EXHIBIT 99.4
SUN HOME SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
SUN HOME SERVICES, INC. AND SUBSIDIARIES
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CONTENTS
PAGE(s)
REPORT OF INDEPENDENT ACCOUNTANTS............................................................1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets...............................................................................2
Statements of Operations.....................................................................3
Statements of Stockholders' Equity...........................................................4
Statements of Cash Flows.....................................................................5
Notes to Financial Statements ............................................................6-11
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Sun Home Services, Inc.
In our opinion, based upon our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Sun Home Services, Inc. and its
subsidiaries at December 31, 2002 and 2001, and the results of their operations
and their cash flows for the year ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Origen Financial,
L.L.C., an investee of the Company, which statements reflect total assets of
$227,748,000 at December 31, 2002 and total revenues of $20,835,000 for the year
ended December 31, 2002. Those statements were audited by other auditors whose
report thereon has been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts included for Origen Financial, L.L.C., is
bases solely on the report of the other auditors. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audits to
obtain reasonable assurance about whether the 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.
The accompanying consolidated statements of operations, of stockholders' equity
and of cash flows of Sun Home Services, Inc. and its subsidiaries for the year
ended December 31, 2001 were not audited by us and, accordingly, we do not
express an opinion on them.
/s/ PRICEWATERHOUSECOOPERS LLP
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PRICEWATERHOUSECOOPERS LLP
Detroit, Michigan
March 12, 2003
1
SUN HOME SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND DECEMBER 31, 2001
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2002 2001
Assets
Cash $ 4,065,350 $ 487,104
Accounts receivable 845,918 756,850
Accounts receivable -- related party 5,000 105,000
Inventory 14,142,543 12,636,211
Prepaid expenses and other current assets 620,916 391,219
------------- ------------
Total current assets 19,679,727 14,376,384
Property and equipment, net 18,733,261 4,170,793
Investment in equity investee -- 16,069,674
Loan receivable -- equity investee 33,559,540 --
Deferred income taxes 2,325,000 1,275,000
Other assets 482,293 389,269
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TOTAL ASSETS $ 74,779,821 $ 36,281,120
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 446,667 $ 477,002
Accounts payable -- related party:
Interest bearing 33,559,540 --
Noninterest bearing 51,801,254 28,475,438
Line of credit 7,462,882 7,803,273
Accrued liabilities 724,375 467,737
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Total current liabilities 93,994,718 37,223,450
STOCKHOLDERS' EQUITY
Common stock, voting, $1 stated par value per share,
30,000 shares authorized, 1,000 shares issued and
outstanding 1,000 1,000
Preferred stock, cumulative participating, $1 stated value
per share, 30,000 shares authorized, 100 shares issued
and outstanding 100 100
Stock subscription receivable (1,100) (1,100)
Additional paid-in capital 662,994 1,452,468
Retained earnings (deficit) (19,877,891) (2,394,798)
------------- ------------
Total stockholders' equity (deficit) (19,214,897) (942,330)
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 74,779,821 $ 36,281,120
============= ============
The accompanying notes are an integral part of the consolidated financial
statements.
2
SUN HOME SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
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2002 2001
(unaudited)
Revenues
Home sales $ 20,490,750 $ 26,399,826
Rental home revenue 1,993,423 306,367
Other income 31,859 9,959
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Total revenues 22,516,032 26,716,152
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Expenses
Cost of home sales 15,815,521 21,287,106
Rental home 1,768,142 197,976
Selling, general and administrative 7,137,248 6,579,245
Depreciation and amortization 558,551 368,836
Interest 474,263 588,356
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Total expenses 25,753,725 29,021,519
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Loss before loss from equity investee and income taxes (3,237,693) (2,305,367)
Loss from equity investee (15,295,400) --
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Loss before income taxes (18,533,093) (2,305,367)
Income tax benefit 1,050,000 785,000
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Net loss $ (17,483,093) $ (1,520,367)
============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
3
SUN HOME SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
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Stock Additional Retained
Common Preferred subscription paid-in earnings
stock stock receivable capital (deficit) Total
Balance,
January 1, 2001, unaudited $1,000 $100 $(1,100) $ 662,994 $ (874,431) $ (211,437)
Capital contributions 789,474 789,474
Net loss, unaudited (1,520,367) (1,520,367)
------ ---- ------ ---------- ------------ -------------
Balance, December 31, 2001 1,000 100 (1,100) 1,452,468 (2,394,798) (942,330)
Distributions (789,474) (789,474)
Net loss (17,483,093) (17,483,093)
------ ---- ------- ---------- ------------ -------------
Balance, December 31, 2002 $1,000 $100 $(1,100) $ 662,994 $(19,877,891) $ (19,214,897)
====== ==== ======= ========== ============ =============
The accompanying notes are an integral part of the consolidated financial
statements.
