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FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
Commission File No. 0-23381
BINGHAM FINANCIAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
STATE OF MICHIGAN 38-3313951
State of Incorporation I.R.S. Employer I.D. No.
260 EAST BROWN STREET
SUITE 200
BIRMINGHAM, MICHIGAN 48009
(248) 644-5470
(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 December 4, 1998, the aggregate market value of the Registrant's voting
stock held by non-affiliates of the Registrant was approximately $17,767,187.50,
determined in accordance with the highest price at which the stock was sold on
such date as reported by the Nasdaq SmallCap Market.
As of December 4, 1998, there were 1,576,818 shares of the Registrant's common
stock issued and outstanding.
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PART I
ITEM 1. BUSINESS
GENERAL
Bingham Financial Services Corporation (the "Company") is a specialized
financial services company, providing financing for new and previously owned
manufactured homes. Through acquisitions during 1998, the Company's business has
expanded to include commercial lending and mortgage servicing for
income-producing properties.
The Company has recently moved its executive office to 260 East Brown Street,
Suite 200, Birmingham, Michigan 48009 and its new telephone number is (248)
644-5470. The Company, which is a Michigan corporation, employed 25 people as of
September 30, 1998.
HISTORY OF THE COMPANY
The Company was incorporated in August, 1996 as an affiliate of Sun Communities,
Inc. ("Sun"), a fully integrated publicly held real estate investment trust
("REIT"), and began transacting business in January of 1997. The Company
completed its initial public offering on November 13, 1997. At that time, the
Company's business was focused primarily on providing financing for new and
previously owned manufactured homes by making conventional loans under
installment loan contracts secured by the borrower's manufactured home
("Contracts").
The Company was formed by Sun in response to the growing need to provide timely
and competitive financing to residents in manufactured home communities owned
and managed by Sun ("Sun Communities"). Sun is one of the nation's largest
owners and managers of manufactured housing communities. Established in 1975,
Sun became a public company in 1993 with its common stock listed on the New York
Stock Exchange under the symbol SUI. Sun has experienced rapid growth since
becoming public, growing from 24 communities and 6,500 developed sites to 104
communities and over 37,000 developed sites as of September 30, 1998.
STRUCTURE OF THE COMPANY
Sun assisted in forming the Company by loaning the Company amounts required to
fund the Company's Contracts pursuant to a demand note which was paid in full
with the proceeds from the Company's initial public offering. In addition, Sun
through its operating subsidiary, Sun Communities Operating Limited Partnership
(collectively, "Sun"), continues to provide financial assistance pursuant to a
subordinated debt facility consisting of a $4 million term loan and a $6 million
five year revolving credit facility (the "Subordinated Debt Facility") as well
as a $12 million demand line of credit. In connection with the Subordinated Debt
Facility, the Company issued common stock purchase warrants to Sun to purchase
up to 400,000 shares of common stock at the initial public offering price of $10
per share. Sun also entered into an arrangement with the Company whereby Sun
offers the Company as the only preferred financing source to home purchasers and
home owners in Sun Communities. For its services, Sun receives an annual fee
based on average loan balances, which fee was $85,000 for the year ended
September 30, 1998, and the Company granted Sun 330,000 options to purchase
common stock of the Company which will vest in eight equal annual amounts
beginning in January 2001. The Company paid Sun a fee of $75,000 for the year
ended September 30, 1998 as reimbursement for general and administrative
expenses.
The operations of the Company are carried on through certain subsidiaries (the
"Subsidiaries"), including MHFC, Inc., a Michigan corporation ("MHFC"), I.J.K.
Insurance Agency, Inc., MHFC
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of New Mexico, Inc., Bloomfield Acceptance Company, L.L.C. ("Bloomfield") and
Bloomfield Servicing Company, L.L.C. ("Bloomfield Servicing"). Substantially all
of the Company's assets are held by or through MHFC and Bloomfield, of which the
Company is the sole shareholder and sole member, respectively.
MAJOR ACQUISITIONS
In March of 1998, the Company, through two wholly owned subsidiaries, acquired
(the "Transaction") Bloomfield and its mortgage servicing affiliate Bloomfield
Servicing, expanding the Company's business into commercial lending and
servicing. As consideration for the Transaction, the Company issued 272,727
shares of Bingham common stock to the members of Bloomfield and Bloomfield
Servicing and an additional 9,091 shares of Bingham common stock to certain
members to be held in escrow for a period of three years from the closing of the
Transaction in accordance with the terms of an escrow agreement. In addition, at
some time between May 31, 1999 and May 31, 2000, the Company is required to
issue up to that number of shares of Bingham common stock equal in value to
$500,000 as additional consideration if the businesses of Bloomfield and
Bloomfield Servicing meet certain requirements.
FINANCING AND OTHER ACTIVITIES
MANUFACTURED HOUSING
The Company originates conventional loans that generally range in size from
$4,500 to $90,000 and have a term of 5-25 years. The Company has focused its
marketing efforts principally through manufactured home community owners and
operators. This effort has been targeted at Sun Communities, where the Company's
services are offered as the preferred source of financing. The Company continues
to take the steps necessary to capture a greater share of the loans generated by
home purchasers and owners in Sun Communities. In addition, the Company has also
started to originate loans through manufactured home dealers.
The Company is responsible for processing credit applications for potential
borrowers and adheres to a set of uniform underwriting guidelines to maintain an
acceptable level of credit risk with respect to its growing portfolio of loans.
The Company has a scoring model which uses a statistically based automated
credit scoring system, that is continually refined, which quantifies responses
using variables obtained from the applicant's credit application and credit
report. This scoring model is based on empirical historical data which helps the
Company determine the probability of loan failure and assess what changes in
loan terms would make the loan an acceptable risk. The most significant criteria
in the scoring model are the applicant's payment history and income. While the
scoring model is based on objective criteria, the underwriter has the discretion
to award a limited number of points to an applicant for certain credit and value
factors.
The Company retains a security interest in any manufactured home it finances. To
perfect its security interest in the manufactured home, the Company delivers the
application for a new certificate of title to the applicable state agency for
processing. Once either the new certificate of title or a stamped application
form is received by the Company, its security interest is deemed "perfected"
under applicable state law.
The Company has entered into an agreement with an unaffiliated third party, St.
James Servicing Corporation (the "Subservicer") for the servicing of the
Contracts (the "Subservicer Agreement"). The Subservicer receives a monthly fee
per Contract depending on the number of Contracts it is servicing. The
Subservicer Agreement has a 10 year term and terminates if the entire amounts of
principal and interest on all loans are paid in full. The Company may terminate
the agreement earlier with or without cause upon 90 days written notice to the
Subservicer. If the
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Company terminates the Subservicer Agreement without cause it must pay the
Subservicer 3 months' servicing fees.
The Company's ability to finance Contracts is dependent on its availability of
funds. In March 1998, Sun extended a line of credit of up to $12 million to the
Company. The loan is evidenced by a demand promissory note bearing interest at a
per annum rate equal to LIBOR plus 140 basis points. The loan is unsecured but
with full recourse. In addition, the Company continues to draw from funds
available under the Subordinated Debt Facility. The Company has entered into a
repurchase arrangement with an unrelated party and has also sold a significant
number of Contracts to unrelated financial institutions without retaining
servicing and with full recourse to the Company in the event of a default by the
borrower.
COMMERCIAL MORTGAGE BANKING BUSINESS
GENERAL
Through Bloomfield and Bloomfield Servicing, the Company participates and is
active in all aspects of commercial real estate mortgage banking, including
originating, underwriting, placing, securitizing, and servicing commercial real
estate loans. Bloomfield acts as both a direct lender, making commercial real
estate loans for its own portfolio as well as for accumulation and
securitization, and as a traditional mortgage banker, placing commercial real
estate loans with institutional investors.
Much of Bloomfield's activities are focused on the manufactured housing industry
and the Company believes that Bloomfield is one of the largest originators of
loans on manufactured home communities in the country. A manufactured home
community is a residential subdivision designed and improved with sites for the
placement of manufactured homes and related improvements and amenities. From
January 1, 1998 through the end of the Company's fiscal year, Bloomfield had
originated approximately $185 million of loans on manufactured home communities.
LENDING
Bloomfield sources lending opportunities on a nationwide basis from direct
borrower inquiry as well as from mortgage bankers. Loan applications are
processed at the Company's offices in Birmingham, Michigan where due diligence
is performed, including an analysis of property operating history, appraisal
report, environmental report, borrower creditworthiness, credit history and
experience. Bloomfield performs on-site property inspection and local market
analysis.
Bloomfield historically has funded its direct lending operations through
simultaneous buy/sell arrangements with major institutional investors, earning
origination and servicing fees. Beginning in May 1998, Bloomfield began funding
loans primarily through a repurchase agreement with a Wall Street investment
bank, in expectation of receiving the benefit of greater securitization profits
by taking on the risk of hedging and aggregation. It is expected that Bloomfield
will fund the bulk of its future direct lending activities through similar
arrangements. A portion of Bloomfield's direct lending activities will remain on
the balance sheet.
As of the end of the fiscal year, Bloomfield maintained a portfolio of $65.5
million of loans.
TRADITIONAL MORTGAGE BANKING
Bloomfield places commercial real estate mortgage loans with institutional
investors, primarily life insurance companies that it represents on an exclusive
or semi-exclusive basis. The bulk of
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these activities take place in Michigan.
SERVICING
Bloomfield Servicing services loans that Bloomfield originates. Historically,
the majority of the loans made on a direct lending basis were serviced until the
loan was securitized, at which time Bloomfield Servicing received a servicing
termination fee. Beginning in May 1998, Bloomfield Servicing began retaining the
servicing of its direct loans and it is expected that the size of Bloomfield
Servicing's servicing portfolio will increase.
