UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended December 31,1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _____________________ to
_______________________
Commission File No. 333-39339-03
STERLING LENDING CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
South Carolina 57-1042033
- ------------------------------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
15 South Main Street Suite 750 Greenville, South Carolina 29601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 864-235-8056
Securities registered under Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on which registered
- --------------------------------- -------------------------------------------
None None
Securities registered under Section 12(g) of the Act:
Title of Each Class
- --------------------------------------------------------------------------------
None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [ X ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
DOCUMENTS INCORPORATED BY REFERENCE
None.
The Registrant meets the conditions set forth in General Instructions (I)(1)(a)
and (b) of Form 10-K (as modified by prior no-action release to unrelated
parties) and is therefore filing this form with the reduced disclosure format.
<PAGE>
PART I
Item 1. BUSINESS
GENERAL
Sterling Lending Corporation ("the Company"), a South
Carolina corporation and a majority-owned subsidiary of Emergent Group,
Inc. ("The Parent"), is a financial services company that is primarily
engaged in the business of originating residential mortgage loans. The
funds for these loans are obtained principally through affililated
companies. Emergent Mortgage Corporation, Inc. ("EMC"), an affiliated
company, purchases the loans at closing. Due to the fact that the
Company serves as an originating source for EMC, it is not subject to
credit risk or interest rate risk. The Company earns origination fees
from the borrower at the time the loan is closed, and also shares with
EMC in the gain on sale when the loan is sold to outside parties. The
Company makes substantially all of its loans to non-prime borrowers.
These borrowers generally have limited access to credit or are
considered to be credit-impaired by conventional lenders such as thrift
institutions and commercial banks.
The Company has one subsidiary, Sterling Insurance
Agency, a Louisiana corporation. The Company, which began operations on
August 1, 1996, operates from 13 traditional "bricks and mortar"
approach retail offices in Louisiana, Florida, Mississippi, Georgia,
Tennessee, and North Carolina. The Company's loan originations have
grown from $1.2 million for the five months ended December 31, 1996 to
$41.5 million for the year ended December 31, 1997. Although the Company
has expanded rapidly, it continues to represent a small portion of the
Parent Company's loan originations. Also, the Company has incurred
losses of approximately $4.7 million since inception, due mainly to the
significant start-up costs associated with such rapid expansion. In
1998, the Parent Company has determined to pursue the divestiture of the
Company to focus on its Homegold(R) retail strategy.
EMPLOYEES
At December 31, 1997, the Company employed a total of 98
full-time equivalent employees. The Company believes that its relations with its
employees are good.
Item 2. PROPERTIES
The Company's headquarters are located at 8591 United Plaza
Boulevard, United V, Suite 200, Baton Rouge, LA 70809 and are leased. At
December 31, 1997, the Company leased 13 offices. None of the leases, considered
separately, is believed to be material to the Company's operations. The Company
believes that its leased locations are suitable and adequate for their intended
purposes.
<PAGE>
Item 3. LEGAL PROCEEDINGS
The Company and its subsidiary are, from time to time, parties
to various legal actions arising in the normal course of business. Management
believes that there is no proceeding threatened or pending against the Company
or its subsidiary that, if determined adversely, would have a materially adverse
effect on the operations, profitability or financial condition of the Company or
its subsidiary.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to General Instruction I to Form 10-K
(the "Instruction").
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's equity securities are not publicly
traded. The Parent owns 80% of the Company's common stock and each of
two minority shareholders owns 10% of the Company's common stock. The
Company has not paid and does not expect in the immediate future to pay,
dividends.
Item 6. SELECTED FINANCIAL DATA
Omitted pursuant to the Instruction.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The discussion should be read in conjunction with the
Consolidated Financial Statements and notes of the Company appearing elsewhere
in this report.
Forward-Looking Information
Certain statements in the financial discussion and analysis by
management that reflect projections or expectations of future financial or
economic performance of the Company, and statements of the Company's plans and
objectives for future operations are "forward-looking" statements. No assurance
can be given that actual results or events will not differ materially from those
projected, estimated, assumed or anticipated in any such forward-looking
statements. Important factors that could result in such differences are many and
include: lower origination volume due to market conditions, higher losses due to
economic downturn or lower real estate values, loss of key employees, adverse
consequences of changes in interest rate environment, deterioration of
creditworthiness of borrowers and risk of default, general economic conditions
in the Company's markets, including inflation, recession, interest rates and
other economic factors, loss of funding sources, loss of ability to sell loans,
general lending risks, dependence on Federal programs, impact of competition,
regulation of lending activities, and changes in the regulatory environment.
<PAGE>
General
The Company, which began its operations in August 1996, is
still in the start-up phase of operations. Because of this, the Company has
generated significant losses since inception. The Company did not start
originating loans until October 1996 and therefore had little activity in 1996.
The Company has grown significantly since inception and now operates from ten
retail offices, mainly in the Southeast. Loan originations have grown from
approximately $500,000 a month in late 1996 to approximately $5.0 million a
month by the end of 1997. Total loan originations in 1997 and 1996 were $41.5
million and $1.2 million, respectively. Total loans sold in 1997 and 1996 were
$32.2 million and $1.2 million, respectively. As the Company operates mainly as
an originating source for EMC, the Company receives all of the origination fee
income when produced and shares in the gain on sale of loans when sold by EMC to
outside parties.
The Company is just a small part of the Parent Company's
retail lending strategy. In early 1998, the Parent Company announced plans to
pursue the divestiture of the Company in order to narrow its focus and
concentrate on its larger retail lending operation.
Results of Operations
Year Ended December 31, 1997, Compared to Five Months Ended December 31, 1996
Total revenues increased to $3.6 million in 1997 from $107,000
in 1996. The higher level of revenues resulted principally from increases in
gain on sale of loans and loan fee income.
Gain on sale of loans increased to $1.4 million in 1997 from
$16,000 in 1996 and loan fee income increased to $2.1 million in 1997 from
$72,000 in 1996. The increase in gain on sale of loans and loan fee income
resulted from increased loan originations and the corresponding loan sales. Loan
originations increased to $41.5 million from $1.2 million mainly due to a full
year of operation in 1997 and expansion of additional retail offices. Loan fees
as a percentage of production approximated 6.0% for both years. Gain on sale of
loans approximated 4.4% in 1997 and 1.4% in 1996.
Total expenses increased to $7.3 million in 1997 from $1.0
million in 1996. Total expenses are comprised of interest expense, salaries,
wages and employee benefits, and other general and administrative expenses.
Interest expense increased to $193,000 in 1997 from $21,000 in
1996. The increase in interest expense was due principally to increased
borrowings from affiliated companies to fund the increased loan originations
discussed above. Average monthly borrowings in 1997 approximated $2.6 million as
compared to approximately $565,000 in 1996.
Salaries, wages and employee benefits increased to $3.6
million in 1997 from $511,000 in 1996. This is a result of increased personnel
due to the significant expansion incurred in the start-up phase of the Company.
The Company has expanded to 13 retail offices and total personnel has increased
to 98 at December 31, 1997 as compared to 25 at December 31, 1996.
<PAGE>
Other general and administrative expenses increased to $3.6
million in 1997 from $501,000 in 1996. This is a result of a full year of
operations in 1997 and the significant expansion associated with the start-up
phase of the Company.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements are set forth herein commencing on
page F-1 of this Report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted pursuant to the Instruction.
Item 11. EXECUTIVE COMPENSATION
Omitted pursuant to the Instruction.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Omitted pursuant to the Instruction.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted pursuant to the Instruction.
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Documents filed as part of Report.
1. FINANCIAL STATEMENTS:
The Financial Statements are listed in the index to
Consolidated Financial Statements on page F-1 of this
Report.
2. FINANCIAL STATEMENT SCHEDULES:
Not applicable.
3. EXHIBITS:
The exhibits are listed on the Exhibit Index attached
hereto.
<PAGE>
STERLING LENDING CORPORATION AND SUBSIDIARY
(A majority-owned subsidiary of Emergent Group, Inc.)