4
SUN HOME SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
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2002 2001
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (17,483,093) $ (1,520,367)
Adjustments to reconcile net loss to net cash
used by operations:
Depreciation and amortization 558,551 368,836
Deferred income taxes (1,050,000) (785,000)
Loss on sale of assets -- 3,998
Loss from equity investee 15,295,400 --
Changes in operating assets and liabilities:
Accounts receivable 10,932 (102,454)
Inventory (16,412,026) (4,764,517)
Prepaid expenses and other current assets (229,697) (222,049)
Other assets (120,201) 328,302
Accounts payable and accrued liabilities 226,303 139,203
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NET CASH USED BY OPERATING ACTIVITIES (19,203,831) (6,554,048)
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CASH FLOWS FROM INVESTING ACTIVITIES
Investment in equity investee -- (16,069,674)
Advances to equity investee (33,559,540) --
Purchases of property and equipment (237,686) (424,643)
Proceeds from sale of assets 34,338 134,622
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NET CASH USED IN INVESTING ACTIVITIES (33,762,888) (16,359,695)
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CASH FLOWS FROM FINANCING ACTIVITIES
Advances from related party 56,885,356 21,233,221
Net borrowing (repayments) under line of credit (340,391) 1,076,395
Capital contributions -- 789,474
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NET CASH PROVIDED BY FINANCING ACTIVITIES 56,544,965 23,099,090
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Net increase in cash 3,578,246 185,347
Cash, beginning of period 487,104 301,757
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Cash, end of period $ 4,065,350 $ 487,104
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 474,263 $ 588,356
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SUPPLEMENTAL NON-CASH INVESTING AND OPERATING ACTIVITIES
Transfer of inventory to property and equipment
in connection with the rental home program $ 14,905,694 $ 1,997,576
============= ===========
Distribution of equity investment to stockholder $ 789,474 $ --
============= ===========
The accompanying notes are an integral part of the consolidated financial
statements.
5
SUN HOME SERVICES, INC. AND SUBSIDIARIES
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Sun Home Services, Inc. (the "Company") sells and rents new and used
manufactured homes, manages a golf course, and provides activities and other
services for residents living in manufactured home communities throughout
the United States. The manufactured home communities are owned by Sun
Communities Inc. ("Sun"), a real estate investment trust and the holder of
the Company's preferred stock who is entitled to ninety-five percent of the
operating cash flow. The Company was initially formed to perform all
operations that generate income of a nonqualifying nature for real estate
investment trusts. The common stock is owned by one officer of Sun and the
estate of a former officer of Sun who collectively are entitled to receive
five percent of the operating cash flow.
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of the Company and its
subsidiaries, all of which are wholly owned. All material intercompany
accounts and transactions have been eliminated.
CASH
Cash includes cash on hand and balances in noninterest-bearing accounts. For
the purposes of the statement of cash flows, the Company considers all
highly liquid investments with an initial maturity of three months or less
to be cash equivalents.
REVENUE RECOGNITION/ACCOUNTS RECEIVABLE
Revenue from the sale of manufactured homes is recognized upon transfer of
title at the closing of the sales transaction.
Revenue from leasing rental homes is recognized over the term of the lease
in accordance with the lease agreement. Lease terms are typically twelve
months and are renewable by mutual agreement of the Company and resident.
Accounts receivable consists primarily of receivables from finance and
mortgage companies related to the sales of homes.
INVENTORY
Inventory is stated at lower of specific cost or market.
