EXHIBIT 99.3
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ORIGEN FINANCIAL, L.L.C.
DECEMBER 31, 2002
CONTENTS
PAGE
Report of Independent Certified Public Accountants.................................................. 3
FINANCIAL STATEMENTS
Consolidated Balance Sheet - December 31, 2002.................................................. 4
Consolidated Statement of Operations for the year
ended - December 31, 2002................................................................... 5
Consolidated Statement of Changes in Members'
Capital for the year ended - December 31, 2002.............................................. 6
Consolidated Statement of Cash Flows for the year
ended - December 31, 2002................................................................... 7
Notes to Consolidated Financial Statements...................................................... 8
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Origen Financial, L.L.C.
We have audited the accompanying consolidated balance sheet of Origen Financial,
L.L.C. as of December 31, 2002 and the related consolidated statements of
operations, changes in members' capital and cash flows for the year then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit 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
audit provides 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 Origen
Financial, L.L.C. as of December 31, 2002 and the consolidated results of its
operations and its cash flows for the year ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America.
/S/ GRANT THORNTON LLP
Southfield, Michigan
March 7, 2003, except for note I, as to
which the date is March 27, 2003
ORIGEN FINANCIAL, L.L.C.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
DECEMBER 31, 2002
ASSETS
ASSETS
Cash and equivalents $ 257
Restricted cash 2,799
Loans receivable, net of allowance for losses 173,764
Loan sale proceeds receivable 3,905
Servicing advances 8,863
Retained interests in loan securitizations 5,833
Furniture, fixtures and equipment, net 2,448
Servicing rights 7,327
Goodwill 18,332
Repossessed homes 2,863
Other assets 1,357
---------
Total assets $227,748
=========
LIABILITIES AND MEMBERS' CAPITAL
LIABILITIES
Accounts payable and accrued expenses $ 8,093
Recourse liability 13,320
Advances under repurchase agreements 141,085
Notes payable 54,946
---------
Total liabilities 217,444
=========
MEMBERS' CAPITAL:
Contributed capital 39,106
Retained earnings (deficit) (28,802)
---------
Total members' capital 10,304
---------
Total liabilities and members' capital $ 227,748
=========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
ORIGEN FINANCIAL, L.L.C.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, 2002
REVENUES
Interest income on loans $ 9,963
Loan servicing fees 7,672
Gain on sale and securitization of loans 2,719
Other income 31
--------
Total revenues 20,385
COSTS AND EXPENSES
Interest expense 5,935
Provision for credit losses and recourse liability 16,092
Write down of residual interest 2,084
Compensation and benefits 16,830
General and administrative 4,987
Reorganization costs 1,554
Other operating expenses 2,090
--------
Total costs and expenses 49,572
--------
Net loss $(29,187)
========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
ORIGEN FINANCIAL, L.L.C.
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' CAPITAL
(IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, 2002
RETAINED TOTAL
CONTRIBUTED EARNINGS MEMBERS'
CAPITAL (DEFICIT) CAPITAL
---------- -------- --------
Balance, December 31, 2001 $ 39,457 $ 385 $ 39,842
Recapitalization costs (351) -- (351)
Net loss -- (29,187) (29,187)
-------- -------- --------
Balance, December 31, 2002 $ 39,106 $(28,802) $ 10,304
======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
6
ORIGEN FINANCIAL, L.L.C.
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' CAPITAL
(IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, 2002
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (29,187)
Adjustments to reconcile net loss to net
cash used in operating activities:
Provision for credit losses and recourse liability 15,995
Impairment of residual interest 2,084
Impairment of deferred purchase price receivable 708
Depreciation and amortization 2,984
Originations and purchase of loans held for sale (209,533)
Principal collections on loans held for sale 16,415
Proceeds from sale of loans held for sale 129,088
Proceeds from deferred purchase price receivable 1,110
Gain on sale and securitization of loans (2,677)
Decrease in other assets 127
Increase in other liabilities 1,390
---------
Net cash used in operating activities (71,496)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,480)
---------
Net cash used in investing activities (1,480)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from advances under repurchase agreements 154,730
Repayment of advances under repurchase agreements (119,210)
Proceeds from advances on note payable 311,236
Repayment of note payable (273,724)
---------
Net cash provided by financing activities 73,032
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 56
Cash and cash equivalents, beginning of the year 201
---------
Cash and cash equivalents, end of the year $ 257
=========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 5,911
=========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
7
ORIGEN FINANCIAL, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE 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 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.