Consolidated Financial Statements
Year Ended December 31, 1997 and Period from August 1, 1996 (date of
inception) through December 31, 1996
Contents
Independent Auditors' Report........................................F-2
Consolidated Balance Sheets.........................................F-3
Consolidated Statements of Income...................................F-4
Consolidated Statements of Shareholder's Equity.....................F-5
Consolidated Statements of Cash Flows...............................F-6
Notes to Consolidated Financial Statements..........................F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Sterling Lending Corporation and subsidiary
Greenville, South Carolina
We have audited the accompanying consolidated balance sheets of Sterling Lending
Corporation and subsidiary, a majority-owned subsidiary of Emergent Group, Inc.,
as of December 31, 1997 and 1996 and the related consolidated statements of
income, shareholders' equity and cash flows for the year ended December 31, 1997
and the period from August 1, 1996 (date of inception) through December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above presents
fairly, in all material respects, the financial position of Sterling Lending
Corporation and subsidiary, a majority-owned subsidiary of Emergent Group, Inc.,
as of December 31, 1997 and 1996, and the results of their operations and their
cash flows for the periods then ended in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Greenville, SC
February 27, 1998
F-2
<PAGE>
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1996
---------------- ---------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 262,612 $ 125,799
Mortgage loans held for sale 9,325,758 --
Less net deferred loan fees (368,274) --
---------------- ---------------
Net mortgage loans held for sale 8,957,484 --
Other receivables 558,703 62,534
Property and equipment, net 1,327,532 361,578
Other assets 207,338 302,251
---------------- ---------------
Total assets $ 11,313,669 $ 852,162
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 760,257 $ 81,976
Subordinated debt to affiliates, due on demand 9,543,337 634,616
---------------- ---------------
Total liabilities 10,303,594 716,592
Shareholders' equity:
Common stock, no par value -- --
Additional paid-in capital 5,700,000 1,000,000
Accumulated deficit (4,689,925) (864,430)
---------------- ---------------
Total shareholders' equity 1,010,075 135,570
---------------- ---------------
Total liabilities and shareholders' equity $ 11,313,669 $ 852,162
================ ===============
</TABLE>
See accompanying Notes to Consolidated Financial Statements,
which are an integral part of these statements
F-3
<PAGE>
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Consolidated Statements of Income
Year Ended December 31, 1997 and Period from August 1, 1996 (date of
inception) through December 31, 1996
Periods Ended December 31,
-----------------------------
1997 1996
------------ -------------
REVENUES:
Interest income $ 50,091 $ 19,397
Gain on sale of loans 1,419,421 16,282
Loan fee income 2,137,048 71,852
Other revenues 10,768 --
------------ -------------
Total revenues 3,617,328 107,531
------------ -------------
EXPENSES:
Interest 192,904 21,496
Salaries, wages and employee benefits 3,590,559 510,923
Management fee to Parent 780,000 125,000
Legal, audit, and professional fees 632,321 74,639
Rent and utilities 452,454 36,694
Telephone 310,119 19,430
Travel and entertainment 280,544 36,680
Business development costs 255,497 28,747
Other general and administrative expenses 847,005 179,751
------------ -------------
Total expenses 7,341,403 1,033,360
------------ -------------
Loss before income taxes (3,724,075) (925,829)
Provision (benefit) for income taxes 101,420 (61,399)
------------ -------------
Net loss $(3,825,495) $ (864,430)
============ =============
See accompanying Notes to Consolidated Financial Statements,
which are an integral part of these statements
F-4
<PAGE>
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Consolidated Statements of Shareholders' Equity
Year Ended December 31, 1997 and Period from August 1, 1996 (date of
inception) through December 31, 1996
<TABLE>
<CAPTION>
Common Additional Accumulated
Stock Paid-in Deficit Total
Capital
----------------- ----------------- -------------------- -------------------
<S> <C> <C> <C> <C>
Initial cash investment by Parent $ -- $ 1,000,000 $ -- $ 1,000,000
Net loss from inception to
December 31, 1996 -- -- (864,430) (864,430)
----------------- ----------------- -------------------- -------------------
Balance at December 31, 1996 -- 1,000,000 (864,430) 135,570
Cash investment by Parent -- 4,700,000 -- 4,700,000
Net loss -- -- (3,825,495) (3,825,495)
----------------- ----------------- -------------------- -------------------
Balance at December 31, 1997 $ -- $ 5,700,000 $ (4,689,925) $ 1,010,075
================= ================= ==================== ===================
</TABLE>
See accompanying Notes to Consolidated Financial Statements, which are an
integral part of these statements.
F-5
<PAGE>
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Consolidated Statements of Cash Flows
Year Ended December 31, 1997 and Period from August 1, 1996 (date of
inception) through December 31, 1996
<TABLE>
<CAPTION>
Periods Ended December 31,
------------------------------------------------
1997 1996
----------------------- ---------------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (3,825,495) $ (864,430)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 374,620 103,701
Provision for deferred income taxes 331,348 1,135
Increase in deferred loan fees 368,274 --
Principal proceeds from loans sold and securitized 32,181,128 1,195,255
Loans originated with intent to sell (41,506,886) (1,195,255)
Changes in operating assets and liabilities (201,691) (372,485)
----------------------- ---------------------
Net cash used in operating activities (12,278,702) (1,132,079)
----------------------- ---------------------
INVESTING ACTIVITIES:
Purchase of property and equipment (1,193,206) (376,738)
----------------------- ---------------------
Net cash used in investing activities (1,193,206) (376,738)
----------------------- ---------------------
FINANCING ACTIVITIES:
Cash investment from Parent 4,700,000 1,000,000
Net cash received on intercompany borrowings 8,908,721 634,616
----------------------- ---------------------
Net cash provided by financing activities 13,608,721 1,634,616
----------------------- ---------------------
Net increase in cash and cash equivalents 136,813 125,799
Cash and cash equivalents at beginning of year 125,799 --
----------------------- ---------------------
Cash and cash equivalents at end of year $ 262,612 $ 125,799
======================= =====================
</TABLE>
See accompanying Notes to Consolidated Financial Statements, which are an
integral part of these statements.
F-6
<PAGE>
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting and Reporting Policies
Organization and Business Activity
Sterling Lending Corporation ("Sterling Lending" or "the Company") is an 80%
owned subsidiary of Emergent Group, Inc. ("Parent Company"). Sterling Lending
was organized on March 6, 1996 as Emergent Lending Corp., and the name was
changed to Sterling Lending Corporation on July 24, 1996. Operations began
August 1, 1996.
Sterling Lending is primarily engaged in the business of originating residential
mortgage loans. The funds for these loans are obtained principally through
Emergent Mortgage Corp., who purchases the loans at closing. Due to the fact
that the Company serves as an originating source for Emergent Mortgage Corp., it
is not subject to credit risk or interest rate risk. The Company earns
origination fees from the borrower at the time the loan is closed, and also
shares in the gain on sale with Emergent Mortgage Corp. when it is sold to
outside parties.
Substantially all of the Company's mortgage loans are made to non-prime
borrowers. These borrowers generally have limited access to credit or are
otherwise considered to be credit-impaired by conventional lenders such as
thrift institutions and commercial banks.
Basis of Financial Statement Presentation
The accompanying consolidated financial statements include the accounts of
Sterling Lending and Sterling Insurance Agency ("Sterling Insurance") (100%
owned) (collectively known as the "Company"). All significant intercompany
balances and transactions between Sterling Lending and its subsidiary have been
eliminated in consolidation.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
balance sheet and revenues and expenses for the period. Actual results could
differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Cash equivalents include amounts
invested in overnight reverse repurchase agreements. Such agreements are
collateralized by U.S. Government securities pledged by the banks.
F-7
<PAGE>
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Notes to Consolidated Financial Statements (continued)
Note 1. Summary of Significant Accounting and Reporting Policies (continued)
Mortgage Loans Held for Sale
Mortgage loans held for sale consist primarily of first and second residential
mortgages on one to four family residences located throughout the United States.
Mortgage loans held for sale are carried at the lower of aggregate cost or
market. There was no allowance for market losses on mortgage loans held for sale
at December 31, 1997 and 1996. Non-refundable loan fees and direct costs
associated with the origination or purchase of loans are deferred and netted
against outstanding loan balances.
In many lending transactions, collateral is taken to provide an additional
measure of security. Generally, the cash flow or earning power of the borrower
represents the primary source of repayment and collateral liquidation a
secondary source of repayment. The Company determines the need for collateral on
a case-by-case or product-by-product basis. Factors considered include the
current and prospective creditworthiness of the customer, terms of the
instrument and economic conditions.