It addition to Bloomfield's loans, Bloomfield Servicing services commercial real
estate loans on behalf of five institutional investors. The majority of these
loans are in Michigan.
As of September 30, 1998, Bloomfield Servicing's servicing portfolio totaled
approximately $374 million. The entire portfolio was current.
DELINQUENCY AND REPOSSESSION
The Subservicer is responsible for the servicing of Contracts from the time of
funding until the loan is paid in full. This servicing includes processing
payments and issuing delinquent letters of 7 days and 17 days, and a 27 day
default letter. The Company is responsible for collecting loans that are over 30
days delinquent and it hires a local attorney after the expiration of the 27 day
default letter. The local attorney issues a 30 day demand letter, at which time
full payment must be made on all arrearages including late fees and attorney
fees. The Company generally repossesses the manufactured home after payments
have become 60 to 90 days delinquent if the Company is not able to work out a
satisfactory arrangement with the borrower. Sun and an affiliate of Sun may
assist with foreclosure and the sale of the manufactured home after
repossession.
In an effort to minimize repossessions on Contracts sold with full recourse, the
Company monitors the servicing and collection efforts of the financial
institutions to which the Company has sold Contracts with full recourse.
The Company maintains a reserve for estimated credit losses on Contracts owned
by the Company or sold to third parties with full recourse. The Company provides
for losses in amounts necessary to maintain the reserves at levels the Company
believes are sufficient to provide for future losses based on the Company's
historical loss experience, current economic conditions and portfolio
performance measures. For fiscal 1998 and 1997, as a result of expenses incurred
due to defaults and repossessions, $39,000 and $0, respectively was charged to
the reserve for losses on credit sales. The Company's reserve for losses on
credit sales at September 30, 1998 was $185,000, as compared to $58,000 at
September 30, 1997.
In fiscal 1998 and 1997, the Company repossessed 15 and 1 manufactured homes,
respectively. The Company's inventory of repossessed homes was 8 homes at
September 30, 1998 as compared to 1 home at September 30, 1997. The estimated
net realizable value of the repossessed homes in inventory at September 30, 1998
was approximately $194,000.
The net losses resulting from repossessions on Company originated loans as a
percentage of the average principal amount of such loans outstanding for fiscal
1998 and 1997 was .23% and 0.0%.
At September 30, 1998 and September 30, 1997, delinquent installment sales
contracts and loans expressed as a percentage of the total number, and of the
total amount, of installment sales
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contracts and loans which the Company services, or has sold with full recourse
and are serviced by others, were as follows:
TOTAL DELINQUENCY PERCENTAGE
NUMBER OF SEPTEMBER 30, 1998
CONTRACTS ------------------------------------------------------------
AND LOANS
---------
30 DAYS 60 DAYS 90 DAYS TOTAL
------- ------- ------- -----
Company-serviced contracts and loans 803 3.9% 2.2% 2.0% 8.2%
(Manufactured Home loans)
Contracts and loans sold with full 382 0.0% 0.0% 0.0% 0.0%
recourse serviced by others(1) --- ---- ---- ---- ----
1185 2.6% 1.5% 1.4% 5.5%
Company-serviced contracts and loans 13 0.0% 0.0% 0.0% 0.0%
(Commercial loans)
TOTAL NUMBER DELINQUENCY PERCENTAGE
OF CONTRACTS SEPTEMBER 30, 1997
AND LOANS -----------------------------------------------------------
---------
30 DAYS 60 DAYS 90 DAYS TOTAL
------- ------- ------- -----
Company -serviced contracts and loans 366 0.0% 0.3% 0.3% 0.6%
(Manufactured Home loans)
Contracts and loans sold with full 0 0.0% 0.0% 0.0% 0.0%
recourse serviced by others - ---- ---- ---- ----
366 0.0% 0.3% 0.3% 0.6%
Company-serviced contracts and loans 0 0.0% 0.0% 0.0% 0.0%
(Commercial loans)
TOTAL AMOUNT DELINQUENCY PERCENTAGE
OF CONTRACTS SEPTEMBER 30, 1998
AND LOANS -----------------------------------------------------------
--------- (Dollars in thousands)
30 DAYS 60 DAYS 90 DAYS TOTAL
------- ------- ------- -----
Company-serviced contracts and loans $ 22,674 3.2% 2.2% 1.6% 7.0%
(Manufactured Home loans)
Contracts and loans sold with full $11,218 0.0% 0.0% 0.0% 0.0%
recourse serviced by others(1) ------- ---- ---- ---- ----
$33,892 2.2% 1.5% 0.5% 4.2%
Company-serviced contracts and loans $65,546 0.0% 0.0% 0.0% 0.0%
(Commercial loans)
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TOTAL AMOUNT DELINQUENCY PERCENTAGE
OF CONTRACTS SEPTEMBER 30, 1997
AND LOANS -----------------------------------------------------------
--------- (Dollars in thousands)
30 DAYS 60 DAYS 90 DAYS TOTAL
------- ------- ------- -----
Company-serviced contracts and loans $9,556 .59% .13% .61% 1.33%
(Manufactured Home loans)
Contracts and loans sold with full 0 0.0% 0.0% 0.0% 0.0%
recourse serviced by others - ---- ---- ---- ----
$9,556 .59% .13% .61% 1.33%
Company-serviced contracts and loans 0 0.0% 0.0% 0.0% 0.0%
(Commercial loans)
(1) On September 30, 1998 the Company completed a sale of 382 loans with a total
principal balance of approximately $11.2 million. At the time of the sale the
loans were all current. They are included in the above tables to more accurately
reflect delinquency percentages of the portfolio.
INSURANCE
IJK Insurance Agency, Inc., a subsidiary of the Company, is a licensed agent
placing property and casualty, credit life and warranty insurance, primarily for
the Company's manufactured home loans.
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 the Company 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. Historically,
traditional financing sources (commercial banks, savings and loans, credit
unions and other consumer lenders), many of which have significantly greater
resources than the Company and may be able to offer more attractive terms to
potential customers, have not consistently served this market.
The Company believes that its relationship with Sun, its focus on community
owners and operators, its prompt and consistent review of credit applications
and its emphasis on providing a high level of service enable it to compete
effectively for the purchase price financing and refinancing of manufactured
homes. However, to the extent that traditional and non-traditional lenders
significantly expand their activity in this market, the Company may be adversely
affected. There is no assurance that the Company will be able to effectively
compete against its existing or any future competitors.
The Company's 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 January.
The Company's commercial lending business is highly competitive and Bloomfield
operates on a nationwide basis against a host of local, regional and national
lenders. Many of its competitors are larger and have greater financial resources
than the Company. Traditionally, the Company's competitors included banks and
thrifts, life insurance companies, mortgage bankers and credit companies. More
recently, the competition has expanded to encompass Wall Street brokerage
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houses, either directly or through proxies or "conduits." The Company believes
that the industry is in a state of transition and rapid consolidation and while
the Company believes that it is well-positioned to compete effectively in this
environment, there can be no assurances that it will do so.
REGULATION AND SUPERVISION
The Company is subject to regulation and licensing under various federal and
state statutes and regulations. The Company's manufactured home finance business
currently is conducted in the states of Alabama, Arizona, Colorado, Delaware,
Florida, Georgia, Illinois, Indiana, Kansas, Michigan, Missouri, North Carolina,
Ohio, Oregon, South Carolina, Texas and Virginia, and the Company currently
intends to operate in the states of California, Idaho, Nevada, North Dakota, New
Mexico, Utah and Washington. Most states where the Company operates: (i) limit
the interest rate and other charges that may be imposed under, or prescribe
certain other terms of, the Contracts; (ii) regulate the sale and type of
insurance products that the Company may offer and the insurers for which it will
act as agent; and (iii) define the Company's rights to repossess and sell
collateral. The Company is licensed to conduct its finance operations in the
states of Alabama, Colorado, Delaware, Florida, Indiana, Kansas, Michigan,
Missouri, North Carolina, Ohio, Texas and Virginia. No license is required to
conduct the Company's manufactured home finance operations in Arizona, Georgia,
Illinois, Oregon and South Carolina.
The Company is subject to numerous federal laws, including the Truth in Lending
Act, the Equal Credit Opportunity Act and the Fair Credit Reporting Act and the
rules and regulations promulgated thereunder, and certain rules of the Federal
Trade Commission. These laws require the Company to provide certain disclosures
to applicants, prohibit misleading advertising and protect against
discriminatory financing or unfair credit 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 Contract.
The Equal Credit Opportunity Act prohibits creditors from discriminating against
loan applicants (including retail installment contract obligors) on the basis of
race, color, sex, age or marital status. Under the Equal Credit Opportunity Act,
creditors are required to make certain disclosures regarding consumer rights and
advise consumers whose credit applications are not approved of the reasons for
the rejection. The Fair Credit Reporting Act requires the Company to provide
certain information to consumers whose credit applications are not approved on
the basis of a report obtained from a consumer reporting agency. The rules of
the Federal Trade Commission limit the types of property a creditor may accept
as collateral to secure a consumer loan and its holder in due course rules
provide for the preservation of the consumer's claims and defenses when a
consumer obligation is assigned to a subject holder. The Credit Practices Rule
of the Federal Trade Commission imposes additional restrictions on loan
provisions and credit practices.
The sale of insurance products by the Company is subject to various state
insurance laws 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 the
Company.