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.
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.
8
ORIGEN FINANCIAL, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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, impairment of retained
interests and goodwill. Actual results could differ from those estimates.
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 that 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. Interest on loans is credited to income when earned. Loans
receivable include accrued interest and are presented net of deferred loan
origination costs and an allowance for estimated loan losses.
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.
9
ORIGEN FINANCIAL, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Loans are considered impaired and accrual of interest is
discontinued when a loan becomes more than 90 days past due. These homogeneous
loans are collectively evaluated for impairment. Impaired loans, or portions
thereof, are charged off when deemed uncollectible. 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. Management is
required to make complex judgments when establishing the assumptions used in
determining fair values of servicing assets. The fair value of servicing assets
is determined by calculating the present value of estimated future net servicing
cash flows, using assumptions of prepayments, defaults, servicing costs and
discount rates that the Company believes market participants would use for
similar assets. These assumptions are reviewed on a monthly basis and changed
based on actual and expected performance.
The Company stratifies its servicing assets based on the predominant risk
characteristics of the underlying loans, which are loan type, interest rate and
loan size. Servicing assets are amortized in proportion to and over the expected
servicing period.
The carrying amount of loan servicing rights is assessed for impairment by
comparison to fair value and a valuation allowance is established through a
charge to earnings 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, 2002.
10
ORIGEN FINANCIAL, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RETAINED INTERESTS IN LOAN SECURITIZATIONS
Retained interests are carried at estimated fair value, which is determined by
discounting the projected cash flows over the expected life of the receivables
sold, using current prepayment, default, loss and interest rate assumptions.
Changes in the fair value of retained interests are recorded as a component of
other comprehensive income unless there has been a decline in value that is
other than temporary. Under current accounting rules (pursuant to Emerging
Issues Task Force Consensus Number 99-20) declines in value of the Company's
retained interests are considered other than temporary and recognized in
earnings when: (i) the fair value of the retained interest is less than its
initial value at the time of securitization; and (ii) the timing and/or amount
of cash expected to be received has changed adversely from the previous
valuation which determined the carrying value of the retained interest. When
declines in value considered to be other than temporary occur, the amortized
cost is reduced to fair value and a loss is recognized in the statement of
operations. The assumptions used to determine new values are based on internal
evaluations and consultations with advisors having significant experience in
valuing such retained interests.
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 are comprised of prepaid expenses, deferred financing costs, 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. The Company 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.
11
ORIGEN FINANCIAL, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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;
computers -- five years; capitalized software -- three years.
INCOME TAXES
No procedure for income taxes is included in the accompanying financial
statements as the Company's results of operations are passed through to its
members for inclusion in their respective income tax returns.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company may periodically use 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. The Company follows the provisions of
Statement of Financial Accounting No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities". 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 will be measured for effectiveness both at inception and on an ongoing
basis, and hedge accounting will be 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 will be recognized as a component of
the hedged item and subsequent gains or losses will be recognized in earnings.
Derivative financial instruments that do not qualify for hedge accounting will
be carried at fair value and changes in fair value will recognized currently in
earnings. There were no derivative instruments used during 2002 or designated as
hedges at December 31, 2002.
12
ORIGEN FINANCIAL, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued Interpretation No. 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others", which addresses the disclosure to be made
by a guarantor in its interim and annual financial statements about its
obligations under guarantees. FIN 45 requires the guarantor to recognize a
liability for the non-contingent component of the guarantee. This is the
obligation to stand ready to perform in the event that specified triggering
events or conditions occur. The initial measurement of this liability is the
fair value of the guarantee at inception. The recognition of the liability is
required even if it is not probable that payments will be required under the
guarantee or if the guarantee was issued with a premium payment or as part of a
transaction with multiple events. The initial recognition and measurement
provisions are effective for all guarantees within the scope of FIN 45 issued or
modified after December 31, 2002. The impact of adoption is not expected to have
a significant impact on the Company's financial reporting.
In June 2002, the FASB issued Statement No.146 (SFAS 146), "Accounting for Costs
Associated with Exit or Disposal Activities". This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity. This Statement requires that a liability for a cost associated with an
exit or disposal activity be recognized and measured initially at fair value
only when the liability is incurred. SFAS 146 is effective for exit or disposal
activities that are initiated after December 31, 2002, and the Company does not
anticipate the provisions of this statement to have a material impact on the
Company's reported results of operations, financial positions, or cash flows.