Interest income on loans receivable is recorded on an accrual basis as earned.
Accrual of interest is generally discontinued when a loan is over 90 days past
due and the collateral is determined to be inadequate or when foreclosure
proceedings begin. Loan fees and deferred insurance premiums are amortized into
income using the interest method over the life of the loan.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is calculated using the straight-line method over the
estimated useful lives of the related assets. Estimated lives are 3 to 7 years
for furniture, fixtures and equipment. Leasehold improvements are amortized on a
straight-line basis over the lesser of the estimated useful life of the
improvement or the terms of the respective lease. Additions to property and
equipment and major replacements or improvements are capitalized at cost.
Maintenance, repairs and minor replacements are expensed when incurred.
Impairment of Long-Lived Assets
Long-lived assets held and used by the Company are reviewed for impairment
whenever management believes events or changes in circumstances indicate that
the carrying value of an asset may not be fully recoverable. No impairment loss
was recognized in 1997 or 1996.
F-8
<PAGE>
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Notes to Consolidated Financial Statements (continued)
Note 1. Summary of Significant Accounting and Reporting Policies (continued)
Advertising Expense
Advertising, promotional, and other business development costs are generally
expensed as incurred. External costs incurred in producing media advertising are
expensed the first time the advertising takes place.
Income Taxes
The Company is included in the consolidated Federal income tax return of its
Parent Company. The tax sharing agreement with the Parent Company provides for
the Company to compute its taxes on a separate return basis, and allows the
Company to reduce its taxes to the extent of available net operating loss (NOL)
carryforwards of its Parent Company. The Company uses Statement of Financial
Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes, which
requires accounting for income taxes using the asset and liability method. Under
the asset and liability method of Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Deferred income taxes result primarily from differences in
financial and income tax reporting of depreciation. At December 31, 1997 and
1996, the Company had a net deferred tax liability of $332,483 and $1,135,
respectively, which is included in accrued liabilities in the accompanying
consolidated balance sheet.
Note 2. Mortgage Loans Held for Sale
The following is a summary of mortgage loans held for sale by type of loan at
December 31, 1997.
First mortgage residential property $ 8,391,144
Second mortgage residential property 934,614
================
Total $ 9,325,758
================
First mortgage residential loans generally have contractual maturities of 12 to
360 months with average interest rates of approximately 11%. Second mortgage
residential loans have contractual maturities of 12 to 360 months with average
interest rates of approximately 15%.
The Company currently originates loans in six states. The following is a summary
of mortgage loans held for sale by state at December 31, 1997.
F-9
<PAGE>
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Notes to Consolidated Financial Statements (continued)
Note 2. Mortgage Loans Held for Sale (continued)
Loan Percentage
Balance of total
------------------- ------------------
Florida $ 4,033,515 43.2%
Louisiana 2,181,330 23.4%
Mississippi 1,509,854 16.2%
Georgia 797,758 8.6%
Tennessee 568,904 6.1%
North Carolina 234,397 2.5%
------------------- ------------------
Total $ 9,325,758 100.0%
=================== ==================
There was no allowance for loan losses recorded at December 31, 1997 as the
mortgage loans are held for sale and recorded at lower of aggregate cost or
market value.
Note 3. Property and Equipment
Property and equipment at December 31, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Office equipment and computers $ 648,116 $ 165,938
Leasehold improvements 16,394 729
Furniture, fixtures and equipment 905,434 210,071
------------- -------------
1,569,944 376,738
Less accumulated depreciation and amortization 242,412 15,160
------------- -------------
Property and equipment, net $ 1,327,532 $ 361,578
============= =============
</TABLE>
Depreciation expense in 1997 and 1996 was $227,252 and $15,160, respectively.
Note 4. Subordinated Debt to Affiliates
From time to time, the Company borrows money from the Parent Company and other
affiliated companies as subordinated debt which is payable on demand.
Subordinated debt to affiliates at December 31, 1997 consists of $4,750,000 to
the Parent Company and $4,793,337 to Carolina Investors, Inc. ("CII"), an
affiliate of the Company, both with interest payable based on the Wall Street
Journal Prime Rate + 2%, (10.50% at December 31, 1997). Subordinated debt to
affiliates at December 31, 1996 consists of $624,871 to Emergent Mortgage
Corporation and $9,745 to CII, both with interest payable based on the Wall
Street Journal Prime Rate + 2%. Interest expense on these borrowings in 1997 and
1996 was $192,343 and $21,496, respectively.
F-10
<PAGE>
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Notes to Consolidated Financial Statements (continued)
Note 5. Income Taxes
Income tax expense (benefit) for the periods ended December 31, 1997 and 1996,
consists of the following:
<TABLE>
<CAPTION>
Periods Ended December 31,
-------------------------------
1997 1996
-------------- -------------
<S> <C> <C>
Current:
Federal $ (46,698) $ (18,501)
State and local (183,230) (44,033)
-------------- -------------
Total current (229,928) (62,534)
Deferred:
Federal 297,107 324
State and local 34,241 811
-------------- -------------
Total deferred 331,348 1,135
Total:
Federal 250,409 (18,177)
State and local (148,989) (43,222)
-------------- -------------
Total income tax expense (benefit) $ 101,420 $ (61,399)
============== =============
</TABLE>
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The tax effects of significant
items comprising the Company's net deferred tax liability are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Amortization of organizational costs $ 65,740 $ --
Net operating loss carryforward 1,767,687 301,204
Other 3,218 --
------------ ------------
Total deferred tax assets 1,836,645 301,204
Less: valuation allowance (1,767,687) (301,204)
------------ ------------
Net deferred tax assets 68,958 --
Deferred tax liabilities:
Differences between book and tax basis of property (39,042) (1,135)
Deferred loan costs (76,000) --
Difference between book and tax basis of the interest-only
strip security associated with the Company's investment in
the Real Estate Investment Trust (286,399) --
------------ ------------
Total deferred tax liabilities (401,441) (1,135)
------------ ------------
Net deferred tax liability $ (332,483) $ (1,135)
============ ============
</TABLE>
F-11
<PAGE>
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Notes to Consolidated Financial Statements (continued)
Note 5. Income Taxes (continued)
The net deferred tax liability is included in accounts payable and accrued
liabilities on the balance sheet.
Income tax expense differs from tax benefit computed by applying the statutory
Federal income tax rate, 34%, to loss before income taxes. The reasons for these
differences for the periods ended December 31, 1997 and December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
Periods Ended December 31,
----------------------------------------
1997 1996
------------------ -----------------
<S> <C> <C>
Tax benefit at statutory Federal rate of 34% $ (1,266,185) $ (314,782)
Differences resulting from:
Nondeductible expense 9,400 51
Increase in valuation allowance 1,466,483 301,204
State income taxes, net of federal income tax benefit (98,333) (28,526)
Other (9,945) (19,346)
------------------ -----------------
$ 101,420 $ (61,399)
================== =================
</TABLE>
There are no known significant pending assessments from taxing authorities
regarding taxation issues at the Parent Company or its subsidiaries.
Note 6. Statement of Cash Flows
The following information relates to the Statements of Cash Flows for the
periods ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
Periods Ended December 31,
---------------------------------------
1997 1996
----------------- ------------------
<S> <C> <C>
Changes in operating assets and liabilities
increasing (decreasing) cash:
Other receivables (496,169) (62,534)
Other assets (52,455) (390,792)
Accounts payable and accrued liabilities 346,933 80,841
----------------- ------------------
$ (201,691) $ (372,485)
----------------- ------------------
Supplemental disclosures of cash flow information:
Interest paid $ 192,904 $ 21,496
----------------- ------------------
Income taxes paid $ -- $ --
================= ==================
</TABLE>
F-12
<PAGE>
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Notes to Consolidated Financial Statements (continued)
Note 7. Retirement Plan
The Company participates in the Parent Company's Matched Savings Plan under
Section 401(k) of the Internal Revenue Code. To be eligible, employees must be
at least 21 years old, have completed at least 30 days of service, and be
considered full-time employees. Under this plan, the Company contributes a
matching contribution of 50% of employee contributions to a maximum of 6% of
compensation for each employee. The Company's contribution to the plan totaled
$55,724 for the year ended December 31, 1997. No contributions were made to the
plan in 1996.
