posam
As filed with the Securities and Exchange Commission on
May 25, 2005
Registration No. 333-112520
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Post-Effective Amendment No. 2
To
Form S-11
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES
Origen Financial, Inc.
(Exact name of registrant as specified in its charter)
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Delaware |
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20-0145649 |
(State or other jurisdiction of
Incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
27777 Franklin Road, Suite 1700
Southfield, Michigan 48034
(248) 746-7000
(Address, including ZIP code, and telephone number,
including area code, of registrants principal executive
offices)
Ronald A. Klein, Chief Executive Officer
Origen Financial, Inc.
27777 Franklin Road, Suite 1700
Southfield, Michigan 48034
(248) 746-7000
(Name, address, including ZIP code, and telephone number,
including area code, of agent for service)
with copies to:
Peter Sugar, Esq.
Joel M. Alam, Esq.
Matthew Murphy, Esq.
Jaffe, Raitt, Heuer & Weiss, P.C.
27777 Franklin Road, Suite 2500
Southfield, Michigan 48034
(248) 351-3000
(248) 351-3082 (fax)
(Address, including ZIP code, and telephone number,
including area code, of agent for service)
Approximate date of commencement of proposed sale to
public: At any time and from time to time after the
effective date of this registration statement.
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering: o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering: o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering: o
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following
box: o
Amending the prospectus, Part II and the
Exhibit Index
The information in this prospectus is not
complete and may be changed or supplemented. None of the
securities described in this prospectus can be sold by the
selling stockholders until the registration statement filed with
the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell the securities, nor is it a
solicitation to buy the securities, in any state where any offer
or sale of the securities is not permitted.
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SUBJECT TO COMPLETION DATED
MAY 25, 2005
PROSPECTUS
10,575,000 Shares
Common Stock
The selling stockholders named in this prospectus are offering
up to 10,575,000 shares of our common stock. The selling
stockholders may sell all or a portion of these shares from time
to time in market transactions through any stock exchange or
market on which our common stock is listed, in negotiated
transactions or otherwise, and at prices and on terms that will
be determined by the then prevailing market price or at
negotiated prices directly through a broker or brokers, who may
act as agent or as principal or by a combination of such methods
of sale. The selling stockholders will receive all proceeds from
the sale of these shares of our common stock. For additional
information on the methods of sale, you should refer to the
section entitled Plan of Distribution on
page 94. We will not receive any of the proceeds from the
sale of shares of common stock by the selling stockholders. Our
common stock is subject to transfer restrictions designed to
preserve our status as a real estate investment trust, see
Description of Capital Stock and Material Provisions of
Delaware and Our Certificate of Incorporation.
Our common stock is listed on the Nasdaq National Market under
the symbol ORGN.
Investing in our common stock involves a high degree of risk.
See Risk Factors beginning on page 6, for a
discussion of risks of investing in our common stock.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
May , 2005
TABLE OF CONTENTS
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ABOUT THIS PROSPECTUS
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
information that is different. This prospectus may be used only
where it is legal to sell these securities. The information in
this prospectus may be accurate only on the date of this
prospectus.
ii
SUMMARY
This summary contains basic information about this offering
and us. Because it is a summary, it does not contain all of the
information that you should consider before investing. You
should read this entire prospectus carefully, including the
section titled Risk Factors and our financial
statements and related notes before making an investment in our
common stock. As used in this prospectus, Origen
Financial, company, we,
our, and us refer to Origen Financial,
Inc., except where the context otherwise requires.
Overview
Origen Financial, Inc. is an internally-managed and
internally-advised Delaware corporation that is taxed as a real
estate investment trust, or REIT. We are a national consumer
manufactured housing lender and servicer. Currently we originate
loans in 42 states and we service loans in 43 states.
We originate and intend to continue to originate manufactured
housing loans to borrowers who have above average credit
profiles and above average income, each as compared to
manufactured housing borrowers as a whole. We and our
predecessors have originated more than $2 billion of
manufactured housing loans from 1996 through December 31,
2004, including $249.7 million in 2004. We service the
manufactured housing loan contracts that we originate as well as
manufactured housing loan contracts owned by third parties. As
of December 31, 2004, our loan servicing portfolio of over
33,000 loans totaled approximately $1.37 billion.
Origen Financial, Inc. was incorporated on July 31, 2003.
On October 8, 2003, we began operations when we acquired
all of the equity interests of Origen Financial L.L.C. (which is
our primary operating subsidiary) and its subsidiaries and
completed a private placement of $150 million of our common
stock to certain institutional and accredited investors. In
February 2004, we completed another private placement of
$10 million of our common stock to an institutional
investor. In May 2004, we completed an initial public offering
of 8,000,000 shares of our common stock at a purchase price
of $8.00 per share. In June 2004, the underwriters for the
public offering purchased an additional 625,900 shares by
exercising their over-allotment option. Currently, most of our
operations are conducted through Origen Financial L.L.C., our
wholly-owned subsidiary. We conduct the rest of our business
operations through our other wholly-owned subsidiaries,
including taxable REIT subsidiaries, to take advantage of
certain business opportunities and ensure that we comply with
the federal income tax rules applicable to REITs.
Our executive office is located at 27777 Franklin Road,
Suite 1700, Southfield, Michigan 48034 and our telephone
number is (248) 746-7000. We maintain our servicing
operations in Ft. Worth, Texas and have other regional
offices located in Glen Allen, Virginia and Duluth, Georgia. As
of April 29, 2005, we employed 245 full-time employees.
Risk Factors
An investment in our common stock involves material risks,
including the following:
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We may not generate sufficient revenue to make or sustain
distributions to stockholders. Our ability to make and sustain
cash distributions is based on many factors, including the
performance of our manufactured housing loans, our ability to
borrow at favorable rates and terms, interest rate levels and
changes in the yield curve and our ability to use hedging
strategies to insulate our exposure to changing interest rates.
Some of these factors are beyond our control and a change in any
such factor could affect our ability to pay future distributions. |
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We may not have access to capital to meet our anticipated needs.
Our ability to achieve our investment objectives depends to a
significant extent on our ability to raise equity and to borrow
money in sufficient amounts and on sufficiently favorable terms
to earn incremental returns and our ability to securitize our
loans. Our inability to access capital could jeopardize our
ability to fund loan originations and continue operations. |
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There is no limit on the amount of indebtedness we can incur.
Our use of borrowings or leverage amplifies the
risks associated with other risk factors, which could reduce our
net income or cause us to suffer a loss. |
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We may not be able to securitize our manufactured home loans or
do so on favorable terms. If we are unable to securitize, or
securitize profitably, the manufactured home loans that we
originate and that we may invest in from time to time, then our
revenues for the duration of our investment in those
manufactured home loans will decline, which would lower our
earnings for the time the loans remain in our portfolio. |
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Our future success depends to a significant extent upon the
continued services of our key management employees. The loss of
one or more key employees may harm our business and our
prospects. |
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We operate in a highly regulated industry. If we fail to comply
with applicable laws and regulations at the federal, state or
local level, it could negatively affect our business. |
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Manufactured housing loan borrowers may be relatively high
credit risks. The manufactured home loans we originate and have
an ownership interest in generally have higher probability of
default and may involve higher delinquency rates and greater
servicing costs relative to loans to more creditworthy
borrowers. If we are unable to control our delinquency and
default risks our business, financial condition, liquidity and
results of operations could be significantly harmed. |
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The manufactured housing industry has been in a downturn since
1998. Many of the same national and regional economic and
demographic factors that affect the housing industry generally
affect the manufactured housing industry. However, these factors
tend to impact manufactured home buyers to a greater degree than
buyers of site built homes. |
Each prospective purchaser of our common stock should consider
carefully these and the other risks discussed under Risk
Factors beginning on page 6 before investing in our
common stock.
This Offering
This prospectus covers the resale of up to
10,575,000 shares of our common stock. We issued and sold
1,075,000 of these shares on October 8, 2003, in a private
offering to Lehman Brothers Inc., which we refer to as Lehman
Brothers. We issued and sold 8,500,000 of these shares on
October 8, 2003 in a concurrent private placement to
several other institutional or accredited investors. We refer to
both of the transactions that occurred on October 8, 2003
as the October 2003 private placement. We issued and sold
1,000,000 of these shares on February 4, 2004 in a private
placement to an institutional investor. We refer to this
transaction as the February 2004 private placement. We were
advised by Lehman Brothers that the shares it purchased were
resold to qualified institutional buyers, as defined in
Rule 144A under the Securities Act of 1933, as amended
(Securities Act).
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Common stock offered by the selling stockholders |
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10,575,000 shares |
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Common stock outstanding as of May 17, 2005 |
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25,472,581 shares(1) |
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Use of proceeds |
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We will not receive any proceeds from the sale of the shares of
common stock offered by this prospectus. |
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Nasdaq National Market trading symbol |
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ORGN |
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(1) |
Excludes 260,500 shares reserved for issuance upon exercise
of outstanding options. |
Our Tax Status
We have elected to be taxed as a REIT under the Internal Revenue
Code. Provided we continue to qualify as a REIT, we generally
will not be subject to U.S. federal corporate income tax on
taxable income that we distribute to our stockholders. REITs are
subject to a number of organizational and operational
requirements, including a requirement that they currently
distribute at least 90% of their annual REIT taxable income. We
face the risk that we might not be able to comply with all of
the REIT requirements in the future. Failure to qualify as a
REIT would render us subject to U.S. federal income tax
(including any applicable alternative minimum tax) on our
taxable income at regular corporate rates, and distributions to
our stockholders would not be deductible. Even if we qualify for
taxation as a REIT, we may be subject to certain
2
U.S. federal, state, local and foreign taxes on our income
and property. See Material U.S. Federal Income Tax
Consequences.
Restrictions on Ownership of Our Stock
In order to facilitate our REIT election, our charter generally
prohibits any individual from directly or indirectly owning more
than 9.25% of the outstanding shares of any class or series of
our stock. Our board of directors has the authority under our
charter, subject to certain limitations, to exempt individuals
from this ownership restriction. We adopted this restriction to
promote compliance with the provisions of the Internal Revenue
Code that limit the degree to which ownership of a REIT may be
concentrated. See Description of Capital Stock and
Material Provisions of Delaware Law and Our Certificate of
Incorporation.
Dividend and Distribution Policy
In order to qualify for the tax benefits accorded to REITs under
the Internal Revenue Code, we must make distributions to our
stockholders each year in an amount equal to at least
(i) 90% of our REIT taxable income (before the deduction
for dividends paid and not including any net capital gains),
plus (ii) 90% of the excess of our net income from
foreclosure property over the tax imposed on such income by the
Internal Revenue Code, minus (iii) any excess non-cash
income. We refer to this amount as REIT taxable
income.
We intend to pay regular quarterly distributions to our
stockholders equal to at least 90% of our estimated REIT taxable
income for each quarter, although we may pay more. Differences
in timing between the receipt of income and the payment of
expenses and the effect of required debt amortization payments
could require us to borrow funds on a short-term basis, access
the capital markets or liquidate investments to meet this
distribution requirement. Until we are able to originate and
securitize a sufficient number of loans to achieve our desired
asset level and target leverage ratio, we may pay quarterly
distributions to our stockholders in excess of 100% of our REIT
taxable income. To the extent our distributions exceed our then
current and then accumulated earnings and profits as determined
for U.S. federal income tax purposes, such excess generally
will represent a return of capital for U.S. federal income
tax purposes. See Market Price of and Distributions on Our
Common Stock for the amounts of quarterly distributions
that we have paid since our inception.
The actual amount and timing of distributions will be at the
discretion of our board of directors and will depend upon our
actual results of operations.
Outstanding shares of our preferred stock have, and our board
may issue additional shares or classes of preferred stock with,
distribution rights superior to those of our common stock. This
could result in no distributions being paid on the common stock.
Selling Stockholders
The holders of all the shares of our common stock issued in our
October 2003 and February 2004 private placements were granted
registration rights pursuant to registration rights agreements
entered into in connection with the closing of the private
placements. All of the shares included in this offering are held
by such stockholders.
Our Structure
At formation, our founders, consisting of an affiliate of Sun
Communities, Inc. (Sun Communities), Bingham
Financial Services Corporation (Bingham), Woodward
Holding, LLC and Shiffman Family, LLC, contributed their
respective membership interests and warrants to purchase
membership interests in Origen Financial L.L.C. to us. None of
the founders received any monetary consideration or shares of
our common stock in exchange for their contributed membership
interests and warrants in Origen Financial L.L.C. For more
information regarding our formation, see Certain
Relationships and Related Transactions Our
Structure and Note B to Origen Financial, Inc.s
consolidated financial statements for the year ended
December 31, 2004 and period ended December 31, 2003
included elsewhere in this prospectus.
3
Summary Financial Information
The summary financial information presented below for Origen
Financial, Inc. is derived from the audited consolidated
financial statements of Origen Financial, Inc. for the period
ended December 31, 2003 and the year ended
December 31, 2004. The financial information presented
below for Origen Financial L.L.C. (our predecessor for
accounting purposes) is derived from the audited consolidated
financial statements of Origen Financial L.L.C. for the periods
indicated. The financial information presented below for Bingham
(Origen Financial L.L.C.s predecessor for accounting
purposes) is derived from the audited consolidated financial
statements of Bingham for the periods indicated.
The historical financial statements of Origen Financial L.L.C.
and Bingham represent the combined financial condition and
results of operations of those entities. We believe that the
businesses, financial statements and results of operations of
those entities are quantitatively different from ours. Those
entities results of operations reflect capital constraints
and corporate and business strategies, including commercial
mortgage loan origination and servicing, which are different
than ours. We have also elected to be taxed as a REIT.
Accordingly, we believe the historical financial results of
Origen Financial L.L.C. and Bingham are not indicative of our
future performance. In addition, since the financial information
presented below is only a summary and does not provide all of
the information contained in the financial statements from which
it is derived, including related notes, you should read
Managements Discussion and Analysis of Financial
Condition and Results of Operations, and the financial
statements, including related notes, contained elsewhere in this
prospectus.
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Bingham Financial | |
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Services | |
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Origen Financial, Inc. | |
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Origen Financial L.L.C. | |
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Corporation | |
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Period from | |
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Period from | |
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October 8 | |
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January 1 | |
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Year Ended | |
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Quarter Ended | |
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Year Ended | |
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through | |
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through | |
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Year Ended | |
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December 31, | |
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March 31, | |
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December 31, | |
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December 31, | |
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October 7, | |
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December 31, | |
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2005 | |
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2004 | |
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2003(1) | |
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2003 | |
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2002 | |
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2001 | |
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2000 | |
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(Unaudited) | |
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(Restated) | |
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(In thousands, except for per share data) | |
Operating Statement Data:
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Interest income on loans
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$ |
13,166 |
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$ |
42,479 |
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$ |
7,339 |
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$ |
16,398 |
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$ |
9,963 |
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$ |
9,493 |
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$ |
14,593 |
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Gain on sale and securitization of loans
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28 |
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2,719 |
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5,186 |
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27 |
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Servicing and other revenues
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3,280 |
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11,184 |
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2,880 |
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7,329 |
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7,703 |
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14,994 |
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10,866 |
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Total revenue
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16,446 |
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53,663 |
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10,219 |
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23,755 |
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20,385 |
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29,673 |
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25,486 |
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Interest expense
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5,410 |
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15,020 |
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2,408 |
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11,418 |
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5,935 |
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7,875 |
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14,202 |
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Provisions for loan loss, recourse liability and write down of
residual interests
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2,030 |
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10,210 |
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768 |
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9,849 |
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18,176 |
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18,118 |
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7,671 |
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Distribution of preferred interest
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1,662 |
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Other operating expenses
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7,999 |
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31,399 |
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5,546 |
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24,754 |
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25,461 |
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22,129 |
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28,242 |
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Total expenses
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15,439 |
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56,629 |
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8,722 |
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47,683 |
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49,572 |
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48,122 |
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50,115 |
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Income (loss) before income taxes
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1,007 |
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(2,966 |
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1,497 |
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(23,928 |
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(29,187 |
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(18,449 |
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(24,629 |
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Provision (benefit) for income taxes(2)
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1,245 |
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(8,374 |
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Income (loss) before cumulative effect of change in accounting
principle
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1,007 |
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(2,966 |
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1,497 |
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(23,928 |
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(29,187 |
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(19,694 |
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(16,255 |
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Cumulative effect of change in accounting principle
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Net Income (Loss)
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$ |
1,007 |
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$ |
(2,966 |
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$ |
1,497 |
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$ |
(23,928 |
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$ |
(29,187 |
) |
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$ |
(19,694 |
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$ |
(16,255 |
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Earning (loss) per share Diluted(3)
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$ |
0.04 |
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$ |
(0.14 |
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$ |
0.10 |
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$ |
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$ |
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$ |
(7.63 |
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$ |
(6.19 |
) |
|
Distributions declared per share
|
|
$ |
0.04 |
|
|
$ |
0.39 |
|
|
$ |
0.098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bingham Financial | |
|
|
|
|
|
|
|
|
|
|
|
|
Services | |
|
|
|
|
|
|
|
|
|
|
|
|
Corporation | |
|
|
|
|
|
|
| |
|
|
Origen Financial, Inc. | |
|
Origen Financial L.L.C. | |
|
|
|
|
| |
|
| |
|
|
|
|
|
|
Period from | |
|
Period from | |
|
|
|
|
|
|
|
|
October 8 | |
|
January 1 | |
|
|
|
Year Ended | |
|
|
Quarter Ended | |
|
Year Ended | |
|
through | |
|
through | |
|
Year Ended | |
|
December 31, | |
|
|
March 31, | |
|
December 31, | |
|
December 31, | |
|
October 7, | |
|
December 31, | |
|
| |
|
|
2005 | |
|
2004 | |
|
2003(1) | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
|
|
(Restated) | |
|
|
|
|
|
|
|
|
|
|
(In thousands, except for per share data and ratios) | |
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net of allowance for losses
|
|
$ |
630,244 |
|
|
$ |
563,268 |
|
|
$ |
368,040 |
|
|
$ |
279,300 |
|
|
$ |
173,764 |
|
|
$ |
126,591 |
|
|
$ |
98,633 |
|
|
Servicing rights
|
|
|
3,844 |
|
|
|
4,097 |
|
|
|
5,131 |
|
|
|
5,892 |
|
|
|
7,327 |
|
|
|
6,855 |
|
|
|
9,143 |
|
|
Retained interests in loan securitizations
|
|
|
724 |
|
|
|
724 |
|
|
|
749 |
|
|
|
785 |
|
|
|
5,833 |
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
32,277 |
|
|
|
32,277 |
|
|
|
32,277 |
|
|
|
18,332 |
|
|
|
18,332 |
|
|
|
|
|
|
|
|
|
|
Cash and other assets
|
|
|
85,470 |
|
|
|
82,181 |
|
|
|
37,876 |
|
|
|
22,894 |
|
|
|
22,492 |
|
|
|
33,646 |
|
|
|
40,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
752,559 |
|
|
$ |
682,547 |
|
|
$ |
444,073 |
|
|
$ |
327,203 |
|
|
$ |
227,748 |
|
|
$ |
167,092 |
|
|
$ |
147,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
523,372 |
|
|
|
455,914 |
|
|
|
277,441 |
|
|
|
273,186 |
|
|
|
196,031 |
|
|
|
122,999 |
|
|
|
113,617 |
|
|
Preferred interest in subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
23,626 |
|
|
|
23,167 |
|
|
|
24,312 |
|
|
|
22,345 |
|
|
|
21,413 |
|
|
|
53,335 |
|
|
|
23,424 |
|
|
Members/Stockholders Equity/Capital
|
|
|
205,561 |
|
|
|
203,466 |
|
|
|
142,320 |
|
|
|
(13,945 |
) |
|
|
10,304 |
|
|
|
(9,242 |
) |
|
|
10,840 |
|
Other Information Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(source/(use)) From operating activities
|
|
$ |
(69,461 |
) |
|
$ |
(210,179 |
) |
|
$ |
(95,357 |
) |
|
$ |
(124,461 |
) |
|
$ |
(80,646 |
) |
|
$ |
(63,264 |
) |
|
$ |
15,696 |
|
|
From investing activities
|
|
|
(677 |
) |
|
|
26,340 |
|
|
|
851 |
|
|
|
4,272 |
|
|
|
7,670 |
|
|
|
10,871 |
|
|
|
(911 |
) |
|
From financing activities
|
|
|
66,443 |
|
|
|
250,828 |
|
|
|
100,254 |
|
|
|
121,110 |
|
|
|
73,022 |
|
|
|
49,312 |
|
|
|
(11,264 |
) |
Selected Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets
|
|
|
0.57 |
% |
|
|
(0.52 |
)% |
|
|
1.43 |
% |
|
|
(8.52 |
)% |
|
|
(18.79 |
)% |
|
|
(15.68 |
)% |
|
|
(9.32 |
)% |
|
Return on average equity
|
|
|
1.97 |
% |
|
|
(1.56 |
)% |
|
|
4.21 |
% |
|
|
(1352.96 |
)% |
|
|
(91.29 |
)% |
|
|
(165.30 |
)% |
|
|
(80.90 |
)% |
|
Average equity to average assets
|
|
|
29.08 |
% |
|
|
33.03 |
% |
|
|
33.91 |
% |
|
|
0.63 |
% |
|
|
20.58 |
% |
|
|
4.22 |
% |
|
|
11.52 |
% |
|
|
(1) |
Origen Financial, Inc. began operations on October 8, 2003
as a REIT with Origen Financial L.L.C. as a wholly-owned
subsidiary. |
|
(2) |
As a REIT, Origen Financial, Inc. is not required to pay federal
corporate income taxes on its net income that is currently
distributed to its stockholders. As a limited liability company,
Origen Financial L.L.C. does not incur income taxes. Bingham was
taxed as a regular C corporation during the periods indicated. |
|
(3) |
As a limited liability company, Origen Financial L.L.C. did not
report earnings per share. |
5
RISK FACTORS
Our prospects are subject to certain uncertainties and risks.
Our future results could differ materially from current results,
and our actual results could differ materially from those
projected in forward-looking statements as a result of certain
risk factors. These risk factors include, but are not limited
to, those set forth below, other one-time events, and important
factors disclosed previously and from time to time in our other
filings with the Securities and Exchange Commission. This
prospectus contains certain forward-looking statements.
Risks Related to Our Business
|
|
|
We may not generate sufficient revenue to make or sustain
distributions to stockholders. |
We intend to distribute to our stockholders substantially all of
our REIT net taxable income each year so as to avoid paying
corporate income tax on our earnings and to qualify for the tax
benefits accorded to a REIT under the Internal Revenue Code.
Distributions will be made at the discretion of our board of
directors. Our ability to make and sustain cash distributions is
based on many factors, including the performance of our
manufactured housing loans, our ability to borrow at favorable
rates and terms, interest rate levels and changes in the yield
curve and our ability to use hedging strategies to insulate our
exposure to changing interest rates. Some of these factors are
beyond our control and a change in any such factor could affect
our ability to pay future distributions. We cannot assure our
stockholders that we will be able to pay or maintain
distributions in the future. We also cannot assure stockholders
that the level of distributions will increase over time and that
our loans will perform as expected or that the growth of our
loan servicing business will be sufficient to increase our
actual cash available for distribution to stockholders.
|
|
|
We may not have access to capital to meet our anticipated
needs. |
Our ability to achieve our investment objectives depends to a
significant extent on our ability to raise equity and to borrow
money in sufficient amounts and on sufficiently favorable terms
to earn incremental returns and on our ability to securitize our
loans. There can be no assurance that we will be able to obtain
such funding on terms favorable to us or at all. Even if such
funding is available, we may not be able to achieve the degree
of leverage we believe to be optimal due to decreases in the
proportion of the value of our assets that we can borrow
against, decreases in the market value of our assets, increases
in interest rates, changes in the availability of financing in
the market, conditions then applicable in the lending market and
other factors. Our inability to access capital could jeopardize
our ability to fund loan originations and continue operations.
|
|
|
We intend to incur indebtedness to fund our operations,
and there is no limit on the total amount of indebtedness that
we can incur. |
We intend to borrow against, or leverage, our assets
primarily through repurchase agreements, securitizations of
manufactured housing loans and secured and unsecured loans. The
terms of such borrowings may provide for us to pay a fixed or
adjustable rate of interest, and may provide for any term to
maturity that management deems appropriate. The total amount of
indebtedness we can incur is not expressly limited by our
certificate of incorporation or bylaws. Instead, management has
discretion as to the amount of leverage to be employed depending
on managements measurement of acceptable risk consistent
with the nature of the assets then held by us. We face the risk
that we might not be able to meet our debt service obligations
and, to the extent we cannot, we might be forced to liquidate
some of our assets at disadvantageous prices. Also, our debt
service payments will reduce the net income available for
distributions to stockholders. Our use of leverage amplifies the
risks associated with other risk factors, which could reduce our
net income or cause us to suffer a loss.
|
|
|
We may not be able to securitize our manufactured housing
loans or do so on favorable terms. |
We intend to securitize a substantial portion of the
manufactured housing loans we originate. We intend to account
for securitizations as secured financings. In a typical
securitization, we issue collateralized debt securities of a
subsidiary in multiple classes, which securities are secured by
an underlying portfolio of
6
manufactured housing loans owned by the subsidiary. Factors
affecting our ability to securitize loans and to do so
profitably, include:
|
|
|
|
|
conditions in the asset-backed securities markets generally; |
|
|
|
conditions in the manufactured housing asset-backed securities
markets specifically; |
|
|
|
the performance of the securities issued in connection with our
securitizations; |
|
|
|
the nominal interest rate and credit quality of our loans; |
|
|
|
our relationship with our bond and other investors in our
securities and loans; |
|
|
|
compliance of our loans with the eligibility requirements for a
particular securitization; |
|
|
|
our ability to adequately service our loans, including our
ability to maintain a servicer rating; |
|
|
|
adverse changes in state and federal regulations regarding
high-cost and predatory lending; and |
|
|
|
any material negative rating agency action pertaining to
certificates issued in our securitizations. |
In addition, federal income tax requirements applicable to REITs
may limit our ability to use particular types of securitization
structures.
If we are unable to securitize, or securitize profitably, the
manufactured housing loans that we originate and that we may
invest in from time to time, then our net revenues for the
duration of our investment in those manufactured housing loans
would decline, which would lower our earnings for the time the
loans remain in our portfolio. We cannot assure stockholders
that we will be able to complete loan securitizations in the
future on favorable terms, or at all.
|
|
|
Certain securitization structures may cause us to
recognize income for accounting and tax purposes without
concurrently receiving the associated cash flow. |
Certain securitizations are structured to build
overcollateralization over time with respect to the loans that
are the subject of the securitization or to accelerate the
payment on senior securities to enhance the credit ratings of
such securities. Accordingly, these structures may cause us to
recognize income without concurrently receiving the associated
cash flow. We have used such securitization structures in the
past and may use them in the future. These securitization
structures and the possible resulting mismatch between income
recognition and receipt of cash flow may require us to access
the capital markets at times which may not be favorable to us.
|
|
|
Our business may not be profitable in the future. |
We incurred a net loss of approximately $3.0 million during
the twelve months ended December 31, 2004. Origen Financial
L.L.C., which we acquired in October 2003, experienced net
losses in each year of its existence while growing its loan
origination platform and business, including net losses of
approximately $23.9 million for the period from
January 1, 2003 through October 7, 2003 and
$29.2 million for fiscal year 2002. We will need to
generate significant revenues to achieve and maintain
profitability. If we are unable to achieve and maintain
sufficient revenue growth, we may not be profitable in the
future. Even if we do achieve profitability, we may not be able
to sustain or increase profitability on a quarterly or annual
basis.
|
|
|
We depend on key personnel, the loss of whom could
threaten our ability to operate our business
successfully. |
Our future success depends, to a significant extent, upon the
continued services of Ronald A. Klein, our Chief Executive
Officer, J. Peter Scherer, our President, W. Anderson
Geater, Jr., our Chief Financial Officer, and Mark W.
Landschulz, our Executive Vice President, Portfolio Management.
Although we have entered into employment agreements with all of
these individuals, there is no guarantee that they will remain
employed with us. The market for skilled personnel, especially
those with the technical abilities we require, is currently very
competitive, and we must compete with much larger companies with
significantly greater
7
resources to attract and retain such personnel. The loss of
services of one or more key employees may harm our business and
our prospects.
|
|
|
Future acquisitions of loan portfolios, servicing
portfolios and other assets may not yield the returns we
expect. |
We expect to make future acquisitions or investments in loan
portfolios, servicing portfolios and bonds in outstanding
securitizations backed by manufactured housing loans. The
relevant economic characteristics of the assets we may acquire
in the future may not generate returns or may not meet a risk
profile that our investors find acceptable. Furthermore, we may
not be successful in executing our acquisition strategy.
|
|
|
Our profitability may be affected if we are unable to
effectively manage interest rate risk and leverage. |
We derive our income in part from the difference, or
spread, between the interest earned on loans and
interest paid on borrowings. In general, the wider the spread,
the more we earn. In addition, at any point in time there is an
optimal amount of leverage to employ in the business in order to
generate the highest rate of return to our stockholders. When
market rates of interest change, the interest we receive on our
assets and the interest we pay on our liabilities will
fluctuate. In addition, interest rate changes affect the optimal
amount of leverage to employ. This can cause increases or
decreases in our spread and can affect our income, require us to
modify our leverage strategy and affect returns to our
stockholders. Factors such as inflation, recession,
unemployment, money supply, international disorders, instability
in domestic and foreign financial markets and other factors
beyond our control may affect interest rates.
|
|
|
We may pay distributions that result in a return of
capital to stockholders, which may cause stockholders to realize
lower overall returns. |
Until we are able to originate and securitize a sufficient
number of loans to achieve our desired asset level and target
leverage ratio, we may pay quarterly distributions that result
in a return of capital to our stockholders. Any such return of
capital to our stockholders will reduce the amount of capital
available to us to originate and acquire manufactured home
loans, which may result in lower returns to our stockholders.
|
|
|
Some of our investments are illiquid and their value may
decrease. |
Some of our assets are and will continue to be relatively
illiquid. In addition, certain of the asset-backed securities
that we may acquire may include interests that have not been
registered under the relevant securities laws, resulting in a
prohibition against transfer, sale, pledge or other disposition
of those securities except in a transaction that is exempt from
the registration requirements of, or otherwise in accordance
with, those laws. Our ability to vary our portfolio in response
to changes in economic and other conditions, therefore, may be
relatively limited. No assurances can be given that the fair
market value of any of our assets will not decrease in the
future.
|
|
|
We may engage in hedging transactions, which can limit
gains and increase exposure to losses. |
Periodically, we have entered into interest rate swap agreements
in an effort to manage interest rate risk. An interest rate swap
is considered to be a hedging transaction designed to protect us
from the effect of interest rate fluctuations on our floating
rate debt and also to protect our portfolio of assets from
interest rate and prepayment rate fluctuations. We intend to use
hedging transactions, primarily interest rate swaps and caps, in
the future. The nature and timing of interest rate risk
management strategies may impact their effectiveness. Poorly
designed strategies may increase rather than mitigate risk. For
example, if we enter into hedging instruments that have higher
interest rates embedded in them as a result of the forward yield
curve, and at the end of the term of these hedging instruments
the spot market interest rates for the liabilities that we
hedged are actually lower, then we will have locked in higher
interest rates for our liabilities than would be available in
the spot market at the time and this could result in a narrowing
of our net interest rate margin or result in losses. In some
situations, we may sell assets or hedging instruments at a loss
in order to maintain adequate liquidity. There can be no
assurance that our hedging activities will have the desired
beneficial
8
impact on our financial condition or results of operations.
Moreover, no hedging activity can completely insulate us from
the risks associated with changes in interest rates and
prepayment rates.
|
|
|
The competition we face could adversely affect our
profitability. |
The manufactured housing finance industry is very fragmented.
The market is served by both traditional and non-traditional
consumer finance sources. Several of these financing sources are
larger than us and have greater financial resources. In
addition, some of the manufactured housing industrys
larger manufacturers maintain their own finance subsidiaries to
provide financing for purchasers of their manufactured houses.
Our largest competitor in the industry is Clayton Homes, Inc.,
through its subsidiary 21st Mortgage Corporation.
Traditional financing sources such as commercial banks, savings
and loans, credit unions and other consumer lenders, many of
which have significantly greater resources than us and may be
able to offer more attractive terms to potential customers, also
provide competition in our market. Competition among industry
participants can take many forms, including convenience in
obtaining a loan, amount and term of the loan, customer service,
loan-closing criteria, marketing/distribution channels, loan
origination fees and interest rates. To the extent any
competitor expands their activities in the manufactured housing
industry, we could be adversely affected.
|
|
|
The success and growth of our business will depend upon
our ability to adapt to and implement technological
changes. |
Our manufactured housing loan origination business is currently
dependent upon our ability to effectively develop relationships
with retailers, brokers, borrowers and other third parties and
to efficiently process loan applications and closings. The
origination process is becoming more dependent upon
technological advancement, such as the ability to process
applications over the Internet, accept electronic signatures, to
provide process status updates instantly and other
customer-expected conveniences that are cost-efficient to our
process. Implementing this new technology and becoming
proficient with it may also require significant capital
expenditures. As these requirements increase in the future, we
will have to fully develop these technological capabilities to
remain competitive or our business will be significantly harmed.
|
|
|
We may experience capacity constraints or system failures
that could damage our business. |
If our systems or third-party systems cannot be expanded to
support increased loan originations, acquisitions of loan
portfolios or additional servicing opportunities, or if such
systems fail to perform effectively, we could experience:
|
|
|
|
|
disruptions in servicing and originating loans; |
|
|
|
reduced borrower satisfaction; |
|
|
|
delays in the introduction of new loan services; or |
|
|
|
vulnerability to Internet hacker raids, |
any of which could impair our reputation, damage the Origen
brand, or otherwise have a material adverse effect on our
business, operating results and financial condition.
Our ability to provide high-quality service also depends on the
efficient and uninterrupted operation of our technology
infrastructure. Even though we have developed a redundant
infrastructure to protect our systems and operations, our
systems are vulnerable to damage or interruption from human
error, natural disasters, telecommunication failures, break-ins,
sabotage, failure to adequately document the operation of
software and hardware systems and procedures, computer viruses,
intentional acts of vandalism and similar events. If any of
these events were to occur, our business could be materially and
adversely affected. Although we maintain business interruption
insurance to compensate for losses that could occur for any of
these risks, such insurance may not be sufficient to cover a
loss.
9
|
|
|
If the prepayment rates for our manufactured housing loans
are higher than expected, our results of operations may be
significantly harmed. |
Prepayments of our manufactured housing loans, whether due to
refinancing, repayments, repossessions or foreclosures, in
excess of managements estimates could adversely affect our
future cash flow as a result of the resulting loss of any
servicing fee revenue and net interest income on such prepaid
loans. Prepayments can result from a variety of factors, many of
which are beyond our control, including changes in interest
rates and general economic conditions.
|
|
|
If we are unable to maintain our network of retailers and
brokers, our loan origination business will decrease. |
A significant majority of our originations of manufactured
housing loans comes from retailers and brokers. The retailers
and brokers with whom we do business are not contractually
obligated to do business with us. Further, our competitors also
have relationships with these retailers and brokers and actively
compete with us in our efforts to strengthen our retailer and
broker networks. Accordingly, we cannot assure stockholders that
we will be successful in maintaining our retailer and broker
networks, the failure of which could adversely affect our
ability to originate manufactured housing loans.
|
|
|
We may not realize the expected recovery rate on the
resale of a manufactured house upon its repossession or
foreclosure. |
Most states impose requirements and restrictions relating to
resales of repossessed manufactured houses and foreclosed
manufactured houses and land, and obtaining deficiency judgments
following such sales. In addition to these requirements and
restrictions, our ability to realize the expected recovery rate
upon such sales may be affected by depreciation or loss of or
damage to the manufactured house. Federal bankruptcy laws and
related state laws also may impair our ability to realize upon
collateral or enforce a deficiency judgment. For example, in a
Chapter 13 proceeding under federal bankruptcy law, a court
may prevent us from repossessing a manufactured house or
foreclosing on a manufactured house and land. As part of the
debt repayment plan, a bankruptcy court may reduce the amount of
our secured debt to the market value of the manufactured house
at the time of the bankruptcy, leaving us as a general unsecured
creditor for the remainder of the debt. A Chapter 7
bankruptcy debtor, under certain circumstances, may retain
possession of his or her house, while enforcement of our loan
may be limited to the value of our collateral.
Risks Related to the Manufactured Housing Industry
|
|
|
Manufactured housing loan borrowers may be relatively high
credit risks. |
Manufactured housing loans make up substantially our entire loan
portfolio. Typical manufactured housing loan borrowers may be
relatively higher credit risks due to various factors,
including, among other things, the manner in which borrowers
have handled previous credit, the absence or limited extent of
borrowers prior credit history, limited financial
resources, frequent changes in or loss of employment and changes
in borrowers personal or domestic situations that affect
their ability to repay loans. Consequently, the manufactured
housing loans we originate and have an ownership interest in
bear a higher rate of interest, have a higher probability of
default and may involve higher delinquency rates and greater
servicing costs relative to loans to more creditworthy
borrowers. Our profitability depends upon our ability to
properly evaluate the creditworthiness of borrowers and price
each loan accordingly and efficiently service the contracts by
limiting our delinquency and default rates and foreclosure and
repossession costs and by maximizing our recovery rates. To the
extent that aggregate losses on the resale of repossessed and
foreclosed houses exceed our estimates, our profitability will
be adversely affected.
Delinquency interrupts the flow of projected interest income
from a manufactured housing loan, and default can ultimately
lead to a loss if the net realizable value of the collateral or
real property securing the manufactured housing loan is
insufficient to cover the principal and interest due on the
loan. Also, our cost of financing and servicing a delinquent or
defaulted loan is generally higher than for a performing loan.
We bear the risk of delinquency and default on loans beginning
when we originate them and continuing even after we
10
sell loans with a retained interest or securitize them. We also
reacquire the risks of delinquency and default for loans that we
are obligated to repurchase. Repurchase obligations are
typically triggered in any sale or securitization if the loan
materially violates our representations or warranties. If we
experience higher-than-expected levels of delinquency or default
in pools of loans that we service, resulting in higher than
anticipated losses we may trigger termination of our servicing
rights, which would result in a loss of future servicing income
and damage to our reputation as a loan servicer.