NOTE B - LOANS RECEIVABLE
The carrying amounts and fair value of loans receivable at December 31, 2002
consisted of the following (in thousands):
Manufactured home loans $177,828
Floor plan loans 452
Accrued interest receivable 1,044
Deferred fees (2,817)
Allowance for loan loss (2,743)
--------
$173,764
========
13
ORIGEN FINANCIAL, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002
NOTE B - LOANS RECEIVABLE (CONTINUED)
The following table sets forth the average loan balance, weighted average loan
yield and weighted average initial term at December 31, 2002 (in thousands):
Principal balance loans receivable $177,828
Number loans receivable 4,067
Average loan balance 44
Weighted average loan yield 10.34%
Weighted average initial term 23 years
The following table sets forth the concentration by state of the manufactured
home loan portfolio at December 31, 2002 (dollars in thousands):
PRINCIPAL
BALANCE PERCENT
-------- --------
California $ 29,883 16.8%
Texas 27,196 15.3%
Alabama 11,320 6.4%
Oklahoma 9,082 5.1%
Michigan 8,876 5.0%
Mississippi 8,385 4.7%
New York 8,804 4.9%
Georgia 7,913 4.5%
Other 66,369 37.3%
-------- -----
Total $177,828 100.0%
========= =====
The manufactured home contracts are collateralized by manufactured homes that
were built between the years 1973 and 2003, with approximately 85.1% of the
manufactured homes built since 1999.
14
ORIGEN FINANCIAL, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002
NOTE B - LOANS RECEIVABLE (CONTINUED)
The following table sets forth the number and value of loans for various terms
for the manufactured home loan portfolio at December 31, 2002 (dollars in
thousands):
NUMBER OF PRINCIPAL
LOANS BALANCE
-------- ---------
5 or less 9 $ 83
6-10 201 3,971
11-12 41 888
13-15 914 24,576
16-20 1,470 61,801
21-25 695 38,229
26-30 737 48,280
-------- --------
Total 4,067 $177,828
======== ========
Delinquency statistics for the manufactured home loan portfolio at December 31,
2002 are as follows (dollars in thousands):
NO. OF PRINCIPAL % OF
LOANS BALANCE PORTFOLIO
----- ------- ---------
Days delinquent
31-60 45 $1,789 1.0%
61-90 39 1,418 0.8%
Greater than 90 96 4,309 2.4%
The Company defines non-performing loans as those loans that are 90 or more days
delinquent in contractual principal payments. For the year ended December 31,
2002 the average outstanding principal balance of non-performing loans was
approximately $3.2 million.
15
ORIGEN FINANCIAL, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002
NOTE C - ALLOWANCE FOR CREDIT LOSSES AND RECOURSE LIABILITY
The allowance for credit losses and related additions and deductions to the
allowance for the year ended December 31, 2002 were as follows (in thousands):
Balance at beginning of year $ 1,764
Provision for loan losses 2,914
Transfers from recourse liability 6,971
Gross chargeoffs (17,414)
Recoveries 8,508
--------
Balance at end of year $ 2,743
========
The recourse liability and related additions and transfers out of the recourse
liability for the year ended December 31, 2002 were as follows (in thousands):
Balance at beginning of year $ 7,860
Additional recourse agreements 25
Provision for recourse liability 13,178
Reimbursements for losses per recourse
agreements (772)
Transfers to allowance for credit losses (6,971)
---------
Balance at end of year $ 13,320
=========
NOTE D - GOODWILL AND INTANGIBLE ASSETS
In July 2001, the FASB Statement of Financial Accounting Standards ("SFAS") 141,
"Business Combinations" and SFAS 142 "Goodwill and Other Intangible Assets".
SFAS 141 requires, among other things, that the purchase method of accounting
for business combinations be used for all business combinations initiated after
September 30, 2001. SFAS 142 addresses the accounting for goodwill and other
intangible assets subsequent to their acquisition.