Note 8. Related Parties
The Company was charged management fees of $780,000 and $125,000 in 1997 and
1996, respectively, by the Parent Company for support services, including
accounting and management information systems. The amount charged is determined
at the discretion of the Parent Company's management based on budgeted loan
volume and payroll costs for each of the Parent Company's subsidiaries.
Additionally, the Company obtains legal services from a firm considered to be a
related party. Total charges for these services were $1,658 and $39 in 1997 and
1996, respectively.
Note 9. Operating Leases
The Company leases office space, and office equipment under operating leases.
Future minimum lease payments are as follows:
1998 $ 553,659
1999 527,781
2000 482,122
2001 422,024
2002 55,739
--------------------
2,041,325
====================
Total rent expense was $448,480 and $36,694 in 1997 and 1996, respectively.
Note 10. Dependency on Parent
Due to the Company being in its early stages of operations, loan volumes have
not reached a profitable level as of December 31, 1997. As a result, the Company
is dependent on its Parent Company or affiliated companies for funding of its
operations either through capital contributions or additional subordinated debt
to affiliates.
F-13
<PAGE>
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Notes to Consolidated Financial Statements (continued)
Note 11. Contingencies and Loan Commitments
In the normal course of business, the Company makes commitments to extend credit
that are not presented in the accompanying financial statements. Commitments
outstanding at December 31, 1997 aggregated approximately $709,000. There were
no commitments outstanding at December 31, 1996.
From time to time, the Company or its subsidiaries are defendants in legal
actions involving claims arising in the normal course of its business. The
Company believes that, as a result of its legal defenses and insurance
arrangements, none of these actions, if decided adversely, would have a material
effect on its business or financial condition taken as a whole.
In September 1997, the Parent Company made an offering of $125 million of Senior
Notes due 2004. The purpose of the offering was to provide the Parent Company's
group of companies with additional funds with which to continue to expand its
business, particularly its residential mortgage loan business. Most of the
Parent Company's subsidiaries, including SLC, guarantee payment of the Senior
Notes.
Note 12. Subsequent Event
On January 29, 1998, the Parent Company engaged an investment advisor to seek a
strategic acquirer of the Company.
F-14
<PAGE>
EXHIBIT INDEX
3.1-- Articles of Incorporation dated Februsry 29, 1996.
3.2-- Bylaws.
3.3-- Articles of Amendment dated July 7, 1996.
3.4-- Articles of Amendment dated June 1, 1997.
10.1-- Emergent Group, Inc. Stock Option Plan: Incorporated by
reference to Exhibit 10.1 of Emergent's Group Inc.'s
Registration Statement on Form S-1, Commission File
No. 333-01393.
10.2-- 1995 Officer and Employee Stock Option Plan: Incorporated
by reference to Exhibit 10.1 of Emergent Group, Inc.'s 1995
Notice of Annual Meeting and Proxy Statement, Commission
File No. 0-8909.
10.3-- 1995 Restricted Stock Agreement Plan: Incorporated by
reference to Exhibit 10.4 of Emergent's Group Inc.'s
Registration Statement on Form S-1, Commission File
No. 333-01393.
10.4-- Emergent Group, Inc. Employee Stock Purchase Plan:
Incorporated by reference to Exhibit 99.1 of
Emergent Group, Inc.'s registration statement
on Form S-8, Commission File No. 333-20179.
27.1-- Financial Data Schedule (For SEC Use Only).
(b) Reports on Form 8-K filed in the fourth quarter of 1997:
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
STERLING LENDING CORPORATION
------------------------------------
Registrant
April 13, 1998 \s\ Dennis W. Canupp
- ------------------------------------- ------------------------------------
(Date) Dennis W. Canupp, Director
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
\s\ Dennis W. Canupp \s\ Kevin J. Mast
- ------------------------------------- ------------------------------------
Dennis W. Canupp, Director Kevin J. Mast, Director
and Chief Executive Officer and Treasurer
\s\ Keith B. Giddens \s\ W. Roger Clark, Sr.
- ------------------------------------- ------------------------------------
Keith B. Giddens, Chairman of W. Roger Clark, Sr., Director
the Board of Directors and Vice and President
President
April 13, 1998
- ---------------------------------------
(Date)
STATE OF SOUTH CAROLINA
SECRETARY OF STATE
ARTICLES OF INCORPORATION
FOR
EMERGENT LENDING CORPORATION
1. The name of the proposed corporation is Emergent Lending Corporation.
2. The initial registered office of the corporation is Post Office Box 17526,
Greenville, Greenville County, South Carolina 29606 [include county] and
the initial registered agent at such address is Dennis Canupp. (Street
address - 15 South Main Street, Suite 750 (29601)
3. The corporation is authorized to issue a single class of shares, and the
total number of shares authorized is 100,000.
4. The existence of the corporation shall begin when these articles are filed
with the Secretary of State.
5. The optional provisions which the corporation elects to include in the
articles of incorporation are as follows: None
6. The name and address of each incorporator is as follows:
Name Address Signature
---- ------- ---------
Dennis Canupp Post Office 17526 /s/ Dennis Canupp
Greenville, SC 29606 ---------------------
George Roberson Post Office 17526 /s/ George Roberson
Greenville, SC 29606 ---------------------
Phil Cox PO Box 17526 /s/ Phil Cox
Greenville, SC 29606 ---------------------
7. I, Cary H. Hall, Jr., an attorney licensed to practice in the State of
South Carolina, certify that the corporation, to whose articles of
incorporation this certificate is attached, has complied with the
requirements of Section 33-2-102 of the 1976 Code of Laws of South
Carolina, as amended.
February 29, 1996 /s/ Cary H. Hall, Jr.
------------------------------
Cary H. Hall, Jr.
Wyche, Burgess, Freeman & Parham, P.A.
P.O. Box 728
Greenville, SC 29602
(803) 242-8255
BYLAWS
OF
EMERGENT LENDING CORPORATION
<PAGE>
ARTICLE I
OFFICE AND REGISTERED AGENT
Section 1.01. Principal Office. The Corporation shall maintain its
Principal Office in the City of Greenville, State of South Carolina.
Section 1.02. Registered Office, The Corporation shall maintain a
Registered Office as required by the South Carolina Business Corporation Act, as
amended from time to time (the "Act"), at a location in the State of South
Carolina designated by the Board of Directors from time to time. In the absence
of a contrary designation by the Board of Directors, the Registered Office of
the Corporation shall be located at its Principal Office.
Section 1.03. Other Offices. The Corporation may have such other offices
within and without the State of South Carolina as the business of the
Corporation may require from time to time. The authority to establish or close
such other offices may be delegated by the Board of Directors to one or more of
the Corporation's Officers.
Section 1.04. Registered Agent. The Corporation shall maintain a Registered
Agent as required by the Act who shall have a business office at the
Corporation's Registered Office. The Registered Agent shall be designated by the
Board of Directors from time to time to serve at its pleasure. In the absence of
such designation the Registered Agent shall be the Corporation's Secretary.
Section 1.05. Filings. In the absence of directions from the Board of
Directors to the contrary, the Secretary of the Corporation shall cause the
Corporation to maintain currently all filings respecting the Registered Office
and Registered Agent with all governmental officials as required by the Act or
otherwise by law.
ARTICLE II
SHAREHOLDERS
Section 2.01. Annual Meetings. An annual meeting of the Corporation's
Shareholders shall be held once each calendar year for the purpose of electing
Directors and for the transaction of such other business as may properly come
before the meeting. The annual meeting shall be held at the time and place
designated by the Board of Directors from time to time. In the absence of any
such designation, the annual meeting shall be held at the hour of ten o'clock in
the morning on the second Tuesday of the third month following the Corporation's
fiscal year-end; but if that day shall be a legal holiday, then such annual
meeting shall be
<PAGE>
held on the next succeeding business day. The failure to hold the Annual Meeting
shall have no effect on the validity of any action taken by the Corporation, its
officers or Board of Directors.
