- ------ ----
Total net deferred tax assets (liabilities)...... $ 7,000 $ 8,446 $ 72 $(12)
======= ======= ====== ====
</Table>
M. STOCKHOLDERS' EQUITY
The Company consummated an initial public offering of 1,200,000 shares of
common stock on November 19, 1997. The initial offering price was $10.00 per
share, which provided approximate proceeds to the Company of $11.2 million. On
December 16, 1997, an additional 70,000 shares were issued which provided
approximate proceeds to the Company of $651,000. Prior to the initial public
offering, on October 27, 1997 the Company sold 25,000 shares to Sun Communities,
Inc. for gross proceeds of $250,000.
In April, 1999, the Company issued 800,330 shares of its common stock in
private equity raises. The stock issuances resulted in proceeds of approximately
$12 million.
During the years ended December 31, 2001 and 2000, the three months ended
December 31, 1999, and the year ended September 30, 1999 the Company awarded 0
restricted shares, 44,138 restricted shares, 11,243 restricted shares and 84,658
restricted shares, respectively, to executive officers and senior management
that vest over three years. In the years ended December 31, 2001 and 2000,
96,693 and 10,178 of previously issued restricted shares, respectively, were
canceled.
Upon completion of the Company's recapitalization plan, 17,739 of unvested
restricted shares issued to executive officers and senior management became
immediately vested. As of December 31, 2001, 140,039 restricted stock awards had
been issued; 33,168 have vested and 106,871 have been canceled. The compensation
cost for the restricted shares was amortized over the respective vesting
periods.
N. DISPOSITION OF ASSETS
On June 13, 2001, Bingham sold certain of the assets of its commercial
mortgage financing and servicing subsidiaries and other related assets to Wells
Fargo Bank, National Association and Wells Fargo & Company for cash
consideration of approximately $9.6 million. The assets sold consisted of
commercial loans receivable with a carrying amount of approximately $3.5
million, mortgage servicing rights with a carrying amount of approximately $2.1
million and furniture and equipment with carrying amounts of approximately
$303,000. The pre-tax gain on the sale of assets of approximately $1.4 million
is net of the write-off of $1.3 million in goodwill related to the purchase of
the commercial mortgage operations and approximately $1.1 million in costs
related to the transaction.
Proceeds from the sale were used to pay down Bingham's existing lines of
credit. The sale was completed pursuant to an Agreement dated May 8, 2001, as
amended, among Bingham, Bloomfield Acceptance, Bloomfield Servicing, Hartger &
Willard, Wells Fargo Bank and Wells Fargo & Company. The terms of the
transaction were determined on the basis of arm's length negotiations between
the parties.
O. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS: At December 31, 2001 aggregate minimum rental
commitments under noncancelable leases having terms of more than one year were
$1.2 million payable (2002), $593,000 (2003), $370,000 (2004) and $58,000
(2005). Total rental expense for the years ended December 31, 2001 and 2000, the
three months ended December 31, 1999 and the year ended September 30, 1999 was
$1.3 million, $1.2 million,
54
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$251,000 and $420,000, respectively. These leases are for office facilities and
equipment and generally contain either clauses for cost of living increases
and/or options to renew or terminate the lease.
LOAN COMMITMENTS: At December 31, 2001 and 2000, the Company had
commitments to originate manufactured home installment contracts approximating
$24.2 million and $48.6 million, respectively. Commercial mortgage loan
commitments totaled $0 and $90.5 million at December 31, 2001 and 2000,
respectively.
P. FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET ACTIVITY
FINANCIAL INSTRUMENTS: As part of its interest rate risk management
strategy, the Company has in the past attempted to hedge the interest rate risk
on its loan portfolio by entering into Treasury rate locks and forward interest
rate swaps. The Company has classified these transactions as hedges on specific
classes of loan receivables. Any gross unrealized gains or losses on these hedge
positions were an adjustment to the basis of the mortgage loan portfolio and
were used in the lower of cost or market valuation to establish a valuation
allowance as shown in Note D. As of December 31, 2001 the Company had no
outstanding hedge positions.
The following table identifies the gross unrealized gains and losses of the
hedge positions as of December 31, 2001, December 31, 2000 and December 31,
1999:
<Table>
<Caption>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED YEAR ENDED
-------------------------------- DECEMBER 31, SEPTEMBER 30,
2001 2000 1999 1999
-------------- -------------- -------------- --------------
GROSS GROSS GROSS GROSS
UNREALIZED UNREALIZED UNREALIZED UNREALIZED
HEDGE TYPE REFERENCE RATE/TREASURY GAINS (LOSSES) GAINS (LOSSES) GAINS (LOSSES) GAINS (LOSSES)
---------- ----------------------- -------------- -------------- -------------- --------------
(IN THOUSANDS)
Interest Rate Swap... 10 Year Swap $-- $(364) $609 $(146)
Treasury Lock........ U.S. Treasury 4.750% -- 11/08 -- -- -- 126
Treasury Lock........ U.S. Treasury 5.625% -- 5/08 -- -- -- 115
Treasury Lock........ U.S. Treasury 5.500% -- 5/09 -- -- -- 6
Treasury Lock........ 10 Year Treasury -- -- -- 2
</Table>
FAIR VALUE OF FINANCIAL INSTRUMENTS: Statement of Financial Accounting
Standards No. 107 ("SFAS 107") requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate such value. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques.
55
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table shows the carrying amount and estimated fair values of
the Company's financial instruments:
<Table>
<Caption>
DECEMBER 31,
----------------------------------------------
2001 2000
--------------------- ---------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- --------- -------- ---------
(IN THOUSANDS)
Assets
Cash and equivalents............................... $ 440 $ 440 $ 3,521 $ 3,521
Restricted cash.................................... 1,739 1,739 1,628 1,628
Loans receivable................................... 127,412 129,298 98,633 105,416
Loan sale proceeds receivable...................... 5,723 5,723 6,603 6,603
Other.............................................. 9,540 9,540 9,102 9,102
Liabilities
Accounts payable and accrued expenses.............. 5,709 5,709 14,111 14,111
Recourse liability................................. 8,681 8,681 9,313 9,313
Interest rate swap................................. -- -- 2,640 2,640
Advances under repurchase.......................... 105,564 105,564 67,256 67,256
Subordinated debt.................................. -- -- 3,664 3,664
Note payable....................................... 17,435 17,435 42,697 42,697
</Table>
The carrying amount for cash and cash equivalents and other assets is a
reasonable estimate of their fair value.