The Company's recorded goodwill resulted at the time of the formation of the
Company. Under an investment agreement and merger agreement entered into on
December 18, 2001, SUI TRS, Inc., Shiffman Family LLC and Woodward Holding made
capital contributions totaling $40 million to the Company and Bingham Financial
Services Corporation ("Bingham") contributed the net assets of its operating
subsidiary Origen Financial, Inc. At the time of Bingham's contribution, Origen
Financial, Inc. had net liabilities totaling $19.2 million for which Bingham
received a 20% interest in the net assets and profits of the Company,
effectively resulting in a purchase price in excess of interest received. Under
the provisions of SFAS 141 the newly formed entity, Origen Financial, L.L.C.,
allocated $900,000 of the excess to capitalized servicing rights and $18.3
million to goodwill.
16
ORIGEN FINANCIAL, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002
NOTE D - GOODWILL AND INTANGIBLE ASSETS (CONTINUED)
The provisions of SFAS 142 require the Company to test its recorded goodwill for
impairment on an annual basis. For purposes of testing impairment, the Company
has determined that it is a single reporting unit and the goodwill was allocated
accordingly. The initial and ongoing estimate of the fair value of the Company
is based on assumptions and projections provided by the Company. This amount was
then compared to the net book value of the Company. As a result of this process
the Company concluded that there was no impairment at the time of the Company's
formation or at December 31, 2002.
NOTE E - MORTGAGE SERVICING RIGHTS
Changes in servicing rights for the year ended December 31, 2002 are summarized
as follows (in thousands):
Balance at beginning of period $ 7,755
Loans sold and securitized 1,099
Amortization (1,527)
--------
Balance at end of year $ 7,327
========
The Company services the manufactured home loans it originates and holds in its
loan portfolio as well as manufactured home loans it originated and securitized
or sold with the servicing rights retained. The principal balances of
manufactured home loans serviced totaled approximately $1.1 billion at December
31, 2002. The estimated fair value of loan servicing rights was approximately
$7.3 million at December 31, 2002.
NOTE F - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2002 are summarized as follows (in
thousands):
Furniture and fixtures $1,381
Leasehold improvements 207
Capitalized software 303
Computer equipment 1,354
------
3,245
Less: accumulated depreciation 797
-------
$ 2,448
=======
Depreciation expense was approximately $817,000 for the year ended December 31,
2002.
17
ORIGEN FINANCIAL, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002
NOTE G - RETAINED INTERESTS IN LOAN SECURITIZATIONS
Periodically the Company securitizes manufactured home loans. Under the current
legal structure of the securitization program, the Company sells manufactured
home loans it originates and purchases to a trust for cash. The trust sells
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.
The Company retains the right to service the loans it securitizes. Fees for
servicing the loans are based on a contractual percentage per annum ranging from
..5% to 1.25% of the unpaid principal balance of the associated loans. The
Company recognizes 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 Company follows the provisions of SFAS 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" in the
valuation of its residual interests. Certain data and the key economic
assumptions used in measuring the retained interests at December 31, 2002
resulting from the securitization completed in March 2002 were as follows
(dollars in thousands):
Number of transactions completed 1
Aggregate balance of certificates issued $129,600
Aggregate principal balance of contracts sold $135,000
Balance of securitized loans outstanding at December 31, $124,540
Weighted average interest rate of loans securitized and sold 10.74%
Aggregate amount of net gain recognized $ 2,677
ORIGINAL KEY ECONOMIC ASSUMPTIONS
Prepayment speed 150% MHP
Weighted average life (months) 293
Discount rate 15.00%
Expected credit losses 10.04%
18
ORIGEN FINANCIAL, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002
NOTE G - RETAINED INTERESTS IN LOAN SECURITIZATIONS (CONTINUED)
At December 31, 2002, the effect on the estimated fair value of the retained
interests in securitizations to immediate 10% and 20% adverse changes to the key
economic assumptions used in those valuations are as follows (dollars in
thousands):
Residual interest in loans sold $ 5,833
Servicing asset 1,003
-------
Carrying value (fair value) of retained interests $ 6,836
=======
Prepayment speed 150% MHP
Impact of 10% adverse change $(0.34)
Impact of 20% adverse change $(0.67)
Expected credit losses 10.04%
Impact of 10% adverse change $(1.0)
Impact of 20% adverse change $(1.7)
Discount rate 15.00%
Impact of 10% adverse change $(0.55)
Impact of 20% adverse change $(1.1)
The sensitivity analysis is hypothetical. Changes in fair value based on a 10%
variation in assumptions generally cannot be extrapolated because the
relationship of the change in assumption to the change in fair value may not be
linear. In addition, the effect of a variation in a particular assumption on the
fair value of the retained interest is calculated without changing any other
assumption, when in reality, changes in any one factor may result in changes in
another factor.