We attempt to manage these risks with risk-based loan pricing
and appropriate underwriting policies and loan collection
methods. However, if such policies and methods are insufficient
to control our delinquency and default risks and do not result
in appropriate loan pricing, our business, financial condition,
liquidity and results of operations could be significantly
harmed.
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The manufactured housing industry has been in a downturn
since 1998. |
The manufactured housing industry historically has been cyclical
and is generally subject to many of the same national and
regional economic and demographic factors that affect the
housing industry generally. These factors, including consumer
confidence, inflation, regional population and employment
trends, availability of and cost of alternative housing, weather
conditions and general economic conditions, tend to impact
manufactured housing buyers to a greater degree than buyers of
traditional site built houses. In addition, sales of
manufactured houses typically peak during the spring and summer
seasons and decline to lower levels from mid-November through
February. Due to aggressive underwriting practices by some
industry lenders that led to increased defaults, decreased
recovery rates on repossessions, the continued excessive
inventory of repossessed houses and unfavorable volatility in
the secondary markets for manufactured housing loans, companies
in the manufactured housing finance business have generally not
been profitable since 1998. Some of the industrys largest
lenders have exited the business. Although we believe that our
business plan will be profitable in the long term, there can be
no assurance that we will in fact be profitable either in the
long term or the short term.
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Wide spreads between interest rates for manufactured
housing loans and traditional site built housing loans decrease
the relative demand for manufactured houses. |
In the current interest rate environment, traditional site built
houses have become more affordable relative to manufactured
houses. If the difference between interest rates for
manufactured housing loans and traditional site built housing
loans does not decrease, demand for manufactured housing loans
may decrease, which would decrease our loan originations.
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Any substantial economic slowdown could increase
delinquencies, defaults, repossessions and foreclosures and
reduce our ability to originate loans. |
Periods of economic slowdown or recession may be accompanied by
decreased demand for consumer credit, decreased real estate
values, and an increased rate of delinquencies, defaults,
repossessions and foreclosures. We originate loans to some
borrowers who make little or no down payment, resulting in high
loan-to-value ratios. A lack of equity in the house may reduce
the incentive a borrower has to meet his payment obligations
during periods of financial hardship, which might result in
higher delinquencies, defaults, repossessions and foreclosures.
These factors would reduce our ability to originate loans and
increase our losses on loans in which we have a residual or
retained interest. In addition, loans we originate during an
economic slowdown may not be as valuable to us because potential
investors in or purchasers of our loans might reduce the
premiums they pay for the loans or related bonds to compensate
for any increased risks arising during such periods. Any
sustained increase in delinquencies, defaults, repossessions or
foreclosures is likely to significantly harm the pricing of our
future loan sales and securitizations and also our ability to
finance our loan originations.
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Our business may be significantly harmed by a slowdown in
the economies of California or Texas, in each of which we
conduct a significant amount of business. |
We have no geographic concentration limits on our ability to
originate, purchase or service loans. As a result, a significant
portion of the manufactured housing loans we have originated,
purchased or serviced historically has been in California and
Texas. For the year ended December 31, 2004, approximately
30% and 11% by principal balance and 19% and 12% by number of
loans, respectively, of the loans we originated were in
California and Texas. An overall decline in the economy or the
residential real estate market in California or Texas or in any
other state in which we have a high concentration of loans could
decrease the value of manufactured houses and increase the risk
of delinquency. This, in turn, would increase the risk of
default, repossession or foreclosure on manufactured housing
loans in our portfolio or that we have sold to others.
Geographic concentration could adversely affect our ability to
securitize pools of manufactured housing loans.
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Depreciation in the value of manufactured houses may
decrease sales of new manufactured houses and lead to increased
defaults and delinquencies. |
Over the last several years, the value of manufactured houses
has tended to depreciate over time. This depreciation makes
pre-owned houses, even relatively new ones, significantly less
expensive than new manufactured houses, thereby decreasing the
demand for new houses, which negatively affects the manufactured
housing lending industry. Additionally, rapid depreciation may
cause the fair market value of borrowers manufactured
houses to be less than the outstanding balance of their loans.
In cases where borrowers have negative equity in their houses,
they may not be able to resell their manufactured houses for
enough money to repay their loans and may have less incentive to
continue to repay their loans, which may lead to increased
delinquencies and defaults.
Tax Risks of Our Business and Structure
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Distribution requirements imposed by law limit our
flexibility in executing our business plan, and we cannot assure
stockholders that we will have sufficient funds to meet our
distribution obligations. |
To maintain our status as a REIT for federal income tax
purposes, we generally are required to distribute to our
stockholders at least 90% of our REIT taxable income each year.
REIT taxable income is determined without regard to the
deduction for dividends paid and by excluding net capital gains.
We are also required to pay federal income tax at regular
corporate rates to the extent that we distribute less than 100%
of our taxable income (including net capital gains) each year.
In addition, to the extent such income is not subject to
corporate tax, we are required to pay a 4% nondeductible excise
tax on the amount, if any, by which certain distributions we pay
with respect to any calendar year are less than the sum of 85%
of our ordinary income for that calendar year, 95% of our
capital gain net income for the calendar year and any amount of
our income that was not distributed in prior years.
We intend to distribute to our stockholders at least 90% of our
REIT taxable net income each year in order to comply with the
distribution requirements of the Internal Revenue Code and to
avoid federal income tax and the nondeductible excise tax.
Differences in timing between the receipt of income and the
payment of expenses in arriving at REIT taxable net income and
the effect of required debt amortization payments could require
us to borrow funds on a short-term basis, access the capital
markets or liquidate investments to meet the distribution
requirements that are necessary to achieve the federal income
tax benefits associated with qualifying as a REIT even if our
management believes that it is not in our best interest to do
so. We cannot assure our stockholders that any such borrowing or
capital market financing will be available to us or, if
available to us, will be on terms that are favorable to us.
Borrowings incurred to pay distributions will reduce the amount
of cash available for operations. Any inability to borrow such
funds or access the capital markets, if necessary, could
jeopardize our REIT status and have a material adverse effect on
our financial condition.
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We may suffer adverse tax consequences and be unable to
attract capital if we fail to qualify as a REIT. |
Since our taxable period ended December 31, 2003, we have
been organized and operated, and intend to continue to operate,
so as to qualify for taxation as a REIT under the Internal
Revenue Code. Although we
12
believe that we have been and will continue to be organized and
have operated and will continue to operate so as to qualify for
taxation as a REIT, we cannot assure stockholders that we have
been or will continue to be organized or operated in a manner to
so qualify or remain so qualified. Qualification as a REIT
involves the satisfaction of numerous requirements (some on an
annual and quarterly basis) established under highly technical
and complex Code provisions for which there are only limited
judicial or administrative interpretations, and involves the
determination of various factual matters and circumstances not
entirely within our control. In addition, frequent changes may
occur in the area of REIT taxation, which require us continually
to monitor our tax status.
If we fail to qualify as a REIT in any taxable year, we would be
subject to federal income tax (including any applicable
alternative minimum tax) on our taxable income at regular
corporate rates. Moreover, unless entitled to relief under
certain statutory provisions, (generally requiring reasonable
cause for any REIT testing violations), we also would be
disqualified from treatment as a REIT for the four taxable years
following the year during which qualification was lost. This
treatment would reduce our net earnings available for investment
or distribution to stockholders because of the additional tax
liability to us for the years involved. In addition,
distributions to stockholders would no longer be required to be
made. Even if we qualify for and maintain our REIT status, we
will be subject to certain federal, state and local taxes on our
property and certain of our operations.
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Our use of taxable REIT subsidiaries will cause income
from our servicing and insurance activities to be subject to
corporate level tax and may cause us to restrict our business
activities. |
To preserve our qualification as a REIT, we conduct all of our
servicing and insurance activities through one or more taxable
REIT subsidiaries. In addition, we may conduct some of our
securitization transactions through such taxable REIT
subsidiaries. A taxable REIT subsidiary is subject to federal
income tax, and state and local income tax where applicable, as
a regular C corporation. Accordingly, net income
from our servicing and insurance activities is subject to
corporate level tax. In addition, under the Internal Revenue
Code, no more than 20% of the total value of the assets of a
REIT may be represented by securities of one or more taxable
REIT subsidiaries. This limitation may cause us to restrict the
use of certain securitization transactions and limit the growth
of our servicing and insurance subsidiaries with the potential
for decreased revenue.
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Our ability to securitize our loans is limited due to
various federal income tax rules applicable to REITs. |
Under the Internal Revenue Code, a REIT is subject to a 100% tax
on its net income derived from prohibited
transactions. The phrase prohibited
transactions refers to the sales of inventory or assets
held primarily for sale to customers in the ordinary course of a
taxpayers business. A taxpayer who engages in such sales
is typically referred to as a dealer. The Internal Revenue
Service has taken the position that if a REIT securitizes loans
using a real estate mortgage investment conduit
(REMIC) structure, then such activity will cause the
REIT to be treated as a dealer, with the result that the 100%
tax would apply to the net income generated from such activity.
If we securitize loans using a REMIC, we intend to do so through
one or more taxable REIT subsidiaries, which will not be subject
to such 100% tax, but will be taxable at regular corporate
federal income tax rates. We also may securitize mortgage assets
through the issuance of non-REMIC securities, whereby we retain
an equity interest in the mortgage-backed assets used as
collateral in the securitization transaction. The issuance of
any such instruments could result, however, in a portion of our
assets being classified as a taxable mortgage pool,
which would be treated as a separate corporation for
U.S. federal income tax purposes, which in turn could
adversely affect the treatment of our stockholders for federal
income tax purposes or jeopardize our status as a REIT.
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We may pay distributions that are in excess of our current
and accumulated earnings and profits, which may cause our
stockholders to incur adverse federal income tax
consequences. |
We may pay quarterly distributions to our stockholders in excess
of 100% of our estimated REIT taxable income. Distributions in
excess of our current and accumulated earnings and profits are
not treated as a dividend and generally will not be taxable to a
taxable U.S. stockholder under current U.S. federal
income tax
13
law to the extent those distributions do not exceed the
stockholders adjusted tax basis in his or her common
stock. Instead, any such distribution generally will constitute
a return of capital, which will reduce the stockholders
adjusted basis and could result in the recognition of increased
gain or decreased loss to the stockholder upon a sale of the
stockholders stock.
Risks Related to Our Organization and Structure
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Our rights and the rights of our stockholders to take
action against our directors are limited, which could limit
stockholders recourse in the event of certain
actions. |
Our certificate of incorporation limits the liability of our
directors for money damages for breach of a fiduciary duty as a
director, except under limited circumstances. As a result, we
and our stockholders may have more limited rights against our
directors than might otherwise exist. Our bylaws require us to
indemnify each director or officer who has been successful, on
the merits or otherwise, in the defense of any proceeding to
which he or she is made a party by reason of his or her service
to us. In addition, we may be obligated to fund the defense
costs incurred by our directors and officers.
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Our board of directors may change our investment and
operational policies and practices without a vote of our
stockholders, which limits stockholder control of our policies
and practices. |
Our major policies, including our policies and practices with
respect to investments, financing, growth, debt capitalization,
REIT qualification and distributions, are determined by our
board of directors. Although we have no present intention to do
so, our board of directors may amend or revise these and other
policies from time to time without a vote of our stockholders.
Accordingly, our stockholders will have limited control over
changes in our policies. Our organizational documents do not
limit the amount of indebtedness that we may incur. Although we
intend to maintain a balance between our total outstanding
indebtedness and the value of our assets, we could alter this
balance at any time. If we become highly leveraged, then the
resulting increase in debt service could adversely affect our
ability to make payments on our outstanding indebtedness and
harm our financial condition.
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Certain provisions of Delaware law and our governing
documents may make it difficult for a third-party to acquire
us. |
9.25% Ownership Limit. In order to qualify and maintain
our qualification as a REIT, not more than 50% of the
outstanding shares of our capital stock may be owned, directly
or indirectly, by five or fewer individuals. Thus, ownership of
more than 9.25% of our outstanding shares of common stock by any
single stockholder has been restricted, with certain exceptions,
for the purpose of maintaining our qualification as a REIT under
the Internal Revenue Code.
The 9.25% ownership limit, as well as our ability to issue
additional shares of common stock or shares of other stock
(which may have rights and preferences over the common stock),
may discourage a change of control of the company and may also:
(1) deter tender offers for the common stock, which offers
may be advantageous to stockholders; and (2) limit the
opportunity for stockholders to receive a premium for their
common stock that might otherwise exist if an investor were
attempting to assemble a block of common stock in excess of
9.25% of our outstanding shares or otherwise effect a change of
control of the company.
Preferred Stock. Our charter authorizes the board of
directors to issue up to 10,000,000 shares of preferred
stock and to establish the preferences and rights (including the
right to vote and the right to convert into shares of common
stock) of any shares issued. The power to issue preferred stock
could have the effect of delaying or preventing a change in
control of the company even if a change in control were in the
stockholders interest.
Section 203. Section 203 of the Delaware
General Corporation Law is applicable to certain types of
corporate takeovers. Subject to specified exceptions listed in
this statute, Section 203 of the Delaware General
Corporation Law provides that a corporation may not engage in
any business combination with any interested
stockholder for a three-year period following the date
that the stockholder becomes an interested
14
stockholder. Although these provisions do not apply in certain
circumstances, the provisions of this section could discourage
offers from third parties to acquire us and increase the
difficulty of successfully completing this type of offer.
Other Risks
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We operate in a highly regulated industry and failure to
comply with applicable laws and regulations at the federal,
state or local level could negatively affect our
business. |
Currently, we originate both chattel, or home-only, loans and
loans collateralized by both the manufactured house and real
property, or land-home loans, in 42 states. We also
currently conduct servicing operations in 43 states. Most
states where we operate require that we comply with a complex
set of laws and regulations. These laws, which include
installment sales laws, consumer lending laws and mortgage
lending laws, differ from state to state, making uniform
operations difficult. Most states periodically conduct
examinations of our contracts and loans for compliance with
state laws. In addition to state laws regulating our business,
our consumer lending and servicing activities are subject to
numerous federal laws and the rules and regulations promulgated
thereunder.
These federal and state laws and regulations and other laws and
regulations affecting our business, including zoning, density
and development requirements and building and environmental
rules and regulations, create a complex framework in which we
originate and service manufactured housing loans. Moreover,
because these laws and regulations are constantly changing, it
is difficult to comprehensively identify, accurately interpret,
properly program our technology systems and effectively train
our personnel with respect to all of these laws and regulations,
thereby potentially increasing our exposure to the risks of
noncompliance with these laws and regulations. As a result, we
have not always been, and may not always be, in compliance with
these requirements, including licensing requirements.
Our failure to comply with these laws and regulations can lead
to:
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defaults under contracts we have with third parties, which could
cause those contracts to be terminated or renegotiated on less
favorable terms; |
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civil fines and penalties and criminal liability; |
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loss of licenses, exemptions or other approved status, which
could in turn require us temporarily or permanently to cease our
affected operations; |
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demands for indemnification, loan repurchases or modification of
our loans; |
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class action lawsuits; and |
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administrative enforcement actions. |
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The increasing number of federal, state and local
anti-predatory lending laws may restrict our ability
to originate or increase our risk of liability with respect to
certain manufactured housing loans and could increase our cost
of doing business. |
In recent years, several federal, state and local laws, rules
and regulations have been adopted, or are under consideration,
that are intended to eliminate so-called predatory
lending practices. These laws, rules and regulations impose
certain restrictions on loans on which certain points and fees
or the annual percentage rate, or APR, exceeds specified
thresholds. Some of these restrictions expose a lender to risks
of litigation and regulatory sanction no matter how carefully a
loan is underwritten. In addition, an increasing number of these
laws, rules and regulations seek to impose liability for
violations on purchasers of loans, regardless of whether a
purchaser knew of or participated in the violation. It is
against our policy to engage in predatory lending practices and
we have generally avoided originating loans that exceed the APR
or points and fees thresholds of these laws, rules
and regulations. These laws, rules and regulations may prevent
us from making certain loans and may cause us to reduce the APR
or the points and fees on loans that we do make. In addition,
the difficulty of managing the risks presented by these laws,
rules and regulations may decrease the availability of
15
warehouse financing and the overall demand for our loans in the
secondary market, making it difficult to fund, sell or
securitize our loans. If nothing else, the growing number of
these laws, rules and regulations will increase our cost of
doing business as we are required to develop systems and
procedures to ensure that we do not violate any aspect of these
new requirements.
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We may be subject to fines, judgments or other penalties
based upon the conduct of third parties with whom we do
business. |
The majority of our business consists of purchasing from
retailers retail installment sales contracts for the sale of a
manufactured house. These contracts are subject to the Federal
Trade Commissions Holder Rule, which makes us
subject generally to the same claims and defenses that a
consumer might have against the retailer that sold the consumer
his or her manufactured house up to the value of the payments
made by the consumer. Increasingly federal and state agencies,
as well as private plaintiffs, have sought to impose third-party
or assignee liability on purchasers or originators of loans even
where the Holder Rule and similar laws do not specifically
apply. We attempt to mitigate our risk for this liability by
ending our relationships with retailers whose practices we
believe may put us at risk and limiting our retailer network to
retailers that have the ability to indemnify us against these
types of claims. Although we routinely seek indemnification from
retailers in these situations, there is no assurance that we
will not be liable for these types of claims or that the
retailer will indemnify us if we are held liable.
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Common stock eligible for future sale may have adverse
effects on our share price. |
We cannot predict the effect, if any, of future sales of shares
of our common stock, or the availability of shares for future
sales, or the market price of our common stock. Sales of
substantial amounts of common stock (including
260,500 shares of common stock issuable upon the exercise
of currently outstanding options, and up to 848,000 restricted
shares issued under our 2003 Equity Incentive Plan), or the
perception that these sales could occur, may adversely affect
prevailing market prices for our common stock. We also may issue
from time to time additional shares of common stock and we may
grant registration rights in connection with these issuances.
Sales of substantial amounts of shares of common stock or the
perception that these sales could occur may adversely affect the
prevailing market price for our common stock. In addition, the
sale of these shares could impair our ability to raise capital
through a sale of additional equity securities.
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Market interest rates may affect the value of our
securities. |
One of the factors that investors may consider in deciding
whether to buy or sell our securities is our distribution rate
as a percentage of our share price, relative to market interest
rates. If market interest rates increase, prospective investors
may desire a higher distribution or interest rate on our
securities or seek securities paying higher distributions or
interest. It is likely that the public valuation of our common
stock will be based primarily on the earnings that we derive
from the difference between the interest earned on our loans
less net credit losses and the interest paid on borrowed funds.
As a result, interest rate fluctuations and capital market
conditions can affect the market value of our common stock.
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We will be subject to significant financial penalties if
this registration statement is not maintained effective for its
prescribed period of time. |
Under the terms of the registration rights agreements entered
into in connection with the closings of our October 2003 and
February 2004 private placements, we are obligated to maintain
the effectiveness of this registration statement for a
prescribed time period. If we do not comply with this
obligation, we must pay liquidated damages with respect to each
outstanding share of common stock affected for the duration of
the registration default. The liquidated damages will be payable
in cash quarterly, in arrears within 10 days after the end
of each quarter. The liquidated damages will accrue during the
first 90 days at a daily rate of $0.25 per share of
common stock per year. The liquidated damages will escalate at
the end of each of the first three 90 day periods after
default up to a maximum daily rate of $1.00 per share of
common stock per year. Any payment of these liquidated damages
could adversely affect our financial position, as well as our
ability to continue to pay distributions.
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The market price of our common stock could be volatile and
could decline substantially. |
The market price of our common stock may be highly volatile and
could be subject to wide fluctuations. Some of the factors that
could negatively affect our share price or result in
fluctuations in the price of our common stock include:
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actual or anticipated variations in our quarterly operating
results; |
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changes in our earnings estimates or publication of research
reports about us or the manufactured home industry; |
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increases in market interest rates that may lead purchasers of
our shares to demand a higher yield; |
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changes in market valuations of similar companies; |
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adverse market reaction to any increased indebtedness we incur
in the future; |
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additions or departures of key management personnel; |
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actions by institutional stockholders; |
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speculation in the press or investment community; and |
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general market and economic conditions. |
In addition, the stock market has experienced extreme price and
volume fluctuations that have affected the market price of many
companies in industries similar or related to ours and that have
been unrelated to these companies operating performances.
These broad market fluctuations could reduce the market price of
our common stock. Furthermore, our operating results and
prospects may be below the expectations of public market
analysts and investors, which could lead to a material decline
in the market price of our common stock.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains various forward-looking
statements within the meaning of the Securities Act and
the Securities Exchange Act of 1934 (Exchange Act),
and we intend that such forward-looking statements will be
subject to the safe harbors created thereby. For this purpose,
any statements contained in this prospectus that relate to
prospective events or developments are deemed to be
forward-looking statements. Words such as believes,
forecasts, anticipates,
intends, plans, expects,
will and similar expressions are intended to
identify forward-looking statements. Forward-looking statements
in this prospectus are contained under the headings
Summary, Risk Factors, Our
Business and elsewhere. These forward-looking statements
reflect our current views with respect to future events and
financial performance, but involve known and unknown risks and
uncertainties, both general and specific to the matters
discussed in this prospectus. These risks and uncertainties may
cause our actual results to be materially different from any
future results expressed or implied by such forward-looking
statements. Such risks and uncertainties include those found in
the section entitled Risk Factors and the following:
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the performance of our manufactured home loans; |
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our ability to borrow at favorable rates and terms; |
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the supply of manufactured home loans; |
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interest rate levels and changes in the yield curve (which is
the curve formed by the differing Treasury rates paid on one,
two, three, five, ten and 30 year term debt); |
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our ability to use hedging strategies to insulate our exposure
to changing interest rates; |
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changes in, and the costs associated with complying with,
federal, state and local regulations, including consumer finance
and housing regulations; |
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applicable laws, including federal income tax laws; and |
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general economic conditions in the markets in which we operate. |
All forward-looking statements included in this prospectus are
based on information available to us on the date of this
prospectus. We do not intend to update or revise any
forward-looking statements that we make in this prospectus or
other documents, reports, filings or press releases, whether as
a result of new information, future events or otherwise.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of
common stock offered by this prospectus. The proceeds from this
offering are solely for the account of the selling stockholders.
MARKET PRICE OF AND DISTRIBUTIONS ON OUR COMMON STOCK
Market Information
Our common stock has been listed on the Nasdaq National Market
(Nasdaq) since May 5, 2004 under the symbol
ORGN. On April 29, 2005, the closing sales
price of the common stock was $7.29 and the common stock was
held by approximately 64 holders of record. The following table
presents the per share high and low bid prices of our common
stock for the periods indicated as reported by the Nasdaq
National Market. The stock prices reflect inter-dealer prices,
do not include retail mark-ups, mark-downs or commissions and
may not necessarily represent actual transactions.
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Fiscal Year Ended December 31, 2004
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Period from May 5, 2004 through June 30, 2004
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$ |
8.33 |
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$ |
7.50 |
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Third quarter
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$ |
8.15 |
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$ |
6.96 |
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Fourth quarter
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$ |
7.80 |
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$ |
6.67 |
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Fiscal Year Ended December 31, 2005
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First quarter
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$ |
8.75 |
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$ |
6.65 |
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Second quarter (through May 17, 2005)
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$ |
7.47 |
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$ |
6.58 |
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Distributions and Distribution Policy
In order to qualify for the tax benefits accorded to REITs under
the Internal Revenue Code, we must, and we intend to, make
distributions to our stockholders each year in an amount at
least equal to (i) 90% of our REIT taxable income (before
the deduction for dividends paid and not including any net
capital gain), plus (ii) 90% of the excess of our net
income from foreclosure property over the tax imposed on such
income by the Internal Revenue Code, minus (iii) any excess
non-cash income. We refer to this amount as REIT taxable
income. See Material U.S. Federal Income Tax
Consequences Annual Distribution Requirement.
The following table presents the distributions per share that
were paid with respect to each quarter since our formation in
October 2003.
|
|
|
|
|
|
|
Distribution per share | |
|
|
| |
Fiscal Year Ended December 31, 2003
|
|
|
|
|
Period from October 8, 2003 through December 31, 2003
|
|
$ |
0.098 |
|
Fiscal Year Ended December 31, 2004
|
|
|
|
|
First quarter
|
|
$ |
0.040 |
|
Second quarter
|
|
$ |
0.060 |
|
Third quarter
|
|
$ |
0.250 |
|
Fourth quarter
|
|
$ |
0.040 |
|
Fiscal Year Ended December 31, 2005
|
|
|
|
|
First quarter
|
|
$ |
0.060 |
|
18
Differences in timing between the receipt of income and the
payment of expenses and the effect of required debt amortization
payments could require us to borrow funds on a short-term basis,
access the capital markets or liquidate investments to meet this
distribution requirement. Until we are able to originate and
securitize a sufficient number of loans to achieve our desired
asset level and target leverage ratio, we may pay quarterly
distributions to our stockholders in excess of 100% of our
estimated REIT taxable income. To the extent out distributions
exceed our then current and then accumulated earnings and
profits as determined for U.S. federal income tax purposes,
such excess generally will represent a return of capital for
U.S. federal income tax purposes. Distributions in excess
of our current and accumulated earnings and profits and not
treated as a dividend will not be taxable to a taxable
U.S. stockholder under current U.S. federal income tax
law to the extent those distributions do not exceed the
stockholders adjusted tax basis in his or her common
stock, but will rather reduce such adjusted basis. Therefore,
the gain (or loss) recognized on the sale of that common stock
or upon our liquidation will be increased (or decreased)
accordingly. To the extent those distributions exceed a taxable
U.S. stockholders adjusted tax basis in his or her
common stock, they generally will be treated as a capital gain
realized from the taxable disposition of those shares. For a
more complete discussion of the tax treatment of distributions
to holders of our common stock, see Material
U.S. Federal Income Tax Consequences.
The actual amount and timing of distributions will be at the
discretion of our board of directors and will depend upon our
actual results of operations, including:
|
|
|
|
|
the performance of our manufactured housing loans; |
|
|
|
our ability to borrow at favorable rates and terms, including
our ability to securitize manufactured housing loans we
originate or purchase; |
|
|
|
interest rate levels and changes in the yield curve; and |
|
|
|
our ability to use hedging strategies to insulate our exposure
to changing interest rates. |
To the extent not inconsistent with maintaining our REIT status,
we may maintain accumulated earnings of our taxable REIT
subsidiaries in those subsidiaries.
Outstanding shares of our Series A Cumulative Redeemable
Preferred Stock have distribution rights superior to our common
stock. Our board of directors has the authority to issue
additional classes and shares of preferred stock with
distribution rights superior to those of our common stock. See
Description of Capital Stock and Material Provisions of
Delaware Law and Our Certificate of Incorporation. This
could result in no distributions being paid on the common stock.
In the future, our board of directors may elect to adopt a
dividend reinvestment plan.
Equity Compensation Plan Information
The following table reflects information about the securities
authorized for issuance under our equity compensation plans as
of December 31, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities | |
|
|
|
|
|
|
Remaining Available for | |
|
|
|
|
|
|
Future Issuance Under | |
|
|
Number of Securities to | |
|
Weighted-Average | |
|
Equity Compensation | |
|
|
be Issued Upon Exercise | |
|
Exercise Price of | |
|
Plans (Excluding | |
|
|
of Outstanding Options, | |
|
Outstanding Options, | |
|
Securities Reflected in | |
Plan Category |
|
Warrants and Rights | |
|
Warrants and Rights | |
|
First Column) | |
|
|
| |
|
| |
|
| |
Equity compensation plans approved by shareholders
|
|
|
267,500 |
|
|
$ |
10.00 |
|
|
|
901,848 |
|
Equity compensation plans not approved by shareholders
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
TOTAL
|
|
|
267,500 |
|
|
$ |
10.00 |
|
|
|
901,848 |
|
19
SELECTED FINANCIAL INFORMATION
The selected financial information presented below for Origen
Financial, Inc. is derived from the audited consolidated
financial statements of Origen Financial, Inc. for the period
ended December 31, 2003 and the year ended
December 31, 2004. The financial information presented
below for Origen Financial L.L.C. (our predecessor for
accounting purposes) is derived from the audited consolidated
financial statements of Origen Financial L.L.C. for the periods
indicated. The financial information presented below for Bingham
(Origen Financial L.L.C.s predecessor for accounting
purposes) is derived from the audited consolidated financial
statements of Bingham for the periods indicated.
The historical financial statements of Origen Financial L.L.C.
and Bingham represent the combined financial condition and
results of operations of those entities. We believe that the
businesses, financial statements and results of operations of
those entities are quantitatively different from ours. Those
entities results of operations reflect capital constraints
and corporate and business strategies, including commercial
mortgage loan origination and servicing, which are different
than ours. We have also elected to be taxed as a REIT.
Accordingly, we believe the historical financial results of
Origen Financial L.L.C. and Bingham are not indicative of our
future performance. In addition, because the financial
information presented below is only a summary and does not
provide all of the information contained in the financial
statements from which it is derived, including related notes,
you should read Managements Discussion and Analysis
of Financial Condition and Results of Operations, and the
financial statements, including related notes, contained
elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bingham Financial | |
|
|
|
|
|
|
Services | |
|
|
Origen Financial, Inc. | |
|
Origen Financial L.L.C. | |
|
Corporation | |
|
|
| |
|
| |
|
| |
|
|
|
|
Period from | |
|
Period from | |
|
|
|
|
|
|
|
|
October 8 | |
|
January 1 | |
|
|
|
Year Ended | |
|
|
Quarter Ended | |
|
Year Ended | |
|
through | |
|
through | |
|
Year Ended | |
|
December 31, | |
|
|
March 31, | |
|
December 31, | |
|
December 31, | |
|
October 7, | |
|
December 31, | |
|
| |
|
|
2005 | |
|
2004 | |
|
2003(1) | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
|
|
(Restated) | |
|
|
|
|
|
|
|
|
|
|
(In thousands, except for per share data) | |
Operating Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on loans
|
|
$ |
13,166 |
|
|
$ |
42,479 |
|
|
$ |
7,339 |
|
|
$ |
16,398 |
|
|
$ |
9,963 |
|
|
$ |
9,493 |
|
|
$ |
14,593 |
|
|
Gain on sale and securitization of loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28 |
|
|
|
2,719 |
|
|
|
5,186 |
|
|
|
27 |
|
|
Servicing and other revenues
|
|
|
3,280 |
|
|
|
11,184 |
|
|
|
2,880 |
|
|
|
7,329 |
|
|
|
7,703 |
|
|
|
14,994 |
|
|
|
10,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
16,446 |
|
|
|
53,663 |
|
|
|
10,219 |
|
|
|
23,755 |
|
|
|
20,385 |
|
|
|
29,673 |
|
|
|
25,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
5,410 |
|
|
|
15,020 |
|
|
|
2,408 |
|
|
|
11,418 |
|
|
|
5,935 |
|
|
|
7,875 |
|
|
|
14,202 |
|
|
Provisions for loan loss, recourse liability and write down of
residual interests
|
|
|
2,030 |
|
|
|
10,210 |
|
|
|
768 |
|
|
|
9,849 |
|
|
|
18,176 |
|
|
|
18,118 |
|
|
|
7,671 |
|
|
Distribution of preferred interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses
|
|
|
7,999 |
|
|
|
31,399 |
|
|
|
5,546 |
|
|
|
24,754 |
|
|
|
25,461 |
|
|
|
22,129 |
|
|
|
28,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
15,439 |
|
|
|
56,629 |
|
|
|
8,722 |
|
|
|
47,683 |
|
|
|
49,572 |
|
|
|
48,122 |
|
|
|
50,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
1,007 |
|
|
|
(2,966 |
) |
|
|
1,497 |
|
|
|
(23,928 |
) |
|
|
(29,187 |
) |
|
|
(18,449 |
) |
|
|
(24,629 |
) |
|
Provision (benefit) for income taxes(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,245 |
|
|
|
(8,374 |
) |
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
|
1,007 |
|
|
|
(2,966 |
) |
|
|
1,497 |
|
|
|
(23,928 |
) |
|
|
(29,187 |
) |
|
|
(19,694 |
) |
|
|
(16,255 |
) |
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$ |
1,007 |
|
|
$ |
(2,966 |
) |
|
$ |
1,497 |
|
|
$ |
(23,928 |
) |
|
$ |
(29,187 |
) |
|
$ |
(19,694 |
) |
|
$ |
(16,255 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning (loss) per share Diluted(3)
|
|
$ |
0.04 |
|
|
$ |
(0.14 |
) |
|
$ |
0.10 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(7.63 |
) |
|
$ |
(6.19 |
) |
|
Distributions declared per share
|
|
$ |
0.04 |
|
|
$ |
0.39 |
|
|
$ |
0.098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bingham Financial | |
|
|
|
|
|
|
Services | |
|
|
Origen Financial, Inc. | |
|
Origen Financial L.L.C. | |
|
Corporation | |
|
|
| |
|
| |
|
| |
|
|
|
|
Period from | |
|
Period from | |
|
|
|
|
|
|
|
|
October 8 | |
|
January 1 | |
|
|
|
Year Ended | |
|
|
Quarter Ended | |
|
Year Ended | |
|
through | |
|
through | |
|
Year Ended | |
|
December 31, | |
|
|
March 31, | |
|
December 31, | |
|
December 31, | |
|
October 7, | |
|
December 31, | |
|
| |
|
|
2005 | |
|
2004 | |
|
2003(1) | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
|
|
(Restated) | |
|
|
|
|
|
|
|
|
|
|
(In thousands, except for per share data and ratios) | |
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net of allowance for losses
|
|
$ |
630,244 |
|
|
$ |
563,268 |
|
|
$ |
368,040 |
|
|
$ |
279,300 |
|
|
$ |
173,764 |
|
|
$ |
126,591 |
|
|
$ |
98,633 |
|
|
Servicing rights
|
|
|
3,844 |
|
|
|
4,097 |
|
|
|
5,131 |
|
|
|
5,892 |
|
|
|
7,327 |
|
|
|
6,855 |
|
|
|
9,143 |
|
|
Retained interests in loan securitizations
|
|
|
724 |
|
|
|
724 |
|
|
|
749 |
|
|
|
785 |
|
|
|
5,833 |
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
32,277 |
|
|
|
32,277 |
|
|
|
32,277 |
|
|
|
18,332 |
|
|
|
18,332 |
|
|
|
|
|
|
|
|
|
|
Cash and other assets
|
|
|
85,470 |
|
|
|
82,181 |
|
|
|
37,876 |
|
|
|
22,894 |
|
|
|
22,492 |
|
|
|
33,646 |
|
|
|
40,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
752,559 |
|
|
$ |
682,547 |
|
|
$ |
444,073 |
|
|
$ |
327,203 |
|
|
$ |
227,748 |
|
|
$ |
167,092 |
|
|
$ |
147,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
523,372 |
|
|
|
455,914 |
|
|
|
277,441 |
|
|
|
273,186 |
|
|
|
196,031 |
|
|
|
122,999 |
|
|
|
113,617 |
|
|
Preferred interest in subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
23,626 |
|
|
|
23,167 |
|
|
|
24,312 |
|
|
|
22,345 |
|
|
|
21,413 |
|
|
|
53,335 |
|
|
|
23,424 |
|
|
Members/Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity/Capital
|
|
|
205,561 |
|
|
|
203,466 |
|
|
|
142,320 |
|
|
|
(13,945 |
) |
|
|
10,304 |
|
|
|
(9,242 |
) |
|
|
10,840 |
|
Other Information Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(source/(use)) From operating activities
|
|
$ |
(69,461 |
) |
|
$ |
(210,179 |
) |
|
$ |
(95,357 |
) |
|
$ |
(124,461 |
) |
|
$ |
(80,646 |
) |
|
$ |
(63,264 |
) |
|
$ |
15,696 |
|
|
From investing activities
|
|
|
(677 |
) |
|
|
26,340 |
|
|
|
851 |
|
|
|
4,272 |
|
|
|
7,670 |
|
|
|
10,871 |
|
|
|
(911 |
) |
|
From financing activities
|
|
|
66,443 |
|
|
|
250,828 |
|
|
|
100,254 |
|
|
|
121,110 |
|
|
|
73,022 |
|
|
|
49,312 |
|
|
|
(11,264 |
) |
Selected Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets
|
|
|
0.57 |
% |
|
|
(0.52 |
)% |
|
|
1.43 |
% |
|
|
(8.52 |
)% |
|
|
(18.79 |
)% |
|
|
(15.68 |
)% |
|
|
(9.32 |
)% |
|
Return on average equity
|
|
|
1.97 |
% |
|
|
(1.56 |
)% |
|
|
4.21 |
% |
|
|
(1352.96 |
)% |
|
|
(91.29 |
)% |
|
|
(165.30 |
)% |
|
|
(80.90 |
)% |
|
Average equity to average assets
|
|
|
29.08 |
% |
|
|
33.03 |
% |
|
|
33.91 |
% |
|
|
0.63 |
% |
|
|
20.58 |
% |
|
|
4.22 |
% |
|
|
11.52 |
% |
|
|
(1) |
Origen Financial, Inc. began operations on October 8, 2003
as a REIT with Origen Financial L.L.C. as a wholly-owned
subsidiary. |
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(2) |
As a REIT, Origen Financial, Inc. is not required to pay federal
corporate income taxes on its net income that is currently
distributed to its stockholders. As a limited liability company,
Origen Financial L.L.C. does not incur income taxes. Bingham was
taxed as a regular C corporation during the periods indicated. |
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(3) |
As a limited liability company, Origen Financial L.L.C. did not
report earnings per share. |
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OUR BUSINESS
General
Origen Financial, Inc. is an internally-managed and
internally-advised Delaware corporation that is taxed as a real
estate investment trust, or REIT. We are a national consumer
manufactured housing lender and servicer. Currently we originate
loans in 42 states and we service loans in 43 states.
We and our predecessors have originated more than
$2 billion of manufactured housing loans from 1996 through
December 31, 2004, including $249.7 million in 2004.
As of December 31, 2004, our loan servicing portfolio of
over 33,000 loans totaled approximately $1.37 billion.
Origen Financial, Inc. was incorporated on July 31, 2003.
