<PAGE> 1
Filed Pursuant to Rule 424(a)
Commission File No. 333-12371
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 18, 1996
3,000,000 SHARES
(LOGO) Emergent Group Inc.
COMMON STOCK
Of the 3,000,000 shares of common stock, $0.05 par value per share (the
"Common Stock"), offered hereby (the "Offering"), 2,119,030 shares are being
sold by Emergent Group, Inc. (the "Company") and 880,970 shares are being sold
by certain shareholders of the Company (the "Selling Shareholders"). See
"Principal and Selling Shareholders." The Company will not receive any of the
proceeds from the sale of the shares by the Selling Shareholders.
Prior to this Offering, there has been limited trading of the Common Stock
on the over-the-counter Bulletin Board under the market symbol "EMGG." On
October 17, 1996, the last reported sales price of the Company's Common Stock
was $15.25. It is currently anticipated that the public offering price will be
between $11.00 and $13.00 per share. See "Underwriting" for a discussion of the
factors to be considered in determining the public offering price. In connection
with this Offering, the Company has received preliminary approval for the
quotation of the Common Stock on The Nasdaq Stock Market's National Market (the
"Nasdaq National Market") under the trading symbol "EMER."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Per Share.............. $ $ $ $
Total(3)............... $ $ $ $
</TABLE>
- ---------------
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $500,000.
(3) The Company has granted the Underwriters a 30-day over-allotment option to
purchase up to 450,000 additional shares of Common Stock on the same terms
and conditions as set forth above. If all such shares are purchased by the
Underwriters, the total Price to Public will be $ , the total
Underwriting Discount will be $ , the total Proceeds to Company will be
$ and the total Proceeds to Selling Stockholders will remain unchanged.
See "Underwriting."
------------------------
The shares of Common Stock are offered subject to receipt and acceptance by
the several Underwriters, to prior sale, and to the Underwriters' right to
reject any order in whole or in part and to withdraw, cancel or modify the offer
without notice. It is expected that certificates for the shares will be
available for delivery on or about , 1996, at the offices of
Wheat, First Securities, Inc., Richmond, Virginia.
WHEAT FIRST BUTCHER SINGER RAYMOND JAMES & ASSOCIATES, INC.
, 1996
<PAGE> 2
EMERGENT LOCATIONS
A MAP OF THE UNITED STATES SHOWING THE LOCATIONS OF THE COMPANY'S OFFICES.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company with the Commission may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following Regional Offices of the Commission: New York
Regional Office, 7 World Trade Center, Suite 1300, New York, New York 10048 and
Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such material may also be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
upon the payment of fees at prescribed rates.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere herein. Unless otherwise indicated, all information in this
Prospectus has been adjusted to reflect a one-for-three reverse stock split of
the Common Stock effective June 9, 1995 and a two-for-one stock split effected
in the form of a 100% stock dividend on the Common Stock effective March 1,
1996. Unless otherwise indicated, the information in this Prospectus assumes
that the Underwriters' over-allotment option is not exercised. Unless the
context requires otherwise, all references to the Company shall include the
Company and all of its subsidiaries. Prospective investors should carefully
consider the information set forth under the heading "Risk Factors."
THE COMPANY
Emergent Group, Inc. is a diversified financial services company
headquartered in Greenville, South Carolina, that originates, services and sells
residential mortgage loans ("Mortgage Loans"), small business loans ("Small
Business Loans") and used automobile loans ("Auto Loans"). The Company makes
substantially all of its loans to borrowers who have limited access to credit or
who may be considered credit-impaired by conventional lending standards
("non-prime borrowers"). The Company commenced its lending operations in 1991
and has experienced significant loan growth over the past several years. During
the years 1993, 1994 and 1995, the Company originated $63.6 million, $150.0
million and $249.5 million in loans, respectively. During the six months ended
June 30, 1996, the Company originated $194.4 million in loans. Of the Company's
loan originations in the first six months of 1996, $153.8 million were Mortgage
Loans, $30.6 million were Small Business Loans and $10.0 million were Auto
Loans. For the years ended December 31, 1993, 1994 and 1995, the Company's
pre-tax income from continuing operations was $663,000, $2.4 million and $4.9
million, respectively. For the six months ended June 30, 1996, the Company's
pre-tax income from continuing operations was $3.6 million.
MORTGAGE LOAN DIVISION
The Company's Mortgage Loan operation (the "Mortgage Loan Division") makes
Mortgage Loans primarily to owners of single family residences who use the loan
proceeds for such purposes as debt consolidation, home improvements and
educational expenditures. Approximately 93% of the Company's Mortgage Loans are
secured by first mortgages, with the balance being secured by second mortgages.
The Mortgage Loans generally have initial principal balances ranging from
$25,000 to $100,000 (with an average initial principal balance in the first six
months of 1996 of approximately $41,500) and fixed rates of interest ranging
from 9% to 16% per annum (with an average interest rate earned in the first six
months of 1996 of 12.2%). The Mortgage Loan Division has experienced significant
growth over the past several years. During 1993, 1994 and 1995, Mortgage Loan
originations totaled $20.5 million, $99.4 million and $192.8 million,
respectively. During the six months ended June 30, 1996, Mortgage Loan
originations totaled $153.8 million. A majority of the Mortgage Loans are sold
on a non-recourse basis to institutional investors.
The Mortgage Loan Division originates Mortgage Loans on both a retail basis
through regional offices and a wholesale basis through independent mortgage
brokers and mortgage bankers (collectively, the "Mortgage Bankers"). The
Company's retail lending operations were established in the second quarter of
1996, and currently operate through offices in Indianapolis, IN, Baton Rouge, LA
and New Orleans, LA. The Company expects to open retail lending operations in
Greenville, SC and Phoenix, AZ during the fourth quarter of 1996 and five new
retail lending offices during the first quarter of 1997. Through its retail
offices, the Company targets Mortgage Loan borrowers through a variety of
marketing methods. During August and September 1996, retail originations totaled
$5.0 million and $8.4 million, respectively.
The Company also originates Mortgage Loans on a wholesale basis through
approximately 225 Mortgage Bankers in approximately 12 states. The Company has
established strategic alliance agreements with certain Mortgage Bankers (the
"Strategic Alliance Mortgage Bankers"), which require the Strategic Alliance
Mortgage Bankers to refer to the Company all of their loans up to specified
levels which meet the Company's underwriting criteria, in exchange for delegated
underwriting, administrative support and expedited funding.
3
<PAGE> 4
The Company currently has four Strategic Alliance Mortgage Bankers (one of which
was added in October 1996) and plans to add two more during the remainder of
1996 and the first quarter of 1997. The Company has a minority equity interest
in certain of the Strategic Alliance Mortgage Bankers. The Company believes that
its use of retail and wholesale origination and strategic alliances is a unique
strategy which enables the Company to penetrate the non-prime mortgage loan
market through multiple channels.
In the first six months of 1996, approximately 53% (or approximately $15
million per month) of the Company's Mortgage Loans by principal amount were
originated through one Strategic Alliance Mortgage Banker, First Greensboro Home
Equity, Inc. ("First Greensboro"). On June 1, 1996, First Greensboro terminated
its agreement with the Company in connection with its sale to a third party. As
a result of such termination, First Greensboro paid the Company $7.3 million in
September 1996. Although First Greensboro generated a large percentage of the
Company's Mortgage Loan originations, the Company believes that it will be able
to replace such originations through its retail lending operations and through
additional Strategic Alliance Mortgage Bankers, two of which entered into
strategic alliance agreements with the Company in the second and third quarters
of 1996. During August and September 1996, Mortgage Loan originations through
these additional sources totaled $6.2 million and $9.9 million, respectively.
SMALL BUSINESS LOAN DIVISION
The Company's Small Business Loan operation (the "Small Business Loan
Division") makes loans to small businesses primarily for the acquisition or
refinancing of property, plant and equipment and working capital. During 1993,
1994 and 1995, Small Business Loan originations totaled $37.9 million, $43.1
million and $39.6 million, respectively. During the six months ended June 30,
1996, Small Business Loan originations totaled $30.6 million.
A substantial portion of the Company's Small Business Loans are loans ("SBA
Loans") which are guaranteed by the U.S. Small Business Administration (the
"SBA"). The SBA Loans are secured by real or personal property and have initial
principal balances ranging from $250,000 to $1.5 million (with an average
initial principal balance in the first six months of 1996 of $650,000) and
variable interest rates limited to a maximum of 2.75% over the prime rate. The
SBA guarantees approximately 75% of the original principal amount of the SBA
Loans, up to a maximum guarantee amount of $750,000. The Company sells
participations representing the SBA-guaranteed portion of its SBA Loans (the
"SBA Loan Participations") in the secondary market. In connection with such
sales, the Company receives, in addition to excess servicing revenue, cash
premiums of approximately 10% of the guaranteed portion being sold. SBA Loans
are originated directly by the Company's loan officers in its six branch offices
and are primarily generated through referral sources such as commercial loan and
real estate brokers ("Commercial Loan Brokers") located in its market areas.
Approximately 75% of the SBA Loans originated in the first six months of 1996
were originated through Commercial Loan Brokers. The Company believes that it
was among the ten largest SBA Loan lenders in the United States, by principal
amount of SBA Loans approved, for the SBA's fiscal year ended September 30,
1995.
The Small Business Loan Division also provides working capital loans
secured by accounts receivable, inventory and equipment to small- to
medium-sized businesses in the southeastern United States ("Asset-based Small
Business Loans"). The Company began its asset-based lending operation in April
1996 in Atlanta, GA. For the six months ended June 30, 1996, Asset-based Small
Business Loans originated by the Small Business Loan Division totaled
approximately $4.6 million.
AUTO LOAN DIVISION
The Company's Auto Loan operation (the "Auto Loan Division") makes loans to
non-prime borrowers for the purchase of used automobiles. Substantially all of
the Auto Loans are made directly by the Company to purchasers of automobiles who
are referred to the Company by automobile dealers ("Dealers"). Less than 20% of
the Auto Loans made in the first six months of 1996 were indirect loans
purchased from Dealers. The Auto Loans generally have initial principal balances
ranging from $3,000 to $10,000 (with an average initial principal balance in the
first six months of 1996 of approximately $5,000), terms ranging from 24 to 48
4
<PAGE> 5
months, and fixed interest rates ranging from 18% to 46% per annum (with an
average yield in the first six months of 1996 of 27.4%). The Auto Loan Division
operates through eight locations and originates Auto Loans in connection with
approximately 200 Dealers. During 1993, 1994 and 1995, Auto Loan originations
totaled $5.2 million, $7.5 million and $17.1 million, respectively. During the
six months ended June 30, 1996, Auto Loan originations totaled $10.0 million.
LOAN PORTFOLIO/LOAN SALES AND SECURITIZATIONS
The Company's loan receivables held for investment at December 31, 1993,
1994 and 1995 totaled $66.3 million, $91.7 million, and $103.9 million,
respectively. At June 30, 1996, loan receivables totaled $87.8 million, of which
$55.0 million were Mortgage Loans, $24.0 million were Small Business Loans and
$8.8 million were Auto Loans. Consistent with the Company's "high velocity"
capital strategy described below, the Company has sold a substantial majority of
the loans it has originated through whole Mortgage Loan sales, sales of SBA Loan
participations and through the securitization of approximately $17.1 million of
the unguaranteed portion of SBA Loans in June 1995 and $16.1 million of Auto
Loans in March 1996. The Company plans to continue to pursue securitizations in
the future, including the securitization of a majority of its Mortgage Loans
beginning in 1997. The Company retains in its portfolio the Mortgage Loans
originated in South Carolina, principally to take advantage of the relatively
low-cost funding source provided by the senior subordinated notes and
subordinated debentures ("Debentures") issued by the Company to residents of
South Carolina.
BUSINESS AND GROWTH STRATEGY
The Company's business strategy is to be a diversified financial services
company that meets the credit needs of borrowers in what the Company believes to
be under-served credit markets. Key elements of the Company's business strategy
are to:
-- Maintain a "high velocity" capital strategy whereby loans are generally
sold within 10 to 40 days of origination, thereby enabling the Company to
recognize cash gains on the sales of its loans and quickly redeploy its
capital, as well as reduce its interest rate risk, default risk and
borrowing costs. In addition, the Company plans to continue to pursue
securitization transactions for all of its loan divisions in the future.
-- Respond quickly to customer credit requests by utilizing a decentralized
loan approval process, while ensuring consistent credit quality through
uniform underwriting guidelines and procedures.
-- Utilize a proactive underwriting process whereby the Company may
restructure credit requests in order to cause them to meet the Company's
underwriting criteria.
-- Achieve profitability goals by maximizing interest margins and
emphasizing effective monitoring and collection of loans.
The Company's growth strategy is to continue to expand all areas of its
lending operations, emphasizing profitability, rather than asset growth. Key
elements of the Company's growth strategy are to:
-- Increase Mortgage Loan originations by expanding its retail lending
operations where the Company lends directly to the customer without using
a Mortgage Banker.
-- Increase wholesale Mortgage Loan originations from the Strategic
Alliance Mortgage Bankers and enter into additional strategic alliances
with other Mortgage Bankers, as well as increase the number of
relationships with other referral sources such as Commercial Loan Brokers
and Dealers.
-- Expand its Small Business Loan operations by utilizing its "Preferred
Lender" status with the SBA to minimize response time and maximize Small
Business Loan production.
-- Increase its penetration in existing markets and expand geographically
by opening additional offices.
-- Pursue the acquisition of businesses in the financial services industry
(although no agreements or understandings relating to any acquisitions are
presently pending).
5
<PAGE> 6
The Company was incorporated in 1968 and until 1990 engaged principally in
railroad-related operations. Prior to 1990, the Company incurred significant
losses which resulted in net operating losses. In December 1990, current
management acquired control of the Company and implemented a strategic plan to
acquire profitable businesses which could utilize such net operating losses.
Pursuant to such strategy, the Company acquired certain financial services
companies in 1991 and an apparel manufacturer in 1993. In 1994, the Company made
a strategic decision to divest all non-financial operations and to focus
exclusively on the financial services industry. In accordance with such
strategy, the Company has completed its divestiture of its apparel-related and
transportation-related operations.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.......... 2,119,030 shares
Common Stock offered by the
Selling Shareholders....................... 880,970 shares
Common Stock to be outstanding after
the Offering............................... 8,741,130 shares(1)
Use of proceeds.............................. To repay indebtedness. See "Use of Proceeds."
Proposed Nasdaq National Market symbol....... EMER
</TABLE>
- ---------------
(1) Excludes (i) 226,708 shares of Common Stock issuable upon the exercise of
options granted pursuant to the Company's existing stock option plans, (ii)
102,167 shares of Common Stock issuable upon the exercise of outstanding
warrants and (iii) 10,500 shares of Common Stock issuable pursuant to stock
grants made pursuant to the Company's Restricted Stock Agreement Plan. See
"Management."
6
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE FISCAL YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------------------- ------------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- --------- --------- --------- --------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Interest and servicing revenue...... $ 4,064 $ 6,980 $ 7,983 $ 10,903 $ 15,639 $ 7,307 $ 9,937
Gain on sale of loans(1)............ -- 1,686 3,605 6,450 9,169 4,355 7,468
Other revenues...................... 96 342 458 842 1,470 692 904
-------- -------- --------- --------- --------- --------- -----------
Total revenues.................. 4,160 9,008 12,046 18,195 26,278 12,354 18,309
Expenses:
Interest expense.................... 2,399 4,315 5,073 5,879 8,527 3,780 5,576
Provision for credit losses(2)...... 83 349 686 2,510 2,480 1,240 1,532
General and administrative
expenses.......................... 2,265 4,698 5,624 7,359 10,419 4,514 7,622
-------- -------- --------- --------- --------- --------- -----------
Total expenses.................. 4,747 9,362 11,383 15,748 21,426 9,534 14,730
Income (loss) from continuing
operations(3)(4).................... (595) (249) 937 1,792 4,581 2,696 3,436
Income (loss) from discontinued
operations(3)....................... 344 685 260 546 (3,924) (751) --
-------- -------- --------- --------- --------- --------- -----------
Net income (loss)(3).................. $ (251) $ 436 $ 1,197 $ 2,338 $ 657 $ 1,945 $ 3,436
========== ========== =========== =========== =========== =========== ==============
Income (loss) per share from
continuing operations(3)(4)......... $ (0.11) $ (0.04) $ 0.14 $ 0.27 $ 0.69 $ 0.40 $ 0.51
Income (loss) per share from
discontinued operations(3).......... 0.06 0.12 0.04 0.08 (0.59) (0.11) --
-------- -------- --------- --------- --------- --------- -----------
Net income (loss) per share(3)........ $ (0.05) $ 0.08 $ 0.18 $ 0.35 $ 0.10 $ 0.29 $ 0.51
========== ========== =========== =========== =========== =========== ==============
Weighted average outstanding
equivalent shares (in thousands).... 5,660 5,639 6,552 6,689 6,668 6,691 6,728
Supplemental net income per
share:(3)(5)
Income per share from continuing
operations........................ $ 0.52 $ 0.39
Income (loss) from discontinued
operations........................ (0.45) --
--------- -----------
Net income per share................ $ 0.07 $ 0.39
=========== ==============
OPERATING DATA:
Total loans originated or purchased... $ 18,361 $ 57,282 $ 63,633 $ 150,044 $ 249,507 $ 104,977 $ 194,437
Total loans sold...................... -- 10,827 31,052 85,772 153,055 58,494 159,886
Total loans securitized............... -- -- -- -- 17,063 17,063 16,107
Total loans serviced (period
end)(6)............................. 41,250 68,489 106,898 157,443 214,534 185,118 217,982
Total loans receivable (period end)... 39,870 56,785 66,279 95,398 126,458 98,969 103,265
Weighted average interest rate
earned.............................. 14.23% 14.19% 12.83% 13.43% 13.94% 15.02% 15.76%
Weighted average interest rate paid... 7.69 7.74 7.24 6.94 7.57 7.40 8.64
Allowance for credit losses as a % of
serviced loans (period end)(6)...... 2.35 1.92 1.60 1.98 2.03 2.07 2.83
Net charge-offs as a % of average
serviced loans(2)(6)................ 0.83 0.68 1.29 2.36 1.43 0.90 0.96
General and administrative expenses as
a % of average serviced loans(6).... 8.24 8.56 6.41 5.57 5.60 5.39 6.66
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1996
------------------------
AS
ACTUAL ADJUSTED(7)
--------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Loans receivable................................................................................. $ 87,835 $ 87,835
Mortgage loans held for sale..................................................................... 15,430 15,430
Total assets..................................................................................... 146,657 149,787
Total indebtedness............................................................................... 128,334 108,073
Total shareholders' equity....................................................................... 13,535 36,925
</TABLE>
- ---------------
(1) These amounts represent gains recorded on the sale of Mortgage Loans and SBA
Loan Participations.
(2) Approximately 90% of the amount in 1994 relates to the writedown to market
of certain foreclosed properties associated with speculative construction
loans made by the Mortgage Loan Division prior to its acquisition by the
Company. Speculative construction loans are no longer being made by the
Company.
(3) Includes the impact of the utilization of the Company's net operating loss
carryforward, which totaled approximately $23 million and $18 million at
December 31, 1995 and June 30, 1996, respectively.
(4) The amount set forth with respect to the year ended December 31, 1993
includes $113,000 ($0.01 per share) which reflects the cumulative effect of a
change in the method of accounting for income taxes.
(5) Supplemental net income per share (as adjusted) reflects the issuance of the
2,119,030 shares of Common Stock offered by the Company hereby, the proceeds
of which are to be used to repay approximately $22 million in Company debt.
These amounts were calculated based on total weighted average shares of
8,787,222 at December 31, 1995 and 8,846,704 shares at June 30, 1996.
(6) Serviced loans includes all portfolio Mortgage Loans and Auto Loans, all
securitized loans, and the Small Business Loans, but solely for purposes of
calculating the allowance ratio and net charge-off ratio, excludes the
guaranteed portion of the SBA Loans. Operating data stated as a percentage of
serviced loans (except period end data) for the six month periods ended June
30, 1995 and 1996 have been annualized.
(7) Adjusted to reflect the sale by the Company of 2,119,030 shares at an
assumed public offering price of $12.00, the receipt by the Company of
$242,000 in connection with the exercise of warrants by certain Selling
Shareholders and the application of the estimated net proceeds thereof as
described under "Use of Proceeds."
7
<PAGE> 8
RECENT DEVELOPMENTS
The following table sets forth certain recent unaudited financial data of
the Company on a consolidated basis. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position and results of operations for such
unaudited periods have been included. The financial position and results of
operations for the three and nine month periods ended September 30, 1996, are
not necessarily indicative of operations which may be expected for the entire
year.
<TABLE>
<CAPTION>
FOR THE THREE AT AND FOR THE
MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- ---------------------
1995 1996 1995 1996
------- ------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Interest and servicing revenue.................. $ 3,909 $ 5,143 $ 11,216 $ 15,081
Gain on sale of loans........................... 2,224 7,870 6,579 15,338
Other revenues.................................. 526 1,557 1,218 2,459
------- ------- -------- --------
Total revenues.......................... 6,659 14,570 19,013 32,878
Expenses:
Interest expense................................ 2,161 2,603 5,941 8,181
Provision for credit losses..................... 380 1,569 1,620 3,101
General and administrative expenses............. 2,620 6,058 7,134 13,680
------- ------- -------- --------
Total expenses.......................... 5,161 10,230 14,695 24,962
Income from continuing operations................. 1,376 4,301 4,072 7,736
Income (loss) from discontinued operations........ (2,728) -- (3,479) --
------- ------- -------- --------
Net income (loss)................................. $(1,352) $ 4,301 $ 593 $ 7,736
======= ======= ======== ========
Net income (loss) per share....................... $ (0.20) $ 0.63 $ 0.09 $ 1.14
======= ======= ======== ========
Weighted average outstanding equivalent shares (in
thousands)...................................... 6,706 6,777 6,706 6,774
OPERATING DATA:
Total loans originated or purchased............. $63,290 $89,043 $168,268 $283,480
Total loans sold................................ 38,694 52,146 94,597 211,913
Total loans securitized......................... -- -- 17,063 16,107
Total loans serviced (period end)............... 197,512 238,737
Allowance for credit losses as a % of serviced
loans (period end)(1)........................ 1.97% 2.81%
Net charge-offs as a % of average serviced
loans(1)..................................... 0.74 1.43
Total serviced loans past due 90 days or more as
a % of total serviced loans(1)............... 2.10 4.03
BALANCE SHEET DATA:
Loans receivable................................ $ 93,405 $105,700
Mortgage Loans held for sale.................... 14,348 23,111
Total assets.................................... 124,283 165,106
Total indebtedness.............................. 111,031 142,060
Total shareholders' equity...................... 9,743 17,834
</TABLE>
- ---------------
(1) Serviced loans includes all portfolio Mortgage Loans and Auto Loans, all
securitized loans, and the Small Business Loans, but solely for purposes of
calculating the allowance ratio, net charge-off ratio, and delinquency
ratio, excludes the guaranteed portion of the SBA Loans. Operating data
stated as a percentage of average serviced loans (except period end data)
for the periods indicated have been annualized.
8
<PAGE> 9
Revenues increased $7.9 million, or 118%, from $6.7 million for the three
months ended September 30, 1995, to $14.6 million for the three months ended
September 30, 1996. This increase in revenues was due principally to increases
in interest and servicing revenue, gain on sale of loans, and loan fee income.
Interest and servicing revenue increased $1.2 million, or 31%, from $3.9 million
for the three months ended September 30, 1995, to $5.1 million for the same
period in 1996. The increase in interest and servicing revenue was due
principally to the increase in loan originations of $25.7 million, or 41%, from
$63.3 million for the three months ended September 30, 1995, to $89.0 million
for the same period in 1996. Gain on sale of loans increased $5.7 million, or
259%, from $2.2 million for the three months ended September 30, 1995, to $7.9
million for the same period in 1996. The increase in gain on sale of loans was
principally from the recoupment by the Company of previously shared premiums
received in connection with the settlement with First Greensboro. Other
revenues, including loan fee income, increased $1.1 million, or 220%, from
$500,000 for the three month period ended September 30, 1995, to $1.6 million
for the same period in 1996. The increase in other revenues was due principally
to increased loan-fee income generated by the Company's retail mortgage
operation.
Interest expense increased $400,000, or 18%, from $2.2 million for the
three month period ended September 30, 1995, to $2.6 million for the same period
in 1996. Interest expense increased due to the increased borrowings to fund the
growth in loan originations. Provision for credit losses increased $1.2 million,
or 300%, from $400,000 for the three months ended September 30, 1995, to $1.6
million for the same period in 1996. With this increased provision, the
allowance for credit losses increased from 1.97% of average unguaranteed
serviced loans at September 30, 1995, to 2.81% of average unguaranteed serviced
loans at September 30, 1996. While total serviced loans past due 90 days or more
as a percent of total serviced loans increased from 2.10% at September 30, 1995
to 4.03% at September 30, 1996, overall delinquencies of 30 days and greater
decreased from 12.46% at September 30, 1995 to 11.37% at September 30, 1996. The
increase in total serviced loans past due 90 days or more was principally due to
the increase in loans past due 90 days or more in the Small Business Loan
Division from .25% at September 30, 1995 to 4.65% at September 30, 1996.
Management believes that the allowance for credit losses is adequate to cover
possible losses. General and administrative expense increased $3.5 million, or
135%, from $2.6 million for the three months ended September 30, 1995, to $6.1
million for the same period in 1996. The increase in general and administrative
expenses was due primarily to increased personnel, facilities, advertising, and
operating costs related to new retail mortgage operations in Indianapolis and
Baton Rouge, as well as increased loan servicing facilities and personnel to
handle additional lending activities.
Income from continuing operations for the three month period ended
September 30, 1996, increased $2.9 million, or 207%, from $1.4 million for the
three month period ended September 30, 1995, to $4.3 million for the three month
period ended September 30, 1996.
In October 1996, AmeriFund Group, Inc. ("AmeriFund"), a Strategic Alliance
Mortgage Banker, terminated its strategic alliance agreement with the Company.
During 1995 and the first nine months of 1996, approximately 7.0% and 14.5%,
respectively, of the Company's total loans were originated through AmeriFund.
For July, August and September 1996, AmeriFund originated $6.4 million, $2.6
million and $2.0 million in Mortgage Loans, respectively. Because of the
Company's agreement with AmeriFund to share certain production costs, the
Company's arrangement with AmeriFund was not as profitable for the Company as
other Strategic Alliance Mortgage Bankers. For the nine months ended September
30, 1996, approximately $550,000 of the Company's pre-tax income resulted from
its relationship with AmeriFund. The Company currently does not have any other
arrangements with Strategic Alliance Mortgage Bankers which provide for shared
production costs.
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RISK FACTORS
Prospective investors should consider carefully, in addition to the other
information contained in this Prospectus, the following risk factors in
evaluating an investment in the Common Stock offered hereby.
CREDITWORTHINESS OF NON-PRIME BORROWERS AND RISK OF DEFAULT
Substantially all of the Company's loans are made in the non-prime credit
market, which consists of borrowers who are deemed to be credit-impaired due to
various factors. These factors include, among others, the manner in which they
have managed previous credit, the absence or limited extent of their prior
credit history or their limited financial resources. Consequently, the Company's
loans, relative to consumer, commercial and mortgage loans to prime borrowers,
involve a significantly higher probability of default and greater servicing and
collection costs. The Company's profitability depends upon its ability to
properly evaluate the creditworthiness of non-prime borrowers and to efficiently
and effectively service and collect its loan portfolio. There can be no
assurance that the performance of the Company's loan portfolio will be
maintained, that the Company's systems and controls will continue to be adequate
or that the rate of future defaults and/or losses will be consistent with prior
experience or at levels that will maintain the Company's profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Allowance for Credit Losses and Credit Loss Experience."
The Company is exposed to the risk of loan delinquencies and defaults,
particularly with respect to loans retained in its portfolio. With respect to
loans to be sold on a non-recourse basis, the Company is at risk for loan
delinquencies and defaults on such loans while they are held by the Company
pending such sale. Following the sale of such loans, the Company's loan
delinquency and default risk with respect to such loans is limited to those
circumstances in which it is required to repurchase such loans due to a breach
of a representation or warranty in connection with the whole loan sale. This
risk with respect to breaches of representations or warranties also exists for
loans sold through securitization. In addition, in securitization transactions,
the subordinate and/or residual certificates bear the risk of default for the
entire pool of securitized loans to the extent of such certificates' value.
Accordingly, the value of the subordinate and/or residual certificates retained
by the Company would be impaired to the extent of losses on the securitized
loans. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Allowance for Credit Losses and Credit Loss
Experience."
LOAN ORIGINATION BY THE RETAIL LENDING OPERATIONS
In April 1996, the Company established its retail mortgage lending
operations, and currently originates retail loans through offices in
Indianapolis, IN, Baton Rouge, LA and New Orleans, LA. The Company expects to
open retail lending operations in Greenville, SC and Phoenix, AZ during the
fourth quarter of 1996 and five new offices in the first quarter of 1997.
Through these offices, the Company expects to target Mortgage Loan borrowers
throughout their respective regions. The Company's strategic plan is to continue
to increase its retail operations at a rapid pace. However, because the retail
mortgage lending operations were only recently established and have a limited
operating history, there is no assurance that the Company will be able to
achieve this growth. In the event that the Company's retail lending operations
do not perform as expected, the Company's operations, profitability or financial
condition could be materially and adversely affected.
TERMINATION OF STRATEGIC ALLIANCE AGREEMENTS
On June 1, 1996, First Greensboro terminated its strategic alliance
agreement with the Company. Until the loan volume associated with First
Greensboro is replaced, this termination is expected to have a material adverse
effect on the Company's loan originations. During 1995 and the first six months
of 1996, approximately 44.5% and 41.6%, respectively, of the Company's total
loans were originated through First Greensboro.
In October 1996, AmeriFund Group, Inc. ("AmeriFund"), a Strategic Alliance
Mortgage Banker, terminated its strategic alliance agreement with the Company.
During 1995 and the first nine months of 1996, approximately 7.0% and 14.5%,
respectively, of the Company's total loans were originated through Ameri-
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Fund.
No assurance may be given that the Company will be able to replace the
monthly loan volume associated with First Greensboro and AmeriFund, and in the
event that such loan volume is not replaced, the Company's operations,
profitability or financial condition could be materially and adversely affected.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General."
TERMINATION OF MORTGAGE BANKER RELATIONSHIPS
The Company's business of originating Mortgage Loans on a wholesale basis
depends, in large part, upon its ability to establish and maintain relationships
with Mortgage Bankers. For the year ended December 31, 1995 and the first six
months of 1996, 98% of the Company's Mortgage Loans were originated in
connection with Mortgage Bankers. Of the approximately 225 Mortgage Bankers that
were responsible for the origination of Mortgage Loans during the first six
months of 1996, First Greensboro, AmeriFund and Prime Investors, Inc. accounted
for approximately 53%, 20% and 9%, respectively, of the Mortgage Loans
originated. In June 1996, First Greensboro terminated its strategic alliance
agreement with the Company.
Since April 1996, the Company has entered into strategic alliance
agreements with three additional Mortgage Bankers and will pursue strategic
alliance agreements with other Mortgage Bankers in the future. The Company's
volume of Mortgage Loans is expected to be significantly influenced by its
ability to secure and maintain strategic alliance agreements.
The existing strategic alliance agreements provide that the Strategic
Alliance Mortgage Bankers must first offer to the Company the right to fund all
of their loans up to specified levels which meet the Company's underwriting
criteria before offering such loans to other parties. These agreements have
terms ranging from three to five years and are scheduled to terminate beginning
in August 1999. Furthermore, each agreement provides for certain minimum
termination fees upon wrongful termination. Although the Company will seek to
renew these agreements at the end of their terms, there can be no assurance that
such agreements will be renewed or that loan volumes will be maintained. In the
event of the wrongful termination of the Company's relationship with one or more
Mortgage Bankers associated with a material amount of the Company's Mortgage
Loans, the Company's operations, profitability or financial condition could be
materially and adversely affected. See "Business -- Mortgage Loan
Division -- Mortgage Loan Origination."
NO AGREEMENTS WITH CERTAIN MORTGAGE BANKERS
Except for the agreements with the Strategic Alliance Mortgage Bankers,
there are no contractual arrangements between the Company and its Mortgage
Bankers with respect to the Mortgage Bankers' referrals of Mortgage Loans to the
Company. Accordingly, any such Mortgage Banker could decline to utilize the
Company to originate and fund its loans. In the event that a large number of
Mortgage Bankers representing a material amount of Mortgage Loans were to
determine not to utilize the Company, the Company's operations, profitability or
financial condition could be materially and adversely affected.
ECONOMIC CONDITIONS
The Company's business may be adversely affected by periods of economic
slowdown or recession which may be accompanied by decreased demand for consumer
credit and declining collateral values. Any material decline in real estate
values reduces the ability of borrowers to use home equity to support borrowings
and increases the loan-to-value ratios of Mortgage Loans previously made by the
Company, thereby weakening collateral coverage and increasing the possibility of
a loss in the event of default. Furthermore, delinquencies, foreclosures and
losses generally increase during economic slowdowns or recessions. Because of
the Company's focus on borrowers who are unable or unwilling to obtain financing
from conventional lending sources, the actual rates of delinquencies,
foreclosures and losses on such loans could be higher under adverse economic
conditions than those experienced in the lending industry in general. In
addition, any sustained period of such increased delinquencies, foreclosures or
losses could adversely affect the pricing of the Company's loan sales, whether
through whole loan sales or securitizations. In the event that pools of loans
sold
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and serviced by the Company experience higher delinquencies, foreclosures or
losses than anticipated, the Company's operations, profitability or financial
condition could be materially and adversely affected.
GEOGRAPHIC CONCENTRATION
Approximately 70% and 57% of the Mortgage Loans in 1995 and the first six
months of 1996, respectively, were made to borrowers in North Carolina and South
Carolina, and substantially all of the Auto Loans are made to borrowers in South
Carolina. In the event of an economic slowdown in either or both of these
states, the Company's operations, profitability or financial condition could be
materially and adversely affected. See "Business -- Mortgage Loan
Division -- Mortgage Loan Origination."
ADEQUACY OF ALLOWANCE FOR CREDIT LOSSES
There are certain risks inherent in making all loans, including risks with
respect to the period of time over which loans may be repaid, risks resulting
from changes in economic and industry conditions, risks inherent in dealing with
individual borrowers and, in the case of a collateralized loan, risks resulting
from uncertainties as to the future value of the collateral. The Company
maintains an allowance for credit losses based on, among other things,
historical experience, an evaluation of economic conditions and regular reviews
of delinquencies and loan portfolio quality. Although management considers the
allowance appropriate and adequate to cover possible losses in the loan
portfolio, management's judgment is based upon a number of assumptions about
future events, which are believed to be reasonable, but which may or may not
prove valid. Thus, there can be no assurance that charge-offs in future periods
will not exceed the allowance for credit losses or that additional increases in
the allowance for credit losses will not be required. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operation -- Allowance for Credit Losses and Credit Loss Experience."