The following table summarizes certain cash flow activity with respect to the
securitization done in March 2002 for the year ended December 31, 2002 (in
thousands):
Proceeds from securitization $ 127,636
Servicing fees received $ 1,091
Total principal balance of loans serviced at December 31, 2002 which were
securitized in March 2002, was approximately $124.5 million. Delinquency
statistics on those loans at December 31, 2002 were as follows (dollars in
thousands):
NO. OF PRINCIPAL % OF
LOANS BALANCE PORTFOLIO
------ ------- ---------
Days delinquent
31-60 55 $2,463 2.0%
61-90 24 $1,199 1.0%
Greater than 90 58 $2,631 2.1%
19
ORIGEN FINANCIAL, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002
NOTE G - RETAINED INTERESTS IN LOAN SECURITIZATIONS (CONTINUED)
Changes to the Company's retained interests for the year ended December 31, 2002
were as follows (in thousands):
Balance at beginning of year $ -
New retained interest recorded 7,917
Other than temporary impairment during year (2,084)
--------
Balance at end of year $ 5,833
========
The Company will assess the carrying value of the residual receivables for
impairment on a monthly basis. There can be no assurance that the Company's
estimates used to determine the residual receivable and the servicing asset
valuations will remain appropriate for the life of the securitization. If actual
loan prepayments or defaults exceed the Company's estimates, the carrying value
of the Company's residual receivable and/or servicing asset may decrease through
a charge against earnings in the period management recognizes the disparity.
NOTE H - DEBT
Total debt outstanding at December 31, 2002 was as follows (in thousands):
Loans sold under agreements to repurchase $141,085
Line of credit and term loan, net of discount 51,060
Notes payable - servicing advances 3,886
--------
$196,031
========
REPURCHASE AGREEMENTS - In December 2001, Credit Suisse First Boston Mortgage
Capital and the Company, through its special purpose subsidiary Origen Special
Holdings, LLC entered into a master loan repurchase agreement. Under the
agreement, the Company contributes manufactured home loans it originates or
purchases to Origen Special Holdings, Origen Special Holdings 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 transfers the
funds to the Company for operations. 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 was set to terminate on May 28, 2002, but was extended
and will now terminate on May 27, 2003. At December 31, 2002, the aggregate
amount advanced by Credit Suisse First Boston under the facility was $141.1
million.
20
ORIGEN FINANCIAL, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002
NOTE H - DEBT (CONTINUED)
LINE OF CREDIT AND TERM LOAN - The Company currently has a line of credit
extended by Sun Home Services, Inc. During 2002 the agreement was amended
several times, increasing the borrowing limit from $21.25 million to $48.0
million. The original loan agreement was entered into with Sun Communities
Operating Limited Partnership ("Sun Communities") and on December 30, 2002 Sun
Communities assigned its interest in the agreement to Sun Home Services, Inc., a
subsidiary of which Sun Communities owns 100% of the preferred stock. The line
of credit is set to terminate on December 31, 2003, but extendable through
December 31, 2004 upon the occurrence of certain events. The outstanding balance
on the facility 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 subordinate and at all times junior in right to payment in full of all
senior debt, including indebtedness under the Company's repurchase facility. The
line of credit is collateralized by a security interest in substantially all of
the Company's assets. At December 31, 2002, the outstanding balance on the line
of credit was approximately $41.1 million.
On December 4, 2002 the Company entered into a $10.0 term loan with Sun
Communities. On December 30, 2002 Sun Communities assigned its interest in the
agreement to Sun Home Services, Inc. The term loan is set to terminate on
December 31, 2003, but extendable through December 31, 2004 upon the occurrence
of certain events. 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 term loan is subordinate and at all times junior in
right to payment in full of all senior debt, including indebtedness under the
Company's repurchase facility. The term loan is collateralized by a security
interest in substantially all of the Company's assets. At December 31, 2002, the
outstanding balance on the term loan was $10.0 million.