On October 8, 2003, we began operations when we acquired
all of the equity interests of Origen Financial L.L.C. (which is
our primary operating subsidiary) and its subsidiaries and
completed a private placement of $150 million of our common
stock to certain institutional and accredited investors. In
February 2004, we completed another private placement of
$10 million of our common stock to an institutional
investor. In May 2004, we completed an initial public offering
of 8,000,000 shares of our common stock at a purchase price
of $8.00 per share. In June 2004, the underwriters for the
public offering purchased an additional 625,900 shares by
exercising their over-allotment option. Currently, most of our
operations are conducted through Origen Financial L.L.C., our
wholly-owned subsidiary. We conduct the rest of our business
operations through our other wholly-owned subsidiaries,
including taxable REIT subsidiaries, to take advantage of
certain business opportunities and ensure that we comply with
the federal income tax rules applicable to REITs.
Our executive office is located at 27777 Franklin Road,
Suite 1700, Southfield, Michigan 48034 and our telephone
number is (248) 746-7000. We maintain our servicing
operations in Ft. Worth, Texas and have other regional
offices located in Glen Allen, Virginia and Duluth,
Georgia. As of April 29, we employed 245 full-time
employees.
Our website address is www.origenfinancial.com and we make
available, free of charge, on or through our website all of our
periodic reports, including our annual report on Form 10-K,
quarterly reports on Form 10-Q and current reports on
Form 8-K, as soon as reasonably practicable after we file
such reports with the Securities and Exchange Commission.
Recent Developments
In May 2005, we completed our Origen Manufactured Housing
Contract Trust Collateralized Notes, Series 2005-A transaction.
In this transaction we securitized approximately
$190.0 million of manufactured housing contracts and issued
approximately $165.3 million of asset-backed certificates
secured by those contracts with seven separate offered classes
ranging from $11.4 million to $44.5 million consisting of AAA,
AA, A and BBB+ rated bonds.
Effective January 1, 2005, we formed our first Corporate
Internal Audit Department. While in the past, we and our
predecessor recognized the need for the performance of a wide
range of internal audit functions and quality control reviews,
such audits and reviews were primarily performed on a
departmental basis with no centralization of responsibility at
the corporate level and no formalized reporting to the Audit
Committee of our board of directors. The newly-formed Internal
Audit Department is staffed by a Director of Internal Audit and
two staff auditors. The Director of Internal Audit reports
directly to the Chairman of the Audit Committee.
In September 2004, we completed our Origen Manufactured Housing
Contract Trust Collateralized Notes, Series 2004-B
transaction. In this transaction we securitized approximately
$200 million of manufactured housing contracts and issued
approximately $169 million of asset-backed certificates
secured by those contracts with seven separate offered classes
ranging from $10 million to $49 million consisting of
AAA, AA, A and BBB+ rated bonds.
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Loan Origination and Underwriting
We and our predecessors have originated more than
$2 billion of manufactured housing loans from 1996 through
December 31, 2004, including $249.7 million in 2004.
We originate and intend to continue to originate manufactured
housing loans to borrowers who have above average credit
profiles and above average income, each as compared to
manufactured housing borrowers as a whole.
Although we consider FICO scores in underwriting loans, our
primary underwriting tool is
TNGtm,
an internally-developed, externally-validated proprietary
statistical scoring system that ranks the risk of default for
our manufactured home-only loans. Our loan origination
activities are conducted through proprietary systems maintained
and enhanced by an internal staff of systems professionals. Our
home-only loan origination activities are centralized at our
Southfield, Michigan executive offices and our land-home
origination activities are centralized at our Ft. Worth,
Texas facility.
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Dealer and Broker Network |
We currently provide new and pre-owned manufactured housing
financing through a network of over 900 primarily independent
retailers of new and pre-owned manufactured houses and loan
brokers specializing in the manufactured housing industry. We
are focused on penetrating our existing broker/retailer network
to achieve a higher level of approvals and fundings from those
approvals. Each loan submitted to us by a retailer or broker
must meet the standards for loan terms, advance amounts, down
payment requirements, residency type, and other pertinent
parameters we have established under our housing loan purchase
programs.
We have invested heavily in technology to increase our
penetration into the retailer network and to streamline the
application, approval and funding process. We have a proprietary
web-based delivery system, known as Origen
Focustm,
for application, approval, funding, tracking, and reporting of
loans. This system allows for the application to be submitted
and tracked over the Internet. During 2004, approximately 72% of
our application volume was submitted through Origen Focus. We
intend to eventually transition substantially all of the
retailer network to the Origen Focus platform. Loan applications
submitted through Origen Focus seamlessly interface
electronically with our other proprietary loan processing
systems. Origen Focus also eliminates the need for personnel to
input loan applications, improving our productivity and reducing
our staffing costs.
We perform initial and periodic reviews of our retailers. We
underwrite their credit profile, industry experience, sales and
financing plans. We regularly monitor retailer performance and
rank retailers according to their default, delinquency, credit
quality, approval and funding ratios, and the volume of loans
they submit to us, and, if necessary, we terminate relationships
with non-performing retailers.
We have also developed a retailer rewards program called Origen
Elite
Rewardstm
that provides benefits to the retailers who provide us with the
highest quality loans. These benefits include guaranteed same
day turnaround for completed applications and other service
enhancements, specific pricing incentives and improved financing
options for new and pre-owned homes.
We underwrite retail installment loans secured only by
manufactured houses, or consumer loans, using our
internally-developed proprietary credit scoring system, TNG. We
developed and enhanced TNG to predict defaults using empirical
modeling techniques. TNG takes into account information about
each applicants credit history, debt and income,
demographics, and the terms of the loan. The TNG model is fully
integrated into our origination system and is based on our
historical lending experience. We have used TNG to back-test all
of our home-only loans originated since 1996 by Origen Financial
L.L.C., its predecessors and us. Following internal testing and
validation, Experian Information Solutions, Inc., a leading
consumer credit reporting and risk modeling company,
independently validated the TNG model.
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All home-only applications are scored by TNG and then reviewed
by an underwriter. TNG provides the underwriter a recommendation
of pass, fail or review. The
recommendations are based upon the underlying TNG score as well
as other factors that may arise from the application. TNG alerts
underwriters to particular attention areas and provides review
recommendations. It also provides a reason for declination on
fail recommendations. TNG is used to rescore the application
throughout the origination and underwriting process as the
initial application information is verified and/or terms and
conditions of the loan change.
We also underwrite mortgage loans, often called
land-home loans, collateralized by both the
manufactured houses and the underlying real estate. Because the
land-home and home-only business lines have different
characteristics, and because we have not accumulated enough
default data points for our land-home loans (a necessary
component of a successful predictive model), predictive modeling
has only been possible for the home-only applications. We use
our Internal Credit Rating grid and a full property appraisal to
underwrite land-home loans. The grid is a traditional
underwriting method that primarily takes into account the
applicants credit history, debt capacity and underlying
collateral value. In specially approved markets a comparable
appraisal is used to determine chattel manufactured home values
through our Comparable Appraisal Program, which is discussed in
more detail below.
In addition to using our proprietary TNG scoring model, we
underwrite loans based upon our review of credit applications to
ensure loans will comply with internal company guidelines, which
are readily available on our intranet site. Our approach to
underwriting focuses primarily on the borrowers
creditworthiness and the borrowers ability and willingness
to repay the debt, as determined through TNG. Each contract
originated by us is individually underwritten and approved or
rejected based on the TNG result and an underwriters
evaluation of the terms of the purchase agreement, a detailed
credit application completed by the prospective borrower and the
borrowers credit report, which includes the
applicants credit history as well as litigation, judgment
and bankruptcy information. Once all the applicable employment,
credit and property-related information is received, the
application is evaluated to determine whether the applicant has
sufficient monthly income to meet the anticipated loan payment
and other obligations.
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Acquisitions of Manufactured Home Loans and Securities
from Existing Securitizations |
We believe there are selective opportunities to acquire existing
portfolios of manufactured home whole loans and bonds in
outstanding securitizations backed by manufactured home loans.
From time to time, we may seek to acquire such assets at
attractive prices.
Servicing
We service the manufactured housing loan contracts that we
originate as well as manufactured housing loan contracts owned
by third parties. As of December 31, 2004, our loan
servicing portfolio of over 33,000 loans totaled approximately
$1.37 billion. Our annual servicing fees range from 50 to
150 basis points of the outstanding balance on manufactured
housing loans serviced. The vast majority of loans we service
are included in securitized loan pools. As opportunities present
themselves, we intend to grow our servicing business by
acquiring the servicing or subservicing rights to portfolios of
manufactured home loans owned by third parties, including many
companies that have stopped originating manufactured home loans
but continue to own loan portfolios.
Servicing activities include processing payments received,
recording and tracking all relevant information regarding the
loan and the underlying collateral, collecting delinquent
accounts, remitting funds to investors, repossessing houses upon
loan default and reselling repossessed houses. Our loan
servicing activities are centralized at our national loan
servicing center in Ft. Worth, Texas.
Although we strive to continuously reduce delinquency, our
primary servicing objectives are to maintain a stream of
borrower payments, limit loan defaults, and maximize recoveries
on defaulted loans. Accordingly, we perform loss mitigation
activities on delinquent loans whereby we maintain the
borrowers delinquent status during the payment plan or
other loan workout situation. The industry has typically
reported borrowers in loss mitigation as current. In our efforts
to maximize recoveries on defaulted loans, we hold repossessed
collateral longer to achieve a retail sale to a consumer for a
higher price rather than a quicker sale to a reseller at a lower
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price. These business strategies cause us to report higher
delinquencies, but lead to improved default and recovery
performance.
Securitizations
We have securitized a substantial portion of our owned
manufactured housing loans and intend in the future to originate
and acquire manufactured housing loans for securitization. After
accumulating enough manufactured housing loans (typically not
less than $125 million), we use transactions known as
asset-backed securitizations to pay off short term debt,
replenish funds for future loan originations, limit credit risk,
and match the maturity of interest rates on borrowings with the
interest rates on our manufactured housing loans. In our
securitizations, the manufactured housing loans are transferred
to a bankruptcy remote trust that then issues bonds, typically
both senior and subordinate, collateralized by those
manufactured housing loans. By securitizing loans in this way,
we eliminate the credit risk on our manufactured housing loans
up to the amount of bonds sold to investors. Likewise, the form
of securitization is designed to insulate the securitized loans
from our creditors if we file for bankruptcy so that the loans
supporting the bonds issued by the trust will not be encumbered.
This process enables us to fund our business at competitive
rates without asset-backed bond investors relying on our
corporate credit-worthiness.
We successfully completed two securitizations in 2004. In
February 2004, we completed a securitization of approximately
$240 million in manufactured housing loans and in September
2004, we completed a securitization of approximately
$200 million in manufactured housing loans.
Insurance
As a complement to our origination and servicing business, we
have historically placed property and casualty insurance for
lapsed policies, primarily for manufactured housing loans we
have originated or service. We estimate that the closing of
approximately 30% of all manufactured housing loans we originate
is delayed because the borrower has not obtained insurance or
the insurance policy obtained by the borrower does not meet our
guidelines. By offering our borrowers the opportunity to obtain
insurance from us, we are able to close loans more quickly and
efficiently because all insurance policies placed through us
will meet our guidelines.
Competition
The manufactured housing finance industry is very fragmented.
The market is served by both traditional and non-traditional
consumer finance sources. Several of these financing sources are
larger than us and have greater financial resources. In
addition, some of the manufactured housing industrys
larger manufacturers maintain their own finance subsidiaries to
provide financing for purchasers of their manufactured homes.
Our largest competitor in the industry is Clayton Homes, Inc.,
through its subsidiary 21st Mortgage Corporation.
Traditional financing sources such as commercial banks, savings
and loans, credit unions and other consumer lenders, many of
which have significantly greater resources than us and may be
able to offer more attractive terms to potential customers, also
provide competition in our market. Competition among industry
participants can take many forms, including convenience in
obtaining a loan, amount and term of the loan, customer service,
marketing/distribution channels, loan origination fees and
interest rates
Corporate Governance
We have implemented the following corporate governance
initiatives to address certain legal requirements promulgated
under the Sarbanes-Oxley Act of 2002, as well as Nasdaq
corporate governance listing standards:
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Our board of directors determined that each of Richard H. Rogel,
the Chairman of the Audit Committee, and Paul A. Halpern and
James A. Williams, the other members of the Audit Committee,
qualifies as an audit committee financial expert as
such term is defined under Item 401 of Regulation S-K.
Each member of the Audit Committee is independent as
that term is defined under applicable SEC and Nasdaq rules. |
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Our board of directors adopted a Financial Code of Ethics for
Senior Financial Officers, which governs the conduct of our
senior financial officers. A copy of this code is available on
our website at www.origenfinancial.com under the heading
Investors and subheading Corporate
Governance and is also available in print to any
stockholder upon written request to Origen Financial, Inc.,
27777 Franklin Road, Suite 1700, Southfield, Michigan
48034. |
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Our board of directors established and adopted charters for each
of its Audit, Compensation and Nominating and Governance
Committees. Each committee is comprised of independent
directors. A copy of each of these charters is available on our
website at www.origenfinancial.com under the heading
Investors and subheading Corporate
Governance and is also available in print to any
stockholder upon written request to Origen Financial, Inc.,
27777 Franklin Road, Suite 1700, Southfield, Michigan 48034. |
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Our board of directors adopted a Code of Business Conduct and
Ethics, which governs business decisions made and actions taken
by our directors, officers and employees. A copy of this code is
available on our website at www.origenfinancial.com under
the heading Investors and subheading Corporate
Governance and is also available in print to any
stockholder upon written request to Origen Financial, Inc.,
27777 Franklin Road, Suite 1700, Southfield, Michigan
48034. |
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The Sarbanes Oxley Act of 2002 requires the establishment of
procedures whereby each member of the Audit Committee of our
board of directors is able to receive confidential, anonymous
employee communications regarding concerns in the areas of
accounting, internal controls or auditing matters. Accordingly,
effective in January 2004, we established a Whistleblower
Hotline maintained with an independent third party.
Through this arrangement, each Audit Committee member has access
to two-way anonymous communications with the employee/
whistleblower. There are three submission methods (voicemail,
e-mail and web form). There is a message management system that
provides the member an up-to-date snapshot of all incoming and
outgoing communications. The Whistleblower Hotline is accessible
through our website at www.origenfinancial.com. |
Employees
As of April 29, 2005, we employed 245 full time employees.
None of our employees are subject to collective bargaining
agreements. We believe our relations with our employees are
generally good.
Legal and Administrative Proceedings
We are not involved in any litigation other than routine
litigation arising in the ordinary course of business. We are
not a party to any state or federal regulatory compliance
administrative proceeding.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the consolidated
financial condition and results of operations should be read in
conjunction with the consolidated financial statements and the
notes thereto.
Managements discussion and analysis of financial condition
and results of operations and liquidity and capital resources
contained within this prospectus is more clearly understood when
read in conjunction with our historical financial statements and
the historical financial statements of our predecessor, Origen
Financial L.L.C., as well as the related notes. The notes to the
financial statements provide information about us and Origen
Financial L.L.C., as well as the basis for presentation used in
this prospectus.
Overview
On October 8, 2003, we began operations upon the completion
of a private placement of $150 million of our common stock
to certain institutional and accredited investors. On
February 4, 2004, we completed another private placement of
$10 million of our common stock to one institutional
investor. In connection with and as a condition to the October
2003 private placement, we acquired all of the equity interests
of Origen Financial L.L.C. We also took steps to qualify Origen
Financial, Inc. as a REIT. In May 2004, we completed an initial
public offering of 8,000,000 shares of our common stock at
a purchase price of $8.00 per share. In June 2004, the
underwriters for the public offering purchased an additional
625,900 shares by exercising their over-allotment option.
Currently, most of our operations are conducted through Origen
Financial L.L.C., which is our wholly-owned subsidiary. We
conduct the rest of our business operations through our other
wholly-owned subsidiaries, including taxable REIT subsidiaries,
to take advantage of certain business opportunities and ensure
that we comply with the federal income tax rules applicable to
REITs.
The historical financial statements of Origen Financial L.L.C.
represent combined financial condition and results of
operations. We believe that the business, financial statements
and results of operations of Origen Financial L.L.C. are
quantitatively different from ours. Origen Financial
L.L.C.s results of operations reflect capital constraints
and corporate and business strategies which are different than
ours. We also have elected to be taxed as a REIT. Accordingly,
we believe the historical financial results of Origen Financial
L.L.C. are not indicative of our future performance.
On March 31, 2005, we announced that we would restate our
financial statements for the year ended December 31, 2003
and for the first three quarters of 2004 to correct an
interpretive error in applying accounting principles to a pool
of loans acquired at a discount in October 2003. The financial
statements included elsewhere in this prospectus and the
following discussion reflect the restatement.
Critical Accounting Policies
Our discussion and analysis of our financial condition and
results of operations are based upon our financial statements,
which have been prepared in accordance with accounting
principles generally accepted in the United States of America.
The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and the related
disclosures. On an on-going basis, we evaluate these estimates,
including those related to reserves for credit losses, recourse
liabilities, servicing rights and retained interests in loans
sold and securitized. Estimates are based on historical
experience, information received from third parties and on
various other assumptions that are believed to be reasonable
under the circumstances, which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results
may differ from these estimates under conditions different from
our assumptions.
Transfers of Financial Assets: We engage in
securitizations and whole loan sales of our manufactured housing
loan receivables. Securitizations may take the form of a loan
sale or a financing. We structured all loan securitizations
occurring prior to 2003 as loan sales and all loan
securitizations in 2003 and 2004 as financings for accounting
purposes. In the future, we intend to structure and account for
our securitizations as financings. When a loan securitization is
structured as a financing, the financed asset remains on our
books
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along with the recorded liability that evidences the financing.
Income from both the loan interest spread and the servicing fees
received on the securitized loans are recorded into income as
earned. An appropriate allowance for credit losses is maintained
on the loans. When a loan securitization is structured as a loan
sale, such as our pre-2003 transactions, any gains and losses
are recognized in the consolidated statements of operations when
control of the transferred financial asset is relinquished by
the seller. In accordance with Statement of Financial Accounting
Standards No. 140 Accounting For Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities, certain assets and income are recorded
based upon the difference between all principal and interest
received from the loans sold and the following factors
(i) all principal and interest required to be passed
through to the asset-backed bond investors, (ii) all excess
contractual servicing fees, (iii) other recurring fees and
(iv) an estimate of losses on loans. At the time of the
sale these amounts are estimated based upon a declining
principal balance of the underlying loans, adjusted by an
estimated prepayment and loss rate, and such amounts are
capitalized using a discount rate that market participants would
use for similar financial instruments. These capitalized assets
are recorded as retained interests in loans sold and securitized
and capitalized servicing rights. We assess the carrying value
of any retained interests for impairment on a monthly basis. Any
subsequent changes in fair value of the retained interests are
recognized in the consolidated statements of operations. The use
of different pricing models or assumptions could produce
different financial results. There can be no assurance that our
estimates used to determine the value of retained interests and
the servicing asset valuations will remain appropriate for the
life of the securitization.
Investment in Loan Receivable Portfolios: In October 2003
we acquired a portfolio of manufactured housing loans at a
discount. We account for our investment in the acquired loan
receivable portfolio on the accrual basis or
cost recovery method of accounting in accordance
with the provisions of the AICPAs Practice
Bulletin 6, Amortization of Discounts on Certain
Acquired Loans. A static pool was established for the
loans which had similar attributes, based on the specific seller
and timing of acquisition. We account for the static pool as a
unit for the economic life of the pool (similar to one loan) for
recognition of the revenue from the loan receivable portfolio,
for collections applied to principal of the loan receivable
portfolio and for a provision for losses or impairment. Revenue
from the loan receivable portfolio is accrued based on the
constant effective interest rate determined for the pool applied
to the pools adjusted cost basis. The pools cost
basis is increased for revenue earned and decreased for
collections and impairments. The constant effective interest
rate is the internal rate of return determined based on the
timing and amounts of actual cash received and anticipated
future cash flow projections for the pool.
We monitor and evaluate actual and projected cash flows for the
loan receivable portfolio on a quarterly basis. At the
conclusion of our quarterly evaluation, if the revised
forecasted cash flows are in excess of the forecasted cash flows
prior to evaluation, the constant effective interest rate is
increased prospectively. If the revised forecasted cash flows
are less than the forecasted cash flows prior to evaluation, the
constant effective interest rate is reduced prospectively. If
the revised forecasted cash flows are less than the remaining
carrying value, the receivable portfolio is impaired and all of
the remaining collections are subsequently applied against book
value. An impairment charge is taken for the difference between
the carrying value and the remaining revised forecasted cash
flow amount. Additionally, if the amount and timing of future
cash collections are not reasonably estimable, we will account
for the portfolio on the cost recovery method (Cost
Recovery Portfolios). No revenue is accreted on Cost
Recovery Portfolios; all collections are first applied
completely to recover the remaining cost basis of the portfolio
and collections thereafter, if any, are recognized as revenue.
Allowance for Credit Losses: Determining an appropriate
allowance for credit losses involves a significant degree of
estimation and judgment. The process of estimating the allowance
for credit losses may result in either a specific amount
representing the impairment estimate or a range of possible
amounts. Statement of Financial Accounting Standards No. 5
Accounting for Contingencies provides
guidance on accounting for credit losses associated with pools
of loans and requires the accrual of a loss when it is probable
that an asset has been impaired and the amount of the loss can
be reasonably estimated. Our loan portfolio is comprised of
manufactured housing loans with an average loan balance of less
than $50,000. The allowance for credit losses is developed at
the portfolio level and the amount of the allowance is
determined by applying a probability weighting to a calculated
range of losses. A lower range of probable losses is calculated
by applying historical loss rate factors to the loan portfolio
on a stratified basis using current portfolio performance and
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delinquency levels (0-30 days, 31-60 days,
61-90 days and greater than 90 days delinquent). An
upper range of probable losses is calculated by the
extrapolation of probable loan impairment based on the
correlation of historical losses by vintage year of origination.
Financial Accounting Standards Board Interpretation
No. 14 states that a creditor should recognize the
amount that is the best estimate within the estimated range of
credit losses. Accordingly, our application of probability
weighting to the calculated range of losses is in recognition of
the fact that historical charge-off experience, without
adjustment, may not be representative of current impairment of
the current portfolio of loans because of changed circumstances.
Such changes may relate to changes in the age of loans in the
portfolio, changes in the creditors underwriting
standards, changes in economic conditions affecting borrowers in
a geographic region, or changes in the business climate in a
particular industry.
Liability for Loans Sold With Recourse: Our predecessors
sold certain pre-2002 manufactured housing loans on a whole-loan
basis. At the time of such loan sales, recourse liabilities were
recognized pursuant to future obligations, if any, to the
applicable loan purchasers under the provisions of the
respective sale agreements. Under existing recourse provisions,
we are required to repurchase any loan contract that goes into
default, as defined in the respective loan agreement, for the
life of each loan sold, at an amount equal to the outstanding
principal balance and accrued interest, and refund any purchase
premiums. The loan purchasers have no recourse to our other
assets for failure of debtors to pay when due .
The loan pools subject to recourse provisions are comprised of
manufactured housing loans with an average loan balance of less
than $50,000. The estimated recourse liability is calculated
based on historical default rates and loss experience for pools
of similar loans we originate and service. These loss rates are
applied to each pool of loans subject to recourse provisions and
the resulting estimated recourse liability represents the
present value of the expected obligations under those recourse
provisions. The loss rates are adjusted for economic conditions,
other trends affecting borrowers ability to repay and
estimated collateral value. The recourse liability is calculated
at a portfolio level and there are no elements of the estimated
recourse liability allocated to specific loans.
Derivative Financial Instruments: We have periodically
used derivative instruments, including forward sales of
U.S. Treasury securities, U.S. Treasury rate locks and
forward interest rate swaps to mitigate interest rate risk
related to our loans receivable and anticipated sales or
securitizations. We follow the provisions of Statement of
Financial Accounting Standards No. 133
(SFAS 133),Accounting for Derivative
Instruments and Hedging Activities (as amended by
Statement of Financial Accounting Standards No. 149). Under
SFAS 133, all derivative instruments are recorded on the
balance sheet at fair value and changes in fair value are
recorded in current earnings or other comprehensive income,
depending on whether a derivative instrument qualifies for hedge
accounting and, if so, whether the hedge transaction represents
a fair value or cash flow hedge.
Hedges are measured for effectiveness both at inception and on
an ongoing basis, and hedge accounting is terminated if a
derivative instrument ceases to be effective as a hedge or its
designation as a hedge is terminated. In the event of
termination of a hedge, any gains or losses during the period
that a derivative instrument qualified as a hedge are recognized
as a component of the hedged item and subsequent gains or losses
are recognized in earnings.
Derivative financial instruments that do not qualify for hedge
accounting are carried at fair value and changes in fair value
are recognized currently in earnings.
Stock Options: In connection with our formation, we
adopted a stock option plan. We have elected to measure
compensation cost using the intrinsic value method in accordance
with APB Opinion No. 25 Accounting for Stock
Issued to Employees. Effective June 15, 2005, we
will begin measuring compensation cost under the provisions of
Statement of Financial Accounting Standards No. 123 revised
(SFAS 123R), Share-Based
Payment that addresses the accounting for share-based
payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the
enterprise or (b) liabilities that are based on the fair
value of the enterprises equity instruments or that may be
settled by the issuance of such equity instruments. Under this
pronouncement, all forms of share-based payments to employees,
including employee stock options, are treated the same as other
forms of compensation by recognizing the
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related cost in the income statement. The expense of the award
would generally be measured at fair value at the grant date. The
fair value of each option granted would be determined using the
Cox, Ross & Rubenstein binomial option-pricing model
based on assumptions related to annualized dividend yield, stock
price volatility, risk free rate of return and expected average
term.
Goodwill Impairment: The provisions of Statement of
Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets, require that recorded
goodwill be tested for impairment on an annual basis. The
initial and on-going estimate of our fair value is based on our
assumptions and projections. Once determined, the amount is
compared to our net book value to determine if a write-down in
the recorded value of the goodwill is necessary.
Loans Acquired at a Discount: During the three months
ended March 31, 2005, we adopted the provisions of
Statement of Position (SOP 03-3) Accounting
for Certain Loans or Debt Securities Acquired in a Transfer,
which addresses accounting for differences between contractual
cash flows and cash flows expected to be collected from an
investors initial investment in loans or debt securities
(loans) acquired in a transfer if those differences are
attributable, at least in part, to credit quality. It includes
such loans acquired in a purchase business combination, but does
not apply to loans originated by the entity. After
December 15, 2004, all loan pools that are acquired at a
discount due to credit quality will be accounted for under
SOP 03-3. We have determined the impact of adoption of
SOP 03-3 will not have a material effect on our results
from operations.
Financial Condition
|
|
|
March 31, 2005 Compared to March 31, 2004 |
Net loans receivable outstanding increased 11.9% to
$630.2 million at March 31, 2005 compared to
$563.3 million at December 31, 2004. Loans receivable
are comprised of installment contracts and mortgages
collateralized by manufactured houses and in some instances real
estate.
New loan originations for the quarter ended March 31, 2005
increased 28.3% to $58.5 million compared to
$45.6 million for the quarter ended March 31, 2004.
The increase was due primarily to increased market share
resulting from our focus on customer service and the use of
technology to deliver our products and services. Also, on
March 30, 2005 we purchased a portfolio of 431 manufactured
housing loans with an outstanding principal balance of
approximately $30.7 million from Residential Funding
Corporation. The portfolio had a weighted average coupon rate of
7.31% and weighted average remaining term of 26.8 years.
In October 2003 we purchased a pool of manufactured housing
loans at a substantial discount to the outstanding principal
balance of the underlying loans. The discount was in recognition
of identified credit impairment associated with a substantial
number of these loans. We account for this purchased loan pool
according to guidance provided by AICPA Practice
Bulletin No. 6, Amortization of Discounts on
Certain Acquired Loans (PB 6). In transactions
where the initial investment differs from the related principal
balances of the underlying loans and such difference is due to
credit quality, PB 6 requires a level-yield accounting treatment
over the life of the loan pool. We are required to evaluate the
loan pool, at least quarterly. If upon evaluation, the estimate
of probable collections is increased, the amount of the discount
amortized to achieve a level-yield must be adjusted accordingly
and the adjustment is treated as a change in estimate in
accordance with APB Opinion 20, Accounting Changes,
and the amount of the periodic discount amortization is adjusted
over the life of the loan pool. If, however, at any valuation
date, the estimate of collections is reduced, the loan pool is
considered impaired for purposes of applying the measurement
provisions of FASB Statement No. 5, Accounting for
Contingencies, which requires an accrual for a loss
contingency, resulting in a charge against operations. The
required accounting treatment may subject us to substantial
variations in income recognition for this loan pool from period
to period. At March 31, 2005, net book value of this pool
was approximately $37.9 million. No adjustment to the
carrying value of this loan pool was necessary at March 31,
2005.
30
The following table sets forth the average loan balance,
weighted average loan coupon and weighted average initial term
of the loan receivable portfolio (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Principal balance loans receivable
|
|
$ |
638,622 |
|
|
$ |
572,973 |
|
Number of loans receivable
|
|
|
14,583 |
|
|
|
13,358 |
|
Average loan balance
|
|
$ |
44 |
|
|
$ |
43 |
|
Weighted average loan coupon(a)
|
|
|
9.69 |
% |
|
|
9.86 |
% |
Weighted average initial term
|
|
|
21 years |
|
|
|
20 years |
|
|
|
(a) |
The weighted average loan coupon includes an imbedded servicing
fee rate resulting from securitization or sale of the loan but
accounted for as a financing. |
Delinquency statistics for the manufactured housing loan
portfolio are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
No. of | |
|
Principal | |
|
% of | |
|
No. of | |
|
Principal | |
|
% of | |
Days Delinquent |
|
Loans | |
|
Balance | |
|
Portfolio | |
|
Loans | |
|
Balance | |
|
Portfolio | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
31-60
|
|
|
168 |
|
|
$ |
6,156 |
|
|
|
1.0 |
% |
|
|
146 |
|
|
$ |
5,253 |
|
|
|
0.9 |
% |
61-90
|
|
|
60 |
|
|
|
2,465 |
|
|
|
0.4 |
% |
|
|
80 |
|
|
|
3,014 |
|
|
|
0.5 |
% |
Greater than 90
|
|
|
155 |
|
|
|
6,274 |
|
|
|
1.0 |
% |
|
|
195 |
|
|
|
7,637 |
|
|
|
1.3 |
% |
We define non-performing loans as those loans that are 90 or
more days delinquent in contractual principal payments. For the
quarter ended March 31, 2005 the average outstanding
principal balance of non-performing loans was approximately
$7.3 million compared to $6.7 million for the quarter
ended March 31, 2004. However, non-performing loans as a
percentage of average loan receivables decreased to 1.3% for the
quarter ended March 31, 2005 compared to 1.8% for the
quarter ended March 31, 2004, primarily as a result of
higher average balances and improved credit quality in the loan
portfolio.
At March 31, 2005 we held 176 repossessed houses owned by
us compared to 177 houses at December 31, 2004. The book
value of these houses, including repossession expenses, based on
the lower of cost or market value was approximately
$3.5 million at March 31, 2005 compared to
$3.4 million at December 31, 2004, an increase of
$0.1 million or 2.9%.
The allowance for credit losses was $5.3 million at
March 31, 2005 and December 31, 2004. Despite the
11.9% increase in net loan receivable balance, the allowance for
credit losses remained relatively flat due to significant
improvement in delinquency rates at March 31, 2005. Loans
delinquent over 60 days decreased $2.0 million or
18.7% from $10.7 million at December 31, 2004 to
$8.7 million at March 31, 2005. The allowance for
credit losses as a percentage of net loans receivable was
approximately .83% at March 31, 2005 compared to
approximately .93% at December 31, 2004. Net charge-offs
were $3.0 million for the quarter ended March 31,
2005, compared to $3.3 million for the quarter ended
March 31, 2004. Based on the analysis we performed related
to the allowance for credit losses, we believe that our
allowance for credit losses is currently adequate to cover
inherent losses in our loan portfolio.
In the past, our predecessor companies sold loans with recourse.
We regularly evaluate the recourse liability for adequacy by
taking into consideration factors such as changes in outstanding
principal balance of the portfolios of loans sold with recourse;
trends in actual and forecasted portfolio performance, including
delinquency and charge-off rates; and current economic
conditions that may affect a borrowers ability to pay. If
actual results differ from our estimates, we may be required to
adjust our liability accordingly. There was no increase to the
liability for the quarter ended March 31, 2005 or 2004. At
March 31, 2005, the reserve for loan recourse liability was
$5.7 million as compared to $6.6 million at
December 31, 2004, a decrease of 13.6%. The remaining
principal balance of all loans sold with recourse at
March 31, 2005 was $49.3 million versus
$51.5 million at December 31, 2004, a decrease of 4.3%.
31
Our asset quality statistics for the quarter ended
March 31, 2005 reflect our continued emphasis on the credit
quality of our borrowers and the improved underwriting and
origination practices we put into place. Continued improvement
in delinquency statistics and recovery rates are expected to
result in lower levels of non-performing assets and net
charge-offs. Long term, lower levels of non-performing assets
and net charge-offs should have a positive effect on earnings
through decreases in the provision for credit losses and
servicing expenses as well as increases in net interest income.
|
|
|
December 31, 2004 Compared to December 31,
2003 |
At December 31, 2004, we held loans representing
approximately $572.9 million of principal balances, which
constituted over 83% of our total assets compared to
$380.1 million of principal balances, which constituted
over 85% of our total assets at December 31, 2003.
Approximately $402.0 million of the loans on our balance
sheet at December 31, 2004 were included in our February
2004 and September 2004 public securitizations, and will
continue to be carried on our balance sheet because both
securitization transactions were structured as financings. To
the extent loans on our balance sheet are eligible on an
individual basis and not already included in our securitized
pools, we plan to securitize such loans and issue asset-backed
bonds through periodic transactions in the asset-backed
securitization market. The timing of any securitization will
depend on prevailing market conditions and the availability of
sufficient total loan balances to constitute an efficient
transaction.
New loan originations for the year ended December 31, 2004
increased $63.5 million, or 33.7%, to $249.7 million,
compared to $188.4 million for the year ended
December 31, 2003. The increase was due primarily to
increased market share resulting from our focus on customer
service and the use of technology to deliver our products and
services. However, the impact of the damaging hurricanes
throughout the Southeast during 2004 has adversely affected us
as housing sales and deliveries were slowed by the storms. This
had an adverse effect on our origination volume in the third and
fourth quarters of 2004.
The carrying amount of loans receivable consisted of the
following at December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Manufactured housing loans
|
|
$ |
572,973 |
|
|
$ |
380,174 |
|
Accrued interest receivable
|
|
|
3,285 |
|
|
|
2,608 |
|
Deferred fees
|
|
|
(3,100 |
) |
|
|
(3,518 |
) |
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Discount on purchased loans
|
|
|
(4,575 |
) |
|
|
(7,610 |
) |
Allowance for loan loss
|
|
|
(5,315 |
) |
|
|
(3,614 |
) |
|
|
|
|
|
|
|
|
|
$ |
563,268 |
|
|
$ |
368,040 |
|
|
|
|
|
|
|
|
The following table sets forth the average individual loan
balance, weighted average loan yield, and weighted average
initial term at December 31 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Principal balance loans receivable
|
|
$ |
572,973 |
|
|
$ |
380,174 |
|
Number of loans receivable
|
|
|
13,358 |
|
|
|
9,154 |
|
Average loan balance
|
|
$ |
43 |
|
|
$ |
42 |
|
Weighted average loan yield
|
|
|
9.86 |
% |
|
|
10.23 |
% |
Weighted average initial term
|
|
|
20 years |
|
|
|
22 years |
|
32
Delinquency statistics for the loan receivable portfolio at
December 31 are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
No. of | |
|
Principal | |
|
% of | |
|
No. of | |
|
Principal | |
|
% of | |
Days delinquent |
|
Loans | |
|
Balance | |
|
Portfolio | |
|
Loans | |
|
Balance | |
|
Portfolio | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
31-60
|
|
|
146 |
|
|
$ |
5,253 |
|
|
|
0.9 |
% |
|
|
193 |
|
|
$ |
7,068 |
|
|
|
1.9 |
% |
61-90
|
|
|
80 |
|
|
|
3,014 |
|
|
|
0.5 |
% |
|
|
83 |
|
|
|
2,943 |
|
|
|
0.8 |
% |
Greater than 90
|
|
|
195 |
|
|
|
7,637 |
|
|
|
1.3 |
% |
|
|
158 |
|
|
|
6,575 |
|
|
|
1.7 |
% |
We define non-performing loans as those loans that are 90 or
more days delinquent in contractual principal payments. The
average balance of non-performing loans was $6.8 million
for the year ended December 31, 2004 compared to
$5.4 million for the year ended December 31, 2003, an
increase of $1.4 million, or 25.9%. However, non-performing
loans as a percentage of average outstanding principal balance
were 1.5% for the year ended December 31, 2004 compared to
2.2% for the year ended December 31, 2003.
The improvement in our asset quality statistics for the year
ended December 31, 2004 reflects our continued emphasis on
the credit quality of our borrowers and the improved
underwriting and origination practices we have put into place.
Continued improvement in delinquency statistics and recovery
rates are expected to result in lower levels of non-performing
assets and net charge-offs. However, in the short term,
charge-offs and delinquency statistics may increase slightly due
to the effects of the severe hurricanes that hit the Southeast
in 2004. Long term, lower levels of non-performing assets and
net charge-offs should have a positive effect on earnings
through decreases in the provision for credit losses and
servicing expenses as well as increases in net interest income.
At December 31, 2004 we held 177 repossessed houses owned
by us compared to 170 houses at December 31, 2003, an
increase of seven houses, or 4.1%. The book value of these
houses, including repossession expenses, based on the lower of
cost or market value, was approximately $3.4 million at
December 31, 2004 compared to 3.7 million at
December 31, 2003, a decrease of $0.3 million, or
8.1%. We also manage the repossession and disposition of houses
that we service for others, and at December 31, 2004, the
inventory of such houses totaled 220 compared to 405 at
December 31, 2003, a decrease of 185 houses, or 45.7%. The
decline in the inventory of houses from our serviced for others
portfolio is largely the result of normal run-off, as the
balance of loans serviced for others declined by approximately
$73 million between year-end 2003 and 2004. The weighted
average age in inventory of all houses, including those owned by
us and those managed for others, was 136.0 days at
December 31, 2004 compared to 143.8 days, at
December 31, 2003.