ITEM 2. PROPERTIES
FACILITY
The Company's corporate headquarters is approximately 14,800 square feet,
terminates on October 31, 2001 and is located in Birmingham, Michigan. The lease
on this space currently
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provides for monthly rent of $28,700 per month, including base rent and a pro
rata share of operating expenses and real estate taxes. The Company has an
option to renew the lease for an additional 3 years.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal, governmental, administrative or other
proceedings to which the Company is a party or of which any of its property is
the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been listed on the Nasdaq SmallCap Market
("Nasdaq") since May 11, 1998 under the symbol "BFSC" and was previously traded
on the NASD OTC Bulletin Board. On December 4, 1998, the closing sales price of
the Common Stock was 16 1/8 and the Common Stock was held by approximately 38
holders of record and approximately 750 beneficial holders. The following table
sets forth, for the periods indicated, the range of the high and low sales
prices.
High Low
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FISCAL YEAR ENDED SEPTEMBER 30, 1998
First Quarter ended 12/31/97................................... 10 3/8 9
Second Quarter ended 3/31/98................................... 16 9 3/8
Third Quarter ended 6/30/98................................... 22 3/4 16 1/8
Fourth Quarter ended 9/30/98................................... 28 1/2 13 1/4
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain any earnings for use in its operations and does not
anticipate paying cash dividends in the foreseeable future.
The following chart sets forth the information regarding all securities issued
by the Company during the year ended September 30, 1998, which were not
registered under the Securities Act:
Conversion/
Securities Issued Date of Issuance Purchaser Consideration Exemption Exercise price
- ----------------- ---------------- --------- ------------- --------- --------------
Sun
25,000 shares of Communities, (4)2 of the
Common Stock 10/27/97 Inc. $250,000 Securities Act N/A
96,730 shares of Membership (4)2 of the
Common Stock 3/05/98 Daniel E. Bober Interest (1) Securities Act N/A
96,730 shares of Creighton J. Membership (4)2 of the
Common Stock 3/05/98 Weber Interest (1) Securities Act N/A
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Conversion/
Securities Issued Date of Issuance Purchaser Consideration Exemption Exercise price
- ----------------- ---------------- --------- ------------- --------- --------------
25,695 shares of Joseph Membership (4)2 of the
Common Stock 3/05/98 Drolshagen Interest in (1) Securities Act N/A
17,130 shares of Membership (4)2 of the
Common Stock 3/05/98 James Bennett Interest (1) Securities Act N/A
5,136 shares of Patricia Membership (4)2 of the
Common Stock 3/05/98 Jorgensen Interest (1) Securities Act N/A
13,689 shares of Membership (4)2 of the
Common Stock 3/05/98 Deborah Jenkins Interest (1) Securities Act N/A
1,708 shares of Membership (4)2 of the
Common Stock 3/05/98 Lynn Baszczuk Interest (1)(2) Securities Act N/A
15,000 shares of Membership (4)2 of the
Common Stock 3/05/98 James Simpson Interest in (1) Securities Act N/A
7,500 shares of Katheryne Membership 4)2 of the
Common Stock 3/05/98 Zelenock Interest (1) Securities Act N/A
2,500 shares of Membership (4)2 of the
Common Stock 3/05/98 Jeffrey Urban Interest (1) Securities Act N/A
(1) Membership interest in Bloomfield Acceptance Company, L.L.C and
Bloomfield Servicing Company, L.L.C. For a description of the acquisition
of Bloomfield Acceptance Company, L.L.C. and Bloomfield Servicing Company,
L.L.C., see the Company's Current Report on Form 8-K dated March 5, 1998.
(2) Ms. Baszczuk did not hold a membership interest in Bloomfield Servicing
Company, L.L.C.
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED PERIOD JANUARY 2
SEPTEMBER 30, 1998 TO SEPTEMBER 30, 1997
------------------ ---------------------
(Dollars in thousands)
INCOME STATEMENT DATA:
- ----------------------
Revenue $ 6,141 $ 280
Loss before income tax benefit (793) (110)
Net loss (574) (110)
Loss per common share, basic and diluted (0.46) -
BALANCE SHEET DATA:
Total assets $ 94,859 $ 9,652
Total debt 78,230 9,747
Stockholders' equity (deficiency) 13,457 (110)
SELECTED RATIOS:
Return on average assets (1.23%) (2.28%)
Return on average equity (deficiency) (4.13) (100.00)
Average equity (deficiency) to average assets 29.77 (1.14)
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company commenced operations in January 1997, for the primary purpose of
originating loans on manufactured home "Contracts" located within the
communities owned by Sun. The Company was formed by Sun in response to the
growing need to provide timely and competitive financing to residents in
manufactured home communities. The Company provides 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. The Company through one of its subsidiaries also provides
warranty, credit life and disability insurance on the contracts it finances.
Through acquisitions the Company's business has expanded to include commercial
lending and mortgage servicing for income producing properties.
The Company expects to extend its business to include the origination of
manufactured home loans to communities not owned and operated by Sun, other
types of installment loans, expand its mortgage servicing operations and engage
in other related businesses through the initiation of new businesses or through
the acquisition of existing ones.
RESULTS OF OPERATIONS
The Company had a loss before federal income tax benefit of $793,000 for the
year ended September 30, 1998 on gross revenues of $6.1 million and expenses of
$6.9 million. This is compared to a loss of $110,000 on gross revenues of
$280,000 and expenses of $390,000 for the period January 2, 1997 (date of
inception) through September 30, 1997. Net loss for the Company increased
$464,000 versus the $110,000 loss for 1997.
The large increase in total gross income was due to a greater number of loans
originated in the manufactured home loan portfolio and through the acquisition
of a commercial mortgage loan originator in March, 1998. Interest income on
manufactured home loans increased to $2.2 million from $280,000 for the year
ended September 30, 1998 versus the period ended September 30, 1997. Interest
income on the commercial mortgage loan portfolio for the period March 1, 1998
through September 30, 1998 was $1.1 million.
The following table sets forth the extent to which the Company's net interest
income has been affected by changes in average interest rates and average
balances of interest-earning assets and interest-bearing liabilities:
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YEAR AND PERIOD ENDED SEPTEMBER 30, 1998 AND 1997
----------------------------------------------------------------------------------
AVERAGE BALANCE AVERAGE RATE INTEREST INCREASE VARIANCE DUE TO:
----------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997 (DECREASE)VOLUME RATE
----------------------------------------------------------------------------------
Interest-earning assets:
Loans $51,480 $3,879 8.60% 10.83% $3,296 $ 280 $3,016 $2,991 $ 25
Cash and equivalents 3,839 - 3.75% - 84 - 84 84 -
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55,319 3,879 8.26% 10.83% 3,380 280 3,100 3,075 25
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Interest-bearing
Liabilities
Term loan 4,000 3,727 11.75% 6.98% 392 195 197 20 177
Revolving line of credit 9,540 - 7.00% - 668 - 668 668 -
Loans sold under
agreement to repurchase 32,549 - 7.15% - 873 - 873 873 -
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46,089 3,727 7.52% 6.98% 1,933 195 1,738 1,561 177
----------------------------------------------------------------------------------
Interest rate spread 0.74% 3.85%
Excess average earning assets $ 9,230 $ 152 8.26% 10.83%
==================================
Net interest margin 2.00% 4.12% $1,447 $ 85 $1,362 $1,514 $(152)
=============================================================
Mortgage origination and refinance fees totaled $1.2 million for fiscal 1998 on
the brokered commercial mortgage loans. The sale of mortgage servicing rights in
connection with the commercial mortgage loans originated and serviced resulted
in gross revenues of approximately $600,000. No comparable is reported for
fiscal 1997 as this is the first year of commercial mortgage origination for the
Company.
During the latter part of the fourth quarter of 1998, the Company incurred
losses due to unprecedented market conditions related to commercial mortgage
backed securities and related instruments. The Company recorded $2.4 million of
losses related to mark-to-market valuations of commercial mortgage loans held
for sale and the related hedge positions.
Gain on sale of loans represents the gross income from the sale of approximately
$11.2 million of manufactured home loans on a servicing released basis. This is
the first year in which the Company has sold a portion of its manufactured home
loan portfolio.
Interest expense for the year ended September 30, 1998 was $1.9 million versus
$195,000 for the period ended September 30, 1997. The Company maintained a
significantly higher level of borrowings to fund its increased manufactured home
loan originations and commercial mortgage portfolio.
Provision for credit losses increased to $147,000 in 1998 from $58,000 in 1997
due to the large increase in the manufactured home loan portfolio. Provision for
loan 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.
General and administrative and other operating expenses increased to $2.5
million in fiscal 1998 as compared to $137,000 for the period ended September
30, 1997. The large increase was the result of underwriting and originating
significantly higher manufactured home loan volumes in fiscal 1998, operations
for the full year rather than the shorter period from inception to September 30,
1997, and through the acquisition of Bloomfield and Bloomfield Servicing with
the related underwriting, originating and servicing of commercial mortgage
loans. The largest
-12-
13
increase in general and administrative expenses related to the increase in the
number of employees from 4 to 25, including the increase through acquisition.
LIQUIDITY AND CAPITAL RESOURCES
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, which
provided approximate proceeds of $11.2 million. On December 16, 1997, an
additional 70,000 shares were issued, which provided approximate proceeds of
$651,000. The Company also sold 25,000 shares of common stock to Sun in a
private transaction resulting in an additional $250,000 in gross proceeds.
In connection with the initial public offering the Company entered into a
subordinated loan agreement with Sun. The subordinated loan agreement provides
for a subordinated debt facility of up to $10 million, which indebtedness shall
be subordinated to all senior debt of the Company. The facility consists of a $4
million term loan with an annual interest rate of 9.75% and a five year
revolving line of credit for up to $6 million at an annual interest rate equal
to the prime rate plus 125 basis points. In March 1998, Sun provided an
additional $12 million revolving line of credit payable upon demand with an
annual interest equal to "LIBOR" plus 140 basis points. At September 30, 1998
the Company had used $21.3 million of the subordinated debt and revolving line
of credit facilities.