Fair values for the Company's loans are estimated using quoted market
prices for loans with similar interest rates, terms and borrowers credit quality
as those being offered by the Company.
The carrying amount of accrued interest approximates its fair value. Due to
their short maturity, accounts payable and accrued expense carrying values
approximate fair value.
Fair value of the Company's loan sale proceeds receivable approximates its
carrying value. The fair value is based on a discounted cash flow analysis with
prepayment assumptions based on historical performance and industry standards.
The fair value of the Company's recourse liability approximates its
carrying value. The fair value is based on a discounted cash flow analysis with
prepayment assumptions based on historical performance and industry standards.
Fair value of loan commitments valued on the basis of fees currently
charged for commitments for similar loan terms to new borrowers with similar
credit profiles is not considered material.
The fair value of the Company's fixed rate subordinated debt at December
31, 2000 was based on quoted market prices for debt with similar terms and
remaining maturities. The fair value of the variable rate debt is based on its
carrying amount.
56
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Q. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
YEAR ENDED DECEMBER 31, 2001:
Interest income........................................ $ 3,384 $ 795 $ 2,194 $ 3,120
Interest expense....................................... 2,914 1,224 1,717 2,020
Net income (loss)...................................... 865 (755) (2,959) (16,845)
Diluted income (loss) per share........................ .33 (0.29) (1.16) (6.62)
YEAR ENDED DECEMBER 31, 2000:
Interest income........................................ $ 4,118 $ 4,650 $ 3,296 $ 2,529
Interest expense....................................... 3,538 4,232 3,267 3,165
Net loss............................................... (2,897) (2,506) (2,859) (7,993)
Diluted loss per share................................. (1.12) (0.95) (1.08) (3.03)
YEAR ENDED SEPTEMBER 30, 1999:
Interest income........................................ $ 2,118 $ 2,617 $ 2,521 $ 2,221
Interest expense....................................... 1,699 1,841 1,953 1,363
Net income (loss)...................................... 764 480 304 (772)
Diluted income (loss) per share........................ 0.43 0.26 0.13 (0.30)
THREE MONTHS ENDED DECEMBER 31, 1999:
Interest income........................................ $ -- $ -- $ -- $ 4,069
Interest expense....................................... -- -- -- 2,832
Net loss............................................... -- -- -- (185)
Diluted loss per share................................. -- -- -- (0.07)
</Table>
R. SUBSEQUENT EVENTS
In March 2002, the Company completed a securitization of manufactured home
loans with principal balances totaling approximately $135.0 million. These loans
will serve as collateral for bonds issued by Origen Manufactured Housing Trust
2002-A. The securitization is expected to qualify as a sale of loans for
accounting purposes and the Company expects to recognize a gain on the
transaction of approximately $2.5 million. The Company received proceeds of
approximately $128.6 million at closing which were used to reduce amounts
outstanding under the Company's credit facilities.
57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<Table>
<Caption>
NAME OFFICE
---- ------
Ronald A. Klein.............................. Director, President and Chief Executive Officer
Gary A. Shiffman............................. Chairman of the Board and Secretary
Mark A. Gordon............................... Director
Brian M. Hermelin............................ Director
Robert H. Orley.............................. Director
Arthur A. Weiss.............................. Director
W. Anderson Geater, Jr....................... Chief Financial Officer and Treasurer
J. Peter Scherer............................. Chief Operating Officer
</Table>
RONALD A. KLEIN, 44, has been a director and the Chief Executive Officer of
Bingham since February 1999. He was named Bingham's President in June 1999. He
is a member of Bingham's Nominating Committee. Since 1994, he has been the
Managing Director of Equity Growth L.L.C., a private real estate investment
company. From 1990 to 1994, Mr. Klein served as Executive Vice President of
Alaron Inc., an international distributor of consumer electronics. From 1985 to
1990, Mr. Klein was a member of the Chicago Board Options Exchange. Mr. Klein
has also served as the Managing Director of a financial derivatives trading firm
and, before 1985, he was in the private practice of law.
GARY A. SHIFFMAN, 47, has been the Chairman of the Board of Bingham since
August 1996. He is a member of Bingham's Nominating Committee. Mr. Shiffman has
been the Secretary of Bingham since 1997. Since 1994, Mr. Shiffman has been the
Chief Executive Officer and a director of Sun Communities, Inc., a publicly held
REIT with its stock traded on the New York Stock Exchange. Since March 2000, Mr.
Shiffman has served as Chairman of the Board of Sun. He has been actively
involved in the management, acquisition, financing, construction and development
of manufactured housing communities for over 15 years. He has overseen the land
acquisition, rezoning, development and marketing of numerous manufactured home
expansion projects. In addition, Mr. Shiffman has extensive experience in the
debt and capital markets and retains significant interests in a diverse
portfolio of real estate assets.
MARK A. GORDON, 56, has been a director of Bingham since February 1999. He
is currently a member of Bingham's Audit Committee. Mr. Gordon has been with The
Budd Company, an automotive parts manufacturer, since 1976 and currently holds
the position of Assistant General Counsel. Previously, he was President of Budd
Financial Corporation, a financial services affiliate of The Budd Company. Mr.
Gordon is a certified public accountant and an attorney. Before his employment
with The Budd Company, Mr. Gordon was a tax specialist with the public
accounting firms KPMG Peat Marwick and Coopers & Lybrand.
BRIAN M. HERMELIN, 36, has been a director of Bingham since October 1997.
He is a member of Bingham's Audit Committee and Compensation Committee. Since
1997, Mr. Hermelin has been Chief Operating Officer and a director of USA Jet
Airlines Inc., a cargo airline that also operates Active Aero Charter, an air
charter broker and logistics provider. From 1992 to 1997, Mr. Hermelin provided
acquisition analysis, strategic planning and business development services
through various consulting arrangements. Mr. Hermelin is Mr. Orley's
brother-in-law.