The allowance for loan loss increased $1.7 million, or
47.2%, to $5.3 million at December 31, 2004, from
$3.6 million at December 31, 2003. The primary reason
for the increase in the allowance level is the 53.1% increase in
the outstanding loan receivable balance. The percentage increase
in the level of our allowance compared to the percentage
increase in the loan portfolio balance has been favorably
impacted by the higher credit quality of our new loan
originations. We measure loan quality in several ways. In
addition to using TNG, our internally developed credit scoring
model, we also score our loans using a widely used
credit-scoring model commonly referred to as FICO®. The
weighted average FICO® score for loans originated in 2004
increased to 721 compared to 719 for those loans originated in
2003, continuing the trend of improving credit quality that
began with our 2002 loan originations. Aside from the credit
quality of the borrower, we have further reduced the risk of
loss for loans originated in years 2003 and 2004 by reducing the
average loan term and lowering the average loan-to-invoice ratio
(LTI). The percentage of loans originated with terms
less than 20 years increased from 87% to 95% and the
average LTI remained constant at 1.26%. Improved loan quality
should continue to decrease delinquency rates, loss severity and
losses going forward as the outstanding principal balances of
the pre-2002 originated loans in the portfolio decreases and are
replaced by the higher credit quality originations.
Through our wholly-owned subsidiary, Origen Servicing, Inc., we
provide loan servicing for manufactured housing loans that we
and our predecessors have originated or purchased, and for loans
originated by third
33
parties. As of December 31, 2004 we serviced approximately
$1.37 billion of loans, consisting of approximately
$796.8 million of loans serviced for others and
approximately $573.0 million of loans that we own. Included
in the loans serviced for others are $176.8 million of
loans that we or our predecessors originated and subsequently
sold in two pre-2003 securitization transactions. As part of our
contractual services, certain of our servicing contracts require
us to advance uncollected principal and interest payments at a
prescribed cut-off date each month to an appointed trustee on
behalf of the investors in the loans. We are reimbursed by the
trust in the event such delinquent principal and interest
payments remain uncollected during the next reporting period.
Also, as part of the servicing function, in order to protect the
value of the housing asset underlying the loan, we are required
to advance certain expenses such as taxes, insurance costs and
costs related to the foreclosure or repossession process as
necessary. Such expenditures are reported to the appropriate
trustee for reimbursement. At December 31, 2004, we had
servicing advances outstanding of approximately
$9.1 million compared to $10.5 million at
December 31, 2003, a decrease of 13.3%.
As a result of the acquisition of Origen Financial L.L.C. on
October 8, 2003, which was accounted for as a purchase, we
recorded the net assets acquired at fair value, which resulted
in recording goodwill of $32.3 million. Based upon our
estimate of the fair value of Origen Financial L.L.C. at
December 31, 2004, there was no impairment of the recorded
value of goodwill.
In the past, our predecessor companies sold loans with recourse.
We monitor the performance of these loans and each month we
perform a valuation to determine the adequacy of the reserve.
For the year ended December 31, 2004 the liability was
increased by $3.1 million through a charge to earnings.
There was no increase to the liability for the year ended
December 31, 2003. The increase to the recourse liability
in 2004 is primarily due to continued performance deterioration
of a pool of loans originally sold by a predecessor with full
recourse in 2000. These loans, which we do not service, have a
large concentration in the state of Michigan and in states
impacted by the hurricanes of 2004. Michigan has experienced a
difficult economy during 2004 and these difficulties have
translated into unanticipated increases in late stage loan
delinquencies and defaults in the recourse loan pool. Likewise,
we saw similar increases in delinquencies in the hurricane
affected states. The pool of loans has continued to experience
actual losses in excess of that estimated at the time of sale.
The principal balance of the loan pool at the date of sale was
approximately $114.4 million, and as of December 31,
2004, the remaining loan principal balance is approximately
$45.1 million. We regularly evaluate the recourse liability
for adequacy by taking into consideration factors such as
changes in outstanding principal balance of the portfolios of
loans sold with recourse; trends in actual and forecasted
portfolio performance, including delinquency and charge-off
rates; and current economic conditions that may affect a
borrowers ability to pay. If actual results differ from
our estimates, we may be required to adjust our liability
accordingly. On a prospective basis, we do not expect to
experience any significant increases in our recorded liability
with respect to this loan pool, as the related loan balances
continue to pay down and the life of the loans extend beyond the
peak loss periods in their normal life cycle. At
December 31, 2004, the reserve for loan recourse liability
was $6.6 million as compared to $8.7 million, a
decrease of 24.1 %. The remaining principal balance of all loans
sold with recourse at December 31, 2004 was
$51.5 million versus $86.1 million at
December 31, 2003, a decrease of 24.3%.
Bonds outstanding, relating to securitized financings utilizing
asset-backed structures, totaled $328.4 million at
December 31, 2004. These bonds represented two securitized
transactions. Origen 2004-A, issued in February 2004, had bonds
outstanding of $167.9 million and Origen 2004-B, issued in
September 2004, had bonds outstanding of $160.5 million.
There were no bonds outstanding at December 31, 2003.
At December 31, 2004 our total borrowings under our
short-term securitization arrangement with Citigroup Global
Markets Realty Corp. were $107.4 million compared to
$273.4 million at December 31, 2003. We use the
Citigroup facility to fund loans we originate or purchase until
such time as they can be included in one of our securitization
transactions. We used the proceeds of our February 2004 and
September 2004 public securitizations and our May 2004 initial
public offering to reduce borrowings outstanding on the
Citigroup facility.
We currently have a revolving credit facility with JPMorgan
Chase Bank, N.A. (as successor by merger to Bank One, NA). Until
the most recent renewal date of December 31, 2004, the
terms of the facility allowed
34
us to borrow up to $7 million for the purpose of funding
required principal and interest advances on manufactured home
loans that are serviced for outside investors. Borrowings under
the facility are repaid upon our collection of monthly payments
made by borrowers on such manufactured home loans. At
December 31, 2004 we had no outstanding balance on the
facility compared to $4.0 million outstanding at
December 31, 2003. The facility was renewed on
January 14, 2005, with a borrowing limit of
$5 million. The lower limit reflects our assessment of
amounts likely to be utilized under the facility during its
term, which expires on December 31, 2005.
Stockholders equity at December 31, 2003 was
approximately $142.3 million. We raised $142.2 million
from our common stock offering of 15 million shares in a
Rule 144A private transaction that closed on
October 8, 2003, after deducting related offering costs. We
earned approximately $1.5 million for the period
October 8, 2003 through December 31, 2003 and declared
approximately $1.5 million in distributions in December
2003. The distributions were recorded as a liability and a
reduction to stockholders equity. The distributions were
paid in January 2004. We recorded unearned stock compensation in
the amount of $1.1 million relating to restricted shares
granted to executive management and independent directors
concurrent with the closing of our October 2003 common stock
offering.
In February 2004, we sold an additional 1 million shares,
also in a Rule 144A private transaction. In May 2004, we
issued 8 million shares in an initial public offering and
sold an additional 625,900 shares pursuant to an
underwriters over-allotment option. After deducting
offering costs, we netted cash of $72.2 million from the
February sale and the initial public offering. For the year
ended December 31, 2004, we made distributions to our
stockholders of approximately $8.5 million in the form of
dividends. This amount differs significantly from our book and
REIT taxable net income. The distributions are
reflected as a reduction of stockholders equity. In the
future we expect to pay dividends at an amount approximating our
REIT taxable net income. Our book net income in accordance with
GAAP on a consolidated basis will differ from our REIT taxable
net income due to book/tax differences relating to timing of
transactions and the exclusion of the results of operations of
any of our taxable REIT subsidiaries. Stockholders equity
at December 31, 2004 was approximately $203.5 million.
|
|
|
Results of Operations for the Three Months Ended
March 31, 2005 and 2004 |
Net income increased $0.7 million to $1.0 million for
the three months ended March 31, 2005 compared to net
income of $0.3 million for the same period in 2004. The
increase is the result of an increase of $1.8 million in
net interest income after loan losses and an increase of
$0.4 million in non interest income offset by an increase
in non interest expenses of $1.5 million as described in
more detail below.
Interest income increased 48.9% to approximately
$13.1 million compared to approximately $8.8 million.
This increase resulted primarily from an increase of
$230.5 million or 57.0% in average interest earning assets
from $404.7 million to $635.2 million. The increase in
interest earning assets includes approximately
$195.9 million in newly originated and purchased
manufactured housing loans and approximately $6.7 million
in asset backed securities. The weighted average net interest
rate on the loan receivable portfolio decreased to 8.4% from
9.0% due to competitive conditions resulting in lower interest
rates on new originations and a continuing positive change in
the credit quality of the loan portfolio. Generally, higher
credit quality loans will carry a lower interest rate. The
weighted average net interest rate is net of any servicing fee
resulting from securitization or sale of the loan but accounted
for as a financing.
Interest expense increased $2.4 million, or 80.0%, to
$5.4 million from $3.0 million. The majority of our
interest expense relates to interest on our loan funding
facilities. Average debt outstanding on our loan funding
facilities increased $153.4 million to $452.8 million
compared to $299.4 million, or 51.2%. The average interest
rate on total debt outstanding increased from 4.0% to 4.6%. The
higher average rate for the three months
35
ended March 31, 2005 was due primarily to the increase in
the average balance of loans financed on our long term
securitization facilities, which tend to have higher weighted
average interest rates compared to our short term securitization
facility, which is used primarily to fund new originations.
The following table presents information relative to the average
balances and interest rates of our interest earning assets and
interest bearing liabilities for the three months ended
March 31 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
Average | |
|
|
|
Yield/ | |
|
Average | |
|
|
|
Yield/ | |
|
|
Balance | |
|
Interest | |
|
Rate | |
|
Balance | |
|
Interest | |
|
Rate | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufactured housing loans
|
|
$ |
582,414 |
|
|
$ |
12,222 |
|
|
|
8.39 |
% |
|
$ |
386,427 |
|
|
$ |
8,643 |
|
|
|
8.95 |
% |
Investment securities
|
|
|
38,063 |
|
|
|
869 |
|
|
|
9.13 |
% |
|
|
6,279 |
|
|
|
98 |
|
|
|
6.24 |
% |
Other
|
|
|
14,719 |
|
|
|
75 |
|
|
|
2.04 |
% |
|
|
11,998 |
|
|
|
29 |
|
|
|
0.97 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
635,196 |
|
|
$ |
13,166 |
|
|
|
8.29 |
% |
|
$ |
404,704 |
|
|
$ |
8,770 |
|
|
|
8.67 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan funding facilities
|
|
$ |
452,819 |
|
|
$ |
5,226 |
|
|
|
4.62 |
% |
|
$ |
299,393 |
|
|
$ |
2,985 |
|
|
|
3.99 |
% |
Repurchase agreement investment securities
|
|
|
20,616 |
|
|
|
174 |
|
|
|
3.38 |
% |
|
|
4,181 |
|
|
|
19 |
|
|
|
1.82 |
% |
Notes payable servicing advances
|
|
|
402 |
|
|
|
10 |
|
|
|
9.95 |
% |
|
|
1,359 |
|
|
|
15 |
|
|
|
4.42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
473,837 |
|
|
$ |
5,410 |
|
|
|
4.57 |
% |
|
$ |
304,933 |
|
|
$ |
3,019 |
|
|
|
3.96 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and interest rate spread
|
|
|
|
|
|
$ |
7,756 |
|
|
|
3.72 |
% |
|
|
|
|
|
$ |
5,751 |
|
|
|
4.71 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net yield on average interest earning assets
|
|
|
|
|
|
|
|
|
|
|
4.88 |
% |
|
|
|
|
|
|
|
|
|
|
5.68 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the changes in net interest
income attributable to changes in volume (change in average
portfolio volume multiplied by prior period average rate) and
changes in rates (change in weighted average interest rate
multiplied by prior period average portfolio balance) for the
three months ended March 31, 2005 compared to the three
months ended March 31, 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume | |
|
Rate | |
|
Total | |
|
|
| |
|
| |
|
| |
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufactured housing loans
|
|
$ |
4,113 |
|
|
$ |
(534 |
) |
|
$ |
3,579 |
|
Investment securities
|
|
|
726 |
|
|
|
45 |
|
|
|
771 |
|
Other
|
|
|
14 |
|
|
|
32 |
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$ |
4,853 |
|
|
$ |
(457 |
) |
|
$ |
4,396 |
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan funding facilities
|
|
$ |
1,771 |
|
|
$ |
470 |
|
|
$ |
2,241 |
|
Repurchase agreement investment securities
|
|
|
139 |
|
|
|
16 |
|
|
|
155 |
|
Notes payable servicing advances
|
|
|
(24 |
) |
|
|
19 |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$ |
1,886 |
|
|
$ |
505 |
|
|
$ |
2,391 |
|
|
|
|
|
|
|
|
|
|
|
|
Increase in net interest income
|
|
|
|
|
|
|
|
|
|
$ |
2,005 |
|
|
|
|
|
|
|
|
|
|
|
Non-interest income is primarily made up of loan servicing
related revenue including loan servicing fees, late charges and
commissions on force placed insurance. Such revenue increased
$0.4 million, or 13.8% to $3.3 million compared to
$2.9 million. The average serviced loan portfolio on which
servicing fees are
36
collected increased approximately $79.6 million, or 6.1%
from $1.29 billion to $1.38 billion. The increase
relates primarily to fees from new loans originated that are
financed on our short term securitization facility with
Citigroup. The weighted average service fee rate increased
slightly as our serviced for others portfolio, which
has lower than average servicing rates, continues to pay down
and as we add servicing from securitizations at higher than our
average servicing portfolio rates. Also commissions and fees
related to force placed insurance increased 50.0% from
$0.2 million to $0.3 million.
We maintain an allowance for credit losses to cover inherent
losses that can be reasonably estimated for loan receivables
held on our balance sheet. The level of the allowance is based
principally on the outstanding balance of the contracts held on
our balance sheet and historical loss trends.
The provision for credit losses increased 5.3% to
$2.0 million from $1.9 million. Net charge-offs
against the allowance for loan loss decreased 9.0% from
$3.3 million, to $3.0 million. As a percentage of
average outstanding principal balance total net charge-offs on
an annualized basis decreased to 2.1% compared to 3.4%. We
expect net charge-offs as a percentage of average outstanding
principal balance to continue to decrease in the future due to
the fact that the owned portfolio of loans at
March 31, 2005 has a larger concentration of loans
originated in the years 2002 through 2005 than was the case for
the owned portfolio at March 31, 2004. A change to our
underwriting practices and credit scoring model in 2002 has
resulted in higher credit quality of loans originated since 2002.
Personnel expenses increased approximately $1.1 million, or
25.0%, to $5.5 million compared to $4.4 million. The
increase is primarily the result of a $0.4 million increase
in stock compensation expense related to restricted stock
granted to certain officers and employees, a $0.3 million
increase in annual performance bonus accrual and an increase in
the number of full time equivalent employees from 258 to 263,
largely related to staffing needs from our compliance efforts
for Sarbanes-Oxley compliance.
Loan origination and servicing expenses increased approximately
6.7%, to $414,000 compared to $388,000. The increase is
primarily a result of an increase in custodial bank and other
servicing related fees related to the general growth of the
servicing portfolio as we continue to securitize our new loan
originations.
Other operating expenses, which consist of occupancy and
equipment, professional fees, travel and entertainment and
miscellaneous expenses increased approximately $0.3 million
to $1.9 million, or approximately 18.8%, compared to
$1.6 million, the details of which are discussed below.
Occupancy and equipment, office expense and telephone expense
remained relatively constant at approximately $1.0 million
as we continue to recognize the cost saving benefits related to
the consolidation of some of our servicing and origination
functions in our Fort Worth, Texas and Southfield, Michigan
offices.
Professional fees increased approximately $271,000 or 279.4%, to
$368,000 compared to $97,000. The primary reason for the
increase was due to additional fees related to our year end
audit and Sarbanes-Oxley compliance related costs.
Travel and entertainment expenses increased approximately
$47,000 or 17.8%, to $311,000 compared to $264,000, primarily as
a result of our expanded marketing programs.
Miscellaneous expenses increased approximately $129,000 or
37.4%, to $474,000 compared to $345,000. The increase was
primarily the result of an increase of approximately $105,000 in
director and officer liability insurance which was $286,000
compared to $181,000. The increase was due to our conversion to
a publicly traded company following our initial public offering
in May 2004.
37
|
|
|
Results of Operations for the Years Ended
December 31, 2004 and December 31, 2003 (pro forma of
Origen Financial Inc.) |
The following schedule is a presentation of the results of
operations for the twelve months ended December 31, 2004,
of Origen Financial, Inc. and a pro forma presentation of the
combined results of operations, for the year 2003, of Origen
Financial L.L.C. (January 1, 2003 through October 7,
2003) and Origen Financial, Inc. (October 8, 2003 through
December 31, 2003). The historical results of Origen
Financial L.L.C. for 2003 have been combined with those of
Origen Financial, Inc. because we feel this comparison is the
most meaningful since the operations were substantially the same
for all of 2003 and there was no significant difference between
the cost basis Origen Financial L.L.C.s assets and their
respective fair values at October 8, 2003.
The pro forma combined results of operations for the year ended
December 31, 2003 reflect a restatement of previously
issued financial statements as the result of the correction of
an interpretive error in applying accounting principles to a
pool of loans acquired at a discount in October 2003. The effect
of the correction reduced interest income by approximately
$438,000 for the year ended December 31, 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(In thousands) | |
|
|
|
|
(Restated) | |
Interest Income
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$ |
42,479 |
|
|
$ |
23,737 |
|
|
Total interest expense
|
|
|
15,020 |
|
|
|
13,826 |
|
|
|
|
|
|
|
|
Net interest income before loan losses
|
|
|
27,459 |
|
|
|
9,911 |
|
|
Provision for credit losses and recourse liability
|
|
|
10,185 |
|
|
|
5,533 |
|
|
|
|
|
|
|
|
Net interest income after loan losses
|
|
|
17,274 |
|
|
|
4,378 |
|
Non-interest income
|
|
|
11,184 |
|
|
|
10,237 |
|
Non-interest Expenses
|
|
|
|
|
|
|
|
|
|
Personnel
|
|
|
21,947 |
|
|
|
20,206 |
|
|
Loan origination and servicing
|
|
|
1,354 |
|
|
|
1,199 |
|
|
Write down of residual interest
|
|
|
25 |
|
|
|
5,084 |
|
|
State business taxes
|
|
|
312 |
|
|
|
121 |
|
|
Other operating
|
|
|
7,786 |
|
|
|
10,436 |
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
|
31,424 |
|
|
|
37,046 |
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(2,966 |
) |
|
$ |
(22,431 |
) |
|
|
|
|
|
|
|
Loan originations increased $63.5 million, or 33.7% from
$188.4 million to $251.9 million. For the year 2004,
chattel loans comprised approximately 97% of loans originated
compared to approximately 95% for year 2003. The balance of
loans originated, in each year, were land-home loans, which
represent manufactured housing loans that are additionally
collateralized by real estate.
Interest income on loans increased by $16.2 million, from
$23.7 million to $39.9 million, or 68.4%. This
increase in interest income resulted primarily from an increase
in the average outstanding balance of manufactured housing loan
receivables of $214.4 million from $250.2 million to
$464.6 million, or 85.7%. The increase in the average
receivable balance was partially offset by a decrease in the
average yield on the portfolio from 9.5% to 8.6%. The decrease
in the yield on the portfolio was a result of our continued
efforts to originate higher credit quality, shorter term loans.
Generally, higher credit quality, shorter term loans carry a
lower interest rate.
Interest income on other interest earning assets increased from
$0.03 million to $2.6 million. The increase was
primarily the result of purchases during 2004 of asset-backed
securities that we plan to hold for investment. Such securities
are carried on our balance sheet at amortized cost, which at
December 31, 2004
38
was $37.6 million. The securities are collateralized by
manufactured housing loans and are classified as
held-to-maturity. Other interest earning assets in 2003
consisted primarily of restricted cash in the form of servicing
related escrow accounts.
Interest expense increased to $15.0 million from
$13.8 million, or 8.7%. Average interest-bearing
liabilities increased from $237.6 million to
$362.6 million. However the interest rate on interest
bearing liabilities decreased from 5.8% to 4.1%. In the absence
of other capital sources prior to the $150.0 million
private placement of our common stock in October 2003, it was
necessary to rely on high cost, short-term borrowed funds. The
historically low rates on loan funding facilities accessed
during 2003 were partially offset by the continued use of high
cost borrowings to fund shortfalls in cash from operations
through October 7, 2003. Given our improved capital
position resulting from our private placement and initial public
offering of common stock in May 2004 and our February 2004 and
September 2004 securitizations, we anticipate that there will be
no discernable need for the type of short-term, high-cost
borrowings that were utilized during 2003. We expect that our
improved capital position will allow us to negotiate more
favorable terms on our loan warehouse facilities and other
borrowings in the future.
The following table presents information relative to the average
balances and interest rates of our interest earning assets and
interest bearing liabilities for the years ended
December 31 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
Average | |
|
|
|
Yield/ | |
|
Average | |
|
|
|
Yield/ | |
|
|
Balance | |
|
Interest | |
|
Rate | |
|
Balance | |
|
Interest | |
|
Rate | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
(Restated) | |
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufactured housing loans
|
|
$ |
464,578 |
|
|
$ |
39,862 |
|
|
|
8.58 |
% |
|
$ |
250,193 |
|
|
$ |
23,707 |
|
|
|
9.48 |
% |
Investment securities
|
|
|
28,109 |
|
|
|
2,397 |
|
|
|
8.53 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
18,855 |
|
|
|
220 |
|
|
|
1.17 |
% |
|
|
3,449 |
|
|
|
30 |
|
|
|
0.87 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
511,542 |
|
|
$ |
42,479 |
|
|
|
8.30 |
% |
|
$ |
253,642 |
|
|
$ |
23,737 |
|
|
|
9.36 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan funding facilities
|
|
$ |
344,502 |
|
|
$ |
14,582 |
|
|
|
4.23 |
% |
|
$ |
236,245 |
|
|
$ |
13,770 |
|
|
|
5.83 |
% |
Repurchase agreement investment securities
|
|
|
17,573 |
|
|
|
399 |
|
|
|
2.27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable servicing advances
|
|
|
553 |
|
|
|
39 |
|
|
|
7.05 |
% |
|
|
1,333 |
|
|
|
56 |
|
|
|
4.20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
362,628 |
|
|
$ |
15,020 |
|
|
|
4.14 |
% |
|
$ |
237,578 |
|
|
$ |
13,826 |
|
|
|
5.82 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and interest rate spread
|
|
|
|
|
|
$ |
27,459 |
|
|
|
4.16 |
% |
|
|
|
|
|
$ |
9,911 |
|
|
|
3.54 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net yield on average interest earning assets
|
|
|
|
|
|
|
|
|
|
|
5.37 |
% |
|
|
|
|
|
|
|
|
|
|
3.91 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
The following table sets forth the changes in net interest
income attributable to changes in volume (change in average
portfolio volume multiplied by prior period average rate) and
changes in rates (change in weighted average interest rate
multiplied by prior period average portfolio balance) for the
year ended December 31, 2004 compared to the year ended
December 31, 2003 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume | |
|
Rate | |
|
Total | |
|
|
| |
|
| |
|
| |
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufactured housing loans
|
|
$ |
18,395 |
|
|
$ |
(2,240 |
) |
|
$ |
16,155 |
|
Investment securities
|
|
|
2,397 |
|
|
|
|
|
|
|
2,397 |
|
Other
|
|
|
180 |
|
|
|
10 |
|
|
|
190 |
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$ |
20,972 |
|
|
$ |
(2,230 |
) |
|
$ |
18,742 |
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan funding facilities
|
|
$ |
4,582 |
|
|
$ |
(3,770 |
) |
|
$ |
812 |
|
Repurchase agreement investment securities
|
|
|
399 |
|
|
|
|
|
|
|
399 |
|
Notes payable servicing advances
|
|
|
(55 |
) |
|
|
38 |
|
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$ |
4,926 |
|
|
$ |
(3,732 |
) |
|
$ |
1,194 |
|
|
|
|
|
|
|
|
|
|
|
|
Increase in net interest income
|
|
|
|
|
|
|
|
|
|
$ |
17,548 |
|
|
|
|
|
|
|
|
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Monthly provisions are made to the allowance for general loan
losses in order to maintain a level that is adequate to absorb
inherent losses in the manufactured housing loan portfolio. The
provision for credit losses increased $1.6 million, or
29.0%, from $5.5 million to $7.1 million. The increase
is primarily related to the increase in the outstanding
principal balance of the loan portfolio through new loan
originations offset by charge-offs. However, our provision for
mortgage loan losses has not increased at the same rate as our
mortgage loan portfolio due to the improved credit quality and
reduced charge-offs of our new originations. Delinquency rates
on more recent vintage year loans have shown consistent
improvement from 2003 to 2004. At December 31, 2004, 89.6%
of our owned loan portfolio was originated after
December 31, 2001, compared with 81.0% at December 31,
2003. This is significant because in 2002 we introduced a
significantly improved internally developed credit-scoring
model,
TNGtm,
and implemented new underwriting procedures around this model,
both of which greatly improved the quality of our loan
originations.
In the fourth quarter 2004, $3.1 million was added, through
a charge against earnings, to the provision for losses on loans
sold with recourse. No additional provision for loan recourse
losses was made in year 2003. The primary reason for the
increase to the provision for losses relates to a pool of loans
sold, with full recourse, by our predecessor in 2000. During the
fourth quarter of 2004, this pool of loans experienced actual
losses in excess of that estimated previously, largely due, in
our estimation, to the difficult economy in Michigan during 2004
and the effect of the hurricanes. The loans in the pool include
a significant amount of Michigan originations and the difficult
Michigan economy has caused an increase in late stage
delinquencies. The increased loss provision was based on an
increase in the estimated cumulative life-time losses on the
remaining loans in the pool and the resulting impact on the
calculated present value of expected future obligations. We
regularly evaluate the recourse liability for adequacy by taking
into consideration factors such as changes in outstanding
principal balance of the portfolios of loans sold with recourse;
trends in actual and forecasted portfolio performance, including
delinquency and charge-off rates; and current economic
conditions that may affect a borrowers ability to pay.
When actual results differ from our estimates, we adjust our
liability accordingly. The original pool balance was
$114.4 million. The pool balance at December 31, 2004
was $45.1 million, which represented 39.4% of the original
pool balance. On a prospective basis, we do not expect to
experience any significant increases in losses on these loans,
with respect to this loan pool, as the related loan balances
continue to pay down and the life of the loans extend beyond the
peak loss periods in their normal life cycle.
Non-interest income for year 2004 totaled $11.2 million as
compared to $10.2 million for year 2003, an increase of
9.8%. The primary components of non-interest income are fees and
other income from loan
40
servicing and insurance operations. Loan servicing fees
comprised approximately 83% of non-interest income in 2004 and
approximately 74% in 2003, reflecting the overall increase in
the serviced loan portfolio. Servicing fees were negatively
impacted, however, during 2004 due to a subordination to bond
investors of the payment of our servicing fees from our 2002-A
securitization transaction. In March 2004, due to greater than
originally anticipated losses in the 2002-A loan pool, the
over-collateralization of the 2002-A bonds fell below the
contractual requirement, which triggered the subordination of
our servicing fee. The regular payment of the servicing fee will
be resumed in the event the contractually required
over-collateralization level is attained. Our projections
indicate that there will be sufficient cash available to recover
all loan servicing fees due us over the life of the transaction.
However, our analysis indicates that the earliest likely payment
date of such fees will occur during year 2018, which is the
contractual early call date for the bond issue. Accordingly, we
adjusted our monthly accrual of the 2002-A servicing fee based
on a net present value calculation that assumes a discount rate
of 12% and a lump-sum pay-out of the servicing fees due us in
June of 2018. The negative impact of this subordination of
servicing fees for 2004 was a reduction in servicing fee income
of approximately $500,000.
Total non-interest expense for 2004 was $31.4 million as
compared to $37.0 million for 2003. Following is a
discussion of the decrease of $5.6 million, or 15.1%.
Total personnel expenses increased $1.7 million or 8.4%
from $20.2 million to $21.9 million. Salaries and
commissions increased 12.4%, from $12.9 million to
$14.5 million as a result of the increase during 2004 in
the average number of full time employee equivalents from 252 to
265, the cost of a December 2004 reduction in force of
approximately 8% of our authorized positions, and increased
commissions due to increased sales. The expenses incurred in
relation to the reduction in force consisted primarily of
severance payments and employee relocation costs. As a
consequence of the reduction in force, it was necessary to
require several employees to relocate in response to changed
responsibilities. The approximate cost of the reduction in force
and related relocations was $500,000. The most significant
increase in personnel expense in 2004 related to stock
compensation expense under our Equity Incentive Plan. This
non-cash expense increased from $0.1 million in 2003 to
$2.1 million in 2004. The plan did not go into effect until
the last quarter of 2003, following our October 2003
$150.0 million private placement of common stock. The
number of shares of common stock granted under the Equity
Incentive Plan increased from 182,500 to 589,500. The cost of
the stock grants is being amortized over the related service
periods. The increase in salaries and stock compensation expense
was partially offset by a decrease in total bonus expense of
$1.6 million. Of the $1.5 million of bonus expense in
2004, $300,000 related to quarterly incentive payments,
primarily to non-management personnel. For 2003, approximately
$1 million of the total bonus expense of $3.1 million
related to such non-annual payments.
Annual performance bonuses are paid at the discretion of the
compensation committee of the board of directors. Through the
first three quarters of 2004 there was no accrual for annual
performance bonuses due to the fact that our actual operating
results were not keeping pace with our budgeted operating
results. In the fourth quarter of 2004 the compensation
committee determined that the payment of an annual performance
bonus was in the best interests of the company, albeit at a
level significantly reduced from the prior year because targeted
profit and loan origination goals were not attained.
Accordingly, due to the achievement of numerous personal goals
and for competitive considerations, an accrual of
$1.2 million was established in the fourth quarter 2004 for
the payment of annual performance bonuses for the year 2004.
Such bonuses were paid in March 2005.
Loan origination and servicing expenses increased
$0.2 million, or 16.7% from $1.2 million to
$1.4 million. The increase is directly related to the
increase in loan originations from $188.4 million to
$251.9 million and an increase in the servicing portfolio
from $1.29 billion to $1.37 billion. The increase in
these costs was partially mitigated by the consolidation of the
majority of our origination operations in Southfield, Michigan
and the consolidation and streamlining of much of our
repossession operations in our Fort Worth, Texas offices in
2004.
Securitized loan transactions completed during years 2002 and
2001 were structured as loan sales for accounting purposes. As a
result, our predecessor companies recorded an asset representing
residual interests in the loans at the time of sale, based on
the discounted values of the projected cash flows over the
expected
41
life of the loans sold. Due to deterioration (beginning in 2002
and accelerating in 2003) in the credit performance of these
sold loans as compared to the initially projected performance,
it was necessary to adjust the carrying value of these residual
interests by $25,000 in 2004 compared to a write down of
$5.0 million in 2003. On a prospective basis, we do not
expect to record any significant write-downs, as we only have
residual balances remaining on our balance sheet of
approximately $724,000. Since 2002, neither we nor our
predecessor has structured a securitization transaction in a
manner requiring gain on sale treatment , nor is it our
intention to do so in the future.
As a national loan originator and servicer of manufactured
housing loans, we are required to be licensed in all states in
which we conduct business. Accordingly, we are subject to
taxation by the states in which we conduct business. Depending
on the individual state, taxes may be based on proportioned
revenue, net income, capital base or asset base. In 2004 we
incurred state taxes of $312,000 as compared to $121,000 in 2003.
Other operating expenses, which consist of occupancy and
equipment, professional fees, travel and entertainment and
miscellaneous expenses decreased $2.6 million, or 25.0%,
from $10.4 million to $7.8 million, the details of
which are discussed below.
Occupancy and equipment, office expense and telephone expense
decreased a total of approximately $0.3 million, or 6.3%,
from $4.7 million to $4.4 primarily as a result of
consolidating a significant amount of our loan origination
functions to Southfield, Michigan in April 2003.
Professional fees decreased $1.8 million, or 66.7%, from
$2.7 million to $0.9 million. The primary reasons for
the decrease related to a reduction in the use of outside
professionals and consultants that were used prior to October
2003 as we attempted to raise capital, undertook certain
licensing efforts, pursued several information technology
initiatives and various other legal expenses. We have made a
concerted effort to shift more of these functions, when
feasible, to our in-house personnel.
Miscellaneous expenses decreased approximately $0.5 million
from $3.0 million to $2.5 million. The decrease was
primarily the result of $1.7 million in costs associated
with minority interests in 2003, offset by an increase of
approximately $1.1 million in director and officer
liability insurance related to our formation as a REIT in
October 2003 and our conversion to a publicly traded company
following our initial public offering in May 2004.
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|
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Results of Operations for the Years Ended
December 31, 2003 (pro forma of Origen Financial, Inc.) and
December 31, 2002 (Origen Financial L.L.C.) |
Loan originations for the twelve months ended December 31,
2003 totaled $188.4 million versus $191.3 million for
the full year of 2002. For year 2003, chattel loans comprised
approximately 95% of loans originated compared to approximately
92% for year 2002. The balance of the loans originated in each
year were land-home loans, which represent manufactured housing
loans additionally secured by real estate.
Interest income on loans of $23.7 million was significantly
greater in 2003 as compared to $10.0 million in 2002,
primarily because during 2003 we utilized a combination of loan
funding facilities to finance our loan portfolio on book,
whereas during 2002 we sold a substantial portion of our loan
portfolio in a securitized transaction, the structure of which
required gain on sale treatment for accounting purposes. In
March 2002, we sold approximately $135 million of our loans
through a securitized structure, retaining a residual interest
in such loans representing an initial retention of approximately
4%. Accordingly, we had less interest-earning assets on our
books during year 2002. For the year 2003, we had average
interest-earning assets of $264.0 million as compared to
$93.9 million for year 2002. This was offset to a degree by
lower average interest rates during 2003. Average rates for
interest-earning assets during 2003 were 9.40% versus 10.67% for
year 2002.
Interest expense increased significantly during year 2003 to
$13.8 million compared to $5.9 million in 2002. As
operating losses were incurred during 2002 and 2003, it was
necessary to rely to an increasing degree, in the absence of
adequate permanent capital, on high cost, short-term borrowed
funds. Average interest-bearing liabilities for year 2003 were
$370.2 million, as compared to $108.5 million for
2002. Of the $370.2 million average interest-bearing
liabilities for year 2003, approximately $197.8 million
related to
42
financing treatment relating to loans receivable funded by the
Citigroup facility. This was a significant reason for the
increased interest expense in 2003. Average interest rates on
interest-bearing liabilities were lower in 2003 than in 2002.
However, the historically low rates on loan funding facilities
accessed during 2003 were partially offset by the continued use
of high cost borrowings to fund shortfalls in cash from
operations through October 7, 2003. The average rate on
interest-bearing liabilities for 2003 was 4.17% as compared to
5.47% for 2002. Interest expense incurred during years 2003 and
2002 is not indicative of future interest expense.
While the average serviced loan portfolio remained fairly
constant during years 2003 and 2002 at approximately
$1.3 billion, we realized an increase in loan servicing
fees during year 2003. Typically, we receive servicing fees of
1.00% on loans we place in securitized transactions. During
2003, we financed our loans primarily using a short-term
securitized structure, the terms of which specified a servicing
fee of 1.25%, resulting in higher servicing income on a
significant portion of our serviced loans.
Provisions for credit losses and loan recourse reserves were
substantially lower in year 2003 at $5.5 million as
compared to $16.1 million in 2002. In 2002, due to the
continued performance deterioration of a pool of loans
originally sold with full recourse in year 2000, it was
necessary for our predecessor company to greatly increase its
provision for such recourse. The principal balance of the loan
pool at the date of sale was approximately $114.4 million,
and as of December 31, 2003, the remaining loan principal
balance was approximately $56.5 million. These loan
balances are not carried on our books, since ownership of the
loans was transferred to the acquirer in a true sale
transaction, albeit with 100% recourse for loans that become
90-days delinquent.
The March 2002 securitized loan sale was accounted for using
gain on sale treatment. The resulting net gain recorded in year
2002 was approximately $2.7 million. Our 2003 private
securitization with Citigroup was structured as a financing.
Other income increased substantially in year 2003 compared to
2002. Such income consists primarily of ancillary revenue
relating to our loan servicing operations. This revenue is
substantially derived from commissions on force-placed insurance
on loans serviced and late fees retained by us as collected from
delinquent borrowers.
For 2003 total credit losses on loans we originated, including
losses relating to assets securitized by us and loans sold with
full or partial recourse, amounted to approximately 3.37% of the
average principal balance of the related loans, compared to
approximately 3.70% for 2002. Because losses on repossessions
are reflected in the loss ratio principally in the period during
which the repossessed property is disposed of, fluctuations in
the number of repossessed properties disposed of from period to
period may cause variations in the charge-off ratio. At
December 31, 2003, the 30 days or greater delinquency
rate on loans was 5.59%, compared to 4.13% at December 31,
2002.
Non interest income decreased slightly from $10.4 million
in 2002 to $10.2 million in 2003. Such income consists
primarily of fees from loan servicing activities and insurance
operations.
Non interest expenses increased by $9.5 million in 2003.
The most significant increases were in personnel costs, residual
interest write downs and other operating expenses.
Personnel costs increased $3.4 million primarily due to an
increase in the average number of employees between years 2003
and 2002 and costs associated with a change of control payment
to one of our executives. The October 8, 2003 common stock
offering triggered a change of control provision in the
employment contract of the Chief Executive Officer of Origen
Financial L.L.C., which was satisfied by the payment of
approximately $944,000 in stock grants and cash. At
December 31, 2003, we had 262 employees. The average number
of employees for the year 2003 was 252 versus 236 in 2002, an
increase of 6.8%. In 2002, there were approximately
$1.6 million of reorganization costs, most of which were
personnel related.
Securitized loan transactions completed during years 2002 and
2001 were structured as loan sales for accounting purposes. As a
result, our predecessor companies recorded an asset representing
residual interests in the loans at the time of sale, based on
the discounted values of the projected cash flows over the
expected life of the loans sold. Due to deterioration (beginning
in 2002 and accelerating in 2003) in the credit
43
performance of these sold loans as compared to the initially
projected performance, it was necessary to adjust the carrying
value of these residual interests during both years 2003 and
2002. As a result, a write-down of approximately $5 million
was taken in 2003 and approximately $2.1 million was taken
in 2002. On a going-forward basis, we do not expect to
experience this magnitude of write-down, as we only have
residual balances remaining on our balance sheet of
approximately $749,000. Our 2003 private securitization with
Citigroup was structured as a financing. Since 2002, neither we
nor our predecessor companies have structured a securitization
transaction in a manner requiring gain on sale treatment, nor is
it our intention to do so in the future.