AVAILABILITY OF FUNDING SOURCES
The Company, like most financial service companies, has a constant need for
capital to finance its lending activities. Historically, the Company has funded
the majority of its lending activities from the cash flow generated from
operations and through borrowings pursuant to its existing credit facilities
(the "Credit Facilities"), by selling the Debentures and by selling a
substantial portion of the loans it originates. In the event that the Company
were unable to sell its loans in the secondary markets, its Credit Facilities
were terminated, the Company were unable to sell Debentures, or holders of
Debentures were unwilling to renew their Debentures, the Company's operations,
profitability or financial condition could be materially and adversely affected.
In particular, the Credit Facilities contain a number of financial covenants,
including, but not limited to, covenants with respect to debt to net worth
ratios, borrowing base calculations and minimum adjusted tangible net worth. In
the event that the Company's financial performance were to deteriorate
materially, the Company's ability to borrow under the Credit Facilities or renew
the Credit Facilities could be impaired. Furthermore, there can be no assurance
that the Company's existing lenders will agree to refinance such debt, that
other lenders will be willing to extend lines of credit to the Company or that
funds otherwise generated from operations will be sufficient to satisfy such
obligations. Future financing may involve the issuance of additional Common
Stock or other securities, including securities convertible into or exercisable
for Common Stock, and any such issuance may dilute the equity interest of
purchasers of the Common Stock offered hereby. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
As of September 30, 1996, the Company had aggregate unused borrowing
availability under the Credit Facilities of approximately $41.8 million. The
Company may increase borrowings under the lines up to a maximum of $151 million,
depending upon the total amount of loans outstanding. In the event that the
Company is unable to sell or securitize loans or increase its borrowing
capacity, its operations, profitability or financial condition could be
materially and adversely affected.
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LOSS OF ABILITY TO SELL LOANS
A significant portion of the Company's profits are generated through the
sale of loans. To the extent that the Company is unable to sell its loans on
terms acceptable to the Company, the Company's operations, profitability or
financial condition could be materially and adversely affected.
GENERAL LENDING RISKS
The lending business is subject to various business risks, including, but
not limited to, the following: (i) the risk that borrowers will not satisfy
their debt service payments, including interest charges and principal
amortization obligations; (ii) the risk that appraisals of properties securing
loans originated or purchased by the Company will not reflect the property's
actual value, either due to valuation errors or fluctuations in the value of
real estate and that, upon liquidation of real estate owned or other collateral
securing loans, the Company may suffer a loss; and (iii) the risk that
environmentally hazardous substances could be discovered on real properties
acquired by the Company in foreclosure and that the Company might be required to
remove such substances from the affected properties at its sole cost or that the
value of the properties would otherwise be impaired. Also, general increases in
interest rates after the origination of fixed rate loans and prior to the sale
of such loans may cause such loans to decrease in value. A general decrease in
interest rates also could cause an increase in the rate at which outstanding
fixed rate loans are prepaid, reducing the period of time during which the
Company receives its net interest margin and servicing revenue with respect to
such prepaid loans. With respect to SBA Loans, unanticipated prepayments and/or
defaults also have the effect of reducing servicing revenue associated with the
excess servicing receivables created at the time the SBA Loan Participations are
sold.
DEPENDENCE ON FEDERAL PROGRAMS AND RELATED AGREEMENTS
A portion of the Company's business is dependent upon the continuation of
various federally funded programs, such as the SBA loan program. Of the total
loans originated by the Company during the year ended December 31, 1995 and the
first six months of 1996, approximately 16% and 12%, respectively, by principal
amount were SBA Loans. The discontinuation, elimination or significant reduction
of guarantee levels or any modification of the qualification criteria or the
permissible loan purposes under any of these federal programs could have a
material adverse effect on the Company's operations or financial condition. In
addition, in the event that the Company were to lose its status as a "Preferred
Lender," the Small Business Loan Division could be materially and adversely
affected. See "Business -- Small Business Loan Division."
During 1995, the SBA reviewed the funding available for the guarantee of
SBA Loans under the government's SBA lending program and in connection with such
review instituted a number of changes, which included the implementation of
$500,000 as the maximum loan amount that could be made under the SBA program,
and the preclusion of the use of SBA Loans for purposes of refinancing most
forms of existing debt. These two major changes were ultimately rescinded in
connection with certain other changes in the SBA program instituted in October
1995. However, these temporary changes had a material adverse effect on the
Small Business Loan Division's loan volume for 1995. Although the permanent
changes instituted with respect to SBA Loans in October 1995 are not expected to
have a material adverse effect on the Small Business Loan Division in the
future, the SBA's actions in 1995 illustrate the potential for governmental
regulation having a material effect on the Company's operations. The agreement
pursuant to which the SBA has agreed to guarantee SBA loans made by the Company
may be terminated by either the Company or the SBA on 10 days prior written
notice to the other party. The termination or non-renewal of this agreement or
any change in the SBA program could have a material adverse effect on the
Company's operations, profitability or financial condition. See
"Business -- Small Business Loan Division" and "Business -- Regulation."
LOSS OF NET OPERATING LOSS CARRYFORWARD
As a result of operating losses incurred by the Company under prior
management, the Company generated significant net operating loss carryforwards
(the "NOL"). At June 30, 1996, the amount of the NOL remaining and available to
the Company was approximately $18 million. The NOL expires, to the
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extent that it is not utilized to offset income, in varying amounts annually
through 2001. Federal tax laws provide that net operating loss carryforwards are
restricted or eliminated upon certain changes of control. In the future, it is
possible that a change of control could occur and that the Company could lose
the benefits of the NOL. In the event that the Company lost the NOL, the
Company's earnings would be materially and adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Tax
Considerations -- The NOL."
INTEREST RATE SENSITIVITY
The Company is subject to certain interest rate risks, particularly with
respect to its Mortgage Loans and Auto Loans, which bear fixed rates of interest
and are principally funded with variable rate debt. In the event that interest
rates change dramatically in a relatively short period of time, the Company's
interest spread and certain premiums received upon the sale of loans would
decrease, which could materially and adversely affect the Company's operations,
profitability or financial condition. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
COMPETITION
The non-prime financial market is very fragmented and highly competitive.
The Company believes that there are numerous traditional sources of credit
providing, or capable of providing, financing which are not currently serving
the Company's market segment. Historically, commercial banks, savings and loans,
credit unions, financing subsidiaries of automobile manufacturers and other
lenders providing traditional financing (many of which are larger, have
significantly greater financial resources and have relationships with
established captive transaction networks) have not consistently served the
Company's market segment. If one or more of such traditional sources of credit
were to enter the Company's market segment, the Company's operations,
profitability or financial condition could be materially and adversely affected.
In addition, if the Company were to experience increased competition from other
traditional or non-traditional sources of credit, such increased competition may
result in a reduction in the interest rates charged borrowers or a reduction in
the volume of originated loans. A reduction in such interest rates or loan
volume could materially and adversely affect the Company's operations,
profitability or financial condition. See "Business -- Competition."
REGULATION OF LENDING ACTIVITIES AND CHANGING REGULATORY ENVIRONMENT
The operations of the Company are subject to extensive regulation by
federal, state and local governmental authorities and are subject to various
laws and judicial and administrative decisions imposing various requirements and
restrictions, including among other things, regulating credit granting
activities, establishing maximum interest rates, insurance coverages and
charges, requiring disclosures to customers, governing secured transactions and
setting collection, repossession and claims handling procedures and other trade
practices. Furthermore, there can be no assurance that more restrictive laws,
rules and regulations will not be adopted in the future which could make
compliance much more difficult or expensive, restrict the Company's ability to
originate or purchase loans, or otherwise adversely affect the operations,
profitability or financial condition of the Company. See
"Business -- Regulation."
CONCENTRATION OF VOTING CONTROL IN MANAGEMENT
The Company's Board of Directors and executive officers ("Company
Management") currently beneficially own approximately 27% of the outstanding
Common Stock. After completion of the Offering, Company Management will
beneficially own an aggregate of approximately 21% of the outstanding Common
Stock (approximately 19% if the Underwriters' over-allotment option is exercised
in full). Therefore, Company Management, if they were to act in concert, would
be able to exercise significant influence with respect to the election of the
Board of Directors of the Company and all matters submitted to shareholders. See
"Principal and Selling Shareholders."
DEPENDENCE UPON KEY EXECUTIVES
The Company's growth and development to date have been dependent upon the
services of certain members of its senior management. The loss of the services
of one or more of such members of senior management could have a material
adverse effect on the Company. See "Management."
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ABSENCE OF PRIOR MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Although the Company's Common Stock has been traded on the over-the-counter
Bulletin Board under the market symbol "EMGG," there has generally been no
liquid public market for the Common Stock in the several years prior to the
Offering. The Company has filed an application seeking to have the Common Stock
listed for quotation on the Nasdaq National Market and has received preliminary
approval of such application, subject to compliance with further conditions.
However, there can be no assurance that an active trading market will develop
or, if developed, will be sustained following the Offering. Because of the
relatively illiquid market for the Common Stock prior to the Offering, the price
of the Common Stock offered hereby will be determined solely by negotiations
among the Company, the Selling Shareholders, and Wheat, First Securities, Inc.
and Raymond James & Associates, Inc., as representatives (the "Representatives")
of the several underwriters named in this prospectus (the "Underwriters") and
may bear no relationship to the market price of the Common Stock after the
Offering. See "Underwriting."
From time to time after this Offering, there may be significant volatility
in the market price for the Common Stock. Quarterly operating results of the
Company or of other similar companies, changes in general conditions in the
economy, consumer delinquency and default rates generally, the financial markets
or the industry in which the Company operates, natural disasters, litigation
developments or other developments affecting the Company or its competitors
could cause the market price of the Common Stock to fluctuate substantially. In
addition, in recent years the stock market has experienced extreme price and
volume fluctuations. This volatility has had a significant effect on the market
prices of securities issued by many companies for reasons unrelated to their
operating performance.
SHARES AVAILABLE FOR FUTURE SALE
Upon the closing of the Offering, the Company will have 8,741,130 shares of
Common Stock outstanding, of which the 3,000,000 shares offered hereby will be
freely tradeable. In addition, 2,964,356 shares of Common Stock not subject to
the lock-up described below are freely tradeable.
Directors and executive officers of the Company and certain shareholders of
the Company's Common Stock holding an aggregate of 2,776,774 shares have agreed
not to sell or otherwise dispose of their Common Stock for a period of 180 days
following the closing date of this Offering without the prior written consent of
the Representatives of the Underwriters and the Company. When such lock-up
restrictions lapse, such shares of Common Stock may be sold in the public market
or otherwise disposed of, subject to compliance with applicable securities laws.
Sales of a substantial number of shares of Common Stock, or the perception that
such sales could occur, could adversely affect prevailing market prices for the
Common Stock. At this time, the Company is unaware of any party who expects to
seek a waiver of such 180-day lock-up agreement.
DILUTION
Investors in the Offering will experience immediate and substantial
dilution of $8.16 per share (based on an assumed public offering price of $12.00
per share), and current shareholders will receive a material increase in the net
tangible book value of their shares of Common Stock. See "Dilution."
ACTUAL RESULTS MAY DIFFER FROM FORWARD LOOKING STATEMENTS
Statements in this Prospectus 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, in addition to the risk factors identified above, include: general
economic conditions in the Company's markets, including inflation, recession,
interest rates and other economic factors.
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THE COMPANY
The Company is a diversified financial services company headquartered in
Greenville, South Carolina, that originates, services and sells Mortgage Loans,
Small Business Loans, and Auto Loans. The Company makes substantially all of its
loans to non-prime borrowers. The Company also serves as investment manager for
Reedy River Ventures Limited Partnership and Palmetto Seed Capital Fund, L.P.
(collectively, the "Venture Funds").
The Company was incorporated in South Carolina in 1968 under the name
Golden Tye Corporation and conducted operations related to the railroad
transportation industry (the "Transportation Segment"). During the period from
1980 through 1990, the Company's business suffered significant operating losses.
In December 1990, approximately 40% of the Company's equity was acquired by a
small group of investors, including the Company's current Chairman and Chief
Executive Officer. In connection with such acquisition, a substantially new
Board of Directors was elected and new executive officers were appointed. In
1991, the Company changed its name to Emergent Group, Inc. and began operating
its financial services business (the "Financial Services Segment").
The Company began its transformation to a financial services company with
its acquisition of Carolina Investors, Inc. ("CII") in May 1991. At the time of
acquisition, CII had approximately $32 million in Mortgage Loans, and did not
sell any loans in the secondary market. Since the Company acquired CII, it has
expanded its Mortgage Loan Division significantly. In particular, the Mortgage
Loan Division has significantly increased its loan originations, principally
through establishing relationships with Mortgage Bankers. During 1993, 1994 and
1995, Mortgage Loan originations totaled $20.5 million, $99.4 million and $192.8
million, respectively. During the six months ended June 30, 1996, Mortgage Loan
originations totaled $153.8 million. Furthermore, in 1994 the Mortgage Loan
Division began selling a majority of its loans originated in connection with
Mortgage Bankers. During 1994 and 1995, the Mortgage Loan Division sold $54.6
million and $127.6 million, respectively, in Mortgage Loans. During the six
months ended June 30, 1996, the Mortgage Loan Division sold $143.9 million in
Mortgage Loans. During the second quarter of 1996, the Mortgage Loan Division
established a retail lending operation. This retail lending operation currently
operates through offices in Indianapolis, IN, Baton Rouge, LA and New Orleans,
LA under the trade names "HomeGold" and Sterling Lending Corporation. The
Company expects to open retail lending operations in Greenville, SC and Phoenix,
AZ during the fourth quarter of 1996 and five new offices in the first quarter
of 1997. The retail operation originates Mortgage Loans directly to borrowers,
as opposed to the wholesale operation, which originates loans principally
through Mortgage Bankers. A majority of the Mortgage Loans originated through
the retail operations are sold on a non-recourse basis to institutional
investors.
The Company formed Emergent Business Capital, Inc. ("EBC") in December 1991
for the purpose of acquiring substantially all of the assets, including the SBA
license, of an inactive SBA lender. Immediately following this acquisition, EBC
operated through one location and had $1.6 million in serviced loans receivable
of which $1.4 million had been sold in the secondary markets. Since the
Company's acquisition of EBC in 1991, its Small Business Loan Division has
expanded its operations such that EBC now operates through six locations. In
addition to selling the SBA Loan Participations, in June 1995 the Small Business
Loan Division securitized $17.1 million in loans receivable consisting of the
unguaranteed portions of SBA Loans. Emergent Financial Corp. ("EFC") was formed
by the Company in April 1996 to originate Asset-based Small Business Loans.
Through June 30, 1996, it has originated $4.6 million in Asset-based Small
Business Loans. During 1994 and 1995, the Small Business Loan Division
originated $43.1 million and $39.6 million, respectively, in Small Business
Loans. During the six months ended June 30, 1996, the Small Business Loan
Division originated $30.6 million in Small Business Loans. At December 31, 1994
and 1995 and June 30, 1996, the Small Business Loan Division serviced $88.8
million, $108.7 million and $125.7 million, respectively, in Small Business
Loans.
The Company acquired Premier Financial Services, Inc. ("Premier") in May
1991 and an 80% interest in The Loan Pro$, Inc. ("Loan Pro$") in July 1991. At
the time of acquisition, Loan Pro$ had $1.8 million in loans receivable and
operated through one location, and Premier had approximately $3 million in loans
receivable and operated through three locations. Since the Company acquired
Premier and Loan Pro$, it has
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expanded its Auto Loan Division significantly. During 1994 and 1995, the Auto
Loan Division originated $7.5 million and $17.1 million, respectively, in Auto
Loans. During the six months ended June 30, 1996, the Auto Loan Division
originated $10.0 million in Auto Loans. The Auto Loan Division currently
operates through a total of eight locations.
In January 1993, as part of the Company's then-existing strategy of
acquiring businesses to utilize the NOL, the Company acquired Young Generations,
Inc., a North Carolina corporation ("YGI"), which was engaged in the design,
manufacture and marketing of children's apparel (the "Apparel Segment").
Subsequent to 1993, the Company decided to focus the Company's resources and
attention solely on its core financial services operations. In accordance with
such strategy, the Company discontinued its Transportation Segment and Apparel
Segment operations in 1995 through the sale of the Transportation Segment assets
and the sale of YGI to YGI's management team. The Company does not anticipate
making any acquisitions unrelated to the financial services industry.
The Company's principal executive offices are located at 15 South Main
Street, Suite 750, Greenville, South Carolina 29601, and its telephone number is
(864) 235-8056.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,119,030 shares of
Common Stock offered by the Company are estimated to be approximately $23.4
million (2,569,030 shares and $28.4 million if the Underwriters' over-allotment
option is exercised in full), after deducting the underwriting discount and
estimated Offering expenses, based upon an assumed public offering price of
$12.00 a share. The Company will also receive $242,000 of proceeds from certain
of the Selling Shareholders upon the exercise of their warrants. All of the net
proceeds of this Offering will be used to repay outstanding indebtedness under
the Credit Facilities. The indebtedness expected to be repaid with the proceeds
of this Offering had a weighted average interest rate at June 30, 1996 of 8.41%
and maturity dates ranging from April 1997 to December 1998.
As part of its growth strategy, the Company may use a portion of the net
proceeds for acquisitions of businesses in the financial services industry.
Although the Company is engaged from time to time in discussions relating to
possible acquisitions, no agreements or understandings relating to any
acquisitions are presently pending.
In connection with the repayment of indebtedness referenced above, the
Company is not terminating the relevant Credit Facilities and, accordingly,
would expect, in the future, to borrow under such Credit Facilities in order to
fund additional loan demand. The amount of such additional borrowing will
depend, among other things, upon the Company's loan demand and profitability.
The Company will receive no proceeds from the sale of the shares sold by
the Selling Shareholders.
DIVIDEND POLICY
The Company has not paid cash dividends on any shares of capital stock
since 1990, and after the Offering intends to retain its earnings to support the
growth and development of its business. Accordingly, it does not anticipate
paying any cash dividends in the foreseeable future. Any future dividend
payments would also depend upon the financial condition, funding requirements
and earnings of the Company, as well as other factors that the Board of
Directors may deem relevant. In addition, the ability of the Company to pay
dividends depends substantially upon its ability to receive dividends from its
subsidiaries. The Credit Facilities limit the amount of dividends that the
Company's subsidiaries may pay to the Company (although management fees may be
paid and certain subsidiaries may make loans to the Company). Accordingly, the
Company's access to funds for the purpose of paying dividends may be limited.
17
<PAGE> 18
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the over-the-counter Bulletin Board
under the market symbol "EMGG." However, for significant periods of time over
the past several years, there has been no established public trading market for
the Common Stock. As a result, prices reported for the Common Stock reflect the
relative lack of liquidity and may not be reliable indicators of market value.
The following table sets forth, for the periods indicated, the high and low
bid prices for the Company's Common Stock as reported by National Daily
Quotation Service. The prices given may represent quotations between dealers
which do not include retail mark-ups, mark-downs or commissions and do not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK
---------------
CALENDAR YEAR HIGH LOW
- ----------------------------------------------------------------------------- ------ ------
<S> <C> <C>
1994
First Quarter.............................................................. $ 0.75 $ 0.75
Second Quarter............................................................. 0.75 0.63
Third Quarter.............................................................. 0.75 0.63
Fourth Quarter............................................................. 1.13 0.63
1995
First Quarter.............................................................. $ 1.13 $ 0.56
Second Quarter............................................................. 1.88 0.75
Third Quarter.............................................................. 5.50 1.75
Fourth Quarter............................................................. 6.50 2.00
1996
First Quarter.............................................................. $ 9.00 $ 4.00
Second Quarter............................................................. 12.50 9.00
Third Quarter.............................................................. 12.00 7.50
Fourth Quarter (through October 17, 1996).................................. 12.25 11.50
</TABLE>
Bid and ask quotations with respect to the Common Stock may be obtained
from the National Daily Quotation Service. On October 17, 1996, the last
reported sales price of the Common Stock, as obtained from the Bloomberg
quotation service, was $15.25. On October 17, 1996, there were 545 holders of
record of Common Stock and 6,529,745 shares of Common Stock outstanding. In
connection with this Offering, the Company has received preliminary approval for
the Common Stock to be quoted on the Nasdaq National Market under the trading
symbol "EMER."
18
<PAGE> 19
DILUTION
The net tangible book value of the Company at June 30, 1996 was $10.2
million, or $1.56 per share of Common Stock. Net tangible book value per share
represents the amount of the Company's total tangible assets less total
liabilities, divided by the number of shares of Common Stock outstanding. Net
tangible book value dilution per share to new investors represents the
difference between the amount per share paid by purchasers of shares of Common
Stock in the Offering and the pro forma net tangible book value per share of
Common Stock immediately after completion of the Offering.
After giving effect to the sale of 2,119,030 shares of Common Stock offered
by the Company hereby (at an assumed public offering price of $12.00 per share),
and after deducting the underwriting discount and other estimated expenses to be
paid by the Company in connection with this Offering, and after the application
of the estimated net proceeds therefrom, the pro forma net tangible book value
of the Company as of June 30, 1996 would have been $33.6 million, or $3.84 per
share of Common Stock. This represents an immediate increase in net tangible
book value of $2.28 per share to existing shareholders and an immediate dilution
in net tangible book value of $8.16 per share to purchasers of Common Stock in
this Offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share............................... $12.00
Net tangible book value per share before the Offering............... $1.56
Increase in net tangible book value per share attributable to new
investors........................................................ 2.28
Pro forma net tangible book value per share after the Offering........ 3.84
------
Dilution per share to new investors................................... $ 8.16
======
</TABLE>
Assuming the Underwriters' over-allotment option is exercised in full, pro
forma net tangible book value per share after the Offering would be $4.42 per
share, the increase in pro forma net tangible book value of shares owned by
existing shareholders would be $2.86 per share, and the dilution per share to
new investors after the Offering would be $7.58 per share.
The foregoing assumes no exercise of outstanding stock options or warrants
except for the exercise of 92,355 warrants by certain of the Selling
Shareholders. At June 30, 1996, a total of 700,000 shares are authorized for
issuance under the Company's stock option plans. At June 30, 1996, options to
purchase an aggregate of 14,841 shares with a weighted average exercise price of
$3.88 were outstanding and exercisable under such stock option plans. At June
30, 1996, options to purchase an additional 226,708 shares were outstanding but
were not exercisable. At June 30, 1996, the Company also had warrants
outstanding which entitled the holders thereof to purchase an aggregate of
102,167 shares. On January 29, 1996, the Company adopted the Restricted Stock
Agreement Plan which provides for the grant of up to 100,000 shares of
restricted stock to non-employee directors. To the extent outstanding options
and warrants are exercised, or shares reserved for future issuance are issued,
there will be further dilution to new investors. See "Management."
19
<PAGE> 20
CAPITALIZATION
The following table sets forth the capitalization of the Company at June
30, 1996 (i) on a historical basis and (ii) as adjusted to reflect the sale by
the Company of the 2,000,000 shares of Common Stock offered hereby at an assumed
public offering price of $12.00 per share and the application of the estimated
net proceeds therefrom as described in "Use of Proceeds." This table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements and the Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT JUNE 30, 1996
-------------------
AS
ACTUAL ADJUSTED
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Indebtedness:
Debentures(1).......................................................... $108,073 $108,073
Notes payable to banks, including under the Credit Facilities(2)(3).... 20,261 --
-------- --------
Total indebtedness............................................. 128,334 108,073
-------- --------
Shareholders' equity:
Common Stock, $0.05 par value; 30,000,000 authorized shares; 6,529,745
shares issued and outstanding; 8,741,130 shares issued and
outstanding as adjusted............................................. 327 437
Additional paid-in capital............................................. 6,839 30,119
Retained earnings...................................................... 6,369 6,369
-------- --------
Total shareholders' equity..................................... 13,535 36,925
-------- --------
Total capitalization........................................... $141,869 $144,998
======== ========
</TABLE>
- ---------------
(1) The Debentures are comprised of senior subordinated notes and subordinated
debentures bearing fixed rates of interest which are sold by CII only to
South Carolina residents. At June 30, 1996, there were $91.4 million of
senior subordinated notes and $16.7 million of subordinated debentures
outstanding bearing aggregate weighted average interest rates of 8% and 5%,
respectively. Both senior subordinated notes and subordinated debentures
are subordinate in priority to the Mortgage Loan Division Credit Facility.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
(2) The Company's Credit Facilities provide for aggregate borrowing availability
of up to $151.0 million, subject to certain borrowing base limitations
which at June 30, 1996, would have allowed additional borrowing of $22.5
million. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
(3) The Company anticipates that upon the consummation of the Offering, Notes
payable to banks, including under the Credit Facilities will be in excess
of $23 million, thereby allowing the Company to utilize the net proceeds of
this Offering to pay down such indebtedness.
20
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following unaudited selected consolidated financial and operating data
at and for the five years ended December 31, 1995 are derived from the audited
financial statements of the Company. The data for the six months ended June 30,
1995 and 1996 are unaudited. The data set forth below is qualified by reference
to, and should be read in conjunction with, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements and Notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
AT AND FOR THE
SIX MONTHS
ENDED
AT AND FOR THE YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------ --------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Interest and servicing revenue.................. $ 4,064 $ 6,980 $ 7,983 $ 10,903 $ 15,639 $ 7,307 $ 9,937
Gain on sale of loans (1)....................... -- 1,686 3,605 6,450 9,169 4,355 7,468
Other revenues.................................. 96 342 458 842 1,470 692 904
------- ------- -------- -------- -------- -------- --------
Total revenues........................... 4,160 9,008 12,046 18,195 26,278 12,354 18,309
Interest on notes payable....................... 41 218 419 848 2,303 2,774 3,878
Interest on Debentures.......................... 2,358 4,097 4,654 5,031 6,224 1,006 1,698
Provision for credit losses(2).................. 83 349 686 2,510 2,480 1,240 1,532
General and administrative expenses............. 2,265 4,698 5,624 7,359 10,419 4,514 7,622
------- ------- -------- -------- -------- -------- --------
Total expenses........................... 4,747 9,362 11,383 15,748 21,426 9,534 14,730
------- ------- -------- -------- -------- -------- --------
Income (loss) from continuing operations before
minority interest, income taxes and cumulative
effect of change in accounting principle....... (587) (354) 663 2,447 4,852 2,820 3,579
Income taxes.................................... (2) (130) (186) 609 190 93 121
------- ------- -------- -------- -------- -------- --------
Income (loss) from continuing operations before
minority interest and cumulative effect of
change in accounting principle(3).............. (585) (224) 849 1,838 4,662 2,727 3,458
Minority interest............................... (10) (25) (25) (46) (81) (31) (22)
------- ------- -------- -------- -------- -------- --------
Income from continuing operations before
cumulative effect of change in accounting
principle(3)................................... (595) (249) 824 1,792 4,581 2,696 3,436
Income (loss) from discontinued operations...... 344 685 260 546 (3,924) (751) --
Cumulative effect of change in accounting
principle...................................... -- -- 113 -- -- -- --
------- ------- -------- -------- -------- -------- --------
Net income (loss)........................ $ (251) $ 436 $ 1,197 $ 2,338 $ 657 $ 1,945 $ 3,436
======= ======= ======== ======== ======== ======== ========
Income per share from continuing operations..... $ (0.11) $ (0.04) $ 0.13 $ 0.27 $ 0.69 $ 0.40 $ 0.51
Income per share from discontinued operations... 0.06 0.12 0.04 0.08 (0.59) (0.11) --
Cumulative effect per share of change in
accounting principle........................... -- -- 0.01 -- -- -- --
------- ------- -------- -------- -------- -------- --------
Net income (loss) per share(4)........... $ (0.05) $ 0.08 $ 0.18 $ 0.35 $ 0.10 $ 0.29 $ 0.51
======= ======= ======== ======== ======== ======== ========
Weighted average outstanding equivalent shares
(in thousands)................................. 5,660 5,639 6,552 6,689 6,668 6,691 6,728
OPERATING DATA:
Total loans originated or purchased............. $18,361 $57,282 $ 63,633 $150,044 $249,507 $104,977 $194,437
Total loans sold................................ -- 10,827 31,052 85,772 153,055 58,494 159,886
Total loans securitized......................... -- -- -- -- 17,063 17,063 16,107
Total loans serviced (period end)(5)............ 41,250 68,489 106,898 157,443 214,534 185,118 217,982
Total loans receivable (period end)............. 39,870 56,785 66,279 95,398 126,458 98,969 103,265
Weighted average interest rate earned........... 14.23% 14.19% 12.83% 13.43% 13.94% 15.02% 15.76%
Weighted average interest rate paid............. 7.69 7.74 7.24 6.94 7.57 7.40 8.64
Allowance for credit losses as a % of serviced
loans(period end)(5)........................... 2.35 1.92 1.60 1.98 2.03 2.07 2.83
Net charge-offs as a % of average serviced
loans(2)(5).................................... 0.83 0.68 1.29 2.36 1.43 0.90 0.96
General and administrative expenses as a % of
average serviced loans(5)...................... 8.24 8.56 6.41 5.57 5.60 5.39 6.66
BALANCE SHEET DATA:
Loans receivable................................ $39,870 $56,785 $ 66,279 $ 91,736 $103,865 $ 88,842 $ 87,835
Mortgage loans held for sale.................... -- -- -- 3,662 22,593 10,127 15,430
Total assets.................................... 53,562 70,359 84,279 109,448 144,931 123,531 146,657
Total indebtedness.............................. 48,492 64,840 76,195 95,015 129,950 105,884 128,334
Total shareholders' equity...................... 4,635 5,057 7,362 9,700 9,885 11,102 13,535
</TABLE>
- ---------------
(1) These amounts represent gains on the sale of Mortgage Loans and SBA Loan
Participations.
(2) Approximately 90% of the amount in 1994 relates to the writedown to market
of certain foreclosed properties associated with speculative construction
loans made by the Mortgage Loan Division prior to its acquisition by the
Company. Speculative construction loans are no longer being made by the
Company.
(3) The Company adopted Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," effective January 1, 1993. The adoption
of SFAS No. 109 had the cumulative effect of (i) increasing the Company's
net income in 1993 by $113,000 and (ii) reducing the Company's effective tax
rate from approximately 45% to approximately 22%. The Company recognized no
deferred tax benefits of operating loss carryforwards as a result of the
adoption of SFAS No. 109.
(4) See "Supplemental Earnings Per Share" in the Summary Consolidated Financial
and Operating Data on page 6.
(5) Serviced loans includes all portfolio Mortgage Loans and Auto Loans, all
securitized loans, and the Small Business Loans, but solely for purposes of
calculating the allowance ratio and the net charge-off ratio, excludes the
guaranteed portion of the SBA Loans. Operating Data stated as a percentage
of serviced loans (except period end data) for the six month periods ended
June 30, 1995 and 1996 have been annualized.
21
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the preceding
"Selected Consolidated Financial and Operating Data" and the other historical
and pro forma financial statements of the Company, including the notes thereto,
appearing elsewhere herein. As used herein, "Discontinued Operations" refers to
the Company's Transportation Segment and Apparel Segment. Unless otherwise
noted, the discussion contained herein relates to the continuing operations of
the Company, which consist of its Financial Services Segment operations.
GENERAL
The Company is a diversified financial services company headquartered in
Greenville, South Carolina which makes Mortgage Loans, Small Business Loans and
Auto Loans. Prior to current management's acquisition of control of the Company
in December 1990, the Company was primarily engaged in its Transportation
Segment operations. Under previous management, the Company incurred significant
losses which resulted in the NOL. In 1991, current management implemented a
strategic plan to acquire profitable businesses which could utilize the NOL.
Pursuant to such strategy, the Company acquired CII, Premier, EBC and Loan Pro$
in 1991 and YGI in 1993. In 1994, the Company made a strategic decision to
divest all nonfinancial operations and to focus exclusively on the financial
services industry. In accordance with such strategy, the Company completed its
divestiture of its Apparel Segment and Transportation Segment operations in
1995.
The Company's total serviced loans receivable increased from $106.9 million
at December 31, 1993, to $157.4 million at December 31, 1994, to $214.5 million
at December 31, 1995 and to $218.0 million at June 30, 1996. Mortgage Loans
increased during all such periods principally as a result of an increase in the
number of Mortgage Bankers originating loans through the Mortgage Loan Division,
as well as increased loan volume from existing Mortgage Bankers. Small Business
Loans increased during 1994 due to the opening of additional offices, as well as
a result of an increase in the number of Commercial Loan Brokers which refer SBA
Loans to the Small Business Loan Division. In 1995, the SBA adopted certain
policies, such as the temporary implementation of a maximum SBA Loan amount of
$500,000 and the temporary prohibition of the use of SBA Loan proceeds for
certain refinancings (which temporary limitations were removed in October 1995).
Consequently, Small Business Loan volume in 1995 was relatively unchanged from
the 1994 level. Auto Loans increased during all such periods principally as a
result of an increase in the number of loan production offices and successful
efforts at establishing additional dealer relationships.
Approximately $125.3 million, or approximately 68% of the Company's
Mortgage Loans in 1995, were originated through First Greensboro. Furthermore,
for the six months ended June 30, 1996, First Greensboro originated
approximately $80.9 million or 53% of the Company's Mortgage Loans. On June 1,
1996, First Greensboro terminated its strategic alliance agreement with the
Company. See "Risk Factors -- Termination of Strategic Alliance Agreements."
Consequently, the Company's future Mortgage Loan originations will be less than
if First Greensboro had not terminated this agreement (which was scheduled to
expire December 31, 1997). Although First Greensboro generated a large
percentage of the Company's Mortgage Loan originations, the Company believes
that it will be able to replace such loan originations through (i) its other
Strategic Alliance Mortgage Bankers, three of which entered into strategic
alliance agreements with the Company since April 1996 and (ii) its direct retail
lending operation, the planned implementation of which was accelerated as a
result of the termination of the First Greensboro strategic alliance agreement.
The Company's retail lending operations were established in the second
quarter of 1996, and currently operate through offices in Indianapolis, IN,
Baton Rouge, LA and New Orleans, LA. The Company expects to open retail lending
operations in Greenville, SC and Phoenix, AZ during the fourth quarter of 1996
and to open five new offices in the first quarter of 1997. Through its retail
offices, the Company targets Mortgage Loan borrowers through a variety of
marketing methods. During August and September 1996, retail originations totaled
$5.0 million and $8.4 million, respectively. The Company expects continued
growth in its retail Mortgage Loan originations.