Section 2.02. Special Meetings. Special meetings of the Corporation's
Shareholders may be called for any one or more lawful purposes by the
Corporation's President, the Chairman of the Board of Directors, a majority of
the Board of Directors, or by the written request describing the purpose for
which the meeting is to be held which is filed by holders of record of not less
than ten percent of the Corporation's outstanding shares entitled to be cast on
any issue to be considered at the proposed special meeting. Special meetings of
the Shareholders shall be held at the Corporation's Registered Office at the
time designated in the notice of the meeting in accordance with Section 2.03;
provided, however, that such meetings called by a majority of the Board of
Directors may be held at such places as the Board of Directors may determine.
Section 2.03. Notice of Meetings, Waiver or Notice. Written or printed
notice of all meetings of Shareholders shall be delivered not less than ten nor
more than fifty days before the meeting date, either personally or by registered
or certified mail, to all Shareholders of record entitled to vote at such
meeting. If mailed, the notice shall be deemed to be delivered when deposited
with postage thereon prepaid in the United States mail, addressed to the
shareholder at the shareholder's address as it appears on the Corporation's
records, or if a Shareholder shall have filed with the Secretary of the
Corporation a written request that notices to him be mailed to some other
address, then directed to him at that other address. The notice shall state the
date, time, and place of the meeting and, in the case of a special meeting, the
purpose or purposes for which such meeting was called. At the written request,
delivered personally or by special meeting of Shareholders, the President or
Secretary of the Corporation shall fix the date and time of the meeting and
provide notice thereof to the Shareholders as required above; provided, however,
that the date of the meeting shall in no event be fixed less than ten or more
than sixty days from the date the request was received. If the notice of the
meeting is not given within fifteen days after the request is made to the
President or Secretary, the person or persons calling the meeting may fix the
date and time of the meeting and give or cause to be given the required notice.
Notice of a meeting of Shareholders need not be given to any Shareholder who, in
person or by proxy, signs a waiver of notice either before or after the meeting.
Section 2.04. Quorum. Except as may otherwise be required by law or the
Corporation's Articles of Incorporation, at any meeting of Shareholders the
presence, in person or by proxy, of
3
<PAGE>
the holders of a majority of the outstanding shares entitled to vote thereat
shall constitute a quorum for the transaction of any business properly before
the meeting. Shares entitled to vote as a separate voting group on a matter may
take action at a meeting only if a quorum of the shares in the separate voting
group are present in person or by proxy at the meeting. In the absence of a
quorum a meeting may be adjourned from time to time, in accordance with the
provisions concerning adjournments contained elsewhere in these Bylaws, by the
holders of a majority of the shares represented at the meeting in person or in
proxy. At such adjourned meeting a quorum of Shareholders may transact any
business as might have been properly transacted at the original meeting.
Section 2.05. Transaction of Business. Business transacted at an annual
meeting of Shareholders may include all such business as may properly come
before the meeting. Business transacted at a special meeting of Shareholders
shall be limited to the purposes stated in the notice of the meeting.
Section 2.06. Shareholders of Record. For the purpose of determining
Shareholders entitled to vote at any meeting of Shareholders, or entitled to
receive dividends or other distributions, or in connection with any other proper
purpose requiring a determination of Shareholders, the Board of Directors shall
by resolution fix a record date for such determination. The date shall be not
more than fifty and not less than ten days prior to the date on which the
activity requiring the determination is to occur. The Shareholders of record
appearing in the stock transfer bonds of the Corporation at the close of
business on the record date so fixed shall constitute the Shareholders of right
in respect of the activity in question. In the absence of action by the Board of
Directors to fix a record date, the record date shall be ten days prior to the
date on which the activity requiring a determination of Shareholders is to
occur.
Section 2.07. Voting. Except as may otherwise be required by law or the
Corporation's Articles of Incorporation, and subject to the provisions
concerning Shareholders of record contained elsewhere in these Bylaws, a person
(or his proxy) present at a meeting of Shareholders shall be entitled to one
vote for each share of voting stock as to which such person is the Shareholder
of Record.
Section 2.08. Adjournments. A majority of the voting shares held by
Shareholders of record present in person or by proxy at a meeting of
Shareholders may adjourn a meeting from time to time to a date, time, and place
fixed by notice as provided for above or, if such date is less than thirty days
from the date of adjournment, to a date, time, and place fixed by the
4
<PAGE>
majority and announced at the original meeting prior to adjournment.
Section 2.09. Action Without Meeting. Any action required or permitted to
be taken at a meeting of the Shareholders may be taken without a meeting if a
consent in writing, setting forth the action taken, shall be signed by all of
the Shareholders entitled to vote with respect to the subject matter thereof.
Section 2.10. Proxies. At all meetings of Shareholders, a Shareholder may
vote in person or by proxy executed in writing by the Shareholder or by his duly
authorized attorney in fact. Such proxy shall be filed with the Secretary of the
Corporation before at the time of the meeting. No proxy shall be valid after
eleven months from the date of its execution unless it qualifies as an
irrevocable proxy under the Act.
Section 2.11. Voting of Shares by Certain Holders. Shares standing in the
name of another Corporation may be voted by the officer, agent or proxy as the
bylaws of that corporation may prescribe, or, in the absence of such provision,
as the board of directors of the other corporation may determine.
Shares held by an administrator, executor, guardian or conservator may be
voted by him, either in person or by proxy, without a transfer of such shares
into his name. Shares standing in the name of a trustee may be voted by him,
either in person or by proxy, but no trustee shall be entitled to vote shares
held by him without a transfer of the shares into his name.
Shares standing in the name of a receiver may be voted by the receiver, and
shares held by or under the control of a receiver may be voted by the receiver
without the transfer thereof into his name if authority to do so is contained in
an appropriate order of the court by which such receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Section 2.12. Action. Approval of actions by Shareholders shall be in
accordance with the requirements of the Act, except to the extent otherwise
provided by the Articles of Incorporation.
Section 2.13. Order of Business. The order of business at the annual
meeting, and so far as practicable at all other meetings of Shareholders, shall
be as follows:
1. Proof of notice of the meeting
5
<PAGE>
2. Determination of a quorum
3. Reading and disposal of unapproved minutes
4. Reports of officers and committees
5. Election of directors
6. Unfinished business
7. New business
8. Adjournment
Except with respect to a specific rule to the contrary in these Bylaws or
the Act, Robert's Rules of Order shall be used to resolve any procedural
disputes that might rise in a Shareholders' meeting.
ARTICLE III
DIRECTORS
Section 3.01. Authority. The Board of Directors shall have ultimate
authority over the conduct and management of the business and affairs of the
Corporation.
Section 3.02. Number. The Corporation shall have three Directors. The
number of Directors may be increased or decreased from time to time by the Board
of Directors by a number that is thirty percent (30%) or less than the number of
Directors last elected by the Shareholders. No decrease in the number of
Directors shall have the effect of shortening the term of any incumbent
Director.
Section 3.03. Tenure. Each Director shall hold office from the date of his
election and qualification until his successor shall have been duly elected and
qualified, or until his earlier removal, resignation, death or incapacity. An
election of all Directors by the Shareholders shall be held at each annual
meeting of the Corporation's Shareholders.
Section 3.04. Removal. Any Director may be removed from office, with or
without cause, by a vote of the holders of a majority of the shares of the
Corporation's voting stock. Any Director may be removed from office with cause
by a majority vote of the Board of Directors at a meeting at which only the
removal and replacement of the Director or Directors in question shall be
considered.
Section 3.05. Vacancies. The Shareholders shall elect a new Director to
fill any vacancy on the Board of Directors in the same manner and subject to the
same restrictions and voting rights as apply to the election of the Director
whose removal, resignation, death, or newly created directorship created the
vacancy.
6
<PAGE>
Section 3.06. Regular Meetings. A regular meeting of the Board of Directors
shall be held without notice other than this Bylaw immediately after, and at the
same place as the annual meetings of Shareholders. The Board of Directors may by
resolution provide for the holding of additional regular meetings without notice
other than such resolution, provided, however, the resolution shall fix the
date, time, and place (which may be anywhere within or without the State of the
Corporation's Principal Office) for these regular meetings. Notwithstanding the
foregoing any action of the Board of Directors may be taken by unanimous written
consent of the Directors, which action shall have the same validity as if taken
at a regular meeting of the Board of Directors.