Other operating expenses increased by almost $2.7 million
in 2003 as compared to 2002. This increase was largely
attributable to approximately $2.5 million related to the
extensive use of outside professional services, primarily law
firms, in the process of determining all state licensing
requirements and the securing of such licenses, as well as
professional services used in the pursuit of capital, other than
that incurred for the October 2003 stock offering.
Liquidity and Capital Resources
We require capital to fund our loan originations, acquire
manufactured housing loans originated by third parties and
expand our loan servicing operations. At March 31, 2005 we
had approximately $5.6 million in available cash and cash
equivalents. As a REIT, we are required to distribute at least
90% of our REIT taxable income (as defined in the Internal
Revenue Code) to our stockholders on an annual basis. Therefore,
as a general matter, it is unlikely we will have any substantial
cash balances that could be used to meet our liquidity needs.
Instead, these needs must be met from cash provided from
operations and external sources of capital. Historically, we
have satisfied our liquidity needs through cash generated from
operations, sales of our common and preferred stock, borrowings
on our credit facilities and loan sales and securitizations.
Cash used in operating activities during the quarter ended
March 31, 2005, totaled $69.5 million versus
$50.5 million for the quarter ended March 31, 2004.
Cash used to originate and purchase loans increased 48.9%, or
$28.9 million, to $88.0 million for the quarter ended
March 31, 2005 compared to $59.1 million for the
quarter ended March 31, 2004. The increase is the result of
increased origination volume and the purchase of approximately
$30.7 million in principal balance of manufactured housing
loans in March 2005. Principal collections on manufactured
housing loans receivable totaled $16.3 million for the
quarter ended March 31, 2005 as compared to
$11.4 million for the quarter ended March 31, 2004 an
increase of $4.9 million, or 43.0%. The increase in
collections is primarily related to the increase in the average
outstanding loan portfolio balance, which was
$582.4 million for the quarter ended March 31, 2005
compared to $386.4 million for the quarter ended
March 31, 2004 in addition to improved credit quality and
decreased delinquency as a percentage of outstanding loan
receivable balance.
Cash used in investing activities was $0.7 million in the
quarter ended March 31, 2005 versus $29.1 million for
the quarter ended March 31, 2004. The primary reason for
this decrease was the purchase of approximately
$32.0 million in securitization bonds in the quarter ended
March 31, 2004 compared to the purchase of approximately
$4.1 million of securitization bonds in the quarter ended
March 31, 2005. The bonds were purchased at a discount to
par of approximately 2.0% in the quarter ended March 31,
2005 compared to a discount to par of 18.7% in the quarter ended
March 31, 2004.
The primary source of cash during the quarter ended
March 31, 2005 was approximately $65.5 million in net
proceeds from notes payable used to finance loan receivables.
This is compared to $55.0 million in net proceeds from
notes payable used to finance loan receivables,
$23.5 million from a repurchase agreement to finance the
purchase of the securitization bonds and approximately
$9.6 million from the issuance of 1,000,000 million
shares of our common stock, in the quarter ended March 31,
2004.
On May 12, 2005, we completed a securitized financing
transaction for approximately $190.0 million of loans,
which was funded by issuing bonds in the approximate amount of
$165.3 million, at a duration weighted average interest
cost of 5.30%. We structured the transaction to issue classes of
bonds with different estimated maturity dates and average lives
to better meet investor demands.
44
We currently have a short term securitization facility used for
warehouse financing with Citigroup Global Markets Realty Corp.
(Citigroup) (formerly Salomon Brothers Realty
Corporation). Under the terms of the agreement we pledge loans
as collateral and in turn are advanced funds. The facility has a
maximum advance amount of $200 million, an advance rate
equal to 85% of the unpaid principal balance of the pool of
loans pledged and an annual interest rate equal to LIBOR plus a
spread. The facility also includes a $15 million
supplemental advance amount that is collateralized by our
residual interests in the 2004-A and 2004-B securitizations. The
facility matures on March 23, 2006. At March 31, 2005
the outstanding balance on the facility was approximately
$183.7 million.
We currently have three separate repurchase agreements with
Citigroup for the purpose of financing the purchase of
investments in three asset backed securities with principal
balances at March 31, 2005 of $32.0 million,
$3.1 million and $3.7 million, respectively. Under the
terms of the agreements we sell our interest in the securities
with an agreement to repurchase the interests at a predetermined
future date at the principal amount sold plus an interest
component. The securities were financed at an amount equal to
75% of the current market value as determined by Citigroup. At
March 31, 2005 the repurchase agreements had outstanding
principal balances of approximately $18.1 million,
$1.8 million and $2.2 million, respectively. Typically
the repurchase agreements are rolled over for 30 day
periods when they expire. Annual interest rates on the
agreements are equal to LIBOR plus a spread.
We currently have a revolving credit facility with JPMorgan
Chase Bank, N.A. (as successor by merger to Bank One, NA). Under
the terms of the facility we can borrow up to $5 million
for the purpose of funding required principal and interest
advances on manufactured housing loans that are serviced for
outside investors. Borrowings under the facility are repaid upon
our collection of monthly payments made by borrowers. The
outstanding balance under the facility accrues interest at the
banks prime rate. To secure the loan, we have granted the
bank a security interest in substantially all of our assets
excluding securitized loans. The expiration date of the facility
is December 31, 2005. At March 31, 2005 the
outstanding balance on the facility was approximately
$2.0 million.
In addition to borrowings under our credit facilities, we have
fixed contractual obligations under various lease agreements.
Our contractual obligations were comprised of the following as
of December 31, 2004:
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Less than | |
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1-3 | |
|
4-5 | |
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|
|
Total | |
|
1 Year | |
|
Years | |
|
Years | |
|
Thereafter | |
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| |
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| |
|
| |
|
| |
|
| |
Notes payable
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Citigroup(1)
|
|
$ |
107,373 |
|
|
$ |
83,279 |
|
|
$ |
24,094 |
|
|
$ |
|
|
|
$ |
|
|
Notes payable 2004 A securitization(2)
|
|
|
167,887 |
|
|
|
3,173 |
|
|
|
11,623 |
|
|
|
9,887 |
|
|
|
143,204 |
|
Notes payable 2004 B securitization(3)
|
|
|
160,501 |
|
|
|
3,033 |
|
|
|
11,111 |
|
|
|
9,452 |
|
|
|
136,905 |
|
Repurchase agreement(4)
|
|
|
20,153 |
|
|
|
20,153 |
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|
|
|
|
|
|
|
|
|
|
|
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Operating leases
|
|
|
5,421 |
|
|
|
1,004 |
|
|
|
2,801 |
|
|
|
948 |
|
|
|
668 |
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
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Total Contractual Obligations
|
|
$ |
461,335 |
|
|
$ |
110,642 |
|
|
$ |
49,629 |
|
|
$ |
20,287 |
|
|
$ |
280,777 |
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(1) |
Origen Financial L.L.C. and Origen Securitization Company, LLC,
one of our special purpose entity subsidiaries, are borrowers
under the short-term securitization facility with Citigroup. |
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(2) |
Origen Financial L.L.C. through a special purpose entity, Origen
Manufactured Housing Trust 2004-A, is the issuer of the
notes payable under the 2004 A securitization. |
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|
(3) |
Origen Financial L.L.C. through a special purpose entity, Origen
Manufactured Housing Trust 2004-B, is the issuer of the
notes payable under the 2004 B securitization. |
|
|
|
(4) |
Origen Financial L.L.C. is the borrower under the Citigroup
repurchase agreement. |
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Cash generated from operations and borrowings under our
Citigroup facility should enable us to meet our liquidity needs
through the end of 2005, depending on market conditions which
may affect loan origination volume, loan purchase opportunities
and the availability of securitizations. Thereafter, or earlier
if adverse market
45
conditions require or if loan purchase opportunities become
available, we may be required to seek additional funds through
additional credit facilities or additional sales of our common
or preferred stock to satisfy our short-term liquidity needs.
Our long-term liquidity and capital requirements consist
primarily of funds necessary to originate and hold manufactured
housing loans, acquire and hold manufactured housing loans
originated by third parties and expand our loan servicing
operations. We expect to meet our long-term liquidity
requirements through cash generated from operations, but we will
require external sources of capital, including sales of shares
of our common and preferred stock and third-party borrowings. We
intend to continue to access the asset-backed securities market
for the long-term financing of our loans in order to match the
interest rate risk between our loans and the related long-term
funding source. Our ability to meet our long-term liquidity
needs depends on numerous factors, many of which are outside of
our control. These factors include general market interest rate
levels, the shape of the yield curve and spreads between rates
on U.S. Treasury obligations and securitized bonds, all of
which affect investors demand for securitized debt.
The risks associated with the manufactured housing business
become more acute in any economic slowdown or recession. Periods
of economic slowdown or recession may be accompanied by
decreased demand for consumer credit and declining asset values.
In the manufactured housing business, any material decline in
collateral values increases the loan-to-value ratios of loans
previously made, thereby weakening collateral coverage and
increasing the size of losses in the event of default.
Delinquencies, repossessions, foreclosures and losses generally
increase during economic slowdowns or recessions. For our
finance customers, loss of employment, increases in
cost-of-living or other adverse economic conditions would impair
their ability to meet their payment obligations. Higher industry
inventory levels of repossessed manufactured houses may affect
recovery rates and result in future impairment charges and
provision for losses. In addition, in an economic slowdown or
recession, servicing and litigation costs generally increase.
Any sustained period of increased delinquencies, repossessions,
foreclosures, losses or increased costs would adversely affect
our financial condition and results of operations.
These same risks also affect our ability to securitize loans.
Continued access to the securitization market is very important
to our business. Numerous factors affect our ability to complete
a successful securitization, including factors beyond our
control. These include general market interest rate levels, the
shape of the yield curve and spreads between rates on
U.S. Treasury obligations and securitized bonds, all of
which affect investors demand for securitized debt. When
these factors are unfavorable our ability to successfully
complete securitization transactions is impeded and our
liquidity and capital resources are affected negatively. There
can be no assurance that current favorable conditions will
continue or that unfavorable conditions will not return.
Quantitative and Qualitative Disclosure about Market Risk
Market risk is the risk of loss arising from adverse changes in
market prices and interest rates. Our market risk arises from
interest rate risk inherent in our financial instruments. We are
not currently subject to foreign currency exchange rate risk or
commodity price risk.
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For the Three Months Ended March 31, 2005 |
Our variable rate debt, under which we paid interest at various
LIBOR rates plus a spread totaled $207.9 million and
$160.5 million at March 31, 2005 and March 31,
2004, respectively. If LIBOR increased or decreased by 1.0%
during the three months ended March 31, 2005 and 2004, we
believe our interest expense would have increased or decreased
by approximately $0.4 million and $53,500, respectively,
based on the $149.4 million and $213.9 million average
balance outstanding under our variable rate debt facilities for
the three months ended March 31, 2005 and March 31,
2004, respectively. For the three months ended March 31,
2004, the increase or decrease in interest expense related to an
increase or decrease in LIBOR was mitigated somewhat because our
average variable rate debt outstanding was hedged for portions
of the period through the use of interest rate swap agreements
thus minimizing the effect of changes in the benchmark LIBOR
rate. We had no variable rate interest earning assets
outstanding during the three months ended March 31, 2005
and 2004.
46
The following table shows the contractual maturity dates of our
assets and liabilities at March 31, 2005. For each maturity
category in the table the difference between interest-earning
assets and interest-bearing liabilities reflects an imbalance
between repricing opportunities for the two sides of the balance
sheet. The consequences of a negative cumulative gap at the end
of one year suggests that, if interest rates were to rise,
liability costs would increase more quickly than asset yields,
placing negative pressure on earnings (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity | |
|
|
| |
|
|
0 to 3 | |
|
4 to 12 | |
|
1 to 5 | |
|
Over 5 | |
|
|
|
|
Months | |
|
Months | |
|
Years | |
|
Years | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
ASSETS |
Cash and equivalents
|
|
$ |
5,598 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,598 |
|
Restricted cash
|
|
|
10,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,653 |
|
Loans receivable, net
|
|
|
3,013 |
|
|
|
9,489 |
|
|
|
84,279 |
|
|
|
533,463 |
|
|
|
630,244 |
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,772 |
|
|
|
40,772 |
|
Furniture, fixtures and equipment, net
|
|
|
217 |
|
|
|
680 |
|
|
|
1,823 |
|
|
|
|
|
|
|
2,720 |
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,277 |
|
|
|
32,277 |
|
Other assets
|
|
|
11,641 |
|
|
|
9,174 |
|
|
|
6,847 |
|
|
|
2,633 |
|
|
|
30,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
31,122 |
|
|
$ |
19,343 |
|
|
$ |
92,949 |
|
|
$ |
609,145 |
|
|
$ |
752,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Warehouse financing
|
|
$ |
868 |
|
|
$ |
182,871 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
183,739 |
|
Securitization financing
|
|
|
1,491 |
|
|
|
4,588 |
|
|
|
40,511 |
|
|
|
268,925 |
|
|
|
315,515 |
|
Repurchase agreements
|
|
|
22,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,141 |
|
Notes payable servicing advances
|
|
|
1,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,977 |
|
Recourse liability
|
|
|
334 |
|
|
|
863 |
|
|
|
2,937 |
|
|
|
1,531 |
|
|
|
5,665 |
|
Other liabilities
|
|
|
16,831 |
|
|
|
318 |
|
|
|
|
|
|
|
812 |
|
|
|
17,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
43,642 |
|
|
|
188,640 |
|
|
|
43,448 |
|
|
|
271,268 |
|
|
|
546,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125 |
|
|
|
125 |
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
252 |
|
|
|
252 |
|
Paid-in-capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
219,121 |
|
|
|
219,121 |
|
Accumulated other comprehensive loss
|
|
|
(2 |
) |
|
|
(5 |
) |
|
|
(36 |
) |
|
|
(327 |
) |
|
|
(370 |
) |
Unearned stock compensation
|
|
|
(581 |
) |
|
|
(1,268 |
) |
|
|
(282 |
) |
|
|
|
|
|
|
(2,131 |
) |
Retained deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,436 |
) |
|
|
(11,436 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
(583 |
) |
|
|
(1,273 |
) |
|
|
(318 |
) |
|
|
207,735 |
|
|
|
205,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$ |
43,059 |
|
|
$ |
187,367 |
|
|
$ |
43,130 |
|
|
$ |
479,003 |
|
|
$ |
752,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitivity gap
|
|
$ |
(11,937 |
) |
|
$ |
(168,024 |
) |
|
$ |
49,819 |
|
|
$ |
130,142 |
|
|
|
|
|
Interest sensitivity gap
|
|
$ |
(11,937 |
) |
|
$ |
(179,961 |
) |
|
$ |
(130,142 |
) |
|
|
|
|
|
|
|
|
Cumulative interest sensitivity gap to total interest earning
assets
|
|
|
(1.59 |
)% |
|
|
(23.91 |
)% |
|
|
(17.29 |
)% |
|
|
|
|
|
|
|
|
We believe the negative effect of a rise in interest rates is
reduced by the anticipated securitization of our loans
receivable and our use of forward interest rate locks, which
fixes our cost of funds associated with the loans over the lives
of such loans.
In March 2005, we entered into a forward starting interest rate
swap for the purpose of locking in the benchmark interest rate
on our securitization transaction completed in May 2005. On the
start date of the swap we began paying a fixed rate of 4.44% and
receiving a floating rate of 2.69% on a notional balance of
47
$132.9 million, which would approximate 90% of the expected
balance of the bonds to be sold in the securitization
transaction. A rise in rates during the interim period would
increase our borrowing cost in the securitization, but the
increase would be offset by the increased value in the right to
pay a lower fixed rate during the term of the securitized deal
making the hedge highly effective. On May 3, 2005, the
hedge was terminated. Because interest rates had fallen slightly
during the interim period the cost to terminate the swap was
approximately $0.4 million. This cost will be amortized
over the expected life of the securitization transaction.
The following table shows our financial instruments that are
sensitive to changes in interest rates, categorized by expected
maturity, and the instruments fair values at
March 31, 2005 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Maturity | |
|
|
| |
|
|
2005 | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
Thereafter | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Interest sensitive assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable
|
|
$ |
10,333 |
|
|
$ |
13,549 |
|
|
$ |
14,922 |
|
|
$ |
16,433 |
|
|
$ |
18,098 |
|
|
$ |
556,909 |
|
|
$ |
630,244 |
|
Average interest rate
|
|
|
9.69 |
% |
|
|
9.69 |
% |
|
|
9.69 |
% |
|
|
9.69 |
% |
|
|
9.69 |
% |
|
|
9.69 |
% |
|
|
9.69 |
% |
Interest bearing deposits
|
|
|
15,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,972 |
|
Average interest rate
|
|
|
1.54 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.54 |
% |
Loan sale proceeds receivable
|
|
|
318 |
|
|
|
360 |
|
|
|
299 |
|
|
|
249 |
|
|
|
207 |
|
|
|
461 |
|
|
|
1,894 |
|
Average interest rate
|
|
|
1.50 |
% |
|
|
1.50 |
% |
|
|
1.50 |
% |
|
|
1.50 |
% |
|
|
1.50 |
% |
|
|
1.50 |
% |
|
|
1.50 |
% |
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,772 |
|
|
|
40,772 |
|
Average interest rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.93 |
% |
|
|
7.93 |
% |
Residual interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
724 |
|
|
|
724 |
|
Average interest rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.00 |
% |
|
|
15.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest sensitive assets
|
|
$ |
26,623 |
|
|
$ |
13,909 |
|
|
$ |
15,221 |
|
|
$ |
16,682 |
|
|
$ |
18,305 |
|
|
$ |
598,866 |
|
|
$ |
689,606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse financing
|
|
$ |
2,605 |
|
|
$ |
181,134 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
183,739 |
|
Average interest rate
|
|
|
4.00 |
% |
|
|
4.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.00 |
% |
Securitization financing
|
|
|
4,472 |
|
|
|
6,425 |
|
|
|
7,087 |
|
|
|
7,820 |
|
|
|
8,625 |
|
|
|
281,086 |
|
|
|
315,515 |
|
Average interest rate
|
|
|
4.51 |
% |
|
|
4.51 |
% |
|
|
4.51 |
% |
|
|
4.51 |
% |
|
|
4.51 |
% |
|
|
4.51 |
% |
|
|
4.51 |
% |
Repurchase agreements
|
|
|
22,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,141 |
|
Average interest rate
|
|
|
3.31 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.31 |
% |
Note payable servicing advance
|
|
|
1,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,977 |
|
Average interest rate
|
|
|
4.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.50 |
% |
Recourse liability
|
|
|
863 |
|
|
|
901 |
|
|
|
697 |
|
|
|
548 |
|
|
|
435 |
|
|
|
1,886 |
|
|
|
5,330 |
|
Average interest rate
|
|
|
10.41 |
% |
|
|
10.41 |
% |
|
|
10.41 |
% |
|
|
10.41 |
% |
|
|
10.41 |
% |
|
|
10.41 |
% |
|
|
10.41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest sensitive liabilities
|
|
$ |
32,058 |
|
|
$ |
188,460 |
|
|
$ |
7,784 |
|
|
$ |
8,368 |
|
|
$ |
9,060 |
|
|
$ |
282,972 |
|
|
$ |
528,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2004 |
The average outstanding balance of our variable rate debt, under
which we paid interest at various LIBOR rates plus a spread,
totaled $127.5 million and $157.2 million at
December 31, 2004 and 2003, respectively. If LIBOR
increased or decreased by 1.0% during the years ended
December 31, 2004 and 2003, we believe our interest expense
would have increased or decreased by approximately
$1.2 million and $0.4 million, respectively, based on
the $127.5 million and $157.2 million average balance
outstanding under our variable rate debt facilities for the
years ended December 31, 2004 and 2003, respectively. The
increase or decrease in interest expense related to an increase
or decrease in LIBOR is mitigated somewhat because our average
variable rate debt outstanding for the years ended
December 31, 2004 and 2003, was hedged for portions of the
periods through the use of interest rate swap agreements thus
minimizing the effect of changes in the benchmark LIBOR rate. We
had no variable rate interest earning assets outstanding during
the years ended December 31, 2004 or 2003.
48
The following table shows the contractual maturity dates of our
assets and liabilities at December 31, 2004. For each
maturity category in the table the difference between
interest-earning assets and interest-bearing liabilities
reflects an imbalance between re-pricing opportunities for the
two sides of the balance sheet. The consequences of a negative
cumulative gap at the end of one year suggests that, if interest
rates were to rise, liability costs would increase more quickly
than asset yields, placing negative pressure on earnings
(dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity | |
|
|
| |
|
|
0 to 3 | |
|
4 to 12 | |
|
1 to 5 | |
|
Over 5 | |
|
|
|
|
Months | |
|
Months | |
|
Years | |
|
Years | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
ASSETS |
Cash and equivalents
|
|
$ |
9,293 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
9,293 |
|
Restricted cash
|
|
|
9,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,222 |
|
Loans receivable, net
|
|
|
2,565 |
|
|
|
8,083 |
|
|
|
72,162 |
|
|
|
480,458 |
|
|
|
563,268 |
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,622 |
|
|
|
37,622 |
|
Furniture, fixtures and equipment, net
|
|
|
186 |
|
|
|
584 |
|
|
|
1,566 |
|
|
|
|
|
|
|
2,336 |
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,277 |
|
|
|
32,277 |
|
Other assets
|
|
|
10,962 |
|
|
|
8,639 |
|
|
|
6,448 |
|
|
|
2,480 |
|
|
|
28,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
32,228 |
|
|
$ |
17,306 |
|
|
$ |
80,176 |
|
|
$ |
552,837 |
|
|
$ |
682,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Warehouse financing
|
|
$ |
83,279 |
|
|
$ |
464 |
|
|
$ |
23,630 |
|
|
$ |
|
|
|
$ |
107,373 |
|
Securitization financing
|
|
|
1,552 |
|
|
|
4,655 |
|
|
|
41,117 |
|
|
|
281,064 |
|
|
|
328,388 |
|
Repurchase agreements
|
|
|
20,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,153 |
|
Recourse liability
|
|
|
389 |
|
|
|
1,006 |
|
|
|
3,423 |
|
|
|
1,785 |
|
|
|
6,603 |
|
Other liabilities
|
|
|
15,535 |
|
|
|
293 |
|
|
|
|
|
|
|
736 |
|
|
|
16,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
120,908 |
|
|
|
6,418 |
|
|
|
68,170 |
|
|
|
283,585 |
|
|
|
479,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125 |
|
|
|
125 |
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
252 |
|
|
|
252 |
|
Paid-in-capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
210,639 |
|
|
|
210,639 |
|
Accumulated other comprehensive loss
|
|
|
(9 |
) |
|
|
(26 |
) |
|
|
(226 |
) |
|
|
(1,546 |
) |
|
|
(1,807 |
) |
Unearned stock compensation
|
|
|
(660 |
) |
|
|
(1,426 |
) |
|
|
(704 |
) |
|
|
|
|
|
|
(2,790 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings (deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,953 |
) |
|
|
(2,953 |
) |
|
Total stockholders equity
|
|
|
(669 |
) |
|
|
(1,452 |
) |
|
|
(930 |
) |
|
|
206,517 |
|
|
|
203,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$ |
120,239 |
|
|
$ |
4,966 |
|
|
$ |
67,240 |
|
|
$ |
490,102 |
|
|
$ |
682,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitivity gap
|
|
$ |
(88,011 |
) |
|
$ |
12,340 |
|
|
$ |
12,936 |
|
|
$ |
62,735 |
|
|
|
|
|
Interest sensitivity gap
|
|
$ |
(88,011 |
) |
|
$ |
(75,671 |
) |
|
$ |
(62,735 |
) |
|
|
|
|
|
|
|
|
Cumulative interest sensitivity gap to total interest earning
assets
|
|
|
(273.09 |
)% |
|
|
(437.25 |
)% |
|
|
(78.25 |
)% |
|
|
|
|
|
|
|
|
We believe the negative effect of a rise in interest rates is
reduced by the anticipated securitization of our loans
receivable which fixes our cost of funds associated with the
loans over the lives of such loans.
In conjunction with the loan funding facility with Citigroup, we
entered into six interest rate swap agreements in an effort to
manage interest rate risk on our floating rate notes payable.
The interest rate swaps expired on April 12, 2004. The
interest rate swaps were structured to be hedges against changes
in the benchmark interest rate (LIBOR) of the floating rate
notes. We designated the swaps as hedges for accounting
purposes. The hedges were highly effective and had a minimal
impact on the results of operations.
49
In August 2004, we entered into a forward starting interest rate
swap for the purpose of locking in the benchmark interest rate
on our securitization transaction completed in September 2004.
On the start date of the swap we began paying a fixed rate of
4.15% and receiving a floating rate of 1.65% on a notional
balance of $170.0 million, which approximated the expected
balance of the bonds to be sold in the securitization
transaction. A rise in rates during the interim period would
increase our borrowing cost in the securitization, but the
increase would be offset by the increased value in the right to
pay a lower fixed rate during the term of the securitized deal
making the hedge highly effective. Upon closing of the
securitization transaction on September 29, 2004, the hedge
was terminated. Because interest rates had fallen during the
interim period the cost to terminate the swap was approximately
$1.9 million. This cost will be amortized over the expected
life of the securitization transaction.
In March 2005, we entered into a forward starting interest rate
swap for the purpose of locking in the benchmark interest rate
on a portion of our securitization transaction that was
completed in May 2005. On the start date of the swap we began
paying a fixed rate of 4.44% and receiving a floating rate equal
to the one month LIBOR rate on a beginning notional balance of
$132.9 million. A rise in rates during the interim period
would increase our borrowing cost in the securitization, but the
increase would be offset by the increased value in the right to
pay a lower fixed rate during the term of the securitized deal
making the hedge highly effective.
The following table shows our financial instruments that are
sensitive to changes in interest rates, categorized by expected
maturity, and the instruments fair values at
December 31, 2004, (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Maturity | |
|
|
| |
|
|
|
|
There- | |
|
|
|
|
2005 | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
after | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Interest sensitive assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable
|
|
$ |
10,648 |
|
|
$ |
11,746 |
|
|
$ |
12,958 |
|
|
$ |
14,294 |
|
|
$ |
15,768 |
|
|
$ |
497,854 |
|
|
$ |
563,268 |
|
Average interest rate
|
|
|
9.86 |
% |
|
|
9.86 |
% |
|
|
9.86 |
% |
|
|
9.86 |
% |
|
|
9.86 |
% |
|
|
9.86 |
% |
|
|
9.86 |
% |
Interest bearing deposits
|
|
|
16,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,406 |
|
Average interest rate
|
|
|
1.16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.16 |
% |
Loan sale proceeds receivable
|
|
|
445 |
|
|
|
368 |
|
|
|
306 |
|
|
|
255 |
|
|
|
212 |
|
|
|
471 |
|
|
|
2,057 |
|
Average interest rate
|
|
|
1.50 |
% |
|
|
1.50 |
% |
|
|
1.50 |
% |
|
|
1.50 |
% |
|
|
1.50 |
% |
|
|
1.50 |
% |
|
|
1.50 |
% |
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,622 |
|
|
|
37,622 |
|
Average interest rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.91 |
% |
|
|
7.91 |
% |
Residual interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
724 |
|
|
|
724 |
|
Average interest rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.00 |
% |
|
|
15.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest sensitive assets
|
|
$ |
27,499 |
|
|
$ |
12,114 |
|
|
$ |
13,264 |
|
|
$ |
14,549 |
|
|
$ |
15,980 |
|
|
$ |
536,671 |
|
|
$ |
620,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse financing
|
|
$ |
83,279 |
|
|
$ |
24,094 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
107,373 |
|
Average interest rate
|
|
|
3.59 |
% |
|
|
3.64 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.60 |
% |
Securitization financing
|
|
|
6,207 |
|
|
|
6,847 |
|
|
|
7,553 |
|
|
|
8,334 |
|
|
|
9,192 |
|
|
|
290,255 |
|
|
|
328,388 |
|
Average interest rate
|
|
|
4.43 |
% |
|
|
4.43 |
% |
|
|
4.43 |
% |
|
|
4.43 |
% |
|
|
4.43 |
% |
|
|
4.43 |
% |
|
|
4.43 |
% |
Repurchase agreements
|
|
|
20,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,153 |
|
Average interest rate
|
|
|
3.17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.17 |
% |
Recourse liability
|
|
|
1,395 |
|
|
|
1,050 |
|
|
|
813 |
|
|
|
639 |
|
|
|
507 |
|
|
|
2,198 |
|
|
|
6,602 |
|
Average interest rate
|
|
|
10.43 |
% |
|
|
10.43 |
% |
|
|
10.43 |
% |
|
|
10.43 |
% |
|
|
10.43 |
% |
|
|
10.43 |
% |
|
|
10.43 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest sensitive liabilities
|
|
$ |
111,034 |
|
|
$ |
31,991 |
|
|
$ |
8,366 |
|
|
$ |
8,973 |
|
|
$ |
9,699 |
|
|
$ |
292,453 |
|
|
$ |
462,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our Formation
In connection with our formation and our October 2003 private
placement, we entered into a contribution agreement pursuant to
which we acquired all of the interests of Origen Financial
L.L.C., from certain of our founders, including an affiliate of
Sun Communities, Bingham, Woodward Holding, LLC, and Shiffman
Family, LLC. These founders, severally, and not jointly, made
representations and warranties to us regarding their:
|
|
|
|
|
organization and good standing; |
|
|
|
non-violation of any other agreements; |
|
|
|
authority to enter into and perform their obligations under the
contribution agreement; |
|
|
|
ownership of clear title to the membership interests
contributed; and |
|
|
|
non-payment of a brokerage or finders fee. |
Bingham, alone, made a representation and warranty that its
board of directors approved the transaction.
None of the founders received any monetary consideration, nor
did they receive any shares of our common stock, in exchange for
their respective interests in Origen Financial L.L.C. Under the
terms of the contribution agreement, no party is entitled to
make any claim against any other party for indemnification
arising from any breach of the contribution agreement. The
contribution agreement has been filed as an exhibit to the
registration statement of which this prospectus is a part.
Our Structure
At formation, our founders, consisting of an affiliate of Sun
Communities, Bingham, Woodward Holding, LLC and Shiffman Family,
LLC, contributed their respective membership interests and
warrants to purchase membership interests in Origen Financial
L.L.C. to us. None of the founders received any monetary
consideration or shares of our common stock in exchange for
their contributed membership interests and warrants in Origen
Financial L.L.C. The charts below illustrate our formation
transactions (including our October 2003 and February 2004
private placements and our January 2004 sale of preferred stock)
and our current structure. For more information regarding these
charts, see Note B to Origen Financial, Inc.s
consolidated financial statements for the year ended
December 31, 2004 and period ended December 31, 2003
included elsewhere in this prospectus.
51
Our Formation Transaction
|
|
* |
Origen Financial L.L.C. owned 100% of the common equity
interests of all of its subsidiaries |
Our Current Structure
Other Relationships
Gary A. Shiffman, one of our directors, is the Chairman of the
Board, President and Chief Executive Officer of Sun Communities.
Sun Communities owns approximately 20% of the outstanding shares
of our common stock. Mr. Shiffman beneficially owns
approximately 20% of the outstanding shares of our common stock,
which amount includes his deemed beneficial ownership of the
stock owned by Sun Communities. Mr. Shiffman and his
affiliates beneficially own approximately 9% of the outstanding
common stock of Sun Communities. He is the President of Sun Home
Services, Inc. (Sun Home Services), of which Sun
Communities is the sole beneficial owner.
Origen Servicing, Inc., a wholly owned subsidiary of Origen
Financial L.L.C., services approximately $16.0 million
(including approximately $3.9 million transferred from
another servicer in December 2004) in manufactured home loans
for Sun Home Services as of December 31, 2004. Sun Home
Services pays Origen Servicing, Inc. an annual servicing fee of
1.25% of the outstanding principal balance of the loans. The
total servicing fees paid by Sun Home Services in 2004 were
approximately $172,000.
In addition, Sun Communities has agreed to provide us certain
concessions on manufactured houses we repossess in its
communities. These concessions include marketing and
refurbishing assistance, rent abatement
52
during the first 12 months the repossessed house is for
sale and commission abatement with respect to repossessed
manufactured houses sold under the program. The fair value of
these abatements amounted to approximately $85,000 in 2004. This
program allows us to further enhance recoveries on repossessed
houses and allows Sun Communities to retain houses for resale in
its communities.
In February 2004 Origen Financial L.L.C. purchased approximately
$12.3 million in principal balance of manufactured housing
loans from Sun Home Services, for an amount equal to
approximately 99.3% of the unpaid principal balance.
We lease our executive offices in Southfield, Michigan from an
entity in which Mr. Shiffman and certain of his affiliates
beneficially own approximately a 21% interest. Ronald A. Klein,
our Chief Executive Officer, beneficially owns an approximate 1%
interest in the landlord entity. William M. Davidson, the sole
member of Woodward Holding, LLC, which owns approximately 7% of
our common stock, beneficially owns an approximate 25% interest
in the landlord entity. The lease, which terminates on
March 31, 2008, provides for monthly rent of approximately
$32,000. Under the terms of a renewal option, if no event of
default exists and no default existed within a period of one
year prior to notification of our intent to renew, we have the
right to extend the initial term of the base for two three-year
terms. The base rent for the option terms will be calculated at
95% of the then prevailing market rates for comparable renewal
space, but in any event not less than the base rate payable at
the end of the current term of the lease.
53
MANAGEMENT
Directors and Executive Officers
|
|
|
Name |
|
Position |
|
|
|
Paul A. Halpern
|
|
Chairman of the Board of Directors |
Ronald A. Klein
|
|
Chief Executive Officer and Director |
Richard H. Rogel
|
|
Director |
Gary A. Shiffman
|
|
Director |
Michael J. Wechsler
|
|
Director |
James A. Williams
|
|
Director |
J. Peter Scherer
|
|
Head of Operations and President |
W. Anderson Geater, Jr
|
|
Chief Financial Officer and Secretary |
Mark W. Landschulz
|
|
Executive Vice President, Portfolio Management |
O. Douglas Burdett
|
|
Executive Vice President, Manager of Loan Servicing |
Paul J. Galaspie
|
|
Senior Vice President and Chief Information Officer |
David M. Rand
|
|
Senior Vice President, Marketing and Strategic Development |
Benton E. Sergi
|
|
Senior Vice President, Operations |
Paul A. Halpern. Mr. Halpern, 52, has been our
Chairman of the Board since August 2003. He is a member of the
Audit Committee and the Nominating and Governance Committee and
an alternate member of the Executive Committee. Prior to
co-founding Origen Financial, Inc., Mr. Halpern was a
manager of Origen Financial L.L.C. from January 2002 until
December 2003. Mr. Halpern is currently the manager of
Woodward Holding, LLC. Mr. Halpern has also served as Vice
President of Operations of Guardian Energy Management Corp., an
oil and gas exploration and production company, which is a
subsidiary of Guardian Industries Corp., a glass manufacturing
corporation, since 1990. In addition, Mr. Halpern has
served as Associate Tax Counsel of Guardian Industries Corp.
since 1988. From 1979 through 1988, Mr. Halpern was
employed in various capacities by both McDermott Incorporated
and McDermott International, Inc. (collectively,
McDermott), with his last position as Tax Director
for McDermott Incorporated. Before joining McDermott,
Mr. Halpern worked in the tax department of the public
accounting firm of Alexander Grant & Company.
Ronald A. Klein. Mr. Klein, 47, has served as our
Chief Executive Officer since August 2003. He is a member of the
Executive Committee. Prior to co-founding Origen Financial,
Inc., Mr. Klein joined Origen Financial L.L.C.s
predecessor in February 1999 and currently serves as Origen
Financial L.L.C.s sole manager and its Chief Executive
Officer. Since 1999, Mr. Klein has served as a director and
as Chief Executive Officer and President of Bingham. In
addition, he has served as the Managing Director of Equity
Growth L.L.C., a private real estate investment company since
1994. From 1990 to 1994, Mr. Klein served as Executive Vice
President of Alaron Inc., an international distributor of
consumer electronics. Prior to joining Alaron Inc.,
Mr. Klein was a member of the Chicago Board Options
Exchange since 1985. Mr. Klein has also served as the
Managing Director of a financial derivatives trading firm and,
before 1985, he was in the private practice of law.
Richard H. Rogel. Mr. Rogel, 56, has been one of our
directors since August 2003. He is the Chairman of the Audit
Committee and a member of the Compensation Committee and the
Executive Committee. Mr. Rogel has been a director of
CoolSavings, Inc., a publicly-traded online direct marketing and
media company, since 1996, has served as its Chairman of the
Board since July 2001 and served as the Chairman of its audit
committee from 1998 to 2004. In 1982, Mr. Rogel founded
Preferred Provider Organization of Michigan, Inc., a preferred
provider organization, and served as its Chairman from its
inception until it was sold in 1997. Mr. Rogel is the
President of the University of Michigan Alumni Association,
chairs the University of Michigans Business School
Development Advisory Board and serves on other boards of the
University.
54
Gary A. Shiffman. Mr. Shiffman, 51, has been one of
our directors since August 2003. Prior to co-founding Origen
Financial, Inc. Mr. Shiffman was also a manager of Origen
Financial L.L.C. since its formation in 2001 until December
2003. Mr. Shiffman has served as Chief Executive Officer
and as a director of Sun Communities, Inc. since 1994, and as
Chairman of the Board and President of Sun Communities since
March 2000.
Michael J. Wechsler. Mr. Wechsler, 65, has been one
of our directors since August 2003. He is a member of the
Compensation Committee and the Nominating and Governance
Committee and an alternate member of the Executive Committee.
Mr. Wechsler has served as Executive Vice President, Credit
of CharterMac since October 2003. CharterMac is a
publicly-traded real estate financial services company.