In accordance with the subordinated loan agreement the Company issued detachable
warrants to Sun covering 400,000 shares of common stock at a price of $10.00 per
warrant share. The detachable warrants have a term of seven years and may be
exercised at any time after the fourth anniversary of the issuance.
In March 1998 the Company's commercial mortgage originating subsidiary entered
into a one year master repurchase agreement with a lender to finance up to $150
million of fixed rate commercial loans secured by real estate. In September of
1998 that agreement was amended to include financing of manufactured home, floor
plan and bridge loans. At the time of the amendment the maximum financing limit
was increased to $250 million. The annual interest rate on the facility is a
variable rate of interest equal to "LIBOR" plus a spread, dependent on the
advance rate and the asset class. As of September 30, 1998 approximately $56.9
million of borrowings were outstanding under the facility.
In September 1998, the Company completed a sale of approximately $11.2 million
outstanding principal balance amount of loans from its manufactured home loan
portfolio. The sale resulted in approximate proceeds to the Company of $12
million.
The Company expects to meet its short-term liquidity requirements through
working capital provided by operating activities and proceeds from additional
sales of its loan portfolio. Long term liquidity requirements will be met
through additional equity offerings, draws on its revolving lines of credit,
advances under repurchase agreements and periodic securitizations of its loan
portfolio.
MARKET RISK
Market risk is the risk of loss arising from adverse changes in market prices
and interest rates. The Company's market risk arises from interest rate risk
inherent in its financial instruments. The Company is not currently subject to
foreign currency exchange rate risk or commodity price risk.
In the normal course of business, the Company also faces risks that are either
nonfinancial or nonquantifiable. Such risks principally include credit risk
-13-
14
and legal risk and are not included in the following table.
The following table shows the Company's expected maturity dates of its 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 positive 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.
MATURITY
------------------------------------------------------------
0 TO 3 4 TO 12 1 TO 5 OVER 5
MONTHS MONTHS YEARS YEARS TOTAL
- --------------------------------------------------------------------------------------------------------------------
(In thousands)
Assets:
Cash and equivalents....................... $ 1,979 $ - $ - $ - $ 1,979
Restricted cash............................ 716 1,537 - - 2,253
Loans receivable........................... 204 85,871 - - 86,075
Other assets............................... 399 2,464 755 934 4,552
------------------------------------------------------------
$ 3,298 $ 89,872 $ 755 $ 934 $ 94,859
TOTAL ASSETS ============================================================
Liabilities:
Advances by mortgagors..................... $ 701 $ 1,537 $ - $ - $ 2,238
Accounts payable and accrued expenses...... 503 123 10 - 636
Advances under repurchase agreement........ 150 56,742 - - 56,892
Subordinated debt.......................... (19) 3,509 - - 3,490
Notes Payable - Sun Communities............ - 17,848 - - 17,848
Other liabilities.......................... - - - 298 298
------------------------------------------------------------
TOTAL LIABILITIES 1,335 79,759 10 298 81,402
------------------------------------------------------------
Stockholders' Equity
Common stock............................... - - - 13,608 13,608
Paid-in-capital............................ - - - 533 533
Retained deficit........................... - - - (684) (684)
-------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 1,335 $ 79,759 $ 10 $ 13,755 $94,859
=============================================================
Reprice difference......................... $ 1,963 $ 10,113 $ 745 $ (12,821)
Cumulative gap............................. $ 1,963 $ 12,076 $12,821 $ -
Percent of total assets.................... 2.07% 12.73% 13.52% -
The following table shows the Company's financial instruments and derivative
instruments that are sensitive to changes in interest rates, categorized by
expected maturity, and the instruments' fair values at September 30, 1998.
Management believes the negative effect of a rise in interest rates is reduced
by the anticipated short duration of the Company's loan receivables. Management
intends that the loan receivables will be securitized or sold as part of a whole
loan sale prior to the end of 1999. Proceeds from the securitization or whole
loan sales would be used to pay down the corresponding debt. This strategy
reduces interest rate exposure that might otherwise arise from maturities of
debt instruments not matching maturities of assets. The instruments held by the
Company are held for purposes other than trading.
The Company also manages interest rate risk through the use of forward sales of
U.S. Treasury
-14-
15
securities to hedge the commercial loan portfolio. The Company
uses these instruments to reduce risk by essentially creating offsetting market
exposures since the majority of the commercial loans are fixed rate loans that
have an annual interest rate equal to a spread over U.S. Treasuries.
MATURITY
------------------------------------------------------------------------------------------
TOTAL
1999 2000 2001 2002 2003 THEREAFTER FAIR VALUE
------------------------------------------------------------------------------------------
Interest sensitive assets:
Loans receivable $ 90,369 $ - $ - $ - $ - $ - $ 90,369
Average interest rate 8.60% - - - - - 8.60%
Interest bearing deposits 1,979 - - - - - 1,979
Average interest rates 3.75% - - - - - 3.75%
------------------------------------------------------------------------------------------
Total interest sensitive assets $92,348 $ - $ - $ - $ - $ - $ 92,348
==========================================================================================
Interest sensitive liabilities:
Borrowings:
Advances under
repurchase agreements $ 56,892 $ - $ - $ - $ - $ - $ 56,892
Average interest rate 7.15% - - - - - 7.15%
Forward sales of U.S.
Treasury securities 48,497 - - - - - 48,497
Average interest rate 5.84% - - - - - 5.84%
Subordinated debt 3,490 - - - - - 3,490
Average interest rate 11.75% - - - - - 11.75%
Note payable - Sun 17,848 - - - - - 17,848
Average interest rate 7.00% - - - - - 7.00%
------------------------------------------------------------------------------------------
Total interest sensitive liabilities $ 126,727 $ - $ - $ - $ - $ - $ 126,727
==========================================================================================
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report form 10-K which are not
historical fact, may be deemed to be forward-looking statements under the
federal securities laws. There are many factors that could cause the Company's
actual results to differ materially from those indicated in the forward-looking
statements. Such factors include but are not limited to general economic
conditions, interest rate risk, delinquency and default rates, demand for the
Company's services, the degree to which the Company is leveraged and its needs
for financing. In addition, it should be noted that past financial and
operational performance of the Company is not necessarily indicative of future
financial and operational performance.
YEAR 2000
Background. Some computers, software, and other equipment include a programming
code in which calendar year data is abbreviated to only two digits. As a result
of this design decision, some of these systems could fail to operate or fail to
produce correct results if "00" is interpreted to mean 1900, rather than 2000.
These problems are widely expected to increase in frequency
-15-
16
and severity as the year 2000 approaches, and are commonly referred to as "Year
2000 Problem".
The Year 2000 Problem could affect computers, software and other equipment used
and operated by the Company. Accordingly, the Company is reviewing its internal
computer programs and systems to ensure that the programs and systems will be
Year 2000 compliant. The Company presently believes that its computer systems
will be Year 2000 compliant in a timely manner.
The Company believes that it has identified substantially all of the major
computers, software applications, and related equipment used in connection with
its internal operations that must be modified, upgraded or replaced to minimize
the possibility of a material disruption to its business. The Company has
commenced the process of modifying, upgrading and replacing those systems that
have been identified as adversely affected, and expects to complete this process
by early 1999.
The Company estimates the total cost of completing any required modifications,
upgrades, or replacements of these internal systems will not have a material
adverse effect on the Company's business or results of operations. This estimate
is being monitored and will be revised as additional information becomes
available.
The Company is in the process of identifying and contacting its critical
suppliers, service providers and contractors to determine the extent to which
the Company's interface systems are vulnerable to those third parties' failure
to remedy their own Year 2000 issues. To the extent that responses to Year 2000
readiness are unsatisfactory, the Company will seek to change suppliers, service
providers or contractors to those that have demonstrated year 2000 readiness,
but cannot be assured that it will be successful in finding such alternatives.
In the event that any of the Company's significant suppliers, service providers
and contractors do not successfully achieve Year 2000 compliance, and the
Company is unable to replace them, the Company's business or operations could be
adversely affected.
The Company expects to identify and resolve all Year 2000 Problems that could
materially adversely affect business operations. However, management believes it
is not possible to determine with complete certainty that all Year 2000 Problems
affecting the Company have been identified or corrected. The number of devices
that could be affected and the interactions among these devices are simply too
numerous. As a result, management expects that the Company could possibly suffer
the following consequences:
1. a significant number of operational inconveniences and
inefficiencies for the Company and its clients that may divert
management's time and attention and financial and human
resources from its ordinary business activities; and
2. a lesser number of serious system failures that may require
significant efforts by the Company to prevent or alleviate
material business disruptions.
The Company does not yet have a comprehensive contingency plan with respect to
the Year 2000 Problem, but intends to establish such a plan during fiscal 1999
as part of its ongoing Year 2000 compliance effort.
The discussion of the Company's efforts, and management's expectations, relating
to Year 2000 compliance are forward-looking statements. The Company's ability to
achieve Year 2000 compliance and the level of incremental costs associated
therewith, could be adversely impacted by, among other things, the availability
and cost of programming and testing resources, vendors' ability to modify
proprietary software, and unanticipated problems identified in the ongoing
compliance review.
-16-
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued SFAS
No. 130 "Reporting Comprehensive Income" ("SFAS 130") which is effective for
fiscal years beginning after December 15, 1997. SFAS 130 establishes standards
for reporting comprehensive income and its components in a full set of
general-purpose financial statements. SFAS 130 requires that all components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The adoption of this standard
will not have an impact on the Company's financial position or results of
operations.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131") which is effective for fiscal
years beginning after December 15, 1997. SFAS 131 establishes standards for
reporting information about operating segments in annual financial statements
and in interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The adoption of this standard will not have an impact on the Company's financial
position or results of operations.
