SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM _________ TO _________.
COMMISSION FILE NUMBER 333-39339-03
-----------------------
STERLING LENDING
CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
SOUTH CAROLINA 57-1042033
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
P. O. BOX 17526
GREENVILLE, SOUTH CAROLINA 29606
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
864-235-8056
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 report), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
OUTSTANDING AT JULY
TITLE OF EACH CLASS: 31, 1998
- --------------------------------- -----------------------
NONE NONE
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(A) AND
(B) OF FORM 10-Q AND FORM 10-QSB, AS MODIFIED BY GRANTS OF NO-ACTION RELIEF TO
UNRELATED THIRD PARTIES, AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
1
<PAGE>
STERLING LENDING CORPORATION AND SUBSIDIARY
FORM 10-Q
QUARTER ENDED JUNE 30, 1998
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997 ......................... 4
Consolidated Statements of Income
for the six months ended June 30, 1998 and June 30, 1997 and
for the three months ended June 30, 1998 and June 30, 1997 .. 5
Consolidated Statements of Cash Flows
for the six months ended June 30, 1998 and June 30, 1997 ... 6
Notes to Consolidated Financial Statements ...................... 7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition ............... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk ...... 9
PART II.OTHER INFORMATION
Item 1. Legal Proceedings ............................................... 11
Item 2. Changes in Securities ........................................... 11
Item 3. Defaults Upon Senior Securities ................................. 11
Item 4. Submission of Matters to a Vote of Security Holders ............. 11
Item 5. Other Information ............................................... 11
Item 6. Exhibits and Reports on Form 8-K ................................ 11
2
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PART I. FINANCIAL INFORMATION
3
<PAGE>
STERLING LENDING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
------------ ------------
1998 1997
------------ ------------
ASSETS:
Cash and cash equivalents ...................... $ -- $ 262,612
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
Property and equipment, net .................... 1,352,314 1,327,532
Other assets ................................... 109,183 207,338
------------ ------------
TOTAL ASSETS ................................... $ 1,461,497 $ 11,313,669
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable and accrued liabilities ....... $ 366,089 $ 760,257
Subordinated debt to affiliates, due on demand . 586,368 9,543,337
------------ ------------
Total liabilities ....................... 952,457 10,303,594
Shareholders' equity:
Common stock, no par value ................... -- --
Additional paid-in capital ................... 7,100,000 5,700,000
Accumulated deficit .......................... (6,590,960) (4,689,925)
------------ ------------
Total shareholders' equity .............. 509,040 1,010,075
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..... $ 1,461,497 $ 11,313,669
============ ============
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS
4
<PAGE>
STERLING LENDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Interest income .............................. $ 10,038 $ -- $ -- $ --
Gain on sale of loans ........................ 1,355,355 191,559 562,858 160,373
Loan fee income .............................. 1,474,151 729,869 880,453 642,631
Other revenues ............................... 192,934 65,426 65,986 43,392
----------- ----------- ----------- -----------
Total revenues ......................... 3,032,478 986,854 1,509,297 846,396
----------- ----------- ----------- -----------
EXPENSES:
Interest ..................................... 112,220 37,723 32,019 25,007
Salaries, wages and employee benefits ........ 2,757,977 1,634,185 1,475,217 915,626
Management fee to Parent ..................... 400,000 390,000 250,000 195,000
Legal, audit, and professional fees .......... 78,782 178,290 15,508 104,423
Office rent .................................. 286,946 165,642 149,506 125,496
Telephone .................................... 209,848 137,948 105,315 107,714
Travel and entertainment ..................... 162,206 136,943 89,571 58,143
Business development costs ................... 257,879 173,883 158,639 91,668
Other general and administrative expenses .... 718,509 553,464 367,352 327,998
----------- ----------- ----------- -----------
Total expenses ......................... 4,984,367 3,408,078 2,643,127 1,951,075
----------- ----------- ----------- -----------
Loss before income taxes ....................... (1,951,889) (2,421,224) (1,133,830) (1,104,679)
Provision (benefit) for income taxes ........... (50,854) (1,135) (88,872) --
----------- ----------- ----------- -----------
NET LOSS ....................................... $(1,901,035) $(2,420,089) $(1,044,958) $(1,104,679)
=========== =========== =========== ===========
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS
5
<PAGE>