22
<PAGE> 23
The following table sets forth certain data relating to the Company's loans
at and for the periods indicated:
<TABLE>
<CAPTION>
AT AND FOR THE
SIX MONTHS
AT AND FOR THE YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
MORTGAGE LOANS:
Mortgage Loans originated.............. $ 20,536 $ 99,373 $192,800 $ 76,966 $153,802
Total Mortgage Loans (period end)...... 42,335 60,151 88,165 72,200 70,430
Total serviced Mortgage Loans (period
end)................................ 42,335 60,151 88,165 72,200 70,430
Average Mortgage Loans(1).............. 42,397 51,243 74,158 65,493 92,188
Average serviced Mortgage Loans(1)..... 42,397 51,243 74,158 65,493 92,188
Average rate earned(1)................. 11.96% 12.37% 12.10% 11.92% 12.24%
SMALL BUSINESS LOANS:
Small Business Loans originated........ $ 37,867 $ 43,123 $ 39,560 $ 18,915 $ 30,583
Total Small Business Loans (period
end)................................ 17,933 26,764 20,620 12,421 24,013
Total serviced Small Business Loans
(period end)........................ 58,552 88,809 108,696 98,570 125,687
Average Small Business Loans(1)........ 13,956 22,348 23,692 19,757 20,839
Average serviced Small Business
Loans(1)............................ 40,117 73,681 98,753 93,593 116,038
Average rate earned(1)................. 9.73% 11.06% 12.27% 16.50% 17.92%
AUTO LOANS:
Auto Loans originated.................. $ 5,230 $ 7,547 $ 17,148 $ 9,097 $ 10,052
Total Auto Loans (period end).......... 6,011 8,483 17,673 14,348 8,822
Total serviced Auto Loans (period
end)................................ 6,011 8,483 17,673 14,348 21,865
Average Auto Loans(1).................. 5,179 7,247 13,078 10,811 12,138
Average serviced Auto Loans(1)......... 5,179 7,247 13,078 10,811 19,883
Average rate earned(1)................. 28.33% 28.28% 27.40% 26.50% 38.26%
TOTAL LOANS:
Total loans receivable (period end).... $ 66,279 $ 95,398 $126,458 $ 98,969 $103,265
Total serviced loans receivable (period
end)................................ 106,898 157,443 214,534 185,118 217,982
</TABLE>
- ---------------
(1) Averages are computed using beginning and ending balances for the period
presented, except that the 1996 averages are calculated based on the daily
averages (rather than the beginning and ending balances). Average rate
earned is calculated using both interest and servicing revenues. The
average rates earned in 1996 for Small Business Loans and Auto Loans were
higher than in prior years principally as a result of the servicing
revenues received in connection with the securitization transactions.
PROFITABILITY
The principal components of the Company's profitability are (i) net
interest and servicing revenues associated with the Company's loans receivable
and serviced loans, which is the excess of interest and fees earned on its
serviced loans receivable over interest expense paid on borrowed funds
associated with such serviced loans receivable, (ii) gains resulting from the
sale of its Mortgage Loans, and (iii) gains resulting from the sale of the SBA
Loan Participations and the related servicing revenue.
23
<PAGE> 24
The following table sets forth, for the periods indicated, certain
information derived from the Company's Consolidated Financial Statements
expressed as a percentage of total revenues.
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS
FOR THE YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Interest and servicing revenue..................... 66.3% 59.9% 59.5% 59.2% 54.3%
Gain on sale of loans.............................. 30.0 35.4 34.9 35.2 40.8
Other revenues..................................... 3.7 4.7 5.6 5.6 4.9
----- ----- ----- ----- -----
Total revenues........................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
Interest expense................................... 42.1% 32.3% 32.5% 30.6% 30.5%
General and administrative expenses................ 46.7 40.4 39.6 36.6 41.6
Provision for credit losses........................ 5.7 13.8 9.4 10.0 8.4
----- ----- ----- ----- -----
Income from continuing operations before income
taxes............................................ 5.5 13.5 18.5 22.8 19.5
Income tax expense (benefit)....................... (1.6) 2.9 0.8 0.8 0.6
Minority interest.................................. (0.2) (0.3) (0.3) (0.3) (0.1)
Income (loss) from discontinued operations......... 2.1 2.6 (14.9) (6.0) --
Cumulative effect of change in accounting
principle........................................ 0.9 -- -- -- --
----- ----- ----- ----- -----
Net income............................... 9.9% 12.9% 2.5% 15.7% 18.8%
===== ===== ===== ===== =====
</TABLE>
RESULTS OF OPERATIONS
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
Total revenues increased $5.9 million, or 48%, from $12.4 million for the
six month period ended June 30, 1995, to $18.3 million for the six month period
ended June 30, 1996. The increase in revenues resulted principally from
increases in interest and servicing revenue and gain on sale of loans.
Interest and servicing revenue increased $2.6 million, or 36%, from $7.3
million for the six month period ended June 30, 1995, to $9.9 million for the
six month period ended June 30, 1996. This increase was due principally to the
growth in the serviced loan portfolio of the Mortgage and Auto Loan Divisions.
Interest and servicing revenue earned by the Mortgage Loan Division increased
$1.8 million, or 37%, from $4.7 million for the six month period ended June 30,
1995, to $6.5 million for the six month period ended June 30, 1996. Interest and
servicing revenue earned by the Auto Loan Division increased $700,000, or 44%,
from $1.6 million for the six month period ended June 30, 1995, to $2.3 million
for the six month period ended June 30, 1996.
Gain on sale of loans increased $3.0 million, or 71%, from $4.5 million for
the six month period ended June 30, 1995, to $7.5 million for the six month
period ended June 30, 1996. The increase resulted principally from increased
sales of Mortgage Loans associated with the increased loan originations of the
Mortgage Loan Division.
Other revenues increased $212,000, or 31%, from $692,000 for the six month
period ended June 30, 1995, to $904,000 for the six month period ended June 30,
1996. Other revenues are comprised principally of origination and processing
fees, insurance commissions and management fees paid in connection with the
management of two venture capital funds by the Company. The increase in other
revenues resulted principally from the increase in the Company's loan
originations, as well as from increased management fees paid by the two venture
capital funds managed by the Company.
Total expenses increased $5.2 million, or 53%, from $9.5 million for the
six month period ended June 30, 1995, to $14.7 million for the six month period
ended June 30, 1996. Total expenses are comprised of interest expense, provision
for credit losses, and general and administrative expenses.
24
<PAGE> 25
Interest expense increased $1.8 million, or 47%, from $3.8 million for the
six month period ended June 30, 1995, to $5.6 million for the six month period
ended June 30, 1996. The increase was due principally to increased borrowings by
the Mortgage and Auto Loan Divisions associated with increased loan
originations. Borrowings attributable to the Mortgage Loan Division, both under
the Credit Facilities and in connection with the sales of Debentures, totaled
$108.1 million as of June 30, 1996, which represented an increase of 25%,
compared to $86.8 million as of June 30, 1995. Borrowings attributable to the
Small Business Loan Division totaled $16.0 million as of June 30, 1996, which
represented an increase of 90%, compared to $8.4 million as of June 30, 1995.
This increase in debt resulted principally from the loan origination activity
for the six month period ended June 30, 1996, as compared to the same period in
1995. This increase in loan originations was due principally to the elimination
in October 1995 of the SBA's $500,000 loan limitation and prohibition against
refinancing existing loans. Borrowings attributable to the Auto Loan Division at
June 30, 1996 totaled $4.2 million, which represented a decrease of 56%,
compared to $9.5 million at June 30, 1995. This decrease was due to the
repayment of bank debt with proceeds of the securitization of $16.1 million of
Auto Loans in March 1996.
Provision for credit losses increased $300,000, or 25%, from $1.2 million
for the six month period ended June 30, 1995, to $1.5 million for the six month
period ended June 30, 1996. The provision was made to maintain the general
reserves for credit losses associated with loan growth, as well as to fund
specific reserves for possible losses associated with particular loans.
General and administrative expense increased $3.1 million, or 69%, from
$4.5 million for the six month period ended June 30, 1995, to $7.6 million for
the six month period ended June 30, 1996. This is a result of increased
personnel costs in the Mortgage Loan Division due to the continued expansion in
the servicing and underwriting areas, and increased expenses associated with the
opening of three new loan production offices by the Auto Loan Division. General
and administrative expense increased from 5.90% of average serviced loans at
June 30, 1995, to 6.66% at June 30, 1996, principally as a result of the costs
associated with the expansion of the Mortgage Loan Division's servicing
operations in anticipation of increased originations of Mortgage Loans,
including Mortgage Loans which may be sold servicing retained.
Income from continuing operations increased $700,000, or 26%, from $2.7
million for the six month period ended June 30, 1995, to $3.4 million for the
six month period ended June 30, 1996.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Total revenues increased $8.1 million, or 44%, from $18.2 million in 1994
to $26.3 million in 1995. The increase in revenues resulted principally from
increases in interest and servicing revenue and gain on sale of loans.
Interest and servicing revenue increased $4.7 million, or 43%, from $10.9
million in 1994 to $15.6 million in 1995. This increase was due principally to
the growth in the serviced loan portfolio of the Mortgage Loan Division.
Interest and servicing revenue earned by the Mortgage Loan Division increased
$2.4 million, or 38%, from $6.3 million in 1994 to $8.7 million in 1995.
Interest and servicing revenue earned by the Small Business Loan Division
increased $382,000, or 15%, from $2.5 million in 1994 to $2.9 million in 1995.
This increase resulted from continued growth in serviced SBA Loans, despite the
temporary changes in the SBA policies which negatively impacted the Company's
SBA Loan originations. Interest and servicing revenue earned by the Auto Loan
Division increased $1.5 million, or 71%, from $2.1 million in 1994 to $3.6
million in 1995. The increase in interest and servicing revenue for the Auto
Loan Division was due to the growth of its loan portfolio.
Gain on sale of loans increased $2.7 million, or 42%, from $6.5 million in
1994 to $9.2 million in 1995. Gain on sale of loans was generated by the sale of
Mortgage Loans and SBA Loan Participations. The increase resulted principally
from increased sales of Mortgage Loans associated with the increased loan
originations of the Mortgage Loan Division.
Other revenues increased $627,000, or 74%, from $842,000 in 1994 to $1.5
million in 1995. Other revenues is comprised principally of origination and
processing fees, insurance commissions and management
25
<PAGE> 26
fees paid in connection with the management of the Venture Funds. The increase
in other revenues resulted principally from the increase in the Company's loan
originations, as well as from increased management fees paid by the Venture
Funds.
Total expenses increased $5.6 million, or 36%, from $15.8 million in 1994
to $21.4 million in 1995. Total expenses are comprised of interest expense,
provision for credit losses and general and administrative expenses.
Interest expense increased $2.6 million, or 44%, from $5.9 million in 1994
to $8.5 million in 1995. The increase was due principally to increased
borrowings by the Mortgage and Auto Loan Divisions associated with increased
loan originations. Total borrowings attributable to the Mortgage Loan Division,
both under the Credit Facilities and in connection with the sale of Debentures,
increased $27.7 million, or 36%, from $77.5 million at December 31, 1994 to
$105.2 million at December 31, 1995. Interest expense in the Mortgage Loan
Division increased $1.6 million, or 31% from $5.1 million in 1994 to $6.7
million in 1995. Total borrowings attributable to the Small Business Loan
Division increased $456,000, or 3%, from $14.4 million at December 31, 1994 to
$14.8 million at December 31, 1995. This increase in debt resulted principally
from current year loan origination activity, partially offset by a reduction to
outstanding debt due to the securitization transaction completed in June 1995.
Interest expense in the Small Business Loan Division increased $553,000, or 117%
from $471,000 in 1994 to $1.0 million in 1995. Total borrowings attributable to
the Auto Loan Division increased $7.0 million, or 241%, from $2.9 million at
December 31, 1994 to $9.9 million at December 31, 1995. Interest expense in the
Auto Loan Division increased $500,000, or 189%, from $264,000 in 1994 to
$764,000 in 1995.
Provision for credit losses remained stable at $2.5 million in 1994 and in
1995. The provision was made to maintain the general reserves for credit losses
associated with loan growth, as well as to fund specific reserves for possible
losses associated with particular loans. In 1994, the majority of the provision
resulted from the writedown to market value of certain foreclosed properties in
the amount of $1.7 million. These foreclosed properties related principally to
speculative construction loans made by CII prior to its acquisition by the
Company. Speculative construction loans are no longer being made by the Company.
General and administrative expense increased $3.0 million, or 40%, from
$7.4 million in 1994 to $10.4 million in 1995 principally as a result of
increased personnel costs of $1.7 million due primarily to the continued
expansion in the servicing and underwriting areas, increased legal, audit and
professional fees of $504,000 associated with the Company's stock tender offer
in February 1995 and other corporate transactions, and increased expenses of
$477,000 associated with the opening of three new loan production offices by the
Auto Loan Division. General and administrative expense increased from 5.59% of
average serviced loans in 1994 to 5.63% in 1995, principally as a result of the
increase in the Mortgage Loan Division's servicing operations in anticipation of
increased originations of Mortgage Loans, including Mortgage Loans which may be
sold servicing retained.
Income from continuing operations increased $2.8 million, or 155%, from
$1.8 million in 1994 to $4.6 million in 1995. The improvement in income was due
principally to increased growth and profitability of the Mortgage Loan Division.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Total revenues increased $6.2 million, or 52%, from $12.0 million in 1993
to $18.2 million in 1994. The increase in revenues resulted principally from
increases in interest and servicing revenue and gain on sale of loans.
Interest and servicing revenue increased $2.9 million, or 36%, from $8.0
million in 1993 to $10.9 million in 1994. This increase was due principally to
growth in serviced loans receivable in the Mortgage and Small Business Loan
Divisions. Interest and servicing revenue earned by the Mortgage Loan Division
increased $1.2 million, or 24%, from $5.1 million in 1993 to $6.3 million in
1994. Interest and servicing revenue earned by the Small Business Loan Division
increased $1.1 million, or 79%, from $1.4 million in 1993 to $2.5 million in
1994.
26
<PAGE> 27
Gain on sale of loans increased $2.9 million, or 81%, from $3.6 million in
1993 to $6.5 million in 1994. Gain on sale of loans resulted from the sale of
Mortgage Loans and SBA Loan Participations. The increase resulted principally
from increased sales associated with the increased loan originations of the
Mortgage and Small Business Loan Divisions.
Other revenues increased $384,000, or 84%, from $458,000 in 1993 to
$842,000 in 1994. Other revenues were comprised principally of management fees
paid in connection with origination and processing fees, insurance commissions
and the management of the Venture Funds. The increase in other revenues resulted
principally from the increase in the Company's loan originations.
Total expenses increased $4.3 million, or 38%, from $11.4 million in 1993
to $15.7 million in 1994. Total expenses are comprised of interest expense,
provision for credit losses, and general and administrative expenses. This
increase was due in part to the increase in interest expense as a result of
increased borrowing to fund increases in loan volume at the Mortgage and Small
Business Loan Divisions. The increase in total expenses also resulted from an
increase in the provision for credit losses, which was associated with the
writedown to market value of certain foreclosed properties.
Interest expense increased $806,000, or 16%, from $5.1 million in 1993 to
$5.9 million in 1994. The increase was due principally to increased borrowings
by the Mortgage Loan Division and the Small Business Loan Division which were
associated with increased loan originations. Total borrowings attributable to
the Mortgage Loan Division, both under the Credit Facilities and in connection
with the sale of Debentures, increased $7.6 million, or 11%, from $69.9 million
at December 31, 1993 to $77.5 million at December 31, 1994. Interest expense in
the Mortgage Loan Division increased $456,000, or 10% from $4.7 million in 1993
to $5.1 million in 1994. Total borrowings attributable to the Small Business
Loan Division increased $12.7 million, or 747%, from $1.7 million at December
31, 1993 to $14.4 million at December 31, 1994. Interest expense in the Small
Business Loan Division increased $359,000, or 321%, from $112,000 in 1993 to
$471,000 in 1994.
Provision for credit losses increased $1.8 million, or 262%, from $686,000
in 1993 to $2.5 million in 1994. This increase resulted from growth in the
Company's loan portfolio and the $1.7 million writedown to market of certain
foreclosed properties included in the Company's real estate held for sale. This
unusually high writedown related principally to speculative construction loans
made by CII prior to its acquisition by the Company. Speculative construction
loans are no longer being made by the Company.
General and administrative expense increased $1.7 million, or 30%, from
$5.7 million in 1993 to $7.4 million in 1994, principally as a result of
increased expenses of $251,000 associated with the opening of a new loan
production office by the Auto Loan Division and $800,000 associated with the
general expansion of the Mortgage and Small Business Loan Divisions' operations.
General and administrative expense decreased from 6.41% of average serviced
loans in 1993 to 5.59% in 1994, principally as a result of the increase in the
volume of loan originations, principally in the Mortgage Loan and Small Business
Loan Divisions.
Income from continuing operations increased $968,000, or 117%, from
$824,000 in 1993 to $1.8 million in 1994. The improvement in income was due
principally to increased growth and profitability of the Mortgage Loan Division.
DISCONTINUED OPERATIONS
Transportation Segment
In connection with the Company's strategic plan to focus its business
efforts on the Financial Services Segment, the Company divested its
Transportation Segment operations during 1994 and 1995. As a result, the
Transportation Segment has been classified as discontinued operations, and,
accordingly, the Company's Consolidated Financial Statements and the Notes
related thereto segregate continuing and discontinued operations. The
Transportation Segment had pre-tax income of $422,000 in 1993 and $2.8 million
in 1994, and a loss of $333,000 in 1995. The profits in 1993 and 1994 resulted
principally from gains on the sale of boxcars and other assets. Operating
revenues for the Transportation Segment were $1.7 million in 1993, $1.4 million
in 1994, and $390,000 in 1995. These decreases in revenues were due principally
to the progressive sale of assets
27
<PAGE> 28
associated with the Transportation Segment. The Company does not believe that
there are material liabilities, contingent or otherwise, with respect to its
Transportation Segment.
Apparel Segment
In connection with the Company's strategic plan to focus its business
efforts on the Financial Services Segment, the Company sold all of the
outstanding stock of YGI in exchange for a non-recourse note in September 1995,
thereby divesting its Apparel Segment operations. In connection with the sale of
YGI, the Company wrote off all amounts due the Company from YGI as intercompany
debt and amounts due to the Company from the purchasers of the YGI stock, which
amounts totaled $3.9 million, net of income taxes of $156,000. The Company wrote
off these amounts due to its concern over a decline in YGI's operating profits
and the related impact on YGI's and the purchasers' ability to repay these
obligations. As a result of the sale of YGI, the operating results of the
Apparel Segment have been classified as discontinued operations. The Company
remains contingently liable for its guaranty of certain bank loans and certain
trade accounts payable which at August 31, 1996 totaled $495,000 and were
secured by substantially all of YGI's assets. Management does not anticipate any
significant charges to future earnings as a result of these guarantees.
The Apparel Segment had net losses of $163,000 in 1993, $31,000 in 1994 and
$1.3 million in 1995. The net loss in 1994 was decreased by the receipt of $1.25
million in life insurance proceeds due to the death of YGI's President. The
Apparel Segment had revenues of $11.5 million in 1993, $12.2 million in 1994,
and $7.3 million in 1995.
ALLOWANCE FOR CREDIT LOSSES AND CREDIT LOSS EXPERIENCE
To provide for credit losses, the Company charges against current earnings
an amount necessary to maintain the allowance for credit losses at levels
expected to cover future losses of principal on its portfolio loans and its
residual asset-backed certificates held as a result of its securitizations of
loans. At June 30, 1996, the total allowance for credit losses for the Company
was $3.6 million, including $1.3 million reserved for potential losses relating
to the Company's securitized SBA and Auto Loans. This compares to an allowance
for credit losses at December 31, 1995 of $2.6 million, which included $773,000
reserved for potential losses relating to the Company's securitized SBA Loans.
The increase in the allowance resulted from increases in the general allowance
due to corresponding growth in the Company's serviced loans receivable, rather
than in connection with specific loans or circumstances.
The allowance for credit losses is a composite of the allowance for credit
losses of the Mortgage Loan Division, the Small Business Loan Division and the
Auto Loan Division as of June 30, 1996. The Mortgage Loan Division maintains an
allowance for credit losses equal to approximately 1% of its serviced loan
portfolio, the Small Business Loan Division currently maintains an allowance for
credit losses equal to approximately 3% of the unguaranteed portion of its
serviced loan portfolio, and the Auto Loan Division currently maintains an
allowance for credit losses equal to approximately 5% of its serviced loan
portfolio. In addition, each subsidiary may establish a specific reserve for a
particular loan that is deemed by management to be a potential problem loan
where full recovery is questionable. The Company does not currently service any
loans for which it does not have credit risk other than the guaranteed portion
of its SBA Loans. However, the Company's credit risk on its securitized loans is
limited to its investment in its residual asset-backed certificates.
28
<PAGE> 29
The table below summarizes certain information with respect to the
Company's allowance for credit losses and the composition of charge-offs and
recoveries for each of the periods indicated.
SUMMARY OF ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
AT AND FOR THE
AT AND FOR THE YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
----------------------------- --------------
1993 1994 1995 1996
----- ------- ------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Allowance for credit losses at beginning of
period......................................... $ 976 $ 952 $ 1,730 $ 1,874
Total loans charged-off.......................... (787) (1,808) (1,718) (721)
Total loans recovered............................ 77 76 155 103
----- ------- ------- --------------
Net charge-offs........................ (710) (1,732) (1,563) (618)
Provision charged to expense..................... 686 2,510 2,480 1,532
----- ------- ------- --------------
Allowance for credit losses at end of period..... 952 1,730 2,647 2,788
Allowance for losses on asset-backed
securities..................................... -- -- (773) (574)
----- ------- ------- --------------
Allowance for credit losses at end of period, net
of allowance for losses on asset-backed
securities..................................... $ 952 $ 1,730 $ 1,874 $ 2,214
===== ======= ======= ===========
</TABLE>
The Company considers its allowance for credit losses to be adequate in
view of the Company's loss experience and the secured nature of most of the
Company's outstanding loans. Although management considers the allowance
appropriate and adequate to cover possible losses, management's judgment is
based upon a number of assumptions about future events, which are believed to be
reasonable, but which may or may not prove valid. Thus, there can be no
assurance that charge-offs in future periods will not exceed the allowance for
possible credit losses or that additional increases in the allowance for
possible credit losses will not be required.
Management closely monitors delinquency to measure the quality of its loan
portfolio and securitized loans, and the potential for credit losses. The
Company's policy is to place a loan on non-accrual status after it becomes 90
days past due, or sooner if the interest is deemed uncollectible. Collection
efforts on charged-off loans continue until the obligation is satisfied or until
it is determined such obligation is not collectible or the cost of continued
collection efforts will exceed the potential recovery. Recoveries of previously
charged-off loans are credited to the allowance for credit losses.
29
<PAGE> 30
The following table sets forth the Company's allowance for credit losses at
the end of the periods indicated, the credit loss experience over the periods
indicated, and delinquent loan information at the dates indicated for loans
receivable at least 90 days past due.
<TABLE>
<CAPTION>
AT AND FOR THE
AT AND FOR THE YEAR SIX MONTHS
ENDED DECEMBER 31, ENDED JUNE 30,
----------------------- --------------
1993 1994 1995 1996
----- ----- ----- --------------
<S> <C> <C> <C> <C>
ALLOWANCE FOR CREDIT LOSSES AS A % OF SERVICED LOANS:
Mortgage Loan Division.................................. 0.70% 1.23% 0.93% 1.38%
Small Business Loan Division(1)......................... 4.26 3.91 4.50 4.90
Auto Loan Division(1)................................... 2.92 3.00 4.03 4.60
Total allowance for credit losses as a % of
serviced loans................................ 1.60 1.98 2.03 2.83
NET CHARGE-OFFS AS A % OF AVERAGE SERVICED LOANS(2):
Mortgage Loan Division(3)............................... 1.05% 2.96% 1.04% 0.03%
Small Business Loan Division(1)......................... 0.05 0.21 1.43 0.39
Auto Loan Division(1)................................... 5.03 2.53 3.68 5.51
Total net charge-offs as a % of total serviced
loans......................................... 1.29 2.36 1.43 0.96
LOANS RECEIVABLE PAST DUE 90 DAYS OR MORE AS A % OF
SERVICED LOANS:
Mortgage Loan Division.................................. 7.08% 2.96% 3.67% 3.93%
Small Business Loan Division(1)......................... 0.09 -- 0.97 2.54
Auto Loan Division(1)(4)................................ 5.69 0.64 0.77 1.70
Total loans receivable past due 90 days or more
as a % of total serviced loans................ 5.62 2.10 2.77 3.15
TOTAL ALLOWANCE FOR CREDIT LOSSES AS A % OF SERVICED LOANS
PAST DUE 90 DAYS OR MORE:(1)............................ 28.44% 94.20% 73.21% 89.96%
</TABLE>
- ---------------
(1) For purposes of these calculations, serviced loans includes all portfolio
Mortgage Loans and Auto Loans, all securitized loans, and the Small Business
Loans, but excludes the guaranteed portion of the SBA Loans.
(2) Average loans receivable have been determined by using beginning and ending
balances for the period presented except that the 1996 averages are
calculated based on the daily averages (rather than the beginning and ending
balances). Net charge-offs as a % of Average Loans Receivable for the six
month period ended June 30, 1996 have been annualized.
(3) Approximately 90% of the amount in 1994 relates to the writedown to market
of certain foreclosed properties associated with speculative construction
loans made by the Mortgage Loan Division prior to its acquisition by the
Company.
(4) The amount in 1993 relates primarily to consumer loans on personal property
made prior to the Company's acquisition of Premier.
30
<PAGE> 31
The following table illustrates the Company's delinquency and charge-off
experience with respect to Mortgage Loans, Small Business Loans and Auto Loans.
The Company currently does not service any loans for which it does not have
credit risk other than the guaranteed portion of its SBA Loans. However, the
Company's credit risk on its securitized loans is limited to its investment in
its residual asset-backed certificates.
MORTGAGE LOAN DELINQUENCIES AND CHARGE-OFFS
<TABLE>
<CAPTION>
AT AND FOR THE
SIX MONTHS
AT AND FOR THE YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
--------------------------- --------------
1993 1994 1995 1996
------- ------- ------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Serviced Mortgage Loan delinquencies:
30-59 days past due.......................................... 8.09% 7.96% 7.75% 5.51%
60-89 days past due.......................................... 2.05 2.87 1.80 1.83
Over 90 days past due........................................ 7.08 2.96 3.67 3.93
In-substance foreclosure....................................... 6.32 3.87 1.26 2.43
Serviced Mortgage Loans charged-off, net, as a % of average
Mortgage Loans............................................... 1.05% 2.96% 1.04% 0.03%(1)
Serviced Mortgage Loans charged-off, net....................... $ 446 $ 1,518 $ 771 $ 15
Serviced Mortgage Loans (period end)........................... 42,335 60,151 88,165 70,430
Average Serviced Mortgage Loans................................ 42,397 51,243 74,158 92,188
</TABLE>
SMALL BUSINESS LOAN DELINQUENCIES AND CHARGE-OFFS
<TABLE>
<CAPTION>
AT AND FOR THE
SIX MONTHS
AT AND FOR THE YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
--------------------------- --------------
1993 1994 1995 1996
------- ------- ------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Serviced unguaranteed Small Business Loan delinquencies:
30-59 days past due.......................................... 1.10% 1.17% 2.97% 3.39%
60-89 days past due.......................................... -- -- 4.47 3.67
Over 90 days past due........................................ 0.09 -- 0.99 2.54
In-substance foreclosure....................................... -- -- 1.54 0.92
Serviced unguaranteed Small Business Loans charged-off, net, as
a % of average serviced unguaranteed Small Business Loans.... 0.05% 0.21% 1.43% 0.39%(1)
Serviced unguaranteed Small Business Loans charged-off, net.... $ 4 $ 31 $ 311 $ 56
Serviced unguaranteed Small Business Loans (period end)........ 11,238 18,771 24,867 32,219
Average serviced unguaranteed Small Business Loans............. 7,635 15,004 21,819 28,201
Serviced Small Business Loans (period end)..................... 58,552 88,809 108,696 125,687
</TABLE>
AUTO LOAN DELINQUENCIES AND CHARGE-OFFS
<TABLE>
<CAPTION>
AT AND FOR THE
SIX MONTHS
AT AND FOR THE YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
--------------------------- --------------
1993 1994 1995(3) 1996
------ ------ ------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Serviced Auto Loan delinquencies:
30-59 days past due......................................... 2.80% 2.29% 9.39% 9.55%
60-89 days past due......................................... 1.02 0.79 2.68 3.15
Over 90 days past due....................................... 5.69(2) 0.64 0.77 1.70
Serviced Auto Loans charged-off, net, as a % of average
serviced Auto Loans......................................... 5.03% 2.53% 3.68% 5.51%(1)
Serviced Auto Loans charged-off, net.......................... $ 260 $ 183 $ 481 $ 548
Serviced Auto Loans (period end).............................. 6,011 8,483 17,673 21,865
Average serviced Auto Loans................................... 5,179 7,247 13,078 19,883
Auto Loans (period end)....................................... 6,011 8,483 17,673 8,822
</TABLE>
- ---------------
(1) Net charge-offs for the six month period ended June 30, 1996 have been
annualized.
(2) Relates primarily to consumer loans on personal property made prior to the
Company's acquisition of Premier.
(3) In September 1995, the Company modified its financial reporting software
package for the Auto Loan Division. Prior to that time, the Company's
software did not report a loan as past due until the first day of the month
after the loan became 30 days past due. The modified software package
records loans past due during the month the loan becomes past due.
Therefore, after modification of its software, the Company's loans that were
past due shifted one past-due category (e.g., from current to 30 days past
due, or from 60 to 90 days past due.)
31
<PAGE> 32
LIQUIDITY AND CAPITAL RESOURCES
The Company's business requires continued access to short- and long-term
sources of debt financing and equity capital. The Company's cash requirements
arise from loan originations and purchases, repayments of debt upon maturity,
payments of operating and interest expenses, expansion activities and capital
expenditures. The Company's primary sources of liquidity are cash flow from
operations, sales of the loans it originates and purchases, proceeds from the
sale of Debentures, borrowings under the Credit Facilities and proceeds from
securitizations of loans. While the Company believes that such sources of funds
will be adequate to meet its liquidity requirements, no assurance of such fact
may be given.
Shareholders' equity increased from $7.4 million at December 31, 1993, to
$9.7 million at December 31, 1994, to $9.9 million at December 31, 1995, to
$13.5 million at June 30, 1996. Each of these increases resulted principally
from the retention of income by the Company.
Cash and cash equivalents increased from $778,000 at December 31, 1994, to
$1.3 million at December 31, 1995, to $22.7 million at June 30, 1996. Cash
provided by operating activities increased from $7.7 million for the six month
period ended June 30, 1995, to $53.0 million for the six month period ended June
30, 1996; cash used in investing activities increased from $14.7 million for the
six month period ended June 30, 1995, to $30.0 million for the six month period
ended June 30, 1996; and cash provided by (used in) financing activities
decreased from $9.4 million for the six month period ended June 30, 1995, to
$(1.4) million for the six month period ended June 30, 1996. The increase in
cash provided by operations was due principally to the increase in loans sold
during the first six month period of 1996 and the increase in net income. Cash
used in investing activities was principally for the net increase in loans
originated with the expectation of holding the loans until maturity. Cash used
in financing activities was due principally to the repayment of the Credit
Facilities, principally from the proceeds of the securitization of $16.1 million
in Auto Loans in March 1996, partially offset by the cash provided by the sale
of Debentures by the Mortgage Loan Division. At June 30, 1996, the Company's
Credit Facilities were comprised of credit facilities of $90 million for the
Mortgage Loan Division (the "Mortgage Loan Division Facility"), credit
facilities of $35 million for the Small Business Loan Division (the "Small
Business Loan Division Facility"), and credit facilities of $26 million for the
Auto Loan Division (the "Auto Loan Division Facility"). Based on the advance
rates contained in the Credit Facilities, at June 30, 1996, the Company had
aggregate borrowing availability of $28.2 million under the Mortgage Loan
Division Facility (none of which was outstanding), $16.2 million under the Small
Business Loan Division Facility ($16.0 million of which was outstanding), and
$6.7 million of aggregate borrowing availability under the Auto Loan Division
Facility ($4.2 million of which was outstanding). The Mortgage Loan Division
Facility and the Small Business Loan Division Facility both bear interest at the
lender's prime rate, while the Auto Loan Division Facility bears interest at
0.75% over the lender's prime rate. The Credit Facilities have terms ranging
from one to three years and are renewable upon the mutual agreement of the
Company and the respective lender.
The Credit Facilities contain a number of financial covenants, including,
but not limited to, covenants with respect to certain debt to equity ratios,
borrowing base calculations and minimum adjusted tangible net worth. The Credit
Facilities also contain certain other covenants, including, but not limited to,
covenants that impose limitations on the Company with respect to declaring or
paying dividends, making payments with respect to certain subordinated debt, and
making certain changes to its equity capital structure. The Company believes
that it is currently in material compliance with these covenants.
The Company sells substantially all of its Mortgage Loans originated
through its retail lending operations and its Strategic Alliance Mortgage
Bankers, as well as its SBA Loan Participations. During 1994 and 1995, the
Company sold $54.6 million and $127.6 million, respectively, of Mortgage Loans
and $31.2 million and $25.4 million, respectively, of SBA Loan Participations.
During the six months ended June 30, 1996, the Company sold $143.9 million of
Mortgage Loans and $16.0 million of SBA Loan Participations.
In June 1995, the Company securitized $17.1 million of loans representing
the unguaranteed portions of the SBA Loans and in March 1996, the Company
securitized $16.1 million of Auto Loans. Although securitizations provide
liquidity, the Company has utilized securitizations principally to provide a
lower cost of funds and reduce interest rate risk. Additional liquidity is not a
material factor in the Company's
32
<PAGE> 33
determination to pursue securitizations. In connection with its SBA Loan and
Auto Loan securitizations, the Company has retained subordinated certificates
representing approximately 10% of the transferred loans. The retained
subordinated certificates totaled approximately $2.2 million, net of allowances,
at June 30, 1996. See "Business -- Small Business Loan Division --
Securitization of SBA Loans."