ROBERT H. ORLEY, 46, has been a director of Bingham since October 1997. He
is a member of Bingham's Audit Committee and Compensation Committee. Mr. Orley
is the Executive Vice President of the Oxford Investment Group, Inc., where
since 1985, he has supervised the legal, administrative, taxation and financial
reporting aspects of Oxford's business portfolio and acquisition searches. Since
1984, Mr. Orley has
58
also been Vice President and a director of Real Estate Interests, Inc., a real
estate development and management company affiliated with Oxford. Mr. Orley is
Mr. Hermelin's brother-in-law.
ARTHUR A. WEISS, 53, has been a director of Bingham since February 1998. He
is a member of Bingham's Nominating Committee and Compensation Committee. Since
1976, Mr. Weiss has practiced law with, and is currently a stockholder of, the
law firm of Jaffe, Raitt, Heuer & Weiss, Professional Corporation, which
represents Bingham in various matters. Mr. Weiss is also a director of Sun.
W. ANDERSON GEATER, JR., 53, has been Bingham's Chief Financial Officer and
Treasurer since May 2000. From 1994 through April 2000, Mr. Geater was the Chief
Financial Officer and Chief Administrative Officer of UFS Holdings, LLC and
Central Park Capital, LLC. UFS Holdings provides a wide range of support
services to financial institutions related to mortgage products. Central Park
Capital originates commercial real estate mortgage loans. From 1991 to 1993, Mr.
Geater was the Chief Operating Officer of First Mortgage Strategies Group, Inc.,
which provides support services related to mortgage products. From 1990 to 1991,
he was the director of financial services for Pannell Kerr Forster, a public
accounting firm. From 1975 to 1990, he was Executive Vice President and Chief
Financial Officer of Leader Federal Bank for Savings, a national savings bank.
Before joining Leader Federal Bank, Mr. Geater was an audit supervisor with the
public accounting firm of KPMG Peat Marwick.
J. PETER SCHERER, 52, has been Bingham's Chief Operating Officer since
October 1999. From 1984 through 1998 he served in various capacities at The
Taubman Company, a publicly-traded company engaged in the ownership, management,
leasing, acquisition, development, and expansion of regional shopping centers.
Mr. Scherer was most recently Senior Vice President and chairman of the asset
management group at Taubman. From 1976 to 1980 and from 1980 to 1984 Mr. Scherer
was an attorney with American Motors Corporation and Volkswagen of America,
Inc., respectively.
BOARD OF DIRECTORS AND COMMITTEES
Our board of directors is divided into three classes, as equal in number as
possible. At each annual meeting, the successors to the class of directors whose
terms expire at that meeting will be elected to hold office for a term expiring
at the annual meeting of shareholders held in the third year following the year
of their election.
Messrs. Klein and Weiss have terms expiring at the annual meeting of
shareholders to be held in 2002, Messrs. Shiffman and Orley have terms expiring
at the annual meeting of shareholders to be held in 2003, and Messrs. Gordon and
Hermelin have terms expiring at the annual meeting of shareholders to be held in
2002.
The board of directors met eight times during the year ended December 31,
2001 and took various actions by written consent without a meeting. All
incumbent directors attended at least 75% of the meetings of the board and of
each committee on which they served.
Committees made up of members of the board perform several important
functions of the board of directors. Our bylaws authorize the formation of
committees and grant the board the authority to prescribe the functions and
standards for membership of each committee. In addition, the board appoints the
members of each committee. The board currently has three standing committees: an
Audit Committee, a Compensation Committee and a Nominating Committee.
Audit Committee
The Audit Committee:
- annually recommends a firm of independent public accountants to the board
of directors to act as auditors of Bingham;
- reviews the scope of the annual audit with the auditors in advance of the
audit;
- generally reviews the results of the audit and the adequacy of our
accounting, financial and operating controls;
59
- reviews our accounting and reporting principles, policies and practices;
and
- performs such other duties as may be delegated to it by the board.
Currently, the Audit Committee is comprised of Messrs. Orley, Hermelin and
Gordon. The Audit Committee met four times during the year ended December 31,
2001.
Compensation Committee
The Compensation Committee:
- reviews and modifies the compensation (including salaries and bonuses) of
our officers as initially set by our President;
- administers our stock option plan; and
- performs such other duties as may be delegated to it by the board.
Currently, the Compensation Committee is comprised of Messrs. Hermelin,
Weiss and Orley. During the fiscal year ended December 31, 2001, the
Compensation Committee did not hold any formal meetings but took various actions
by written consent without a meeting.
Nominating Committee
The Nominating Committee:
- nominates persons for election or appointment to the office of director
of Bingham; and
- performs such other duties as may be delegated to it by the board.
Currently, the Nominating Committee is comprised of Messrs. Shiffman, Weiss
and Klein. During the fiscal year ended December 31, 2001, the Nominating
Committee did not hold any formal meetings but took various actions by written
consent without a meeting. The Nominating Committee will consider nominees
recommended by shareholders upon submission in writing to Bingham's Secretary of
the names of the nominees, together with their qualifications for service as a
director of Bingham.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Bingham is required to identify each person who was an officer, director or
beneficial owner of more than 10% of its registered equity securities during
Bingham's most recent fiscal year and who failed to file on a timely basis
reports required by Section 16(a) of the Securities Exchange Act of 1934. Based
solely upon its review of copies of such reports received by it during or with
respect to the fiscal year ended December 31, 2001, Bingham believes that all
officers, directors and beneficial owners of more than 10% of its registered
equity securities timely filed all required reports, except that Mr. Shiffman
filed one late report on Form 4 regarding one transaction, and Mr. Weiss filed
one late report on Form 4 regarding one transaction.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation paid to our Chief Executive
Officer and our four highest paid other executive officers whose remuneration
from Bingham exceeded $100,000 during the last three fiscal years (the "Named
Executive Officers"). Effective February 4, 2000, Bingham changed its fiscal
year end from September 30 to December 31. The information in the following
tables is presented for the fiscal year
60
ended September 30, 1999, the three months ended December 31, 1999 (the "Stub
Period"), the fiscal year ended December 31, 2000, and the fiscal year ended
December 31, 2001.