In February 1998, FASB issued SFAS 132 "Employers' Disclosures about Pensions
and Other Postretirement Benefits" ("SFAS 132")), This standard standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer as useful as
they were when FASB Statement No. 87, Employers' Accounting for Pensions, No.
88, Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, and No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions, were issued. It will be adopted
effective October 1, 1998 and is not expected to have a material effect on the
Company's financial statements.
In June 1998, FASB issued SFAS No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging Activities. This statement will be adopted
effective October 1, 1999.
In October 1998, FASB issued SFAS No. 134 "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise", this statement establishes accounting and
reporting standards for certain activities of mortgage banking enterprises and
other enterprises that conduct operations that are substantially similar to the
primary operations of a mortgage banking enterprise. This statement will be
adopted effective October 1, 1999 and is not expected to have a material effect
on the Company's financial statements.
-17-
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BINGHAM FINANCIAL SERVICES CORPORATION
FINANCIAL STATEMENTS FURNISHED PURSUANT TO
THE REQUIREMENTS OF FORM 10-K
AND
REPORT OF INDEPENDENT ACCOUNTANTS
FOR THE YEAR AND PERIOD ENDED SEPTEMBER 30, 1998 AND 1997
-18-
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BINGHAM FINANCIAL SERVICES CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants........................................... 20
Financial Statements:
Consolidated Balance Sheets - September 30, 1998 and 1997................... 21
Consolidated Statements of Operations for the year and period ended
September 30, 1998 and 1997........................................ 22
Consolidated Statements of Changes in Stockholders' Equity for the
year and period ended September 30, 19987 and 1997................. 23
Consolidated Statements of Cashflows for the year and period ended
September 30, 1998 and 1997........................................ 24
Notes to Consolidated Financial Statements.................................. 25
-19-
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Bingham Financial Services Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Bingham Financial Services Corporation and its subsidiaries at September 30,
1998 and 1997, and the results of their operations and their cash flows for the
year ended September 30, 1998 and for the period from January 2, 1997 (date of
inception) through September 30, 1997, in conformity with generally accepted
accounting principles. 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 conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit 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 provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Detroit, Michigan
December 18, 1998
-20-
21
BINGHAM FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARES)
SEPTEMBER 30,
---------------------------------------
ASSETS 1998 1997
---------------------------------------
Cash and equivalents $ 1,979 $ -
Restricted cash 2,253 -
Loans receivable 86,075 9,541
Property and equipment, net 655 7
Other assets 3,897 104
============ ============
Total assets $ 94,859 $ 9,652
============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY
Liabilities:
Advances by mortgagors $ 2,238 $ -
Accounts payable and accrued expenses 636 15
Advances under repurchase agreements 56,892 -
Subordinated debt, net of debt discount
of $510 3,490 -
Note payable - Sun Communities 17,848 9,747
------------ -----------
Total liabilities
81,104 9,762
------------ -----------
Minority Interest 298 -
------------ -----------
Stockholders' equity (deficiency)
Preferred stock, no par value, 10,000,000 shares
authorized; no shares issued and outstanding - -
Common Stock, no par value, 10,000,000 shares
authorized; 1,576,818 and 100 shares issued
and outstanding at 1998 and 1997
respectively 13,608 -
Paid-in capital 533 -
Retained earnings (deficit) (684) (110)
------------ -----------
Total stockholders equity (deficiency) 13,457 (110)
------------ -----------
Total liabilities and stockholders' equity $ 94,859 $ 9,652
(deficiency) ============ ===========
The accompanying notes are an integral part of these financial statements.
-21-
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BINGHAM FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR AND PERIOD ENDED SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT FOR SHARES)
PERIOD
JANUARY 2,
YEAR ENDED THROUGH
REVENUES SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------ ------------------
Interest income on loans $ 3,296 $ 280
Mortgage origination and servicing fees 1,361 -
Gain on sale of loans 738 -
Sale of mortgage servicing rights 618 -
Other income 128 -
------------------ ------------------
Total revenues 6,141 280
------------------ ------------------
COSTS AND EXPENSES
Interest expense 1,933 195
Provision for credit losses 147 58
Provision for unrealized hedge loss 2,400 -
General and administrative 1,250 -
Other operating expenses 1,204 137
------------------ ------------------
Total costs and expenses 6,934 390
------------------ ------------------
Loss before income tax benefit (793) (110)
Income tax benefit (219) -
------------------ ------------------
Net loss $ (574) $ (110)
================== ==================
Weighted average common shares outstanding 1,261,031
==================
Loss per share:
Basic and diluted $ (0.46)
==================
The accompanying notes are an integral part of these financial statements.
-22-
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BINGHAM FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR AND PERIOD ENDED SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT FOR SHARES)
TOTAL
COMMON PAID-IN RETAINED STOCKHOLDER'S
STOCK CAPITAL DEFICIT EQUITY
----- ------- ------- ------
Balance January 2, 1997 $ - $ - $ - $ -
Issuance of 100 shares
of common stock - -
Net loss (110) (110)
-------- ------- --------- -----------
Balance, September 30, 1997 - - (110) (110)
Issuance of 1,295,000 shares
of common stock, net 11,583 11,583
Issuance of 281,818 shares of
common stock in conjunc-
tion with acquisition 2,025 (119) 1,906
Issuance of 400,000 warrants
with subordinated debt 577 577
Option amortization 75 75
Net loss (574) (574)
-------- ------- --------- -----------
Balance, September 30, 1998 $ 13,608 $ 533 $ (684) $ 13,457
======== ======= ========= ===========
The accompanying notes are an integral part of these financial statements.
-23-
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BINGHAM FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASHFLOWS
FOR THE YEAR AND PERIOD ENDED SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS)
PERIOD
YEAR ENDED JANUARY 2 TO
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------ ------------------
Net loss $ (574) $ (110)
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for unrealized hedge loss 2,400 -
Provision for credit losses 147 58
Depreciation and amortization 516 18
Gain on sale of investment securities (13) -
Gain on sale of loans (738) -
Increase in other assets (2,386) (129)
Increase in other liabilities 115 210
------------ --------------------
Net cash provided (used) by operating activities (533) 47
------------ --------------------
Commercial loans originated (65,796) -
Manufactured home loans originated (27,010) (9,844)
Collections on installment contracts receivable 2,191 244
Proceeds from the sale of loans 12,513 -
Proceeds from the sale of investment securities 71 -
Capital expenditures (27) -
------------ --------------------
Net cash used in investing (78,058) (9,600)
------------ --------------------
Proceeds from issuance of common stock 11,582 -
Proceeds from issuance of subordinated debt,
and related warrants 4,000 -
Advances under repurchase agreements 56,892 -
Advances on note payable, Sun Communities 30,117 9,553
Repayment of note payable, Sun Communities (22,021) -
------------ --------------------
Net cash provided by financing activities 80,570 9,553
------------ --------------------
Net increase in cash and cash equivalents 1,979 -
Cash and cash equivalents, beginning of period - -
------------ --------------------
Cash and cash equivalents, end of period $ 1,979 $ -
============ ====================
Supplemental disclosures of cash flow information:
Interest paid $ 2,128 $ -
Federal income taxes paid $ 290 $ -
The accompanying notes are an integral part of these financial statements.
-24-
25
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: The Company was incorporated as an affiliate of Sun
Communities, Inc. for the purpose of providing financing to residents
living in manufactured housing communities for the purchase of new and used
manufactured homes. The Company originates conventional loans that
generally range in size from $4,500 to $90,000 and have a term of 5-25
years. The Company has focused its marketing efforts principally through
manufactured home community owners and operators. This effort has been
targeted at Sun Communities, where the Company's services are offered as
the preferred source of financing. The Company continues to take the steps
necessary to capture a greater share of the loans generated by home
purchasers and owners in Sun Communities. In addition, the Company has also
started to originate loans through manufactured home dealers.
The Company also participates and is active in all aspects of commercial
real estate mortgage banking, including originating, underwriting, placing,
securitizing, and servicing commercial real estate loans through Bloomfield
and Bloomfield Servicing. Bloomfield acts as both a direct lender, making
commercial real estate loans for its own portfolio as well as for
accumulation and securitization, and as a traditional mortgage banker,
placing commercial real estate loans with institutional 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.
For purposes of income statement and cashflow comparison, the Company does
not have a period covering the twelve months ended September 30, 1997.
Information presented covers the period from January 2, 1997 (date of
inception) through September 30, 1997. Earnings per share information for
the period ending September 30, 1997 is based on the 100 shares issued for
initial capitalization. The Company's initial public offering of common
stock did not take place until the quarter ended December 31, 1997.
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. 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 servicing on loans held by others which is held
in trust for subsequent payment to the owners of those loans.
LOANS RECEIVABLE: Loans receivable consist of commercial real estate loans
and manufactured home loans. The commercial loans primarily consist of
fixed rate loans secured by mortgages on commercial property. Commercial
loans originated are either sold immediately to permanent investors or held
for sale. Manufactured home loans are conventional fixed rate loans under
contracts secured by the borrowers' manufactured homes.
-25-
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BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
Loans held for sale are carried at the lower of cost or market value
determined on an aggregate basis. Loans receivable include accrued interest
and are net of deferred hedging gains or losses and an allowance for
expected losses.
DERIVATIVE FINANCIAL INSTRUMENTS: The Company uses forward sales of U.S.