Mr. Wechsler served as Chief Operating Officer of the
Related Companies, L.P. from 1987 until 1997 and as Chief Credit
Officer of Related from 1997 until 2003. The Related Companies,
L.P. is a major developer of multifamily affordable housing
nationwide, one of the largest owners of multi-family dwellings
in the country and a leading syndicator of residential real
estate financed with Low Income Housing Tax Credits in the
United States. Prior to joining the Related Companies, L.P., he
held various positions in the Real Estate Division of Chemical
Bank for over twenty years. His last position was as Senior Vice
President and Managing Director, with overall responsibility for
the Real Estate Divisions administration and lending
activities in twenty-five states and New York City.
James A. Williams. Mr. Williams, 63, has been one of
our directors since August 2003. He is the Chairman of the
Compensation Committee and a member of the Audit Committee, the
Executive Committee and the Nominating and Governance Committee.
From 2001 until it was acquired in October 2003,
Mr. Williams served as a director of Chateau Communities,
Inc., a publicly-traded equity real estate investment trust and
an owner/manager of manufactured home communities.
Mr. Williams has been a director of Standard Federal Bank
and LaSalle Bank Corporation since 2001 and has served on
LaSalles audit committee since 2001. Mr. Williams has
been a partner with Williams, Williams, Ruby &
Plunkett, P.C., a Michigan-based law firm, since he founded
the firm in 1972. He also currently serves as Managing General
Partner of Jamison Management Company, which operates
manufactured housing developments. Mr. Williams is the
chairman of the Henry Ford Hospital of West Bloomfield,
Michigan, and former chairman of the Michigan National
Corporation.
J. Peter Scherer. Mr. Scherer, 55, has served
as our President and Head of Operations since August 2003.
Prior to co-founding Origen Financial, Inc., Mr. Scherer
joined Origen Financial L.L.C.s predecessor in December
1999 and currently serves as President and Head of Operations of
Origen Financial L.L.C. Since October 1999, Mr. Scherer has
served as Chief Operating Officer of Bingham Financial Services
Corporation. From 1984 through 1998, Mr. Scherer served in
various capacities at The Taubman Company, including most
recently as Senior Vice President and chairman of the asset
management group. From 1976 to 1980 and from 1980 to 1984, he
was an attorney with American Motors Corporation and Volkswagen
of America, Inc., respectively. Prior to joining American Motors
Corporation, Mr. Scherer was engaged in the private
practice of law.
W. Anderson Geater, Jr. Mr. Geater, 56,
has served as our Chief Financial Officer since August 2003 and
as our Secretary since January 2004. Prior to co-founding Origen
Financial, Inc., Mr. Geater joined Origen Financial
L.L.C.s predecessor in April 2000 and currently serves as
Chief Financial Officer of Origen Financial L.L.C. Since April
2000, Mr. Geater has served as Chief Financial Officer and
Treasurer of Bingham Financial Services Corporation. From April
1994 through April 2000, Mr. Geater served as Chief
Financial Officer and Chief Administrative Officer of Univest
Financial Services Holdings, LLC and Central Park Capital, LLC.
He also served as Chief Operating Officer of First Mortgage
Strategies Group, Inc. from 1991 to 1993, and as Director of
Financial Services for Pannell Kerr Forster, a public accounting
firm from 1990 to 1991. From 1975 to 1990, Mr. Geater
served as Executive Vice President and Chief Financial Officer
of Leader Federal Bank for Savings. Prior to joining Leader
Federal Bank for Savings, Mr. Geater was an audit
supervisor with the public accounting firm of KPMG Peat Marwick.
Mark W. Landschulz. Mr. Landschulz, 40, has served
as our Executive Vice President of Portfolio Management since
August 2003. Prior to co-founding Origen Financial, Inc.,
Mr. Landschulz joined Origen
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Financial L.L.C.s predecessor in February 2000, and
currently serves as Executive Vice President of Portfolio
Management of Origen Financial, L.L.C. Prior to serving as
Executive Vice President, Mr. Landschulz was the Chief
Financial Officer of Origen Financial L.L.C. From 1997 to 2000,
Mr. Landschulz was the founding principal of Landworks
Enterprises, a private consulting practice. Prior to founding
Landworks Enterprises, Mr. Landschulz served as Senior Vice
President for Knutson Mortgage Corporation from April 1996 to
December 1996. From February 1990 to April 1996,
Mr. Landschulz served as a director and Vice President of
GE Capital Mortgage. From 1988 to 1990, he served as Chief
Financial Officer of a Fannie Mae approved seller/servicer,
regional mortgage banking firm.
O. Douglas Burdett. Mr. Burdett, 55, has served
as our Executive Vice President, Manager of Loan Servicing since
August 2003. He has held the same position with Origen Financial
L.L.C. since May 2002. From July 1999 to April 2002,
Mr. Burdett served as Vice President, National Asset
Manager of CitiFinancial Associates Housing Finance and led its
manufactured housing loan servicing operation. From December
1997 to July 1999, he was employed by First Union Bank as
Director and Asset Manager for The Money Store. From 1972
through 1997, Mr. Burdett was employed by GE Capital
Corporation, where he led its customer service, loss mitigation
and default groups in a number of business units ranging from
consumer and mortgage as Vice President GE Capital Mortgage
to commercial and government services as Senior Vice President
GE Asset Management.
Paul J. Galaspie. Mr. Galaspie, 43, has served as
our Senior Vice President and Chief Information Officer since
August 2003. Mr. Galaspie joined the predecessor of Origen
Financial L.L.C. in March 1994, and currently serves as Senior
Vice President and Chief Information Officer of Origen Financial
L.L.C. Beginning in March 1994, Mr. Galaspie served in
various capacities for Origen Financial L.L.C.s
predecessors, including as a Senior Programmer Analyst for Saxon
Mortgage Funding Corp. Prior to March 1994, Mr. Galaspie
worked for PSA, a national photographic retailer, in their
marketing department as a programmer/analyst.
David M. Rand. Mr. Rand, 43, has served as our
Senior Vice President, Marketing and Strategic Development since
October 2004. From August 2003 to October 2004 he served as our
Senior Vice President, Sales and Marketing. Mr. Rand joined
the predecessor of Origen Financial L.L.C. in June 1998, and
currently serves as Senior Vice President Marketing
and Business Development of Origen Financial L.L.C. Prior to
joining the predecessor of Origen Financial L.L.C., he was
employed by Associates First Capital Corporation as Vice
President New Business/ Product Development from
April 1996 to June 1998, and as Director Corporate
Training from November 1993 to April 1996. Prior thereto,
Mr. Rand held various positions with General Electric
Capital Corporation.
Benton E. Sergi. Mr. Sergi, 43, has served as our
Senior Vice President, Operations since August 2003. He has held
the same position with Origen Financial L.L.C. since June 2003.
From April 2002 to June 2003, Mr. Sergi served as Executive
Vice President, National Sales and Operations of HomePride
Finance Corp, a subsidiary of Champion Enterprises, Inc. He also
served as Senior Vice President of Sales and Operations of CIT
Group, from 1997 to 2002, and held various positions with Key
Bank USA, NA in its sales finance division from 1987 to 1997.
Prior to joining Key Bank USA, NA, Mr. Sergi was employed
by The Midwest Bank & Trust Company in its installment
loan and credit card sales departments.
Board Committees
Our board has established an Audit Committee, a Compensation
Committee, an Executive Committee and a Nominating and
Governance Committee. Our board of directors may establish other
committees from time to time.
Our board of directors has established an Audit Committee, which
consists of Messrs. Rogel (Chairman), Halpern and Williams.
Mr. Rogel is currently not serving as the Chairman of the
Audit Committee for health reasons. He expects to resume his
duties as Chairman during the third quarter of 2005. In his
absence, Mr. Williams is serving as interim Chairman of the
Audit Committee. Our board of directors has determined
56
that all members of the Audit Committee satisfy the independence
requirements of the Nasdaq National Market rules. Our board has
also determined that each of Messrs. Halpern, Rogel and
Williams qualifies as an audit committee financial
expert, as defined by the SEC, and all members of the
Audit Committee are financially literate, within the
meaning of the rules, and independent, under the
audit committee independence standards of the SEC. Our Audit
Committee operates pursuant to a written charter adopted by the
board of directors, which is included as an exhibit to the
registration statement of which this prospectus is a part. Among
other things, the Audit Committee charter calls upon the Audit
Committee to:
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oversee the accounting and financial reporting processes and
compliance with legal and regulatory requirements on behalf of
our board of directors and report the results of its activities
to the board; |
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be directly and solely responsible for the appointment,
retention, compensation, oversight, evaluation and, when
appropriate, the termination and replacement of our independent
auditors; |
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review the annual engagement proposal and qualifications of our
independent auditors; |
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prepare an annual report as required by applicable SEC
disclosure rules; |
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review the integrity, adequacy and effectiveness of our internal
controls and financial disclosure process; |
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approve in advance all audit and non-audit engagement fees,
scope and terms with our independent auditors; and |
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meet periodically with our senior executive officers, internal
audit staff and our independent auditors in separate executive
sessions. |
The Compensation Committee consists of Messrs. Williams
(Chairman), Wechsler and Rogel. Mr. Rogel is currently on a
temporary leave of absence from the Audit Committee for health
reasons. He expects to resume his duties during the third
quarter of 2005. The principal functions of the committee are to:
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evaluate the performance of our senior executives; |
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review and approve senior executive compensation plans, policies
and programs; |
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consider the design and competitiveness of our compensation
plans; |
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review and make recommendations concerning our long-term
incentive compensation plans; |
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approve the salaries, bonus and other compensation for all
corporate officers, provided that, as to the chief executive
officer, the committee will recommend appropriate salary, bonus
and other compensation to the board for approval; |
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review and approve chairman and chief executive officer goals
and objectives and evaluate performance in light of these
objectives; and |
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produce an annual report on executive compensation for inclusion
in our proxy statement. |
Our Compensation Committee also administers our 2003 Equity
Incentive Plan.
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Compensation Committee Interlocks and Insider Participation
in Compensation Decisions |
During 2004 and currently, none of our executive officers served
as a director or member of a compensation committee (or other
committee serving an equivalent function) of any other entity,
whose executive officers served as a director or member of our
Compensation Committee, none of our employees serve on the
Compensation Committee and all of the Compensation
Committees members are independent directors.
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Our board of directors has established an Executive Committee,
which consists of Messrs. Williams, Rogel and Klein.
Messrs. Wechsler and Halpern serve as alternate members in
the case of an absence of an Executive Committee member. The
Executive Committee operates pursuant to a written charter
adopted by the board, which is included as an exhibit to the
registration statement of which this prospectus is a part. The
Executive Committee exercises certain enumerated powers and
duties of the board of directors between board meetings. The
Executive Committee has the authority to approve the following
actions:
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the acquisition and sale of loans and loan portfolios; |
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financing transactions; and |
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the securitization of loans and loan portfolios. |
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Nominating and Governance Committee |
Our Nominating and Governance Committee has been formed to
establish and implement our corporate governance practices and
to nominate individuals for election to the board of directors.
The members of our Nominating and Governance Committee are
Messrs. Halpern, Wechsler and Williams. The committee is
composed entirely of independent directors.
Our Nominating and Governance Committee operates pursuant to a
written charter adopted by the board, which is included as an
exhibit to the registration statement of which this prospectus
is a part. Among other things, the committee charter calls upon
the Nominating and Governance committee to:
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develop criteria for selecting new directors and to identify
individuals qualified to become board members and members of the
various committees of the board; |
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select, or recommend that the board select, the director
nominees for each annual meeting of stockholders and the
committee nominees; and |
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develop and recommend to the board a set of corporate governance
principles applicable to the corporation. |
Corporate Governance
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Corporate Governance Guidelines |
On the recommendation of the Nominating and Governance
Committee, our board of directors adopted corporate governance
guidelines, which are included as an exhibit to the registration
statement of which this prospectus is a part. The guidelines
address matters such as frequency of board meetings, director
tenure, director compensation, executive sessions of the board,
communication with the independent directors and continuing
education.
Our board of directors has established a code of business
conduct applicable to all of our directors, officers and
employees. The code of business conduct is included as an
exhibit to the registration statement of which this prospectus
is a part. Among other matters, the code of business conduct is
designed to deter wrongdoing and to promote:
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honest and ethical conduct, including appropriate handling of
actual or apparent conflicts of interest; |
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full, fair, accurate, timely and understandable disclosure in
our SEC reports and other public communications; |
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compliance with applicable governmental laws, rules and
regulations; |
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prompt internal reporting of violations of the code to
appropriate persons identified in the code; and |
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accountability for adherence to the code. |
Waivers to the code of business conduct for directors and
officers may be granted only by the board or the Nominating and
Governance Committee of the board. In the event any such waivers
are granted, we expect to promptly announce the waiver on the
investor relations section of our website and to otherwise make
such disclosure as is required by law and any applicable stock
exchange regulations.
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Code of Ethics for Senior Financial Officers |
Our board of directors has adopted a financial code of ethics
that applies to our principal executive officer, our principal
financial officer, our principal accounting officer or
controller, and persons performing similar functions. Under the
terms of the financial code of ethics, our senior financial
officers must, among other things:
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act with honesty and integrity, including the ethical handling
of actual or apparent conflicts of interest between personal and
professional relationships; |
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provide full, fair, accurate, timely, and understandable
disclosure in reports and documents that we file with the SEC
and in other public communications; |
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comply with applicable laws, rules and regulations; |
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promote the prompt internal reporting of violations of the
financial code of ethics to the chair of our Audit Committee; |
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respect the confidentiality of information acquired in the
course of employment; and |
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promote ethical and honest behavior within our organization. |
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Public Availability of Corporate Governance
Documents |
Our key corporate governance documents, including our corporate
governance guidelines, our code of business conduct , the code
of ethics for senior financial officers and the charters of our
committees are:
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available in print to any stockholder who requests them from our
corporate secretary; |
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filed as exhibits to the registration statement of which this
prospectus is a part; and |
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available on our website at www.origenfinancial.com under
the heading Investors and subheading Corporate
Governance. |
Board Structure
Directors are elected for a term of one year, and hold office
until their successors are elected and qualified. All officers
serve at the discretion of the board of directors. Under our
charter, the board of directors shall fix the number of
directors from time to time. The board of directors currently
has six members, consisting of one director who is an employee
(Mr. Klein), Mr. Shiffman and four independent
directors. Vacancies occurring on the board of directors will be
filled by the vote of a majority of the directors then in office.
Our bylaws provide for the indemnification of our directors and
officers to the fullest extent permitted by Delaware law. Our
certificate of incorporation provides that the personal
liability of any director to us or our stockholders for money
damages is limited to the fullest extent allowed by Delaware law
as amended or interpreted. See Description of Capital
Stock and Material Provisions of Delaware Law and Our
Certificate of Incorporation Indemnification of
Directors and Officers.
59
Board Compensation
We pay an annual directors fee to each non-employee
director of $25,000, payable quarterly. We pay each non-employee
director meeting fees of $1,000 per meeting attended in
person and $500 per telephonic meeting. We also reimburse
all costs and expenses of all directors for attending each
meeting. In addition to their annual directors fees, the
Chairman of the Audit Committee receives an annual committee fee
of $15,000, and other members of the Audit Committee receive an
annual committee fee of $5,000. Members of the Compensation
Committee receive an annual committee fee of $5,000. For
services during the fiscal year ended December 31, 2004,
Mr. Halpern earned directors fees of $34,000,
Mr. Rogel earned directors fees of $48,500,
Mr. Shiffman earned directors fees of $27,500,
Mr. Wechsler earned directors fees of $32,500 and
Mr. Williams earned directors fees of $38,500.
Directors who are also employees will not be separately
compensated for services as a director other than through our
2003 Equity Incentive Plan.
Under our 2003 Equity Incentive Plan, our board of directors has
the discretion to grant awards under the plan to our
non-employee directors with such vesting and exercise provisions
as the board may determine at the date of grant.
On each of March 23, 2004 and August 5, 2004, we
granted all directors other than Mr. Klein an award of
2,500 restricted shares of our common stock (or a total of
5,000 shares per director). Two-thirds of the shares
granted under each of these awards will vest on May 11,
2005 and the remaining one-third of the shares under each grant
will vest on May 11, 2006. Distributions on the shares of
restricted stock will be paid to the directors.
Executive Compensation
The following table summarizes the compensation we paid to our
Chief Executive Officer and each of our four other highest paid
executive officers (the Named Executive Officers)
during the year ended December 31, 2004 and during the
period from October 8, 2003 (when we began operations)
through December 31, 2003.
Summary Compensation Table
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Long-Term Compensation | |
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Annual Compensation | |
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Year or | |
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Restricted | |
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Securities | |
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Period Ended | |
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Other Annual | |
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Stock | |
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Underlying | |
Name and Principal Position |
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December 31, | |
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Salary | |
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Bonus | |
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Compensation | |
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Awards(1) | |
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Options | |
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Ronald A. Klein
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2003 |
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$ |
90,602 |
(2) |
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$ |
280,040 |
(3) |
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$ |
9,935 |
(4) |
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$ |
1,100,000 |
(5) |
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25,000 |
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Chief Executive Officer |
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2004 |
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$ |
405,763 |
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$ |
159,375 |
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$ |
386,583 |
(6) |
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$ |
656,250 |
(7) |
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W. Anderson Geater, Jr.
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2003 |
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$ |
47,323 |
(2) |
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$ |
151,494 |
(3) |
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$ |
9,962 |
(4) |
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$ |
200,000 |
(8) |
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15,000 |
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Chief Financial Officer |
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2004 |
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$ |
207,305 |
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$ |
91,375 |
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$ |
42,136 |
(6) |
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$ |
262,500 |
(9) |
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J. Peter Scherer
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2003 |
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$ |
47,323 |
(2) |
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$ |
151,494 |
(3) |
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$ |
9,661 |
(4) |
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$ |
200,000 |
(8) |
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15,000 |
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President and Head of Operations |
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2004 |
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$ |
207,305 |
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$ |
91,375 |
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$ |
40,852 |
(6) |
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$ |
262,500 |
(9) |
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Mark W. Landschulz
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2003 |
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$ |
43,852 |
(2) |
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$ |
140,409 |
(3) |
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$ |
9,059 |
(4) |
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$ |
200,000 |
(8) |
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15,000 |
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Executive Vice President of |
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2004 |
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$ |
192,305 |
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$ |
85,000 |
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$ |
38,592 |
(6) |
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$ |
262,500 |
(9) |
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Portfolio Management |
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Benton E. Sergi
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2003 |
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$ |
42,125 |
(2) |
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$ |
36,807 |
(3) |
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$ |
5,235 |
(4) |
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Senior Vice President, Operations |
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2004 |
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$ |
188,747 |
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$ |
41,800 |
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$ |
20,224 |
(6) |
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$ |
43,750 |
(10) |
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12,500 |
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(1) |
As of December 31, 2004, Mr. Klein held
185,000 shares of restricted stock (with an aggregate value
of $1,383,800), each of Messrs. Geater, Scherer and
Landschulz held 50,000 shares of restricted stock (with an
aggregate value of $374,000) and Mr. Sergi held
15,000 shares of restricted stock (with an aggregate value
of $112,200). For purposes of the preceding sentence, aggregate
values are based on the closing market price of our common stock
on December 31, 2004. |
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(2) |
Represents salary received from commencement of operations to
year end. Annual base salaries for Messrs. Klein, Geater,
Scherer, Landschulz and Sergi are set forth below under
Employment |
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Agreements. Mr. Sergis annualized base salary
during the period ended December 31, 2003 was $185,000. |
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(3) |
2003 bonuses paid are with respect to the executive
officers employment by us and Origen Financial L.L.C.
during the twelve months ended December 31, 2003. |
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(4) |
Included in these amounts are split-dollar whole life insurance
premiums of $7,985 for Mr. Klein, $7,601 for
Mr. Geater, $7,364 for Mr. Scherer, $7,467 for
Mr. Landschulz and $4,522 for Mr. Sergi, in each case
pro rated for the period October 8, 2003 through
December 31, 2003. We pre-paid the annual premiums for the
split-dollar whole life insurance for 2004 in November 2003. The
annual premiums for these policies for the coverage period
ending in November 2004 were $34,700 for Mr. Klein, $33,030
for Mr. Scherer, $32,000 for Mr. Geater, $32,450 for
Mr. Landschulz and $19,650 for Mr. Sergi. These
policies are owned by us and are intended to provide key man
insurance benefits to us, and the cash build-up in the policies
is intended to fund the payment of benefits under our capital
accumulation plan described below. |
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(5) |
Mr. Klein was granted a restricted share award of
60,000 shares on October 8, 2003, which vested on
April 8, 2004. Mr. Klein was also granted a restricted
share award of 50,000 shares on October 8, 2003.
One-third of the shares granted under this award vested on
May 11, 2004. One-third of the remaining shares will vest
on each of June 3, 2005 (extended from May 11, 2005)
and May 11, 2006. Distributions on the shares of restricted
stock will be paid to Mr. Klein. |
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(6) |
Included in these amounts are split-dollar whole life insurance
premiums for the coverage period ending in November 2005 of
$35,600 for Mr. Klein, $34,100 for Mr. Geater, $34,030
for Mr. Scherer, $33,900 for Mr. Landschulz and
$19,350 for Mr. Sergi. We pre-paid the annual premiums for
the split-dollar whole life insurance for 2005 in November 2004.
These policies are owned by us and are intended to provide key
man insurance benefits to us, and the cash build-up in the
policies is intended to fund the payment of benefits under our
capital accumulation plan described below. Mr. Kleins
other annual compensation also includes a payment of $344,161 to
cover the tax liability arising from the vesting of
60,000 shares of restricted stock in 2004. These shares of
restricted stock were granted to Mr. Klein upon his waiver
of the right to receive a change in control payment of $600,000
in connection with our formation transactions. |
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(7) |
On each of March 23, 2004 and August 5, 2004,
Mr. Klein was granted a restricted share award of
37,500 shares (or a total of 75,000 shares).
Two-thirds of the shares granted under each of these awards will
vest on June 3, 2005 (extended from May 11, 2005) and
the remaining one-third of the shares under each grant will vest
on May 11, 2006. Distributions on the shares of restricted
stock will be paid to Mr. Klein. |
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(8) |
Each of Messrs. Geater, Scherer and Landschulz was granted
a restricted share award of 20,000 shares on
October 8, 2003. One-third of the shares granted under this
award vested on May 11, 2004. One-third of the remaining
shares will vest on each of June 3, 2005 (extended from
May 11, 2005) and May 11, 2006. Distributions on the
shares of restricted stock will be paid to the applicable holder
of the restricted stock. |
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(9) |
On each of March 23, 2004 and August 5, 2004, each of
Messrs. Geater, Scherer and Landschulz was granted a
restricted share award of 15,000 shares (or a total of
30,000 shares each). Two-thirds of the shares granted under
each of these awards will vest on June 3, 2005 (extended
from May 11, 2005) and the remaining one-third of the
shares under each grant will vest on May 11, 2006.
Distributions on the shares of restricted stock will be paid to
the applicable holder of the restricted stock. |
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(10) |
On January 29, 2004 Mr. Sergi was granted a restricted
share award of 10,000 shares and on each of March 23,
2004 and August 5, 2004, Mr. Sergi was granted a
restricted share award of 2,500 shares (or a total of
15,000 shares). Two-thirds of the shares granted under each
of these awards vested on May 11, 2005 and the remaining
one-third of the shares under each grant will vest on
May 11, 2006. Distributions on the shares of restricted
stock will be paid to Mr. Sergi. |
Section 162(m) of the Internal Revenue Code disallows a tax
deduction to public companies for compensation paid in excess of
$1,000,000 for any fiscal year to the companys chief
executive officer and the
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four other most highly compensated executive officers. To
qualify for deductibility under Section 162(m),
compensation in excess of $1,000,000 annual maximum paid to
these executive officers must be performance-based
compensation, as determined under Section 162(m). For these
purposes, compensation generally includes base salary, annual
bonuses, stock option exercises, compensation attributable to
restricted shares vesting and nonqualified benefits. While it is
our intention to structure compensation so that it satisfies the
performance-based compensation requirements under
Section 162(m) to the fullest extent possible, if we become
subject to the provisions of Section 162(m), the
Compensation Committee will balance the costs and burdens
involved in doing so against the value to us and our
stockholders of the tax benefits to be obtained by us.
Accordingly, we reserve the right, should Section 162(m)
apply, to design compensation programs that recognize a full
range of performance criteria important to our success, even
where the compensation paid under such programs may not be
deductible as a result of the application of Section 162(m).
We have adopted a non-qualified capital accumulation plan that
provides supplemental compensation to certain executive officers
and employees on a deferred basis. We have the discretion to
select which employees will be eligible to participate in the
plan. The plan is intended to attract and maintain qualified
individuals in key positions. The deferred compensation under
the plan vests over a ten-year period, with the first 30%
vesting beginning on the third anniversary of the
employees participation in the plan, and the remainder
vesting at a rate of 10% per year, until the tenth
anniversary of the employees participation in the plan.
The deferred compensation is paid to the employee, in a lump
sum, following the tenth anniversary of the participants
enrollment in the plan. If a participants employment is
terminated for any reason after the third anniversary, but
before the tenth anniversary, of his or her enrollment in the
plan, we will pay the participant his or her vested portion of
the deferred compensation, in a lump sum, following the tenth
anniversary of his or her enrollment in the plan. If a
participant dies before he or she has been enrolled in the plan
for ten years, we have no obligation to pay any amount to the
participant or the participants beneficiaries. A copy of
the plan is attached as an exhibit to the registration statement
of which this prospectus is a part. The following table sets
forth the compensation payable to our named executive officers
under the capital accumulation plan.
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Compensation Payable Under | |
Named Executive Officer |
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Capital Accumulation Plan | |
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Ronald A. Klein
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$ |
400,000 |
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W. Anderson Geater
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$ |
400,000 |
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J. Peter Scherer
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$ |
400,000 |
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Mark W. Landschulz
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$ |
400,000 |
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Benton E. Sergi
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$ |
225,000 |
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We have adopted a split-dollar life insurance plan that, through
individual life insurance policies, provides death benefits to a
participants beneficiaries and coordinates with the
capital accumulation plan described above. Under the
split-dollar plan, we are the sole owner of each life insurance
policy and pay all premiums due under the policies. Upon a
participants death, a portion of the death benefit is paid
to the participants designated beneficiary and a portion
of the death benefit is paid to us. It is intended that the
policies under the split-dollar plan provide key man insurance
benefits to us, and the cash build-up in the policies is
intended to fund the payment of benefits under our capital
accumulation plan described above. Participation in the
split-dollar plan terminates upon the earlier of a
participants death or the tenth anniversary of a
participants enrollment in our capital accumulation plan
described above. In addition, the split-dollar plan will
terminate, as to all participants, upon the total cessation of
our business, if we file for bankruptcy, are put into
receivership or upon our dissolution. Upon the plans
termination, participants have the right to acquire the life
insurance policy from us for the then current cash surrender
value of the policy. A copy of the plan is attached as an
exhibit to the registration statement of which this prospectus
is a part.
62
Employment Agreements
We and Origen Financial L.L.C. have entered into employment
arrangements with the executive officers named in the following
table, pursuant to which Origen Financial L.L.C. pays the
executives salaries. Each of our executives is also an
officer of Origen Financial L.L.C. These employment agreements
are for a three-year term and provide the following annual base
salaries:
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Ronald A. Klein
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$ |
400,000 |
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$ |
425,000 |
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$ |
450,000 |
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W. Anderson Geater, Jr
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205,000 |
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215,000 |
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225,000 |
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J. Peter Scherer
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205,000 |
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215,000 |
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225,000 |
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Mark W. Landschulz
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190,000 |
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200,000 |
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210,000 |
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Benton E. Sergi
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190,000 |
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195,000 |
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205,000 |
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(1) |
The initial term of the employment agreement of each of
Messrs. Klein, Geater, Scherer and Landschulz began on
October 8, 2003 and ends on October 7, 2006. The
initial term of Mr. Sergis employment agreement began
on April 1, 2004 and ends on March 31, 2007. |
Each such employee will be prohibited from competing with us for
a period of one year after termination of his employment under
certain conditions. Each employee will also be prohibited from
soliciting the employment of any of our other employees and
diverting any business from us for a period of up to
12 months after termination of the employment agreement.
Each of the employment agreements is for an initial term of
three years, and will be automatically renewed for successive
one-year terms unless otherwise terminated by us or the
employee. Under the employment agreements, each employee will be
entitled to a severance payment of one years salary upon a
termination by us without cause. In addition, each of
Messrs. Klein, Geater, Scherer and Landschulz will be
entitled to a severance payment of one years salary upon a
termination by the executive for good reason or the failure by
us to renew the term of the contract. Each of the executive
officers is eligible to receive a bonus payable in cash, equity
or a combination of cash and equity, in an amount and in the
form determined by the Compensation Committee in its discretion.
Pursuant to Mr. Kleins prior employment arrangement
with Origen Financial L.L.C., he was entitled to a change of
control payment in the amount of $600,000 upon our acquisition
of Origen Financial L.L.C. in October 2003. Mr. Klein
waived his rights to the payment in connection with our
formation transactions. In consideration for this waiver, we
granted Mr. Klein a restricted stock award of
60,000 shares of our common stock, which vested on
April 8, 2004.
2003 Equity Incentive Plan
We have established our 2003 Equity Incentive Plan for the
purpose of attracting and retaining directors, officers, key
employees and consultants, including officers, key employees and
consultants of Origen Financial L.L.C. Under this plan, we may
award incentive and non-statutory stock options, stock
appreciation rights, dividend equivalent rights, restricted
stock, performance stock units and other stock units or
securities, including membership interests in Origen Financial
L.L.C., that are valued by reference to our common stock, our
book value or the performance of our subsidiaries. Incentive
stock options may be granted only to our employees. This plan is
administered by the Compensation Committee, which determines,
subject to the provisions of the plan, who shall receive awards,
the types of awards to be made, and the terms and conditions of
each award. The Compensation Committee may delegate to our Chief
Executive Officer all or part of its authority and duties with
respect to awards to individuals who are not our executive
officers or directors. The number of shares of common stock that
may be issued pursuant to awards granted under the plan is
limited to 1,758,848.
The exercise price of options may not be less than the fair
market value of the common stock at the time the option is
granted except with respect to options granted in lieu of cash
compensation. Options that are intended to qualify as incentive
stock options under the plan may not be exercisable for more
than ten years
63
after the date the option is granted and may not be granted at
an exercise price of less than the fair market value of the
common stock at the time the option is granted. In the case of
incentive stock options granted to holders of more than 10% of
our common stock, the options may not be granted at an exercise
price less than 110% of the fair market value of the common
stock at the time the options are granted.
Awards granted under the plan generally expire 90 days
after the termination of the recipients service to us or
any subsidiary, except in the case of death, in which case
awards generally may be exercised up to 12 months following
the date of death. Awards generally terminate immediately upon
termination for cause.
The terms of the 2003 Equity Incentive Plan in respect of
non-employee directors are described under Board Compensation
above.
The Compensation Committee shall make appropriate adjustments in
the number of shares of common stock subject to each award and
the exercise price per share of each award if there is any
change in the common stock as a result of a stock dividend,
stock split, reverse stock split, recapitalization,
reclassification, combination or exchange of shares, merger,
consolidation or other change in capitalization with a similar
substantive effect on the plan or the awards granted under the
plan. The Compensation Committee also has the authority to
accelerate or extend award exercise rights. In the event of a
merger, consolidation or sale of all or substantially all of our
assets in which our outstanding shares are exchanged for cash,
securities or other property of an unrelated corporation, in the
event that our board decides that all awards will terminate
prior to the consummation of the transaction, all outstanding
awards will vest and become immediately exercisable and all
awards shall be fully settled in cash or in kind as determined
by the Compensation Committee. Our board of directors, in its
discretion, can either provide that all awards will be assumed
or equivalent awards substituted by the surviving corporation or
that all awards will terminate immediately prior to the
consummation of the change in control.
The plan will terminate when no further shares of common stock
are available for issuance upon the exercise of awards and all
outstanding awards have expired or have been exercised. The
Compensation Committee may at any time terminate the plan, but
termination will not affect awards previously granted. Any
awards that were granted prior to termination would remain
exercisable by the holder thereof in accordance with the terms
of the applicable award agreement. In addition, the Compensation
Committee may at any time amend the plan without stockholder
approval; however, stockholder approval of an amendment of the
plan will be required for any amendment that requires
stockholder approval under applicable law.
Stock Option Grants
The following table contains information describing the stock
options we have granted to our Named Executive Officers during
the year ended December 31, 2004. The table also lists
potential realizable values of such options on the basis of
assumed annual compounded share appreciation rates of 5% and 10%
over the life of the options.
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Potential Realizable | |
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Value at Assumed | |
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Annual Rates of | |
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% of Total | |
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Share Price | |
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Options | |
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Exercise | |
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Appreciation for | |
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Number of Securities | |
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Granted to | |
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or Base | |
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Option Term | |
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Underlying Options | |
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Employees in | |
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Price per | |
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Name of Grantee |
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Granted(1) | |
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Fiscal Year | |
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Share | |
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Expiration Date(2) | |
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5%(3) | |
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10%(3) | |
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Ronald A. Klein
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J. Peter Scherer
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W. Anderson Geater, Jr
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Mark W. Landschulz
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Benton E. Sergi
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12,500 |
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6.3 |
% |
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$ |
10.00 |
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January 29, 2014 |
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$ |
78,625 |
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$ |
199,250 |
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(1) |
One-third of these options vested on each of May 11, 2004
and May 11, 2005. The remaining options will vest on
May 11, 2006. |
64
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(2) |
The expiration date of the options will be 10 years after
the date of the grant. |
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(3) |
The potential realizable value is reported net of the option
price, but before the income taxes associated with exercise.
These amounts represent assumed annual compounded rates of
appreciation at 5% and 10% from the date of grant to the
expiration date of the options. |
Option Exercises and Year-End Option Values
During the year ended December 31, 2004, no Named Executive
Officer exercised any options. The following table contains
information concerning option holdings as of December 31,
2004 with respect to each of the Named Executive Officers.
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Options at | |
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Fiscal Year-End(1) | |
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Shares Acquired | |
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on Exercise | |
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Value Realized | |
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Exercisable | |
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Unexercisable | |
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Ronald A. Klein
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8,333 |
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16,667 |
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J. Peter Scherer
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5,000 |
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10,000 |
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W. Anderson Geater, Jr
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5,000 |
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10,000 |
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Mark W. Landschulz
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5,000 |
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10,000 |
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Benton E. Sergi
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4,166 |
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8,334 |
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(1) |
None of the options were in-the-money as of December 31,
2004. |
OPERATING POLICIES AND STRATEGIES
Investment Policies
Investments in Real Estate or Interests in Real Estate.
Other than (a) upon the foreclosure of real estate pursuant
to land-home loans we originate, service, or own, and
(b) as described below under Investments in Real
Estate Mortgages, we do not currently invest in or own,
and have no present intention to invest in or own real estate
assets or interests in real estate.
Investments in Real Estate Mortgages. Our business is to
originate and service manufactured home loans and to acquire and
service manufactured home loans originated by others. Most of
the manufactured home loans we originate and purchase are
chattel loans secured only by an interest in the manufactured
home itself. However, we also make and purchase
land-home loans, in which we take a security
interest in real estate in addition to the manufactured home.
Land-home loans comprised 3.45% of our originations in 2004. We
currently originate land-home loans in 22 states. In 2004,
except for New York, which accounted for 32% of our land-home
originations, respectively, no other state accounted for more
than 10% of our land-home originations. Our policy is to retain
or sell classes of securities in securitized loan portfolios to
maintain a target leverage ratio (debt to tangible equity) of
3:1 to 9:1.
Securities of or Interests in Persons Primarily Engaged in
Real Estate Activities and Other Issuers. Subject to the
percentage of ownership limitations and gross income tests
necessary for REIT qualification, while we have no present
intention to do so, we may also invest in securities of entities
engaged in the manufactured home finance industry and related
industries, or securities of other issuers, including for the
purpose of exercising control over such entities. We may acquire
all or substantially all of the securities or assets of other
REITs or similar entities where such investment would be
consistent with our investment policies. In any event, we do not
intend that our investments in securities will require us to
register as an investment company under the
Investment Company Act of 1940, and we intend to divest
securities before any such registration would be required.
Investments in Other Securities. We may also invest in
other securities by purchasing bonds representing interests in
securitized pools of manufactured home loans. We will use the
same analytics to value the
65
existing securitizations of manufactured home loans as we apply
to value existing pools of manufactured home loans.
Conflict of Interest Policies
Our board is subject to certain provisions of Delaware law that
are designed to eliminate or minimize potential conflicts of
interest. We cannot assure you that these policies always will
be successful in eliminating the influence of those conflicts.
Under Delaware law, a contract or other transaction between us
and a director or between us and any other corporation or other
entity in which a director is a director or has a material
financial interest is not void or voidable solely on the grounds
of the common directorship or interest, the presence of the
director at the meeting at which the contract or transaction is
authorized, approved or ratified or the counting of the
directors vote in favor of the transaction or contract if
(a) the transaction or contract is authorized, approved or
ratified by the board of directors or a committee of the board,
after disclosure of the common directorship or interest, by the
affirmative vote of a majority of disinterested directors, even
if the disinterested directors constitute less than a quorum, or
by a majority of the votes cast by disinterested stockholders,
(b) the transaction or contract is authorized or approved
by our stockholders, after disclosure of the common directorship
or interest, or (c) the transaction or contract is fair and
reasonable to us at the time it is authorized, approved or
ratified by our board or our stockholders.
Under our certificate of incorporation, our directors are not
personally liable for monetary damages for breach of their
fiduciary duty of care except for liability for acts or
omissions not in good faith or which involve intentional
misconduct or a knowing violation of law or for any transaction
from which the directors derived an improper personal benefit.
In addition, we have adopted a conflict of interest policy
designed to eliminate or minimize potential conflicts of
interest. Generally, the policy provides that avoidable
conflicts of interest are prohibited as a matter of company
policy. Specifically, the policy provides, among other things,
that:
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employees may not accept benefits from any other employee that
are inconsistent with our policies; |
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employees should avoid having an ownership interest in any
enterprise if the ownership interest would, or appears to,
compromise the employees loyalty to us; |
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employees may not participate in joint ventures, partnerships or
other business arrangements with us; |
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employees are prohibited from taking for themselves personal
opportunities discovered through the use of corporate property,
information or position; |
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employees may not use corporate property, information or
position for personal gain; and |
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employees may not accept simultaneous employment with or serve
as a director of one of our competitors. |
The policy provides that any potential conflict of interest
should be disclosed to and reviewed by higher levels of
management and our legal department.