STERLING LENDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ............................................................................. $ (1,901,035) $ (2,420,089)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization .................................................. 141,182 224,919
Provision for deferred income taxes ............................................ (325,820) (1,135)
Decrease in deferred loan fees ................................................. (368,274) --
Principal proceeds from loans sold ............................................. 41,847,196 11,693,720
Loans originated with intent to sell ........................................... (32,521,438) (11,693,720)
Changes in operating assets and liabilities .................................... 588,510 202,122
------------ ------------
Net cash provided by (used in) operating activities ..................... 7,460,321 (1,994,183)
------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment ................................................... (165,964) (1,143,594)
------------ ------------
Net cash used in investing activities ................................... (165,964) (1,143,594)
------------ ------------
FINANCING ACTIVITIES:
Cash investment from Parent .......................................................... 1,400,000 2,600,000
Net cash received (paid) on
intercompany borrowings .............................................................. (8,956,969) 523,384
------------ ------------
Net cash provided by (used in) financing activities ..................... (7,556,969) 3,123,384
------------ ------------
Net increase (decrease) in cash and cash equivalents ................... (262,612) (14,393)
Cash and cash equivalents at beginning of year ....................................... 262,612 125,799
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR ............................................. $ -- $ 111,406
============ ============
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS
6
<PAGE>
STERLING LENDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1--ORGANIZATION AND BASIS OF PREPARATION
Sterling Lending Corporation ("Sterling Lending" or the "Company") is an 80%
owned subsidiary of HomeGold Financial, Inc. (f/k/a 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 on July 24, 1996.
Operations began August 1, 1996.
The accompanying consolidated financial statements include the accounts of
Sterling Lending and Sterling Lending Insurance Agency, Inc. (a 100% owned
subsidiary) and are prepared in accordance with the SEC's rules regarding
interim financial statements, and therefore do not contain all disclosures
required by generally accepted accounting principles for annual financial
statements. Reference should be made to the financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997,
including the footnotes thereto. Certain previously reported amounts have been
reclassified to conform to current period presentation. Such reclassifications
had no effect on net income or shareholders' equity as previously reported.
The consolidated balance sheet as of June 30, 1998, and the consolidated
statements of income for the six-month and three-month periods ended June 30,
1998 and 1997, and the consolidated statements of cash flows for the six-month
periods ended June 30, 1998 and 1997, are unaudited and in the opinion of
management contain all known adjustments, which consist of only normal recurring
adjustments necessary to present fairly the financial position results of
operations, and cash flows of the Company. All significant intercompany balances
and transactions between Sterling Lending and its subsidiary have been
eliminated in consolidation.
KPMG Peat Marwick LLP previously examined and reported on the Company's
financial statements for the year ended December 31, 1997, from which the
consolidated balance sheet as of that date is derived.
NOTE 2--CASH FLOW INFORMATION
For the six-month periods ended June 30, 1998 and 1997, the Company paid
interest of $112,022 and $37,723, respectively. The Company paid no income taxes
for the six months ended June 30, 1998 and 1997.
NOTE 3--CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments readily convertible to known
amounts of cash or having a maturity of three months or less to be cash
equivalents.
The Company maintains its primary checking account with one bank. The amounts
maintained in the checking account are insured by the Federal Deposit Insurance
Corporation ("FDIC") up to $100,000.
NOTE 4 --ADOPTION OF NEW ACCOUNTING STANDARDS
Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income". This Statement establishes standards for
reporting comprehensive income and its components in a full set of general
purpose financial statements. The objective of the Statement is to report a
measure of all changes in equity of an enterprise that result from transactions
and other economic events during the period other than transactions with owners.
Comprehensive income is divided into net income and other comprehensive income.
Adoption of this Statement did not change total shareholders' equity as
previously reported. Net income and comprehensive income are the same for the
six-month and three-month periods ended June 30, 1998 and 1997.