Treasury securities to hedge its commercial mortgage loan portfolio. These
forward sales are used as a means to hedge interest rate risk connected to
anticipated sales or securitizations of the commercial mortgage loans. The
Company's accounting for derivative financial instruments that are used to
manage risk is in accordance with the concepts established in SFAS No. 80,
"Accounting for Futures Contracts".
Deferral (hedge) accounting is applied if the derivative reduces the risk
of the underlying hedged item and is designated at inception as a hedge
with respect to the hedged item. Additionally, the derivative must result
in payoffs that are expected to be inversely correlated to the hedged item.
Derivatives are measured for effectiveness both at inception and on an
ongoing basis. If a derivative instrument ceases to meet the criteria for
deferral accounting, any subsequent gains and losses are currently
recognized in income.
ALLOWANCE FOR LOAN LOSSES: The allowance for possible losses on loans is
maintained at a level believed adequate by management to absorb potential
losses from impaired loans, loans sold with recourse and the remainder of
the loan portfolio. The allowance for loan losses is based upon periodic
analysis of the portfolio, economic conditions and trends, historical
credit loss experience, borrowers' ability to repay and collateral values.
CAPITALIZED MORTGAGE SERVICING RIGHTS: The Company accounts for mortgage
servicing rights in accordance with SFAS No. 125 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS
125"). SFAS 125 requires that a separate asset or liability be recorded
representing the right or obligation to service loans for others. A
servicing asset or liability is determined by allocating the loans'
previous carrying amount between the servicing asset and the loans that
were sold, based on their relative fair values at the date of sale. The
fair value of the servicing asset or liability is based on an analysis of
discounted cash flows that incorporates estimates of market servicing
costs, projected ancillary servicing revenue, projected prepayment rates
and market profit margins.
Mortgage servicing rights are periodically assessed for impairment based on
the fair value of those rights calculated on a discounted basis. This
assessment is performed on a disaggregate basis, stratified by mortgage
type and term. Identified impairments are recognized through a valuation
allowance.
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
75 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.
REPOSESSED HOMES: Manufactured homes acquired through foreclosure or
similar proceedings are recorded at the lower of the related loan balance
plus any operating expenses of such homes or the estimated fair value of
the home at acquisition date.
-26-
27
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
OTHER ASSETS: Other assets is comprised of margin deposits with brokers,
organization costs, prepaid expenses, deferred financing costs and other
miscellaneous receivables. Margin deposits with brokers totaled $1.3
million and are invested in short-term treasury bills. Organization costs
are amortized on a straight-line basis over a five-year life. Deferred
financing costs are capitalized and amortized over the life of the
corresponding line of credit.
LOANS SOLD UNDER AGREEMENTS TO REPURCHASE: The Company enters into sales of
loans 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; capitalized software - five years;
computers - five years.
INCOME TAXES: The Company uses the liability method in accounting for
income taxes. Under this method, deferred income taxes result from
temporary differences between the tax bases of assets and liabilities and
the bases reported in consolidated financial statements. The deferred taxes
are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
GOODWILL: Goodwill, which represents the excess of purchase price over the
fair value of net assets acquired, is amortized on a straight-line basis
over the expected periods to be benefited, generally 25 years.
PER SHARE DATA: SFAS No. 128, "Earnings Per Share", was issued in March
1997 and is effective for financial statements issued after December 15,
1997. This Statement establishes standards for computing and presenting
earnings per share ("EPS") and supersedes Accounting Principles Board
Opinion No. 15 and its related interpretations. The Statement replaces the
presentation of primary EPS with a presentation of basic EPS. Basic EPS
excludes dilution, whereas diluted EPS includes the potential dilution that
could occur if securities or contracts to issue shares of common stock were
to be exercised or converted into shares of common stock.
Basic earnings per share are computed by dividing net income available to
common shareholders by the weighted average common shares outstanding. At
September 30, 1998 there were approximately 260,000 potential shares of
common stock from stock options and warrants outstanding. Had these stock
options and warrants been exercised they would have had an anti-dilutive
effect on the net loss. In accordance with SFAS No. 128 the effect of the
anti-dilutive shares is not included in the earnings per share calculation.
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 for the year
ended September 30, 1998:
-27-
28
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
-----------------------------------------------------------------------------------------------------
Net Loss Per
Loss Shares Share
------------------------------------------------------
(In thousands, except loss per share)
Basic and diluted loss per share............... $ (574) 1,261 $ (0.46)
B. ACQUISITIONS
In March 1998 the Company acquired 100% of the outstanding stock of
Bloomfield Acceptance Company, L.L.C. ("Bloomfield") and Bloomfield
Servicing Company, L.L.C. ("Bloomfield Servicing") for 281,818 shares of
the Company's common stock valued at approximately $2.1 million. Bloomfield
is engaged in the business of the origination of mortgages and real estate
lending. Loans originated by Bloomfield primarily consist of fixed rate
loans secured by mortgages on commercial property. Bloomfield Servicing was
formed to service the loans originated by Bloomfield and other investors.
In addition to the shares of common stock issued to the former owners of
Bloomfield and Bloomfield Servicing, additional consideration of up to
$500,000, in the form of the Company's common stock, will be paid to the
owners subject to the performance of the merged entities over the two year
period following the date of merger.
Each of the acquisitions was accounted for as a purchase. The results of
operations for the year ended September 30, 1998 include the results of
operations for each of the acquired companies since the date of their
respective acquisitions.
The aggregate purchase price for the acquisitions completed for the year
ended September 30, 1998, was $2.1 million. The purchase price 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 is being amortized on a
straight-line method over 25 years.
In conjunction with these acquisitions, liabilities assumed and other
non-cash consideration was as follows (in thousands, unaudited):
Fair value of assets acquired.................................... $ 4,668
Goodwill......................................................... 664
Stock issued in consideration of companies acquired... (2,067)
------------------
Liabilities assumed.............................................. $ 3,265
==================
-28-
29
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
The following table summarizes pro forma unaudited results of operations as
if each of the acquisitions completed during 1998 had occurred at the
beginning of each year presented:
PERIOD JANUARY 2
SEPTEMBER 30, TO SEPTEMBER 30,
1998 1997
-----------------------------------------------------------------------------------------------------------------
(In thousands, except earnings per share)
Revenues............................................................... $ 7,660 $ 2,329
Income before income taxes............................................. (684) 624
Net Income ............................................................ (503) 367
Basic and diluted loss per share....................................... $ (0.40)
C. LOANS RECEIVABLE
The carrying amounts and fair values of loans receivable consisted of the
following:
SEPTEMBER 30
-------------------------------------------------------------------
1998 1997
-------------------------------------------------------------------
Book Value Market Value Book Value Market Value
----------------------------------------------------------------------------------------------------------
(In thousands)
Manufactured home loans............ $ 22,674 $ 24,098 $ 9,556 $ 9,556
Commercial loans................... 65,546 61,722 - -
Accrued interest receivable........ 440 440 43 43
Valuation allowance................ (2,400) - - -
Reserve for credit loss............ (185) - (58) -
-------------------------------------------------------------------
$ 86,075 $ 86,260 $ 9,541 $ 9,599
===================================================================
The carrying amount of loans receivable includes a valuation allowance for
mark-to-market adjustments on the hedge positions. The following table
shows the valuation allowance and any related additions or deductions:
1998 1997
---------------------------------------------------------
(In thousands)
Balance at beginning of year $ - -
Valuation allowance.......... 2,400 -
-------------------------
Balance at end of year... $ 2,400 -
=========================
-29-
30
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
The following table sets forth the average loan balance, weighted average
loan yield and weighted average initial term of the loan portfolio:
SEPTEMBER 30
-----------------------------------------------------------
1998 1997 1998 1997
-----------------------------------------------------------
Manufactured Home Commercial Mortgage
-------------------------------------------------------------------------------------------------
(Dollars in thousands)
Principal balance loans receivable,
net................................. 22,673 $ 9,541 $ 63,402 $ -
Number of loans receivable.......... 803 366 13 -
Average loan balance................ $ 29 $ 26 $ 5,042 $ -
Weighted average loan yield......... 10.9% 10.7% 7.6% -
Weighted average initial term....... 22 years 23 years 9.7 years -
The contracts are secured by manufactured homes, which range in age from
1963 to 1998, with approximately 56% of the manufactured homes built since
1996. The following table sets forth the concentration by state of the loan
portfolio:
SEPTEMBER 30
------------------------------------------------------------------------------------------------
1998 1997 1998 1997
--------------------------------------------------------------------------------------------------
Manufactured Home Commercial Mortgage
-------------------------------------------------------------------------------------------------
Principal % Principal % Principal % Principal %
------------------------------------------------------------------------------------------------
(Dollars in thousands)
Michigan 9,177 40.5% 4,644 48.7% 29,107 44.4% - -
Indiana 5,729 25.3% 2,257 23.7% - - - -
Arizona - - - - 9,953 15.2% - -
Texas 1,859 8.2% 1,458 15.3% - - - -
Florida 1,805 8.0% 830 8.7% 14,260 21.8% - -
California - - - - 8,504 13.0% - -
Other 4,104 18.1% 352 3.6% 3,722 5.6% - -
The following table sets forth the number and value of loans for various terms
for the manufactured home loan portfolio:
SEPTEMBER 30
-------------------------------------------------------
1998 1997
----------------------------------------------------------------------
Number of Principal Number of Principal
Term Loans Balance Loans Balance
---- ------------- ---------- ------------- ------------
(Dollars in thousands)
5 or less.. 27 $ 209 7 $ 40
6-10........ 88 1,073 29 342
11-12...... 9 100 3 45
13-15...... 104 1,876 51 745
16-20...... 210 6,020 71 1,357
21-25...... 363 13,291 196 6,557
26-30...... 2 105 9 455
-30-
31
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
The commercial mortgage loans have amortization terms of between 25 and 30
years. In certain cases they also have a hyper-amortization feature that
takes effect if the loan is not repaid on its anticipated repayment date.