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
LONG-TERM COMPENSATION
--------------------------
ANNUAL COMPENSATION RESTRICTED SHARES
-------------------- STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS AWARDS OPTIONS(#) COMPENSATION
- --------------------------- ----------- ------ ----- ---------- ---------- ------------
Ronald A. Klein, 9/30/1999 $105,000 $ 50,000 $145,000(1) 5,000(2) --
President and Chief Stub Period 37,500 50,000 -- 30,000(2) --
Executive Officer 12/31/2000 250,000 150,000 -- -- --
12/31/2001 250,000 150,000 -- -- --
Daniel E. Bober,(3) 9/30/1999 155,625 150,000(4) -- -- $25,000(5)
Vice President Stub Period 65,846 -- -- -- 25,000(5)
12/31/2000 165,375 105,882 -- -- 25,000(5)
12/31/2001 79,587 167,647 -- -- 10,416(5)
Creighton J. Weber,(6) 9/30/1999 155,625 150,000(7) -- -- 25,000(8)
Vice President Stub Period 65,846 -- -- -- 25,000(8)
12/31/2000 165,375 105,882 -- -- 25,000(8)
12/31/2001 79,587 257,866 -- -- 10,416(8)
W. Anderson Geater, Jr., 9/30/1999 -- -- -- -- --
Chief Financial Officer Stub Period -- -- -- -- --
12/31/2000 106,250 50,000 -- 10,000(9) --
12/31/2001 144,375 175,000 -- -- --
J. Peter Scherer, 9/30/1999 -- -- -- -- --
Chief Operating Officer Stub Period 31,250 1,442 100,000(10) 2,500(11) --
12/31/2000 131,250 55,000 -- 10,000(11) --
12/31/2001 160,000 150,000 -- -- --
</Table>
- -------------------------
(1) On April 14, 1999, Bingham granted Mr. Klein 10,000 shares of restricted
stock of which 5% vested on April 14 of each of 2000 and 2001 and 25% vests
on April 14 of each of 2002 and 2003 and the balance vests on April 14,
2004. As of December 31, 2001, the value of these restricted shares (as
determined in accordance with the rules promulgated by the SEC) was
$15,000. If dividends on Bingham's common stock are paid, Mr. Klein has the
right to receive any dividends paid on these restricted shares.
(2) These options were terminated as of December 31, 2001.
(3) Mr. Bober resigned as a director and executive officer of Bingham as of
June 13, 2001.
(4) Mr. Bober earned this bonus for services rendered to Bingham for the period
from March of 1998 through March of 1999. This bonus was paid in 17 equal
monthly installments beginning September 1, 1999.
(5) Represents contribution to an annuity plan of Mr. Bober's choice.
(6) Mr. Weber resigned as a director and executive officer of Bingham as of
June 13, 2001.
(7) Mr. Weber earned this bonus for services rendered to Bingham for the period
from March of 1998 through March of 1999. This bonus was paid in 17 equal
monthly installments beginning September 1, 1999.
(8) Represents contribution to an annuity plan of Mr. Weber's choice.
(9) These options were terminated as of December 31, 2001.
(10) On October 1, 1999, Bingham granted Mr. Scherer 9,709 shares of restricted
stock of which 5% vested on October 1 of each of 2000 and 2001 and 25%
vests on October 1 of each of 2002 and 2003 and the
61
balance vests on October 1, 2004. As of December 31, 2000, the value of
these restricted shares (as determined in accordance with the rules
promulgated by the SEC) was $14,564. If dividends on Bingham's common stock
are paid, Mr. Scherer has the right to receive any dividends paid on these
restricted shares.
(11) These options were terminated as of December 31, 2001.
STOCK OPTIONS
All stock options held by Named Executive Officers were terminated as of
December 31, 2001.
DIRECTOR COMPENSATION
Directors who are not employees of Bingham are entitled to an annual
retainer fee of $12,000, payable $3,000 per calendar quarter. Each of Mark A.
Gordon, Brian M. Hermelin and Robert H. Orley earned directors' fees of $12,000
for services during the fiscal year ended December 31, 2001. Although Arthur A.
Weiss earned director's fees of the same amount for services during that period,
he declined such fees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Since December 13, 2000, the members of the Compensation Committee of our
board of directors have been Messrs. Hermelin, Weiss and Orley. Mr. Weiss' law
firm provided services to Bingham in fiscal year ended December 31, 2001. Please
see "Certain Relationships and Related Party Transactions".
EMPLOYMENT AGREEMENTS
We have entered into an employment agreement with Ronald A. Klein under
which Mr. Klein serves as Bingham's Chief Executive Officer and President. Mr.
Klein's employment agreement is for an initial term of three years ending
December 31, 2002. The term is automatically renewed for successive one year
periods unless either party terminates the agreement. Mr. Klein's annual base
salary in the first, second and third year of the agreement is $250,000,
$275,000 and $300,000, respectively. After the third year, the base salary will
be increased by 5% or more per year as determined by our board. Mr. Klein will
be paid an annual bonus under the terms of an executive bonus plan to be agreed
upon by us and Mr. Klein. The agreement provides for a cash payment of up to
2.99 times Mr. Klein's base salary if there is a change in control of Bingham.
Mr. Klein's employment agreement precludes him for the term of the agreement
plus 18 months, from diverting business from Bingham or its subsidiaries or
inducing anyone to leave the employment of Bingham or its subsidiaries.
In August 2001, our board approved amendments to Mr. Klein's employment
agreement. Mr. Klein agreed to reduce a change of control payment described in
the original employment agreement from $822,250 to $500,000, of which $250,000
will be paid in cash at the closing of the recapitalization and $250,000 will be
payable under a promissory note. Interest at an annual rate of 6% on the
principal amount of the note will be payable monthly. The entire principal
amount of the note will be payable on December 31, 2004, or earlier upon a
change of control of Origen LLC. The employment agreement was also amended to
extend the term from December 31, 2002 to December 31, 2004 and to provide for a
payment of $322,250 if there is a change of control in Origen LLC in the future.
In addition, under the amended agreement Mr. Klein will have the option to
purchase a 0.5% interest in Origen LLC at an enterprise value of $55 million, a
0.5% interest at an enterprise value of $60 million and a 0.5% interest at an
enterprise value of $65 million. These options will be exercisable for cash, at
times and on other terms to be established by the parties. Origen LLC will
assume the employment agreement (but not Bingham's obligations under the
promissory note) upon the closing of the recapitalization. The execution of a
written employment agreement incorporating these terms is a condition to the
closing of the merger of Origen Inc. and Origen LLC.