CII engages in the sale of Debentures to investors. The Debentures are
comprised of senior notes and subordinated debentures bearing fixed rates of
interest which are sold by CII only to South Carolina residents. The offering of
the Debentures is registered under South Carolina securities law and is exempt
from Federal registration under the Federal intrastate exemption. CII conducts
its operations so as to qualify for the safe harbor provisions of Rule 147
promulgated pursuant to the Securities Act of 1933, as amended (the "Securities
Act"). At June 30, 1996, CII had an aggregate of $91.4 million of senior notes
outstanding bearing a weighted average interest rate of 8.2%, and an aggregate
of $16.7 million of subordinated debentures bearing a weighted average interest
rate of 5.5%. Both senior notes and subordinated debentures are subordinate in
priority to the Mortgage Loan Division Credit Facility. Substantially all of the
Debentures have one year maturities. The Company expects that after the
Offering, it will continue the offering of the Debentures.
TAX CONSIDERATIONS -- THE NOL
As a result of the operating losses incurred by the Company under prior
management, the Company generated the NOL. At June 30, 1996, the amount of the
NOL remaining and available to the Company was approximately $18 million. The
NOL expires, to the extent that it is not utilized to offset income, in varying
amounts annually through 2001.
Federal tax laws provide that net operating loss carryforwards are
restricted or eliminated upon certain changes of control. Applicable federal tax
laws provide that a 50% "change of control," which is calculated over a rolling
three-year period, would cause the loss of substantially all of the NOL.
Although the calculation of the "change of control" is factually difficult to
determine, upon the consummation of this Offering, the Company believes that it
will have had a maximum cumulative change of control of 33% during the relevant
three-year period.
No net deferred tax asset was recognized with respect to the NOL for the
years ended December 31, 1993, 1994 and 1995 or for the six months ended June
30, 1996. A valuation allowance equal to the NOL was applied to the NOL in each
of the years ended December 31, 1993, 1994 and 1995 and for the six months ended
June 30, 1996. A valuation allowance of approximately $7.7 million was applied
to the tax effect of the NOL for the year ended December 31, 1995.
ACCOUNTING CONSIDERATIONS
In connection with the Company's sale of SBA Loan Participations, the
Company accounts for the servicing revenue in excess of that defined as "normal"
servicing revenue in accordance with Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 65 as excess
servicing receivable. This asset is amortized against servicing revenue over the
life of the loan to which it relates. In the event that the related loan is
prepaid or the related borrower defaults on such loan, the balance of the excess
servicing receivable is charged against servicing revenue in the period in which
the prepayment or default occurs.
The Company has engaged in securitizations of loans. The net interest rate
spread received by the Company is recorded as excess servicing fees when
received over the life of the transaction.
The Company complies with the provisions of Emerging Issues Task Force
("EITF") 88-11 dealing with income recognition on the sales of loans. EITF 88-11
requires that the amount of gain or loss recognized on the sale of a portion of
a loan be based on the relative fair values of the loan portion sold and the
loan portion retained. For the Company, EITF 88-11 primarily impacts the amount
of gain recognized by the Company on the sale of the SBA Loan Participations. As
a result of the Company's accounting treatment described above, a portion of the
cash premiums received are deferred and recognized as income over the remaining
term of the retained unguaranteed portion of the loan.
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IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS AND REGULATORY POLICIES
In March 1995, the FASB issued SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The statement
requires that long-lived assets and certain identified intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The statement is effective for the Company for the fiscal year
ending December 31, 1996 and does not have a significant impact on the Company's
financial statements.
In May 1995, the FASB issued SFAS 122, "Accounting For Mortgage Servicing
Rights," which amends SFAS No. 65, "Accounting For Mortgage Banking Activities."
This statement allows the capitalization of servicing-related costs associated
with mortgage loans that are originated for sale, and to create servicing assets
for such loans. Prior to this statement, originated mortgage servicing rights
were generally accorded off-balance sheet treatment. The statement is effective
for the Company for the fiscal year ending December 31, 1996. The adoption does
not have a material effect on the Company's financial condition or results of
operations.
The FASB issued SFAS No. 123, "Accounting For Stock-based Compensation," in
October 1995. This statement supersedes APB Opinion No. 25, "Accounting For
Stock Issued To Employees" and establishes financial accounting and reporting
standards for stock-based employee compensation plans. Those plans include all
arrangements by which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees in
amounts based on the price of the employer's stock. The statement also applies
to transactions in which an entity issues its equity instruments to acquire
goods or services from nonemployees.
A new method of accounting for stock-based compensation arrangements with
employees is established by SFAS 123. The new method is a fair value based
method rather than the intrinsic value based method that is contained in APB
Opinion 25. However, SFAS 123 does not require an entity to adopt the new fair
value based method for purposes of preparing its basic financial statements.
Entities are allowed (1) to continue to use the APB Opinion 25 method or (2) to
adopt the SFAS 123 fair value based method. The selected method would apply to
all of the entity's compensation plans and transactions.
SFAS 123 requires that an employer's financial statements include certain
disclosures about stock-based employee compensation arrangements regardless of
the method used to account for them. The accounting requirements of this
statement are effective for transactions entered into in fiscal years that begin
after December 15, 1995, though they may be adopted at issuance. The disclosure
requirements are effective for financial statements for fiscal years beginning
after December 15, 1995, or for an earlier fiscal year for which this statement
is initially adopted for recognizing compensation cost. The Company has elected
to continue use of the method prescribed by APB 25 for recording stock-based
compensation and will provide pro forma disclosures in its annual financial
statements as prescribed by SFAS 123.
In June 1996, the FASB issued SFAS 125 "Accounting For Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." FASB's
objective is to develop consistent accounting standards for such transactions,
including determining when financial assets should be considered sold and
removed from the statement of financial position and when related revenues and
expenses should be recognized. This approach focuses on analyzing the components
of financial asset transfers and requires each party to a transfer to recognize
the financial assets it controls and liabilities it has incurred and remove such
assets from the statement of financial position when control over them has been
relinquished. The statement is not expected to have a significant impact on the
accounting practices of the Company and is generally effective for transactions
entered into after December 31, 1996.
INFLATION
Unlike most industrial companies, the assets and liabilities of financial
services companies such as the Company are primarily monetary in nature.
Therefore, interest rates have a more significant effect on the Company's
performance than do the general levels of inflation in the price of goods and
services. While the
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Company's noninterest income and expense and the interest rates earned and paid
are affected by the rate of inflation, the Company believes that the effects of
inflation are generally manageable through asset/liability management. See
"-- Liquidity and Capital Resources" and "-- Interest Rate Sensitivity."
INTEREST RATE SENSITIVITY
Asset/liability management is the process by which the Company monitors and
controls the mix and maturities of its assets and liabilities. The essential
purpose of asset/liability management is to ensure adequate liquidity and to
maintain an appropriate balance between interest sensitive assets and
liabilities.
The Company's asset/liability management varies by division. In general,
with respect to the Mortgage Division, the Company sells substantially all of
its Mortgage Loans on a monthly basis. Furthermore, commitments to a prospective
borrower for a Mortgage Loan do not extend beyond 45 days. In the event that
economic conditions necessitate a change in rate, such rate change is
communicated to potential borrowers and the Company's published rates are
adjusted. In addition, the Company may from time to time enter into forward
commitments to sell residential first mortgage loans to reduce risk associated
with originating and holding loans for sale.
With respect to the Small Business Loans, the Company only originates
variable rate loans, which generally adjust on the first day of each calendar
quarter. Therefore, interest rate risk exists for a maximum period of 60 days,
due to the Small Business Loan Division Facility having a variable rate which
adjusts monthly.
With respect to the Auto Loans, the Company's rate spread is in excess of
15% and is fixed. The Company believes that this interest rate spread provides
adequate margin to allow for any potential increase in interest rates.
The Company's average interest rates earned for the year ended December 31,
1995 and for the six months ended June 30, 1996 were 13.94% and 15.76%,
respectively, computed on a simple average monthly basis. The Company's average
interest rates paid for the year ended December 31, 1995 and for the six months
ended June 30, 1996 were 7.57% and 8.64%, respectively, which resulted in an
average interest rate spread of 6.37% and 7.12%, respectively.
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BUSINESS
GENERAL
Emergent Group, Inc. is a diversified financial services company
headquartered in Greenville, South Carolina which originates, services and sells
Mortgage Loans, Small Business Loans and Auto Loans. The Company also serves as
investment manager for the Venture Funds. Substantially all of the Company's
loans are made to non-prime borrowers. The Company commenced its lending
operations in 1991 and has experienced significant loan growth over the past
several years. During 1993, 1994 and 1995, the Company originated $63.6 million,
$150.0 million and $249.5 million in loans, respectively. During the first six
months of 1996, the Company originated $194.4 million in loans. Of the Company's
loan originations in the first six months of 1996, $153.8 million were Mortgage
Loans, $30.6 million were Small Business Loans and $10.0 million were Auto
Loans. For the years ended December 31, 1993, 1994 and 1995, the Company's pre-
tax income from continuing operations was $663,000, $2.4 million and $4.9
million, respectively. For the six months ended June 30, 1996, the Company's
pre-tax income from continuing operations was $3.6 million.
BUSINESS STRATEGY
The Company's business strategy is to be a diversified financial services
company that meets the credit needs of borrowers in what the Company believes to
be under-served credit markets. The key elements of the Company's business
strategy are as follows:
-- Emphasis on Profitability Rather than Asset Growth. The Company will
continue to focus on profitability, rather than asset growth. The Company
believes that it can maximize its profitability by maintaining a "high
velocity" capital strategy, whereby loans are made and sold within 10 to
40 days of origination. Recycling its capital in this manner enables the
Company to recognize gains on the sale of its loans and quickly redeploy
its capital, as well as reduce its interest rate risk, default risk and
borrowing costs. In addition, the Company plans to continue to focus on
high-margin loan products, while maintaining a low-cost operation.
-- Decentralized Loan Approval. The Company believes that one of the most
important factors to customers is the length of time between the lender's
initial contact with the customer and the disbursement of loan proceeds.
Accordingly, the Company emphasizes minimizing the length of time involved
in the lending process, without sacrificing credit quality. It attempts to
accomplish this goal, in part, by fostering an entrepreneurial,
decentralized management culture and by maintaining up-to-date MIS systems
for loan production, asset quality management and servicing. In the
Mortgage Loan Division, the Company has an expedited review process with
respect to loans submitted by the Strategic Alliance Mortgage Bankers,
which results in a final credit determination generally within two
business days. The Company also utilizes a decentralized approval process
with respect to its retail Mortgage Loan operations which generally
results in the lending decision being made within one business day. Also,
with respect to SBA Loans, the Company uses its "Preferred Lender" status,
as well as specially-trained officers who handle only SBA Loans, to
shorten the loan approval process. Furthermore, the Small Business Loan
Division maintains relatively autonomous regional offices which have
significant underwriting capabilities and credit authority.
-- Proactive Underwriting Process. The Company takes a proactive approach
to its loan underwriting process. Because the Company's borrowers are
generally non-prime borrowers, standardized credit scoring and
underwriting criteria are not always meaningful in assessing a particular
credit. Consequently, the Company attempts to employ experienced, trained
underwriters who analyze each application independently and have the
ability to craft a loan package which, where possible, meets the needs of
the borrower but provides the Company with adequate security. Underwriting
adjustments often suggested by Company underwriters include requiring a
guarantor or co-borrower with better credit history and/or additional
disposable income, lowering the loan-to-value ratio, increasing the
interest rate, securing additional collateral and lowering the loan
amount.
-- Uniform Credit Guidelines and Procedures. The Company attempts to
mitigate the risks associated with non-prime borrowers by utilizing
uniform guidelines and procedures for evaluating credit applications in
connection with its loan originations. This is designed to complement the
Company's
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decentralized management strategy by ensuring consistent credit quality.
The Company's guidelines and procedures relate to such matters as the
borrower's stability of residence, employment history, credit history,
capacity to pay, total income, discretionary income and debt ratios, as
well as the value of the collateral. With respect to its Small Business
Loans, the Company's guidelines and procedures also emphasize factors
pertaining to the business of the borrower, such as business plans,
historical and projected financial statements and strength of management.
-- Corporate Monitoring and Supervision of Operations. The Company has in
place corporate policies designed to monitor and ensure continued quality
of credit underwriting and servicing and to evaluate management in each of
the Mortgage, Small Business and Auto Loan Divisions. Such policies
include on-site audits of loan files and underwriting and servicing
procedures at each branch office as well as continuous evaluation of
general portfolio credit and performance quality, the effectiveness of
business development efforts and branch office profitability. The
Company's MIS systems provide management with reports on a continuous
basis which contain operational information from each of the Mortgage,
Small Business and Auto Loan Divisions, including the volume of loan
originations, delinquency experience and foreclosure and repossession
activities.
GROWTH STRATEGY
The Company's growth strategy is to continue to expand all areas of its
lending operations, while emphasizing profitability and return on equity, rather
than asset growth. The key elements in the Company's growth strategy are as
follows:
-- Retail Mortgage Lending. The Company expects to increase its Mortgage
Loan originations through the expansion of its retail lending operations.
The Company began its retail mortgage lending operations with the opening
of an office in Indianapolis, IN in April 1996, and currently operates
through this Indianapolis office, as well as offices in Baton Rouge, LA
and New Orleans, LA. The Company expects to open retail lending operations
in Greenville, SC and Phoenix, AZ during the fourth quarter of 1996 and to
open five offices in the first quarter of 1997. The Indianapolis office
generates loans in Indiana, Illinois, Michigan, Ohio and Kentucky and is
responsible for its own loan processing, underwriting, origination,
closing and loan documentation. The Company's Baton Rouge office is a loan
processing and underwriting center for the loans originated through New
Orleans office. However, in the future, the Company expects to open
additional retail loan production offices which will have their loan
processing, underwriting, closing and loan documentation performed through
the Baton Rouge office. The Company expects that Mortgage Loan volume
associated with its retail lending operation will continue to experience
significant growth in the future. In addition, the Company's retail
originations are generally more profitable than originations through
Mortgage Bankers. The Company believes that the combination of its retail
and wholesale strategies will increase the Company's penetration of the
non-prime market.
-- Wholesale Mortgage Lending. The Company plans to increase its wholesale
mortgage lending originations by expanding its operations geographically
and by adding additional account executives and Mortgage Bankers. Prior to
1994, the wholesale lending operations were conducted exclusively in South
Carolina. In 1994, the Company launched its expansion strategy by entering
the North Carolina market, and since that time has expanded into
approximately ten other states. The Company intends to continue this
geographic expansion as well as further penetrate existing markets. The
Company plans to add approximately nine account executives and 15 Mortgage
Bankers during the fourth quarter of 1996 and first quarter of 1997.
-- New Strategic Alliances in the Mortgage Loan Division. The Company
plans to establish ten additional strategic alliances with Mortgage
Bankers during 1997. The Company offers additional services to these
Strategic Alliance Mortgage Bankers, such as providing capital through
arrangements similar to warehouse lending and additional MIS and
accounting services, which are designed to increase their loan
originations. The Company expects to establish two to three additional
strategic alliances per year after 1997. The Company does not expect to
have contractual arrangements
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regarding future loan originations with any Mortgage Bankers except for
the Mortgage Bankers with whom the Company has strategic alliance
agreements. The Company has a minority equity interest, generally ranging
from 5% to 10%, in certain of the Strategic Alliance Mortgage Bankers,
which enhances the Company's growth potential.
-- Small Business Lending. The Company plans to expand its Small Business
Loan operations by opening additional regional offices and by utilizing
its Preferred Lender status to minimize its response time and maximize its
SBA Loan production. The Company has been designated as a Preferred Lender
by the SBA, which gives the Company the authority to approve a loan and to
obligate the SBA to guarantee the loan without submitting an application
to the SBA for credit review. Preferred Lender status will enable the
Company to enter more easily additional SBA districts in 1996 and future
years. The Company also expects to increase its Small Business Loan
originations through expansion of its asset-based lending operation, which
was begun in April 1996. This asset-based lending operation currently
operates through an Atlanta office. The Company expects to open additional
asset-based lending offices during 1996 and 1997.
-- Additional Offices. The Company plans to increase its penetration of
existing markets and expand geographically by opening additional offices.
To date in 1996, the Company has opened three Mortgage Loan offices, one
Small Business Loan office, and one Auto Loan office. The Company expects
that these additional offices will begin to produce significant loan
volume in the fourth quarter of 1996. In the future, the Company will
continue to target for expansion areas which have favorable demographics
or where the Company has identified qualified individuals who are
available to effectively manage additional locations.
-- Selected Acquisitions. The Company intends to pursue the acquisition of
businesses in the financial services industry. The Company believes that
each of the non-prime Mortgage Loan, Small Business Loan and Auto Loan
markets will present significant opportunities for growth and expansion
through acquisitions. Although the Company is engaged from time to time in
discussions relating to possible acquisitions, no agreements or
understandings relating to any acquisitions are presently pending.
MORTGAGE LOAN DIVISION
Overview
The Company's mortgage lending activities consist primarily of originating,
selling and servicing Mortgage Loans which are secured by owner-occupied,
single-family residential properties. Substantially all of the Company's
Mortgage Loans are made to refinance existing mortgages and for debt
consolidation, home improvements, educational expenses and a variety of other
purposes. The Mortgage Loans generally are secured by a first lien, have
principal balances ranging from $25,000 to $100,000, and bear fixed interest
rates ranging in 1995 and the first six months of 1996 from 9% to 16% per annum.
Most Mortgage Loans provide for equal monthly payments over their terms, which
generally range from 15 to 30 years.
Substantially all of the Mortgage Loans are made 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. These conventional lending sources generally impose stringent
and inflexible loan underwriting guidelines and generally require a longer
period of time, as compared to the Company, to approve and fund loans. The
Company believes that its customers require or seek a high degree of
personalized service and swift response to their loan applications. Furthermore,
the Company believes that its customers generally focus more on the amount of
the monthly payment, rather than the interest rate charged. Consequently, the
Company's customers many times are willing to pay higher interest rates,
assuming the amount of the monthly payment is otherwise acceptable. Furthermore,
because the Company's customers are generally credit-impaired for one or more
reasons, the customers are not in a position to obtain better rates from
traditional lending institutions.
The Mortgage Loan Division has experienced significant growth over the past
several years. For the years ended December 31, 1993, 1994 and 1995, Mortgage
Loan originations totaled $20.5 million, $99.4 million
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and $192.8 million, respectively. For the six months ended June 30, 1996,
Mortgage Loan originations totaled $153.8 million.
In 1995, the Company diversified its Mortgage Loan products to include
second mortgage primary-financing-only loans made to finance closing costs
associated with first Mortgage Loans made by the Company ("PFO Loans"). PFO
Loans have principal amounts ranging from $5,000 to $15,000 and, in the first
six months of 1996, had a weighted average interest rate of approximately 16%
per annum. All of the Company's PFO Loans are sold on a nonrecourse basis in the
secondary market. During 1995 and the first six months of 1996, the Company
originated $9.0 million and $8.1 million, respectively, of PFO Loans.
The Company originates Mortgage Loans through Mortgage Bankers located in
South Carolina, North Carolina, Missouri and Florida and through retail offices
which make Mortgage Loans directly to borrowers. Officers in the Mortgage Loan
Division headquarters in Pickens, SC are responsible for maintaining
relationships with the Mortgage Bankers.
The Mortgage Loan Division is managed by a Chief Operating Officer who
oversees other senior division officers who are responsible for the various
aspects of the operations of the Mortgage Loan Division such as underwriting,
servicing, loan origination and sale of Debentures. Each loan production area,
which includes retail production, wholesale production through Strategic
Alliance Mortgage Bankers, and wholesale production through other Mortgage
Bankers, is managed by a separate senior Mortgage Loan Division officer.
Industry
Although no official estimates exist regarding the size of the non-prime
mortgage industry, the Company believes that the non-prime mortgage market is
approximately $240 billion. The Company believes that the non-prime mortgage
industry is highly fragmented, with no single lender having a significant
portion of the market. However, many of the providers of financing to the
non-prime mortgage industry are publicly-traded specialty finance companies.
Non-prime borrowers may be generally considered credit-impaired because
their loan application is characterized by one or more of the following: (1)
inadequate collateral, (2) insufficient debt coverage, (3) problems with
employment history, (4) limited or unfavorable credit history or (5)
self-employment. Certain lenders in the non-prime market may internally classify
borrowers (generally with letters from A to D) according to the perceived credit
quality of the loan. However, the Company does not believe that there are
uniform guidelines among various non-prime lenders with respect to the
classification of borrowers. See "Business -- Mortgage Loan
Division -- Underwriting Classifications."
Under the Company's underwriting guidelines, Mortgage Loans are generally
classified into four categories: A, B, C and D. These categories are further
divided into subcategories, depending on various underwriting criteria. These
underwriting standards are under continual review and are subject to revision by
Company management. The majority of the Company's borrowers do not fit into one
category. Rather, such borrowers generally have some characteristics of one or
more classifications. Accordingly, there is a significant degree of subjectivity
in determining which rates and other loan terms will be offered. The following
is a general description of the basic categories in the Company's Mortgage Loan
underwriting process as currently in effect.
Under the Company's "A" category for owner-occupied Mortgage Loans, the
prospective borrower generally can have no more than two payments on mortgage
debt paid 30 days late during the preceding 12 month period, a debt-to-income
ratio of no more than 50% and no bankruptcy, judgment or liens within the
preceding two years. The maximum loan amount is $350,000. Loan-to-value ratios
range from 65% to 90%, are determined by the loan amount and credit history
which, in turn, determines the interest rate charged on the loan. In the case of
no income-qualifier loans, the maximum loan-to-value ratio is 70% and the
potential borrower must be able to provide proof of a minimum of two years of
self-employment. Loan applicants with less favorable credit ratings generally
are offered loans with higher interest rates and lower loan-to-value ratios than
applicants with more favorable credit ratings.
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Under the Company's "B" category for owner-occupied Mortgage Loans, the
prospective borrower can have no more than three payments on mortgage debt paid
30 days late during the preceding 12 month period, a debt-to-income ratio of no
more than 50% and no bankruptcy within the preceding 24 month period with a
reestablished credit history. The maximum loan amount is $350,000. Loan-to-value
ratios range from 65% to 85%, are determined by the loan amount and credit
history which, in turn, determines the interest rate charged on the loan. In the
case of no income-qualifier loans, the loan-to-value ratio cannot exceed 70% and
the potential borrower must be able to provide proof of self-employment for a
minimum of two years. No income-qualifier loan applicants must also have had no
bankruptcy within the past 24 month period and have reestablished their credit
history.
Under the Company's "C" category for owner-occupied Mortgage Loans, the
prospective borrower can have no more than four payments on mortgage debt paid
30 days late during the preceding 12 month period or no more than one payment on
mortgage debt paid 60 days late during the preceding 12 month period, a debt-
to-income ratio of no more than 55% and no bankruptcy within the preceding 24
month period with a reestablished credit history. The maximum loan amount is
$250,000. Loan-to-value ratios range from 70% to 80%, are determined by the loan
amount and credit history which, in turn, determines the interest rate charged
on the loan. The potential borrower may have had some payments 30 days or 60
days late on revolving or installment debt, but must bring such debt current
prior to the loan being made or with the proceeds of the Mortgage Loan.
Under the Company's "D" category for owner-occupied Mortgage Loans, the
prospective borrower can have no payments on mortgage debt more than four months
past due, a debt-to-income ratio of no more than 55% and no active bankruptcy.
The potential borrower can have no foreclosures in their credit history. The
maximum loan amount is $250,000. The loan-to-value ratio ranges from 65% to 70%,
is determined by the loan amount and credit history which, in turn, determines
the interest rate charged on the loan. The borrower must bring any delinquent
installment or revolving debt current prior to the loan being made or with the
proceeds of the loan, except that the borrower cannot use in excess of 10% of
the proceeds or $10,000, whichever is smaller, to bring the delinquent debt
current.
During 1995, approximately 37% of the Company's Mortgage Loans were
classified as "A" loans, 37% were "B" loans, 20% were "C" loans and 6% were "D"
loans. During the first six months of 1996, approximately 45% of the Company's
Mortgage Loans were classified as "A" loans, 37% were "B" loans, 15% were "C"
loans and 3% were "D" loans.
Mortgage Loan Origination
The Company originates Mortgage Loans both on a retail and wholesale basis.
Retail Mortgage Loans are originated by persons employed by the Company, while
wholesale Mortgage Loans are generally originated through Mortgage Bankers.
The Company utilizes two principal strategies in the retail lending area,
one which utilizes a regional approach to origination, underwriting, processing
and funding and a second which utilizes a centralized approach to underwriting,
funding and processing, but a decentralized, state-by-state approach to
origination. The Company expects that Mortgage Loan volume associated with its
retail lending operation will continue to experience significant growth in the
future.
The Company began its regional approach to retail lending in April 1996
through the establishment of its Indianapolis, IN office under its tradename,
"HomeGold." This regional office originates loans in Indiana, Illinois,
Michigan, Ohio and Kentucky and is managed by the former National Sales Manager
of BancOne Financial Services, Inc. which originated approximately $1 billion in
mortgage loans during 1995. The Company has created a marketing plan which
utilizes the HomeGold tradename in direct mail, radio, inbound and outbound
telephone, and television marketing efforts, and is designed to create national
brand awareness and capitalize on the fragmentation which currently exists in
the marketplace. From May through September 1996, HomeGold originated $22.0
million in Mortgage Loans. For the month of September, Mortgage Loan volume
totalled $8.4 million. The Company expects to open retail lending operations
which utilize this strategy in Greenville, SC and Phoenix, AZ during the fourth
quarter of 1996.
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The second, decentralized origination approach is conducted through
Sterling Lending Corporation, which has offices in Baton Rouge and New Orleans,
LA. The Company's Baton Rouge office is a loan processing and underwriting
center for the loans originated through the New Orleans office. In the future,
the Company expects to open additional retail loan production offices which will
have their loan processing, underwriting, closing and loan documentation
performed through the Baton Rouge office. The Company expects to open additional
offices which utilize this approach in Atlanta, GA, Nashville, TN, Columbia, SC
and Charlotte, NC in the first quarter of 1997. This operation is managed by the
former President of United Companies Financial Corporation which originated
approximately $1 billion in mortgage loans during 1995. This decentralized
operation will utilize more offices than the HomeGold operation, and its
potential customers will be identified through courthouse searches and purchased
lists, then solicited through direct mail and inbound and outbound telephone.
To date, substantially all of the Mortgage Loans have been originated on a
wholesale basis by the Company through Mortgage Bankers with whom the Company
has a relationship (although the Company does not have contractual arrangements
regarding future loan origination with any Mortgage Bankers except for the
Strategic Alliance Mortgage Bankers). As a wholesale originator of Mortgage
Loans, the Company funds the Mortgage Loans at closing, although the Mortgage
Loans may be closed in either the Company's name or in the name of the Mortgage
Banker with the Company taking an assignment of the Mortgage Banker's interest.
During 1994 and 1995 and the first six months of 1996, the Company originated
loans through approximately 65, 120 and 225 Mortgage Bankers, respectively,
which are located principally in North Carolina, South Carolina and Florida. Of
the approximately 120 and 225 Mortgage Bankers who were responsible for
origination of Mortgage Loans in 1995 and the first six months of 1996, the
Strategic Alliance Mortgage Bankers accounted for approximately $145 million, or
75%, of the Company's Mortgage Loans originated in 1995 and approximately $126.1
million, or 62%, of the Company's Mortgage Loans originated in the first six
months of 1996.
In July 1996, the former Vice President, Regional Sales Manager for Fleet
Finance, Inc. ("Fleet") assumed management of the Company's wholesale lending
operation. While at Fleet, he managed the daily sales activities of four
divisions, 40 branches and 180 employees. Monthly wholesale Mortgage Loan
production has grown from $3.5 million in January 1996 to $4.4 million in
September 1996 for total production of $40.8 million through September 30, 1996.
The Company plans to add approximately nine account executives and 15 Mortgage
Bankers during the fourth quarter of 1996 and the first quarter of 1997.
In 1994, the Company began seeking to enter into strategic alliance
agreements with Mortgage Bankers that were believed by the Company to be able to
consistently generate large volumes of quality mortgage loans. These strategic
alliance agreements require that the Strategic Alliance Mortgage Bankers must
first offer to the Company the right to fund all of their loans which meet the
Company's underwriting criteria before offering such loans to other parties. The
Strategic Alliance Mortgage Bankers are accorded additional services,
information and authority by the Company, including the provision of capital
through arrangements similar to warehouse lending and the provision of
additional MIS and accounting services. These strategic alliance agreements have
terms ranging from three to five years and are scheduled to terminate beginning
in August 1999. The Company believes that these strategic alliances are an
important factor in providing a higher level of customer service. The Company
currently has four Strategic Alliance Mortgage Bankers. The Company has a
minority equity interest in certain of the Strategic Alliance Mortgage Bankers,
which enhances the Company's growth potential.
On June 1, 1996, First Greensboro terminated its strategic alliance
agreement with the Company in connection with the pending purchase of First
Greensboro by a third party financial institution. In addition, AmeriFund
terminated its strategic alliance agreement with the Company in October 1996. As
a result of the termination of these strategic alliance agreements, the
Company's Mortgage Loan originations will be materially less than would
otherwise have been the case. See "Risk Factors -- Termination of Strategic
Alliance Agreements."
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The Company plans to increase the number of Mortgage Bankers with which it
is affiliated. The Company also seeks to identify specific Mortgage Bankers
either from its group of affiliated Mortgage Bankers or from unaffiliated
Mortgage Bankers and enter into strategic alliance agreements with these
parties.
During 1994, 1995 and the first six months of 1996, Mortgage Loan
originations by state were as follows:
<TABLE>
<CAPTION>
FOR THE SIX MONTH
FOR THE YEAR ENDED DECEMBER 31, PERIOD ENDED JUNE 30,
---------------------------------------- --------------------
STATE 1994 % 1995 % 1996 %
- ----------------------------------- ------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
North Carolina..................... $49,100 49.4% $ 97,400 50.5% $ 54,600 35.5%
South Carolina..................... 42,600 42.9 37,600 19.5 33,700 21.9
Florida............................ -- -- 16,200 8.4 26,000 16.9
Arkansas........................... 3,600 3.6 9,700 5.0 5,200 3.4
Virginia........................... 400 0.4 9,600 5.0 12,600 8.2
Tennessee.......................... 1,900 1.9 8,800 4.6 6,200 4.1
All other states (13 states)....... 1,800 1.8 13,500 7.0 15,500 10.0
------- ----- -------- ----- -------- -----
Total.................... $99,400 100.0% $192,800 100.0% $153,800 100.0%
======= ===== ======== ===== ======== =====
</TABLE>
Application and Approval Process
In the application and approval process associated with the Company's
retail Mortgage Loan operations, a Company loan officer in a retail loan
origination office obtains an initial loan application, which is processed
through the underwriting department associated with the particular loan
origination office. The Company loan officer is responsible for securing all
necessary underwriting information associated with such application. The
underwriting department generally completes its review within one business day
after procurement of all necessary documentation. Upon approval by the
underwriting department, the loan is forwarded to an attorney or title company
for closing.
The application and approval process for wholesale Mortgage Loans depends
upon the specific Mortgage Bankers involved in the origination process. Loans
originated through the Strategic Alliance Mortgage Bankers are initially
evaluated and underwritten by the loan officers of the Strategic Alliance
Mortgage Bankers, who are required to follow the Company's underwriting
procedures. After the Strategic Alliance Mortgage Bankers have gathered the
necessary underwriting information and evaluated and approved the application,
summary loan information and a funding request is forwarded to the Company for
review on an expedited basis, which review is generally completed within two
business days. After approval by the Company, the loan package is forwarded to
an attorney or title company for closing. In the origination process, the
Strategic Alliance Mortgage Banker makes standard representations and warranties
with respect to the Mortgage Loan, as well as a representation that the Mortgage
Loan meets the Company's underwriting criteria. With respect to loans originated
through Mortgage Bankers other than the Strategic Alliance Mortgage Bankers, the
necessary underwriting information is gathered by both the Mortgage Banker and
the Mortgage Loan Division's credit department. After review and evaluation, an
officer in the credit department makes the final credit decision.
The Company attempts to grant approvals of loans quickly to borrowers
meeting the Company's underwriting criteria. Loan officers are trained to
structure loans that meet the applicant's needs, while satisfying the Company's
lending criteria. If an applicant does not meet the lending criteria, the loan
officer may offer to make a smaller loan, request additional collateral, or
request that the borrower obtain a co-borrower or guarantor.
Mortgage Loans are generally made in amounts ranging from $25,000 to
$100,000, with the maximum amount generally being $200,000. In limited
instances, Mortgage Loans are made in excess of this limit. However, such loans
must be approved by a senior officer and have two independent appraisals. The
maximum amount that the Company will lend to a particular borrower is determined
by a number of factors including the applicant's creditworthiness, the value of
the borrower's equity in the real estate and the ratio of such equity to the
home's appraised value.
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<PAGE> 43
Creditworthiness is assessed through a variety of means, including
calculating standard debt to income ratios, examining the applicant's credit
history through standard credit reporting bureaus, verifying an applicant's
employment status and income, and checking the applicant's payment history with
respect to the first mortgage, if any, on the property. The Company uses several
procedures to verify information obtained from an applicant. The applicant's
outstanding balance and payment history on any senior mortgage is verified by
calling the senior mortgage lender. In order to verify an applicant's employment
status and income, the Company generally obtains a written statement from the
applicant's employer.
In the case of owner-occupied property, the loan amount generally may not
exceed 80% of the appraised value of the property, less any balance outstanding
on any existing mortgages. In non-owner-occupied properties, the loan amount
generally may not exceed 75% of the appraised value of the property, less any
balance outstanding on any existing mortgages. In limited instances, the Company
makes loans which have loan-to-value ratios greater than 80%. However, such
loans are generally made only to borrowers deemed by the Company to have a
higher degree of creditworthiness (i.e., superior credit history, stable,
high-income employment and low gross debt ratios), when compared to its typical
borrowers. It is the Company's current policy that such loans do not exceed
$250,000. Approximately 90% of the Company's Mortgage Loans are secured by
owner-occupied property.
The Company generally requires a physical inspection of collateral by a
Company officer if the loan is under $15,000 or an independent appraisal if the
loan is greater than $15,000. Loans in excess of $200,000 require two
independent appraisals. The Company generally requires title insurance for real
estate loans in excess of $15,000. For real estate loans less than $15,000, the
Company generally requires an insured certificate of title from a title abstract
company. The Company generally requires real estate improvements to be fully
insured as to fire and other commonly insured-against risks and regularly
monitors its loans to ensure that insurance is maintained for the period of the
loan.
In connection with Mortgage Loans, the Company collects nonrefundable
underwriting fees, late charges and various other fees, depending on state law.
Other fees charged, where allowable, include those related to credit reports,
lien searches, title insurance and recordings, prepayment fees and appraisal
fees.