Some of our directors and officers may be subject to certain
conflicts of interest in fulfilling their responsibilities to
us. See Certain Relationships and Related
Transactions. Certain of our executive officers have
entered into employment agreements with us containing covenants
limiting the ability of the executives to engage in a similar or
competitive business. See Management
Employment Agreements.
Policies with Respect to Other Activities
We may, but do not presently intend to, make investments other
than as previously described. All investments (other than
short-term investments) are expected to relate to the
manufactured housing business. At all times, we intend to make
investments in the manner necessary for us to qualify as a REIT
unless,
66
because of circumstances or changes in the Internal Revenue Code
(or the regulations promulgated thereunder), the board of
directors determines that it is no longer in our best interests
to qualify as a REIT.
In the event that our board of directors determines to raise
additional equity capital, it has the authority, without
stockholder approval, to issue additional common stock or
preferred stock in any manner and on such terms and for such
consideration it deems appropriate.
Our operations are expected to be leveraged. We intend to
acquire assets primarily by leveraging our existing portfolio
and using the proceeds to acquire additional assets. See
Risk Factors Risks Related to Our
Business Our profitability may be affected if we are
unable to effectively manage interest rate risk and
leverage. Although our ability to leverage is not limited
and may vary over time and with market factors, we expect to
employ leverage consistent with the type of assets acquired and
the desired level of interest rate risk in various investment
environments. Our certificate of incorporation and bylaws do not
limit the amount of indebtedness we may incur. Instead,
management has discretion as to the amount of leverage to be
employed depending on managements assessment of acceptable
risk consistent with the nature of the assets then held by us.
We leverage our assets primarily with repurchase agreements,
securitizations of manufactured home loans and secured and
unsecured loans. The terms of such borrowings may provide for us
to pay a fixed or adjustable rate of interest, and may provide
for any term to maturity that we deem appropriate.
We also intend to enter into repurchase agreements. Repurchase
agreements are structured as sale and repurchase obligations and
have the economic effect of allowing a borrower to pledge
purchased assets as collateral securing short-term loans to
finance the purchase of such assets. Typically, the lender in a
repurchase arrangement makes a loan in an amount equal to a
percentage of the market value of the pledged collateral. At
maturity, the borrower is required to repay the loan and the
pledged collateral is released. Pledged assets continue to pay
principal and interest to the borrower.
We expect that repurchase agreements will be, together with loan
securitizations, the principal means of leveraging our assets.
However, we may also use warehouse lines of credit or issue
secured or unsecured notes of any maturity if it appears
advantageous to do so. We may also issue shares of preferred
stock, including in connection with the acquisition of assets.
We intend to enter into repurchase agreements with financially
sound institutions, including broker/retailers, commercial banks
and other lenders.
The repurchase agreements also would require us to deposit
additional collateral or reduce our borrowings thereunder if the
market value of the pledged collateral declines. This may
require us to sell assets to provide such additional collateral
or to reduce our borrowings. We intend to maintain an equity
cushion sufficient to provide liquidity in the event of interest
rate movements and other market conditions affecting the market
value of the pledged assets. However, there can be no assurance
that we will be able to safeguard against being required to sell
assets in the event of a change in market conditions.
We have authority to offer our common stock or other equity or
debt securities in exchange for property and to repurchase or
otherwise reacquire our shares or any other securities and may
engage in such activities in the future.
We do not have a policy regarding, nor have we engaged in,
trading, underwriting or agency distribution or the selling of
securities of other issuers.
We do not have a policy limiting our ability to make loans to
third parties and currently do not intend to engage in
significant lending activities other than in connection with our
manufactured home lending business.
Our board of directors may change any of these policies without
prior notice to and without a vote of our stockholders.
Operating Policies
We have implemented certain other operating policies. The board
of directors may, in its discretion, revise such policies from
time to time in response to changes in market conditions or
opportunities without stockholder approval. See Risk
Factors Risks Related to Our Organization and
Structure Our board of
67
directors may change our investment and operational policies and
practices without a vote of our stockholders, which limits your
control of our policies and practices.
We have adopted compliance guidelines, including restrictions on
acquiring, holding and selling assets, to ensure that we
establish and maintain our qualification as a REIT and are
excluded from regulation as an investment company. Before
acquiring any asset, our management will determine whether such
asset would constitute a qualified REIT asset under the REIT
provisions of the Internal Revenue Code. Substantially all of
the assets that we intend to acquire are expected to be
qualified REIT assets. We regularly monitor purchases of assets
and the income generated from such assets, including income from
our hedging activities, in an effort to ensure that at all times
we maintain our qualification as a REIT and our exclusion under
the Investment Company Act.
Our directors rely substantially on information and analysis
provided by management to evaluate our operating policies,
compliance therewith and other matters relating to our
investments.
In order to maintain our REIT status and avoid paying federal
income and excise tax, we generally intend to distribute to our
stockholders each year substantially all of our REIT taxable
income. See Material U.S. Federal Income Tax
Consequences Annual Distribution Requirements.
Regulatory Compliance Policies
We endeavor to comply with a variety of federal and state laws
and regulations applicable to our business. See Risk
Factors Other Risks.
To ensure compliance with such laws and regulations, we employ
the following mechanisms and policies:
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Our internal legal department oversees our consumer lending
regulatory compliance program. It also oversees our licensing
compliance program, including the application for and renewal of
state lending, servicing and insurance licenses. One method we
use to attempt to assure compliance is to incorporate applicable
law and legal restrictions on our operations into our policies
and internal software systems, including those that generate
manufactured home loan documentation. Our legal department
regularly monitors applicable laws and regulations for changes
or new requirements using commercial legislative services,
industry publications, business information services and law
firm newsletters. Our legal department reviews our existing
origination, credit, servicing and other documents, develops new
documents, reviews and develops policies and procedures and
provides counsel to other employees. Such documents and policies
are posted on our intranet. |
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We supplement our internal legal resources with the specialized
expertise of outside counsel as necessary. On a going-forward
basis, we plan to employ specialized outside counsel to
periodically audit and update our regulatory compliance program. |
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Our legal department actively participates in meetings and
forums of the Manufactured Housing Institute on industry legal
and regulatory topics. |
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Under the direction of our legal department, our credit service
department systematically audits previously issued loans to
ensure that our software systems are generating documents and
terms consistent with applicable laws and regulations. |
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Our credit services and legal departments periodically review
all origination, credit, and servicing documentation for
accuracy, completeness and consistency of information. |
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Our legal department manages litigation against us, including
litigation concerning consumer lending and compliance with state
licensing and federal regulatory requirements. Our legal
department works with senior credit officers and information
technology personnel to appropriately adapt our policies and
procedures in response to issues raised in litigation or by a
federal or state regulatory authorities. |
68
FACILITIES
Our executive offices are located in approximately
20,000 square feet of leased space at 27777 Franklin
Road, Suite 1700, Southfield, Michigan 48034. The lease,
which terminates on March 31, 2008, provides for monthly
rent of approximately $32,000. Certain of our affiliates own
interests in the company from which we lease our executive
offices. Under the terms of a renewal option, if no event of
default exists and no default existed within a period of one
year prior to notification of our intent to renew, we have the
right to extend the initial term of the lease for two three year
terms. The base rent for the option terms will be calculated at
95% of the then prevailing market rates for comparable renewal
space, but in any event not less than the base rate payable at
the end of the current term of the lease.
We also lease office space for our offices in other locations.
We currently have a lease expiring in August 2008 for
approximately 6,800 square feet of office space in Glen
Allen, Virginia with a current monthly rent of approximately
$9,950; a lease expiring in October 2007 for approximately
3,750 square feet of office space in Duluth, Georgia with a
current monthly rent of approximately $5,000; and a lease
expiring in March 2012 for approximately 42,000 square feet
of office space in Fort Worth, Texas with a current monthly
rent of approximately $36,000.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material U.S. federal
income tax considerations regarding our qualification and
taxation as a REIT and the material U.S. federal income tax
consequences resulting from the acquisition, ownership and
disposition of our common stock. This discussion is based on
current law and assumes that we will at all relevant times
qualify as a REIT for U.S. federal income tax purposes. The tax
law upon which this discussion is based could be changed, and
any such change could have retroactive effect. The following
discussion is not exhaustive of all possible tax considerations.
This summary neither gives a detailed discussion of any state,
local or foreign tax considerations nor discusses all of the
aspects of U.S. federal income taxation that may be relevant to
you in light of your particular circumstances or to particular
types of stockholders that are subject to special tax rules,
such as insurance companies, tax-exempt entities, financial
institutions or broker-dealers, foreign corporations or
partnerships, and persons who are not citizens or residents of
the United States, stockholders that hold our stock as a hedge,
part of a straddle, conversion transaction or other arrangement
involving more than one position, or stockholders whose
functional currency is not the U.S. dollar. This discussion
assumes that you will hold our common stock as a capital
asset, generally, property held for investment, under the
Internal Revenue Code.
YOU ARE URGED TO CONSULT WITH YOUR OWN TAX ADVISOR REGARDING THE
SPECIFIC CONSEQUENCES TO YOU OF THE PURCHASE, OWNERSHIP AND SALE
OF STOCK IN AN ENTITY ELECTING TO BE TAXED AS A REIT, INCLUDING
THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSIDERATIONS
OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION AND THE POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
Our Qualification as a REIT
We have elected to be taxed as a REIT under the Internal Revenue
Code. We intend that we will continue to be organized and
operate in such a manner as to qualify for taxation as a REIT.
In connection with this offering, we have received the opinion
of our legal counsel, Jaffe, Raitt, Heuer & Weiss,
Professional Corporation, that we are organized in conformity
with the requirements for qualification as a REIT under the
Internal Revenue Code, and our proposed method of operation will
enable us to continue to meet the requirements for qualification
and taxation as a REIT under the Internal Revenue Code. It must
be emphasized that this opinion is not binding on the IRS or any
court. In addition, the opinion of our counsel is based on
various assumptions and is conditioned upon certain
representations made by us as to factual matters, including
factual representations concerning our business and assets as
set forth in this prospectus, and assumes that the actions
described in this prospectus are completed in a timely fashion.
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Our qualification and taxation as a REIT depends on our ability
to meet, through actual annual (and in some cases quarterly)
operating results, requirements relating to income, asset
ownerships, distribution levels, diversity of stock ownership,
and the various other qualification tests imposed under the
Internal Revenue Code discussed below, the results of which will
not be reviewed by Jaffe, Raitt, Heuer & Weiss, Professional
Corporation. No assurance can be given that our actual results
for any particular taxable year will satisfy these requirements.
See Failure to Qualify as a REIT. In
addition, qualification as a REIT depends on future transactions
and events that cannot be known at this time.
So long as we qualify for taxation as a REIT, we generally will
be permitted a deduction for federal income tax purposes for
dividends we pay to our stockholders. As a result, we generally
will not be required to pay federal corporate income taxes on
our net income that is currently distributed to our
stockholders. This treatment substantially eliminates the
double taxation that ordinarily results from
investment in a corporation. Double taxation means taxation once
at the corporate level when income is earned and once again at
the stockholder level when this income is distributed. We will
be required to pay U.S. federal income tax, however, as follows:
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we will be required to pay tax at regular corporate rates on any
undistributed REIT taxable income (REIT taxable
income is the taxable income of the REIT subject to specified
adjustments, including a deduction for dividends paid and
including undistributed net capital gain); |
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we may be required to pay the alternative minimum
tax on our items of tax preference; and |
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if we have (i) net income from the sale or other
disposition of foreclosure property which is held
primarily for sale to customers in the ordinary course of
business or (ii) other non-qualifying income from
foreclosure property, we will be required to pay tax at the
highest corporate rate on this income. Foreclosure property is
generally defined as property acquired through foreclosure or
after a default on a loan secured by the property or on a lease
of the property. |
We will be required to pay a 100% tax on any net income from
prohibited transactions. Prohibited transactions
are, in general, sales or other taxable dispositions of
property, other than foreclosure property, held primarily for
sale to customers in the ordinary course of business. Under
existing law, whether property is held as inventory or primarily
for sale to customers in the ordinary course of a trade or
business depends on all the facts and circumstances surrounding
the particular transaction.
If we fail to satisfy the 75% gross income test or the 95% gross
income test discussed below, but nonetheless maintain our
qualification as a REIT because certain other requirements are
met, we will be subject to a tax equal to:
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the greater of (i) the amount by which 75% of our gross
income exceeds the amount qualifying under the 75% gross income
test described below for the taxable year, and (ii) the
amount by which 95% of our gross income exceeds the amount
qualifying under the 95% gross income test described below for
the taxable year, multiplied by |
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a fraction intended to reflect our profitability. |
We will be required to pay a 4% excise tax on the excess of the
required distribution over the amounts actually distributed if
we fail to distribute during each calendar year at least the sum
of:
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85% of our real estate investment trust ordinary income for the
year; |
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95% of our real estate investment trust capital gain net income
for the year; and |
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any undistributed taxable income from prior years. |
This distribution requirement is in addition to, and different
from the distribution requirements discussed below in the
section entitled Distributions Generally.
If we acquire any asset from a corporation which is taxed as a
C corporation in a transaction in which the basis of the
asset in our hands is determined by reference to the basis of
the asset in the hands of the C corporation, and we
subsequently recognize gain on the disposition of the asset
during the 10-year period
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beginning on the date on which we acquired the asset, then we
will be required to pay tax at the highest regular corporate tax
rate on the lesser of such gain and the excess of:
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the fair market value of the asset, over |
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our adjusted basis in the asset, in each case determined as of
the date on which we acquired the asset. |
This built-in-gain tax is often referred to as the sting
tax.
A C corporation is generally defined as a corporation
required to pay full corporate-level tax. The results described
in this paragraph with respect to the recognition of gain will
apply unless we make an election under Treasury
Regulation Section 1.337(d)-7(c) to cause the C
corporation to recognize all of the gain inherent in the
property at the time of acquisition of the asset.
In addition, if we acquire any asset from an S corporation or
another REIT that previously acquired such asset from a
C corporation in a carry-over basis transaction (including
in connection with the making of an S corporation or REIT
election), we will also be subject to the sting tax if we
dispose of the asset during the 10-year period beginning on the
date that the asset was acquired from the C corporation.
Finally, if our dealings with any taxable REIT subsidiaries
(discussed below) are not at arms length, we could be
subject to a 100% tax on any redetermined income or deduction
items.
Requirements for Qualification as a REIT
The Internal Revenue Code defines a REIT as a corporation, trust
or association:
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(i) that is managed by one or more trustees or directors; |
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(ii) that issues transferable shares or transferable
certificates to evidence beneficial ownership; |
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(iii) that would be taxable as a domestic corporation but
for Sections 856 through 859 of the Internal Revenue Code; |
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(iv) that is not a financial institution or an insurance
company within the meaning of the Internal Revenue Code; |
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(v) that is beneficially owned by 100 or more persons; |
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(vi) not more than 50% in value of the outstanding stock of
which is owned, actually or constructively, by five or fewer
individuals, including specified entities, during the last half
of each taxable year (the 5/50 Rule); |
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(vii) that makes an election to be taxable as a REIT, or
has made this election for a previous taxable year which has not
been revoked or terminated, and satisfies all relevant filing
and other administrative requirements established by the
Internal Revenue Service that must be met to elect and maintain
REIT status; and |
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(viii) that meets other tests, described below, regarding
the nature of its income and assets and the amount of its
distributions. |
The Internal Revenue Code provides that all of the first four
conditions stated above must be met during the entire taxable
year and that the fifth condition must be met during at least
335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than
12 months. The fifth and sixth conditions do not apply
until after the first taxable year for which an election is made
to be taxed as a REIT.
Stock Ownership Tests
At all times after our first REIT taxable year, our stock must
be beneficially held by at least 100 persons during at least
335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than
12 months. In addition, under the 5/50 Rule during the last
half of each taxable year (other than our first REIT taxable
year) not more than 50% in value of our outstanding shares may
be owned actually or
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constructively by five or fewer individuals. In determining
whether five or fewer individuals hold our shares, certain
attribution rules of the Internal Revenue Code apply. For
purposes of the 5/50 Rule, pension trusts and other specific
tax-exempt entities generally are treated as individuals, except
trusts that are qualified trusts under Internal Revenue Code
Section 401(a) are not considered individuals, and
beneficiaries of such trusts are treated as holding shares of a
REIT in proportion to their actuarial interests in the trust for
purposes of the 5/50 Rule. Our charter imposes repurchase
provisions and transfer restrictions to avoid having more than
50% of the value of our stock held by five or fewer individuals
and to ensure that we comply with the 100 shareholder
requirement. These restrictions, however, may not ensure that we
will be able to satisfy these stock ownership requirements. We
will be treated as satisfying the 5/50 Rule if we comply with
the demand letter and record keeping requirements discussed
below, and if we do not know, and by exercising reasonable
diligence would not have known, whether we failed to satisfy the
5/50 Rule. We anticipate that we will satisfy the stock
ownership tests, and will use reasonable efforts to monitor our
stock ownership in order to ensure continued compliance with
these tests. If we were to fail either of the stock ownership
tests, we would generally be disqualified from REIT status,
unless our failure was due to reasonable cause and not willful
neglect, provided we pay a penalty of $50,000 for each such
failure.
To monitor our compliance with the stock ownership tests, we are
required to maintain records regarding the actual ownership of
our shares of stock. To do so, we are required to demand written
statements each year from the record holders of certain
percentages of our shares of stock in which the record holders
are to disclose the actual owners of the shares (i.e., the
persons required to include our dividends in gross income). A
REIT with 2,000 or more record stockholders must demand
statements from record holders of 5% or more of its shares, one
with fewer than 2,000, but more than 200, record stockholders
must demand statements from record holders of 1% or more of the
shares, while a REIT with 200 or fewer record stockholders must
demand statements from record holders of 0.5% or more of the
shares. A list of those persons failing or refusing to comply
with this demand must be maintained as part of our records. A
stockholder who fails or refuses to comply with the demand must
submit a statement with his tax return disclosing the actual
ownership of the shares of stock and certain other information.
Qualified REIT Subsidiaries and Disregarded Entities
If a REIT owns a corporate subsidiary that is a qualified
REIT subsidiary, or owns 100% of the membership interests
in a limited liability company, the separate existence of that
subsidiary or limited liability company will be disregarded for
federal income tax purposes. Generally, a qualified REIT
subsidiary is a corporation, other than a taxable REIT
subsidiary (discussed below), all of the stock of which is owned
by the REIT. A limited liability company 100% owned by a single
member is referred to as a disregarded entity. All assets,
liabilities and items of income, deduction and credit of the
qualified REIT subsidiary or disregarded entity will be treated
as assets, liabilities and items of income, deduction and credit
of the REIT itself. If we own a qualified REIT subsidiary or
disregarded entity, neither will be subject to federal corporate
income taxation, although such entities may be subject to state
and local taxation in some states.
Taxable REIT Subsidiaries
A taxable REIT subsidiary of a REIT is a corporation
in which the REIT directly or indirectly owns stock and that
elects, together with the REIT, to be treated as a taxable REIT
subsidiary under Section 856(l) of the Internal Revenue
Code. In addition, if one of our taxable REIT subsidiaries owns,
directly or indirectly, securities representing 35% or more of
the vote or value of a subsidiary corporation, that subsidiary
will also be treated as our taxable REIT subsidiary. A taxable
REIT subsidiary is a corporation subject to federal income tax,
and state and local income tax where applicable, as a regular
C corporation.
A taxable REIT subsidiary is not subject to the 100% tax on
prohibited transactions and need not comply with the
REIT income tests. Our taxable REIT subsidiaries will generally
conduct business activities, such as loan servicing and
insurance, the income from which, if earned directly by us,
could cause us to fail to satisfy the REIT income tests. We may
also use taxable REIT subsidiaries to engage in certain
securitization transactions. Our ability to conduct activities
through taxable REIT subsidiaries, however, is limited by the
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requirement that not more than 20% of the total value of the
assets of a REIT may be represented by securities of one or more
taxable REIT subsidiaries.
Several provisions regarding the arrangements between a REIT and
its taxable REIT subsidiaries ensure that a taxable REIT
subsidiary will be subject to an appropriate level of federal
income taxation. For example, taxable REIT subsidiaries are
limited in their ability to deduct interest payments in excess
of a certain amount made to the REIT. In addition, a REIT will
be obligated to pay a 100% penalty tax on some payments that it
receives or on certain expenses deducted by the taxable REIT
subsidiary if the economic arrangements between the REIT and the
taxable REIT subsidiary are not comparable to similar
arrangements among unrelated parties.
Income Tests
We must satisfy two gross income requirements annually to
maintain our qualification as a REIT:
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under the 75% gross income test, we must derive at
least 75% of our gross income, excluding gross income from
prohibited transactions, from specified real estate sources,
including rents from real property, interest on obligations
secured by mortgages on real property or on interests in real
property, gain from the disposition of real estate
assets, i.e., interests in real property, mortgages
secured by real property or interests in real property, certain
amounts received or accrued as consideration for entering into
agreements to make loans secured by mortgages on real property
or on interests in real property and income from certain types
of temporary investments; and |
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under the 95% gross income test, we must derive at
least 95% of our gross income, excluding gross income from
prohibited transactions, from (i) the sources of income
that satisfy the 75% gross income test, (ii) dividends,
interest and gain from the sale or disposition of stock or
securities, or (iii) any combination of the foregoing. |
For our taxable year commencing after October 22, 2004, any
income we recognize from certain hedging transaction (as defined
in clause (ii) or (iii) of code Section 1221(b)(2)(A))
which is clearly identified pursuant to Code
Section 1221(a)(7), including gain from the sale or
disposition of such a transaction, shall not constitute gross
income to the extent that the transaction hedges any
indebtedness incurred or to be incurred by us to acquire or
carry real estate assets.
For purposes of the 75% and 95% gross income tests, a REIT is
deemed to have earned a proportionate share of the income earned
by any partnership, or any limited liability company treated as
a partnership for U.S. federal income tax purposes, in which it
owns an interest and is deemed to have earned the income earned
by any qualified REIT subsidiary or disregarded entity.
Any amount includable in our gross income with respect to a
regular or residual interest in a REMIC or a regular interest in
a FASIT generally also is treated as interest on an obligation
secured by a mortgage on real property. Interest income received
with respect to non-REMIC pay-through bonds and pass-through
debt instruments, such as collateralized mortgage obligations
(CMOs), however, will not be qualifying income for
this purpose. If, however, less than 95% of the assets of a
REMIC or FASIT consists of real estate assets (determined as if
we held such assets), we will be treated as receiving directly
our proportionate share of the income of the REMIC or FASIT. In
addition, if we receive interest income with respect to a
mortgage loan that is secured by both real property and other
property and the highest principal amount of the loan
outstanding during a taxable year exceeds the fair market value
of the real property on the date we became committed to make or
purchase the mortgage loan, a portion of the interest income,
equal to (i) such highest principal amount minus such
value, divided by (ii) such highest principal amount,
generally will not be qualifying income for purposes of the 75%
gross income test.
Interest earned by a REIT ordinarily does not qualify as income
meeting the 75% or 95% gross income tests if the determination
of all or some of the amount of interest depends in any way on
the income or profits of any person. Interest will not be
disqualified from meeting such tests, however, solely by reason
of being based on a fixed percentage or percentages of receipts
or sales.
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If we fail to satisfy one or both of the 75% or 95% gross income
tests for taxable years commencing after October 22, 2004,
we may nevertheless qualify as a REIT for the year if we are
entitled to relief under the Internal Revenue Code. Generally,
we may avail ourselves of the relief provisions if:
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our failure to meet these tests was due to reasonable cause and
not due to willful neglect; and |
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following our identification of such failure, we provide a
description of each item of REIT gross income in a schedule
filed in accordance with Treasury Regulations. |
If we are entitled to avail ourselves of the relief provisions,
we will maintain our qualification as a REIT but will be subject
to certain penalty taxes as described under
Our Qualification as a REIT above. We
may not, however, be entitled to the benefit of these relief
provisions in all circumstances. If these relief provisions do
not apply to a particular set of circumstances, we will not
qualify as a REIT.
Asset Tests
At the close of each quarter of our taxable year, we must
satisfy four tests relating to the nature and diversification of
our assets:
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at least 75% of the value of our total assets must be
represented by qualified real estate assets, cash,
cash items and government securities; |
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not more than 25% of our total assets may be represented by
securities, other than those securities included in the 75%
asset test: |
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except for equity investment in REITs, qualified REIT
subsidiaries, disregarded entities or taxable REIT subsidiaries,
or other securities that qualify as real estate
assets for purposes of the 75% asset test, (i) the
value of any one issuers securities owned by us may not
exceed 5% of the value of our total assets, (ii) we may not
own more than 10% of any one issuers outstanding voting
securities, and (iii) we may not own more than 10% of the
value of the outstanding securities of any one issuer; and |
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not more than 20% of our total assets may be represented by
securities of one or more taxable REIT subsidiaries. |
Securities for purposes of the asset tests generally may include
debt securities. However, debt of an issuer will not count as a
security for purposes of the 10% value test if the debt
securities are straight debt as defined in
Section 1361 of the Code as modified by
Section 856(m)(2)(B) of the code to permit certain
contingencies.
Straight debt held by a REIT and issued by a partnership or
corporation will cease to be qualified as such if a REIT (or any
controlled taxable REIT subsidiary) owns non-straight debt
securities of the issuer that have an aggregate value greater
than 1% of the issuers outstanding securities. Loans by a
REIT to a partnership that do not qualify as straight debt, but
are otherwise characterized as securities, will not be
considered as such to the extent of a REITs interest as a
partner in the partnership. In addition, loans to a partnership
whose income is 75% derived from real estate sources are
per se excluded from the definition of securities.
In addition, the following will also not be treated as debt
securities (Safe Harbor Debt): (1) any loan to
an individual or estate; (2) any Section 467 rental
agreement, other than with a more than 10% related person;
(3) any obligation to pay rents from real property;
(4) any security issued by a state or political subdivision
thereof, the District of Columbia, a foreign government or any
political subdivision thereof, or the Commonwealth of Puerto
Rico, but only if the determination of payment under such
security does not depend on the profits of any entity;
(5) any securities issued by a REIT; or (6) any other
agreement as determined by the Secretary of the Treasury.
Qualified real estate assets include interests in mortgages on
real property to the extent the principal balance of a mortgage
does not exceed the fair market value of the associated real
property, regular or residual interests in a REMIC, regular
interests in a FASIT (except that, if less than 95% of the
assets of a REMIC or FASIT consists of real estate
assets (determined as if we held such assets), we will be
treated as holding
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directly our proportionate share of the assets of such REMIC or
FASIT), and shares of other REITS. Non-REMIC CMOs, however, do
not qualify as qualified real estate assets for this purpose.
Our manufactured housing loans will generally constitute
qualified real estate assets for purposes of the REIT rules.
For purposes of the asset tests, we will be deemed to own a
proportionate share of the assets of any partnership, or any
limited liability company treated as a partnership for U.S.
federal income tax purposes, other than partnership securities
qualifying as straight debt or Safe Harbor Debt, in which we own
an interest, which share is determined by reference to our
capital interest in the entity, and will be deemed to own the
assets owned by any qualified REIT subsidiary and any other
entity that is disregarded for U.S. federal income tax purposes.
After initially meeting the asset tests at the close of any
quarter, we will not lose our status as a REIT for failure to
satisfy the asset tests at the end of a later quarter solely by
reason of changes in asset values. If we fail to satisfy the
asset tests because we acquire securities or other property
during a quarter, we can cure this failure by disposing of
sufficient non-qualifying assets within 30 days after the
close of that quarter. For this purpose, an increase in our
capital interest in any partnership or limited liability company
in which we own an interest will be treated as an acquisition of
a portion of the securities or other property owned by that
partnership or limited liability company. If our failure to meet
the 5% and 10% (vote and value) asset tests is de minimis (the
value of total assets at a quarter end is not more than the
lesser of: (i) 1% of the total REIT assets for such quarter
or (ii) $10 million). In addition, we must dispose of
the assets within 6 months following the end of the quarter
during which we identify such failure or otherwise meet the
requirements of such asset tests by the end of such time period.
If our failure is other than de minimis, we may still meet the
various asset tests if (a) our failure is due to reasonable
cause and not willful neglect; (b) we provide a schedule of
offending assets to the IRS and dispose of such assets within
6 months after the last day of the quarter in which such
failure is discovered and (c) we pay a monetary penalty
equal to the greater of $50,000 or a tax equal to the highest
corporate rate multiplied by the net income generated by the
offending asset during the period it is held.
We may at some point securitize mortgage loans and/or
mortgage-backed securities. If we were to securitize mortgage
assets ourselves on a regular basis (other than through the
issuance of non-REMIC transactions), there is a substantial risk
that such activities would cause us to be treated as a
dealer and that all of the profits from such sales
would be subject to tax at the rate of 100% as income from
prohibited transactions. Accordingly, where we intend to sell
the securities created by that process, we expect that we will
engage in the securitization through one or more taxable REIT
subsidiaries, which will not be subject to this 100% tax, but
will be subject to corporate income tax. We also may securitize
such mortgage assets through the issuance of non-REMIC
securities, whereby we retain an equity interest in the
mortgage-backed assets used as collateral in the securitization
transaction. The issuance of any such instruments could result
in a portion of our assets being classified as a taxable
mortgage pool under Section 7701(1) of the Internal
Revenue Code. A taxable mortgage pool would be treated as a
separate corporation for U.S. federal income tax purposes, which
in turn could jeopardize our status as a REIT. We intend to
structure our securitizations in a manner that would not result
in the creation of taxable mortgage pool. There is no assurance,
however, that the IRS might not successfully maintain that such
taxable mortgage pool exists.
Annual Distribution Requirements
To maintain our qualification as a REIT, we are required to
distribute dividends, other than capital gain dividends, to our
stockholders each year in an amount at least equal to the sum of:
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90% of our REIT taxable income, and |
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90% of our after tax net income, if any, from foreclosure
property, minus |
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the excess of the sum of specified items of our non-cash income
items over 5% of REIT taxable income, as described below. |
For purposes of these distribution requirements, our REIT
taxable income is computed without regard to the dividends
paid deduction and net capital gain. In addition, for purposes
of this test, the specified items of
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non-cash income include income attributable to leveled stepped
rents, certain original issue discount, excess inclusion income,
certain like-kind exchanges that are later determined to be
taxable and income from cancellation of indebtedness. In
addition, if we disposed of any asset we acquired from a
corporation which is or has been a C corporation in a
transaction in which our basis in the asset is determined by
reference to the basis of the asset in the hands of that C
corporation and we did not elect to recognize gain currently in
connection with the acquisition of such asset, we would be
required to distribute at least 90% of the after-tax gain, if
any, we recognize on a disposition of the asset within the
ten-year period following our acquisition of such asset, to the
extent that such gain does not exceed the excess of:
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the fair market value of the asset on the date we acquired the
asset, over |
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our adjusted basis in the asset on the date we acquired the
asset. |
Only distributions that qualify for the dividends paid
deduction available to REITs under the Internal Revenue
Code are counted in determining whether the distribution
requirements are satisfied. We must make these distributions in
the taxable year to which they relate, or in the following
taxable year if they are declared before we timely file our tax
return for that year, paid on or before the first regular
dividend payment following the declaration and we elect on our
tax return to have a specified dollar amount of such
distributions treated as if paid in the prior year. For these
and other purposes, dividends declared by us in October,
November or December of one taxable year and payable to a
stockholder of record on a specific date in any such month shall
be treated as both paid by us and received by the stockholder
during such taxable year, provided that the dividend is actually
paid by us by January 31 of the following taxable year.
In addition, dividends we make must not be preferential. If a
dividend is preferential, it will not qualify for the dividends
paid deduction. To avoid being preferential, every stockholder
of the class of stock to which a distribution is made must be
treated the same as every other stockholder of that class, and
no class of stock may be treated other than according to its
dividend rights as a class.
To the extent that we do not distribute all of our net capital
gain, or we distribute at least 90%, but less than 100%, of our
REIT taxable income, as adjusted, we will be required to pay tax
on this undistributed income at regular ordinary and capital
gain corporate tax rates. Furthermore, if we fail to distribute
during each calendar year (or, in the case of distributions with
declaration and record dates falling in the last three months of
the calendar year, by the end of the January immediately
following such year) at least the sum of (i) 85% of our
REIT ordinary income for such year, (ii) 95% of our REIT
capital gain income for such year, and (iii) any
undistributed taxable income from prior years, we will be
subject to a 4% nondeductible excise tax on the excess of such
required distribution over the amounts actually distributed or
subject to corporate tax. We intend to make timely distributions
sufficient to satisfy the annual distribution requirements and
avoid paying federal income and excise taxes.
Under certain circumstances, we may be able to rectify a failure
to meet the distribution requirements for a year by paying
deficiency dividends to our stockholders in a later
year, which may be included in our deduction for dividends paid
for the earlier year. Although we may be able to avoid being
taxed on amounts distributed as deficiency dividends, we will be
required to pay to the IRS interest based upon the amount of any
deduction taken for deficiency dividends.
Failure to Qualify as a REIT
If we fail to qualify for taxation as a REIT in any taxable
year, and the relief provisions of the Internal Revenue Code do
not apply, we will be required to pay federal income taxes,
including any applicable alternative minimum tax, on our taxable
income in that taxable year and all subsequent taxable years at
regular corporate rates. Distributions to our stockholders in
any year in which we fail to qualify as a REIT will not be
deductible by us and we will not be required to distribute any
amounts to our stockholders. As a result, we anticipate that our
failure to qualify as a REIT would reduce the cash available for
distribution to our stockholders. In addition, if we fail to
qualify as a REIT, all distributions to our stockholders will be
taxable as regular corporate dividends to the extent of our
current and accumulated earnings and profits and may be eligible
for the corporate dividends-received deduction and, in the case
of individuals, the new reduced rate
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applicable to qualified dividend income. See
Distributions Generally below. Unless
entitled to relief under specific statutory provisions, we will
also be disqualified from taxation as a REIT for the four
taxable years following the year in which we lose our
qualification. It is not possible to state whether in all
circumstances we would be entitled to such statutory relief.
Taxation of Taxable United States Stockholders
For purposes of the discussion in this prospectus, the term
United States stockholder means a beneficial holder
of our stock that is, for U.S. federal income tax purposes:
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a citizen or resident of the United States (as determined for
U.S. federal income tax purposes); |
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a corporation, partnership, or other entity created or organized
in or under the laws of the United States or of any state
thereof or in the District of Columbia, unless Treasury
regulations provide otherwise; |
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an estate the income of which is subject to U.S. federal income
taxation regardless of its source; or |
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a trust whose administration is subject to the primary
supervision of a U.S. court and which has one or more U.S.
persons who have the authority to control all substantial
decisions of the trust. |
Distributions Generally
Distributions out of our current or accumulated earnings and
profits, other than capital gain dividends, will be taxable to
United States stockholders as ordinary dividends. Such REIT
dividends generally are ineligible for the new reduced 15% tax
rate (for calendar years from 2003 through 2008) for
qualified dividend income received by individuals,
trusts and estates. However, such rate will apply to the extent
that we have qualified dividend income for the taxable year in
which the dividend is paid and we designate such dividend as
qualifying for such reduced rate. For this purpose, qualified
dividend income of a REIT includes (i) dividends from
taxable REIT subsidiaries, (ii) the excess of its
REIT taxable income for the preceding year, which
would typically include any income that the REIT did not
distribute to stockholders, over the tax payable by the REIT on
such income, and (iii) the excess of the income of the REIT
for the preceding year subject to the built-in-gain tax on
certain assets acquired from C corporations over the tax
payable by the REIT on any such income in the preceding year.
Provided that we qualify as a REIT, dividends paid by us will
not be eligible for the dividends received deduction generally
available to United States stockholders that are corporations.
To the extent that we make distributions in excess of current
and accumulated earnings and profits, the distributions will be
treated as a tax-free return of capital to each United States
stockholder, and will reduce the adjusted tax basis that each
United States stockholder has in our stock by the amount of the
distribution, but not below zero. Distributions in excess of
current and accumulated earnings and profits that exceed the
United States stockholders adjusted tax basis in its stock
generally will be taxable as capital gain, and will be taxable
as long-term capital gain if the stock has been held for more
than one year. The calculation of the amount of distributions
that are applied against or exceed adjusted tax basis are made
on a share-by-share basis. If we declare a dividend in October,
November, or December of any calendar year that is payable to
stockholders of record on a specified date in such a month and
actually pay the dividend during January of the following
calendar year, the dividend is deemed to be paid by us and
received by the stockholder on December 31st of the year
preceding the year of payment. Stockholders may not include in
their own income tax returns any of our net operating losses or
capital losses.
Capital Gain Distributions
We can designate distributions as capital gain dividends to the
extent of our net capital gain for the taxable year of the
distribution. Distributions designated by us as capital gain
dividends will be taxable to United States stockholders as gain
from the sale or exchange of a capital asset held for more than
one year, without regard to how long the United States
stockholder has held its shares. United States stockholders that
are corporations may be required to treat up to 20% of certain
capital gain dividends as ordinary income.
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Retention of Net Capital Gains
We may elect to retain, rather than distribute as a capital gain
dividend, our net capital gains. If we were to make this
election, we would pay federal income tax at regular corporate
rates on such retained capital gains. In such a case, our
stockholders would generally:
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include their proportionate share of our undistributed net
capital gains in their taxable income as a long term capital
gain for federal income tax purposes; |
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be deemed to have paid their proportionate share of the tax paid
by us on such undistributed capital gains and receive a credit
or refund to the extent that the tax paid by us exceeds their
tax liability on the undistributed capital gain. |
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increase the adjusted basis of their stock by the difference
between the amount of their share of our undistributed net
capital gain and their share of the federal income tax paid by
us. |
Based on the source of our capital gain, capital gain dividends
or undistributed capital gain will generally be taxed to
non-corporate United States stockholders at a maximum rate of
15% (20% for sales occurring after December 31, 2008) or
25%.