62
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Based upon information available to us, the following table shows, as of
March 15, 2002, the shareholdings of:
- each person known to us to be the beneficial owner of more than 5% of our
common stock;
- each of our directors;
- each Named Executive Officer; and
- all of our executive officers and directors as a group.
<Table>
<Caption>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP OUTSTANDING SHARES(1)
------------------- -------------------- ---------------------
Gary A. Shiffman....................................... 131,516 5.31%
31700 Middlebelt Road, Suite 145
Farmington Hills, MI 48334
Ronald A. Klein........................................ 18,300(2) *
260 E. Brown Street, Suite 200
Birmingham, MI 48009
Robert H. Orley........................................ 87,500(3) 3.53
2000 North Woodward, Suite 130
Bloomfield Hills, MI 48304
Brian M. Hermelin...................................... 132,000(4) 5.33
2064 D Street
Belleville, MI 48111
Arthur A. Weiss........................................ 141,920(5) 5.73
One Woodward Avenue, Suite 2400
Detroit, MI 48226
Mark A. Gordon......................................... -- *
3155 W. Big Beaver Road
Troy, Michigan 48084
W. Anderson Geater, Jr................................. -- *
260 E. Brown Street, Suite 200
Birmingham, MI 48009
J. Peter Scherer....................................... 9,709 *
260 E. Brown Street, Suite 200
Birmingham, MI 48009
Daniel E. Bober........................................ 113,784(6) 4.59
260 E. Brown Street, Suite 200
Birmingham, MI 48009
Creighton J. Weber..................................... 113,584(7) 4.59
260 E. Brown Street, Suite 200
Birmingham, MI 48009
Lois T. Shiffman....................................... 242,714(8) 9.80
5315 Isle Royale Ct.
West Bloomfield, MI 48323
All current executive officers and directors as a group
(eight persons)(9)................................... 520,945 21.0
</Table>
63
- -------------------------
* Less than 1% of the outstanding shares.
(1) In accordance with SEC regulations, the percentage calculations are based on
2,476,321 shares of common stock issued and outstanding as of March 15, 2002
plus shares of common stock which may be acquired pursuant to options
exercisable within 60 days of March 15, 2002 by each individual or group
listed.
(2) Includes 1,000 shares of common stock held by a trust for the benefit of Mr.
Klein's wife.
(3) Includes 60,000 shares held by the Four O Group, L.L.C., a Michigan limited
liability company, which are attributable to Mr. Orley because he is the
manager of the limited liability company. Includes 7,500 shares held by Mr.
Orley's wife which are attributable to him.
(4) Includes 70,000 shares of common stock held by Kamar J. Fabri, a Michigan
limited partnership, and 18,000 shares of common stock held by Lamm
Investments, a Michigan limited partnership, which are attributable to Mr.
Hermelin because he is the President of Gamm, Inc. a Michigan corporation
and the general partner of the partnerships.
(5) Includes 49,420 shares of common stock held by the Lois T. Shiffman
Qualified Annuity Trust u/t/a dated March 20, 2000, of which Mr. Weiss is
the sole trustee; 22,500 shares of common stock held by the 1997 Shiffman
Charitable Remainder Trust, of which Mr. Weiss is the co-trustee; and 67,000
shares of common stock owned by the Estate of Milton M. Shiffman, of which
Mr. Weiss is the co-personal representative. Mr. Weiss disclaims beneficial
ownership of all such shares.
(6) Includes 200 shares of common stock held by two trusts for the benefit of
Mr. Bober's children, as to which beneficial ownership is disclaimed. Mr.
Bober resigned as a director and executive officer of Bingham as of June 13,
2001.
(7) Mr. Weber resigned as a director and executive officer of Bingham as of June
13, 2001.
(8) Includes 22,500 shares of common stock held by the 1997 Shiffman Charitable
Remainder Trust, of which Mrs. Shiffman is the co-trustee, and 67,000 shares
of common stock held by the Estate of Milton M. Shiffman, of which Mrs.
Shiffman is a co-personal representative.
(9) Includes 138,920 shares of common stock owned by executive officers and
directors with respect to which beneficial ownership is disclaimed. Does not
include holdings of Mr. Bober or Mr. Weber, each of whom resigned as a
director and executive officer of Bingham as of June 13, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
RECAPITALIZATION
Gary A. Shiffman, Bingham's Chairman of the Board and Secretary, and Arthur
A. Weiss, a director of Bingham, are affiliated with other members of Origen LLC
that received interests in Origen LLC in connection with the recapitalization of
our operating subsidiaries. Mr. Shiffman is also a manager of Origen LLC. See
"Business -- Recapitalization" for a more detailed description of the
recapitalization.
Shiffman Family LLC purchased approximately an 8.4% equity interest in
Origen LLC for approximately $4.2 million. Shiffman Family LLC is owned and
controlled by Mr. Shiffman and members of his immediate family.
SUI TRS, Inc. purchased approximately a 30% equity interest in Origen LLC
for approximately $15 million. SUI TRS is wholly-owned by Sun Home Services,
Inc. Sun Communities Operating Limited Partnership owns all of the non-voting
preferred stock of Sun Home Services, which entitles Sun Communities Operating
Limited Partnership to 95% of the cash flow from the operating activities of Sun
Home Services (including the operating activities of SUI TRS) and effectively an
approximate 30% interest in Origen LLC. Sun Communities, Inc., of which Mr.
Shiffman is a director and officer and Mr. Weiss is a director, is the general
partner of Sun Communities Operating Limited Partnership. Mr. Shiffman and the
Estate of Milton M. Shiffman, his father, own all of the voting common stock of
Sun Home Services, which entitles them to 5% of the cash flow from the operating
activities of Sun Home Services (including the operating
64
activities of SUI TRS) and effectively an approximate 1.6% interest in Origen
LLC. Mr. Weiss is a personal representative of the Estate of Milton M. Shiffman.
SUI TRS, Shiffman Family LLC and Woodward Holding will have the option to
buy Bingham's ownership interest in Origen LLC between 36 and 60 months from
December 18, 2001. The purchase price of Bingham's interest would be its fair
market value as determined by an appraiser selected by Origen LLC's managers.