NOTES PAYABLE - SERVICING ADVANCES - On July 25, 2002 the Company entered into a
revolving credit facility with Bank One, NA to replace a facility with Standard
Federal Bank which was terminated on June 30, 2002. Under the new facility the
Company can borrow up to $8.0 million for the purpose of funding required
principal, interest, taxes and insurance advances on manufactured home loans
that are serviced for outside investors. Borrowings under the facility are
repaid upon the collection by the Company of monthly payments made by borrowers
under such manufactured home loans. A negotiated interest rate is payable on the
outstanding balance. To secure the loan from Bank One, the Company has granted
Bank One a security interest in substantially all its assets. The facility has a
termination date of May 31, 2003. At December 31, 2002, the aggregate amount
advanced by Bank One under the facility was $3.9 million.
21
ORIGEN FINANCIAL, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002
NOTE H - DEBT (CONTINUED)
The average balance and average interest rate of outstanding debt for the year
ended December 31, 2002 was as follows (in thousands):
AVERAGE AVERAGE
BALANCE RATE
------- ----
Loans sold under agreement to repurchase $80,342 2.5%
Term loan, net of discount 26,637 11.0%
Note payable - servicing advances 1,543 3.8%
NOTE I - LIQUIDITY RISKS, UNCERTAINTIES AND SUBSEQUENT EVENTS
The Company has sustained losses from operations since its inception, and has
used, rather than provided, cash in its operations. The risks associated with
the Company's business become more acute in any economic slowdown or recession.
Periods of economic slowdown or recession may be accompanied by decreased demand
for consumer credit and declining asset values. In the manufactured housing
business, any material decline in collateral values increases the loan-to-value
ratios of loans previously made, thereby weakening collateral coverage and
increasing the size of losses in the event of default. Delinquencies,
foreclosures and losses generally increase during economic slowdowns or
recessions. Proposed changes to the federal bankruptcy laws applicable to
individuals would make it more difficult for borrowers to seek bankruptcy
protection, and the prospect of these changes may encourage certain borrowers to
seek bankruptcy protection before the law changes become effective, thereby
increasing defaults. For the Company's finance customers, loss of employment,
increases in cost-of-living or other adverse economic conditions would impair
their ability to meet their payment obligations. Higher industry inventory
levels of repossessed manufactured homes may affect recovery rates and result in
future impairment charges and provision for losses. In addition, in an economic
slowdown or recession, servicing and litigation costs generally increase. Any
sustained period of increased delinquencies, foreclosures, losses or increased
costs would adversely affect the Company's financial condition and results of
operations.
As of December 31, 2002 the Company was in violation of certain of the loan
covenants related to its repurchase facility with Credit Suisse First Boston.
Upon agreement from Credit Suisse First Boston the Company was allowed to
continue funding loans on the facility until January 28, 2003 at which time the
Company had reached the maximum funding amount on the facility. After January
28, 2003 the Company's new loan production was funded on its other existing loan
facilities. On March 24, 2003 the Company received a waiver of the loan covenant
violations and renegotiated the maximum funding limit on the repurchase facility
through May 27, 2003, the expiration date of the facility. The Company is
currently negotiating with Credit Suisse First Boston to extend its repurchase
facility in order to provide the Company with sufficient liquidity to continue
its loan origination activities.
22
ORIGEN FINANCIAL, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002
NOTE I - LIQUIDITY RISKS, UNCERTAINTIES AND SUBSEQUENT EVENTS (CONTINUED)
In order to free up funding capacity on its repurchase facility, on March 27,
2003 the Company entered into a one-year term loan agreement with Salomon
Brothers Realty Corporation ("Salomon Brothers"). Under terms of the agreement
the Company will be advanced approximately $160.0 million and in turn pledged as
collateral approximately $200.0 million in total principal balance of
manufactured home loans of which approximately $181.0 million had been funded on
the Company's repurchase facility with Credit Suisse First Boston. The annual
interest rate on the term loan is a variable rate equal to LIBOR plus a spread
and the advance rate is 80% of the outstanding principal of the manufactured
home loans pledged as collateral on March 31, 2002. The agreement is set to
expire in one year.
Management believes that it will have sufficient sources of capital to provide
for the Company to continue its operations in the near term, however, the
Company's future cash flow requirements depend on numerous factors, many of
which are outside of its control. Based on its business model and the nature of
the capital markets, the Company expects it will need to raise additional
capital before the end of 2003, even if it maintains its current borrowing
relationships. As a result, during that time it will need to obtain funding from
sources such as operating activities, loan sales or securitizations, sales of
debt or member interests or additional debt financing arrangements. The
Company's 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.