Sale of Mortgage Loans
The Company began selling Mortgage Loans in 1994 and for the years ended
December 31, 1994 and 1995, the Company sold $54.6 million and $127.6 million,
respectively, of Mortgage Loans. For the first six months of 1996, the Company
sold $143.9 million of Mortgage Loans. The Mortgage Loans to be sold are
generally packaged in pools of approximately $10 million and offered to several
potential purchasers for the purpose of obtaining bids. After obtaining bids,
the pool is generally sold to the highest bidder. Historically, the Mortgage
Loans have been sold servicing released (i.e., without retention of the
servicing rights and associated revenues) and on a non-recourse basis, with
customary representations and warranties.
In connection with the sale of Mortgage Loans, the Mortgage Loan Division
receives premiums generally ranging from 4% to 8% of the principal amount of the
Mortgage Loan being sold, depending on prevailing interest rates and the term of
the loan. During 1994 and 1995, the weighted average premiums on the Mortgage
Loans sold were 5.9% and 7.0%, respectively. For the years ended December 31,
1994 and 1995, gains recognized by the Company in connection with the sale of
Mortgage Loans were $2.4 million and $6.0 million, respectively. For the six
months ended June 30, 1996, gains recognized by the Company in connection with
the sale of Mortgage Loans were $5.8 million. Purchasers of Mortgage Loan pools
are typically large financial institutions, many of which purchase the Mortgage
Loans for inclusion in larger pools of loans which, in turn, are sold to
institutional investors.
The Company plans to begin securitizing the majority of its Mortgage Loans
during 1997.
Mortgage Loan Servicing
The Company maintains a centralized portfolio management department which
services the Mortgage Loans that are not sold. Historically the Company has not
retained the servicing on Mortgage Loans sold, but
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<PAGE> 44
may do so, in the future. Servicing includes collecting payments from borrowers,
accounting for principal and interest, contacting delinquent borrowers, ensuring
that insurance is in place, monitoring payment of real estate property taxes,
and supervising foreclosures and bankruptcies in the event of unremedied
defaults. The Company has increased its servicing capabilities and staffing
significantly during 1996 in anticipation of increased origination growth. A
centralized quality control department reviews each Mortgage Loan subsequent to
funding to maintain consistency and compliance with documentation and
underwriting standards. The quality control department is managed by the former
Operations Manager of the Correspondent Lending division of BancOne Financial
Services, Inc.
Delinquencies and Collections
Collection efforts generally begin when an account is over seven days past
due. At that time, the Company attempts to contact the borrower to determine the
reason for the delinquency and cause the account to become current. After an
account becomes 15 days past due, weekly letters are sent to the borrower. In
general, at 30 days past due, a right to cure letter is sent; at 61 days a
five-day demand letter is sent; and at 68 days, the account is turned over to an
attorney. If the status of the account continues to deteriorate, the Company
undertakes an analysis to determine the appropriate action. In limited
circumstances, when a borrower is experiencing difficulty in making timely
payments, the Company may temporarily adjust the borrower's payment schedule
without changing the loan's delinquency status. The determination of how to work
out a delinquent loan is based upon a number of factors, including the
borrower's payment history and the reason for the current inability to make
timely payments.
When a loan is 90 days past due in accordance with its original terms, it
is placed on non-accrual status and foreclosure proceedings are generally
initiated. In connection with such foreclosure, the loan and the facts
surrounding its delinquency are reviewed, and the underlying property may be
reappraised. Regulations and practices regarding foreclosure and the rights of
the mortgagor in default vary greatly from state to state. If deemed
appropriate, the Company will bid in its loan amount at the foreclosure sale or
accept a deed in lieu of foreclosure. The real estate owned portfolio, which is
carried at the lower of carrying value or appraised fair market value less
estimated cost to sell, totaled $3.1 million at June 30, 1996.
SMALL BUSINESS LOAN DIVISION
Overview
The Company formed EBC in December 1991 for the purpose of acquiring
substantially all of the assets, including the SBA license, of an inactive SBA
lender. EBC is one of approximately 12 non-bank entities in the United States
possessing a license to make SBA Loans. Substantially all of the Company's SBA
Loans are made under Section 7(a) ("Section 7(a) Loans") of the Small Business
Act of 1953, as amended (the "Small Business Act"). However, the Company,
through a subsidiary, began making loans in 1995 pursuant to Section 504
("Section 504 Loans") of the Small Business Act (the "Section 504 Loan
Program").
During 1993, 1994 and 1995, the Company originated $37.9 million, $43.1
million and $39.6 million, respectively, in Section 7(a) Loans. During the first
six months of 1996, the Company originated $23.9 million in Section 7(a) Loans.
Management believes that during the SBA's fiscal year ended September 30, 1995,
the Company was among the ten largest SBA Loan lenders in the nation based on
principal amount of Section 7(a) Loans approved by the SBA.
During 1995 the Company originated approximately $3 million in Section 504
Loans and approximately $2 million in the six month period ended June 30, 1996.
The Company expects that it will continue to focus its SBA lending efforts on
Section 7(a) Loans, although future regulatory changes could alter such
decision.
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<PAGE> 45
The Small Business Loan Division's SBA lending operation originates loans
through a total of six offices, four of which are staffed by Company employees
and two of which are staffed by independent loan correspondents. The Company's
SBA lending operations are currently divided into three regions: (1) the
Southeastern Region, which is headquartered in Greenville, SC, (2) the Gulf
Coast Region, which is headquartered in Panama City, FL and (3) the Rocky
Mountain Region, which is headquartered in Denver, CO. In 1996, the Company
closed its Wichita regional office and services the area previously covered by
this office through its Dallas, TX, office, which is expected to become a
regional office in 1997.
The Small Business Loan Division also makes Asset-based Small Business
Loans to small- to medium-sized businesses in the southeastern United States.
These Asset-based Small Business Loans are structured as revolving credit lines
for working capital purposes and are generally secured by a first lien in
accounts receivable, inventory and equipment. This asset-based lending operation
was begun by the Company in April 1996 in Atlanta, GA and it currently
originates loans through this Atlanta office. However, the Company expects to
open additional offices in Denver, CO and Philadelphia, PA during the fourth
quarter of 1996 and the first quarter of 1997. For the six months ended June 30,
1996, loans originated by this asset-based lending operation totaled
approximately $4.6 million.
The Small Business Loan Division also serves as investment manager for the
Venture Funds. One of such funds provides venture capital to start-up companies
principally located within South Carolina. The second such fund provides loans
to early stage companies with equity participation as a part of the loan
agreement.
The Small Business Loan Division is managed by three Presidents who are
responsible for the three separate small business lending areas: SBA lending,
asset-based lending and the Venture Funds. The President of the SBA lending
operation oversees three regional vice presidents who are responsible for the
day-to-day operations within their respective regions. The President is also
responsible for the servicing operations of the SBA lending operation.
Small Business Loan Customers
The Company's Small Business Loan customers are commercial businesses which
are generally considered to be non-prime borrowers insofar as they generally do
not have access to traditional bank financing. Such financing may be unavailable
because of a variety of factors, including inadequate collateral, insufficient
debt coverage, lack of management experience or an unfavorable credit history.
The Company's SBA Loans are made only to potential borrowers who meet
defined criteria of the SBA as to the definition of a "small business." These
criteria differ based upon the industry in which the potential borrower
operates. The portion of the loan guaranteed by the SBA, the term of the loan
and the range of interest rates charged are also defined by the SBA. The Company
underwrites SBA loans on these SBA criteria, as well as by assessing the
available collateral, personal guarantees, and projected earnings and cash flow
of the small business on a case by case basis.
SBA Loan Program Participation
Section 7(a) Loan Program. Section 7(a) Loans are term loans made to
commercial businesses which qualify under SBA regulations as "small businesses."
These loans are primarily for the acquisition or refinancing of property, plant
and equipment, working capital or debt consolidation.
The SBA administers three levels of lender participation in its Section
7(a) Loan program. Under the first level of lender participation, known as the
Guaranteed Participant Program, the lender gathers and processes data from
applicants and forwards it, along with its request for the SBA's guaranty, to
the local SBA office. The SBA then completes an independent analysis and makes
its decision on the loan application. SBA turnaround time on such applications
can vary greatly, depending on its backlog of loan applications. Under the
second level of lender participation, known as the Certified Lender Program, the
lender (the "Certified Lender") gathers and processes the application and makes
its request to the SBA, as in the Guaranteed Participant Program procedure. The
SBA then performs a review of the lender's credit analysis on an expedited
basis, which review is generally completed within three working days. The SBA
requires that
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<PAGE> 46
lenders originate loans meeting certain portfolio quality and volume criteria
before authorizing lenders to participate as Certified Lenders. Authorization is
granted by the SBA on a district-by-district basis. Under the third level of
lender participation, known as the Preferred Lender Program, the lender has the
authority to approve a loan and to obligate the SBA to guarantee the loan
without submitting an application to the SBA for credit review. However, the
lender (the "Preferred Lender") is required to secure confirmation from the SBA
that the applicant qualifies as a small business. Such confirmation generally
takes less than 24 hours. The standards established for participants in the
Preferred Lender Program, the SBA's highest designation, are more stringent than
those for participants in the Certified Lender Program and involve meeting
additional portfolio quality and volume requirements.
The Company has been designated a Preferred Lender by the SBA in 27 of the
65 SBA districts. These districts are all of the SBA districts in which the
Company is deemed to be an "active" lender by the SBA. Virtually all of the
Company's SBA Loans are made in these districts. The determination of whether a
lender attains Preferred Lender status is determined by the Associate
Administrator for Financial Assistance (the "AA/FA"). In making its decision,
the SBA considers whether the lender (1) has the required ability to process,
close, service and liquidate loans; (2) has the ability to develop and analyze
complete loan packages; and (3) has a satisfactory performance history with the
SBA. The AA/FA may suspend or revoke Preferred Lender status for reasons such as
loan performance unacceptable to the SBA, failure to make the required number of
loans under the expedited procedures, or violations of applicable statutes,
regulations or published SBA policies and procedures.
Section 504 Program. The Section 504 Program differs from the Section 7(a)
Loan program in both structure and size of loans. Section 504 loans generally
range in principal amount from $1.0 million to $2.5 million and are made in
connection with a state chartered certified development corporation. Section 504
Loans are generally commercial development-related loans which, in the case of
construction loans, are initially funded entirely by the SBA-licensed lender
(such as the Company). Upon completion of the construction phase of the project,
a significant portion of the total loan (generally approximately 55%) is repaid
by the certified development corporation. This repayment is funded by the SBA
through the purchase of a fixed rate debenture issued by the certified
development corporation. This purchased portion of the loan is subordinated to
the first mortgage loan (held by the SBA-licensed lender). Consequently, the
SBA-licensed lender has a loan which has a very favorable loan-to-value ratio.
The acquisition of existing properties is generally funded 50% by the
SBA-licensed lender (in a first mortgage position), 40% by the certified
development corporation (in a subordinate lien position), with the remaining 10%
provided by the borrower. The approval process for Section 504 Loans is similar
to the first level of lender participation with respect to Section 7(a) Loan
program except that the certified development company presents the loan to the
SBA (after it has been approved by the SBA-licensed lender and the certified
development company). Upon presentation, the SBA completes its independent
analysis of the loan and makes its credit decision. SBA turnaround time on such
applications can vary greatly, depending on its backlog of loan applications.
SBA Guarantees
Under the Preferred Lender Program, the SBA guarantees up to 80% on loans
of $100,000 or less, and up to 75% on loans in excess of $100,000. However, the
SBA's maximum guaranty per borrower under any SBA Loan is $750,000.
In the event of a default by a borrower on an SBA Loan, if the SBA
establishes that any resulting loss is attributable to a failure by the Company
to comply with SBA policies and procedures in connection with the origination,
documentation or funding of the loan, the SBA may seek recovery of funds from
the Company. With respect to SBA Loan Participations which have been sold, the
SBA first will honor its guarantee and then seek compensation from the Company
in the event that a loss is deemed to be attributable to such failure to comply
with SBA policies and procedures. To date, the SBA has not sought recovery from
the Company on any of its SBA Loans. However, the SBA has notified the Company
as to the potential for impairment of guarantee on two of its loans. The Company
believes it is adequately reserved in relation to these potential impairments.
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Loan Origination and Approval
In the past five years, the Company's Small Business Loan origination
offices have made loans in 23 states and the District of Columbia. The Company's
Small Business Loans generally range in size from $250,000 to $1.5 million.
Average loan size for originations during 1995 and the first six months of 1996
was $332,000 and $651,000, respectively. The SBA Loans generally have a variable
rate of interest which is limited to a maximum of 275 basis points over the
prime rate adjusted on the first day of each calendar quarter. The Company's
Asset-based Small Business Loans have variable rates of interest which range
generally from 2.0% to 3.0% above the prime lending rate. However, these
Asset-based Small Business Loans also provide for servicing and other processing
fees, which cause the effective rate associated with such loans to be
approximately 26% for the loans originated to date.
Although the Company originates Small Business Loans through direct contact
between its loan officers and potential borrowers, a substantial portion of the
Company's Small Business Loans are generated by Commercial Loan Brokers who
generally are paid referral fees. The Company does not have any contractual
agreements with any of these brokers obligating them to refer loans to the
Company. In 1995, the Company originated Small Business Loans in connection with
approximately 35 Commercial Loan Brokers, and no Commercial Loan Broker
accounted for more than 15% of the Company's Small Business Loans. The Company
also attempts to maintain strong relationships with commercial banks, attorneys,
accountants and other potential loan referral sources.
The majority of the Company's Small Business Loan originations have been
for the acquisition or refinance of property, plant and equipment, working
capital or debt consolidation. A number of SBA Loans were made to business
franchisees in connection with the acquisition of national franchises. All SBA
Loans are secured, generally by all assets of the borrower, including any real
property. The Asset-based Small Business Loans are generally secured by a first
lien in accounts receivable, inventory and equipment. In connection with the
Small Business Loans, the Company generally obtains the guarantee of the
principals involved in the business, which is often secured by real property.
All SBA Loans originated by the Company are evidenced by variable rate
notes which adjust quarterly, require monthly payments and are scheduled to
amortize fully over their stated term. SBA Loans originated by the Company have
terms ranging from seven to 25 years depending upon the use of proceeds, with a
weighted average term of approximately 16 years. Generally, seven-year loans are
made for working capital, 10-year loans for equipment and 25-year loans for real
estate.
Applicants for SBA Loans are generally required to provide historical
financial statements for three years and/or projected statements of operations
for two years. They are also generally required to provide proof of equity,
personal guarantees and assignments of affiliated leases and life insurance.
Credit reports are generally obtained from independent credit reporting agencies
for all applicants. These reports are reviewed by the SBA lending operation's
credit officers. Independent appraisals are generally required on real estate
pledged as collateral.
Asset-based Small Business Loans are evidenced by variable-rate, revolving
credit notes, which are payable upon demand. However, the Company generally
commits to make the credit facility available for a period of one to two years,
provided that certain covenants and conditions are met. Applicants for
Asset-based Small Business Loans are generally required to provide cash flow
projections, and inventory and accounts receivable aging and turn-over
information. Such aging and turnover information is provided to the Company on a
daily basis.
All loans made by the Small Business Loan Division generally must be
approved by a designated executive officer and one other loan officer. All SBA
Loans in excess of $1.0 million must also be approved by either the President or
Executive Vice President of the SBA lending operation. After approval by such
officers, the loan application is produced and forwarded to the SBA office
servicing the location of the applicant. If an SBA Loan is being made in a
district where the Small Business Loan Division is certified as a Preferred
Lender, no prior credit approval of the SBA is required before the loan
transaction can be consummated. However, if the SBA Loan is being made in a
district where the Small Business Loan Division is not certified
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as a Preferred Lender, the loan cannot be made until the SBA office approves the
loan, issues an authorization letter and assigns a loan number.
Multiple Disbursements of SBA Loans
The Company funds certain of its SBA Loans on a multiple disbursement
basis. In particular, when part of the use of proceeds of a loan is for the
construction or improvement of real property, the loan may require multiple
disbursements over a lengthy period of time. At June 30, 1996, the Company had
$14.3 million of outstanding SBA Loans in various stages of multiple
disbursements, of which $6.0 million had been disbursed. The length of time
necessary to complete the disbursement process for multiple disbursement loans
is generally six to twelve months.
SBA Loan Sales
Upon final disbursement of the proceeds of each SBA Loan, the Company
obtains bids in the secondary market for the SBA Loan Participation associated
with that SBA Loan. The SBA Loan Participation is generally sold to the highest
bidder. The Company retains the unguaranteed portion of the loan and the
servicing rights to the entire loan. The Small Business Loan Division sells the
SBA Loan Participations generally to financial institutions or other
institutional investors. Purchasers of the SBA Loan Participations share ratably
with the Small Business Loan Division (holding the unguaranteed portion) with
respect to all principal collected from the borrowers with respect to the SBA
Loans. SBA lenders are required to pay a fee of 50 basis points per annum to the
SBA on the outstanding balance of the guaranteed portion of all loans.
In connection with the sale of SBA Loan Participations, the Small Business
Loan Division receives, in addition to additional servicing revenue, cash
premiums of approximately 10% of the guaranteed portion being sold. During 1993,
1994 and 1995 and the first six months of 1996, the weighted average premiums on
the SBA Loan Participations sold, together with the additional servicing
revenue, aggregated 13.75%, 11.79%, 13.75% and 14.46%, respectively, of the SBA
Loan Participations sold. For the years ended December 31, 1993, 1994 and 1995,
premiums recognized by the Company in connection with the sale of SBA Loan
Participations were $3.6 million, $4.0 million and $3.9 million, respectively.
For the first six months of 1996, premiums recognized by the Company in
connection with the sale of SBA Loan Participations were $1.7 million.
The SBA has contracted with Colson Services Corp. ("Colson Services") to
serve as the exclusive fiscal and transfer agent for the SBA Loan Participations
sold in the secondary market. The Company collects payments from borrowers and
remits to Colson Services amounts due to investors. Colson Services then remits
such amounts to the investors and administers the transfer of SBA Loan
Participations from one investor to another.
Securitization of SBA Loans
In 1995, the Company securitized approximately $17.1 million of the
unguaranteed portions of its SBA Loans. The securitization was effected through
a grantor trust (the "Trust"), the ownership of which was represented by Class A
and Class B certificates. The Class A certificates were purchased by investors,
while the Company retained the Class B certificates. These certificates give the
holders thereof the right to receive payments and other recoveries attributable
to unguaranteed portion of the SBA Loans held by the Trust. The Class B
Certificates represent approximately 10% of the principal amount of the SBA
Loans transferred in the securitization and are subordinate in payment and all
other respects to the Class A Certificates. Accordingly, in the event that
payments received by the Trust are not sufficient to pay certain expenses of the
Trust and the required principal and interest payments due on the Class A
Certificates, the Company, as holder of the Class B Certificates, would not be
entitled to receive principal or interest payments due thereon.
The Company serves as master servicer for the Trust and, accordingly,
forwards payments received on account of the SBA Loans held by the Trust to the
trustee of the Trust, which, in turn, pays the holders of the certificates in
accordance with the terms of and priorities set forth in the securitization
documents. Because the transfer of the SBA Loans to the Trust constitutes a sale
of the underlying SBA loans, no liability is
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created on the Company's Consolidated Financial Statements. However, the Company
has the obligation to repurchase the SBA Loans from the Trust in the event that
certain representations made with respect to the transferred SBA Loans are
breached or in the event of certain defaults by the Company, as master servicer.
The Class A certificates received a rating of Aaa from Moody's Investors
Service, Inc. The Class B Certificates were not rated. In connection with the
securitization, the Small Business Loan Division received funds substantially
equal to the Class A certificates' percentage of the total principal amount of
the SBA Loans transferred to the Trust.
If available, the Company intends to continue to pursue securitization
transactions in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Loan Servicing
The Company services substantially all the Small Business Loans it
originates. Servicing includes collecting payments from borrowers and remitting
payments with respect to the SBA Loan Participations to Colson Services,
accounting for principal and interest, contacting delinquent borrowers and
supervising foreclosures. The Company initially reviews loan files to confirm
that the loans were originated in accordance with SBA regulations and Company
policies. Thereafter, the Company conducts periodic reviews of the borrower's
financial condition and typically conducts field visits to the borrower's place
of business at least once a year.
Delinquency and Collection
When an SBA Loan becomes delinquent, the Company contacts the borrower to
determine the circumstances of the delinquency and attempts to maintain close
contact with the borrower until the loan is brought current or is liquidated.
When an SBA Loan becomes 60 days past due, the Company is required to notify the
SBA of such delinquency. Generally, after a loan becomes 90 days delinquent, the
Company places the loan on non-accrual status, delivers a default notice and
begins the legal process of foreclosure and liquidation, upon notification to
and approval by the SBA. Foreclosure proceedings are generally conducted by the
lender, although where the SBA Loan was not made by a Preferred Lender, the SBA
has the right to conduct the foreclosure. Any loss after foreclosure and
liquidation is allocated pro rata between the guaranteed and the unguaranteed
portions of the SBA Loan. Generally, after an SBA Loan becomes 60 to 90 days
past due, the SBA, upon the request of the servicer of the SBA Loan, repurchases
the guaranteed portion of the principal balance of the SBA Loan from the holder,
together with accrued interest covering a period of up to 120 days.
The asset-based lending operation monitors its borrowers daily for
availability under the lines of credit. Loans are placed on watch if the
borrower is experiencing tight cash flow and poor profitability. Loans are
placed on non-accrual status if collection of the interest is deemed to be
doubtful. In the event of a default, the Company makes an assessment of the
borrower's financial condition and nature of the default to determine further
action. If repayment of the loan is considered doubtful, a demand letter is sent
and the Company begins the process to take control of the collateral.
AUTO LOAN DIVISION
Overview
The Company's Auto Loan Division makes loans directly to non-prime
borrowers for the purchase of used automobiles. Substantially all of the Auto
Loans are made directly by the Company through referrals from Dealers located in
South Carolina. Less than 20% of the Auto Loans originated in the first six
months of 1996 were "indirect" loans purchased from Dealers, all of which were
located in South Carolina. Of the Dealers which referred loans to the Company in
1995 and the first six months of 1996, the Company estimates that half of such
Dealers were franchised Dealers and half were independent Dealers.
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The non-prime consumer automobile market is comprised of borrowers who
generally do not have access to other conventional sources of automobile credit
because they do not meet the credit standards imposed by other lenders. As a
result of its borrowers' credit status, the Company charges relatively high
rates of interest to such consumers, which, in the first six months of 1996,
ranged from 18% to 46% (with an average yield of 27.4%). By contrast, banks,
thrift institutions, and financing subsidiaries of manufacturers and retailers
generally impose more stringent, objective credit requirements and generally
charge lower interest rates based on the prevailing interest rate environments
at the time of origination.
The Company began making Auto Loans with its acquisition of 80% of the
common stock of Loan Pro$ in 1991. At the time of acquisition, Loan Pro$ had
$1.8 million in loans and operated through one location. The Company also
acquired Premier in 1991. At the time of acquisition, Premier had approximately
$3 million in loans, which were principally personal property loans, and
operated through three locations. During 1993, the Company decided to terminate
Premier's unsecured personal property loan operation and focus its lending
efforts on secured automobile lending. The Company currently operates its Auto
Loan Division through eight locations, and at December 31, 1995, had a total of
$18 million of serviced Auto Loans, substantially all of which were made in
connection with the purchase of automobiles. During 1993, 1994 and 1995, Auto
Loan originations totaled $5.2 million, $7.5 million and $17.1 million,
respectively. During the first six months of 1996, Auto Loan originations
totaled $10.1 million.
The Auto Loan Division is managed by the presidents of Loan Pro$ and
Premier. These individuals oversee the branch managers of each loan production
office and are generally responsible for the performance of their respective
companies. These individuals report to the Chief Executive Officer of the Auto
Loan Division, who is also the President and Chief Operating Officer of the
Company.
Although Premier and Loan Pro$ have substantially similar operations, the
Company has maintained their separate existence because Loan Pro$ is not a
wholly-owned subsidiary. The president of Loan Pro$ retained a 20% equity
interest in Loan Pro$ at the time of its acquisition by the Company.
Industry
The automobile finance industry is the second largest consumer finance
market in the United States, estimated by the Federal Reserve Board to have been
a $325 billion market in terms of outstanding automobile installment credit at
the end of 1994. The non-prime portion of the automobile finance market is
estimated to be between $30 billion and $50 billion and is highly fragmented.
Many large financial service entities, such as commercial banks, savings and
loans, credit unions and captive finance companies do not consistently provide
financing to the non-prime market. In many cases, those organizations electing
to remain in the automobile finance business have migrated toward higher credit
quality customers in order to reduce collection and processing costs and to
maintain higher levels of credit quality. Many of the largest providers of
financing to the non-prime automobile finance market are the publicly-traded
specialty automobile finance companies. The Company estimates that these
companies collectively have less than a 15% market share. The remainder is
primarily comprised of privately-held finance companies and Dealers who provide
financing programs directly to the consumer.
Non-prime borrowers in the automobile finance market may be generally
considered credit-impaired because their loan application is characterized by
one or more of the following: (1) inadequate collateral, (2) insufficient debt
coverage, (3) problems with employment history, (4) limited or unfavorable
credit history or (5) self-employment. Certain lenders in the non-prime market
may internally classify borrowers (generally with letters from A to D) according
to the perceived credit quality of the loan. However, the Company does not
believe that there are uniform guidelines among various non-prime lenders with
respect to the classification of auto loan borrowers.
The Company does not utilize a category rating system with respect to its
Auto Loans. Rather, such loans are underwritten independently based on criteria
such as the age and wholesale value of the automobile, the borrower's past
credit history and the availability of cosigners and/or guarantors for the loan.
The interest rates charged on Auto Loans are determined by the loan officer
after reviewing the potential borrower's credit history.
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Direct Auto Loans and Related Products
Substantially all of the Company's Auto Loans are made directly by the
Company to consumers in connection with purchases of used automobiles. This is
in contrast to "indirect lending," where lenders purchase loans from Dealers
that have already been originated by such Dealers.
The Auto Loans are generally fixed rate loans, with interest rates ranging
from 18% to 46% per annum, depending on the model year of the automobile being
financed and the creditworthiness of the borrower. At June 30, 1996, the Auto
Loans had a weighted average interest rate earned of 27.4%. The amount financed
on Auto Loans generally ranges from $3,000 to $10,000 (with an average initial
principal balance in the first six months of 1996 of approximately $5,000), and
the repayment terms generally range from 24 to 48 months, depending upon the
amount financed. The interest rate which may be charged by the Company is
regulated by state law. See "-- Regulation." The age of the vehicles financed
generally ranges from four to six years. The Company's underwriting guidelines
generally provide that the amount of the Auto Loan may not exceed 105% of
National Auto Dealers Association wholesale value of the vehicle being financed.
In connection with its Auto Loans, the Company offers credit life and
accident and health insurance products for which it receives commissions. These
insurance products are sold by branch managers who are licensed representatives
of an unaffiliated insurance company. During 1995, insurance was sold in
connection with approximately 50% of the total number of Auto Loans originated.
During 1995 and the first six months of 1996, the Company recognized $140,000
and $89,000, respectively, in commissions in connection with the sale of
insurance products.
Relationships with Dealers
Substantially all of the Company's Auto Loans are originated by referrals
from Dealers located in or around the localities served by the Company. In a
typical situation, the dealer will bring a customer who wishes to purchase an
automobile, along with the automobile, to an Auto Loan Division branch location.
At the branch location, the branch manager (or a person designated by the branch
manager) will examine the automobile and make a final credit determination with
respect to the customer. In dealing with the Company, Dealers become familiar
with the Company's lending policies and procedures and develop the ability to
screen potential applicants for credit who are unlikely to be approved by the
Company. The Company attempts to establish and maintain its relationships with
Dealers by making prompt credit determinations and by offering quality,
consistent and dependable service. New dealer relationships are secured
principally through personal contact by branch managers.
During 1995 and the first six months of 1996, the Company originated Auto
Loans in connection with approximately 200 Dealers. In 1995 and the first six
months of 1996, no single dealer accounted for a material portion of the
Company's Auto Loans. The Company has no formal agreements with any Dealers
under its direct lending program.
Direct Auto Lending Procedures
The initial credit screening on potential Auto Loan customers is performed
by the Dealers based on the Company's lending policies and procedures. Final
credit decisions involving less than $10,000 are made by the branch managers,
who interview borrowers in person, examine the automobile and perform other
verification procedures. Auto Loans in amounts greater than $10,000 require the
approval of the branch manager and one other member of the Auto Loan Division's
senior management.
The Company's credit review process requires the completion of a
standardized credit application with information on the applicant's background,
employment and credit history. The Company obtains a credit report on the
applicant from an independent reporting service and obtains verification of the
applicant's employment and wages from his or her employer. Branch managers are
encouraged to apply their knowledge of local conditions and collateral values
and their personal experience in making credit decisions. The Company does not
use a "scoring" system or other inflexible, standardized credit criteria.
Nevertheless, the Company estimates that approximately 50% of all applicants are
denied credit by the Company, generally
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because of their credit histories or because their income levels will not, in
the Company's judgment, support the amount of credit sought. If the credit is
approved, standardized financing documents are executed between the customer and
the Company. In connection with all Auto Loans, the automobile is pledged as
collateral and the Company obtains the certificate of title to the automobile,
on which its lien is recorded. The Company generally retains keys on the
financed automobiles. The customer receives a payment coupon book and
instructions on remitting monthly payments to the Company.
The Company considers refinancing of its existing loans on a case-by-case
basis. The Company generally does not refinance delinquent loans unless it
determines that refinancing is not likely to increase the credit risk.
Indirect Lending Operations
In 1995, the Company began an indirect automobile lending program. Under
this program, certain approved dealerships are provided underwriting criteria
and guidelines by the Company. The dealerships close and fund the loans to the
borrowers. The manager of the Company's local office is then given an
opportunity to purchase the loan from the dealer based on the office managers'
credit decision and verification procedures. Loans are purchased from the Dealer
at a discount from the principal amount of the loan. This discount, which is not
refundable to the Dealer, averaged approximately 5% in the first six months of
1996. Less than 20% of the Auto Loans originated in the first six months of 1996
were generated under this indirect lending program.
Servicing, Collection and Delinquencies
The Company's borrowers are expected to remit their monthly payments using
the payment coupon book provided to them at the time the credit is extended.
Consequently, the Company does not issue monthly statements to borrowers. If a
payment is not received within five days after its due date, the Company
telephones the borrower, and attempts to maintain weekly contact thereafter
until the loan is brought current. If a payment is not received within 11 days
after its due date, the borrower is sent a right to cure letter. In certain
instances, the automobile is picked up and stored by the Company after the right
to cure letter has been received. After 30 days, the branch manager contacts the
borrower. After 45 to 60 days, at the discretion of the branch manager, the
Company generally repossesses the automobile. In certain instances, borrowers
are permitted to recover their repossessed vehicles if they cure defaults under
their loan.
Repossessed automobiles are usually offered for sale by the Company through
independent Dealers. If such efforts are unsuccessful, the automobiles are sold
at public auction. The time between repossession and public sale generally
ranges from one to three months.
COMPETITION
The financial services industry, including the markets in which the Company
operates, is highly competitive. Competition is based on the type of loan,
interest rates, and service. Traditional competitors in the financial services
industry include commercial banks, credit unions, thrift institutions, credit
card issuers, consumer and commercial finance companies, and leasing companies,
many of which have considerably greater financial and marketing resources than
the Company. Moreover, substantial national financial services networks have
been formed by major brokerage firms, insurance companies, retailers and bank
holding companies. The Company believes that it competes effectively by
providing competitive rates, and efficient, complete services.
The Company faces significant competition in connection with its Mortgage
Loan operations, principally from national companies which focus their efforts
on making mortgage loans to non-prime borrowers. These competitors include The
Money Store, Ford Consumer Finance Company, Associates First Capital
Corporation, and ContiFinancial Corporation. Each of these companies has
considerably greater financial and marketing resources than the Company.
Although these large national companies compete in the mortgage loan industry,
the industry, as a whole, is highly fragmented and no one company has a large
percentage of the total mortgage loan market. The Company attempts to maintain
its competitiveness by establishing strong relationships with Mortgage Bankers.
Although the Company believes that it has been successful in this
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regard, in the event that the Company's competitors are able to weaken the
relationships between the Company and its Mortgage Bankers, including the
Strategic Alliance Mortgage Bankers, the Company's operations would be
materially and adversely affected. Conventional lenders, such as banks and
thrifts, are not believed to be significant competitors of the Company because
they are generally reluctant to make loans to non-prime borrowers. See
"Business -- Mortgage Loans -- Mortgage Loan Origination."
The Company faces significant competition in all markets in which it makes
Small Business Loans. The Company's major competitors vary from region to
region. However, its primary competitors are small independent banks and large
companies such as The Money Store, AT&T Capital Corp. and Heller First Capital.
Because SBA Loan interest rates and terms offered by lenders are relatively
uniform, the Company believes that the principal source of competition in making
SBA Loans relates to the quality of service provided by the lender and the
relationships established with the borrower. Competition with respect to Asset-
based Small Business Loans is also principally based upon the quality of the
service provided by the lender and the relationships established with the
borrower, and secondarily upon the interest rate and other terms of such loans.
In addition, the Company believes that it is important that it maintain good
relations with the Commercial Loan Brokers, accountants and attorneys, which are
a significant source of Small Business Loan originations.
The consumer finance business, and the Auto Loan business in particular, is
highly competitive. Because the Company's Auto Loan business is limited to a
particular area of the consumer finance industry and because the Company's
customer base consists of individuals who generally do not have access to other
traditional sources of consumer credit, the Company usually does not compete
directly with banks, savings and loans, financing subsidiaries of manufacturers
and retailers of automobiles, and other traditional consumer financing sources
with respect to Auto Loans. However, in each market where the Company operates,
there are generally a number of other non-prime lenders that compete for the
Auto Loans, including local finance companies. Certain of these non-prime
lenders are larger and have greater resources than the Company. These companies
include Mercury Finance Company, First Merchants Acceptance Corporation and
Regional Acceptance Corporation. Furthermore, the Company believes that
conventional lenders are increasingly seeking to operate in the non-prime
consumer market. Such additional competition could have a material adverse
effect on the Company and its ability to attract customers. The Company believes
that the principal bases for competition in the Auto Loan business are the
monthly payment amount, the speed of the credit determination process and the
general level of service provided to the Dealers. Accordingly, the Company
believes that it is important that it maintain good relationships with its
associated Dealers.