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SUN HOME SERVICES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets. Useful lives are 30 years for golf courses,
improvements, sales offices and building; and 7 to 20 years for rental
homes, furniture, equipment, vehicles and signs. Adjustments of the assets
and related accumulated depreciation are made in connection with retirements
and disposals, and the related gain or loss is included in operations.
INVESTMENT IN EQUITY INVESTEE
Bingham Financial Services Corporation ("BFSC") was formed by Sun in 1997 in
response to demand for financing from purchasers and residents in Sun's
communities. As BFSC's business developed, its objectives and opportunities
expanded and Sun concluded that its business could be operated and grown
more effectively as a separate public entity. BFSC's initial public offering
occurred in November 1997. In December 2001, Sun, through the Company, made
a $15 million equity investment in a newly formed company, Origen Financial,
L.L.C., that was merged with Origen Financial, Inc., subsidiary of BFSC, as
part of the recapitalization of BFSC. As a result of this equity investment,
the Company owns approximately a thirty percent (30%) interest in the
surviving company ("Origen"), which company holds all of the operating
assets of BFSC and its subsidiaries. Origen's business has suffered as a
result of the general economic recession, excessive amounts of repossession
inventory, declining recovery rates in the repossession market and the
deteriorating asset-backed securitization market. While the Company believes
Origen can still become a profitable national manufactured housing lender in
its industry, the Company wrote-off its remaining investment in Origen in
the fourth quarter of 2002 after an extensive analysis of the investment.
The Company and two other participants (one unaffiliated and one affiliated
with the President and common stock holder) began providing financing to
Origen in December 2002 and are subject to the risks of being a lender.
Similar financing was directly provided by Sun to Origen prior to the loan
being assigned to the Company in December 2002. These risks include the
risks relating to borrower delinquency and default and the adequacy of the
collateral for such loans. This financing consists of a $48 million line of
credit and a $10 million term loan of which the Company's commitment is
$35.5 million ($33.6 million was outstanding as of December 31, 2002). The
line is due December 31, 2003, bears interest at a per annum rate equal to
700 basis points over thirty-day LIBOR, with a minimum interest rate of 11
percent per annum and a maximum interest rate of 15 percent per annum. Of
the Company's $35.5 million participation, $18 million is subordinate in all
respects to the first $40.0 million funded under the facility by the three
participants. This line of credit is collateralized by a security interest
in Origen's assets, which is subordinate in all respects to all
institutional indebtedness of Origen, and a guaranty and pledge of assets by
BFSC. The Company funds this line of credit with a similar financing
arrangement from Sun due December 31, 2003 and which bears interest at a
per annum rate equal to 750 basis points over LIBOR, with a minimum interest
rate of 11.5 percent and a maximum interest rate of 15.5 percent. Origen
paid the Company $21,894 in interest income and the Company paid Sun $23,076
in interest expense for the year ended December 31, 2002 related to this
financing.
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SUN HOME SERVICES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT IN EQUITY INVESTEE (CONTINUED)
Origen's summarized financial data as of December 31, 2002 and 2001 follows:
2002 2001
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Loans receivable, net..................... $ 173,764,000 $ 127,412,000
Other assets.............................. 53,984,000 49,813,000
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Total assets.............................. $ 227,748,000 $ 177,225,000
============= =============
Advances under repurchase agreements...... $ 141,085,000 $ 105,564,000
Debt payable to Sun Home Services, Inc.... 33,560,000 ---
Debt payable to Sun....................... --- 11,185,000
Other liabilities ........................ 42,799,000 20,634,000
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Total liabilities......................... 217,444,000 137,383,000
Equity.................................... 10,304,000 39,842,000
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Total liabilities and equity ............. $ 227,748,000 $ 177,225,000
============= =============
Revenues ................................. $ 20,385,000 $ 1,016,000(a)
Expenses.................................. 49,572,000 633,000(a)
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Net income (loss)......................... $ (29,187,000) $ 383,000
============= =============
(a) Financial data for the period from December 19, 2001 to December 31,
2001.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the differences between the financial
and tax reporting basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
ESTIMATES
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 asset and liabilities and
disclosure of contingent assets and liabilities at the date of the balance
sheet. Actual results could differ from those estimates.