Bingham controls only two of the five votes of the managers and at least two of
the remaining three votes will be controlled by the parties who hold the option.
While the appraiser must be an independent investment banking firm, the
purchasers of Bingham's interest would have greater influence in selecting the
appraiser than Bingham would.
LINE OF CREDIT WITH SUN COMMUNITIES OPERATING LIMITED PARTNERSHIP AND WOODWARD
HOLDING
Through December 18, 2001, Sun Communities Operating Limited Partnership
provided financing to us through three separate facilities: a $4.0 million
subordinated term loan, bearing interest at the rate of 9.75% per annum; a $10.0
million subordinated demand line of credit, bearing interest at a rate of LIBOR
plus a spread; and a $50.0 million subordinated demand line of credit, bearing
interest at a rate of LIBOR plus a spread. The funds from the capital
contributions to Origen LLC received in connection with the recapitalization
were used to repay a substantial portion of this debt.
The remaining balance of this debt (approximately $11.4 million) was
restructured into a $21.25 million line of credit extended by Sun Communities
Operating Limited Partnership to Origen Inc. and Origen LLC, as co-borrowers.
The line of credit will terminate on December 18, 2002 and the outstanding
balance bears interest at a rate of LIBOR plus 700 basis points, with a minimum
interest rate of 11% and a maximum interest rate of 15%. The line of credit is
secured by a security interest in substantially all of each borrower's assets.
Sun Communities Operating Limited Partnership and Woodward Holding, a member of
Origen LLC, have entered into a participation agreement under which Sun
Communities Operating Limited Partnership will loan up to approximately 59% of
the borrowing limit (or $12.5 million) and Woodward Holding will loan up to
approximately 41% of the borrowing limit (or $8.75 million) under the line of
credit. Sun Communities Operating Limited Partnership and Woodward Holding
jointly administer the line of credit. Bingham has guaranteed the obligations of
the borrowers under the line of credit and has granted the lenders a security
interest in substantially all of its assets as security for the guaranty.
PROFESSIONAL FEES
During the fiscal year ended December 31, 2001, the law firm of Jaffe,
Raitt, Heuer & Weiss, Professional Corporation, acted as our general counsel and
represented us in various matters. Mr. Weiss is a shareholder of Jaffe, Raitt,
Heuer & Weiss.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed herewith as part of this Form 10-K:
(1) A list of the financial statements required to be filed as a part
of this Form 10-K is shown in the "Index to the Financial Statements"
included in Part II, Item 8 of this report.
(2) Schedules other than those listed in the "Index to the Financial
Statements" contained in Part II, Item 8 of this report are omitted because
of the absence of the conditions under which they are required or because
the information required is included in the consolidated financial
statements or notes thereto.
(3) A list of the exhibits required by Item 601 of Regulation S-K to
be filed as a part of this Form 10-K is shown on the "Exhibit Index" filed
herewith.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: April 1, 2002
BINGHAM FINANCIAL SERVICES
CORPORATION
By: /s/ RONALD A. KLEIN
------------------------------------
Ronald A. Klein
President and Chief Executive
Officer
By: /s/ W. ANDERSON GEATER, JR.
------------------------------------
W. Anderson Geater, Jr.
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
66
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Ronald A. Klein and Gary A. Shiffman, and each of them, his attorneys-in-fact,
each with the power of substitution, for him in any and all capacities, to sign
any amendments to this Report on Form 10-K, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting to said attorneys-in-fact, or his
substitute or substitutes, the power and authority to perform each and every act
and thing requisite and necessary to be done in connection therewith, as fully
to all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
<Table>
<Caption>
NAME TITLE DATE
---- ----- ----
/s/ GARY A. SHIFFMAN Chairman of the Board of Directors, April 1, 2002
- ------------------------------------- Secretary
Gary A. Shiffman
/s/ RONALD A. KLEIN President, Chief Executive Officer April 1, 2002
- ------------------------------------- and Director
Ronald A. Klein
/s/ ROBERT H. ORLEY Director April 1, 2002
- -------------------------------------
Robert H. Orley
/s/ BRIAN M. HERMELIN Director April 1, 2002
- -------------------------------------
Brian M. Hermelin
/s/ ARTHUR A. WEISS Director April 1, 2002
- -------------------------------------
Arthur A. Weiss
/s/ MARK A. GORDON Director April 1, 2002
- -------------------------------------
Mark A. Gordon
</Table>
67
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
2.1 Agreement and Plan of Merger dated as of February 17, 1998
by and among Bingham Financial Services Corporation, BAC
Acquiring Corp., BSC Acquiring Corp., Bloomfield Acceptance
Company, L.L.C., and Bloomfield Acceptance Company, L.L.C.
(Incorporated by reference to Exhibit 2.1 to Bingham's
Current Report on Form 8-K dated March 5, 1998)
2.2 Purchase Agreement dated as of November 27, 1999 by and
among DFI Acquiring Corp., Dynex Capital, Inc., Dynex
Holding, Inc. (Incorporated by reference to Exhibit 2.1 to
Bingham's Report on Form 8-K filed December 30, 1999)
2.3 Reorganization Agreement dated as of June 30, 1999, by and
among Bingham Financial Services Corporation, DMR Financial
Services, Inc., Hartger & Willard Mortgage Associates, Inc.
and Detroit Mortgage and Realty Company (Incorporated by
reference to Exhibit 2.1 to Bingham's Current Report on Form
8-K dated July 14, 1999)
2.4 Agreement dated May 8, 2001 among Bingham Financial Services
Corporation, Bloomfield Acceptance Company, L.L.C.,
Bloomfield Servicing Company, L.L.C., Hartger & Willard
Mortgage Associates, Inc., Wells Fargo Bank, National
Association, and Wells Fargo & Company. (Incorporated by
reference to Exhibit 2.1 to Bingham's Current Report on Form
8-K filed May 25, 2001.)
2.5 Amendment No. 1 to Agreement dated June 13, 2001 among
Bingham Financial Services Corporation, Bloomfield
Acceptance Company, L.L.C., Bloomfield Servicing Company,
L.L.C., Hartger & Willard Mortgage Associates, Inc., Wells
Fargo Bank, National Association, and Wells Fargo & Company.