REGULATION
General
The Company's operations are subject to extensive local, state and federal
regulations including, but not limited to, the following federal statutes and
regulations promulgated thereunder: the Small Business Act, the Small Business
Investment Act of 1958, as amended (the "SBIA"), Title 1 of the Consumer Credit
Protection Act of 1968, as amended (including certain provisions thereof
commonly known as the "Truth-in-Lending Act" or "TILA"), the Equal Credit
Opportunity Act of 1974, as amended (the "ECOA"), the Fair Credit Reporting Act
of 1970, as amended (the "FCRA"), the Fair Debt Collection Practices Act, as
amended, the Real Estate Settlement Procedures Act (the "RESPA") and the
National Housing Act, as amended. In addition, the Company is subject to state
laws and regulations with respect to the amount of interest and other charges
which lenders can collect on loans (e.g., usury laws).
Although most states do not regulate commercial loans, a few states do
require licensing of lenders, limitations on interest rates and other charges,
adequate disclosure of certain contract terms and limitations on certain
collection practices and creditor remedies. Authorities in those states that
regulate the Company's SBA Loan activities may conduct audits of the books,
records and practices of the Company. The Company is licensed to do business in
each state in which it does business and in which such licensing is required and
believes it is in compliance in all material respects with these regulations.
The Company is also required to comply with certain portions of the ECOA which
are applicable to commercial loans, including SBA Loans.
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The Company must comply with ECOA's prohibition against discrimination on the
basis of race, color, sex, age or marital status and with the portion of
Regulation B under the ECOA that requires lenders to advise loan applicants of
the reasons their credit request was declined or subject to other adverse
action. The Company believes that it is in substantial compliance in all
material respects with ECOA.
In the opinion of management, existing statutes and regulations have not
had a materially adverse effect on the business done by the Company. However, it
is not possible to forecast the nature of future legislation, regulations,
judicial decisions, orders or interpretations, nor their impact upon the future
business, financial condition or prospects of the Company.
The Company believes that it is in substantial compliance with state and
federal laws and regulations governing its lending activities. However, there
can be no assurance that the Company will not inadvertently violate one or more
of such laws and regulations. Such violations may result in actions for damages,
claims for refunds of payments made, certain fines and penalties, injunctions
against certain practices, and the potential forfeiture of rights to repayment
of loans. Further, adverse changes in the laws or regulations to which the
Company's business is subject, or in the interpretation thereof, could have a
material adverse effect on the Company's business.
Mortgage Loans
Mortgage lending laws generally require licensing of the lender,
limitations on the amount, duration and charges for various categories of loans,
adequate disclosure of certain contract terms and limitations on certain
collection practices and creditor remedies. Many states have usury laws which
limit interest rates, although the limits generally are considerably higher than
current interest rates. State regulatory authorities may conduct audits of the
books, records and practices of the Company's operations. The Company is
licensed to do business in each state in which it does business and in which
such licensing is required and believes it is in compliance in all material
respects with these regulations.
The Company's Mortgage Loan origination activities are subject to TILA.
TILA contains disclosure requirements designed to provide consumers with
uniform, understandable information with respect to the terms and conditions of
loans and credit transactions in order to give them the ability to compare
credit terms. TILA also guarantees consumers a three-day right to cancel certain
credit transactions, including any refinanced mortgage or junior mortgage loan
on a consumer's primary residence. The Company believes that it is in
substantial compliance in all material respects with TILA.
The Company is also required to comply with the ECOA, which, in part,
prohibits creditors from discriminating against applicants on the basis of race,
color, sex, age or marital status. ECOA restricts creditors from obtaining
certain types of information from loan applicants. It also requires certain
disclosures by the lender regarding consumer rights and requires lenders to
advise applicants who are turned down for credit of the reasons therefor. In
instances where a loan applicant is denied credit or the rate or charge for a
loan is increased as a result of information obtained from a consumer credit
agency, another statute, the FCRA, requires the lender to supply the applicant
with the name and address of the reporting agency. Under RESPA, disclosures to
certain borrowers are required to be made within prescribed time frames. Good
faith estimates of applicable closing costs are also required. The Company
believes that it is in substantial compliance in all material respects with
ECOA.
Small Business Loans
The SBA Loans made by the Small Business Loan Division are governed by
federal statutes (the Small Business Act and SBIA) and may be subject to
regulation by certain states. These federal statutes and regulations specify the
types of loans and loan amounts which are eligible for the SBA's guaranty as
well as the servicing requirements imposed on the lender to maintain SBA
guarantees.
The Company's Asset-based Small Business Loans are generally not regulated
except to the extent set forth above in "-- Regulation -- General."
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Auto Loans
The Company's Auto Loan business is subject to extensive supervision and
regulation under state and federal laws and regulations, which, among other
things, require that the Company obtain and maintain certain licenses and
qualifications, regulate the interest rates, fees and other charges the Company
is allowed to charge, limit or prescribe certain other terms of the Company's
loans, require specified disclosures to consumers, govern the sale and terms of
insurance products offered by the Company and the insurers for which it acts as
agent, and define the Company's rights to repossess and sell collateral.
The Company's Auto Loan business is currently limited to South Carolina and
is therefore subject to certain South Carolina laws and regulations, including
the South Carolina Consumer Protection Code (the "SC Code"). With respect to
their direct lending activities, Premier and Loan Pro$ are each licensed under
the SC Code as a "supervised lender" (a lender making consumer loans at interest
rates in excess of 12% per annum), and are subject to regulation by the Consumer
Finance Division of the State Board of Financial Institutions and by the South
Carolina Department of Consumer Affairs. These state regulatory agencies audit
the Company's local offices from time to time, and each state agency performs an
annual compliance audit of the Company's operations.
The SC Code and the regulations thereunder generally do not limit the
finance charges that may be contracted for with respect to loans having a cash
advance exceeding $600, but require supervised lenders to file schedules showing
maximum finance charges for each category and amount of supervised loans. Such
schedules must express finance charges in terms of annual percentage rates
determined in accordance with TILA, and must be conspicuously posted in each
location where loans are originated in the format and with certain notices set
forth in regulations promulgated under the SC Code. The SC Code and regulations
thereunder also, among other things, limit or regulate closing costs, insurance
premiums, delinquency, deferral, refinancing, consolidation and conversion fees
and other additional charges which may be assessed in connection with consumer
loans, prescribe certain disclosures and notices to borrowers and cosigners,
prescribe maximum repayment terms for loans of $1,000 or less, define and limit
creditors' remedies on default, and prescribe certain record-keeping and
reporting procedures and requirements, and regulate other aspects of consumer
finance transactions, including permitted collateral, application of payments,
limits on scheduled balloon payments, rebates on prepayments, certain terms,
disclosures and formalities in the loan contract, and other matters.
The SC Code contains provisions similar to the foregoing which are
applicable to consumer credit sale transactions in which a consumer's purchase
of goods or services is financed by the seller or by the seller's assignment of
the retail installment sale contract to another lender. These provisions are
applicable to the Company's indirect financing of automobile purchases. The SC
Code provides that the seller effecting the credit sale is responsible for
licensing and compliance with respect to loans originated in connection with
credit sales, and does not impose on the assignee any obligation of the seller
with respect to events occurring before the assignment. However, upon the
assignment, the Company is subject to the provisions governing credit sales. The
Company believes that it and the dealers from which it accepts assignment of
consumer loans are in substantial compliance with the provisions of the SC Code
governing credit sales.
The Company's Auto Loan business is also subject to extensive federal
regulation in connection with its consumer loans, including TILA, ECOA and FCRA
and the regulations thereunder, and certain rules of the Federal Trade
Commission. These laws and regulations are referenced above under
"--Regulation -- Mortgage Loans." The Company's Auto Loan business is also
subject to the rules of the Federal Trade Commission, which limit the types of
property a creditor may accept as collateral to secure a consumer loan and
provide for the preservation of the consumer's claims and defenses when a
consumer obligation is assigned to a subsequent holder. The Company believes
that it is in substantial compliance in all material respects with TILA, ECOA,
FCRA and the Federal Trade Commission rules.
EMPLOYEES
At June 30, 1996, the Company employed a total of 243 full-time equivalent
employees. The Company believes that its relations with its employees are good.
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PROPERTIES
The Company's headquarters are located at 15 South Main Street, Suite 750,
Greenville, South Carolina and are leased. The Company owns three locations and
leases 20 locations. None of the leases or properties owned is believed to be
material to the Company's operations. The Company believes that its leased and
owned locations are suitable and adequate for their intended purposes. The
Company would expect to lease or purchase any properties necessary for any
expansion.
LEGAL PROCEEDINGS
The Company and its subsidiaries 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 any of its
subsidiaries that, if determined adversely, would have a materially adverse
effect on the operations, profitability or financial condition of the Company or
any of its subsidiaries.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the names and ages of the Company's
executive officers and directors, the positions and offices with the Company
held by each such person, and the period that each such person has served as an
executive officer or director of the Company.
<TABLE>
<CAPTION>
DIRECTOR OR
NAME AGE POSITION OFFICER SINCE
- ----------------------------------------- --- ----------------------------------- -------------
<S> <C> <C> <C>
John M. Sterling, Jr. ................... 58 Chief Executive Officer and 1991
Chairman of the Board
Keith B. Giddens......................... 41 President, Chief Operating Officer 1992
and Director
Kevin J. Mast............................ 36 Vice President, Chief Financial 1995
Officer and Treasurer
Robert S. Davis.......................... 50 Vice President -- Administration 1990
and Director
Clarence B. Bauknight(1)(2).............. 60 Director 1995
Tecumseh Hooper, Jr.(2).................. 49 Director 1991
Jacob H. Martin(1)....................... 78 Director 1991
Buck Mickel(1)........................... 70 Director 1991
Porter B. Rose(2)........................ 54 Director 1991
</TABLE>
- ---------------
(1) Members of the Compensation Committee.
(2) Members of the Audit Committee.
John M. Sterling, Jr. has served as Chief Executive Officer and Chairman of
the Board of the Company since January 1991. In addition, Mr. Sterling also
served as President of the Company from January 1991 to August 1996. Mr.
Sterling was Chairman of the Board and Chief Executive Officer of Modern Office
Machines, Inc. ("MOM") from 1981 through August 1992. Since November 1993, Mr.
Sterling has served as President of the corporate general partner of Palmetto
Seed Capital Fund, L.P. ("PSC"), which invests primarily in early stage South
Carolina companies. Mr. Sterling has served as General Partner and Manager of
Reedy River Ventures, L.P. ("RRV"), which is a SBIC licensed by the SBA. PSC and
RRV are currently managed by the Company. Mr. Sterling also serves on the Board
of Directors of Datastream Systems, Inc. and several private companies.
Keith B. Giddens has served as President and Chief Operating Officer since
August 1996, and as Executive Vice President and Chief Operating Officer of the
Company from November 1995 to August 1996 and Chief Executive Officer of CII,
Premier, Loan Pro$ and EBC since the date of their respective acquisitions by
the Company in 1991. Mr. Giddens was a partner in the public accounting firm of
Ernst & Young from October 1988 through April 1991 and a Senior Manager at such
firm from October 1984 through September 1988.
Kevin J. Mast has served as Vice President and Chief Financial Officer of
the Company since August 1996 and as Treasurer of the Company since November
1995, Executive Vice President and Chief Financial Officer and Treasurer of EBC
since April 1992, Chief Financial Officer and Treasurer of Loan Pro$ and Premier
since April 1995 and Treasurer of CII since April 1995. From June 1991 to
October 1992, Mr. Mast served as Executive Vice President and Chief Financial
Officer of Citizens Bank & Trust Co. and its parent company Business Banc of
America. Prior to that time, Mr. Mast was an audit Senior Manager at Ernst &
Young where he specialized in the audits of financial institutions.
Robert S. Davis has served as Vice President -- Administration since August
1996 and as Chief Financial Officer of the Company from January 1991 to August
1996, as Treasurer from 1992 to 1995, as Vice President of Finance from November
1989 through June 1990, as President and Treasurer from June through December
1990, and as Corporate Controller from 1986 through November 1989. Prior to
1986, Mr. Davis was Chief Financial Officer of Alexander's Wholesale
Distributors, Inc., a catalog retailer of consumer goods.
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Clarence B. Bauknight has been Chairman of the Board and Chief Executive
Officer of Builderway, Inc. since 1976. Builderway, Inc. is engaged in the
business of distribution and retail sale of building supplies and appliances.
Mr. Bauknight has also served since 1978 as Chairman of the Board and Chief
Executive Officer of Enterprise Computer Systems, Inc. which is engaged in the
development of computer software for the building supply industry. Mr. Bauknight
also serves on the Board of Directors of Builder Marts of America, Inc., a
building supply company. Mr. Bauknight was a founder of all three of these
companies.
Tecumseh Hooper, Jr. served as Treasurer of the Company from January 1991
through 1992. Mr. Hooper has served as President of MOM, which is engaged in the
sale of office equipment and supplies, since 1982. Since October 1994, Mr.
Hooper has also been the Southeast Regional Director for Alco Office Products,
MOM's parent company.
Jacob H. Martin was Chairman of Standard Car Truck Company from January
1989 until May 1, 1995, when he retired from this position. Standard Car Truck
Company is engaged in the business of designing, manufacturing and selling
railroad equipment. Mr. Martin also served as Chairman of the Board of
Enterprise Finance Company ("EFC") and as Chairman of the Board of Freight Car
Building and Supply Company ("FCBSC") until May 1995, when he retired from these
positions. EFC and FCBSC are engaged in the finance business and railway
equipment accessories business, respectively. Prior to 1989, Mr. Martin was a
partner of the law firm of Martin, Craig, Chester & Sonnenschein in Chicago,
Illinois. Mr. Martin is presently of counsel to that firm.
Buck Mickel is Chairman of Mickel Investment Group, a private investment
company in Greenville, SC. Mr. Mickel has served in various executive positions,
including Vice Chairman of the Board of Fluor Corporation, a construction firm,
from which he resigned in 1987, and Chairman of the Board of Daniel
International Corporation, a construction firm and a subsidiary of Fluor
Corporation, from which he resigned in 1987. Mr. Mickel also serves on the Board
of Directors of Fluor Corporation, Monsanto Company, NationsBank Corporation,
Liberty Corporation, Duke Power Company, Delta Woodside Industries, Inc. and
Insignia Financial Group, Inc.
Porter B. Rose has been President of Liberty Insurance Services, Inc. since
January 1995, President of Liberty Investment Group, Inc. ("Liberty Group")
since April 1992, and Chairman of Liberty Capital Advisors, Inc. ("Liberty
Capital") and Liberty Properties Group, Inc. since January 1987 (collectively,
the "Liberty Subsidiaries"). Mr. Rose served as President of Liberty Capital
from January 1987 to April 1992 and as Executive Vice President of Investments
for Liberty Life Insurance Company from 1983 through 1987. The Liberty
Subsidiaries are engaged in property development and the management of
investment portfolios for Liberty Corporation, its subsidiaries and other
clients.
All directors of the Company serve one year terms and until the election
and qualification of their respective successors. The Company's executive
officers are appointed by the Board of Directors and serve at the discretion of
the Board.
Meetings, Committees and Compensation of the Board of Directors
During fiscal 1995, the Company's Board of Directors met four times. Each
director attended more than 75% of the total number of meetings of the Board of
Directors and all committees on which he served.
The Board of Directors has an Executive Committee, the function of which is
to make decisions between meetings of the Board of Directors pursuant to
authority delegated by the Board of Directors. The current members of the
Executive Committee are Messrs. Sterling, Rose and Mickel. The Executive
Committee met twice during 1995.
The Board of Directors also has an Audit Committee, which is responsible
for reviewing and making recommendations regarding the Company's engagement of
independent auditors, the annual audit of the Company's financial statements and
the Company's internal accounting practices and policies. The current members of
the Audit Committee are Messrs. Hooper, Bauknight and Rose. The Audit Committee
met once during 1995.
58
<PAGE> 59
The Board of Directors also has a Compensation Committee, the function of
which is to make recommendations to the Board of Directors as to the salaries
and bonuses of the officers of the Company. The current members of the
Compensation Committee are Messrs. Bauknight, Mickel and Martin. The
Compensation Committee met once during 1995.
The Board of Directors has a Risk Oversight Committee, the function of
which is to review the operations of the Company with a view toward assessing
various Company risks, including asset/liability risk, interest rate risk,
credit risk and liquidity risk. The current members of the Risk Oversight
Committee are Messrs. Bauknight, Rose and Hooper. This Committee, which was
formed in November 1995, has met once since inception.
The Board of Directors does not have a Nominating Committee. The functions
of a nominating committee are performed by the Board of Directors as a whole.
Non-management Board members receive a director's fee of $24,000 per year,
half of which is payable in cash and half of which is payable in restricted
stock. The directors also automatically receive annual grants of options to
purchase 666 shares of Common Stock under the Company's 1995 Director Stock
Option Plan.
EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following table shows the cash compensation paid by the Company, as
well as certain other compensation paid or accrued, to the Company's Chief
Executive Officer and to the executive officers of the Company who earned in
excess of $100,000 per year in compensation (in all capacities) for the years
ending December 31, 1995, 1994 and 1993 (collectively, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
---------------------------------
AWARDS PAYOUTS
ANNUAL COMPENSATION ----------------------- -------
------------------------------------- SECURITIES
OTHER RESTRICTED UNDERLYING ALL OTHER
NAME AND SALARY BONUS ANNUAL STOCK OPTIONS/ LTIP COMPENSATION
PRINCIPAL POSITION YEAR (1)($) ($) COMPENSATION(2) AWARDS SARS(#) PAYOUTS (3)($)
- ------------------------ ---- --------- ------- --------------- ---------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John M. Sterling, Jr.... 1995 186,992 110,000 -- -- 30,000 -- 3,234
Chairman and CEO 1994 178,437 70,000 -- -- -- -- 3,234
1993 170,303 50,000 -- -- 33,334 -- 3,148
Keith B. Giddens........ 1995 173,923 100,000 -- -- 74,000 -- 2,835
President and COO 1994 165,900 65,000 -- -- 20,000 -- 2,572
1993 157,698 45,000 -- -- 33,334 -- 1,470
Kevin J. Mast........... 1995 93,461 25,000 -- -- 22,668 -- 2,698
Vice President, Chief 1994 82,978 10,000 -- -- -- -- 2,005
Financial Officer and 1993 75,972 12,513 -- -- -- -- 808
Treasurer
Robert S. Davis......... 1995 93,796 43,000 -- -- 33,334 -- 2,663
Vice President -- 1994 88,137 33,000 -- -- 20,000 -- 2,168
Administration 1993 83,793 25,000 -- -- 33,334 -- 2,285
</TABLE>
- ---------------
(1) A portion of total salary may have been deferred, at the option of the
employee, pursuant to the Company's 401(k) plan.
(2) Certain amounts may have been expended by the Company which may have had
value as a personal benefit to the Named Executive Officer. However, the
total value of such benefits did not exceed the lesser of $50,000 or 10% of
the annual salary and bonus of such Named Executive Officer.
(3) Amounts shown under "All Other Compensation" consist of contributions during
fiscal year 1995, 1994, and 1993 to the Company's 401(k) plan in the amount
shown to match pre-tax elective deferral contributions (included under
salary) made by the executive officers pursuant to the plan.
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<PAGE> 60
Restricted Stock Agreement and Stock Option Plans
The Company has in place the 1995 Officer and Employee Stock Option Plan,
the 1995 Director Stock Option Plan and the Restricted Stock Agreement Plan. At
December 31, 1995, a total of 700,000 shares were authorized for issuance under
these stock plans. At December 31, 1995, options to purchase an aggregate of
83,532 shares with a weighted average exercise price of $4.26 were outstanding
and exercisable under such stock option plans. At December 31, 1995, options to
purchase an additional 255,468 shares were outstanding but were not exercisable.
The Restricted Stock Agreement Plan was adopted in January 1996 and provides for
the grant of up to 100,000 shares of restricted stock to non-employee directors.
Since its adoption, restricted stock agreements with respect to a total of
10,500 shares have been granted.
Option Grants in Last Fiscal Year
The following table sets forth certain information with respect to options
to purchase Common Stock granted to the Named Executive Officers during fiscal
1995.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES
OF STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
-------------------------------------------------------------- ----------------
PERCENT OF
NUMBER OF TOTAL OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE PRICE EXPIRATION
NAME OPTIONS GRANTED IN FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ----------------------------- --------------- -------------- -------------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
John M. Sterling, Jr......... 30,000 12.7% 5.09 10-31-05 73,309 207,181
Keith B. Giddens............. 50,000 21.2 1.32 1-13-05 41,507 105,187
24,000 10.2 4.63 10-31-05 69,807 176,905
Kevin J. Mast................ 6,668 2.8 1.32 1-13-05 5,535 14,028
16,000 6.8 4.63 10-31-05 46,538 117,937
Robert S. Davis.............. 13,334 5.6 1.32 1-13-05 11,069 28,051
20,000 8.5 4.63 10-31-05 58,173 147,421
</TABLE>
60
<PAGE> 61
Fiscal Year End Option Values
The following table sets forth certain information with respect to options
to purchase Common Stock held by the Named Executive Officers as to the number
of shares covered by both exercisable and unexercisable stock options and
options exercised in 1995. Also reported are the values for the "in-the-money"
options which represent the positive spread between the exercise price of any
such existing stock option and the year-end fair market value of the Common
Stock.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR- FISCAL
END (#) YEAR-END ($)
------------ ------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- -------------------------------------------- --------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
John M. Sterling, Jr........................ 26,000 167,670 -- / -- /
37,334 $ 177,567(1)
Keith B. Giddens............................ 5,400 39,812 37,400 / 256,427 /
84,534 546,007(1)
Kevin J. Mast............................... 4,536 21,811 -- / -- /
18,132 87,158(1)
Robert S. Davis............................. 4,400 32,439 30,266 / 208,381 /
52,002 324,290(1)
</TABLE>
- ---------------
(1) The indicated value is based on exercise prices ranging from $1.09 to $5.09
per share and a per share value at December 31, 1995 of $8.46.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Over the past several years, the Company has provided management services
to RRV. Certain of the Company's officers and directors, namely John M.
Sterling, Jr., Buck Mickel, Tecumseh Hooper, Jr. and Clarence B. Bauknight, are
partners of RRV. During 1994 and 1995, RRV paid the Company $35,000 and
$250,000, respectively, in management fees. The Company expects that fees paid
by RRV to the Company in 1996 will be approximately $175,000. In October 1995,
the Company became an investor in RRV, with an investment of $1 million, and
became its general partner.
Certain officers, directors and employees of the Company held Debentures
which at December 31, 1995 aggregated approximately $1.1 million. These
Debentures were purchased on terms which were the same as those available to
purchasers not affiliated with the Company.
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<PAGE> 62
PRINCIPAL AND SELLING SHAREHOLDERS
The information set forth below is furnished as of September 13, 1996, with
respect to Common Stock owned beneficially or of record by (i) persons known to
the Company to be the beneficial owner of more than 5% of the Common Stock as of
that date, (ii) each of the directors individually, (iii) each of the Named
Executive Officers, (iv) the Selling Shareholders and (v) all directors and
executive officers as a group. Unless otherwise noted, each person has sole
voting and investment power with respect to such person's shares owned. All
share amounts in the table include shares which are not outstanding but which
are the subject of options exercisable in the 60 days following the date hereof.
All percentages are calculated based on the total number of outstanding shares,
plus the number of shares for the particular person or group which are not
outstanding but which are the subject of options or other convertible securities
exercisable or convertible in the 60 days following the date hereof.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING SHARES AFTER OFFERING
------------------- BEING -------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ---------------------------------------------------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
John M. Sterling, Jr.(1)............................ 900,622 13.8% -- 900,622 10.6%
C. Thomas Wyche (2)................................. 210,532 3.2 -- 210,532 2.5
John Hancock Mutual Life Ins. Co.(3)................ 550,970 8.3 550,970 -- --
Enterprise Finance Company(4)....................... 327,996 5.0 250,000 77,996 0.9
Charles C. Mickel(5)................................ 300,510 4.6 40,000 260,510 3.1
Minor M. Shaw(5).................................... 265,086 4.1 20,000 245,086 2.9
Buck Mickel(6)...................................... 248,358 3.8 -- 248,358 2.9
Buck A. Mickel(5)................................... 248,490 3.8 20,000 228,490 2.7
Keith B. Giddens(7)................................. 171,368 2.6 -- 171,368 2.0
Tecumseh Hooper, Jr.(8)............................. 171,562 2.6 -- 171,562 2.0
Clarence B. Bauknight(9)............................ 167,554 2.4 -- 167,554 2.0
Robert S. Davis(10)................................. 64,666 1.0 -- 64,666 0.8
Porter B. Rose(8)................................... 17,332 0.3 -- 17,332 0.2
Kevin J. Mast....................................... 10,032 0.2 -- 10,032 0.1
Jacob H. Martin(8).................................. 2,666 -- -- 2,666 --
Sterling Family Limited Partnership(11)............. 797,168 12.2 -- 797,168 9.4
All directors and executive officers as a group (9
persons).......................................... 1,754,160 26.8 -- 1,754,160 20.6
</TABLE>
- ---------------
(1) The address of John M. Sterling, Jr. is P.O. Box 17526, Greenville, SC
29606. Includes 32,688 shares owned by Mr. Sterling directly. Also includes
797,168 shares owned by a partnership whose partners are Mr. Sterling, his
spouse and his three adult children. Includes 70,786 shares of Common Stock
owned by a trust of which Mr. Sterling is the sole trustee, as to which Mr.
Sterling disclaims beneficial ownership.
(2) The address of C. Thomas Wyche is P.O. Box 728, Greenville, SC 29602.
Includes 85,042 shares owned by Mr. Wyche directly, and 125,489 shares
owned by Mr. Wyche's spouse. Also includes the right to acquire 400 shares
at $5.09 pursuant to currently exercisable stock options.
(3) The address of John Hancock Mutual Life Insurance Co. is P.O. Box 111,
Boston, MA 02118. Includes the right to acquire 92,354 shares of Common at
$2.63 per share pursuant to currently exercisable stock purchase warrants.
(4) The address of Enterprise Finance Company is 865 Busse Highway, Park Ridge,
IL 60068.
(5) Charles C. Mickel, Minor M. Shaw and Buck A. Mickel are the adult children
of Buck Mickel, a director of the Company. These individuals are not
involved in the management of the Company.
(6) Includes 11,332 shares owned by Mr. Mickel directly. Also includes 236,360
shares owned by Mr. Mickel's spouse, as to which shares he disclaims
beneficial ownership. Also includes the right to acquire 666 shares at
$10.38 per share pursuant to currently exercisable stock options.
(7) Includes 99,368 shares owned by Mr. Giddens directly. Also includes 21,004
shares owned by Mr. Giddens' spouse, as to which shares he disclaims
beneficial ownership. Also includes 15,996 shares owned by a trust
administered by Mr. Giddens' spouse for his three children. Includes 35,000
shares owned by a limited partnership which is owned by Mr. Giddens, his
wife and his children.
(8) Includes the right to acquire 666 shares at $9.43 per share pursuant to
currently exercisable stock options.
(9) Includes 166,882 shares owned by a partnership whose partners are Mr.
Bauknight, his spouse and his two adult children. Also includes 6 shares
owned by Mr. Bauknight in a Defined Benefit Trust. Also includes the right
to acquire 666 shares at $9.43 pursuant to currently exercisable stock
options.
(10) Includes the right to acquire 2,842 shares at $4.82 per share pursuant to
currently exercisable stock options.
(11) The address of the Sterling Family Limited Partnership is P.O. Box 17526,
Greenville, SC 29606.
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<PAGE> 63
DESCRIPTION OF SECURITIES
COMMON STOCK
The authorized capital stock of the Company consists of 30,000,000 shares
of Common Stock, of which 6,529,745 were issued and outstanding as of the date
hereof.
All shares of Common Stock currently outstanding are fully paid and
nonassessable, not subject to redemption and without preemptive or other rights
to subscribe for or purchase any proportionate part of any new or additional
issues of any class or of securities convertible into stock of any class.
Holders of Common Stock are entitled to one vote per share in all matters to be
voted on by shareholders and have cumulative voting rights. The holders of
Common Stock are entitled to receive cash dividends equally on a per share basis
if and when such dividends are declared from time to time by the Board of
Directors of the Company in its discretion from funds legally available
therefor. In the event of a liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to share with each other on a
ratable basis as a single class in the net assets of the Company available for
distribution after payment of liabilities and satisfaction of any preferential
rights of holders of preferred stock and have no rights to convert their Common
Stock into any other securities.
The Company's Articles of Incorporation provide that shareholders may
cumulate votes for the election of directors.
CERTAIN PROVISIONS OF BYLAWS AND ARTICLES OF INCORPORATION
The Company's Bylaws provide that the Board of Directors shall be at least
three and not more than nine persons. The Board of Directors is currently
comprised of eight persons.
The Company's Board of Directors are exempt under the Company's Articles of
Incorporation from personal monetary liability to the extent permitted by
Section 33-2-102(e) of the South Carolina Business Corporation Act of 1988, as
amended (the "South Carolina Corporation Act"). This statutory provision
provides that a director of the corporation shall not be personally liable to
the corporation or any of its shareholders for monetary damages for breach of
fiduciary duty as a director, provided that this provision shall not be deemed
to eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its shareholders, (ii) for acts
or omissions not in good faith or which involved gross negligence, intentional
misconduct, or a knowing violation of law, (iii) imposed under Section 33-8-330
of the South Carolina Corporation Act (improper distribution to shareholder), or
(iv) for any transaction from which the director derived an improper personal
benefit.
As noted above, the Company's Articles of Incorporation provide that
shareholders may cumulate votes for the election of directors.
SOUTH CAROLINA ANTITAKEOVER STATUTES
Business Combinations Act. Generally, the South Carolina Corporation Act
prohibits certain South Carolina corporations, including those whose securities
are listed on the Nasdaq system, from engaging in a "business combination" with
an "interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder unless (i)
prior to the date of the business combination, the transaction is approved by
the board of directors of the corporation, (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owns at least 85% of the outstanding
voting stock, or (iii) on or after such date the business combination is
approved by the board and by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder. A
"business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the stockholder. An "interested stockholder"
is a person who, together with affiliates and associates, owns (or within three
years did own) 15% or more of the corporation's voting stock. A South Carolina
corporation may "opt out" from the application of these
63
<PAGE> 64
South Carolina Corporation Act provisions through a provision in its articles of
incorporation or by-laws. The Company has not "opted out" from the application
of these provisions.
Control Share Acquisition Act. The South Carolina Control Share
Acquisition Act provides that upon the acquisition by a person of certain
threshold percentages of stock (20%, 33% and 50%), a shareholders' meeting must
be held in order to determine whether or not to confer voting rights upon such
acquiring person's shares. An affirmative vote of holders of a majority of all
outstanding company's stock (excluding shares held by the acquiring person,
company officers and company employees who are also directors of the company) is
required to confer voting rights upon such acquiring person's shares.
TRANSFER AGENT
The transfer agent for the Common Stock is First Union National Bank.
64
<PAGE> 65
UNDERWRITING
Pursuant to the Underwriting Agreement and subject to the terms and
conditions thereof, the Underwriters named below, acting through the
Representatives, have agreed, severally, to purchase from the Company and the
Selling Shareholders the number of shares of Common Stock set forth below
opposite their respective names.
<TABLE>
<CAPTION>
NAME OF UNDERWRITER NUMBER OF SHARES
- ----------------------------------------------------------------------------- ----------------
<S> <C>
Wheat, First Securities, Inc.................................................
Raymond James & Associates, Inc..............................................
----------------
Total.............................................................. 3,000,000
=============
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all the shares of Common
Stock offered hereby (other than those subject to the over-allotment option
described below) if any of such shares are purchased. In the event of a default
by any Underwriter, the Underwriting Agreement provides that, if the number of
shares of Common Stock any defaulting Underwriter agreed but failed or refused
to purchase is not more than one-tenth of the aggregate number of shares of
Common Stock offered hereby, the purchase commitments of the non-defaulting
Underwriters may be increased. If the non-defaulting Underwriters do not agree
to purchase the shares allocated to such defaulting Underwriter, the
Underwriting Agreement may be terminated.
The Representatives have advised the Company and the Selling Shareholders
that the several Underwriters propose initially to offer the shares of Common
Stock to the public at the public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to certain other
dealers. After the Offering, the public offering price and such concessions may
be changed. The Representatives have informed the Company that the Underwriters
do not intend to confirm sales to accounts over which they exercise
discretionary authority.
The Offering of the Common Stock is made for delivery when, as and if
accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offer without notice. The Underwriters
reserve the right to reject any order for the purchase of shares.
The Company has granted the Underwriters an option, exercisable not later
than 30 days from the date of the effectiveness of the Offering, to purchase up
to an aggregate of 450,000 additional shares of Common Stock to cover
over-allotments, if any. To the extent that the Underwriters exercise such
option, each Underwriter will have a firm commitment, subject to certain
conditions, to purchase approximately the same percentage thereof which the
number of shares of Common Stock to be purchased by it shown in the table above
bears to the total number of shares in such table and the Company will be
obligated, pursuant to the
65
<PAGE> 66
option, to sell such shares to the Underwriters. If purchased, the Underwriters
will sell these additional shares on the same terms as those on which the
3,000,000 shares are being offered.
Although traded on the over-the-counter Bulletin Board, the market for the
Common Stock prior to the Offering has not been liquid. Consequently, the public
offering price will be determined by negotiation among the Company, the Selling
Shareholders and the Representatives. In determining such price, consideration
will be given to, among other things, the trading prices for the Common Stock on
the Bulletin Board, the financial and operating history and trends of the
Company, the experience of its management, the position of the Company in its
industry, the Company's prospects and the Company's financial results. In
addition, consideration will be given to the status of the securities markets,
market conditions for new offerings of securities and the prices of similar
securities of comparable companies.
The Company, its directors and executive officers and certain shareholders
of the Company have each agreed with the Underwriters that they will not offer,
sell or contract to sell, or otherwise dispose of directly or indirectly, or
announce the offering of, or exercise any registration rights with respect to,
or register, cause to be registered or announce the registration or intended
registration of, any shares of Common Stock, or any stock option or other
security or agreement convertible with or exchangeable for, any shares of Common
Stock for a period of 180 days from the date of this Prospectus, without the
prior written consent of the Representatives, except for (a) the Common Stock
offered hereby; (b) in the case of the Company, (i) Common Stock issued pursuant
to any employee or director benefit plan or (ii) issuances of Common Stock upon
the conversion of securities or the exercise of warrants outstanding on the date
the Underwriting Agreement is executed; (c) in the case of directors, executive
officers and certain shareholders of the Company, the exercise of stock options
pursuant to benefit plans described herein and shares of Common Stock disposed
of as bona fide gifts, and (d) in the case of certain shareholders, registered
shares of Common Stock acquired in the public market after the Offering.