At that time the interest rate increases and any excess cash flows from the
project are used to pay down the principal balance.
Delinquency statistics for the manufactured home loan portfolio are as
follows:
SEPTEMBER 30
----------------------------------------------------------------------
1998 1997
----------------------------------------------------------------------
Days No. of Principal % of No. of Principal % of
Loans Balance Portfolio Loans Balance Portfolio
----------------------------------------------------------------------------------------
(Dollars in thousands)
31-60........... 31 $ 730 3.2% 2 $ 56 .59%
61-90........... 18 508 2.2% 1 12 .13%
Greater than 90 16 357 1.6% 2 58 .61%
No commercial mortgage loans were delinquent as of September 30, 1998.
D. ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses and related additions and deductions to the
allowance for the years ended September 30, 1998 and 1997 were as follows:
1998 1997
---------------------------------------------------------
(In thousands)
Balance at beginning of year $ 58 $ -
Provision for loan losses....... 147 58
Net losses...................... (20) -
-------------------------
Balance at end of year... $ 185 $ 58
=========================
E. SERVICING RIGHTS
Changes in capitalized mortgage servicing rights are summarized as follows:
1998
------------------------------------------------------------------------
(In thousands)
Balance at beginning of year......................... -
Addition through acquisition of Bloomfield Servicing $ 552
Additional servicing asset net....................... 104
Amortization ........................................ (28)
Sales ............................................... (472)
------------
Balance at end of year........................... $ 156
============
Bloomfield Servicing services loans that Bloomfield originates. In
addition to Bloomfield's loans, Bloomfield Servicing services commercial
real estate loans on behalf of five institutional investors. The majority
of these loans are in Michigan. As of September 30, 1998, Bloomfield
Servicing's servicing portfolio totaled approximately $374 million. The
Company had no servicing rights in 1997.
-31-
32
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
F. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
September 30
---------------------------------
1998 1997
-----------------------------------------------------------------------------------
(In thousands)
Cost:
Furniture and fixtures....................... $ 159 $ -
Leasehold improvements....................... 33 -
Capitalized Software......................... 322 -
Computer equipment........................... 175 8
---------------------------------
689 8
Less accumulated depreciation.................. 34 1
=================================
$ 655 $ 7
=================================
Depreciation expense was $33,700 and $1,100 in 1998 and 1997 respectively.
G. DEBT
At the time of its initial public offering the Company entered into a
subordinated debt facility with Sun Communities. The facility consisted of
a $4.0 million term loan and a five-year revolving line of credit for up to
$6.0 million. The term loan was at an annual interest rate of 9.75% and the
revolving line of credit is at an annual rate equal to the prime rate plus
125 basis points. In accordance with the subordinated debt loan agreement
the Company has issued detachable warrants to Sun covering 400,000 shares
of common stock at a price of $10 per warrant share. The detachable
warrants have a term of seven years and may be exercised at any time after
the fourth anniversary of issuance.
In March 1998 Sun provided an additional line of credit of up to $12.0
million payable upon demand at an annual interest rate equal to "LIBOR"
plus 140 basis points.
In March 1998 the Company's commercial mortgage subsidiary entered into a
one-year master repurchase agreement with a lender to finance up to $150
million of fixed rate commercial loans secured by real estate. In September
1998 that agreement was amended and restated to include manufactured home
and floor plan loans. The borrowing limit was also increased to $250
million. The loans are sold at 85- 92% of the then current face value,
depending on the asset class and certain concentration constraints. The
repurchase transactions are for 30 days and may be rolled over for up to
nine months.
At September 30, 1998 and 1997 debt outstanding was as follows:
SEPTEMBER 30
---------------------------------
1998 1997
---------------------------------
(In thousands)
Loans sold under agreements to repurchase....... $ 56,900 $ -
Revolving line of credit........................ 17,800 5,700
Term loan, net of discount...................... 3,500 4,000
================= ==============
$ 78,200 $ 9,700
================= ==============
-32-
33
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
H. PARTICIPANTS SUPPORT AGREEMENT
As of September 30, 1997 the Company entered into a participant support
agreement with Sun Communities. Pursuant to the agreement, participants
options were granted to Sun September 30, 1997 and will vest if, and only
if, Sun is a party to and in compliance with the terms of the participant
support agreement on the vesting date and on December 31 of the previous
year. The options will vest in eight equal annual amounts, each consisting
of 41,250 options, on January 31, 2001 through 2008. The options may be
exercised at any time after vesting until expiration ten years after the
date of vesting. Each option vesting January 31, 2001 to 2003 will entitle
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 will entitle
the holder to purchase one share of common stock for $12. Each option
vesting on January 31, 2007 and 2008 will entitle the holder to purchase
one share of common stock for $14.
The Company recognizes 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 are amortized based on the vesting periods of the options.
Amortization for the year ended September 30, 1998 was $74,700.
I. STOCK OPTION PLAN
The Company has stock option plans in which 157,681 shares of common stock
have been reserved for issuance as of September 30, 1998. Under the plans,
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.
The Company has adopted the disclosure requirements of Statements of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation." Accordingly, the fair value of each option grant
in 1998 was estimated using the Black-Scholes option pricing model based on
the assumptions stated below:
1998
---------------------------------------------------------------------------
Estimated weighted average fair value
Per share of options granted........................... $ 5.44
Assumptions:
Annualized dividend yield ..................... -%
Common stock price volatility.................. 44.14%
Weighted average risk free rate of return...... 5.83%
Weighted average expected option term (in years) 6
-33-
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BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
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 are 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 1998
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:
1998
================================================================================
(In thousands, except earnings per share)
Net loss (as reported)................................... $ (574)
Stock option compensation cost........................... 143
===============
Pro forma net loss............................... $ (717)
===============
Basic and diluted loss per share (as reported)........... $ (0.46)
Stock option compensation cost........................... .11
===============
Pro forma basic and diluted loss per share....... $ (0.57)
===============
The following table sets forth changes in options outstanding:
1998
================================================================================
WEIGHTED
AMOUNT AVG. PRICE
- --------------------------------------------------------------------------------
Shares under option:
Outstanding at beginning of year.................. - $ -
Granted........................................... 111,850 10.65
Forfeited......................................... (1,950) 13.00
Canceled.......................................... - -
Exercised ........................................ - -
---------------------
Outstanding at end of year........................ 109,900 10.65
---------------------
Exercisable at end of year........................ 30,000 $ 10.00
---------------------
The following table sets forth details of options outstanding at September 30,
1998
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RANGE OF NUMBER REMAINING RANGE OF NUMBER REMAINING
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE
- -------------------------------------------------------------------------------------------------------
$ 10.00 85,900 9.08 Years $ 10.00 30,000 9.08 Years
13.00 24,000 9.42 Years
- ------------------------------------------------------------------------------------------------------
$10.00 -13.00 109,900 9.15 Years $ 10.00 30,000 9.08 Years
======================================================================================================
There were no options outstanding in 1997.
-34-
35
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
J. FEDERAL INCOME TAXES
Federal income tax expense consisted of the following:
1998 1997
-------------------------------------------------------------------------------
(In thousands)
Current.............................. $ 683 $ -
Deferred............................. (902) -
======================================
$ (219) $ -
======================================
A reconciliation of the statutory federal income tax rate to the effective
income tax rate follows:
1998
-------------------------------------------------------------
Statutory tax rate................................. (34.00%)
Effect of:
Change in valuation of deferred tax assets (4.70)
Other, net .................................... 11.09
========
Effective tax rate ................................ (27.61%)
========
There was no federal income tax provision in 1997.
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 believes its current tax planning strategy will allow for the
recovery of the total net deferred tax asset. Significant components of the
Company's deferred tax assets and liabilities are as follows:
1998
------------------------------------------------------------------
(In thousands)
Deferred Tax Assets:
Option amortization............................ $ 25
Net deferral required by FAS 91................ 130
Reserve for loan losses ....................... 14
Valuation allowance for unrealized hedge loss.. 816
Other items, net .............................. 5
-------------
Total deferred tax assets ................ 990
Deferred Tax Liabilities:
Deferred closing costs ........................ 88
-------------
Total deferred tax liabilities ............ 88
-------------
Total net deferred tax assets...................... 902
=============
Total net federal income tax assets $ 902
=============
Total net deferred tax assets are shown as a part of other assets in the
consolidated balance sheets. There were no deferred taxes at September 30, 1997.
-35-
36
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
K. 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,
which provided approximate proceeds to the Company of $11,160,000. 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 for gross proceeds of $250,000.
L. LITIGATION
The Company is subject to various claims and legal proceedings arising out
of the normal course of business, none of which in the opinion of
management are expected to have a material effect on the Company's
financial position.
M. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS: At September 30, 1998 aggregate minimum rental
commitments under noncancelable leases having terms of more than one year
were $917,000, payable $280,000 (1999), $314,000 (2000) and $323,000
(2001). Total rental expense for the year ended September 30, 1998 was
$83,000. 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 September 30, 1998 and 1997 the Company had
commitments to originate manufactured home installment contracts
approximating $4.8 million and $3 million respectively. Commercial mortgage
loan commitments totaled $14.7 million at September 30, 1998.
N. FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET ACTIVITY
FINANCIAL INSTRUMENTS: The Company hedges its commercial mortgage loan
portfolio as part of its interest rate risk management strategy and as a
condition of the related repurchase agreement which finances the portfolio.