(Incorporated by reference to Exhibit 2.2 to Bingham's
Current Report on Form 8-K filed June 26, 2001)
2.6 Stock Purchase Agreement dated as of March 17, 2000 between
Bingham and Gwenuc, LLC (Incorporated by reference to
Exhibit 2.2 to Bingham's Report on Form 8-K filed March 23,
2000)
2.7 Merger Agreement dated December 17, 2001 among Bingham
Financial Services Corporation, Origen Financial, Inc.,
Origen Manufactured Home Financial, Inc., Dynex Insurance
Agency, Inc., Origen Financial L.L.C., Origen Manufactured
Home Financial, L.L.C. and Origen Insurance Agency, L.L.C.
(filed herewith)
3.1 Amended and Restated Articles of Incorporation of Bingham
Financial Services Corporation (Incorporated by reference to
Exhibit 3.1 to Bingham's Registration Statement on Form S-1;
File No. 333-34453)
3.2 Amended and Restated Bylaws of Bingham Financial Services
Corporation (Incorporated by reference to Exhibit 3.3 to
Bingham's Registration Statement on Form S-1; File No.
333-34453)
4.1 Shareholders Agreement dated March 5, 1998 (Incorporated by
reference to Exhibit 2.7 to Bingham's Current Report on Form
8-K dated March 13, 1998)
4.2 Amendment to Merger Agreement, Shareholders Agreement and
Employment Agreements, dated February 21, 1999 (Incorporated
by reference to Exhibit 4.2 to Bingham's Annual Report on
Form 10-K dated December 29, 1999)
4.3 Form of Registration Rights Agreement dated April 27, 1999
with respect to an aggregate of 800,330 shares (Incorporated
by reference to Exhibit 4.1 to Bingham's Quarterly Report on
Form 10-Q dated August 14, 2000)
4.4 Bingham Financial Services Corporation Third Amended and
Restated 1997 Stock Option Plan (Incorporated by reference
to Exhibit 4.1 to Bingham's Quarterly Report on Form 10-Q
dated August 14, 2001)
10.1 Participants Support Agreement between Bingham and Sun
Communities, Inc. (assigned to Sun Communities Operating
Limited Partnership as of December 31, 1997) entered into on
September 30, 1997, but effective as of July 1, 1997
(Incorporated by reference to Exhibit 10.1 to Bingham's
Registration Statement on Form S-1; File No. 333-34453)
</Table>
68
<Table>
<Caption>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.2 Amendment to Participants Support Agreement between Bingham
Financial Services Corporation and Sun Communities Operating
Limited Partnership, dated as of April 1, 1999 (Incorporated
by reference to Exhibit 10.2 to Bingham's Annual Report on
Form 10-K dated December 29, 1999)
10.3 Administration Agreement between Bingham Financial Services
Corporation and Sun Communities, Inc., dated July 1, 1997
(Incorporated by reference to Exhibit 10.3 to Bingham's
Registration Statement on Form S-1; File No. 333-34453)
10.4 Form of Indemnification Agreement between Bingham and its
directors (Incorporated by reference to Exhibit 10.4 to
Bingham's Registration Statement on Form S-1; File No.
333-34453)
10.5 Security Agreement dated December 13, 1999 between Bingham
and Sun Communities Operating Limited Partnership
(Incorporated by reference to Exhibit 10.3 to Bingham's
Quarterly Report on Form 10-Q dated August 14, 2000)
10.6 Amended and Restated Security Agreement dated as of December
13, 1999 between Sun Communities Operating Limited
Partnership and Bingham (Incorporated by reference to
Exhibit 10.14 to Sun Communities, Inc.'s Registration
Statement on Form S-3 dated January 31, 2001; File No.
333-54718)
10.7 Amendment to Amended and Restated Security Agreement dated
as of October 20, 2000 between Sun Communities Operating
Limited Partnership and Bingham (Incorporated by reference
to Exhibit 10.20 to Sun Communities, Inc.'s Registration
Statement on Form S-3 dated January 31, 2001; File No.
333-54718)
10.8 Supplemental Agreement Regarding Assignment of Notes, Loan
Agreements and Security Agreements as Collateral Security
between Sun Communities Operating Limited Partnership and
Bingham effective as of December 13, 1999 and December 17,
1999 (Incorporated by reference to Exhibit 10.16 to Sun
Communities, Inc.'s Registration Statement on Form S-3 dated
January 31, 2001; File No. 333-54718)
10.9 Supplemental Agreement Regarding Assignment of Note, Loan
Agreement and Security Agreement as Collateral Security
between Sun Communities Operating Limited Partnership and
Bingham effective as of December 13, 1999 (Incorporated by
reference to Exhibit 10.22 to Bingham's Annual Report on
Form 10-K for the year ended December 31, 2000)
10.10 Supplemental Agreement Regarding Assignment of Note, Loan
Agreement and Security Agreement as Collateral Security
between Sun Communities Operating Limited Partnership and
Bingham effective as of December 13, 1999 (Incorporated by
reference to Exhibit 10.23 to Bingham's Annual Report on
Form 10-K for the year ended December 31, 2000)
10.11 Supplemental Agreement Regarding Assignment of Note and
Security Agreement as Collateral Security between Sun
Communities Operating Limited Partnership and Bingham
effective as of March 16, 2000 (Incorporated by reference to
Exhibit 10.18 to Sun Communities, Inc.'s Registration
Statement on Form S-3 dated January 31, 2001; File No.