The ability to obtain funding from loan sales and securitizations may be
adversely impacted by, among other things, the price and credit quality of the
Company's loans, conditions in the securities markets generally (and
specifically in the asset-backed securities), compliance of loans with the
eligibility requirements for a particular securitization and any material
negative rating agency action pertaining to certificates issued in the Company's
securitizations. The 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
the Company's financial condition and prospects.
NOTE J - MEMBERS' CAPITAL
Under an investment agreement and merger agreement entered into on December 18,
2001, three investors, SUI TRS, Inc., Shiffman Family LLC and Woodward Holding,
made capital contributions totaling $40 million to the Company and Bingham
Financial Services Corporation ("Bingham") contributed its operating subsidiary,
Origen Financial, Inc. At the time of Bingham's contribution, Origen Financial,
Inc. had net liabilities totaling $19.2 million for which Bingham received a 20%
interest in the net assets and profits of the Company. Members' total capital
was reduced by approximately $894,000 in costs related to the recapitalization.
23
ORIGEN FINANCIAL, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002
NOTE J - MEMBERS' CAPITAL (CONTINUED)
The Company is managed by a Board of Managers currently consisting of three
individuals, one individual appointed by each of the three investors. Members of
the Board have a total of five votes with the manager appointed by Bingham
controlling two votes, the manager appointed by SUI TRS, Inc. controlling two
votes and the manager appointed by Woodward Holding controlling one vote.
NOTE K - COMMITMENTS AND CONTINGENCIES
LOAN COMMITMENTS
At December 31, 2002, the Company had commitments to originate manufactured home
installment contracts approximating $26.5 million.
LEASE COMMITMENTS
At December 31, 2002 aggregate minimum rental commitments under non-cancelable
leases having terms of more than one year were (in thousands):
2003 $ 1,218
2004 939
2005 507
2006 444
2007 437
2008 107
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.
NOTE L - 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. As of December 31,
2002 the Company had no outstanding hedge positions.
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.
24
ORIGEN FINANCIAL, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002
NOTE L - FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET ACTIVITY (CONTINUED)
The following table shows the carrying amount and estimated fair values of the
Company's financial instruments at December 31, 2002 (in thousands):
ESTIMATED
CARRYING FAIR
AMOUNT VALUE
-------- --------
ASSETS
Cash and equivalents $ 257 $ 257
Restricted cash 2,799 2,799
Loans receivable 173,764 174,126
Loan sale proceeds receivable 3,905 3,905
Other 7,327 7,327
LIABILITIES
Accounts payable and accrued expenses 8,093 8,093
Recourse liability 13,320 13,320
Advances under repurchase 141,085 141,085
Note payable 54,946 54,946
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.
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,
2002 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.
25
ORIGEN FINANCIAL, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002
NOTE M - RELATED PARTY TRANSACTIONS
The Company currently has a credit facility extended by Sun Home Services, Inc.
consisting of a $48.0 million line of credit and a $10.0 million term loan. The
facility is set to terminate on December 31, 2003 but is automatically
extendable to December 31, 2004 upon the occurrence of certain events. The
outstanding balance on the facility 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 facility is secured by a security interest in substantially all of the
Company's assets.
Sun Home Services, Inc. owns a 100% interest in SUI TRS, Inc., which purchased
approximately a 30% equity interest in the Company for approximately $15
million. Sun Home Services, Inc.'s non-voting preferred stock is owned 100% by
Sun Communities which entitles Sun Communities to 95% of the cash flow from the
operating activities of Sun Home Services including the cash flow from the
operating activities of SUI TRS, Inc. Mr. Gary a Shiffman is the Chairman of the
Board of Sun Communities.
Mr. Shiffman and members of his immediate family also control Shiffman Family
LLC, which purchased approximately an 8.4% equity interest in the Company for
approximately $4.2 million.
SUI TRS, Inc., Shiffman Family LLC and Woodward Holding have the option to buy
Bingham Financial Services Corporation's ("Bingham") 20% ownership interest in
the Company 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 the Company's managers.
Included in accounts payable and accrued expenses of the Company at December 31,
2002 is approximately $568,000 in advances from Bingham.
26