8
SUN HOME SERVICES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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2. INVENTORY
Inventory at December 31, 2002 and 2001 consists of the following:
2002 2001
New homes $ 10,524,175 $ 9,487,278
Used homes 3,618,368 3,148,933
------------- -------------
$ 14,142,543 $ 12,636,211
============ =============
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2002 and December 31, 2001 consist of
the following:
2002 2001
Rental homes $ 16,903,270 $ 1,997,576
Furniture and fixtures 981,745 957,025
Sales offices 325,280 290,894
Signs 27,320 24,198
Golf course and other improvements 427,086 373,011
Equipment and vehicles 540,921 487,919
Buildings 476,857 457,976
----------- -----------
19,682,479 4,588,599
Less accumulated depreciation (1,651,963) (1,120,551)
----------- -----------
18,030,516 3,468,048
Land 702,745 702,745
----------- -----------
$ 18,733,261 $ 4,170,793
=========== ===========
Accumulated depreciation related to rental homes at December 31, 2002 and
2001 is approximately $492,000 and $135,000, respectively.
4. LINE OF CREDIT
The Company's financing arrangement at December 31, 2002 and 2001 consists
of the following:
2002 2001
Bank One, Michigan revolving line of credit, interest
at a one month LIBOR base rate plus 230 basis
points per annum or prime rate minus 0.50% per annum
(3.68% at December 31, 2002), due upon sale of inventory,
$15,000,000 available based on borrowing base formula,
expiration date August 31, 2003 $7,462,882 $7,803,273
========== ==========
9
SUN HOME SERVICES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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4. LINE OF CREDIT (CONTINUED)
At December 31, 2002 and 2001, the Company pledged certain inventories with
a carrying value of approximately $9,500,000 and $10,000,000, respectively,
as collateral for the revolving line of credit.
5. INCOME TAXES
Deferred taxes reflect the estimated future tax effect 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 has net operating loss carryforwards for federal income tax
purposes of approximately $6,800,000 at December 31, 2002. A deferred tax
asset of approximately $2,325,000 and $1,275,000 principally related to the
net operating loss carryforwards, exclusive of losses related to the
Company's investment in Origen, has been established at December 31, 2002
and 2001, respectively. The deferred tax asset at December 31, 2002 is net
of a valuation allowance of $5,200,000 related to the Company's losses on
its investment in Origen. The net operating losses will begin to expire in
2011 through 2022 if not offset by future taxable income.
Management believes its deferred tax asset will be realized but realization
is continuously subject to an assessment as to recoverability in the future.
6. RELATED PARTIES
The Company pays fees to Sun for various operating costs, including site and
office rents and payroll. Total expenses paid during the years ended
December 31, 2002 and 2001 were approximately $3,010,000 and
$852,000 (unaudited), respectively. The Company receives revenues from Sun,
including broker agent fees. Total revenues received for the years ended
December 31, 2002 and 2001 were $94,500 and $87,000 (unaudited),
respectively. Additionally, the Company sold $226,000 in homes to Sun during
the year ended December 31, 2002 at cost. Noninterest bearing related party
balances in the accompanying balance sheet are due to/from Sun, and are due
on demand.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46 ("FIN No. 46"), "Consolidation of Variable
Interest Entities." The objective of this interpretation is to provide
guidance on how to identify a variable interest entity ("VIE") and determine
when the assets, liabilities, non-controlling interests and results of
operations of a VIE need to be included in a company's consolidated
financial statements. A company that holds variable interests in an entity
will need to consolidate the entity if the company's interest in
10
SUN HOME SERVICES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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7. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
the VIE is such that the company will absorb a majority of the VIE's
expected losses and/or receive a majority of the VIE's expected residual
returns, if they occur. FIN No. 46 also requires additional disclosures by
primary beneficiaries and other significant variable interest holders. The
provisions of this interpretation became effective upon issuance with
respect to VIEs created after January 31, 2003 and to VIEs in which a
company obtains an interest after that date. The provisions of this
interpretation apply in the first interim period beginning after June 15,
2003 (i.e., third quarter of 2003) to VIEs in which a company holds a
variable interest that it acquired before February 1, 2003. The Company is
in the process of assessing whether its interest in Origen may require
consolidation in the third quarter of 2003 pursuant to FIN No. 46.
11