Section 3.07. Special Meetings; Notice of Special Meeting. Special meetings
of the Board of Directors may be called for any lawful purpose or purposes by
any Director or the President of the Corporation. The person calling a special
meeting shall give, or cause to be given, to each Director at his business
address, notice of the date, time and place of the meeting by any normal means
of communication not less than seventy-two hours nor more than sixty days prior
thereto. The notices may, but need not, describe the purpose of the meeting. If
mailed, the notice shall be deemed to be delivered when deposited in the United
States mail at the Director's business address, with postage thereon prepaid. If
notice is given by telegram, the notice shall be deemed delivered when the
telegram, is delivered to the telegraph company. Any time or place fixed for a
special meeting must permit participation in the meeting by means of
telecommunications as authorized below.
Section 3.08. Waiver of Notice of Special Meetings. Notice of a special
meeting need not be given to any Director who signs a waiver of notice either
before or after the meeting. The attendance of a Director at a special Directors
meeting shall constitute a waiver of notice of that meeting, except where the
Director attends the meeting for the sole and express purpose of objecting to
the transaction of any business because of the meeting is not lawfully called or
convened.
Section 3.09. Participation by Telecommunications. Any Director may
participate in, and be regarded as present at, any meeting of the Board of
Directors by means of conference telephone or any other means of communication
by which all persons participating in the meeting can hear each other at the
same time.
Section 3.10. Quorum. A majority of Directors in office shall constitute a
quorum for the transaction of business at any meeting of the Board of Directors.
7
<PAGE>
Section 3.11. Action. The Board of Directors shall take action pursuant to
resolutions adopted by the affirmative vote of a majority of the Directors
participating in a meeting at which a quorum is present, or the affirmative vote
of a greater number of Directors where required by the Corporation's Articles of
Incorporation or otherwise by law.
Section 3.12. Action Without Meeting. Any action required or permitted to
be taken by the Board of Directors at an annual, regular, or special meeting may
be taken without a meeting if a consent in writing, setting forth the action
taken, shall be signed by all of the Directors.
Section 3.13. Presumption of Assent. A Director of the Corporation who is
present at a meeting of the Board of Directors at which action on any corporate
matter is taken unless his dissent shall be entered in the minutes of the
meeting, or unless he shall file his written dissent to such action with the
person acting as the secretary of the meeting before the adjournment thereof or
shall forward his dissent by registered mail to the Secretary of the Corporation
immediately after the adjournment of the meeting. The right to dissent shall not
apply to a Director who voted in favor of such action.
Section 3.14. Committees. The Board of Directors maybe resolution designate
and delegate authority to an Executive Committee and other committees with such
authority as may be permitted by the Act. Special meetings of any committee may
be called at any time by any Director who is a member of the committee or by any
person entitled to call a special meeting of the full Board of Directors. Except
as otherwise provided in the section, the conduct of all meetings of any
committee, including notice thereof, shall be governed by Sections 3.06 through
3.13 of this Article. In the absence or disqualification of a member of a
committee, the member or members present at the meeting and not disqualified
from voting may, regardless of the presence of a quorum, unanimously appoint
another member of the Board of Directors to act at the committee meeting in
place of the absent or disqualified member.
Section 3.15. Compensation. The Board of Directors may be resolution
authorize payment to all Directors of a uniform fixed sum for attendance at each
meeting or a uniform stated salary as a Director. No such payment shall preclude
any Director from serving the Corporation in any other capacity and receiving
compensation therefore. The Board of Directors may also by resolution authorize
the payment of reimbursement of all expenses of each Director related to the
Director's attendance at meetings.
8
<PAGE>
Section 3.16. Order of Business. The order of business at all meetings of
the Board of Directors shall be:
1. Determination of a quorum
2. Reading and disposal of all unapproved minutes
3. Reports of officers and committees
4. Unfinished business
5. New business
6. Adjournment
Except with respect to a specific rule to the contrary in These By laws or
the Act, Robert's Rules of Order shall be used to resolve any procedural dispute
that might arise in a Board of Directors' meeting.
ARTICLE IV
OFFICERS
Section 4.01. In General. The officers of the Corporation Shall consist of
a Chief Executive Officer, a President, a Vice president, a Secretary and a
Treasurer and such additional vice presidents, assistant secretaries, assistant
treasurers and other officers and agents as the Board of Directors deems
advisable from time to time. All officers shall be appointed by the Board of
Directors to serve at its pleasure. Except as may otherwise be provided by law
or in the Articles of Incorporation, any officer may be removed by the Board of
Directors at any time, with or without cause. Any vacancy, however occurring, in
any office may be filled by the Board of Directors for the unexpired term. One
person may hold two or more offices. Each officer shall exercise the authority
and perform the duties as may be set forth in these Bylaws and any additional
authority and duties as the Board of Directors shall determine from time to
time.
Section 4.02 Chief Executive Officer ("CEO"). The CEO shall be subject to
the authority of the Board of Directors and shall manage the business and
affairs of the Corporation. The CEO shall preside at all meetings of the
Shareholders and all meetings of the Board of Directors, and shall see that the
resolutions of the Board of Directors are put into effect. The CEO shall have
full authority to execute on the Corporation's behalf any and all contracts,
agreements, notes, bonds, deeds, mortgages, certificates, instruments, and other
documents except as may be specifically limited by resolution of the Board of
Directors.
Section 4.03 President; Vice President. The President and Vice President
shall be subject to the authority of the CEO and shall perform such duties as
the CEO may direct.
9
<PAGE>
Section 4.04 Secretary. Except as otherwise provided by These Bylaws or
determined by the Board of Directors, the Secretary shall serve under the
direction of the CEO. The Secretary shall attend all meetings of the
Shareholders and the Board of Directors and record the proceedings thereof. The
Secretary shall give, or cause to be given, all notices in connection with such
meetings. The Secretary shall be the custodian of the Corporate seal and affix
the seal to any document requiring it.
Section 4.05 Treasurer. Except as otherwise provided by these Bylaws or
determined by the Board of Directors, the Treasurer shall serve under the
direction of the CEO. The Treasurer shall, under the direction of the CEO, keep
safe custody of the Corporation's funds and maintain complete and accurate books
and records of account. The Treasurer shall upon request report to the Board of
Directors on the financial condition of the Corporation.
Section 4.06. Assistant Officers. Except as otherwise provided by these
Bylaws or determined by the Board of Directors, The Assistant Secretaries and
Assistant Treasurers, if any, shall serve under immediate direction of the
Secretary and the Treasurer, respectively and under the ultimate direction of
the CEO. The Assistant Officers shall assume the authority and perform the
duties of their respective immediate supervisor officer as may be necessary in
the absence, incapacity, or inability or refusal of such immediate superior
officer to act. The seniority of Assistant Officers shall be determined from
their date; of appointment unless the Board of Directors shall otherwise
specify.
Section 4.07. Salaries. The salaries of the officers shall be fixed from
time to time by the Board of Directors and no officer shall be prevented from
receiving a salary by reason of the fact that he is also a Director of the
Corporation.
ARTICLE V
INDEMNIFICATION
Section 5.01. Scope. Every person who was or is a party to, or is
threatened to be made a party to, or is otherwise involved in, any action suit,
or proceeding, whether civil, criminal, administrative, or investigative, by
reason of the fact that he or a person of whom he is the legal representative is
or was a Director or Officer of the Corporation or is or was serving at the
request of the Corporation or for its benefit as a Director or officer of
another corporation, or as its representative in a partnership, joint venture,
trust, or other enterprise, shall be indemnified and held harmless to the
fullest
10
<PAGE>
extent legally permissible under and pursuant to the Act, against all expenses,
liabilities, and losses (including without limitation attorney's fees,
judgements, fines, and amounts paid or to be paid in settlement) reasonably
incurred or suffered by him in connection therewith. Such right of
indemnification shall be a contract right that may be enforced in any manner
desired by such person. Such right of indemnification shall not be exclusive of
any other right which such Directors, Officers, or representatives may have or
hereafter acquire and, without limiting the generality of such statement, they
shall be entitled to their respective rights of indemnification under any bylaw,
agreement, vote of Shareholders, insurance, provision of law, or otherwise, as
well as their rights under this article.