The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the Underwriters and controlling persons, if any,
against certain civil liabilities, including liabilities under the Securities
Act, or will contribute to payments the Underwriters or any such controlling
persons may be required to make in respect thereof.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company and the Selling Shareholders by Wyche, Burgess, Freeman & Parham, P.A.,
Greenville, South Carolina. At September 13, 1996, members of Wyche, Burgess,
Freeman & Parham, P.A. beneficially owned an aggregate of 404,115 shares of
Common Stock. Counsel for the Underwriters is Nelson Mullins Riley &
Scarborough, L.L.P., Atlanta, Georgia.
EXPERTS
The Consolidated Financial Statements of the Company as of December 31,
1995 and 1994 and for each of the three years in the period ended December 31,
1995 included in this Prospectus and elsewhere in the Registration Statement,
have been audited by Elliott, Davis & Company, L.L.P. ("ED&C"), independent
certified public accountants, as indicated in their report with respect thereto,
and are included herein in reliance upon the authority of said firm as experts
in accounting and auditing in giving said reports.
On August 26, 1996, the Company determined to dismiss ED&C and to engage
KPMG Peat Marwick LLP ("KPMG") as the Company's independent auditors for the
1996 fiscal year. ED&C has served as the Company's principal accountants since
1993. The change in auditors resulted from the Company's decision that it was in
the Company's best interest to utilize a national accounting firm, with its
attendant size, experience and expertise. In connection with its audits for the
past two fiscal years and for the interim period through August 26, 1996, there
have been no disagreements between the Company and ED&C on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
the auditors, would have caused it to make reference to the
66
<PAGE> 67
subject matter of the disagreement in connection with its report. Moreover,
ED&C's reports as principal auditor of the financial statements of the Company
for the past two fiscal years did not contain an adverse opinion or a disclaimer
of opinion, nor were they qualified or modified as to uncertainty, audit scope
or accounting principles. The Audit Committee of the Board of Directors and the
Board of Directors of the Company have approved this change of accounting firms.
ED&C has furnished to the Company a letter addressed to the Commission stating
that it agrees with the above statements.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement (which
term shall encompass any amendments thereto) on Form S-1 through the Electronic
Data Gathering, Analysis and Retrieval ("EDGAR") system under the Securities Act
(the "Registration Statement") with respect to the Common Stock offered hereby.
This Prospectus, which constitutes part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto, to which reference is hereby made. Certain items
were omitted in accordance with the rules and regulations of the Commission.
Statements made in this Prospectus as to the contents of any contract, agreement
or other document referred to herein are not necessarily complete; with respect
to each such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference.
The Registration Statement, including the exhibits and schedules thereto,
may be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, its New
York Regional Office, 7 World Trade Center, New York, New York 10048 and its
Chicago Regional Office, Suite 1400, Northwestern Atrium Center, 500 West
Madison Street, Chicago, Illinois 60661. Copies of such material can be obtained
by mail at prescribed rates. Requests should be directed to the Commission's
Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549.
Electronic registration statements, reports, proxy and information statements
filed through EDGAR are publicly available through the Commission's Web Site
(http://www.sec.gov).
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<PAGE> 68
INDEX TO FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996
(unaudited)......................................................................... F-3
Consolidated Statements of Income for the Years Ended December 31, 1993, 1994 and 1995
and the six months ended June 30, 1995 and 1996 (unaudited)......................... F-4
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1993,
1994 and 1995 and the six months ended June 30, 1996 (unaudited).................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994
and 1995 and the six months ended June 30, 1995 and 1996 (unaudited)................ F-6
Notes To Consolidated Financial Statements............................................ F-8
</TABLE>
F-1
<PAGE> 69
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
EMERGENT GROUP, INC. AND SUBSIDIARIES
Greenville, South Carolina
We have audited the accompanying consolidated balance sheets of EMERGENT
GROUP, INC. AND SUBSIDIARIES as of December 31, 1994 and 1995, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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
present fairly, in all material respects, the consolidated financial position of
EMERGENT GROUP, INC. AND SUBSIDIARIES as of December 31, 1994 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
ELLIOTT, DAVIS AND COMPANY, L.L.P.
Greenville, South Carolina
January 31, 1996
F-2
<PAGE> 70
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1994 1995 1996
-------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE
DATA)
ASSETS
Cash and cash equivalents................................................ $ 278 $ 1,260 $ 22,731
Short-term investments................................................... 597 -- --
Restricted cash.......................................................... -- 912 3,230
Receivables
Loans receivable....................................................... 91,736 103,865 87,835
Mortgage loans held for sale........................................... 3,662 22,593 15,430
Excess servicing receivable............................................ 1,872 2,054 2,526
Accrued interest receivable............................................ 927 1,571 1,468
Other receivables...................................................... 701 1,626 715
-------- -------- --------
98,898 131,709 107,974
Less allowance for credit losses....................................... (1,730) (1,874) (2,214)
Less unearned discount................................................. (1,359) (610) (1,646)
-------- -------- --------
95,809 129,225 104,114
Investment in asset-backed securities, net of allowance for loss of $773
(1995)................................................................. -- 865 2,158
Property and equipment................................................... 2,670 4,327 5,592
Less accumulated depreciation.......................................... (608) (957) (1,285)
-------- -------- --------
2,062 3,370 4,307
Excess of cost over net assets of acquired businesses, net of accumulated
amortization of $419 (1994) and $597 (1995)............................ 2,991 2,865 2,773
Real estate and personal property acquired through foreclosure........... 3,603 3,742 3,937
Deposit base intangibles, net of accumulated amortization of $412 (1994)
and $525 (1995)........................................................ 712 600 544
Net assets of discontinued operations.................................... 2,505 77 --
Other assets............................................................. 891 2,015 2,863
-------- -------- --------
Total assets.................................................... $109,448 $144,931 $146,657
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Notes payable to banks and other, including $100 (1994) to related
parties.............................................................. $ 17,520 $ 31,633 $ 20,261
Investor Savings:
Notes payable to investors, including $722 (1994) and $820 (1995) to
related parties..................................................... 56,497 82,132 91,362
Subordinated debentures, including $69 (1994) and $53 (1995) to
related parties..................................................... 20,998 16,185 16,711
-------- -------- --------
Total investor savings.......................................... 77,495 98,317 108,073
Accrued liabilities.................................................... 2,843 3,090 2,052
Remittance due to loan participants.................................... 683 1,188 1,827
Accrued interest payable............................................... 471 622 691
-------- -------- --------
3,997 4,900 4,570
-------- -------- --------
Total liabilities............................................... 99,012 134,850 132,904
Minority interest........................................................ 736 196 218
Commitments and contingencies
Shareholders' equity
Common stock, par value $.05 a share -- authorized 400,000 shares
(1994) and 4,000,000 shares (1995) and 30,000,000 shares (1996),
issued 200,575 (1994) and 121,000 (1995) and 6,529,745 (1996)........ 10 6 327
Class A common stock, par value $.05 a share -- authorized 20,000,000
shares (1994) and 6,666,667 shares (1995) and -0- (1996); issued
9,803,438 shares (1994) and 6,276,474 shares (1995) and -0- (1996)... 490 314
Capital in excess of par value......................................... 6,924 6,632 6,839
Retained earnings...................................................... 2,276 2,933 6,369
-------- -------- --------
Total shareholders' equity...................................... 9,700 9,885 13,535
-------- -------- --------
Total liabilities and shareholders' equity...................... $109,448 $144,931 $146,657
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements which are
an integral part of these statements.
F-3
<PAGE> 71
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE
FOR THE YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
--------------------------------- ---------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
REVENUES
Interest, servicing and finance charges........... $ 7,983 $ 10,903 $ 15,639 $ 7,307 $ 9,937
Gain on sale of loans............................. 3,605 6,450 9,169 4,355 7,468
Management fees................................... 81 320 570 410 257
Other revenues.................................... 377 522 900 282 647
--------- --------- --------- --------- ---------
Total revenues............................. 12,046 18,195 26,278 12,354 18,309
--------- --------- --------- --------- ---------
EXPENSES
Interest.......................................... 5,073 5,879 8,527 3,780 5,576
Provision for credit losses....................... 686 2,510 2,480 1,240 1,532
Salaries, wages and employee benefits............. 3,106 4,001 5,691 2,047 4,321
Business development.............................. 515 626 653 320 332
General and administrative expense................ 2,003 2,732 4,075 2,147 2,969
--------- --------- --------- --------- ---------
Total expenses............................. 11,383 15,748 21,426 9,534 14,730
--------- --------- --------- --------- ---------
Income from continuing operations before income
taxes, minority interest and cumulative effect
of change in accounting principle............. 663 2,447 4,852 2,820 3,579
Provision (benefit) for income taxes
Current........................................... 59 266 149 73 154
Deferred.......................................... (245) 343 41 20 (33)
--------- --------- --------- --------- ---------
(186) 609 190 93 121
--------- --------- --------- --------- ---------
Income from continuing operations before
minority interest and cumulative effect of
change in accounting principle................ 849 1,838 4,662 2,727 3,458
Minority interest in earnings of subsidiary......... (25) (46) (81) (31) (22)
--------- --------- --------- --------- ---------
Income from continuing operations before
cumulative effect of change in accounting
principle..................................... 824 1,792 4,581 2,696 3,436
Discontinued transportation and apparel
manufacturing segments
Gain (loss) from operations, net of income tax.... 257 (2,022) (1,573) (751) --
Gain (loss) on disposal of segments, net of income
tax............................................. 3 2,568 (2,351) -- --
--------- --------- --------- --------- ---------
260 546 (3,924) (751) --
--------- --------- --------- --------- ---------
Cumulative effect of change in method of accounting
for income taxes.................................. 113 -- -- -- --
--------- --------- --------- --------- ---------
Net income...................................... $ 1,197 $ 2,338 $ 657 $ 1,945 $ 3,436
========= ========= ========= ========= =========
Income (loss) per share of common stock
Continuing operations............................. $ 0.13 $ 0.27 $ 0.69 $ 0.40 $ 0.51
Discontinued operations........................... 0.04 0.08 (0.59) (0.11) --
Cumulative effect of change in accounting
method.......................................... 0.01 -- -- -- --
--------- --------- --------- --------- ---------
$ 0.18 $ 0.35 $ 0.10 $ 0.29 $ 0.51
========= ========= ========= ========= =========
Computed on the weighted average number of shares,
options and warrants outstanding.................. 6,551,508 6,688,734 6,668,192 6,690,608 6,727,674
========= ========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements which are
an integral part of these statements.
F-4
<PAGE> 72
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK COMMON STOCK CAPITAL
------------------ ------------------- IN
SHARES SHARES EXCESS OF RETAINED
ISSUED AMOUNT ISSUED AMOUNT PAR VALUE EARNINGS
--------- ------ ---------- ------ --------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992........... 169,664 $ 8 8,288,814 $ 415 $ 5,893 $ (1,259)
Issuance of shares in exchange for
minority interest in
subsidiaries...................... 4,218 1 206,667 10 133 --
Redemption of stock purchase
warrants.......................... -- -- -- -- (3) --
Issuance of shares as payment for
purchase of a subsidiary.......... 26,693 1 1,307,957 65 901 --
Net income............................. -- -- -- -- -- 1,197
--------- ------ ---------- ------ --------- --------
Balance at December 31, 1993........... 200,575 10 9,803,438 490 6,924 (62)
Net income............................. -- -- -- -- -- 2,338
--------- ------ ---------- ------ --------- --------
Balance at December 31, 1994........... 200,575 10 9,803,438 490 6,924 2,276
Shares issued, formerly held by
subsidiary........................ -- -- 24,700 1 15 --
Shares purchased through Tender
Offer............................. (19,377) (1) (467,288) (23 ) (535) --
Shares retired through reverse stock
split............................. (121,204) (6) (6,242,275) (312 ) 309 --
Shares issued on exercise of stock
options........................... 506 -- 19,662 1 79 --
Two for one stock split in the form
of a stock dividend............... 60,500 3 3,138,237 157 (160) --
Net income............................. -- -- -- -- -- 657
--------- ------ ---------- ------ --------- --------
Balance at December 31, 1995........... 121,000 6 6,276,474 314 6,632 2,933
Shares issued on exercise of stock
options (unaudited).................. 2,026 -- 110,668 5 156 --
Conversion of Class A Common Stock to
Common Stock (unaudited)............. 6,387,142 319 (6,387,142) (319 ) -- --
Shares issued on exercise of stock
warrants (unaudited)................. 19,577 2 -- -- 51 --
Net income for six months ended June
30, 1996 (unaudited)................. -- -- -- -- -- 3,436
--------- ------ ---------- ------ --------- --------
Balance at June 30, 1996 (unaudited)... 6,529,745 $327 -- $ -- $ 6,839 $ 6,369
======== ====== ========= ====== ======= =======
</TABLE>
See Notes to Consolidated Financial Statements which are
an integral part of these statements.
F-5
<PAGE> 73
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
FOR THE YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------- -------------------
1993 1994 1995 1995 1996
-------- -------- --------- -------- --------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................... $ 1,197 $ 2,338 $ 657 $ 1,945 $ 3,436
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities
Depreciation and amortization......... 558 783 938 318 496
Provision for deferred income taxes... -- -- -- -- (33)
Provision for credit losses........... 686 2,510 2,480 1,238 1,532
Loss on sale of investments........... -- 66 -- -- --
Loss on disposal of property and
equipment........................... 4 5 44 5 --
Net increase in deferred loan costs... -- -- (171) -- 202
Net increase (decrease) in unearned
discount and other deferrals........ 744 453 (853) (1,140) 835
Loans originated -- held for sale..... (31,882) (73,709) (173,985) (66,120) (137,940)
Principal proceeds from loans sold.... 31,052 85,693 144,861 57,906 173,343
Proceeds from securitization of
loans............................... -- -- 15,357 15,357 14,102
Minority interest in earnings of
subsidiary.......................... 19 7 81 31 22
Changes in operating assets and
liabilities increasing(decreasing)
cash
Restricted cash..................... -- -- (912) (341) (2,318)
Excess servicing receivable......... (411) (1,460) (183) (102) (472)
Remittance due loan participants.... 304 295 505 1,307 639
Accrued interest payable............ 35 30 103 93 70
Accrued liabilities................. (58) 913 877 (1,176) (1,039)
Accrued interest receivable......... 23 (193) (644) (475) 104
Other assets........................ (577) 242 (923) (338) (86)
Net cash provided by (used in)
operating activities of
discontinued operations.......... (100) (1,253) 1,592 (784) 77
-------- -------- --------- -------- --------
Net cash provided by (used in)
operating activities............. 1,594 16,720 (10,176) 7,724 52,970
-------- -------- --------- -------- --------
INVESTING ACTIVITIES
Loans originated -- held for
investment.......................... (36,460) (74,937) (74,363) (38,529) (54,289)
Principal collections on loans not
sold................................ 26,094 31,786 50,329 22,289 23,373
Principal payments received on
asset-backed securities............. -- -- 177 -- 421
Additional investment in subsidiary... -- -- (359) (106) --
Purchase of investment in
partnership......................... -- -- (1,000) -- --
Increase in note receivable from
former subsidiary................... -- -- (200) -- --
Cash paid for acquisition, net of cash
purchased........................... (830) -- -- -- --
Reduction in goodwill of subsidiary... -- 85 -- -- --
Purchase of short-term investments.... (947) -- -- -- (115)
Proceeds from sale of short-term
investments......................... 1,000 581 614 417 --
</TABLE>
F-6
<PAGE> 74
<TABLE>
<CAPTION>
FOR THE
FOR THE YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------- -------------------
1993 1994 1995 1995 1996
-------- -------- --------- -------- --------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Proceeds from sale of real estate and
personal property acquired through
foreclosure......................... 557 1,128 3,401 1,414 1,898
Proceeds from sale of property and
equipment........................... 8 -- -- -- --
Purchase of property and equipment.... (227) (479) (1,732) (377) (1,271)
Rent received on real estate acquired
through foreclosure................. 36 87 85 59 76
Improvements and related costs
incurred on real estate acquired
through foreclosure................. (286) (477) (205) (112) (189)
Net cash provided by (used in)
investing activities of discontinued
operations.......................... (743) 806 31 207 --
-------- -------- --------- -------- --------
Net cash used in investing
activities.......................... (11,798) (41,420) (23,222) (14,738) (30,096)
-------- -------- --------- -------- --------
FINANCING ACTIVITIES
Advances under bank lines of credit... 19,583 104,622 179,381 83,311 209,636
Payments on bank lines of credit...... (23,869) (91,839) (164,989) (80,314) (221,008)
Net increase in notes payable to
investors........................... 10,971 13,496 25,635 14,854 9,230
Net (decrease) increase in
subordinated debentures............. 3,637 (5,826) (4,812) (7,894) 526
Payments on long-term debt and capital
leases.............................. -- (280) (279) -- --
Payments for stock purchased in tender
offer............................... -- -- (568) (560) --
Proceeds from exercise of stock
options and warrants................ -- -- 52 -- 213
Payment for redemption of stock
purchase warrant.................... (3) -- -- -- --
Increase (decrease) in note payable to
minority shareholder................ 2 (50) -- -- --
Payments on mortgage payable.......... -- (80) -- -- --
Net cash provided by (used in)
financing activities of discontinued
operations.......................... 610 (25) (40) (7) --
-------- -------- --------- -------- --------
Net cash provided by (used in)
financing activities................ 10,931 20,018 34,380 9,390 (1,403)
-------- -------- --------- -------- --------
Net increase (decrease) in cash and
cash equivalents.................... 727 (4,682) 982 2,376 21,471
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR..................................... 4,233 4,960 278 384 1,260
-------- -------- --------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR..... $ 4,960 $ 278 $ 1,260 $ 2,760 $ 22,731
======== ======== ========= ======== ========
</TABLE>
See Notes to Consolidated Financial Statements which are an integral part of
these statements.
F-7
<PAGE> 75
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PREPARATION
The consolidated financial statements as of June 30, 1996 and for the
six-month periods ended June 30, 1995 and 1996 are unaudited. These financial
statements 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. These
financial statements as of June 30, 1996 and for the six-month periods ended
June 30, 1995 and 1996, in management's opinion, contain all known adjustments
necessary to present fairly the financial position, results of operations and
cash flows of the Company.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries, each of which is wholly-owned except The Loan Pro$, Inc.
("Loan Pro$") which is 80% owned. All significant intercompany items and
transactions have been eliminated in consolidation.
The Company and its subsidiaries are primarily engaged in the business of
originating, selling and servicing first and second residential mortgage loans,
commercial loans partially guaranteed by the United States Small Business
Administration ("SBA") and loans collateralized by pre-owned automobiles. The
funds for these loans are obtained principally through the issuance of notes
payable and subordinated debentures to investors, and utilization of various
lines of credit with banks.
Substantially all of the Company's mortgage and automobile 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.
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. These estimates include, among other things,
anticipated prepayments on loans sold with servicing retained, valuation of real
estate owned, and determination of the allowance for credit losses.
Minority interest represents minority shareholders' proportionate share of
the equity and earnings of Loan Pro$.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
principally using the straight-line method over the estimated useful lives of
the assets. Estimated lives are 15 to 40 years for buildings and improvements
and 3 to 7 years for furniture, fixtures and equipment. Additions to property
and equipment and major replacements or improvements are capitalized at cost.
Maintenance, repairs and minor replacements are expensed when incurred.
AMORTIZATION
The excess of cost over related net assets of businesses acquired is
amortized using the straight-line method principally over 25 years. On a
periodic basis, the Company reviews goodwill for events or changes in
circumstances that may indicate that the carrying amount of goodwill may not be
recoverable. The Company utilizes discounted estimated future cash flows of the
purchased subsidiary in determining any impairment on the excess of cost over
the related net assets.
Deposit base intangibles associated with the acquisition of certain
subsidiaries are amortized using the straight-line method over 10 years, based
on the estimated remaining life of the existing deposit base assumed, as
calculated from a core deposit base study performed by a third party at the time
of acquisition of the
F-8
<PAGE> 76
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
subsidiary. On a periodic basis, management assesses the recoverability of the
deposit base intangible. Such assessments encompass a projection of future
earnings from the deposit base as compared to original expectations and the
actual nonrenewal of investor savings upon maturity, based upon a discounted
cash flow analysis. If an assessment of the deposit base intangible indicates
that its recoverability is impaired, a charge to the statement of income for the
most recent period is recorded for the amount of such impairment.
INCOME TAXES
The Company and its subsidiaries file a consolidated Federal income tax
return. Deferred income taxes arise principally from depreciation, unrealized
gains on loans held for sale, amortization of deposit base intangibles and
allowances for credit losses.
STATEMENT OF CASH FLOWS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
The Company foreclosed on or repossessed property used to collateralize
loans receivable in the amount of $5,345,000 in 1993, $3,362,000 in 1994 and
$3,955,000 in 1995.
The Company sold real estate held for sale by issuing loans to the buyers
in the amount of $1,050,000 in 1993, $611,000 in 1994 and $689,000 in 1995.
The Company paid income taxes of $60,000 in 1993, $214,000 in 1994 and
$267,000 in 1995. The Company paid interest of $5,271,000 in 1993, $5,967,000 in
1994 and $8,397,000 in 1995.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is based on management's ongoing evaluation
of the serviced loan portfolio and reflects an amount that, in management's
opinion, is adequate to absorb losses in the existing portfolio. In evaluating
the portfolio, management takes into consideration numerous factors, including
current economic conditions, prior loan loss experience, the composition of the
serviced loan portfolio, and management's estimate of anticipated credit losses.
Loans are charged against the allowance at such time as they are determined to
be losses. Subsequent recoveries are credited to the allowance.
Management considers the year-end allowance appropriate and adequate to
cover possible losses in the serviced loan portfolio; however, management's
judgment is based upon a number of assumptions about future events, which are
believed to be reasonable, but which may or may not prove to be valid. Thus,
there can be no assurance that charge-offs in future periods will not exceed the
allowance for credit losses or that additional increases in the allowance for
credit losses will not be required.
ACCOUNTING FOR IMPAIRED LOANS
The allowance for credit losses is a composite of the allowance for credit
losses of the Mortgage Loan Division, the Small Business Division and the Auto
Loan Division. The Company currently maintains an allowance for credit losses on
its mortgage loans equal to approximately 0.75%, approximately 3% on the
unguaranteed portion of its SBA loans and approximately 4.0% of its auto loans.
In addition, each subsidiary may establish a specific reserve for a particular
loan that is deemed by management to be a potential problem loan where full
recovery is questionable.
When an impaired loan is identified by the portfolio management department
of the Company to have risk characteristics that are unique to an individual
borrower, the Company assesses a specific allowance on a loan-by-loan basis each
month. The general allowance is calculated on a monthly basis using historical
statistics.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") 114 (Accounting by Creditors for Impairment of a
Loan). SFAS 114 requires that the allowance for credit losses for impaired loans
(as defined) be measured based on the present value of expected future
F-9
<PAGE> 77
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
cash flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. SFAS 114 also changed the
treatment of "in-substance foreclosed" properties to require that properties
should be included as other real estate owned when legal possession of the
property has been obtained. Accordingly, the Company transferred $2,674,000 and
$2,327,000 (net of allowance of $297,000) of in-substance foreclosed properties
from other real estate owned to loans receivable at December 31, 1993 and 1994,
respectively. The adoption of SFAS 114 had no effect on net income or
shareholders' equity.
The Company's policy is to evaluate impaired loans based on the fair value
of the collateral. Interest income from impaired loans is recorded using the
cash method.
REAL ESTATE AND PERSONAL PROPERTY ACQUIRED THROUGH FORECLOSURE
Real estate and personal property acquired through foreclosure represent
properties foreclosed upon or repossessed in the normal course of business and
is valued at the lower of cost or net realizable value. Costs related to the
development and improvement of the properties are capitalized whereas those
costs relating to holding the properties are charged to expense.
INTEREST INCOME
Interest income on loans receivable is recognized using the interest
method. Accrual of interest is 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 issuance commissions are amortized into income
over the life of the loan, using the interest method.
GAIN ON SALE OF LOANS
The Company sells participations representing the SBA-guaranteed portion of
all of its SBA Loans (the "SBA Loan Participations") in the secondary market. In
connection with such sales, the Company receives excess servicing revenue and
typically receives a cash premium of approximately 10% related to the guaranteed
portion being sold. In accordance with Emerging Issues Task Forces ("EITF")
88-11 a portion of the cash premium received from the sale of the guaranteed
portion of the SBA loan is deferred as an unearned discount against the
remaining unguaranteed portion of the loan based on the relative fair values of
those portions to the total loan and the remainder is recognized as income at
the time of the sale. The resulting unearned discount is accreted into interest
income over the life of the loan using the interest method. The weighted average
interest rate inherent in the carrying value of the excess servicing receivable
is 10% at December 31, 1995.
Mortgage loans consist principally of first and second residential
mortgages originated principally throughout North Carolina, South Carolina and
the remaining southeastern United States, and are stated at the principal amount
outstanding if held for investment purposes. Non-refundable loan fees and direct
costs associated with the origination or purchase of loans are deferred and
netted against outstanding loan balances. Mortgage loans held for sale are
carried at the lower of aggregate cost or market. Origination fees on mortgage
loans held for sale are deferred until the time of sale and are included in the
computation of the gain on, or loss from, the sale of the related loans. The
cost of mortgage loans held for sale is the face value of the mortgage notes
adjusted for the net deferred fees and costs that are recognized upon sale.
Mortgage loans are sold servicing released and on a nonrecourse basis, with
customary representations and warranties. In connection with the sale of
mortgage loans, the Company receives cash premiums generally ranging from 4% to
8% of the principal amount of the mortgage loan being sold.
Loans sold through securitizations with servicing retained are sold at or
near par with the Company retaining a participation in the cash flows. Excess
servicing receivable is calculated using prepayments, default, and interest rate
assumptions that market participants would use for similar instruments. The
excess servicing receivable recognized at the time of sale does not exceed that
amount which would be received if it were sold
F-10
<PAGE> 78
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in the marketplace. The excess servicing receivable is written down to the
present value of the remaining estimated future cash flows exceeding normal
servicing fees at each balance sheet date using the same discount rate used in
the original calculation. The Company's excess servicing fees from its
securitization transactions are recognized over the life of the related
transaction.
REMITTANCE DUE LOAN PARTICIPANTS AND SERVICING FEE INCOME
The Company retains the servicing rights on SBA guaranteed loan
participations sold on the secondary market, for which it receives monthly a
minimum of 1% of the outstanding principal balance. The Company receives the
payments from the borrowers and records the portion relating to the sold
participation as a liability. The participation portion is remitted to Colson
Services Corp., the exclusive Fiscal and Transfer Agent for the guaranteed
portion of SBA loans sold in the secondary market, by the 3rd business day of
the following month.
MANAGEMENT FEES
The Company serves as investment manager for two Venture Funds for which it
receives management fees. The Company recognizes the management fees on the
accrual basis.
EXCESS SERVICING RECEIVABLE
An excess servicing receivable is recognized on SBA guaranteed loan
participation sales in which a servicing fee in excess of the normal servicing
fee is retained. The amount is determined based on the difference between the
actual sales price and the estimated sales price that would have been obtained
if a normal servicing fee rate had been specified. The excess servicing
receivable is amortized on a loan by loan basis against servicing income over
the life of the loan using the interest method. The Company monthly assesses its
excess servicing receivable for any impairment on a disaggregated basis based on
predominate risk factors such as prepayment, default and the discount rate.
(Note 4)
BORROWER COMMITMENT DEPOSITS
The Company generally receives a commitment deposit from its applicants for
SBA loans prior to closing. The commitment deposits are recorded as a liability
when received, and are reduced for any direct expenses paid to a third party
incurred in making the loan. Any deposit in excess of these direct expenses is
refunded to the borrower at the time of, or subsequent to, the loan closing.
Borrower commitment deposits are included in accrued liabilities.
NET INCOME PER SHARE OF COMMON STOCK
The Company's shareholders approved a one-for-three reverse split of the
Company's Common and Class A Common Stock in June 1995. Effective January 29,
1996, the Company declared a two for one stock split effected in the form of a
100% stock dividend on the Common Stock and Class A Common Stock. The weighted
average number of shares of Common and Class A Common Stock have been restated
for all periods presented to reflect these stock splits.
Net income per share is computed on the weighted average number of shares
of Common Stock and Common Stock equivalents outstanding during each year,
6,551,508 shares (1993), 6,688,734 shares (1994), 6,668,192 shares (1995),
consisting of Common and Class A Common shares.
RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform to
current year presentation. Such reclassifications had no effect on net income or
shareholders' equity.
F-11
<PAGE> 79
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company maintains its primary checking accounts with three principal
banks and maintains overnight investments in reverse repurchase agreements with
those same banks. The amounts maintained in the checking accounts are insured by
the Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At December
31, 1995, the amounts maintained in the overnight investments in reverse
repurchase agreements, which are not insured by the FDIC, totaled $791,000.
These investments were collateralized by U.S. Government securities held by the
banks. At December 31, 1994, the amount maintained in the overnight investments
in reverse repurchase agreements totaled $378,000. These investments were also
collateralized by U. S. Government securities held by the banks.
3. LOANS RECEIVABLE
The following is a summary of loans receivable by type of loan:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1995
------- --------
(IN THOUSANDS)
<S> <C> <C>
Mortgage Loans:
Real estate loans on personal residences...................... $46,961 $ 56,722
Real estate loans on rental property.......................... 2,415 3,867
Construction loans............................................ 5,639 2,934
Notes receivable from related parties......................... 169 363
------- --------
55,184 63,886
SBA loans....................................................... 25,845 19,937
Automobile loans................................................ 8,483 17,673
Other loans..................................................... 2,224 2,369
------- --------
$91,736 $103,865
======= ========
</TABLE>
Notes receivable from related parties included advances of $54,000 (1994)
and $261,000 (1995) and repayments of $8,000 (1994) and $67,000 (1995).
Real estate loans generally have contractual maturities of 12 to 360 months
with an average interest rate at December 31, 1994 and 1995 of approximately
12%. Construction loans generally have contractual maturities of 12 months with
an average interest rate at December 31, 1994 and 1995 of approximately 12%. SBA
loans range in maturity from 7 years to 25 years depending on the use of
proceeds. Interest rates on SBA loans are variable, adjusted on the first day of
each calendar quarter and are generally prime plus 2.75%. The average interest
rate at December 31, 1994 and 1995 for SBA loans was 11.5% and 10%,
respectively. Automobile loans have maturities generally not exceeding 60 months
with fixed interest rates averaging 28% in 1994 and 1995. At December 31, 1994
and 1995, approximately $3,145,000 (net of an allowance for impaired loans of
$297,000) and $3,950,000 (net of an allowance for impaired loans of $73,000),
respectively, of loans receivable were impaired.
Loans sold and serviced for others at December 31, 1994 and 1995 were
approximately $62,046,000 and $88,077,000, respectively, and are not included in
assets in the accompanying balance sheets.
The Company's portfolio of SBA loans receivable is diversified by industry
type. At December 31, 1995, the largest concentration of SBA loans was to
servicing and manufacturing companies, which comprised approximately 23% and
17%, respectively, of the SBA serviced portfolio. Approximately 23%, 16%, 16%
and 13% of the serviced SBA loan portfolio at December 31, 1995 consisted of
loans to borrowers located in Florida, Kansas, South Carolina and Colorado,
respectively. The majority of the Company's other types of loans were to
borrowers located in South Carolina. In addition, during 1995 the Company
originated mortgage
F-12
<PAGE> 80
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
loans principally in the southeastern United States, with 51% of originations in
South Carolina, 20% in North Carolina and the remainder distributed through the
remaining southeastern states.
An analysis of the allowance for credit losses is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1993 1994 1995
----- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year.............................. $ 976 $ 952 $ 1,730
Provision for credit losses............................... 686 2,510 2,480
Net charge offs........................................... (710) (1,732) (1,563)
----- ------- -------
Balance at end of year.................................... 952 1,730 2,647
Less allowance for loss on asset-backed securities........ -- -- (773)
----- ------- -------
Balance at end of year.................................... $ 952 $ 1,730 $ 1,874
===== ======= =======
</TABLE>
As of December 31, loans totaling $2,110,000 (1993), $1,433,000 (1994) and
$5,145,000 (1995) were on non-accrual status. The associated interest income not
recognized on these non-accrual loans was approximately $146,000 during 1993,
$45,000 during 1994 and $164,000 during 1995.
4. EXCESS SERVICING RECEIVABLE
The activity in the excess servicing receivable is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1994 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Balance, beginning of year....................................... $ 412 $1,872
Additional gain on sale of loans................................. 1,942 1,095
Amortization against servicing revenues.......................... (482) (913)
------ ------
Balance, end of year............................................. $1,872 $2,054
====== ======
</TABLE>
The weighted average interest rate inherent in the carrying value of the
excess servicing receivable is 10% at December 31, 1995. During 1994, the
Company changed its estimated normal servicing rate to more closely reflect the
industry standard in accordance with Emerging Issues Task Force Consensus 94-9.
The effect of this change was to increase 1994 income by approximately $490,000.
The carrying value of the excess servicing receivable approximates fair
value.
5. INVESTMENT IN ASSET-BACKED SECURITIES
In 1995, the Company securitized $17,063,000 of the unguaranteed portions
of its SBA loans. The securitization was effected through a grantor trust (the
"Trust"), the ownership of which was represented by Class A and Class B
certificates. The Class A certificates were purchased by investors, while the
Company retained the Class B certificates. The Company classifies its Class B
certificates as trading securities under SFAS 115, and they are carried at fair
market value. These certificates are carried on the balance sheet as
asset-backed securities in the net amount of $865,000. This amount is net of
$773,000 allowance for loss. These certificates give the holders thereof the
right to receive payments and other recoveries attributable to the unguaranteed
portion of SBA loans held by the Trust. The Class B certificates represent
approximately 10% of the principal amount of the SBA loans transferred in the
securitization and are subordinate in payment and all other respects to the
Class A certificates. Accordingly, in the event that payments received by the
Trust are not sufficient to pay certain expenses of the Trust and the required
principal and interest payments due on
F-13
<PAGE> 81
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Class A certificates, the Company, as holder of the Class B certificates,
would not be entitled to receive principal or interest payments due thereon. The
Company is required to establish and maintain cash reserve and collection
accounts with a trustee in connection with the securitization. These accounts
are shown as restricted cash of $912,000 on the Company's consolidated balance
sheets. Although securitizations provide liquidity, the Company has utilized
securitizations principally to provide a lower cost of funds and to reduce
interest rate risk. The Company's excess servicing fees from the transaction are
recognized over the life of the transaction.