The Company hedges the interest rate risk on its portfolio by doing forward
sales of U.S. Treasury Securities. The Company classifies these forward
sales as hedges on specific loan receivables. Any gross unrealized gains or
losses on these forward sales are an adjustment to the basis of the
mortgage loan portfolio and are used in the lower of cost or market
valuation to establish a valuation allowance as shown in Note C.
The following table identifies the gross unrealized gains and losses of the
forward sales as of September 30, 1998 and 1997:
-36-
37
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
SEPTEMBER 30
-------------------------------------------------------------------------------
1998 1998 1997 1997
-------------------------------------------------------------------------------
GROSS GROSS GROSS GROSS
UNREALIZED UNREALIZED UNREALIZED UNREALIZED
SECURITY DESCRIPTION GAINS LOSSES GAINS LOSSES
----------------------------------------------------------------------------------------------------------------
(In thousands)
U.S. Treasury 6.125% - 8/07 $ - $ (2,019) $ - $ -
U.S. Treasury 6.375% - 8/27 - (294) - -
U.S. Treasury 5.500% - 2/08 - (1,649) - -
U.S. Treasury 5.625% - 5/08 - (321) - -
--------------------------------- ---------------------------------
$ - $ (4,283) $ - $ -
================================= =================================
LOANS SOLD WITH RECOURSE: In September 1998 the Company sold $11.2 million
of its manufactured home loan portfolio with recourse. The Company is
required to repurchase any contract that goes into default, as defined in
the loan agreement, for the life of the loan.
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 that value. In cases
where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques.
The carrying amount for cash and cash equivalents approximate their fair
value. Fair values for the Company's loans are estimated using discounted
cash flow analyses, using interest rates currently being offered for loans
with similar terms to borrowers of similar credit quality. 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
O. SELECTED QUARTERLY FINANCIAL DATA
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------------------------------------------------------------------------------------------------
(In thousands, except earnings per share)
1998:
Interest income $ 316 $ 433 $ 819 $ 1,797
Interest expense 151 135 405 1,241
Net income (loss) 22 120 435 (1,151)
Diluted earnings (loss) per share .04 .08 .22 (0.73)
1997:
Interest income $ - $ 10 $ 112 $ 158
Interest expense - 15 70 110
Net loss - (62) (3) (45)
-37-
38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in the Company's independent public
accountants during the past two fiscal years.
PART III
The information required by ITEMS 10, 11, 12 AND 13 will be included
in the Company's proxy statement for its 1999 Annual Meeting of Shareholders,
and is incorporated herein by reference.
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
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
The Company filed a report on Form 8-K detailing the merger of
Bloomfield Acceptance Company, L.L.C. and Bloomfield Servicing Company, L.L.C.
with subsidiaries of the Company pursuant to an Agreement and Plan of Merger
dated as of February 17, 1998. The date of the report was March 5, 1998. The
required financial statements of the businesses acquired and the required pro
forma financial information were filed with an amendment to the Form 8-K on
May 12, 1998.
-38-
39
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: December 28, 1998
BINGHAM FINANCIAL
SERVICES CORPORATION
By: /s/ Jeffrey P. Jorissen
--------------------------------
Jeffrey P. Jorissen, President
Chief Executive Officer
and Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K has been signed by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ Gary A. Shiffman Chairman of the Board of December 28, 1998
------------------------------------------- Directors, Secretary
Gary A. Shiffman
/s/ Jeffrey P. Jorissen President, Chief Executive Officer, December 28, 1998
------------------------------------------- Chief Financial Officer and Director
Jeffrey P. Jorissen
/s/ Milton M. Shiffman Director December 28, 1998
-------------------------------------------
Milton M. Shiffman
/s/ Robert H. Orley Director December 28, 1998
-------------------------------------------
Robert H. Orley
/s/ Brian M. Hermelin Director December 28, 1998
-------------------------------------------
Brian M. Hermelin
-39-
40
NAME TITLE DATE
---- ----- ----
/s/ Arthur A. Weiss Director December 28, 1998
--------------------------------------------
Arthur A. Weiss
/s/ Daniel E. Bober Director and Vice President December 28, 1998
--------------------------------------------------
Daniel E. Bober
/s/ Creighton J. Weber Director and Vice President December 28, 1998
--------------------------------------------
Creighton J. Weber
-40-
41
EXHIBIT INDEX
EXHIBIT
NUMBER
------
DESCRIPTION
-----------
2.1 Agreement And Plan of Merger dated as of February 17, 1998 by and among Bingham Financial
Services Corporation, a Michigan corporation, BAC Acquiring Corp., a Michigan corporation, BSC
Acquiring Corp., a Michigan corporation, Bloomfield Acceptance Company, L.L.C., a Michigan
limited liability company, and Bloomfield Servicing Company, L.L.C., a Michigan limited
liability company. Omitted from such exhibit, as filed, are the remaining exhibits referenced
in such agreement. The Registrant will furnish supplementally a copy of any such exhibits to
the Commission upon request. (incorporated by reference to the Company's Current Report on
Form 8-K dated March 5, 1998)
2.2 Certificate of Merger for BAC Acquiring Corp. and Bloomfield Acceptance Company, L.L.C., dated
March 5, 1998. (incorporated by reference to the Company's Current Report on Form 8-K dated
March 5, 1998)
2.3 Certificate of Merger for BSC Acquiring Corp. and Bloomfield Servicing Company, L.L.C.,
dated March 5, 1998. (incorporated by reference to the Company's Current Report on Form
8-K dated March 5, 1998)
3.1 Amended and Restated Articles of Incorporation of Bingham Financial Services Corporation
(incorporated by reference to the Company'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 the Company's registration Statement on Form S-1; File No. 333-34453)
4.1 Shareholders Agreement dated March 4, 1998 (incorporated by reference to the Company's Current
Report on Form 8-K dated March 5, 1998)
4.2 Bloomfield Shareholders Agreement dated March 5, 1998 (incorporated by reference to the
Company's Current Report on Form 8-K dated March 5, 1998)
10.1 Participants Support Agreement, by and between Bingham Financial Services Corporation 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 the Company's registration Statement on Form S-1; File No. 333-34453)
10.2 Administration Agreement, by and between Bingham Financial Services Corporation and Sun
Communities, Inc., dated July 1, 1997 (incorporated by reference to the Company's registration
Statement on Form S-1; File No. 333-34453)
10.3 Form of Indemnification Agreement (incorporated by reference to the Company's registration
Statement on Form S-1; File No. 333-34453)
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EXHIBIT
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DESCRIPTION
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10.4 Employment Agreement between the Company and William L. Mulvaney (incorporated by
reference to the Company's registration Statement on Form S-1; File No. 333-34453)
10.5 Employment Agreement dated as of March 4, 1998 by and between Bingham Financial Services
Corporation and Daniel E. Bober (incorporated by reference to the Company's Current Report on
Form 8-K dated March 5, 1998)
10.6 Employment Agreement dated as of March 4, 1998 by and between Bingham Financial Services
Corporation and Creighton J. Weber (incorporated by reference to the Company's Current Report
on Form 8-K dated March 5, 1998)
10.7 Subordinated Loan Agreement dated September 30, 1997 between Bingham Financial Services
Corporation and Sun Communities, Inc. (assigned to Sun Communities Operating Limited
Partnership as of December 31, 1997) (incorporated by reference to the Company's registration
Statement on Form S-1; File No. 333-34453)
10.8 Form of Line of Credit Promissory Note, dated September 30, 1997 between Bingham Financial
Corporation and Sun Communities, Inc. (assigned to Sun Communities Operating Limited
Partnership as of December 31, 1997) (incorporated by reference to the Company's registration
Statement on Form S-1; File No. 333-34453)
10.9 Form of Term Promissory Note, dated September 30, 1997 between Bingham Financial Corporation
and Sun Communities, Inc. (assigned to Sun Communities Operating Limited Partnership as of
December 31, 1997) (incorporated by reference to the Company's registration Statement on Form
S-1; File No. 333-34453)
10.10 Loan Agreement between Bingham Financial Services Corporation and Sun Communities Operating
Limited Partnership, dated March 1, 1998 (filed herewith)
10.11 Demand Promissory Note between Bingham Financial Services Corporation and Sun Communities
Operating Limited Partnership, dated March 1, 1998 (filed herewith)
10.12 Amended and Restated Master Repurchase Agreement dated October 5, 1998, by and among
Bloomfield Acceptance Company, L.L.C., MHFC, Inc. and Lehman Commercial Paper Inc. Omitted
from such exhibit, as filed, are the remaining exhibits referenced in such agreement. The
Registrant will furnish supplementally a copy of any such exhibits to the Commission upon
request. (filed herewith)
10.13 Bingham Financial Services Corporation 1997 Stock Option Plan (incorporated by reference to
the Company's registration Statement on Form S-1; File No. 333-34453)
10.14 Detachable Warrant Agreement, dated September 30, 1997 between Bingham Financial Services
Corporation and Sun Communities, Inc.
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EXHIBIT
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DESCRIPTION
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(assigned to Sun Communities Operating Limited Partnership as of December 31, 1997)
(incorporated by reference to the Company's registration Statement on Form S-1; File No.
333-34453)
10.15 Form of Detachable Warrant of Bingham Financial Corporation dated September 30, 1997
(incorporated by reference to the Company's registration Statement on Form S-1; File No.
333-34453)
10.16 Subservicer Agreement between Bingham Financial Services Corporation and St. James Servicing
Corporation, dated January 1, 1997 (incorporated by reference to the Company's registration
Statement on Form S-1; File No. 333-34453)
11 Calculation of Earnings Per Share (filed herewith)
21 List of Subsidiaries (filed herewith)
27 Financial Data Schedule (filed herewith)