Section 5.02. Indemnification Plan. The Board of Directors may from time to
time adopt an Indemnification Plan implementing the rights granted in Section
5.01. This Indemnification Plan shall set forth in detail the mechanics of how
the indemnification Rights granted in Section 5.01 shall be exercised.
Section 5.03. Insurance. The Board of Directors may cause the Corporation
to purchase and maintain insurance on behalf of any person who is or was a
Director or Officer of the Corporation, or is or was serving at the request of
the Corporation as a Director or Officer of another Corporation, or as its
representative in a partnership, joint venture, trust or other enterprise,
against any liability asserted against such person and incurred in any such
capacity or arising out of such status whether or not the Corporation would have
the power to indemnify such person.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 6.01. Contracts. The Board of Directors may authorize any officer
or officers, agent or agents, to enter into any contract or execute and deliver
any instrument in the name of and on behalf of the corporation, and such
authority may be general or confined to specific instances.
Section 6.02. Loans. No loans shall be contracted on behalf of the
Corporation and no evidence of indebtedness shall be issued in its name unless
authorized by a resolution of the Board of Directors, and such authority may be
general or confined to specific instances.
Section 6.03. Checks, Drafts, etc. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation shall be
11
<PAGE>
signed by the officer or officers, agent or agents of the Corporation and in
such manner as shall from time to time be determined by resolution of the Board
of Directors.
Section 6.04. Deposits. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in such
banks, trust companies or other depositories as the Board of Directors or the
CEO of the Corporation may select.
ARTICLE VII
MISCELLANEOUS
Section 7.01. Certificates for Shares. Certificates representing shares of
capital stock of the Corporation shall state upon the face thereof the name of
the person to whom issued, the number of shares, the par value per share and the
fact that the Corporation is organized under the laws of the State of South
Carolina. Each certificate shall be signed by the President or a Vice President
and by the Secretary or an Assistant Secretary. All certificates for shares
shall be consecutively numbered. The name and address of the person to whom the
shares represented thereby are issued, with the number of shares and date of
issuance, shall be entered on the stock transfer books of the Corporation. All
certificates surrendered to the Corporation for transfer shall be cancelled and
no new certificate shall be issued until the former certificate for a like
number of shares shall have been surrendered and cancelled, except that in case
of a lost, destroyed or mutilated certificate a new one may be issued therefor
upon the making of an affidavit by the holder of record of the shares
represented by such certificate setting forth the facts concerning the loss,
theft or mutilation thereof and upon such bond or indemnity to the Corporation
as the Board of Directors may prescribe. A new certificate may be issued without
requiring any bond when in the judgement of the Board of Directors, it is not
imprudent to do so.
Section 7.02. Transfer of Shares. Subject to the provisions of the Act and
to any transfer Restrictions binding on the Corporation, transfer of shares of
the Corporation shall be made only on the stock transfer books of the
Corporation by the holder of record thereof or by his agent, attorney-in-fact or
other legal representative, who shall furnish proper evidence of authority to
transfer, upon surrender for cancellation of the certificate for such shares.
The person in whose name shall be deemed by the Corporation to be the owner
thereof for all purposes.
12
<PAGE>
Section 7.03. Voting of Shares in Other Corporations Owned By The
Corporation. Subject always to the specific directions of the Board of
Directors, any share or shares of stock issued by any other corporation and
owned or controlled by the Corporation may be voted at any shareholder's meeting
of the other corporation by the CEO of the Corporation if he be present, or in
his absence by the President or any Vice-President of the Corporation who may be
present. Whenever, in the judgement of the CEO, or, in his absence of the
President or any Vice-President, it is desirable for the Corporation to execute
a proxy or give a shareholders' consent in respect to any share or shares of
stock issued by any other corporation and owned or controlled by the
Corporation, the proxy or consent shall be executed in the name of the
Corporation by the CEO, the President or one of the Vice-Presidents of the
Corporation without necessity of any authorization by the Board of Directors.
Any person or persons designated in the manner above stated as the proxy or
proxies of the Corporation shall have full right, power and authority to vote
the share or shares of stock issued by the other corporation.
Section 7.04. Fiscal Year. The fiscal year of the Corporation shall be
established, and may be altered, by resolution of the Board of Directors from
time to time as the Board deems advisable.
Section 7.05. Dividends. The Board of Directors may from time to time
declare, and the Corporation may pay, dividends on its outstanding shares in the
manner and upon the terms and conditions as the Board of Directors deems
advisable and is permitted by law.
Section 7.06. Seal. The seal of the Corporation shall be circular in form
and shall have inscribed thereon the name of the Corporation, the year of its
organization, and the words "Corporate Seal, State of South Carolina."
Section 7.07. Amendments. These Bylaws may be altered, amended, or repealed
and new Bylaws may be adopted by the Directors, subject to the right of the
shareholders to alter, adopt, amend, or repeal Bylaws as provided in the Act.
Section 7.08. Severability. Any provision of these Bylaws, or any amendment
or alteration thereof, which is determined to be in violation of the Act shall
not in any way render any of the remaining provisions invalid.
Section 7.09. References to Gender and Number Terms. In construing these
Bylaws, feminine or neuter pronouns shall be substituted for those masculine in
form and vice versa, and plural terms shall be substituted for singular and
singular for plural in any place in which the context so requires.
13
<PAGE>
Section 7.10. Headings. The Article and Section headings in these Bylaws
are inserted for convenience only and are not part of the Bylaws.
Section 7.11. Inspection of Records by Shareholders. A shareholder is
entitled to inspect and copy, during regular business hours at the Corporation's
principal office, any of the following records of the Corporation, if he gives
the Corporation written notice of his demand at least five business days before
the date on which he wishes to inspect and copy:
(1) its Articles of Incorporation or Restated Articles of Incorporation
and all amendments to them currently in effect;
(2) its Bylaws or restated Bylaws and all amendments to them currently in
effect;
(3) resolutions adopted by its Board of directors creating one or more
classes or series of shares, and finding their relative rights,
preferences, and limitations, if shares issued pursuant to those
resolutions are outstanding;
(4) the minutes of all Shareholders' meetings, and records of all action
taken by Shareholders without a meeting, for the past three years;
(5) all written communications to Shareholders, generally, within the past
three years, including the financial statements furnished for the past
three years;
(6) a list of the names and business addresses of its current Directors
and Officers;
(7) its most recent Annual Report delivered to the Secretary of State; and
(8) all contracts or other written agreements between the Corporation and
any of its Shareholders and all contracts or other written agreements
between two or more of the Shareholders.
A Shareholder is entitled to inspect and copy, during regular business
hours at a reasonable location specified by the Corporation, any of the
following records of the corporation if the Shareholder: gives the Corporation
written notice of his demand at least five business days before the date on
which he whishes to inspect and copy, and his demand is made in good faith and
for a proper purpose; he describes with reasonable particularity his purpose and
the records he desires to inspect; and the records are directly connected with
his purpose:
14
<PAGE>
(1) excerpts from minutes of any meeting of the Board of Directors,
records of any action of a committee of the Board of Directors while
acting in place of the Board of Directors on behalf of the
Corporation, minutes of any meeting of the Shareholders, and records
of action taken by the Shareholders or Board of Directors without a
meeting, to the extent not otherwise subject to inspection under this
section of the Bylaws;
(2) account records of the Corporation; and
(3) the record of Shareholders.
A Shareholder's agent or attorney has the same inspection and copying
rights as the shareholders he represents. The right to copy records under this
section includes, if reasonable, the right to receive copies made by
photographic, xerographic or other means. The Corporation may impose a
reasonable charge, covering the costs of labor and material, for copies of any
documents provided to the shareholder. The charge may not exceed the estimated
cost of production or reproduction of the records.
Section 7.12. Reimbursement of Disallowed Compensation Expenses. Any
payments made to a director or officer of the Corporation to compensate him for
services rendered which shall be disallowed in whole or in part as a deductible
expense for federal income tax purposes shall be reimbursed to the Corporation
by such person to the full extent of such disallowance, together with interest
thereon at the rate then in effect for interest on federal income tax
deficiencies from the date of payment to the date of reimbursement, within sixty
(60) days notice of the disallowance to such person by the Board of Directors.