NOTE 5--SUBSEQUENT EVENT
In July 1998, the Company reached an agreement to sell the stock of Sterling
Lending Corporation for $1.5 million, payable $400,000 in cash at closing and a
promissory note for $1.1 million. The transaction is expected to close before
the end of the third quarter 1998, although no assurance of this can be given.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company appearing elsewhere herein.
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, adverse consequences
of changes in interest rate environment, uncreditworthiness of borrowers and
risk of default, limited operating history of retail lending operations, 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, impact of competition, regulation
of lending activities, changes in the regulatory environment, and dependence on
key executives.
GENERAL
Sterling Lending, a majority-owned subsidiary of HomeGold Financial, Inc.
(f/k/a Emergent Group, Inc.), is a financial services company that is primarily
engaged in the business of originating residential mortgage loans to sub-prime
borrowers. The funds for these loans are obtained principally through affiliated
companies. HomeGold, Inc. ("HomeGold")(f/k/a Emergent Mortgage Corp.), an
affiliated company, purchases the loans at closing. The Company has grown
significantly since inception and now operates from 11 retail offices, mainly in
the Southeast. Loan originations have grown to approximately $5.4 million per
month on average for the six months ended June 30, 1998 from approximately $2.0
million per month on average for the six months ended June 30, 1997. Total loan
originations for the six months ended June 30, 1998 and 1997 were $32.5 million
and $11.7 million, respectively. Total loans sold by HomeGold on the Company's
behalf for the six months ended June 30, 1998 and 1997 were $24.7 million and
$9.7 million, respectively. As the Company operates mainly as an originating
source for HomeGold, the Company receives 100% of the origination fee income
when produced and in 1997 shared in the gain on sale of loans when sold by
HomeGold to outside parties. Beginning in 1998, the Company receives 100% of the
gain on sale of loans.
The Company is just a small part of the Parent's retail lending strategy.
In the first quarter of 1998, the Parent's announced plans to pursue the
divestiture of the Company in order to narrow its focus and concentrate on its
larger retail lending operation. In July 1998, the Company reached an agreement
to sell the stock of Sterling Lending Corporation for $1.5 million, payable
$400,000 in cash at closing and a promissory note for $1.1 million. The
transaction is expected to close before the end of the third quarter 1998,
although no assurance of this can be given.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998, COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Total revenues increased to $3.0 million for the six months ended June 30,
1998 from $987,000 for the six months ended June 30, 1997. 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 for the six months ended
June 30, 1998 from $192,000 for the six months ended June 30, 1997 and loan fee
income increased to $1.5 million for the six months ended June 30, 1998 from
$730,000 for the six months ended June 30, 1997. 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 $32.5 million for the
six months ended June 30, 1998 from $11.7 million for the six months ended June
30, 1997 mainly due to the expansion of additional retail offices. Loan fees as
a percentage of production approximated 6.3% for the six months ended June 30,
1998 as compared to 6.2% for the six months ended June 30, 1997. Gain on sale of
loans approximated 5.5% for the six months ended June 30, 1998 as compared to
2.0% for the six months ended June 30, 1997.
8
<PAGE>
Total expenses increased to $5.0 million for the six months ended June 30,
1998 from $3.4 million for the six months ended June 30, 1997. Total expenses
are comprised of interest expense, salaries, wages and employee benefits, and
other general and administrative expenses.
Interest expense increased to $112,000 for the six months ended June 30,
1998 from $38,000 for the six months ended June 30, 1997. The increase in
interest expense was due principally to increased borrowings from affiliated
companies to fund accumulated losses.
Salaries, wages and employee benefits increased to $2.8 million for the
six months ended June 30, 1998 from $1.6 million for the six months ended June
30, 1997. This is a result of increased personnel due to the significant
expansion since June 1997. The Company has expanded to 11 retail production
offices at June 30, 1998 from 7 retail production offices at June 30, 1997 and
total personnel has increased to 138 at June 30, 1998 from 88 at June 30, 1997.