Ownership of Residual Interests in REMICs
If a REIT holds a residual interest in a REMIC, its stockholders
will be subject to a tax on their share of the excess of the
REITs excess inclusion income, as defined in
Section 860E of the Internal Revenue Code, over the taxable
income of the REIT. REIT stockholders generally may not offset
their share of excess inclusion income with any current,
carryforward or carryback net operating losses. Tax exempt
entities that own shares in a REIT must treat their allocable
share of excess inclusion income as unrelated business taxable
income. Any portion of a REIT dividend paid to foreign
stockholders that is allocable to excess inclusion income will
not be eligible for exemption from the 30% withholding tax (or
reduced treaty rate) on dividend income. If shares of a REIT
that owns a residual REMIC interest are acquired by
disqualified organizations, than the REIT will be
subject to an entity level tax, at the highest rate of tax
imposed on corporations, on the excess inclusion amounts
allocated to such stockholders. For this purpose, disqualified
organizations include state or governmental entities, any
instrumentalities or agencies of the foregoing and any other
organization that is exempt from income tax and not subject to
unrelated business income taxation. If imposed, such entity
level tax is deductible to the REIT. If we securitize loans
using a REMIC, we intend to do so through one or more taxable
REIT subsidiaries. We cannot assure you, however, that all our
securitization transactions utilizing REMICs will be conducted
through a taxable REIT subsidiary. We may also securitize
mortgage assets through the issuance of non-REMIC securities.
The issuance of such instruments, however, may result in us or a
portion of our assets being classified as a taxable
mortgage pool under Section 7701(i) of the Internal
Revenue Code. If we or a portion of our assets is considered a
taxable mortgage pool for federal income tax purposes, a portion
of our taxable income may, under regulations to be issued by the
U.S. Treasury Department, be characterized as excess
inclusion income. Although we intend to securitize our
assets so as to avoid classification as a taxable mortgage pool,
we cannot assure you that the Internal Revenue Service could not
successfully maintain that such taxable mortgage pool exists.
Passive Activity Losses, Investment Interest Limitations and
Other Considerations of Holding Our Stock
Distributions we make, undistributed net capital gain includible
in income and gains arising from the sale or exchange of our
stock by a United States stockholder will not be treated as
passive activity income. As a result, United States stockholders
will not be able to apply any passive losses against
income or gains relating to our stock. With respect to
non-corporate stockholders, dividends that do not constitute a
return of capital that are taxed at ordinary income rates will
generally be treated as investment income for purposes of the
investment interest limitation. However, net capital gain from
the disposition of shares (or distributions treated as such),
capital gain dividends and dividends taxed at the net capital
gain rate generally will be excluded from investment income
except to the extent the stockholder elects to treat such net
capital gain or dividends as ordinary income for federal income
tax purposes.
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If we, or a portion of our assets, were to be treated as a
taxable mortgage pool, or if we were to acquire REMIC residual
interests, our stockholders (other than certain thrift
institutions) may not be permitted to offset certain portions of
the dividend income they derive from our shares with their
current deductions or net operating loss carryovers or
carrybacks. The portion of a stockholders dividends that
will be subject to this limitation will equal its allocable
share of our excess inclusion income, as defined in
Section 860E of the Internal Revenue Code. See
Ownership of Residual Interests in
REMICs.
Dispositions of Stock
A United States stockholder that sells or disposes of our stock
will recognize gain or loss for federal income tax purposes in
an amount equal to the difference between the amount of cash or
the fair market value of any property the stockholder receives
on the sale or other disposition and the stockholders
adjusted tax basis in the stock. This gain or loss generally
will be capital gain or loss and will be long-term capital gain
or loss if the stockholder has held the stock for more than one
year. However, any loss recognized by a United States
stockholder upon the sale or other disposition of our stock that
the stockholder has held for six months or less will be treated
as long-term capital loss to the extent the stockholder received
distributions from us that were required to be treated as
long-term capital gains. The deductibility of capital losses is
limited.
Information Reporting and Backup Withholding
We report to our United States stockholders and the IRS the
amount of dividends paid during each calendar year, along with
the amount of any tax withheld. Under the backup withholding
rules, a stockholder may be subject to backup withholding with
respect to dividends paid and redemption proceeds unless the
holder is a corporation or comes within other exempt categories
and, when required, demonstrates this fact, or provides a
taxpayer identification number or social security number,
certifying as to no loss of exemption from backup withholding,
and otherwise complies with applicable requirements of the
backup withholding rules. A United States stockholder that does
not provide us with its correct taxpayer identification number
or social security number may also be subject to penalties
imposed by the IRS. A United States stockholder can meet this
requirement by providing us with a correct, properly completed
and executed copy of IRS Form W-9 or a substantially
similar form. Backup withholding is not an additional tax. Any
amount paid as backup withholding will be creditable against the
stockholders income tax liability, if any, and otherwise
be refundable, provided the proper forms are filed on a timely
basis. The backup withholding tax rate currently is 28%.
In addition, we may be required to withhold a portion
(currently, 35%) of capital gain distributions made to any
stockholders who fail to certify their non-foreign status.
Taxation of Tax-Exempt Stockholders
Provided that a tax-exempt stockholder has not held our stock as
debt financed property within the meaning of the
Internal Revenue Code, i.e., property the acquisition or holding
of which is or is treated as financed through a borrowing by the
tax-exempt United States stockholder, and the stock is not
otherwise used in an unrelated trade or business, dividend
income on our stock and income from the sale of our stock
generally should not be unrelated business taxable income to a
tax-exempt stockholder. However, if we were to hold residual
interests in a REMIC, or if we or a pool of our assets were to
be treated as a taxable mortgage pool, a portion of the
dividends paid to a tax-exempt stockholder may be subject to tax
as unrelated business taxable income. See
Ownership of Residual Interests in
REMICs. Although we do not believe that we, or any portion
of our assets, will be treated as a taxable mortgage pool, we
cannot assure you that the IRS might not successfully maintain
that such a taxable mortgage pool exists.
For tax-exempt stockholders that are social clubs, voluntary
employees beneficiary associations, supplemental
unemployment benefit trusts, and qualified group legal services
plans exempt from U.S. federal income taxation under
Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the
Internal Revenue Code, respectively, income from an investment
in our stock will constitute unrelated business taxable income
unless the organization is able to properly claim a deduction
for amounts set aside or placed in reserve for certain
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purposes so as to offset the income generated by its investment
in our stock. Any such investors should consult their tax
advisors concerning these set aside and reserve
requirements.
Notwithstanding the above, however, a substantial portion of the
dividends received with respect to our stock may constitute
unrelated business taxable income if we are treated as a
pension-held REIT and you are a trust which:
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is described in Section 401(a) of the Internal Revenue Code
and exempt from tax under Section 501(a) of the Internal
Revenue Code; and |
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holds more than 10%, by value, of our equity interests. |
Tax-exempt pension funds that are described in
Section 401(a) of the Internal Revenue Code are referred to
below as qualified trusts.
A REIT is a pension-held REIT if:
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it would not have qualified as a REIT but for the fact that
Section 856(h)(3) of the Internal Revenue Code provides
that stock owned by a qualified trust shall be treated, for
purposes of the 5/50 rule, described above, as owned by the
beneficiaries of the trust, rather than by the trust itself; and |
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either at least one qualified trust holds more than 25%, by
value, of the interests in the REIT, or one or more qualified
trusts, each of which owns more than 10%, by value, of the
interests in the REIT, holds in the aggregate more than 50%, by
value, of the interests in the REIT. |
The percentage of any REIT dividends treated as unrelated
business taxable income under these rules is equal to the ratio
of:
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the unrelated business taxable income earned by the REIT, less
directly related expenses, treating the REIT as if it were a
qualified trust and therefore subject to tax on unrelated
business taxable income, to |
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the total gross income, less directly related expenses, of the
REIT. |
A de minimis exception applies where this percentage is
less than 5% for any year. As a result of the limitations on the
transfer and ownership of stock contained in our charter, we do
not expect to be classified as a pension-held REIT.
Taxation of Non-United States Stockholders
The rules governing U.S. federal income taxation of non-United
States stockholders are complex, and no attempt will be made
herein to provide more than a summary of these rules.
Non-United States stockholders mean beneficial
owners of shares of our stock that are not United States
stockholders (as such term is defined in the discussion above
under the heading entitled Taxation of Taxable United
States Stockholders).
PROSPECTIVE NON-U.S. STOCKHOLDERS SHOULD CONSULT THEIR TAX
ADVISORS TO DETERMINE THE IMPACT OF FOREIGN, FEDERAL, STATE, AND
LOCAL INCOME TAX LAWS WITH REGARD TO AN INVESTMENT IN OUR STOCK
AND OF OUR ELECTION TO BE TAXED AS A REAL ESTATE INVESTMENT
TRUST, INCLUDING ANY REPORTING REQUIREMENTS.
Distributions to non-United States stockholders that are neither
attributable to gain from our sale or exchange of U.S. real
property interests nor designated by us as capital gain
dividends or retained capital gains will be treated as dividends
to the extent that they are made out of our current or
accumulated earnings and profits. These distributions will
generally be subject to a withholding tax equal to 30% of the
distribution unless an applicable tax treaty reduces or
eliminates that tax. Under some treaties, lower withholding
rates do not apply to dividends from REITs. However, if income
from an investment in our stock is treated as effectively
connected with the non-United States stockholders conduct
of a U.S. trade or business (and, if an income tax treaty
applies, is attributable to a U.S. permanent establishment of
the non-United States stockholder), the
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non-United States stockholder generally will be subject to
federal income tax at graduated rates in the same manner as
United States stockholders are taxed with respect to those
distributions, and also may be subject to the 30% branch profits
tax in the case of a non-United States stockholder that is a
corporation, unless a treaty reduces or eliminates these taxes.
We expect to withhold federal income tax at the rate of 30% on
the gross amount of any dividend distributions (other than
capital gain dividends or distributions attributable to gain
from the sale or exchange of U.S. real property interests) made
to a non-United States stockholder unless:
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a lower treaty rate applies and any required form, for example
IRS Form W-8BEN, evidencing eligibility for that reduced
rate is filed by the non-United States stockholder with us; or |
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the non-United States stockholder files an IRS Form W-8ECI
with us claiming that the distribution is effectively connected
income. |
Any portion of the dividends paid to non-United States
stockholders that is treated as excess inclusion
income will not be eligible for exemption from the 30%
withholding tax or a reduced treaty rate. See
Ownership of Residual Interests in
REMICs.
Distributions in excess of our current and accumulated earnings
and profits that are neither attributable to the gain from our
disposition of a U.S. real property interest nor designated by
us as capital gain dividends will not be taxable to non-United
States stockholders to the extent that these distributions do
not exceed the adjusted basis of the stockholders stock,
but rather will reduce the adjusted basis of that stock. To the
extent that such distributions in excess of current and
accumulated earnings and profits exceed the adjusted basis of a
non-United States stockholders stock, these distributions
will give rise to a federal income tax liability if the
non-United States stockholder would otherwise be subject to tax
on any gain from the sale or disposition of its stock, as
described below. Because it generally cannot be determined at
the time a distribution is made whether or not such distribution
may be in excess of current and accumulated earnings and
profits, the entire amount of any distribution normally will be
subject to withholding at the same rate as a dividend. However,
amounts so withheld are creditable against U.S. federal income
tax liability, if any, or refundable by the IRS to the extent
the distribution is subsequently determined to be in excess of
our current and accumulated earnings and profits and the proper
forms are filed with the IRS by the stockholder on a timely
basis. We are also required to withhold 10% of any distribution
in excess of our current and accumulated earnings and profits.
Consequently, although we intend to withhold at a rate of 30% on
the entire amount of any distribution that is neither
attributable to the gain from the disposition of a U.S. real
property interest nor designated by us as capital gain
dividends, to the extent that we do not do so, any portion of a
distribution not subject to withholding at a rate of 30% may be
subject to withholding at a rate of 10%.
Distributions that are designated by us as capital gain
dividends which are not attributable to gain from the sale or
exchange of a U.S. real property interest generally will not be
subject to income taxation, unless (1) investment in our
stock is effectively connected with the non-United States
stockholders U.S. trade or business (or, if an income tax
treaty applies, is attributable to a U.S. permanent
establishment of the non-United States stockholder), in which
case the non-United States stockholder will be subject to the
same treatment as United States stockholders with respect to
such gain (and a corporate non-United States stockholder may
also be subject to the 30% branch profits tax), or (2) the
non-United States stockholder is a non-resident alien individual
who is present in the U.S. for 183 days or more during the
taxable year and certain other conditions are satisfied, in
which case the non-resident alien individual will be subject to
a 30% tax on the individuals capital gains.
For any year in which we qualify as a REIT, distributions
whether or not designated as capital gain dividends that are
attributable to gain from the sale or exchange of a U.S. real
property interest, which includes some interests in real
property, but generally does not include an interest solely as a
creditor in mortgage loans or mortgage-backed securities, will
be taxed to a non-United States stockholder under the provisions
of the Foreign Investment in Real Property Tax Act of 1980, or
FIRPTA. Under FIRPTA, distributions attributable to
gain from sales of U.S. real property interests are taxed to a
non-United States stockholder as if that gain were effectively
connected with the stockholders conduct of a U.S. trade or
business. Non-United States stockholders thus would be taxed at
the normal capital gain rates applicable to United States
stockholders, subject to applicable alternative minimum tax and
a special alternative minimum
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tax in the case of nonresident alien individuals. Distributions
subject to FIRPTA also may be subject to the 30% branch profits
tax in the hands of a non-U.S. corporate stockholder. We are
required to withhold 35% of any distribution paid to a
non-United States stockholder that we designate (or, if greater,
the amount that we could designate) as a capital gains dividend.
The amount on which we are required to withhold includes capital
gains not subject to FIRPTA. The amount withheld is creditable
against the non-United States stockholders tax liability,
or refundable to the extent in excess of such tax liability,
provided the proper forms are filed on a timely basis.
Gains recognized by a non-United States stockholder upon a sale
of our stock generally will not be taxed under FIRPTA if we are
a domestically controlled REIT, which is a REIT in which at all
times during a specified testing period less than 50% in value
of the stock was held directly or indirectly by non-United
States stockholders. We currently expect that we will be a
domestically controlled REIT. We cannot, however, assure you
that we will be or that we will remain a domestically controlled
REIT. Even if we are not a domestically controlled REIT,
however, a non-United States stockholder that owns, actually or
constructively, 5% or less of our stock throughout a specified
testing period will not recognize taxable gain on the sale of
our stock under FIRPTA if our shares are traded on an
established securities market in the future.
If gain from the sale of the stock were subject to taxation
under FIRPTA, the non-United States stockholder would be subject
to the same treatment as United States stockholders with respect
to that gain, subject to applicable alternative minimum tax, a
special alternative minimum tax in the case of nonresident alien
individuals, and the possible application of the 30% branch
profits tax in the case of non-U.S. corporations. In addition,
the purchaser of the stock could be required to withhold 10% of
the purchase price and remit such amount to the IRS.
Gains not subject to FIRPTA will be taxable to a non-United
States stockholder if the non-United States stockholders
investment in the stock is effectively connected with a trade or
business in the U.S. (or, if an income tax treaty applies, is
attributable to a U.S. permanent establishment of the non-United
States stockholder), in which case the non-United States
stockholder will be subject to the same treatment as United
States stockholders with respect to that gain; or the non-United
States stockholder is a nonresident alien individual who was
present in the U.S. for 183 days or more during the taxable
year and other conditions are met, in which case the nonresident
alien individual will be subject to a 30% tax on the
individuals capital gains.
Information Reporting and Backup Withholding for Non-United
States Stockholders
If the proceeds of a disposition of our stock are paid by or
through a U.S. office of a broker-dealer, the payment is
generally subject to information reporting and to backup
withholding (currently at a rate of 28%) unless the disposing
non-United States stockholder certifies as to his non-U.S.
status or otherwise establishes an exemption. Generally, U.S.
information reporting and backup withholding will not apply to a
payment of disposition proceeds if the payment is made outside
the U.S. through a foreign office of a foreign broker-dealer. If
the proceeds from a disposition of our stock are paid to or
through a foreign office of a U.S. broker-dealer or a non-U.S.
office of a foreign broker-dealer that is (i) a
controlled foreign corporation for U.S. federal
income tax purposes, (ii) a foreign person 50% or more of
whose gross income from all sources for a three-year period was
effectively connected with a U.S. trade or business,
(iii) a foreign partnership with one or more partners who
are U.S. persons and who in the aggregate hold more than 50% of
the income or capital interest in the partnership, or
(iv) a foreign partnership engaged in the conduct of a
trade or business in the U.S., then (a) backup withholding
will not apply unless the broker-dealer has actual knowledge
that the owner is not a foreign stockholder, and
(b) information reporting will not apply if the non-United
States stockholder satisfies certification requirements
regarding its status as a foreign stockholder. Other information
reporting rules apply to non-United States stockholders, and
prospective non-United States stockholders should consult their
own tax advisors regarding these requirements.
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Possible Legislative or Other Action Affecting Tax
Consequences
You should recognize that the present U.S. federal income tax
treatment of an investment in us may be modified by legislative,
judicial or administrative action at any time and that any such
action may affect investments and commitments previously made.
The rules dealing with U.S. federal income taxation are
constantly under review by persons involved in the legislative
process and by the Internal Revenue Service and the Treasury
Department, resulting in revisions of regulations and revised
interpretations of established concepts as well as statutory
changes. Revisions in federal tax laws and interpretations
thereof could affect the tax consequences of an investment in us.
State, Local and Foreign Taxation
We may be required to pay state, local and foreign taxes in
various state, local and foreign jurisdictions, including those
in which we transact business or make investments, and our
stockholders may be required to pay state, local and foreign
taxes in various state, local and foreign jurisdictions,
including those in which they reside. Our state, local and
foreign tax treatment may not conform to the federal income tax
consequences summarized above. In addition, a stockholders
state, local and foreign tax treatment may not conform to the
federal income tax consequences summarized above. Consequently,
prospective investors should consult their tax advisors
regarding the effect of state, local and foreign tax laws on an
investment in our stock.
ERISA AND OTHER EMPLOYEE BENEFIT PLAN CONSIDERATIONS
General
Each prospective purchaser that is an employee benefit plan or
trust within the meaning of the Employee Retirement Income
Security Act of 1974, as amended (ERISA), including
employee benefit plans and trusts maintained by churches,
governments and non-U.S. entities, or an individual
retirement account or annuity (IRA) or a
Keogh plan subject to Section 4975 of the
Internal Revenue Code (collectively, Plans and
individually, a Plan) should consider carefully the
matters described below in determining whether to make an
investment in our common stock.
ERISA imposes certain general and specific responsibilities on
fiduciaries with respect to employee benefit plans
(as defined in Section 3(3) of ERISA) that are subject to
the provisions of Title I of ERISA (collectively,
ERISA Plans and individually, an ERISA
Plan). The term ERISA Plans, for purposes of
this prospectus, includes entities whose underlying assets are
deemed plan assets by reason of an employee benefit
plans investment in such entity. These responsibilities
include the requirements of investment prudence and
diversification and the requirement that an ERISA Plans
investments be made in accordance with the documents governing
such plan.
In determining whether a particular investment is appropriate
for a Plan, the fiduciary of the Plan should give appropriate
consideration to, among other things, the role that the
investment plays in the Plans portfolio, including, but
not limited to, the matters discussed above under Risk
Factors and the anticipated cash flow needs of the Plan.
For example, a fiduciary should consider whether an investment
in our common stock may be too illiquid or too speculative for a
particular Plan, and whether the assets of the Plan would be
sufficiently diversified after any such investment, or the
possibility that the investment might generate unrelated
business taxable income within the meaning of Section 511
through 514 of the Internal Revenue Code. Any fiduciary of a
Plan that proposes to cause such Plan to purchase our common
stock should consult with his, her or its own legal and tax
advisors with respect to the potential applicability of ERISA
and the Internal Revenue Code to such investment and the
consequences of such investment under ERISA and the Internal
Revenue Code. Moreover, each fiduciary of a Plan should
determine whether, under the general fiduciary standards of
ERISA or other applicable law, an investment in our common stock
is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the overall composition of the
Plans investment portfolio.
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ERISA Plan Assets
Generally, when an ERISA Plan invests in an entity, the ERISA
Plans assets include its investment but do not, solely by
reason of its investment, include any of the underlying assets
of the entity. A pertinent regulation under ERISA (29 CFR
Section 2510.3-101, the Plan Assets Regulation)
provides, however, that when an ERISA Plan invests in an equity
interest in an entity that is neither a publicly-offered
security nor a security issued by an investment company
registered under the Investment Company Act of 1940, the
plans assets include both the equity interest and an
undivided interest in each of the underlying assets of the
entity (i.e., the plans fiduciaries are required to
look through the investment vehicle and treat each
underlying asset of the investment vehicle as an asset of the
plan), unless (a) the entity is an operating company or
(b) equity participation in the entity by benefit plans is
not significant. Under this regulation, equity participation in
an entity by benefit plans is deemed significant if
25% or more of the value of any class of equity interests is
held by benefit plan investors. For this purpose, the Plan
Assets Regulation defines the term benefit plan
investors broadly to include not only all types of ERISA
employee benefit plans, but also employee benefit plans that are
not themselves subject to ERISA, such as foreign, church and
governmental plans, as well as individual retirement accounts
and individual retirement annuities.
When the underlying assets of an entity are deemed to be ERISA
Plan assets, transactions in which the entity participates are
considered transactions involving ERISA Plan assets, raising
prohibited transaction considerations under ERISA and/or the
Internal Revenue Code. Section 406 of ERISA and
Section 4975 of the Internal Revenue Code prohibit certain
transactions involving the assets of ERISA Plans, as well as
those Plans that are not subject to ERISA but which are subject
to Section 4975 of the Internal Revenue Code, such as
individual retirement accounts and individual retirement
annuities, and certain persons (referred to as parties in
interest for purposes of ERISA or disqualified
persons for purposes of the Internal Revenue Code) having
certain relationships to Plans, unless a statutory or
administrative exemption is applicable to the transaction. A
party in interest or disqualified person who engages in a
non-exempt prohibited transaction may be subject to
non-deductible excise taxes and other penalties and liabilities
under ERISA and the Internal Revenue Code, and the transaction
might have to be rescinded. A fiduciary who causes a Plan that
is subject to the prohibited transaction rules to engage in a
non-exempt prohibited transaction may be personally liable for
any resultant loss incurred by the Plan and may be subject to
other potential remedies. In addition, if a non-exempt
prohibited transaction occurs with respect to a Plan that is an
individual retirement account or individual retirement annuity,
the Plan may lose its tax-favored status and all of its assets
may be deemed distributed and taxable in the year the
transaction occurs.
Governmental plans and certain church plans, while not subject
to the fiduciary responsibility provisions of ERISA or the
provisions of Section 4975 of the Internal Revenue Code,
may nevertheless be subject to local, state or other Federal
laws that are substantially similar to the foregoing provisions
of ERISA and the Internal Revenue Code. Fiduciaries of any such
plans should consult with their counsel before purchasing our
common stock.
We intend that the company constitute an operating company
(within the meaning of that term as defined in the Plan Assets
Regulation). If for any reason our assets are deemed to be
plan assets of an ERISA Plan because we fail to be
an operating company or because we do not qualify for any other
exception under the Plan Assets Regulation, certain transactions
that we might enter into, or may have entered into, in the
ordinary course of our business might constitute non-exempt
prohibited transactions under Section 406 of
ERISA or Section 4975 of the Internal Revenue Code and
might have to be rescinded and may give rise to prohibited
transaction excise taxes and fiduciary liability, as described
above. In addition, if our assets were deemed to be assets
constituting plan assets of an ERISA Plan, our
management may be considered to be plan fiduciaries under ERISA
and the Internal Revenue Code. Moreover, if our underlying
assets were deemed to constitute plan assets, there
are several other provisions of ERISA that could be implicated
for an ERISA Plan if it were to acquire and hold our common
stock either directly or by investing in an entity whose
underlying assets are deemed to be assets of the ERISA Plan.
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SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of our common stock in the
public market, or the possibility of such sales occurring, could
adversely affect prevailing market prices for our common stock
or could impair our ability to raise capital through further
offerings of equity securities.
As of May 17, 2005, we had 25,472,581 outstanding shares of
common stock and outstanding options to
purchase 260,500 shares of our common stock, with an
additional 650,348 shares of our common stock reserved for
issuance upon exercise of other options and shares of restricted
stock that may be granted in the future under our 2003 Equity
Incentive Plan. The number of shares of common stock that may be
issued pursuant to awards granted under the 2003 Equity
Incentive Plan is limited to 1,758,848 shares of common
stock. On December 15, 2004, we filed a registration
statement on Form S-8 to register our issuance of common
shares under our 2003 Equity Incentive Plan.
All of the shares sold in our initial public offering and all of
the shares that may be sold, from time to time, under this
registration statement (provided that we have not temporarily
suspended sales hereunder) are freely tradable by the purchasers
without restriction under the Securities Act, except for any
shares that were purchased by our affiliates, as
that term is defined in Rule 144 under the Securities Act.
Restricted shares may be sold in the public market
only if they are registered under the Securities Act or if they
qualify for an exemption from registration, such as
Rule 144, 144A or 701 under the Securities Act.
Accordingly, 182,500 of the shares we issued on
October 8, 2003, the 207,000 shares we issued on
January 29, 2004, the 113,000 shares we issued on
March 23, 2004, the 111,750 shares we issued on
August 5, 2004, and 230,000 of the shares we issued on
May 8, 2005 are restricted securities and, in
the absence of an effective resale registration statement, will
become eligible for resale under Rule 144 in limited
quantities beginning one year after their issuance. In addition,
if sales under this registration statement or our registration
statement on Form S-8 are temporarily suspended,
(i) 1,075,000 shares issued on October 8, 2003
registered hereunder (ii) 1,000,000 shares issued on
February 4, 2004 registered hereunder and (iii) 28,500
shares issued on May 8, 2005 and registered on
Form S-8 may be sold subject to the provisions of
Rule 144. In general, under Rule 144 as currently in
effect, one year after the later of the date of acquisition of
restricted shares from us or from any of our affiliates, the
acquiror or subsequent holder thereof is entitled to sell within
any three-month period a number of shares that does not exceed
the greater of 1% of our then outstanding common stock or the
average weekly trading volume of our common stock during the
four calendar weeks preceding the date on which notice of the
sale is filed with the SEC. Sales under Rule 144 also are
subject to various manner of sale provisions, notice
requirements and the availability of current public information
about us that will be satisfied so long as we timely file
periodic reports under the Exchange Act. We cannot assure you
that we will file such reports in a timely manner. If two years
have elapsed since the date of acquisition of restricted shares
from us or from any of our affiliates, and if the acquiror or
subsequent holder thereof is deemed not to have been one of our
affiliates at any time during the three months preceding a sale,
such person may sell such shares in the public market under
Rule 144(k) without regard to the volume limitations,
manner of sale provisions, public information requirements or
notice requirements.
DESCRIPTION OF CAPITAL STOCK AND MATERIAL PROVISIONS OF
DELAWARE LAW AND OUR CERTIFICATE OF INCORPORATION
This section describes the general terms of our capital stock.
The following summary describes the material terms of our
certificate of incorporation and bylaws and applicable
provisions of the Delaware General Corporation law. This
description is qualified in its entirety by reference to our
certificate of incorporation and bylaws, each of which has been
filed as an exhibit to the registration statement of which this
prospectus is a part, and the provisions of the Delaware General
Corporation Law. You should read our certificate of
incorporation and bylaws for the provisions that are important
to you.
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Capital Stock
Under our certificate of incorporation, we have authority to
issue up to 135,000,000 shares of stock, consisting of
100,000,000 shares of common stock, par value $0.01 per share,
25,000,000 shares of excess stock, par value $0.01 per share
(Excess Stock) (as described below), and 10,000,000
shares of preferred stock, par value $0.01 per share. As of
May 17, 2005, 25,472,581 shares of our common stock
were issued and outstanding. In addition, in order to comply
with certain REIT qualification requirements, in January 2004 we
issued and sold 125 shares of our Series A Cumulative
Redeemable Preferred Stock.
Subject to the provisions of our certificate of incorporation
regarding Excess Stock, holders of common stock are entitled to
one vote for each share of common stock owned of record on all
matters to be voted on by stockholders, including the election
of directors (other than amendments to our certificate of
incorporation that relate solely to the terms of our outstanding
shares of preferred stock). Subject to the provisions of our
certificate of incorporation regarding Excess Stock, the holders
of common stock are entitled to receive such distributions, if
any, as may be declared from time to time by our board of
directors, in its discretion, from funds legally available. The
common stock has no preemptive or other subscription rights, and
there are no conversion rights or redemption provisions. All
outstanding shares of common stock are validly issued, fully
paid and non-assessable.
Under our certificate of incorporation, the board of directors
is authorized, subject to certain limitations and without
further stockholder approval, to issue from time to time one or
more series of our preferred stock, with such distinctive
designations, powers, rights and preferences as shall be
determined by the board of directors. Preferred stock will be
available for possible future financings, acquisitions and
general corporate purposes without any legal requirement that we
obtain any stockholder authorization. The issuance of preferred
stock could have the effect of making an attempt to gain control
of the company more difficult by means of a merger, tender
offer, proxy contest or otherwise. The preferred stock, if
issued, may have a preference on distribution payments that
could affect our ability to make dividend distributions to
holders of our common stock.
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Series A Cumulative Redeemable Preferred Stock |
We have authorized 500 shares of Series A Cumulative
Redeemable Preferred Stock, of which 125 shares are issued and
outstanding as of the date of this prospectus. With respect to
dividends and distributions upon our liquidation, winding-up and
dissolution, the Series A Preferred Stock ranks senior to
our common stock. The liquidation preference of the
Series A Preferred Stock is $1,000 per share plus any
accumulated but unpaid dividends and interest on unpaid
dividends, if applicable. We issued the shares of Series A
Preferred Stock in January 2004 in order to comply with certain
REIT qualification requirements.
Dividends. Dividends on the Series A Preferred Stock
are payable in cash quarterly at a rate of 12.5% of the
liquidation preference per year. To the extent not paid
quarterly, unpaid dividends will accrue interest at the simple
per annum rate of 12.5% on the amount of the unpaid dividends
through the date on which the unpaid distributions are paid in
full.
Redemption. We may redeem the shares of Series A
Preferred Stock, in whole or in part, at our option at any time
for a per share amount equal to the liquidation preference plus
all accrued but unpaid dividends and any interest on unpaid
dividends through the date of redemption. In addition, we are
required to pay a redemption premium upon the redemption of the
Series A Preferred Stock. The redemption premium is $200
per share if the Series A Preferred Stock is redeemed on or
before December 31, 2005, $150 per share if the
Series A Preferred Stock is redeemed after
December 31, 2005 and on or before December 31, 2006, $100
per share if the Series A Preferred Stock is redeemed after
December 31, 2006 and on or before December 31, 2007,
and $50 per share if the Series A Preferred Stock is
redeemed after December 31, 2007 and on or before
December 31, 2008.
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Voting. Except as expressly permitted in our certificate
of incorporation and except as required by applicable law, the
holders of shares of Series A Preferred Stock have no
voting rights. Our certificate of incorporation provides that at
least 90% of the votes entitled to be cast by the holders of the
Series A Preferred Stock are necessary for any:
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amendment to our certificate of incorporation that materially
adversely affects the preferences, rights, voting powers,
restrictions, limitations as to dividends and other
distributions, qualifications and terms and conditions of
redemption of the Series A Preferred Stock; |
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issuance of shares of any class or series of stock which would
entitle the holders thereof to receive dividends or amounts
distributable upon liquidation, dissolution or winding-up in
preference, priority or parity to the holders of Series A
Preferred Stock; or |
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merger or consolidation in which Origen is not the surviving
entity unless as a result of the merger or consolidation the
holders of Series A Preferred Stock receive equity
securities of the acquiror with preferences, rights and
privileges not materially inferior to the preferences, rights
and privileges of the Series A Preferred Stock. |
Certain Provisions of our Certificate of Incorporation
Two of the requirements for qualification as a REIT are that
(i) during the last half of each taxable year for which a
REIT election is in effect (other than the first such taxable
year), not more than 50% in value of the outstanding shares may
be owned directly or indirectly by five or fewer individuals
(the 5/50 Rule) and (ii) there must be at least
100 stockholders on 335 days of each taxable year (other
than the first taxable year for which a REIT election is made)
of 12 months.
In order that we may meet these requirements, our certificate of
incorporation generally prohibits any individual from acquiring
or holding, directly or indirectly, shares of any class or
series of our stock in excess of 9.25% of the outstanding shares
of such class or series. For this purpose, the term
ownership is defined in accordance with the REIT
provisions of the Internal Revenue Code and the constructive
ownership provisions of Section 544 of the Internal Revenue
Code, as modified by Section 856(h)(1)(B) of the Internal
Revenue Code. Our board of directors has the authority under our
certificate of incorporation, subject to certain limitations, to
exempt individuals from the 9.25% ownership restriction. In
addition, our certificate of incorporation prohibits any
transfer of shares of our stock that would cause our stock to be
beneficially held by less than 100 persons, determined
without respect to any rules of attribution. Subject to certain
limitations, our board of directors may increase or decrease the
ownership limitations or waive the limitations for individual
investors to the extent such action does not affect our
qualification as a REIT.
For purposes of the 5/50 Rule, the constructive ownership
provisions applicable under Section 544 of the Internal
Revenue Code (i) attribute ownership of securities owned by
a corporation, partnership, estate or trust proportionately to
its stockholders, partners or beneficiaries, (ii) attribute
ownership of securities owned by certain family members to other
members of the same family, and (iii) treat securities with
respect to which a person has an option to purchase as actually
owned by that person. These rules will be applied in determining
whether a person holds shares of stock in violation of the
ownership limitations set forth in the certificate of
incorporation. Accordingly, under certain circumstances, shares
of any class or series of stock owned by a person who
individually owns less than 9.25% of the shares outstanding of
any such class or series of stock may nevertheless be in
violation of the ownership limitations set forth in the
certificate of incorporation. Ownership of shares of common
stock through such attribution is generally referred to as
constructive ownership. The 100 stockholder test is determined
by actual, and not constructive, ownership.
Our certificate of incorporation further provides that if any
transfer of shares of common stock which, if effective, would
result in any person beneficially or constructively owning
shares of common stock in excess or in violation of the above
transfer or ownership limitations, then any such purported
transfer will be void and of no force and effect with respect to
the purported transferee (the Prohibited Transferee)
as to that number of shares in excess of the ownership limit and
the Prohibited Transferee shall acquire no right or interest
(or, in the case of any event other than a purported transfer,
the person or entity holding record title to any such
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shares in excess of the ownership limit (the Prohibited
Owner) shall cease to own any right or interest) in such
shares in excess of the ownership limit. Any such excess shares
described above will be converted automatically into an equal
number of shares of Excess Stock (the Excess Shares)
and transferred automatically, by operation of law, to a trust,
the beneficiary of which will be a qualified charitable
organization selected by us (the Beneficiary). Such
automatic transfer shall be deemed to be effective as of the
close of business on the trading day prior to the date of such
violative transfer. As soon as practical after the transfer of
shares to the trust, the trustee of the trust (who shall be
designated by us and be unaffiliated with us and any Prohibited
Transferee or Prohibited Owner) will be required to sell such
Excess Shares to a person or entity who could own such shares
without violating the ownership limit, and distribute to the
Prohibited Transferee an amount equal to the lesser of the price
paid by the Prohibited Transferee for such Excess Shares or the
sales proceeds received by the trust for such Excess Shares. In
the case of any Excess Shares resulting from any event other
than a transfer, or from a transfer for no consideration (such
as a gift), the trustee will be required to sell such Excess
Shares to a qualified person or entity and distribute to the
Prohibited Owner an amount equal to the lesser of the fair
market value of such Excess Shares as of the date of such event
or the sales proceeds received by the trust for such Excess
Shares. In either case, any proceeds in excess of the amount
distributable to the Prohibited Transferee or Prohibited Owner,
as applicable, will be distributed to the Beneficiary. Prior to
a sale of any such Excess Shares by the trust, the trustee will
be entitled to receive in trust for the Beneficiary all
distributions paid with respect to such Excess Shares.
In addition, shares of our stock held in the trust shall be
deemed to have been offered for sale to us, or our designee, at
a price per share equal to the lesser of (i) the price per
share in the transaction that resulted in such transfer to the
trust (or, in the case of a devise or gift, the market price at
the time of such devise or gift) and (ii) the market price
on the date we, or our designee, accepts such offer. We shall
have the right to accept such offer for a period of
90 days. Upon such a sale to us or our designee, the
interest of the Beneficiary in the shares sold shall terminate
and the trustee shall distribute the net proceeds of the sale to
the Prohibited Owner.
These restrictions do not preclude settlement of transactions
through the Nasdaq National Market.
Market price mean the last sales price reported on
the New York Stock Exchange of our common stock on the trading
day immediately preceding the relevant date, or if not then
traded on the New York Stock Exchange, the last reported sales
price of our common stock on the trading day immediately
preceding the relevant date as reported on any exchange or
quotation system over which our common stock may be traded, or
if not then traded over any exchange or quotation system, then
the market price of our common stock on the relevant date as
determined in good faith by the board of directors.
Thirty days after January 1 of each year, every owner of
more than 5% (or such lower percentage as required by the
Internal Revenue Code or the regulations promulgated thereunder)
of the outstanding shares or any class or series of our stock,
is required to notify us in writing of its name and address, the
number of shares of each class and series of our stock it
beneficially owns and a description of the manner in which such
shares are held. Each such owner shall provide us such
additional information as we may request in order to determine
the effect, if any, of such beneficial ownership on our status
as a REIT and to ensure compliance with the ownership
limitations.
Indemnification of Directors and Officers
Our certificate of incorporation provides that the personal
liability of any director to us or our stockholders for money
damages is limited to the fullest extent allowed by Delaware law
as amended or interpreted. Our certificate of incorporation
provides that a director shall not be personally liable to the
corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director except for liability:
(i) for any breach of the directors duty of loyalty
to the corporation or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law; (iii) under
Section 174 of the Delaware General Corporation Law; or
(iv) for any transaction from which the director derived an
improper personal benefit. Delaware law does not affect the
potential liability of directors to third parties, such as our
creditors.
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Our bylaws provide for the indemnification of our directors and
officers to the fullest extent permitted by Delaware law.
Delaware law generally permits indemnification of directors and
officers against certain costs, liabilities and expenses that
any such person may incur by reason of serving in such positions
if: (i) the director or officer acted in good faith;
(ii) the director or officer acted in a manner the director
or officer reasonably believed to be in or not opposed to the
best interests of the corporation; and (iii) in the case of
criminal proceedings, the director or officer had no reasonable
cause to believe that the conduct was unlawful. Insofar as
indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling
us pursuant to the foregoing provisions, we have been informed
that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in
the Securities Act