The Company serves as master servicer for the Trust and, accordingly,
forwards payments received on account of the SBA loans held by the Trust to the
trustee, which, in turn, pays the holders of the certificates in accordance with
the terms of and priorities set forth in the securitization documents. Because
the transfer of the SBA loans to the Trust constitutes a sale of the underlying
SBA loans, no liability is created on the Company's Consolidated Financial
Statements. However, the Company has the obligation to repurchase the SBA Loans
from the Trust in the event that certain representations made with respect to
the transferred SBA loans are breached or in the event of certain defaults by
the Company, as master servicer. The Class A certificates received a rating of
Aaa from Moody's Investors Service, Inc. The Class B certificates were not
rated. In connection with the securitization, the Company received a cash
payment of $15,357,000.
6. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Land............................................................. $ 228 $ 228
Buildings and leasehold improvements............................. 1,063 1,162
Equipment........................................................ 105 264
Furniture and fixtures........................................... 1,274 2,673
------ ------
$2,670 $4,327
====== ======
</TABLE>
Depreciation expense was $678,000, $694,000, and $769,000 in 1993, 1994 and
1995, respectively.
7. REAL ESTATE AND PERSONAL PROPERTY ACQUIRED THROUGH FORECLOSURE
An analysis of real estate and personal property acquired through
foreclosure is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Balance at beginning of year..................................... $2,848 $3,603
Loan foreclosures and improvements............................... 3,889 4,160
Dispositions, net................................................ (3,134) (4,021)
------ ------
Balance at end of year........................................... $3,603 $3,742
====== ======
</TABLE>
F-14
<PAGE> 82
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. NOTES PAYABLE
Notes payable are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
A. Notes payable under revolving credit agreements, with
interest at the bank's prime rate (8.5% at December 31,
1995) maturing March 31, 1996.............................. $ 2,865 $ 6,892
B. Notes payable under lines of credit, with interest at the
bank's prime rate plus 3/4% (9.25)% at December 31, 1995)
maturing in December 1997.................................. -- 9,911
C. Notes payable under lines of credit, with interest at the
bank's prime rate (8.5% at December 31, 1995) maturing
December 29, 1998.......................................... 14,376 14,830
Note payable in equal annual principal installments plus 8%
interest................................................... 279 --
------- -------
$17,520 $31,633
======= =======
- ----
A. Under the terms of revolving credit agreements, the mortgage lending
subsidiaries of the Company may borrow up to a maximum of $20,000,000 with
interest at the bank's prime rate payable monthly. The note is collateralized by
loans receivable. The agreements, among other matters, require the total unpaid
balance of such pledged loans receivable to be a maximum of $25,000,000, a
specified debt to net worth ratio, minimum tangible net worth and restrictions
on the payment of dividends. The Company is in compliance with such restrictive
covenants. The revolving credit agreements mature on March 31, 1996. At December
31, 1995, $8,958,000 was available under these lines of credit.
B. Under the terms of the lines of credit, the automobile lending subsidiaries of
the Company may borrow up to a maximum of $26,000,000 with interest at the
bank's prime rate plus three-quarters of one percent payable monthly. The notes
are collateralized by loans receivable. The terms of the agreements state that
advances under the lines of credit cannot exceed 85% of the aggregate unpaid
principal balance of outstanding notes receivable which are no more than sixty
days past due. The agreements, among other matters, require minimum debt to
tangible net worth ratios, minimum interest coverage ratios, minimum loss
reserves, maximum debt to borrowing base restrictions, and restrictions on the
payment of dividends. At December 31, 1995, the automobile lending subsidiaries
were in compliance with such restrictive covenants and $4,308,000 was available
under these lines of credit. These agreements mature in December, 1997.
C. Under the terms of the lines of credit, the commercial lending subsidiaries of
the Company may borrow up to a maximum of $32,000,000 with interest at the
bank's prime rate. The lines are limited to 100% of the outstanding balance of
the guaranteed portion of SBA 7(a) loans, 80% of the outstanding balance of the
unguaranteed portion of SBA 7(a) loans, and 50% of SBA 504 loans as defined in
the loan agreements. The agreements, among other matters, require minimum
tangible net worth ratios, maximum ratios of total liabilities to tangible net
worth, minimum interest coverage ratios, limitations on the amount of capital
expenditures in any fiscal year, and restrictions on the payment of dividends.
At December 31, 1995, these subsidiaries were in compliance with such
restrictive covenants and $933,000 was available under these lines of credit.
These agreements mature in December, 1998.
</TABLE>
F-15
<PAGE> 83
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Annual aggregate maturities of notes payable at December 31, 1995 are as
follows (in thousands):
<TABLE>
<S> <C>
1996......................................... $ 6,892
1997......................................... 9,911
1998......................................... 14,830
-------
$31,633
=======
</TABLE>
The Company currently has a commitment from a lender with respect to a new
credit facility in the amount of $70,000,000. It is expected that this facility
will be in place by the end of February, 1996.
9. INVESTOR SAVINGS
Investor savings are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
A. Notes payable to investors.................................. $56,497 $82,132
B. Subordinated debentures..................................... 20,998 16,185
------- -------
$77,495 $98,317
======= =======
- ---------------
A. Notes payable to investors are issued in any denomination greater than $10,000
and are registered under the South Carolina Uniform Securities Act. The notes
mature from three months to three years from date of issuance. Interest is
payable monthly, quarterly or at maturity at the option of the investors.
Interest rates on the notes are fixed until maturity and range from 6% to 10% at
B. December 31, 1994 and 7% to 9% at December 31, 1995. The notes are subordinated
to all bank debt, and are senior to subordinated debentures.
Subordinated debentures are issued in any denomination greater than $100 and are
registered under the South Carolina Uniform Securities Act. The subordinated
debentures normally mature in one year from date of issuance and have an interest
rate ranging from 5% to 6% quarterly. The debentures are subordinated to all bank
debt and notes payable to investors.
</TABLE>
At December 31, 1994 and 1995, notes payable to investors and subordinated
debentures include an aggregate of approximately $11,043,000 and $17,080,000,
respectively, of individual investments exceeding $100,000.
The investor savings at December 31, 1995 mature as follows (in thousands):
<TABLE>
<S> <C>
1996............................................... $ 91,833
1997............................................... 2,993
1998............................................... 3,491
-----------
$ 98,317
===========
</TABLE>
10. LEASES
The Company leases various property and equipment, office space and
automobiles under operating leases.
F-16
<PAGE> 84
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a schedule by year of future minimum rental payments for
all operating leases that have initial or remaining noncancellable terms in
excess of one year (in thousands):
<TABLE>
<S> <C>
1996............................................... $ 427
1997............................................... 350
1998............................................... 264
1999............................................... 222
2000............................................... 73
-------
$1,336
=======
</TABLE>
Total rental expense was approximately $974,000 in 1994 and $901,000 in
1995.
11. MANAGEMENT AGREEMENTS
The Company manages two Venture Funds. The Company receives management fees
equal to two and one-half percent of the total assets under management in each
Venture Fund with an aggregate minimum management fee of $445,000 annually. The
Company received management fees of $570,000 from the Venture Funds during 1995.
The Company may also receive incentive management fees of 15% and 20%,
respectively, from the two Venture Funds, of the net portfolio profits of each
Venture Fund, as defined.
The Company is a General Partner of one of the Venture Funds and, during
1995, made a $1,000,000 investment into the partnership. This partnership has
significant common principals with the Company.
12. OTHER ASSETS AND ACCRUED LIABILITIES
Other assets include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1994 1995
---- ------
(IN
THOUSANDS)
<S> <C> <C>
Debt issuance costs, net.............................................. $ 68 $ 666
Investments, at cost.................................................. 12 1,012
Deferred tax benefits................................................. 172 196
Other................................................................. 639 141
---- ------
$891 $2,015
==== ======
</TABLE>
Accumulated amortization for other assets was approximately $1,083,000 in 1994
and $1,253,000 in 1995.
Accrued liabilities include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1994 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Taxes accrued and withheld........................................... $ 177 $ --
Income taxes......................................................... 159 302
Deferred fees income................................................. 483 13
Accrued professional fees............................................ 20 141
Accounts payable..................................................... 278 208
Borrower commitment deposits......................................... 402 356
Accrued salaries and wages........................................... 186 289
Other................................................................ 1,138 1,781
------ ------
$2,843 $3,090
====== ======
</TABLE>
F-17
<PAGE> 85
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SHAREHOLDERS' EQUITY
The Company has two classes of capital stock, Common Stock and Class A
Common Stock. The two classes have identical rights except for certain
restrictions on the transferability of the Class A Common Stock to holders of
4.5% or more of the Company's outstanding capital stock (Common and Class A
Common Stock).
On May 21, 1981, the shareholders approved a stock option plan and on May
22, 1984, the shareholders approved an increase in the number of shares of
Common Stock which may be granted from 250,000 to 500,000. Under the terms of
the plan, the Company may grant options to key employees and directors to
purchase up to a total of 500,000 shares of its $.05 par value Common Stock. The
option price is the fair market value at date of grant. The options expire five
years from date of grant, are not transferable other than on death, and are
exercisable 20% on the date of grant and 20% per year on a cumulative basis for
each year subsequent to the date of grant. No shares are available for grant
under this stock option plan.
On June 9, 1995, the shareholders approved a stock option plan under which
the Board of Directors may issue 11,334 shares of Common Stock and 555,354
shares of Class A Common Stock. Under the terms of the plan, the Company may
grant options to key employees to purchase up to a total of 566,668 shares of
its $.05 par value Common and Class A Common Stock. The option price is the fair
market value at date of grant. The options expire five years from date of grant,
are not transferable other than on death, and are exercisable 20% on the date of
grant and 20% per year on a cumulative basis for each year subsequent to the
date of grant. The options available for grant under the plan consist of 6,612
Common Stock options and 324,048 Class A Common Stock options at December 31,
1995.
Also on June 9, 1995, the shareholders approved a stock option plan under
which each nonemployee member of the Board of Directors receives options to
purchase 14 shares of Common Stock and 652 shares of Class A Common Stock each
December 31 beginning in 1995 through 1999. The terms of the plan are identical
to the employee stock option plan approved on June 9, 1995. The options
available for grant under this plan consist of 597 Common Stock options and
29,407 Class A Common Stock options at December 31, 1995.
On June 9, 1995 the shareholders of the Company approved a one-for-three
reverse split of the Common and Class A Common Stock. The certificates for
previously issued Common and Class A Common Stock were canceled and were
forfeited by the holder in order for the holder to receive replacement
certificates for the after reverse split shares. The shareholders also
authorized the increase of post reverse split authorized shares of Common Stock
to 4,000,000 shares. The Company issued to all shareholders certificates for
one-third of their Common and Class A Common shares as of June 9, 1995 upon the
shareholder presenting their existing shares. No fractional shares were issued
as a result of the one-for-three reverse stock split. All fractional shares were
redeemed at an equivalent price of $1.25 per share.
The Company offered to buy from the shareholders up to 20,000 shares of
Common Stock and up to 980,000 shares of Class A Common Stock for the period
March 31, through May 8, 1995 at a price of $1.15 per share. As a result of this
offer, the Company purchased 19,377.38 shares of Common Stock and 467,287.96
shares of Class A Common Stock at an aggregate cost of approximately $560,000.
F-18
<PAGE> 86
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity in stock options is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
---------------------
1994 1995
------- -------
<S> <C> <C>
Options outstanding, beginning of year $1.09 per share)........ 133,333 140,000
Issued at:
$1.09 per share.............................................. 40,000 --
$1.32 per share.............................................. -- 80,006
$4.625 per share............................................. -- 124,000
$5.09 per share.............................................. -- 32,000
$9.44 per share.............................................. -- 2,664
$10.39 per share............................................. -- 666
Expired or canceled.......................................... (33,333) --
Exercised:
$1.09 per share.............................................. -- (29,800)
$1.32 per share.............................................. -- (1,336)
$4.625 per share............................................. -- (3,200)
$5.09 per share.............................................. -- (6,000)
------- -------
Options outstanding, end of year............................. 140,000 339,000
======= =======
Exercisable, end of year....................................... 56,000 83,532
======= =======
Available for grant, end of year............................... 82,667 330,660
======= =======
</TABLE>
Warrants have been issued and are outstanding at December 31 as follows:
<TABLE>
<CAPTION>
1994 1995
---------------- ----------------
COMMON CLASS A COMMON CLASS A
------ ------- ------ -------
<S> <C> <C> <C> <C>
$2.625 per share................................ 4,870 238,618 2,434 119,308
====== ======= ====== =======
</TABLE>
These warrants are 100% exercisable at December 31, 1995. Fifty percent of
the 1994 warrants outstanding expired on December 31, 1995. The 1995 outstanding
warrants expire on December 31, 1996. No warrants were exercised or issued in
1994 or 1995.
14. SALE OF SUBSIDIARY
In connection with the Company's strategic plan to focus its business
efforts on financial services, the Company divested its apparel segment
operations, which was comprised solely of the operations of Young Generations,
Inc. ("YGI"). On September 30, 1995, the Company sold all of the outstanding
stock (the "stock sale") of YGI to fifteen individuals (the "Buyers"), who were
members of YGI's management team. As a result, the loss on the sale of the stock
and operating results of the apparel segment have been classified as
discontinued operations. The results of operations have been restated to exclude
the Apparel Manufacturing segment from continuing operations.
The Company sold the stock for $600,000 under a non-recourse promissory
note from the buyers. As a result of the sale, the Company wrote-off all amounts
due from YGI resulting in a charge of $3,580,300, net of income taxes of
$67,700, reported as a loss from discontinued operations and have valued the
note receivable at $1 due to concern over a decline in operating profits and the
related impact on the buyers' source of cash to pay the note. The Company
remains contingently liable for the guaranty of certain bank loans and trade
accounts payable which existed prior to the stock sale which do not exceed
$715,000. Management does not anticipate any significant charges to future
earnings as a result of these guarantees.
F-19
<PAGE> 87
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The apparel segment, which consists solely of the operations of YGI, had
net losses of $163,000 in 1993, $31,000 in 1994 and $1.3 million for the nine
months ended September 30, 1995. The net loss in 1994 was decreased by the
receipt of $1.25 million in life insurance proceeds due to the death of YGI's
president. YGI had revenues of $11.5 million in 1993, $12.2 million in 1994 and
$7.3 million for the nine months ended September 30, 1995.
15. DISCONTINUED OPERATIONS
The Company's operations in the Apparel and Transportation segments were
discontinued during 1995. The sale of the apparel segment is discussed further
in Note 14. In July 1994 the Company sold an operating railroad for $940,000. In
connection with this sale, the Company received $20,000 cash, and a note
receivable of $920,000, payable in semi-annual payments over five years, with an
interest rate of 10%. In November 1994, the Company assigned the rights to
boxcars in a lease with a Class I railroad for $1,174,000 cash. The Company sold
additional railcars in June 1995 for $111,000 cash.
At December 31, 1995, the Company had remaining net assets in the
transportation segment of $77,000, which the Company anticipates will be sold
during 1996 at or above their carrying value.
The results of operations have been restated to exclude these segments from
continuing operations.
Revenues applicable to the discontinued operations were:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Apparel manufacturing...................................... $11,456 $12,140 $7,263
Transportation............................................. 1,712 1,407 390
</TABLE>
Income from operations and gain (loss) on disposal attributable to the
discontinued segments is reported net of income tax expense of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Apparel manufacturing...................................... $18 $(158) $(22)
Transportation............................................. 23 306 (53)
</TABLE>
F-20
<PAGE> 88
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net assets of discontinued operations were comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents........................................ $ 106 $ --
Accounts receivable, net......................................... 196 --
Inventories, net................................................. 2,738 --
Property and equipment, net...................................... 1,332 153
Other assets..................................................... 398 80
------ ------
4,770 233
LIABILITIES
Notes payable.................................................... 918 --
Other liabilities................................................ 1,347 156
------ ------
2,265 156
------ ------
Net assets of discontinued operations............................ $2,505 $ 77
====== ======
</TABLE>
Gain (loss) from operations, net of income tax, consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1993 1994 1995
----- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Apparel manufacturing segment............................... $(163) $(1,949) $(1,253)
Transportation segment...................................... 420 (73) (320)
----- ------- -------
$ 257 $(2,022) $(1,573)
===== ======= =======
</TABLE>
Gain (loss) on disposal of segments, net of income taxes, consists of the
following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1993 1994 1995
----- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Apparel manufacturing segment............................... $ -- $ -- $(2,324)
Transportation segment...................................... 3 2,568 (27)
----- ------- -------
$ 3 $ 2,568 $(2,351)
===== ======= =======
</TABLE>
F-21
<PAGE> 89
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. INCOME TAXES
A reconciliation of the provision for Federal and state income taxes and
the amount computed by applying the statutory Federal income tax rate to income
before income taxes, minority interest and cumulative effect of change in
accounting principal is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1993 1994 1995
----- ----- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory Federal rate applied to pre-tax income from
continuing operations...................................... $ 225 $ 832 $1,650
State income taxes, net...................................... 51 311 3
Alternative Minimum Tax on proceeds from life insurance...... -- 25 --
Nondeductible expenses....................................... -- 3 5
Benefit of operating loss carryforward....................... (453) (630) (1,566)
Amortization of excess cost over net assets of acquired
businesses................................................. 63 69 62
Other........................................................ (72) (1) 36
----- ----- ------
$(186) $ 609 $ 190
===== ===== ======
</TABLE>
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes", effective January 1, 1993. This
statement supersedes Accounting Principles Board Statement No. 11, under which
the Company has previously been recognizing income tax expense. The cumulative
effect of adopting SFAS No. 109 had the effect of increasing the Company's 1993
net income by approximately $113,000. The Company's effective tax rate was
reduced from approximately 45% to approximately 22% as a result of the adoption
of SFAS No. 109. The Company recognized no deferred tax benefits of operating
loss carryforwards as a result of the adoption of SFAS No. 109.
Provision (benefit) for income taxes is comprised of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1993 1994 1995
----- ----- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current
Federal.................................................... $ 46 $ 117 $ 100
State...................................................... 13 149 49
----- ----- ------
59 266 149
Deferred
Federal.................................................... (191) 242 27
State...................................................... (54) 101 14
----- ----- ------
Total........................................................ (245) 343 41
Federal.................................................... (145) 359 127
State...................................................... (41) 250 63
----- ----- ------
$(186) $ 609 $ 190
===== ===== ======
</TABLE>
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax
F-22
<PAGE> 90
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purposes, and (b) operating loss carryforwards. The tax effects of significant
items comprising the Company's net deferred tax asset are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Differences between book and tax basis of property............. $ (108) $ (269)
Other.......................................................... (3) --
Deferred tax assets:
Differences between book and tax basis of deposit base
intangibles................................................. 130 165
Allowance for credit losses.................................... 737 1,202
Write-off of notes receivable.................................. -- 1,386
Unrealized gain on loans to be sold............................ 152 382
Deferred tax asset related to discontinued operations.......... 707 --
Operating loss carryforward (net of valuation allowance)....... (1,443) (2,670)
------- -------
Net deferred tax asset......................................... $ 172 $ 196
======= =======
</TABLE>
No net deferred tax asset was recognized as to the capital loss
carryforwards for the years ended December 31, 1994 and 1995. A valuation
allowance equal to these loss carryforwards was applied to each such
carryforward as of December 31, 1994 and 1995. A valuation allowance of
approximately $7,700,000 was applied to the tax effect of the net operating loss
carryforward for the year ended December 31, 1995.
As of December 31, 1995, the Company has available Federal net operating
loss carryforwards of approximately $23,000,000 expiring in 1996 through 2001.
17. OPERATIONS AND INDUSTRY SEGMENTS
The Financial Services segment was active in 1993, 1994 and 1995 in making
first and second mortgage loans, small business loans, construction loans and
pre-owned automobile loans.
The Apparel Manufacturing segment was active in 1993 and 1994 in the
design, manufacture and marketing of dresses for children. The Company sold YGI,
the sole component of the segment as of September 30, 1995 and as a result, the
Apparel Manufacturing segment is shown on the statements of income as
discontinued operations.
The Transportation segment was active in 1993 and 1994 in boxcar leasing,
short-line railroad operations and railcar repair shop operations. The Company
sold Peninsula Terminal Company in July 1994 and assigned the rights to boxcars
in the lease with a Class I railroad in November 1994. The Company sold
additional railcars in 1995 and as a result, the Transportation segment is shown
on the statements of income as discontinued operations.
The Company's customers include investors within the State of South
Carolina, first and second residential mortgage borrowers principally in South
Carolina and North Carolina, commercial borrowers throughout the United States
and pre-owned automobile borrowers principally in South Carolina.
18. TRANSACTIONS WITH RELATED PARTIES
The Company engaged in the following related party transactions:
The Company obtains legal services from a firm, certain members of which,
when considered in the aggregate, own 824,928 shares of the Company's capital
stock. One member of the firm may be deemed to share investment and voting power
with respect to 501,960 shares of the Company's capital stock owned by a
F-23
<PAGE> 91
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
South Carolina partnership, of which his spouse and three adult children are
partners and 70,788 shares of the Company's capital stock owned by a Trust, of
which he is the Grantor. Total charges for these services were $82,000 (1993),
$118,000 (1994), and $234,000 (1995). Approximately $17,000 (1994) and $0 (1995)
of accounts payable are payable to this law firm.
The Company provided management services to a company with significant
common shareholders for which it received fees of $35,000 in 1993 and 1994 and
$250,000 in 1995.
Notes payable to investors and subordinated debentures include amounts due
to officers, directors and key employees of approximately $1,124,000, $791,000
and $873,000 at December 31, 1993, 1994 and 1995, respectively. The Company also
has notes receivable from related parties. (Note 3)
19. EMPLOYEE RETIREMENT PLAN
The Company has a matched savings plan under Section 401(k) of the Internal
Revenue Code covering employees meeting certain eligibility requirements. The
plan provides for employee and Company contributions, subject to certain
limitations. Company matching contributions are 35% of employee contributions to
a maximum of 6% of compensation for each employee. The Company's contributions
under the plan totaled approximately $52,000 in 1993, $95,000 in 1994 and
$76,000 in 1995.
20. RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." The statement requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The statement is effective
for the Company for the fiscal year ending December 31, 1996 and does not have a
significant impact on the Company's financial statements.
In May 1995, the FASB issued SFAS 122, "Accounting for Mortgage Servicing
Rights," which amends SFAS No. 65, "Accounting for Mortgage Banking Activities.
This statement allows the capitalization of servicing-related costs associated
with mortgage loans that are originated for sale, and to create servicing assets
for such loans. Prior to this statement, originated mortgage servicing rights
were generally accorded off-balance sheet treatment. The statement is effective
for the company for the fiscal year ending December 31, 1996. The adoption does
not have a material effect on the company's financial condition or results of
operations.
The FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," in
October 1995. This statement supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees" and establishes financial accounting and reporting
standards for stock-based employee compensation plans. SFAS 123 requires that an
employer's financial statements include certain disclosures about stock-based
employee compensation arrangements regardless of the method used to account for
them. The accounting requirements of this statement are effective for
transactions entered into in fiscal years that begin after December 15, 1995.
Though they may be adopted at issuance, the disclosure requirements are
effective for financial statements for fiscal years beginning after December 15,
1995, or for an earlier fiscal year for which this statement is initially
adopted for recognizing compensation cost. The Company has elected to continue
use of the method prescribed by APB 25 for recording stock-based compensation
and will provide pro forma disclosures in its annual financial statements as
prescribed by SFAS 123.
In June 1996, the FASB issued SFAS 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." FASB's
objective is to develop consistent accounting standards for those transactions,
including determining when financial assets should be considered sold and
derecognized from the statement of financial position and when related revenues
and expenses should be recognized. The approach
F-24
<PAGE> 92
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
focuses on analyzing the components of financial asset transfers and requires
each party to a transfer to recognize the financial assets it controls and
liabilities it has incurred and derecognize assets when control over them has
been relinquished. The statement is not expected to have a significant impact on
the accounting practices of the Company and is generally effective for
transactions entered into after December 31, 1996.
21. CONTINGENCIES AND LOAN COMMITMENTS
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These instruments expose the Company to credit risk in excess of the amount
recognized in the balance sheet.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Company uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments. Total credit exposure at December 31,
1995 related to these items is summarized below:
<TABLE>
<CAPTION>
CONTRACT
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
Loan commitments:
Approved loan commitments.............................................. $ 79,906
Unadvanced portion of loans............................................ 4,251
-----------
Total loan commitments....................................... $ 84,157
===========
</TABLE>
Loan commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract. Loan
commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained upon
extension of credit is based on management's credit evaluation of the
counterparty. Collateral held is primarily residential property. Interest rates
on loan commitments are a combination of fixed and variable.
Commitments outstanding at December 31, 1995 consist of adjustable and
fixed rate loans of $38,866,000 and $45,291,000, respectively, at rates ranging
from 10% to 13%. Commitments to originate loans generally expire within 30 days
to 60 days.
There is also a contingent purchase price agreement in place amounting to
2 1/2% of net income of a subsidiary not to exceed $125,000 through 1996. Any
payments of the contingent purchase price will increase the excess of cost over
net assets of acquired businesses. The amount paid or accrued under this
arrangement was $23,000, $47,000 and $9,000 in 1993, 1994 and 1995,
respectively.
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 the business, financial condition, results of operations or cash flows
of the Company taken as a whole.
The Company may from time to time enter into forward commitments to sell
residential first mortgage loans to reduce risk associated with originating and
holding loans for sale. At December 31, 1995, the Company had no outstanding
forward commitment contracts.
The Company has accrued $164,000 for two former operating locations to
record the potential liability for environmental contamination at these two
sites. The Company believes that the total cost for this environmental liability
will not exceed the amount accrued.
F-25
<PAGE> 93
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
22. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosures about Fair Value of Financial Instruments" requires
disclosure of fair value information whether or not recognized in the balance
sheet, when it is practicable to estimate the fair value. SFAS 107 defines a
financial instrument as cash, evidence of an ownership interest in an entity or
contractual obligations which require the exchange of cash or financial
instruments. Certain items are specifically excluded from the disclosure
requirements, including the Company's common stock, property and equipment and
other assets and liabilities.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and Cash Equivalents and Short-Term Investments
For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
Receivables
For residential mortgage loans, SBA loans and automobile loans fair value
is estimated using the market prices received on recent sales or securitizations
of these loans in the secondary market.
Mortgage Loans Held for Sale
Fair value for mortgage loans held for sale is determined using the
anticipated premium to be derived from the sale of the mortgage loans in the
secondary market.
Excess Servicing Receivable
Fair value of the excess servicing receivable is determined based on the
discounted present value of the remaining excess estimated future cash flows
using estimated prepayment and default rates and discount rates anticipated in
similar instruments.
Investment in Asset-Backed Securities
Fair value of the investment in asset-backed securities approximates the
carrying amount. Fair value is determined based on the discounted present value
of the remaining estimated future cash flows attributable to the related
investment in asset-backed securities using estimated prepayment and default
rates and discount rates anticipated in similar instruments.
Investor Savings
Due to their short-term maturity, usually one year, the fair value of the
notes due investors and subordinated debentures is the current carrying amount.
Notes Payable to Banks and Other
The fair value of notes payable to banks and other approximates the
carrying amount. Rates with similar terms and maturities currently available to
the Company are used to estimate fair value of existing debt.
F-26
<PAGE> 94
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Commitments to Extend Credit
The fair value of commitments to extend credit is determined by using the
anticipated market prices that the loans will generate in the secondary market.
The estimated fair values of the Company's financial instruments at
December 31, were as follows:
<TABLE>
<CAPTION>
1995
-------------------
CARRYING FAIR
AMOUNT VALUE
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Financial Assets:
Cash and cash equivalents...................................... $ 1,560 $ 1,560
Loans receivable -- net........................................ 103,865 107,520
Mortgage loans held for sale................................... 22,593 23,526
Excess servicing receivable.................................... 2,054 2,054
Investment in asset-backed securities.......................... 1,477 1,477
Financial Liabilities
Investor savings:
Notes due to investors...................................... $ 82,132 $ 82,132
Subordinated debentures..................................... 16,185 16,185
Notes payable to banks and other............................... 31,633 31,633
Commitments to extend credit................................... 84,157 89,711
</TABLE>
23. PARENT COMPANY FINANCIAL INFORMATION
The following is condensed financial information of Emergent Group, Inc.
(parent company only):
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents.................................................. $ 110 $ 363
Short-term investments..................................................... 597 --
Receivable from subsidiaries............................................... 4,016 --
Property and equipment, net................................................ 180 139
Investment in subsidiaries, net of allowance of $2,100 in 1994............. 5,215 9,195
Notes receivable, net...................................................... 920 683
Other investments.......................................................... -- 1,000
Other assets............................................................... 255 234
------- -------
$11,293 $11,614
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expenses and other liabilities..................................... $ 1,593 $ 1,729
Shareholders' equity....................................................... 9,700 9,885
------- -------
$11,293 $11,614
======= =======
</TABLE>
F-27
<PAGE> 95
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Interest......................................................... $ 103 $ 158 $ 313
Gain on disposal of assets....................................... 4 -- 66
Management fees.................................................. 216 455 570
Other............................................................ 22 6 42
------ ------ ------
345 619 991
EXPENSES
Interest......................................................... 369 255 152
General and administrative....................................... 801 1,537 862
Other............................................................ 40 231 --
------ ------ ------
1,210 2,023 1,014
------ ------ ------
Loss from continuing operations before income taxes.............. (865) (1,404) (23)
Income tax expense (benefit)..................................... (556) 468 (23)
Discontinued operations
Income from operations, net of income tax...................... 625 467 12
Gain (loss) on disposal........................................ -- 672 (2,391)
------ ------ ------
625 1,139 (2,379)
Equity in income of subsidiaries................................. 768 3,071 3,036
Cumulative effect of change in method of accounting for income
taxes.......................................................... 113 -- --
------ ------ ------
Net income....................................................... $1,197 $2,338 $ 657
====== ====== ======
</TABLE>
F-28
<PAGE> 96
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income..................................................... $1,197 $ 2,338 $ 657
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Depreciation and amortization................................ 358 367 26
Gain on sale of property and equipment....................... (4) (2,187) (66)
Reserve for devaluation of subsidiary........................ -- 2,100 --
Gain on sale of subsidiary................................... -- (585) (1,257)
Decrease (increase) in due from subsidiaries................. (97) (813) 306
Increase in investment in subsidiaries....................... (904) (2,358) (3,323)
Write-off of notes receivable from discontinued operations... -- -- 3,648
Revenues recorded under an assigned operating lease.......... (789) (657) --
Interest expense from assignment of an operating lease....... 297 207 --
Decrease (increase) in other assets.......................... 435 (83) 59
(Decrease) increase in other liabilities..................... (311) 1,186 (272)
------ ------- -------
Cash provided by (used in) operating activities................ 182 (485) (222)
------ ------- -------
INVESTING ACTIVITIES
Cash received in advances from subsidiaries.................... 700 250 3,891
Loans advanced to subsidiary................................... (400) (907) (2,041)
Payments to subsidiary on loans................................ -- -- (300)
Payments received from subsidiaries............................ 100 -- --
Proceeds from sale of short-term investments................... 1,000 350 597
Purchase of short-term investments............................. (947) -- --
Cash paid for purchase of subsidiary........................... (836) -- --
Purchase of property and equipment............................. (8) (21) (25)
Proceeds from sale of property and equipment................... 4 1,201 112
Proceeds from sale of subsidiary............................... -- 20 --
Loan advance to former subsidiary.............................. -- -- (200)
Payments received on notes receivable.......................... -- -- 236
Purchase of investment in partnership.......................... -- -- (1,000)
------ ------- -------
Cash provided by (used in) investing activities................ (387) 893 1,270
------ ------- -------
FINANCING ACTIVITIES
Payments made on notes payable................................. (279) (279) (279)
Purchase of stock purchase warrants............................ (3) -- --
Purchase of stock under Tender Offer........................... -- -- (568)
Proceeds from exercise of stock options........................ -- -- 52
------ ------- -------
Cash used in financing activities.............................. (282) (279) (795)
------ ------- -------
Net increase (decrease) in cash and cash equivalents........... (487) 129 253
Cash at the beginning of the year.............................. 468 (19) 110
------ ------- -------
Cash at the end of the year.................................... $ (19) $ 110 $ 363
====== ======= =======
</TABLE>
F-29
<PAGE> 97
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
24. SUBSEQUENT EVENT (UNAUDITED)
In March of 1996, the Company securitized $16,107,000 of auto loans. The
securitization was effected through a grantor trust (the "Trust"), the ownership
of which was represented by Class A and Class B certificates. The Class A
certificate was purchased by an investor, while the Company retained the Class B
certificate. The Company has classified its Class B certificates as trading
securities under SFAS 115 and such certificates are carried at fair value. These
certificates, in addition to the Class B certificates held by the Company
pursuant to the securitization of the unguaranteed portions of its SBA loans in
1995, are carried on the balance sheet as asset-backed securities in the amount
of $2,185,000 which is net of $1,382,000 allowance for losses. These
certificates give the holders thereof the right to receive payments and other
recoveries attributable to the loans held by the Trust. The Class B certificates
represent approximately 10% of the principal amount of the loans transferred in
the securitization and are subordinate in payment and all other aspects to the
Class A certificates. Accordingly, in the event that payments received by the
Trust are not sufficient to pay certain expenses of the Trust and the required
principal and interest payments due on the Class A certificates, the Company, as
holder of the Class B certificates, would not be entitled to receive principal
or interest payments due thereon.
The Class A certificates for the Auto securitization received a rating of
Aaa from Moody's Investors Service, Inc. In addition, the Class A certificates
for the Auto securitization received a rating of AAA from Standards and Poors
ratings group, and were guaranteed by Financial Security Assurance, Inc. The
Class B certificates were not rated. In connection with the Auto securitization,
the Company received cash proceeds, net of securitization costs, of $14,195,000.
F-30
<PAGE> 98
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING
SHAREHOLDERS OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Prospectus Summary.................... 3
Risk Factors.......................... 10
The Company........................... 16
Use of Proceeds....................... 17
Dividend Policy....................... 17
Price Range of Common Stock........... 18
Dilution.............................. 19
Capitalization........................ 20
Selected Consolidated Financial and
Operating Data...................... 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
Business.............................. 36
Management............................ 57
Principal and Selling Shareholders.... 62
Description of Securities............. 63
Underwriting.......................... 65
Legal Matters......................... 66
Experts............................... 66
Additional Information................ 67
Index to Financial Statements......... F-1
</TABLE>
3,000,000 SHARES
[LOGO] EMERGENT
COMMON STOCK
-----------------------
PROSPECTUS
-----------------------
WHEAT FIRST BUTCHER SINGER
RAYMOND JAMES & ASSOCIATES, INC.
, 1996