Other general and administrative expenses increased to $2.1 million for
the six months ended June 30, 1998 from $1.7 million for the six months ended
June 30, 1997. This is a result of the expansion of the Company in number of
offices and number of people since June 1997 as discussed above.
THREE MONTHS ENDED JUNE 30, 1998, COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Total revenues increased to $1.5 million for the three months ended June
30, 1998 from $846,000 for the three months ended June 30, 1997. 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 $563,000 for the three months ended
June 30, 1998 from $160,000 for the three months ended June 30, 1997 and loan
fee income increased to $880,000 for the three months ended June 30, 1998 from
$643,000 for the three months ended June 30, 1997. 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 $17.4 million for the
three months ended June 30, 1998 from $10.1 million for the three months ended
June 30, 1997 mainly due to the expansion of additional retail offices. Loan
fees as a percentage of production approximated 6.1% for the three months ended
June 30, 1998 as compared to 6.4% for the three months ended June 30, 1997. Gain
on sale of loans approximated 3.8% for the three months ended June 30, 1998 as
compared to 1.8% for the three months ended June 30, 1997.
Total expenses increased to $2.6 million for the three months ended June
30, 1998 from $2.0 million for the three months ended June 30, 1997. Total
expenses are comprised of interest expense, salaries, wages and employee
benefits, and other general and administrative expenses.
Interest expense increased to $32,000 for the three months ended June 30,
1998 from $25,000 for the three months ended June 30, 1997. The increase in
interest expense was due principally to increased borrowings from affiliated
companies to fund accumulated losses.
Salaries, wages and employee benefits increased to $1.5 million for the
three months ended June 30, 1998 from $916,000 for the three months ended June
30, 1997. This is a result of increased personnel due to the significant
expansion since March 1997. The Company has expanded to 11 retail production
offices at June 30, 1998 from 7 retail production offices at June 30, 1997 and
total personnel has increased to 138 at June 30, 1998 from 88 at June 30, 1997.
Other general and administrative expenses increased to $1.1 million for
the three months ended June 30, 1998 from $1.0 million for the three months
ended June 30, 1997. This is a result of the expansion of the Company in number
of offices and number of people since June 1997 as discussed above.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted pursuant to General Instruction H of Form 10-Q (the "Instruction").
9
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PART II. OTHER INFORMATION
10
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
Omitted pursuant to the Instruction.
Item 3. Defaults Upon Senior Securities
Omitted pursuant to the Instruction.
Item 4. Submission of Matters to a Vote of Security Holders
Omitted pursuant to the Instruction.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
10.1 Mortgage Loan Warehousing Agreement dated June 30, 1998
between HomeGold, Inc. and Carolina Investors, Inc., as
Borrowers, and the Financial Institutions Party Thereto, and
the CIT Group/Business Credit, Inc., as Administrative Agent
and the Guaranty thereof by Sterling Lending Corporation
dated June 30, 1998: Incorporated by reference to exhibit
10.1 of the Current Report on Form 8-K of Emergent Group,
Inc. (f/k/a HomeGold Financial, Inc.) dated July 7, 1998
(Commission File No. 0-8909).
b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements 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
Date: August 14, 1998
By: \s\ Dennis W. Canupp
----------------------------
Dennis W. Canupp,
Chief Executive Officer
Date: August 14, 1998
By: \s\ Kevin J. Mast
----------------------------
Kevin J. Mast,
Vice President, Chief
Financial Officer and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 1736
<DEPRECIATION> 384
<TOTAL-ASSETS> 1461
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
7100
<COMMON> 0
<OTHER-SE> (6591)
<TOTAL-LIABILITY-AND-EQUITY> 1461
<SALES> 0
<TOTAL-REVENUES> 3032
<CGS> 0
<TOTAL-COSTS> 4872
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 112
<INCOME-PRETAX> (1952)
<INCOME-TAX> (51)
<INCOME-CONTINUING> (1901)
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<CHANGES> 0
<NET-INCOME> (1901)
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<FN>
<F1> * Unclassified Balance Sheet
</FN>
</TABLE>