333-54718)
10.12 Employment Agreement dated January 1, 2000 between Bingham
and Ronald A. Klein (Incorporated by reference to Exhibit
10.5 to Bingham's Quarterly Report on Form 10-Q dated August
14, 2000)
10.13 Credit Agreement dated March 31, 2000 among Bingham, Dynex
Financial, Inc., and Michigan National Bank (Incorporated by
reference to Exhibit 10.8 to Bingham's Quarterly Report on
Form 10-Q dated August 14, 2000)
10.14 Secured Promissory Note dated March 31, 2000 executed by
Bingham and Dynex Financial, Inc. in favor of Michigan
National Bank (Incorporated by reference to Exhibit 10.9 to
Bingham's Quarterly Report on Form 10-Q dated August 14,
2000)
10.15 Security Agreement dated March 31, 2000 between Michigan
National Bank and Dynex Financial, Inc. (Incorporated by
reference to Exhibit 10.10 to Bingham's Quarterly Report on
Form 10-Q dated August 14, 2000)
10.16 Security Agreement dated March 31, 2000 between Michigan
National Bank and Bingham (Incorporated by reference to
Exhibit 10.11 to Bingham's Quarterly Report on Form 10-Q
dated August 14, 2000)
</Table>
69
<Table>
<Caption>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.17 Membership Pledge Agreement dated December 13, 1999 between
Sun Communities Operating Limited Partnership and Bingham
(Incorporated by reference to Exhibit 10.13 to Sun
Communities, Inc.'s Registration Statement on Form S-3 dated
January 31, 2001; File No. 333-54718)
10.18 Stock Pledge Agreement dated December 13, 1999 between Sun
Communities Operating Limited Partnership and Bingham
(Incorporated by reference to Exhibit 10.15 to Sun
Communities, Inc.'s Registration Statement on Form S-3 dated
January 31, 2001; File No. 333-54718)
10.19 Stock Pledge Agreement dated October 20, 2000 between Sun
Communities Operating Limited Partnership and Bingham
(Incorporated by reference to Exhibit 10.19 to Sun
Communities, Inc.'s Registration Statement on Form S-3 dated
January 31, 2001; File No. 333-54718)
10.20 Pooling and Servicing Agreement dated as of February 1, 2001
among Lehman ABS Corporation, Origen Financial, Inc.,
Vanderbilt Mortgage and Finance, Inc. and LaSalle Bank
National Association (Incorporated by reference to Exhibit
4.1 to Lehman ABS Corporation's Current Report on Form 8-K
filed April 12, 2001)
10.21 Manufactured Housing Contract Purchase Agreement dated as of
February 1, 2001 among Lehman ABS Corporation, Origen
Financial, Inc., and Bingham Financial Services Corporation
(Incorporated by reference to Exhibit 10.1 to Lehman ABS
Corporation's Current Report on Form 8-K filed April 12,
2001)
10.22 Investment Agreement dated July 20, 2001 among Bingham,
Woodward Holding, LLC, SUI TRS, Inc. and Shiffman Family LLC
(Incorporated by reference to Exhibit 10.59 to Sun
Communities, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 2001)
10.23 Amendment to Investment Agreement dated August 13, 2001
among Bingham, Woodward Holding, LLC, SUI TRS, Inc. and
Shiffman Family LLC (Incorporated by reference to Exhibit
10.59 to Sun Communities, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 2001)
10.24 Limited Liability Company Agreement of Origen Financial
L.L.C. dated December 18, 2001 among Bingham, Woodward
Holding, LLC, SUI TRS, Inc., and Shiffman Family LLC
(Incorporated by reference to Exhibit 10.60 to Sun
Communities, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 2001)
10.25 Amended and Restated Subordinated Loan Agreement dated
February 1, 2002 among Origen Financial, Inc., Origen
Financial, L.L.C. and Sun Communities Operating Limited
Partnership (Incorporated by reference to Exhibit 10.51 to
Sun Communities, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 2001)
10.26 First Amendment to Amended and Restated Subordinated Loan
Agreement dated March 22, 2002 among Origen Financial, Inc.,
Origen Financial, L.L.C. and Sun Communities Operating
Limited Partnership (Incorporated by reference to Exhibit
10.51 to Sun Communities, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 2001)
10.27 Third Amended and Restated Promissory Note dated March 22,
2002 executed by Origen Financial, Inc. and Origen
Financial, L.L.C. in favor of Sun Communities Operating
Limited Partnership (Incorporated by reference to Exhibit
10.52 to Sun Communities, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 2001)
10.28 Amended and Restated Security Agreement dated February 1,
2002 between Origen Financial, Inc. and Sun Communities
Operating Limited Partnership (Incorporated by reference to
Exhibit 10.53 to Sun Communities, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 2001)
10.29 Amended and Restated Stock Pledge Agreement dated February
1, 2002 between Origen Financial, Inc. and Sun Communities
Operating Limited Partnership (Incorporated by reference to
Exhibit 10.54 to Sun Communities, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 2001)
</Table>
70
<Table>
<Caption>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.30 Amended and Restated Limited Liability Company Interest
Security and Pledge Agreement dated February 1, 2002 between
Origen Financial, Inc. and Sun Communities Operating Limited
Partnership (Incorporated by reference to Exhibit 10.55 to
Sun Communities, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 2001)
10.31 Security Agreement dated February 1, 2002 between Origen
Financial, L.L.C. and Sun Communities Operating Limited
Partnership (Incorporated by reference to Exhibit 10.56 to
Sun Communities, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 2001)
10.32 Limited Liability Company Interest Security and Pledge
Agreement dated February 1, 2002 between Origen Financial,
L.L.C. and Sun Communities Operating Limited Partnership
(Incorporated by reference to Exhibit 10.57 to Sun
Communities, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 2001)
10.33 Amended and Restated Guaranty made February 1, 2002 by
Bingham in favor of Sun Communities Operating Limited
Partnership (Incorporated by reference to Exhibit 10.58 to
Sun Communities, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 2001)
10.34 Participation Agreement dated February 28, 2002 between Sun
Communities Operating Limited Partnership and Woodward
Holding, LLC (Incorporated by reference to Exhibit 10.61 to
Sun Communities, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 2001)
10.35 Master Repurchase Agreement dated December 18, 2001 between
Credit Suisse First Boston Mortgage Capital LLC and Origen
Special Purpose, L.L.C. (filed herewith)
10.36 Annex I to Master Repurchase Agreement dated December 18,
2001 between Credit Suisse First Boston Mortgage Capital LLC
and Origen Special Purpose, L.L.C. (filed herewith)
10.37 Guaranty dated December 18, 2001 made by Bingham Financial
Services Corporation in favor of Credit Suisse First Boston
Mortgage Capital LLC (filed herewith)
21 List of Subsidiaries (filed herewith)
24 Power of Attorney (contained on the signature page to this
Annual Report on Form 10-K)
</Table>
71