Such notice shall be promptly given upon a determination, as defined in Section
1313 (a) of the Internal Revenue Code of 1986 (as now in effect and hereafter
amended), that such payment shall be disallowed in whole or in part as a
deductible expense for federal income tax purposes. It shall be the duty of the
Board of Directors to enforce payment by such person of each such amount
disallowed. In lieu of payment by such person, subject to the approval of the
Board of Directors, proportionate amounts may be withheld from such person's
future compensation payments until the full amount owed to the Corporation has
been recovered. Reimbursement of such disallowed expenses shall constitute a
condition of election to any office or directorship of the Corporation.
Approved as of _____________________, 1996.
___________________________________
___________________________________
, Secretary
15
STATE OF SOUTH CAROLINA
SECRETARY OF STATE
ARTICLES OF AMENDMENT
Pursuant to Section 33-10-106 of the 1976 South Carolina Code, as amended,
the undersigned corporation adopts the following Articles of Amendment to its
Articles of Incorporation:
1. The name of the corporation is EMERGENT LENDING CORPORATION
2. On JULY 7, 1996 the corporation adopted the following Amendment (s) of its
Articles of Incorporation
RESOLVED, that the Articles of Incorporation of the Corporation be amended
to CHANGE THE NAME OF THE CORPORATION TO "STERLING LENDING CORPORATION".
3. The manner, if not set forth in the amendment, in which any exchange,
reclassification, or cancellation of issued shares provided for in the
Amendment shall be effected, is as follows: (if not applicable, insert "not
applicable or "NA).
NOT APPLICABLE
4. Complete either a or b, whichever is applicable.
a. (X) Amendment (s) adopted by shareholder action. At the date of
adoption of the amendment, the number of outstanding shares of
each voting group entitled to vote separately on the Amendment,
and the vote of such shares was:
<TABLE>
<CAPTION>
Number of Number of Number of Votes Number of Undisputed*
Voting Outstanding Votes Entitled Represented at Shares Voted
Group Shares to be Cast the Meeting For Against
- ------ ----------- -------------- --------------- -------- --------
<S> <C> <C> <C> <C>
COMMON 25,000 25,000 25,000 : 5,000
</TABLE>
<PAGE>
*NOTE: Pursuant to Section 33-10-106 (6) (i), the corporation can
alternatively state the total number of undisputed shares cast for the
amendment by each voting group together with a statement that the
number of votes cast for the amendment by each voting group was
sufficient for approval by that voting group.
b. |_| The Amendment (s) was duly adopted by the incorporators or board of
directors without shareholder approval pursuant to ss.33-6-102 (3),
33-10-102 and 33-10-105 of the 1976 South Carolina Code as amended,
and shareholder action was not required.
5. Unless a delayed date is specified, the effective date of these Articles of
Amendment shall be the date of acceptance for filing by the Secretary of
State.
Date: July 7, 1996 EMERGENT LENDING CORPORATION
(Name of Corporation)
By: /s/ DENNIS CANUPP
----------------------------------
DENNIS CANUPP, PRESIDENT
----------------------------------
STATE OF SOUTH CAROLINA
SECRETARY OF STATE
ARTICLES OF AMENDMENT
Pursuant to Section 33-10-106 of the 1976 South Carolina Code, as amended, the
undersigned Corporation adopts the following Articles of Amendment to its
Articles of Incorporation:
1. The name of the corporation is Sterling Lending Corporation.
2. On June 1, 1997, the corporation adopted the following Amendments (s) of
its Articles of Incorporation:
RESOLVED, that the Articles of Incorporation of the Corporation be
amended to the Corporation is authorized to issue one million shares
of preferred stock. The relative rights, preferences and limitations
of such preferred stock shall be determined by the Corporation's Board
of Directors in its sole discretion. The Corporation's Board of
Directors shall have the sole authority to issue shares of such
preferred stock to whomever and for whatever purposes it, in its sole
discretion deems appropriate. The Board is expressly authorized to
divide such preferred shares into separate series, with each series
separately designated so as to distinguish the shares thereof from the
shares of all other series. Each share of each series of serial
preferred stock shall have the same relative rights as and be
identical in all respects with all the other shares of the same
series. Among other things, the Board may designate the following
variations among any of the various series of preferred stock without
further action of the shareholders of the Corporation: (a) the
distinctive serial designation and the number of shares constituting
such series; (b) the dividend rate or the amount of dividends to be
paid on the shares of such series, whether dividends shall be
cumulative and, if so, from which date (s) the payment date(s) for
dividends, and the participating or other special rights, if any, with
respect to dividends; (c) the voting powers, full or limited, if any,
of shares of such series; (d) whether the shares of such series shall
be redeemable and, if so, the price(s) at which, and the terms and
conditions on which, such shares may be redeemed; (e) the amount(s)
payable upon the shares of such series in the event of voluntary or
involuntary liquidation, dissolution, or winding up of the
association; (f) whether the shares of such series shall be entitled
to the benefit of a sinking or retirement fund to be applied to the
purchase or redemption of such shares, and if so entitled, the amount
of such fund and the manner of its application, including the price(s)
at which such shares may be redeemed or purchased through the
application of such fund; (g) whether the shares of such series shall
be convertible into, or exchangeable for, shares of any other class or
classes of stock of the association and, if so, the conversion
price(s) or the rate(s) of exchange, and the adjustments thereof, if
any, at which such conversion or exchange may be made, and any other
terms and conditions of such conversion or exchange; (h) the price or
other consideration for which the shares of such series shall be
issued; and (i) whether the shares of such series which are redeemed
or converted shall have the status of authorized but unissued shares
of serial preferred stock and whether such shares may be reissued as
shares of the same or any other series of serial preferred stock.
3. The manner, if not set forth in the amendment, in which any exchange,
reclassification, or cancellation of issued shares provided for in the
Amendment shall be effected, is as follows: (If not applicable, insert "not
applicable" or "NA").
NOT APPLICABLE
<PAGE>
4. Complete either a or b, whichever is applicable.
a. X Amendment(s) adopted by shareholder action. At the date of
adoption of the amendment, the number of oustanding shares of
each voting group entitled to vote separately on the Amendment,
and the vote of such shares was:
<TABLE>
<CAPTION>
Number of Number of Number of Votes Number of Undisputed*
Voting Outstanding Votes Entitled Represented at Shares Voted
Group Shares to be Cast the Meeting For Against
- ------ ----------- -------------- --------------- ---------------------
<S> <C> <C> <C> <C>
COMMON 25,000 25,000 25,000 25,000
</TABLE>
NOTE: Pursuant to Section 33-10-106 (6) (I), the corporation can
alternatively state the total number of undisputed shares cast for the
amendment by each voting group together with a statement that the
number of votes cast for the amendment by each voting group was
sufficient for approval that voting group.
b. _ The Amendment(s) was duly adopted by the incorporators or board
of directors without shareholder approval pursuant to
ss.33-6-102(d), 33-10-102 and 33-10-105 of the 1976 South
Carolina Code as amended, and shareholder action was not
required.
5. Unless a delayed date is specified, the effective date of these Articles of
Amendment shall be the date of acceptance for filing by Secretary of State.
Date: June 30, 1997 Sterling Lending Corporation
----------------------------
(Name of Corporation)
By: /s/ DENNIS CANUPP
--------------------------------------
Dennis Canupp, Chief Executive Officer
--------------------------------------
FILING INSTRUCTIONS
1. Two copies of this form, the original and either a duplicate original or a
conformed copy, must be filed.
2. If the space in this form is insufficient, please attach additional sheets
containing a reference to the appropriate Paragraph in this form.
3. Filing fees and taxes payable to the Secretary at the time of filing
application.
Filing Fee $ 10.00
Filing tax 100.00
Total $110.00
Form Approved by South Carolina
Secretary of State 1/89
2
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 263
<SECURITIES> 0
<RECEIVABLES> 9516
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 1570
<DEPRECIATION> 242
<TOTAL-ASSETS> 11314
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 1010
<TOTAL-LIABILITY-AND-EQUITY> 11314
<SALES> 0
<TOTAL-REVENUES> 3617
<CGS> 0
<TOTAL-COSTS> 7148
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 193
<INCOME-PRETAX> (3724)
<INCOME-TAX> 101
<INCOME-CONTINUING> (3825)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3825)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Unclassified Balance Sheet
</FN>
</TABLE>
